Now Comes the Oil Shock - The Wall Street Journal

By

The Editorial Board

The Editorial Board
The Wall Street Journal
• Biography
• @WSJopinion
• WSJOpinion

March 9, 2020 7:18 pm ET

A trader reacts on the floor of the New York Stock Exchange, March 9.

Photo: Wang Ying/Zuma Press

President Trump has defended Saudi leader Mohammed bin Salman despite his displays of bad judgment or worse. If the crown prince wants to return the favor, now would be the time amid the panic in oil markets after a price war broke out between former cartel partners Russia and Saudi Arabia. How about putting in a call, Mr. President?

The immediate cause for this chaos is a game of chicken between Riyadh and Moscow. The Saudis were keen to orchestrate production cuts among fellow OPEC members and other major producers to sustain prices as oil demand falls due to Covid-19. Vladimir Putin refused, and in retaliation the Saudis slashed prices on Sunday and promised more production to steal market share from Russia.

Oil prices fell through the floor Monday with Brent crude closing at $34.36 a barrel, down 24% from Friday and 50% from its recent peak on Jan. 6. The shock triggered a fall in equities around the world, as investors fled to gold and bonds, with the Dow falling 7.8% Monday. A morning plunge of more than 7% triggered the New York Stock Exchange “circuit breaker” to pause trading for the first time since 1997.

This response is partly panic but it’s also rooted in rational fear, despite the benefit for consumers from lower oil prices. The market worry is that the oil-price plunge will hurt the U.S. economy—the main support for global growth these days—by damaging U.S. shale oil production.

Not long ago the U.S. imported most of its oil and natural gas. But the rise of fracking and horizontal drilling have made the U.S. an energy powerhouse. U.S. crude oil exports have soared from around an average of 490,000 barrels per day in January 2016 to 3.7 million barrels per day in December 2019. (See the nearby chart.) A sharp decline in global oil demand now hurts U.S. producers. The damage to producers and workers from a price collapse could exceed the benefit to consumers who pay less for gasoline.

Some shale producers are especially vulnerable because they’ve relied on easy credit fueled by low Federal Reserve interest rates. Analysts peg energy companies’ bond issuance at anywhere between 10% and 16% of the U.S. high-yield debt market. Widespread defaults on that debt could have systemic financial consequences for banks and other lenders.

The break-even oil price for these producers varies by company and the shale oil well, with some in Texas’s Permian Basin now claiming to be able to make money at $30 a barrel. Exxon and Chevron also own much shale production and have the balance sheets to ride out a downturn.

But a Dallas Fed survey in December found that, even before the price decline since January, two-thirds of oil and gas firms in its region expected to hold steady or reduce capital investment during 2020. And 59% of those firms said they’d need the price for West Texas Intermediate Crude to be above $50 a barrel to fund their capital investment.

Mr. Putin is willing to endure lower prices because he wants to break the U.S. shale industry. U.S. exports to Europe threaten Russia’s energy hold on Western Europe. He’s also sore at U.S. opposition to his Nord Stream 2 gas pipeline linking Siberia to Germany. This oil action is another example, among dozens already, that Mr. Putin isn’t Mr. Trump’s friend.

***

The Saudi strategy is harder to understand. Riyadh is cutting prices at the expense of its own national oil company, which recently floated shares in the public market. With the price cut, Aramco’s shares have fallen well below their December offering price. The Saudis last tried a stunt like this in 2014-15. Their target then was U.S. shale and they nearly tipped America into a recession as lower global prices pushed numerous U.S. oil-and-gas companies into bankruptcy.

The longer this oil-price war continues, the greater the danger that a crisis in the oil patch combined with the coronavirus will do broader damage. Even the resilient U.S. economy, which had been gaining steam as trade tensions eased, may be hard-pressed to power through the dual shocks of a pandemic and suddenly collapsing oil prices.

Crown Prince bin Salman, widely known as MBS, is famous for actions that seem rash and ill-considered. In this case he’s hurting Saudi interests by hurting his main geopolitical benefactor, the United States. President Trump may need to use the phone to remind the crown prince which country has stuck by him during his war with Yemen, his standoff with Qatar, and missile attacks from Iran.

The week's best and worst from Kim Strassel, Jason Riley, Mary O'Grady and Dan Henninger. Image: Chip Somodevilla/Getty Images

Copyright ©2019 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Let's block ads! (Why?)

"oil" - Google News
March 10, 2020 at 07:18AM
https://ift.tt/2Q3bR10

Now Comes the Oil Shock - The Wall Street Journal
"oil" - Google News
https://ift.tt/2PqPpxF
Shoes Man Tutorial
Pos News Update
Meme Update
Korean Entertainment News
Japan News Update

Bagikan Berita Ini