“I’m not a pessimist, I’m an optometrist.”
- Ricky, lovable imbecile and small-time felon from “Trailer Park Boys” (bless you Netflix)
If there is anything funny at all about the COVID-19 experience, other than some very clever memes making the rounds, it’s the way that market commentators, the ones that “give meaning” to the day’s market activity, have been reduced to puddles of gibberish in trying to explain what’s going on. They try hard, oh lord they do try, but the standard reference points are obliterated. In normal times, they patter harmlessly on in vapid circles of nothingness, but in today’s crazy world, the anchors they cling to are poignantly pointless.
First up, a month or two ago, was the dumb stage show put on by Saudi Arabia and Russia. Saudi Arabia wanted to lower production levels amongst the major cartel players, what’s known as OPEC+, to bring some price stability as continued US shale growth was tipping the market into surplus. Russia refused to go along and mused that they just might increase production. A day later, on a Saturday in early March, Saudi Arabia announced that they would slash prices and crank up production to take market share from Russia. The whole thing smelled of a World-Wrestling-Federation grade plotline, particularly since they launched the war at the same time that rather ominous demand-destruction clouds were looming on the coronavirus-plagued horizon.
We’ve seen these antics before, Saudi Arabia’s jerked the market around for decades, and daily market commentators always fall for it. They reacted the way they always do – shouting hysterically in the news, prices plunging in hours, and the world taking the posturing as the driving force in the markets because, well, those guys sounded really serious. It is an odd drama at the best of times but March was not, to put it mildly, the best of times.
As Saudi Arabia announced plans to increase production capacity (on March 11, three days after the Russia/Saudi cockfight) from 12 million barrels per day to 13, the market was in full panic mode. Few seemed to actually put on their thinking hats and ask: what exactly does “increasing production capacity” mean, when would be able to get to that target (increasing productive capacity isn’t like turning on a tap), and where would this oil go in a world that was apparently using 30 million b/d less than it had two months ago?
Had those questions been contemplated and answered, we’d have seen that the Saudi threat – “increasing productive capacity” – was nonsense. Within days, the Saudis came to an agreement with Russia and other OPEC countries to cut production by 10 million b/d, beginning in May. The market lapped this up too, and prices rose.
But no one seemed to do the math; speculation was growing that world oil demand had fallen by 30 million b/d, or perhaps even more. So the 10 million b/d cut, to begin in May, was just silliness because three times that amount was about to be shut in anyway, deal or no deal. The world has finite storage capacity for oil, and flaring it like natural gas is not at all a popular strategy.
By about April 20 then, Saudi Arabia was already reducing output massively to deal with the physical reality that there might soon be nowhere to sell the stuff as storage was rapidly filling. For the world’s oil kingpin to transition from “we will raise output capacity from 12 million to 13 million b/d” to slashing production 6 weeks later – Russian agreement or no – is bizarre behaviour, usually reserved for only the world’s most erratic regimes like North Korea. Let’s hope the Saudis don’t start emulating that little madman any further (to be fair, the Saudis’ bark has always been worse than their bite: their production swings, in hindsight, have always been a fraction of their bluster and hyperbole).
In a sign of how weird things are these days, that news that the Saudis were trimming production seems like incredibly old news (fully two weeks ago). And one reason it seems like such old news is that it is possible that oil demand didn’t plummet nearly as much as had been thought all those long (two) weeks ago.
A recent article in Platts, dated April 30, notes that crude oil inventories in the US did not build nearly as much as expected, indicating that demand may not have fallen as much as speculated. Or, possibly, demand did fall as much as speculated, but only for a very short time (days or weeks, not months). The IEA then voiced their opinion that global oil demand might only be down 6.5 million b/d for 2020, due to a rapid bounceback in activity and possible widespread easing of lockdowns. Illustratively, China’s demand has been bouncing back (BP reported that its Chinese road fuel business had bounced back to 90-95% of pre-coronavirus levels, and even jet fuel consumption was “only” down 50% from same). Had the Saudis known in early March that global demand might recover that quickly, they would look like geniuses. But to have that foresight defies all logic (and it’s not at all certain that oil demand will rebound that quickly; the signs point in that direction but that’s about all at this stage). While all this is happening, real physical production is being shut in all over the place due to localized gluts, further rendering the Saudi/Russia agreement as completely moot.
Lost in all this noise is the movement to prevent capital from flowing to the petroleum sector that has been building for a few years. Before coronavirus, the markets had had enough of financing rampant US shale growth, and in other heavily industrialized centers like Europe, the pressure to divest hydrocarbon investments has been immense. Some investors had the intelligence to suss that coal is not oil which is not natural gas, and remained supportive of the cleaner end; however, the more ideological arms made no such distinction and simply attack anything that falls under the “fossil fuel” banner. Whether for ideological grounds or demands for smarter capital allocation, the fundamentals of oil and gas development have been changing over the past few years anyway, and the full effects of such capital starvation were only starting to take shape just recently. Then, of course, every single wheel fell off the wagon, and we’re left with a tangled mass of market pundits commenting away, with all the confidence of a trailer-dweller trying to describe what’s flying past his window while inside a tornado.
In fairness to daily market commentators, the oil production/demand situation is so fluid and so far outside the normal parameters that it is extremely difficult to be make integrate it all and see what’s truly happening. I sure as hell can’t. That brings up the age-old question of why they repeatedly try to do so anyway, their constant need to explain minute (in both senses of the word) market fluctuations that may be just random movements caused by very short term buy/sell imbalances. That habit destroys the context of actual thoughtful market commentary, and when something truly massive happens they can’t help themselves but to jump in and explain it all before even the world’s biggest market participants have it figured out.
At the end of the day, and the point of all this since we’re all looking for reasons to be optometrists instead of pessimists, is that there are reasons to be optimistic that the world’s economy is going to come back in a recognizable form if oil consumption is a reasonable barometer. We should all be thankful for that. Though some won’t like to hear it, the sky isn’t falling on oil demand either, not by a long shot. That doesn’t mean we’re out of the woods even if the economy restarts; the world’s debt problem, which was huge in 2019, will be unfathomable in 2021. Such is the cost of keeping the world turning when entrepreneurs, business people, travellers, and consumers could not. But as with the previously-unfathomable phenomenon of negative interest rates, the world’s handling (and conception) of debt continues to morph in weird ways. So there is hope; let’s keep our fingers crossed.
The history of coronavirus in 6 words: “Bat soup cough cough bye bye.” The state of the energy industry, almost as succinctly: “The End of Fossil Fuel Insanity” at Amazon.ca, Indigo.ca, or Amazon.com.