It took Tariff Man and the high priests of MAGA exactly two months to achieve his macroeconomic trinity: A collapse in the price of money, the price of crude oil and the US dollar. So, Brent has fallen from 74 to 69 since Liberation Day while the 10-year US Treasury note yield has plunged from 4.80% to 3.95% now and the US dollar is down from 110 to 102 even as gold has soared to all-time highs above 3100. Mission accomplished, even though it took the destruction of the global trading system, $8 trillion vaporised in the US stock market alone, a quantum increase in global recession risk and a rise in breakeven inflation expectations above 3.5%, making the current four Fed rate cuts priced into the money markets futures curve, nothing more than a midsummer’s night self-indulgent fantasy.
The collapse of oil price is not just the demand destruction that Trump’s draconian tariffs on China and India portend, the world’s two largest oil importers. Asia is the epicentre of global oil and LNG demand growth and the most lucrative downstream market for the Gulf’s oil and LNG exporters. Trump’s tariff will have a chilling impact on economic growth, industrial production and thus oil demand across the Pacific Rim. From the Middle Kingdom to the Kingdom of Smiles (Siam).
It is ominous that eight OPEC+ countries, led by Saudi Arabia, Kuwait and the UAE chose to add 411,000 BPD to a glutted market at this precise moment, negating Trump’s deployment of B2 stealth bombers armed with 40,000 pound bunker buster bombs that could gut Iran’s underground nuclear sites to Diego Garcia, the Pentagon’s unsinkable aircraft carrier that happens to be an island deep in the Indian Ocean. Yet there is no geopolitical risk premium in black gold at a time when Riyad send a blunt message to Kazakhstan, Russia and Iraq, who exceeded their quota production in March by a shocking 1.4-MBD.
Get set for one of OPEC’s devastating price wars. When Saudi Arabia refuses to play the role of swing producer and removes all self-restraint to flood the markets with the black goo. This happened in the summer of 2014 and just before the Covid virus swept the planet. In the 2014-2015 price war Brent plunged from $115 a barrel to a low of $28 a barrel. In 2019-2020, an output spat between Riyadh and the Kremlin led to negative $38 a barrel in oil futures. Riyadh has had enough, the kingdom’s output has fallen to a 4-year low of 9.4-MBD, even as oil prices are nowhere near its IMF estimated $108 a barrel budget breakeven price at a time when Kazakhstan alone cheated by 700,000 BPD on its quota in March alone and a Ukraine peace deal could well remove sanctions on Russian oil and gas.
China is Saudi Arabia’s largest customer, and its oil demand cannot survive 54% tariff in its exports to the planet’s largest $30 trillion economic colossus. If America sneezes, the gas guzzling export economies of Asia catch pneumonia. When this happens, OPEC’s fragile fabric falls apart, Riyadh abandons its role as the central bank of oil and a Darwinian price war begins. Prince Abdulaziz has warned the quota cheaters of OPEC+ with words for the past 2-years and now he has chosen to act. $30 Brent as in late 2015? Sadly, yes.
