The big chill of recession and a banking panic now haunts black gold, exactly as it did in the last six months of 2008 when Brent crude plunged from $148 a barrel in July to barely $40 in December. Brent crude was $85 two weeks ago and plunged to a low of 71.4 on Friday. It is ironic that crude oil prices are in a free fall even though Russia, a Big Three producer is under sanctions and China, the world’s largest importer of commodities has just reopened after a draconian Covid lockdown. The spike in crude oil storage tanks to 150 million barrels suggests a supply glut in the wet barrel market.
It is entirely possible that global inventories of crude oil rise by another 50 million barrels in April and May as the China reopening theme is unmasked as a macro delusion. This means Brent crude can well fall to $60 a barrel, a macro call I made months ago. Since GCC currencies are pegged to the dollar and cannot depreciate when oil prices tank, the burden of adjustment falls disproportionately on the asset markets, stocks and real estate. As in 2008/09, a spike in global bank funding risk and a free fall in oil prices guarantees a liquidity squeeze and a collapse in speculative real estate prices in the Gulf. Offplan punters should do not forget the lessons of history and the existential fact that the laws of economics are not repealed in New Dubai.
The Biden White House howled with outrage when OPEC reduced its output by 2 million barrels a day last October but Prince Abdulaziz of Saudi Arabia was way too modest in his output cut targets as the current oil glut and price plunge demonstrates. Three catalysts could provide a temporary floor for oil prices next week. One, the Swiss central bank has finally arranged a shotgun marriage between UBS and Credit Suisse. Two, OPEC may decide to make a bigger output cut and punish quota cheats like Libya, Nigeria and Iraq. Three, the US may fulfill Biden’s pledge to replenish the strategic petroleum reserve (SPR) now that West Texas (WTI) has fallen to $65 and SPR inventory levels are at 40 year lows.
Recessions caused by a banking crisis take twice the brutal toll on oil prices than a normal cyclical slump, as the oil price crashes of 2008 and 2014 proved to us here in the Gulf. Global banks have lost $500 billion in market value in the past two weeks and the trauma on consumer spending, 70% of the US GDP, will hit oil and gas demand with a vengeance worldwide. So Saudi Arabia must act now with a shock and awe output cut of at least 2 million MBD if it wants to avoid another catastrophic oil price crash that will threaten the petrodollar tsunami that bankrolls the kingdom’s Vision 2030 blueprint. Is this politically feasible at the next OPEC conclave? No, it is not. So the path of least resistance for Brent is to fall to $65 a barrel or even lower. This time the wolf is here and speculative bubbles in the Gulf are destined to melt once again like a cruel desert mirage.
