My head is full of grizzly mania, the Russian bear is trapped in Ukraine’s military bear trap and the black gold bears are laughing all the way to the bank as Brent tanks to $76 and West Texas settled at $71. Does this week define the new geopolitics of black gold for the rest of our lifetimes?
The G7 price cap and European embargo on Russian oil would have argued for the mother of all price spikes since the Kremlin threatened not to sell its oil to any country that complied with the humiliating price cap imposed on its Ural crude. Xi Jinping is on a state visit to Saudi Arabia, where MBS welcomed him with all the pomp denied to Joe Biden’s July fist-pump diplomacy.
The supply trauma in the wet barrel market went ballistic as the Bosphorus was clogged with a traffic jam of oil tankers laden with Russian/Kazakh crude unable to get through the Dardanelles, where Winston Churchill had once sent a generation of young ANZACs to fight and die on the beaches of Gallipoli.
India is now paying for its oil in rupees and Xi has gone to Riyad to request the Saudis, who supply 17% of the PRC’s imports, to accept payments in yuan. Will MBS agree to accumulate billions of yuan he does not need? Never. So why have oil prices fallen to new 2022 lows as Brent traded as high as 125 in June?
It is significant that Washington forced the EU to scale back its blanket ban on marine insurance for any oil tanker that violated the Russian oil price cap to a 90-day ban. This has prevented a supply shock and kept the petrodollar tsunami for Putin from drying up. Saudi Arabia’s Prince Abdulaziz has been vindicated as Brent/West Texas price tanked rather than rose after the Biden White House criticised the kingdom for OPEC+’s 2 MBD output cut at Vienna.
“The short-term supply glut is the reason why the West Texas oil futures curve has moved from backwardation to contango”
The ugly truth is that Brent crude now prices a steep drop in fuel demand as the global recession deepens outside the US and commercial inventories/Strategic Petroleum Reserve (SPR) releases mean 500 million barrels are now in supertanker (VLCC) bellies or in oil storage depots. The short-term supply glut is the reason why the West Texas oil futures curve has moved from backwardation to contango.
It is obvious that all members of OPEC+ have not complied with the Vienna output cuts, led by Angola and Nigeria. When oil demand in China/EM plunges, a net 1MBD OPEC output cut is insufficient to prevent a fall in Brent crude. So the oil bears make serious money while sovereign producers see untold billions of petrodollars vaporised into thin air. The marginal price of crude oil is not set in the Arabian desert or the plains of West Texas, but in the futures pits of the NYMEX and ICE, since almost 2 billion barrels of paper oil are traded every session, 20X the 100 million barrel a day global consumption.
The spot market price of oil is lower than the price for future deliveries, the telltale sign of a classic oversupplied market. The IEA was dead right when it estimated that China’s oil consumption would contract for the first time ever in the 21st century. I believe the plunge in Chinese demand was totally underestimated by the oil bulls who proliferate in MENA banks, the reason I recommended friends who read my posts to short Brent crude last summer at 120.
China’s draconian Covid lockdowns, horrible consumer sentiment and $5tn property black hole suggests that the 2020s could be a lost decade of 0% real GDP growth for the PRC, as the 1990s were for Japan. Petrol consumption in the US has fallen to 20 year lows, equal only to 2020’s pandemic metrics. When the world’s two biggest oil consumers see a contraction in petroleum products demand on this scale, I cannot be anything other than an oil bear – Abu grizzly of Brent.
When will Brent crude stop falling? One, when the Fed rate hike stops and the global recession bottoms. Will this happen in the first six months of 2023? Dream on. Two, will China’s reopening lead to a huge surge in PRC fuel demand? Dream on. Three, will Biden begin to buy West Texas now that it has hit his $70 SPR buy target? I think the current 70 is now 60. All three of the above conditions need to flash green before I turn into an oil price bull again.
Are we prepared here in the Gulf for a world where Brent crude trades at $50 a barrel in 2023? No. But we should be.
