Saudi Arabian politics may have collided with coronavirus shock to form a perfect storm. Photo / Getty Images
Saudi Arabian politics may have collided with coronavirus shock to form a perfect storm. Photo / Getty Images
COMMENT:
While sharemarkets fell further, oil prices steadied today with traders and analysts taking stock and trying to make sense of Monday's unprecedented sell-off.
Good luck to them.
If there was any relief that the free-fall was over, it was buried by a long and complex list of new concernsnow facing the industry and the global economy.
Russia raised the stakes last week when it refused to cut oil production in defiance of its Opec+ partners.
Opec+ (for the record) refers to the traditional 14 Opec nations, led by Saudi Arabia, and 10 non-Opec countries, including Russia.
It was a loose alliance formed in 2017 in response to the supply shocks through 2014 and 2016.
In what Financial Times described as "the oil market equivalent of declaration of war" the Saudis blew it out of the water by slashing prices and threatening to boost production.
Industry analysts say Russia is much better placed to weather the price shock than the Saudis and other Arab producers, like Iraq and the UAE.
So the price war threatens to economically destabilise the already politically volatile region.
That begs the question: what were the Saudis thinking?
What is actually going on in the secretive kingdom is anyone's guess.
An Emirati trader checks the stocks on the screen at the Dubai Financial Market in Dubai, United Arab Emirates. Photo / AP
Saudi Arabia's dramatic power play on oil production came just two days after a major crackdown and high-profile arrests of several of the kingdom's most powerful sheiks.
Although there has been no official explanation, Bloomberg News reports that:
Prince Ahmed bin Abdulaziz (the last surviving full brother of King Salman bin Abdulaziz) and Prince Mohammed bin Nayef (a former heir apparent to the Saudi throne with strong ties to the US security establishment) had been plotting a coup."
As if assessing global economic risk wasn't hard enough with an increasingly authoritarian Chinese regime and an erratic US President - this stuff adds an impossible new layer of geopolitical complexity.
It's clear though that something is awry in the traditional diplomatic alignment of US/Saudi interests on oil.
The Saudi regime must have known its actions would be almost as damaging to the US as they are to Russia.
For starters, there was the inevitable Wall Street panic.
That reached right around the world - all the way to our KiwiSaver accounts - and directly undermined a President who's staked much of his reputation on the raging bull market.
But, more specifically for the US economy, at current prices much its shale oil industry becomes instantly unprofitable.
That's terrible for Donald Trump given how much he has politically staked on the US energy sector.
In fact its not good for energy producers anywhere.
In this part of the world we've seen Australia's stockmarkets hit much harder than ours as gas and coal producers get drawn into the energy slump.
In the US the price crash also creates risk for a number of banks which are highly exposed to the energy sector.
The giants of Wall Street - JPMorgan Chase, Bank of America, Citibank and Wells Fargo - saw their shares fall by between 12 and 16 per cent on Monday.
But a number of smaller regional banks have much higher exposure to energy companies - many saw their shares fall by more than 20 per cent.
With the crunch that sparked the 2008 global financial crisis top of mind, a spill-over from the energy sector to credit markets is the big fear now.
Then, overlaying all of that, the coronavirus continues to spread.
It continues to keep downward pressure on global demand. And, despite some signs of improvement, supply chain shocks due to the China shutdown are still heading to a peak.
President Donald Trump speaks in the briefing room of the White House in Washington on Monday. Photo / AP
Technically there is time for Russia and Saudi Arabia to pull things back from the brink.
There are existing production agreements in place until March 31.
If the US has any diplomatic clout left it must surely be trying to bring it to bear.
But, frankly, the current leadership looks embattled and out of its depth just coping with the domestic health crisis.
