How Low Can Oil Go?

Oil is testing the lows at WTI $20, as refilling the SPR got left out of last week’s “stimulus bill.” This would be destabilizing to the US financial system even in normal times, as it was in 2015-2016. It’s not clear how the Fed’s new programs can directly help the non-investment grade issuers in the energy sector. There’s a storage squeeze building, and anything could happen to prices in the short-term. But even today’s impaired global demand cannot be supplied with $20 oil. Saudi may break even there, but it is throwing away revenues by overproducing, when a production cut could sharply raise prices. No one else breaks even, including Russia, whose median breakeven is higher than US shale. Trump has the option to tariff Saudi oil, and to use diplomacy to get Saudi to do the right thing for the world economy. At $20, we have to bet on the upside, and take a timid bite at the long-suffering energy sector.