Just What We Didn’t Need: An Oil Price War
Sunday, March 8, 2020
Saudi and Russia have a falling out. This is the systemic threat we’ve been warning about.
We were wrong in forecasting that OPEC-Plus would cut production on Friday to track slack demand in the Covid-2019 crisis. Now it looks like the opposite: a price war between Saudi and Russia in which the US will be collateral damage. OPEC’s 2015-2016 price war drove oil to $26 and nearly caused a US recession by blowing out credit spreads at the same time as the Fed was tightening. But OPEC couldn’t stand the heat, and OPEC-Plus was born to control output and raise prices. The oil crash calls for another leg down in equities and Treasury yields, but the end could be in sight. With prices tonight already as low as $30, OPEC-Plus may have to come to its senses quickly, in which case US financial damage would be limited. Indeed, we think this price war is being engineered by Saudi – which just days ago was advocating production cuts, unilateral if necessary – to punish Russia for not sharing the burden and bring them back to the negotiating table quickly. Trump’s best play is to secretly call bin Salman and press him for higher prices. Doing nothing imperils his election, and could make the economy even weaker, imperiling his election further, which in turn weakens the economy further. On the good side, the Fed has already eased and will ease more, perhaps before the March FOMC. And lower oil prices at least support consumers worried about the virus crisis.