04 апреля 2020
335

Triangular Chinese Chess and the Oil Market

We are facing an economic and political drama against the backdrop of a viral pandemic that played in unison in an unexpected way on March 8, 2020. The imbalance of the world oil market in March has already led to a drop in oil prices below the crisis levels seen in 2009 and 2015. The world media is enjoying asserting various conspiracy explanations, entertaining the reader, but barely hiding the pleasure that the actors themselves are “bleeding” amid financial hits and losses to their image.

A model of the situation exists in ancient Chinese chess, in which three of the players must make their moves with stone faces (that is, without the media!). Only one player wins in Chinese chess, and along the way every player constantly has to make moves in a coalition with either the partner on the right or the left.

The fundamental difference between the oil market and Chinese chess at the moment is that absolutely everyone is losing. But we have two trios of players. The first one is the US private shale industry; the Russian group of oil companies; and ARAMCO, the state-owned “mono-company” in the Kingdom of Saudi Arabia. The first group came out of a mature industry and, seeking profitability, began to export. It does not need a drop in oil prices, since it was the threat of lower prices from competition that forced OPEC+ to gradually give the market to it. If prices fall for a long time, investors will suffer losses, which the Russian government absolutely does not need in the year of elections and pandemics. Russian companies are in a specific position: they will survive in the price war, but they cannot manipulate production (wells are difficult to bring to life after they are closed). Big losses will be borne by the budget, which usually removes most of the oil rent (through export duties). This is not desirable for our Ministry of Finance, especially given low growth rates and costs to combat the threat of an epidemic! Saudi Arabia’s oil producers are generally the easiest of all – Russia has 50 times as many wells, and it is much easier for the Saudis to increase/reduce production. But the country does not need its own high expenses or a long depressed state of the market. A previous attempt to bring down prices and slow down the development of the shale industry yielded the opposite results – the cost of shale oil production decreased and production volumes increased. There were many financial losses, but the rigs survived and changed hands (most probably at a lower price).

The triangle of companies corresponds to the triangle of the respective governments with their political interests. While the chess players are making statements that are more likely to indicate the willingness of the parties to wait and see what happens, the global recession from the pandemic is gaining momentum and you can wait for the April IMF Report, which everyone will believe and adjust forecasts of the dynamics of national economies, energy demand, prices for them and the income of companies and ministries.

The Wall Street Journal cited White House officials as saying the Trump administration is considering new sanctions against Russia in connection with its withdrawal from the OPEC deal. Of course, Russia, which has its own complex array of interests, certainly did not push its partners to pursue a collapse in prices. It is unlikely that during a pandemic it makes sense to impose any sanctions based on far-fetched pretexts, all the more so, as this will in no way lead the market out of its current impasse on the oil chessboard. There is a large volume of excess oil; according to the IEA, in the 1stquarter – it amounted to about 4 mbd (approximately 4% of world production). These volumes can be partially poured into reserves (the US government is already buying oil – 77 million barrels). But China is still experiencing a severe recession, while the EU is quarantining itself country by country.

Frankly speaking, the World Pandemic and the Recession are changing all external conditions of the market situation and destroying all long-term plans in this strange chess game, even if they were devised in all seriousness and somewhat rational. This is a very strange time for exporters to add politics and emotions to the collapse of their income, possibly for a long time. Ancient Chinese (as well as current ones) would be extremely surprised at the low degree of rationality of what is happening. If the world recession drags on, then exporters are marching towards extended periods of loss, and possibly, exacerbating it with secondary trade-related shocks. But the global rise of 2017-2019 took place largely due to the stability of oil prices and the predictability of the behaviour of key players in the market. This is a payment for the collapse of global coordination and the stability of the rules of the game, undermining the stability and conditions of the global economy.

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