News & Politics

Turmoil in Crude Oil Markets Signals Larger Economic Crisis Looms On the Horizon

Image by John R Perry from Pixabay

This week, the price of West Texas Intermediate crude oil (WTI) set a historic low, with future contracts trading negative for the first time in history. This precipitous crash signaled a total lack of demand for crude oil in the coming months, in large part due to the economic shutdown associated with the response to coronavirus.

Several things have happened this week in response to the crisis in the oil markets. The Trump Administration announced on Tuesday that it would create a buying opportunity for the Strategic Petroleum Reserve. Trump said in announcing the move:

Based on the record low price of oil, it is at a level that is very interesting to a lot of people, we’re filling up our national petroleum reserves, strategic reserves and we are looking to put as much as 75 million barrels into the reserves themselves that would top it out, that would be the first time in a long time it’s been topped out and we’d get it at the right price.

Taking advantage of the low price would help America’s strategic reserves as well as helping the crude oil industry offload a huge glut on the market. Per Fox News,

If Trump’s plan gets approved by Congress the SPR would act as the motherload of U.S. storage purchased on the cheap.

“We’ll ask for permission to buy it or store it one way or the other it will be full” he added.

Oil has been crushed this year as the coronavirus has eliminated global demand, even before dipping into negative territory crude had lost over 60 percent of its value this year alone. Adding fuel to the fire, a price war between Saudi Arabia and Russia that delayed a production cut in concert with OPEC, that failed to stop the global carnage.

Because crude is traded on the futures market, it is one signal used as a crystal ball to gauge future economic activity. The massive drop in May and June contracts signals that the global economy will get worse before it gets better, although July contracts have not dropped as much. Removing the excess supply is vital. If producers have nowhere to store the crude oil they produce, it will create cascading effects throughout the industry.

This leads to the next action taken to shore up the markets. On Wednesday, the State of Oklahoma approved an emergency application for an oil company to halt production and still maintain their lease:

(Reuters) – Oklahoma’s energy regulator on Wednesday ruled in favor of an oil company’s emergency application to classify unprofitable production as economic waste, enabling producers to maintain leases when output is halted due to low prices.

The decision represents the first win by oil groups seeking regulatory relief to oil and gas prices that have tumbled to levels not seen in decades. New Mexico on Tuesday agreed to allow producers to apply to shut in oil wells on state lands for at least 30 days.

Crude supplies have overwhelmed global demand, which has fallen more than 30% due to the coronavirus outbreak that limited business openings and travel. This week, U.S. crude futures traded negative for the first time in history, and on Wednesday were around $14.60 a barrel.

Finally, on Wednesday, crude oil prices spiked a bit as President Trump ordered the US Navy to fire on Iranian gunboats harassing American ships:

Oil prices spiked Wednesday morning after President Trump threatened action against Iranian gunboats that have been harassing U.S. ships.

West Texas Intermediate crude oil, the U.S. benchmark, gained 19 percent to $13.78 a barrel. WTI was trading at $11.37 ahead of the president’s tweet. Brent crude, the international benchmark, was higher by 5.38 percent at $20.37.

Trump’s statement comes after 11 Iranian vessels last week operated dangerously close to U.S. ships in the Persian Gulf. Earlier on Wednesday, Iran said it launched its first military satellite into orbit.

Wednesday’s rebound amid rising geopolitical tensions comes after WTI crude oil for June delivery plunged 60 percent this week amid worries about demand destruction caused by COVID-19 and ballooning supplies due to the price war between Russia and Saudi Arabia.

Analysts noted that the spike will not last:

While Trump’s comments have provided a short-term lift, they’re unlikely to keep prices elevated.

“You can’t talk oil prices higher. You can’t talk oil prices higher by threatening military action,” Stephen Schork, founder and editor of the daily oil subscription newsletter The Schork Report, told FOX Business.

“The economies have to open up, and they’re closed,” he added. “And that’s the bottom line. So without demand, you’re not going to get any sort of meaningful rally in oil.”

Taken together, these measures appear to provide a reprieve, for crude oil, but that likely won’t last. Economic activity in many sectors remains shut down as we deal with coronavirus. Moreover, actions by the Federal Reserve and bailout bills have had little effect in jump-starting our economy. They have, however, added a significant amount to our public debt, which will only continue to shackle economic activity. As volatility continues in the energy sector, so too will the overall volatility threaten the fundamentals of our economy.

Jeff Reynolds is the author of the book, “Behind the Curtain: Inside the Network of Progressive Billionaires and Their Campaign to Undermine Democracy,” available now at www.WhoOwnsTheDems.com. Jeff hosts a podcast at anchor.fm/BehindTheCurtain. You can follow him on Twitter @ChargerJeff.

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