Images: Top and Bottom. Oil production crash 2020 and 2021. WTI and the Dow reflation trade, spiking at the same time.
With the so called reflation trade in full swing, although cracks in the hyper parabolic stock market maybe hard to see, apart from valuations been stretched in a dramatic manner, with billions of dollars chasing dividend yields of equities, speculation in cryptocurrencies and the overbidding of the commodity market. It is oil which can be seen as a warning shot that all is not well, rather than any hedge against inflation and a declining US dollar, it maybe reflecting a looming supply shock on declining reserves, elevated overheads and shortfalls in production. Oil demand maybe increasing on expectations of a post-Covid 19 world, but supply is dwindling, with geopolitical tensions also mounting between the superpowers. An inflation based oil shock could be on the cards.
On April the 20th 2020, the oil price gauge known as the West Texas Intermediate (WTI) collapsed to -37 a barrel, an unprecedented price which in simple terms means a trader on a short term contract who bough a barrel of oil before the pandemic, had just witnessed on that day that no one wanted to buy his/her oil. This is a first time in history that this has occurred, when demand collapsed to the point that oil, as a physical commodity, was unloved and unwanted. Without wanting or expecting a full barrel of oil delivered to his/her door steep with no means to store it, the buyer ended up paying the seller to not to deliver that barrel of oil; thus the WTI collapsing into a negative price. Drastically oversold, on the 24th April the price clawed back out of negative territory regaining its bid status at $12 a barrel, still at historically low prices, but on the 9th November 2020 after the pharmaceutical giant Pfizer announced that its COVID-19 vaccine had a 90% effectiveness against a virus that had wreaked havoc on society, the markets, already underwritten by the Federal Reserve per monthly $120 billion bond buying spree to keep the credit markets liquid, roared back to life from their 2020 lows.
As the industrialized nations slowly try to remove their dependence on oil in light of climate change, the investment boom for oil production could be beginning to show the hallmarks of an unsustainable industry, as a decline in overall investments into exploration and oil refineries could end up turning into a crash. The International Energy Agency (IEA) has forecast that oil going into 2021 and gas projects could collapse to over 30% of new projects, with an overall expenditure on oil investment dropping from 483 million in 2019 to 347 million in 2020. Referred to as a “upstream investment”, this production decline in a saturated world of oil due was primarily due the COVID-19 lock downs and the crash in the oil price on the 20th April 2020, which also tore into the profit margins of oil companies wiping out 1.4 trillion in upstream investment. Effecting more so the more indebted and speculative shale oil producers, cuts to oil supply have been gradual, with excesses already built up throughout 2019 and with oil being extraordinary cheap for the consumer throughout 2020, the problem oil companies faced, was trying to offload excess supply, with the virus locking down nations, the consumer wasn’t able to take advantage of these cheap prices. Hence in March 2021, the Organization of the Petroleum Exporting Countries (OPEC) cut oil supply in the following month of April and as simple market theory, these ‘cuts’ to oil output were needed for prices to move upward for the industry to become profitable again.
And this share price spike since the 20th April 2020 lows has occurred rather quickly, which in turn has added to the overall inflation trade of global markets. With interest rates being suppressed and trillions in US Dollars circulating around the global economy, speculation and risk is now front and center, if operational costs do indeed blow out and oil investment ends up crashing further, the oil price could spike significantly and in a more intensified manner. What was called an “oil shock” when the price of oil went sub 0%, was not actually a shock at all for the consumer, deflation rarely is, rather it was a profit shock for the companies that not only produce oil, but hedge black gold as a commodity. However, the shock that will occur is when oil and other consumer goods and services begin to feed off each other in an upward inflationary trend, it will be the end user, that everyday consumer who will feel the potentiality of hyper-inflation at the fuel pump in a very significant manner.
next: “Inflation and the Finite endgame: Oil Inflation. Russia’s strategic power play.”
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