The oil price and the groaning inside the swamp
CAPE TOWN – For his presidential election campaign of 2017, Donald Trump once ran on a catchy slogan of ‘draining the swamp’. Very catchy indeed, the swamp that is. For, whatever bothers the swamp gets caught by it. Deep in the swamp, claims Francine C.S Hicks, lurk shadows of darkness, desiring to become your reflection. They feed off your complacency and they feed off your ignorance of the truth. Counter intuitively, POTUS 45 went straight to Goldman Sachs, ignored Hicks at her best and appointed its creatures as senior members of his cabinet. And so became the biggest swamp ogre.
April 20 provides a glimpse of the extent to which the vicissitudes of meddling politics could pervert the pricing of commodities. It also taught us that there are three sides to the prism of truth, two noisy arguments and a shiny illusion right in the middle. And frankly that’s a lot to learn, which scarcely help our understanding of the calamitous events of the fateful Monday morning in the Asian markets.
On that day, the May delivery barrels of the WTI futures contracts collapsed below zero. It would seem as if there is a perfect explanation to it all. And that is the issue of storage or lack of it, we are told. A very suspect logic indeed! It sounds rich for a car recklessly hurtling towards a cliff, to lay blame on the architecture of the rockface. When OPEC+ agreed to binding scheduled cuts, immediately followed by the Group of Five, which included Norway, Canada and Brazil, the US had no intention of obliging. Together with Mexico, they mumbled acquiescence tongue-in-cheek at the collective bargain and derisively laughed their way to more production.
There is adequate literature that plots how 1971 and the abandoning of the gold standard had introduced a new economy driven by debt. The ability of the creation of such debt and the attribution of its profitable values is a function of a secret pact with the Feds which is very difficult to fathom. Their incentive for keeping the debt economy flowing comes from the fiat money printed by the Feds in the form of bailouts. 99 percent of humankind remains outside this pact, and so in their isolation, are burdened by the inelastic sinews of debt and its onerous obligations. The creators of debt in the meantime, recline in the cool inscrutable green slime of the swamp. So powerful is the marsh that nothing in politics or the economy can ever happen without the permission of the swamp dwellers.
Poor shale! You can’t blame them though for recklessness. They owe an approximate $300 billion, a hefty leverage compared to the measly $1.3 billion which triggered the 2008 subprime mortgage lending crisis. Threatened by the asphyxiating debt, they sought help from one Donald J.Trump. Preeminently, they had three things in mind. First, they implored Congress to approve a shale oil bailout. Congress demurred. Second, they persuaded the White House to break up OPEC and form a new alliance consisting of Saudi Arabia and the US. The American Petroleum Institute immediately objected. Third, they motivated for the levying of super tariffs on imported Saudi barrels . The servant of two masters sought diversion and found it in Covid 19.
In 1745, the genius of Carlo Goldoni in his masterpiece, The Servant of Two Masters was in the creation of a character called Truffaldino who literally served two masters. Like the Venice of Goldini, Congress and the swamp represent two masters in the home of the brave. And like Truffaldino of his time, Trump is destined to serve both. Saudi Arabia is a touchy family subject for King Don and is therefore a no-go area. Harold Hamm, the poster boy of shale, dropped the gauntlet with his insistent rallying call of ‘patriotic petroleum’. A bailout for one is a bailout for all! DJT started looking for quick egress options. In the middle, I’m afraid, he is stuck. The Saudis cannot be censured, nor can he ignore shale oil and the block vote it represents. And so he threatened Iran on the April 23 on a tweet instead. Immediately thereafter, the price of a WTI oil barrel on the June futures contract jumped by 40 percent. To be sure, there is no new storage found, but a different index moved. This is the Fear/Excitement Index known as the VIX and traded as VXX.
What happened on April 20 is a tragic financial consequence, long in the making, resulting from a number of things occurring all at once, with Covid-19 providing an ominous slow moving background. The futures obligations matured into a force major, declared or otherwise. The Clearing Houses and mark-to-markets obligations came knocking at the shale door for margin calls. About half a billion US dollars punished a lot of contract holders for being tardy laggards. Futures contracts will be fine I’m sure, as they have been since they were codified into law by Hammurabi in 1750 in ancient Babylon. Since then, so many futures contracts have similarly matured into ugly spectres of war and preternatural events of extraordinary proportions.
I think shale oil can turn off the spigots when their options become insufferable. But this is a different war for a different stage audience. They will take it to the wire, or the ballot box, whichever comes first. Truffaldino is caught between the tempestuous characters of his two masters and their irreconcilable demands. With the powers of the poles pulling him apart and shale oil seething with rage as it is, I am of the view that not even the ballot box can save him.
Ambassador Bheki Gila is a Barrister-at Law. BUSINESS REPORT