Understanding Oil :

Understanding Oil : US shale producers have added a huge surplus into the global oil market , making the US a net oil exporter . OPEC+ Russia were trying to keep supplies constrained to keep prices up. They tried to bankrupt the US producers in 2014 but failed . 1/n 

Last week there was no agreement on further cuts . This seems to be a decision made to push the over leveraged US shale producers to bankruptcy by unleashing a supply glut in a falling demand environment . The consequences are complex . 2/n 

A large portion of the US junk bonds market is funding US shale producers . At USD 55 levels they were profitable . At USD 35 levels it will be difficult . The Saudi and Russian aim is to cripple this supply and then raise rates once bankruptcies have removed some of this . 3/n 

This was tried in 2014 and did not work . In 2020 given the demand pressures , the amount of debt and the size of the US shale production , this oil price war will hurt if prices stay below USD 50 to 60 range 4/n 

The Russians have built financial reserves over the last 6 years and can withstand the huge fiscal deficit that low oil prices and continued economic sanctions will lead to . They claim they can hold out for multiple years. Not so sure . 5/n 

Saudis will face larger fiscal deficits in selling oil so cheap . The show case Aramco listing is already trading below the IPO price . The Saudi govt will need to borrow and spend more and keep the growth initiatives going domestically . Funding becomes a question mark 6/n 

Other OPEC producers will see a knock on impact of lower prices . Real estate in the Middle East will be the first victim . Recipients of aid from the Middle East as well as the value chains supplying goods to them will suffer . 7/n 

Non oil producing countries will see their oil import bills lowered dramatically if oil sustains at the USD 35 levels for a few months . Consumers will benefit and central banks will have monetary space to cut rates as deflation gets imported in 8/n 

But the destruction in aggregate global demand is what is spooking the markets . Given integrated value chains, demand destruction will outweigh the positive impact of lower oil prices globally 9/n 

Add on Coronavirus uncertainty , a US election year , already weak European ,Japanese , Chinese economies and we have a major global risk off . On its 11 th anniversary the Global Bull market is teetering on the brink of ceding ground to the bears 10/n 

The usual monetary stimulus is still on the table but seems to have diminishing marginal utility . Fiscal steps will be needed to reinflate and reflate the global economy . Those resources are limited 11/n 

Add in the geopolitical issues and we have convergent , global, large scale risks . The need is for a fresh concerted , convergent and united action by the G7 and G20 leadership 12/n 

Statesmanship is rare at present in the anti globalisation, “my country first”environment . The market forces will take time to sort this out and the cost will be painful . “RIP Good Times”as a PE fund wrote in 2008 before the GFC tsunami . We have to move fast,unitedly 13/13