The Guardian: Lower demand for oil may cause a financial crisis .. Bin Salman's move was a miscalculation

A report by British newspaper The Guardian by Helen Thompson said that Saudi Crown Prince Mohammed bin Salman's move after the failure of the OPEC Plus meeting to flood oil markets was "an amazing miscalculation" and that what he did caused the stock and bond markets to collapse after that.

The Cambridge University political professor said that when the price of West Texas Intermediate crude futures for the month of May fell to minus $ 38 per barrel last Monday, the Covid-19 crisis seemed to have taken a turn towards surrealism.

Traders, some of whom would buy oil as a financial asset and not to use it, would pay people to take oil from them because few had the ability to deliver it at Cushing Storage Station in Oklahoma, where storage capacity reached theoretically maximum.

And considered the professor of political economy that what happened on Monday, corresponding to the date of April 20 at the level of oil circulation was a secondary phenomenon that oil has invoked as a financial commodity.

She said no one thought that the demand for oil will be affected permanently, and indeed the price of West Texas Intermediate crude futures for the month of June remained around the corner of twenty dollars per barrel, such as the price of Brent crude, which is the reference standard for European, Middle Eastern and African oil.

But that - the author adds - does not mean that there is no problem about to happen in the oil market, and therefore for all of us, even for June prices, the current rate is dangerously low.

She pointed out that during the past few years, the abundance of production led to the sale of oil at very low prices for producers to take profits or to finance oil countries, such as the Kingdom of Saudi Arabia, and this was done in the wake of American producers seeking to pump shale oil into the market.

The aim of this - the author asserts - was to compensate for the shortfall that had previously existed in global markets, but by 2014 the pumping of shale oil into the markets in addition to the traditional oil provided by the Organization of Petroleum Exporting Countries (OPEC) and Russia saturated the market to glut. 

Devastating race

The author explained that when many producers wanted to sell a lot of oil, they all engaged in a devastating race to the abyss. When the price of oil reached the point of crisis, the producing countries were interested in cooperating to curb production in order to restore prices to their former times.

And she added that these movements in the markets pushed Saudi Arabia and Russia to form a reluctant alliance in November 2016 in what is known as the "OPEC Plus Alliance". But Saudi-Russian cooperation allowed US shale companies to raise prices freely.

After the United States imposed a package of sanctions on Moscow over the Nord Stream 2 gas pipeline - a project that would have allowed Russia to export more gas to Germany - at the end of last year, Vladimir Putin became more reluctant to allow Americans to operate freely to lift Prices by stopping Russian production.

The professor of political economy reported that after the Covid-19 wave and the global economy approaching a recession, the OPEC Plus alliance of the major oil producers led by Saudi Arabia and Russia collapsed.

It seems that when Russian President Vladimir Putin refused to limit production to stabilize prices, Muhammad bin Salman decided to dump the market instead to acquire a larger market share, she said.

She added that, given that the demand for oil was declining at the time, Bin Salman's decision reflected an astonishing miscalculation of the crisis and also caused the collapse of stock and bond markets during the week that began on the ninth of last March.

The news does not bode well
The writer indicated that if the collapse of the futures contracts for the month of May is an example of the problems facing the oil markets, the fact is that the prices of the future contracts for the year 2022 for that day that did not exceed much thirty dollars do not bode well.

Oil prices must be high enough to cover the cost of production and pay off the debts that support the sector in the case of US shale oil. 

Without high prices, the author warned that there would be insufficient supply to restore growth, and that oil would default on loans through bond markets, which could lead to another banking crisis.

The Mexican state oil company, Pimex, is already suffering from a debt crisis, and credit rating agency Moody's this week downgraded the sovereign debt rating of Mexico due to the difficulties experienced by Pimkes.

The writer said that the bad news for those who think that the collapse of oil prices is a good thing for the climate, is that our financial markets, our economies and our policies are closely linked to oil, and this industry is in distress.

"There may not be a rapid transition to the green economy, because there are not yet enough alternative energy sources to replace the amount of economic and daily activities fueled by oil," she added.

The author concludes that it is possible that the demand for oil will not reach 100 million barrels per day again for a long time, but the economy will not begin to recover from the global closure if this does not include consumers buying more expensive oil and the commodities associated with it.