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Trump says if oil price stays the way it is he would do very substantial tariffs

  
  Analysis
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Oil remarks from US President Trump.

The oil price has plunged at the opening to this week’s trade after weekend news and comments. Trump’s latest in that headline cutting a few cents out of it again.
  • if oil price stays the way it is he would do very substantial tariffs
  • does not think he will need to use tariffs in oil fight
(On that second remark, note that Trump has said a few times from late last week that expects Russia and Saudi to cut production, he’s mentioned by 10m barrels a day, perhaps 15m. Noter also though that the OPEC+ meeting scheduled for today has been put off to April 9. )

Oil: Theater of war

  
Analysis, Crude
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A look at the competitors in the oil price war

A look at the competitors in the oil price war

Disposition

So we have now an all-out oil price war between Saudi Arabia and Russia.

Russia is planning to increase its oil supplies undoing the December output cut once its term ends in March. It is assuring that its fund reserves are ready to absorb the damage from lower oil prices for as long as up to 10 years (with oil prices at $25-30 per barrel).

Saudi Arabia, in response, prepares to increase its own supplies for up to 12mln barrels per day. It also offers its crude under huge discounts, especially in Europe, to push away Russia from its core market.

The opposition doesn’t end here, however: the situation is actually a triangle of relationship rather than a Russia-Saudi Arabia standoff. The US is involved heavily, but indirectly, although it may be not that obvious: recently they just commented that they were hoping to see the oil market in an “orderly” condition.

Let’s observe the starting points of each protagonist here.

The US

Strengths

  • ·The strongest world economy gives the US the highest strategic resilience to withstand any economic damage in the long-term.
  • ·The “newly-founded” domestic shale oil production satisfies a big part of domestic oil demand and enables oil exports.

Weaknesses

  • ·The strongest world economy pushes the internal domestic oil demand chronically higher than the domestic oil production capacities and hence obliges the country to import oil from other countries.
  • ·With the exception of just a few, the US shale oil producers’ break even price for a barrel of oil is well above the current price – that means, they are losing the game now and will most likely stay out as drilling new wells is not profitable.

US oil imports, exports

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Ten Simple Facts about OIL

  
  Education
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Oil_barrel_standard1) Oil is priced in dollars.
2) Oil trades in Dollars and Euros right now in spite of the pricing unit being dollars. OPEC has recently admitted this fact.
3) Clearly oil does not have to be priced in Euros to trade in Euros, or for that matter priced in Yen to trade in Yen. The same applies to any major currency.
4) Neither Venezuela or Iran hold any dollar reserves. To the extent that either is taking trades in dollars, there is clearly nothing forcing them to hold dollars. By extension there is nothing forcing any OPEC country to hold dollars if it doesn’t want to.
5) It takes less than a second for Forex trades to take place. 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency.
6) The above logic applies to any currency and any commodity.
7) Nothing is stopping anyone at any time anywhere from selling dollars for whatever currency they want to hold. Nor is anything stopping anyone anywhere at any time from selling any major currency for U.S. Dollars.
8) Because currency conversion is instantaneous no one has to hold U.S. dollars to buy oil, copper, gold, iron, lead, wheat, soybeans, or anything else.
9) Dollars are held (or not held) for reasons totally unrelated to pricing unit. Some of those reasons are political, some are based on sentiment, some on trade patterns and trade relationships, and some to suppress the value of local currencies to improve exports.
10) Currencies float and so do the price of oil and commodities. Pricing oil (or any other commodity) in Euros will not cause a price change in dollars. Look at gold which is simultaneously priced in everything as proof.

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