The Economist - UK (2022-03-26)

74 Finance&economics TheEconomistMarch26th 2022

Oil

A volatilemix

A

lmosta monthafterRussia’sinvasion

ofUkrainesenttheoilpricesurging,

turbulenceinoneoftheworld’smostcru­

cialcommoditiesmarketsshowslittlesign

ofcomingtoanend.Thepriceofa barrelof

Brentcrudeoilsurgedto $121onMarch

23rd,asstormdamagehaltedexportsfrom

a Russianpipeline.Overthepastfortnight

ithaswhipsawedfroma peakof$128toas

lowas$98.Thepandemic­relatedchaosof

2020 aside,theovxindexofoil­marketvo­

latilityhasrarelybeenhigherinthepast

decadethanit hasbeenthismonth.

The swings reflect the interplay be­

tweenthegeopoliticalandeconomicforc­

esbuffetingtheworldtoday,fromwarto

risinginterestratesandcovid­19.Evenbe­

yondtheoutcomeoftheconflictinUk­

raine,therearethreebigsourcesofuncer­

taintyfortheoilmarket.Thefirstiswhat

themembersoftheOrganisationofthePe­

troleumExportingCountries(opec) doas

theWest’ssanctionsbiteandRussianpro­

ductionisshunned.Americahasbanned

importsofRussianoil;evenincountries

thathavenottakenthatstep,prospective

buyersarestrugglingtotransactwiththe

Russianfinancialintermediariesthathave

beencutofffromtheplumbingofglobalfi­

nanceasa resultofsanctions,andmayfear

freshsanctionstocome.

OnMarch16ththeInternationalEnergy

Agency,anofficialforecaster,saidthatin­

ternationalmarketscouldfacea shortfall

of3mbarrelsofoilperdayfromAprilasa

consequence.(Theworldconsumedabout

98mbarrelsa daylastyear.)Thedisruption

inwhatwasoncea fluidglobalmarketis

best illustrated by thegap between the

pricesoftheBrentbenchmarkandUrals

oil.OnJanuary31stitstoodatabout 60

cents per barrel. By March 23rd it was

around$30.

Thisleavesa greatdealofpowerinthe

handsofthetwocountriesthataremost

abletooffseta chunkoftheRussianshort­

fall: Saudi Arabia and the United Arab

Emirates.Sofar,bothhaveresistedpleasto

raiseoutputsubstantially.Ata meetingin

earlyMarch,opecanditsallies(including

Russia)merelyconfirmedexistingplansto

raiseoveralloutputby400,000barrelsper

day.Theirnextgathering,attheendofthis

month,willbewatchedclosely.Evensmall

shiftsinpublicpronouncementshavethe

potentialtosetoffswingsintheoilprice.

Thesecondseamofuncertaintyrelates

tothecapacityofAmericanshale­oilpro­

ductiontomeetthesupplyshortfall.Dur­

ingthefirstfrackingboom,whichlasted

fromaround 2010 to2015,Americanoutput

surged,causingtheoilpricetoslumpand

weakeningopec‘shand.Butconditionsin

theAmericaneconomyhavechangeddra­

matically since,leavinganalystsandin­

dustryinsidersdoubtfulthatshalecanrise

tothechallenge.

Fora start,financingconditionsareless

encouraging than they were during the

boomin2010­15.TheFederalReserveisex­

pectedtoraiseinterestratesseveraltimes

this year and next: two­year Treasury

yieldsarejustabove2%,comparedwith

the sub­1% levels that persisted during

mostofthepastboom.Anotherconstraint

onproductioncomesfromAmerica’stight

labour market.Just over128,000 people

wereemployedinoil­and­gasextractionin

February,downfrommorethan200,000at

the heightofthe frackingboominlate

2014. With the headline unemployment
      rateat3.8%andemployersstrugglingtofill
      vacanciesalready,findingseveraltensof
      thousandsofworkerstomoveacrossthe
      countrywillbenomeanfeat.
      Theindustry’sattitudeshavealsoshift­
      ed.BothAmericanproducersandtheirpo­
      tentialcreditorsarenowfarmorecautious
      aboutborrowing.Banksandassetmanag­
      ers areboundby stricterenvironmental

standards.Thatisonefactordrivingcosts

higher.Inthefirstquarterof 2022 energy­

explorationandproductionfirmsreported

thesteepestincreaseinlease­operatingex­

penses(ie,therecurringcostsofoperating

wells)inatleastsixyears,accordingtoa

surveyby theDallasFed. Drillersthem­

selves,havingstruggledto makeconsis­

tentprofitsinthepast,arefarkeeneron

capitaldisciplinethistime,too.

Thethirdcomponentofthevolatilityin

theoilpriceistodowithdemand.China’s

“zero­covid”strategyisbeingtestedtoan

extremedegree.Thecountryhasrecorded

itshighestnumbersofcasessincethepan­

demicbegan,andbigcitiesarefacingroll­

inglockdownsagain(seenextstory).Platts

Analytics,a commodities­researchhouse,

suggeststhattherestrictionscouldcutoil

demand by 650,000 barrels per day in

March,roughlyequivalenttoVenezuela’s

oiloutput.

Evenbeforethelockdownsbegan,there

were signs of a deceleration in China’s

economy,particularlyinthepropertysec­

tor.Any sign thatthe slowdown inthe

world’sbiggestimporterofenergyisbe­

comingbroad­basedwouldmeanmoretu­

multforcommodities.

The machinations ofopec, the shale

calculusinAmerica,andthehealthofthe

Chineseeconomy:anyoneofthesesourc­

esofuncertaintywouldusuallybesuffi­

cienttogeneratepriceswings.Together,

theymakea flammablemix.n

H ONGKONG

Thethreebiguncertaintiesclouding

theoilmarket

Toingandfroing

Brentcrudeoilprice,$ perbarrel

Source: Refinitiv Datastream

1

140

120

100

80

60

40

20

0

202 2022

MFJDNOSAJJMAMFJ

Ural alone

Price difference between Brent crude and

Urals oil, $ per barrel

Source:RefinitivDatastream

2

↓ Urals cheaper than Brent

0

-10

-20

-30

202 2022

MFJDNOSAJJMAMFJ

InvestinginChina

Departing

thoughts

S

tate mediahave  not  tried  to  hide  the

fact that billions of dollars in global in­

vestors’ funds have drained away from Chi­

na  in  recent  weeks.  They  have  attributed

the  outflows—$11.5bn  since  the  start  of

March—to  volatility  in  global  markets,  a

hawkish Federal Reserve and the impact of

Russia’s invasion of Ukraine on global sup­

ply  chains.  One  government  publication

downplayed  the  seriousness  of  the  situa­

tion  and  speculated  that  foreign  money

will soon come pouring back in.

Indeed,  China’s  markets  have  experi­

enced  short  spells  of  outflows  in  recent

years  only  to  see  them  reverse  quickly,

usually within two months. Onshore mar­

kets have mainly been a sure bet since the

inclusion  of  many  mainland­traded  secu­

rities  in  several  global  indices,  such  as

msci’s  flagship  emerging­markets  index,

starting in 2018. Tens of billions of dollars’

Why foreign punters are feeling jittery

about China