Vladimir Putin, the leader of Russia, just declared open war with U.S. oil producers. In a meeting with OPEC+, his energy minister let the other members know that Russia will no longer be playing ball in terms of how cheap they’ll sell oil.
This has led to an oil price implosion. As of right now, WTI – West Texas Intermediate – is trading at 28.3, over a 30% drop in a single day and the biggest oil price crash since 1991.
This is going to cause utter carnage for U.S. energy producers because $30 oil is simply too cheap for most oil and gas businesses to stay afloat forever. This is one reason, among many, that junk bonds have been hit hard.
Why would Russia do this? Pretty simple:
- Putin is an opportunist. He saw that this was the perfect time to hit oil markets since they were already weak from the Coronavirus fallout.
- Putin knows that sometimes taking a hit is worth it if your enemy is hit harder.
- Putin’s enemy, in his eyes, is the U.S. oil industry that he sees as leaching off of the artificially high prices created by OPEC+.
Someone who was familiar with the Russia-OPEC negotiations reported, via the Financial Times:
“Russia has had enough of the shale guys living off Opec-plus.”
In terms of financial strategy, this was a massive gamble. There’s no telling what his next move will be.
Trump should immediately declare U.S. oil assets as strategic assets and ban foreigners from buying them.
All of the fear has led to a massive stampede for safety, meaning the safer the asset, the higher the price will be. Gold is up, Treasury bills are way up, and corporate bonds are either up or down depending on credit rating.
On the plus side, energy consumption should get cheaper. But all of the oil price drops won’t translate to the same percentage drop for gasoline since gasoline prices are based on refinery output, which bottlenecks any savings from being perfectly translated to cheaper-at-the-pump results.
Get ready for a bumpy ride. It’s just starting.