Oil Price Rally is Flimsy and Stinks of a Dead Cat Bounce

The oil price rally may not be based in reality as the overarching issue of an outsized supply glut remains whether or not the price war ends.
Donald Trump, MBS
President Trump doesn't have as much influence on the oil markets as he thinks. | Image: REUTERS/Kevin Lamarque/File Photo
  • Oil price gains are likely to be short lived as Donald Trump’s optimism regarding a deal has been dismissed by the Kremlin.
  • Trump has limited options when it comes to helping the oil industry.
  • A tariff on importing oil might be the only way to stabilize prices, but that probably isn’t in the cards.

Oil prices posted a substantial gain on Thursday as investors absorbed Donald Trump’s remarks that a deal between Saudi Arabia and Russia was on the horizon. The two nations’ oil price war has taken the price of Brent crude oil to historic lows, but the president believes the two may lay down their swords sooner than later.

Oil Price Will Follow China Trade-Deal Cycle

The uptick in oil prices will likely be short-lived. | Source: BBC

Donald Trump announced Thursday that conversations with both Russia and Saudi Arabia suggested they’d announce a production cut of up to 15 million barrels.

That’s an abrupt about face from where Russia stood just a few hours earlier. On Wednesday Trump said the two sides would “work it out over the next few days,” but the Kremlin replied that Trump’s version of events was false. A spokesperson for Vladimir Putin said no talks between Russia and Saudi Arabia are planned:

So far, no one has started talking about any specific or even abstract deals in exchange for Opec+

This isn’t the first time Donald Trump has made false remarks to boost markets, and it probably won’t be the last. For that reason, investors who are trading based on oil news might want to buckle up. If the U.S.-China trade deal saga taught us anything, it’s that the market is in for a bumpy ride.

Oversupply Just as Pressing

Even if the two are able to come to some miraculous agreement, the supply glut has become so pronounced that it may not have much of an impact.

Analysts at JCB Energy noted that the conflict between Russia and Saudi Arabia is equally as worrying as the lack of demand for oil in the current climate:

The political hurdles to any supply deal are as large as the balance problem itself

Not only were Trump’s remarks on Wednesday premature, but they also don’t matter much in the scheme of things. As Jim Cramer pointed out on Twitter, the president would need to impose a tariff on imported oil to restore balance and support oil prices for good—that’s unlikely.

oil price
Jim Cramer pointed out that a tariff is one way to stabilize oil prices. | Source: Twitter

Trump is reportedly meeting with oil big-wigs on Friday to discuss what can be done to support the battered industry. But even if he does want to help prop up oil prices, Trump’s options will be limited. 

Tariff an Unlikely Solution

First, there’s the geopolitical repercussions of adding tariffs to imported oil. Just as we saw with his Chinese trade war, the ramifications can be costly to American businesses.

Oil price
Saving oil producers at the expense of other industries suffering from coronavirus fallout isn’t a smart political move for Trump. | Source: corlaffra/Shutterstock.com

Plus, there would almost certainly be push back from lawmakers in Washington who would say Trump should be focused on the pandemic and reviving the American economy rather than bailing out the energy sector.

At best, the president may be able to lower the royalties companies pay for using federal land to extract oil and gas—but that won’t do much to address the lack of demand that’s overcome the market.

Negative Oil Prices Could be Coming

Senior energy analyst at Neuberger Berman Jeff Wyll predicts that if coronavirus lockdown measures persist, demand could sink low enough to push prices into the negative territory:

The market is starting to signal that not only is there no demand for this crude, eventually there could be nowhere for it to go

That would mean the world would have so much oil on hand, that there would be nowhere to store it. That scenario could play out this month, according to analysts at JCB Energy:

Demand is falling so fast relative to supply that very soon many producers’ main issue is not going to be whether they can ensure operating profit but rather if they can find an outlet for their crude

The firm said around 6 million barrels could be “homeless” in April. In May, that figure is slated to rise to 7 million. That could push oil prices negative if it means oil producers have to pay someone to take it off their hands. 

Sam Bourgi edited this article for CCN - Capital & Celeb News. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

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