It seems that the Federal Reserve can’t get a break. For months, President Trump has been increasingly criticizing the Fed’s policy of incrementally increasing interest rates, a near-unprecedented move for an American president. After the most recent Fed move to hike interest rates by a quarter of a percentage point last week, Trump tweeted on Monday that the Fed was the “only problem our economy has.”
“They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch — he can’t putt!” Trump added in his tweet. Trump’s remarks sent the White House scrambling on damage control mode, trying to ensure both domestic and global markets that the president was not about to try to remove Fed chairman Jerome Powell from office. Stock markets plunged the next day as worries over U.S. leadership waned as well as other economic concerns. An Associated Press (AP) report said Trump’s latest tweet attacking the Fed was met with concern that any effort to diminish Powell or remove him as chairman could destabilize the economy.
Russian criticism
Now, criticism over Fed policy is coming from an unlikely place - Russia. The head of Russian oil giant Rosneft, Igor Sechin, said yesterday the slump in global oil prices was mostly linked to a fresh interest rate hike announced by the U.S. Federal Reserve last week. He added that he saw oil prices at $50-53 per barrel next year.
Not only is it noteworthy that the head of a foreign oil company would criticize the Federal Reserve, but it could open the floodgates for more criticism over Fed policy, second-guessing and angst over what should remain an institution undeterred by both domestic and international politics. Related: ExxonMobil Faces Off With Venezuela’s Navy
Another takeaway from Sechin’s comments is what is likely growing concern among not only Russian oil production companies, but Moscow itself, over oil prices that have plunged around 40 percent since hitting multi-year highs in October. Prices remain in the doldrums over concerns about the global economy, ongoing trade tensions between Washington and Beijing, though there is a temporary freeze on increased tariffs until at least March 2, slowing oil demand growth in 2019 and record oil production, mostly coming from the U.S., Russia and Saudi Arabia - the world’s top three oil producers.
Unknown variables
The unknown variable in the oil markets equation is how markets will respond in January going forward when the OPEC+ deal reached earlier this month to trim 1.2 million b/d will impact an anticipated oil supply overhang. So far, it appears that the market has largely discounted the oil output cut, signaling that more action could be needed, particularly from both oil production heavy weights Saudi Arabia and Russia. It also remains to be seen if U.S. shale oil production will continue on its record-setting pace into 2019. However, it appears that U.S. production could push ahead despite prices for West Texas Intermediate (WTI) crude futures having settled in the mid-$40s price point, well below the oil production break-even price for a number of producers. Related: The Battle To Control Russia’s Pipelines
U.S. shale oil production
Baker Hughes reported a 9-rig increase for oil and gas in the U.S. last week - a turnaround from three losses in a row in the three prior weeks. The total number of active oil and gas drilling rigs in the country now stands at 1,080 according to the report, with the number of active oil rigs increasing by 10 to reach 883 and the number of gas rigs decreasing by 1 to 197. The oil and gas rig count is now 149 up from this time last year, 136 of which is in oil production rigs.
Dwindling state coffers
The stakes are high for not only the global economy, oil companies, and developing market economies (which seem to be most severely hit when equity and oil markets fluctuate too much as well as struggling with a strong U.S. dollar), but also for Riyadh and Moscow, since both are largely dependent on oil revenue for state coffers. While both countries are already seeing those revenues decline precariously over the last two months, it appears that Saudi Arabia could take the largest hit as its economy is less diversified than Russia.
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By Tim Daiss for Oilprice.com
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In a paper titled:”A Post-Oil Era Is a Myth” I gave at the 8th conference on Scientific Research in Amman, Jordan on the 11th of November 2017, I said that the United States has been manipulating oil prices for ages by falsifying claims about rising US oil production and significant build-up in US crude and products inventories and hiking the value of the US dollar opposite other currencies.
Any sign of the oil price heading upwards prompts the US Energy Information Administration (EIA) to claim a huge addition of a few million barrels to US oil stocks. However, an addition to stocks could only happen in three ways: one if the United States is producing far beyond its oil needs. This is not the case otherwise it wouldn’t have imported 8.72 million barrels a day (mbd) in 2017 according the 2018 OPEC Annual Statistical Bulletin with the projection that its imports in 2018 will amount to 8.8 mbd. The other is that the US is taking advantage of low oil prices by importing so much thus increasing its stocks. If this is the case, then the rising demand for imports should push the price up. A third is that US oil demand is declining thus adding to the stocks. This is not true either as US oil demand has been steadily growing by 1.54% annually for the last five years.
The United States is also able to manipulate the oil prices through the petrodollar. By hiking the interest rate of the dollar by which oil is priced, the value of the dollar appreciates against other currencies thus exerting a downward pressure on the global oil demand and therefore on oil prices. Conversely, by devaluing the dollar, the actual purchasing power of the oil revenues of members of OPEC and other oil-producing nations around the world declines against other world currencies forcing them to raise oil production to maintain revenue thus depressing the oil price.
To reduce the impact of this malpractice, OPEC members are well advised to cut all their oil exports to the US estimated at 3.21 mbd which have been augmenting US crude oil inventories. They should also adopt the petro-yuan in preference to the petrodollar since 80% of their oil exports go to the Asia-Pacific region particularly China.
And while low oil prices undermine the US shale oil industry which employs 2% of the work force in the United States, US shale oil producers will never stop production for two reasons. The first is that the US shale oil industry is not judged by standard criteria of economics and profit that govern conventional oil companies otherwise it would have been declared bankrupt years ago given the hundreds of billions of dollars it owes Wall Street. It has to keep producing irrespective of oil prices just to remain afloat. In other words, the US shale industry works on the principle of “robbing Peter to pay Paul” supported by Wall Street investors.
The second reason is that despite being very deeply in debt, the US shale oil industry will continue operating because it gives the United States a say in the global oil prices and markets along with Russia and Saudi Arabia. Without that, the EIA will not be able to hype about the US becoming the world’s top oil producer or the US is now a net oil exporter.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London