[Stribog]

Originally Posted by Thermodynamics

I work for a petrochemical giant. From the other side of the table, We are directly affected by oil prices.


There isn't enough volume of oil production in USA perse and also USA and UK have a significant share of oil produced in the Gulf. It is the Russia's opportunism that has fueled the oil war. When OPEC (Gulf and South American countries) decides to cut volumes, so there is a collective good price for everyone, Russia continued to exploit the high prices. OPEC warned Russia multiple times and they didn't budge. This was bound to happen sooner than later and here they are on their knees.

Sorry sir but on the contrary, it is US private producers who have been exploiting these pricing and production cuts. Russia as a part of OPEC+ does coordinate production cuts and surges with Opec. US shale companies do as they wish, and if prices go up, they benefit from this without any cutback in production. From Feb 2016 to Mar 2020, Russia and Saudi Arabia (Opec+) have been cutting production to shore up oil prices while US shale production has increased.

Putin almost succeeded in collapsing the Shale industry but now with talks of a bail out package, that option does not exist any more.

[Tucker48]

Originally Posted by Thermodynamics

The thing is, Russia has got capacity to pump as much as the other major producers. A country that believes in Socialism, doesn't recognize the importance of a UNION and acts selfish. OPEC went all out, why only we suffer, let every one suffer in a fair market.

OPEC is a cartel not a Union. Let the market decide the price!
Russia has been under sanctions since they annexed(allegedly) Crimea. The sanctions are unilaterally placed by US not by any international body.
It's cheaper to pump out crude in Russia as compared to the US. In Saudi it's even more cheaper.
This was a way for Russia to exact revenge but unfortunately for them this virus came along.
Their plan was to put shale gas producers out of business.
Venezuela with second largest crude oil reserves now has to import refined oil to meet its domestic needs. Why? USA at its best!
Iran can't sell it's oil and no prizes for guessing why?
The market is fair for only USA and it's companies and allies.
That's why we need a multipolar world and an alternative reserve currency.

[Thermodynamics]

Originally Posted by Stribog

From Feb 2016 to Mar 2020, Russia and Saudi Arabia (Opec+) have been cutting production to shore up oil prices while US shale production has increased

Russia didn't cut.

Link

Originally Posted by Tucker48

OPEC is a cartel not a Union. Let the market decide the price!

the problem is not market, it is the production capacity. We have over capacity than actual demand. If crude sells like sand, some facilities may go bankrupt especially the ones in USA and then Russia and then what will be left, just Gulf. Would you prefer, just the Gulf having all the hold on oil ? and in the process of reaching there burn billions of barrels into atmosphere because the greener technologies look insanely expensive.

[digitalnirvana]

Originally Posted by SnS_12

This demand is artificial, since the U.S. dollar is just a middleman in a transaction that has nothing to do with a U.S. product or service.

But that's not true. It has a lot to do with *the* key US product - guns! The dollar is backed by the strongest army, the strongest airforce and the strongest navy in the world - as Libya and Iraq famously found out.

[fache89]

Originally Posted by SmartCat

What is the logic behind dividing dollar supply by physical gold quantity? There are literally hundreds of currencies and many metal commodities (Eg: copper and silver). Copper and silver have an intrinsic value too, and can be used for transactions or as store of value. Also, "value" can be stored in stocks or real estate for a long period of time, not just in gold.

Correction: What I meant was price of Gold relative to USD monetary base. You are correct that there are many currencies. But, USD is world reserve currency because of the PetroDollar system. Thus, everything from Oil, Gold, etc is priced in USD.

You are spot on Copper and Silver. It can be a store of value. But, there is a reason why Central banks all over the world don't keep anything else other than Gold. Because Gold is the ultimate form of money. Robert Kiyosaki says,'Gold is God's money'.

Stocks and real estate over long period can store value. However, one must understand the difference between fair value, over value, and hyper bubble category. IMHO, Gold is fairly well priced at $1700 an ounce relative to currency supply.

[McLaren Rulez]

Originally Posted by Samurai

When countries all around the world locked down due to Coronavirus, reducing air travel and road traffic drastically, wasn't this expected?
I don't follow commodities market, but those who do should have foreseen this, no?

The trouble is getting Russia and OPEC members (particularly Saudi Arabia) to agree and adhere to supply cuts. A game theoretic disaster ensued!

https://en.wikipedia.org/wiki/2020_R..._oil_price_war

[SmartCat]

Why oil at negative $100 isn’t a crazy bet anymore (Bloomberg article)
https://economictimes.indiatimes.com...w/75292979.cms

The world of negative prices doesn’t have a floor, and after this week, anything is possible.

One certainty is that the latest satellite data shows a massive glut. There are 50 million barrels of crude are going into storage every week, enough to fuel Germany, France, Italy, Spain, and the U.K. combined.

And closer home:

India running out of space to store petrol and diesel. Fuel pumps almost full
https://www.livemint.com/news/india/...535128494.html

India is quickly running out of space to store a swelling stockpile of fuel as every possible container - including those in the 66,000 pump stations nationwide - threatens to overflow.

Refiners in India, the world’s third-biggest oil consumer, have filled 95% of about 85 million barrels of fuel storage capacity, according to officials at three state-owned processors

[tarik.arora]

Originally Posted by SnS_12

So, will the recent collapse in Oil prices lead to termination of Petrodollar?

Many thanks for bringing this up. I have zero idea of what a Petrodollar is and how USD and Oil economics work. A couple of months back i read a conspiracy theory that the whole COVID-19 thing has been 'planned' to end this Petrodollar system. I am not sure if the author was high when he was putting things on paper, but everything that he wrote in now starting to make sense.

Mods: Please delete this comment if you feel that such theories / speculations disturb the tone of discussion.

[fache89]

Originally Posted by tarik.arora

Many thanks for bringing this up. I have zero idea of what a Petrodollar is and how USD and Oil economics work.

Allow me to enlighten the forum on Petrodollar monetary system. I would like to go back in history to explain the context as well.

The saying “The Empire on which the sun never sets” has been used to explain the vastness of the British Empire. Britain ruled the world not only because it was a Naval Power at the time, but because world reserve currency was the sterling pound. The aftermath of World War II caused a massive devastation in the European and Asian countries. They were deep in debt. The only country to come unscathed was USA.

In 1944, USA organised a Bretton Woods conference to establish a new monetary system. Almost all the countries participated in this conference. India was represented by C.D. Deshmukh who was the 1st Governor of RBI.

In theory, Bancor (World Currency) as proposed by John Maynard Keynes was supposed to be reserve currency. However, USA objected to it and instead pushed USD to be the world reserve currency. It also agreed to back USD with Gold at $35 an ounce. Thus, all the currencies were pegged to USD and they could redeem it for Gold which was to be kept in USA. This conference also led to the formation of IMF and World bank to give out loans to countries to help them reconstruct themselves post world War II.

Fast forward to 1970s, Uncle Sam was fighting the Vietnam War. In order to fund the war, US printed way too much currency without sufficient backing of Gold. There was just one leader in the world who figured this out. French President Charles De Gaulle at the time sent his Navy to get some of the gold back from America.

Uncle Sam was nervous by now. On August 15, 1971 US President Richard Nixon went on air to promulgate suspension of convertibility of USD to Gold. The key word to note here is suspension, but what he meant was termination. Ideally, this should have caused World War III. But, that was not to be.

Nixon was soon caught up in Watergate Scandal. After a couple of years, there was the Arab - Israeli War of 1973. Organization of Arab Petroleum Exporting Countries (OAPEC) imposed an oil embargo. This led to shortage of fuel and the price of Oil went up from $3 a barrel to $12 a barrel. Americans were stunned and queuing up at Gas stations.

Henry Kissinger, the secretary of state flew to Saudi Arabia to meet King Fahad. The conversation must have gone something like this.

Kissinger: "Your Royal Highness! The money that you are making right now is just peanuts. You could make windfall if you sign a deal with us that you will only sell Oil for USD. "

King Fahad agreed and with it came the Petrodollar money system. Thus every country in the world needed USD because either it was buying or selling Oil. Thus, US could print unlimited amount of USD and it became the world reserve currency again albeit without the Gold.

Originally Posted by digitalnirvana

But that's not true. It has a lot to do with *the* key US product - guns! The dollar is backed by the strongest army, the strongest airforce and the strongest navy in the world - as Libya and Iraq famously found out.

Twice in the recent history, the Petrodollar was challenged. The first time was by Saddam Hussein who was once a CIA agent. However, once he came to power He announced that he'd be selling Oil in Euros. We know what US did in the garb of weapons of mass destruction in that country.

Second time, Colonel Gaddafi challenged the hegemony of US because behind the scenes he was working on a Gold backed African dollar which should be used to trade Oil.

Today, USA is precariously placed because it is the world largest producing nation of Oil. However, Saudi Arabia continues to world largest exporter. The falling Oil prices has unsettled US more than anybody else because US has a lot of shale production. The Shale wells cannot be simply stopped. If you stop them, then you simply can't restart. The shale wells would simply undergo something like an engine cease on a highway. Thus, they have to keep them on and find space for excess Oil.

These are the times which beget revolutions and War. Hence, it must come as no surpise that Donald Trump tweeted threatening Iran with dire repercussions if it messes around with its ships and the price of Oil went up.

I can't comment on the conspiracy theories, but I reckon there is a plan in the works for de-dollarisation. Will it be led by Russia-China-Iran or a Digital dollar in a Cryptocurrency or an IMF led SDR (Special Drawing rights). Only time will tell.

[Nav-i-gator]

Originally Posted by fache89

Allow me to enlighten the forum on Petrodollar monetary system. I would like to go back in history to explain the context as well.

Thanks for the insightful post. The more I read US and contemporary world history post WW2, more I am intrigued by how US have manipulated the world to become stronger and stronger, and still wonder how every country was either cajoled, forced, or decimated to fall in line.

They exercised the potent mix of free market, strong & unchallenged military might and lure of democracy quite efficiently. Now that a pure capitalist is at the helm there, one thing we can be sure of - no WW3 as long as he is president. A capitalist knows the lure of money (and dread of losing it) is more important and only "gun Dollars" can not sustain it in this changing world.

[GT3]

Negative oil prices explained in simple terms:

https://www.youtube.com/watch?v=YGDQzORZ4NM&t=913s

[SilentEngine]

Apparently the software at MCX isn't able to handle contracts with negative values, and it has resulted in incorrect settlements.

https://www.moneycontrol.com/news/bu...0-5184081.html

[fache89]

Originally Posted by fache89

Henry Kissinger, the secretary of state flew to Saudi Arabia to meet King Fahad. The conversation must have gone something like this.

Correction: It was King Faisal, and not King Fahad.

[V.Narayan]

Originally Posted by fache89

Allow me to enlighten the forum on Petrodollar monetary system. I would like to go back in history to explain the context as well.

@fache89, Excellent summary. Lovely to have you on this forum.

All, to add to the precis @fache89 has written -- in 1973 the Americans basically, very cleverly, converted the US$ from a currency backed by allegedly enough gold reserves {which in reality they did not have} to one backed by the need to trade in petroleum which they figured was needed for the next 60 to 100 years from 1973. The turmoil today could {not sure, but could} see the USD become one of two or three currencies* that play the role of reserve currencies. Should that happen I suspect {but may be wrong} the US Govt will need to scale down its gargantuan debt pile. Any nation that holds the reserve currency basically dominates the world as it controls the salt everyone needs in their food.

*...at least one of which will be a digital/crypto currency

[alpha1]

Originally Posted by fache89

If one divides the supply of Dollar with the Physical Gold, one can reach a figure of $20,000 and increasing exponentially.

Well, do you mean that an ideal currency system would be the one that doesn't lose its value over time, but actually should increase?

I for one believe all currencies should actually get devalued with time. Otherwise there is no balancing force to the hoarding effect. Gold has extremely limited usage besides hoarding; a Gold back currency would behave extremely similar. And what does this decrease in money velocity lead to?

The purpose of currency is to establish a medium of transacting goods and services. If you want appreciation of value, buy some asset like real estate, shares/stocks, debt/bonds etc that galvanize economic activity ... or well you can also buy gold .

I am also surprised how you have arrived at a fair valuation of $1700 per oz figure? It should actually fluctuate according to the expected returns from other appreciating assets. Actually a plot of gold price vs cost of capital may be more informative for predicting the price movements.


###
On the topic of price of crude oil.
Economy of Russia is not as dependent on petroleum as Saudi.
The prices will come back to the $60/bbl levels because:
1) all of the E&P facilities, refineries and petrochem plants stay as it is (no destruction of assets)
2) the demand for fuels and petrochems is not going to vanish (end user consumption - even if say the population of world decreases by 5% due to Covid)
3) Saudi cannot sustain nearly zero crude oil price, the kingdom will be financially ruined slowly