If you mix oil with paper and throw in a match, what do you think it will happen? This short article is intended to add to our list of oil market features a phenomenon we began to discern last month, but which, in our view, is growing. Most importantly, this phenomenon brings us closer to a ‘day of reckoning’ with potentially cataclysmic consequences. Despite no longer being at the centre of the economic world, we know the degree to which oil remains the pillar of the international monetary and financial system based on the still resisting dollar. Not for long, though…
The virtual nature of the international monetary & financial system inherited from the 20th century
It is not very original to say that Western stock markets, essentially based on dollar and dollar-valued commodity trading around the world, are even more disconnected from economic realities than they were in 2008. The famous derivative products of the self-survival mechanism of a financial system that has gone crazy make up just one of countless examples of this proven fact. In 2016, the total amount of derivatives on the market was 1.2 ‘quadrillion’, or $1 200 000 000 000 000, from a total of coins, notes and cash deposit accounts from around the world estimated at 81 000 000 000 000 ($81 trillion)! 
Another example of this total aberration is the quantitative easing (QE) led by the central banks, which are supposed to link international finance with the global economy. The transformation of private debts into public debts, then into cash dumpers (12.3 trillion dollars to be exact in 2016) poured on very private actors who started the transformation chain, simply defies any intelligence and logic. And, as we have often repeated, it challenges the assumptions on which the monetary paradigm and the financing of the economy is based, asking the fundamental question, ‘What is money?’ But let’s not be judgmental… This manipulation will have allowed us to gain the time needed to build another paradigm and avoid a collapse into emptiness. We still need to arrive at this new paradigm, with all the shocks and rebounds one would expect as the plane lands. It is only at the moment of ground impact that we know with certainty if it is to be a landing or a crash.
More examples? Towers are now encircling the sublime city of Istanbul; hundreds of luxury residential towers in the remote outskirts of the city centre… As with Dubai a while ago, promoters keep building huge towers like mushrooms, based on nothing, really; borrowed money, land made available by the state and more-or-less slave labour (the 3.5 million Syrian refugees in Turkey). But from this ‘nothing’, these builders create huge numbers in their bank accounts. A tower of, let’s say, 100000m2 values at $10,000/m2; hence, from nothing, they create a $1 billion entry in their account. Admittedly, nobody will actually live in these towers for a long time, especially with the stunt in growth the Turkish crisis of last summer provoked. But as long as the towers are not confronted with the reality of supply and demand markets, the square meter can remain valued at $10,000 and the $1 billion entry in the bank account remains. Not only does it remain, but, because of it, the builders can borrow again from money they have never had to build the next five towers. The 2008 bubble was burst through a confrontation with reality, but, these days, we’re definitely cleverer than that!
Then there is the pitiful enthusiasm of the Brazilian stock exchange to the announcement of the 46% win by Bolsonaro in the first round of the Presidential elections. The Workers Party (PT) of Lula, then Rousseff, brought out a middle class based on the redistribution of the enormous wealth of the country. In real economy, a middle class is both a sign and a vehicle of health. But the financiers who are so openly celebrating Bolsonaro’s rise do not need a middle class at all…
And these stock markets which continued to break increasing records (in rain, wind or sunny weather), do they actually reflect world realities? Analysts spend their time bringing out models of progression and cycling theories in order to anticipate shocks and to raise the question of sustainability… Certainly, reality has nothing to do with models, but, this time, it goes beyond that. The stock markets are completely out of touch with the world. And the world needs to be clear on this in order to finally progress.
A black market of black gold
What about oil? How is it managing to cavort at $80 in the current context of energy transition and economic downturn in emerging markets?
Let’s quickly recall the principles that have led us to consider a structural downturn in the oil market:
However, if oil producers have no interest in backing a high oil price – no more, of course, than consumer countries – who is increasing them? Clearly, this is the same financial system that we described above, based entirely on the oil-dollar pair and consisting of automated mechanisms of speculation, self-driven and self-sustaining, essentially outside any human intervention. A system which operates essentially on its own and which only persists because of the absolute terror that the prospect of its collapse generates.
Currently, the freezing of the Venezuelan reserves (300 billion barrels), Iranian reserves (157 billion barrels) and Libyan reserves (41.5 billion barrels) theoretically removes 29% of the world’s reserves (1,700 billion barrels) from the market. Enough to sustain prices for sure!
Figure 1: Distribution of proven oil reserves in the world. Source: Energy knowledge
We have been anticipating for many months that this situation will not last long. Donald Trump blocked Iran more for geopolitical reasons than to boost the oil rates. The strong calls he is sending to oil producing countries in favour of an increase in production and the decline in prices support this opinion.
That said, a new phenomenon is to be added to our anticipation of the upcoming relaxation of the oil market – that of circumvention.
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