Oil – The harsh taste of rock bottom

Apr 23, 2020 Editorial

Oil is suddenly bitter, which adds to the ongoing nightmares lived by Guyanese. Whatever cascades were excitedly anticipated and depended upon have all but dissipated for this year. The news is uniformly bad all over, as the haemorrhage continued in early Wednesday futures trading.
Guyana, which has rested so much of its hopes, now flinches from the near pneumonia chills unleashed.
On the New York Mercantile Exchange, Brent crude futures for June delivery stood at US$11.43 a contract, as the freefall continued. The encouraging news is that pricing on this leading benchmark is still in positive territory. It is said that a drowning man gulps for any air he can get. Guyanese are doing just that, because whenever those oil futures engage in what Goldman Sachs described as “exceptionally high” price volatility for the short term, there is sucking for air here, any drop of air.
It is at this hour, like none other before, that inspiring and unified Guyanese political leadership is most called for, most needed. And yet, most dispiritingly, all we have is the ferocious clashing, and the immovable positions that serve nothing on a national scale. Those are only of narrow, self-serving leadership interests and, by extension, those of identically committed fanatical groups.
Goldman Sachs threw a bucket of freezing water on those political self-interests, when its most informative note spoke of “violent rebalancing”, as if Guyanese with their raft of homegrown troubles need any more warnings of more agonies.
The chorus of bad news messengers is near unanimous, with a still more cruel twist to remind us in our little lost world over here of how disconnected we are as a people, from the harsh realities that torment the real world. For there was the Global Head of Energy at prestigious KPMG extending the fears of long-term price declines by being bearish (mainly negative price outlook) not only throughout this punishing year, but into 2021. Locals are already in severe pain, with many lacking hope over personal and national prospects on many fronts. Thus, even to mention the far distance of 2021 weighs us down further.
The reality is that demand for oil and goods is in the wilderness: planes are not flying, drivers are not driving other than for the mandatory, which depletes demand for gasoline, even when it is below US$1.00 a gallon in some places. Unsurprisingly, coronavirus heat is incinerating everything in its path, with production and demand hurtling off a cliff, and lots of inventory stockpiled. According to Bib McNally, president of consulting firm, Rapidian Energy, “demand is contracting two or three times as fast as supply” (Wall Street Journal, April 21).
In a report cum analysis done by Neil Irwin in the New York Times edition of April 21st, the conclusion is that we are experiencing a “deflationary moment.” In an effort to provide more clarity, we expand: “the Covid-19 crisis is an extraordinary deflationary shock to the economy, causing the idling of a vast share of the world’s productive resources.” If there is “idling” of those resources, then not many are operating anywhere near to capacity, not many are working, not many have what is required to buy basics, not many are in a position to pay taxes, in the circular, cascading effects that bring down and hurl still further down.
In this environment, producers have not slowed output as rapidly and intensely as the shifting futures markets were signaling and delivering. Now they have no choice, since they have nowhere to send the oil, nowhere to store it, and nobody standing by ready to buy most of it. All of this has darkly coloured the various revenue calculations that Guyana had in mind.
The big questions on all minds are: how long will this linger? How long before demand rebounds so that inventories are cleared, and production could return to some state of normalcy? And since government tied so much to tens of millions of US dollars flowing to here, that oil slick suddenly is most treacherous. Our hubris has made us overestimate, overreach, and over-depend. The pain of the bottom is sure to be harsh, very harsh for suffering citizens, whose hopes just went up in smoke.

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