Oil price war; Zombie corporates
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Game theory and playing chicken in the global oil market. WTI/Brent Crude plunged by 30% as Saudi Aramco begins yet another oil price war. The lesson of the 2014 oil price crash demonstrates that this can continue for another two years as the two protagonists go eye ball to eye ball.
As hundreds of US shale E&P firms go bankrupt, this will have a huge impact on the US Presidential election and thus US-Saudi relations. Putin plays judo, not chess but he has miscalculated that his $42 budget breakeven price, $170 billion sovereign reserve fund, cheaper ruble and more diversified industrial base will protect Russia's economy from recession.
The financial fallout on the Saudi economy will be draconian if Riyadh raises output to its maximum capacity of 12 MBD. The Saudi drilling cost is the world's lowest, below $10 a barrel but the kingdom's budget breakeven price is $85 Brent at a time the kingdom has announced the most fiscally expansionary State Budget ever.
The mathematics of Von Neumann's "game theory" will govern Russia and Saudi Arabia's moves in the oil market. Yet the stakes are so much higher than in 2015-16. If Riyadh and Moscow do not renew output cut deal, Brent crude could fall to $20 a barrel, down from the 7 Jan 2020 peak of $74 back in the Stone Age.
“Hi sexy, hello sexy…” was a catchy Bollywood song from the naughty 90’s. “Hi zombie, hello zombie…” will be the mantra of credit markets in 2020.
Zombie is a corporate/sovereign borrower whose cash flows have collapsed and so can no longer service its colossal debt load, recklessly taken out during the last QE decade. Zombies must refinance or die, now that credit markets shut down for zombie borrowers, thousands of zombies are doomed to die.
So maybe Bollywood will come out with a new song. “Buy zombie, drop dead zombie…” Watch entire industries and countries turn into Zombiestan as a black swan virus meets the first post Lehman global credit market cardiac seizure!
Matein Khalid is the CIO of Asas Capital Management