The price of oil continues to tumble lower — WTI crude briefly traded for under $20 per barrel this week. The dollar, dependent on oil, could now in serious jeopardy.
The oil price war between Russia and Saudi Arabia shows no signs of slowing down, and US shale will likely see mass bankruptcies in the short-term. WTI crude traded for under $20 a barrel this week, before briefly recovering but is now on shaky footing yet again. Increasingly, it is looking like depressed global demand is causing a downward spiral for oil markets with no end in sight.
A Barrel of Oil is Cheaper Than a Large Pizza
Although the tumbling price of WTI crude oil and Brent crude is concerning in its own right, the real damage being done is happening to US producers.
Mars Oil, extracted from the Gulf of Mexico, found itself near the $10 mark at the beginning of the week, while WTI briefly saw prices slip below $7 per barrel.
If you think sub-$20 WTI is bad, in Texas the WTI Midland contract just slipped below $7 a barrel (according to Eikon).
Total collapse underway.
A barrel of oil from the shale heartlands of America now costs less than a pint in London. And this isn't some niche grade. #OOTT pic.twitter.com/qzLM1BqSLQ
— David Sheppard (@OilSheppard) March 30, 2020
To put it succinctly, it seems that crude oil in some parts of the United States is now cheaper than a large pizza. That’s a stunning comparison.
A barrel of oil is cheaper than a large pizza with pepperoni.
— JWilliamsFstmed (@JWilliamsFstmed) March 30, 2020
If this continues, US shale seems destined to collapse. With the coronavirus lockdown expected to continue well into May, this seems especially likely now. Depressed demand will have ramifications for other oil producers as well, but the quickly-declining prices in the US show that this is all hitting American companies much harder.
Is this the End of the Petrodollar?
It’s so secret that much of the dollar’s dominance can be linked to oil sales. Petroleum-exporting nations have historically relied on dollars in the 20th century which led to stockpiling of the currency around the world. The term ‘petrodollars’ emerged to describe the unique relationship between oil markets and the dollar which has allowed for USD to become the de facto currency of global commerce.
However, that seems to be changing now. As markets orient themselves away from ‘petro-economies’ due to depressed demand, many emerging powers are trying to now asset themselves. China, for example, wants to see the Chinese yuan become an international currency, an effort it has pursued since the late-2000s. Undoubtedly, its digital currency aspirations are tied up in this effort.
?? Oil below $20 … back at 1990's level. Note the steep drop in oil price during the 2008 Global Financial Crisis. Bitcoin was born at that very moment. Compare with now. pic.twitter.com/mtTensIP7c
— PlanB (@100trillionUSD) March 30, 2020
With the petrodollar receding, we could see a push toward digital currencies and competition among them. Bitcoin will, of course, be in the mix but so will other state-sponsored stablecoins. In other words, the dollar’s days of dominance may wane with oil markets crashing — and what comes next will likely be a scramble among the new wave of digital currencies.
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