BRICS+ and the fallout from Trump's energy shocks

Until recently, it appeared that the Trump regime's most impressive feat was to steady the price of oil futures in the face of what constituted an energy shock guaranteed to roil the markets. But appearances can be delusional. Facts provide a sobering view of how far you can push a narrative based on manipulated numerical indicators and presidential proclamations that don't stand the test of credibility.

Before Feb 28, the Gulf countries supplied ~23% - 23 mn barrels per day (bpd) - of global oil, with the Strait of Hormuz seeing an outflow of ~20 mn bpd. Red Sea, on account of Saudi Arabia's East-West pipeline (Petroline), accounting for ~1.6 mn bpd, and Fujairah port, connected to Abu Dhabi Crude Oil Pipeline (ADCOP), debouching ~1.5 mn bpd.

But when the war broke out, the strait was closed with barely 2 mn bpd trickling out a day, reducing outflows to a mere 5.1 mn bpd, a net reduction of 18% of global supply. Under this punishing deficit, an oil shock should have quickly followed. (The energy crisis of 1973 occurred after Opec's Arab members cut production by 4.5 mn bpd, constituting 7% of global supply at the time.)


This did not occur for 3 reasons: Petroline increased its flows to ~5.5 mn bpd; the US and others released ~2.5 mn bpd of strategic petroleum reserves; China cut imports by ~5.5 mn bpd, providing a total incremental cushion of ~13.5 mn bpd. So, the world only had to deal with a crude oil shortfall of ~4.5 mn bpd.

But this was, at best, a tenuous solution. So, Washington resolved to keep the prices of Brent Crude and West Texas Intermediate (WTI) oil futures - legally binding contracts, settled monthly, to buy or sell a specific amount of crude oil at a set price - artificially depressed.

This was first achieved by Trump's pronouncements about impending ceasefires, fictitious discussions with Iran, and successful oil tanker exits from the Persian Gulf being fed to natural language-processing algorithms that used his incoherent social media posts - which had enabled friends and family to make a killing on equities in the past - to execute large-volume and high-frequency trades on oil futures. Eventually, when the market turned wise to the deception, the regime's officials and backers allegedly began to take significant short positions in the oil futures market to combat paranoid or speculative selling.

But equally important was the crack spread, the refining margin that constitutes the difference between crude oil and petrol-diesel prices. By August, this spread - usually relegated to $15-20 a barrel - had breached $35 a barrel for petrol and $55 a barrel for diesel, respectively. In the absence of government subsidies, these augmented spreads (diesel spread has nearly doubled since), coupled with logistics costs, taxes and retail profit margins, caused considerable consumer heartburn at the pump.

Today, things are falling apart. Despite Centcom admiral Brad Cooper's absurd boast that 1 bn barrels have made it out of Hormuz in the last 2 mths - implying ~17 mn barrels a day - only a trickle got through after paying a toll. The strait's now closed. Separately, Houthis have bombed Saudi refineries, stalled Petroline and virtually closed Red Sea.

Consequently, in October, the EU will not receive any Saudi oil. Moreover, the war in Ukraine has forced Russia to effectively constrain the export of diesel, jet-fuel and LNG. With bond markets in turmoil, petrodollar under siege and inflation rearing its head everywhere, panic is being restored even as the US Fed has raised interest rates by 0.25%, destined not to be the only hike this year.

With no end in sight, and Trump falsely promising a swift end to a war he has already lost, the world is staring down the barrel of a recession. India is vulnerable for 2 reasons:

With constrained oil flows and refinery disruptions that may take years to restore, actual price of crude may exceed today's $103-108 in the near future, while the netback LNG spreads and gas- to-urea fertiliser spreads - already at 5-10x their regular values - could also increase exponentially, adversely affecting India's export and subsidy bills.

After the US Congress authorised POTUS to levy a 100% tariff on countries that purchase Russian and Iranian oil and gas, it's unlikely that Trump won't, in some way, use this as leverage to extract favourable trade concessions.

But India shouldn't compromise its long-term energy security - Russian oil currently makes up ~50% of oil imports - for short-term export gains. Instead, GoI should reconsider its strategy of running with the hare and hunting with the hounds, throwing in its lot with BRICS+ to ensure that the US is forced to terminate its war with Iran, that peace is restored in West Asia, and the world economy can heal. Eventually, this may even stave off, or soften, a global recession.