Another 1998-ish Ruble crisis in the making? Lower oil prices drive #Russia's 5yr default probability to 16.9%. pic.twitter.com/OgEnyBCfrV
— Holger Zschaepitz (@Schuldensuehner) November 4, 2014
As soon as word spread that Saudi Arabia’s Aramco cut prices, rather than production, for its US customers – though it raised prices for Asian and European customers – the price of WTI swooned $2 a barrel on Monday, then continued to plunge on Tuesday, briefly dropping below $76 a barrel, before recovering a smidgen. Prices not seen since mid-2012.
The Saudi price cut came on top of lagging economic growth and iffy demand in China and possibly a triple-dip recession in Europe, layered with what increasingly smells like an oil glut in the US where production from shale has been skyrocketing. If this price environment gets worse – and that seems to be the trend for the moment – the heat will spread to the US fracking industry.
Shale oil drillers will bleed, and some of them will crumble under the pile of debt they have issued. Plenty of investors – including those with conservative-sounding bond funds that are larded with energy junk bonds, and those with equity funds that have picked up the slew of recent energy IPOs – will lose their shirts. And if it lasts long enough, some states where oil has become the new economic lifeblood will get hit too. But mostly, in the vast and diversified US economy, it will be a minor squiggle, counterbalanced in part by the benefits of lower energy prices for consumers and businesses.
For Russia, the plunge in oil prices has a broader meaning. Russia’s economy and government have both become dependent on the hard-currency revenues generated by oil and gas exports. And the ruble has been plunging in sync with the price of oil:
This post was published at Wolf Street on November 4, 2014.