The Doha Summit Is a Fiasco

The news arrived Sunday around 8 p.m.: The Doha Summit is a failure. No agreement to freeze crude production has been found.

We could have written pages after pages of comments gathering proofs of an ineluctable fiasco. The Iranian minister could have explained that he did not want to participate in the Doha Summit in order not to miss his nephew’s birthday, for the same outcome would have occurred [without his presence]. The oil prices crawled with difficulty to $42 on the eve of the weekend against all odds. It does not matter that the IMF forecasts downward, after revision, global growth to 3.1 percent and the Global Bank to 2.5 percent… It does not matter that U.S. crude oil stocks jumped to 6.3 million barrels last Wednesday… It does not matter that industrial production has been announced to decline on Thursday in the eurozone, then on Friday in the U.S. In fact, reality does not matter, nor the economic conjuncture – not even the fact that many Doha summit participants declined in all existing languages all the reasons why no agreement was found: oil prices had to increase by “freaky Friday.”*

It had to balloon because all the other reasons justifying a share price increase were not credible, namely feeble growth, squeezed benefits, or central banks not having enough flexibility. So the last actionable lever for an upward movement on the price was the mechanical relationship (assisted by trading algorithms) between black gold and shares.

The manipulation is insultingly obvious. Financial players know the market is managed with utter intellectual indigence and devoid of economic rationale. Nevertheless, it is out of the question to go against the furious steamroller driving the market upward relentlessly since Feb. 12. The ineluctable and forced recovery is followed symmetrically by a volumes collapse. It simply betrays the posturing market and shows that flesh and bone investors, including portfolios managers, brokers-traders, pension funds/institutional investors, have abdicated.

Have we witnessed a “foolish” upward trading day last week?

On a fundamental level, it is unquestionable. Nonetheless, it is not on this basis that we ought to analyze the 5 percent recovery of April 12, 13 and 14. The same as in poker, what really matters is not the cards in hand but how one plays them. The sherpas have benefited the most by plummeting the VIX (15 percent) in 48 hours. Simultaneously, they have propelled the CAC to 4500 points, DAX above 10000 points and EuroStoxx 50 beyond 3000 points. Keeping the numbers up for 48 hours was the only necessary condition to take the pot, and it was executed with mastery, against (truth be told) a quasi-non-existing opposition on the verge of capitulation. Last Wednesday’s trading day resulted in a double bluff: Outrageously increase the share prices and ascribe this sharp increase to good figures from China and simultaneously lock upward oil prices by 5 percent, so that the Chinese economic recovery fable is substantiated. As many financial players were sellers on oil, anticipating a fiasco from the summit, they were forced to buy-back Tuesday and Wednesday. That is, they were forced to “fold” despite a hand full of aces for fear of a color (black obviously) in the opposing hand, which did not even have a pair of two… but owning a big pile of chips.

Acting as though they did not see the bluff on oil and Chinese exports coming, the permabulls rushed to construct a narrative a posteriori justifying an increase they did not see coming and moreover they did not participate in – the great concerns of the beginning of the year were not based on serious matters. That is what demonstrates with pristine clarity the evaporation of volumes.

Never seen before, the “triple witching” day finished on less than three billion euros traded before the fixing and 3.65 billion when the bell rang. This incredibly low trading volume demonstrates than there is only one player left on the table in the casino market, the other players not even feeling like making up the numbers. Now that the Doha summit turns out to be the fiasco any financial operator with a functioning brain expected, on what hopes will the permabulls dwell? On the next summit meeting in June where the chief oil producers (Russia, Saudi Arabia, Iraq, Venezuela) will finally agree to freeze the oil production to two million barrels above the necessary global need? At the same time, Iran wishes to export one million more barrels a day by the end of 2016 – that is, 600,000 more barrels than in March. The only likelihood to witness a decline of surplus production would be a massive wave of bankruptcies in the U.S. shale oil industry. The Saudi Arabian minister of energy, Ali Al-Naim, hinted at an alternative when he last visited the U.S. at the end of February. He only reiterated what was said at the end of November 2014, which was back then interpreted as a declaration of war on prices against the United States. Truth be told, Saudi Arabia had no interest in signing an agreement this weekend, which was an armistice synonymous with price recovery. Indeed, right now, U.S. producers, who are financially strangulated and in the middle of debt renegotiation workouts, have only one hope: an oil rebound reaching $50 by the end of April in order to snatch new credit lines. In reality, running on borrowed time only buys them a few additional months.

The oil price relapse on the horizon will have dire consequences for Wall Street and the European indices:

– Mechanical fall in share prices ensuing the oil debacle schemed by Saudi Arabia against Iran/United States.

– Resurgence of speculation on U.S. shale bankruptcies, seriously harming the balance sheets of big American banks such as Bank of America, Wells Fargo, JP Morgan and many local players in Texas and Arkansas.

– Falling orders of goods and services coming from OPEC members, which are now becoming debtor countries, to western countries and China.

– Risk of seeing producing countries forced to carry on selling their financial assets through their sovereign wealth funds, as Saudi Arabia and Norway already did.

– Persistence of deflationary pressures in developed countries and acknowledgment that central banks have no more aces up their sleeves. That is, they have no more credibility.

The fifth and final point is by far the most concerning for a financial system whose survival is solely based, since 2009, on the blind faith that central banks are mystically infallible.

*Editor’s note: “Freaky Friday” is also known as “triple witching day,” where the contracts for stock index futures, stock index options and stock options all expire on the same day. It occurs four times a year.