About a year ago — a few days before Opec spooked the world with its decision to wage war on shale producers with an oil production race to the bottom, but following a few months of steady oil declines post the Fed’s decision to start signalling an upcoming tightening path — we speculated regarding a what if scenario based on the hypothetical eventuality of no petrodollars :
The monthly IEA oil market report puts things about as simply as they can be put:
In our Christmas podcast and this post, we warned of the eery similarities between the oil market of today and the oil market of JR Ewing and Blake Carrington in the 1980s.
We even predicted that if history tells us anything we might soon be blessed with a modern equivalent of a Dynasty and Dallas TV series, something along the lines of “North Dakota Millionaires”. Read more
Many shale producers outspend cash flow and thus depend on capital market injections to fund ongoing activity.
That’s from Citi’s Richard Morse and Edward Morse (related?), plus team, on the way capital markets rather than cartels are driving commodity prices these days. The note is titled: “From Cartel to Capital Markets: Investors Join OPEC Shaping Oil Market Dynamics.”
This of course relates to our point on Monday that even the big commodity traders have been forced to turn to market-based funding in lieu of a dearth of bank finance in the sector. Read more
From the IEA’s Oil Market Report released on Wednesday:
WTI prices were sliding again on Monday:
And we’re probably going lower due to a glut of Saudi and Middle Eastern crude entering the market. Read more
The Central Bank of Nigeria MPC voted eight to four to leave the monetary policy rate unchanged at 13.00 per cent following the conclusion of its two-day meeting on July 24, note Barclays’ emerging market team.
But, in a further signal that the oil producing country, which transitioned to a new government in March after 16 years of rule by the People’s Democratic Party, may be prepping for a sustained period of low petroleum prices the Central Bank stressed the importance of diversifying the economy away from oil and expanding its base of FX receipts. Read more
Bigger than Greece, bigger than China (or at least one of the most significant parts of the China story) is the massive shift occurring in global currency reserves. Long story short: they’re being depleted, rapidly. Especially the reserves of emerging market sovereigns.
On Thursday we suggested the evolving dynamic could be linked to a contraction of petrodollar/sweatdollars in the global monetary system, thanks to growing US energy independence and US labour/tech-based re-shoring.
We failed to mention, however, how the situation is exacerbated by China’s growing inability to throw renminbi at its export competitiveness problem due to not insubstantial dollar leverage exposure on the country’s books. Which is to say: China can only help its exporters — and by extension other emerging markets — by shedding a whole bunch of dollar reserves at the same time. Read more
Back in November we meandered through the possible implications of there being no more petrodollars in the system (on account of US shale oil energy liberation).
Since then, we’ve also been thinking about the possible implications of there being no more sweatdollars in the system (on account of US re-shoring and digital manufacturing trends).
So what happens if key dollar recycling pathways were to be significantly closed off or contracted?
Privately, we’ve speculated the situation could over time lead to the rise of a new international funding currency front runner. (Though, certainly not because the US is losing influence. More because, shale oil and a labour surplus means it may not be in America’s interest to defend reserve-currency status at all.) Read more
See below for short view videographic, corporate credit related thoughts, as well as some additional sauce. Read more
In 2008, it was fairly common practice to blame any of the following (evil passive index investors — hedge funds—oil traders—Opec) for driving oil prices up to $145 per barrel.
The standard narrative was either that irresponsible and greedy institutions were synthetically pumping the price higher — and in so doing imposing a needless energy tax on the global economy — or, alternatively, that the smart-money was taking advantage of oil scarcity for their own future profitability.
But with prices back at $60-65 per barrel levels, and the world facing something of a fossil fuel oil glut, is it time to frame the reality of 2008 in a different perspective?
Perhaps, by providing the world with the incentive it desperately needed to get its collective butt into action on alternative fuel investment and development, speculators/passive investors/Opec cartels/banks actually did everyone a massive favour, albeit costly favour, in 2008. Read more
A quick post to update readers on an interesting debacle that occurred in the world of oil stock data analysis this week.
Philip Verleger, veteran independent oil analyst, launched a scathing attack on the quality of the EIA’s data on Monday, claiming the agency had been overestimating US output by some 1.6m barrels a day.
The accusations in his note were brutal to say the least:
“The explanation for the mistake indicates a gross dereliction of responsibility on the EIA’s part. Rarely if ever has a US agency charged with collecting data made a miscue of this magnitude. The EIA administrator should be dismissed immediately for gross incompetence.”
So this could be the beginning of the end.
Or, alternatively, the bond price rout is a perfectly predictable response to…:
There were those who said it would never happen. Then there were those who said it wouldn’t matter even if it did happen. And there were those who recognised Saudi Arabia was probably panicking about the prospect of a destabilising cash burn situation as soon as the term Saudi America became a thing.
But, as the FT reports on Friday, Saudi cash burn is now not only a big thing, it’s an accelerating big thing: Read more
At first glance, America’s latest growth figures don’t look so good. We generally refrain from commenting on quarterly GDP data because, among other reasons, the numbers are naturally noisy and they’re often revised by large amounts. (Or as the Fed says, “transitory factors,” although probably not the weather.) Those caveats out of the way, there are a few interesting points in this report that are worth noting.
Let’s start with a theoretical exercise. Imagine it were one year ago today, and someone told you that, between then and the end of this past March, the price of oil would fall by about half and that the real, trade-weighted dollar would appreciate by more than 10 per cent. A reasonable person would expect two things: big cutbacks in domestic oil investment that wouldn’t initially have been offset by higher investment elsewhere, and a hit to net exports.
None of this would have told you anything about would happen to total spending, but it would have provided guidance on how the composition of spending would change. Read more
You’ve got to hand it to Alan Rusbridger: he’s a great contrarian indicator. The editor of The Guardian launched his valedictory campaign to demand divestment from fossil fuels with a wrap-around promotion and the paper’s full moral force. Read more
The FT’s Martin Wolf led a stellar panel on the global economy and the outlook for commodities featuring China expert Michael Pettis, BP’s group chief economist, Spencer Dale (formerly chief economist at the Bank of England), and Goldman’s chairman of global natural resources Brett Olsher.
As one might expect there was a difference of opinion on the panel about China’s future growth path. Goldman’s Olsher said he was confident that China would be able to maintain 6.5 per cent to 7 per cent growth in the near term, whereas Pettis suggested that even 3-4 per cent should be considered a successful adjustment. Read more
An inundated inbox means we’re slightly late to this, but it’s worth flagging up two days on regardless.
It’s the EIA’s take on the US crude system’s “l’embarass de richesses” problem.
Inventory levels at Cushing may be at a record high, they note, but not as a percentage of total working storage capacity.
The great thing about the Cushing storage system is that it’s a private market. That means whenever storage gets tight the incentive to build new capacity increases for commercial operators. Read more
Back in 2009, Olivier Jakob of Petromatrix was one of the first analysts to spot the weird effects that commodity ETFs were having on commodity future markets.
It started with the USO, the oil ETP, and then went on to the UNG, a natural gas ETP
At the time, what was going on was a bit of a mystery. Why should these ETFs be bloating up even as professional investors were staying clear of the underlying assets backing the ETFs? Read more
The oil world’s been full of speculation about the shift of strategy last year by Saudi Arabia which saw it keep the pumps running even as the price fell, turning an initial drop into a plunge.
There may be a simpler explanation for Saudi’s willingness to see prices slide than an attack on US shale or a “political plot” against regional rival Iran, though: a change in the Saudi view on peak oil.
The Saudis have two choices with their oil: sell it now, or sell it later. Read more
Nigeria’s oil minister Diezani Alison-Madueke told the Financial Times (and FT Alphaville with them) on Monday she was happy with Opec’s decision to keep production unchanged at last year’s November meeting, a move which had shocked the oil market at the time and prompted an extended rout in the price of oil.
To the oil minister’s mind the decision was a “text-book” manoeuvre, designed to help the cartel stand its ground, defend market share in the face of growing international competition and drive inefficient producers out of the market. This to a large part had been achieved, in her opinion.
“I think it’s quite shrewd really,” she said. “If you cede market share continuously you drive yourself into oblivion.” Read more
At what point does running out of space to keep all the stuff you want to hold on to stop being prudent risk management and become a compulsive hoarding disorder instead?
It’s a question worth asking in the context of oil surpluses because, according to Citi’s commodity research team, US capacity to store excess crude oil may be about to run out of space. Read more
The shift to an oil-driven economy with a high wage capacity has been a comfortable journey. The journey forward, where the oil service industry must downscale and other trade-exposed industries must grow, will be more challenging.
That’s the short answer, from a recent speech by Øystein Olsen, the governor of Norway’s central bank. Oil has been a windfall that pushed Norwegian living standards far above that of its neighbors. If the windfall has ended, living standards will probably converge through a combination of currency depreciation and wage cuts. So far, that hasn’t happened. Read more
Canada is a large, diversified economy in which commodity extraction plays a (relatively) small role. Yet historically its currency, which was once known as the Canadian peso thanks to its 30 per cent devaluation against the US dollar in the 1990s, seems to have been driven by changes in the oil price.
Here’s a chart comparing two-month changes in the amount of US dollars you can buy with a single Canadian dollar against changes in the price of West Texas Intermediate: Read more
So, this weekend, the Bank for International Settlements released a preview of an upcoming report in which they make a connection between financialisation and the oil market.
Tracy’s written it up here.
But, before you get too excited, two things must be pointed out.
The first, of course, is that a BIS admission about financialisation effects on the oil market is pretty unexpected.
You see, as far as we’ve tracked or heard from BIS economists on this matter, they’ve resisted arguments and models pointing to financialisation effects, embracing instead explanations that link price effects to fundamentals.
Which brings us to the second thing. Yes, the BIS is shifting its view on the financialisation argument, but the paper also shows it doing so in a really convoluted and unconvincing way. Definitely the opposite of Occam’s Razor. Read more
FT Alphaville has written before about how the pronounced collapse in the price of oil appears very reminiscent of the disintegration in the value of a certain subprime financial asset; both have been swift, disorderly and self-reinforcing.
A new report from The Bank for International Settlements emphasises the latter dynamic by drawing a connection between the vast sums of money energy companies have borrowed from investors in recent years as well as the retreat of traditional dealers from certain commodities-related transactions. The new dynamic has imparted a swift and sudden forcefulness to the recent price action in the crude price that goes beyond the effects of a simple change in production and consumption of oil. Read more
Back in May 2008, nobody — especially regulators — had a clue about what was causing crude oil prices to spike to $100-per-barrel-levels, and mostly everyone was inclined to either blame “China” or “speculators” or some combination of the two.
But Michael Masters, a portfolio manager at Masters Capital Management, had a simple proposition. In the Senate committee hearings organised to figure out exactly what was going on, Masters testified that it was his belief that a new class of investor — one he dubbed the passive “index speculator” — had bulldozed his way into the market and distorted the usual price discovery process. Read more
In this guest post, Alex Bellefleur, global macro strategist at Pavilion Global Markets, writes that the Bank of Canada was prudent to loosen monetary policy in response to the decline in oil prices.
Last week the Bank of Canada (BOC) surprised markets by cutting interest rates 25 basis points, leaving them at 0.75%. While some argue this move was unnecessary, we are of the view that the cut is needed as a pre-emptive manoeuvre to counter private sector deleveraging. Read more