One of the still to be appreciated side-effects of falling oil prices is a reduction in so-called petrodollar recycling by oil producers.
As we’ve already noted, there are analysts who believe petro-induced liquidity shortages may already be impacting certain eurodollar markets. Furthermore, there’s also the fact that as liquidity shortfalls manifest in external markets, the opposite could become true for internal US markets. So, just as the dollar liquidity tap gets switched off externally, it gets turned on with gusto back at home.
But Bank of America Merrill Lynch’s Jean-Michel Saliba gets to the same point somewhat differently.
As Saliba noted last week (our emphasis):
Lower oil for longer could imply material shifts in petrodollar recycling flows. Petrodollar recycling through the absorption channel has generally been USD negative, helping an orderly reduction of global imbalances though greater domestic investment. Although recycling through the financial account is less well understood, the bulk has likely, directly or indirectly, ended up in US financial markets and has thus been USD-positive. A prolonged period of low oil prices is thus likely to lead to lower petrodollar liquidity with, in time, an allocation shift towards more inward-looking repatriation and financing flows, in our view.
For seasoned oil watchers the latest spew of “informed commentary” hitting the media waves is probably becoming nauseating.
That’s because everyone from Robert Peston and Peter Hitchens to Vitol’s Ian Taylor seem to have a view on the oil price decline, some making claims that “the market may have hit bottom”, others hinting that the fall was too “mysterious” to be market led and the latter even admitting that even oil traders can’t predict what’s going to happen next.
But it’s the words of Saudi Oil Minister Ali Naimi that matters most. And as he explained to Mees Energy on December 21 — echoing what FT Alphaville has been saying for a long time now — in a price war, everything turns into a market-share-based game of chicken, meaning there’s no incentive for the world’s most efficient and financially buffered producer to cut at all. (H/T Neil Hume for the Mees report.) Read more
Those looking to intensively scrutinise and analyse Opec’s non-cutting decision would do well to check out the public statement from the cartel which can be found here.
In any case, here is the key par to take note of (our emphasis): Read more
As per Opec tradition, the cartel’s decision on Thursday has been leaked to wire reporters from Bloomberg and Reuters who are citing delegates stating…
OPEC KEEPS OIL PRODUCTION TARGET UNCHANGED AT 30M B/D: DELEGATE, BBG Read more
When you look at things hard enough you realise almost everything in society can be reduced to a cartel, monopoly or perfect (and chaotically disruptive) competition model.
While cartels come in many shapes and forms, the purpose is common: stability.
In other words, as long as everyone plays by the rules of the cartel, what’s best for that particular participatory group can be guaranteed.
On which basis, government itself can be reduced to a cartel-type system. As can central banks. Read more
That Saudi Arabia and the Opec cartel were going to be “disrupted” by North Dakota millionaires was hardly difficult to foresee.
What was always harder to figure out, however, was how Saudi would react. Would Opec’s most important swing-producing state cave in and give up on market share for the sake of price control? Or, conversely, would it be more inclined to follow along the lines of the Great UK Supermarket Price War, and enter a clear-cut race to the bottom?
So far, it seems, the strategy is focused on the latter course. Which means people are finally beginning to wonder just how sustainable a path that really is.
More so, to what degree does such a price war potentially disrupt the average break-even rate for the entire industry and compromise energy security more widely? What exactly happens to prices when the cartel effect is stripped out? Read more
This little chart is becoming a major headache for the world’s biggest oil producers:
According to BP’s Energy Outlook, which was released this week, global energy demand will continue to grow until 2013, but that growth is set to slow, driven by emerging economies — mainly China and India.
To wit, the following chart from the presentation booklet:
From JBC Energy on Monday:
As the analysts note, the North Dakota production surge — which was under appreciated by the industry even as recently as this time last year — is beginning to have “profound” effects on the oil markets: Read more
WTI crude prices are on the rise, but only at the expense of Brent’s premium. The spread between the two crude grades shrank below $8 this week, its lowest since January 2011.
But what’s really striking is the rise in US crude output, which has risen 57,000 barrels a day to 7.37m — its highest level since February 1992.
If one chart speaks a thousand words in this regard, it’s the following one from the American Enterprise Institute’s Carpe Diem’s blog, charting data from the US Department of Energy:
Okay. This is weird.
Looks like the analysts in Citi’s commodities team headed by Seth Kleinman (which includes the inimitable Ed Morse) didn’t get the memo. You know, the one about needing to talk up the carbon complex as much as possible?
After all, how else do you account for the disruptive tone of the following summary points? Read more
First there was plain old commodity inventory.
Then “in-the-ground” inventory — funded by pre-pay deals — started to make an appearance. Most recently, there’s even been the tendency towards “just-in-time” inventory in energy markets. Read more
In Marrakesh, there is no such thing as a fixed vendor price.
The price you pay is determined by who you are, how well you barter, and the supply and demand fundamentals of the product you’re trying to buy on that on that specific day. Read more
JBC Energy sums up the thrust of Thursday’s Opec meeting in one handy paragraph:
As expected, OPEC members decided to keep the current overall production ceiling of 30 million b/d unchanged during yesterday’s meeting. Lowering the ceiling was not an option as the group is currently producing at around 1.6 million b/d above the target. On the other hand, an increase would not have been accepted by the price hawks. Saudi Arabia was allegedly asked by other members to cut production and adhere to the overall ceiling. Due to the lower prices and the massive global stockbuild, we forecast that Saudi Arabia will decrease production in H2 to 9.5 million b/d, bringing the 2012 annual average down to 9.7 million b/d. Read more
Thursday’s Opec meeting is expected to be a cracker. Supply is relatively abundant right now, but Saudi Arabia wants the quota raised. Iran, Venezuela, and a bunch of other Opec members fearful for their export receipts definitely do not want that.
The FT’s Guy Chazan writes that it’s expected to be a tussle that Saudi and its Gulf state allies will lose, despite their considerable power within the cartel. The point, some industry watchers maintain, is just to send a message that Saudi’s got this: that is, it won’t let high oil prices worsen the risk of a global slowdown. A message it probably sees as very necessary as the Iranian sanction deadline draws nearer, and the world economy looks more fragile. Read more
Bernstein’s energy analysts have looked at the upstream costs for the 50 biggest listed oil producers and found that — surprise, surprise — “the era of cheap oil is over”:
Tracking data from the 50 largest listed oil and gas producing companies globally (ex FSU) indicates that cash, production and unit costs in 2011 grew at a rate significantly faster than the 10 year average. Last year production costs increased 26% y-o-y, while the unit cost of production increased by 21% y-o-y to US$35.88/bbl. This is significantly higher than the longer term cost growth rates, highlighting continued cost pressures faced by the E&P industry as the incremental barrel continues to become more expensive to produce. The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. Assuming another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach close to US$100/bbl. Read more
For the long haul, that is.
So, Saudi Arabia is now effectively targeting $100/barrel crude oil, instead of the $70 – $80 price range of the past several years. This is significant because Saudi Arabia is the only country that can (in theory at least) ramp up its oil production quickly if prices spike (say, in the event of an Iran-related affair). Read more
Iran has warned Saudi Arabia and other members of the Opec cartel not to boost their oil production to make up for any shortfall created by western sanctions against Tehran, reports the FT. The warning comes after senior policymakers from the UK to Japan flocked to Riyadh to ask Saudi Arabia for guarantees it would boost its oil production to offset the impact of the US and the EU sanctions against Iran. Mohammad Ali Khatibi, Iran’s Opec representative, said Tehran would consider any output increase as “unfriendly”, further inflaming the tensions in the oil-rich Middle East that have pushed the cost of Brent, the global oil benchmark, above $110 a barrel. Also in the FT, China has hit back at the US over Washington’s sanctions against Zhuhai Zhenrong, a state-owned Chinese oil trading company, doing business in Iran. The Chinese foreign ministry called the move “unreasonable” and said it was not in line with the spirit and content of UN Security Council resolutions regarding Iran’s nuclear programme.
Opec has pulled off a show of unity after its last meeting ended in disarray, agreeing to keep its members’ oil output at current levels of about 30m barrels a day for the first half of next year, the FT reports. The deal on Wednesday will go some way to allaying the concerns of oil consuming countries, who have urged the producers’ cartel to maintain supplies rather than cut them in the face of slower economic activity. Even so, analysts said oil prices were unlikely to fall significantly from the current level of about $110 a barrel. The balance of supply and demand remains tight. Brent crude, the benchmark, tumbled $4.88 a barrel to $104.62 amid a wider sell-off in commodities ater Opec announced the deal. Brent prices hit a two-year high of $127.02 in February.
Last week it transpired that Saudi Arabian oil production had hit its highest level in three years.
As Bloomberg reported at the time: Read more
Opec ministers were edging towards a decision to keep oil output broadly steady at their meeting on Wednesday, the FT reports, moving to heal the profound differences between Saudi Arabia and Iran that led to the collapse of the previous meeting in June. The oil cartel painted a sanguine picture for the energy market heading into 2012, with Riyadh and Tehran largely agreeing on the outlook. The two countries, the two biggest producers in Opec, had clashed over levels at the group’s previous meeting in June which ended with no formal agreement on output targets. Saudi Arabia, Kuwait and the United Arab Emirates unilaterally increased production to make up for the loss of output from Libya.
The China Flash PMI for August of 49.8 was met with relief today, even though it’s the second negative month in a row.
It’s that kind of scene now, however, when equity markets seem to be hoping for some kind of QE3 announcement at Jackson Hole on Friday even though a) it’s not an FOMC meeting, so Ben Bernanke can’t make a policy announcement, and b) things will need to get worse before purchasing Treasuries is back on the table. Read more
High oil prices and weaker economic growth have “dramatically” curtailed the expansion of global oil demand, with the world registering a zero increase in June, according to the International Energy Agency, the FT reports. The monthly oil market report, released on Wednesday, discloses a significant cooling of demand and a modest increase in supply. Total consumption of oil products in Asia fell in absolute terms by 500,000 barrels per day between May and June, declining from 20.6m b/d to 20.1m b/d. This was led by China, where total oil product demand fell by 1.5 per cent between May and June. Overall, the IEA has trimmed its forecast of global oil demand this year by 100,000 b/d, predicting it will average 89.5m b/d. “Concerns over debt levels in Europe and the US, and signs of slowing economic growth in China and India have spooked the market and raised fears in some quarters of a double-dip recession,” says the report.
Is this the reason why the rest of Opec were miffed at Saudi Arabia last week?
Reuters reports on Wednesday (H/T John Kemp): Read more
Wednesday’s Opec meeting may have resulted in a no-change decision on production targets, but as more and more people are noticing, its importance lay elsewhere — in signalling some significant turmoil within the organisation itself.
Indeed, if ever proof was needed that Opec may be turning into an outdated institution for today’s commodity markets, Wednesday’s meeting could very possibly have been it. Read more
Opec’s failure to agree increased targets on production has exposed the political divisions afflicting a once technocratic oil cartel, the FT says. Saudi Arabia, whose oil minister declared Opec’s disagreement ‘one of the worst meetings we have ever had’, had pushed for Opec increasing production quotas to 30.3m barrels a day, a third of world supplies, but encountered resistance from countries led by Iran. The White House is considering tapping the Strategic Petroleum Reserve following the cartel’s lack of guidance on supply, the WSJ reports.
Saudi Arabia has been publicly humiliated by its greatest rival after Iran rallied five Opec countries to block the kingdom’s bid to increase the oil cartel’s output quotas, reports the FT. The unexpected development sent Brent crude up more than $2 to a one-month high of $118.59 a barrel. West Texas Intermediate, the US benchmark, moved back above $100 a barrel.
Saudi Arabia has been left isolated at Opec over its call to lift the oil cartel’s production target by 1.5 million barrels a day, the first such increase to supplies in four years, says Reuters. Whereas Gulf countries have offered support for the Saudi position, countries including Iran, Angola, Iraq and Venezuela are pressing for prices to remain above $100 a barrel, with key producers Nigeria and Algeria remaining on the sidelines. As Opec’s largest producer, Saudi Arabia still stands a good chance of getting its way as geopolitical problems continue to rock supply, especially in Libya, according to Bloomberg.
Saudi Arabia has been quietly increasing its crude oil production ahead of Wednesday’s meeting of the Opec oil cartel, in a sign that Riyadh is trying to bring oil prices down to more comfortable levels for consumers in the US, Europe and China. The kingdom boosted production in May by about 200,000 barrels a day and it is on course to increase it by another 200,000-300,000 b/d this month, taking its output above the critical 9m b/d level for the first time since mid-2008, says the FT.
Opec’s oil ministers will discuss raising production when they meet next week, the first increase in almost four years and a sign the oil cartel is responding to fears about the economic damage caused by prices above $100 per barrel, reports the FT. The International Energy Agency, the west’s oil watchdog, last month urged Opec to boost output, saying there was a “clear, urgent need for additional supplies” to cool down oil prices and avoid derailing economic recovery. An Opec delegate confirmed that a formal change in the cartel’s production policy would be discussed at the June 8 gathering.