While the world contends with the consequences of shrinking petrodollar flows, Emad Mostaque at consultancy Ecstrat provides an interesting take on the potential benefits of such reversals for petro sovereign Saudi Arabia.
Tl;dr: It’s a blessing in disguise because it forces the kingdom to restructure its economy and reduce its dependency on foreign labour and hydrocarbon receipts.
As Mostaque explains, to-date Saudi Arabia’s rulers have supported a social contract with the populace wherein the state offers a level of employment surety through the public sector and benefits, while almost all of the private sector workers are foreigners without settlement rights: Read more
That, at right, is a slice of Saudi Aramco history that you probably won’t be seeing in an IPO prospectus any time soon — a story on the strikes that once wracked the Saudi Arabian state oil company’s eastern oil fields (in 1945, 1947, 1953 and 1956)…
A little bit of political risk on the way from the first Saudi oil concession to foreigners in 1933 and Aramco’s modern role as the might behind Saudi Arabia’s swing producer status in the oil market. Read more
Remember the days when SWFs were considered the saviours of the universe? The white knights of the banking crisis? The clients every asset manager wanted to have.
Well, fast-forward seven years or so and they’re bullet point number seven in Morgan Stanley’s “10 Surprises for 2016″ outlook piece. A bigger risk, they add, than retail mutual fund redemptions. Who’d have thought, eh? Read more
Changes are afoot in Saudi Arabia’s financial system.
According to the Financial Stability Board’s latest review, the Saudi Arabian Monetary Agency, which manages the kingdom’s foreign exchange reserves, is in the process of bolstering its defences (as it was recommended to do by the FSB in previous reviews). Read more
Ever since oil prices started plunging last summer, people have been wondering whether the producers responsible for the supply added since 2010 — mostly in the US and Canada — would want to keep pumping. How many US shale wells, for example, would be economically viable in a world where the West Texas Intermediate price was about $45 per barrel instead of $100?
It’s now been long enough to get a sense of the answer. Compared to the peak almost exactly one year ago, the number of US rigs drilling has collapsed by 62 per cent, according to Baker Hughes: Read more
Distracted as we were by liquidity events featuring quiz questions and former Federal Reserve chairmen, we missed this note from Citi earlier this week on the escalating effects of — one of our favourite subjects right now — petrodollar liquidity removal from the oil producing sovereign complex.
From Citi (our emphasis):
One topic we have been focused on recently is the pressure coming from the withdrawal of liquidity by Middle Eastern entities. By funding source, 60% of the AUM in the SWF (Sovereign Wealth Fund) community comes from oil/gas economies. In the other 40%, there is also a great deal of commodity content. So, the acute terms-of-trade shock EM economies are now experiencing will probably continue to impact the ability of SWFs to support new investment flows in Emerging Markets bonds and stocks. According to our estimates the AUM at the top 10 SWFs in the world is now at USD 5.4 trillion. EM allocations, in many cases, are not properly disclosed, but the disclosed EM fixed income exposure at these funds is now running at 2.5-5.0% of AUM. That corresponds to USD 135-270bn, a sizeable portion of the current ~USD1 trillion worth of EM debt held by foreign investors.
Just in case Glencore’s stock slide and general market volatility have distracted you from fully digesting the significance of this Saudi Arabia funding story from the FT’s Simeon Kerr in Dubai…
We thought we’d reiterate the really important bit about the rate at which the Kingdom is pulling funds from global asset managers:
Nigel Sillitoe, chief executive of financial services market intelligence company Insight Discovery, said fund managers estimate that Sama has pulled out $50bn-$70bn over the past six months.
“The big question is when will they come back, because managers have been really quite reliant on Sama for business in recent years,” he said.
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
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
Boom. BANG! Crunch. CRACK.
That’s the sound of the world’s fixed currency systems buckling under the pressure of a new dollar paradigm. Today’s edition: Saudi Arabia’s riyal.
The last time the riyal’s peg with the dollar came under any significant stress, of course, was back in 2008. And we know what the problem was back then (hint: not enough dollars).
So the following chart by way of Standard Chartered on Friday is probably worth a minute or two your time:
Adam Curtis, the controversial end of the BBC documentary making department, is back with a straight-to-iPlayer special, called Bitter Lake. His topic du jour: Saudi Arabia, Afghanistan and the petrodollars that turned financiers dizzy.
For those unfamiliar with Curtis’ work, think archive footage, mood music, dramatic pauses, voiceovers of the “…but it was all a fantasy” variety and grand themes linking multiple strands into a single overarching narrative.
Love him or loathe him, a particularly cool piece of stock footage unearthed in his latest offering comes about 45 minutes into the documentary, and it is definitely worth your attention: Read more
In their latest oil note, Goldman Sachs describe the oil market as having a “dominant firm/competitive fringe” structure, in contrast to say a monopolistic or perfect competition structure.
This is basically the description of an oligopoly, in which a dominant firm (for decades, Saudi Arabia) only differs from a monopolist in one key aspect… Read more
An excellent observation from John Kemp over at Reuters on Tuesday regarding the spot/forward disconnect we’ve been talking about:
The increasingly close linkage between hedge funds and spot prices since 2010 has also coincided with a sharp reduction in the correlation between front-month and far-forward prices. Correlation between spot month and forward prices, generally above 90 percent until 2010, is now often less than 50 percent (Charts 5-6). Read more
Some excellent market commentary from Olivier Jakob at Petromatrix on Friday morning regarding the current state of oil market (dis)equilibrium and the potentially precarious position of Saudi Arabia. Read more
Veteran economist and oil analyst Phil Verleger in his latest note has roundly criticised everyone who forecast in recent years that oil prices would keep rising forever; which he says includes just about everyone who has an opinion about oil prices.
He highlights the work of Morris Adelman, an MIT economist who’s little known these days — unjustly, according to Verleger: Read more
Is Saudi Arabia having to again resort to Jedi mind tricks? Does the central bank of oil still have such a big problem with its policy transmission mechanism that it can’t weaken prices by production alone — and what effect is this having on world trade?
From today’s FT: 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.
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
Last November John Hempton wrote an amusing post arguing that Ben Bernanke’s problem was that the Fed’s credibility was too high, thus creating a liquidity trap, and to solve this Bernanke should do something crazy like appear on television wearing a Hawaiian shirt and smoking a spliff.
John Kay’s latest FT column looks at the problem of credibility, although more in a fiscal than a monetary context. As he points out, we frequently hear now that credibility is the problem besetting heavily-indebted governments. Credibility is seen as a kind of panacea but Kay points out it’s only a very recent concept in economics: not in Keynes, not in Smith, not in Marshall. It dates back to a 1979 article by Finn Kydland and Edward Prescott, he says, who won a Nobel economics award for their work on the subject. Read more
From the commodities research team at Goldman Sachs on Wednesday:
Saudi Arabian crude oil inventories built by 35.4 million barrels in the December-February period, adding 390 thousand b/d to world oil demand, according to data from the Joint Organisations Data Initiative (JODI). The strong build in Saudi inventories raises a number of questions, however. The foremost question being: why would Saudi Arabia increase its oil production to the highest level in over 30 years to simply put the crude oil into storage?
Saudi Arabia’s oil minister Ali Naimi penned a sharply worded piece in the Financial Times on Thursday declaring that high prices are unjustified because “there is no lack of supply.”
But what does resorting to an op-ed in the Financial Times actually tell us about the kingdom’s position? Read more
The latest movement in Brent and WTI crude…
Something of a strange one this. Every analyst and his dog has for the longest while been preaching that demand for crude post-crisis has really been all about emerging market demand… that the US, by and large, has become increasingly irrelevant when it comes to global supply and demand.
Yet, from Reuters last week, we had this: Read more
Ali Naimi, Saudi Arabia’s powerful oil minister, has insisted the kingdom will be able to make up for any disruptions to global oil supplies amid mounting tensions over the European embargo on Iran’s oil exports, the FT reports. r Naimi said Saudi Arabia’s ongoing investment in oil production capacity meant it was “able to respond to shortages around the world”. Without naming Iran, he told an audience in London that Saudi Arabia would continue to be a “reliable, steady and dependable supplier of energy to the world”. He cited the example of Libya last year, when the kingdom significantly ramped up oil output to make up for the volumes lost during the north African country’s civil war. His comments came as Iran ramped up its criticism of the Saudis, with a senior Iranian official describing the Saudi royal family as “tyrant rulers”.
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
Saudi Arabia is aiming to keep oil prices at about $100 a barrel, a third above its previous public target, the FT reports. Ali Naimi, the Saudi oil minister, on Monday for the first time said the world’s largest oil producer aimed to keep oil prices at the triple-digit level, in an interview with CNN. The revised target is in part a reflection of rising public spending in the wake of the Arab spring. “The Saudis need to spend more money to keep their citizens quiet and prevent protests,” said Carsten Fritsch, oil analyst at Commerzbank. Bill Farren-Price of consultants Petroleum Policy Intelligence added that there was a “consensus” within Opec that $100 a barrel was the appropriate price level for its members’ fiscal requirements and the need to invest to boost supply. “The context is an industry where a lot of new investment is predicated on that kind of price level.”
Saudi Arabia, the Middle East’s biggest economy and the world’s largest oil exporter, is expected to allow foreigners to invest directly on its $340bn stock market for the first time later this year, the FT reports. Direct access to Saudi Arabia’s Tadawul exchange has long figured at the top of many emerging market asset managers’ wish lists, given the kingdom’s favourable demographics, buoyant economy and oil wealth. In 2008, the country’s Capital Markets Authority allowed foreign investors to buy shares indirectly by means of “total return swaps” via licensed brokers. But many institutional investors are reluctant to use these derivatives.
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.
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