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
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.
Saudi Arabia has halted the $100bn expansion of its oil production capacity after reaching a target of 12m barrels a day as the kingdom believes that new oil sources will meet rising demand, reports the FT. Khalid al-Falih, chief executive of state-owned Saudi Aramco, said on Monday that pressure on Riyadh to raise its output capacity had “substantially reduced”, the clearest indication yet that the world’s top oil producer is not pushing ahead with an assumed expansion plan to 15m b/d by the end of 2020.
FT Alphaville’s three-part series attempting to explain the current backwardation in the market…
…continued. Read more
Saudi Arabia is making an aggressive push to increase trade with the UK, with ambitions to boost deals in the oil-rich country’s financial sector, reports the FT. Ibrahim al-Assaf, the finance minister, said on Thursday that there was “enormous potential” for British businesses to invest in the kingdom, which is the UK’s largest trading partner in the Middle East. Speaking at the Saudi Finance Forum in London, Mr al-Assaf highlighted more than $400bn of infrastructure opportunities in the kingdom and said the government would publish a list of more than 40 projects later this year.
The US has accused Iran of backing a plot to assassinate the Saudi Arabian ambassador to the US, detailing an alleged conspiracy that could spark a new confrontation between Washington and Tehran, reports the FT. The plot was part of a $1.5m “international murder-for-hire scheme” directly linked to the Islamic Revolutionary Guard Corps, Iran’s elite military force, said Eric Holder, attorney-general. The scheme was “conceived, was sponsored and was directed from Iran, and constitutes a flagrant violation of US and international law, including a convention that explicitly protects diplomats from being harmed”, Mr Holder told a news conference on Tuesday.
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