You know who doesn’t like a falling oil price? Sovereign wealth funds for countries dependent on high oil prices and in love with their (endangered) petrodollars. And a risk based on that dislike is a presumption of forced selling and equity market weakness becoming self-fulfilling as/ if oil prices slide. Stable oil prices means SWFs don’t have to suddenly liquidate but the opposite would also seem to be true… The last time JPM’s Flows & Liquidity team looked at this risk they based it on a fall in Brent to an average price of $45 per barrel. They now assume an average oil price of $40 for 2016 and also note that the “YTD average has already fallen to $42.”
To what degree is the collapse in oil prices responsible for the contraction in cross-border financial activity and over-the-counter derivatives? According to the BIS’ latest quarterly review, the slowdown — which began in earnest in early 2015, coinciding with the oil drop — broadened in the last quarter of 2015 to a $651bn contraction. Of that, the biggest drop in cross-border claims was on euro area countries, at $276bn, whilst the overall advanced economy contraction was $361bn.
Shell sees more cost savings in its purchase of BG, esure may spin off gocompare, the CMA will investigate the Tullett Prebon-ICAP deal. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
It’s a theory at least, courtesy of a new Bernstein long read on the reported listing of 5 per cent of the state owned oil and gas giant by 2018. The final highlighted bit being the point, with the question being “why now?”: Often the simplest explanation is the most likely to be correct. With Saudi running a significant budget deficit, the listing of Aramco is one way to plug a gap in government finances. More broadly the listing of Aramco could be an example to other state owned firms, as Saudi reaches its ‘Thatcher’ moment in seeking to privatize state owned companies to increase efficiency as part of their plan to move beyond oil. The problem for oil markets is that privatized state companies tend to grow more quickly following privatization. Perhaps Aramco’s growth will be focused on refining and natural gas, but it is possible that Saudi have also realized that demand is likely to run out before supply and it makes more sense to deplete their own reserves ahead of others. While this is pure conjecture at this point, it could have bearish implications for oil markets. In the near term however, Saudi will not want to list Aramco at a low oil price. In the run up to 2018, we expect that Saudi will do everything in its power to ensure oil markets remain balanced and prices stable. This could be positive near term for oil equities. If that last theory is correct, it’s a solid end of the oil age gambit that is based in part on an eventual race to produce kicking in.
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- Mihir Desai explains the Wisdom of Finance
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Notes for today’s show: Oil, spending and saving[1:47]
GMO’s Jeremy Grantham famously speculated in 2011 that when it came to commodities and resources we were very possibly witnessing the most important economic event since the industrial revolution: From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.
Barclays’ profits are down by a quarter, Steinhoff concedes defeat in the battle for Darty, the BHS blame game is heating up. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
Because if his Royal Highness the prince wants the world’s largest sovereign wealth fund — then who’s to say no? As for the Arab and Islamic depth, we have the Qiblah of Muslims. We have Medina. We have a very rich Islamic heritage. We have great Arab depth. The Arabian Peninsula forms the basis of Arabism. The kingdom constitutes a large part of it. That issue has not been exploited in full. We have a pioneer investment power at the level of the world. Today, you see that many statements are being made, including statements indicating that the Saudi Sovereign Fund will be the largest fund in the world by far, compared to the other funds. That will be the main engine for the whole world and not only the region. There will be no investment, movement or development in any region of the world without the vote of the Saudi Sovereign Fund.
Commodity curve purists insist that long-term futures prices must not be confused with market forecasts. People who do that are deemed commodity dummies because long-term futures are said to reflect the price at which market participants are prepared to buy or sell commodities in the future today. That generally means prices that make sense for them right now, but not necessarily those they expect in the future. As a result, certain assumptions can be made about curve structures. If long-dated futures are very much higher than spot prices, the market is offering premiums to those who have the capacity to take delivery today and store the oil until the future. It’s a dynamic that indicates an abundance of oil in the spot market today, rather than an expectation that prices will be higher tomorrow. It’s known as a contango market and is generally a bearish signal.
We recently had a chance to chat with a senior Canadian economic policymaker. Among other topics — he estimated fiscal stimulus would boost growth by around half a percentage point in 2016 and by a full percentage point in 2017 — we discussed his belief the depreciation of Canada’s currency could help export growth offset some of the weakness in the oil economy. What follows is an attempt to assess Canada’s progress so far. For context, the Canadian dollar has lost about 21.5 per cent of its value against the currencies of its trading partners since the most recent peak in mid-2011, although the loonie had dropped as much as 31 per cent before the recent rally in risky assets:
Finance is the wrong business for people committed to the idea of objective truth. No asset is inherently worth anything, just some multiple of the income you think it will produce over time. Both the earnings forecast and the multiple can change at a moment’s notice — sometimes because the outlook for the future has genuinely changed, but often for other reasons.
A well-rounded education should give some understanding of economics and finance. So, in principle, it’s a good thing there are organisations such as America’s Council for Economic Education, a non-profit backed primarily by large financial and industrial companies aiming to train teachers and provide resources for children to understand basic concepts. But a little knowledge is a dangerous thing, and our recent experience with the CEE’s quiz on “economic literacy” — thanks to the Federal Reserve Bank of Richmond for tweeting the link — suggests this education effort could be doing more harm than good. On the bright side, it’s still possible to learn something useful from the quiz by closely studying why some of its questions are so bad.
Back in October, 2015, Bloomberg’s Tracy Alloway and I struck an OTC futures deal over a teeny, tiny vial of crude oil, which Tracy for some reason felt compelled to nickname “Williston”. Read about it here. I now plan to default on this contract (a ladies’ agreement, witnessed by “the world” due its publication on Bloomberg) and this is a public notice explaining my reasons for doing so.