The price of oil might have perked up over the past year, but there’s not much evidence that it’s feeding through to some of the second and third tier E&P issues that litter the AIM market in London. One of the more depressing things to do is to click on the last annual report from a company like Bowleven and read through the asset review.
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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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.