Archive for the ‘Oil’ Category

Saudi Aramco Oil Facility

Some may have seen recent news reports of Saudi Arabia targeting $100 oil. TradeFlow21 has tweeted (Jan 18th: “Saudi Arabia is not targeting $100 oil.“) a very helpful article on just the subject. Complementing the article, TF21 adds that triple-digit oil prices are not exactly in the Saudi’s or any oil exporting country’s best interest. Reason being is that often times when oil prices are high, they are accompanied by higher prices almost across the board. In volatile times like now, at home in the U.S. and in countries around the world, wages paid to employees that have not kept up with inflation are partially to blame for discontent. Thus, $100-plus oil is not helpful to Saudi Arabia if it in turn must pay higher prices for materials (and services) for the tens and hundreds of billions of dollars of real investments it’s making.

A new IMF working paper by Nese Erbil explains:

This paper examines the cyclicality of fiscal behavior in 28 developing oil-producing countries (OPCs) during 1990-2009. After testing five fiscal measures – government expenditure, consumption, investment, non-oil revenue, and non-oil primary balance – and correcting for reverse causality between non-oil output and fiscal variables, the results suggest that all of the five fiscal variables are strongly procyclical in the full sample. Also, the results are not uniform across income groups: expenditure is procyclical in the low and middle-income countries, while it is countercyclical in the high-income countries. Fiscal policy tends to be affected by the external financing constraints in the middle- and high-income groups. However, the quality of institutions and political structure appear to be more significant for the low-income group.

Among the conclusions:

The results confirm that political and institutional factors, as well as financing constraints, play a role in the cyclicality of fiscal policies in the OPCs. Most of the variables on the quality of institutions and the political structure appear to be significant for the low- income group. Two of the variables are significant for the middle-income countries: the composite institution index and checks and balances. None of the institutional variables turns out to be significant for the high-income countries.21 Domestic financing constraints seem to matter for the low-income group. But fiscal policy is affected more by the external financing constraint in the middle- and high-income groups, as they may be more integrated into the global financial system than the low-income countries.

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An April web exclusive published by Vanity Fair (written by A.A. Gill), “Dubai on Empty,” depicts the emirate in a highly unfavorable light. To invoke the nasty vigor of Gill, it is highly distasteful and reeks as if there’s some unspoken vengeance. Bemoaning a “cautionary tale” of all encompassing greed in Dubai, Gill argues a doomed future for Dubai is a fait accompli. TradeFlow21 does not disagree that there are serious issues to be dealt with, but we urge readers to not be taken in by the bleeding headline and gushing story. As Gill says, “Dubai has been built very fast.” And that’s part of the problem. Too much has happened too fast. Similar to our experiences in China, TradeFlow21 recognizes what many in the Western world have long forgotten, that economic growth, especially the kind we’re witnessing in select economies, is a bumpy ride. Gill claims, “Dubai suffers from gigantism—a national inferiority complex that has to make everything bigger and biggest. This includes their financial crisis.” Are the Western bankers and executives not culpable for some of this hedonism and grandeur? Rather than slam an entire emirate (state), TradeFlow21 seeks to work in practical ways to bridge businesses, students, travelers, and all parties that can help make the world a better place now and for posterity.

IMF staff just published a report on this subject. Abstract:

We present evidence on one facet of energy security in OECD economies – the extent of diversification in sources of oil and natural gas supplies. Viewed from the perspective of the energy-importing countries as a whole, there has not been much change in diversification in oil supplies over the last decade, but diversification in sources of natural gas supplies has increased steadily. We document the cross-country heterogeneity in the extent of diversification. We also show how the extent of diversification changes if account is taken of the political risk attached to suppliers; the size of the importing country; and transportation risk.

You can buy the report here, or ask us for the full paper in digital form.

Bartle Bull, founder of Northern Gulf Partners, an Iraq-focused investment bank, tells us in today’s WSJ:

The expected announcement of Iraq’s new government marks the culmination of a remarkable process. The former bully-boy of the Arab neighborhood has become its only functional democracy. What may be the world’s richest resource economy, once the closed shop of a murderous clique, is today wide open for business.

Driven by what many geologists consider the world’s largest oil reserves, Iraq will probably be the world’s biggest crude oil producer within a decade. The country currently ranks second to Saudi Arabia in official reserves, with 143 billion barrels. With much of Iraq’s exploration still to come after a three-decade hiatus, and with Saudi Arabia’s reserves substantially inflated and already in decline, Iraq could take the mantle as No. 1 in fairly short order.

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The Gulf Daily News reports that Gulf Cooperation Council (GCC) member oil ministers met ahead of a scheduled OPEC meeting and have vowed to continue to achieve oil price stability. While adherence to oil output targets (qutoas) is controversial and is reportedly as low as 50% this year compared to 90% in April 2009, the principals of TradeFlow21 must admit that oil at $80/bbl is desirable compared to the alternatives. In fact, in August, we penned, “Oil at $80 just about right for GCC and not bad for U.S.” We stand by that position, keeping in mind the $147/bbl peak in July 2008 and the $32/bbl trough in December 2008. Furthermore, in a world comprised of a herd of desperate central bankers (unrelenting in their quantitative easing), hungry holders of capital willing to chase seemingly any asset (note broad rallies in equities, debt securities, and commodities), against a backdrop of surreptitious dollar devaluation and open competitive devaluation of rival currencies (not to mention the conundrum in China’s currency, the yuan), we find solace in oil at $80/bbl. Yes there is admitted overcapacity; but there is also the compelling story of peak oil –  real, severe limits for safely and cost-effectively extracting new sources — and the aforementioned unfavorable global macro environment.

The US Dollar Index (which measures US$ performance against a basket of leading currencies) has been falling rather sharply of late, coinciding with an inverse rise in the price of crude oil, which last traded above $82 a barrel on Wednesday in the U.S. compared to a low-$70 trading level a month ago. Day-to-day the volatility not just in the prices of financial instruments, but also in the accompanying roller coaster analyses by the business press and among the so-called experts including market analysts, economists, and investors, adds fuel to the uncertainty surrounding the fragile global economy. In this article, TradeFlow21 wants not so much to join the dubious and perhaps fruitless debate, but rather to provide readers with a concise thought-provoking angle.

The Daily Star of Beirut, reports today that “the improvement in oil prices and projections that they could increase further would largely benefit Gulf crude producers, however, they carry risks of return of high inflation to the region,” according to National Commercial Bank (NCB). What’s highly interesting here is that the Gulf producers obviously want to earn as much per barrel as possible, however, after a certain (sustained) level, say $100/bbl, problems arise due to the weaker dollar (remember oil is priced in dollars), since most of the Gulf Cooperation Council members peg their currencies to the dollar, and thus they will face the challenge of rising domestic inflation from the massive dollar inflows subjected to higher import prices.  Therefore, the producers must somehow achieve a desirable level, say between $80 and $85/bbl (remember their respective national budgets are based on levels as low as $40/bbl), and thus, with an already weak dollar and an abundance of global economic uncertainty, they will utilize their excess production capacity to cap the upside in hopes of maintaining the said lucrative price range.

TradeFlow21 is not keen on collusion, but it turns out that should the dollar’s value erode further due to a rightfully perceived multi-front deficit death spiral in the face of quantitative easing, and if crude continues to climb over the wall of economic worry turbocharged by the same quantitative easing, then a little cooperation among the GCC is good thing if it keeps a lid on oil prices. It’s a win-win, for now and near-term, since oil at where it trades now means hard cash for the producers (with some purchasing power to boot), and in the U.S. it means averting a repeat of the oil price spike of 2008. Such circumstances suggest the possibility of a real recovery, as the GCC is able to continue to both make oil-related investments and diversify their respective economies and financial investments; and the U.S. can keep the price of a key input under some sort of control.

So oil at $80 is not necessarily a bad thing, since it could be much higher, or on the flip side, it could even flirt with $30 again, in either case effectively reintroducing “it’s the end of global trade” scares again.

A published report by NCB Capital, a Saudi subsidiary of the National Commercial Bank, cited a study by the German Aerospace Centre that estimates the region’s deserts “receive annually average solar energy equivalent to 1.5m barrels of oil per sq km.” The Arabian Desert, which covers an area of 2.3m sq km (900,000 sq mi), would yield the equivalent of 1.1 trillion barrels of oil per year, assuming solar panels were erected on one-third of the available land. The UAE’s recent committment to support 7 percent of its energy needs from renewable sources by 2020 further suggests that other Middle East states, particularly those where shortfalls are reportedly “looming,” may soon follow suit (see full article in Financial Times, via Zawya). From TradeFlow21′s perspective, the commercial opportunities for green industries, including water desalination/filtration, are immediate and immense. For more information on doing business in the Middle East, contact Lew Nescott, Jr. at 203.848.7257.

Early last week, oil briefly traded above $60 for the first time since November. Hard to believe that last summer oil peaked at nearly $150/bbl, and subsequently collapsed to a multi-year low of $32/bbl in February. So while we’re way off last summer’s levels, we have witnessed a practical doubling in price in just a few months time. It goes without saying that consumers and producers are all impacted in some way by price, and even though comparatively lower prices are welcomed, the volatility and recent upside are sources of uncertainty.

The message from oil analysts and capital market participants is mixed. On one side, the picture is bleak, as unemployment and economic contraction loom, while so-called oil “fundamentals” are weak (weak demand and strong supply). These all suggest that the oil rally may have run its course for the time being. However, the bullish camp points to the now rhetorical “green shoots of recovery” theory, reports of stockpiling by China, short (seller) covering in futures markets,  and higher risk appetite among investors and traders — with all the aforementioned accompanied by a weakening dollar, which has an inverse relationship with oil and many other commodities.

Therefore, it truly is a mixed bag. For consumers and domestic U.S. manufacturers, an economic recovery at home and more broadly around the world has huge implications, but higher oil nibbles away at the purse and at margins, respectively. At the same time, as a weak dollar typically suggests a more favorable climate for U.S. exports, there is pressure on the input (or materials) side from rising commodities. Nevertheless, at current price levels, higher growth for higher oil is a bargain! For oil producers, higher oil is almost always welcome, although refining operations can cap the upside. Also, higher oil means more likelihood for investment and exploration, which eventually may lead to more revenues, and supply, but ultimately, perhaps somewhat of a damper on prices.

That being said, TradeFlow21 remains enthusiastic about the sustained growth prospects in the Middle East. In some cases, oil now accounts for a lower portion of GDP than in years past as Gulf economies seek economic diversification, but in terms of a source of foreign reserves, oil overwhelmingly remains the source of liquidity. In our opinion, the higher oil prices of late are not necessarily worrisome from the U.S. viewpoint. Reason being is that OPEC, and the Gulf producers in general, are sensitive. A recent guest on Bloomberg Radio made the point that the Gulf producers don’t want to be blamed for a prolonged global recession, and therefore, are willing to sacrifice near-term profits and even some budgetary shortfalls. Oil producing companies have a relatively low break-even price, perhaps as low as $30 or less, but oil producing nations that went on a spending spree in recent years tend to have budgets based on break-even oil in the $40-$60 range, with outliers such as Abu Dhabi in the low $30s and Bahrain in the $70s (Fitch Ratings). No doubt sovereign budgets have been, and will be further adjusted, but in order to sustain growth, significant amounts of money will continue to be spent within the region. For Connecticut manufacturers and exporters, the Gulf represents real opportunity (from everyday consumer products to building materials and beyond), and TradeFlow21 is here to help make the region more accessible to you.