May 15, 2017

If you were to read only one thing…

FT – Oil: the market finds that the Sheikh has no clothes – Nick Butler 5/7

  • The markets have “lost all confidence in the power of Saudi Arabia to set prices.”
  • Why?
  • “First, US production led by so called tight oil extracted from shale rocks has started to rise. Month by month, production increases and will continue to grow, not least from prolific and low-cost sources such as the Permian basin in Texas. Far from being closed down by the fall in prices over the last three years the US oil sector has demonstrated its resilience and its ability to cut costs.”
  • The majors have become more efficient as well.
  • “In contrast, the traditional oil producers have not been able to adjust. A study by the International Monetary Fund published a few weeks ago listed the oil price needed by a range of producers to balance their national budgets. Because of recent increases in production, Iran and Iraq have reduced their fiscal break-even point to just over $50 a barrel, but Libya requires a price of $71, and Saudi itself, despite record production, needs $83.”
  • Opec agreed to a cut in November and the group is meeting again this month to determine its next steps.
  • “But the prospect of a coordinated response has diminished as the weeks have passed. There is a big temptation for producers to cheat on any deal. Could the Saudis continue to fill the gap themselves by cutting more? In theory yes, but in practice the kingdom is also short of revenue and clearly unwilling to make the dramatic cut in output — by 1.5m barrels a day to 2m — that would really reset the market.”
  • “The realization that the market is beyond control in the accustomed way is now changing expectations across the industry. There is still more growth in supply than in demand. New projects are still coming onstream, and among the producers many — from Iran to Libya to Russia — have plans to raise production over the next two years.”
  • “The fact that the industry has learnt how to operate profitably at $50 suggests that the private sector will also continue to bring projects forward. Several of the major companies have announced planned increases in output in 2018 and 2019.”
  • “The private sector has passed through the pain barrier of adjustment. The oil-exporting countries have not. Matching lower revenues to the needs of growing populations who have become dependent on oil wealth will not be easy. It is hard to think of an oil-producing country that does not already have deep social and economic problems. Many are deeply in debt.”
  • “In Nigeria, Venezuela, Russia and even Saudi Arabia itself the latest fall, and the removal of the illusion that prices are about to rise again, could be dangerously disruptive. The effects will be felt well beyond the oil market.”

Worthy Insights / Opinion Pieces / Advice

LinkedIn – The Big Picture – Ray Dalio 5/12

  • “Big picture, the near term looks good and the longer term looks scary. That is because:”
    1. “The economy is now at or near its best, and we see no major economic risks on the horizon for the next year or two,”
    2. “There are significant long-term problems (e.g., high debt and non-debt obligations, limited abilities by central banks to stimulate, etc.) that are likely to create a squeeze,”
    3. “Social and political conflicts are near their worst for the last number of decades, and”
    4. “Conflicts get worse when economies worsen.”

Bloomberg Gadfly – OPEC’s Staring Down a Double-Barrel Cut – Julian Lee 5/14

  • “OPEC is going to have to do much more than simply extend its current production deal when it meets next week if it’s serious about addressing surplus inventory. In fact, its own figures show it needs to double the cut it made in January. That means finding another 1.2 million barrels a day to take out of production.”

Markets / Economy

FT – The silent sell-off in US Treasuries – Robin Wigglesworth 5/11

  • “From a five-month low of 2.17% in April, the 10-year yield has now jumped to 2.4%.”

Energy

WSJ – China Trade Plan Is Big Deal for Natural Gas – Nathaniel Taplin 5/12

  • “China has terrible air pollution, burns too much coal and pays too much for natural gas. The U.S. has too much gas, trouble financing expensive export terminals, and a huge trade deficit with China. The solution should be obvious.”
  • “It looks like policy makers in both countries may be thinking along similar lines, according to a preliminary 10-point bilateral trade plan released by the Trump administration Thursday.”
  • Good for the U.S. and China, bad for existing high cost suppliers to China such as Australia and Russia.

FT – The importance of the Iranian election – Nick Butler 5/13

  • “Anyone hoping that the cycle of oil prices will soon turn, and that the market will tighten over the next two years, should be watching the Iranian election results very carefully.”

Asia – excluding China and Japan

NYT – Singapore, a Rising Home for Quiet Money, Comes Under Pressure – Neil Gouch 5/12

  • “Tight bank secrecy laws have helped draw $1.1 trillion in foreign funds to the city, according to an estimate from Boston Consulting Group, a consulting firm. Singapore is now growing faster than Switzerland and is set to become the largest cross-border financial center in the world by 2028, the firm forecasts.”

FT – Worst-hit oil exporters see recessions extend to fifth year – Steve Johnson 5/11

  • “Brunei and Equatorial Guinea have contracted every year since 2013.”

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