29.1.15

Saudi can't win oil price war against US shale producers

London 29.01.2015 – The “swing producer” no more. There was a time not long ago, when Saudi Arabia could call the shots in the global oil market. Its dominant position was due, mainly, to its spare production capacity, its low production costs, its commanding position as the world's largest producer, and the fact that the dynasty that rules the kingdom could modify that country's oil policy at the click of a finger.

Over time, other equally powerful players appeared. First it was Russia, which surpassed Saudi as the world's largest producer. Although not a monarchy, the man in charge could also tack and order his minions to change energy policies. Then the US appeared. The production boom caused by shale producers can be easily described as capitalism unleashed. Unlike the other two, a myriad of independent private companies, varying in size, got onto the oil business, catapulting production numbers, and getting the US overall output ahead of both Russia and Saudi.

So now there are three “swing producers”, with quite different economic realities. Saudi has decided to “let the market” set oil prices. Increase of previous years, to over $100 levels, was due to a combination of factors, perhaps the most overlooked one being that oil became a store of value commodity. Aside from a spike in demand associated with growth in emerging markets, futures trading were buoyed by billions of dollars looking for shelter, which fueled an ever increasing price trend that wasn't necessarily demand-driven. As the saying goes, there's nothing more cowardly than money, and so the billions that were pumped in have either taken flight, or changed positions, offer and demand are now the drop's culprits. 

The market is oversupplied. Nearly all producers are countering lost income by increasing output, which adds to the glut. Stockpiles are at an all time high in most places. There's talk of players hoarding oil in tankers, expecting to turn a quick buck when prices rebound. Adding to the glut, is the fact that consumption in China, and Europe is decreasing, while Japan's chronic stagnation further weakens demand. While this is happening, the US Dollar has strengthened, which is another factor that pushes prices down. The US Federal Reserve, with its quantitative easing (QE) and low interest rates, has contributed in no small part to the shale boom. 

Europe, in the meantime, is suffering its own economic woes. Mario Draghi's recent QE announcements saw the Euro taking a beating against other currencies. Switzerland's Central Bank decision to un-peg value of its currency against the Euro, followed by Denmark's decision to cut interest rates, piled on the drama. Then, Grexit fears, now that Greeks have voted into office someone who wants to “renegotiate” sovereign debt terms, is creating more volatility in the Eurozone, while undermining trust in its economies' capacity to spur growth.

Russia is having to deal with a different set of cards. Imposed international sanctions, after de facto annexation of Crimea, have caused the Ruble to lost over a third of its value. Oil income has dropped dramatically. Further sanctions are being discussed in Brussels. China is watching this developing scenario with great concern. The two nations border is thousands of miles long. Potential instability in Russia could spill over. Ever pragmatic, China is increasing oil imports from Russia.

This pushes Saudi to a situation of having to defend, simultaneously, its market share against two of the world's three largest producers in the world's two largest markets. Saudi's decision to discount its oil to Asian clients is surely not appreciated by Putin, though it appears that increasing energy deals between Russia and China are not circumscribed solely to economics, but to political factors. China has enough muscle to throw a lifeline to Russia, as the WSJ reported recently “Saudi Arabia imports fell 8 percent in 2014, and imports from Venezuela fell 11 percent.”

Rumors of a possible meeting between OPEC and non-OPEC producers, to agree on cuts, can only undermine Saudi in the long run. For it is almost unimaginable that US shale producers will sit on that table, or indeed reach a cartel-like consensus. If prices rebound, Russia probably keeps its increased market share in China, and shale producers -pumping at an all time high- will compete with Saudi also in international markets upon US government lifting long held light oil exports ban.

While the kingdom has a rather large financial cushion, recent investments-cuts announced by Saudi Aramco's officials would suggest that the pinch is already being felt. No point in adding production capacity with current oversupply showing no signs of abating. Consider recent comments by OPEC's al-Badri, of price having “bottomed”. However US stockpile levels, highest since 1982, may well be the reason for Goldman Sachs' contrasting view, suggesting that price could drop further to around $30. If there's an entente to be reached, it will likely be between Russia and Saudi. Who will benefit more if it happens? Not Saudi...

8.1.15

Je suis Charlie

Yesterday's attack surprised most around the civilised world. What surprises me, judging the massive outpour of support and empathy, is indeed that most seem to have been surprised by the ghastly attack on Charlie Hebdo. It's as if 9/11, or 7/7 and 11-M never happened. As if ISIS doesn't exist. As if Putin didn't just invade Ukraine and annexed Crimea under the very noses of the entire European continent. As if China hasn't been running roughshod over Tibet or the Uyghurs. As if the world's largest democracy hasn't suffered enough at the hands of radical members of the world's second largest Muslim population. As if Syria and it's 200,000+ killed were in a different galaxy, or Mugabe was a cartoon character, and Che just a companion of Mafalda. As if attacks on civilisation weren't a regular ocurrence.

Shocking it is that the general public in Europe, from whose lands individuals like Hitler, Mussolini, and organizations like the IRA or ETA have emerged, are surprised by the fundamentalists that killed 12 freedom fighters hours ago. How quickly they seem to have forgotten the miseries and despair of old. It is easy to feel safe in a place like Paris, or London, easy to live with a wholly misplaced sense of security, as if exempt from disgraceful obscurantism and ignorance, which is present in every society.

I am Charlie. For over a decade I have been exposing criminal activity from my virtual corner. More often than not I have been derided, mocked, as a fatalistic Kassandra, an unconvincing exaggerator. Almost without fail, people adopt the "it's-not-as-bad-as-you-paint-it" stance, when not absconding to the standard and almost universal self-defeating appeasement mode of "let's-not-confront", mainly to avoid becoming a target of the Frankfurt School thought police, being branded a racist, or worse.

Well, tragedies, such as yesterday's, happen, have happened, and will continue to happen no matter what. Appeasement... Chamberlain... The world is faced with a new normal. We thought Europe had overcome hatred of the type. But then again, it just takes a couple of deranged Islamofundamentalists to prove the contrary. Policy makers must understand that ostrich-like, self centered, "all politics are local" BS no longer works, for the beliefs some of the locals have do not conform to established and accepted dogma. The assasins were born and raised in France, is not that they weren't exposed to the beauties and freedoms of civilisation. Those very freedoms, and tolerance towards the other, have brought us to a point where we must accept to live with such fanatics in our midst. We can wish fundamentalism away all we like, alas it is here, at the very core of our societies, reminding us, unfortunately at regular intervals, that it is part of our polity.

I bet no one at Charlie Hebdo ever thought their ideas would cost so much. I can, comparingly in an insignificant way, attest that I had never thought that exposing criminals, and their chavista counterparts, could cause so much hatred, and endanger the wellbeing of my family. But that's the thing, one can't imagine how the other is going to react, because one would never behave like that. We do not share their beliefs. We couldn't care less about our own deities, let alone theirs. No one at Charlie Hebdo ever thought it'd become a statistic, alas it takes a particular type of statistic to get the Leviathan -rather comfy with its inertia and dismissive stance- moving, at which point tragedy has already struck.

I too rather die standing than live on my knees. I too refuse to let deranged thugs dictate how and where I live my life, for Je suis Charlie.