The Wayang Kulit Behind Oil Price Gyrations

Is there a puppet master, I mean nothing much has changed for much of 2014, so why the sudden drop in oil prices over the past two months? One can cite US production of shale oil but thats not like something happened overnight. All knew the numbers coming on from shale oil. So what gives?

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Opec divided on oil output

BY BEN PERRY
LONDON: The Organization of Pe- troleum Exporting Countries (Opec) oil producers cartel will hold one of its toughest and most significant meetings in recent years as, faced with sliding prices, its members must contemplate whether to cut output.
Ahead of Thursday’s Opec meet- ing in Vienna, its dozen member countries are split on what direction to take after a 30% drop in crude prices since June has slashed rev- enues.Opec’s poorer members, led by Venezuela and Ecuador, have

called publicly for a cut in output, while Iran has hinted at a need to reduce production.
But the cartel’s Gulf members, led by kingpin Saudi Arabia, are rejecting calls to pump out less oil unless they are guaranteed market share in the highly competitive are- na, according to analysts.
“The minimum consensus that appears likely to be reached at Opec’s meeting is a commitment to better comply with the official production target of 30 million bar- rels per day,” Commerzbank ana- lysts said in a note to clients. — AFP 
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As you can see OPEC is almost toothless... not really toothless but rather that Saudi Arabia is not brandishing their big stick. So whats their motivation?

Apa Lagi Saudi Mahu?

Some cynics might say that its Saudis' way of trying to curb or trash the US shale oil's viability. That does not hold much water though nice conspiracy theory for a Hurt Locker movie script. 

Much of US shale oil can cost between $50-100 per barrel just to get the oil out. That is official figures fro International Energy Agency. The IEA confirms that ONLY 4% needs oil prices to be above $80 for it to be viable, though some analyst reports put that at as high as 20%.

It is very hard to displace shale oil as their wells are much shallower, which is to say they will move to more viable wells and will only tap harder to get at shale oil till prices move back above $90. 

Plus politically, it does not make sense to screw with USA while they are an important ally in the current 'war' against Islamic State.

It also does not make sense to screw with shale oil as their production costs will never be competitive against their own oil extraction cost. Saudis (and North Africa) cost per barrel is closer to $10 per barrel, though some areas may reach as high as $25 per barrel. Hence in actual fact it would make more sense for shale oil to continue as a base for oil prices, plus adding sufficiently to a resource that is limited. Its pointless to push oil to $200 per barrel, even if they can. The fallout to the global economy, and making themselves more a 'future target' for war for oil.

This Is Why Saudis Are Letting Oil Price Slip

Saudis can easily move oil prices back above $90 if they reduce their output and they can do so as they have the reserves to do so. Saudi Arabia has about 260n barrels in reserves and about 9-13m barrels a day. So what did the Saudis do in recent weeks... they actually increase their daily output by 0.5% to 9.6m a day. Strange isn't it? Not only that, the Saudis in recent weeks even offered discounts to big Asian consumers thus depressing oil price further.

Financially Saudi Arabia has over $700bn in cash/bonds reserves , so they do not need the money and can stay at this status quo for a couple of years if need be. The worst country to be affected is their 'enemy' Iran, which actually needs oil to be above $120-140 for it to break even. Russia needs $100 per barrel or else its budget loses $2bn for every dollar below $100... hence for now Russia will need nearly $40bn to watch the hole in their budget this year alone. 

It is also an important way to make life very tough for rogue nations in the Middle East supporting the IS as the funds are necessary to fund the war and terrorist acts.

The unfortunate nations who get steamrolled from all this include Venezuela and to a lesser extent Malaysia. 

The Truth Hurts ...

Canto-Mando Movie Reviews

Time to bring up some movie recommendations cause there are a couple recently that piqued my interest. The first is Kung Fu Jungle, its a badly titled movie in English, sounds so much cooler in Chinese. Its a great kung fu movie but its significant for a lot more than just entertainment. 

If you remember the comedy classic Kung Fu by Stephen Chow Sing Chi, where he tried (successfully) to incorporate the many popular kung fu techniques and "fantasy kung fu stuff" into a well woven comedy. In many ways its a great tribute and acknowledgement to the discipline in movie making.

Well, KFJ is like Kung Fu except that it took the more serious route, and the kung fu is a lot more realistic and authentic. Besides entertaining audiences, KFJ roped in as many as possible the HK kung fu movie stars from the late 60s, 70 and 80s and gave them roles in it. In many ways, its an excellent tribute, as the story goes about a guy wanting to be the ultimate kung fu master and he goes about it by seeking out the top masters in each genre of kung fu, but he has gone a bit cuckoo so he not only wants to beat them but kill them as well for no apparent reason.

Donnie Yen was amazing and so were his co stars. 

The second recommendation is a romantic comedy. Its part 2 of Don't Go Breaking My Heart, you need not have watch the first to watch this, but it would help a lot in enjoyment. When masters such as Johnnie To and Wai Kar Fai decide to ditch their usual gangster-police-shootout hats and go into rom-com, it usually leads to pretty watchable stuff.

The interlinking relationships between the main stars were fantastic. The energy and believability, the characters all fleshed out properly and you would feel for each of them. Gao Yuan Yuan was adorable and sublime. Koo Tin Lok, Miriam Yeung and Daniel Wu were great. Storyline was solid and layered. No kiddie mushy stuff here. Great movie, watch both parts.

There is a running theme and its more for those jaded but yet still looking for love in the modern world - love is not so much determined or predestined... its in your own hands, you have to take it, grab it, or let it go. I think I can use the word "satisfying" here for a really good romantic comedy.

So Bad, Its Good ...

“Chick Chick” by Chinese pop group Wang Rong Rollin from China I think. Its Old McDonald's Farm on acid ... Its pretty ridiculous but fun and hypnotic. A kick ass music video... I predict this will be very big globally for a few months. Being different makes people sit up and take notice as we all get jaded with what is out there. Of course some will say that its a ripping off from Ylvis' What Does The Fox Say ... if you put the two side by side, you can say some parts were similar but 'greatness' often results in copycats, and Chick Chick is a lot more fun, really makes you smile. I think this will go viral globally in a big way.

Apa Lagi Amerika Mahu

For my life I could not understand why the US mid term election came to be a snub against Obama... I mean although he is not a big fanfare guy, he has "righted" the many wrongs from the Bush administration, if you can call it that.

Stock markets at all time highs, gasoline low, interest rates low, did not go to war, best OECD growth, hunted and killed Osama, inflation benign, jobs up and up...

New Board Game - How Big Is Your Pond

I blogged about this about 5 years ago. Its a fun game. As investors or banking/finance professionals in the markets, we need to get a grip and look at where we are in the whole scheme of things. No matter how"great" we are its only in a very tiny pond. Of course I am not belittling ourselves here, big pond small pond, still a pond ... but don't let it get to our heads when it comes to why we are only a small boat in a sea storm whose waves could sometimes overwhelm our tiny boat, no matter how well built it is.

As things stand, just the US markets alone is as big as the next 7 markets COMBINED: Japan, China, HK, UK Canada, France and Germany all totaled up.

Hence thats why we mainly look to the US for direction. The blog post below on how big each state's GDP is in terms of another country would show beyond a shadown of a doubt why America is the world in business, trade and finance.

Thursday, February 13, 2014

Why Global Investors Keep Looking To United States For Guidance

Thats the first thing you learn when you step into an investment career, but do we know why. I mean, we know its big, but just how big? This map shows clearly why. It dissects out the states of the United States and correspond that to a country with the similar GDP for that state. 

Its an incredible map as it puts into perspective just how important that entire economy is ... its like over 50 countries .... That may partially explain why most Americans do not travel much, they have most of what they need there. For us, we may need to travel for business, but for them traveling within a few states there is like making business contacts with a few countries.

We also give Americans a hard time when we find out how few actually travel outside of America ... but just trying to cover a few states is already like covering a few countries, and each of the states are actually quite different in their make up and essence.

Low Oil Price Providing a $1.3 Trillion Fiscal Stimulus

You cannot just be focused on one side of the equation. Yes, lower oil prices may affect the revenues of oil exporting nations. It may even be a reflection of the oversupplu, maybe brought on by rogue nations milking oil for funds for war and terrorism. It could also be a strategy by OPEC to decapitate shale oil production ventures which needs oil to be safely way above $80 to make it feasible.

Whatever it is, lower oil prices will also mean savings for almost all nations, and in actual fact may go a long way to boosting demand and improve savings for reallocation of resources t

o other areas of the global economy. The report below from Bloomberg pegged stimulus at $1.1 trillion, now it should be $1.3 trillion. Thats a whole lot of QE in a different form and manner. Not all news is bad, the pendulum may swing but there is always a counter balance.
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The lowest oil price in four years will provide stimulus of as much as $1.1 trillion to global economies by lowering the cost of fuels and other commodities, according to Citigroup Inc.

Brent, the world’s most active crude contract, closed at $83.78 a barrel inLondon yesterday. That’s more than 20 percent below its average for the past three years, amounting to savings of about $1.8 billion a day based on current output, Citigroup estimates. Savings will climb to $1.1 trillion annually as the slide cuts costs of other commodities, leaving consumers and companies with extra cash to spend and bolstering growth, according to Ed Morse, the bank’s head of global commodities research in New York.

Crude prices are plunging amid signs that OPEC, supplier of 40 percent of the world’s oil, won’t act to eliminate a surplus as global growth slows. Combined supplies from the U.S. and Canadarose last year to the highest since at least 1965 as producers tapped stores locked in shale-rock formations and oil sands. The global economy will rebound next year, with growth quickening to 2.98 percent, the fastest since 2010, according to analyst forecasts compiled by Bloomberg.

“A reduction in oil prices also results in a reduction in prices across commodities, starting with natural gas, but also including copper, steel, and agriculture,” Morse said yesterday in an e-mailed response to questions. “All commodities are energy intensive to one degree or another.”

Commodity Prices

Regular gasoline averaged nationwide in the U.S. dropped to $3.163 a gallon, the lowest in more than three-and-a-half years, Heathrow, Florida-based motoring group AAA said on its website yesterday. The Bloomberg Commodity Index slumped to a five-year low, about 50 percent below its peak in July 2008. Copper, natural gas, coal and iron ore are all far below their peaks.

“Cheaper oil is an advantage for both consumers as well as industrial and manufacturing operations, especially as winter approaches,” Myrto Sokou, an analyst at Sucden Financial Ltd. in London, said by e-mail yesterday.

As lower energy prices help reduce commodity costs, they can push down the inflation rate. While freeing up more money for consumers, outsized declines could become a concern in places likeEurope, where policy makers are trying to stave off deflation, which can exacerbate an economic slump.

The euro area will have inflation of 0.5 percent this year, according to estimates compiled by Bloomberg. Consumer prices globally will increase by 2.47 percent in 2014, about the same as last year, the forecasts show.

Oil Analysts

Brent rebounded from the lowest level in almost four years today, rising 47 cents to $84.25 a barrel at 1:13 p.m. in New York on the ICE Futures Europe exchange.

“Lower prices, for most economies, reduce the cost of doing business and support economic growth,” the International Energy Agency said in a report Oct. 14. “Lower prices offer a cushion of sorts against an otherwise vulnerable macroeconomic backdrop.”

The Paris-based adviser to governments said in the same report that oil demand will expand by about 650,000 barrels a day this year, half the pace it anticipated in July.

Nations in the Organization of Petroleum Exporting Countries may resist cutting output in response to the slowing demand growth to try and test the prices at which some North American supply is profitable, Antoine Halff, head of the IEA’s oil industry and markets division, said.

A decline to $80 would cost OPEC $200 billion of its recent earnings of $1 trillion, Morse said in an analysis on the topic that was published yesterday in the Financial Times.

Big Chunk

Oil prices rose to a record in 2008, boosting revenues for nations including Russia as well as Middle East states such as Saudi Arabia, Kuwait and the United Arab Emirates. It also increased prices for consumers in industrialized nations.

“It is a big chunk of stimulus,” Seth Kleinman, Citigroup’s head of European energy research, said by phone from London. “The macro economic analysis of higher oil prices was always that it is essentially a wealth transfer from leveraged spending U.S. consumers to saving Middle East sovereigns, so ultimately it reduces the global velocity of money significantly and it’s a net drag. Now a price fall reverses that.”