Category Archives: markets

A Speculation on Oil

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I have one of my own, against the backdrop of the oil production and price war just begun between Saudi Arabia and Russia.

The Saudis, dismayed over Russia’s refusal to go along with a proposal to further reduce oil production in the face of declining economic demand that’s potentiated by the coronavirus affair, have announced an increase in oil production.  Russia has responded with a “we can do that, too” threat.

The increase by the one (to begin 1 April) and the threat to match by the other have sent oil prices into the low $30s per barrel with projections into the mid-$20s.  Both nations claim they can afford these prices for the next few years before they exhaust their financial reserves.

Those reserves would be tapped heavily because the Saudis need $80 per barrel to balance its budget, although its debt-to-GDP ratio is in the neighborhood of 25%, so they can borrow for some time on reasonable terms.  Russia needs $50 per barrel to balance its budget, and its debt-to-GDP ratio is in the neighborhood of 15%.

On the other hand, Russia’s currency has fallen about 10% since the oil crisis began, while the Saudi riyal is pegged to the dollar.  Those combine to reduce the strain on Saudi Arabia’s overall economic moves relative to Russia’s.  Russia also faces reduced economic flexibility relative to the Saudis due to the broad reach of sanctions applied to it over its military and cyber adventurism.

The snapshot and short-term future would seem to favor Russia in this pricing and production contest, but the longer term not so much as currency fluctuations and sanctions will continue to accumulate in their relative effects.

If this contest gets to the longer-term, one other factor could come into play that would support Russia against Saudi Arabia: the People’s Republic of China greatly increasing its purchases of Russian oil.  This would favor the PRC, too, as it would give it a nearby source of cheap oil along with a distribution network that would be less vulnerable to international disruption.

It would also deepen Russia’s dependence on the PRC—possibly good for the PRC, but definitely dangerous for Russia.

Note, though, that I’m ignoring the impact of this contest on our own oil (and gas) industry; the contest will not do us any good at all.

How Long Can Russia Hold Out?

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What’s behind the oil price plunge and the associated stock index plunge?

Russia refused a Saudi Arabia deal to cut oil production during the current drop in demand for oil by an additional 1.5 billion barrels per day. This would have been on top of the 1.7 billion barrel per day cut begun some weeks ago in response to reduced oil demand driven by reducing Asian and European economic activity.

That reduced demand has been exacerbated by the coronavirus’ panic-driven impediment to overall economic activity.

In response to the Russians’ refusal the Saudis cut their price of oil by $6-$8 dollars and have said they’d increase their oil production by some 2.3 million barrels per day. In essence, the OPEC-agreed limits on oil output are completely withdrawn.

This has added stress to the Russian economy.

…the Russian ruble ha[d] its worst day since 2014, down more than 8% against the dollar.
…
Russian authorities on Monday pledged to use their $150 billion sovereign-wealth fund to support the economy and said the nation’s budget can withstand low crude prices for a decade.

But at what cost, what trade-offs? Given Russia’s financial commitments/needs to support its occupations of Ukraine and Georgia, its drive to build up its military, its cyber attacks against Ukraine, the Baltic States, and elsewhere around the world, it’s part in the joint development, with the People’s Republic of China, of Siberian resources, and on and on, for how long can Russia’s monetary reserves last, really? How long until Russia starts printing roubles, and triggering dangerous inflation?

And: do we have the stomach for lasting longer and doing better than Russia?

A British Proposal

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In contrast with UK-EU negotiations, begun earlier this week, these are the high points of Great Britain’s suggestion of what a US-UK trade deal would look like.

  • reduce or remove tariffs for UK exports…US has indicated its intention to seek to reduce or remove UK tariffs on US exports in a UK-US FTA
  • customs procedures at the border are as facilitative as possible makes importing and exporting easier
  • address subsidies which have the potential to distort trade. Provisions for fair, effective and transparent competition rules could underpin liberalisation of trade between the UK and the US
  • a UK-US FTA as an opportunity to build on our global leadership in this area to develop a world-class [Intellectual Property] chapter

These form the core of an actual free trade agreement, one that is much better than the restrictive, anti-competition, anti-business straitjacket in which the EU wants to trap Great Britain and in which it wants to keep remaining member nations trapped.

The proposal itself can be seen in its entirety here.

Tight Schedule

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Negotiations are in progress on the nature of the, primarily economic, relationship between Great Britain and the European Union now that the former has taken its leave of and independence from the former. The relationship being negotiated is primarily economic; although, law enforcement, judicial cooperation, foreign policy, security, and defense are under discussion, also.  The functional deadline for these negotiations is 31 December 2020, after which the Brits have said they’re done, deal or no deal.

Ten rounds of meetings are scheduled every three weeks from Monday, March 2, until October when a deal is desired.

Following which enacting legislation would need to be passed by both sides in order to bring the deal to life. “Most experts” think this is a tight schedule.

It need not be, though: the putative tightness of this schedule is directly and strictly a function of the degree of intransigence that will be exhibited by the EU’s negotiators.  I hold out no great expectations here; the EU has been operating in bad faith, using its position to discourage other dissatisfied nations from going out from the Union, ever since the Brits voted for sovereignty.

In this current round of negotiations, too, the Brits appear more serious than the EU.

UK Prime Minister Boris Johnson threatened to accelerate [the schedule] further last week, saying the UK would end talks as early as June if negotiations had failed to progress by then.

It needn’t be a tight schedule, nor need it be “tightened” further. Again, that’s up to the continental Europeans.

Sadly, the EU’s intransigence is demonstrated in a couple of areas:

  • EU wants the UK to enact EU regulations and laws regarding business subsidies, labor law, the environment
  • EU wants its Common Fisheries Policy to apply in British territorial waters, especially British coastal waters

Nor is the matter of EU labor movement entirely settled; the EU still hopes for free access—essentially waiver of British national borders—for EU workers to British territory.

These run directly counter to Great Britain’s national sovereignty; of course, the continental Europeans know this full well. It’s why they demand these accessions.

The Value of Debt

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There seems to be little in the People’s Republic of China, at least with respect to government and government-backed debt.

Bond investors who put their faith in Chinese state-owned enterprises are swallowing another bitter pill, just two months after an earlier wake-up call.
This week, the province of Qinghai persuaded a narrow majority of investors holding dollar debt with a face value of $850 million to sell their holdings for as little as 37 cents on the dollar….
The tender came two months after a similar debt purchase and exchange deal involving bonds issued by Tewoo Group, a commodity trader based in the northern port city of Tianjin.

As someone else once said, I am altering the deal. Pray I do not alter it further.