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Oil Bingo ! Truth About Global Economy

October 9, 2015

WTI @ $ 50.50    Brent @ $ 53.90

In my last write-up in August see below or click the link

https://asadcmka.wordpress.com/2015/08/17/oil-bingo/

https://www.linkedin.com/pulse/bingo-asad-rizvi?trk=mp-author-card

WTI was @ $ 41.95 & Brent @ $ 48.65 per barrel, I wrote WTI & Light Arabian will not surrender and should find support around $ 37 for a $ 10 – $15 up-move or else break of support level could see sharp plunge to new record lows. The expected move did occur.

Oil producers and energy companies are desperately looking for further rally in oil prices, as both are suffering from budget deficit and are behind their projected targets.

Over supply by the major producers, probably with the intention to dent and shun shale oil producers and sharp slowdown of Chinese economy is a big cause of fall in oil prices.

But one should not ignore the fact that sharp increase in shale oil production is one of the major causes of oil plunge, as US oil import demand from Saudi Arabia, Nigeria and Algeria fell sharply that have been constantly for new buyers in the Asian zone .

Falling oil prices have certainly dented oil economies that are totally dependent or depend on oil their exports. Saudi Arabia that comfortably exports above 55 pct of its oil produced is faced with huge deficit. Its reserves fell sharply from the peak of $ 280 billion in August 2014 to nearly $ 245 current resulting 20 pct budget deficit of its GDP.

Russia that has highest oil production of over 10 million barrels per day and nearly 51 pct of its exports are crude oil and petroleum products is hardest hit, as it is faced with increasingly tight sanctions resulting sharp fall in the value of Ruble. As a consequence, investors have pulled their capital.

Oil producing country has its own dimension that may differ from each other. Norway, another major oil producer but a Non-OPEC member that managed to escape worst of European financial crisis is feeling the pinch. Estimates suggest oil account nearly 12-15 pct of its GDP, as its production fell from the highs of 3.4 million barrels per day to below 2 million barrels per day due to lack of New North Sea Oil discoveries.

In the current year, Norway’s budget is based on Brent @ $ 52 and in 2106 @ $ 53 per barrel has announced utilizing cash money from its $ 820 Billion Sovereign Wealth Fund to plug hole//fund its deficit caused by lower oil prices.

In last couple of months we saw oil prices picking up and WTI came close to $ 50. The rise is not due to OPEC policy change or cut in oil production elsewhere. It because of recent oil data that suggest minor decrease in US production, as lower oil prices is hurting due to high cost of exploration.

Iran, Venezuela and Algeria are constantly demanding production cut, but they are not getting support from its leading oil producing members and they may not get respite unless OPEC’s main sponsors decides to adopt soft approach. This is because Saudi Arabia may not want to take risk by reducing production, fearing cut in its oil market share.

Global Economic Growth Is Not Very Encouraging

There are no signs of real economic growth in Europe.  Its economy is in a muddy mess and is financially clogged, as it does not have cash. The problem is that European goods are too costly and unaffordable for the importing countries. Its expensive modern goods do not have enough buyers to pull Europe’s economic engine.

European policy makers have to accept the facts that to take the leap and break the shackles, its economy is required to expand beyond Euro-zone region and find new avenues. Germany and France cannot carry the entire load and UK has policy differences.

After thoroughly enjoying the status of miracle economy, Japanese economy is still suffering from excessive pain and agony. The happy journey that began in the mid 60’ is a fairly tale as the economy continues to struggle after the 1991 asset price bubble with prolong recession and stagflation.

Japan’s population is constantly shrinking as aging increases. Japan’s public debt in relation to its GDP has swelled to 246.14 pct. This is partly due to increase in health and social security cost linked with aging problem. Hence shrinking labor force is a big issue.

While, Japanese stuffs are too expensive for the world market to match its price and its domestic market is too small to meet the expense. This has allowed China and Korea to take firm grip of the global electronic market and car industry, which is challenging and problematic for the Japanese exporters.

Almost since couple of decades, Japanese government is making every effort to make a comeback, but recovery is feeble and turnaround still looks impossible.

Similarly, China’s economic meltdown is a big blow to the global market. Its stock market continues to give jitters to the foreign investors and its economy is still in the middle of the storm.

Falling global commodity prices such as, gold, silver, steel, copper etc is a good indicator, which provides hint that its construction business has collapsed. Estimates are that 60-70 million luxury apartments are lying empty.

In the beginning of the millennium year outstanding debt of China was roughly USD 1.5 Trillion, which is comfortably hovering around or is slightly above USD 23 Trillion, which is a challenging number.

With the size of USD 11 Trillion Chinese economy, a country that has nearly USD 30 Trillion size of its bank asset, one can imagine the type of risk involved because of over leveraging.

US economic revival is just a glimmer of hope. Feds accommodative monetary policy may look good on paper, but improving job market condition still raises many eyebrows. Whereas, potential threat of bubble in real and financial assets exists, which is why FED may want to move above its zero interest rate policy? The delay in FED rate hike seems temporary caused by weak and uncertain economic condition in China and jittery global stock market.

Global Economic Reality

The real truth about the global economy is that it has nothing significant to offer to change the decades old pathetic economic growth/direction, as good part of the global economy is taker and hence, laden with large debt. It has been more than decade the world economy is surviving on Quantitative easing money (QE) and a very low interest rate funding environment.

During this period only oil exporting countries were the real beneficiaries due to exorbitantly high oil prices, as the remaining global economies were surviving artificially on borrowed funding.

All lending during this period to debtor countries was done through artificial money/means by creating fake money against zero securities to avoid default to meet debt obligation or for rollover purpose and or funds were given to financial institutions to meets its Capitalization requirement. The creation of debt will bring more misery in future because such funding does not/will never resolve the issue.

Due to artificially inflated size of the global economy and in the absence of real cash money availability there is an increased risk of frequent systematic collapse, which is likely to occur more frequently in large part of the developed and underdeveloped economies because of deteriorating economic realities.

Unfortunately, financial Godfathers would continue to mislead the world economies to avoid and delay collapse by hiding the real problem. This strategy helps to protect the cash rich minorities of shareholders.

In April, IMF projected 3.5 pct global growth. IMF revised down its forecast to 3.3 pct in July and in October it has once again revised down 2015 growth projection to 3.1 pct. This is either intentional or all those sitting in such organizations are not competent for the job/assignment.

The compounding effect of continued slow down is caused due to falling oil prices because on average, USD 50 drop would mean that if calculation is made based on 365 days @ 93.6 million barrels per day, the world is deprived of USD 1.708 Trillion Cash money.

This portion of sizable cash is genuine money created against a product unlike artificial QE money. QE money is only a computer generated figure for Book Entry purpose that only helps to inflates Central Banks Balance sheets and therefore is meaningless. Instead of distributing QE funds for economic activity, small part of QE money is offered to Hedge Funds through banks for speculative/arbitrage purpose.

OIL Trend – Medium Term & Long Term

Current up-move is caused by slow US Oil production. Rig count confirms drilling is slow, which is helping WTI prices to climb and so is Brent prices moving in same direction.

Russian involvement in Syria could be the part of its strategy to push oil prices higher. Putin should not be underestimated. He is shrewd and always respond with a counter plan. Due to lower oil prices, Russia economy and its currency is in shambles. After its Syrian involvement Ruble has so far made good recovery.

Obama administration is threatening to veto legislation that would allow free sale of US Crude Oil around the world. This is important development, which should be focused seriously. Any action could be the game changer that could upset all odds.

Therefore, in medium term above factors or and Geo political instability/factor will play key role in determining the trend.

However, in Long Term apart from all above factors, policy change in Saudi Arabia, Syrian and Yemen factor would be the key driver. Looming uncertainty in Middle East region could disrupt oil analysis.

However, technically in Medium Term, in a stable Geo political market condition Oil should soon exhaust, as it should not gain beyond another $ 3-5 for another $ 10-15 drop.

Similarly in Long Term, even quiet and stable global condition would not help global growth to get better, which means demand for more oil will remain slow. Whereas, in next 6-12 months oil production in USA is expected to increase.

More Iranian, Canadian and Iraqi oil tankers will be looking for new buyers, which could mean another round of oil glut.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transactions)

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