Archive for December, 2014

Oil: a Saudi’s point of view

Posted: December 3, 2014 in Uncategorized

A  similar situation to the current one in 1980s where the price fell from (inflation  adjusted) USD100 to the current equivalent of USD28 a barrel in 1986.

King Abdullah of Saudi was actually regent for the sick King Fahd at the time and it has still nightmares of those times where the real income of Saudis was practically halved in 6 years!

The single biggest mistake at the time was to cut oil production to maintain (failing) high price.

Even without the help of conspiracy theories (Russia, US Shale Oil wipeout), you can be sure King Abdullah will not make the same move. Also OPEC was disunited (Iran/Iraq war) until 1985.

In 1985 the Saudis changed strategy (of cutting production)  and  increased production crashing the price of oil and constricting a lot the North Sea oil production and regaining market share. The price of oil took 16 years to recover and spurring one of the longest US  Bull Market in history 1982-1999)

In the ’80s the drop was led by a reduction of US and European consumption and the rise of the North Sea (UK) oil.

Now it is an easing demand in Europe and China and rising US shale oil production – plus Ukraine (maybe). OPEC is quite disunited, specially Venezuela.

Learning the lessons of the past, Saudis seems to have jumped directly to 1985 and start a price war that, if history tell us, can last year (not so long as now Saudis have 3 time the population of the 80s….so they can last 5 year of low price at maximum.

They need to last at least 2-3 years as a lot of US shale oil producers have hedged the prices for 1 year.

Advertisements

In the Middle East, apart the continuation  of the “usual” issues and the geopolitical stress caused by the low oil prices (less revenues to finance the various legitimate armies against the terrorist) the big issue is Egypt.

Egypt is battling a constant lack of revenues and it is even financed by the Gulf states as a Egypt fall would be a nightmare for the Saudis.

Luckily Egypt has a very strong and well prepared army, plus a lot of strange interested friends (from the US, to Russia – from Israel to Saudi Arabia) – all interested in its stability.

It’s biggest threat are two;

A Sinai’s based terror organization Ansar Bayt al-Maqdis (new IS affiliated) that is making a full on bombing campaign (planted 21 bombs just last month, 14 exploded) in Sinai and plans to expand operations in the Egypt core, maintaining a high media profile for recruitment purposes.

The threat is yet minimal, but increasing.

The other issue is Yemen, where now the Houthi rebels (probably Iran supported) are taking over the Government. This could induce Egypt to attack Yemen (with the blessing of everyone else) as if the Houthis rebel reach the Bab al Mandeb choke point that would be a life or death threat to Egypt.

Why this is important?

Egypt with the Suez Canal is a strategic passage for the world commerce and oil prices. A spike in issues there would be an economic shock and would send sky rocketing the oil.

Well, definitely pretty bad with oil crash, sanctions.

But they do not yield and they will not yield.

Unfortunately for the West, our politicians seems not to understand the Russians way of thinking.

They think the Soviet Union was bad and President Putin and a great number of Russians think that the demise of the USSR was the worst think ever happened.

They saw (or think) that sanctions and the crash in oil in the 80s (sound familiar? yes it is!) brought the collapse of the USSR – from the Second (or equal first) power of the world to a semi  West-vassal third world country and 10 years (the 1990s) of ruin.

They survived (still blessing him, for the majority) Stalin, they survived a 2 year siege of Leningrad (1.5 million man), Stalingrad and lost over a 1 million soldier in Ukraine (and yes if it was not for the Soviets the D-Day would not have happened)

Would you like that? No.

Do Russians show resilience: Yes, more than American and European combined.

President Putin is trying to diversify the economy and open new friendships (China, Turkey, Egypt, but also opening up to North and South Korea, Vietnam, Venezuela, Chile, Brazil) – but it will take time.

In Ukraine, they are consolidating the eastern position with enough army to deter any new Ukrainian Army offensive. They are using the carrot and the stick with Georgia. And being much more assertive with NATO (just yesterday there was a close encounter in international space between a MIG 31 and an F16).

So a lot depends if Russia can change to a new model before the Russian reserves will provoke a systemic crisis.

And I hope they succeed as for Russians and Putin defeat is not an option. If Russia goes down it will be a war – maybe (hopefully) very limited as “real war”, but very real as cyber/financial war.

Some people wish for a coup that takes President Putin away. If you studied Russia you know you should know to be careful for what you wish for – Putin could look an amiable pacifist compared to his successor.,

Rarely I post links, but this is worth it

http://www.telegraph.co.uk/finance/oilprices/11263851/Saudis-risk-playing-with-fire-in-shale-price-showdown-as-crude-crashes.html

Not so US Black Friday

Posted: December 1, 2014 in Uncategorized

US Black Friday is the one day sale pre ThanksGiving that often allows business sell almost 50% of the entire trade for the year.

So it has always being considered a pulse for the real economy (not Wall Street).

This year sales crashed 11% from USD57.4 to USD50.9 billion with an average spend decrease of 6%.

Internet sales were at 42%, stable (as now a the whole world can participate).

This is because the middle class in the US has been obliterated, a few become millionaires – most they end up in the poverty class – and that is why President Obama has been so trashed in the last election.

Yes the stock market is at the top, but it for over 80% is owned by the top wealthiest quartile.

Geopolitics 2015

Posted: December 1, 2014 in Uncategorized

2015 will probably be a continuation and evolution of 2015.

The US will still by far the best economy, but it will have a few issues. The combination of high US Dollar and low oil prices will put pressure on oil companies – specially the shale gas sector. On the political side President Obama will be fully a lame duck president with the US Congress fully Republican. Thank God the Tea Party seems not any more so strong, but we will see.

South America: Brazil will keep on trying to be the US of South America, but it has still a lot of reforms and hard work to do. The entire South America is shifting, as influence sphere, to Russia/China and away from the US as they are considered “bullies”.

The low oil price will have consequences: it will be  a positive for Europe, China, Japan – but several countries will be in recession or even civil unrest (Russia, Venezuela, Libya, Algeria, Ecuador, Nigeria mainly).

Russia will be in recession. It will be posturing aggressively  specially in Ukraine, Georgia, Moldova etc. They will more and more align with Asia, trying to open markets with South Korea and all the Asian Tigers. And also pushing towards South America. How aggressive they will be? Well depends from how bad the recession is and also how aggressive are the Americans (if the US Congress pushes for arming Ukraine the situation could worsen). At this stage Russia will try to avoid a full confrontation as they are hard pressed for budget constrains and re organizing their military. Definitely they will keep on pushing for the subtle long game – the de-dollarization of the world economy.

Europe: the division from North and South will keep growing as unemployment shows (lowest unemployment in Germany and Austria – highest in Greece, Spain, Italy). I would keep a watch on France as if the Government falls there will be full on consequences (luckily for the markets bi French elections this year). A Second French Revolution is always possible – at this level of social issues. But after a year of relative tranquillity, political turmoil will return. But the low oil price is a big boost.

UK will be “pumping along”, but the idea of drifting away from the EU, to join its USA cousins will be growing. A Non EU Great Britain will be having full on consequences specially for the anti European parties in South Europe.

Middle East. The usual mess. Islamic State at least for the media has been seriously diminished (in reality I doubt) – but they need a media coup to go back to former glory. A They could attempt a terrorist act, but now is much more hard and IS is not a terrorist organization with capacity to operate in hostile territory like US and Europe. Not that they will not try, but it  is hard. The more likely target is Egypt and the Sinai peninsula, Jordan and Saudis. But again they are not against Iraq and Syria, but against the strange and powerful alliance US, Saudi, Egypt, Israel.

Iran will strive to be seen as an acceptable power by the West increasing is force, to the terror of the Saudis (funny enough Iran has always been more Western than the Saudi).

Saudi are full on pushing for Asian market and using their “oil power” against the US shale oil danger and the everlasting enemy Iran.

Turkey will as usual balance its various stances (part of NATO, full Islamic population – a lot of it radicalised). It will try to project power – but more focus on not being ripped apart by internal issues. It is a steady path to a be again a “Ottoman” style empire (but without the military aggression) – unless something internal happens.

Asia: apart the buildup (as usual) between India and Pakistan (and different alignment Pakistan with Russia/China and India with the US/Australia – a role reversal in a few years), Asia will be pumping along helped by lower oil price.

China will keep on having a slow growth, but not at the point of a crash. Still they cannot find a solution and their slow descent in a full on crisis is almost guaranteed by the aging population without a safety net. At least the Government is really pulling all the strings to try to avoid it. If they can, I do not know. But not in 2015.

Next year it will be the truth year for Japan, instead. We will see if the kamikaze move (as there is no turning back) will work or not. I tend to think it will as Japanese are very obedient. In this case will see the return of the Rising Sun – not as an evil empire,, but a force to be reckoned with it – specially for China and South Korea.

Last, by not least, Australia. Australia is still a lucky country (as per the original phrase – governed by second tier politicians). As China hit the stops, Japan resurgence will help. Unknown to most Japan is still our 3rd economic partner, and by 2016 with the LNG orders coming on line will be the second – overtaking China!

Logically iron ore and oil will keep things not so happy, specially for the budget (still one of the best budget around the globe – the crisis is just in the mind of our politicians)- maybe spurring some good outcome – a refocus of the industry and some diversification (did anyone notice that also India has over a billion people?).