Global Investing

The missing barrels of oil

Where are the missing barrels of oil, asks Barclays Capital.

Oil inventories in the United States rose sharply last week, with demand for oil products  such as gasoline at the lowest in 15 years and crude stockpiles at the highest since last September. Americans, pinched in the wallet, are clearly cutting back on fuel use.

But worldwide, the inventories picture is different – Barclays calculates in  fact that oil stocks are around 50 million barrels below the seasonal average. And sustainable spare capacity in the market is less than 2 million barrels per day. What that means is that the world has “extremely limited buffers to absorb any one of the series of potential geopolitical mishaps.” (Barclays writes)

A big difference from the picture at the start of 2012. With the global economy weak, analysts predicted OPEC would need to pump 29.7 million barrels per day in the first quarter, more than a million barrels below what the group was actually pumping. Logic dictates inventories would have started to build.

But since then conflict in Syria, Sudan and Yemen has removed a combined 1.2 million barrels per day of non-OPEC crude, Barclays says. There have been some problems with North Sea output.

Most crucially, Iran, OPEC’s No.2 producer is under sanctions for its nuclear programme. The country has already seen production fall 5 percent from February 2010 levels.  The supply situation will get worse, as countries trying to cut back on purchases from Iran compete for imports from elsewhere, notably Africa. But there is little spare capacity elsewhere — Goldman Sachs notes that output in Saudi Arabia, OPEC’s biggest producer, is already at 30-year highs.

Central banks and the next bubble (3)

Expectations are running high ahead of next week’s LTRO 2.0 (expected take-up is somewhat smaller than the first time and the previous estimate though, with Reuters poll predicting banks to grab c492 bln euros).

The ECB’s three-year loan operation, along with the BOJ’s unexpected easing, BoE’s QE and commitment from the Fed to keep rates on hold until at least end-2014 may constitute competitive monetary easing, Goldman Sachs argues.

As the moves to ease have been rolled out, we increasingly encounter the argument that such ‘competitive’ (non-coordinated) monetary expansions by developed market central banks are at best ineffective and at worst a zero-sum game at the global level—and perhaps a precursor of something worse, such as a slide towards protectionism.

Discovering the pleasure of dividends in Russia

American financier J.D. Rockefeller said watching dividends rolling in was the only thing that gave him pleasure. But it is a pleasure which until now has largely bypassed shareholders in most big Russian companies. That might be about to change.

Russian firms,  especially the big commodity producers, are generally seen as poor dividend payers. So dividend yields, the ratio of dividends to the share price,  have been unattractive.

On a trailing 5-year period, the average dividend yield in Russia was 1.8 percent compared to 2.5 percent for emerging markets, notes Soren Beck-Petersen, investment director for emerging markets at HSBC Global Asset Management. That absence of positive cash flow from companies is one reason why Russia has always traded so cheap relative to other emerging markets, he says.

Calculating euro breakup shocks

Euro breakup risks, although subsiding, are still high on investor minds.

Almost one in two fund managers surveyed by Bank of America Merrill Lynch last month said they expect a euro zone country to leave the monetary union.

Technology services company SunGard, which has modelled different euro breakup scenarios, says the departure of Greece and Portugal will lead to a 15 percent rise in the euro against the dollar, a 20 percent fall in euro zone yields, a 15 percent fall in euro zone equities and a 20 percent increase in credit spreads.

Below are other findings:

    If all PIIGS left the euro, the single currency would rise 25% and regional equities would fall 20%. U.S. stocks would drop 15 percent. European banking stocks would fall by 25% and ITRAXX Financials credit spreads would increase by 100%, which would imply losses of up to 20% in high-grade corporate debt. VIX would be over 50. A total collapse scenario would see European equities down 40%, U.S. and global equities down 30%, euro yields down 75% and ITRAXX Europe and ITRAXX Financials credit spreads up 150% and 200%respectively. Oil would fall across the scenarios, ranging from 5% from a Greece departure through to a 50% decline from a complete breakup. Sterling would strengthen against the Euro by between 5-25% across the scenarios.

The results seek to model the impact of each scenario over three months, looking eight weeks before and six weeks after the shock to form a balanced picture.

Iran looms larger on Gulf radar screens

Tensions over Iran may be helping to push up oil prices as traders worry about a widespread embargo on the country’s crude oil but markets in neighbouring Gulf energy-rich economies are not benefiting.

One year after the Arab Spring started in Tunisia, investors remain sensitive to political risk in the Middle East.

Debt insurance costs have risen sharply this month for gas exporter Qatar and oil giant Saudi Arabia, just as global worries appear to be easing about the euro zone crisis.

Clinging to hope in bear-bitten Russia

Poor Russia. After spending six months as the world’s best performing emerging market, the Moscow bourse  has been the big loser of this month’s rout – year-to-date returns of over 10 percent until mid-July have since dissolved in a sea of red, with a plunge of over 20 percent since the start of August. As oil prices fell and the outlook for U.S. and European growth darkened, overweight positions in Russia halved versus July, a survey by Bank of America/Merrill Lynch showed this week.

But get this — Russia remains among investors’ main emerging market punts and only Indonesia is more favoured, according to the BoA/ML poll. The reason is that fund managers are still clinging to hopes that an increasingly wealthy Russian consumer will save the day. Unfortunately those hopes are yet to materialise. Returns on domestic demand-based stocks such as Sberbank, carmaker Avtovaz and supermarket chain Magnit have been even more disappointing this year than the broader Moscow market.

Even the staunchest Russia bull will have been disappointed with data showing Russia’s economy grew at just 3.4 percent in the second quarter of the year.  That proves the economy was running out of steam even before the August oil price fall and suggests that the Russian consumer is not yet stepping up to the mark. Retail data since then have been more heartening — annual sales rose 5.6 percent in July from 3 percent in June.

Venezuela — high risk, higher yield

Venezuela's Chavez with Lukashenko of Belarus

Which bond would you rather buy — one issued by a country with an unpredictable leader but huge oil reserves, or one with  a dictatorial president as well as empty coffers? The answer should be a no brainer. Not so. The countries are Venezuela and Belarus, and a basic comparison of their debt profiles shows how strangely risk can be priced in emerging markets.

Venezuela’s 2022 dollar bond yields 15.5 percent while the 2022 issue from state oil firm PDVSA trades at 17 percent yield. Venezuelan debt pays a 1200 basis point premium to U.S. Treasuries, according to the EMBI Global bond index.

Now check out Belarus. Dire public finances, a huge recent currency devaluation, and seeking an $8 billion bailout from the IMF, yet able to pay 11 percent on its 2018 issue. Its yield premium to Treasuries is 900 bps or three percentage points less than Venezuela.

Libya: a mixed bag

It has debt levels to die for and huge amounts of oil, but economically it’s lagging and political concerns remain.  Speakers at a Libyan trade and investment forum this week saw the North African country as a mixed bag.

RTR25J1A_CompRobert Tashima, an editor for Oxford Business Group,  highlighted the country’s “elephantine” levels of FX reserves, and the privatisation of 80 companies so far, with telecoms and steel sales slated for this year.

Rory Fyfe, an economist with the Economist Intelligence Unit, said he expected the country’s budget to remain in surplus and inflation under control, and pointed to high levels of non-oil growth, but said the economy should be doing better than it is.

Investors wary of BP oil spill cost estimates

BP logo

BP’s CEO Tony Hayward reckons the $100 million cost of drilling a well to divert the flow from a leaking oil well in the Gulf of Mexico  is the biggest hit the oil major will take in the Deepwater Horizon tragedy.

The Deepwater Horizon rig exploded last week, and sank, with the loss of 11 workers, who are now presumed dead, while the well it was drilling is leaking 1,000 barrels of crude a day into the sea.

Investors will hope Hayward is right but BP’s record on estimating the costs of major accidents gives rise for concern.

There’s oil in them thar wealth funds

Some interesting new data on sovereign wealth funds from State Street Global Advisors, a huge fund firm that does a lot of business with them. Most interesting, perhaps, is that the vast majority of sovereign wealth fund money comes from oil and gas revenues rather than from countries building up large foreign reserves from other trade, eg China.

    – The U.S. firm identified 37 major sovereign wealth funds worth a total of $3 trillion. – More than two-thirds, or 70 percent, of that money came from oil and gas interests. – Of the 37, all had at least $3 billion in assets. – Eight of them had more than $100 billion. – Only 13 of the 37 funds were not based on commodity wealth. – Asia had the largest number of SWFs at 13. – The 10 funds based in the Middle East had nearly half the wealth, or 46 percent, between them.

These funds, incidentally, are becoming more like mainstream investment companies by the day. State Street says they are eventually going to turn into the equivalent of large public sector pension funds and could well start becoming more active as shareholders in companies in which they invest.