Oil Oversupply

National Commercial Bank looks at the impact of oversupply of oil.

Elevated production levels, decelerating demand, and record high inventories will suppress oil prices to an average of $50/bbl in 2016, the National Commercial Bank (NCB) said in its latest monthly “Views on Saudi Economic and Developments”.

It said growth dynamics pertaining to emerging markets, in particular China, and production factors relating to OPEC have underpinned the bearish view.

The lack of compliance among OPEC members that produced above the 30MMBD quota for the 18th month in a row will be an important drag, especially that the group lacks a unified front.

Saudi Arabia, Iraq and Iran are adamant in producing as much as they can. The Kingdom’s production peaked at 10.6 MMBD in June, while Iraq has increased output over the year by around 0.7 MMBD, reaching 4.2 MMBD in November. Additionally, lifting the sanctions imposed in July 2012 on Iran is expected to bring an additional 500 thousand barrels a day during 1H2016, which will keep OPEC’s production above the 32 MMBD mark. Even though non-OPEC members and high-cost producers will continue to be pressured this year, the anticipated decline in their production will not offset OPEC’s over quota strategy. The IEA, EIA and OPEC have forecasted a decline in non-OPEC supply between 400-600,000 barrels a day, the first annual decrease since 2008, largely due to the steeper decline in US shale production.

The EIA predicted in its latest report that companies operating in US shale formations will reduce production by a record 570,000 barrels a day, which underscores the challenging environment even after slashing capital spending, laying off workers and focusing on the most productive areas.

On the demand side, China is expected to have the weakest economic performance since 1990, with growth falling below 7% for 2015 and 2016 despite the myriad attempts to reduce interest rates, reserve requirements and devalue the yuan in order to spur business activity.

Furthermore, emerging markets are expected to expand at 4%, the slowest pace since 2010 and well below their 10-year average of 7%. Generally, the three eminent organizations are forecasting oil demand to rise between 1.2 and 1.4 MMBD in 2016, much slower than last year that saw demand grow by as much as 1.8 MMBD, a five-year high.

The record US and global crude oil inventories will also continue to weigh on oil markets. The end of year US crude oil inventory at 487.4 MMbbls is 27% more than the level recorded in 2014, which was 388 MMbbls, and is also at an 80-year high for this time of year.

Additionally, the OECD’s commercial total oil inventories rose to around 2.971 billion barrels, near a record level that is equivalent to 60 days of consumption and above the five-year average. Given these aforementioned dynamics, NCB forecast the market to remain unbalanced in 2016.

Source: Saudi Gazette

Middle East Turning Net Borrowers?

By Martin Armstrong of Armstrong Economics:

SovTimeBomb

Further evidence that 2015.75 is really the peak in a Massive Debt Bubble: The Middle East has always been on a cash basis as their revenues from oil exempted them from ever borrowing money – that is not the case today.

As oil prices rose, spending programs also anticipated no end in sight. So as oil peaked and has begun a technology-shift bear market, those spending programs are causing budget deficits to appear in the Middle East for the first time. Not only has Saudi Arabia issued its first bond issue of $4 billion to cover budget deficits, other countries may follow in the region.

The May turning point has indeed been a profound turn on the long-term setting the stage for the reversal in the short-term come 2015.75. If you can comprehend how everything is connected, you can see these events coming. Since May, Saudi Arabia’s foreign assets have entered crash mode. In May, foreign asset holdings fell over $672 billion. Saudi Arabia sold assets drawing down its reserves to cover the budget deficit.

Source: http://www.armstrongeconomics.com/archives/34916

Israel Palestinian Peace Talks Show the Way

Peace talks are currently underway between Israel and Palestine and sponsored by the USA. It is more a reflection of global social mood. The fact they are engaged in talks reflects the positive mood emerging as the so called economic recovery continues. At this time the chances of breakthrough and success is higher than at other times. It also indicates where we are in the current business cycle.

This event taken in conjunction with other evidence (eg skyskyscraper theory) shows we are late in the cycle of waxing positive social mood and the resultant economic expansion that follows.

Roubini Says ‘Hyped Up’ BRIC Success at Risk on Rising State

By Lyubov Pronina for Bloomberg:

The biggest developing nations risk overturning the achievements of the past decade by increasing the state’s role in the economy, according to Nouriel Roubini.

Roubini — dubbed Dr. Doom for predicting hard times before the global financial crisis began in 2008 — said Brazil, Russia, India and China have been moving away from market economies recently.Roubini Says ‘Hyped Up’ BRIC Success at Risk on Rising State Nouriel Roubini said, “BRICs have been hyped up too much.” Photographer: Simon Dawson/Bloomberg

“BRICs have been hyped up too much,” Roubini said in an interview today at the World Economic Forum’s annual meeting in Davos, Switzerland. “Too much state role in enterprises, banks, resource nationalization, protectionism, lack of structural market-oriented reforms that increase the size of the private sector — this is happening in most of the BRICs.”

China maintained control of its biggest companies, Russian businesses spent shareholder money on projects favored by the government and Brazilian politicians intervened to cut utility rates last year.

State-owned OAO Gazprom (GAZP) may lose its monopoly on natural gas exports as long as the move doesn’t cut prices and damage Russia’s economic interests, Prime Minister Dmitry Medvedev said in a Jan. 23 interview in Davos. Gazprom is using its cash to finance the industry’s largest capital expenditure program, part of which goes to fund projects favored by President Vladimir Putin.

Downgrade Threat

It took the threat of a credit-rating downgrade for Indian Prime Minister Manmohan Singh’s administration to remove barriers on foreign investment in the retail and aviation industries and cut fuel subsidies. Roubini, a professor at New York University, said he favors the Philippines and Indonesia over China and India.

“They are actually doing more in terms of structural reform,” Roubini said. “The economies are growing more than 6 percent.”

Developing economies are set to grow by an average 5 percent worldwide this year, compared with 1 percent for advanced nations, according to Roubini.

In Latin America, Chile and Colombia “have done a lot of things to improve their potential for growth,” he said. “In central Europe, I see success stories like Poland and Czech Republic doing reforms.”

Source: http://www.bloomberg.com/news/2013-01-25/roubini-says-hyped-up-brics-risk-success-on-growing-state-1-.html