Hope equals complacency

March 22, 2013 Leave a comment

Something that I have difficulty explaining tells me that the Cyprus situation can’t end well. This feeling is biased by the complacency exhibited by European politicians.

Loosely, there is an assumption it will be fixed by somebody. Almost a similar feeling that permeated prior to Lehman Brothers collapsing. There is also a distancing by Germany, that someone else will save Cyprus.

Keep in mind that Angela Merkel has an election in September 2013. Why would she use German money to save Cyprus following the backlash she experienced in Greece.

But here come the Russians.

I have read that $40 or $50 billion of private Russian deposits sit within Cyprus’ offshore banking haven.

Here is how you would do a sovereign bailout deal.

For a $10 billion bailout, Russia gets to protect its citizens deposits in Cyprus, take over a huge slice of Cypriot debt (which they’ll eventually make a profit from, as it’s currently trading at 65 cents in the dollar) and take ownership or security over Cyprus’ Aphrodite gas field.

The Aphrodite gas field has natural gas reserves of about 7 trillion cubic feet (tcf) worth around $45 billion. That is enough gas to meet the energy needs of 7 million households for 20 years. Cyprus only has a population of 1 million people.

Incidentally, Aphrodite sits next to Israel’s larger Leviathan (16 tcf) and Tamar (8 tcf) fields.

It possibly makes for some interesting scenarios involving the politics of Israel, Lebanon, Turkey, Syria, Iran & Russia????

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Increase supply means lower oil prices

October 14, 2012 Leave a comment

The increasing supply of oil and natural gas needs to translate into lower energy prices at the consumer level, in order for any cyclical upturn in economic activity and asset prices. I’m not sure how much of the current price factors in the Syrian rebellion and Iranian sanctions but it’s difficult to believe that Brent is trading at $115 considering all of the persistent weak economic news.

It would advisable for producers of thick tar sand oil (such as Canada and Venezuela) to ramp up extraction before it becomes uneconomic. With Chavez’s recent re-election and PSVDA’s recent disruptions, along with Canada’s trade deficit under pressure due to falling metal commodity prices it is plausible that this will happen.

Further to a recent post where I refer to lower oil prices into the end of the decade, below is an extract of a news story sourced from Bloomberg referencing recent comments from the International Energy Agency (IEA).

“The IEA suggests oil demand is basically going to be unchanged and that’s not going to lend support to the market,” said Gene McGillian, an analyst and broker at Tradition Energy inStamford, Connecticut. “The more-than-ample supply we have here is preventing oil from breaking off.”

The Paris-based agency also said global markets will become better supplied in the next five years as demand growth slows and production rises in North America and the Middle East.

Worldwide fuel consumption is projected to rise to 95.7 million barrels a day in 2017 from 89 million last year, the IEA said. Output is forecast to advance about 1.5 million barrels a day each year to 102 million barrels a day in the same period.

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Lower Oil Prices By 2020?

September 17, 2012 Leave a comment

Venezuela is the largest holder (18%) of the world’s proven oil reserves. If we discount any government inflated figures and the difficulty and costliness of extracting from the Orinoco Belt, let’s agree that they may come in slightly lower than Saudi Arabia.

Although, this comparison is between one country to another. It is worthy to note that Middle Eastern countries collectively hold 48% of these reserves.

Recently, it has been reported that Venezuela may default on its debt sometime in 2013.  I don’t believe they will, but they will create tensions and ransoms surrounding such a possibility.

They will simply produce more oil receipts to service or extinguish their debt. The IEA, OPEC and Saudi’s have also said that they would like to see oil prices lower than their present levels.

Recently, it seems that the oil price has been supported by speculation or anticipation surrounding geopolitical tensions and probabilities.

Israel’s equally hostile reaction to Iran’s previous threats has bid up the oil price of late along with populous Arab uprisings, although geopolitically, it would be wise for Israel to seek counsel from the United States before any pre-emptive missile attacks.

Although Iran would prefer a better scenario, but covertly they would welcome higher oil prices as it would ease the fiscal pain associated with new rounds of sanctions while Venezuela needs higher prices to make their tar, economically viable.

Much of America’s foreign policy is oil based and higher oil prices wouldn’t help America’s economic plight. Look for more diplomatic focus towards South America and  the former Soviet Republics.

The fundamental case for lower oil prices includes a subdued global economy, cheap coal and abundant gas (shale or otherwise) and record levels of oil production capacity will help keep the price of oil low.

Furthermore, there is so much oil in the world, we are not close to a “peak oil” scenario. In fact, the value of the world’s proven reserves amounts to at least $150 trillion, which is more than the combined value of all of the worlds gold, bank deposits, government debt and the market capitalisation of the worlds listed companies.

Yossie Hollander’s TED Talk summarised it well. There is not enough money in the world to buy all of the world’s oil, thus oil is too expensive.

When investing, you should avoid owning an asset where there is excess supply for I would prefer owning an asset that is in demand but in short supply.

 

 

 

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Watch Syria – Not Libya

September 1, 2011 Leave a comment

Map of Syria

Image via Wikipedia

This is my read of geopolitical stirrings across the Middle East and how it may be a catalyst for weakness in the equity markets.

Tunisian, Egyptian and Libyan uprisings are a sideshow to the main event. Investors should watch the developments in Syria.

The violence in Syria seems to be on a grander scale, yet America is more vocal about Libya’s Ghaddafi. Why?

The answer and concerns lie with Iran.

Iranian influence through political arms such as Hezbollah in Lebanon, Hamas in Palestine and the Muslim Brotherhood in Egypt is putting the literal geographic squeeze on Israel which is overseen by the Iranian Revolutionary Guard.

Iran’s friendship with Syria sees them funding projects that range from military infrastructure and weaponry, gas pipelines and establishing banks. This possibly makes Tehran the most politically stable and powerful government in the Middle East, today.

Turkey’s political instability of late isn’t helping either.

The catalyst for real global geopolitical turmoil depends on what happens in Syria.

If the Syrian situation escalates, the U.S. will be placed amongst difficult circumstances involving Iran, Israel, nuclear & chemical weapons, Oil and Gas.

A rise in the oil price (Iran is the world’s fourth largest oil producer, OPEC’s second largest producer behind Saudi Arabia and has four times the reserves of Libya) could be the catalyst that sends equity markets into a funk that lasts more than a meagre 10% correction.

The timing of such an event could also see various Western political figures lose re-election as military spending continues higher due to new deployments and energy and food inflation rises.

If you haven’t watched Middle East developments over the years, the near term could, unfortunately, be the most explosive, condensed episode.

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