As oil prices slid a further 4% yesterday (WTI 62.86, Brent 66.19), closing at levels not seen since 2009,
there are an ever-increasing number of countries at risk of default,
recession and destabilization.
With current global oil production outweighing demand, and the dollar continuing to move from strength to strength, foreign currencies are losing value, with the Euro falling to two year lows against the dollar. Meanwhile, fears are growing over slowing economic growth in both China, with weak import data, and Japan, with greater than expected third quarter shrinkage in its economy. Global markets are not a pretty sight at present and several big players in the energy scene find themselves in precarious positions with regards to both energy and economic security.
Firstly let’s consider Nigeria, which overtook South Africa as the African continent’s largest economy in 2014 before the oil price slide began. However, like many developing nations, Nigeria’s economy is over reliant on oil and gas revenues, which accounted for 95% of export revenue and 70% of fiscal revenue. As the global investment climate cools amid the oil price drop, Nigeria is expected to see a swing from a current account surplus this year to deficit next year, worsened further by the prospect of a weakening currency. This, in turn, will lead to national destabilization owing to political and religious tensions that are ongoing in the country. As government forces battle an Islamist insurgency, general elections loom on the horizon, with campaigns reportedly funded by crude oil theft, and with related damage to infrastructure worsening the country’s short-term prospects.
Yet another OPEC member nation overly dependent on natural resources to balance its budget, Venezuela is considering drastic government spending cuts to fill the hole left by lost oil revenues which account for 95% of the country’s export income. Finance Minister Rodolfo Marco has already visited China, from whom Venezuela has already borrowed tens of billions of dollars in exchange for repayments in oil, and is expected to travel to both Russia and Iran in search of further loans. If early reports are to be believed, the Venezuelan government is also in talks with Goldman Sachs regarding the potential sale of Jamaican and Dominican Republic debt to Venezuela at a discounted rate. Such desperate measures are sure to be noticed by an already agitated population.
The bleak situation in the world’s largest oil producer, Russia, has been well documented of late: a falling Ruble, lost crude oil revenue due to both sanctions and plummeting prices, rising sovereign (Dollar denominated) debt yields, a series of less than favorable resource deals with China and the apparent cancellation of the South Stream pipeline. Oil and gas combined to provide Russia with about 68% of its exports last year, but amid growing tensions with the U.S. and E.U., Moscow has been forced to look elsewhere to improve its, albeit slim, chances of avoiding a recession in 2015. Early signs of a return to Cold War politics are emerging and we may yet see further intrigue in the global oil price war. President Putin’s recent actions in the aftermath of the annexation of Crimea, such as leaving the G20 summit early, cancelling the South Stream without notifying any partners and cutting off coal and gas to the rest of Ukraine, have made the short term possibility of a return to business as usual with the West almost non-existent.
Following on from Russia, Ukraine is clearly one of the most at risk countries in the current global economic climate, not only because of the ongoing conflict with pro-Russian separatists, but also due to a worsening energy security situation. This has led to both the EU and IMF stepping in to try and shore up the struggling Ukrainian economy and enable the repayment of debts to Russia in the hopes of resuming both coal and gas supplies. As the end of the year approaches and temperatures drop, growing discontent with energy rationing and an unresolved geopolitical conflict could push tensions in the country to breaking point. The appointment of Ukraine’s next energy minister could prove to be a decisive one not just for national stability but also big picture, long term foreign investment in Ukraine’s resource future.
Meanwhile, Saudi Arabia continues to aggressively defend its market share by further cutting prices to U.S. and Asian markets, and encouraging other OPEC members to do the same. Iraq followed suit yesterday by cutting its prices to Asia, which added further pressure to the energy markets as oil prices continued to dip. While much has been written in the media regarding various nations’ breakeven prices, and whether or not the expensive extraction methods in North America can withstand the oil price drop G forces, a brief history lesson may provide some hope for the near future.
With history tending to repeat itself, the likelihood is that as pressure mounts in international energy markets, much as they had done in the aftermath of the Iranian revolution, a production cut will have to come eventually, though perhaps not as lengthy as that of 1979. The prospect of such a cut, in spite of Saudi Arabian posturing, may come from internal pressure within OPEC. Not just Venezuela, but the dysfunctional producers (Iraq, Iran and Libya) have their own distinct reasons to drive oil prices back up, be that financing internal conflicts to regain national stability or desperately trying to overcome Western Sanctions. Given that both Indonesia and Gabon saw fit to leave OPEC, in combination with OPEC members already seeking pacts with Non-OPEC producers, it may be that a production cut would be required to keep the somewhat fractured cartel together in 2015 and beyond.
EU-Digest
With current global oil production outweighing demand, and the dollar continuing to move from strength to strength, foreign currencies are losing value, with the Euro falling to two year lows against the dollar. Meanwhile, fears are growing over slowing economic growth in both China, with weak import data, and Japan, with greater than expected third quarter shrinkage in its economy. Global markets are not a pretty sight at present and several big players in the energy scene find themselves in precarious positions with regards to both energy and economic security.
Firstly let’s consider Nigeria, which overtook South Africa as the African continent’s largest economy in 2014 before the oil price slide began. However, like many developing nations, Nigeria’s economy is over reliant on oil and gas revenues, which accounted for 95% of export revenue and 70% of fiscal revenue. As the global investment climate cools amid the oil price drop, Nigeria is expected to see a swing from a current account surplus this year to deficit next year, worsened further by the prospect of a weakening currency. This, in turn, will lead to national destabilization owing to political and religious tensions that are ongoing in the country. As government forces battle an Islamist insurgency, general elections loom on the horizon, with campaigns reportedly funded by crude oil theft, and with related damage to infrastructure worsening the country’s short-term prospects.
Yet another OPEC member nation overly dependent on natural resources to balance its budget, Venezuela is considering drastic government spending cuts to fill the hole left by lost oil revenues which account for 95% of the country’s export income. Finance Minister Rodolfo Marco has already visited China, from whom Venezuela has already borrowed tens of billions of dollars in exchange for repayments in oil, and is expected to travel to both Russia and Iran in search of further loans. If early reports are to be believed, the Venezuelan government is also in talks with Goldman Sachs regarding the potential sale of Jamaican and Dominican Republic debt to Venezuela at a discounted rate. Such desperate measures are sure to be noticed by an already agitated population.
The bleak situation in the world’s largest oil producer, Russia, has been well documented of late: a falling Ruble, lost crude oil revenue due to both sanctions and plummeting prices, rising sovereign (Dollar denominated) debt yields, a series of less than favorable resource deals with China and the apparent cancellation of the South Stream pipeline. Oil and gas combined to provide Russia with about 68% of its exports last year, but amid growing tensions with the U.S. and E.U., Moscow has been forced to look elsewhere to improve its, albeit slim, chances of avoiding a recession in 2015. Early signs of a return to Cold War politics are emerging and we may yet see further intrigue in the global oil price war. President Putin’s recent actions in the aftermath of the annexation of Crimea, such as leaving the G20 summit early, cancelling the South Stream without notifying any partners and cutting off coal and gas to the rest of Ukraine, have made the short term possibility of a return to business as usual with the West almost non-existent.
Following on from Russia, Ukraine is clearly one of the most at risk countries in the current global economic climate, not only because of the ongoing conflict with pro-Russian separatists, but also due to a worsening energy security situation. This has led to both the EU and IMF stepping in to try and shore up the struggling Ukrainian economy and enable the repayment of debts to Russia in the hopes of resuming both coal and gas supplies. As the end of the year approaches and temperatures drop, growing discontent with energy rationing and an unresolved geopolitical conflict could push tensions in the country to breaking point. The appointment of Ukraine’s next energy minister could prove to be a decisive one not just for national stability but also big picture, long term foreign investment in Ukraine’s resource future.
Meanwhile, Saudi Arabia continues to aggressively defend its market share by further cutting prices to U.S. and Asian markets, and encouraging other OPEC members to do the same. Iraq followed suit yesterday by cutting its prices to Asia, which added further pressure to the energy markets as oil prices continued to dip. While much has been written in the media regarding various nations’ breakeven prices, and whether or not the expensive extraction methods in North America can withstand the oil price drop G forces, a brief history lesson may provide some hope for the near future.
With history tending to repeat itself, the likelihood is that as pressure mounts in international energy markets, much as they had done in the aftermath of the Iranian revolution, a production cut will have to come eventually, though perhaps not as lengthy as that of 1979. The prospect of such a cut, in spite of Saudi Arabian posturing, may come from internal pressure within OPEC. Not just Venezuela, but the dysfunctional producers (Iraq, Iran and Libya) have their own distinct reasons to drive oil prices back up, be that financing internal conflicts to regain national stability or desperately trying to overcome Western Sanctions. Given that both Indonesia and Gabon saw fit to leave OPEC, in combination with OPEC members already seeking pacts with Non-OPEC producers, it may be that a production cut would be required to keep the somewhat fractured cartel together in 2015 and beyond.
EU-Digest
No comments:
Post a Comment