If Saudi can’t make a buck from oil then…

This story is an interesting way point in the MB thesis that the emerging markets and commodities bear market is going to conclude with a major default and debt crisis somewhere in the not too distant future. From Bloomberg:

-1x-1Saudi Arabia is ordering a series of cost-cutting measures as the slide in oil prices weighs on the kingdom’s budget, according to two people with knowledge of the matter.

The finance ministry told government departments not to contract any new projects and to freeze appointments and promotions in the fourth quarter, the people said, asking not to be identified because the information isn’t public. It also banned the buying of vehicles or furniture, or agreeing any new property rentals and told officials to speed up the collection of revenue, they said.

Saudi is running enormous budget deficits:

This is already depleting the Saudi’s large stash of forex reserves:

Capture

Saudi is already doing big secondary damage to global asset prices by pulling its recycled petrodollars back from equities, via FTAlphaville:

Nigel Sillitoe, chief executive of financial services market intelligence company Insight Discovery, said fund managers estimate that Sama has pulled out $50bn-$70bn over the past six months.

“The big question is when will they come back, because managers have been really quite reliant on Sama for business in recent years,” he said.

Since the third quarter of 2014, Sama’s reserves held in foreign securities have declined by $71bn, accounting for almost all of the $72.8bn reduction in overall overseas assets.

While some of this cash has been used to fund the deficit, these executives say the central bank is also seeking to reinvest into less risky, more liquid products.

“They are not comfortable with their exposure to global equities,”said another manager.Fund managers with strong ties to Gulf sovereign wealth funds, such as BlackRock, Franklin Templeton and Legal & General, have received redemption notices, according to people aware of the matter.

The point of this is not to point the finger at Saudi as a potential default candidate. Rather, it is to ask the question that if the world’s cheapest and most voluminous oil producer can’t make a buck, then how are the higher cost and more indebted producers, private and public, faring?

The Bank of England is more than wondering from the FT:

The Bank of England has asked British financial institutions to reveal their full exposure to commodity traders and falling prices of raw materials amid concerns over the impact of the oil and metals slump.

The Bank of England’s Prudential Regulation Authority, which was set up in 2012 to ensure the “safety and soundness” of banks in the wake of the financial crisis, sent the requests to the UK’s big banks in the past week, according to three people with direct knowledge of the matter.

The PRA move that mirrors similar inquiries it made earlier this year about the banks’ exposure to Greece and to China, was prompted by a sharp drop in the shares of Glencore, the biggest publicly listed trading-house-cum-miner at the start of last week.

It was not provoked by any immediate concerns of a default, a person familiar with the matter said, but it was checking that banks knew what their exposures were to individual commodity houses and that they had examined the wider knock-on effects if a large commodity trader was to collapse.

Of course they do. Hey, is that Elvis?

Comments

  1. Ronin8317MEMBER

    Normally the OPEC will cut production to stablize price. This has not happened, because the new Saudi ruler is a moron that believes it is more important to hurt Iran and US shale gas by keeping oil prices low. It is also hurting Russia, which is why Russian missiles are firing into Syria right now.
    Unless the strategy changes, I expect a palace coup soon.

    • When you say OPEC cut production you are essentially saying the Saudis should cut production bevause the rest of OPEC sure as hell is not going to.

      So how does that help the Saudis?

      They cut production and lose market share and income and the likelihood is the rest of OPEC or the yanks and everyone cranks up production further as the price rises.

      The problem is simply lots of oil.

      Tehran would be loving this as any oil they sell is a bonus because they have been blockaded for years. Knowing their new supply is drivng the Saudis nuts would be very satisfying.

    • The new Saudi ruler is in hospital with dementia apparently. I doubt he’s pulling many strings.

    • “It is also hurting Russia, which is why Russian missiles are firing into Syria right now”

      That’s not the reason. It’s one of them, but it is way down the list, and i mean way down in terms of the actual consideration. Here are the real reasons, and i will try to be as short as possible here.

      1. The Gulf States who are allied with the USA (and the USA themselves) have pipeline plans for Qatari gas to Europe. This must run through Syria, and cannot with Assad in power. This would destroy Russia’s energy monopoly to Europe and seal the USA’s dominance over Europe politically and neuter Russia. This is why the USA successfully pressured Bulgaria to abandon South Stream despite it being in their economic and sovereign best interests.

      This is why they would rather support the Syrian “rebels” and I use the commas to denote sarcasm here because they are ISIS or Al Nusra, or an arm of Al Nusra with different name. The US is deposing a former poster boy of the West who’s father ruled the place before him, who protects minorities, because he is one, in favour of head chopping Islamic fundamentalists. This is why they “wilfully” allowed ISIS to foment and this situation to unfold.

      The USA is looking to carve Syria into 3 manageable pieces. Saudi Arabia is trying to check Iran’s challenge to its dominance in the region and Erdogan for his support is allowed to wage war on the PKK.

      This is why they allow Turkey to buy $1m USD of oil from ISIS daily, this is why they continue funnel money to “moderates” because their previous “moderates” have run wild like the animals they are. Russia bombed ISIL’s oil pipe line in the first week of sorties. Why has the “coalition not hit it after a full year of air strikes?

      This is why Congressman and Senators have openly said the US should be funding Al Nusra i.e. Al Qaeda. You know those guys that perpetrated 9/11.

      This is why the US has rejected any form of coalition with Russia to fight ISIS, and the Western media was so “concerned” about Russia’s entry into the fold, but couldn’t really tell us exactly why they would or should be concerned with Russia targeting ISIS, Nusra front and the 5 rebels who haven’t yet sold their weapons and defect to ISIS or Nusra.

      This is why Saudi clerics have declared Jihad on Russia, supporting who??? ISIS? Al Qaeda?

      2. Russia has been allied with Syria for a long time, and i believe even sent soldiers to the region hundreds of years ago. The warm water port in Tartous is a strategic asset and the only one they have outside of the Black Sea. Without it NATO’s continued expansion encircles them as NATO countries host ABM systems specifically targeted at reducing the Russian strategic nuclear forces potential. With a re invigoration of this Port and a new base at Latakia, they create a ring of anti access with their air force, superior surface to air arsenal and Navy using their Crimean Black sea assets, Mediterranean Syrian assets and Caspian sea fleet.

      3. Islamic fundamentalism is a big problem in Russia. When Putin first took power and took over the war in Chechnya their wasn’t a functioning centralised govt. apparatus and their was a real risk Russia would disintegrate into regions. Despite the USA telling you Russia bombed themselves with false flag attacks, it is a real problem with 2-3k Chechens in Syria. For those who don’t understand these forces are the most effective, hardened and brutal of all Islamic fundamentalist forces, and Russia’s weak spot, often referred to its “weak underbelly” is this region. They would rather nip this in the bud than let ISIS run roughshod over Syria and then the USA and Saudi sponsors direct ISIL to Russia’s border, which is only a 20 hour drive away on flat terrain and have to deal with this in their back yard.

      4. Syria has one of (if not the) oldest Christian population on the planet. They are being butchered like cattle by the USA’s preferred liver eating “moderates.” Believe it or not protecting them is an actual consideration in the Russian states thinking.

      5. The USA in its willful hubris and exceptionalism gave Russia a strategic opening to turn the status quo in the Mid East on its head, and the opportunity to do this has proven too good to pass up. By this i mean Saudia Arabia (and gulf states), USA, Turkey and Israel run the show. Putin has created an alternate axis of Iran, Iraq, Russia and Syria. Iraq only too happy to join despite the USA’s protestations, because at the end of the day even though they may be afraid of the US, they won’t forget it was them who ripped their country to pieces and effectively does nothing to check ISIL.

      These are the major considerations, not seeing the price of oil go up. What does the actual price of oil matter if you lose half of your biggest market?

      It is also a signal that they won’t tolerate the current state of world affairs with the USA using their war on terror excuses to re-mould the mid east in their image.

      • georgeharterMEMBER

        Hmmmm, the above is a great lot of codswallop! The 7 Afganis America trained at a cost of $350million all turned traitor to the vile Non-puppet pseudo Afgan government within a week. This is evidence of a Diabolical Supremely PreScient Evil Cabal in the USA?????? YOU MUST BE JOKING MATE!!! The Repugs argue over misuse of Toilet Tissue and can’t even elect a House Speaker!!! The Evil Obama clique gives away $2 trillion to crooked Bankers like Blan#fein and Di#on, $2 trillion! This is intelligence???? These are factoids representing the Satanic Machinations of a USA led Illuminati conspiracy???? Chill-Out, please. The USN is still maintaining coaling stations for its nuclear subs. Well……..not.
        Your critique is just one step removed from that of “The Protocols of the Elders of Zion” a massive He##ew conspiracy with brains in Jeru##lem. Face it, the USA may be bigger fatter crazier than others but it is still, very obviously just another Bozo on the World bus, Traveling to Oblivion.

      • It is codswallop to the uninitiated. A large number of ISIS ranks are former “rebels” trained by the US. The gent to the right (from where he stands) of McCain is none other than the Caliph himself – what is McCain doing meeting him if not to create a “moderate rebel” group to finance and arm? The US has a long history, along with its vile ally in Saudi Arabia of using fundamentalists to do their dirty work, and also a long history of it coming home to roost.

        http://www.google.com.au/imgres?imgurl=http://countercurrentnews.com/wp-content/uploads/2014/06/Untitled-82.jpg&imgrefurl=https://willyloman.wordpress.com/2014/08/26/busted-jihad-john-mccain-met-with-isis-head-caliph-ibrahim-back-in-2013/&h=328&w=600&tbnid=VE8XSGji_57VeM:&docid=9COH6pvFikZjSM&ei=sU0XVvPtOcPQ0ASFuL7YDg&tbm=isch&ved=0CBwQMygAMABqFQoTCLOKoqrRtMgCFUMolAodBZwP6w

        A former director of the US DIA also called ISIL’s creation a wilful decision. This is backed up by Wikileaks cables as far back as 2006. The US added fuel to the fire by training rebels who have defected and or sold their weapons. At a minimum they knew their actions in the Mid East along with Turkey, KSA and Qatar had a very strong potential to create an extremist group, and it did. Once it was created they didn’t do much to halt its advance and the plan would have been to take them out after they got rid of Assad and then instil a puppet.

        George, one only need to look at the Western media narrative when it became clear Russia would not tolerate this:

        – They made the call that civilians had been killed in the first sortie before it was even launched – using a picture of a Syrian man holding a child from a week ago (blunder), in a similar vein of a high ranking official using a picture of Russian tanks in Georgia and claiming it was taken in Ukraine – it’s like these fools don’t think we use the internet.

        – They are asserting that Russia is targeting their CIA backed moderates – according to you there is only 7 of these?

        – Russia made an offer for US to join them in their campaign – knowing full well it would be rejected. Why has it been rejected out of hand?

        I could go on and on, but you clearly don’t pay attention…..

  2. How would one play a commodities led GFC Mk2 (a thesis you’ve mentioned) in plain old SMSF-accessible equities?

    USD?
    Staples ETF?

    (Already have gold, silver)

    • GFC Mk2? We’re only part way though Mk 1 at the moment!

      Denials aside, there isn’t any evidence to support the idea of US economic strength which is why the September payroll report was only shocking to those that testify to the Yellen economy… Thus Japan wages and machine orders and German exports all figure in with US consumers further slipping down in economic function… And each is met with the growing chorus of “more stimulus” as if the word itself accomplished the directive (since semantics is undoubtedly all that is left of it). Apparently the “slippery slope” of economic denial is likewise as universal as the aligned direction of economic progression across the world….Fittingly, we are all almost Japanese now.

      http://www.alhambrapartners.com/2015/10/08/it-took-three-decades-but-fears-of-turning-japanese-are-closer-than-ever/

      • And yet 3 decades on most economists simply refuse to accept that their ‘fantasy model’ of how the world economy should work is about as useful as cracking top score on Donkey Kong.

        A moral fairytale rendered as economic policy.

        The sooner the robots take over and let us get with what we are really good at – shagging, getting fat, shooting anything that moves and being stoopid – the sooner the world will be a better place.

      • I’m turning Japanese, I think I’m turning Japanese, I really think so….
        All jokes aside it’s exactly what’s happening the whole world is turning Japanese. Personally I don’t know if one should simply attribute it all to demographics or aire we beginning a post consumption society, either way the bottom line is demand deficits as far as the eye can see. Continuously developing new Productivity capacity is only a logical state if a society exists in a sort of permanent supply deficit, however IF we ever enter the domain of permanent demand deficits then logically the destruction of productivity capacity is what should be rewarded, The symmetry of this logic doesn’t worry me anywhere near as much as the implementation options, however you look at it I’m expecting Interesting times ahead.

      • CB, that is one of the main points made by Marx and Engels. That capitalism inevitably leads to excessive productive capacity which needs to be routinely destroyed – and wars are for that purpose.

        The 1920s and 1950s saw unparalleled prosperity in the US. Such prosperity cannot be repeated without first going through a WW3.

      • I agree it is tiresome, but it keeps coming up because most Australians still believe in high house prices, and I have not yet seen a sign that any part of the remainder of the productive Oz economy will be spared; everything will be fed to the bubble.

        Getting back to your question, this means that everything Australian is a bad investment, so you’re forced to go for foreign assets, cash, or metals. I hold US bonds and equities because to my mind the US is still the cleanest shirt in the laundry. It is the most diverse economy, is huge, brutally efficient (when compared to others) at capital reallocation, and its demographics aren’t a downward spiral shitshow. It is also easily the world’s most self contained resilient economy.

      • “the US is still the cleanest shirt in the laundry. It is the most diverse economy, is huge, brutally efficient (when compared to others) at capital reallocation, and its demographics aren’t a downward spiral shitshow. It is also easily the world’s most self contained resilient economy.”

        I couldn’t stated it better. The US economy has tremendous “depth”.

      • Dudley, MB is an echo chamber. Approximately 99% of people feel the same about property.

        Not wishing to cause offence but the “lolz property can’t lose”-“all teh Australian property ownerz are dumb” theme is tiresome.

        Most of you all agree. There is a lot of value in the comments (more than the articles in a lot of cases).

        I suppose I should have a Bex and lie down and race over them, but when they start filling the comments up. I blame Reusa.

    • Failed Baby BoomerMEMBER

      tmarsh,
      I think H&H has hinted at a way forward in previous articles;
      Buy USD ETF as a hedge against falling AUD.
      Buy short to medium Treasury bonds (GSBS19 and so on) as a hedge against falling interest rates.
      It is probably a little late to buy USD-rich ASX stocks (COH, ANN, CSL and so on).

    • tmarsh – the US Stock market (to go to 25000 to 40000 in a few years) and the USD, be like King Kong on steroids. As the outer peripheries of the world collapse due to the sovereign debt crisis, Europe imploding, Japan imploding, China exploding, Asia/Aussie seizing up – all the $$$ go to the ONLY game in town, the worlds currency reserve/safe haven. I know it sounds far fetched – but we will see.

      • Good call – I would also look for automation/commercial robotics manufacturers and well run Agri-businesses. Some-one has to make our new robot overlords, might as well get on their good side early on 🙂

  3. Saudis make good profits from oil at this price. It’s their welfare system that is broke at this price. I’m sure u know that. Just clarifying for people who may not.

    • You mean, people enjoy inflated living standards they get accustomed to from good old days of resources boom that cannot be rescinded because the move is too politically difficult?

      Somehow that sounds familiar.

      • Now that you mention it, yes, it does sound familiar.

        Except we don’t have a FX stash to run down while we make the transition to a more sustainable living standard. We just have a land stash to sell-off.

    • The same way Michael Jackson would have defaulted had he not died first. Unbelievable profligacy. Remember the Saudis are useless and foreigners do everything there. Their sense of entitlement dwarfs anything seen anywhere else. Saudi princes quite literally get away with murder there.

      • there will be a civil war within saudi before they run out of cash. Have a read of Daniel Bergen’s ‘The Prize’. Current Saudi ‘royals’ are a bunch of thugs who grabbed power in the 1930’s…or around then. Oh, and also have a squizz at ‘confessions of an economic hit-man’. the saudi rulers are the scum of the earth…absolutely corrupted by their (now diminishing) oil wealth.

      • Given that the government there beheads and crucifies people for things like attending a protest, I imagine such a war would be rather barbaric.

        And the US sold them a lot of its most expensive weapons systems. Nothing can go wrong with this plan.

      • @Greg
        ‘confessions of an economic hit-man’ I am looking at it now, it will make good reading.

      • Don’t see a civil war happening there. Not in the best interest of the US and its allies so it won’t happen

  4. Nothing more ugly than a circular loop in a financial model when you have no ‘allow iterations’ button… the fact that we default to war and violence every time the model reaches its max loop is a good reason to fix the mathematical madness

  5. 2big2failMEMBER

    The Saudis are a black swan in the making. False stability promoted by years of abundant wealth, brutal punishment of dissidents, and bribing citizens to keep quiet. All coming to an end. Not sure they can survive the current economic/social changes happening around them.

  6. I am very sympathetic to the view, expressed in this podcast by (I think) Mark Jacobson – professor of civil and environmental engineering, Stanford University, that SA is selling its oil as quickly and cheaply as it can to be rid of it at a profit before it becomes a stranded asset.

  7. I wonder if we’ll get a repeat of 2009 when the Saudis had to bail Dubai out from large scale debt default? The Saudis cut production by more than their agreed OPEC limit, the price of oil bottomed at $40 and gold, which had been in a downtrend (at least 15% off its previous high) went ballistic. We’ve got a different landscape now that’s for sure, but at some stage they’ll have to go back into self preservation mode.