Saudi Arabian New Oil Plan Makes OPEC Redundant
Date
5/26/2016 7:42:33 AM
(MENAFN- ProactiveInvestors - UK) Fuller Treacy Money, Wed
Saudi Arabian New Oil Plan Makes OPEC Redundant
Here is the opening of this informative article from Bloomberg:
Saudi Arabia, one of the founders of OPEC, is sounding the group's death knell.
The world's biggest crude exporter has already undermined OPEC's traditional role of managing supply, instead choosing to boost output to snatch market share from higher-cost producers, particularly U.S. shale drillers, and crashing prices in the process.
Now, under the economic plan known as Vision 2030 promoted by the king's powerful son, Deputy Crown Prince Mohammed bin Salman, the government is signaling it wants to wean the kingdom's economy off oil revenue, lessening the need to manage prices. Moreover, the planned privatization of Saudi Arabian Oil Co. will make the nation the only member of the Organization of Petroleum Exporting Countries without full ownership of its national oil company.
'The main take-away from Saudi Vision 2030 is that there's just no role for OPEC,' Seth Kleinman, head of European energy research at Citigroup Inc. in London, said by phone on May 16. 'Or, you can have an OPEC without Saudi Arabia, which just isn't much of an OPEC.'
The first change of oil ministers in more than 20 years may also recast the country's relationship with OPEC. The group's 13 members, which contribute about 40 percent of the world's supply, gather in Vienna on June 2.
King Salman on May 7 replaced Ali al-Naimi, the most influential voice in OPEC and the architect of current Saudi oil policy. While there's likely to be considerable continuity, his replacement, Khalid Al-Falih, is an ally of Prince Mohammed, who scuppered a plan al-Naimi had supported for capping production. When producers considered freezing output to curb a global glut in April, the young royal's view that no deal was possible without Iran prevailed, and talks collapsed.
'We don't care about oil prices,' Prince Mohammed said in an April 25 interview in Riyadh. '$30 or $70, they are all the same to us. We have our own programs that don't need high oil prices.' Benchmark Brent crude was trading at $48.11 a barrel on Tuesday at 11:23 a.m. in London.
David Fuller's view
OPEC will not be missed. Cartels are power arrangements for maximising profits at everyone else's expense.
Oil prices will remain volatile but the current surplus of supply will prevent the strong recovery that some commentators have forecast. Even as the global economy eventually recovers and the record amounts of crude in storage are gradually reduced by consumption, the advance of technology has enabled more conventional oil to be produced than was imaginable less than a decade ago. Supplies may be finite but there are also vast quantities of shale oil, largely untouched.
Meanwhile, technology will continue to hasten declines in costs for renewable forms of energy, led by solar. Most countries now have the capacity to lower their energy costs. However, energy prices paid by business and consumers will vary considerably among nations, subject to their willingness to utilise all forms of available energy, plus their individual taxation policies on these vital resources.
(See also: OPEC Brings Oil Price War Home in Pursuit of Asia Cash - Oct 20, 2015)
Massive Bailout Needed in China, Banking Analyst Chu Says
Here is the opening of this interesting article from Bloomberg:
Charlene Chu, a banking analyst who made her name warning of the risks from China's credit binge, said a bailout in the trillions of dollars is needed to tackle the bad-debt burden dragging down the nation's economy.
Speaking eight days after a Communist Party newspaper highlighted dangers from the build-up of debt, Chu, a partner at Autonomous Research, said she was yet to be convinced the government is serious about deleveraging and eliminating industry overcapacity.
She also argued that lenders' off-balance-sheet portfolios of wealth-management products are the biggest immediate threat to the nation's financial system, with similarities to Western bank exposures in 2008 that helped to trigger a global meltdown.
The former Fitch Ratings analyst uses a top-down approach to calculating China's bad-debt levels as the credit to gross domestic product ratio worsens, requiring more credit to generate each unit of GDP.
While Chu is on the bearish side of the debate about the outlook for China, she's not alone. In a report on Monday, Societe Generale SA analysts said that Chinese banks may ultimately face 8 trillion yuan ($1.2 trillion) in losses and a bailout from the government, citing the scale of soured credit within state-owned enterprises.
Interviewed in Hong Kong last week, Chu estimated as much as 22 percent of all China's outstanding credit may be nonperforming by the end of this year, compared with an official bad-loan number for banks in March of 1.75 percent.
David Fuller's view
Anyone interested in China will want to read the Q & A interview with Charlene Chu, which comprises about two thirds of this article. Her views are certainly credible and other China specialists have expressed similar views in recent years. A relevant question is: can China grow its way out of this problem without widespread disruption?
Monsanto Rejects $62 Billion Bayer Offer, Open to Further Talks
Here is the opening of this report from Bloomberg on the latest information regarding this takeover attempt:
Monsanto Co. rejected a $62 billion takeover offer from Bayer AG as too low, while saying it remains open to further deal talks, putting pressure on the German company to raise a bid that has already sent its stock tumbling.
'We believe in the substantial benefits an integrated strategy could provide to growers and broader society, and we have long respected Bayer's business,' Monsanto Chief Executive Officer Hugh Grant said in a statement Tuesday.
'However, the current proposal significantly undervalues our company and also does not adequately address or provide reassurance for some of the potential financing and regulatory execution risks related to the acquisition," he said.
Bayer will likely come back with a higher bid, Jonas Oxgaard, an analyst with Sanford C. Bernstein & Co. in New York, said Tuesday in a note, adding that an offer below $135 per share would be 'challenging' for Monsanto to agree to.
Buying Monsanto would create the world's biggest supplier of farm chemicals and seeds. Monsanto is the largest seed supplier and a pioneer of genetically modified crops, which two decades on from their introduction have come to account for the majority of corn and soybeans grown in the U.S. Monsanto also sells seeds in foreign markets including Latin America and India.
David Fuller's view
This is clearly a friendly reply by Monsanto, suggesting that it would welcome the merger takeover at a higher price.
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The Markets Now
Monday 11th July at the East India Club, 16 St James's Square, London SW1Y 4LH
David Fuller's view
Here is the current Brochure.
I am looking forward to discussing market opportunities with subscribers and their friends at this post-Brexit seminar, held in the comfort of the East India Club. David Brown will provide new material of considerable interest to long-term investors. Iain Little will also have some new material, in addition to his review of interesting investment trusts.
Presentations commence at 5:30pm and usually end around 8:30pm, followed by further conversation and refreshments at East India's cash bar.
Email of the day on secular bull markets
I was just listening to your big picture round-up from last Friday.
You mentioned a point that I have heard a number of variations on over the last year, from Fuller Money ..... and that is that we (I think you are taking of US shares) are near the beginning of a major secular bull market (in US shares).
I think the argument you made in last Friday's big picture round-up went something along the lines of:
That US shares have had a long period (16 years) of ranging after the peak in 2000 ....... and that this is roughly the length of time that US shares ranged sideways in the period from the late 1960s until 1982 ....... when US share commenced it last major secular bull market.
Like you, I am very happy to acknowledge that I do not know the future.
BUT this is what makes me wary of your view that US share might be near the beginning of a major secular bull market:-
The Shiller cyclically adjusted P/E for US shares is above 25 .... which is an extremely high valuation. I am not aware of any example in history, where there have been good real returns for shares over the following 20 years. Shiller's research would suggest the next 20 year share returns would be more like something closer to 0%pa real.
The historically large debt bubbles in the West (but USA in particular) also warns of bad times ahead for investors. Most debt bubbles are followed by economic depression. I am aware of only 1 debt bubble where this has not occurred, namely Japan post 1989 ...... but the 19 years following 1989, delivered horrible returns for Japanese shares and property.
So you are saying I think, "This time is different". As you know, these are some of the most dangerous words for investors. For US shares to embark on a major secular bull market, would be truly unique in history - at least from what I have found in my very long-term market research.
Your thoughts please?
Eoin Treacy's view
Thanks for this question which in my opinion is of fundamental importance for investors. As you point out, we believe major breakouts from long-term ranges are generally a signal something has changed in how supply and demand are interacting. Provided the breakout is to the upside, this can lead to a new long-term or secular bull market. The possibility of a new secular bull market on Wall Street has been a persistent topic of conversation at this service since we observed large companies with global businesses (Autonomies) breaking out of long-term bases as early as 2011. We are already four years into a secular bull market. .
Hedge funds are betting big against Australian banks
This article by Vera Sprothe for the Wall Street Journal appeared in the Australian and may be of interest to subscribers. Here is a section:
Many have failed to call correctly an end to an Australian housing price boom that has led to some of the country's sleepiest towns becoming less affordable than New York. One investment manager's experience underscores the high stakes involved. In 2010, Jeremy Grantham, co-founder of Boston-based hedge fund GMO and famous for predicting bubbles, found traction among short sellers when he said Australia's property market was a bubble ready to burst. Instead, housing prices continued to climb.
This year, investors shorting Commonwealth Bank, the nation's largest lender, would have made a profit, as the stock has plunged as much as 18 per cent since January 1. However, the shares have started rebounding in recent days. If they continue to rise, short sellers would be at risk of losses when they buy back the stock and return it to the original investor at a higher price.
The banks are benefiting from expectations the Australian central bank will further cut its benchmark rate this year from a record-low 1.75 per cent. This has helped to allay market concerns about intensifying mortgage distress among Australian households, which are among the most indebted in the world. Home loans account for the majority of Australian bank assets.
'It's a tough trade,' Andrew Macken, a fund manager at Montgomery Global Investment Management in Sydney, said. 'Australia's major banks don't make good shorts. Even if their profit prospects may look weaker than in the past, they're still some of the most profitable in the world, competition is limited and they enjoy an implicit government guarantee.'
Eoin Treacy's view
Is there a bubble developing in Sydney and Melbourne housing? Very probably. Is it at risk of popping? With the RBA cutting rates at least there is a monetary tailwind to support prices. What about the banks?
European Shares Rise as Euro Falls, Investors Weigh Fed Talk
This article by Alan Soughley and Sofia Horta e Costa for Bloomberg may be of interest to subscribers. Here is a section
European stocks jumped the most in six weeks as the euro slid and investors assessed the implications of a possible Federal Reserve interest rate increase as early as June.
The Stoxx 600 added 2.2 percent to 344.12 at the close of trading. All industry groups climbed, with insurers and banks leading. The euro has dropped close to a two-month low against the dollar amid an increasing probability of higher borrowing costs in the U.S. this year, favoring European companies that export overseas. The region's firms generate about half their sales abroad, more than the U.S. and Japan, according to Morgan Stanley.
Federal Reserve Bank of Philadelphia President Patrick Harker said late yesterday that he could see two to three rate increases in 2016 and that if the U.S. economy shows sufficient strength, a June raise would be appropriate. San Francisco Fed President John Williams earlier said two to three hikes this year are 'about right.'
'A rise in the dollar would be a big help for European stocks,' said Heinz-Gerd Sonnenschein, a strategist at Deutsche Postbank AG in Bonn, Germany. 'People are testing whether the market has found a bottom, and there's plenty of money sitting on the sidelines. Maybe investors are finally ready to get back in. I wouldn't say we're in a bullish market, but we've had pretty calm, sideways trading this month even with another Fed rate hike looking more likely.'
Eoin Treacy's view
The Eurozone has enough to worry about with having to deal with a strong currency so the Dollar's resurgence is welcome news. This is especially true since European shares experienced a much deeper reaction than their US counterparts and have been in need of a catalyst to reignite investor interest.
Fuller Treacy Money