Oil Hostages & European oil dependence

oil prices at an all time highOil prices are at record highs, not record highs for the last year or decade, but ever. And what we are starting to see now is a realisation by countriees with oil that they hold the cards that in the past they never had, they were at the table and holding a royal flush but didn’t know how to play the game. Up until recently the flow of oil was largely influenced by the USA and the EU but that seems to be diminishing quickly as Arab Nations and Russia grow into the big oil boots they have had for so long but failed to notice.

Here’s a question: Is Russia’s Gazprom, a state sponsored strong arm? They have been holding the Ukraine to ransom lately by denying them oil. Don’t forget: the Japanese went to war with the USA for the same reason 60 years ago, natural resources are unfortunately geographically bound in a very global world. Cutting a nations gas supply during the winter – and although I have not been to the Ukraine I am reliably informed that their winters are insufferably cold – is much the same as taking hostages or holding them to ransom. The answer will be determined in the way that either party deals with the issue in the coming weeks.

Fact: 20% of the Russian state income is from Gazprom (sourced from Bloomberg)

Russia held elections recently, ‘election’ being an arbitrary term which we will use to describe whatever that process was because by all accounts there was an ‘election’ but it missed the vital ingredient of ‘democracy’. Dmitry Medvedev, the new Russian Prime Minister is the current president Of Gazprom, however, he has to step down as the Russian constitution will now allow the prime minister to hold two jobs. The replacement? Likely Vladimir Putin, who will therefore have the whole country under his reign via a puppet prime minister and being head of the single most important income stream to the nation

Russia seems to have done well under Putin so the international protest at the clearly undemocratic elections was not heard as loudly as it should have been. The Micex index in Russia is up 700% since 2001 but is that due to Putin or due to the worldwide commodity upsurge? I would contend it’s the latter. Gazprom as a stock seems to represent value at five times earnings, annualized returns on Gazprom are over 32% for the last five years, the growing concern is if it can sustain this growth? For a start there is always the domestic Russian economy, the new Serbian hub that they are looking to build and the fact that over 25% of europes gas is coming from Russia. The Auto sector in Russia is booming, the Russian car show this week was a massive success.

Putin meanwhile seems happy to deal with the EU, we have a strong currency and the addition of their bourse which is accepting Euro’s will be a further boon to a nation that was Dollar Built. He promises that relations with the US will not thaw under Medvedev. (see bbc world) So perhaps the cold war is not as dead and gone as one would have hoped for, indeed the collusion with Iran and the support of their Oil Bourse shows that the lines of communication are much clearer and reception that much better between the Kremlin and Tehran than the Kremlin and Washington.

Arab nations are also using massive Oil wealth to diversify away from that commodity, there is a correlation right now where we are seeing massive Commodity gains alongside a financial and stock meltdown, so nations rich in oil are able to purchase companies throughout the world as if they had a blank chequebook and unlimited funds.

Liverpool football club is likely to become Arab Owned, Inmobiliaria Colonial in Spain – a massive Spanish Property Company, already is.

Dollar Gold Correlation: Gold rises as the USD FallsThe real question plaguing minds is whether Oil will reach 120 per barrel? We have to end oil dependency, Jimmy Carter said it years ago and he was right in the 70’s the same way he is right about it today. The USA doesn’t seem to want to face up to that though and they are doing their best to buy their way out of a recession. The Fed will likely cut rates 50-75 basis points, I’m sure that will work 39th time a charm, because it hasn’t solved things thus far although there does seem to be some liquidity returning to the market. In S & L crisis in the 90’s and Japanese banking crisis there were similar events, rates went down and stayed down. The rate outlook therefore in the US is going to be one of low rates that will not rise any time soon as they try to keep the market poised for stimulative conditions. The danger is that of Stagflation, this is where you have a reducing or negative GDP at the same time as an inflationary period.

Not much is being made worldwide of the dollar oil correlation. Interestingly Gold and Oil seem to have an inverse relationship to the dollar and I think that’s because people are hedging into gold or taking protective moves into Gold, the Oil Correlation is simple to explain – the increased global need for Oil is causing demand and the low dollar is fueling that, the bourses opening in non-dollar currencies are causing FRN’s to return home and the Fed is cutting rates (reducing international attraction to the dollar for deposits or currency trades) while printing money to beat the band in an effort to stem the liquidity issues resulting from Sub-Prime lenders. The latest exchange shows the Dollar is at $1.53 to the euro! The graphs in this article show that Gold and Oil are gaining with almost matching correlation during the dollar fall.

dollar oil graph: correlation of USD to Oil PricesBack in January I had said that I felt we were on the cusp of a recession and we would only realise it at the end of Quarter 1 (because you have to look back to spot the turning point) the recent US non-farm payroll jobs report showed -63k in jobs, if you took out Government jobs it would be even worse. That’s a pure downward trend from November month on month. Recessional signs, and as always the issue of stagflation as prices and commodities such as oil, wheat, corn and oil remain exceedingly high.

Opec: Shokri Ghanem of LibyaFinally, OPECs Vienna meeting: US wants more output to ease the dollar crash, more oil would lower the price and during a spell of weakened dollar this would be a life saving boon to the US economy but OPEC came back with a simple answer…’No‘. The US approach of printing money and cutting rates to save their economy has only one Achilles heel, oil. The oil market is stable for the most part except for in the USA. And indeed the USA isn’t a member of OPEC, Libya’s Shokri Ghanem believes that if there is an issue that the US should join OPEC, he said this with a smug grin and rightly so, the USA has done nothing but mitre Libya for the last thirty years with ongoing embargoes. When it comes to sufferance everybody gets their turn.

$107 per barrel is the record high, and it will likely get higher. US stockpiles are declining, the USA has little or no Oil or energy responsibility, perhaps this squeeze will finally force their hand and their car firms to start making more eco-friendly or climatically responsible cars, maybe this will end the footloose approach to transportation and oil prices that is exhibited in North America where large engines are the norm, the unwillingness to accept the Kyoto Protocol and other climate change directives might be enforced instead by market forces? It is to clear to give any definitive answers but one thing that may come true in the mean time is that we are all going to be held (to some degree) to ransom by the countries who have oil. Its the classical case of the ‘haves v.s. the have nots’ and unfortunately for Europe this time we are of the latter.

Comments

  1. “Putin meanwhile seems happy to deal with the EU, we have a strong currency and the addition of their bourse which is accepting Euro’s will be a further boon to a nation that was Dollar Built.
    +
    So perhaps the cold war is not as dead and gone as one would have hoped for, indeed the collusion with Iran and the support of their Oil Bourse shows that the lines of communication are much clearer and reception that much better between the Kremlin and Tehran than the Kremlin and Washington.”

    This from last week:

    St. Pete Bourse’s First Sales
    Wednesday, March 5, 2008
    http://www.themoscowtimes.com/stories/2008/03/05/06 1.html
    ST. PETERSBURG — The St. Petersburg Exchange said Tuesday that it conducted the first two auctions of refined oil products for private brokers, selling 120 tons of gasoline for a total of 2.3 million rubles ($96,000).
    Perm-based oil trader Uralmontazhstroi offered the two lots Monday, the exchange said in a statement.
    Twenty-six Russian companies and agencies have registered to participate on the bourse, the statement said. (Bloomberg)

    No, Putin does not want the euro.
    Yes, the cold war is still alive and kicking.

    Ivo Cerckel

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