Category Archives: Oil prices

23/5/16: Oil Exporting Countries: Sovereign Risk Metrics

Credit Suisse on fiscal woes of oil exporters:

As a reminder, here are projected 2016 sovereign debt levels across the main oil exporting countries:

Source: IMF

Followed by gross deficits:

Source: IMF

And adding current account balances:

Source: IMF

Now, the list of main oil exporters via in 2015:

  1. Saudi Arabia: US$133.3 billion (17% of total crude oil exports)
  2. Russia: $86.2 billion (11%)
  3. Iraq: $52.2 billion (6.6%)
  4. United Arab Emirates: $51.2 billion (6.5%)
  5. Canada: $50.2 billion (6.4%)
  6. Nigeria: $38 billion (4.8%)
  7. Kuwait: $34.1 billion (4.3%)
  8. Angola: $32.6 billion (4.1%)
  9. Venezuela: $27.8 billion (3.5%)
  10. Kazakhstan: $26.2 billion (3.3%)
  11. Norway: $25.7 billion (3.3%)
  12. Iran: $20.5 billion (2.6%)
  13. Mexico: $18.8 billion (2.4%)
  14. Oman: $17.4 billion (2.2%)
  15. United Kingdom: $16 billion (2%)
Taking out advanced economies and using the data plotted in three charts above, here are the rankings of each oil exporting country in terms of their sovereign risks (the lower the score, the lower is the risk):

15/4/16: Of Breakeven Price of Oil: Russia v ROW

There has been much confusion in recent months as to the 'break-even' price of oil for Russian and other producers. In particular, some analysts have, in the past, claimed that Russian production is bust at oil prices below USD40pb, USD30pb and so on.

This ignores the effects of Ruble valuations on oil production costs. Devalued Ruble results in lower U.S. Dollar break-even pricing of oil production for Russian producers.

It also ignores the capital cost of production (which is not only denominated in Rubles, with exception of smaller share of Dollar and Euro-denominated debt, but is also partially offset by the cross-holdings of Russian corporate debt by affiliated banks and investment funds). It generally ignores capital structuring of various producers, including the values of tax shields and leverage ratios involved.

Third factor driving oil break-even price for Russian (and other) producers is ability to switch some of production across the fields, pursuing lower cost, less mature fields where extraction costs might be lower. This is independent of type of field referenced (conventional vs unconventional oils).

Russian Energy Ministry recently stated that Russian oil production break-even price of Brent for Russian producers is around USD 2 pb, which reflects (more likely than not) top quality fields for conventional oil. Russian shale reserves break-even at USD20 pb. In contrast, Rosneft estimates break-even at USD2.7 pb (February 2016 estimate) down from USD4.0 pb (September 2015 estimate).

Here is a chart mapping international comparatives in terms of break-even prices that more closely resembles the above statements:

Here is another chart (from November 2015) showing more crude averaging, with breakdown between notional capital costs (not separating capital costs that are soft leverage - cross-owned - from hard leverage - carrying hard claims on EBIT):

Another point of contention with the above figures is that they use Brent grade pricing as a benchmark, whereby Russian oil is priced at Urals grade, while U.S. prices oil at WTI (see here: All three benchmarks are moving targets relative to each other, but adjusting for two factors:

  • Historical Brent-Urals spread at around 3.5-4 USD pb and
  • Ongoing increase in Urals-like supply of Iranian oil
we can relatively safely say that Russian break-even production point is probably closer to USD7.5-10 pb Brent benchmark than to USD20pb or USD30pb.

Another interesting aspect of the charts above is related to the first chart, which shows clearly that Russian state extracts more in revenues, relative to production costs, from each barrel of oil than the U.S. unconventional oil rate of revenue extraction. Now, you might think that higher burden of taxation (extraction) is bad, except, of course, when it comes to the economic effects of the curse of oil. In normal economic setting, a country producing natural resources should aim to capture more of natural resources revenues into reserve funds to reduce its economic concentration on the extractive sectors. So Russia appears to be doing this. Which, assuming (a tall assumption, of course) Russia can increase efficiency of its fiscal spending, means that Russia can more effectively divert oil-related cash flows toward internal investment and development.

During the boom years, it failed to do so (see here: although it was not unique amongst oil producers in its failure. 

Note: WSJ just published some figures on the same topic, which largely align with my analysis above:

Update: Bloomberg summarises impact of low oil prices on U.S. banks' balancesheets:

Update 2: Meanwhile, Daily Reckoning posted this handy chart showing the futility of forecasting oil prices with 'expert' models

31/1/16: Why is Inflation so Low? Debt + Demand + Oil = Central Bankers

One of the prevalent themes in macroeconomic circles in recent months has been what I call the “Hero Central Banker” syndrome. The story goes: faced with the unprecedented challenges of dis-inflation, Heroic Central Bankers did everything possible to induce prices recovery by deploying printing presses in innovative and outright inventive ways, but only to see their efforts undermined by the falling oil prices.

Of course, the meme is pure bull.

Firstly, there is no disinflation. There is a risk of deflation. Let’s stop pretending that negative growth rates in prices can be made somewhat more benign if we just contextualise them into a narrative of surrounding ‘recovery’. Dis-inflation is deflation anchored to an invented period duration of which no one knows, but everyone assumes to be short. And there is no hard definition of what 'short' really means either.

Secondly, there is no mystery surrounding the question of why on earth would we have ‘dis-inflation’ in the first place. Coming out of the Global Financial Crisis, the world remains awash with legacy debt (households) and new debt (corporates and governments). This simply means that no one, save for larger corporations and highly-rated governments, can borrow much in the post-GFC world. And this means that no one has much of money to spend on ‘demanding’ stuff. This means that markets are stagnating or shrinking on demand side. Now, the number of companies competing for stagnant or shrinking market is not falling. Which means these companies are getting more desperate to maintain or increase their market shares. Of these companies, those that can borrow, do borrow to fund their expansions (less via capex and more via M&As) and to support their share prices (primarily via buy-backs and further via M&As); and the same companies also cut prices to keep their effectively insolvent or debt-loaded customers. slow growing supply chases even slower growing (if not contracting) demand… and we have ‘dis-inflation’.

Note: much of this dynamic is driven by the QE that makes debt cheaper for those who can get it, but more on this later.

Thirdly, we have oil. Oil is an expensive (or used to be expensive) input into producing more stuff (more stuff that is not needed, by the companies that can’t quite afford to organically increase production for the lack of demand, as explained in the second point above). So demand for oil is going down. Production of oil is going up because we have years of investments by oil men (and few oil women) that has been sunk into getting the stuff out of the ground. We have falling oil prices. Aka, more ‘dis-inflation’.

Note: much of this dynamic is also driven by the QE which does nothing to help deleverage households and companies (supporting future demand growth) and everything to support financial sector where inflation has been all the rage until recently, and in Government bonds continues to-date.

Fourth, when Heroic Central Bankers drop policy rates and/or inject ‘free’ cash into the economy. Their actions fuel  borrowing in the areas / sectors where there either exists sufficient collateral or security of cash flows to borrow against or there is low enough debt level to sustain such new borrowing. You’ve guessed it:

  • Financials (deleveraged using taxpayers funds and sweat with the help of the "Heroic Central Bankers" and protected from competition by the very same "Heroic Central Bankers") and 
  • Commodities producers (who borrowed like there is no tomorrow until oil price literally fell off the cliff). 
When the former borrowed, they rolled borrowed funds into public debt and into financial markets. There was plenty inflation in these 'sectors' though they didn't quite count in the consumer price indices. For a good reason: they have little to do with consumers and lots to do with fat cats. However, part of the inflows of funds to the former went to fund ‘alternative’ energy projects - aka subsidies junkies - which further depresses demand for oil (albeit weakly). Both inflows went to support production of more oil or distribution of more oil (pipelines, refineries, export facilities etc) or both.

Meanwhile, inflows from the financial institutions to the markets usually went to larger corporates. Guess where were the big oil producers? Right: amongst the larger corporates. Thus, cheap money = cheaper oil, as long as cheap money does not dramatically drive up inflation. Which it can’t because to do so, there has to be demand growth at the household level, the very level where there is no cheap money coming and the debts remain high.

Now, take the four points above and put them together. What they collectively say is that the risk of deflation in the euro area (and anywhere else) is not down to oil price collapse, but rather it is down to demand collapse driven by debt overhang in the real economy (corporates and households and governments). And it is also down to monetary policy that fuels misallocation of credit (or risk mispricing). Only after that, risk of deflation can be assigned to oil price shock (in so far as that shock can be treated as something originating from the global economy, as opposed to from within the euro area economy). And across all these drivers for deflation risks up, there are fingerprints of many actors, but just one actor pops up everywhere: the "Heroic Central Banker".

A recent paper from the Banca d’Italia actually manages to almost grasp this, albeit, written by Central Bankers, it just comes short of the finish line.

Antonio Maria Conti, Stefano Neri and Andrea Nobili published their “Why is Inflation so Low in the Euro Area?” in July 2015 (Bank of Italy Temi di Discussione (Working Paper) No. 1019: They focus on euro area alone, so their conclusions do treat oil price change as an exogenous shock. Still, here are their conclusions:

  • “Inflation in the euro area has been falling steadily since early 2013 and at the end of 2014 turned negative. 
  • "Part of the decline has been due to oil prices, but the weakness of aggregate demand has also played a significant role. …
  • "The analysis suggests that in the last two years inflation has been driven down by all three factors, as the effective lower bound to policy rates has prevented the European Central Bank from reducing the short-term rates to support economic activity and align inflation with the definition of price stability. Remarkably, the joint contribution of monetary and demand shocks is at least as important as that of oil price developments to the deviation of inflation from its baseline.” 

Do note that the authors miss the QE channel leading to deflation and instead seem to think that the only thing standing between the ECB and the return to normalcy is the need to cut rates to purely negative nominal levels. In simple terms, this means the authors think that unless ECB starts giving money away to everyone, including the households (a scenario if nominal rates turn sufficiently negative) without attaching a debt lien to these loans, there is no hope. In a sense, I agree - to get things rolling, we need to cancel out household debts. This can be done (expensively) by printing cash and giving it to households (negative nominal rates). Or it can be done more cheaply by simply writing down debts, while monetising write-offs to the risk-weighted value (a fraction of the nominal debt).

I called for both measures for some years now.

Even "Heroic Central Bankers" (for now within the research departments) now smell the rotten core of the QE body: without restoring balancesheets of the households and companies, there isn't much hope for the risk of dis-inflation abating.

2/1/16: Don’t miss that Urals spread

Over recent months, I have been highlighting the importance of considering, when it comes to Russian economy and Ruble analysis, not just quoted spot prices for Brent grade oil but also the Brent-Urals spread.

At last, some media (in Russia) is catching up: Падение спроса на российскую нефть и сильный доллар не дают рублю укрепиться -