Dollar might strengthen

Tensions add to flight to dollar. With Saudi Arabia snapping ties with Iran and with US there is anxiety at turn of events on the geopolitical front. The Middle East, at least at the sub terrain level, seeks some conflagration so that oil prices are increased a shade. Any violence,  might instead , add to dollar strengths more  . Oil  may pick up but not so significantly unless there are clearer signs of supply shortages, which is highly unlikely as of now.

Thus, the USD may not have peaked as yet.. Any small move up in oil prices is good for neutral countries like Qatar, Oman and UAE among the GCC countries.  Indo-Pak uncertainties show that economic factors may be a consequence of geo- political tensions.. In a more refined world, economic requirements should destress political tensions but  that seems faraway.

Commodity prices might look up a shade but the turn of events seem good for US stocks. Indian corporates are going to see input and import costs a trifling more ; so the Indian  stock market should be under some pressure.


This blog recommends no investment. Views expressed are without any risk or responsibility.  

Saudi Budget: Bold, Bluff or Bluster

Saudi Arabians are likely, it is reported, to keep  oil price at $ 80 a barrel for purposes of its 2015 budgeting.  That looks rather a tall order at the given prices today. Hope grows eternally in every human breast. So while the Saudi Arabians have a right to hope, there is little data for such optimism. 

In fact, Japan prices seem declining and industrial production stalling again. This is despite the  Dubai Crude Oil - which is benchmark for Asia oil supplies, having  lost nearly half its value. Japan's Kuroda has still had to talk prices up. So there is no sign as yet of a recovery.

 

With unemployment at about 30 %, Saudi Arabians really have every reason to hope for  a rise. Their talk down strategy having taken them nowhere, Saudi Arabians are now hoping to move up the prices through indications. Domestic pressures (post Feb 2011 Arab Spring) are just too many for comfort.

According to the IMF, between 2006 and 2012, about 5.1 million jobs were created in the GCC (excluding the United Arab Emirates, for which data are unavailable). About 4.3 million of these jobs were in the private sector, while only 0.8 million jobs were in the public sector. Of the 4.3 million private-sector jobs created, nearly 88 percent were filled by foreign workers. In the public sector, nearly 85 percent of the 0.8 million new jobs were filled by nationals. The jobs created in the public sector are largely non productive or disguised unemployment  as there are jobs in sectors like police and defence just for the sake of employment. So the real beneficiaries of employment are expatriate labour. Given that local labour are relatively less efficient,  private sector prefers imported labour. That will become expensive as oil revenues fall. The worst hit would be Bahrain and Oman. Dubai would have to scale down growth projections.

GCC looks set for trying times.

 

Pyrrhic Victory in oil for GCC?

As Saudi Arabia works out a strategy for a long term foothold in the market, it may well see a large chunk of its reserves down. It would disturb allies too. Countries like Oman would be raising dissident voices as they would feel the heat of slide much  more. Bahrain too would be under serious pressure. Dubai ( a city state within UAE dependent on Abu Dhabi's funding in exigencies) may not totally concur with the UAE's   official version that UAE does not care if oil slides to $ 40 . So Saudi's allies themselves may question it even though all except Oman may welcome a weaker Iran. Money matters! Less money matters more when you are used to more money...

Good news from USA  on factory output shows it is back on track despite a strong dollar. Some good news for the markets. Will Wall Street reverse the trend  of the previous week? 

A Requiem for OPEC? OIl at $ 40?

As was submitted here , oil continues to retreat in run. UAE has said that it would not care less if it falls to $ 40.
http://www.bloomberg.com/news/2014-12-14/u-a-e-says-opec-won-t-change-output-even-if-price-drops-to-40.html

That seems to be talking it down... quite effectively. The $150 billion of value loss on Gulf capital markets  since the end of October ...
Reuters: http://in.reuters.com/article/2014/12/14/us-opec-oil-badri-idINKBN0JS06F20141214.

That does not seem to have bothered not so much. 

Markets like Oman will fall faster than others as they have nowhere the reserve staying power of the Saudis.  Reserves cannot be used in the short run and capital markets are in the short run. 

Is this aimed at Iran in a joint Saudi- UAE effort? There goes the dysfunctional  cartel of OPEC then.


This brings power shift in the Middle East back  to Saudi Arabia and GCC rather than Iran .

Sell and buy oil? It seems cruising towards$ 50 for now and now that UAE has set it at $ 40!!!

Gcc economies and the paradox of a dollar peg

Gcc countries are seeing the oil prices fall like sad and mad. So the Government revenues are seriously constrained by falling  inward flows. Except Kuwait,  the GCC countries have their currency pegged to the US  dollar. As dollar increases in international markets, their- GCC household purchasing power goes up and real incomes go up because of appreciation.  So even as national income falls the households experience counter party values rising as their pegged currency rises on the back of dollar. They import more. This affects the trade figures. Imports are cheap and so marginal propensity to consume more. You import and consume more even as national incomes fall. The paradox of a peg. 

Oil price fall hits Oman

1. Oman has drawn up  its 2014 budget on the average price of oil of $85 per barrel and the deficit was forecast at OMR 1.8 billion. (1 OMR = $ 2. 58 )

2. The deficit is  6 per cent of its Gross Domestic product (GDP) and 15 per cent of its total revenues expected to be OMR 11.7 billion. 

3. Last year, Oman earned an average $116 per barrel from its oil production.

4. S&P lowered its long-term outlook for Oman to negative from stable. The agency currently has  Oman with a  rating of A.

5. Oman has few oil reserves. Extracting oil is a costly affair in Oman. So it may not be worthwhile to drill anymore. 

6. The Sultan Of Oman is reportedly unwell and away in Germany on medical  treatment. Absence of his direct presence will aggravate the economic impasse because for several decades they are used to his wisdom.  

Is a big bear wave coming?

Even as the budget deficit shrank to 2.8 % of the US GDP ($ 483 billion) -September 2014 data, (which indicates that fiscal reforms are on course) and even as US employment trends are positive, Dow Jones fell. As investors scramble out on European and Asian worries, the situation is one of 'nowhere to go' : Yen seems to be one reluctant option. Oil is tipped to fall further, and the trend is buttressed by Saudi comments who are on to a oligopolistic price cuts where the market leader cuts and others follow!. Yen falling is bad news for export oriented Japanese corporates. So is a strengthening Euro for the Europeans. OPEC producers will find their budgets in imbalance. Non OPEC members like Oman will find it even harder. Public projects will fall and construction will slow down as Government led project funding will turn to a trickle. Finance centres like Dubai which is external driven will be among the first hit perhaps as the wealthy will exit on finding falling real estates. Banks are likely to face stress too as non performing assets might increase as borrowers find their fund flows choked. In a falling scenario , commodities are hard hit. So one cannot move on to gold either.

It looks like a day of sellers exceeding buyers. The best is to be on the beach; if riding the waves, try to stay afloat; not swim. 

Asian Stocks Fall ...A day for sellers?

Oil falls and falls...as Saudi makes price cutting a tactic in competition... investors read that as a glut in the market...Iran and Iraq are followers in  kinked curve reaction.  In oligopoly, cuts are competed with by cuts... So oil is further down.,. Countries like Oman where costs of extraction are high are likely to suffer.

If Saudi cuts prices to USA, Asia may have to pay for it as Asian demand for oil is relatively inelastic at the base. Countries like India are being hemmed in.
As ECB central bankers fight among themselves, there is room for policy paralysis for the day.

A day for the sellers?