Oil be damned

7 min read

The downward pressure on the oil price continues unabated with WTI trading at US$42.50 and Brent, now also formally in a bear market, at US$44.80 per barrel.

All the while the debate persists as to whether it is falling because the demand side isn’t picking up in a way consistent with global economic expansion or whether the production paradigm is undermining the needs of indebted and technologically stagnant producers.

It is suggested that a cut in production of some 700,000 barrels a day would be needed in order to bring demand and supply back into some kind of equilibrium but with Libya having been exempted from the Opec caps and with its production alone having doubled to 1m barrels a day since the accord last December the auspices are not good. More experienced Opec watchers were never particularly convinced by the show of unity and shorting the rally looked like the smart thing to do. Yet the losses taken by leveraged players who bought the living daylights out of the black stuff in the aftermath of Vienna are staggering.

The most intriguing part of the whole schlimazel, though, is that this sharp drop in prices it taking place with a backdrop of unprecedented political turmoil in the Middle East with Iran and Saudi Arabia as close to being at each other’s throats as they ever have been, the Qatar isolation and now the redefining of Saudi Arabia’s internal power structure towards the notionally more bellicose Prince Mohammed bin Salman. In the past any one of these could have whacked, even if just in the short term, US$10 on the price of a barrel. Currently nothing seems to be able to meaningfully slow the decline and WTI with a three handle is being discussed as though it were already upon us.

I recall suggesting a couple of months back that with the driving season ahead and with consumer confidence in a good place we might see WTI at US$60/bbl. I apologise for that. Not only was it wrong but it also went against all my original post-Opec instincts.

Beep-beep

Into this falling market came BP with a two-tranche €1.5bn transaction at eight years and 12 years, which followed on its recent ratings upgrade by Moody’s to A1 from A2. After years of being beaten up in public for events that were clearly not entirely of its own making, the upgrade was a huge relief although it took guts to push out a deal given current conditions. That said, the new issue discount looked sufficient to make the deal attractive although I’d not be at all surprised to find flippers facing some overly defensive bid/ask spreads.

Still lots of uncertainty in the UK with horror stories emerging on one side of the street and dismissive responses coming from the other. The most unusual spat, however, is emanating from the Old Lady. Bank of England chief economist Andy Haldane suggested that the economy was robust enough to be able to take a spot of monetary tightening without hitting the buffers. This is, for all intents and purposes, in complete conflict with the comments made by his governor, Mark “The Magician” Carney, who just 24 hours earlier had told us in his Mansion House speech that it was not a good time to be thinking of raising interest rates. So much for forward guidance.

Belgian waffle

The UK is certainly in a mess and the EU summit that begins in Brussels today isn’t going to make the living any easier. The Franco-German alliance has gained momentum with the election of Young Macron and with the declining strength in xenophobic populism, which in turn is strengthening Mutti Merkel’s hand ahead of the October Bundestag elections. It’s becoming a sort of “Les Républiques en Marche”. Macron is making all the right noises, not least by way of his finger wagging at the Eastern members when he told them that the EU is not a supermarket in which one can pack and choose which bits suit.

In what was supposed to be an “exclusive interview” with no less than seven newspapers, he made this position very clear when he said that some Eastern European nations choose to “turn their backs on Europe and opt for a cynical approach to the EU, seeing it as a provider of loans that mean nothing in terms of values”. The punch-up with Hungary and Romania over migrant access is far from over as the core of the EU wants to avoid becoming like Opec where great agreements and solidarity are pronounced to the public and the press but once back home, many fail to abide by the accords.

Greater integration might worry Britain which chose, albeit only by 52% to 48%, not to be a part but there are forces afoot from Poland to Bulgaria that question how far beyond economic integration their people might want to go. Having escaped from the “one-size-fits-all” diktat of the Soviet bloc and having re-established their national identities, they feel loath to hand power back to a big brother, even if it speaks French and German rather than Russian. The summit must be sensitive to this while showing the Brexiteers the big stick. With Theresa May’s election defeat – there’s no other description for it - having laid bare many cracks in the UK’s position, this weekend’s summit risks doing the same for the EU’s stance.

Young Macron might be making all the right noises but he has yet to face the stubbornness of Poland and Hungary. The rhetoric of “you’re either in or you’re out” plays well to the media but how recalcitrant members can be brought into line is another matter entirely, especially given the scary and incomplete experiences of binary outcomes such as Brexit.

Meanwhile markets rumble on doing as they will as if oblivious to many of the stresses that would historically have had them running for cover. With such basic issues as to whether there are greater risks of inflation or deflation stalking the system, whether growth is picking up or whether the economy is about to fall off a cliff again and with Trump running mass rallies redolent of many historic unmentionables, what else can they do?

Finally, the business pages are full of George Clooney and the sale of his tequila brand Casamigos to Diageo for something in the region of US$1bn. I’m not much of a tequila aficionado but I do wonder what the brand would have been worth without his name on the docket. How shallow has our celebrity-obsessed society become? Still, I suppose our George needs the money for his twins’ school fees.