For equity investors November went out with all bells ringing and whistles blowing.
That was on the back of a near 10% jump in the price of crude – WTI closed at US$49.44 per barrel and Brent at US$50.47 – which in turn was the result of an agreement by Opec members in Vienna to cut output by around 3%.
There did, however, seem to be more whooping and hollering in the trading rooms of the world than there did in the meeting rooms at Opec headquarters. Every journey, as Kung Fu-tse had it, begins with a single step and Opec has proved itself, historically, to be pretty unsure on its feet when it comes to executing its own plans. The market has, despite this, continued to rally in overnight trade and at the time of writing Brent is at US$52.56 and WTI is at US$49.96.
The enthusiasm confuses me. The agreed reduction in output is pegged at 1.2m barrels per day, which is fine and dandy. What has not been included in the news is that Indonesia, always an uncomfortable bedfellow and only recently re-admitted to Opec after a period of suspension, has been suspended again. Though a small producer at around 720,000bpd, the country consumes a further 740,000 barrels of imported oil. It, therefore, is not really an exporter and benefits more from lower than from higher oil prices. As a unanimous agreement was required for the quota reduction, the best thing to do if one has a recalcitrant member is simply to suspend him. Bingo!
The oint-a fly-ment
Zero Hedge suggests that the Indonesian quota of 720,000 barrels has been taken back within the overall Opec output figure and redistributed among the remaining members. On that basis, 60% of the reduction in capacity emanates from the accounts department and not from a closing of taps. All the while, nobody is speaking of the US shale oil industry, which sees its marginal profitability return at prices over US$50/bbl and which places a cap on the price. There’s a lot of debt out there that needs to be serviced and with a president of the “drill, baby, drill!” persuasion moving into the White House at the end of January, regulation is more likely to be loosened than tightened. US oil self-sufficiency and more is very much a fly in the ointment.
Many of the major oil producers’ fixed-cost commitments were strapped on when US$100/bbl was seen as an axiomatic price floor on the black stuff and although US$50 or even US$60 looks a lot better than US$40, it is not really enough to keep the ship afloat, especially not with a rogue US in the mix. Venezuela is certainly up the Suwannee as is Nigeria and their adherence to the rules can most certainly not be taken for granted. Non-Opec member Russia has also agreed to cut output but if it felt that it could stick a knife in the side of the industrialised West, it would promise to refill the Aral Sea. Sticking to its agreement is far from certain.
Oil and gas analysts are bullish but they would be, wouldn’t they? Not only are oil producers’ stocks up but all the ancillary industries are looking forward to a recovery in their fortunes. Schlumberger’s shares rose 5% to US$84.05, a 12-month high and Halliburton, a company which many think is a bit of a snake pit, saw its shares leap by a full 11% to close at US$ 53.09. The trickle-down from rising crude prices is significant but first the new price levels would have to hold and, in an ideal world, continue to rise.
On the flip side, gold has gone into near meltdown at US$1,175 and in a steepening downwards channel.. Well, anybody who holds it as a hedge against either a stock market correction or rising inflation cannot complain. Hedges are supposed to be imbued with negative correlation and with stocks rallying, isn’t gold meant to fall? If it didn’t, what use would it be as a hedge?
Talking Italian
New issue markets weren’t exactly quiet yesterday but one would have needed a pretty strong magnifying glass to pick out the corporate issuance among the bread-and-butter bank stuff. It’s hard to see that changing ahead of this weekend’s Italian referendum. Can anyone remember how Matteo Renzi came screaming through the pack as mayor of Florence and with the air of a new broom? Since then, other than a lot of promises and even more rhetoric, little has happened. I have no doubt that his intentions were good, as will be those of the mildly Thatcherite François Fillon, if as and when he becomes president of the Republic.
Renzi is now proving himself to be made of the same material as all other politicians when it comes to a fight for survival as he promises pay increases for public sector workers….if he’s still in charge. Nod, nod, wink, wink….you know how to vote on Sunday. Meanwhile an EU official is quoted as having suggested that member governments are spending more and more time trying to work out ways to circumvent central rules on state aid for banks. Sod the spirit of the law, let’s find the loopholes. Are those not the very same people who spend their life squeezing citizens at every corner so that nothing might happen in the economy that they cannot see and therefore cannot tax? No wonder they are so keen on blockchain technology.
India has set an example of nixing a series of bank notes overnight in what is termed a fight against tax evasion and corruption. Could the powers that be in Brussels not find themselves tempted to do the same with the €500 or even the €200 note? But what if, away from the central bank, the people decided that that piece of paper is a way of representing €500 worth of services, central bank or no central bank. That is, after all, how fiat currencies work – they are worth what they are worth because of a consensus that that is what they are worth. That’s how Bitcoin works. The desire to over-control the currency could, over time, end up leading to its demise. Perhaps gold looks cheap here? Or maybe, at US$747 each, Bitcoin does too. In the world of fiat currencies, perception is reality, but maybe that reality needs a check.