Why Goldman Sachs says US$30 oil isn't proof of weak demand

Oil's collapse to US$27 a barrel last week spurred concern that, on top of the existing oversupply, the market is facing a demand crisis. Goldman Sachs Group Inc. thinks that's wrong. 

PHOTO: BLOOMBERG

JAN 28, 20169:52 PM

[LONDON] Oil's collapse to US$27 a barrel last week spurred concern that, on top of the existing oversupply, the market is facing a demand crisis. Goldman Sachs Group Inc. thinks that's wrong.

Over the past six weeks, long-term oil futures - for deliveries in five years' time - have fallen even harder than prices for immediate supplies. That's a sign to Jeff Currie, Goldman Sachs' head of commodities research, that the latest rout wasn't driven by fading oil consumption. When demand is weak, that gap - or timespread - would widen rather than narrow, he says.

"Recent price declines are not demand driven, but rather driven by structural supply forces," he said. "Time-spreads in Brent and oil products have strengthened, not weakened, and weakening time-spreads are characteristic of demand-driven price declines."

So if a demand shock wasn't the culprit, then what did push prompt crude to its lowest in more than a decade? It's still comes down to excess supply, according to Currie. Meanwhile, longer-term prices have slumped for other reasons, most notably producers hedging sales, and some consumers choosing to abandon their own safeguards against higher prices.

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The pressure from low prices is already causing "binding constraints on the oil market," straining producers' ability to both access capital and finance their daily operations, Goldman says. That will ultimately lead crude markets to a "new equilibrium," which Goldman has previously forecast will mean the emergence of a new bull market.

"We're now in the right zip code in terms of prices that are creating the adjustment process," he said.

Still, the re-balancing process will be "both protracted and arduous," with prices swinging between $20 and $40 a barrel throughout the first half before order is restored, Currie predicts.

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Shanghai carbon exchange aids first custody contract to build trade

JAN 28, 20166:42 PM

[BEIJING] The Shanghai Environment and Energy Exchange announced its first "custody contract" on Thursday, allowing a brokerage to borrow permits from a local company and trade them, in a bid to inject liquidity in a depressed market.

China's government will launch a nationwide carbon trading market next year and is working on plans to harmonise the seven existing pilot markets, but it remains unclear how many of the existing local exchanges will survive the transition.

They are now scrambling to stay in business by offering a range of other financial tools, including buy-back contracts, loans using permits as collateral, permit-credit swaps and forward contracts negotiated over the counter.

Under the custody contract, Wujing Thermal Power Plant, a subsidiary of the State Power Investment Corporation, one of China's biggest power firms, transferred 2 million permits to Carbon Trading Capital. The Shanghai exchange carried out the transfer and did a risk evaluation of both parties ahead of the contract signing.

Wujing will receive an agreed share of any carbon-trading profits and will see the full amount of permits returned to it in May in order to comply with its emission targets.

Capital is a brokerage firm registered with all seven of the country's regional exchanges. The permits are nearly 4 per cent of Wujing Thermal's annual amount. "Shanghai regulators gave the approval to intermediaries with capital and credibility to provide financial services to industries with little trading experience," said Kou Weiwei, China director at Carbon Trading.

According to the rules, borrowers have to pay a 30 per cent margin as a risk deposit. Mr Kou said the deal is risk-free since Shanghai is supporting the banking of older local permits that the Chinese government will convert for use in the national market in 2017.

Liquidity in the Shanghai exchange has declined after local factories closed and dumped their permits on the market, causing a glut. No permits have traded since early September when the permit price fell close to a near-historical low of 13.4 yuan. "We think the decline mirrored fundamentals and it is good the government stepped back," said Mr Kou, but she said the market was still unable to send sound price signals because fluctuations could be triggered by a small number of companies.

REUTERS

    
 

JPMorgan plans to hire in Saudi Arabia as Kingdom weighs reforms

JPMorgan Chase & Co is looking to hire in Saudi Arabia as the world's biggest oil exporter weighs asset sales and opens its stock market to foreign investors, according to Bader Alamoudi, chief executive officer of the bank's local investment banking unit. 

PHOTO: AFP

JAN 28, 20167:23 PM

[DUBAI] JPMorgan Chase & Co is looking to hire in Saudi Arabia as the world's biggest oil exporter weighs asset sales and opens its stock market to foreign investors, according to Bader Alamoudi, chief executive officer of the bank's local investment banking unit.

"We will be looking to increase headcount by about 10 per cent this year across areas like investment banking, sales and trading and anti money laundering," Alamoudi said Wednesday in an interview in Riyadh. The US bank has about 65 people in the country across two offices, he said.

A drop in the price of oil - Saudi Arabia's principal source of revenue - is leading the ruling Al Saud family to take unprecedented measures to reduce its reliance on exports of crude. The government last month raised fuel prices and trimmed spending to narrow a deficit that may have been the widest since 1991 last year. It's also considering new forms of taxation and the sale of state assets, Deputy Crown Prince Mohammed bin Salman told The Economist this month. The International Monetary Fund has cut its forecast for economic growth this year to 1.2 per cent.

"Even with the low oil price, there is still a huge opportunity here," Alamoudi said. "Volatility always creates opportunities whether it is as a result of the government reform measures and privatizations, equity trading and currency products, or advising clients on financing."

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Saudi Arabia allowed foreign investors to trade stocks directly for the first time in June. In September, the country announced that it would open its retail and wholesale sectors to full foreign ownership, eliminating the requirement for a local partner.

JPMorgan was among banks that arranged a 3.9 billion riyal (US$1 billion) Islamic bond for National Shipping Co of Saudi Arabia in July and participated in a US$10 billion loan for oil producer Saudi Aramco in March. New York-based JPMorgan and HSBC Holdings Plc are among international lenders in the best position to win a role if the kingdom goes ahead with the sale of a stake in state-run Saudi Arabian Oil Co, people familiar with the matter told Bloomberg earlier this month.

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Morgan Stanley Southeast Asia banker Khanna said to be leaving

Morgan Stanley Southeast Asia investment banker Nehchal Khanna is leaving the firm after more than five years, according to people with knowledge of the matter. 

PHOTO: REUTERS

JAN 28, 20167:34 PM

[SINGAPORE] Morgan Stanley Southeast Asia investment banker Nehchal Khanna is leaving the firm after more than five years, according to people with knowledge of the matter.

Khanna, a managing director focused on dealmaking in Malaysia, resigned Thursday, one of the people said, asking not to be identified as the information is private. Morgan Stanley had hired Khanna from Deutsche Bank AG in 2010 to lead its Malaysia investment-banking coverage.

The US firm ranked eighth among advisers on Southeast Asia mergers and acquisitions last year, up from 13th in 2014, according to data compiled by Bloomberg. It was also a joint global coordinator on the two largest IPOs in Malaysia, Felda Global Ventures Holdings Bhd's US$3.3 billion offering in 2012 and Petronas Chemicals Group Bhd's US$4.8 billion share sale in 2010, the data show.

A Hong Kong-based spokeswoman for Morgan Stanley said she couldn't immediately comment.

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Euro-area economic confidence declines to lowest in five months

JAN 28, 20166:56 PM

[FRANKFURT] Euro-area economic confidence slumped more than analysts predicted in January, strengthening the European Central Bank's case for increasing stimulus.

An index of executive and consumer confidence fell to 105 from a revised 106.7 in December, the European Commission in Brussels said on Thursday. That's the lowest since August and compares to a median estimate for a drop to 106.4 in a Bloomberg survey of economists. The figure for December was previously reported at 106.8.

"We've had increased turbulence in financial markets, and that normally has a spillover effect on confidence," Ken Wattret, chief euro-zone market economist at BNP Paribas SA in London, said before the report. While the external growth backdrop has worsened, "the trend is still positive; the trend still suggests that economic conditions in the euro area are resilient," he said.

ECB President Mario Draghi has held out the prospect of yet-looser monetary policy as early as March to nurture growth and bring inflation back in line with the institution's goal of just under 2 per cent. The Governing Council extended quantitative easing by six months in December and cut the deposit rate to minus 0.3 per cent before holding policy steady this month.

Sentiment in the euro area deteriorated across most sectors amid uncertainty over global economic prospects. The Federal Reserve opened the door to a slower pace of interest-rate increases as China struggles to cope with financial-market turmoil and a slowdown in growth.

A gauge for confidence in euro-area industry slid to minus 3.2 in January from minus 2 in December, according to the report. A measure for services fell to 11.6 from 12.8. Sentiment among consumers and builders also deteriorated.

Euro-area inflation stood at just 0.2 per cent in December, and a Bloomberg survey of economists projects it ticked up slightly to 0.4 per cent in January. Eurostat will release the data on Friday.

Meanwhile, the European labor market is continuing a long slog toward normality. Joblessness fell to 10.5 per cent in November. That's down from a 2013 high of 12.1 per cent but still above an 8.7 per cent average in the decade following the introduction of the euro in 1999.

As unemployment recedes, the economy is forecast to expand steadily at a rate of 0.4 per cent a quarter through the middle of 2017, according to a separate Bloomberg survey. Growth is being driven by consumers, whose disposable income is bolstered by the falling oil prices that hold down inflation, while exports stand to suffer from weaker global trade.

"The drop in the oil price has clearly boosted household real disposable income," Neville Hill, an economist at Credit Suisse Group AG in London, said before the report. "Employment growth is strong and positive, and unemployment is falling, and at the same time financial conditions are clearly easing."

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German inflation inches up in January, state data suggest

German inflation inched up but remained low in January, preliminary state data indicated on Thursday, in news that could embolden proponents of further central bank stimulus. 

PHOTO: REUTERS

JAN 28, 20169:06 PM

[BERLIN] German inflation inched up but remained low in January, preliminary state data indicated on Thursday, in news that could embolden proponents of further central bank stimulus.

A plunge in oil prices has raised questions about the European Central Bank's ability to pull very low inflation back up towards its 2 per cent target for the whole euro zone.

In December, the central bank eased monetary policy further to fight low inflation but kept much of its powder dry, disappointing market hopes of more stimulus.

ECB President Mario Draghi has said the bank still has plenty of options left, suggesting it could act as early as March. A majority of economists in a Reuters poll said the ECB is likely to cut its deposit rate again in March.

The German data from several states including North Rhine-Westphalia and Bavaria, the two most populous, showed higher food costs lifted annual consumer prices slightly at the beginning of 2016.

The state readings ranged between 0.3 per cent and 0.7 per cent - still far below the ECB's inflation target. The regional figures feed into nationwide data due at 1300 GMT.

Capital Economics analyst Jennifer McKeown said the state numbers confirmed market expectations that the pan-German EU-harmonised consumer price inflation (HICP) would rise to 0.4 per cent from 0.2 per cent in December.

A Reuters consensus forecast of economists also predicted a pick-up to 0.4 per cent. For the euro zone, economists polled by Reuters expect the January inflation rate, due out on Friday, to also have increased to 0.4 per cent from 0.2 per cent in December. "Looking ahead, energy inflation should rise in the months ahead, perhaps adding 1 per centage point to the headline rate by the end of the year," McKeown said in reference to Germany.

Germany's robust labour market could lift wage growth and with it also core inflation, she noted, but added that she doubted price pressures would build too much, given signs that the economy might be slowing. "And with fundamental deflationary pressures persisting elsewhere in the euro zone and inflation expectations worrying low, the ECB still has every reason to provide more policy support," McKeown added.

REUTERS