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U.S. may overtake Russia & Saudi Arabia as world’s leading energy producer

The current year promises to be record-setting for the US. Analysts at the International Energy Agency (IEA) expect the country to overtake Russia and Saudi Arabia as the world’s largest oil producer in the next 12 months.

“Relentless growth should see the US hit historic highs above 10 million barrels a day (in production), overtaking Saudi Arabia and rivaling Russia during the course of 2018 — provided OPEC and non-OPEC restraints remain in place,” the Paris-based organization said in the latest monthly report.

The news comes as oil futures have reached new peaks since the dramatic slump seen in December 2014. Earlier this week, Brent crude futures hit $70.37 per barrel with the oil benchmark at $68.49 on Friday morning.

“What we are trying to understand is the responsiveness of the US shale producers. And because of the dynamism of the industry, the innovation and the vast number of players in that space… to some extent, we are in unchartered waters,” said Neil Atkinson, head of the Oil Industry and Markets division at the IEA, as quoted by CNBC.

According to the analyst, the recent rally in oil prices would trigger a “wave of new production” from the US in the upcoming months. Atkinson added that OPEC and its allies would have to “accommodate” that and decide upon the organization’s response.

The production cuts, introduced by OPEC and 10 non-member oil producers, have reportedly become the major price driver. The agreement, sealed in January last year, is scheduled to last through 2018.

The recovery in oil prices has allowed producers of US shale oil, OPEC’s main rivals, to restart operations. US crude production stands at 9.9 million barrels a day, the country’s highest level in almost 50 years, according to the IEA.

The figure puts the US on the same rank as Saudi Arabia, currently the world’s second-largest producer after Russia.

“The stage was set for a strong expansion last year, when non-OPEC supply, led by the US, returned to growth of 0.7 million barrels a day and pushed up world production despite OPEC and non-OPEC cuts,” the agency said.

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Japan Dumping Treasuries Puts Spotlight on Euro-Area Debt

Sovereign issuers that are selling bonds in euros at a record pace could well be finding some of the world’s most prolific buyers ready to pounce.

Investors in Japan and China are shunning U.S. Treasuries, and the conditions are ripe for that cash to find a home in Europe. Early signs of a shift may already be visible: Belgium sold 16 percent of a new deal to Asia this week, compared to just 1 percent a year ago.

  

A widening deficit may double U.S. government bond supply this year, while tax cuts threaten to curb corporate demand for Treasuries. At the same time, Europe’s economy is booming, the euro is the best-performing currency in the Group of 10 in the past 12 months, and the region’s central bank is still buying bonds.

Throw in dollar-yen hedging costs, calculated using currency forwards, near the highest level since the financial crisis, and the stars are aligning for Asian money to flow to Europe. Japanese investors dumped U.S. government obligations for a second straight month in November while snapping up more German and French notes, data published last Friday show.

“Rising currency-hedging costs could drive more Asians out of U.S. Treasuries and into European bonds,” said Ben Emons, chief economist at Intellectus Partners LLC. “It’s certainly true the market is worried about more supply in the U.S.”

China and Japan’s combined share of Treasuries fell to approximately 36 percent of all foreign-held U.S. government debt in November, the lowest level in about 18 years. China is the biggest foreign holder of U.S. bonds.

Outperformance

Euro-area government bonds with lower yields continue to outperform U.S. Treasuries. America’s benchmark 10-year yield rose to the highest level in more than three years on Friday, widening the gap to European bonds even further.

A steeper German yield curve helps compensate for lower absolute yields in the euro area for Asian investors after taking into account their funding costs, according to Peter Tchir, the head of macro strategy at Academy Securities Inc.

To be sure, Asian demand for U.S. securities — the most liquid market in the world — is largely determined by currency and trade policies as well as technical drivers like hedging costs.

“Lightening up on U.S. Treasuries given the deficit-busting tax cut and the other potentially negative news? Sure,” said Aaron Kohli, an interest-rate strategist at BMO Capital Markets in New York. “But these things have rarely left a mark in the U.S. Treasury market in the long-run.”

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Focus on electric cars lights up lithium

Lithium material on the periodic table. Part of a series.

In the aftermath of recent car emission scandals, governments in countries such as France are strongly encouraging carmakers to go electric. Paris wants to banish petrol and diesel cars by 2030.Elsewhere, such as the UK, diesel car demand has slowed. In turn this shift has refocused attention on low or zero emission electric vehicles. Those EVs require batteries, and prices of their key inputs — lithium, cobalt, lead and nickel — have soared.

The first two of these have attracted the most interest given their current importance to batteries. Together they make up about half of a battery’s cathode. No surprise that prices for each have trebled in less than three years. Neither it is no surprise that share prices of both lithium and cobalt producers have also rocketed. But while nickel could replace some of the cobalt required over time, as cathode technology evolves, lithium should remain integral to all batteries for some time.And lithium demand looks healthy, compounding at a 14 per cent rate between 2017 and 2022. That’s because sales of rechargeable batteries should treble by 2025 to $59bn, according to Credit Suisse, as buyers take up electrified vehicles, both hybrids and fully electric.

You know a bull market has arrived, though, when specialist indices and exchange traded funds appear for lithium. Have a look at what’s inside, though. The Solactive Global Lithium index not only has lithium makers such as US listed Albemarle and FMC Corp, it also contains carmakers Tesla and BYD. More than 40 per cent of index members at best only consume lithium. This index has more than doubled since early 2016. Junior miners such as Australia’s Galaxy Resources have been six baggers.Even as demand builds, supply too is surging. Although Argentina and Chile used to make a large proportion of lithium carbonate, that balance will shift.Australia’s contribution is increasing so rapidly that an excess supply of lithium carbonate is likely for the next couple years at least. “It’s our top short idea,” says Vivienne Lloyd at Macquarie. Should lithium prices finally tumble, expect the lithium miners to head back to ground.

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Blockchain Eyed for Mortgage Bundling That Caused 2008 Crisis

A group of big financial institutions wants to use the blockchain to help resurrect the packaging of home mortgages into securities, a business that almost destroyed the global banking system in 2008.

Credit Suisse Group AG, U.S. Bancorp, Wells Fargo & Co. and Western Asset Management Co. said Thursday that they successfully tested the distributed ledger technology as a way to make it easier to track securitized home loans.

Before the 2008 crisis, bundling home loans together and then selling those baskets to investors was a huge profit center for banks. But this was the primary cause of the meltdown after many borrowers couldn’t repay their debt and the value of the securitized loans crashed, causing trillions of dollars in losses.

The business then shrank dramatically. There were about $823 billion of securitized private-label residential mortgage bonds outstanding in early 2017, according to the Securities Industry and Financial Markets Association, down from a peak of $2.7 trillion in 2007.

“Structuring securities is complex, involving many different parties, manual processes, duplicated documents and data in different formats,” David Rutter, chief executive officer of blockchain startup R3, which is organizing the consortium, said in a statement Thursday. While the group is starting with residential mortgages that aren’t backed by the U.S. government, it plans to expand to other types of asset-backed securities. The next step is delivering a commercially viable product, R3 said.

Distributed ledgers consist of a network of users or companies that share access to a database to track things like Bitcoin payments or data reconciliation that’s vital to securitized mortgages.

“Distributed ledger technology will increasingly improve security around data, not just for capital markets but across numerous other industries,” Penny Morgan, global securities operations manager at Western Asset Management, said in the statement.

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China’s strong economic growth blows away expectations

China, the world’s second largest economy, has eclipsed its official growth target of about 6.5 percent, expanding 6.9 percent last year. It’s the first time since 2010 that the pace of growth has picked up.

Chinese Premier Li Keqiang also said last week he expected growth to be at “around 6.9 percent.”

Official data showed economic growth in the October to December period was 6.8 percent, unchanged from the third quarter and above analyst expectations for 6.7 percent growth.

It was helped by a rebound in the industrial sector, a resilient property market and strong export growth.

“The risks that we worried about in 2017, for example overcapacity cuts having a negative impact on GDP, did not happen because new sectors are actually coming out to help production to grow,” Iris Pang, Greater China Economist, ING, told Reuters.

“China’s growth is very healthy,” she added.

According to the head of the National Statistics Bureau, Ning Jizhe, “The national economy has maintained the momentum of stable and sound development and exceeded the expectation with the economic vitality, impetus and potential released.”

He added, however, that the government should be “aware that there are still difficulties and challenges confronting the economy and the improvement of quality and efficiency remains a daunting task.”

Analysts say despite the better-than-expected economic data from China, which is a key driver of the global economy, there are still some worrying signs. They point to higher borrowing costs for firms and the government’s attempts to rein in credit.

Some economists believe the GDP numbers could be much weaker than the official figures suggest.

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