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Iran’s Oil Market Return Not Yet Fulfilling Grand Promises

Bloomberg, Mar 3, 2016


* Nation had pledged to boost exports by 50 percent within weeks
* Banking and logistical hurdles said to constrain sales

Iran’s return to global oil markets after sanctions were lifted isn’t living up to the country’s grand ambitions, or at least not yet.

Six weeks after the historic nuclear deal that allowed Iran to resume oil sales around the world, the OPEC member is shipping barely a third of the extra 500,000 barrels a day it had vowed to unleash within weeks of sanctions being lifted. The country faces hurdles at every step, whether reviving output from aging oil wells or overcoming lingering banking constraints that have forced it to sell crude in barter arrangements, according to BNP Paribas SA.

“Iran is facing short-term obstacles in regaining market share lost to other OPEC members, and in restoring production to pre-sanctions levels,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas in London. “Longer term, the legal and regulatory framework is an obstacle.”

Iran was the second-largest producer in the Organization of Petroleum Exporting Countries when Europe banned imports of the nation’s crude and the U.S. tightened financial sanctions in 2012. Its crude production averaged 2.8 million barrels a day last year compared with 3.6 million in 2011. Oil Minister Bijan Namdar Zanganeh has stressed the importance of regaining lost markets, rejecting an initiative between some OPEC countries and non-members to freeze production to boost prices from a 12-year low.

When the trade restrictions were still in place, Iran had pledged to increase its 1 million-barrel-a-day crude exports by about 50 percent once sanctions were lifted. They actually only shipped an extra 130,000 barrels a day in February, bringing the total to 1.42 million a day, according to shipping data compiled by Bloomberg.

Expected Struggle

Iran’s struggle is in line with the expectations of oil watchers such as Goldman Sachs Group Inc. and Barclays Plc, who had warned the export recovery would be limited. The Middle Eastern nation will boost production by 285,000 barrels a day for 2016 as a whole, Goldman estimates.

Iran loaded its first cargo of oil to Europe since 2012 last month onto a tanker chartered to French oil company Total SA. The Atlantas, a very large crude carrier, loaded at the Persian nation’s port of Kharg Island last month and is sailing around the Horn of Africa on its way to Europe, according to ship-tracking data compiled by Bloomberg.

That’s a longer journey than Iranian crude used to take to European ports because of another logistical hurdle — Egypt and Gulf Arab crude producers have yet to let Iran resume oil shipments through a pipeline connecting the Red Sea with the Mediterranean.

Suez Pipeline

The SuMed pipeline provides a shorter transit than the African route for oil cargoes from the Gulf region to the Europe that are carried in ships too large to sail through the Suez Canal. The tankers can transfer some of their oil into the pipeline, thus lightening their loads for passage through the canal, or fully discharge cargoes that can be collected by smaller vessels at the far end.

Arab Petroleum Pipelines Co., which operates the link, is still reviewing terms of the agreement that removed sanctions on Iran in January, according to a company official. The operator is seeking to ensure Iran complies with sanctions regulations before resuming oil shipments halted since August 2012, said the official, who asked not to be identified citing company policy.

Another oil tanker, Distya Akula, has been anchored at the southern approach to the Suez Canal since Feb. 24 after loading at Kharg Island, ship-tracking data show.

Transactions Refused

Some banks have been refusing to process payments for European refiners seeking to buy cargoes of Iranian crude. Hellenic Petroleum SA has struggled to secure deliveries because banks wouldn’t process payments, two people familiar with the matter said last week.

With Republican candidates threatening to undo President Barack Obama’s lifting of Iran sanctions, most European banks will likely keep avoiding financing deals with the Islamic Republic, according to Caitlin Webber, a government analyst at Bloomberg Intelligence.

National Iranian Oil Co. has sought to circumvent this problem by agreeing to swap crude for gasoline with European trading houses Glencore Plc, Trafigura Beheer BV and Vitol Group SA, according to a report by Iranian news service Mehr. The three companies declined to comment.

Iran may be doing better than estimated, with exports averaging 1.5 million barrels a day during February, according to Citigroup Inc.

“Recent data indicates that exports are at the upper end of people’s expectations,” said Seth Kleinman, European head of energy research at Citigroup in London. Exports touched almost 2 million barrels a day in the second half of February, he estimated.

Prior to the end of sanctions, Iran’s petroleum engineers laid the groundwork for a swift increase in supply of about 600,000 barrels a day by the middle of the year, the International Energy Agency said Feb. 22.

“It’s not like when Saddam Hussein left Kuwait and blew the place up,” Kleinman said. “These facilities were underinvested, they were overworked, but they were there.”


It’s Quantitative Easing, Europe, But Not as We’ve Known It

Bloomberg, Oct 14, 2015


* Euro region’s central banks trial Fed-like reverse auctions
* Lithuania does first purchases with France to follow on Friday

Bond investors, get ready for quantitativeeasing to mutate in Europe.

The European Central Bank this week started a limited pilot program to test out buyingbonds through auctions rather than approaching dealers one to one. Strategists say the system is designed to improve QE’s transparency and may eventually be rolled out across the euro region.

Two of the three central banks testing the new process on behalf of the 19 member states said they’ll release details of the securities to be acquired before they approach owners. Banque de France already published its firstshopping list on Tuesday ahead of an auction later this week.

“Auctions encourage competition, offer more transparency and concentrate market-wide liquidity,” said Haoxiang Zhu, assistant professor of finance at the Massachusetts Institute of Technology, who has studied this method of buying debt at the Federal Reserve. They are “usually more efficient than purchases done bilaterally in a decentralized fashion.”

QE Critics

The QE program has become the main driver of the euro zone’s bond market, with average sovereign yields tumbling to arecord within days of it starting in March. The program has been dogged by suggestions it erodes market liquidity and stokes volatility, while investors have said it makes it difficult to anticipate demand.

Central banks in the euro area have so far bought more than 340 billion euros ($389 billion) ofdebt under QE, which aims to boost inflation and growth by freeing up cash to circulate in the economy. Speculation is rife that officials will soon announce an extension of the plan beyond September 2016.

The pilot program uses reverse auctions, where potential sellers compete to undercut one another on price. The Fed used a similar system for its QE program. The ECB announced the trial on Oct. 5, saying it would be carried out “without prejudging in any way whether the Eurosystem would consider applying auctions more systematically.”

The French central bank published a list of ISINs, or International Securities Identification Numbers, ahead of its Oct. 16 auction, while the Dutch have pledged to do the same before their first purchases next week. The two banks said the Bloomberg auction system will be used to carry out the process.

‘Smoother’ Process

“Higher transparency of the purchases is expected to encourage deepening of the securities market, as well as contribute to its smoother functioning,” Lithuania’s central bank, the third participant in the trials, said in a statement. It held the first reverse auction on Tuesday, said Mindaugas Vaiciulis, head of the market operations department.

The method will become “the norm” across the euro region,Antoine Bouvet, a London-based rates strategist at Mizuho International Plc, said in a note last week.

Others aren’t so sure.

Unlike the Fed, the ECB is hampered by not having a single debt market, according to Commerzbank AG, the biggest primary dealer in German government bonds. There are also limits on what euro-zone central banks can purchase, from not owning too much of a single issue to being prevented from buying securities yielding less than the ECB’s deposit rate.

“Reverse auctions can increase transparency, however they do reduce flexibility on behalf of the euro system, and this will probably make it challenging to implement this for the entire QE program,” saidChristoph Rieger, Commerzbank’s head of fixed-income research in Frankfurt. “There’s already a challenge to figure out where to buy, given the various restraints they have.”


Wealth Funds From Oslo to Riyadh Raid Coffers to Offset Oil Drop

Bloomberg, Oct 8, 2015

Investors watch share price movements in Riyadh, Saudi Arabia.

* SWF growth seen slowing to 4% after 12% five-year average
* Qatar, Abu Dhabi sell assets as Saudi reserves shrink

From Oslo to Doha, Riyadh to Moscow, governments that rode crude’s historic rise to unprecedented wealth are now being forced to start repatriating their rainy-day funds just to make ends meet.

The halving ofoil to less than $50 a barrel has the potential to alter one of the most powerful economic and political forces of the past half century: the rise of the petrostate. These countries led a surge in state investments in the U.S. and Europe that now totals about $7.3 trillion globally, according to the Sovereign Wealth Fund Institute.

During the last boom, the oil countries flaunted their wealth abroad by buying stakes in iconic companies such asBarclays Plc as well as trophy assets including Manhattan hotels, European soccer clubs and London luxury homes, often in the face of opposition from the local public.

Such swagger is fading.

The biggest fund, Norway’s, this weeksaid it expects to tap its $820 billion stockpile for the first time next year to balance its budget, following similar moves across the Persian Gulf and in Russia. If sustained, the withdrawals may be felt by investors the world over, according to Michael Maduell, president of the Las Vegas-based Sovereign Wealth Fund Institute.

“If the wealth funds of Norway and the Gulf countries begin to slowly pull out, it will have an impact on financial markets,” Maduell said by e-mail.

Looking ahead, TheCityUK, a lobby group for the financial services industry in London, expects sovereign-fund assets will increase by just 4 percent in 2015 to $7.4 trillion, well below the 12 percent average annual growth seen over the previous five years.

Quantatative Easing

The amount of petrodollar investments in the five years through 2014 was on a similar scale to theFederal Reserve’s bond-buying program, known as quantitative easing, according to analysts at Barclays. As the flows have reversed, the world has lost about $400 billion in annual demand for financial assets, they said.

Nowhere is the decline more evident than inSaudi Arabia. The kingdom’s foreign holdings fell for the seventh month in a row in August to $654.5 billion, the lowest since February 2013, according to data from theSaudi Arabian Monetary Agency. The oil slump has spurred the biggest Arab economy to search for savings, contemplate project delays and sell bonds for the first time since 2007.

“Any continued weakness in the international oil price could prompt some oil-exporting countries to divert money from sovereign wealth funds to bolster their fiscal positions,”Anjalika Bardalai, deputy chief economist at TheCityUk, said by e-mail.

Other Gulf monarchies that have spent lavishly on public works to ensure the loyalty of their populations –United Arab Emirates, Kuwait and Qatar among them — have all announced initiatives to preserve cash as the price drop in crude saps growth.

Glencore, Volkswagen

Abu Dhabi, home to the $773 billion Abu Dhabi Investment Authority, isreassessing its largest state companies with an eye toward selling assets, four people with knowledge of the matter said. The government and its entities have been running down reserves and withdrawing deposits from banks to fund their spending.

Qatar Investment Authority, which owns stakes in companies includingGlencore Plc andVolkswagen AG, this week sold a stake in French construction companyVinci SA valued at about $400 million, just two months after it sold two London office buildings worth more than 550 million pounds ($842 million).

In Europe, Norway plans to spend 208 billion kroner ($25.4 billion) of its oil wealth next year, topping the 204 billion kroner it predicts it will receive from offshore oil and gas fields, according to the 2016 budget. That implies a net withdrawal from the fund of 3.7 billion kroner, after an inflow of 38 billion kroner this year.

Russia, which is being squeezed both by lower commodity prices and sanctions imposed by the U.S. and the European Union over the conflict in Ukraine, expects to spend as much as 4.7 trillion rubles ($75 billion) of the Reserve Fund, one of its two oil funds, this year and next to weather its first recession in six years. The two funds, which are invested mainly
in U.S. and European government bonds, held the equivalent of $144 billion on Oct. 1, according to the Finance Ministry in Moscow.

Neighboring Kazakhstan, the second-largest oil producer in the former Soviet Union, plans to use about $4 billion of its $69 billion fund to support its economy this year.

Yield Hunt

To be sure, sovereign funds aren’t just retrenching. Norway’s, for example, in search of higher returns, opened an office in Tokyo this week as the government in Oslo considers increasing the fund’s cap on investments in stocks from the current 60 percent.

And Qatar’s fund has expressed interest inbuying a minority stake in Glencore’s agriculture business, according to three people familiar with the matter. The Qatar Investment Authority said last week it opened an office in New York and plans to invest $35 billion in the U.S. over the next five years to diversify its holdings.

“The view now is that oil prices are going to remain low for longer, so oil-producing states are having to look at both how to maximize revenue and how to reduce spending,”Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC, said by phone. “This trend will continue into 2016.”


Norway’s PM Warns Currency Instability Is a Threat to Economy

Bloomberg, Oct 3, 2015


As the currency of one of the world’s richest nations becomes increasingly difficult to trade, the government is starting to worry about the economic fallout.

Prime MinisterErna Solberg says the rapid weakening ofNorway’s krone will only provide short-term relief to western Europe’s biggest oil producer. In the longer term, the loss of liquidity and increased volatility pose a threat to businesses struggling to plan investments.

“It helps some of those industries that have been suffering a bit on competitiveness,” Solberg told Bloomberg on Saturday while attending a Nordic Council meeting outside Copenhagen. “But it’s not good for a country in the long run to have an unstable currency because you also need to be able to long-term plan when you are doing investments.”

Norway's krone has been sold off as oil as plunged
Norway’s krone has been sold off as oil as plunged

Norway’s krone has plunged more than 20 percent against the dollar over the past year. It’s the worst of the 10 major currencies tracked in theBloomberg Correlation Weighted Index in the period. Over the past three months, it’s displayed thebiggest increase in volatility against the euro of the major currencies monitored by Bloomberg.

But Solberg’s warning that the trend may pose a threat to the economy is at odds with the message coming from the central bank. GovernorOeystein Olsen says he welcomes the decline in his nation’s currency because it helps exporters. He delivered a surpriserate cut on Sept. 24, driving the krone down more then 3 percent against the euro at one point during the day.

Olsen merely notes that the krone has weakened together with theprice of oil. He wouldn’t “characterize that as volatility,” he said last month.

But a number of economists have echoed Solberg’s concerns. Strategists at some of Scandinavia’s biggest banks say the currency is being treated with extra caution. Danske Bank points out that markets have put a “Norges Bank uncertainty” premium on the krone.Commerzbank warns that some investors and traders are staying away from the currency because of its volatility. That’s depleting liquidity and making the krone even more volatile.

Solberg underscored her government’s commitment to weaning Norway off its oil addiction. Almost a quarter of output and one in nine jobs are dependent on the petroleum industry in Norway.

“We must make sure our economy has more feet to stand on,” she said.


John Rubino: China Cannot Let This Happen

By John Rubino, Sep 23, 2015

After borrowing — and largely wasting — $15 trillion during the Great Recession, China now looks like a typical decadent developed-world country, complete with slow growth, anemic consumer spending and unstable financial markets.

But it’s not France, Canada or the US, where recessions happen and voters peacefully replace one major party with the other. China, within living memory, has seen civil unrest beget open rebellion beget multi-decade civil war.

Just as Germany is never going back to hyperinflation, China will not tolerate mass protests. Which means it somehow has to find jobs for the tens of millions of citizens who aspire to middle class life. This need for growth at any price explains the borrowing/infrastructure binge of the past five years. And soon it will explain a massive devaluation/QE program. From Monday’s Wall Street Journal:

China’s Workers Stumble as Factories Stall

XIGUOZHUANG, China—For decades, an army of migrant workers drove China’s boom times, flocking to its cities to sew T-shirts, assemble iPhones, or build apartment blocks and Olympic stadiums.The arrangement helped millions of poor, rural Chinese join a new consumer class, though many also paid a heavy price.

Now, many migrant workers struggle to find their footing in a downshifting economy. As factories run out of money and construction projects turn idle across China, there has been a rise in the last thing Beijing wants to see: unrest.

In Xiguozhuang, a village among cornfields some 155 miles south of Beijing, it had been rare to see working-age men for much of the year. This year, however, many of the men are at home, sidelined by a fading property boom.

“Times are tough now,” said Wang Hongxing, a 39-year-old father of three who has worked at building sites across China’s northeast since his teens, but who has spent the past two months tending his farmland plot. “There are too many workers and wages are dropping.”

But for other migrants, especially those of a younger generation who took jobs in factories along China’s coast, a return to farming isn’t an option. Nor do they necessarily want to join the service sector China sees as a cornerstone in its shift to a new economic model.

Wang Chao dropped out of school when he was 15 and left his home in Anhui province. After a series of jobs up and down China’s east coast, he felt he had struck gold with a job in a textile factory near his hometown.

The factory closed in July. Mr. Wang, now 19, and other workers gathered recently outside the factory premises to demand back wages. He says he is owed two months’ pay, or about 2,000 yuan, or $320. The owner of the factory, which produces cheap trousers, told workers he is in deep debt and can’t afford to pay them. He couldn’t be reached to comment.

Mr. Wang hopes he can find another factory job. In Shanghai, he worked in a restaurant but doesn’t want to do that again. “Factory work is so much more comfortable in comparison, and better paid,” he said.

As a result of a rural-to-urban flow that many scholars say is likely the largest in history, roughly 55% of China’s 1.37 billion people now live in cities, compared with just under 18% in 1978.

The migrant workforce now numbers some 274 million but the pace of its expansion has slowed, and many economists believe China now faces a shortage of unskilled labor in urban areas. A mismatch of workers’ skills and aspirations with actual labor demand has exacerbated the problem.

…In August, after the factory a which made Power Wheels cars and other toys for Mattel Inc., shut its doors, hundreds of workers protested to demand unpaid wages.

Such unrest has become more common. China Labour Bulletin, a Hong Kong-based watchdog, has tracked more than 1,600 labor protests and strikes in China since January, already exceeding last year’s overall tally of 1,379.

The malaise has even affected workers at major state-owned enterprises. In May, thousands of workers staged protests over proposed layoffs at China National Erzhong Group Co., a debt-riddled machinery maker in Sichuan. Workers shared images on social media of banners criticizing company officials. One read: “360 yuan! How can we live on that!”

In response to such disputes, local authorities have at times adopted harsh tactics, including sending police officers to break up strikes and detain protesters. But in some cases authorities have also sought to appease workers.

The recent unrest is still far from the massive protests that swept over China in the late 1990s and early 2000s as state-owned enterprises laid off tens of millions of workers and local governments expropriated farmland around emerging cities for development.

But the rise in frequency of strikes and protests has caused concern in Beijing, which in March urged bureaucrats across the country to prioritize “harmonious labor relations.”

Take a surplus of young men (the result of China’s one-child policy which put a premium on male children), combine it with a shortage of good jobs, and the obvious result is instability.

The equally-obvious solution? Easier money designed to get people borrowing and spending. So now it’s just a question of which central bank is first to address its country’s crisis (slow growth and a massive influx of refugees for the eurozone, slow growth and a demographic implosion for Japan, slow growth and global chaos for the US, and now slow growth leading to civil unrest for China) with a massive devaluation. China, given its history, might be the odds-on favorite.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit: