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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.”


Shell CEO `Pulling Out All the Stops’ to Safeguard Dividends

Bloomberg, Oct 6, 2015

Ben van Beurden, chief executive officer of Royal Dutch Shell Plc, pauses during a session at the St. Petersburg International Economic Forum (SPIEF) in Saint Petersburg, Russia, on Thursday, June 18, 2015. SPIEF is an annual international conference dedicated to economic and business issues which takes place at the Lenexpo exhibition center June 18-20. Photographer: Andrey Rudakov/Bloomberg *** Local Caption *** Ben van Beurden Ben van Beurden, chief executive officer of Royal Dutch Shell Plc.

* Company also protecting planned share buybacks and investments
* Oil producer hasn’t cut dividend payouts for seven decades

Royal Dutch Shell Plc is “pulling out all the stops” to safeguard its dividend in a world where oil prices remain “lower for longer,” Chief Executive OfficerBen Van Beurden said.

Europe’s biggest oil company is also protecting a plan to buy back shares and keeping its investment program “steady for the future,” Van Beurden said in e-mailed comments before a speech in London on Tuesday.

Oil’s collapse in the past year has forced Shell and its peers to reduce costs, defer projects and hunker down for a prolonged period of low prices. Even with crude trading for about $50 a barrel, Van Beurden andBP Plc bossBob Dudley have made dividends their top priority. Shell has weathered market ups and downs for seven decades — including oil at less than $10 in the 1980s and 1990s — without cutting shareholder payouts.

The company is “geared to generate cash flow from operations and free cash flow in 2017 and beyond,” Van Beurden said. “Shell is planning for a longer period of low prices.”

Shell’s debt-to-equity ratio gives it the flexibility to maintain dividends, he said. The company expects to cut operating costs by about $4 billion, or 10 percent, this year and will reduce capital expenditure by 20 percent. The weakening oil market has forced Shell to shelve projects including an oil-sands mine in Canada and a liquefied natural gas terminal in Australia.

The oil slump drove Shell’s annual dividend yield to 8.1 percent on Sept. 28, the highest in at least 20 years. The measure — the annual return divided by the share price — was at 7.2 percent on Monday compared with 4.1 percent for the benchmarkFTSE 100 Index.

Some oil majors have mitigated the impact of crude’s decline by bolstering the share of natural gas in their output. The Hague-based Shell and Paris-based Total SA now produce more gas than oil and have promoted the fuel as a cleaner alternative to coal, which dominates electricity output worldwide.

“Gas is a fossil fuel, yes, but a crucial one for the building of a low-carbon future,” Van Beurden said. “When burnt for power, gas produces around half the CO2 and one-tenth of air pollutants that coal does.”

Carbon Pricing

The CEO reiterated his call for governments to put a price on carbon to “level the playing field for renewables” and gas.

Shell and Total were among six European oil companies thatcame together in May to call for carbon pricing as a way to spur cleaner energy production. In a letter to the United Nations’ top official in charge of climate talks, they said climate change was a “critical challenge for our world” and urged global leaders to set out long-term, ambitious policies.

“Governments should take the opportunity to put a price on carbon,” Van Beurden will say on Tuesday. “The issue is essentially about finding economic ways to invest in an energy transition.”

Almost 200 nations are set to hammer out a binding global agreement on carbon emissions in December during talks in Paris.


Oil Speculators Most Bullish on U.S. Crude Price in Two Months

Bloomberg, Sep 21, 2015

best_chartOPEC Speculates $80 Oil by 2020.

* U.S. crude output seen falling the most since 1989 next year
* Almost 15,000 short oil bets closed out before Fed decision

Hedge funds slashed their bets on falling oil prices, leaving them the most bullish on U.S. crude futures in two months.

Money managers’net-long position in West Texas Intermediate rose by 14,821 contracts to 147,678 futures and options in the week ended Sept. 15, according to data from the Commodity Futures Trading Commission. That’s the highest level since July 7. In contrast, traders curbed their bullish positions in European benchmarkBrent by the most in a month.

The Organization of Petroleum Exporting Countries assumes crude prices will rise to $80 by 2020 as output falls elsewhere. U.S. production could sink by the most in 27 years in 2016 as the price rout extends a slump in drilling. Speculators closed out short positions two days before the Federal Reserve decided not to raise key U.S. interest rates.

“The market’s not as oversupplied as we think it is,”David Pursell, a managing director at investment bank Tudor Pickering Holt & Co. in Houston, said in a phone interview. “The news out of OPEC is more bullish, U.S. production is falling and demand is great right now.”

The U.S. benchmarkoil contract fell 2.9 percent in the report week to $44.59 a barrel on the New York Mercantile Exchange. Prices were up 3.4 percent at $46.19 as of 12:53 p.m.

Production Drop

OPEC assumes crude prices will rise by about $5 a year through 2020. Production from nations outside the group will be 58.2 million barrels a day in 2017, 1 million lower than previously forecast, according to an internal report. The impact of low prices is “most apparent on tight oil, which is more price reactive than other liquids sources,” according to the report.

U.S. output could sink by 400,000 barrels a day next year after a prolonged period of low prices forced producers to idle more than half the rigs seeking oil, the International Energy Agency said in a monthly report. That would be the largest one-year decline since 1989, according to U.S. government data.

“There is quite a discernible shift in sentiment because production declines are quite high,”Amrita Sen, chief oil market analyst for Energy Aspects Ltd. in London, said by phone. “There’s a realization that U.S. production is rolling over.”

Money managers reducedshort positions, or bets that prices will fall, by 14,569 contracts, CFTC data showed.Long positions, or bets on rising prices, increased by 252.

Other Markets

In London, money managers reduced their net-long position in Brent crude by 6,612 contracts to 161,846 in the period to Sept. 15, data from the ICE Futures Europe exchange showed on Monday.

In other markets, netbullish bets on Nymex gasoline rose 3.5 percent to 16,562, CFTC data show.Futures fell 4.9 percent to $1.3329 a gallon. Netbearish wagers on U.S. ultra low sulfur diesel expanded by 12 percent to 28,057 contracts. Dieselfutures dropped 5.9 percent to $1.50 a gallon.

The Fed decided not to increase rates for the first time in almost a decade as Fed Chair Janet Yellen said slower growth in China, the second biggest oil-consuming country after the U.S., contributed to volatility across markets and that overall financial conditions have tightened.

“By Tuesday, money managers were closing out their short positions because of the expectation that the Fed would leave rates unchanged, which they worried would mean the dollar stays weaker and commodity prices rise,”Andy Lipow, president of Lipow Oil Associates LLC, said by phone from Houston.


China Is Hoarding the World’s Oil

Bloomberg, Sep 18, 2015

* Goldman Sachs says Chinese hoarding may avert $20 oil scenario
* Price dips seen as green light for crude stockpiling in China

Even after China’s slowing economy dragged crude to a six-year low, oil’s second-biggest consumer remains the main safeguard against a further price meltdown.

While China’s surprise currency devaluation helped trigger Brent crude’s slump to about $42 a barrel last month, the nation’s stockpiling of oil can staunch further losses.

In the first seven months of the year, China purchased about half a million barrels of crude inexcess of its daily needs, the most for the period since 2012, according to data compiled by Bloomberg. As the country gathers bargain barrels for its strategic petroleum reserve, the demand is cushioning an oversupplied market from a further crash, according to Columbia University’s Center on Global Energy Policy.

“It throws a lifeline to the market” that safeguards against the risk of crude touching$20 a barrel,Jeff Currie, head of commodities research at Goldman Sachs Group Inc. in New York, said by phone. “That lifeline lasts through late 2016.”

Other countries have emergency oil-supply buffers, and while the U.S.Strategic Petroleum Reserve has been stable at about 700 million barrels for years, China is expanding its stockpiles rapidly.

The Asian nation has accumulated about 200 million barrels of crude in its reserve so far and aims to have 500 million by the end of the decade, according to the International Energy Agency. It’s currently filling a 19-million-barrel facility at Huangdao and will add oil at six sites with a combined capacity of about 132 million barrels over the next 18 months, the Paris-based adviser on energy policy estimates.

“The fact that China is stockpiling crude for public strategic storage certainly offsets the weaker sentiment on China’s oil-product demand,” saidHarry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London.

China’s demand growth is set to slow to an annual rate of 2.3 percent by the fourth quarter compared with 5.6 percent in the second quarter, a reflection of “weak car sales data, declines in industrial activity, plummeting property prices and fragile electricity output,” the IEA said in a report on Sept. 11.

Price Floor

Brent for November settlement traded at $49.66 a barrel at 10:42 a.m. on the London-based ICE Futures Europe exchange. The international benchmark has fallen about 50 percent in the past year.

When amassing inventories, China’s import demand can swing by as much as 1 million barrels a day, or about 15 percent above monthly average levels, saidColin Fenton, a fellow at the Center on Global Energy Policy at Columbia University in New York. Because the country buys when prices dip, it helps shield crude against extreme losses and effectively makes $30 a floor for Brent, he said by e-mail.

“It’s going to be really, really hard to stay there or push lower because that price has already been demonstrated by the Chinese to be one where you should expect hundreds of thousands of barrels per day of import demand to appear,” said Fenton, who was global head of commodities research at JP Morgan Chase & Co. from 2010 to 2015. “China is the only country that can do it.”

Long-Term Slowdown

These discretionary purchases, while tempering oil’s recent slump, still need to be considered against the long-term slowdown in China’s energy consumption and the size of the current oversupply of crude, according to Barclays Plc.

“The surplus in the market at the moment is close to 2 million barrels a day,” saidMiswin Mahesh, an analyst at Barclays in London. “China’s support for the SPR would only be able to take a fraction out of that.”

While Chinese stockpiling will “taper off” in 2016, it’s helping the oil market to digest excess production gradually, according to Goldman Sachs’s Currie.

By mopping up some of the surplus, China encourages a gentler scenario in which the “financial stress” of $40 oil gradually causes highly indebted shale producers to curb production, Currie said. “You reduce the likelihood of a scenario where the market only balances when prices collapse below production costs, at about $20 a barrel,”  he said.


Draghi Unveils Revamped QE Program as ECB Downgrades Outlook

Bloomberg, Sep 3, 2015

* ECB president says risks to growth remain on the downside
* Says inflation rate may turn negative in the coming months

Mario Draghi unveiled a revamp of quantitative easing and signaled officials might expand stimulus if the rout in financial markets continues to weigh on growth and inflation.

TheEuropean Central Bank president said in Frankfurt on Thursday that the Governing Council raised the share of bonds the ECB can buy to 33 percent of each issue from 25 percent, and that policy makers are ready to make more adjustments to ensure the full implementation of the 1.1 trillion-euro ($1.2 trillion) program. A weaker global outlook prompted an across-the-board reduction of the institution’s growth and consumer-price forecasts through 2017. Theeuro slid to a two-week low.

The reset of the ECB’s stimulus program after a six-month review gives officials more flexibility as they prepare to continue bond purchases until at least September 2016. Weakercommodity prices, slowing trade and volatility in global equities have fueled speculation that more stimulus is on the way.

“The issue limit by itself isn’t particularly significant, but the signal it sends is,” saidJames Nixon, head of forecasting for EMEA at Oxford Economics Ltd. in London. “It’s a clear signal to the market that they’re ready to do more. If the economy weakens further and inflation doesn’t come back as expected they’ll definitely extend the QE.”

Weaker Recovery

Stimulus will continue until the end of September 2016 “or beyond, if necessary,” Draghi told reporters, in a tweak to language that hints more strongly than before at a readiness to prolong purchases.

“The information available indicates a continued, though somewhat weaker, economic recovery and a slower increase in inflation rates compared with earlier expectations,” he said. “Taking into account the most recent developments in oil prices and recent exchange rates, there are downside risks” to the latest inflation forecasts.

The euro dropped 1.1 percent to $1.1101 at 4:18 p.m. London time
and touched $1.1087, its weakest level since Aug. 19. Government bonds rose across the region, with Portugal’s 10-year yield falling 11 basis points, the most in eight weeks.

Euro falls as Draghi speaks
Euro falls as Draghi speaks

While Draghi said it’s premature to pass judgment on whether “sharp fluctuations” in financial and commodity markets will have a lasting impact on inflation, he reiterated that for a sustained recovery in the region and a return of inflation to the ECB’s goal of just under 2 percent, the asset-purchase program must be fully implemented.

‘Dovish Draghi’

To achieve that, the ECB will buy more individual bonds, subject to “a case-by-case verification” that the central bank wouldn’t gain a blocking minority. In that case the issue share limit would remain at 25 percent, Draghi told reporters.

“I wouldn’t see this change in the issue limit as a huge thing but QE beyond September 2016 now looks increasingly likely,” saidHolger Sandte, chief European analyst at Nordea Markets in Copenhagen. “We expected a dovish Draghi, indicating the willingness and readiness of the ECB to act, but he was as dovish as you can be without doing something.”

The ECB cut its outlook for inflation and growth for each year through 2017. Officials see consumer prices almost stagnant this year with an average increase of 0.1 percent. Draghi said inflation rates in the 19-nation region may drop below zero before accelerating to 1.1 percent in 2016 and 1.7 percent the following year.

China Visibility

“We may see negative numbers of inflation in the coming months: is that deflation?,” he said. “The Governing Council tends to think that these are transitory effects mostly due to oil-price effects. However, as I said before, we’ll closely monitor all incoming information and the Governing Council wanted to emphasize in the discussion we had today its willingness to act, its readiness to act and its capacity to act, its ability to act.”

The economy will grow 1.4 percent this year and accelerate to 1.8 percent in 2017, he said.

Policy makers expect to have “much more visibility” about the severity of China’s economic slowdown and any implications for the euro area after a meeting of Group of 20 finance ministers and central bankers in Ankara that starts Friday, according to Draghi.

“There aren’t special limits to the possibilities that the ECB has in gearing up monetary policy,” he said.