Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
Bulls Out for Summer!
Bulls out for summer! Bulls out for summer! No More QE More no-more QE .The summer solstice brings in more uncertainty in the market place. As the Fed starts the great exodus from QE the market has to get ready for the great unwind. Volatility is back and the bulls are no longer going to get a free ride bought and paid for by our friends at the Federal Reserve. Add to that the fears of a China meltdown based on a credit freeze as the government tries to squeeze the shadow banking system but may bring down the entire banking system along with it. The problem with China is so much of their economy is in the shadows as it is and with the reversal of the hot money provided by our Fed they may see some credit freeze even more as it will be impossible to determine the credit worthiness of your trading partner. While during the height some were praising the Chinese quay controlled way of capitalism it seems that cronyism and shadow markets and currency can only get you so far.
Of course the uncertainty surrounding China and the fading Fed handout the prospects for oil demand growth are fleeting at best. Not even word that OPEC was cutting production seemed to stop the carnage. Bloomberg Reports that “The Organization of Petroleum Exporting Countries will reduce crude shipments through early July as adequate inventory levels curb a typical seasonal increase in shipments, tanker tracker Oil Movements said. The group that supplies about 40 percent of the world’s oil will ship 23.84 million barrels a day in the four weeks to July 6, down 20,000 a day from 23.86 million in the previous period to June 8, the researcher said in an e-mailed report. The figures exclude two of OPEC’s 12 members, Angola and Ecuador. OPEC’s exports, which normally climb at this time with higher gasoline demand during the northern hemisphere summer, should recover later in July, the consultant said.”
Reuters News reports that “Russia’s Rosneft agreed to double oil supplies China, in a deal valued at $270 billion on Friday, as the Kremlin energy champion shifts its focus to Asia from saturated and crisis-hit European markets. Rosneft will supply China with 300,000 barrels per day over 25 years starting in the second half of the decade, on top of the 300,000 bpd it already ships to the world’s largest energy consumer. “The estimated value of the deal is $270 billion,” Rosneft boss Igor Sechin, a powerful ally of President Vladimir Putin, told reporters in what would be one of the biggest supply deals in the history of Russia, the world’s top oil producer. The speed of change in Russian export patterns has been dramatic – switching huge volumes from Europe in only five years. Russia first started supplying China by railway and then by a new pipeline while opening a Pacific port, Kozmino, in 2009. Together with supplies to Kozmino, it is already exporting around 750,000 barrels per day to Asia, or 17 percent of its overall exports of 4.4 million.”
That is a good deal for Russia and much needed as The New York Times writes “ For more than a dozen years, it has been impossible to miss Russia’s soaring, often ostentatious, energy wealth — the flashiness of Moscow, the 250-foot yachts and the hundred-million-dollar penthouse apartments for the children. And the riches have hardly been confined to the private sector. Last year, when Vladimir V. Putin wanted to shore up support ahead of Election Day, the salaries of government workers jumped; military pay actually doubled. Those heady days seem to be running out, however. The great gush of oil and gas wealth that has fueled Mr. Putin’s power and popularity and has raised living standards across Russia is leveling off. Foreign investors, wary of endemic corruption and an expanding government role in the economy, are hanging back, depriving the economy of essential capital.
In many respects, analysts say, the same iron fist that Mr. Putin wielded to public approval in the early years of his presidency could be the biggest obstacle to a badly needed economic restructuring, and potentially even turn public opinion against him.
Russia’s economy, the world’s eighth largest, slowed to a near standstill in the first months of this year, and the Kremlin is now preparing to dip into its $171 billion rainy day fund in a bid to spur growth. But the problems for Russia’s economy run deeper than its overwhelming dependence on oil and gas revenues, which now account for more than half the federal budget.
Despite the conspicuous consumption of oligarchs and the growing middle class in Moscow, most of Russia’s goods-producing economy has been languishing for decades. Many provincial cities and towns have grown shabby, the factories that sustained them decrepit. Young people have moved away.
With flattening revenues, the government badly needs to attract foreign capital, but the Kremlin’s recent move to tighten its grip on the oil industry through Rosneft, the national oil company, is just the latest warning flag to potential investors.
“The fundamental problem in this economy is still the politics of the country,” said Bernard Sucher, the former head of Merrill Lynch in Russia, who serves on the board of Aton, an investment company. “The way power is organized in this country dooms the economy to underperformance,” he said. “The state is too big; it’s involved in too many areas of activity, and involving itself in too many more areas of activity, and by its nature discourages private investment.”
As Russia’s senior political officials, business leaders and foreign investors convened here in St. Petersburg on Thursday at an economic forum that serves as an annual gathering of the country’s top financial minds, the task facing Mr. Putin was how to create sustainable growth in a country where commodities, taken together, now account for 80 percent of exports.
Some experts at the forum said they were confounded by Russia’s contradictory problems: low growth and high inflation. “Financial policy is weird,” said Yu Yongding, a senior fellow at the Institute of World Economics and Politics in Beijing. He was on a panel with Elvira Nabiullina, an aide to Mr. Putin who has been tapped to lead Russia’s central bank, and Russia’s economic development minister, Andrei Belousov. “Where is your industry?” Mr. Yu asked. “You can produce super excellent jet fighters, but what else?”
Energy prices, while still relatively high, are expected to flatten or decline in the years ahead. Gazprom, the Russian energy behemoth, has been cutting prices and renegotiating contracts, under pressure from cash-poor clients in Europe and rising competition globally, caused in part by market shifts like development of American shale gas. Discounts to customers cost Gazprom $4.2 billion, or about 7 percent of pretax earnings, according to Renaissance Capital, an investment bank. Oil revenues are also projected to decline long-term as production grows more costly and new technology curbs demand. And more than a decade of efforts to diversify the economy have largely failed. There is little to show for government-sponsored programs aimed at developing a technology sector, for instance, or reviving once-robust Soviet manufacturing.
In response to the slowdown, Mr. Putin has directed the government to prepare an aggressive and potentially risky stimulus plan that would dip into reserve funds to pay for infrastructure projects. There have been blunt warnings against tapping the reserve funds, which now total $171 billion, or roughly 8 percent of annual economic output. “Fiscal stimulus at this time would likely be ineffective, and merely intensify inflation pressures” said Antonio Spilimbergo, who led an International Monetary Fund team that just completed a fact-finding mission in Russia.
At the same, Mr. Spilimbergo and other analysts say Russia is better positioned than many other big economies, and could thrive if needed changes are put in place. “Improving Russia’s business climate would provide needed impetus to investment, diversification and growth,” he said. Ksenia Yudaeva, an economist who is Mr. Putin’s liaison to the Group of 20, said Russia was hardly alone in struggling to find new sources of growth. “The significant problem is uncertainty above all,” she said. “Before the crisis, it was clear that Russia has natural resources and Russia has significant demand, which was based largely on oil profits.” Now, she said, investors are not sure where to look for opportunities. “It’s not clear yet for investors which sectors, other than the traditional ones, will be most profitable.”
Other economists said investment was the key. “If you look at growth performance the weakest part of the economy is investment,” Yaroslav Lissovolik, chief economist at Deutsche Bank, said in an interview. “To revitalize Russia’s growth, measures need to be taken on the structural front, to boost investment.”
Mr. Putin, who will speak at the forum on Friday, is expected to try to reassure investors and to discuss the infrastructure program, as well as other strategic efforts to stimulate growth, including reducing interest rates on commercial loans. The Russian finance minister, Anton G. Siluanov, who is leading the response to the slowdown, said in an interview that Russia was suffering partly because of continuing woes in Europe, which collectively is Russia’s main trading partner, but that the government was poised to act. “There is a question what measures have to be taken in order to stimulate the investment activity, stimulate the business activity, make the Russian economy more attractive for foreign investors,” Mr. Siluanov said. “This is exactly what the Russian government is working on now.” He said the infrastructure program — high-speed railroads, major investment projects and upgrades to road networks in Moscow — would benefit the country on many levels. Without new sources of growth, the government will struggle to meet demands for increased social spending, particularly on pensions for the country’s aging population. And if the stimulus plan fails, Mr. Putin could find his political support eroding in the Russian heartland, where it remained strong even during the large street protests against him in Moscow last year. Some of his critics are expecting, if not quite hoping for, that result. “I don’t really think the economy is heading toward collapse, more likely long-term stagnation — a lost decade, if you will,” said Vladimir Milov, a former deputy energy minister and now a leader in the political opposition. “This will not lead to an immediate surge in protests, but it will be very difficult for Mr. Putin to stage another successful election in 2018 should the economy be dead.”
Mr. Putin envisions Russia as a global economic powerhouse and the ruble as perhaps a reserve currency someday. But what economists almost universally cite as a precondition — a political overhaul that produces effective and reliable institutions that investors trust, and a resilient, diversified economy — so far remains out of reach.” A must read in the New York Times! And of course the lack of trust in Russia’s business sector does not help either.
Fill me up with Natural Gas! Sara Kent of The Wall Street Journal writes “Natural gas is set to emerge as a significant new transportation fuel over the next five years, raising the prospect of a challenge to oil’s dominance in the sector, the International Energy Agency said Thursday. Already, gas demand in road transport grew tenfold between 2000 and 2010, but cheap gas in the U.S. as a result of the boom in production of shale gas, and concerns over air pollution and oil dependency in China, could help it develop into a more mainstream fuel, the IEA said.”
In its five-year gas outlook, the Paris-based energy watchdog said it expects natural gas use in road and maritime transportation to rise to 98 billion cubic meters by 2018, covering around 10% of incremental energy needs in the transport sector. According to the IEA, this shift will do more to reduce the medium-term growth in oil demand than both biofuels and electric cars combined. “Gas is already a major fuel in power generation, but the next five years will also see it emerging as a significant transportation fuel, driven by abundant supplies as well as concerns about oil dependency and air pollution,” said Maria van der Hoeven, the IEA’s executive director. Several hurdles still exist that could stymie the development of natural gas as a transport fuel, not least the need to develop infrastructure like fuelling stations, the IEA said. But in several countries, notably the U.S. and China, activity is already underway to develop the sector.” The Christen Science Monitor writes “The natural gas revolution is getting some wheels – and just in time for the gas industry. Rising use of natural gas in the transportation sector will offset a global slowdown in the growth of natural gas to produce electricity, according to a report released Thursday by the International Energy Agency. That timely boost will mean that America’s boom in natural gas is likely to continue for several years, even if the focus begins to shift away from power plants and toward cars and trucks.”
Not everyone is convinced natural gas will do for auto companies what it did for utilities. Changing fuels requires an overhaul of existing infrastructure, and natural gas comes with its own set of environmental concerns. In many regions, it is difficult for natural gas to compete with the range, power, and price of gasoline. But natural gas has already proven itself a useful alternative for fueling large vehicle fleets and it’s even more attractive in parts of the world where gasoline prices are high.” Reuters wrote that U.S. natural gas futures ended lower on Thursday, pressured by technical selling after three straight gains and a slightly bearish weekly inventory report despite fairly hot weather forecasts for northern tier states that should stir more demand. The U.S. Energy Information Administration reported that total domestic gas inventories rose last week by 91 billion cubic feet to 2.438 trillion cubic feet.
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