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Coming 'oil Glut' May Push Global Economy Into Deflation

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Telegraph 16/1/14

'One piece of the jigsaw puzzle is missing to complete the deflation landscape across the West: a slide in oil prices. This is becoming more likely each month. Turmoil across the Middle East and parts of Africa has choked supply over the past two years, keeping Brent crude near $110 a barrel despite a broader commodity slump. Cotton and corn prices have halved, as has the UBS index of industrial metals. Such anomalies rarely last.

"We estimate that crude oil is now the mostly richly priced commodity in the world," says Deutsche Bank in a fresh report.

Michael Lewis, the bank's commodity strategist, said markets face an "new oil supply glut" as three forces combine. US shale will add 1m barrels a day (b/d) to global supply for the third year running; Libya will crank up shipments after a near collapse in 2013; and Iran will come out of hibernation. "This will push OPEC spare capacity to levels last seen in the depths of the financial crisis in 2009," he said.

America is on track to overtake Saudi Arabia as the top global producer of oil by 2016. It will account for more than half of non-OPEC world supply this year. The US Energy Department says US oil imports will drop to 5.5m b/d by next year, half the level a decade ago. This turns the world's 89m b/d market upside-down.

chart1_2792426c.jpg

Deutsche Bank said Saudi Arabia may have to slash its output by a quarter to 7.5m b/d this year to stop the bottom falling out of the market. The Saudis no longer have such money to spare. They are propping up an elephantine welfare nexus to keep a lid on explosive tensions in the Eastern Province, home to Saudi oil and its aggrieved Shia minority. A cut of this size would push the budget into deep deficit.

This comes as Iran makes its peace with the West. Its 30-year vendetta with US - Iran's natural ally in many ways - no longer makes sense. President Hassan Rohani is no doubt pushing his luck by describing the nuclear deal as a "surrender" to Iran by the great powers, but let him have his flourish to save face. "It does not matter what they say, it matters what they do," retorted the White House.

The facts are that Mr Rohani has agreed to eliminate Iran's stocks of 20pc enriched uranium. Iran will submit to daily inspections of its Fordo enrichment site and monthly inspections of the Arak reactor. The deal is on track and the first phase will come into force next week.

The UN oil sanctions have been crippling. They reduced the economy to rubble last year. The real is almost worthless. Mr Rohani is desperate to break out of the impasse. The US, in turn, is carrying out a "Kissingeresque" pirouette in its Middle East policy. President Barack Obama says he will veto any attempt by Congress to scupper the accord.

Julian Jessop, from Capital Economics, says the existing sanctions cut Iranian supplies of oil by 1m to 1.5m b/d. In the end they would have knocked out up to 3m b/d in various ways. This will start to come onto the market instead as the sanctions are softened.

Meanwhile, Libya is picking itself up from the floor after separatist militia forces reduced the country to anarchy last year, blockading key export terminals. The oil minister said this week that crude output has tripled since the summer to more than 600,000 b/d as the El Sharara field comes back on stream. Libya may add 1m b/d to global supply this year.

Bank of America says a simultaneous return of Iran and Libya could add up to 3m b/d. Just a third of this "positive supply shock" could shave $20 off the world oil price, unless OPEC's fractious cartel can slash output quickly enough to offset it. We should expect hot words at OPEC summits, and plenty of cheating.

oil-losses_2792434c.jpg

It is hazardous to make any assumptions about Mid-East politics, not least with the Shia-Sunni conflict spreading from Iraq and Syria to threaten the whole region in what looks disturbingly like the onset of the Catholic-Lutheran showdown in Europe's Thirty Years War - a blood-letting that ended only with mutual exhaustion and bankruptcy at the Treaty of Westphalia in 1648.

The uprising by Sunnis in the Iraqi region of Anbar has revived fears of a full-blown civil war. The Islamic State of Iraq and Syria has seized control of Fallujah and Ramadi. Iraqi oil output has crashed to 2m b/d as Al Qaeda attacks the Kirkuk-Ceyhan pipeline. The United Nations said 8,868 people were killed last year in Iraq, nearly all civilians.

Iraq is clearly a long way from becoming a 6m b/d petro-superpower by the end of the decade, as predicted by the International Energy Agency last year. Yet the latest turmoil cuts both ways for oil prices. Any calming of tensions could lead to a rapid rebound in output. Indeed, HSBC expects Iraqi and Kurdish production to rise to 3.5m b/d by the end of the year despite the conflict.

Oil bulls says global economic recovery is strong enough to soak up any rise in supply. Perhaps, but Simon Ward at Henderson Global Investors says the world money supply rolled over in November and is now flashing amber warnings.

His key gauge - real six-month M1 - for the G7 rich states and E7 emerging market economies has slowed to 2.3pc from 3.7pc last May. It acts as an early warning indicator, six months ahead. This suggest that global growth may soon fade. "Global risks are rising. The cycle already looks mature by historical standards," he said.

The growth of broad M3 money in the US has slowed to 4.6pc even before Fed tapering cuts off stimulus. In the eurozone it is has been near zero for the past six months.

us-emu-deflation_2792432c.jpg

The latest data from China are very weak, with M2 growth falling to 13.6pc in December from 14.2pc in November as the authorities tighten. It is the change in pace that matters. China looks eerily like the US in 2007 when broad money buckled.

The sheer scale of money creation in China has worldwide implications. Zhang Monan from the China Foundation says the money supply is 200pc of GDP, and 1.5 times larger than the US money supply in absolute terms. She said debt deflation is now setting in as the central bank tries to rein in credit.

As readers know, my view is that China is riding a $24 trillion credit tiger that it cannot control. Fresh data show that fixed investment surged to $5 trillion last year, more than in the US and Europe combined. This implies yet more excess capacity, transmitting a deflationary impulse worldwide.

A sudden slide in oil prices against this background may not be entirely benign. While it will boost spending power in the US and Europe, we also know from academic studies that oil shocks are asymmetric at first.

The losers take an immediate hit, and that will be Bahrain, Nigeria and Algeria with a “fiscal break-even point” above $120, Russia at $117 and Venezuela at $110, among others. Some will face crises.

The winners in Europe, America and Japan will enjoy slower and less concentrated gains. It is, in any case, double-edged. The risk is that it will "unhinge" inflation expectations as the headline rate keeps dropping. Half of Europe already has one foot in deflation, with prices falling over the past five months once austerity taxes are stripped out. Any shock at this point could start to frighten the horses.

Albert Edwards, from Societe Generale, said investors are strangely nonchalant about the deflation risk, seemingly taking it for granted that there is no risk of recession and that central banks can and will bail out equities. "They do not seem to care that they are sitting on the edge of a cliff. They believe with all their heart that we are at the start of a self-sustained recovery," he said.

oil-equity-diverge_2792433c.jpg

To avoid confusion, let me be clear that the dangers of dwindling oil supplies in the long-run have not gone away. Easy reserves of crude are being depleted. New fields are more costly. Peak oil may have the last laugh. Yet this should not be confused with the short-term risks of deflationary shock.

I recently attended a Transatlantic Dialogue on Energy Security with senior military officers in London and Washington. The message was that shale will come and go - with US tight gas peaking by 2017 - creating a false sense of security as the deeper strategic threat continues to build. That is broadly my view as well. Much drama can intrude along the way.'

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To avoid confusion, let me be clear that the dangers of dwindling oil supplies in the long-run have not gone away. Easy reserves of crude are being depleted. New fields are more costly. Peak oil may have the last laugh. Yet this should not be confused with the short-term risks of deflationary shock.

I recently attended a Transatlantic Dialogue on Energy Security with senior military officers in London and Washington. The message was that shale will come and go - with US tight gas peaking by 2017 - creating a false sense of security as the deeper strategic threat continues to build. That is broadly my view as well. Much drama can intrude along the way.'

They do need to look at demand growth in China, India et. al.

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It doesn't matter if the USA overtakes KSA in oil production. The US will still be importing roughly half of what it consumes, and KSA will still be the largest exporter. The US cannot close the gap between imports and exports.

http://www.whichcountry.co/which-country-exports-the-most-oil/

https://en.wikipedia.org/wiki/Petroleum_in_the_United_States

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It doesn't matter if the USA overtakes KSA in oil production. The US will still be importing roughly half of what it consumes, and KSA will still be the largest exporter. The US cannot close the gap between imports and exports.

http://www.whichcountry.co/which-country-exports-the-most-oil/

https://en.wikipedia.org/wiki/Petroleum_in_the_United_States

Meanwhile the US is technically self sufficient (as could be the UK) by trading its shale gas surpluses.

The commodity rich countries would like to keep the status quo and hold the world economy to ransom.

But commodities are on the turn and so is the UK and US economy.

Good for hard working countries, bad for commodity rich parasites.

Edited by crashmonitor

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Euro zone deflation is entirely a choice.

Germany refuses to inflate and forcing deflation on PIIGS

Oil prices falling is good for everybody except despots.

This isn't a deflation like we had in '08 caused by a freezing of the credit markets/inter bank lending this is just a normal and very healthy end of the commodity cycle and start of the next secular equity bull market.

China/Japan though...........won't end well. At all.

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If they stop the free and easy monetary policies there certainly could be meaningful deflation.

But said policies are doing very well for the elites, so there's little chance of that happening until the general public start to really protest about how their disposable income is plummeting in the face of a supposedly strengthening economy. And depending on the amount of distraction that the establishment can create, that could be a long time indeed.

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They do need to look at demand growth in China, India et. al.

There won't be any. They're both gigantic, debt-logged property bubbles just like the UK, Brazil, or Singapore...

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Meanwhile the US is technically self sufficient (as could be the UK) by trading its shale gas surpluses.

I'm not sure if I follow you. Non-conventional oil is added to the total supply figure, but even if it wasn't, it could not bridge the supply-demand gap either in the US or the UK.

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I follow a couple of food commodities closely- wheat and sugar.

Wheat is at multi-year(>7 year) lows and around a third down over 12 months and it doesn't look like it has bottomed yet after a decent planting season in Autumn:

http://www.google.com/finance?q=lon%3Aweat&ei=yenXUrDONMT3wAPuUA

Sugar is moving lower on a 30 month downtrend, near 25% down in the 12 months but is in the range last seen in the lead up to the crisis 7 years ago, so not quite so cheap historically.

http://www.google.com/finance?q=lon%3Asuga&ei=0unXUq20BqaVwQOd7wE

I've started to notice this feeding through in supermarkets- Morrisons now offer 2 instore bakery loafs for £1, practically unheard of in recent years. It should feed through into other foodstuffs dependent on wheat input too feed for other animals etc.

http://www.agrimoney.com/feature/wheat-prices---will-they-continue-their-collapse-in-2014--253.html

Throw in a bit of oil price deflation and Ed won't have to worry much about the cost of living crisis, at least on the food and energy sides of things.

Bring it on.

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So maybe qe was just a mechanism to keep oil prices high all along, to encourage development and exploitation of previously uneconomic sources, ultimately enabling the US to get out of the middle east and to allow it to descend into war and chaos without any unpleasant economic consequences.

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I've started to notice this feeding through in supermarkets- Morrisons now offer 2 instore bakery loafs for £1, practically unheard of in recent years. It should feed through into other foodstuffs dependent on wheat input too feed for other animals etc.

I noticed a couple of years ago in the UK, that the price of bread had suddenly almost doubled while I'd been away, from aroud 50p to around a quid. Good to know prices are falling again.

Haven't noticed it with bread here, but the price of a kilo of flour at lidl went from 25c to 45c last year, and I've just noticed it's back down to 35c.

Almonds and walnuts are still twice what they were 18 months ago though. I guess the speculation cycle moves through the commodities from the basics to the more unusual, so I'll have to wait awhile before I can enjoy my nuts again.

Edited by BigPig

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Isn't all this the wrong way around?

Surely global deflation (imploding demand) is pushing down demand for oil and hence prices?

I thought we were all expecting this and it was only QE that inflated the price.

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If they stop the free and easy monetary policies there certainly could be meaningful deflation.

But said policies are doing very well for the elites, so there's little chance of that happening until the general public start to really protest about how their disposable income is plummeting in the face of a supposedly strengthening economy. And depending on the amount of distraction that the establishment can create, that could be a long time indeed.

There must not be deflation......there is too much debt to pay for.....most debt will never be paid for but the cost of that debt must stay at the minimum.........only the indebted hate lower prices, to the highly indebted inflation is the drug of life. ;)

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It doesn't matter if the USA overtakes KSA in oil production. The US will still be importing roughly half of what it consumes, and KSA will still be the largest exporter. The US cannot close the gap between imports and exports.

http://www.whichcountry.co/which-country-exports-the-most-oil/

https://en.wikipedia.org/wiki/Petroleum_in_the_United_States

Instead of posting random links which do not discuss the issue at all, I'll post one to one that does (again).

http://www.bbc.co.uk/news/business-22524597

Peak oilers should go to sleep for 40 years and come back then.

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Instead of posting random links which do not discuss the issue at all, I'll post one to one that does (again).

http://www.bbc.co.uk/news/business-22524597

Peak oilers should go to sleep for 40 years and come back then.

I did not post random links. I addressed several points raised in the original article.

As for your comment about peak oilers, production has barely moved since 2005. There is no glut, merely an absence of demand (in the west) due to poor economic performance).

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There will be no oil glut, as all surplus energy will be dumped into the great bitcoin mining machines. This will provide a floor to the price.

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I'm not sure if I follow you. Non-conventional oil is added to the total supply figure, but even if it wasn't, it could not bridge the supply-demand gap either in the US or the UK.

You can change the way you produce energy, you can change the way you fuel cars. conventional oil is not the be all and end all.........

http://www.bloomberg.com/news/2014-01-15/u-s-will-be-energy-self-sufficient-by-2035-on-shale-bp-says.html

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You can change the way you produce energy, you can change the way you fuel cars. conventional oil is not the be all and end all.........

http://www.bloomberg.com/news/2014-01-15/u-s-will-be-energy-self-sufficient-by-2035-on-shale-bp-says.html

Thanks for posting that link. Frankly, though I don't believe what it says. Shale gas is energy intensive and will dribble away like a prostate-affected pee.

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Thanks for posting that link. Frankly, though I don't believe what it says. Shale gas is energy intensive and will dribble away like a prostate-affected pee.

Agree... as a former shell shareholder I can vouch that all that glitters is not shale.

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Agree... as a former shell shareholder I can vouch that all that glitters is not shale.

There's probably a lot of wishful thinking in the West, crashmonitor to. Otherwise we accept that despots can take a sledge hammer to the world economy whilst they drink vodka in Russia or mess about in shopping malls in the Middle East whilst the rest of the world slaves away.

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Bump. Reported Brent Crude futures below 100 $ a barrel at 16mth lows

supply crunch coming, not a demand crunch.

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Thanks for posting that link. Frankly, though I don't believe what it says. Shale gas is energy intensive and will dribble away like a prostate-affected pee.

...this has been reflected at our pumps with a downward spiral of prices....as the US imports less ... :rolleyes:

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