A betting man would likely place at least even odds on a $20 oil pendulum swing before we hit $50 again, if for no other reason to its’ proximity to spot prices in the low 30’s.
JP Morgan has issued some interesting research, modelling the asset divestitures (by asset class) likely seen from reserve managers and sovereign wealth funds (SWF) on a further downside trajectory in oil, to as low as $20 per barrel. Global FX reserves peaked at just over $12 trillion in August 2014. Reductions from that time have come primarily from China (approx. $700bln) and commodity levered economies. A decent current estimate is $11 trillion. SWF assets stand at $4.5 trillion, with 93% held by the top 10 funds, ranked by size. Half of the top 10 gained their girth via oil riches with the remainder plumped via long held general trade surpluses. If we were to see a $428bln divestiture in 2016 on a move to $20 oil by this approx $15 trillion war chest (2.9% of assets), I would characterize it as a “flesh wound”. Seems low. Check you VaR. Fat tail result observation likely (kurtotic distributions).
The stresses on oil dependent global economies had been well documented and as illustrated in the graph below,most need a snorkel if not a nitrox tank already. 4 of the “fiscally challenged” sovereigns below also have top 10 ranked SWF’s by size.
-Saudi Arabia. SAMA Foreign Holdings. Est. 1952. $762bln (14′), 100 of GDP, 2.6x expenditures, 65.0 x sovereign debt.
-UAE. Abu Dhabi Investment Authority. Est. 1976. $589bln (14′), 147% GDP, 4.8x expenditures, 5.3 x sovereign debt.
-Kuwait. Kuwait Investment Authority. Est. 1953. $548bln (14′), 321% GDP, 6.7X expenditures, 54.0 x sovereign debt.
-Qatar. Qatar Investment Authority. Est 2006. $304bln (14′), 144% GDP, 5.48X expenditures, 6.2X sovereign debt.
Source: Moody’s, IMF, SWFI
The most stressed nations at current oil levels will be in straight jackets at $20bbl oil. As the dominoes of Venezuela, Nigeria and Libya wobble if not fall, it will likely make Arab Spring of 2011 look like a Tragically Hip concert.
Many market pundits point to the fact that lower is oil is positive and will result in an eventual GDP lift for most countries. MSCI World (-6%) has significantly underperformed MSCI EM (-1.8%) over the last 3-4 weeks.
As James Grant recently put it, more eloquently than I might, “Surely, no such thing as a separate and distinct U.S. economy can be said to exist. There is rather the single dollarized and financialized and leveraged worldwide economy. Like it or not, we are all in this together – the Chinese communists, the European socialists, the Japanese statists and we the people.”
The amount of Gas & Oil related debt that will need to be re-structured and that will eventually default clearly ramps at $20 oil. Current default rate estimates are at 7%+ and it is difficult to envision that default rates do not get to the low teens if oil prices languish to $20 bbl from here. The list of global survivors left to pick up the pieces dwindles as well, impacting recovery rates. The public debt markets have been the funding avenue of choice in the latest energy build out cycle and while the Banks will certainly not escape unscathed, there will be enough pain to share with estimated industry debt at $700bln+.
USD denominated debt (non-bank) outside the contiguous states stood at $9.2 tln as at 09/14, +$3tln since 01/10.
Cupped hands to make up for the reserve manager and SWFs asset divestitures are hard to find as the pension & endowment space revamp their asset allocation, largely away from the public markets in favour of private & specialty areas with higher alpha potential.
Liquidity is waning, and not likely to recover near term. Global regulations, regardless of intent, have had the effect of neutering the profit motive. The former commodity prop groups of the major global banks have largely been thrown to the winds with the most successful finding homes in the successful, albeit less stable trading houses (Mercuria, Vitol, Glencore, Trafigura, Noble, Gunvor, etc.).
Opportunities abound with so many cross currents, but the penalties for being wrong will be increasingly punitive. Asset redemptions, spikes is deficit spending/drawing down former surpluses, spikes in unfunded liabilities, credit downgrades (out of IG), increased civil unrest, increased protectionism and a ballooning global refugee crisis are all issues we will be dealing with in 2016 and beyond. JCGComments »