Global oil market facing a “sea change”, says Yergin

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In an interview with David Wessel, Daniel Yergin, author of “The Prize,” states that the turmoil in the Middle East is a “sea change” for the global oil market and that the U.S. and emerging markets are most economically vulnerable to rising oil prices.

Source: The Wall Street Journal, February 25, 2011.

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Mobius: Middle East –youthful reawakening

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The paragraphs below come courtesy of Mark Mobius, emerging markets guru and executive chairman of Templeton Asset Management.

Over the past few months, the world’s attention has focused on events in the Middle East and North Africa (MENA), as the uprising that began in Tunisia spread to Egypt and onward to a number of countries in the region. The widening conflicts were quickly reflected in CDS (credit default swaps) spreads widening in those countries and the decline or closure of regional stock markets. Although we do not have investments in Libya, when I see what is happening there, I worry about the safety of innocent citizens. I’m encouraged by the determination of many Libyans who are fighting for more freedom and an opportunity to more fully share in their country’s economic future.

The upheavals in Tunisia, Egypt and other countries can be attributed to a complex of variables, most important of which are rising food prices, unemployment, corruption and political stagnation. Unemployment has stayed high and, more crucially, waves of new young job seekers entering the labor market have not been absorbed. As in many emerging markets, the populations in MENA countries are young—approximately one-fifth are between the ages of 15 and 24.

Most politically explosive is that an increasing number of the unemployed are high school and university graduates. Average unemployment in many MENA countries is estimated at more than 10%, but among the youth that percentage could be almost four times as much. It is important to note that the recent protests have come not from the lowest income levels but from middle-class and educated Arabs seeking fair treatment.

Moreover, innovation and investment are stifled by bloated bureaucracies that smother small businesses with red tape, while corruption feeds the politically powerful. Of course, corruption is not exclusive to the MENA region, but it has become more exposed, most recently with increased information being shared online through cell phones and social media outlets. In Egypt, about 20% of the population uses the Internet, and in the Middle East that percentage is higher, at around 30%.

Partly in response to the regional uprisings, almost all MENA governments are currently taking populist measures, such as increasing spending to boost economic activities and welfare levels, which are likely to put pressure on future budgets. Economic liberalization could also slow in the short term as the government focuses on socialist measures. Some of these measures will be positive in the long term, such as higher budget allocations to improve education, housing and healthcare. In addition, socialist measures could hopefully help decrease the economic inequalities and the disparity between the top and bottom sections of the population. Other measures, such as increased subsidies and handouts, are positive from an individual standpoint but not from the standpoint of government finances. Increased freedom, increased democracy and decreased corruption are other possible developments as a result of the political upheaval in the region, and these potential outcomes will be indeed positive. For these economies to truly thrive, the opportunities for small business growth and entrepreneurialism must be improved. One risk in the region is a tendency toward more fundamentalist Islamic movements, but so far we have seen few signs of this, which is also encouraging.

According to projections from the International Monetary Fund, the MENA region as a whole grew approximately 3.9% in 2010, but within the region, growth rates varied considerably: countries such as Tunisia and Egypt recorded growth of about 3.8% and 5.3%, respectively, while Qatar recorded growth of 16% for the year. North African and Levant countries are likely to see increased pressures on their current accounts and budgets in the short term, and consequently slower economic growth. However, the picture could probably change in the medium to long term if governments implement the right policies. In addition, over the longer term, foreign direct investment from wealthy Gulf countries could potentially spill over into the North African countries, which offer several production and operational advantages as well as a wide consumer base and a cheaper labor force.

In the resource-rich Gulf countries, high oil prices have boosted GDP, current accounts and trade balances to record levels. Much of this wealth has been channeled toward spending on infrastructure and economic diversification, which is likely to continue. This is not new and has been a theme across the region ever since oil prices started climbing around 2004.

In the short term, we expect to see increased volatility and the eventual outcomes are uncertain. I think it is very unlikely that a Libyan-style uprising would take place in Saudi Arabia; however, I do see a high likelihood for smaller protests as well as an increased level of negative news streaming out of Saudi Arabia and the greater MENA region over the coming weeks and months.

Given the current turmoil, we are monitoring the situation closely but continue to cautiously look for potential opportunities to accumulate companies that are oversold and well-managed. We are interested in companies that are domestic, regional and/or international leaders, that focus on the core advantage of the countries in which they operate and/or those that are likely to benefit from increased budget spending and economic activity.

Source: Mark Mobius, Investment Adventures in Emerging Markets, March 11, 2011.

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Roubini Global Economics: Jasmine dreams in China?

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The report below comes courtesy of Adam Wolfe, an analyst of Roubini Global Economics.

The “days of rage” sweeping through the Middle East and North Africa (MENA) have raised questions about the possibility of a similar movement erupting in China. At a glance, the ingredients for uprising appear to be present. Online calls for a “Jasmine Revolution” in China resulted in a massive staging of security forces at the planned protest sites, which could be taken as a sign of the Communist Party’s insecure grip on power. Like several of the MENA governments, China’s ruling elite is plagued by corruption and is preparing for a transfer of power. Inequality has devolved to Sub-Saharan levels, and the political system provides few outlets for popular grievances to be aired. However, China is unlikely to face a popular uprising for six reasons, discussed in more depth in our latest China Monthly.

First, and most importantly, China’s party rule implies that a larger segment of the population is represented by or dependent on the government than in the MENA region’s autocratic systems. While the vast majority of the population has little say in how China is run, the Chinese Communist Party (CCP) cannot maintain its rule by providing private goods only to a narrow segment of the population. Instead, the CCP provides a mix of private and public goods to its 80 million members and those other elites who might otherwise challenge its rule. Instead of forming a restive middle class, those who have managed to move up the income ladder largely have become the CCP’s support base. Additionally, the CCP has institutionalized the transfer of power between generations, a process seen as more legitimate than the geriatric MENA leaders’ attempts to transfer power to their sons.

Second, China has maintained strong economic growth throughout the reform period, with few spells of high inflation. Strong growth increases the incentives for rulers to maintain power (as it makes political monopoly more valuable) and decreases the threat to their power by legitimizing their rule. A monetary overhang and demand-side pressures are driving China’s inflation higher this year, but the Party will do everything it can on the supply side to contain inflation expectations.

Third, while official corruption plagues China, it appears highly decentralized. It is local officials who confiscate land from citizens for development, ignore environmental regulations to boost industrial output and benefit from a judicial system that remains incapable of challenging their authority. This dynamic explains the apparent mismatch between survey data that suggest Chinese citizens are largely satisfied with national conditions and the tens of thousands of protests and mass incidents reported each year.

Fourth, while unemployment among college graduates and a skewed sex ratio are problems in China, there is no youth bulge to provide the tinder for an uprising along the lines of those in the MENA region. As China’s bountiful labor force has begun to disappear in the coastal export hubs, a significant portion of the young population has enjoyed brighter future prospects and wage hikes.

Fifth, from the “Great Firewall” to the systematic arrest of any potential opposition leaders, the CCP has been successful in disrupting strategic coordination among potential adversaries. This year, China will spend RMB624 billion (US$95 billion) on internal security, more than it plans to spend on its military. Human Rights Watch’s Nicholas Bequelin reported that since calls for a Jasmine Revolution first appeared on microblogs, China’s security forces have “rounded up, detained, or placed under house arrest more than 100 people nationwide.” The CCP’s panoptic monitoring of online forums requires activists to either use VPN services that only a relatively rich, urban segment of the population can access or disguise their complaints in coded language that limits the message to a narrow demographic already initiated into the cause.

Finally, there is no strong voice for reform within the CCP along the lines of Hu Yaobing, Zhou Ziyang or Bao Tong in the 1980s. In 2010, Premier Wen Jiabao made several public calls for political reform that raised hopes among Western commentators and Chinese liberals that Wen’s bleeding heart was shining through in his final years in the Zhongnanhai. However, political reform was not on the agenda at the Fifth Plenary Session of the 17th Central Committee in October 2010, and Wen’s comments did not depart significantly from standard CCP messaging on gradual intra-Party political reforms.

Still, each of the silver clouds listed above has a black lining: Party rule means decentralized power that opens opportunities for corruption, strong growth creates the incentives and the means for an opposition group to challenge CCP rule and China’s demographics may eventually create problems for the CCP’s leadership. Perhaps the most important threat to the CCP’s legitimacy in the medium term will be the slowing of Chinese economic growth. Demographics and malinvestment will soon bite into China’s potential growth, and dithering on financial-sector reforms raises the prospect of a sharp contraction in the medium term. In the past, it has taken anemic growth and fiscal woes to topple Communist governments. The Party’s emphasis on economic progress over political reform is likely to continue, which could allow the clouds on the horizon to darken further.

Source: Adam Wolfe, Roubini Global Economics, March 9, 2011.

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Max Keiser’s “On the Edge”: Face to Face with Gerald Celente

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Gerald Celente, the man behind the famous Trends Journal, is Max Keiser’s guest for this edition of “On the Edge”. The main focus of the interview is on the relationship between the Middle East uprisings and financial changes as a result of such political transformations.

Part 1:

Part 2:

Part 3:

Source: YouTube (here, here and here), March 4, 2011.

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Impending crude correction by mass rollover

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This post is a guest contribution by Dian Chu, market analyst, trader and author of the EconForecast blog.

Thanks to Muammr Gaddafi’s airstrikes near a Libyan oil terminal, and protests in Iran adding to the continuing chaos in Middle East and North Africa (MENA), on Wednesday, March 2, Brent oil settled at its highest level since August 2008 at $116.35 a barrel, while WTI futures on NYMEX also advanced to $102.33 per barrel.

Peace by Chavez?
However, crude oil retreated on Thursday, March 3 after Al Jazeera reported that Gadhafi had accepted a plan proposed by Venezuelan President Hugo Chavez for a multinational commission to mediate the conflict with rebel groups.

The International Energy Agency (IEA) said between 850,000 and 1 million barrels a day (bpd) of Libyan crude output has gone offline, and that the unrest in Libya had started to affect Europe’s oil supplies. Indeed, since Europe is the largest importer of Libyan crude, the supply disruption there had Italian and French refiners rush to secure cargoes driving an 18-fold surge in oil-tanker rates in two weeks.

Saudi & Nigeria Stepping In
Then, Bloomberg reported that Saudi Arabian Oil Co. said the kingdom is “ready to supply incremental change in demand,” to cover any shortfall from Libya. Saudi Arabia pumped 8.43 million bpd of oil in February, according to Bloomberg.

Moreover, Nigeria, an alternative producer of Libyan crude grade and a favored oil supplier to U.S. refiners, said it will also increase daily crude exports of 14 main grades by 9.3% in April from this month.

Small Oil Disruption Risk
Crude market would react to the faintest geopolitical event as remote as North Korea shelling South Korea’s Yeonpyeong Island. So far, the shortfall from Libya is not significant enough to cause a major supply disruption. However, the real oil supply risk is actually with Saudi Arabia, which accounts for about 12% of global oil production in 2009 and holds almost 25% of the world’s oil reserves. In a worst case scenario, the entire MENA oil supply could be at risk.

But from all indications, things most likely will not get out of control in Saudi as they did in Egypt and Libya for several reasons. The Saudi royal family maintains a tight control of the military force, and there’s not a significant opposition force. Furthermore, Saudi is in a much better economic state than Egypt, Libya, etc., and with a whole lot of petro dollars and resources to go around. And most importantly, the rest of world would hate to see any instability in Saudi Arabia.

Cushing Inventory at All Time High.
Against this backdrop, the U.S. EIA reported the first draw in the U.S. crude inventories in six weeks. However, instead of demand-driven, the 364,000-barrel drawdown was primarily due to falling imports and higher refinery runs. And guess what? Crude inventory at Cushing, Oklahoma just rose 1.1 million barrels to hit a new all-time high of 38.6 million barrels (See Exhibit 1)

Continue reading Impending crude correction by mass rollover

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Al Jazeera’s Wadah Khanfar: A historic moment in the Arab world

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As a democratic revolution led by tech-empowered young people sweeps the Arab world, Wadah Khanfar, the head of Al Jazeera, shares a profoundly optimistic view of what’s happening in Egypt, Tunisia, Libya and beyond – at this powerful moment when people realized they could step out of their houses and ask for change.

“I am here to tell you that the future that we were dreaming for [in the Middle East] has eventually arrived,” Khanfar told the audience at the Technology Entertainment and Design conference (TED), speaking about the recent popular uprisings that have toppled long-standing governments.

“A new generation, well-educated, connected, inspired by universal values and a global understanding has created a new reality for us,” he said.

Source: TED, March 4, 2011 (hat tip: The Big Picture).

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