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November 27 2014

Commentary by David Fuller

OPEC Takes No Action to Ease Supply Glut as Oil Slumps

Here is a latter section of this topical report from Bloomberg:

“The change is that it’s no longer Saudi Arabia and OPEC that are going to be managing the supply side of the market,” Michael Wittner, head of oil market research at Societe Generale SA, said in an e-mail. “That is so fundamental, it is hard to overstate.”

The Organization of Petroleum Exporting Countries considered a cut of 5 percent in output, according to Iraqi Oil Minister Adel Abdul Mahdi. That’s about 1.5 million barrels a day based on the current ceiling.

“If you cut 5 millions, this will raise the prices of course,” Mahdi said. “No one discussed a large cut, maybe 5 percent was the utmost that some people wanted.”

OPEC will convene again on June 5 in Vienna. The decision not to change the production ceiling was anticipated by 58 percent of respondents in a Bloomberg Intelligence survey this week.

“We are not sending any signals to anybody, we just try to have a fair price,” Secretary-General Abdalla El-Badri said at a press conference. The group will abide by the limit, he said. El-Badri will retain his position until the end of 2015.

Iranian Oil Minister Bijan Namdar Zanganeh told reporters after the meeting that he was “not angry” about the decision, but it was “not in line with what we wanted.”

David Fuller's view

The opening comment above is the most relevant in my opinion.  OPEC’s agreed production ceiling since 2012 has been 30 million barrels a day, but this has been exceeded most months, according to several reports.  OPEC’s production will probably increase, unofficially, following today’s meeting, in a desperate search for a little more revenue. 

The Saudi’s have no interest in cutting their supply to help rivals.  Moreover, their unofficial goal, presumably shared by other countries in today’s closed-door meeting, is to knock back US shale oil production. 

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November 27 2014

Commentary by David Fuller

Pressure Grows for Rajan to Follow China Rate Cut as India Slows

Here is the opening of this informative article from Bloomberg:

After months of holding one of Asia’s highest interest rates to fight inflation, Indian central bank Governor Raghuram Rajan is getting closer to a cut.

Economic growth probably slowed last quarter, inflation is at a three-year low, China lowered borrowing costs and Finance Minister Arun Jaitley is calling for a cut. While almost all economists expect Rajan to ignore the clamor and hold the benchmark rate at 8 percent on Dec. 2., markets are pricing in a reduction and forecasters are moving up their rate-cut calls.

“There is some kind of limited room for easing as we go ahead, but not immediately,” said Upasna Bhardwaj, an economist at ING Vysya Bank Ltd. in Mumbai. While inflation has surprised positively, she said, the central bank “should wait for that noise to fade off and also be very, very sure that the easing trajectory will continue.”

The rate cut would signal a divergence among the biggest emerging markets, with India and China easing policy to boost growth as Russia and Brazil raise rates to fight inflation. Rajan has kept one of Asia’s highest interest rates unchanged since January after pledging to lower Indian inflation once and for all when he took over the central bank last year.

“While we do not expect the RBI to drop its guard against long-term inflation pressures, we think the RBI will find it difficult to ignore the large easing in inflation momentum and is likely to tone down its hitherto hawkish policy rhetoric, ”Siddhartha Sanyal and Rahul Bajoria at Barclays Plc wrote in a report yesterday. There’s an “outside chance” of a cut next week “if Governor Rajan wants to surprise,” they wrote.

David Fuller's view

Raghuram Rajan is a big asset for India and he is sensibly determined to break the inflationary psychology which has plagued India for so long.  

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November 27 2014

Commentary by David Fuller

November 27 2014

Commentary by David Fuller

Email of the day

On gold shenanigans:

“David, I think your summary of the conditions currently prevailing in the gold market is absolutely spot on! The Goldman Sachs' trumpet call for $1,050 gold by the end of 2014 seems to have been as much to its investment bank peers as its clients. Furthermore, the ominous part is now the calendar consideration. Can December bring fruition to Jeffrey Currie's long-heralded forecast? It doesn't take a lot of ingenuity to suggest that a failure to pass of Sunday's Swiss Gold Referendum - currently the most likely outcome - might supply the necessary fodder for a further bear raid, supposedly justified by the fact that gold has now been discredited by the nation that has historically been most supportive of it? These may sound like cynical words, but until the pricing mechanism is actually driven by physical (even though backwardation now exits 6 months forward in the futures market), rather than the (GS) house of paper gold, it's difficult to imagine where these shenanigans end, short of an actual exchange failure to deliver physical. The wave of recent euro central bank requests for gold repatriation (first Germany, then the Dutch and now France's Marie Le Pen is on the case) seem to be adding to the apparent concern that physical availability may not be all that meets the eye. So, I wonder if it is a case of fasten your seatbelts for one more GS-inspired descent on their proprietary gold big dipper, before market fundamentals borne out by the real level of physical availability are able to assert themselves? Kind Regards,”

David Fuller's view

Thanks for your summary and interesting questions. 

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November 27 2014

Commentary by Eoin Treacy

China Loosens Monetary Policy Further as PBOC Scraps Repo Sales

This article for Bloomberg News may be of interest to subscribers. Here is a section: 

Industrial profits in China fell 2.1 percent from a year earlier in October, the biggest decline since August 2012, government data showed today.

The halt to repo sales was “an expected move following the rate cut in the previous week,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. “Market interest rates remain sticky in general. This reflects a policy dilemma faced by the Chinese authorities as the rate cut alone cannot manage market expectations.”

And

There will probably be two more rate cuts by mid-2015, each by 25 basis points, and banks’ reserve-requirement ratios are forecast to be lowered by 150 basis points cumulatively next year, HSBC Holdings Plc economists Qu Hongbin and Julia Wang wrote in a Nov. 24 report.

 

Eoin Treacy's view

In the environment of ultra-low interest rates and extraordinary monetary policy we have been accustomed to it is easy to forget that during this time China has been reloading its central bank’s arsenal of policy tools. 

Interest rate differentials are high relative to other major economies, bank reserve requirements are in the region of 20% versus low single figures elsewhere, the currency remains close to highs not seen in 20 years and aggressive measures are in place to withhold credit from property investments among other tools.

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November 27 2014

Commentary by Eoin Treacy

November 27 2014

Commentary by Eoin Treacy