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Page added on January 17, 2016
When Oil-Rich Countries Need More Cash
The long slide in oil prices, which reached a 13-year low this week of less than $30 a barrel, means that oil-rich nations are not so rich anymore. And that is potentially a big problem for investors and policy makers in the United States and abroad.
Falling oil revenues will increase the need for Saudi Arabia and other oil producers to raise money, in part by selling investments they have made with their oil wealth. The more oil prices fall and the longer they stay low, the greater the risk that such sales will occur at a time when financial markets are already weakening, which would amplify the downward pull.
The sums involved are potentially huge. Most of the $7.2 trillion in sovereign-wealth funds — financial portfolios owned by governments — is from nations that rely on oil and gas profits to sustain their economies and societies. From April through September last year, as oil prices fell from the high $50s to the low $40s a barrel, sovereign wealth funds pulled an estimated $100 billion from their investments, according to Morgan Stanley. At least half of that total was withdrawn by Saudi Arabia, according to The Financial Times. More recently, The Financial Times reported that prolonged low oil prices would empty the $64.2 billion sovereign fund of Kazakhstan within 10 years.
In October, the International Monetary Fund warned that interest rates could be forced up if sovereign funds began to sell off their bond holdings. In December, an I.M.F. official told The Wall Street Journal that asset sales by those funds against a backdrop of “liquidity concerns” could cause “large price movements.” As it turns out, liquidity concerns — or worry about the ability to pull one’s money out of an investment — have preoccupied investors since last month, when a prominent hedge fund halted redemptions because it could not meet investors’ demands to cash out.
Meanwhile, Saudi Arabia, Russia and other oil producers continue to push oil prices lower by flooding the world with cheap crude in an attempt to protect their market shares, even though they need much higher oil prices to sustain their nations.
Worse, those dynamics are unfolding without the transparency that investors and policy makers need. In recent years, multinational efforts by investor groups and government officials to create disclosure rules on the size, holdings and strategies of sovereign wealth funds have had limited success. In addition, American and foreign financial regulators recently opted not to impose heightened regulatory standards on BlackRock and other large asset managers that handle sovereign wealth, thus precluding the chance to monitor the funds by monitoring their managers.
As a result, no one can say with precision how much or when the markets could be affected by the investment moves of oil-producing nations. That uncertainty is a significant problem, and one of regulators’ own making.
9 Comments on "When Oil-Rich Countries Need More Cash"
James Tipper on Sun, 17th Jan 2016 12:20 pm
“Meanwhile, Saudi Arabia, Russia and other oil producers continue to push oil prices lower by flooding the world with cheap crude in an attempt to protect their market shares, even though they need much higher oil prices to sustain their nations.”
It’s almost as if they actually are not manipulating the market and are instead on the same boat everyone else is. That the market is responding to REAL changes in the economy. But yes, I guess I’m the conspiracy theorist for thinking such things.
Anonymous on Sun, 17th Jan 2016 2:43 pm
Guess the empires sure fire plan to crush Russia and Iran is not working out as well as hoped. At some point, the empire will be forced to abandon it’s plan to bankrupt the enemies it cant defeat thought subversion or outright attack. It will be forced to, because its oil corporation masters will be forced to pass along the costs of ‘cheap’ oil somewhere. The alternative is of course, is to keep selling product at a dead loss. But for how long? The US may be able to print toilet paper to give to its oil corporations and gulf puppets, but will the US risk re-igniting severe inflation to wage economic war on the free people of the world?
sean on Sun, 17th Jan 2016 6:43 pm
‘Falling oil revenues will increase the need for Saudi Arabia and other oil producers to raise money’
Unlike most countries Saudi has no borrowing and billions in the bank. They don’t need to raise any money and can keep this going for years!
twocats on Sun, 17th Jan 2016 7:17 pm
In October, the International Monetary Fund warned that interest rates could be forced up if sovereign funds began to sell off their bond holdings. In December, an I.M.F. official told The Wall Street Journal that asset sales by those funds against a backdrop of “liquidity concerns” could cause “large price movements.” As it turns out, liquidity concerns — or worry about the ability to pull one’s money out of an investment — have preoccupied investors since last month, when a prominent hedge fund halted redemptions because it could not meet investors’ demands to cash out. [article]
here is the nighmare in nutshell. 1) the fed and ECB’s can attempt to set interest rates (actual), but the market will set an implied rate. Rates could go up very quickly, 2) SWFs and governments selling assets into the HFT melt-up in the absence of a strong QE environment could lead to bidless offers. There is no “rational bottom” in that scenario.
makati1 on Sun, 17th Jan 2016 8:27 pm
The whole money game is out of control and anyone claiming otherwise is in denial. Should be an exciting year.
JuanP on Sun, 17th Jan 2016 10:18 pm
Russia’s economy in good shape,
http://russia-insider.com/en/business/russias-economy-good-shape-ride-out-world-economic-crisis/ri12245
makati1 on Mon, 18th Jan 2016 12:28 am
Very good article, JuanP. It confirms what I already pieced together from other sources.
Davy on Mon, 18th Jan 2016 7:15 am
Sure guys everything is fine. It is more like a mixed bag with a down trend.
“Russia 2016: Big Economic Problems”
http://newsaratti.com/russia-2016-big-economic-problems
“The worst, I think, is over at this point,” said world-renowned Russian expert Timothy Frye of Columbia University’s Harriman Institute, and who also teaches at a university in Moscow. “From 2012 to 2015, economic growth in Russia decelerated at a rate of around 1.5 to 2 percent a year. The last quarter, we’ve seen the economy start to stabilize and adjust to the new reality of lower oil prices.”.
“Others disagree, and believe that the Russian economy will continue it’s downward momentum through 2016. Diversifying away from reliance on oil and gas has been discussed for decades but, according to Vladimir Milov, a leader of the Democratic Choice party, “Diversification sounds good in public speeches, but its totally contradictory with the fundamentals of this system, which was built by Putin.”
“Today, Russians are again seeing their savings diminish. In February 2014, the monetary exchange rate was 35 rubles to one dollar; on January 14, 2016 it was 76.4 rubles to the dollar and devaluing to perhaps as low as 90. “Many people have become poorer; the middle class has been hurt,” Prime Minister Dmitry Medvedev said. Protesters have begun letting policymakers hear their discontent, but Putin’s approval ratings are 85%. How long they will remain high with the economy markedly deteriorating will be worth monitoring.”
Dredd on Mon, 18th Jan 2016 9:52 am
Need more cash to pay for the damage they have done (The Evolution of Models – 20)