The American oil industry is booming and that may undermine OPEC

America may well become the world’s leading energy producer by next year, according to the International Energy Agency.

The latest IEA report said that in the 3 months to November last year, U.S. crude output was seen increasing by 846,000 barrels a day.

The data revealed how fast rising production in non-OPEC countries (led by the U.S.) is likely to grow by more than demand this year. The relentless rise of American crude supply could undermine OPEC efforts to re-balance the global oil market, and may see the U.S. overtaking Saudi Arabia and Russia (two of the world’s largest producers) in oil production by the end of 2019.

Head of the oil industry and markets division at the IEA Neil Atkinson said: “We are seeing United States production rising very, very dramatically before our very eyes and that’s likely to continue in 2018.”

One reason this trend looks set to continue may be due to the Trump administration’s willingness to open up more areas in the U.S. to oil production. The U.S. Department of the Interior announced that it may conduct 16 auctions to open new oil and gas wells along the Atlantic and Pacific continental shelves. It will also sell 31 new leases near Alaska and in the Gulf of Mexico.

U.S. energy exports now compete with Middle East oil for buyers in Asia, and daily trading volumes of U.S. oil futures contracts have doubled in the past 10 years, according to the CME Group. This indicates just how much America has grown as a major player in world energy markets.

Conversely, the latest OPEC report showed production for the members of the group was little changed in January as they continued to limit their output for a second year in order to balance an oversupplied market. However, key members like Iraq raised their output in the first month of 2018.

Crude prices have jumped nearly 50 per cent since mid 2017 reaching highs of over $70 a barrel but have since lost steam, now sitting at around $62 p/b.

Patrick Jones

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Trump hails “Big win” for Republicans as U.S. shutdown ends – but for how long?

The government shutdown is over for now, but Washington will be back on the brink in less than 3 weeks, unless the Republicans and Democrats can work out a solution to their major differences over immigration reform.

Yesterday Republicans in Capitol Hill seemingly took the advice of Senator Rand Paul on board, after he said they should give Democrats the chance to have a debate over immigration and more specifically the Obama-era DACA order in order to end the gridlock.

The party did just that, and in response the Democratic leadership agreed to back a spending bill that ended the standoff in Washington for the time being, passing the Senate by a majority of 81-18 and the House of Representatives by 266-150 on Monday.

Despite the news which Trump hailed as a “Big win” for the GOP, Republican leaders are under increasing pressure from their own members to reach a long-term budget agreement by Feb. 8. The problem is that in order to do that, they will need Democrat support, and the two parties are massively divided on what should be done in terms of immigration reform in the U.S.

The Trump administration has made it clear that it takes a hard line stance on illegal immigration, and has already been responsible for large scale deportations. ICE (Immigration and Customs Enforcement) arrests rose significantly during the President’s first 100 days in office, compared with the same period a year before under Obama, while ICE also requested a $1.2 billion increase in funding for the next fiscal year, seeking to expand immigrant detention centres and taking on an additional 1,600 staff.

As a liberal left-leaning party, naturally the Democrats have taken a firm stance against Republicans on the issue, particularly on the rights of the ‘Dreamers’, illegal immigrants who were brought to the U.S. as children. Originally they had said they wouldn’t let a bill pass to fund the government if it didn’t include protection for the migrants, but yesterday they caved on the issue in return for a debate over it instead, prompting condemnation from immigration activists.

In the markets, a majority of U.S. stocks rose Tuesday, with major indices pushing forward once again to record levels only a day after a partial shutdown ended.

It looks as if the political stalemate had practically no impact on stocks whatsoever, though arguably the end removed an element of political uncertainty from the market, allowing investors to focus more fully on corporate earnings, which have so far been strong, albeit with the variable of the recently passed tax law.

Democrats and Republicans may have avoided a long shutdown on this occasion, but the critical issue still lurks beneath the surface.

2018 is upon us… here are some major geopolitical risks

It’s going to be a busy year in global politics – and that means fresh risks for investors. Here’s a few you should be watching this year.

Italian elections
Italy’s President Sergio Mattarella called elections for early March, a vote that will highlight the economic and political problems still stalking Europe and the country’s role as one of the weakest areas of the currency union.

German stability
Chancellor Angela Merkel is facing a rising tide of condemnation as she repeatedly tries to form a union that can govern the country.

With her CDU (Christian Democratic Party) having already failed to reach an agreement with the CSU (the Christian Social Union Party headed by Martin Schulz), popular support for the Chancellor is dwindling.

Germany represents a key cornerstone of the European Union besides France, and long term political destabilisation may pull down the value of the Euro and German stock markets (DAX30).

The Middle East
An emboldened Israel and Saudi Arabia may change the power dynamics of the Middle East, especially with the US backing them more strongly than ever before.

President Trump’s close relationship with Israeli leader Benjamin Netanyahu and his disdain for Iran and the nuclear deal signed by his predecessor Barack Obama may force Tehran into a corner, while Saudi Arabia is looking to exert stronger influence across the region, made possible by wider American support.

Asia
It looked as if the North Korean crisis would escalate into an armed conflict at many points throughout 2017, but fortunately the world avoided a full-scale war which may have killed millions across the Korean Peninsula and elsewhere.

Despite firing rockets over Japanese territory, testing ever more advanced missiles and issuing countless threats to eradicate America, North Korea faced no military action from the US or its allies in the region (Japan and South Korea). The threat remains as great as ever for 2018.

Catalan separation
A win for pro-independence parties in the Catalonian election on December 22 will deepen Spain’s political crisis further, as questions remain over what moves independence parties will make next.

Separatist groups won 70 out of 135 seats in the Parliament of Barcelona, in a major humiliation for the Prime Minister Mariano Rajoy, whose odds of being victorious seemed to be assured. However, his party (the ‘People’s Party’) ended up only winning 3 seats.

Though separation from Spain may be good in the eyes of pro-independence voters, it may deter foreign investment further. Official data shows foreign direct investment in Catalonia fell by 75% in the third quarter of 2017 from a year earlier, dragging down the rest of the country too. This is definitely something to keep an eye on for next year, especially if you own Spanish equities.

Trump
A push to pass an infrastructure package may be coming next year, as Trump moves on from his first major success on tax reform.

But there is still a major problem for the President – the Mueller investigation looking into his links with Russia.

To date, four former members of Trump’s campaign team have already been claimed by Mueller’s probe. Former campaign manager Paul Manafort and campaign official Rick Gates were handed a 12-count indictment, while two ex-campaign advisers George Papadopoulos and Michael Flynn each pleaded guilty to lying to the FBI about contact with Russians.

What next for the Eurozone?
Emmanuel Macron’s attempts to revamp France’s labour market will spur economic growth and boost confidence but their impact will take time to have an effect, according to a Financial Times survey of eurozone analysts.

The poll which involved 34 economists also found that most believed a new “grand coalition” government in Germany would help the eurozone to continue its recovery, but Italy’s impending election was viewed as one of the largest risks to stability.

India’s growth story
It was a fantastic year for Indian equity markets.

Though a large scale problem with non-performing loans in the banking sector and the long term repercussions of Narendra Modi’s demonetisation plans last year are still causing concern, the future is bright for one of the worlds most attractive developing economies. The World Bank has also praised India’s economic achievements and is optimistic about its future.

Tesla Stock Turns Bearish as Model 3 Production Disappoints Investors

Shares in electric auto-maker Tesla slipped Thursday (4/1/2018) on American stock markets, after the company announced production targets of Tesla’s highly sought after Model 3 cars had been pushed back yet again!

In the latest disappointing news for Tesla investors, the company revealed they delivered 29,870 vehicles in Q4 2017, with only 1,550 of those being Model 3 cars. These numbers fell short of forecasts, while it pushed back production targets for the Model 3 as well. This puts the Model 3 at under 2,000 deliveries for its first six months, while the Chevy Bolt just announced its best month ever at more than 3,000 units delivered. A damning comparison.

In 2017 the company said it planned to reach a production rate of 5,000 Model 3 cars per week by the end of the year, but later revised back this target to the end of Q1 2018.

Now however it says it doesn’t expect to reach this target until Q2 this year (representing yet another delay). It said it had made “major progress” toward addressing production bottlenecks, but these words will ring hollow for investors who are growing increasingly frustrated.

Tesla figurehead Elon Musk said in October that the company had been “deep in production hell” making the Model 3. The car is its first attempt to create an appealing electric vehicle for the mass market and not just niche enthusiasts.

Some investors believe the issues in the production chain could be more easily resolved if Musk spent more time on Tesla instead of his other ventures (The Boring Company and SpaceX).

Here’s a 1 month chart for Tesla’s stock. It was a poor December for shareholders.

Telsaa

With all of this being said, I find Tesla to be a fascinating company and a stock to watch for the long term.

Setbacks in production, though frustrating, are not unusual for a business which is so focused on revolutionizing the auto-sector and the way humanity will travel in the future. I think investors understand that too.

Tesla’s tentacles keep spreading further across the auto-industry. Elon Musk announced the Tesla ‘Semi’ truck in November 2017, a fully electric alternative to traditional trucks, which seems as if it will genuinely be able to compete in the space with its regular diesel/petrol counterparts.

Then there is his side-line projects like The Boring Company, which aims to relieve congestion on American roads by creating huge underground tunnels for traffic to flow through, as well as his ambition to give people the chance to travel around the world at rapid speeds via spacecraft (London to New York in 29 minutes, anyone?)

Overall, those who are shorting Tesla stock at the first sign of issues (like this production problem) are probably not the sort of people who should have bought the stock in the first place. If you believe in Elon Musk and his aspirations, then this is a long-term buy and hold and you shouldn’t jump ship when hiccups occur along the way. You can see that by looking at just how far Tesla’s vehicles have already come since its inception in 2003. The stock price has also ballooned by nearly $300 in the past 5 years despite a chorus of criticism from naysayers who doubted its ability to enact change.

 

December 1st Market Wrap – Tax Reform Stumbles – Corbyn Threatens Banks

Dow Rallies while NIFTY Slips
The Dow Jones index had a bullish performance yesterday, closing at 24,272.35 points – yet another new record. This means it’s rallied by over 1000 points in the space of around a month and a half, thanks to hopes of lower corporate taxes, robust economic growth (around the world, not just the US) and impressive corporate earnings – the key driver.

Markets in Asia went higher today too, following the American lead, Though the NIFTY50 took a battering, shedding over -1%. The index fell below 10,200 weighed down by metal stocks and index heavyweights like Reliance Industries and State Bank of India.

It’s not all bad news though. Yesterday we got new data which showed India’s GDP growth rebounded from a 3-year low in the June quarter thanks to stronger manufacturing performance. Still, the NIFTY seems to be struggling with staying above the 10,400 points mark, consistently falling back, this indicates a bearish trajectory for the time being.

European indices are also lower today, with Italy’s FTSE MIB falling the most, down almost -1%. In individual equities, healthcare stocks including UCB and Novo Nordisk got a boost thanks to an upgrade from Morgan Stanley – the latter being flagged as one of the banks favourites in the pharma space.

Tax Reform Stumbles
A little tax reform momentum was lost yesterday, after the Senate delayed a vote on the Republican tax bill until morning in the US today. Several factors were at play, the first being that Senator Bob Corker (R) seemingly held firm on his commitment that he would not vote for a tax bill that increased the US deficit. He said his vote on the bill would be dependent on some kind of trigger, which would automatically increase taxes if the bill didn’t generate the kind of economic growth the party hopes for.

The Senate parliamentarian said that a fiscal ‘trigger’ is not allowed, which has given more reason for skeptics including Corker to back away from the bill. If a few key Republicans vote against the bill, it may not pass, which would be yet another big stumbling block for Trump as he tries to finally get something passed after his failure on healthcare.

Commodities
Oil prices got a small boost from the OPEC meeting yesterday in Vienna. Arguably the vote for an extension of production cuts was already ‘priced in’ as expectations were high that the group would unanimously agree to continue with cuts, and indeed Russia said it would cut its oil output to the end of 2018. Here is a chart of Brent Crude’s movements since the news broke.

Yesterday Gold prices hit their lowest level in over a week, falling after a new round of promising American economic data filtered into the markets. The good news of lower joblessness and higher GDP did little to sway the markets from expectations of an interest-rate hike later in December. Gold prices have been falling consistently since they peaked in mid-summer.

No Love Lost between Labour and Banks
The leader of Britain’s Labour Party Jeremy Corbyn has hit out at banks and called them speculators and gamblers, who are right to be afraid of a Labour government getting into power.

In a video uploaded to Twitter, the socialist leader said, “Bankers like Morgan Stanley should not run our country but they think they do.” He then took a swipe at the Conservative government for protecting financial institutions interests, while adding that it was these banks which crashed the economy in 2008.

He is right, in that the careless actions of overpaid executives and bankers in both the US and the UK prompted the financial crisis, but failed to mention that it was a Labour leader (not Conservative), that encouraged risk taking in the City of London.

In his Mansion House speech in 2006, Labour’s Chancellor Gordon Brown (who would become Prime Minister the next year), said the British economy would succeed through ‘light touch’ regulation, a ‘competitive tax environment’ and ‘flexibility’. Only 2 years earlier, he had praised Lehman Brothers, the bank which had contributed directly to the crisis and collapsed in 2008. Lehman’s bankruptcy filing was the biggest in history, and its demise contributed to the loss of around $10 trillion from global equity markets.

Ed Balls, another Labour cabinet member, said in 2006, “I believe we are right to avoid prescriptive, heavy-handed regulation in Britain.” It turns out they were both wrong.

The concern among businesses is that a Labour government with a strongly socialist bent under Jeremy Corbyn and his Chancellor John McDonnell would seek to curtail businesses ambitions, increase corporate taxation and generally dissuade foreign investors from wanting to do business in the UK.

The problem with this combative approach towards banks is that, despite its past crimes and misbehavior, the financial services sector is one of the strongest assets the British economy has. A report earlier this year revealed that financial and related professional services workers contribute 1.5 times more to the economy than the average UK employee, while showing that the sector makes up over 10% of the UK economy. It also contributes the most amount of tax already, at 11.5% of the total income for the treasury.

Morgan Stanley said this week that a radical left-wing government under Corbyn is a more serious threat to British markets than Brexit, and that a ‘double whammy’ of Brexit and a Labour leadership could prove ‘toxic’ to UK stock markets.

Patrick Jones

UBS say Worries on China’s Debt are Overblown as it Sets Up Exclusive Investment Fund

Swiss banking giant UBS is introducing a new private fund for institutional and high net-worth individuals with an interest in investing in China’s booming equity markets.

Having obtained a new permit granting them increased access to stock markets in the country, UBS is introducing the first mainland China stock fund owned by a company outside China. The UBS China Equity Private Fund Series 1 has completed it’s initial offering, and will help its members to invest in China’s thriving stock markets, which for many years were available only to Chinese citizens.

China’s markets are dominated by state-owned businesses, but private companies are starting to make headway too, particularly in sectors like healthcare. Not only this, but the central government has made reforms in order to let foreign investors trade on more-restricted stock exchanges like the Shenzhen and Shanghai exchanges (which contain so called ‘A-Shares’ – the stocks that this new fund from UBS is mostly interested in).

Historically, these shares were only available for purchase by mainland citizens, due to China’s skepticism about foreign investment, but the country is continuing to open up its markets to overseas wealth.

UBS has a long history in China. UBS AG was China’s first qualified foreign institutional investor, as approved by the China Securities Regulatory Commission in 2003 – a massive deal for a foreign bank!

The fund’s manager, Zizhen Wang, said “From a long-term perspective, UBS sees sustainable growth in the Chinese economy and opportunities in the A-share market,” he added, “Blue-chip stocks are fairly valued and leading companies across numerous sectors are enhancing their international competitiveness.”

In another vote of confidence for the economy, UBS also said they were less worried about China’s debt burden than other banks. Speaking to Bloomberg, Jason Bedford, a Hong Kong-based UBS analyst, said a financial systemic credit event in China is “very unlikely”. He added that a lot of the items on China’s balance sheet were less risky than many thought, even the asset-backed securities.

He said “A significant portion of off-balance sheet exposures are composed of benign, no-risk or low-risk items.” He added, “The failure to distinguish the risk between these items has often led to an exaggerated risk perception among many market watchers.”

It’s no secret that the Chinese economy is hooked on debt, especially in its state-owned enterprises. Lending in the country has grown rapidly over recent years, as household and corporate wealth has ballooned. China’s citizens and businesses have been looking for higher returns in a system where bank interest rates have been held down.

The government is aware of this, and looks to be taking steps to deleverage the economy by cracking down on certain problem-areas, including the booming online lending market.

Just this week, CNBC reported that a top-level Chinese government body issued an urgent notice on Tuesday to provincial (local) governments, urging them to suspend approval for the setting up of new internet micro-lenders. They also apparently told local regulators to restrict granting new approvals for micro-loan firms to conduct lending across regions.

These kinds of businesses have grown massively in popularity over recent years, by giving credit to people who couldn’t get loans at state banks, which tend to favour bigger corporate clients instead.

Xi Jinping has made clear that he backs the idea of deleveraging so as to ‘cleanse risk’ from China’s financial system, and the governments actions so far have been applauded by analysts. But though reforms are clearly in motion, whether this will be enough to offset China’s already hugely leveraged economy is less certain.

As we saw in the case of the financial crisis in 2008 where top Wall Street firms were leveraged (indebted) to an obscene degree, a high amount of total debt can signal systemic financial fragility. When everyone owes everyone else money, a negative shock to the economy, or even just a spontaneous panic can upset the system, by causing a lot of borrowers to default at the same time. When financial firms are highly leveraged, it also makes it easier to have a bank run or a similar liquidity crisis. During the financial crisis, this was certainly the case. China must avoid this kind of situation at all costs.

Though UBS are bullish, other data shows the future looks bleak for the world’s second largest economy. Bloomberg economists Fielding Chen and Tom Orlik estimate that China’s total debt will reach 327% of GDP by 2022, a staggering level which could make it harder for the country to avoid a financial crisis, especially considering actual economic expansion is set to slow to 5.8% in 2022 from 6.7% in 2016, compounding matters further, and as growth continues to slow while debt continues to rise, the risk of a collapse in asset prices looms. This would spell big trouble for an economy that the world depends on for so much.

Patrick Jones

Former ECB head calls time on debt & highlights risks to investors

Trichet
Mario Draghi’s predecessor is concerned

Eurozone growth is up across the board, earnings season in the US was impressive, the UK’s FTSE100 has had a stellar year despite Brexit worries, and even Greece’s economic woes look far less terrifying.

Everything looks better, doesn’t it? Aren’t we through the worst of the post-crisis economic downturn, so now we have less to worry about? Jean-Claude Trichet, the former President of the ECB (pictured), doesn’t entirely think so.

Speaking to CNBC, Trichet said, “Despite the fact that real growth is active, I wouldn’t say buoyant, but very satisfactory, we have some indicators on global leverage that are not reassuring.” Referring to massive debt levels across the world, he added, “We are now at a level (of debt) which is higher than immediately before the financial crisis, so there’s no time for complacency.”

The International Monetary Fund has repeatedly warned about global debt levels. The IMF’s deputy managing director David Lipton said, “We are seeing some greater leverage in the corporate world, in some countries for households, so that rising indebtedness and that increase in market risk really is something policymakers should keep an eye on.” Last year, global debt hit a record high of $152 trillion, while the IMF warned it added major risks to recovery.

Even China, which has relied heavily on debt to boost their economy in the past, is slowing down borrowing in order to reduce risk. Yesterday they pulled a $4.6 billion subway project in Inner Mongolia.

Additionally, Jean-Claude Trichet pointed out that a very long period of ultra low interest rates, coupled with quantitative easing programmes carried out by central banks, has allowed for the prices of financial assets like stocks to rise rapidly. This presents the risk of major bubbles in financial markets, which some would argue are already present.

Indeed, surveys indicate that a large number of investors think stock markets are overvalued, though they are still choosing to take on high levels of risk. Bank of America Merill Lynch’s new fund-manager survey (which includes over 200 people who manage $610 billion) shows a record number of survey respondents are taking higher-than-normal risk, at a time when US stocks are close to their highest valuations in history. Overconfidence here could be dangerous. The data indicates investors are feeling emboldened at a time when they should be more cautious.

Regardless, US markets are likely to rise further, pushing up stock prices. UBS thinks tax cuts in the US could boost S&P500 earnings per share by at least 6.5% in 2018, with telecom and financials predicted to be the biggest winning sectors. They noted that the S&P500 rallied by over 40% after the 1986 corporate tax cut under Ronald Reagan, so this seems likely.

Patrick Jones