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21st April 2020, 13:44 | #16 |
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| Re: Effects of Coronavirus on the global economy
Thanks for the informative figure, it is always not about production cost but also transportation cost and oil quality. The thing is, Russia has got capacity to pump as much as the other major producers. A country that believes in Socialism, doesn't recognize the importance of a UNION and acts selfish. OPEC went all out, why only we suffer, let every one suffer in a fair market. |
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21st April 2020, 16:42 | #17 |
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| Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel There are many questions that should be everyone’s minds right now: 1) Will oil prices ever recover to pre-pandemic levels or has the oil bubble finally burst? 2) How does it affect economies such as India and China which are dependent on oil? Generally these countries do better with low oil prices but do very low oil prices come with risks for oil importers too? 3) Gulf countries like Saudi Arabia and Kuwait get a chunk of their revenues from oil. But smart cat pointed out that the gulf has very low production costs. So, can these countries weather this storm? (Even UAE gets a lot of it’s revenues from oil since Abu Dhabi which covers most of the country’s revenues is a major oil exporter). 4) Being the only major natural gas producer in the gulf, will Qatar finally get a upper hand in its now hostile neighbourhood? 5) The economies of Russia, Azerbaijan, Brazil, Venezuela and Ecuador will surely be affected. The drop in oil prices in 2016 already strained their finances with Venezuela becoming a failed state. So, what will it mean for global politics? Will Russia finally leave global politics? 6) Many major oil based economies (Norway, UAE, Saudi, Kuwait etc) have invested hundreds of billions (more than 1 trillion dollars in the case of UAE and Norway) worldwide through their sovereign wealth funds. So will this crash in oil prices affect these investments? I guess we can only speculate at this point, these are unprecedented times. |
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21st April 2020, 17:16 | #18 | ||||||
Team-BHP Support | Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel Quote:
- Depends on what happens to small and medium shale oil companies in US. If they go bankrupt (they are already knee deep in debt) and are forced to shutdown, then oil price recovery will be faster because large supply has been taken out of the market. Quote:
Sure, India might have better balance of trade (because import fall will be greater than exports fall) but it will be accompanied by flight of capital. It will be accompanied by low FDI investments and low FII investments. Rupee will lose value compared to major currencies like USD/EUR/GBP/JPY etc. Quote:
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How all this will affect global politics and middle-eastern politics is speculation. Quote:
Norway’s wealth fund to liquidate assets due to Covid-19 impact https://www.thehindubusinessline.com...le31226685.ece Last edited by SmartCat : 21st April 2020 at 17:17. | ||||||
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21st April 2020, 17:58 | #19 |
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| Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel
Nice insight. Most likely they would print money in the short term and INR could deflate. Was thinking on the lines of what can be the best ways for preserving our bank balance. Buy commodities, gold bonds ? or turn it into some nondepriciable fixed assets. |
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21st April 2020, 20:14 | #20 | |
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| Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel Quote:
The developing oil based economies like Iran, Iraq, Algeria etc will have a really tough time. If China moves into a self reliance route inwards, these countries have to move to a Chinese bloc for survival. If Shale collapses, then the OPEC+ could split into two factions. That would also support a move to regionalism of commodity+oil supply in the Americas as well, where countries like Mexico could survive on a regional cooperation model serving US. This pure guess is also looking like the best case scenario for all regions in my opinion, where there may be some hostile politics around and some economic issues here and there, but in general there are no wars or catastrophes. China can move to a consumption model slowly, with Belt and road initiative to run a bloc of commodity+oil producers allies and US running its own commodity+oil producers allies. Who would have thought a year ago that countries like Argentina whose major exports are agriculture related (soy, corn etc) will suffer least shock of a global crisis ! | |
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21st April 2020, 20:40 | #21 | ||
Team-BHP Support | Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel Quote:
Gold is a hedge against inflation and sovereign gold bonds are even better because you get 2.5% annual interest. However, nobody on earth knows what is the fair value of Gold (because it has both investing demand and commodity demand). So investing in Gold has a speculative element in it. FMCG stocks too generate good profits in high inflation environment, because they can pass on the costs to the consumer without significantly affecting demand. Anyway, too early to talk about all this. Let's see how the situation unfolds. Quote:
Bondholders reject Argentina’s debt offer Creditors denounce government restructuring plan as unacceptable https://www.ft.com/content/558582bb-...2-f4b0d2fb05be Last edited by SmartCat : 21st April 2020 at 20:42. | ||
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21st April 2020, 21:23 | #22 |
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| Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel To highlight one aspect of these crazy prices, extreme crash is due to "technical" reasons. No rationale exists to sell "actual" Oil at negative prices. These are "Future" prices. Only prices for delivery in next few days are impacted. Say you are an Oil trader (and you hold this contract on your books), you have two options : 1. Buy the Oil, scramble to find storage in terms of ships + Pay cost for storage 2. Sell the contract at any price possible Trader will do whatever is cheaper. Since contract is expiring tomorrow, hence the urgency to choose an option. Contracts for July are nowhere near these prices. "The July contract was roughly 11% lower at $26.18 per barrel." https://www.cnbc.com/2020/04/20/oil-...ts-demand.html |
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22nd April 2020, 08:58 | #23 | |
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| Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel A news report in The Hindu today which throws light into few queries raised here. https://www.thehindu.com/business/ex...le31394425.ece Quote:
Last edited by Bibendum90949 : 22nd April 2020 at 09:12. | |
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22nd April 2020, 11:51 | #24 | |
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| Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel Quote:
Gold in the last 50 years has had two Bull runs. Prior to 1971, the money printing was backed by Gold. But, when Nixon moved away from Gold standard, Gold became a commodity. 1st Bull Run: 1971 - 1980: The price of Gold went up from $32 an ounce to $900. 2nd Bull Run: 1999 - 2011 : The price of Gold went up from $250 to $1950. The price came down to $1050 in 2015. A lot of us who got married in 2000s were astounded by the meteoric rise in the value of Gold. What is a fair price of Gold ? In order to get it, it is vital that you must bifurcate between Physical Gold vs Digital Gold which is Comex/ETF. The latter is based on Fractional Reserve System. Thus, the reserves is only 10% Physical Gold and rest is paper Gold. If you ask for redemption, they may not be able to honour your request. Thus, they will send you a cheque for price of Gold on that day but you won't get your physical gold. As far as Physical gold, there are approximately 30,000 tons. The value is manipulated by London Bullion Market Association (LBMA) to keep the financial markets and oligarchy rich. If one divides the supply of Dollar with the Physical Gold, one can reach a figure of $20,000 and increasing exponentially. One must understand that Gold has intrinsic value. Gold does not loose value. If you had 1 ounce of Gold in 1971 and you put it under your mattress and went to sleep for 50 years. It will still remain 1 ounce of Gold. After you wake up, you could purchase anything for the same 1 ounce of Gold subject to we are in a gold based monetary system. But, if you slept with $10 in 1971 which could buy you a second hand car, after 50 years $10 will only buy you a box of chocolates. It is USD that is devalued which leads to appreciation of Gold. We are in a massive rally for Gold because all this money printing will enter into an asset class. Stock/Real Estate are well past their prime. Post the pandemic with myriad bankruptcies, Gold will be considered as the absolute safe haven. Silver may also see a rise. But, Silver is not just money, but an industrial metal as well. We know that in a depression Industrial demand plunges, Thus, after gold surpasses a certain threshold , Silver might start to pick up. As the famous maxim goes, "Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves.” For the uninitiated, we live in a debt based monetary system. | |
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22nd April 2020, 12:23 | #25 | |
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| Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel Quote:
When Indian consumer and Chinese bank lose appetite for gold, prices will tumble. Which is a very likely event as purchasing power of Indian consumer gets impacted and central banks all over world will print money to boost consumer spend, surely not to buy gold which is counter productive in this scenario. Capital flying out is always a big concern, lets see what happens this time. I have a suspicion that smart money will stay and come flying into India. | |
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22nd April 2020, 12:30 | #26 | ||
Team-BHP Support | Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel Quote:
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But yeah, in a zero interest rate environment, the above logic goes for a six. When interest rates stay at zero, Gold is an attractive investment option for the long term for Americans, Japanese and Eurozone. But so does stocks (dividends + capital appreciation) and real estate (rentals + capital appreciation) Last edited by SmartCat : 22nd April 2020 at 12:43. | ||
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22nd April 2020, 12:52 | #27 |
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| Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel Historically, if we look at very long term 30-50 years, gold has followed world GDP. But it has been relatively volatile in the short term. I'm nay interested in keeping gold under my pillow for 30 years, all I need is how can I preserve the value of my savings during sudden inflation. If we look at the 2008 financial crisis, Gold proved to be a safe bet. Link |
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22nd April 2020, 13:25 | #28 | |
Team-BHP Support | Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel Quote:
But as I mentioned in the mutual fund thread, Govt bond fund (also called g-sec or gilt fund) too works quite well in a financial crisis. | |
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22nd April 2020, 13:39 | #29 | |
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| Re: Effects of Coronavirus on the global economy Quote:
1) Three way battle between Russia, USA (Shale) and Saudi Arabia (KSA) over production levels - All these three countries have been playing a game of Russian Roulette with each other for the past year almost. The break even price of oil that will match production, transportation and gross taxes for each country differs, Russia - $ 19.5 / barrel, US Shale - $23.5, KSA - $8 However this is further compounded by the fact that US does not depend on oil to fund it's budget but KSA and Russia are heavily dependent. KSA needs oil at $ 80 / brl, Russia at $ 25, while US private producers need prices at $40 / brl to stay solvent and pay off the massive debts they took to build this shale oil extraction infrastructure. Now keep this aside for a bit 2) Cartels and price rigging - KSA with some other countries formed something called the OPEC, till the early 2000 AD period, this comprised all leading oil producing companies with the Soviet union and later Russia being the sole exception. Whenever prices dropped on account of market conditions, OPEC would simply cut supply and push prices up. When it wanted prices to drop (like the USA wanted KSA to do in the mid 80's), it ramped up production. So OPEC (KSA) could create both the oil shortage of the 70's and the oil glut of the 80's that wrecked the Soviet economy and was one of the key reasons for its fall. However the rise of US shale meant that OPEC lacked the ability to influence what is now the largest oil producer in the world with the second or third depending on the year, Russia both out of it. So OPEC + was formed along with Russia. Starting Nov end oil demand was slowing but production was not, prices were dropping, so OPEC+ met in Vienna in March to agree on production cuts. Russia refused and ramped up production. Russia did this because it wants to price the US shale producers into bankruptcy and out of business as they need oil at $40 to sustain and aren't given state support like in Russia or KSA. This however angered the Saudis who started offering deep discounts to their European and key Asian buyers including India. This kept oil prices historically low in the first quarter of 2020. With Covid though the already weak demand collapsed but none of the producers wanted to be the first to blink and cut back on production. Now link this to point 1, USA wants Russia to be destabilised and for that it needs oil at less than $30 / brl, Russia wants to bankrupt US shale companies and thus are willing to eat losses the short run as they know that the heavily indebted private sector companies will die quickly at low oil prices and finally KSA wants the highest possible oil prices ($80) as otherwise it runs massive deficits, but has massive production capacity and wants to force both Russia and US companies to the negotiation table. Russia seems fine winning so far. The largest shale company in the USA, Occidental Petrol corp, is near bankruptcy and is looking to sell a million acres of land (largest land transaction in USA after it purchased Alaska from Russia), just 15 days ago another large company, Whitting Petrol filed for bankruptcy, so it appears as though if Russia continues to sustain high production and low prices US Shale is in deep trouble. This is how it was till a week ago, when point 3 hit 3) Oil Futures Market - in a simplistic explanation, this is when you (trader) can contract to buy oil at a predetermined date at a predetermined price. Think of it like gambling? Hedging? Whatever you want to call it. Assume oil is at $50 a barrel today, your analysis tells you that oil prices are going to rise by June, so you will agree to buy 100 barrels of oil on June 1at at $ 45. Now if prices rise? You win. If prices drop to say $ 35.... Then you lose. It is more complex than this but as a simplistic explanation this should suffice. May futures contracts For WTI expired Tuesday, and on Monday when markets opened, traders dumped their contracts at a loss. Why? Another simplistic explanation follows, When in the previous example you contracted to buy 100 barrels at $45, and prices dropped to $20 also, while you lose $2500, you had the ability to to store the oil, wait for prices to hit $50 and then sell. Now though with world demand being 60% of what it was even 4 months ago and all strategic storages filling up (US is at 70% capacity for instance on average), traders had another problem, you can buy the oil, but where will you store them? And so they started dumping their contracts in market (so you could sell your June futures contracts at say $10, a massive $35/ brl loss but imagine you purchased them, you will now have huge storage costs + when will you be able to sell them again?), But no one expected the blood bath that happened and we had negative WTI prices. Brent though dropped only by 3-4%. What's the future you ask? Finally OPEC+ has agreed on production cuts from May 1, bjt worryingly for Putin, Trump is pushing for a stimulus / bailout package for Shale, if this happens and the deep pockets of the US come into play, then even at $5/brl, Putin might not be able to bankrupt US shale producers, this means he will look at cutting his loses and thereby further reducing production along with KSA to stabilise prices. My half baked prediction? Oil will stabilise at around $30 by May and stay there. | |
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22nd April 2020, 13:39 | #30 |
Distinguished - BHPian | Re: American crude prices have crashed 90%! Now trading at $2 - 3 per barrel So, will the recent collapse in Oil prices lead to termination of Petrodollar? The Petrodollar created artificial market for U.S. dollars that would not have otherwise naturally existed. This demand is artificial, since the U.S. dollar is just a middleman in a transaction that has nothing to do with a U.S. product or service. Benefits of Petrodollar led to increased purchasing power and a deeper, more liquid market for the U.S. $ and Treasuries. Also, the unique privilege where the U.S don't have to use foreign currency but rather using its own currency, which it can print, to purchase its imports, including oil. Now, U.S has the highest number of Covid-19 cases and deaths already, and they have taken an uncharacteristic back seat in global leadership during this crisis. U.S superpower status now stands exposed, with China stepping up to fill the void dealing with the outbreak in Europe and the Middle East. The unexpected oil market crash could be the final nail in the coffin of U.S dominance, which could led to the end of the petrodollar agreement between the US and Saudi Arabia. Also, U.S shale market will bear the brunt of the oil war, with Russia, not Saudi, coming out on top geopolitically. Oil is cheaper to extract in Russia than in the U.S, and Moscow has less debt to worry about than the Saudis. The Saudis threatened to ditch the dollar for oil deals last year, although the last two countries in the region to do so faced NATO-led wars as a result. Libya’s Muammar Gaddafi wanted to cease trading in U.S dollars and use a gold-backed dinar instead, while Iraq’s Saddam Hussein insisted on dumping the dollar and switched to Euros back in 2000. Saudi Arabia is thus playing a dangerous game and, unlike Russia, it has no nuclear deterrent of its own and has sub-contracted its defence entirely to America. |
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