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June 2008 - Analysis – Energy finance	<< Issue Index
RSS Feeds Opec and the dollar If Opec pulled the plug on the dollar, the financial turbulence of the last year could be eclipsed by even greater problems. That is one of several reasons why the cartel will not take the step, writes Derek Brower YOU OWN the world’s most valuable commodity. And when you sell it, the buyer gives you a piece of paper whose value has been plummeting for months. In these terms, it is not hard to see why Opec members wince when they talk about the persistent weakening of the dollar. They sell oil, they receive dollars in exchange and when they come to use them – to buy food, luxury goods, weapons and whatever else they need to import – they find that the currency is now worth a little less than it was when they sold the oil. The erosion of the oil producers’ purchasing power is part of a cycle that is, to a large extent, out of their hands. As the US economy has spluttered, the Federal Reserve has cut interest rates in an effort to rescue it from full-blown recession. As lower interest rates make the dollar less attractive compared with other currencies, such as the euro, in countries where interest rates are higher, the dollar-denominated price of oil rises to compensate. And, as oil prices rise, the threat of recession in the world’s biggest consumer countries – and especially the US – becomes greater again. It is not quite that simple: there are other reasons for the oil-price rise, not least the apparently unquenchable appetite for crude in the booming economies of Asia – inflated in many countries by generous state subsidies on refined products – and the industry’s failure to keep supply growing as quickly as demand. But the dollar is, nonetheless, under threat. Worthless paper The issue came to a head at an Opec meeting in Riyadh in November, when Venezuela and Iran both called for the group to abandon the dollar and price its oil either in euros, against which the dollar’s fall has been stark, or a basket of currencies. “They get our oil and give us a worthless piece of paper,” Iran’s President Mahmoud Ahmadinejad said then. Hugo Chávez, Venezuela’s president, agreed. In February, Iran’s long-awaited oil bourse opened on Kish Island, trading oil and products in euros and Iranian rials. The opening of the bourse passed largely unnoticed – and failed to trigger the collapse in the dollar predicted by some analysts. But elsewhere among the Opec nations, the momentum for a wider switch away from the dollar has grown. “Maybe we can price the oil in the euro,” Abdulla El-Badri, the group’s secretary-general, said in February. “It can be done, but it will take time.” As a symbol of US power in the world, the pre-eminence of the dollar takes some beating. That is why its recent decline has also been heralded by some, gleefully, as a signal of the “empire’s” decline. “With the fall of the dollar, the deviant US imperialism will fall as soon as possible too,” Chávez said in November. But other similar voices do not just come from the US’ enemies in Tehran and Caracas. Ron Paul, a senator from Texas who ran for the Republican nomination in this year’s US electoral campaign, has long claimed that his country’s wars in the Middle East are as much about defending the dollar as they are about oil. “Using force to compel people to accept money without real value can only work in the short run,” he said in a statement to the House of Representatives in 2006. “It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.” Everyone stands to lose But it would not just be the US that pays. China’s foreign-currency reserves stand at almost $1.5 trillion, according to the CIA; Japan’s at almost $0.9 trillion; and Russia’s at almost $0.5 trillion. Over 60% of global reserves are in dollars. If Opec suddenly demanded euros instead of dollars for its oil, the plunge in the currency’s value would hardly be welcomed in the capitals where the reserves are concentrated. If China sold its dollars, the currency would collapse – but so would China’s ability to export goods to the US. Nor would such a move be welcome in the euro-zone, where pricier euros would hit exports and wipe out any benefit the zone accrues by buying energy in dollars. But perhaps most significant are the $4 trillion of dollar reserves held by the Mideast Gulf states themselves, suggests Stephen Schork, editor of the Schork Report, a newsletter about oil prices. Aside from Iran, the Gulf’s Opec members would be unlikely to devalue their currency reserves overnight. Iran and Venezuela may take economic decisions for reasons connected to their opposition to the US, says Schork, but Opec’s other members do not. Saudi Arabia, for one, quickly dismissed the currency shift idea in November. Other producers around the world would also take a hit from such a switch, given that consumers are transferring some $1.8 trillion a year to oil exporters, according to investment bank Goldman Sachs. And there are other fundamental reasons why such a switch would not work. Despite the Iranian bourse and the efforts of Dubai to become a regional trading hub for commodities, Opec has no real ability to set the price, says Manouchehr Takin, an analyst at the Centre for Global Energy Studies. “They follow what happens in New York and London.” It may be in the interests of Opec’s Gulf states to develop a benchmark to rival Brent or WTI, but the varying qualities of the crudes sold from the region would make that difficult, he says. And it would be just as hard to unravel an entire trading complex that is based on dollars. And until that happens, prices for the world’s oil markets will be decided by traders in the US and UK. Schork agrees, pointing out that the volume of screen trading in futures on ICE and Nymex – all in dollars – is at least as big as the trading in physical oil elsewhere. Practical solutions More practical solutions for the producers exist than abandoning the dollar. The dollar pegs in the Gulf could be adjusted to increase the value of local currencies – and their purchasing power. Indeed, the currency markets price futures for local Gulf currencies much higher than the price at which they trade now, suggesting traders believe an adjustment will happen. Kuwait dropped its dollar peg for the dinar last year and the currency remains the highest valued in the world: one dinar buys almost four dollars. For some economists, the debate is irrelevant anyway. “My instinct is that the effect would not be as large as many commentators fear,” says Andrew Oswald, professor of economics at the University of Warwick. “There would be some short-term turbulence in the currency markets. But ultimately economics tells us that it does not matter whether I buy something by paying Australian dollars for it, or yen, or euros. These differences eventually come out in the wash.” In other words, the market would adjust to whichever piece of paper became its reserve currency. While the producers ponder whether to wait for the wash, consumers in the world’s biggest oil importer could find some relief soon, say analysts. The implicit weak-dollar policy of the President George Bush’s White House will probably end with a new administration. The policy has boosted exports, but the advantages of an improving trade balance have been lost amid rising oil prices – a consequence of the dollar’s fall.
Source: Petroleum Economist

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Turn Money-Losing Bank Deposits Into Safer Cash Vehicles

Monday, August 11th, 2008

Eight Ways to Profit if OPEC Dumps the Dollar

Iranian President Mahmoud Ahmadinejad dropped a bombshell. And while it wasn’t a nuclear one, it might as well have been.

He stated on the record at a rare gathering of the heads of the Organization of Petroleum Exporting Countries (OPEC) member nations have expressed a real interest in converting their cash reserves from the beleaguered U.S. greenback to the European euro. More specifically, Ahmadinejad referred to the U.S. dollar as “a worthless piece of paper.”

Not surprisingly, Ahmadinejad ally and fellow anti-U.S. hardliner Hugo Chavez – the president of Venezuela – echoed a similar sentiment.

What makes their posturing so troublesome, however, is that for the first time there was no rebuttal, or reassuring commentary from Saudi Arabia and other key U.S. petrodollar supporters, in response.

In fact, they didn’t even mention concerns about the falling U.S. dollar in the summit’s final declaration.

Instead, OPEC members formed a working group to study the dollar’s effect on oil prices and to “investigate the possibility of a currency basket” as a means of offsetting declining dollar-based reserves. At the same time, Ahmadinejad and Chavez agreed to set up a joint Iranian-Venezuelan bank and concurrently signed deals to boost cooperation in the oil, petrochemical and general industrial sectors, according to Iranian media.

The timetable for recommendations and action, like many things from OPEC, remains unclear. But the mere fact that they’ve gone so far as to set up a working group to study the currency problem, and that at least two major member states are busy establishing bilateral financial institutions, suggests that changes are in the wind and this time those changes are for real.

Let me emphasize this point: This is not good. In fact, under the circumstances, I can’t think of anything else short of a direct terrorist attack that poses as serious a challenge to our economic future and to any of our investments that aren’t positioned for this possibility.

That said, if you know that something is going to happen, there are almost always profitable plays you can make.

Let’s talk challenges first.

The Fallout From a Falling Dollar

First, OPEC members have long grumbled about the falling dollar and taking payment in euros. This is nothing new. In fact, China already pays for Iranian oil in euros, so Ahmadinejad’s desire to get away from the dollar is hardly unexpected given how much he already banks on the deal. Neither is the fact that both Venezuela and Russia have joined the “euros-for-oil” party, as have Libya, Indonesia and Malaysia, I believe.

But what represents a stark change from past posturing is that this time there was no reassuring voice from countries like Saudi Arabia and Jordan, who have traditionally been our allies in keeping the petrodollar relationship intact since the early 1970s.

This time around, both our “allies” were completely silent on the matter and their silence, as the old adage goes, speaks volumes about how much internal pressure is mounting against such dollar-favorable OPEC members. I’ve met many of the their representatives over the years, and let me assure you that they are very concerned that the oil-for-euros crowd will win.

The reason is that many OPEC countries peg their own currencies to the dollar. By pricing crude the same way, they have their own form of economic benchmark. Should that change in response to a shift away from dollars, each producer would not only have to endure their own economic reset, but they would potentially also have to begin pricing oil on the free market, which is something OPEC cartel members have gone to great lengths to avoid for nearly 30 years. This could result in dramatically higher oil prices as the bigger players squeeze the smaller producers out and the dollar falls even further in response.

How high will crude oil soar? My calculations suggest $197.30 a barrel is possible – not probable – but possible.

[There was talk out of the Middle East this weekend of OPEC boosting output, prompting predictions that oil would fall to as low as $70 a barrel. Even if OPEC boosts production and prices fall that much, I'm telling you right now that any price decline will be temporary, and that oil prices will subsequently resume their upward advance. There's just too much global demand for the "black gold."]

And that brings me to my second point. A run-up in the price of crude oil to nearly $200 a barrel would imply a dollar falling another 25% from present levels. I’ve personally addressed the issue for years at financial conferences, but many people still don’t connect higher oil prices with the falling dollar… and they should.

The pinch we feel in our wallet is as much the result of U.S. Federal Reserve Chairman Ben Bernanke’s seemingly incomprehensible “attention-to-deficits disorder” as it is to any Middle Eastern machinations.

Whether OPEC members make good on their threats to abandon the dollar completely – or simply shift to a currency basket – is a moot point. The real issue is that OPEC members and other oil producers have had to boost the price per barrel to offset both the corresponding loss in immediate cash payments they receive and the decline in value of the dollar-based reserves they maintain.

And OPEC members will have to continue to do so. This can only put additional downward pressure on the greenback.

Any shift away from dollars into other currencies will effectively imbue the U.S. dollar with an added element of exchange-rate risk when it comes to oil – which is seemingly what the anti-US OPEC members want.

If that doesn’t make sense, think of it this way: Should that change and U.S. dollars are no longer required for oil purchases, the demand for dollars would plunge, sending the greenback into a freefall.

In other words, the global demand for dollars would fall dramatically because there would be only disadvantages to maintaining it as a reserve if OPEC no longer prices oil in dollars.
I don’t know about you, but this is enough to make my head spin… and I do this for a living!

So let’s shift away from this gloom and doom and instead look at the profit opportunities this unceremonious dumping of the dollar would create.

Capitalizing on the Dollar’s Denouncement

One thing is certain in all this: There’s no way that Ahmadinejad and Chavez intended to create profit opportunities for U.S. investors. But in making the greenback an OPEC outcast, that’s precisely what they’ll be doing. Let’s look at some of the best opportunities that I see before us.
Indeed, if OPEC makes good on this subtle threat, make sure to:

• Grab the Global Titans: Global titans derive a big portion of their sales from outside U.S. borders, and in currencies other than the greenback. Own a few winners here and you’ll suddenly find that you’re literally cheering every time the dollar clicks downward; you’ll be making it up with investments that are booming even as our own markets are tanking. Examples include YUM! Brands Inc. (YUM), PepsiCo Inc. (PEP), Boeing Co. (BA), Deutsche Telekom AG (DT), and ABB Ltd. (ABB).

• Plug Into Alternative Energy: Big Energy is really expensive right now, but those high oil and gas prices will literally fuel the race to find the eventual winning sources of alternative energy. Unless you really know your stuff, it’s tough for you to pick the winners. This is one of those cases where it’s smart to let the experts make those choices – and to use a fund, with multiple investments, to diversify away the substantial risks. That’s why an exchange-traded fund (ETF) like the PowerShares WilderHill Clean Energy ETF (PBW) is such a great choice. The continued escalation of energy prices will force the transition to alternatives – far more effectively than any legislative conservation measures ever would.

Clean Up on Currencies: Because the dollar forms the backbone of the major currency-trading relationships within the G10, it makes sense to capitalize on potential currency disruptions down the road. The Powershares DB G10 Currency Harvest Fund (DBV) plays that role perfectly. It simultaneously invests in the weakest and the strongest of the G10 currencies and could add a nice kicker as currencies realign themselves in response to a dollar-disadvantaged world. And in this kind of weak-dollar environment, foreign bonds clearly are an attractive investment for U.S. investors. But there aren’t any ETFs specializing in foreign-currency bonds. A good alternative would be a high-quality international bond fund: The no-load T. Rowe Price International Bond Fund (RPIBX), which invests in high-quality, non-dollar-denominated bonds, is a sound choice.

Source: Moneymorning.com

Iran admits some Opec members not keen on gas export group

Tehran: Iran has acknowledged its enthusiasm for an Organisation of Petroleum Exporting Countries-style body for natural gas producers was not shared by everybody in Opec and said experts would hold more talks on the issue this month after a meeting in Tehran.

Deputy ministers and senior experts of the Gas Exporting Countries Forum (GECF) met in the Iranian capital on Monday and Tuesday to debate the idea, as well as a Russian proposal for a “charter” for the informal club.

Few details have so far emerged about the discussions. Major gas exporters have met informally for several years within the forum, widely seen as a talking shop.

Iran has been pushing for turning it into a more formal body for natural gas producers akin to the 13-member Opec, whose output decisions can send oil prices up or down on world markets.

“Iran is after taking a central role in the formation of the organisation of gas exporting countries, as a country with great gas reserves,” Hossein Noghreh-kar-Shirazi, deputy oil minister for international affairs, said. “But some Opec members have no inclination toward the formation of this organisation,” he was quoted as saying by the Mehr News Agency, without naming the countries.

Opec includes big gas producers such as Qatar and Algeria, as well as countries sitting on major gas reserves. The gas forum also includes non-Opec members, notably Russia.

Oil Minister Gholamhossein Nozari said experts would hold more talks in Moscow this month but did not give details, the official IRNA news agency reported.

Source: Reuters

]]> http://opecoholics.wordpress.com/2008/11/22/26/feed/ 0 opec2008 http://opecoholics.wordpress.com/2008/11/22/24/ http://opecoholics.wordpress.com/2008/11/22/24/#comments Sat, 22 Nov 2008 17:25:33 +0000 opec2008 http://opecoholics.wordpress.com/2008/11/22/24/ ]]>

The value of the US dollar has fallen steadily in recent times

Iranian President Mahmoud Ahmadinejad has suggested an end to the trading of oil in US dollars, calling the currency “a worthless piece of paper”.

The call came at the end of a rare Opec summit, and was opposed by US ally Saudi Arabia.

The Iranian president had wanted to include the attack on the dollar in the summit’s closing statement.

The communique made little mention of the dollar, however, focusing instead on energy security and the environment.

The summit in Saudi Arabia was only Opec’s third in 47 years.

During the talks, Opec members revealed differences about the future direction of the exporters’ group.

But Opec leaders ended with a pledge to provide the world with reliable supplies of oil.

Unfair trade?

Speaking after the end of the summit, Mr Ahmadinejad said all leaders at the meeting were unhappy with recent falls in the value of the dollar.

Oil reached a record high of $98.62 a barrel earlier this month

The dollar has weakened considerably against the euro and other currencies in the past 12 months.

Its decline has affected the revenues of Opec members because most of them price and sell their oil exports in the US currency.

Mr Ahmadinejad said that all Opec countries had showed interest in converting their cash reserves into other currencies.

“They [the US] get our oil and give us a worthless piece of paper,” he told reporters.

But Saudi officials were against including any such language in the declaration. One is reported to have warned that it could add to the pressure on the dollar.

However, in the communique Opec did make a reference to the debate, by committing itself to studying “ways and means of enhancing financial co-operation”.

Iran’s oil minister said that this would allow the formation of a committee to study the dollar’s effect on oil prices and investigate the possibility of alternative trading currencies.

Political agenda

The summit was also marked by divisions over the role of Opec in the world oil market.

Chavez (r) and Iran’s Mahmoud Ahmadinejad are staunch US critics

Venezuelan President Hugo Chavez and his Ecuadorean counterpart, Rafael Correa, whose country rejoined Opec at the summit, both argued for a more political agenda for the group, but ran into opposition from US ally Saudi Arabia.

King Abdullah, the head of state of the host nation, Saudi Arabia said: “Those who want Opec to take advantage of its position are forgetting that Opec has always acted moderately and wisely.

“Oil shouldn’t be a tool for conflict, it should be a tool for development.”

President Chavez had opened the meeting with a warning that oil prices could double if the US attacked Iran.

Oil has been hitting record peaks of well over $90 a barrel as markets believe the Organisation of Petroleum Exporting Countries will not boost production, despite calls from oil-consuming countries such as the US to do so.

Source: BBC News

Venezuela’s president said the price of crude could reach $150 or even $200 a barrel.

Columnists and economic prognosticators have been wondering how long the members of the Organization of Petroleum Exporting Countries (OPEC) are going to tolerate continued declines in the exchange value of their substantial oil export earnings, and acquiesce in the erosion of their dollar-denominated assets. The jitters about OPEC’s possible counteractions have been triggered by a series of statements and warnings by OPEC officials regarding the dollar’s 1977 performance and its rather uncertain future. Cabinet ministers from Iraq, Indonesia, Kuwait, the United Arab Emirates and Venezuela have expressed their concern publicly, and have formally asked their fellow OPEC members to take concrete actions to stop revenue losses. Even the Iranians and the Saudis, who seem to have considered the dollar’s fall as temporary (and a decision on changing the methods of oil pricing or oil payments as premature), have reportedly been nervous about their ability to hold the line against the oil price rise, if the dollar should continue to decline.

OPEC’s worries about the continued erosion of its purchasing power, and the market’s fears about the oil exporters’ reactions, have been both serious and real. Between January 1977 (when the crude oil price was last raised) and April 1978 (when the dollar showed faint signs of stabilization), the U.S. currency depreciated by more than 22 percent against the Swiss franc, 21.5 percent against the Japanese yen, nearly 14 percent against the deutsche mark, 10 percent against the pound sterling, some 6 percent against the French franc, and even a small 3 percent vis-à-vis the Italian lira. While the decline of the U.S. dollar over a 21-month period, weighted in terms of U.S. trade, was much less than these figures might indicate1 – actually, only 7.5 percent – the damaging impact on OPEC as a whole, and particularly on some of its members, was considerable.

Due to differences in individual countries’ trade direction and reserves composition, actual losses resulting from the dollar depreciation are not easy to assess. These losses obviously loom substantially large for those OPEC members (e.g., Algeria, Iran, Iraq, Indonesia, Kuwait and Nigeria) that purchase more than 70 percent of their import needs in the West European and Japanese markets, and for those (e.g., Saudi Arabia, Kuwait, and some other Persian Gulf oil exporters) that hold the bulk of their accumulated reserves in U.S. securities and dollar accounts. For a country like Venezuela, which has some 60 percent of its trade with the United States, and also keeps much of its multibillion dollar reserves …

In the following link you will find an annex to the study guide, providing you some stats and informations that should be useful in your debates:

http://www.onujr.com/PDF/Annex%20-%20Country%20Profiles.pdf

Att.,

Directors of OPEC

http://www.bloomberg.com/apps/news?pid=20601087&sid=afxLcinHBliI&refer=home

http://blogs.wsj.com/environmentalcapital/2008/11/14/crude-calculations-would-another-opec-cut-mean-cheaper-oil-prices/

Check these out!