ONE UPDATE AND A POINTER TO PONDER ON: What the Iranians really think of last week's proposed oil deal..../Getting a handle on the cost of Brexit .....(if only!)

Wednesday 24th February 2016

ONE UPDATE AND A POINTER TO PONDER ON :

What the Iranians really think of last week's proposed oil deal ....

ref :- "Oil Falls as Iranian Minister Calls Freeze Proposal "Ridiculous" " , Bloomberg online

There was a time, in fact almost any time until the present, when if you'd suggested that stock markets (outside of the energy sector) would rally as the price of oil rose and fall as oil tumbled they'd have been calling for the men in white coats. Of course that was before crude producing emerging nations contributed such a considerable slice to global growth and the old market dynamic that held that cheaper oil must on balance be good for the more important developed economies has been turned on its head. People are tending to overlook the fact that in the supply/demand equation that ultimately governs all commodity prices, demand for oil is in fact growing (it's oversupply that's the problem) and the price of crude has become a bellwether gauge of the health of the global economy.

Perhaps that's one reason why last week's frankly inconsequential news that Saudi Arabia, Russia, Qatar and Venezuela had agreed to freeze production levels as long as everyone else does was heralded as though it in some way addressed the glut of supply  --  it doesn't, and looks like a case of wishful thinking. Just as a dose of realism was beginning to set in, prices got a further leg-up by the revelation that Iraq and Iran had welcomed the agreement. Well they would, wouldn't they ? Especially as neither gave any indication that they themselves were going to impose any limits on their own production (particularly not the Iranians).

Prices are easing back again as excitable traders get their head around what last week's statements actually meant  --  not a hell of a lot. And just in case they were having any difficulty, two of the biggest players have spelt it out for them. Iran's Oil Minister Zanganeh decided yesterday to forego the polite welcomes and described the proposal to freeze production levels as "ridiculous", and said that to ask Iran to comply would be making "unrealistic demands". Oh , okay ..... but doesn't Saudi's very conditional acceptance of the proposal indicate a willingness to at least discuss cutting production at some stage? Absolutely not, and that's exactly what Saudi Oil Minister al-Naimi told an audience that included a host of disappointed shale oil producers in Houston yesterday.

Another reason why oil prices staged a near $5 rally on the back of what in effect was not very much was one that we regularly touch upon  --  the fact that the speculative positions in this market have been overwhelmingly SHORT, and those speculators are easily spooked into short-covering. But make no mistake, the short-term fundamentals of oversupply and huge stockpiles have not changed one jot and remain resolutely bearish.

And yet .... why is it that some good judges are telling us that if the market is not actually setting some kind of base around the $30 -35 area, then it is at least somewhere near the bottom ? It does seem logical that at some point a deal will have to be stitched together but we're not convinced it's imminent. It appears likely that producers will have to continue to suffer pain for the time being and there are plenty of other respected names calling for yet lower prices (even $15). But as we said (last week, was it?) , the measure of it is : would you feel as comfortable selling Brent crude short at $32.50 say, as you would have done at the same price on its initial leg down ? And the answer to that, in these very nervy markets, is probably not.

  

Getting a handle on the cost of Brexit .....(if only!)

ref :- "City of London torn over EU membership" , The Financial Times , p.2

Just suggesting that you should try to catch this fairly lengthy article in today's FT that discusses the possible costs to London as a financial centre should the British people decide that they want to quit the EU. Of course, nobody really KNOWS what any such cost will be, and won't do until if and when it happens. Plenty of people THINK they know, but the trouble is their views are often contradictory and may be moulded to suit their own book.

Financial Services contribute (by some estimates) about 12% of the UK's GDP, so this is a very big issue indeed. The article looks at the possible loss to the City of Money Market, Investment Banking, Insurance and Asset Management business should Brexit occur, and as a gross generalisation the bigger institutions (banks etc) are heavily against Brexit and many of the smaller firms are for it. The highly contentious issue of Regulation is also examined and given the widely-held resentment to sweeping EU legislation on the matter there's likely to be a broader consensus here, and not just because of anger at bonus-capping. What we don't know is how trading between the EU and a City of London outside the same regulatory framework would be affected.

We don't know any more than anyone else, and before you say it, quite a lot less than some. But if there's one thing we do firmly believe is that it is inconceivable that the financial centres of Frankfurt and Paris will waste any time in clawing back whatever business they can from London. The fact that such a high percentage of Euro-denominated foreign exchange and derivative trading takes place in London has long rankled, and the Governor of the Bank of France Christian Noyer was railing on the subject as recently as December, without even taking Brexit into account. London has always held an advantage in history, tradition and expertise, and there are those that say that London will hang on to all its business just as it did contrary to pessimistic predictions when Britain declined to join the Euro. Highly unlikely, in our opinion. Being in Europe and outside the Eurozone is a very different matter to being out of Europe altogether, and it's the kind of cost people should be factoring in to their decision-making.

It's an interesting read ..... catch it if you can.