OPEC Divided

–If you’ve been illegally distributing copies of our paid subscription services—Australian Small-Cap Investigator, Diggers and Drillers, Slipstream Trader, Sound Money. Sound Investments, or Australian Wealth Gameplan—you’ll want to make sure to read the warning at the bottom of today’s notes.  You may be hearing from us again soon.

–But first to the markets. And here’s a sign that oil, or at least OPEC, may be losing its grip on the world energy market: the cartel can’t agree on how much oil to produce.

–“Unfortunately, we are unable to reach a consensus at this time to reduce or raise our production,” said OPEC Secretary General Abdalla Salem el-Badri after the cartel met in Vienna and agreed to do nothing.  July crude futures on Nymex rallied about 1.7% on the news.

–But what, really, was the news? Is OPEC having a domestic dispute? “This is one of the worst meetings we ever had in OPEC,” said Saudi Arabian oil minister Ali Naimi after the meeting had ended. “We were not able to reach an agreement.”

–What he didn’t mention is the current rotating President of OPEC is Iranian Oil Minister Mohammad Aliabadi. And what he didn’t mention is that the dispute reveals two factions in OPEC, a dividing line that goes all the way back to the race for Middle East oil in the 1920s.

–The countries that supported the proposed 1.5 million barrel per day increase in OPEC production were Saudi Arabia, Kuwait, Qatar and United Arab Emirates. In the 14-page issue of Australian Wealth Gameplan that we published last night, we showed that those countries were all under the protection of either British Imperial interests after the end of World War I, or American (neo-imperial) interests after Standard Oil of California paid Ibn Saud £35,000 in gold for the first oil concession in Saudi Arabia in 1933.

–The countries that voted against an increase in Vienna yesterday—Algeria, Angola, Venezuela, Iraq, Iran and Libya—are not entirely out of the British/American sphere of influence (especially Iraq).  But the dispute is a lot more understandable when you understand that the members of the Gulf Cooperation Council (the four countries above) have been in a strategic energy alliance with America for the last 78 years.

–There could be another explanation, of course—the Sunni-Shia split between Iran and Saudi Arabia. Aliabadi, who used to be the head of Iran’s Physical Education Organisation (an obvious pre-requisite for leading the country’s oil production), was only appointed Oil Minister on June 2nd by Iranian President Mahmoud Ahmadinejad.

–Ahmadinejad sacked the previous minister on May 14th and put himself in charge. Iran’s highest legal authority, the Guardian Council, deemed Ahmadinejad’s move “unlawful”, which was basically a rebuke to his authority, albeit a mild one. Maybe Ahmadinejad was hoping to go to Vienna himself and stir things up a bit, disturbing the peace between the world’s longest-lived energy partnership (the Saudis and the Americans).

–Not being an expert on Islam or contemporary politics in the Middle East, we don’t feel qualified to say much about whether there is a Sunni-Shia civil war being fought by Iran and Saudi Arabia, with all the other powers in the regions as proxies (a kind of Middle East Cold War). But it does recall what Abraham Lincoln, quoting from the Book of Matthew, said on the eve of the American Civil War: a house divided itself cannot stand.

–OPEC needs to get its house in order so it can ensure a plentiful oil supply to the world’s new number one consumer of energy: China. Chinese energy consumption grew by 11.2% last year, according to the 60th annual BP Statistical Review of Energy. Incidentally, BP is the corporate ancestor of the Anglo-Persian Oil Company (APOC).

— APOC was a private company set up to explore for oil in modern-day Iran, but later effectively nationalised by the British Parliament on the eve of World War I.  Britain’s government bought a 51% stake in APOC in order to guarantee Churchill’s navy—which had just switched from coal to oil power—a regular supply of fuel. This is another topic covered in our just-published AWG report.

–But back to the modern fate of oil…and China. China now accounts for 20.3% of total global energy demand. The United States is second, according to BP and the International Energy Agency, at 19%. The opportunity here for Australian investors lies in the different energy mixes of China and America. How so?

–China is the world’s largest consumer of coal, at 48%. The U.S., meanwhile, makes up 21% of global demand for oil, which is about double China’s share of global demand.  Both countries are changing their energy strategies, though. Thanks to the shale-gas boom (and the Second Great Depression, in which oil imports are hard to pay for with a devalued currency) the U.S. is effectively distancing itself from oil and its long-held alliance with the Saudis. The Chinese, for their part, would like to burn a lot less coal and a lot more oil and natural gas.

–Oil’s role in the world economy, and as an object of national energy strategy, is definitely changing. For the first time since commercial quantities of oil began being produced in the Middle East, the United States may not be the most important energy partner for the Saudis. A Sino-Saudi energy era may well the future for the energy markets.

–But oil may be a lot less important than it was 80 years ago. The big winner—because of its relatively lower emissions and new quantities—is natural gas. For Australia, this is a big win. And in the coming weeks, we’ll tell you more about it.

–Let’s switch back to a subject we’ve been covering recently: banks. Aussie banks could be downgraded by the ratings agencies, according to a note published in yesterday’s Wall Street Journal. The article cites a research note from Credit Suisse, which concludes that the Commonwealth Bank of Australia, ANZ, National Australia Bank, and Westpac could be downgraded if the banks are subject to the Basel III capital requirements we’ve discussed before.

–The nub of it is that if banks have to hold more core capital as a reserve against a future liquidity crisis, it will reduce their ability to lend aggressively and expand earnings. A banking system without the ability to aggressively expand its loan book is a banking system with less earnings growth. ‘nuff said.

–For housing, though, some good news. Mortgage finance demand was up in April by 4.8% over the March figure. According to the Australian Bureau of Statistics, 47,300 home loans were approved in April. It was the largest month-over-month rise in new home loans in 26 months. The total value of loans made was $18.7 billion.

–The not-so-good news? The number of new first-home buyers (FHBs) is at its lowest level in 17 years. FHBs made up just 15.4% of the demand for mortgage finance in the first quarter. Thanks to high prices, the first step on the housing ladder is a big step up for a lot of Australians. Mind the gap!

–One more note. Loan-to-value ratios—the size of the loan as a percentage of the market value of the house—are on the rise, according to a recent survey.  “The share of home loans with a maximum LVR of 95 per cent or more made up 62 per cent of all home loans in June, up from 54 per cent in January, according to RateCity’s database of 2500 home loans on offer in Australia,” reports Chris Zappone in the Sydney Morning Herald.

–So what? Well, higher LTV ratios allow you to keep lending, but with more risk. In other words, to achieve mortgage loan growth, the banks have to ask for lower deposits and loan more to borrowers. This doesn’t automatically suggest that the new borrowers are bigger default risks. But it certainly does suggest that the banks are once again taking more risks to achieve lending growth and earnings.

–Of course none of this will be a problem if house prices simply keep doubling every seven years.

–Finally, an unpleasant item to attend to. In the next 10 days we’ll be sending out Letters of Demand to a very small list of subscribers, stock brokers, and wealth-management firms. Our e-mail software tells us that the people on this list have been illegally forwarding copies of our subscription-based publications, including Australian Small-Cap Investigator, Diggers and Drillers, Australian Wealth Gameplan, Slipstream Trader, and Sound Money.Sound Investments.

–You are probably not on this list and won’t be receiving the letter. But if you are, it’s a polite but firm request to immediately stop forwarding—or in some cases, republishing verbatim (otherwise known as plagiarism)—copyrighted material. What you’re doing is illegal. And under the terms and conditions for subscribers, your subscription can be immediately cancelled if we are aware that you’ve violated our copyright.

–Our email broadcast software allows us to detect how many times an individual email gets forwarded from a specific email address. In two weeks, we’ll run a report showing us the names and email addresses of subscribers who’ve forwarded any subscriber-only email more than five times. Unfortunately, there are some serial offenders. So consider this your final warning. If your name is on that list in two weeks, your subscription will be cancelled and further legal action will be considered.

–We hate to be so draconian. And normally we’d prefer to handle matters like this with a phone call or a personal note. But our lawyers have urged us to be unambiguous and firm. And this is more than just an abstract copyright issue or harmless piracy.

–Distributing information which contains trading or investing advice can distort the trading activity in the shares we recommend, disadvantaging paid-up subscribers. Profiting from this illegal distribution is unethical and illegal. We take that issue seriously and will act accordingly.

–By the way, we haven’t forgotten about “the Money Power”. We promise to write about it tomorrow in the Friday edition of the Markets and Money. Your normal Thursday and Friday captain, Sound Money. Sound Investments Greg Canavan, is currently on holiday in Turkey with his wife and daughter. Greg is writing his report to paid subscribers while away, but will return to the DR beat in the third week of June.

Dan Denning
Markets and Money Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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3 Comments on "OPEC Divided"

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Dan: “But it certainly does suggest that the banks are once again taking more risks to achieve lending growth and earnings.” And they’re _fighting_ each other, using Retention Panels, to stop valued customers taking up lower and lower interest rates with other B4 members. Our son recently won 0.4% off his already low rate. No wonder the stats are up! Meanwhile poor old KS laments the lack of media interest in his Big Debate pitch. The media _love_ this stuff. Has Keenism finally been given the old heave-ho? Is blatant Mingsuse of data to blame? I’d sit on the edge… Read more »

Every bear hates
falling interest rates…
but Keen, our hero,
predicted ZERO.


Keen predicted zero… Within 10 years. Has not been 10 years.
Anything below 4.0% is as good as zero due to the banks will not go lower.

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