Wednesday 25 January 2012

Oil and More Rumours of Wars

Just as the Baltic Dry falls through the floor (a reliable indicator of global slowdown), our good friends Gazprom cut their prices again, and commodities soften generally, oil is once again in the spotlight. And not in a good way.

Yes, at home and abroad the prospect of trouble at t'pump looks to be on the cards. Starting with Petroplus*/ Coryton: this may provide an excuse for a price-hike in the South East, but in reality its effect will be limited. When the owners of a conversion-process asset like a refinery go under, the creditors step in smartly to ensure it keeps running, just to generate whatever basic turn is there to be had: no-one wants to see the cashflow dry up. We've seen it a dozen times with power plants (in the dire period 2002-04, for those with short memories). What tends to happen is that the asset, which should be run on a highly-optimised basis when in the hands of a proper owner, slips into a dumb but still effective mode of operation, with reduced but still positive margins.

If it turns out this isn't possible, i.e. only a hyper-optimised refinery is profitable, it will mean there is a surplus of finished products (petrol etc) anyway. So no big worries just yet.

The main story, though, is in the Middle East where Syria is in turmoil, Iraq is nudging towards civil war, the Iranian war-drums are beating, and the carrier groups are massing once again. A war-weary western public may be forgiven for groaning déjà vu and assuming it's just another galling waste of blood and treasure to satisfy the American electoral process.

But from the C@W standpoint, is there something really rather new and interesting afoot ? The possibility that oil might start being priced in gold is not hot news, but could be a serious development - and one that might make the US pause for careful thought. I have previously highlighted the forthcoming Chinese Pan-Asia Gold Exchange as a potential Chinese strategy to supplant the dollar: lots of countries are looking to a post-dollar world: the euro is hardly a candidate anymore and oil-for-gold would be a very logical step along the way.

The ramifications of this will be many. Here's one: if this catches on, a lot more countries and companies will potentially be in the market for gold hedges (just as they are for oil and dollar hedges, as a matter of day-to-day risk management). But the paper (forward) gold market is, allegedly, one of the most heavily manipulated in the world (along with silver and the Swissie and oil and ...) - hmm.

Any other suggestions as to how oil-for-gold would change the world ?


Petroplus was always a quirky operation. The cleverest thing they did in the last decade was develop an LNG import terminal in Pembrokeshire, and planned to do several more around the Atlantic basin - they are very easy to build, even for a company whose main business at the time was oil storage tanks. But they sold this nascent LNG business, '4Gas', to Carlyle in order to concentrate on becoming a 'specialist refiner' ... hah! Should have stuck to tankage.


Demetrius said...

If oil is to have a gold standard what currencies might be forced to follow?

someday said...

To what extent is the fall in the BDIY due to lack of demand for dry goods as opposed to oversupply of ships?

Sean said...

You forgot to mention that Iran has interest rates of 20% to fight hyperinflation with their economy in freefall.

Iran is a very dangerous irrational cornered rat.

Nick Drew said...

Demetrius - top 15 importers of oil might be a start:

USA, China, Japan, Germany, India, S.Korea, France, UK, Spain, Italy, Neth, Taiwan, S'pore, Turkey, Belgium

one might also consider those with big gas imports where these are sold on oil-indexed prices (= Japan, S.Korea, Germany, France & Italy)

someday - both are at work: last time around, this featured in my predictions for 2008 (#5 in the first comment). That was based on (a) my view that we were in for a recession and (b) knowledge that there had been a lot of recent additions to the dry bulk fleet - and that old merchant vessels are not scrapped as fast as new ones are built

(as you perhaps recall the Baltic fell by 95% in 2008)

most of the 2008 fleet is still with us - significant over-capacity

Sean - indeed. And my ME sources tell me there is no hope of taking out all Iran's nuclear facilities in one strike - they have dispersed them comprehensively

(no surprise there !)

alan said...

I think its unlikely that oil, in general, will be paid for in gold. From Irans perspective gold might be a safer option.

The US/UN etc have frozen oil producer bank accounts before. If Iran trades using physical gold then it might be harder to block payments etc?

I think its very unlikely that Iran will be attacked in the next 18? months. The US war machine has been weakened by Iraq/Afgan wars. The US needs to regroup & resupply before taking on Iran. Iran is armed to the teeth, unlike Iraq.

However, if the US starts sabre rattling too much in the run-up to the elections it could annoy Iran enough for Iran to block the straits of hormuz.

Most of Irans nuclear facilities are below ground. In some instances the only ordnance able to penetrate is a nuclear tipped bunker buster. (Bush changed US law allowing tactical nukes to be used)

alan said...

Throwing some numbers around for fun.

Iran total oil exports in a year are equivalent to 70% of total annual world gold production.

World oil production in a year is equivalent to 187% of gold held by all banks.

If all oil producing countries kept 4% of their annual oil revenue in gold that is equivalent to the total production of gold in a year.

Roughly 50% of annual gold production is used for jewelry/industrial. So 2% oil revenue in gold would consume all "investment" gold production.

If it became the norm for oil producing counties to sell in gold then I would expect the price of gold to rise significantly (x2?).

Assumes :
50731 USD/Kg Gold
100 USD/bbl Oil
2,400,000 bbl/day oil Iran exports
80,000,000 bbl/day oil production
2,460,000 kg/year gold production
30,807,000 kg gold held by banks

Nick Drew said...

then I would expect the price of gold to rise significantly ...

you will find plenty to agree with you, alan !

(and some will say - a lot more than 2x ...)