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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°123 ▪ 30th November 2017



November 30th OPEC meeting: business not so much as usual

Where do we stand now a year after Saudi Arabia’s turnaround as a result of the implementation of a production reduction plan involving OPEC, Russia and a few non-OPEC producing countries? By the end of 2016, the market was over-supplied by nearly 400 million barrels in OECD countries. We then considered that the stated target of a reduction of 1.8 million barrels per day would result, at best, in an effective reduction of only 1.2 million barrels per day.

This order of magnitude was, as such and everything else equal, sufficient to absorb the surplus on the world market in about a year. Twelve months later, we observe that the exceptional agreement of November 2016 only resulted in a reduction in inventories of around 100 million barrels of crude oil and even lower in terms of total inventories, crude oil and refined products combined. Over the same period, the price per barrel shows a substantial rebound of around 40%. However, on the one hand, this rise was accompanied by a 15% drop in the US dollar and, on the other hand, the current price level in absolute terms, currently close to 60 US dollars, remains below the levels unofficially targeted by most major producing countries to halt their deadly economic spiral that began at the end of 2014.

The analysis could stop at the repeated observation of a poor performance of an OPEC agreement. Assuming a status quo of the interests, strengths and weaknesses of the main stakeholders, we could anticipate an extension of the 2016 agreement for a reasonable period of 6 to 9 months, allowing pragmatic management, limiting the risk of disappointing the market and feeding contrary expectations that are always difficult to reverse. But we think that this status quo assumption is no longer valid any.

In the first place, the signals sent by the Russian representatives over the last few days testify of a certain wait-and-see attitude in relation to the interest of renewing their participation in the effort to regulate production. The reason is simple: Russia’s macroeconomic performance continues to belie the consensus of the community of economists predicting its imminent collapse. The Russian economy, through the adjustment of the ruble, has on the contrary revealed an unsuspected capacity for adaptation and redeployment which de facto reduces the dependence on a rebound of the price of oil and therefore the need to contribute to the resorption of the oil surplus.

Second, the internal situation of Saudi Arabia, unlike that of Russia, continues to deteriorate on all fronts and that of the social contract, at the very origin of the constitution of this country, is not the least. The prospect of financial strangulation in the short term, by the drying up foreign reserves, has led the new Saudi strongman, Prince Salman, to lead in recent weeks an unprecedented purge in the circles of power. The seizures of assets, to the detriment of those designated as guilty of corruption, provide a financial breath by temporarily interrupting the bleeding of public finances. In the short term, the Saudi power offers itself a respite. But this should not hide that Saudi Arabia has failed in recent years in all its strategic directions: regulation of the global oil market, regional influence, transformation of the domestic economic structure. The Vision 2030 plan, in stark contrast to the flexibility the Russian economy has demonstrated since 2014, is likely to add to this list of fiascos. In addition, the ongoing destabilization in Saudi Arabia is an additional negative signal to potential investors in the Saudi Aramco IPO.

Third and finally, it should be emphasized that the only real element of status quo lies in the abnegation of investors who continue to support the shale industry in the United States, despite some defections including that of BHP, one of the key actors of this sector, which recently announced to throw in the towel and dispose of all its assets.

These three factors thus plead for an extension of the 2016 agreement to a minimum and a pause of the rebound in the oil price in real terms (taking into account the movements of the US dollar). But the essential thing lies in the fact that the status quo, the business as usual scenario has lived. For the last three years, Russia and China have emerged stronger and Saudi Arabia is falling apart. Meanwhile, the United States and the European Union are increasingly becoming spectators of an evolution of the world that is escaping them.

Olivier Rech, Head of Energy-Climate Research




Sovereign Risk

A positive outlook for the global economy… but some alerts on public and private debt

Forecasts of global economic growth by the OECD

On November 28th, the OECD published its latest forecast of annual real GDP growth rate. As the World real GDP growth rate should increase to 3.6% in 2017 then 3.7% in 2018,  “the global economy is growing at its fastest pace since 2010 and the recovery is increasingly synchronized across countries”, according to the institution. France’s GDP should grow by 1.8% in 2017 and 2018, then 1.7% in 2019, whereas the German GDP will slowly decrease from 2.5% in 2017 to 1.9% in 2019. The United Kingdom, following Brexit, should be a laggard (+1.5% in 2017, +1.2% in 2018 and +1% in 2019) due to pound depreciation and its impact on household consumption. Emerging countries should benefit from a robust Chinese demand: Brazilian economy should thus rebound in 2017 (+0.7% in 2017 then timid growth of +1.9% in 2018 and +2.3% in 2019). Despite optimism about global growth, the OECD notes a lower rhythm of growth in developed and emerging countries than in previous episodes of recovery, and insufficient level of investment, which explains a global decrease in productivity growth. Last but not least, the organization warns about growing private debt, which could lead to a new crisis in the event of a brutal rise of interest rates, while high levels of public debt could also undermine States’ capacity to intervene again to support the economy. The ball is definitely in the central banks’ court…

Sources: Beyond Ratings, OECD



What is the price of a life?

Estimates of life years lost per person due to air pollution 

Depending on your geographical situation, your life expectancy can be drastically amputated of few years due to a high exposition to PM2.5. According to the Energy Policy Institute at the University of Chicago (EPIC), an Indian loses on average about 4 years of life due to pollution and almost 9 years if he/she lives in the National Capital Territory of Delhi. For China it is the equivalent of 61 million lives that are lost due to this type of pollution. Considering the yearly budget of USD 17 bn to tackle environmental issues (official figures), we can estimate the value of each life as USD 278.

Sources: Beyond Ratings, AQLI


Carbon/Climate Change

More than 40 countries have adopted carbon pricing policies

Map of explicit carbon prices around the world in 2017

Carbon pricing policies are developing worldwide. Between 2016 and September 2017, 10 ETS and 8 carbon taxes have been implemented or announced for the coming years, with the launch of a national ETS in China scheduled for the end of 2017 (to become the largest carbon pricing initiative worldwide). However, the current scope of carbon policies remains limited with only about 40 countries and 25 provinces or cities, (representing 25% of global GHG emissions). In addition, an issue is the fact that the level of carbon pricing remains too low. More than 75% of covered emissions are regulated by a price below EUR 10.

Sources: Beyond Ratings, I4CE





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