BY MATEIN KHALID
PERISCOPE
Crude oil, Saudi Arabia and Russia Russia’s return to the international capital markets and Saudi Arabia’s spectacular development story are worth putting your money where your mouth is
The author is a renowned investment banker based in Dubai
T
he onset of risk aversion has a traumatic impact on crude oil prices. After trading in a narrow $80-87 range for three months, crude oil prices lost almost a fifth in May, falling as low as $70 before the risk on trade that followed China’s stellar 50 per cent year-on-year growth export data lifted the black gold to the $74-76 range. Oil’s brutal fall from grace vindicates the assertion of the Saudi Petroleum Minister that stratospheric prices above $85 resulted from speculative funds that dominate the London and New York futures exchange, where the marginal price of West Texas Intermediate and North Sea Brent market sweet crude is daily set by the leveraged gladiators in the NYMEX and ICE pits. So investor’s psychology, Wall Street’s mood swings and the economics of margin calls, not physical supply and demand fundamentals, set the stage for the rampage of the oil bears.
Broken quota discipline Yet, I would definitely caution against going long on 78
July 2010
crude oil above $80. OPEC compliance to its supply cuts is a mere 51 per cent, meaning quota discipline has broken down. Iraq and Angola, let alone Russia and Mexico, have begun to boost their production volumes. Summer seasonals argue against higher oil and gas prices. Global spare capacity has risen to six million barrels, mainly in Saudi Arabia and Ali Naimi has ruled out any additional cuts in the Kingdom’s production at a time when Riyadh, Kuwait and Abu Dhabi, suffer most from the impact of OPEC quota violations. The IEA (International Energy Agency) has cut estimates of global demand, US oil inventories are bloated and Chinese industrial production data has softened. This means the next wave of sovereign risk aversion could hit oil prices by another $10-15 dollars, meaning it is entirely possible that crude oil bottoms at $65 this summer.
Undervalued but attractive Saudi Arabia and Russia are the planet’s two energy superpowers. They are also two of the most undervalued financial markets in the world.
Two attractive petrocurrency investment themes are Russian equities/sovereign debt and Saudi Arabian (non-bank) shares, ideally when crude oil trades in the $60-65 range. Russia’s return to the international capital markets since the 1998 Yeltsin default is an event of seminal significance. In late April, just as the market fireworks began, the Kremlin raised $5.5bn in a dual tranche sovereign Eurobond with five and ten year maturity. Finally, Russia has a credible sovereign debt yield curve and a liquid, benchmark new issue. I was amazed that the world’s smart money investors bought Russian sovereign risk at a mere 125 points over US Treasury five years (135 basis points over ten year Uncle Sam paper for the ten year tranche), incredibly cheap pricing since the Russian Federation’s sovereign debt rating is a mere BBB.
Greek repercussion Naturally, the bonds sank in the secondary markets, despite the best efforts of deal lead managers Barcap, Citi, VTB Capital and Credit Suisse, though the Greek debacle