Friday, May 27, 2022

Is the Dollar Really a Petrodollar anymore?

by Martin Armstrong, Armstrong Economics:

QUESTION: Mr. Armstrong; I want to thank you so much for shedding light on what can only be deranged forecasts on the dollar and gold and never change regardless of how much money they lose people year after year. I received this email with the headline How Much Longer Can the Petrodollar Survive? They claim that now adversarial nations like “China, Russia and Iran” are threatening the petrodollar hegemony by establishing their own trading and banking infrastructure that excludes dollars for trade. Suddenly Iran is now a world power and as you said at the conference, the dollar support is not trade or oil, but where big money parks.

My question is, just how can these people sleep at night putting out false information all the time? Isn’t that what the investment banks pled guilty to putting out false forecasts to support their own positions during the Dotcom bubble?

ANSWER: Yes, you are correct. It is one thing to put out analysis that is unbiased and it is raw corruption to put out forecasts that support your own investments creating a conflict of interest. It would not be a criminal act as long as they disclose what their portfolio is. Only the government gets a free get out of jail card for fake forecasts.

The decline in commodities was was due to a number of factors, including an economic slowdown in China, a severe recession in Brazil, with falling prices for oil and other commodities, and exchange rate volatility that saw the dollar rise. Despite positive growth in trade volume terms, the current dollar value of world merchandise exports declined by 14{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} in 2015, to US$ 16.0 trillion, as export prices fell by 15{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}. Even the dollar value of world commercial services exports also fell 6{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} in 2015 to US$ 4.7 trillion, although the decline was less severe than for merchandise.

All these claims that the “petrodollar” is going to collapse are just a total joke. Oil is less than 10{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} of world trade. These people are living in the ’70s. Hey, cut the hair and get rid of the bell bottoms. It’s 40+ years later!

There is not even an attempt to be a true honest analysis of the subject. Just look at the figures. The oil and gas drilling sector make up between 4.6{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} and 6.5{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} of the global economy.  The FX market DAILY trading volume is about $5.3 trillion which dwarfs the equities and futures markets no less oil and gold.

Read More @ ArmstrongEconomics.com

U.S. SHALE OIL PRODUCTION UPDATE: Financial Carnage Continues To Gut Industry

by Steve St. Angelo, SRSrocco:

As the Mainstream media reports about the next phase of the glorious U.S. Shale Oil Revolution, the financial carnage continues to gut the industry deep down inside the entrails of its horizontal laterals.  The stench of fracking fluid must be driving shale oil advocates utterly insane as they are no longer able to see the financial wreckage taking place in these companies quarterly reports.

This weekend, one of my readers sent me the following Bloomberg 45 minute TV special titled, The Next Shale Revolution.  If you are in need of a good laugh, I highly recommend watching part of the video.  At the beginning of the video, it starts off with President Trump stating that the U.S. has become an energy exporter for the first time ever.  Trump goes on to say, “that powered by new innovation and technology, we are now on the cusp of a new energy revolution.”  While I have to applaud Trump’s efforts for putting out some positive and reassuring news, I wonder who is providing him with terribly inaccurate energy information.

I would kindly like to remind the reader; the United States is still a NET IMPORTER of oil.  We still import nearly six million barrels of oil per day, but we export some finished products and a percentage of our shale oil production.  Thus, we still import a net of approximately three million barrels per day of oil.

A few minutes into the Bloomberg video, both Pioneer Resources Chairman, Scott Sheffield, and Continental Resources CEO, Harold Hamm, explain how advanced technology will revolutionize the shale oil industry and bring down costs.  I find that statement quite hilarious as Continental Resources and Pioneer continue to spend more money drilling for oil and gas then they make from their operations.  As I stated in a previous article, Continental Resources long-term debt ballooned from $165 million in 2007 to $6.5 billion currently.  So, how did advanced technology lower costs when Continental now has accumulated debt up to its eyeballs?

Of course… it didn’t.  Debt increased on Continental Resources balance sheet because shale oil production wasn’t profitable… even at $100 a barrel.  So, now the investor who purchased Continental bonds and debt are the Bag Holders.

Regardless, while U.S. oil production continues to increase at a moderate pace, there are some troubling signs in one of the country’s largest shale oil fields.

Shale Oil Production At the Mighty Eagle Ford Stagnates As Companies’ Financial Losses Mount

It was just a few short years ago that the energy industry was bragging about the tremendous growth of shale oil production at the mighty  Eagle Ford Region in Texas.  At the beginning of 2015, Eagle Ford oil production peaked at a record 1.7 million barrels per day (mbd).  Currently, it is nearly 500,000 barrels per day lower.  According to the EIA – U.S Energy Information Agency’s most recently released Drilling Productivity Report, oil production in the Eagle Ford is forecasted to grow by ZERO barrels in December:

The chart above suggests that the companies drilling and producing oil in the Eagle Ford spent one hell of a lot of money, just to keep production flat.  Even though the shale oil producers were able to bring on 88,000 barrels per day of new oil, the field lost 88,000 barrels per day due to legacy declines.  We need not take out a calculator to understand production growth at the Eagle Ford is a BIG PHAT ZERO.

Here are the five largest shale oil and gas producers in the Eagle Ford where:

  1. EOG Resources
  2. ConocoPhillips
  3. BHP Billiton
  4. Chesapeake Energy
  5. Marathon Oil

The company that doesn’t quite fit in the energy group above is BHP Billiton.  BHP Billiton is one of the largest base metal mining companies in the world.  Unfortunately for BHP Billiton, the company decided to get into U.S. Shale at the worst possible time.  BHP Billiton bought shale oil properties when prices were high and eventually had to liquidate when prices were low.  A Rookie mistake made by supposed professionals.  I wrote about this in my article; DOMINOES BEGIN TO FALL: BHP Chairman Says $20 Billion Shale Investment “MISTAKE.”

Read More @ SRSrocco.com

How the Developments in Saudi Arabia May Foretell Collapse of Petrodollar

from Sputnik News:

Saudi Arabia’s crown prince Mohammed bin Salman has vowed to return his country to “moderate Islam”; the pledge was followed by the dismissal and detainment of many of the country’s high-profile princes and businessmen. Turkish energy analyst Dr Volkan Ozdemir commented that it is not about politics but rather about economics and petrodollars.

In his interview with Sputnik Turkiye, Volkan Ozdemir, the Chairman of Ankara-based EPPEN (Institute for Energy Markets and Policies), said that Riyadh is possibly cleaning out the opponents to the oil trade in US dollars and the changes the country is currently living through could be viewed as part of the US’ attempt to fight against a strengthening China.

His comments refer to the latest developments in Saudi Arabia, with numerous dismissals and reshuffling of the country’s government.

 Saudi Arabia's Crown Prince Mohammed bin Salman sits during an allegiance pledging ceremony in Mecca, Saudi Arabia June 21, 2017
Saudi Arabia’s Crown Prince Mohammed bin Salman sits during an allegiance pledging ceremony in Mecca, Saudi Arabia June 21, 2017

Dr Ozdemir recalled that Saudi Arabia remains the world leader in oil exports – producing about 10 million barrels per day and exporting about 7 million barrels daily.

“For the last 44-45 years, the petrodollar system has been ruling the world, which means that the international oil trade had been mostly paid for in US dollars. It stems from the Middle Eastern crises of the 1970s, when Saudi Arabia bound itself to selling oil only in US dollars. Given that Saudi oil has played the major role in the US dollar becoming the world’s reserve currency, the US turned into the guarantor of the security of Saudi Arabia. Being the world’s reserve currency, the US dollar has remained the foundation of the US’ global hegemony,” the expert explained.

READ MORE: End of Petrodollar: Rise of Economic Protectionism to Reshape Global Trade

In the past few years however, especially during the last term of Barack Obama, this status quo began to change due to the rapprochement between the US and Iran, he further noted. After the Arab Spring, the Saudis started feeling a threat to the country’s security and doubts emerged over whether the US will cease being its protector and turn instead to Iran.

These very doubts have highlighted the need for the royal family to opt for other guarantors of its security besides the US, thus, for the first time in 3-4 years there is a split within the family with regards to the oil trade.

These differences within the country’s royalty, however, should be viewed alongside certain other external factors, the energy analyst noted.

“First, after becoming self-sufficient in natural gas supplies, the US is becoming self-reliant in oil, which means it has less demand for Saudi energy resources. In other words, it has yielded to China as the major consumer of Saudi oil,” Dr Ozdemir explained.

However China, he further elaborated, is moving towards its 2020 goal, which is the deadline to setup its own indexes for oil and natural gas trading at the Shanghai International Energy Exchange. This implies that China is targeting abandoning the petrodollar and at switching to the petro-yuan backed by gold or other precious metals.

READ MORE: Venezuela Seeks Dollar Freedom by Pricing Oil in Yuan

According to the expert, China and Saudi Arabia have recently been negotiating the possibility of oil trading in yuan, which has received the backing of many high-ranking Saudis. This has coincided with the election of Donald Trump, who, unlike Barack Obama, announced his adherence towards a conservative American foreign policy.

Hence, cooperation with Saudi Arabia and Israel against Iran topped the agenda, Dr Ozdemir pointed out.

“Therefore, as I see it, there is an ongoing process in Saudi Arabia of cleaning out the elements who are against the petrodollar system,” he explained.

Dr Ozdemir, however, said that the petrodollar system has little chance of survival in the long-term.

“Although with the election of Trump, the supporters of this system have won in the short-term, it has no chance for success in the long-term. We should expect new moves from other large oil suppliers into China, namely Russia and Iran. If we review who the major oil importers to this country are, it is Russia in the first place, then Iran and only then Saudi Arabia. For the petrodollar system to keep working, Iran will be chosen as a target,” the expert suggested.

Read More @ SputnikNews.com

Why Launch of Oil Futures in China’s Currency is Important

from Sputnik News:

China’s decision to launch yuan-denominated oil futures backed by gold may deal a substantial blow to the petrodollar and open the door to the further internationalization of the renminbi. Chinese scholars have told Sputnik that Beijing is ready to take risks and push ahead with its “petro-yuan” project.

The launch of oil futures denominated in yuan is an important step toward the internationalization of the Chinese currency, Cheng Fengying, research fellow at the World Economy Institute of the China Institutes of Contemporary International Relations (CICIR), told Sputnik.

“Now is just the right moment: Oil prices are low, supply exceeds demand and China is the largest consumer of oil,” Cheng highlighted speaking to Sputnik China.  “If we do not set the payments in yuan now, we will not learn how to influence prices and when the market situation changes and demand exceeds supply, we will be in a losing position.”

The researcher admitted that China is facing certain risks related to its plan to price oil in yuan using futures contract, such as the outflow of investments and currency.

According to Cheng, the process of internationalization of the yuan “could be compared to the boundless ocean”: “It all depends on our ability to swim and take risks. We are prepared for risks. For example, a committee under the People’s Republic of China (PRC) State Council to oversee financial stability and development was set up [on Wednesday].”

The official statement quoted by Xinhua News Agency reads that the Committee “will be tasked with deliberating major reform and development programs for the financial sector, coordinating financial reform, development and regulation, coordinating issues concerning monetary policy, and coordinating the making of financial policies and related fiscal and industrial policies.”

What is the Major Advantage of China’s Oil Futures Being Priced in Yuan?

Wang Zhimin, director of the Center for Globalization and Modernization at China’s Institute of Foreign Economy and Trade, regards the possibility of converting futures into gold as a competitive advantage over Brent and West Texas Intermediate (WTI) benchmarks.

“Settlements in renminbi will be convenient, because the ‘petro-yuan’can then be converted into gold,” Wang told Sputnik. “It is very good. After all, the Bretton Woods system was supposed to be tied to gold. Although [the dollar’s convertibility into gold] was suspended [in 1971], gold still remains a solid commodity.”

Read More @ SputnikNews.com

Grant Williams: Petroyuan Oil Contract could be a Game Changer

by Erik Townsend, Macro Voices:

Erik Townsend welcomes Grant Williams to MacroVoices. Erik and Grant discuss:

  • Outlook for the US dollar
  • Update on the Petroyuan oil contract 
  • Edge of the Cliff 
  • Inflation Risks on the Horizon?
  • When is the time for gold?
  • Thoughts on cryptocurrencies
  • Considerations on interest rates and yields
  • Australian real estate
  • Perspective on China’s credit bubble
  • Writing is on the wall in Europe

Read More @ MacroVoices.com

Oil For Gold – Real Or Imagined?

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by Dave Kranzler, Investment Research Dynamics:

By having control of the physical market for gold, China can threaten to use it to destabilize the dollar, without destabilizing the yuan. As such, it is potentially devastating, and used carelessly could trigger an economic collapse in Western capital markets, wreaking financial and economic havoc in America and other advanced nations. China will never be wholly independent from trade with these nations, and severe financial and economic damage to the advanced economies will rebound upon her to some extent. For this reason, she has so far held off using gold as an economic and financial weapon, while she continues to insulate herself from periodic crises in Western economies.   – Alasdair Macleod (Oil For Gold)

In response to questions about when China would finally cast aside the dollar and run the price of gold up, I’ve always replied that China would be shooting itself in the foot if it tried to replace the dollar too quickly.  Don’t forget, China holds about $1.2 trillion in the form of Treasuries. Note: this ratio does not include the market value of its gold holdings, the actual amount of which is unknown outside of a small circle of Chinese officials.

When the idea of a gold-backed yuan-denominated oil futures contract surfaced, it became en vogue for those unable to analyze their way  out of a paper bag to issue commentary refuting the idea.  For some, if an event has not already occurred, they are unable to “see” it.

This article from Alasdair Macleod is a must-read for anyone who wants to understand the path leading up to the ability to convert oil sold in yuan or gold by China’s largest oil suppliers.  Judging by the various recent oil trading and gold trading agreements between Russia and China, the conversion of oil sales into gold  may well be already occurring in a two-stage process between Russia and China.

The purpose of this article is to put the proposed oil for yuan contract, which has been planned for some time, into its proper context. It requires knowledge of the history of how China’s policy of internationalising the yuan has been developed, and will be brought up to date with an analysis of how the partnership of China and Russia is taking over as the dominant power over the Eurasian land-mass, a story that is now extending to the Middle East. To read the rest click here: Oil For Gold – Macleod

While Alasdair does not overtly acknowledge the idea of a gold-backed oil contract coming from China, I would argue that the article about a gold-yuan oil futures contract  in the Nikkei Asian Review – a highly regarded publication – was likely floated intentionally by the Chinese Government. If you read through Alasdair’s article, it’s difficult not to come away with the impression that China has been methodically and patiently putting together the pieces to support the ability to convert oil sold China – benchmarked by the yuan – ultimately into gold.

Read More @ InvestmentResearchDynamics.com

Lies And Distractions Surrounding The Diminishing Petrodollar

by Brandon Smith, Alt Market:

There are a few important rules you have to follow if you want to join the consortium of mainstream economic con-men/analysts. Take special note if you plan on becoming one of these very “special” people:

1) Never discuss the reality that government fiscal statistics are not the true picture of the health of the economy. Just present the stats at face value to the public and quickly move on.

2) Almost always focus on false positives. Give the masses a delusional sense of recovery by pointing desperately at the few indicators that paint a rosier picture.  Always mention a higher stock market as a symbol of an improving economy even though the stock market is irrelevant to the fundamentals of the economy. In fact, pretend the stock market is the ONLY thing that matters. Period.

3) Never talk about falling demand. Avoid mention of this at all costs. Instead, bring up “rising supply” and pretend as if demand is not a factor even worth considering.

4) Call any article that discusses the numerous and substantial negatives in the economy “doom porn.” Ask “where is the collapse?” a lot, when the collapse in fundamentals is right in front of your face.

5)  Avoid debate on the health of the economy when you can, but if cornered, misrepresent the data whenever possible. Muddle the discussion with minutia and circular logic.

6) When a crash occurs, act like you had been the one warning about the danger all along. For good measure, make sure alternative economic analysts do not get credit for correct examinations of the fiscal system.

7) Argue that there was nothing special about their warnings and predictions and that “everyone else saw it coming too;” otherwise you might be out of a job.

Now, if you follow these rules most of the time, or religiously, then you have a good shot at becoming the next Paul Krugman or one of the many hucksters at Forbes, Bloomberg or Reuters. A cushy job and comfortable salary await you. Good luck and Godspeed!

However, say you are one of those weird people cursed with a conscience; becoming a vapid mouthpiece for the establishment may not sound very appealing. Or, maybe you just have OCD and you can’t stand the idea of “creative math” when it comes to economic data. Whatever the case may be, you want to outline the deeper facts of the economy because the economy is life — it is the structure which holds together our civilization, and if we lie about it in the short term, then we only set ourselves up for catastrophe in the long run. Welcome to another dimension. Welcome to the world of alternative economics.

Every aspect of the U.S. economy or the global economy can be presented two very different ways depending on whether you “interpret” the data to fit a preconceived conclusion, or simply relay it to the public as it really is. Let’s use oil and the petrodollar as an example…

To illustrate the mainstream establishment reaction to legitimate economic concerns on oil, I highly suggest going back and reading an article by Foreign Policy, the official magazine of the Council On Foreign Relations, titled “Debunking The Dumping-The-Dollar Conspiracy,” published in 2009. The idiocy of this article was truly bewildering at the time it was released, but even more so now in retrospect.

First, it is important to note that Foreign Policy refused to even acknowledge the issue of the dollar losing petro-currency status until Robert Fisk of The Independent, someone closer to mainstream exposure, dared to broach the topic, warning that a trend was in play to dump the dollar as the petro-currency by 2018. The alternative economic community had been warning about the world moving away from U.S. oil dominance for some time beforehand.

Second, the CFR uses a typical circular fallacy when confronting the potential end of the dollar’s world reserve status; the fallacy that the dollar is the world reserve currency because “the U.S. is the preeminent world economic power.” Actually, the reverse is true — the U.S. is the world’s preeminent economic power only because the dollar has world reserve status. It was also once an industrial powerhouse after WWII, but this was ONLY because the U.S. was one of the few manufacturing hubs in the world that wasn’t demolished by years of kinetic destruction. When you are the only game in town, of course you reap huge economic benefits including massive international investment, but not forever.

Today, obviously, the U.S. is far surpassed by other nations in the area of manufacturing and production, and has also been surpassed as the largest global importer and exporter. The “preeminence” argument is unmitigated garbage.

Third, almost every danger Foreign Policy dismissed as “conspiracy” back in 2009 is now coming true. Just as Robert Fisk warned, and just as the alternative economic community warned long before him, numerous shifts in the world of oil as well as geopolitical relationships have created a spiraling nexus of anti-dollar sentiment. Is it possible that the dollar will lose petro-status by 2018? Absolutely, and here is why…

While the U.S. remains the world’s largest oil consumer according to the Energy Information Administration (EIA), American consumption of petroleum products has greatly diminished over the past few years; falling demand by increasingly destitute U.S. consumers has left oil producers searching for buyers elsewhere. The World Economic Forum noted in 2015 the drastic fall in U.S. demand since the 2008 debt crisis, but this admission went largely unnoticed in the mainstream media. Interestingly, while demand was crashing, the price per barrel continued to skyrocket because of the Federal Reserve’s inflationary QE policies. Almost immediately after the Fed began tapering QE, oil prices drastically declined in line with the lack of existing demand.

Read More @ Alt-Market.com

Are Petrocurrencies Heading For Extinction?

by Irina Slav, Oil Price:

Petrocurrencies are breaking away from their traditional tight link to oil prices, but all it would take for this link to return is for prices to fall bellow their current range. This seems to be the general consensus among bankers interviewed by Bloomberg’s Natasha Doff and Anna Andrianova.

The change is especially obvious with the Russian ruble, the Norwegian crown, and the Canadian dollar. The ruble’s response to the recent string of gains in oil prices was muted; the Norwegian crown barely batted an eyelash at latest price changes; and the Canadian dollar has weakened despite the oil price movements.

It seems there are two factors determining this break between the most-traded commodity in the world and its largest producers: one, interest rates; and two, the price range of oil. Russia, for example, offers high real yields for investors, which has made the ruble more attractive despite weaker oil prices over the last two years. Even a recent interest rate cut of 25 basis points to 8.25 percent didn’t discourage forex traders from buying the Russian currency, Doff and Andrianova note.

The situation isn’t much different in Canada: Ever since June, when the central bank raised interest rates for the first time in seven years, the correlation between the Canadian dollar and crude oil has weakened. This, analysts note, highlights the growing importance of central bank policy compared with the significance of the oil industry for the state budget in each of these countries.

Norway is awaiting an interest rate increase, but it has booked stronger-than-expected economic growth, which has helped weaken the link between the crown and oil. Still, like the ruble and the Canadian dollar, the crown is likely to suffer if a sharp drop occurs in oil prices, as all commodity-related currencies are more sensitive to downward movements in the commodity’s price than to price increases.

The message from bankers and commodity analysts seems to be that it’s too early to celebrate a complete break between oil and the currencies of its biggest producers, but the link between them has certainly weakened and frayed.

Traditionally, petrocurrencies fall when oil prices fall, as this signals a decline in demand for the commodity. This time, oil demand is relatively strong and it is supply that is the reason for the low prices, which explains the limited effect of the price changes on the currencies. At the same time, only the mention of a possibility for weakening oil demand would be enough to cause a price drop, and if other factors emerge and this drop is below $40, petrocurrencies will be hurt.

Read More @ OilPrice.com