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Dying Petrodollar Ripples Through Markets As Asset Managers Bemoan Loss Of Saudi Bid

Dying Petrodollar Ripples Through Markets As Asset Managers Bemoan Loss Of Saudi Bid thumbnail

One of the key things to understand about China’s liquidation of hundreds of billions in US paper is that far from being a country-specific phenomenon, it actually marks the continuation of something that’s been taking place in other emerging markets for some time.

As we outlined in “Why It Really All Comes Down To The Death Of The Petrodollar,” the forced sale of Beijing’s UST reserves is simply the most dramatic example of what Deutsche Bank has called “quantitative tightening.” For years, reserve managers in the world’s emerging economies worked to accumulate war chests of USD-denominated paper in an effort to ensure that in a crisis, they would have sufficient firepower to guard against speculative attacks on their currencies and/or accelerating capital outflows. Slumping commodity prices and the threat of a supposedly imminent Fed hike have conspired to put pressure on these reserves and outside of China, nowhere is this dynamic more apparent than in Saudi Arabia. Indeed it was the Saudis who dealt the deathblow to the great EM reserve accumulation.

By intentionally killing the petrodollar, Riyadh effectively ensured that the pressure on commodity currencies would continue unabated, but as we’ve documented exhaustively, that was and still is considered an acceptable outcome if it means bankrupting the US shale complex and securing market share. But for Saudi Arabia, this is all complicated by three things: 1) the necessity of preserving the lifestyle of everyday citizens, 2) spending associated with the proxy war in Yemen, and 3) defense of the riyal’s dollar peg. All of those factors have served to weigh heavily on the county’s already depleted petrodollar reserves, and if the “lower for longer” crude thesis plays out, Riyadh may see further pressure on its current and fiscal accounts which are now both squarely in the red.

Of course all of the above is a drag on global liquidity and as we warned nearly a year ago, the death of the petrodollar means oil exporters are set to become net sellers of assets for the first time in decades.

As FT reports, markets are beginning to feel the effects. Here’s more:

Saudi Arabia has withdrawn tens of billions of dollars from global asset managers as the oil-rich kingdom seeks to cut its widening deficit and reduce exposure to volatile equities markets amid the sustained slump in oil prices.

 

The Saudi Arabian Monetary Agency’s foreign reserves have slumped by nearly $73bn since oil prices started to decline last year as the kingdom keeps spending to sustain the economy and fund its military campaign in Yemen.

 

The central bank is also turning to domestic banks to finance a bond programme to offset the rapid decline in reserves.

 

This month, several managers were hit by a new wave of redemptions, which came on top of an initial round of withdrawals this year, people aware of the matter said.

 

“It was our Black Monday,” said one fund manager, referring to the large number of assets withdrawn by Saudi Arabia last week.

 

Institutions benefited from years of rising assets under management from oil-rich Gulf states, but are now feeling the pinch after oil prices collapsed last year.

 

Nigel Sillitoe, chief executive of financial services market intelligence company Insight Discovery, said fund managers estimate that Sama has pulled out $50bn-$70bn over the past six months.

 

“The big question is when will they come back, because managers have been really quite reliant on Sama for business in recent years,” he said.

 

BlackRock, which bankers describe as the manager handling the largest amount of Gulf funds, has already reported net outflows from Europe, the Middle East and Africa.

 

Its second-quarter financial results reported a net outflow of $24.1bn from Emea, as opposed to an inflow of $17.7bn in the first quarter.

 

Market participants say the outflow is in part explained by redemptions from Saudi Arabia and other Gulf sovereign funds, such as Abu Dhabi.

Of course, as indicated above, this isn’t an isolated incident (i.e. it’s not confined to the Gulf states and China). The worse things get for EM, the more likely it is that countries will continue to draw down their reserves and indeed, if the situation continues to deteriorate in Brazil, it looks increasingly likely that Copom will become a seller as well.

Make no mistake, this is now a key factor in the FOMC’s decision making process, as EM reserve levels essentially serve as a proxy for trends in global liquidity and thus are one way of measuring the degree to which market conditions are poised to amplify a potential rate hike. We close with the following quote from Goldman, commenting on the above earlier this year:

We estimate that the new (lower) oil price equilibrium will reduce the supply of petrodollars by up to US$24 bn per month in the coming years, corresponding to around US$860 bn over the next three years. The ultimate impact, however, will depend on a number of key current account buffers (goods imports, net factor income and service imports). 

ZeroHedge



25 Comments on "Dying Petrodollar Ripples Through Markets As Asset Managers Bemoan Loss Of Saudi Bid"

  1. Rodster on Mon, 28th Sep 2015 7:58 am 

    China is selling its UST to save its ass from a catastrophic meltdown. It has little to do with taking it to the Petrodollar. It was also reported on ZH that a coal company in China fired/laid off 100,000 workers and supposedly that’s just the start. China is imploding and so is the rest of the world.

    Gloalizing the entire world thru banking and eCONomies was a bad idea. Now when a major player coughs everyone else catches a cold or gets sick.

    Infinite growth in a finite world was also a REALLY, REALLY bad idea. We have pissed thru millions of years worth of fossil fuels and have ruined the ecosystem to boot. Shipping lemons from Chile to Florida or oranges from California to Florida was also dumb.

    We are now beginning to pay the price for the JIT delivery system we built. We are all on the same sinking ship, the “SS Industrial Civilization”.

  2. Davy on Mon, 28th Sep 2015 8:20 am 

    Rodster nailed it. Likewise those in the U.S. that believe the U.S. immune to a Chinese hard landing need to look no farther than the fed who had its tail wagged by this Chinese crash. The U.S. is going to find having a reserve currency is very bad in hard times especially when you want so bad for things to be normal.

  3. BobInget on Mon, 28th Sep 2015 8:57 am 

    Afghanistan’s third largest city falls to Taliban. Thousand Islamic fighters released from prisons. NATO helpless.

    Shell gives up on Arctic drilling. Drops one hundred million dollars in process.
    “No commercial oil found”, low oil prices, reason sited. This is a profound event for Peak Oil followers.

    SECOND largest auto company, VW, facing 100 million car recall. Former CEO under gov. investigation.

    Due to artificially low oil prices/higher demand, the Saudis and friends have led the world down a garden path for which there is No Return.

  4. BobInget on Mon, 28th Sep 2015 9:04 am 

    Japan and China’s debts are to their own people. Both also hold massive foreign reserves.

    Most importantly , China’s crude resources extend worldwide. China is able to use their own currency, yuan, in trade for oil and other vital resources.

  5. makati1 on Mon, 28th Sep 2015 9:16 am 

    Nothing new here. The Petrodollar is dying along with it’s owner. As all of those US IOUs are redeemed, the dollar will fall. How soon is the only question.

    As for coal:

    “Moreover, with an increasing number of coal companies going bankrupt, the number of new and reactivated coal mines that began production in 2013 fell to the lowest level in a decade. Companies opened 103 new mines in 2013, while 271 were idled or closed — resulting in a 14 percent decline in the total number of active mines between 2012 and 2013.”

    http://www.ibtimes.com/us-coal-mines-continue-dwindle-weak-demand-takes-toll-2111573

    and…

    “Several coal producers in the U.S. have already gone bankrupt, including Alpha Natural Resources and Patriot Coal. Just this week, Arch Coal faced questions over a potential bankruptcy. Peabody, another major coal producer, is hoping to restructure some debt according to Bloomberg.”

    http://oilprice.com/Energy/Coal/Goldman-Sachs-Peak-Coal-Is-Here.html

    And the limbo music plays on…

    Blood all over the Stock Market floor this morning…

  6. Davy on Mon, 28th Sep 2015 9:19 am 

    Bob, you fail to fully understand debt is debt especially in a financial world as interconnected as ours. You corns love to try to explain these things away. You crow decouple when it is to your advantage and interconnectedness when it is to your advantage. Excessive debt in a deflationary global economic environment is very dangerous with any major power especially two in the top three. IMA a significant portion of US debt is also internal.

  7. onlooker on Mon, 28th Sep 2015 9:24 am 

    Bob is correct, China and the Brics have already taken the steps to come out from under the Petrodollar reserve currency. They have now means to trade oil in other Oil Bourses as well as issue their own money with as pointed out ample reserves. It is so obvious that now all over those who can are trying to leave the dollar as it is a inherently weak and unstable currency now compared to some others. Of course all this takes time and the House of Saudi and US have done what they could to forestall or reverse this trend. Yet excessive debt is utterly crippling the West and even to some degree China. The whole debt infrastructure is wobbling as worthless paper is meeting up with the reality of finite resources and mis- allocated investments as well as the realization that this economic system is at odds with a contracting or at least not growing world economic system. Nobody is isolated that was the strength now it is a weakness for all.

  8. Rodster on Mon, 28th Sep 2015 9:25 am 

    “and…

    “Several coal producers in the U.S. have already gone bankrupt, including Alpha Natural Resources and Patriot Coal. Just this week, Arch Coal faced questions over a potential bankruptcy. Peabody, another major coal producer, is hoping to restructure some debt according to Bloomberg.”

    Correct, which proves the point that everyone is on the same sinking ship. Choosing sides won’t do any good this time when it all comes crashing down.

    As the collapse intensifies you’ll be reading more of these stories about the US, China, Russia, EU etc, etc.

    No one escapes this time because we are now GLOBAL. It’s like the Leonardo Stick toy. If you try and pull one stick out you risk the toy collapsing.

    …And that my friend is the situation we are now in. All banking and economies are tied at the hip.

  9. onlooker on Mon, 28th Sep 2015 9:30 am 

    Great analysis Rodster. I would like the deniers or cornies to refute what you just said.

  10. Rodster on Mon, 28th Sep 2015 9:31 am 

    “Bob is correct, China and the Brics have already taken the steps to come out from under the Petrodollar reserve currency. They have now means to trade oil in other Oil Bourses as well as issue their own money with as pointed out ample reserves”

    Last time I checked, Brazil is imploding and the Brazilian President is looking at a potential overthrow.

    Taking steps to unlike from the Petrodollar and doing it are two totally different scenarios. The fact that we are all tied at the hip means it all comes crashing down if the system fails.

    So who buys the cheap Chinese trinkets when you have a complete global collapse? Right now in China their eCONomy is so bad that recyclers are moving out of the city because no one is buying their scrap.

  11. marmico on Mon, 28th Sep 2015 9:57 am 

    China and the Brics have already taken the steps to come out from under the Petrodollar reserve currency.

    What a crock of shit. Read the latest TIC data. No big deal.

    Year on year increases/decreases of U.S. Treasuries through July, 2015 in $billions:

    Brazil -2.0
    Russia -60.0
    India +38
    China -24

    A $48 billion decline in a $6 trillion market.

  12. onlooker on Mon, 28th Sep 2015 10:03 am 

    Yes I have to agree Rodster the System is already to unstable ,weak and intertwined for any big change to it.
    China and Russia have become closer and what I stated in others wish to verify is true yet that will not save them either. The age of scarcity is upon us and we are utterly unprepared especially economically to deal with it. I guess I was just seeing things from the point of view of the Brics and their plans.

  13. joe on Mon, 28th Sep 2015 10:29 am 

    The markets are chaotic because the computer systems driving them are trying to balance fundamental economic figures, like wage stagnation with nonsense statistical analysis about currencies which are rigged to favour the dollar and insane US budgets. It’s certain that QE has not ‘trickled down’ to consumers and instead cash is being hoarded by the very wealthy who need to be taxed now to spread that wealth around the economy to create the demand which is not there right now which is causing China so much hurt. But that kind of analysis belongs in another time of pre-globalisation and rational thought about economics in general, before we thought Goldman Sachs could solve the world’s money problems with rivers of more private debt, created of course at public expense.

  14. shortonoil on Mon, 28th Sep 2015 4:41 pm 

    “We estimate that the new (lower) oil price equilibrium will reduce the supply of petrodollars by up to US$24 bn per month in the coming years, corresponding to around US$860 bn over the next three years.”

    The difference between $45 oil, and $100 oil is now $1.87 trillion per year. The world’s oil producing EMs are now shipping their wealth to the oil consuming economies of the world by the supertanker load. $860 billion over three years is a pitiful drop in the bucket. Only the likes of Goldman Sachs are positioned to lose in this game; that is, at least until the producing sector goes bust.

  15. BobInget on Mon, 28th Sep 2015 6:50 pm 

    Shortonoil, respectfully.

    Your analysis is too vertical, IMO. By that I mean your leaving out the fact of several ‘oil wars’ in progress. I’m not talking oil ‘price’ wars though price is being used as a serious weapon.

    I’m not just referring to the US invasion of Iraq to ‘free’ Kuwait oil wells from the grip of Saddam.
    It’s up to historians to decide if Dick Cheney
    and George W were lying. (about true reasons for Iraq invasion)
    Besides, plenty of oil landed in Houston
    since, so, we put those oil wars to the side except to understand our current situations.

    I’m guessing shortonoil is loath to complicate
    an already terribly dense oil supply situation with geopolitics that don”t compute in any mathematical formula. I agree. Geology is easier to understand. I wish it were as simple as 101; supply and demand.

    Each and every oil war currently underway, has its own dynamic. Take Libya, please.

    Poor Yemen, embattled Iraq, starving Syria, bloodiest of all Sudan. I’ve yet to read any post where shortonoil (he doesn’t offer his actual name)
    acknowledges Russian and Iranian defense of ultra bloody Syrian President Assad. Nor do many peaker’s even give credence to WHY Saudi Arabia and Iran are fighting so fiercely over Syria.

    Does shortonoil examine motives for so called Islamic State? What are he and friends afraid of ? I’ll venture a guess.

    Petroleum is vital to our current civilization.
    (agreed?)

    The very fact that every US president only truly understands that after, not before, taking office underlines all the terrible
    decisions (up till now) ‘he’ makes in the energy sector.

    If ‘we’ the West were to truly revalue petroleum (its side effects and geopolitical
    importance) it would become unaffordable.

    Leaders need to pretend oil is freely available with few if any strings attached.
    This despite barrels of evidence to the contrary.

  16. JuanP on Mon, 28th Sep 2015 7:25 pm 

    BobInget, I want to apologize once more for calling you names the other day. I was wrong. As far as I am concerned you are a valued member of this board.

  17. shortonoil on Mon, 28th Sep 2015 8:13 pm 

    “Each and every oil war currently underway, has its own dynamic.”

    Each an every oil war is spawned from the same dynamic. The US constitutes 4.4% of the world’s population, and consumes 21% of the world’s petroleum production. We can do that because the world of oil is ruled (at least for now) by the dollar. And where, one may ask do dollars come from? They are created out of thin air by the FED, and US Treasury department. The US swaps magically created dollars for 6 million barrels of oil per day. As long as it can do that, it will remain the richest nation in the world.

    To continue doing the rabbit out of the hat trick, the dollar must rule the world of oil. To ensure that the world understands that dollars are to be used in the business of oil the US has built the largest war machine the world has ever know. The world uses dollars in its oil trade, or gets the “shock and awe” treatment. Oil wars are not about oil, they are about the PetroDollar. As long as all oil is bought and sold in dollars it doesn’t make any difference who controls the oil; the US controls the dollars.

    Get that silly notion out of your head that Syria, Iran, Libya or any other ME nation is important to the US. It is the PetroDollar that is important to the US, and the US is willing to destroy the world to defend it!!!!!!

    BW Hill
    http://www.thehillsgroup.org/

  18. makati1 on Mon, 28th Sep 2015 8:18 pm 

    Marm, would you please submit the references to your assertion?
    Supposedly, China sold multiples of that number in August alone.

  19. BobInget on Mon, 28th Sep 2015 9:26 pm 

    Shortonoil, thank you for you totally predictable reply. BTW, we agree on many things. The first of which is to disagree.

    Our strong dollar speaks for itself. A curse for any nation importing so called ‘cheap oil’.
    IMO the fist country to go off ‘Petro Dollars will be Venezuela. The wider, deeper Panama Canal makes two way trade with China practical using yuan denominated goods/

    Shortonoil contends wars in Africa, the Middle East, perhaps the China Sea are more about America’s Petro Dollar and not the very
    commodity contained within the nick-name.
    Wikipedia:
    Origin[edit]
    In an effort to prop up the value of the dollar, Richard Nixon negotiated a deal with Saudi Arabia that in exchange for arms and protection they would denominate all future oil sales in U.S. dollars.[2] Subsequently, the other OPEC countries agreed to similar deals thus ensuring a global demand for U.S. dollars and allowing the U.S. to export some of its inflation.[citation needed] Since these dollars did not circulate within the country and thus were not part of the normal money supply, economists felt another term was necessary to describe the dollars received by petroleum exporting countries (OPEC) in exchange for oil, so the term petrodollar was coined by Georgetown University economics professor, Ibrahim Oweiss.
    Because the United States was the largest producer and consumer of oil in the world, the world oil market had been priced in United States dollars since the end of World War II.[3] International oil prices were based on discounts or premiums relative to that for oil in the Gulf of Mexico.[4] But, although oil sales prior to 1973 were denominated in U.S. dollars, nothing precluded settlement in local currency.
    In October 1973, OPEC declared an oil embargo in response to the United States’ and Western Europe’s support of Israel in the Yom Kippur War, and this tension (and the new power of OPEC) led to fear that the dollar would become insignificant in the oil trade.
    Financial impact[edit]
    Large inflows of petrodollars into a country often has an impact on the value of its currency. For Canada it was shown that an increase of 10% in the price of oil increases the Canadian dollar value versus the US dollar by 3%[5] and vice versa.

    No modern War Can be fought without Oil
    Vast quantiles of food to feed burgeoning populations cannot be grown without oil.

    There you have it; fightin, food and sex.
    I rest my case.
    .

  20. Boat on Mon, 28th Sep 2015 10:52 pm 

    onlooker, rodster

    “Several coal producers in the U.S. have already gone bankrupt, including Alpha Natural Resources and Patriot Coal. Just this week, Arch Coal faced questions over a potential bankruptcy. Peabody, another major coal producer, is hoping to restructure some debt according to Bloomberg.”

    I will take that on. The main reason coal companies in the US are going under is because nat gas is cheaper and legislation for cleaner air that requires expensive renovation.
    Nat gas has taken over 20% of coals market just in the last 10 years. Correct, which proves the point that everyone is on the same sinking ship. Choosing sides won’t do any good this time when it all comes crashing down.
    Another reason coal was hit hard is Most states have set aggressive renewable goals. Glad I could help set you out. Google it.

  21. makati1 on Mon, 28th Sep 2015 11:21 pm 

    Boat, about 39% of America’s electric is STILL produced by burning coal. (2014)

    http://www.eia.gov/tools/faqs/faq.cfm?id=427&t=3

  22. Boat on Mon, 28th Sep 2015 11:43 pm 

    mak,
    I knew that. Check back 10 years and it was 60%. since fracking coal started dying.

  23. GregT on Tue, 29th Sep 2015 12:28 am 

    “The U.S. coal industry, already struggling with low natural gas prices and federal regulations, is now facing cheap foreign competition that’s boosting the nation’s imports and cutting its exports.

    After plunging from their peak in 2007, U.S. coal imports have reversed course. They’ve jumped 57% in the first five months of this year compared with the same period in 2013, according to data from the U.S. Energy Information Administration.

    Of the 2.4 million tons imported in this year’s first quarter, two-thirds came from Colombia and nearly one-fourth from Indonesia.

    “U.S. power plants on or near Eastern or Gulf ports can access coal much more cheaply from these traditional offshore exporting countries than they can from the U.S. interior,” says Luke Popovich, spokesman for the National Mining Association. Despite the long distances involved, he said it often costs less to ship coal from a foreign port to a U.S. port than to move it by rail within the U.S.”

    http://www.usatoday.com/story/money/business/2014/08/02/us-coal-imports-up-but-exports-down/13368199/

  24. GregT on Tue, 29th Sep 2015 12:39 am 

    “All banking and economies are tied at the hip.”

    Correct Rodster

  25. shortonoil on Tue, 29th Sep 2015 9:36 am 

    “Our strong dollar speaks for itself. A curse for any nation importing so called ‘cheap oil’.”

    A curse for any nation except the US. The US just has to print the dollars, and no one gets oil without dollars. The US gets 6 million barrels a day for the price of a pile of confetti, and a promise to some day (no specific time exacted) pay it back. The US policy, front and center, has been to insure that no one can get in a position to challenge the PetroDollar. The few that have tried were delivered a cruise missile in their backyard. The US could care less where its oil comes from as long as it is bought, and sold with dollars.

    To understand what is occurring in the geopolitical arena try studying the quotes of Nathan Rothschild.

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