It’s That Time of Year!
It’s that Time of Year when OPEC meets for its December meeting and it looks as if it isn’t going any better than the last one. The Iranians are calling for a production cut and the Saudi’s that survived an assassination attempt of its US Ambassador by the Iranian’s don’t seem to want to go along. Gee I wonder why? The Iranian’s bluster is causing OPEC to be split apart and is it any wonder that these two countries are having a hard time sitting across the table from each other? OPEC will try to put on a good face by trying to come up with a new target that match’s current overproduction assuming the Iranian’s don’t want to stand in the way. Besides, despite all the bluster from the Iranians the Saudi’s have sent a strong message with their production prowess that when it comes to the Iranian’s they are not going to take it anymore. OPEC claims that quota bond members produced 27.687 million barrels a day in November up 1.8 percent from 27.187 million barrels in October.
There was a discrepancy in the Saudi production numbers. According to OPEC Saudi Arabia increased output last month by 1.9 percent to 9.597 million barrels a day. Bloomberg News point out that, “The Saudi production figure for November in the report is smaller than that provided by Saudi Arabian Oil Minister Ali al- Naimi, who said yesterday the kingdom pumped 10.047 million barrels a day last month.” That discrepancy may be what the Saudis agreed to trim under that table if need be to other members of the cartel but not to give satisfaction to Iran that they will see things their way. In other words once again the Saudis still wield the power in the cartel. Of course the Saudi’s are being flexible because of the rising oil production from Libya and Iraq both of which is coming on stronger than many has suspected.
This comes as the International Energy Agency lowered its forecast for world oil demand growth for 2012. Economic worries and the situation in Europe are expected to take a toll on demand yet it should still be strong enough to keep global markets tight till. Dow Jones reports that the Paris-based energy watchdog also trimmed its oil demand growth forecasts for the next five years in its medium-term outlook, led by assumptions of slower economic growth in North America and Europe. But oil demand is still set to increase by an average 1.2%, or 1.1 million barrels a year, led by countries outside the Organization of Economic Cooperation and Development. The IEA is forecasting global oil demand of 95 million barrels a day in 2016, up from 88.3 million barrels a day in 2010. The IEA forecast global oil demand at 90.3 million barrels a day in 2012 up from 89 million barrels a day this year.
For some time now when I have been on the Fox Business channel and when I talked to different clients about why gold is selling off because of the turmoil in Europe it really goes beyond just the strength in the dollar or the weaker demand from China and Europe. It goes to the very real possibility that if Europe falls apart the Eurozone may have to sell gold to support their economy. When I brought this concept up to some people they scratched their heads almost in kind of disbelief that would ever happen, but make no mistake about it if Europe fails that is exactly what may happen. In fact last week an article in the Financial Times said that this concept is not without president. The Financial Times wrote “Ever since the Eurozone bond markets first started to get the jitters, hedge fund managers have been whispering that gold could play a part in resolving the crisis. Until recently, this discussion has mainly been the preserve of gold market conspiracy theorists and backbench German politicians. But now the use of gold to fund a Eurozone bail-out is coming closer to reality. Buried within a draft of the European Commission study on joint ‘Eurobonds’, bonds reported by the Financial Times is the suggestion that gold could be used as collateral for these In order to “enhance” the guarantees on the Eurobonds, the draft says, governments could provide collateral, including “gold reserves which are largely in excess of needs in most EU countries”. Between them, the central banks of the Eurozone hold 10,792 tons of gold – 6.5 per cent of all the yellow metal that has ever been mined – worth some $590bn. Let’s be clear: this does not imply central banks are getting ready to sell gold to bail out the Eurozone. Beyond the numerous legal problems (selling reserves to fund government borrowing contravenes the Maastricht treaty), gold disposals just looks too desperate.
But bullion could be used as collateral. In fact, if Europe’s politicians truly believe that the problems of larger Eurozone countries such as Italy are based on liquidity rather than solvency, the use of gold as collateral could be a neat way to regain the confidence of the bond markets.
For prospective investors (no doubt including emerging market governments, sovereign wealth funds, and the like) the appeal comes from the likely hedge that the gold would provide against a default. If a country such as Italy were to default, most analysts believe, the price of gold (certainly when denominated in euros) would go sky high.”
The FT goes on to say that “For Eurozone countries, gold-collateralized bonds could unlock a large pool of new financing. Italy’s central bank, for example, holds 2,451 tons of gold, worth about €100bn. While that pales in comparison to its total debt stock of nearly 2,000bn Euro’s, it could alleviate some of the short-term funding pressure.
Italy needs to raise about €600bn over the next three years. If it used the yellow metal as collateral for the first 20 per cent of the new bonds, therefore, it could cover its needs until mid-2014. A successful sale of the gold-backed debt would create a virtuous circle, making it easier to raise money through non-collateralized borrowing. Such a deal has precedents. Indeed, Italy has done it before, when it received a $2bn bail-out from the Bundesbank in 1974 and put up its gold as collateral. In 1991, India used its gold as collateral for a loan with the Bank of Japan and others. And in 2008, according to the World Gold Council, Sweden’s Riksbank swapped its gold to raise cash and provide liquidity to the Scandinavian banking system. As Paul Mercier, then deputy director of market operations at the ECB, told a gold industry conference in 2009: “In a generalized crisis that leads to the repudiation of foreign debts or even the international isolation of a country […] gold remains the ultimate and global means of payment that is still accepted and it is one of the reasons used by some central banks to justify gold holdings.”
The problem is, as that statement implies, that countries have historically turned to their gold reserves only in the direst of situations. And lenders are likely to require that the gold is moved to a neutral location. India’s move to ship 47 tons to the Bank of England in its 1991 deal caused outrage within the country. Nonetheless, as the eurozone crisis grinds into its third year, it might just be time to dust off those Roman coins in the Banca d’Italia’s vaults.’ Great Read in FT!
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at email@example.com.