As a reminder we are not living in normal times despite main stream media attempts to frame reality in such terms. The debt levels in the Western world are approaching a 200-year high, according to a new report by the International Monetary Fund. For six years the world’s central banks have been conducting an extreme monetary policy experiment. This cannot however continue indefinitely for there is no higher authority left to bail us all out, no central bank of Mars upon which to call. The final countdown has begun and the reckoning will come within our lifetimes.
These are the highlights of my annual predictions that I have been producing since 2008 the full document (19 pages) is available on request.
The ending of sanctions could put something like 400,000 bpd back on the market.
Things are still a mess and are unlikely to get better anytime soon and while there will likely be fluctuations in both directions overall production will average the same as 2013.
Despite the early hype about Iraq’s potential post war production the reality is finally starting to bite as the country is close to agreeing to sharp cuts with major Western oil companies in production targets set out for them at some of its largest oil fields. Link Despite this I’m going for a rise of about 200,000 bpd due to new export facilities coming into operation.
As of 2011 earnings from the oil industry (including taxes and direct payments from PEMEX) accounted for 34 percent of total government revenues. The optimists would have us believe that the opening of the oil sector to private investment will bolster production to new highs. Much like Brazil I think most analysts will be disappointed and I see only marginal gains at most. whilst the steep decline in their super giant field Cantarell has been partially made up for by Ku-Maloob-Zaap (KMZ) the big plays are all tapped out. As production only tells part of the story I prefer to look at the total exports which is also a reflection of a change in domestic consumption.
Total Crude Oil Exports:
I think the trend is pretty clear with 2009 when the world economy and commodity prices crashed being the only anomaly. Expect a further decrease in exports in 2014.
The government has for several years diverted funds that were needed for maintaining the oil industry and have instead used them to prop up the government. I’m projecting a decline of around 300,000 bpd compared to 2013 by year end
Planned production additions amount to 200,000 bpd assuming they come on line in time.
I see some continued growth in shale oil production in 2014, but not any where near the 700,000 that some analysts expect. I’m going for a peak by the end 2015 at a level not significantly higher than 2014.
As per last year’s predictions oil prices averaged $110 a barrel for Brent, but were higher for WTI than I expected (in fact the highest average price since 2008.) Here I’m taking a view ccontrary to the expectations of most analysts & I expect the average price of both Brent & WTI will rise in 2014 and will be closer to the 2012 all time (average) high. The spread between the two bench mark grades will further tighten as additional pipeline capacity eases the Cushing glut. In other words for all the hype about the US energy renaissance I don’t think even WTI will see any significant downward pressure over the year as a whole.
Growth will again be downgraded from optimistic early estimates in the revised figures by year end. The municipal bond market will come under extreme stress as further cities are dragged through bankruptcy and student loan defaults will soar. The Fed taper will pass more or less unnoticed by the stock market, but yields on treasury bonds will creep upwards. The important point here is that the fed will not end QE in 2014 or 2015 or ever unless it is forced to do so by extreme circumstances and it will certainly not end it due to an improving economy.
Asia will be very much the focus of a new wave of crisis economically and politically originating in Thailand. Military tensions will continue in the south china sea with a new arms race building pace.
Australian manufacturing was in contraction for most of 2013 and mining peaked as Chinese demand stalled. The Reserve Bank of Australia has like so many others entered into the global game of currency debasement in an attempt to boost exports. I see a slowdown in exports to China hitting growth although not to the dramatic extent of 2009.
China has returned to strongman politics and will continue its aggressive stance into 2014 and beyond. The true state of the Chinese economy will remain opaque at best which is worrying as so much of the direction of the world economy will depend upon the actions of this single nation. China’s local debt has now risen to 17.9 trillion Yuan ($2.95 trillion) Link and now equals roughly 33 percent of China’s gross domestic product, up from about 10 percent in 2008 and almost nothing in 1997 Link. There will at some point be a slow down although exactly when is anybody’s guess.
The euro area will have another poor year in terms of economic fundamentals with growth being anaemic at best. Stress will begin to show in the bond market with rising yields. The rise of nationalist and extremist parties in Europe will become more prevalent. Look out for France as it will be one of the worst performers outside of Greece. What begun as an economic crisis is beginning to morph into a political one, there were the Pitchfork Protests in Italy and the Red Cap Protests France. In Spain Mariano Rajoy has been embroiled in a corruption scandal while a separatist movement takes hold in Catalonia. Maybe not in 2014, but at some point somewhere in the Euro zone a referendum on euro membership will be held. All it will take is one member to defect and then the cracks will start to appear in earnest.
It seems almost impossible to untangle the Gordian Knot that is Italian politics, but there is an interesting trend that is occurring in common with many other countries in the Euro zone and that is the rise of Euro scepticism. In this case represented by the rise of Beppe Grillo which caught many observers by surprise.
Unemployment is over 27% with youth unemployment over 50%. Much has been made about Greece’s current account surplus which EU accounting rules declare it to be a €2.78bn surplus, but this is ignoring interest on bailout funds. Greece actually ran a primary deficit of €2.86bn in cash terms for period Jan-Nov in 2013. The best thing I can say about Greece is that the pace of decline is slowing and this will likely continue into 2014.
Sadly Japan is in a mess and is not likely to improve anytime soon. The Fukushima issue has not been resolved and if anything things appear to be deteriorating with each new data release. Economically Abenomics has been a failure by any objective measure. inflation or should I stay stagflation is increasing slightly, but wages are not catching up. Should core inflation get anywhere near north of 2% Japanese bond yields will have to rise a disaster for a country as deeply in debt as Japan. Relations with China one of Japan’s biggest export markets shows no sign of easing and economically this is yet another nail in their coffin.
Stagflation to various degrees with high food inflation & power cuts with be partially evident.
The economy will continue to be affected by the political crisis which will reach a resolution by the end of the year although much metaphorical and physical blood will be spilt before its all over.
In 2012 80% of the buyers of London property were foreigners and in 2013 £16bn of overseas money flooded into the London commercial property market. As far as London is concerned this bubble still has some legs and could be further buttressed if the crisis in the Eurozone bubbles more visibly to the surface as Euro zone citizens look to safe guard themselves against currency risk. For the rest of the country though things do not look as bright although the capitals overweight contribution to GDP will continue to mask the imbalances. Back in 2008 I warned about potential problems with the national grid and the nation’s electricity supply and its interesting that elements of this are now becoming main stream. A recent example of which was the energy regulator Ofgem warning of possible power shortages by 2015. Link.