FRACTIONAL FLOW

Fractional flow, the flow that shapes our future.

The Oil Price and EMEs growth in Credit and Petroleum Consumption since 2000

In this post I present a closer look at the credit growth for 6 Emerging Market Economies (EME) together with the developments in their and the net oil exporters petroleum consumption for the period 2000 to 2014.

The 6 EMEs are; Brazil, China, India, Indonesia, Malaysia and Thailand.

  • Where did the lion’s share of growth in global petroleum consumption end up since 2000?
  • What was the likely mechanism/vehicle that allowed for this?

This post is an update and expansion to my post “Changes in Total Global Credit Affect The Oil Price”

  • The credit growth for the EMEs was strong in absolute and relative terms (also as a percentage of GDP) since 2009. As from 2013 the EMEs credit growth slowed (decelerated).
  • The EMEs credit growth gained momentum as the big central banks lowered interest rates and started Quantitative Easings (QE), refer also figures 02 and 04.
  • As the EMEs enter debt saturation (little room left on their balance sheets {little remaining quality collateral} to take on more credit/debt) expect this to affect their consumption and their potential to pay for higher priced oil.
  • Potential for continued [global] credit growth will for some time become one of the vital factors that define the sustainable ceiling for the oil price.
  • Demand is what one can pay for. In other words, demand is monetary in nature. Credit acts as money and adds to aggregate demand.
    Credit growth also made it possible to bid up and pay for higher priced oil during the recent years.
  • If the oil price, for whatever combination of reasons, moves to a sustainable higher level, it should be expected that those who are left with limited/no access to more credit will reduce their consumption/demand for oil.

Figure 01: The stacked areas in the chart show the growth in petroleum consumption for the 6 EMEs and the net oil exporters from 2000 to 2014 [2000 has been used as a baseline]. Total growth for the 6 EMEs are shown by the black dotted line. The red dashed line shows the change in total global petroleum consumption since 2000. [These are shown versus the right axis]. The development in the oil price is shown by yellow circles connected by a grey line versus the left axis.

Figure 01: The stacked areas in the chart show the growth in petroleum consumption for the 6 EMEs and the net oil exporters from 2000 to 2014 [2000 has been used as a baseline]. Total growth for the 6 EMEs are shown by the black dotted line.
The red dashed line shows the change in total global petroleum consumption since 2000. [These are shown versus the right axis].
The development in the oil price is shown by yellow circles connected by a grey line versus the left axis.

The chart above shows several interesting developments.

  • The strong growth in petroleum consumption from the 6 EMEs and net oil exporters since 2000.
  • Early in the previous decade the OECD countries also grew their petroleum consumption as a response to central banks’ lowered interest rates that allowed for further credit expansion [kicking the can until there is no more road left].
  • A shift occurred post the Global Financial Crisis (GFC) in 2008.
    The 6 EMEs and net exporters outbid OECD (and others) for a portion of their petroleum consumption.
    (This is shown by the growth in global petroleum consumption [the red dotted line] which since 2008 did not fully meet growth in consumption from the 6 EMEs and net oil exporters.
    The 6 EMEs and the net oil exporters increased their total petroleum consumption with 17.1 Mb/d (from 26.7 Mb/d in 2000 to 43.7 Mb/d in 2014), while global consumption grew by 15.2 Mb/d to 92.1 Mb/d.
  • OECD reduced its petroleum consumption from 48.0 Mb/d (2008) to 45.1 Mb/d (2014).
    OECD countries slowed and/or reversed credit expansion (deleveraged [default is one way to deleverage]) and introduced austerity measures in a bid to manage their credit overhang.
  • The net oil exporters (countries/regions) that saw noticeable growth in their petroleum consumption in the period are; Canada, Mexico, Colombia, Ecuador, Venezuela, Azerbaijan, Kazakhstan, Norway, Russian Federation, Turkmenistan and the regions Middle East and Africa. There are other small net oil exporters like Denmark, Trinidad&Tobago which had small changes to their petroleum consumption.
  • Indonesia became a net petroleum importer as of 2003 and Malaysia as of 2011.

The net oil exporters spent some of the increased revenues from higher priced oil for social programs to improve living standards and as leverage for increased investments to sustain and/or grow oil supplies (which require energy!) for what looked like a sustained growth in demand/consumption that would support a lasting high oil price.

This post is based upon data from the Bank for International Settlements (BIS) as per Q4 2014 and the BP Statistical Review of World Energy, June 2015.

Figure 02: The chart above shows the developments in the oil price [Brent spot, black line. The red line is the smoothed one year moving average] and the time of central banks’ announcements/deployments of available monetary tools to support the global financial markets which the economy relies heavily upon. The financial system is virtual and thus highly responsive. NOTE: The chart suggests some causation between FED policies and movements to the oil price. The US dollar is the world’s major reserve currency and most currencies are joined to it at the hip.

Figure 02: The chart above shows the developments in the oil price [Brent spot, black line. The red line is the smoothed one year moving average] and the time of central banks’ announcements/deployments of available monetary tools to support the global financial markets which the economy relies heavily upon. The financial system is virtual and thus highly responsive.
NOTE: The chart suggests some causation between FED policies and movements to the oil price. The US dollar is the world’s major reserve currency and most currencies are joined to it at the hip.

What follows is a set of charts for each of the 6 EMEs.

These 6 EMEs credit growth took off about ten years ago. This coincides with the time oil prices started to grow which left the impression that a structurally higher oil price would be supported by a tight supply/demand balance.

The first chart shows annualized credit expansion by quarter and developments in total private sector credit.

The second chart is a scatter plot of year over year (YoY) relative change in credit and petroleum consumption.

NOTE, the scatter charts do not incorporate the effects of changes in the oil price.

There are some common features for the 6 EMEs.

  • Credit growth accelerated as from 2009 (post the GFC of 2008).
    This was likely driven by China’s aggressive credit expansion in 2008/2009 following the Lehman collapse, refer also figure 04. Shortly thereafter China’s credit growth slowed, followed by a new acceleration as from late 2011. In 2013 China’s credit growth reached about 30% of GDP. From 2014 China’s credit growth started to slow.
  • In 2013 credit growth for the 6 EMEs started to decelerate.
  • Strong growth in petroleum consumption coincided with the strong growth in private credit expansion.

Brazil

Figure 03: The chart show developments in total non financial private debt in Brazil [red area, right hand scale]. The black columns show YoY changes in non financial private debt in Brazil by quarter [left hand scale].

Figure 03: The chart show developments in total non financial private debt in Brazil [red area, right hand scale].
The black columns show YoY changes in non financial private debt in Brazil by quarter [left hand scale].

Figure 04: The chart shows the YoY relative changes in total private non financial debt [horizontal axis] plotted versus the YoY relative changes in total petroleum consumption [vertical axis] for Brazil from 2001 to 2014.

Figure 04: The chart shows the YoY relative changes in total private non financial debt [horizontal axis] plotted versus the YoY relative changes in total petroleum consumption [vertical axis] for Brazil from 2001 to 2014.

Since June 2014 the Brazilian Real has depreciated about 40% versus the US dollar while the oil price declined around 57%, making crude oil priced in Real about 30% cheaper.

Recent reports tell that Brazil as of Q2 2015 has entered a recession.

China

Figure 05: The chart above show developments in total non financial private debt in China [red area, right hand scale]. The black columns show YoY changes in non financial private debt in China by quarter [left hand scale].

Figure 05: The chart above show developments in total non financial private debt in China [red area, right hand scale].
The black columns show YoY changes in non financial private debt in China by quarter [left hand scale].

Figure 06: The chart shows the YoY relative changes in total private non financial debt [horizontal axis] plotted versus the YoY relative changes in total petroleum consumption [vertical axis] for China from 2001 to 2014. The lines have arrows to show the sequence and developments. To ease identification some years are shown.

Figure 06: The chart shows the YoY relative changes in total private non financial debt [horizontal axis] plotted versus the YoY relative changes in total petroleum consumption [vertical axis] for China from 2001 to 2014.
The lines have arrows to show the sequence and developments. To ease identification some years are shown.

India

Figure 07: The chart above show developments in total non financial private debt in India [red area, right hand scale]. The black columns show YoY changes in non financial private debt in India by quarter [left hand scale].

Figure 07: The chart above show developments in total non financial private debt in India [red area, right hand scale].
The black columns show YoY changes in non financial private debt in India by quarter [left hand scale].

Figure 08: The chart shows the YoY relative changes in total private non financial debt [horizontal axis] plotted versus the YoY relative changes in total petroleum consumption [vertical axis] for India from 2001 to 2014. The lines have arrows to show the sequence and developments. To ease identification some years are shown.

Figure 08: The chart shows the YoY relative changes in total private non financial debt [horizontal axis] plotted versus the YoY relative changes in total petroleum consumption [vertical axis] for India from 2001 to 2014.
The lines have arrows to show the sequence and developments. To ease identification some years are shown.

Indonesia

Figure 09: The chart above show developments in total non financial private debt in Indonesia [red area, right hand scale]. The black columns show YoY changes in non financial private debt in Indonesia by quarter [left hand scale].

Figure 09: The chart above show developments in total non financial private debt in Indonesia [red area, right hand scale].
The black columns show YoY changes in non financial private debt in Indonesia by quarter [left hand scale].

Figure 10: The chart shows the YoY relative changes in total private non financial debt [horizontal axis] plotted versus the YoY relative changes in total petroleum consumption [vertical axis] in Indonesia from 2001 to 2014. The lines have arrows to show the sequence and developments. To ease identification some years are shown.

Figure 10: The chart shows the YoY relative changes in total private non financial debt [horizontal axis] plotted versus the YoY relative changes in total petroleum consumption [vertical axis] in Indonesia from 2001 to 2014.
The lines have arrows to show the sequence and developments. To ease identification some years are shown.

Malaysia

Figure 11: The chart above show developments in total non financial private debt in Malaysia [red area, right hand scale]. The black columns show YoY changes in non financial private debt in Malaysia by quarter [left hand scale].

Figure 11: The chart above show developments in total non financial private debt in Malaysia [red area, right hand scale].
The black columns show YoY changes in non financial private debt in Malaysia by quarter [left hand scale].

Figure 12: The chart shows the YoY relative changes in total private non financial debt [horizontal axis] plotted versus the YoY relative changes in total petroleum consumption [vertical axis] for Malaysia from 2001 to 2014. The lines have arrows to show the sequence and developments. To ease identification some years are shown.

Figure 12: The chart shows the YoY relative changes in total private non financial debt [horizontal axis] plotted versus the YoY relative changes in total petroleum consumption [vertical axis] for Malaysia from 2001 to 2014.
The lines have arrows to show the sequence and developments. To ease identification some years are shown.

Ringgit Falls on Concern Data to Show Further Reserve Depletion

Thailand

Figure 13: The chart above show developments in total non financial private debt in Thailand [red area, right hand scale]. The black columns show YoY changes in non financial private debt in Thailand by quarter [left hand scale].

Figure 13: The chart above show developments in total non financial private debt in Thailand [red area, right hand scale].
The black columns show YoY changes in non financial private debt in Thailand by quarter [left hand scale].

Figure 14: The chart shows the YoY relative changes in total private non financial debt [horizontal axis] plotted versus the YoY relative changes in total petroleum consumption [vertical axis] for Thailand from 2001 to 2014. The lines have arrows to show the sequence and developments. To ease identification some years are shown.

Figure 14: The chart shows the YoY relative changes in total private non financial debt [horizontal axis] plotted versus the YoY relative changes in total petroleum consumption [vertical axis] for Thailand from 2001 to 2014.
The lines have arrows to show the sequence and developments. To ease identification some years are shown.

The BIS research paper “Global dollar credit and carry trades: a firm-level analysis” from August 2015 provides some further insights:

“The answers to our pair of questions suggest that non-financial firms from emerging market economies (EMEs) have used US dollar bond issuance to take on financial exposures that have attributes of a dollar carry trade, in addition to any use of such funds for real investment. In this respect, our results add to the evidence that favourable global financial conditions have been important determinants of firms’ financing decisions, especially for firms from emerging economies whose dollar bond issuance activity has been a defining feature of the post-crisis period in international capital markets.”

..

“Our study points to a global liquidity effect coupled with country financial conditions as determinants of the dollar-carry trade. In addition to issuing more bonds, firms choose to issue in dollars to take advantage of a high Sharpe ratio associated with the dollar carry trade, i.e., a higher ratio of interest rate differential to exchange rate volatility. The fact that firms subsequently have a bigger propensity to save the dollar proceeds in cash raises the possibility that firms’ choices are motivated, at least in part, by financial risk-taking rather than real risk taking opportunities.”

When the US dollar was cheap and interest rates low, US dollar denominated debt was tempting. Since the fall of 2014 several of the currencies to these 6 EMEs has depreciated [including devaluation] versus the US dollar, making it more expensive [in local currency] to service their US dollar denominated debt. BIS estimates put the total US dollar denominated debt at $9.2 Trillion at the end of September 2014.

The decline in revenues for the net oil exporters affects their revenues and public spending capabilities.

  • Private credit expansion is a strong driver to the upside for economic growth. It becomes a potent driver to the downside when credit growth decelerates and/or reverses (deleveraging sets in) or carry trade unwinds.

“The greatest barrier to discover is not ignorance, it is the illusion of knowledge.”

Daniel Boorstin

Written by Rune Likvern

Saturday, 5 September, 2015 at 19:01

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