FRACTIONAL FLOW

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Archive for the ‘households debt growth’ Category

Are We In The Midst Of An Epic Battle Between Interest Rates And The Oil Price?

What follows are the continuance of my research, discussions, observations and thoughts around the nexus of debts, interest rates and the oil price.
I now believe these relations are poorly understood and with total global debt levels at all time highs (and growing), years of low interest rates, which are kept low (by concerted efforts by central banks) while the oil price in recent months has collapsed may hide a SIGNAL that struggles with attention from too much noise.

  • A collapsing oil price while interest rates remain low is likely the proverbial canary.

Global Crude Oil Supplies, The Oil Price And Interest Rates

Figure 1: The green area [left hand axis] in the chart above shows the world’s development of crude oil and condensates supplies between 1980 and 2013. The pink line shows the development in the interest rate (yield) for US 10 Year Treasuries [right hand axis]. The price of oil (Brent), black line nominal, yellow line inflation adjusted in $2013 [both right hand axis]. NOTE: The oil price has been divided by 10 to accommodate it on the same scale as the interest rate [right hand axis]. The US 10 Year Treasury (US10T) interest rate has been in decline and is presently around 2.0%.

Figure 1: The green area [left hand axis] in the chart above shows the world’s development of crude oil and condensates supplies between 1980 and 2013.
The pink line shows the development in the interest rate (yield) for US 10 Year Treasuries [right hand axis].
The price of oil (Brent), black line nominal, yellow line inflation adjusted in $2013 [both right hand axis].
NOTE: The oil price has been divided by 10 to accommodate it on the same scale as the interest rate [right hand axis].
The US 10 Year Treasury (US10T) interest rate has been in decline and is presently around 2.0%.

Cause and effects amongst the oil price and interest rates are of course subject to (some informed and gripping) discussions.

  • The price of oil appears to have been the leading indicator.
  • Any (small) increase to the interest rate now will likely affect demand for oil and thus its price, thus further slowing investments for new supplies.

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World Crude Oil Production and the Oil Price

In April 2012 I published this post about World Crude Oil Production and the Oil Price (in Norwegian) which was an attempt to describe the developments in the sources of crude oils (including condensates), tranches of total life cycle costs (that is [CAPEX {inclusive returns} + OPEX] per barrel  of oil) and something about the drivers for the formation of the oil price.

Rereading the post and as time passed, I learnt more and therefore thought it appropriate to revisit and update the post as it in my opinion contains some topics from what I have observed, learned and discussed that have been given poor attention and appears poorly understood.

I will continue to pound the message that oil prices are also subject to the reality of;

  • “Demand is what the consumers can pay for!”

Figure 1: The chart above shows the developments in the oil price [Brent spot] and the time of central banks’ announcements/deployments of available tools to support the global financial markets which the economy heavily relies upon. The financial system is virtual and thus highly responsive. The chart suggests causation between FED policies and movements to the oil price.

Figure 1: The chart above shows the developments in the oil price [Brent spot] and the time of central banks’ announcements/deployments of available tools to support the global financial markets which the economy heavily relies upon. The financial system is virtual and thus highly responsive.
The chart suggests causation between FED policies and movements to the oil price.

The four big central banks, BoE, BoJ, ECB and the Fed expanded their balance sheets with $6 – 7 Trillion following the Lehman collapse in the fall of 2008. These liquidity injections are about to end.

Since 2008 most of the advanced economies’ credit expansions originated from the central banks, the lenders of last resort. Central banks are collateral constrained.

The consensus about the oil price collapse during the recent weeks is attributed to waning global demand and growth in  supplies.

All eyes are now on OPEC.

  • Any forecasts of oil (and gas) demand/supplies and oil price trajectories are NOT very helpful if they do not incorporate forecasts for changes to total global credit/debt, interest rates and developments to consumers’/societies’ affordability.

For more than a decade, I have carefully studied the forecasts (and been involved in numerous fruitful [private] discussions) from authoritative sources like the Energy Information Administration (EIA) and the International Energy Agency (IEA) including the annual outlooks from several of the major oil companies and I did NOT find that any of these takes into consideration changes to global credit/debt [growth/deleveraging], levels of total global credit/debt and interest rates.

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The Crude Oil Price and Changes to Total Global Private Credit/Debt

This is another installment of my work in progress about credit, interest rates and the oil price. Though many of the mechanisms for some time (as in several years and in some circles) have been well understood, nothing beats having the cover of data/reports from authoritative sources.

In this post I present the observations and results from the research of the developments in some selected OECD countries and emerging economies (non OECD) in their petroleum consumption together with the relative developments in their total non financial debt since 1999.

This may put into context how emerging economies were able to grow their petroleum consumption as the oil price grew and remained high. Likewise provide some insights into some of the mechanisms at work that caused a decline in petroleum consumption for the selected OECD countries.

The selected countries presented and the world had the following changes in their total petroleum consumption between 2005 and 2013 based upon data from BP Statistical Review 2014:

OECD countries:  – 4.04 Mb/d (decline)

Emerging economies: 8.39 Mb/d (growth)

Growth in world petroleum consumption: 6.94 Mb/d

The numbers illustrate that the emerging economies’ total growth in petroleum consumption was greater than the world’s from 2005 to 2013. These emerging economies effectively bid out OECD for a portion of its consumption to meet its own growing demand.

·         How was this accomplished?

·         Were the emerging economies about to decouple from the advanced economies?

·         What caused petroleum consumption for the OECD countries to decline?

I set out to explore what could be the likely causes by looking into the relative changes in total non financial debt of these countries armed with data from the Bank for International Settlements (BIS, in Basel, Switzerland) placed together with the changes in their petroleum consumption as from the end of 1999 with data from BP Statistical Review 2014.

It turns out that changes in petroleum consumption for these countries closely follow relative changes to total private non financial debts. Then add changes in sovereign/public debt.

Demand is not what one wants, but what one can pay for.

And expectations for demand drives investments for supplies.

Credit is a vehicle which allows for demand to be pulled forward in time and to some extent negates any price growth and allows for investments to meet expected demand changes.

Credit works both sides of the demand and supply equation.

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NORWAY’s PETROLEUM ECONOMY STRUGGLES WITH DECLINING DEBT PRODUCTIVITY

In this post I present a closer look into the developments in the Norwegian Gross Domestic Product (GDP) and the Marginal Productivity of Debt (MPD) from households, non-Financials and municipalities.

Further a brief update on developments in credit/debt growth (for households, non-Financials and municipalities) in Norway. Sovereign debt and debts in the financial sector are not included in this analysis and for a complete analysis ALL DEBTS have to be included. Norway is a small and open economy that is exposed to developments in the global economy (like the price of oil) and its trade relations.

This post is an expansion to my previous post A closer Look into the Drivers of the Norwegian Economy’s recent Growth Success with some updates.

The post also presents a brief look at how recent years developments in the oil price and total petroleum extraction and sales have affected Norwegian GDP, credit/debt growth, the MPD and petroleum related expenditures and what this may portend for the near future.

NOTE: All financial data in this post are in the Giga Norwegian krone (GNOK; Billion NOK) unless otherwise specified. 6 NOK approximates now around 1 US dollar.

Figure 1: Chart above shows the development in the Norwegian Gross Domestic Product (GDP) split on mainland Norway (brown area) and petroleum and maritime activities (green area). The Norwegian petroleum activities are offshore within the Norwegian maritime economic zone. At present exchange rates Norway’s GDP for 2013 was around $500 Billion (nominal). The black line shows the development for total nominal disposable income for Norwegian households.

Figure 1: Chart above shows the development in the Norwegian Gross Domestic Product (GDP) split on mainland Norway (brown area) and petroleum and maritime activities (green area). The Norwegian petroleum activities are offshore within the Norwegian maritime economic zone. At present exchange rates Norway’s GDP for 2013 was around $500 Billion (nominal).
The black line shows the development for total nominal disposable income for Norwegian households.

The chart illustrates how the Norwegian GDP has been on a steady growth trajectory during the recent four decades and how petroleum activities, which started in the late 1960’s,  gained in relative importance of GDP developments. The effects of growth in the petroleum activities are documented to spill over into the mainland GDP.
In 2013 around 23% of Norway’s GDP was from petroleum related activities.

The acceleration in the Norwegian GDP from around 2004 have been identified to come from two main sources;

  1. The growth in the oil price that really took off from around 2004 spilled over to the mainland economy.
  2. The credit/debt growth from households, non-Financials and municipalities.
    This was likely triggered by the growth in the oil price as it revived consumers’ perception of improved outlooks to service more debt as disposable income grew and interest rates started to decline (cheap credit), which again was reinforced from the feedback from rising housing prices and growth in stock indices (equity growth).

As Norwegian petroleum extraction is in general decline and its gross revenues subject to oil price developments, the remaining force to sustain Norwegian GDP growth is to entice the households for continued growth in debt financed consumption.

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A CLOSER LOOK INTO THE DRIVERS OF THE NORWEGIAN ECONOMY’s RECENT GROWTH SUCCESS

In this post I present some hard data from the Norwegian economy, which in the recent decades show high correlations between total debt growth and the oil price. Presently the total debt growth from some sectors runs at an annual rate above 8% of GDP.

I also present my thoughts and observations about historical developments and what may lie ahead.

The economic undertows now suggest for a sharp downturn in the Norwegian economy. A deep look into the public data from Statistics Norway (SSB) reveals that it was the growth in debt, primarily acquired by the Norwegian households, that was and still continues to be a major and less acknowledged contributor to the recent growth success of the Norwegian economy.

The primer for the strong nominal growth in debt was likely the growth in the oil price starting back in 2004. The oil price has remained at a structurally higher level at around $100/bbl.

Developments in the Norwegian economy have been tightly linked to movements of the oil price and the value of petroleum exports.

  • It is widely recognized that the growth in the oil price spurred more investments for exploration and developments for petroleum from the North Sea.
  • With the increased Norwegian North Sea petroleum activities followed an acceleration in households, non financial and municipalities debt growth.

Figure 1: The stacked columns in the chart above show the development in the 12 Months Moving Totals (Annualized) for Norwegian exports split on petroleum (oil, condensates and natural gas [green columns]) and exports exclusive of petroleum [black columns]. The orange line shows the development in the 12 Months Moving Totals (Annualized) for total imports and the pink line the 12 Months Moving Totals (Annualized) for the trade balance. 6 NOK ~ 1 USD By clicking on the chart a bigger version opens in a new tab/window (goes for all the charts in this post).

Figure 1: The stacked columns in the chart above show the development in the 12 Months Moving Totals (Annualized) for Norwegian exports split on petroleum (oil, condensates and natural gas [green columns]) and exports exclusive of petroleum [black columns]. The orange line shows the development in the 12 Months Moving Totals (Annualized) for total imports and the pink line the 12 Months Moving Totals (Annualized) for the trade balance.
6 NOK ~ 1 USD
By clicking on the chart a bigger version opens in a new tab/window (goes for all the charts in this post).

Norway had a long history of running a balanced trade account and with increased incomes from petroleum exports during the recent decades, a big trade surplus.

As the data on imports are not broken down by sectors, there is good reason to believe that a major portion of the import growth originates from purchases of goods and services for the petroleum industry.

The value of Norwegian petroleum exports is now expected to decline in the near term with the decline in production, primarily of crude oil and by the end of this decade also natural gas.

Anyhow the data were whipped around for confessions, it turned out the Norwegian economy now appear to approach a major turn around.

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