Traders brace for eurozone crisis fallout

The German chancellor warned that Standard & Poor's decision to downgrade nine eurozone countries on Friday evening demonstrated that politicians needed to step up their efforts to resolve the crisis, warning that it was a "longer process" that would take more than a few months.

"The decision confirms my conviction that we have a long way ahead of us before investor confidence returns," she said in a radio address. Germany was not among the countries downgraded.

The downgrades, after markets closed on Friday, marked a further escalation of the debt crisis, which has seen investors lose faith in euro governments' ability to service their debts.

Stalled talks over "haircuts", or writedowns, of Greek government debt will further worry investors, as they pose the threat of Athens making a disorderly default.

Nicolas Sarkozy, the French President, yesterday called for cool heads after his country was scalped of its prized triple-A rating, pushing up its borrowing costs.

"The crisis can be overcome provided that we have the collective will and the courage to reform our country," he said. "We must resist, we must fight, we must show courage, we must remain calm."

The rating agency had explained its move by warning that recent European policies "may be insufficient to fully address systemic stresses in the eurozone". While downgrades were widely rumoured, its decision to cut the ratings of some but not all eurozone nations has complicated the political situation.

In the UK, William Hague, the Foreign Secretary, warned that the clutch of downgrades "is serious. It underlines the fact that the eurozone is not through its problems."

Spanish Prime Minister Mariano Rajoy, responding to his country's own downgrade, pledged spending cuts and a reform of Spain's banking system.

While European leaders appeared to be signing from the same hymn sheet of reform yesterday, eurozone officials suggested there remained considerable doubts over how the region's bail-out fund would be funded, and by who.

"There is a debate. The question is still open and there is no consensus so far," one official reportedly told news agency AFP. Germany is thought to be still unwilling to increase its contribution to the European Financial Stability Facility (EFSF). The S&P downgrades could hit the EFSF's triple-A rating, economists have warned, sending borrowing costs higher.

In an example of the affect the crisis is having outside the region, Japan's prime minister warned that his country, hobbled with the world's largest debt load, could fall into the same problems. Yoshihiko Noda said Europe's situation "isn't a house burning on the other side of the river," telling voters: "We must have a great sense of crisis."

Attempts to stabilise the euro situation were further undermined on Friday after talks between the Greek government, international lenders and private sector holders of Greek debt collapsed.

Officials from the "troika" of Greece's international lenders – the International Monetary Fund, European Commission and European Central Bank – are due in Athens tomorrow to assess the country's efforts in cutting its borrowing and enacting reforms.

View the original article here

Oil markets brace for Saudi 'rage' as global spare capacity wears thin

The flow of Libyan oil has so far fallen by 1m bpd. This may not sound much against global supply of 88m, but oil prices are determined by levels of spare capacity once supply tightens.

Beyond a certain point, the price spiral can kick in with explosive force until the economic damage crushes demand.

Libya's conflict has already cut spare capacity by a third. Hopes for a quick solution are fading as the country succumbs to civil war along ancient lines of tribal cleavage. A raft of new projects planned for the Sirte Basin by mid-decade will be mothballed.

Chris Skrebowski, editor of Petroleum Review, said the long-denied oil crunch is starting to bite. "We cling to the comfort blanket that spare capacity exists, but it is mostly fictional, or inoperable. If you take 2m bpd off the figure, the whole dynamic of global oil supply changes," he said.

A Wikileaks cable cited a Saudi geologist claiming that the kingdom's reserves had been overstated by 40pc. A second cable questioned whether the Saudis "any longer have the power to drive prices down for a prolonged period".

Some investors see trouble. They are buying oil options contracts for $150 and $200 a barrel with expiry dates late this year, either as a bet or as an insurance against Mid-East mayhem. Barclays Capital said the options "call skew" is more stretched now that it was during the 2008 spike.

The implication is that markets are less sure this time that the crisis will blow over quickly, perhaps because the events the last month amount a strategic rupture.

The entire political order of the Middle East has effectively disintegrated, risking of years upheaval in a region that provides 36pc of global oil supply and holds 61pc of proven reserves.

Mass protest by Bahrain's Shi'ite majority against the ruling Sunni dynasty has been a rude awakening for investors who thought oil wealth would shield the Gulf against turmoil.

"We in the West have been listening to the wrong people," said Mr Skrebowski. "We have not been talking to the young: we missed what was happening underneath."

Bahrain sits at the epicentre of the world's energy system. It is a hop to Saudi Arabia's Eastern Province, home to an equally aggrieved Shi'ite population and the kingdom's giant oil fields.

Bahrain's Al Khalifa family has sought to defuse the island's crisis since the original crack-down, when seven people died. Yet protesters have refused to drift away, digging in at the financial hub and staging rallies outside the interior ministry. Sectarian violence between Sunni and Shia has been escalating.

What happens on the tiny island is being watched with alarm across the Gulf. The "demonstration effect" has already led to Shia protests in the Saudi oil region. Saudi police have released a Shia cleric arrested last week for demanding a constitutional monarchy.

Yet the country's Wahabi clerics also warned against "sedition" and violations of Islamic law, while the interior ministry said all rallies were banned and warned that police would use "all measures to prevent any attempt to disrupt public order."

The threats aim to quash a "Day or Rage" planned by cyber-protesters for Friday, allegedy swollen to 17,000. A similar event in Syria was nipped in the bud by secret police.

The world's economic fate now hangs on the success of Wahabi repression. Any sign that the Saudis are losing their grip risks an oil shock large enough to derail the global recovery.

Nobody knows where the "inflexion point" is. Bank of America says we are already in the danger zone since energy costs as a share of global GDP have reached 8.5pc, near historic peaks.

Deutsche Bank said the outcome differs depending on whether spikes are driven by booming demand or a supply crunch. It warns that a sudden jump to $150 will abort world recovery.

Former Fed chief Alan Greenspan said economists have been "bedevilled by over the years" trying to quantity the effect of oil shocks. "We don't know fully where all the channels are. My view is that when oil prices get up to this area and start to move up even higher, you do have to start to worry."

Energy & Utilities and Oil & Gas vacancies at Telegraph Jobs

View the original article here

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.