Oil Prices – Who Wins and Who Loses?

Due to Trump’s recently announced Iran trade sanctions and OPEC led geopolitical shifts, oil prices have soared to a three and a half year high since March 2018. Saudi Arabia are set to benefit greatly from this if they look to use the opportunity to diversify their economy, but consumers will be left footing the bill all around the world as companies pass on their new oil expenses.

Donald Trump is reinstating sanctions on Iran, one of the world’s major oil suppliers, claiming the deal was a “horrible agreement” and “an embarrassment” during his speech on Tuesday, May 8th. In restricting trade with Iran, he inadvertently increases the price of oil by reducing supply to the market. This has happened at a point in which crude oil prices were already estimated to breach the $80 mark due to other geopolitical factors.

Aside from Trump’s involvement, OPEC has rallied its efforts to reduce exports, curtailing the quantity supply to the demand, therefore erasing a global surplus. Consequentially, we could soon see a global shortage of crude oils – theoretically increasing the value of crude oil for years to come. Other factors include a 0.6 million barrel per day reduction in supply from Venezuela due to domestic issues, aging wells naturally depleting all over the world, and exhausted supplies from China and Angola.

Saudi Arabia, who can use the money from oil to diversify its economy from this single commodity propping up its market, are set to benefit from this opportunity greatly. These circumstances fuel its long-term “2030 vision” which seeks to lessen domestic reliance on oil. Unsurprisingly, this OPEC member has led the way in curbing supplies by 0.7 million barrels a day since 2016.

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Although OPEC countries will thrive in this economy, airlines may experience some turbulence as they pass on surmounting costs to the consumer. They will inevitably have to dump the pain of expensive fuel unevenly to jetsetters meaning flights prices might increase above inflation. Airline analyst Savanthi Syth claims this will mainly affect leisure travel lines – whose consumers are highly price sensitive – and are more loyal to price than to brand. This is opposed to business travel airlines, who will not suffer much grief in passing the costs along.

Despite this, budget airlines could use these incidents to push their brand as being the cheapest – taking a short term hit to profit and hoping for long term loyalty after the oil hype dies down – if it ever does.

 

Is It Finally Euro-Russian Economic Armageddon?

Russia’s economy is heavily reliant on the European Union (EU). Over the last six years, we have seen a decline in trade relationships between the neighbours with EU investment falling by heights of as much as 44pc in 2014. Could the recent alleged Russian chemical attack in Salisbury, Britain hammer the final nail in to the coffin of an already dying economic relationship?

The EU/Russia trade relationship is based on the price of oil. Here’s why: The EU market’s relationship with Russia is dependent on the growth of the Russian economy, but this growth is intrinsically linked to oil prices. If this commodity does badly, then Russia does badly. Since 2011, and most significantly 2012-2016, the price of oil began to a steady decline – which is correlated to the weakened financial partnership between the EU and Russia. This was seen most notably at the end of 2015, when hydrocarbon exports were down 42pc from 2012. This subsequently leaves Russia in a weakened financial position – they could not burden further blows and remain buoyant in their current economic situation.

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But the Salisbury attack could be the last straw. Western states have already begun an exodus of Russian politicians from their embassies which worsens Russia’s geo-political influence worldwide.  So far, this has had no impact on the EU/Russia trade deal. Yet, if these sanctions begin to affect trade relations, Russia’s economy could find itself on life support as it stumbles toward a nadir. Its economy is already being pressurised by the decline in oil price, and a dwindling relationship with the EU – trade sanctions would leave the Russian economy in a hopeless situation, seeking alternative solutions.

It seems Russia is  aware of this and have begun reaching out to alternative markets to keep their economy afloat. In difficult circumstances Russia has reached out to Turkey, a nation who has been trying to gain access to the EU for years but has been rejected for a myriad of reasons – most notably their poor human rights record. Earlier this month, Putin joined President Erdogan at a ceremony for a Russian made Nuclear Power Plant. This isn’t the first sign of a romance brewing between the two nation states. Over Christmas they finalized an agreement that Turkey would purchase their S-400 Missile Defence System. Aside from this, they are building the Turkstream pipeline to transfer Russian gas to Turkey. Will Russia need the EU if relationships blossom with alternative markets? They have reached out to Turkey, but could this become a patterned behaviour?

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Financial Ramifications of the UK Response to Russia’s Chemical Attack

From the outside, the purported Russian chemical attack in Salisbury, England is reminiscent of your favourite spy novel – one by John Le Carré, perhaps. The story might go a bit like this: a former Russian intelligence officer living in exile, enjoying lunch with his daughter at a popular local Italian restaurant, only to be found left for dead on a nearby park bench alongside a range of questions like How? Why? And Who? Unfortunately, this compelling drama isn’t a novel but real life, and as British-Russian relations tumble to a post-Cold War low as a result, how will this ordeal impact these two great nations’ economies?

By of the end of March 2018, over 200 diplomats have already been expelled from over 20 countries in Europe, Australasia, and North America in solidarity with the UK against Russia’s alleged aggression. NATO has further removed 7 diplomats from their alliance.  Since the attack, Russia has haemorrhaged political influence as countries turn their back on them to condemn their aggressive behaviour. The question on everyone’s mind is, could this soon escalate and become a financial Cold War?

The London property market and UK banks have long been known to shelter the money of Russian oligarchs. British Prime Minister Theresa May and her government are in the process of deciding whether they should clamp down on these assets and impose a ban on the City of London from helping Russia sell its sovereign debt, a process which props up their economy. It would certainly send a strong message to Moscow that Britain is still a strong international actor – even during the instability she faces during Brexit negotiations.

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Were the British Prime Minister to take this drastic action it is reasonable to expect that Vladimir Putin’s Russia would respond in equally robust terms. In our hyper-globalized world, it should come as no surprise that Russia has influence over socio-political conditions in Britain. The UK’s National Grid has been using Russian natural gas reserves to help keep up with demand for years; in 2015 nearly 10% of the UK’s consumption came from Russia. Although the winter is nearly over, and natural resources may not be important during the summer months, winter always returns, and there is the risk that next year Britain may struggle turning on the central heating.

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The question remains: are economic sanctions and restrictions worth bearing the socio-political ramifications of a stand-off? That remains to be decided. For now, the world waits to see both May and Putin’s next moves.

DISCLAIMER: This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any securities. Past investment performance may not be indicative of future investment performance. 

 

What South Korea Learnt from Sochi’s Winter Games

Hosting the Olympic Games brings with it a recipe for prosperity – and opportunities for disaster.   past, trends have dictated that countries overspend and rarely see returns in the long term. South Korea has decided to take an innovative approach. They cut heavily on spending and infrastructure that usually lies derelict for years after the Games. Maybe they learnt something from recent events in Russia?

 

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The Sochi Olympic Games in 2014 cost Russia a staggering $51bn. During the run-up to the Games, it was made clear that Sochi was to be the most extravagant Olympics ever. The 40’000-mile torch run from Kaliningrad to Chukotka which passed through all 83 regions of the country set the tone for a month of excessive and unnecessary folly. $30bn of the money went into embezzlements to Putin’s close associates while the rest was pumped into ensuring that Russia was portrayed affluently on the world stage. The absence of fair competition in building, strict censorship and clan politics led to sharp increases in prices and low quality of work. Only weeks after the event, Sochi began to fall apart with deserted buildings, empty streets and inhabited almost exclusively by stray dogs. Russia’s taxpayers are footing the bill and seeing very little return.

 

South Korea has learnt from these mistakes. Pyeongchang cut costs by saying no to unnecessary infrastructure and have to build low-cost temporary stadiums in lieu of behemoths that would later sit unused and decay. The stadium cost just over $109m and is set to be used 4 times before demolition. Currently, their frugality is bringing Pyeongchang bad press as blankets were handed out during the opening ceremony as opposed to intense heating. However, this decision is symbolic of their plan to cut costs. Although (like all Olympic Games) South Korea will break their budget of $12.9bn it is still a fraction of what was spent in Russia.

 

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DISCLAIMER: This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any securities. Past investment performance may not be indicative of future investment performance. 

 

What are South Korea Gaining from the Winter Olympics?

The world’s eye is on Pyeongchang this February as they set the stage for the Winter Olympics. After winning the bid for the Games, South Korea is set to splash out large sums of money to attract positive attention to their country. There have already been huge political breakthroughs throughout the peninsula.

 

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Bidding for the Olympic Games is not an open auction – getting through the application process is not a “survival of the richest”. There is a myriad of factors that are considered when the panel votes for the next host – including infrastructure, financial support, and even human rights records. Amongst all the applicants, three stood out: South Korea, Germany, and France. France was deemed unsuitable almost unanimously receiving only six votes, Germany took in 25 votes and was the closest, but nowhere near close to the winners: South Korea who took home the gold with 63 votes.

 

Hosting the Games is a financial burden. What is South Korea looking to gain out of this? Firstly, we don’t yet know how much the Games will cost, but generally, countries will be expected to dish out no less than $5.2bn. Their profits are most likely going to be indirectly obtained through tourism and stock market attention in subsequent years. Although financial profits are likely – there are more important political and cultural changes that have already occurred.

 

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The Korean Peninsula has been divided since the 1950-1953 war. There was no post-war peace treaty signed, and South Korea boycotted the North in 1988. The Games have seen a diplomatic breakthrough with Kim-Yo-Jong visiting alongside her “army of beauties” – a group of women hand-picked for their good looks, talent, and loyalty to the regime. This is after Kim-Jung-un himself raised the prospect of North Korea’s attendance in his New Year’s speech.

 

It also gives South Korea a platform to show off their world-leading technology. Samsung, South Korea’s biggest company, will use this opportunity to expand their market share which will have positive ramifications for their domestic market.

 

DISCLAIMER: This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any securities. Past investment performance may not be indicative of future investment performance.