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Tuesday, 15 March 2016
S&P Target Slashed by Morgan Stanley
There is money to be made on vaccines and GM mosquitos, and money to be lost if sales of pesticides and other chemicals are reduced. It is clear in which direction the politics will lean.
The Zika virus should remind us of other strange activities in the financial world.
The local perspective was provided by UC Berkeley's Deborah Sunter, who works on modeling the future US electrical grid. Dr. Sunter argued that Assembly Bill 32, passed by California in 2007, was a key moment in the US' energy transition. With that legislation, California committed to cut emissions to 1990 levels. Soon after, a number of Northeast states formed the Regional Greenhouse Gas Initiative, the US' largest carbon emissions trading market.
The Organization of Petroleum Exporting Countries and non-members have intermittently held discussions since November 2014, when OPEC first signaled it was unwilling to cut production on it own to support prices. Saudi Arabia, Venezuela, Russia and Mexico assembled in Vienna that month without reaching any deal. A tour of oil capitals from Moscow to Riyadh last month by Venezuelan Energy Minister Eulogio Del Pino failed to produce an accord.
Oil Prices Should Fall, Possibly Hard
Oil prices should fall, possibly hard, in coming weeks. That is because fundamentals do not support the present price.
Prices should fall to around $30 once the empty nature of an OPEC-plus-Russia production freeze is understood. A return to the grim reality of over-supply and the weakness of the world economy could push prices well into the $20s.
A Production Freeze Will Not Reduce The Supply Surplus
An OPEC-plus-Russia production cut would be a great step toward re-establishing oil-market balance. I believe that will happen later in 2016 but is not on the table today.
In late February, Saudi oil minister Ali Al-Naimi stated categorically, “There is no sense in wasting our time in seeking production cuts. That will not happen.”
Instead, Russia and Saudi Arabia have apparently agreed to a production freeze. This is meaningless theater but it helped lift oil prices 37% from just more than $26 in mid-February to almost $36 per barrel last week. That is a lot of added revenue for Saudi Arabia and Russia but it will do nothing to balance the over-supplied world oil market.
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