The second European Central Bank’s tender, announced on 28 February 2012, attracted 800 participants. €530 billion will be allotted to banks according to the ECB’s policy to support bank lending and liquidity in the euro area money market. A 1% fixed rate will be applied for the conducted longer term refinancing operations with a maturity of 36 months and the option of early repayment after one year. Favourable borrowing conditions enabled banks to access cheap money; however, will the opportunity be turned to their advantage?
Mario Draghi, a President of the ECB was interviewed with The Wall Street Journal on 22 February 2012. He explained that before the first ECB’s LTRO tender, conducted in December, bank lending survey was exercised. The results revealed a credit tightening with worse circumstances in the southern regions. A 3-year LTRO allotment reached €490 billion in December; however, banks returned €280 billion shorter term credits to the ECB before the LTRO. According to the ECB’s President the net injection was only about €210 billion which most likely will cover the bank’s bonds coming due in the first quarter.
So, could long term refinancing operations relieve market tensions and clean financial system? A lot depends on mutually beneficial solutions. Banks have got an opportunity to borrow from the ECB for a 3-year period at fixed 1% interest rate, so they may repurchase outstanding debts with higher rates and reduce interest expenses. Moreover, in pursuance of higher profitability banks may have intentions to buy sovereign bonds with higher yields. Consequently, banks may expect higher interest incomes as well as increased demand to purchase sovereign bonds could reduce their yields. However, ongoing structural reforms in euro area will take time and high risk of uncertainty still remains.
According to the European Banking Authority’s press release published on 8 December 2011, the EBA recommended to strengthen banks capital positions by building up an exceptional and temporary capital buffer against sovereign debt exposures to reflect market prices as at the end of September. Moreover, banks will have to reach a 9% of the Core Tier 1 capital ratio by the end of June 2012. The reported identified capital shortfall amounted €114.7 billion.
So, will stability targets be entrenched successfully beside profitability goals?
About Me
- Asta Pravilonytė
- Every manager can call him or herself a good strategist if he or she only works within an environment that is favorable; however, it is only in times of stress that one truly learns what one's capabilities are!
Wednesday 29 February 2012
Thursday 23 February 2012
What could be expected from reduced Chinese banks’ reserve requirements?
Liquidity shortage in China will be reduced by cutting banks’ reserve requirements. Authority’s decision announced in November, 2011 will come into effect on Friday, February 24, Reuters reported on February 20. The same day Bloomberg noticed that the proportion of cash Chinese banks must set aside will drop half a percentage point and more capital will be available for loans. This announcement was made by the central bank on its website on the 18th of February. The amount of additional capital, according to Australia & New Zealand Banking Group’s estimation, may reach 400 billion yuan ($64 billion). Economy stimulation policies define further stakeholders’ actions, so what could be expected?
According to the Statistical Communiqué of the People's Republic of China on the 2011 National Economic and Social Development published by National Bureau of Statistics of China on February 22, 2012 [1], the completed investment in fixed assets (excluding rural households) of the country in 2011 was 30,193.3 billion yuan, up by 23.8 percent over the previous year. Detailed information about fixed assets investment and its growth by sector is available in table 1. [1]
So, it is likely that the message about the reduced Chinese banks’ reserve requirements will stimulate trade; however, the additionally released capital of 400 billion yuan ($64 billion) comprises only 1.3 percentage of total investment in fixed assets made in 2011. Additionally, according to the above information, China’s trade surplus amounts 155,1 billion yuan in 2011 and presents 0.5 percentage of total investment in fixed assets. Moreover, isn’t the shortage of liquidity a sign of financial risk?
[1] Statistical Communiqué of the People's Republic of China on the 2011 National Economic and Social Development, National Bureau of Statistics of China, February 22, 2012, http://www.stats.gov.cn/english/newsandcomingevents/t20120222_402786587.htm
According to the Statistical Communiqué of the People's Republic of China on the 2011 National Economic and Social Development published by National Bureau of Statistics of China on February 22, 2012 [1], the completed investment in fixed assets (excluding rural households) of the country in 2011 was 30,193.3 billion yuan, up by 23.8 percent over the previous year. Detailed information about fixed assets investment and its growth by sector is available in table 1. [1]
The actually utilized foreign capital increased by 9.7 percent and amounted 116.0 billion US dollars in 2011. The value of direct investment in non-financial sectors and the growth rates in 2011 is provided in table 2.[1]
The other important aspect is China’s international trade. According to the statistical data imports comprised 1.743,5 billion yuan, exports amounted 1.898,6 billion yuan. The main trade regions and growth rates in 2011 are provided in table 3.[1]
More information about the main export and import commodities is available in the table 4 and table 5[1]
[1] Statistical Communiqué of the People's Republic of China on the 2011 National Economic and Social Development, National Bureau of Statistics of China, February 22, 2012, http://www.stats.gov.cn/english/newsandcomingevents/t20120222_402786587.htm
Tuesday 14 February 2012
How much does oil cost?
Financial crisis, recession, deterioration of assets... Alongside that, an assumption regarding Iran’s pursued nuclear programme and evoked protest. Geopolitical sanctions against Iran involve oil embargo which may disturb oil supply and push higher crude oil prices. So, could we add the energy crisis beside the issues that burden recovery?
In general, market prices of crude oil are forecasted by the consumption demand of oil and the capacity to supply oil that meets the economy growth. However, I would rather start from the available world oil reserves. According to the Annual Statistic Bulletin (2010/2011 edition) of the Organization of the Petroleum Exporting Countries, OPEC share of proven world crude oil reserves comprised 1193 bn. barrels id. est. 81.33% of total proven crude oil reserves and Non-OPEC countries possessed 274 bn. barrels of crude oil reserves that amounted 18.67% of total proven crude oil reserves. Statistical data represented at the OPEC website shows that Iran is the third largest oil reserves country in the world with the 151.17 bn. barrels of proven crude oil. Hence, the rest of the world strongly depends on oil produced by the OPEC unless we compare proven oil reserves versus recoverable and unconventional world oil reserves.
According to the U.S. Geological Survey World Petroleum Assessment 2000 which was cited in 2003 by Bill Kovarik, Ph.D formerly a journalist and editor of publications such as Energy Resources and Technology and Latin American Energy Report (Professor of Communication at Radford University, Virginia Tech and the University of Western Ontario), identified total world reserves comprised 1103.2 bn barrels and recoverable reserves presented additionally 2272.5 bn barrels. The more accurate pictures of proven versus recoverable an unconventional world oil reserve are available below.
Picture 1. Proven oil reserves [1]
Picture 2. Additional Figures from the US Geological Survey those represent recoverable and unconventional oil reserves. [2]
Even though it is difficult to estimate the conventional oil reserves they are proven as following. Petroleum engineers estimate the costs of drilling and connecting new wells into a reservoir as well as calculate operating expenses per well and cost per barrel extracted. The initial daily output of oil declines and the cost of extraction rises. When the costs become equal to the market value of output, production reaches its “economic limit” and extraction stops. The estimated aggregated output of the new wells over time is known as the “proved reserves added” or “reserves booked”.
However, beside conventional reserves, petroleum may be refined from Heavy Oil reserves, Tar Sands or Oil Shale. Consequently, dependence on oil supply from the Middle East may be reduced. Moreover, the head of the world's largest oil company, Saudi Aramco, in 2006 acknowledged:
“We are looking at more than four and a half trillion barrels of potentially recoverable oil. That number translates into 140 years of oil at current rates of consumption, or to put it another way, the world has only consumed about 18 percent of its conventional oil potential. That fact alone should discredit the argument that peak oil is imminent and put our minds at ease concerning future petrol supplies.”
Considering the cost of oil production which was obtained from traders and industry analysts and published by Reuters in July 28, 2009, Saudi Arabian crude oil is cheapest because of its location near the surface and the size of fields, which allow economies of scale. The operating cost (excluding capital expenditures) of extracting a barrel was estimated around $1-2 and the total cost including capital expenditures comprised $4-6 per barrel. Similar total costs of oil extraction are estimated in Iraq and United Arab Emirates. Oil Extraction from mature and deep water offshore fields is more expensive. It was estimated that production in ultra-deep water fields in Nigeria reached $30 a barrel compared with onshore costs of around $15. The other comparison by the region: operating and capital costs in Algeria, Iran, Libya, Oman and Qatar were estimated around $10-15 per barrel, in Kazakhstan around $10-18, in Venezuela, where fields tend to be mature and small, costs reached $20-30, in the mature British North Sea, where the remaining oil is difficult to access, the costs could be around $30-50.
According the International Energy Agency World Energy Outlook 2008 the statistical data of estimated production costs were the following:
So, if estimated recoverable and unconventional world oil reserves are twice as large as proven oil reserves and if it is possible to extract oil under the $60 per barrel how much consumer should pay for the crude oil? According to the World Oil Outlook 2011, prepared by the OPEC, it is assumed that prices will stay in the range of $85-95 per barrel for the next decade and will reach $133 per barrel by 2035. Different world events may significantly affect the crude oil prices as it is showed in the picture 3. However, high oil price volatility also depends on the futures speculation.
Picture 3. World Events and Crude Oil Prices 2007 - May 20, 2011Recessions and Oil Prices [4]
Notes:
[1] Peak Oil is wrong. THE OIL RESERVE FALLACY Proven reserves are not a measure of future supply By Bill Koyarik http://www.radford.edu/~wkovarik/oil/
[2] Peak Oil is wrong. THE OIL RESERVE FALLACY Proven reserves are not a measure of future supply By Bill Koyarik http://www.radford.edu/~wkovarik/oil/
[3] "The Impact of Upstream Technological Advances on Future Oil Supply" - Mr. Abdallah S. Jum'ah, President & Chief Executive Officer, Saudi Aramco, address to OPEC, Vienna, Austria, Sept. 13, 2006
[4] Oil Price History and Analysis http://www.wtrg.com/prices.htm
In general, market prices of crude oil are forecasted by the consumption demand of oil and the capacity to supply oil that meets the economy growth. However, I would rather start from the available world oil reserves. According to the Annual Statistic Bulletin (2010/2011 edition) of the Organization of the Petroleum Exporting Countries, OPEC share of proven world crude oil reserves comprised 1193 bn. barrels id. est. 81.33% of total proven crude oil reserves and Non-OPEC countries possessed 274 bn. barrels of crude oil reserves that amounted 18.67% of total proven crude oil reserves. Statistical data represented at the OPEC website shows that Iran is the third largest oil reserves country in the world with the 151.17 bn. barrels of proven crude oil. Hence, the rest of the world strongly depends on oil produced by the OPEC unless we compare proven oil reserves versus recoverable and unconventional world oil reserves.
According to the U.S. Geological Survey World Petroleum Assessment 2000 which was cited in 2003 by Bill Kovarik, Ph.D formerly a journalist and editor of publications such as Energy Resources and Technology and Latin American Energy Report (Professor of Communication at Radford University, Virginia Tech and the University of Western Ontario), identified total world reserves comprised 1103.2 bn barrels and recoverable reserves presented additionally 2272.5 bn barrels. The more accurate pictures of proven versus recoverable an unconventional world oil reserve are available below.
Picture 1. Proven oil reserves [1]
Picture 2. Additional Figures from the US Geological Survey those represent recoverable and unconventional oil reserves. [2]
Even though it is difficult to estimate the conventional oil reserves they are proven as following. Petroleum engineers estimate the costs of drilling and connecting new wells into a reservoir as well as calculate operating expenses per well and cost per barrel extracted. The initial daily output of oil declines and the cost of extraction rises. When the costs become equal to the market value of output, production reaches its “economic limit” and extraction stops. The estimated aggregated output of the new wells over time is known as the “proved reserves added” or “reserves booked”.
However, beside conventional reserves, petroleum may be refined from Heavy Oil reserves, Tar Sands or Oil Shale. Consequently, dependence on oil supply from the Middle East may be reduced. Moreover, the head of the world's largest oil company, Saudi Aramco, in 2006 acknowledged:
“We are looking at more than four and a half trillion barrels of potentially recoverable oil. That number translates into 140 years of oil at current rates of consumption, or to put it another way, the world has only consumed about 18 percent of its conventional oil potential. That fact alone should discredit the argument that peak oil is imminent and put our minds at ease concerning future petrol supplies.”
Considering the cost of oil production which was obtained from traders and industry analysts and published by Reuters in July 28, 2009, Saudi Arabian crude oil is cheapest because of its location near the surface and the size of fields, which allow economies of scale. The operating cost (excluding capital expenditures) of extracting a barrel was estimated around $1-2 and the total cost including capital expenditures comprised $4-6 per barrel. Similar total costs of oil extraction are estimated in Iraq and United Arab Emirates. Oil Extraction from mature and deep water offshore fields is more expensive. It was estimated that production in ultra-deep water fields in Nigeria reached $30 a barrel compared with onshore costs of around $15. The other comparison by the region: operating and capital costs in Algeria, Iran, Libya, Oman and Qatar were estimated around $10-15 per barrel, in Kazakhstan around $10-18, in Venezuela, where fields tend to be mature and small, costs reached $20-30, in the mature British North Sea, where the remaining oil is difficult to access, the costs could be around $30-50.
According the International Energy Agency World Energy Outlook 2008 the statistical data of estimated production costs were the following:
So, if estimated recoverable and unconventional world oil reserves are twice as large as proven oil reserves and if it is possible to extract oil under the $60 per barrel how much consumer should pay for the crude oil? According to the World Oil Outlook 2011, prepared by the OPEC, it is assumed that prices will stay in the range of $85-95 per barrel for the next decade and will reach $133 per barrel by 2035. Different world events may significantly affect the crude oil prices as it is showed in the picture 3. However, high oil price volatility also depends on the futures speculation.
Picture 3. World Events and Crude Oil Prices 2007 - May 20, 2011Recessions and Oil Prices [4]
Notes:
[1] Peak Oil is wrong. THE OIL RESERVE FALLACY Proven reserves are not a measure of future supply By Bill Koyarik http://www.radford.edu/~wkovarik/oil/
[2] Peak Oil is wrong. THE OIL RESERVE FALLACY Proven reserves are not a measure of future supply By Bill Koyarik http://www.radford.edu/~wkovarik/oil/
[3] "The Impact of Upstream Technological Advances on Future Oil Supply" - Mr. Abdallah S. Jum'ah, President & Chief Executive Officer, Saudi Aramco, address to OPEC, Vienna, Austria, Sept. 13, 2006
[4] Oil Price History and Analysis http://www.wtrg.com/prices.htm
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