There is life is the old cartel yet, it seems. A year ago, obituaries were being written for Opec when, despite much bullish talk, it couldn’t agree any production cuts. Now the 14 members – soon to be reduced to 13 as Indonesia sits out for a while – have agreed that 1.2m barrels a day will be removed, a reduction in Opec’s volumes of about 4.5%. It’s a “historic moment”, says the organisation.
In a sense, it is. Opec hasn’t managed such a display of unity since 2008. Regional rivals Saudi Arabia and Iran have found a way to share the burden of lower production, which is a significant development if it lasts. The oil price rose 8% to $50 a barrel.
But it is usually wise to take Opec’s grand statements with a pinch of salt. There are several reasons to do so this time. First, the deal depends on non-Opec members removing 600,000 barrels a day of their own production. Russia, said Opec, is good for half that tally. But enforcing compliance, which is Opec’s traditional problem, is harder when you are attempting to corral non-members. Relying on Russia could be a slippery game.
Second, the supposed display of strength requires context. It has happened only because Opec’s previous “keep pumping” strategy, dictated by the Saudis, failed. The aim was to bring the US shale oil industry to its knees. Instead, the US industry cut costs and learned to live with $50 a barrel. A sub-$40 price, if sustained over many years, could have worked. But the Saudis, facing an enormous budget deficit, have blinked first.
Third, what matters now is how long the new quotas stay in place. If the oil price climbs upwards towards $60, happy harmony is possible – the production cuts would have worked. But there is no fundamental shortage of oil supplies in the world, at least at the global economy’s current rate of growth. If the price slips back towards $40, Opec’s internal political squabbles will return. Judge the deal six or nine months from now. The cartel is alive, but we don’t know how hard it can still kick.
Brexit: lost in transition
Mark Carney is right. It matters that the UK is “effectively the investment banker for Europe.” Continental firms would suffer if the eurozone tries to upend the City of London at the moment of Brexit. An orderly transition, in the negotiating jargon, is in everybody’s interests.
It could hardly be otherwise when you consider the statistics in the Bank of England’s annual financial stability report. Banks located in the UK are involved in over half the debt and equity issuance by non-UK borrowers in the European Union. Over three-quarters of the EU’s trading in foreign exchange and over-the-counter interest rate derivatives takes place in the UK. Financial activity of that size does not shift easily, if at all.
It’s not as if Italian banks, for example, are remotely equipped to deal with a sudden increase in demand to underwrite risk derivatives. The danger in sudden rupture is that the cost of capital for big corporate borrowers rises across the eurozone, which would be a almighty own-goal by the EU 27. Energy costs are higher in Europe in the US. Why impose higher financial costs on top?
One suspects even those eurozone politicians who are irate about Brexit, when pressed in private, would accept the need for a smooth transition that covers banks’ passporting rights and so on. The tricky part is making it happen. A safe transition period for the European banking and financial system might have to last half a decade. The political rhetoric, on both sides, is a very long way from that position.
Bad year at the office for RBS
Another year, another wooden spoon for Royal Bank of Scotland. And this time it was a fail, rather than a scrappy pass, in the Bank of England’s annual stress tests on banks. The tests were stiffer this time and RBS can rustle up the required £2bn in capital by cutting costs and shedding more assets, so it would be wrong to conclude that there is any fresh crisis. It is still, for the most part, the old crisis.
The biggest element is the looming fine for mis-selling mortgage securities in the US in the pre-crash years. The fine could be anywhere between $4bn and $14bn. Nobody knows, but an extreme outcome, in either direction, would obviously make a big difference to the bank’s capital position. Why is RBS still waiting to be walloped? Because the US authorities move shockingly slowly and never explain why.
