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David Wilks
Changing the world... one thought at a time
Changing the world... one thought at a time

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Little ripples make large waves...

If you've ever done any sailing you know that big waves start with the gentlest of winds. One wind that is about to blow up into a tsunami (in my humble opinion, of course) is the dramatic fall in oil prices in the past few weeks. On the surface, it seems logical to think that lower oil prices right now will be good for the global recovery and political stability. In fact, nothing could be further from the truth.

I have made no secret of the fact that I think Putin is the world's most dangerous man. He is also reputed by some sources to be the world's richest.* There is no doubt that he has made many of his cronies fabulously wealthy as well. But the Russian economy, previously weak and now weakened further by Ukrainian related economic sanctions, relies very heavily on oil exports to support it's budget. Various reports suggest that Russia needs to sell its oil at or above $US90 a barrel to stay ahead of the game. Today's price? A tad over $61 a barrel. Ouch! The next question is whether prices can stay down:

OPEC is made up of very low cost oil producers. Put a street sign in the ground and chances are you'll have oil bubbling to the surface. (Not really, but metaphorically true.) Other producers, including Russia, the North Sea countries, the USA and Venezuela aren't that lucky. In fact, many fields are not viable at today's prices. And that, of course, is OPEC's game...

By pricing oil below competitors' production costs, OPEC can drive those producers out of business and regain domination. The Canadian tar sands and fracking would be rapid casualties. OPEC still has vast reservoirs of oil (and massive cash reserves) at their disposal so they can play this game for years if need be.

But Russia can't. Her cash reserves sit somewhere around $200B which is unimpressive for a country of 145 million facing economic sanctions and a very cold winter! Add that Putin's reputed wealth is said to come from oil, both through a 37% secret holding in oil company Surgutneftegaz and a 4.5% share in Russia's natural gas giant, Gazprom. It is also suspected that he either controls or has a major interest in a Swiss based oil broker that handles much of Russia's foreign oil sales. Ouch again!

Now while I am absolutely certain that Putin's loans (if he has any) will never be called in - he does control the banks, after all - Russian industry and many of his cronies are extremely vulnerable.

Neither Putin, nor Russians at large, are the kind to roll-over. They're fighters and survivors. The easiest way to push oil prices up is to increase political tensions. Wars, unfortunately, do wonders for both oil prices and failing economies. They also take the heat away from the real issues and focus them on the external 'boogymen'. As the saying goes, you can fool most of the people most of the time!

Putin has already set the stage for a full-blown military roll-out into the Ukraine. After all, Russia MUST have a secure warm sea port so there is zero chance of them backing down over Crimea.

Now, with that spectre in the air, let's move onto that bastion of capitalism, the USA:

Over the past five years, investors including banks large and small, have been tipping money into high-cost energy producers. Oil peaked at close to $130 a barrel in April 2011 and was still sitting above $110 as recently as September! Those prices - generally sustained over 3.5 years, gave investors plenty of leeway for optimism. But, as indicated earlier, a lot of those smaller producers are LOSING $30 and more per barrel today.

It may not just be the Russian economy at risk here. US corporate failures will shake confidence in the recovery process - much of it is based on that very same energy sector! The US stock markets (and others) are being fueled by a substantial level of leveraging. Any fool knows that leveraging is a two-edged sword. It also pays to know that markets usually fall at three times the speed at which they rose.

As always, we live in interesting times. 

* Putin earns less than $200,000 annually. On that, according to a 2012 report into Putin’s wealth by the Daily Telegraph, he has managed to accumulate a fleet of 58 different aircraft. The bathroom on one of those planes cost $85,000 to install - it has gold fittings.

His collection of wrist watches is apparently worth more than $500,000. His assets also include a Black Sea palace valued at some $340 million and a yacht which cost $44 million. Former Russian deputy prime minister, Boris Nemtsov, said that Putin's wealth “can be compared with that of the monarchs of the Persian Gulf or the most outrageous oligarchs.”

Aussie stalled at 1.06870. That's a very nice 300 pip gain. I still think it will get to the 1.0750 range and then possibly challenge the prior all time high.

Next stop for the AUD looks to be 1.0750.

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