TURKMENISTAN - The Global & Regional Petroleum Perspectives

APS Review Oil Market Trends, Sept 29, 2008

Paper WTI has been moving wildly from a peak of $147.27/b on July 11 to below $90/b in recent weeks. The week's trading at NYMEX on Sept. 26 ended with November WTI settled at $106.89, having risen to $130 on Sept. 22 as speculators scrambled to cover short positions and fretted about the US economy after a financial melt-down on Wall Street (WS). The Bush administration's $700 bn rescue plan was being debated in Congress on Sept. 27 as Democrats and Republicans disagreed on the prospect of government assuming control over US financial institutions built on a long free market tradition.

Even the rich GCC region is affected by the US crisis. But huge GCC cash reserves caused by the longest sustained oil price rise in history are providing a cushion for policy-makers (see news14GCC-GlblFinlCrisis&IranSep29-08). The region's ever-growing sovereign wealth funds (SWFs) may avoid more investments in Western financial assets, but they are looking seriously at distressed real estate assets - while cash-rich GCC firms have mostly continued overseas investments, shrugging off global economic gloom.

In its annual survey, the International Institute for Strategic Studies (IISS) on Sept. 18 said of Russia's Aug. 8-12 invasion of Georgia: "The most powerful [US-Western] remark made about Russia's actions in Georgia were not those made by the EU or NATO, but those made by the markets in wiping so much value off Russian stocks and effectively marking up Russia risk". Indeed, a major part of Russia's cash pile of $560 bn was wiped out in a matter of days last week. APS Energy Group said in a recent survey the same happened to Chinese stocks and those of other emerging economies (EEs), including the GCC region and the rich Central Asian states - these are just examples of how the world is being affected by what is happening to the US economy, the largest across the globe.

Paul Volker, former chairman of the US Federal Reserve (Fed), a year ago wrote this: "The US is skating on increasingly thin ice. There are disturbing trends: huge imbalances, disequilibria, risks - call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot". One might expect such a statement from a hardcore gold bug, but from a former Fed chairman? Volker was one of the best Fed leaders the US ever had. His stopping of US inflation in the early 1980s was much tougher than any of the crises Alan Greenspan faced.

On Sept. 26, German Finance Minister Peer Steinbrueck was quoted as blaming Anglo-American banking and financial domination for the global economic slow-down and financial crisis. Steinbrueck said the American pursuit of near-term profits undermined long-term stability. He predicted that, due to its poor stewardship, the US would see its status as an economic super-power diminish, saying: "The US will lose its status as the super-power of the global financial system, not abruptly but it will erode". Steinbrueck was not the first to warn that US dominance was coming to an end. Steinbrueck also criticised the inability to regulate markets elsewhere and said he would push for a global ban on "speculative short-selling" at the next G7 meeting.

The US crisis had been foreseen in Japan and elsewhere in the G7 world long before the American housing mortgage crisis broke out in August 2007. But in March 2008 Japan's top financial regulator - then Financial Services Minister Yoshimi Watanabe - predicted that the US financial crisis was going to be worse than that of his country and urges the Bush government to recapitalise US banks. His comments, in the Financial Times of March 24, were highly unusual. He ventured to give the US advice on its credit crunch based on Japan's experience during its post-bubble-years banking crisis.

Most states - certainly Japan's - do not give others advice on how to run their financial services sector. That alone is pretty unheard of. (However, the IMF dictated the terms of rescue programmes in the Asian crisis of 1997, but those were Third World states suffering capital flight. Their situation, with excessive borrowings, wobbly banks, and unsustainable current account deficits, bore no resemblance to that of the US).

The Japanese are particularly loath to stick their noses in other states' affairs - let alone the US - which gives others licence to comment on their practices. Even the often-belligerent Chinese sound off in response to US pressure, not in a vacuum. In fact on Sept. 27 China offered assistance for the US to put its financial house in order.

Mr. Watanabe's March statement was telling. If the powers in Tokyo behind him had wanted to soft-pedal the message, they would have used a lower-ranking bureaucrat or a retired official. The Japanese comment was effectively a statement that significant actors in the US financial sector technically were bankrupt and needed to be recapitalised.

Economic weakness had already hit oil demand in the US, the world's biggest energy consumer, and in other developed economies. This has contributed to a fall in paper WTI. The EIA on Sept. 24 said US demand over the previous four weeks was 5.3% below last year, hit by high fuel costs and the wider economic crisis. Crude oil imports by No. 3 consumer Japan fell 3.3% to 4.13m b/d in August from the same month last year.