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Pakistan’s Dystopian Warning to the World

Supporters of former Prime Minister Imran Khan at a rally in Rawalpindi in November.
Supporters of former Prime Minister Imran Khan at a rally in Rawalpindi in November. Photographer: Asad Zaidi/Bloomberg

Pakistan has touted itself as one of the world’s cradles of civilization, flourishing for thousands of years along ancient trade routes passing through the fertile Indus Valley.

Now it presents a dystopian vision of the future, bankrupt, unstable and threatened by climate catastrophe. Its fate offers a warning to other heavily indebted nations on the precipice, from Sri Lanka to Zambia.

Pakistan is due to hold elections no later than October, and political jostling is narrowing the nuclear-armed nation’s options.

Opposition leader Imran Khan, who was ousted from the premiership last year, is in a bitter standoff with Prime Minister Shehbaz Sharif over control of the country of 230 million. He’s held mass rallies in recent months to pressure the government into an early vote, while the authorities have filed numerous cases against him and issued a warrant for his arrest.

As Islamabad fiddles, the country is burning up its foreign reserves, and investors see a growing risk of default. The government is living hand to mouth, reliant on outside loans from China while negotiating with the International Monetary Fund for the remaining funds in a $6.5 billion bailout — its 13th since the late 1980s.

Pakistan already got a taste of economic disaster last year when deadly floods displaced millions. Such calamities are unlikely to be a one-off, with climate scientists forecasting massive increases in river flows as a result of melting Himalayan glaciers, inundating farmland and obliterating infrastructure — interspersed with drought.

Pakistan could hardly have a more strategic location, lodged between Iran and India and with China and Afghanistan to the north. That, plus its sheer size as the world’s fifth-most populous nation, make it too big to be allowed to fail.

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World’s most-crucial fuel diesel heads for shortage touching everything

World’s most-crucial fuel diesel heads for shortage touching everything

Within the next few months, almost every region on the planet will face the danger of a diesel shortage


diesel
Photo: Bloomberg

No fuel is more essential to the global  than . It powers trucks, buses, ships and trains. It drives machinery for construction, manufacturing and farming. It’s burned for heating homes. And with the high price of natural gas, in some places it’s also being used to generate power.

Within the next few months, almost every region on the planet will face the danger of a  shortage at a time when supply crunches in nearly all the world’s energy markets have worsened inflation and stifled growth.

The toll could be enormous, feeding through into everything from the price of a Thanksgiving turkey to consumer bills for heating homes this winter. In the US alone, the surging  cost will mean a $100 billion hit to the economy, according to Mark Finley, an energy fellow at Rice University’s Baker Institute of Public Policy.

“Anything and everything that gets moved in our economy, diesel is there,” Finley said. “Moving stuff around is one thing. People potentially freezing to death is another.”

In the US, stockpiles of diesel and heating oil are at their lowest point ever for this time of year in data going back four decades. Northwest Europe is also facing a low buffer — inventories are forecast to hit a low this month and then tumble even more by March, shortly after sanctions come into play that will cut the region off from Russian seaborne supplies. Global export markets have gotten so tight that poorer countries like Pakistan are getting shut out, with suppliers failing to book enough cargoes to meet the nation’s domestic needs.

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New York, New England ration heating oil even before peak winter

New York, New England ration heating oil even before peak winter

The US Northeast is so short on heating oil that the fuel used to power home furnaces is being rationed even before the start of winter.

Some wholesalers in Connecticut are putting retailers on allocation, meaning they can only get a limited amount of fuel based on availability, according to Chris Herb, president of the Connecticut Energy Marketers Association, which represents around 600 family-owned retailers in the state. These retailers must in turn ration their customers.

The measure, designed to prevent panic buying, highlights the extreme fuel tightness across the New York Harbor and New England regions that has attracted the attention of the White House. National Economic Council Director Brian Deese told Bloomberg Television earlier this week that diesel inventories are “unacceptably low” and “all options are on the table” to bulk up supply and cut costs to consumers. In New England, where more people burn diesel — the same product as heating oil — to warm their homes than anywhere else in the country, stockpiles are a third of typical levels for this time of year, government data show.

A main hurdle to replenishing regional fuel supplies has been a steep, sustained backwardation in the diesel market. Backwardation happens when prompt deliveries are priced at a premium over deliveries in the future, which in effect causes product to lose value over time. “There’s just no incentive to store large amount of product,” said Michael Ferrante, president of the Massachusetts Energy Marketers Association

In addition to the scarcity, there’s also the cost. Wholesale heating oil in New York Harbor averaged $4.09 a gallon on Thursday, compared with $2.46 at the same time a year ago, according to data from price reporting agency Argus Media…

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JPMorgan Sees ‘Stratospheric’ $380 Oil on Worst-Case Russian Cut

An employee walks across the top of an oil storage tank at an oil field near Salym, Russia.
An employee walks across the top of an oil storage tank at an oil field near Salym, Russia.

Source: Bloomberg

Global oil prices could reach a “stratospheric” $380 a barrel if US and European penalties prompt Russia to inflict retaliatory crude-output cuts, JPMorgan Chase & Co. analysts warned.

The Group of Seven nations are hammering out a complicated mechanism to cap the price fetched by Russian oil in a bid to tighten the screws on Vladimir Putin’s war machine in Ukraine. But given Moscow’s robust fiscal position, the nation can afford to slash daily crude production by 5 million barrels without excessively damaging the economy, JPMorgan analysts including Natasha Kaneva wrote in a note to clients.

For much of the rest of the world, however, the results could be disastrous. A 3 million-barrel cut to daily supplies would push benchmark London crude prices to $190, while the worst-case scenario of 5 million could mean “stratospheric” $380 crude, the analysts wrote.

“The most obvious and likely risk with a price cap is that Russia might choose not to participate and instead retaliate by reducing exports,” the analysts wrote. “It is likely that the government could retaliate by cutting output as a way to inflict pain on the West. The tightness of the global oil market is on Russia’s side.”

A World That’s More Expensive Is Starting to Destroy Demand

A World That’s More Expensive Is Starting to Destroy Demand

Buyers are balking at high prices for fuel, food and metals, threatening to tip economies back into recession.

The Central de Abastos Market in Mexico City.
The Central de Abastos Market in Mexico City.

Photographer: Alejandro Cegarra/Bloomberg

Prices for some of the world’s most pivotal products – foods, fuels, plastics, metals – are spiking beyond what many buyers can afford. That’s forcing consumers to cut back and, if the trend grows, may tip economies already buffeted by pandemic and war back into recession.

The phenomenon is happening in ways large and small. Soaring natural gas prices in China force ceramic factories burning the fuel to halve their operations. A Missouri trucking company debates suspending operations because it can’t fully recoup rising diesel costs from customers. European steel mills using electric arc furnaces scale back production as power costs soar, making the metal even more expensive.

Global food prices set a record last month, according to the United Nations, as Russia’s invasion of Ukraine disrupted shipments from the countries that, together, supply one-quarter of the world’s grain and much of its cooking oil. More-expensive food may be frustrating to the middle class, but it’s devastating to communities trying to claw their way out of poverty. For some, “demand destruction” will be a bloodless way to say “hunger.”

Source: Bloomberg

In the developed world, the squeeze between higher energy and food costs could force households to cut discretionary spending – evenings out, vacations, the latest iPhone or PlayStation. China’s decision to put its top steelmaking hub under Covid-19 lockdown could limit supply and push up prices for big-ticket items like home appliances and cars. Electric vehicles from Tesla Inc.Volkswagen AG and General Motors Co. may be the future of transportation, except the lithium in their batteries is almost 500% more expensive than a year ago.

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The U.K. is two months away from a brutal cost-of-living crisis

The U.K. is two months away from a brutal cost-of-living crisis

Soaring inflation is causing headaches around the world, but in Britain the squeeze is coming from all sides

Soaring energy prices and rising inflation are causing policy headaches around the world. In the U.K., though, the government is raising taxes at the same time, kicking off an economic experiment in one of the countries worst-hit by the pandemic.

Britain’s acute cost-of-living crunch will hit in April, instantly stretching household and company budgets and penalizing the poorest households, many of which have already been most impacted by COVID-19.

The squeeze is coming from all sides. U.K. consumer price-growth hit a 30-year high of 5.4 per cent in December, and is wiping out wage gains. The Bank of England is jacking up interest rates faster than the Federal Reserve. A cap on domestic energy costs is expected to rise by 50 per cent in April, just as taxes increase in a bid to repair the U.K. public finances. Brexit hasn’t come cheap, either.

The Resolution Foundation think tank says the outcome will be a “living standards catastrophe,” and the Centre for Economics and Business Research reckons annual living costs for a typical U.K. household will rise by 1,980 pounds (US$2,700) — even before taxes go up.

While lawmakers in Westminster debate whether Prime Minister Boris Johnson should resign over whether he broke lockdown rules, the cost of living is fast becoming the country’s key political battleground, and a real danger for him — or for his successor.

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China stockpiling food at historically high levels

China stockpiling food at historically high levels

China stockpiling food at historically high levels

At the end of 2021, NIKKEI Asia reported that China, with less than 20% of the world’s population, has managed to stockpile more than half of the world’s maize and other grains, leading to steep price increases across the planet and dropping more countries into famine.1

On January 5, 2022, Bloomberg reported that food prices have hit 10-year highs, causing worldwide concern.2

“Supply-chain bottlenecks, labor shortages, bad weather and a surge in consumer demand are among the factors responsible for the spike. So, too, is a lesser-known phenomenon: China is hoarding key commodities,” Bloomberg’s Adam Minter said.

According to the U.S. Department of Agriculture, China will hold 69% of the world’s corn reserves, 60% of its rice, and 51% of its wheat by mid-2022.

China is maintaining its food stockpiles at a ‘historically high level,’ said Qin Yuyun, head of grain reserves at the National Food and Strategic Reserves Administration.

“Our wheat stockpiles can meet the demand for one and a half years. There is no problem whatsoever about the supply of food.”

The projections represent increases of around 20 percentage points over the past 10 years, and the data clearly shows that China continues to hoard grain.1

In 2005, China was importing food (not including beverages) for less than $10 billion USD.

In 2010, the number rose to more than $20 billion USD and continued rising year-over-year until $80 billion USD in 2019 and nearly 100 billion in 2020, up to 4.6 times from a decade before.

References:

1 China hoards over half the world’s grain, pushing up global prices – NIKKEI Asia

2 One Reason for Rising Food Prices? Chinese Hoarding – Bloomberg

Featured image: Food silos at Dailan, China on January 11, 2022. Credit: Copernicus EU/Sentinel-2, TW

Deep freeze disrupts crude flows in oil sands and Bakken shale

A deep-freeze in Canada and Northern U.S. is disrupting oil flows, causing a surge in crude prices just as American stockpiles are declining.

With temperatures from North Dakota to Northern Alberta below zero Fahrenheit (-18 Celsius), TC Energy Corp.’s Keystone pipeline was shut on Tuesday before resuming later the next day. In North Dakota’s Bakken shale, production has started to succumb to the freeze, sending local crude prices to their highest since November. Canadian oil has also jumped.

The disruptions mean less supplies at a time when U.S. stockpiles have been shrinking every week since mid-November and getting closer to September’s three-year low. Drillers have been slow to restore output to pre-pandemic levels as they prioritize shareholder returns over growth. This further supports growing predictions that the oil market will return to a deficit this year, with some like Pioneer Natural Resources Co. Chief Executive Officer Scott Sheffield expecting oil to range from US$75 to US$100 a barrel.

Embedded Image

Even though Western Canada and North Dakota are usually cold this time of year, temperatures have been lower than usual.

Western Canadian Select crude’s discount to the U.S. benchmark has shrunk by almost US$3 dollars since Dec. 27, to US$12.10 per barrel on Wednesday.

Bakken crude in the Clearbrook, Minnesota, hub rose 90 cents a barrel in the past two days to reach a US$1.25 premium to Nymex futures Wednesday, a two-month high. The same grade traded this week in Wyoming at a premium to New York futures for the first time since Nov. 18.

Keystone carries 590,000 barrels a day of Canadian oil from Alberta to the U.S. Midwest.

Prior to resuming operations, TC Energy said that its staff have been challenged by extremely cold temperatures impacting the oil flow through its Hardisty terminal. Temperatures there fell to about -24 degrees Celsius (-11 Fahrenheit) on Wednesday afternoon.

Meanwhile, Enbridge Inc. said it was seeking crude supplies for its main pipeline system across Canada and U.S. to keep its pipes running at scheduled rates.

Pakistan Textile Exports Hit by Gas Crunch, Industry Body Says

  •  $250 million of textile exports were lost in Dec., group says
  •  Energy minister rejects claims low gas supplies are to blame

Pakistan’s natural gas shortage is hurting its crucial textile exports, according to an industry trade organization, putting even more stress on the nation’s struggling economy.

About $250 million of textiles exports were lost last month after mills in Punjab were forced to shut for 15 days, said Shahid Sattar, executive director of All Pakistan Textile Mills Association. Factories in the province are dependent on power generated from regasified imports of liquefied natural gas, while domestic supply is being diverted to other regions, he said.

Pakistan has become a fast-growing import market for LNG as local supply has subsided over the last few years. But competition for the fuel — used as an electricity feedstock and for heating and cooking — has intensified due to global shortages, sending spot prices to levels that Pakistan can’t afford.

“The high gas prices are prohibitive,” Sattar said in an interview. The “supply shortfall is due to the energy ministry’s inability to arrange supply, and is hurting the very future of Pakistan’s exports and economy.”

Pakistan’s government, which has been criticized by the opposition for mishandling LNG imports, refutes claims that textile exports dropped because of low gas supplies. More than 90% of mills shifted to using electricity from the grid when gas wasn’t sent to their power generation units last month, Energy Minister Hammad Azhar said by phone, adding that “the electricity is being offered at regionally competitive rates.”

Pakistan restored gas to the textile sector last Wednesday after the association halted litigation against the government on the supply cut, and agreed to energy audits of their captive power plants. Only half of the companies have restored connections, while the rest are still running their mills on the national grid, according to the ministry.

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Tiny North American Oat Crop Could Be Coming for Your Breakfast

Tiny North American Oat Crop Could Be Coming for Your Breakfast

The smallest harvest ever in the U.S. is expected to shrink supplies needed for everything from Cheerios to oat milk

A drought struck North America’s oat fields this season, and farmers are harvesting such a small crop that prices have risen to record highs, signaling inflation for breakfast staples like oatmeal and trendy alternative milk.

Severe hot and dry weather probably slashed oat production by nearly half to an 11-year low in Canada, the world’s biggest exporter. Similarly in the U.S., one of the world’s top consumers of the grain, the harvest will be the smallest ever. The result is all-time high costs that will likely filter down to consumers.

The situation for North American farmers was so dire in the summer that many cut their losses and harvested damaged plants to be sold as feed for animals. That means even less will be available for making popular foods like granola bars and Cheerios, the No. 1 cold cereal in the U.S.

“You can’t make a Cheerio out of barley,” said Randy Strychar, president of Ag Commodity Research and Oatinformation.com.

While major food companies haven’t announced price increases related to oat products yet, the higher costs for the grain can only add to the food inflation that’s been rampant this year. Global food prices recently touched a decade high, according to a United Nations index, while oat futures on Friday climbed as much as 2.1% to reach an all-time high of $6.36 a bushel.

The oat has a humble history as a staid breakfast choice in the form of oatmeal or cereal. But more recently it’s become a trendy darling of millennials. Food companies targeting younger, affluent consumers are billing it as an accessible superfood. Environmentalists tout it as a key crop for reducing carbon emissions in agriculture…

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Someone is betting that oil will soar to a record US$200 per barrel

Crude oil prices are falling after inventories revealed a build in stockpiles for the first time in eight weeks after natural disasters knocked several U.S. refineries offline.

Could the energy crunch get so bad that oil prices hit US$200 a barrel? One options trader thinks so.

Brent US$200 calls for December 2022, options contracts that would profit a buyer from a rally toward that level, traded 1,300 times on Wednesday. While the contracts don’t expire until October next year, they could profit from any sharp spike in prices this winter or next summer.

In a market where a single cargo of crude would currently fetch about US$160 million, the US$130,000 wager on oil reaching an all-time high is tiny. However, it reflects the fact that a growing number of options traders are betting that an energy crunch this winter may see prices rip higher.

Embedded ImageBrent crude, the global benchmark, hit US$80 for the first time in three years this week. Market watchers see demand exceeding supply to the tune of more than a million barrels a day and expect that switching from gas to oil because of high power prices could exacerbate that deficit. Bank of America Corp. this week underlined an earlier call that crude could top US$100 a barrel at some point over the winter, if it is exceptionally cold.

It’s not just US$200 calls that have been trading in recent days. Holdings in Brent US$100 calls through to the end of next year have climbed by 20,000 contracts this month.

U.S. Oil Production Has Already Passed Its Peak, Occidental Says

“It’s just going to be too difficult to replace the 2 million barrels a day of production that we’ve lost, and then to further grow beyond that,” Chief Executive Officer Vicki Hollub said Wednesday at the Energy Intelligence Forum. “Over the next three to four years there’s going to be moderate restoration of production, but not at high growth.”

Occidental is one of the biggest producers in the U.S. shale industry, which added wells at such a rate prior to the spread of Covid-19 that the country became the world’s top crude producer, overtaking Saudi Arabia and Russia, ushering in an era that President Donald Trump called “American energy dominance.”

U.S. oil production is stuck below it's pre-pandemic high

Shale’s debt-fueled expansion came to a juddering halt due to lower gasoline demand and oil prices, but also because of Wall Street’s increasing reluctance to fund growth at any cost. Shale operators are increasingly prioritizing cash flow and returns to investors over production growth.

Occidental, which vies with Chevron Corp. to be the biggest producer in the Permian Basin, has been forced to throttle back capital spending, lower growth targets and cut its dividend in a bid to save cash during the downturn. Its finances were already severely challenged by the debt taken on through its $37 billion purchase of rival Anadarko Petroleum Corp. last year.

Hollub said global consumption stands at about 94 billion barrels a day, and it will take a Covid-19 vaccine before it returns to 100 million barrels. Due to cutbacks around the world, supply and demand for oil will likely balance again by the end of 2021, she said.

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Land of the “Free”: Stashing Gold May be Illegal Soon

LAND OF THE “FREE”: STASHING GOLD MAY BE ILLEGAL SOON

According to one hedge-fund manager, known for his “doom and gloom” economic outlooks, the federal government may soon make stashing gold away illegal for individuals. Crispen Odey believes that governments will ban the possession of gold if they lose control of inflation of their fiat currency.

Odey says that gold is a great way to protect your wealth from the inflation that central banks won’t be able to control as they continue to print money. “History is filled with examples where rulers have, in moments of crisis, resorted to debasing the coinage,” said Odey, who has raised his gold position in his flagship Odey European fund all the way up to 39.9% as of the beginning of the month from 15.9% at the end of March.

“It is no surprise that people are buying gold. But the authorities may attempt at some point to de-monetize gold, making it illegal to own as a private individual. They will only do this if they feel the need to create a stable unit of account for world trade,” he added according to a report by Market Watch.

Bloomberg News said that the fear of government confiscation of gold is often discussed among serious gold bugs. It happened in the U.S. in 1933. But with major currencies no longer linked to gold, there are no signs such a move is realistically being considered by central banks. However, Bloomberg News is a mainstream media outlet and will say what the powers-that-shouldn’t-be tell them to, so take their opinion with a grain of salt.

With far too many Americans believing the government has the right to confiscate their wealth, it wouldn’t come as a surprise if they attempted this kind of theft.  Not enough Americans even question the morality of taxation, let alone confiscation of their morally acquired property.

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Paul Tudor Jones: “This Market, Which Is Reminiscent Of The 1999 Bubble, Is On The Verge Of A Significant Change”

Paul Tudor Jones: “This Market, Which Is Reminiscent Of The 1999 Bubble, Is On The Verge Of A Significant Change”

Just hours after Neil Chriss announced that his $2.2 billion Hutchin Hill hedge fund is shuttering due to underperformance and admitted that “we fought hard, but did not deliver the performance that you expected from us”, another legendary hedge fund announced it was undergoing a significant restructuring as a result of relentless investor withdrawals: citing a November 30 letter, Bloomberg reported that Paul Tudor Jones’ Tudor Investment Corp, which lost 1.6% YTD,  was closing its Discretionary Macro fund “and letting investors shift assets to the main BVI fund as of Jan. 1” with the letter clarifying that “Jones will also principally manage Tudor’s flagship BVI fund, which will be the firm’s only multi-trader fund next year.”

The restructuring took place as clients pulled half a billion dollars from Tudor in the third quarter, leaving the firm’s assets at $7 billion, roughly half the level it managed in June 2015, Bloomberg News reported previously.  As part of the sweeping overhaul, Andrew Bound and Aadarsh Malde, formerly co-CIOs of the Tudor Discretionary Macro Fund, would depart. In a move reminiscent of George Soros’ recent return to more active management, Jones, who ran the BVI fund with a team of managers, would now have a smaller team and will assume a more dominant role in the fund. 

“I will be the largest risk taker and will manage a notional capital account equal to the AUM of the Tudor BVI strategy itself,” Jones said in the letter, referencing assets under management. “This means that my results will have a one-for-one performance impact on Tudor BVI. I relish this challenge.”

Jones and other Tudor partners are the largest investors in the BVI fund, which unlike the soon to be shuttered TIC, is up 0.8% through Nov. 3. More details from Bloomberg:

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Finding the Root Cause of Recessions

Finding the Root Cause of Recessions

Two things bear most of the blame: external shocks and economic volatility.
Beware of shocks.
Photographer: Gary Hershorn/Getty Images

The U.S. managed to avoid recession after the financial crisis, but Japan has succumbed to three contractions since 2009. Economic volatility is a key reason for this divergence, and that tells us a great deal about the risk of future U.S. recessions.

During this decade, both the U.S. and Japan have experienced multiple growth rate cycles, which consist of alternating periods of rising and falling economic growth. Japan had four growth rate cycle (GRC) downturns, three of which turned into recessions; the U.S. experienced three GRC downturns, none of which were recessionary. Why not?

In 2011, a Federal Reserve paper estimated the U.S. economy’s “stall speed,” below which it would plunge into a recession. U.S. growth promptly dropped below that threshold, yet no recession followed. So the concept — which seemed to have worked quite well since the 1950s — broke down and dropped out of the discourse.

Specifically, that estimate of the economy’s stall speed was 2 percent two-quarter annualized growth in real gross domestic income. In theory, the GDI is equal to real GDP, but is measured differently. While GDP adds up what the economy produces, such as goods and services, GDI sums up incomes, including wages, profits and taxes. The chart shows two-quarter annualized growth in real GDP for Japan (red line) and the U.S. (blue line), along with the 2 percent stall speed estimate

Most believe recessions are caused by shocks that then propagate through the economy. In contrast, our research shows that endogenous cyclical forces periodically open up windows of vulnerability for the economy, and that, once it is cyclically vulnerable, almost any exogenous shock can easily tip it into recession. Because such shocks tend to arrive sooner or later, an economy’s entry into a susceptible state is almost always followed by recession.

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Olduvai IV: Courage
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Olduvai II: Exodus
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