Publications: Notes at the Margin

Aramco's China Dream; Exxon as OPEC Executioner; Two Futures Markets: Separated by the Atlantic (November 4, 2024)

 

This Notes at the Margin covers three topics. We begin by commenting on speeches made by Saudi Aramco CEO Amin Nasser. In his talks, Nasser disputes assertions that China may be falling into the economic trap that captured Japan thirty years ago. He sees continued growth there.

 

Nasser is almost certainly wrong, which should not surprise anyone. While he is an excellent engineer, he, like engineers in general, is terrible at economic forecasting. US president Herbert Hoover is a classic example. Thanks to his incompetence, the United States suffered dearly from 1929 to 1932. Unless Nasser changes his expectations, the Saudi economy could pay a similar price for the rest of this decade.

 

In our second section, we ask whether ExxonMobil is becoming an OPEC killer. The company reported its third-quarter financial results on Friday, which show that it has increased dividends and continued share buybacks, paying for it all with the rising cash flow from surging oil production.

 

Exxon is pushing hard to boost output more and drive down costs. It will continue to pursue lower costs and higher production if prices stay high, according to its CEO. Left unsaid is the fact that the company will maintain its tradition of not violating antitrust laws. Thus, the oil world faces the irony that a company created by the breakup of John D. Rockefeller’s Standard Oil empire may, by being the industry’s most efficient firm, destroy OPEC.

 

Finally, we highlight an apparently substantial difference between the trades made in WTI and Brent futures. Specifically, swap dealers trading Brent hold large long positions while those trading WTI have negligible ones. The long position of swap dealers in Brent appears tied to end-user hedging, with increases occurring when prices fall. The short positions in WTI appear to be tied to producer hedging, with increases occurring when prices rise. The net effect of swap dealer actions, then, is to stabilize markets.

 

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