The Kazakhistan listing

Zaikhmunai, the Kazakh oil and gas producer, is the latest company from former Soviet Union to seek a London lsiting that will qualify it from the FTSE 250 index. Frank Monstery, is the leading shareholder with a 28% stake. KaztroyService, which has another stake of 27% in the ZaikhMunia, is controlled by the billionaire son-in-law of President Nursultan, Timur Kulibayuev. Earlier this year Laxmi Mittal brought a third of KaztroyService.

Kurd-ish deal....

Oil companies are flooding to Erbil, capital of semi autonomous state-Kurdistan- of Northern Iraq, to secure exploration and drilling contracts. The prize- 50bn barrels of oil or 40% of Iraq’s proved resources. Kurdistan signed a drilling contracts deal with US super major, ExxonMobil last month, to boost its oil output from 150,000 bpd to 1m bpd. Investors already established in the region can set to reap early rewards. Shares of the like of DNO, Gulf Keystone and Petroceltic initially jumped 30% on the Exxon news.

However one needs to tread carefully as therein lies Iraq’s sensitivity. Exxon’s agreement has angered Baghdad, which regards such deals as illegal and can cancel its existing contracts with Exxon.

Investment Banking Woes!

Sergio Eromotti, the UBS chief, decided to refocus the Bank business by cutting the investment banking assets to half. It has zoomed on the underperforming parts of FICC unit, which uses half the capital but has delivered only 15% of the pre tax profit. However, as the global crisis has altered the landscape of investment and corporate landscape, investment banks should have alternate strategy to be in bulge bracket. UBS has already sounded a retreat from the bulge bracket but has another business, the wealth management unit, to fall back upon.

WTI and Brent spread to narrow!

A recent decision by Enbridge, pipeline’s new owner, to reverse the Seaway pipeline between U.S Midwest and the Gulf Coast, will enable to reduce the spread between the worlds 2 important oil contracts- WTI and the Brent Crude. The pipeline switch will help drain excess of crude oil inventories in and around Cushing, the delivery point of WTI contract. The surplus stock was the root cause of divergence. The Seaway pipeline could start moving 150,000 b/d to the coast by Q2 and increasing by 400,000b/d by 2013.

Along with the news on the pipeline, shipments of oil out of US Midwest has been rising rapidly(number of railcars transporting oil rose 19% from last year) with the Bakkan Oil Express moving its first crude last week. This could be crucial to maintain a hefty differential between WTI and Brent as cost of moving oil by rail, estimated at $5 to $10 a barrel, is significantly higher than by pipeline. Since the Seaway will not able to absorb all the volumes, rail capacity would still need to be considered to move the oil.

 
Analyst don’t expect WTI to trade at parity with the Brent, as tar sands production in Canada and surge in production of shale oil in Dakota would mean that there will still be a surplus of oil in Midwest. Beyond this, there has also been news about cancellation of key pipeline projects that can drown the “Cushing” syndrome. In addition, since the WTI/Brent spread has narrowed, producers and traders, who avoided delivery of oil in Cushing because of WTI trading at discount(low price of oil), will increase deliveries, causing a sharp rise in the inventories at Cushing.

Bank QE prospects rise!

In a likely scenario of the economic growth to stagnate, Bank of England will pursue the option of pumping in billions in the economy. Sir Mervyn King, the bank governor, has sought the worsening conditions abroad – Eurozone crisis – and that there is nothing much the BOE can do to support the weak sterling and rapid deficit reduction. 

            The Bank is forecasting no growth till next summer and has downgraded it forecast from 2.2% to 0.9%. It is expected inflation to fall down from 5% to well below the projected 2% by end of 2012. The low inflation forecast suggests that Bank was planning to increase money printing operations above the targeted £275bn of QE. Given the QE forecasting for weak growth, the Sterling fell at 0.3% against the dollar to $1.5774

Euro-zone breakup!

It is feared that Italy is losing the market access; Given the interest rate for sovereign debt is hovering at 7%, there is an immediate need to restructure the public debt of €1900bn that will take care of the “stock ” problem. However, the account deficit, lack of competitiveness, and a worsening plunge in GDP and economic activity that is the “flow” concern, is not going to resolve.

A credible lender of last resort is needed in Europe.  There are many options but look implementation scenario looks bleak:

• Eurobonds are out of question as Germany opposes them and will require a change in the treaties that will take years to implement.
• Quadrupling the euro zone bailout from €440bn to €2000 is a political non starter in the core countries.
• ECB can bailout Italy or Spain by buying back the debt but would take a huge credit risk and contravene the treaty no bailout clause.
• EFSF, which is a CDO, where bunch of sub triple A rating sovereigns are trying to achieve triple A ratings via bilateral guarantees, cannot be turned into a €2000bn fund with all the financial engineering.  It can spare only €200 for Italy or Spain.
• Even a technocratic Italian government cannot orderly restructure its soverign debt, given the debt to equity ratio of 120% and Italy needing a primary surplus of over 5% of GDP just to stop its debt blowing up.
• In order to define its structuring policies and restore growth and competitiveness (by currency devaluation or depressionary deflation), it is felt that Italy needs to be forced to give up the Euro and convert its euro debts to national currency debts. Such an action will effectively break the currency union.

Only ECB, if it becomes an unlimited lender of the last resort and policy rates to 0, - combined with fall in Euro in parity with the dollar; fiscal stimulus in Germany and Euro core; and austerity in periphery countries - could prevent this disaster.