2018-2020 Financial Crisis: Turning a Dollar Rain into a Wealth Harvest [GEAB 125 / May 2018]

2018-2020 Financial Crisis: Turning a Dollar Rain into a Wealth Harvest

(excerpt from the GEAB 125 / May 2018)

Apprehension goes hand-in-hand with financial matters. Last April, the alarmist IMF announcements predicted a huge crisis by 2020 linked to the level of global debt that ten years of ‘crisis management’ have not brought under control. Rather, US public debt has doubled in absolute terms (from $10,000 billion to $20,000 billion), the EU's debt has increased from €8,000 billion to €12,000 billion, China has contributed 40% of the increase in world debt in 10 years, etc. In this context, financiers are worried about the tendency towards protectionist retreat which appears to be behind the announcements of US customs duties on steel and aluminium. But are we really on the edge of a new financial crash?

First of all, we remind you our constant warnings in the past year of the end of Quantitative Easing policies and the consequences of the accompanying end to easy money. We particularly anticipated a significant risk of corporate bankruptcies for 2018, including multinationals, which could cause significant shocks to global finance[1]. Hence, our readers are used to the current alerts.

Of course, we maintain all these predictions and will not go back on them. But we will return briefly to another major anticipation we addressed last September, the one concerning the arrival of the petro-yuan via the creation of the Shanghai Energy Stock Exchange and the oil futures contracts denominated in yuan and exchangeable to gold[2]. At the time, among other things, we had anticipated that Saudi Arabia could not resist for very long and would soon sell its oil in yuan to the world's largest importer, China. In doing so, Saudi Arabia, historically at the heart of the petrodollar system, would put a definite end to the hegemony of the dollar as energy exchange currency.

A petro-yuan is born

It is time to return to this anticipation track, as the yuan-denominated futures contracts did indeed appear on the Shanghai Energy Stock Exchange last March[3] and, as anticipated, a meeting was held in Shanghai in December 2017 between Saudi Arabia's Finance Minister and the Governor of China's Central Bank[4]… to discuss the date Saudi oil purchases in Chinese currency will start[5].

The petro-yuan contracts of the Shanghai International Energy Exchange made a notable entry into the markets on 26^th March 2018[6]. Foreign giga-operators like Glencore and Trafigura immediately positioned themselves on those futures. At the end of the first trading day, the oil price in this market was 429.9 yuan/barrel. Less than two months later, it is 447.8 yuan/barrel, i.e. between the price of Brent and that of WTI - after yuan-dollar conversion, reflecting the seriousness of this market.

Interestingly, Donald Trump’s recent decision to tighten the sanctions against Iran has had the effect of boosting oil sales in yuan. The contracts went from 8 to 12% (yes, already!) of the world market share and the volumes traded doubled (125,000 to 250,000) between Tuesday 8^th and Wednesday 9^th May [7]...

The entire report edited in the GEAB 125 by our experts, available upon subscription here.

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[1]    See previous GEAB bulletins and particularly our Trends of January. Source: GEAB N°121, 15/01/2018
[2]    Source: GEAB N°117, 15/09/2018
[3]    Source: Bloomberg, 25/03/2018
[4]    Source: People’s Bank of China, 27/12/2017
[5]    According to OilPrice, at least. Source: OilPrice, 14/01/2018
[6]    Source: Bloomberg, 26/03/2018
[7]    12% of global market in one month and a half, this is how petro-yuan excitement works! Source: Reuters, 14/05/2018