Petrodollars outflow from the financial markets. Will it last?
The time of the large inflows of petrodollars in the financial markets seems to be over. Now-days analysts talk much more about Petrodollars’ exodus. The blest countries with high budget surpluses because of the high oil prices now are in the hook. In their Sovereign funds, have been poured for years billions of dollars. The petrodollars have been invested by these legendary funds in many financial markets around the world mainly in the US market to balance the global demand for US dollars.
Currently we are in a reverse situation. Over the past weeks, billions of dollars have been withdrew by the central governments of the oil exporting countries, as they are plunging in large public deficits. Analysts estimate that Saudi Arabia alone has withdrew out of the markets, at least $60 BN in the last few weeks. The Norwegian Sovereign fund after losing around 87 BN of its value, as a result of the latest corrections in the international markets, very soon will see other billions out flowing, to cover the Norwegian public deficit. This is the first time it happens from the time this legendary fund has been founded.
The outlook remains fragile for these sovereign funds, as the prices of the major commodities are in a strong downtrend. If we see such a strong out flow, in a relatively short period of oil price collapse (remember that the price of oil was around $100 only a year before), what can we expect, if this commodity price remains at these levels for at least other 2 year? Probably it won’t be a big problem for Norway as the country owns a large fund (currently around 870 BN) and is little populated. The same can’t be said for Saudi Arabia. The country lately has been involved in a regional conflict, and military expenses have climbed quickly.
These international developments also rise concerns about the stability of the international financial markets and mainly about the economies of the same countries that rely on Petrocurrency. We still don’t know if Glencore is going to be the next Lehman Brothers but many investors, that sold the largest commodity trading and mining company with both hands only two weeks before, were largely convinced about that.
For days we have seen equity markets going down, every time the price of oil goes down and the reverse happening when oil prices go up. This situation is very similar to what happened in 2007 before the oil price collapse. At that time equity markets had a negative correlation with the price of oil. This is a strong sign that the sector can’t support a further slump in the price of this commodity and probably we are at a price level, next to the average global cost of production.