The Impact of the Russia-Saudi Arabia Energy Pact on Global Oil Prices and Supply

Oil prices surged by 3% following a major agreement between Saudi Arabia and Russia, the world’s two largest oil producers, to cooperate in world oil markets.

News of the deal, which was signed by both nations’ energy ministers at the G20 summit in China, sent Brent crude futures for November delivery up 71 cents to $47.54 a barrel, whereas U.S. crude for October delivery spiked to $45.15.

However, the gains were pared back somewhat by revelations that the two nations would not take immediate action to limit oil output and buoy flagging world oil prices. Since the epic collapse in oil prices two years ago, oil prices have rebounded to $45 a barrel, but they are still over 50% below 2014 levels.

Saudi Arabian energy minister Khalid al-Falih noted, however, that recent gains in oil prices had offset the need for an immediate production halt. “Freezing [production levels] is one of the preferred possibilities, but it’s not necessary today,” al-Falih said, according to the BBC. “The market is getting better and we have noticed that prices reflect this [improvement].”

Detractors of the move argue that freezing production at already high levels would be a superficial maneuver that does little to ameliorate the global oil glut.

Part of what has driven the oversupply of oil and depressed oil prices has been the U.S. shale revolution, which turned the nation into a massive producer of oil and natural gas. According to Rystad Energy, U.S. oil reserves (defined as recoverable oil from existing fields and future discoveries) are currently projected to be 264 billion barrels, the largest in the world. By comparison, Russia and Saudi Arabia’s reserves total 256 billion and 212 billion barrels respectively.

U.S. oil production has also been robust, on the other hand, even though oil prices are 60% lower than their 2014-levels. While the U.S. Energy Information Administration reported that field production of crude had dropped to 8.701 million barrels a day in June 2016 (revised upwards from its previous estimate of 8.6 million barrels a day), down from its June 2015 peak of 9.61 million, many industry observers believe that U.S. oil production has bottomed out and that it is due for a resurgence. Citing growing global demand for oil spurred by developing markets, Jude Clemente, an oil analyst at Forbes, argues that global oil prices are destined for a rebound, which will in turn boost production.

Furthermore, evolving technologies have increased American oil companies’ abilities to extract greater amounts of oil while driving down production costs, making U.S. oil exports competitive abroad.

References:

http://www.reuters.com/article/us-global-markets-idUSKCN11B01K

http://money.cnn.com/2016/09/05/investing/saudi-arabia-russia-oil-market/

http://marketrealist.com/2016/09/crude-oil-prices-skyrockets-almost-5-ahead-saudi-arabia-russia-agreement-talks/comments

http://www.forbes.com/sites/judeclemente/2016/08/09/u-s-oil-production-will-continue-to-grow/#b10a232665a2

 

Continued Chinese Spending on U.S. Real Estate

8.25.2016 | Continued Chinese Spending on U.S. Real Estate -Rusty Tweed team

A new report issued in May 2016 by the Rosen Consulting Group and the Asia Society showed that between 2010 and 2015, Chinese buyers purchased $93 billion in residential real estate, close to $208 billion of mortgage-backed securities, and approximately $17 billion of commercial real estate, including hotels and office towers.

Altogether, Chinese investment in the U.S. real estate market has topped $300 billion and is growing despite China’s increased currency controls and recent economic challenges.

Continued Chinese Spending on U.S. Real Estate - Rusty Tweed team

The report found that while interest from some Chinese home buyers may lessen, overall Chinese buyers usually have larger budgets for home purchases than other international buyers. It also demonstrated that from 2013 to 2015 China outspent every other country in relation to the total dollar amount spent on U.S. homes.

While direct investment from China still only comprises 10% of all foreign direct investment into the United States, the Rosen and Asia Society report is significant because it is the first independent study to show that Chinese investors rank among the top in every sector of real estate. It also reveals the staying power of Chinese investors and their ability to withstand short-term market events, said Arthur Margon, a partner at Rosen Consulting Group and co-author of the report.

“There are strong signals that there will be continued, maybe even increasing appetite,” said Margon.

Rosen’s team forecasts a minor slowdown within the next 18 to 24 months for the United States, and a further worsening of China’s economic slowdown.

Xi Jinping, China’s president, recently said he will promote supply-side reforms and concentrate on increasing the middle-class, demonstrating the pressure China is under to turn around growth rates that are the lowest in 25 years.

From economic slowdowns to terrorism to votes over European Union membership, the increasing international footprint in major U.S. real estate markets means we’re increasingly likely to witness the impact of those issues, says Ross Milroy, owner and broker at Ross Milroy Realty in Miami.

“The Miami real estate market – and I think New York is very similar as well – we’re so dependent on the international buyers, and they’re such a huge part of our market,” Milroy says.

“A lot of our real estate markets do not follow traditional patterns, and a lot of our demand is dependent on what’s going on in those home countries of our buyers.”

References:

http://www.cnbc.com/2016/05/16/chinese-investors-have-spent-300-billion-on-us-property-mbs-rosen-study-finds.html

http://www.sec.marketwatch.com/story/chinese-top-foreign-buyers-of-us-real-estate-for-fourth-year-2016-07-06

http://atimes.com/2015/06/china-tops-list-of-foreigners-buying-us-real-estate/

http://www.ft.com/cms/s/351606a8-159b-11e5-be54-00144

http://realestate.usnews.com/real-estate/articles/how-international-issues-affect-foreign-investment-in-us-real-estate/

China Tops Foreign Buyers List of U.S. Real Estate

8.24.2016 | China Tops Foreign Buyers List of U.S. Real Estate – Rusty Tweed team

Last month, the National Association of Realtor survey showed that foreign purchases of U.S. real estate had fallen by 1.3% to $102.6 billion of residential property. Contributing factors include rising house prices in the U.S., a stronger U.S. dollar and a weakening global economy.

The NAR survey showed that China continues to top the list of foreign buyers of U.S. real estate. This is China’s fourth year at the top of the table. Chinese buyers spent $27.3 billion on 29,195 properties between March 2015 and March 2016. For international buyers, the average purchase price was $499,600 per property; however, Chinese buyers spent $831,800 on average, over three times $255,600, the national average transaction price.

China Tops Foreign Buyers List of U.S. Real Estate  - Rusty Tweed team

California and New York were the most popular locations for Asian buyers, compared to Florida and Arizona for Canadians, Europeans and Latin America. In 2015, 35% of Chinese house purchases were in California, followed by 8% in Washington, and 7% in New York. Buyers from China and India generally buy in states with relatively expensive property values.

Canada came in at second in the table, with Canadians spending $8.9 billion on U.S. properties, roughly a third less than the total Chinese spend. India followed in third at $6.1 billion of purchases and Mexico ranked fourth at $4.8 billion. Britain ranked fifth at $5.5 billion in the NAR survey. Lawrence Yun, NAR’s chief economist warned this trend may not continue following the sharp decline in the pound’s value following the surprise exit vote in the EU referendum.

Almost 70% of the Chinese purchases were reported as all-cash, compared with 55% for all international purchases and 25% by US buyers.

“With the Chinese economy and real estate market slowing dramatically and a vociferous anti-corruption campaign in full swing at home, Chinese buyers have been scrambling in the past few years to buy real estate abroad,” said the Financial Times. The Chinese have become the biggest buyers of housing in many major English-speaking western cities with a good quality of life, strong education systems, a resilient rule of law and robust property rights, including New York, Vancouver, London, Sydney, Toronto and Auckland.

The FT reported that the majority of money for overseas property purchases is taken out of China illegally.

For many years, foreign investors have seen U.S. real estate as a strong choice to diversify their portfolio and benefit from the strongest economy in the world. In recent years, however, hard assets in the form of U.S. property have also become an opportunity to securely store money. “We’ve become what is today, I guess, the largest offshore location in the world,” Ed Mermelstein, an international real estate attorney based in New York, recently told Real Estate US News.

References:

http://www.cnbc.com/2016/05/16/chinese-investors-have-spent-300-billion-on-us-property-mbs-rosen-study-finds.html

http://www.sec.marketwatch.com/story/chinese-top-foreign-buyers-of-us-real-estate-for-fourth-year-2016-07-06

http://atimes.com/2015/06/china-tops-list-of-foreigners-buying-us-real-estate/

http://www.ft.com/cms/s/351606a8-159b-11e5-be54-00144

http://realestate.usnews.com/real-estate/articles/how-international-issues-affect-foreign-investment-in-us-real-estate/

The Chinese Exodus – Part 2

8.22.2016 | The Chinese Exodus – Part 2 – Tweed Economics
The History of Chinese Emigration

Ever since the period of the great emperors, the Chinese have traveled overseas in pursuit of fortune, knowledge and adventure. Sailing junks took merchants to Manila to trade silk and porcelain for silver. The largest previous emigration though, known as the Chinese diaspora, was seen from the 19th century to 1949 and was largely the result of wars and starvation in mainland China. The majority of immigrants leaving were peasants and manual labourers, described as “coolies’ (literally: “Hard Labor”) who emigrated to work in the mines and plantations of the Americas, Australia, Southeast Asia and South Africa.

However, through much of China’s history, immigration has been limited by strict controls preventing large groups leaving the country. In the 1980s more liberalized emigration policies were enacted, leading at first to more students and scholars departing to study at foreign universities; a flow that has steadily increased in recent years. The number of wealthy mainlanders has grown 23% yearly even while the country’s economy slows down. Despite their wealth, large scores of Chinese nationals continue to leave the country for overseas homes.

8.22.2016 | The Chinese Exodus – Part 2 - Tweed Economics

Where are the most popular destinations?

In Australia, one of the most popular destinations for Chinese tourists, emigrants and students, Mandarin Chinese is now the second-most widely spoken language after English. Australia is the first most visited tourist destination by China’s high net-worth individuals, followed by France, then Dubai, Switzerland and the Maldives.

In terms of those who want to emigrate, according to the South China Morning Post, Hong Kong is the most important global city, while the U.S. is the preferred destination because for a variety of reasons. In part because of its property market, medical services and friendly immigration policy, and also because it is home to most of the world’s top universities. Britain comes second, and Canada third.

Canada dismantled its controversial investor visa scheme in 2014, which in part accounts for the drop in numbers of new immigrants from China. In the US In 2015, under the EB-5 program, the government issued 6,895 visas to Chinese nationals. The EB-5 program allows foreigners to live in the U.S. as long as they invest $500,000 or above.

References:

http://www.wsj.com/articles/the-great-chinese-exodus-1408120906

http://www.independent.co.uk/news/world/asia/china-s-millionaire-exodus-as-wealthy-flee-with-america-the-preferred-destination-9069551.html

http://www.ca-soc.org/wpmu284a/documents/

http://www.scmp.com/news/china/money-wealth/article/1884376/number-rich-chinese-grows-23-cent-and-many-want-emigrate

http://www.scmp.com/news/china/economy/article/1877180/whatever-happened-sharing-wealth-chinas-fast-growing-group

http://www.cnbc.com/2015/09/02/amid-turmoil-wealthy-chinese-eyeing-the-us.html

 

The Chinese Exodus – Part 1

8.20.2016 | The Chinese Exodus – Part 1 – Tweed Economics

The Chinese Exodus – Part 1

The Wall Street Journal drew attention to the Chinese exodus earlier this week in a long essay on “The Great Chinese Exodus”, a phenomenon, which has also been widely reported elsewhere over the last few years. A recent report by WealthInsight found that the Chinese wealthy have $658 billion overseas.

Chinese nationals are leaving China “in vast waves”. Over 100 million Chinese citizens left the country last year, mostly for tourism; but increasing numbers of students and the wealthy are also leaving, not to return. In a recent survey compiled by Shanghai research firm Hurun Report, it was noted that 64% of China’s wealthy (designated as those with assets of over $1.6 million) are emigrating or intend to do so. Surprising news given the fact that the exodus is occurring as China is becoming a world power.

Today, mainland China has the largest number of billionaires – the Harun Report counted 596 last year compared to 537 in the U.S. Bruno Lannes, partner at Bain & Co management consultancy told the South China Morning Post that this was in general good news for the world as it meant China would continue to help drive the global economy.

Lannes commented, “The world economy today is much more integrated than it was a few years ago,” he said. “When China is doing well, the rest of the world also feels better, because China is importing their products, the middle classes want their products, the billionaires want more holidays, more luxury … All this helps the global economy.”

chinese exodus part 1

What are the factors behind the exodus?

Why are the wealthy Chinese leaving their own country? On the positive side, a comfortable lifestyle along with a strong investment environment can be found outside mainland China for relatively affordable prices in attractive areas such as California or Australia’s Gold Coast, both of which have seen increasing numbers of Chinese immigrants in recent years.

Many of those leaving expressed their perception of a foreign passport as being simply an insurance policy in case things go wrong at home. Ms. Sun, a 34-year-old Beijing resident interviewed by the WSJ said “I’m just giving my family another option”.

Factors causing the exodus from the homeland include the fact that China’s urban population is afflicted by a number of challenging issues, including chronic pollution and an underdeveloped education system that heavily relies on testing. There is also a sense of political uncertainty, which is not widely reported on. However, according to the WSJ, President Xi Jinping’s premiership has “created as much anxiety as hope”.

The Chinese are also splitting their time between their homeland and overseas destinations as they make investments in other countries. The Financial Times released a study last year in which 42% of the wealthy Chinese cited the U.S. as their top destination for their investments. Volatile stock markets and the slowing Chinese economy have led to a surge in interest from the overseas Chinese in U.S. investment opportunities, particularly real estate.

References:

http://www.wsj.com/articles/the-great-chinese-exodus-1408120906

http://www.independent.co.uk/news/world/asia/china-s-millionaire-exodus-as-wealthy-flee-with-america-the-preferred-destination-9069551.html

http://www.ca-soc.org/wpmu284a/documents/

http://www.scmp.com/news/china/money-wealth/article/1884376/number-rich-chinese-grows-23-cent-and-many-want-emigrate

http://www.scmp.com/news/china/economy/article/1877180/whatever-happened-sharing-wealth-chinas-fast-growing-group

http://www.cnbc.com/2015/09/02/amid-turmoil-wealthy-chinese-eyeing-the-us.html