Barclays: Petrodollars Were Basically Another Quantitative Easing

Parsing the incredible shrinking petrodollar.

Crude Oil Refining At OAO Tatneft Petrochemical Plant

Drip, drip, drip. That's the sound of the leaking oil demand.

Photographer: Andrey Rudakov/Bloomberg

Behold a once mighty sovereign wealth fund laid low(er) by plunging oil prices.

Bloomberg reports on Wednesday that Norway is predicting it will have to withdraw cash from its $820bn SWF for the first time ever as it deals with lower oil prices and budget holes. That move comes on top of a series of hits to the coffers of oil-producing states, notably Saudi Arabia, in recent months.

The unwind of the commodities complex is arguably playing out in two ways in global financial markets.

The first is a decline in the amount of petrodollars -- money earned from the sale of oil -- circulating in the global economy, which takes away a substantial source of demand for financial assets. The second is in the sudden revaluation of the worth of many business models that had been predicated on higher and higher commodities prices. Both those developments have implications for financial markets, especially in credit where investors have been more than willing to step up to fund the commodities supercycle.

Analysts over at Barclays concern themselves with the first point in a presentation out today.

As Ryan Preclaw and Andrew Abramczyk note, higher oil prices have spurred a build-up of cash.

Source: Barclays

That windfall was then used to buy a whole bunch of bonds and other securities.

Source: Bloomberg

It's perhaps not surprising then, that credit spreads have mostly been tracking the price of oil:

By their estimates, the amount of petrodollar investment between 2010 and 2014 was on a similar scale to the Federal Reserve's bond-buying program known as quantitative easing. As petrodollar flows reverse, they argue, the world has lost a hefty $400bn in annual demand for financial assets.