What I read this week: Oil prices may touch $100 again; it's time we give RBI more powers to regulate PSBs

Will Oil touch $100 a barrel again? The research piece makes convincing arguments of triple digit oil prices this year itself based on demand, supply and hype created out by shale as market psychology switches from worries about surplus to worries about deficits.

Your bank passwords could no longer be safe and you can blame it on advancement in Quantum Computing. This method if perfected could easily hack passwords and cryptocurrencies passwords. India is emerging as the new-bright spot for commodities demand growth. Will India be able to replicate China on energy demand and more importantly uranium is set to stage a comeback.

Lastly, I believe RBI should share some blame for banking fraud but It’s time we give RBI more independence and supervisory powers to regulate the PSBs as more structural reforms are required to resolve the current crisis in the banking system.

Triple-digit oil prices: Are you ready
The global oil markets had a deficit of 650,000 b/d in 2017. Global demand in 2018 could grow by 1.6 million b/d. With US production estimated to grow by 1.1 million b/d and assuming Opec adheres to production cuts in 2018, the global crude markets would be once again in deficit by 750,000 b/d for 2018.

Global inventories would drop by another 250 million bbl, leaving inventories at a dangerous 140 million bbl below the long-term average – the largest such deficit. Even if Opec were to completely reverse their production cuts, it would not be enough to fully balance the market for 2018 and inventories would continue to fall (albeit at a smaller rate). With the market in deficit, demand surging higher and the rest of the non-Opec world feeling the impact of meager conventional discoveries, the burden of balancing the market falls to the US shales. However, signs are emerging that the US shales are exhibiting the first signs of field exhaustion and will not be able to make up the shortfall.

While investors have convinced themselves that the shales will grow ad infinium from here, more and more evidence has emerged suggesting drilling productivity in the shales is peaking and may very well start to decline especially in the Bakken and Eagle Ford. It would be very difficult to replicate the strong growth from the US shale plays experienced in the 2012-2014 period as two of the three major shale plays are now exhibiting early signs of exhaustion and will not be the large growth drivers they were last cycle.

Huge cuts in upstream capital spending combined with the collapse in new conventional discoveries will have an impact on non-Opec/non-US production in the next five years—another further tightening to global crude oil markets that few analysts expect. As inventories continue to draw, prices will continue to respond and could very easily reach $100 per barrel as market psychology switches from worries about surplus to worries about deficits. READ MORE

Quantum Computers Will Make Even 'Strong' Passwords Worthless
The race is on to perfect quantum computing. It will make your bank passwords and all existing security methods useless. If perfected, existing methods of encryption will cease to work. Your bank account password and passwords to cryptocurrencies will easily be hackable. The ability to break the RSA (Rivest, Shamir, and Adelman) coding system will render almost all current channels of communication insecure. This is a national security threat. The benefits are also huge.

Quantum computers have the ability to solve, in a quick time frame, problems that were previously too difficult to solve in any reasonable time. Large aircraft companies are working to develop quantum algorithms that will greatly reduce research time in achieving aeronautical efficiencies. Quantum-resistant and improved cyber security techniques are being developed. Therefore, the impact of cyber-attacks on artificial intelligence and major databases and other sensitive systems may be significantly reduced.

Quantum computer could help in weather forecasting as simulators could potentially provide models for a large number of areas from turbulence and flow in industrial furnaces to the protection of low-lying countries for sea-water flooding. Quantum computing's ability to model molecular interactions at an atomic level will allow us to gain insight towards developing new medicines and a greater understanding of diseases such as cancer, Alzheimer’s, Huntington’s, and Parkinson’s.

Although the US currently remains at the forefront of quantum information science, their lead is slipping quickly as other nations step up efforts to get there first. China holds the top two positions in the Top 500 list of the world's fastest computers, and the Chinese understand very well the potential power that quantum computing promises. For this reason, they have allocated extensive funding towards the goal of producing a functional quantum computer before anyone else. On 37 hectares (nearly 4 million square feet) in Hefei, Anhui Province, China is building a $10 billion research center for quantum applications.

Quantum computers offer many promises. They also pose security threats. The first country that succeeds could hack into bank accounts or the pentagon. It is a national security threat if China perfects quantum computing first. READ MORE

Is India Becoming the Next Major Source of Commodity Demand Growth?
Demand for uranium is expected to significantly grow over the next decade. With over half of the uranium mining industry now operating at cash operating losses, and with both supply and demand trends having turned positive, the metal has bottomed and a new bull market is about to unfold. Although the uranium market is in surplus today, it could be thrown back into structural deficit as China and India are massively expanding nuclear plant construction. As a result, uranium mine supply could decline in the next several years, and uranium market could slip into deficit by 2019 that could widen significantly as we progress through the next decade.

One of the most important drivers of a country’s commodity demand growth is the rate at which its population urbanizes. 33 per cent of India’s population is urban and total per capita primary energy consumption averages 0.35 tonnes of oil equivalent. Projections from the UN estimate that India could add 300 mm urban residents over the next 15 years which would equate to a ~50per cent urbanization rate by 2030. This in turn suggests that total primary energy consumption will need to grow by between 160 per cent and 270 per cent.

India is now beginning to exhibit accelerating oil demand growth. “S-Curve” explores the relationship between real per capita GDP and a country’s oil demand. Once a country hits a certain level of per capita real wealth (called S-Curve Tipping Point), oil demand begins to rise very sharply. If India has indeed crossed its tipping-point and, using China as a guide, then we should expect to see India’s oil demand to grow to 7 mm b/d over the decade – 67per cent higher than the IEA estimated in its most recent medium-term energy outlook.

Should Banking Regulatory Powers Be Ownership Neutral
The RBI governor Mr Urjit Patel recently spoke at an event organised at the National Law University in Gandhinagar. Responding to charges of laxity on part of the RBI in detecting the fraud, the governor indicated that the RBI had very limited authority over state-run banks and the dual regulation owning to finance ministry’s involvement and weaker market discipline mechanisms for public sector banks (PSBs) had a role to play.

RBI’s regulatory powers over PSBs are weaker than those over the private sector banks. While the Banking Regulation Act allows the central bank to regulate all commercial banks in India, the regulator does not have legal powers to remove PSB directors or management, liquidate PSU banks or order forced mergers of state-owned banks. It has limited legal authority to hold PSB Boards accountable regarding strategic direction, risk profiles, assessment of management, and compensation. Thus legal reforms are necessary to empower the RBI to fully exercise the same responsibilities for PSBs as now apply to private banks. This could be done by making banking regulatory powers neutral to bank ownership and leveling the playing field between public sector and private sector banks.

The Insolvency and Bankruptcy Code along with the RBI's revised framework will help break the promoter-bank nexus, which has led to crony capitalism and an attendant NPA/credit misallocation problem as ever-greening suited some borrowers and some lenders under the earlier framework. These, and other structural reforms to the banking sector, would enable India to grow sustainably at respectable rates. READ MORE