Siddhant Pyasi

The Bombing of Abqaiq, Overnight Rates, and a Government That Sucks at Selling Drugs

Sep 18, 2019 | Read time: 5 min | 827 words

Hey everyone! Here’s a shorter 3-point Daily Something for a week that’s been pretty action-packed.

Saudi Aramco’s refinery at Abqaiq was attacked on Saturday, by around 10 “unmanned aerial vehicles” (the jury is still out on what exactly happened, and who is ultimately to blame, as Fabian Hinz from War on the Rocks and Jason Trevithick from The Drive’s War Zone series tell us). The Houthi rebels in Yemen claimed responsibility for it (but like every situation in the Middle East, there are at least 10 more people who could have had the motive and wherewithal to do what just happened –a bunch of persecuted Shias who lost their lands etc. reside near the Abqaiq refinery, then there’s Iran just 200 miles across the Persian gulf, there are Iran-supported militias in Iraq a little further away, there are people in the Saudi royal family who are sulking, there are your Houthi rebels themselves, etc. etc.), and they also targeted the Khurais oil field, which is one of the bigger Saudi oilfields. The damage to both the complexes must have been pretty extensive, because the fires that were caused as a result can be seen from outer space, leading to Saudi Arabia cutting their oil output by half, sending oil prices soaring. Who are the Houthis again? They’re an Islamic movement in Yemen who have taken over quite a bit of the country, including the capital, Sana’a. The current “official” Yemeni government, with Saudi help, moved the “official” capital to Aden in 2015, and continues to fight the Houthis, alongside Saudi troops (some rumours say that the Houthis are doing well in the fight, and that Saudi Arabia is hiding its true losses). Things in the Middle East will likely stay a mess for the foreseeable future, and life will be difficult, fuel-wise, and aviation-wise (because Aviation Turbine Fuel prices will go up + millions of people will be flying through an area where missiles/drones/angry people randomly shoot things down).

There was some trouble in the repo markets this week. Overnight interest rates jumped, well, overnight, and the Fed had to bring its dollaz to soothe everyone and reduce the interest rates. Why did overnight interest rates jump? Two main causes:

  1. Companies had to pay their quarterly taxes, and they withdrew money from money market accounts to do so
  2. People who bought USTs at the auction last week had to pay for them

As a result, few institutions were left with cash to lend to those who needed it. Because of this shortage of lenders, overnight interest rates jumped. Based on who you heard about it from, your impression of this event can be anything from something minor to something that precedes a global financial market armageddon. My recommendation is for you to listen to Hamilton James, the Vice-Chair of Blackstone. In case you don’t wanna click on the link, he says,

This kind of thing used to be common. They [the Fed] haven’t had to do it [jump into the overnight market with a bucket full of cash] in a long time. But I think it’s important to remember that the rate spike looks very scary, but it’s only overnight. So the actual cost to the system is not high; it’s more of a concern to dealers - it’s a technical problem.

There you go. People who have a clue (they’re two different links, btw) say the same thing - that this was something that regularly happened in the financial markets of yore, and it was never a bad thing. It’s only a bad thing when this continues to happen for a couple of weeks or more. But if it’s one or two days, who cares? The bottom line is, when you have a system that is based on people showing up to decide something, it might happen that on some days, people won’t show up. A pretty standard risk, actually. But not something to be afraid about.

A popular tale I heard on some forms of social media this week (Twitter and Reddit, if you wanna know), is that the Ontario government lost $42m selling cannabis last year, Which is HILARIOUS for two reasons:

  1. If you can’t make money selling drugs in a a semi-monopolistic system (only the government and licensed private retailers can sell cannabis, and the government has been dead slow in granting licenses), then there’s no hope for you
  2. The current Ontario premier Doug Ford was known to have been a hash dealer in his youth

Ontario’s government-owned cannabis retail company (OCRC) made CA$64m in sales with CA$106m in expenses. The question we need to ask is - what are the details here? Their cost of sales was around CA$44m, and their SG&A was another CA$61m. Within SG&A, the one-off one expenses come to around CA$35.5m - which leaves around CA$25m of recurring expenses. So if sales continue at the same levels, they’re staring at another loss-making year.

Have a great week ahead!

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