The Collapse Of The Petrodollar: Oil Exporters Are Dumping US Assets At A Record Pace

Tyler Durden's picture

Back in November we chronicled the (quiet) death of the Petrodollar, the system that has buttressed USD hegemony for decades by ensuring that oil producers recycled their dollar proceeds into still more USD assets creating a very convenient (if your printing press mints dollars) self-fulfilling prophecy that has effectively underwritten the dollar’s reserve status in the post WWII era. Here’s what we said last year:

Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company - the end of the system that according to many has framed and facilitated the US Dollar's reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop...


Few would have believed that the Petrodollar did indeed quietly die, although ironically, without much input from either Russia or China, and paradoxically, mostly as a result of the actions of none other than the Fed itself, with its strong dollar policy, and to a lesser extent Saudi Arabia too, which by glutting the world with crude, first intended to crush Putin, and subsequently, to take out the US crude cost-curve, may have Plaxico'ed both itself, and its closest Petrodollar trading partner, the US of A.


As Reuters reports, for the first time in almost two decades, energy-exporting countries are set to pull their "petrodollars" out of world markets this year.

Not long afterwards (and by that we mean “not long” in the sense that three months isn’t really that long when it comes to everyone catching on to what “fringe” bloggers say is likely important), Bank of America took notice in the form of interviews with a half dozen or so in- house economists whose views can be generally summed up as follows: “...the end of the Petrodollar recycling chain is said to impact everything from Russian geopolitics, to global capital market liquidity, to safe-haven demand for Treasurys, to social tensions in developing nations, to the Fed's exit strategy.”

Here’s Goldman with a bit of color on the projected magnitude of the shifting Petrodollar dynamic:

We estimate that the new (lower) oil price equilibrium will reduce the supply of petrodollars by up to US$24 bn per month in the coming years, corresponding to around US$860 bn over the next three years. The ultimate impact, however, will depend on a number of key current account buffers (goods imports, net factor income and service imports). 

Against this backdrop we bring you the following, from Bloomberg which highlights the fact that oil producers are now liquidating their Petrodollar assets at a frenzied pace in the face of today’s “crude” realities:

In the heady days of the commodity boom, oil-rich nations accumulated billions of dollars in reserves they invested in U.S. debt and other securities. They also occasionally bought trophy assets, such as Manhattan skyscrapers, luxury homes in London or Paris Saint-Germain Football Club.


Now that oil prices have dropped by half to $50 a barrel, Saudi Arabia and other commodity-rich nations are fast drawing down those “petrodollar” reserves. Some nations, such as Angola, are burning through their savings at a record pace, removing a source of liquidity from global markets.


If oil and other commodity prices remain depressed, the trend will cut demand for everything from European government debt to U.S. real estate as producing nations seek to fill holes in their domestic budgets.


“This is the first time in 20 years that OPEC nations will be sucking liquidity out of the market rather than adding to it through investments,” said David Spegel, head of emerging markets sovereign credit research at BNP Paribas SA in London…


A concomitant drop in foreign reserves, revealed in data from national central banks and the IMF, is affecting nations from oil producer Oman to copper-rich Chile and cotton-growing Burkina Faso. Reserves are dropping faster than during the last commodity price plunge in 2008 and 2009.


The drawdown reverses a decade-long inflow into the coffers of commodity-rich nations which helped to increase funds available for investment and boost asset prices. Bond purchases have helped to keep interest rates low.


Oil producers recycled a large portion of their petrodollars -- a term coined for the dollar-denominated oil trade -- by buying sovereign debt of the U.S. and other countries. As they draw down reserves, Middle East countries are likely to sell “low-yielding European assets,” George Saravelos, strategist at Deutsche Bank AG, said in a note to clients.


Available data shows foreign savings by commodity-rich nations are dropping across the board. In Chile, the world’s top copper exporter, foreign savings fell $1.9 billion in February, the biggest drop in three years.


Analysts and officials anticipate that commodity-rich countries will continue selling off foreign assets through the year.



The IMF’s Arezki said that unless they cut spending, resources-rich nations “have no choice but to draw on their financial assets when available” as oil prices are well below the fiscal break-even needed by many exporting nations. The IMF estimates that many oil countries would only balance their budgets if crude prices recover to $75 or higher.

And so the liquidity drain is on, the only question is how far reaching the consequences will be and whether DM central bank largesse can effectively offset the implications of the petrodollar spigot being turned completely off for the first time in nearly two decades, representing a monumental fall from the more than $500 billion in EM Petrodollars that inundated the market just seven years ago. Here's an interesting take on this from Citi:

The longer crude prices persist at current levels, the more likely it is that these investors stop seeing inflows. And if that were to be the case, then the drop in crude prices could end up effectively offsetting further balance-sheet expansion from the BoJ and ECB.

Naysayers will argue that the two aren’t equivalent: QE is money creation while petrodollars are a zero-sum game. In other words, while petrodollars are being accumulated at a slower rate because crude prices have dropped, other economic actors are experiencing a corresponding windfall. 


While that’s certainly the case, what matters is how the savings from lower crude oil prices end up getting invested relative to the investments made by sovereign wealth funds and FX reserve managers. And on that score, we suspect that petrodollar investors generally make conservative investments that are inherently fixed income-friendly, while the savings from lower gasoline prices tend to grow the top line revenue of consumer-oriented companies and the margins of those companies with significant transportation costs. As such, forsaken petrodollars rarely find their way back into fixed income markets.


In a very real sense then, we’d argue that the decline in petrodollar growth is likely to equate to less demand for fixed income securities and make the withdrawal of Fed QE that much more palpable. 

*  *  *

As we said back in February, “...few actually grasped the implications of what plunging oil really means in a world in which this most financialized of commodities plays a massive role in both the global economy and capital markets, not to mention in geopolitics, with implications far, far greater than the amateurish ‘yes, but gas is now cheaper’ retort." In the end, the real question may be this: what happens socially and politically in EM oil producing states when, after years of depressed prices, the coffers finally run dry?

Here’s the schematic again:

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
ebworthen's picture

"Oil Exporters Are Dumping US Assets At A Record Pace."

Good!  Keep it up!

RU-GAY2's picture
RU-GAY2 (not verified) ebworthen Apr 15, 2015 5:43 PM

One thing we've seen over the last 7 yrs of the collapse of this system... it's a really big system.

Thirst Mutilator's picture

How many bitcoins do you suppose the Clinton Foundation holds?


Yes ~ it's a trick question...

nope-1004's picture

End of an era.  Petrodollar is now tainted with .gov lies.  It will die even if everyone doesn't want it to because it has been horribly debauched and mispriced, hence our endless asset bubbles and ZIRP.

Nature has a way of bringing stupidity back into balance.


philipat's picture

Wait till China tells the Saudis "As your largest customer we want to pay you for oil in RMB".....

LawsofPhysics's picture

Is that RMB backed by PMs?  What part of all fiat will die don't people understand?

quintago's picture

The petrodollar is going to go the way of Aaron Hernandez soon. From tight end to wide receiver.

Chief KnocAHoma's picture

I'm confused... If they are dumping treasuries should that add liquidity to the US market? Please explain it to me like I'm a Labrador.

new game's picture

dump treasurie>fund there own welfare state reliant on breakeven of 80/bbl. no surplus reserve. draws liquidity out hence petrodollar demise. the conversion is financing or drawing from previous petrodollar reserves which in turn exasperates the drawdown. usqe fucked> i call blackswan slow mo. and ya what if china pays with rmb? ha.  dollar in trouble, the long demise is nearing its fuition...

SWRichmond's picture

The entire notion of the existence of something called "sovereign wealth fund" displays the extreme distortion of the petrodollar system.  It clearly indicates that the US imports real goods and exports promises, and that others are forced to hold onto these promises and try to find something productive to do with them as they grow more and more massive.

If you refuse to hold onto our promises, we invade you, kick you out of our clearing systems, etc.

No wonder the rest of the world is so anxious for the US to fuck off.

Sages wife's picture

Precisely. The US has only two things to trade; promises and bombs. Accept the former, or expect the latter.

weburke's picture

the saudis PAY for cooperation from tribes of similar desert rats. since they earn less, they have to sell assets besides oil to fund their tyranny. a vast horde of seriously confused/deluded/religiously insane victims of birth location, are in fact funded by the oil. 

that is just one part. 

weburke's picture

Chief, there are many possible zero hedge iinks on this issue, here is one.

weburke's picture

Quintago, here is the best use of the line you used.........."from tight end to wide reciever".

sun tzu's picture

Which one dies first? As long as the RMB can be used to buy goods, the Saudis will accept it. If they don't, Iran, Russia, and Venezuela will accept RMB. The Saudis aren't in control. They produce nothing but oil. If they refuse to sell except in exchange for precious metals, they will be back to living in tents in a year.

TheReplacement's picture

That's an illusion.  The Saudis (family) control whatever they are told they control.  They don't have the numbers, know-how, nor loyalty of their people.  Take away outside support and there is no more house of sodomy.

jaxville's picture

 LawsofPhysics....  Exactly.  Once one of the biggies tips over,  the insurance starts to kick in.  Insurance in the form of derivatives.  

  People will soon really understand the concept of "global".

eddiebe's picture

Actually, most people don't understand any of it, and don't want to. 

Deathrips's picture

Oil for gold, silver, palladium and platinum basket....coming.


Stack on.



sun tzu's picture

There's not enough physical precious metals in the world to facilitate global trade. Bartering would be more likely to happen than using gold to trade. 

ILLILLILLI's picture

Maybe if they're priced at the current valuations that's true.


Deathrips's picture

Fancy pants.


Im agreeing with ILL. If not physical. An exchangable script or transfer method...fully convertable at higher prices. No fractional reserves. Its accountability for what you trade your life for. Any questions?



The Chief's picture

As their largest customer, the Chinese will say, and soon, "We want you to PAY US to take your oil"

post turtle saver's picture

... which is pegged to the dollar

Chupacabra-322's picture

@ nope,

I predicted this scenario a duplex of months ago on these thread. First we've seen the dumping of worthless Criminal Fraud UNITED STATES, CORP. INC. Tresuries now the dumping of Assests.

The end is near. Then complete bedlam & Chaos. Exactly what these Elite Psychopaths want.

Andre's picture

"Be careful what you ask for. You might get it."

Karl-Hungus's picture

absolute power corrupts, absolutly. The US has abused its reserve currency status for decades, and they can't really control the actions of every govt on the planet(despite their best efforts, and they sure have been trying). If Saudi Arabia does anything too big to damage the USD, expect the big guns to come out: releasing the info showing saudi govt involvement in 9/11. This could very well be why that keeps coming up and being hinted at in the MSM. Not that I believe for one second that the SA govt being involved is all thats being covered up, but most people will, and the USG will need someone to direct the braindead mass's anger towards

post turtle saver's picture

it's going to be abused for a few more decades

your grandchildren will be dead and buried and it will still be abused

Ruffmuff's picture


You can't kill a fucking dead horse.

Dead, dead. been there, been dead.

Oil exporters are not dumping assets. For what dollars?

Then what currency? Gold?  Laugh my fucking ass off.

Dumping them where exactly.  Ohhhhhh, yes the fed is buying  with a lick and a promise.

you asses (assets) r safe with us.

Just like the fairy tale from hell

the great rift's picture
the great rift (not verified) ebworthen Apr 15, 2015 9:28 PM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do...

lakecity55's picture

If I were you I would not post whoring myself out on the inntertubes.

Lets Buy The Dip's picture

amen to that sir. 




and for get the news......and their bullshit. Check out the crude CHART on what, could be whats termed a “W BOTTOM formation” See here =>

discusting, that they get everyone SHORT CRUDE< and then right when these people are smiling about what they are goign to do with their new futures being SHORT CRUDE, they reverse it back up, and these people short crude, lose their ass. 


Same thing happed a few years ago in crude, many more people short crude are going to get their god damn asses handed to them. 

TheReplacement's picture

Queue Chinese QE to fill the void.

OldPhart's picture

I know there's financial whizzes here on ZH.

Let's say I'm an Oil Producing Nation that has all these Euro Bonds and shit that had positive interest rates and I want to sell them in a negative interest rate environment.  How much do I come out ahead?

Bighorn_100b's picture

Massive layoffs if oil is below 100 bbl. SHTF IN 3...2...1....

LooseLee's picture

Ye reap what ye sow.

chunga's picture

It's ridiculous to blame the Chinese and the Russians for the rampant, massive fraud that's been going on unchecked in the US for a very long...but that's what will happen.

The problem is it doesn't make any sense. The US has managed to project it's fraud into the future so well that people who aren't even born yet have already been robbed blind.

Peter Pan's picture

Can anyone really afford a hike in interest rates apart from savers?

And why does the FED or the ECB etc have to hike interest rates? Why can't the market be allowed to determine rates for once?


As for the dollar and all the currencies, they are losing their utility as stable and continuing units of value so in my books they should only be temporary repositories of earnings or capital pending a decision to either consume or invest.

Deathrips's picture

Helicopters on the beach...too close for comfort. They fly over us all day and now they are landing 5 miles from their base?


Hmmm....maybe it was an emergency...Jade



lakecity55's picture

The Chinese army is filling up all those unused container ships. They will dock in Mexico and Cali and the Celestials will launch a two-prong invasion.

The Baltic Dry does not include Chinese troop transports.

FidTheRED's picture

Are there any savers left?

To let the market determine the interest rate for itself is analogous to new car-loan, mortgage loan, student loan takers throwing up incessantly without any ability to stop this backward flow of shit to the point where their bodies dissipate and just fade out of existence without ever being able to catch a breather

Family Guy(yes I know) reference -

TheReplacement's picture

We haven't gotten to auto equity loans yet.  Then there are teevees and iwatches too.  Imagine a nation of zirp pawnshops.

nuubee's picture

Wait... if the U.S. can no longer export it's dollars overseas for oil... ah, yes, now I see why the ECB went with QE and why Japan is just openly monetizing debt... the Fed needed someone else to import dollars.

This really feels like that wile-e-coyote moment when he's feeling for ground underneath him.

nope-1004's picture

Exactly.  QE in the US technically ended but realistically did not.  The cocksuckers in Japan and the EU are just covering.  Everyone has to monetize because the system is broken and broke.

lakecity55's picture

"Why Mr Yellin, so are white as a ghost. What happened?"
"I opened the supplies closet and it wass full of...Derivatives!"

SillySalesmanQuestion's picture

"Let's light this candle!"

Max Steel's picture

Burn the candles ! keep oil prices down and let opec dump petrodollar assets .



PSG futball club was also bought using it lol . They  will loose their next match against barco in uefa q/f now .

Al Huxley's picture

That explains the strength in the dollar then.  How long til they run out of USD assets to sell?