Thursday, December 31, 2015

A crude rout & all those downgrades

Both Brent and WTI futures are trading at their lowest levels since 2008 and previous weeks have offered some spectacular declines, if there is such a thing as that!

Biggest of the declines were noted when Brent fell by 12.65% and WTI by 11.90% between Friday, December 4th and Friday, December 11th using 2130 GMT as the cut-off point for 5-day week-on-week assessment. Following that, like January, we had another spread inversion in favour of the WTI, with the US benchmark trading at a premium to global proxy Brent for a good few sessions before slipping lower, as both again got dragged lower in lacklustre post-Christmas trading.

It all points to the year ending just as it began - with a market rout, as yours truly explained in some detail via a recent Forbes post. With nearly 3 million barrels per day of surplus oil hitting the market, the scenario is unavoidable. While the situation cannot and will not last, oversupply will not disappear overnight either. 

The Oilholic reckons it will be at least until the third quarter of 2016 before the glut shows noticeable signs of easing, mostly at the expense of non-OPEC supplies. That said, unless excess flow dips below 1 million bpd, it is doubtful ancillary influences such as geopolitical risk would come into play. 

For the moment, one still maintains an end-2016 Brent forecast near $60 per barrel and would revisit it in the New Year. Much will depend on the relative strength of the dollar in wake of US Federal Reserve’s interest rate hike, but Kit Juckes, Head of Forex at Societe Generale, says quite possibly commodity markets fear even a dovish Fed!

Meanwhile, with the oil market rout in full swing, rating agencies are queuing up predictable downgrades and negative outlooks. Moody’s described the global commodity downturn as “exceptionally severe in its depth and breadth” and expects it to be a substantial factor driving the number of defaults higher on a global basis in 2016.

Collapsing commodity prices have placed a significant strain on credit quality in the oil and gas, metals and mining sectors. These sectors have accounted for a disproportionately large 36% of Moody’s downgrades and 48% of defaults among all corporates globally so far this year. The agency anticipates continued credit deterioration and a spike in defaults in these sectors in 2016.

Over the past four weeks, we’ve had Moody's downgrade several household energy companies, including all ratings for Petrobras and ratings based on the Brazilian oil giant's guarantee, covering the company's senior unsecured debt rating, to Ba3 from Ba2. Concurrently, the company's baseline credit assessment (BCA) was lowered to b3 from b2. 

“These rating actions reflect Petrobras' elevated refinancing risks in the face of deteriorating industry conditions that make it more difficult to raise cash through asset sales; tighter financing conditions for companies in Brazil and in the oil industry, coupled with the magnitude of eventual needs to finance debt maturities; as well as the company's negative free cash flow,” Moody’s explained.

It also downgraded Schlumberger Holdings to A2; with its outlook changed to negative for Holdings and Schlumberger. "The downgrade of Schlumberger Holdings to A2 reflects the expected large increase in debt outstanding related to the adjustment of its capital structure following the Cameron acquisition," commented Pete Speer, Moody's Senior Vice President.

Corporate family rating of EnQuest saw a Moody’s downgrade to B3 from B1 and probability of default ratings to B3-PD from B1-PD. Of course, it’s not just oilfield and oil companies feeling the heat; Moody’s also downgraded the senior unsecured ratings of Anglo American and its subsidiaries to Baa3 from Baa2, its short term ratings to P-3 from P-2, and so it goes in the wider commodities sphere.

In the past week, outlook for Australia’s Woodside Petroleum outlook was changed to negative, while the ratings of seven Canadian and 29 US E&P companies were placed on review for downgrade. And so went the final month of the year. 

Not just that, the ratings agency also cut its oil price assumption for 2016, lowering Brent estimates to average $43 from $53 per barrel in 2016, and WTI to $40 from $48 per barrel. Moody’s said “continued high levels of oil production” by global producers were significantly exceeding demand growth, predicting the supply-demand equilibrium will only be reached by the end of the decade at around $63 per barrel for Brent. 

While, the Oilholic doesn’t quite agree that it would take until the end of the decade for supply-demand balance to be achieved, mass revisions tell you a thing or two about the mood in the market. Meanwhile, at a sovereign level, Fitch Ratings says low oil prices will continue to weigh on the sovereign credit profiles of major exporters in 2016. Of course, the level of vulnerability varies.

“In the last 12 months, we have downgraded five sovereigns where oil revenues accounted for a large proportion of general government and/or current external receipts. Another three - Saudi Arabia, Nigeria, and Republic of Congo - were not downgraded but saw Outlook revisions to Negative from Stable,” the agency said in a pre-Christmas note to clients.

It is now all down to who can manage to stay afloat and maintain production as the oil price stays ‘lower for longer’. Non-OPEC producers will in all likelihood run into financing difficulties, as one said in an OPEC webcast on December 4, with Brent ending 2015 over 35% lower on an annualised basis.

Finally, the Oilholic believes it is highly unlikely a divided OPEC will vote for a unanimous production cut even at its next meeting in June. For what’s it worth, $35 per barrel could be the norm for quite a bit of 2016. So in 12 months’ time, the oil and gas landscape could be very, very different. That’s all for 2015 folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Graph: Oil benchmark Friday closes, Q4 2015 © Gaurav Sharma / Oilholics Synonymous Report, December 2015. Photo: Gaurav Sharma speaking at the 168th OPEC Ministers' Meeting in Vienna, Austria © OPEC Secretariat.

Thursday, December 24, 2015

Brent- WTI parity (again) before the year-end!

Before the year is out, we’ve got parity yet again between both benchmarks. Right at the start of the year, the West Texas Intermediate briefly traded at a premium to Brent having achieved parity at $48.05 per barrel on January 15

Come the end of the year and we are here again! Parity between both benchmarks was achieved once more at a lower level of $36.40 per barrel on December 22 (see above, click to enlarge), exactly $11.65 lower with WTI in the ascendancy. In fact, the US marker's premium appears to holding.

The OPEC stalemate, peak winter demand and lifting of US exports ban are and will remain price positives for the WTI, as one wrote in a Forbes column. So is this a reversal of the 'crude' pecking order of futures contracts we have gotten used to since 2010? The Oilholic feels its early days yet. However, the development sure makes for an interesting 12 months in more ways than one.

Happy Christmas dear readers, but that’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Bloomberg terminal screen grab showing moment of Brent-WTI parity on December 22, 2015  © Bloomberg.

Friday, December 18, 2015

US oil exports could level crude playing field

It has taken 40 years but US politicians finally found the timing, inclination and effort required to get rid of a legislative relic dating back to the Arab oil embargo of 1975 – a ban on exporting the country's crude oil that has plagued the industry for so long for reasons that no longer seem relevant.

Late on Friday, when news of the lifting of the ban arrived, the Oilholic could scarcely believe it. As recently as July 2014, this blogger opined in a Forbes column that movement on this front was highly unlikely until after the US Presidential election. However, in this instance, one is both pleasantly surprised as well as glad to have been proved wrong.

US producers, including independent upstarts behind the country’s shale bonanza, would now be able to sell their domestically produced barrels out in the international market competing with those already having to contend with a global supply glut.

Let's not kid ourselves, lifting of the ban would not necessarily lead to a significant spike in US oil exports over the short-term. However, it at least levels the playing field for the country’s producers should they want to compete on the global markets. It is also price positive for WTI as a crude benchmark leading it to compete better and achieve parity (at the very least) with global benchmarks in the spirit of free market competition.

Of course, in keeping with the shenanigans long associated with political circles in Washington DC, lifting of the ban came as part of a $1.1 trillion spending bill approved by the Senate that will fund the government until 2016.

The spending bill also includes tax breaks for US solar and wind power, and a pledge by both errant Republicans and Democrats not to derail a $500 million grant to the UN Green Climate Fund.

No matter what the political trade-offs were like, they are certainly worth it if the reward is the end of an unnecessary and redundant ban. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Alaska Pipeline, Brooks Range, USA © Michael S. Quinton / National Geographic

Tuesday, December 08, 2015

Crude oil tumbles as OPEC stumbles

Having been to every single OPEC ministers’ summit since 2008, the Oilholic thought he’d seen it all. Not quite it seems; when the 168th meeting of ministers ended – for the very time since yours truly had been here, the oil producers collective failed to mention its production quota. Here’s a link to the communiqué on December 4, that's historic for all the wrong reasons!

In farcical fashion the market was left guessing what OPEC’s actual production is based on previously published data and anecdotal evidence. OPEC itself puts the quota at 30 million barrels per day (bpd). Until recently, while Saudi Arabian production was in overdrive, 31.88 million bpd was the industry consensus, and barely days before the OPEC meeting convened a Bloomberg survey put the figure at 32.1 million bpd.

Bulk of the incremental OPEC barrels are coming from Saudi Arabia and Iraq, with discounting by all 12 members in full swing, as the Oilholic wrote on Forbes. Now Iran, eyeing a meaningful return to the international fold, is also not in favour of production cuts, unlike on previous occasions. It is not just the analyst community that is in uncharted waters, the producers’ group itself appears to be pretty dazed.

OPEC has not published a target oil price since 2004. Then in December 2008, it ceased publication of individual members’ quotas leaving the market to second guess the figure. All we know is that Iraq and Libya are currently not included in the headline quota. Now it seems OPEC will not even reveal what its daily production target is. It is all pretty strange and quite unlike any cartel in the world, if you feel OPEC should be described as such.

No slide rule or calculator was required in working out the stalemate in Vienna would be short-term bearish! There’s just too much oil in the market. In fact, latest surveys suggest we are seeing nearly 2.6 – 2.9 million bpd of surplus oil, double of 1.3 million bpd estimates earlier in the year.

At this rate it would be well into 2016 before supply adjustment occurs, which means that oil price will remain in lacklustre mode. Only saving grace is that a steep decline for Brent below $40 per barrel was not a high probability unless there is a global financial tsunami; even though the global proxy benchmark did briefly fall below the 40-level in intraday trading today.

Expect an uptick next year, but the undeserved oil price heights of Q1 2014 won’t be touched anytime soon. That’s all from Vienna folks. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: OPEC Secretary General Abdalla Salem El-Badri (right) at the conclusion of the 168th OPEC Ministers Summit in Vienna, Austria on December 4, 2015 © Gaurav Sharma / Oilholics Synonymous Report, December 4, 2015.

Saturday, December 05, 2015

Brent & WTI fall by over 3% on OPEC call

The Oilholic is still gathering thoughts on a most unusual conclusion to the OPEC meeting here in Vienna, with the formal communiqué issued by the member nations making no mention of the official production quota but noting that its members had opted to keep production where it was. 

So the only thing that's clear - minus an actual figure - is that OPEC will keep on pumping and maintaining its line of holding on to its market share. Having since waited for the US close, and done the relevant calculations, both Brent and WTI shed over 3% based on a five-day, week-on-week basis, with short-sellers predictably all over both futures contract. 

Using 2130 GMT on Friday as cut-off point, Brent was down $1.70 or 3.79% to $43.17 per barrel compared to the charting point last week, while WTI was $1.35 or 3.23% lower at $40.12 per barrel (see chart above left, click to enlarge). Get prepared for short term bearishness!

Finally, here is how far the OPEC oil price basket has plummeted since June 2014 (see chart below, click to enlarge) More from Vienna shortly; but here is some initial reaction in one’s latest Forbes report. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Chart 1: Oil benchmark prices Jan to YTD 2015. Chart 2: OPEC Oil Price Basket June 2014 – November 2014 © Gaurav Sharma / Oilholics Synonymous Report, November 2015.

Friday, December 04, 2015

OPEC quota where it was, no figures needed

OPEC decided to roll over its 'previous quota' published at 30 million barrels per day, but declined to put a figure in its official communique issued at the conclusion of its 168th ministers' meeting in Vienna, Austria.

Despite repeated questioning on the quota ceiling, OPEC Secretary General Adalla Salem El-Badri said Indonesia's re-entry into the OPEC fold, additional Iranian barrels entering the market and concerns over economic growth meant putting forward a quota figure needed further consideration.

"OPEC will wait and see how the market develops" over the next six months and saw no need to alter the current production level during a period of market adjustment, he added, having been asked to stay on as "acting" Secretary General until July 2016. 

In wake of the OPEC announcement, at 1656 GMT, WTI was trading at $40.47 per barrel, down 61 cents or 1.48%, while Brent came in at $43.52, down 32 cents or 0.73%. Industry surveys suggest OPEC's production for November was at 32.1m bpd, well in excess of stated levels. More shortly! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: OPEC logo © Gaurav Sharma.

Saudis, Iranians not budging - short baby short!

It’s not official yet, but highly likely that an OPEC quota cut is not on cards as the Saudis won’t budge and the Iranians, hoping to return to the international fold, aren’t keen on a cut either. 

That’s unless other non-OPEC producers, most notably the Russians come on board too. It is the latter part that’s the tricky bit. It ain’t happening at the moment, but could it happen at some point 2016? 

Not likely, says our old friend Jason Schenker, President of Prestige Economics. "They might meet and greet, talk on the sidelines. But chatter of a possible joint policy announcement [with Russia] seems pretty far fetched to me."

To The Oilholic, it seems the Saudis want to see how demand goes in the early part of 2016, before possibly backing a cut. Were that to be the case, the good folks in Riyadh reckon they would quite literally get more bang for their bucks.

For the moment, don’t expect much, as yours truly reported for Sharecast. In the interim, here’s the current mantra of OPEC’s Middle Eastern producers, as one wrote for Forbes – i.e. discount the competition to death.

Either way, there appears to quite a bit of intraday short covering going on at moment, which to me suggests the market is bracing for a no change scenario here in Vienna, before an almighty cry of “Short, baby short” once OPEC actually confirms that it will not be cutting. 

That’s all for the moment from Vienna folks, plenty more from here shortly! In the interim, keep reading, keep it ‘crude’!

Update: 1600 CET OPEC Press Conference delayed; ministers have broken up for second session according to sources 

Update: 1630 CET Conference delayed further, expected at 1700 CET now

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Wednesday, December 02, 2015

Oil oversupply has triggered risk premium fatigue

The Oilholic reckons it will take at least another six months in the New Year to ease the current oil oversupply glut. More so, as OPEC is highly likely to maintain its current production level, according to initial conjecture here in Vienna, Austria with the latest oil ministers’ summit currently underway.

That would probably take us to somewhere around June 2016, when we’ll see excess supply falling to somewhere in the region of 1 million barrels per day (bpd). Be that as it may, even such a decline might not be enough to bring the so-called risk or geopolitical premium into play. 

Last week, offered a clear case in point when the Turkish Air Force brought down a Russian fighter jet. Both countries are significant players in the oil and gas world – Turkey, is a custodian of the key shipping artery of the Bosphorus, and Russia, is the world’s leading oil and gas producer.

Yet, an oil futures "rally" in wake of the incident barely lasted two sessions and a few dollars, before oversupply sentiment returned to dictate market direction as per the current norm. Furthermore, both Brent and WTI futures are going sideways in the $40-45 per barrel range, as has been the case of late.

Flashpoints in the oil and gas world haven’t disappeared. Nigeria, Libya, West’s relations with Russia and Iraq are broadly where they were, if not worse. In fact, situation in the wider Middle East is pretty dire. Yet, the risk premium - so prevalent in the oil trade - is more or less nonexistent in a market struggling to park its barrels.

That will remain the case until excess supply falls to around 700,000 to 800,000 bpd. Even beyond the first half of 2016, few expect a dramatic uptick in oil prices, using Brent as a global proxy benchmark. At Fitch Ratings’ recent London Energy Seminar, this blogger found himself in the company of several experts who agreed that $60-level is unlikely to be capped before the end of 2016.

Alex Griffiths, Head of Natural Resources and Commodities at Fitch Ratings, Tim Barker, Head of Credit Research at Old Mutual Global Investors, Julian Mylchreest, Global Head of Energy at Bank of America Merrill Lynch, and Mutlu Guner, Executive Director at Morgan Stanley, all agreed there is little around to instil confidence in favour of a fast uptick above $60 being on cards within 12 months time. 

Moving away from the oil price, Genscape Oil Editor David Arno’s thoughts on the impact of Keystone XL’s rejections by the Obama administration, chimed with yours truly. Rail freight companies would undoubtedly be the biggest beneficiaries. In his blog post following the decision last month, Arno also felt denial of the pipeline provides rail shippers with “at least a year and a half more of comfort that Canadian rail opportunities will be needed.”

Finally, a couple of notes from Moody’s are worth flagging. The agency recently changed Kinder Morgan's outlook to negative from stable. Senior Vice-President Terry Marshall said the negative outlook reflects Kinder Morgan's increased business risk profile and additional pressure on its already high leverage that will result from its agreement to increase ownership in Natural Gas Pipeline Company, a distressed company. 

On November 30, Kinder Morgan announced an agreement to increase its ownership in NGPL of America to 50% from 20% for approximately $136 million. Brookfield Infrastructure Partners will own the remaining 50%. Proportionate consolidation of NGPL's debt will add about $1.5 billion to KMI's consolidated debt. NGPL's trailing twelve month September 30, 2015 EBITDA was $273 million (gross).

Moving on to state-owned crude giants, Moody's also said China National Petroleum Corporation's (CNPC) proposal to sell some of its pipeline assets is credit positive, as profits and proceeds from the sale will partially offset negative impact from low crude oil and gas prices and help preserve its financial profile during the current industry downturn.

However, Moody’s said the sale has no immediate impact on its ratings and outlook as the benefits “are marginal, given CNPC's extremely large revenue and asset size.” Nonetheless, the ratings agency expects sale proceeds to help CNPC fund the gap between its capital expenditure and operating cash flow and therefore lower its reliance on additional debt to fund its growth.

Finally, the rating agency also downgraded Pemex’s global foreign currency and local currency ratings to Baa1 from A3. Simultaneously, Moody's lowered Pemex's baseline credit assessment (BCA), which reflects its standalone credit strength, to ba3 from ba1.

The actions were prompted by Moody's view that the company's current weak credit metrics will "deteriorate further in the near to medium term. The outlook on all ratings was changed to negative." That’s all for the moment folks from Vienna folks, as the Oilholic finds his bearings at yet another OPEC summit. Plenty more from here shortly! In the interim, keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: OPEC Signage © Gaurav Sharma / Oilholics Synonymous Report.


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