Oil Prices

[greengiraffe]

The possible high cost of cheaper oil
PUBLISHED: 7 HOURS 59 MINUTES AGO | UPDATE: 3 HOURS 38 MINUTES AGO


MAX MASON

The 50 per cent plunge in oil prices since June has many cheering, from motorists enjoying the cheapest fuel in years to politicians spruiking that cheaper crude will help economic growth. But there is a flip side to the slump in oil.

Overnight, White House press secretary Josh Earnest said the falling oil price “has been good for the [US] economy” and the lower oil price was a ­“testament to the success” of the United States domestic oil and gas industry.

Brent crude slumped 5.9 per cent overnight to $US53.11 per barrel and WTI crude fell more than 5 per cent, brushing US$50 and less than half the $US107.26 a barrel it fetched on June 20.

Like their American counterparts, Australian motorists are feeling relief at the petrol pump, with the lowest national average price in more than four years.

While the President’s spokesman was keen to talk up the benefits of lower energy prices for US middle-class families, star bond manager and chief executive of DoubleLine, Jeff Gundlach, believes that oil at $US55 per barrel or below shows there will be no inflation in the US except in the areas that will hurt the public.

Mr Gundlach told Swiss Newspaper Finanz und Wirtschaft that inflation would affect housing and food, but not wages. “If oil falls to around $US40 a barrel then I think the yield on 10-year Treasury notes is going to 1 per cent,” Mr Gundlach said.

He added he hoped it didn’t drop that low as that would indicate “something is very, very wrong with the world, not just the economy”.

‘FINANCIAL TROUBLES’
“The geopolitical consequences could be – to put it bluntly – terrifying,” he said.

At current levels, the price of oil was probably going to hit US employment. With job growth and economic growth in fracking regions being huge, it had to slow down with oil below $US60, Mr Gundlach said. Any potential slowdown in labour-force growth would come just after the US economy had posted the strongest month for new employment since the economic crisis, with 321,000 new jobs in November.

“So you could see employment starting to drop a little bit. At some point, with the global economy weakening and the dollar strengthening, there is a real chance that the US will import economic weakness and deflation,” Mr Gundlach said.

The sinking oil price could also have repercussions for debt markets, he warned, pointing out that between 14 and 19 per cent of the US junk bond market were energy-related.

“So when you have oil prices staying where they are for several months – which is likely because that is a policy decision some oil producers have made – some of these companies will start to really run into financial troubles,” Mr Gundlach said.

While this might be seen as just a pocket in an otherwise recovering US economy, he noted that, as the housing market weakened in the subprime ­category, even then-Fed chairman Ben Bernanke had thought this was largely irrelevant to the broader economy. “Things are linked,” he added.

Combining with the negative impact of a rising $US on commodity prices, oil exporters, many of which are emerging economies, are losing a level of support when times are already trying, Deltec chief investment officer Atul Lele said.

EMERGING MARKET CRISIS
“Economies that are significant net exporters of oil are significantly negatively impacted – particularly where government budgets require oil prices significantly above the current level to remain in balance,” Mr Lele said.

“Despite high oil prices over the past several years, many oil-producing nations are running fiscal deficits.”

It was unlikely these countries would continue to borrow from abroad to fund their deficits; rather they were more likely to reduce spending and have tighter fiscal policy, which would crimp their economies, Mr Lele said.

He sees an emerging market crisis developing in 2015, with liquidity being squeezed out of the market. Among emerging market oil producers Iran, Venezuela, Nigeria, Iraq and Russia are the budgets most at risk.

The average price of Brent crude is now about $US55 below what it was between the first quarter of 2011 and the second quarter of 2014, according to Citi.

“That’s a $US4.4 billion daily drop in the costs of oil, discounting for the more than 10 per cent of global oil consumption not fully priced into market levels,” Citi analyst Edward Morse said.

“For the world as a whole, annualised, it amounts to about a $US1.6 trillion ($2 trillion) quantitative easing program for the world economy, but an equal loss of revenue for oil producers, sovereigns and companies alike.”

Citi is forecasting Brent oil to trade at an average price of $US63 a barrel in 2015, revised down from $US80 a barrel.

The Australian Financial Review

[old friend]

Oil hit USD47.80 today.

[Shrivathsa]

This is a very interesting article, a version of which appeared in Business Times today.

The thesis is that Oil prices will double by end of this year.

http://oilprice.com/Energy/Energy-Genera...-2015.html

[CityFarmer]

I moved the post to an more appropriate thread, the "oil prices"

This is a very interesting article, a version of which appeared in Business Times today.

The thesis is that Oil prices will double by end of this year.

http://oilprice.com/Energy/Energy-Genera...-2015.html

[newborn1000]

When capital spending decreases.........would it hurt singapore.......no orders for rigs etc

Not good for the supporting industries too

[CityFarmer]

The view of BofA Merrill...

BofA Merrill sees risk of Brent sliding to $40 per barrel near term

Bank of America Merrill Lynch said Brent prices could reach $40 per barrel in the near term, leaving producers, including Saudi Arabia, with no alternative but to cut output.

"We see a growing risk of WTI and Brent falling to $35 and $40 per barrel near-term to force either non-OPEC producers or Saudi to cut," the bank said in a research note on Tuesday.

The bank said the term structure of oil continues to weaken and inventories are piling up, setting the stage for lower prices in the first quarter of this year.
...
http://www.todayonline.com/business/bofa...-near-term

[greengiraffe]

Oil services companies feel heat of Opec price war
TIM WEBB THE TIMES JANUARY 08, 2015 12:00AM
Print
Save for later
LEADING British oil services companies are already being caught in the crossfire of the fierce price war being waged by OPEC against shale oil and gas drillers and frackers in the US.

Explorers and producers are forecast to cut spending on US projects by up to 40 per cent this year, even after the cost of hiring drilling rigs, a key indicator of the health of the industry, halved over the past 18 months.

As oil companies, particularly in the US, cut spending in an attempt to ride out the storm, services companies are expected to suffer collateral damage from OPEC’s determined refusal to halt the oil price slide.

Weir Group, the FTSE 100 services group, is the most exposed, generating 22 per cent of revenue from supplying equipment and services to US shale oil and gas drillers in the first half of the year.

Those shale drillers are expected to make the biggest cuts in spending as they need oil to be trading at about the $US80 mark to break even.

Credit ratings agency Moody’s estimates if oil prices remain below $US60 this year, spending on US oil and gas projects will be cut by up to 40 per cent. Spending outside the US, where operating costs are generally lower, would fall by between 10 per cent and 20 per cent.

US shale companies have already begun to scale back drilling. Baker Hughes, the New York-listed global oil services company, reported the number of rigs in operation in the US had fallen for the fourth consecutive week, down by 17 to 1482, in the week to January 2, the lowest since March last year.

The slump in oil prices has accelerated the decline in rig rates, under way since 2013 as companies reined in spending to boost returns. Alex Brooks, an analyst at broker Canaccord Genuity, says the cost of hiring modern floating rigs has fallen from $US600,000 a day 18 months ago to between $US300,000 and $US350,000.

Figures for December, due out this week, are expected to show another fall in prices.

As activity dries up, services companies are being forced to offer deeper discounts to secure what little business is going.

According to Pete Speer, vice-president at Moody’s: “The steeper the declines in drilling and completion activity, the more brutal the competition for market share will be, particularly in onshore North America.”

The Times

When capital spending decreases.........would it hurt singapore.......no orders for rigs etc

Not good for the supporting industries too

[greengiraffe]

Winners and losers in the fallout from dropping oil prices
THE AUSTRALIAN JANUARY 03, 2015 12:00AM

Graham Lloyd

Environment Editor
Sydney

AS the giant, hi-tech shipping tankers began arriving in Queensland this week to collect the first exports of gas from Curtis Island, Australia found itself swept up in a new energy disruption that could rival previous oil shocks and, like them, reshape the geopolitics of the world.

Australia has been a price taker and bystander in events that were triggered in Saudi Arabia, have shaken the Middle East, Russia, North Africa and parts of Latin America, and have put a question mark over the durability of the shale oil revolution transforming North America’s energy equation.

The technology-driven shale boom has increased US production by 80 per cent since 2008, putting it on track to overtake Saudi Arabia as the world’s largest producer and turning the world’s largest energy importer into a projected net exporter by 2025

It is this boom that made recent events — whereby the oil price plunged from $US110 in September to $US53 at year’s end — possible, if not inevitable.

The question is: has greater US energy self-sufficiency led the Saudis to reassert their dominance over the world oil market, or has it facilitated a joint US-Saudi assault on some of the toughest strategic issues in the Middle East and elsewhere?

Certainly, lower oil prices are starting to shake out higher-cost US shale oil producers and compromise plans to build export ­facilities to get US production to market.

But analysis in Foreign Policy magazine rejects the “sheiks v shale” theory as unsupported by evidence. Because of the make-up of US oil-refining capacity and the “light” nature of shale oil, it says, it’s Nigeria, Angola and Algeria that are the big losers from US production and exports, not Saudi Arabia.

And because of the structure of US shale oil operations, a temporary oil price collapse may cause a wave of buyouts and some bankruptcies, but it will ultimately lead to a stronger industry.

If the US is the target, Barack Obama responded this week by lifting a 40-year ban on the export of light crude oil, which is expected to unleash a wave of shale oil condensate on to global markets.

Some people believe low oil prices are designed in part to derail accelerating moves to renewable energy, including the wide-scale rollout of electric vehicles. But history would indicate the forces driving Saudi Arabia’s actions are far more calculated.

The evidence is the collapse in oil prices has had the greatest impact on two countries at the centre of two of the world’s most pressing political crises: Russia and Iran.

Collapsing oil revenues have increased financial pressure on the regimes in Moscow and Tehran when they are ­already under international sanctions, Russia over its military actions in Ukraine and Iran over its nuclear weapons program.

Oil price instability will also disrupt attempts by Islamic State to build a funding base through captured territory in Syria and Iraq.

The idea of a Saudi-US plot against Moscow became widespread in Russia last month as the rouble tumbled and the economy weakened from the effects of low oil prices and Western sanctions imposed over its annexation of Crimea and support for rebels in eastern Ukraine.

In a major annual news conference, President Vladimir Putin acknowledged the possibility that Russia had been targeted, but said there was no proof.

“There’s a lot of talk around (concerning) the causes for the slide of oil prices,” he said. “Some people say there is conspiracy between Saudi Arabia and the US in order to punish Iran or to depress the Russian economy or to exert impact on Venezuela.

“It might be really so or might be different, or there might be the struggle of traditional producers of crude oil and shale oil.”

Iran has become increasingly concerned about the fall in oil ­prices. Deputy Foreign Minister Hossein Amir-Abdollahian has told Reuters that Saudi Arabia’s refusal to cut its oil production in the face of a six-month slide in oil prices was a “serious mistake”.

“There are several reasons for the drop of the price of oil, but Saudi Arabia can take a step to have a productive role in this situation,” Amir-Abdollahian said.

“If Saudi does not help prevent the decrease in oil price … this is a serious mistake that will have a negative result on all countries in the region.”

Discussion about market ­forces must recognise that oil is already an artificial market, with the Organisation of the Petroleum Exporting Countries historically regulating supply to set prices.

According to the US Energy Information Administration’s November report, worldwide proved oil reserves stood at about 1.6 trillion barrels and global oil production averaged about 90 million barrels a day.

OPEC members control about 73 per cent of the world’s proved oil reserves but produce only about 40 per cent of the world’s total oil supply. Non-OPEC production is about 57 million barrels a day.

Foreign Policy analyst Andrew Scott Cooper, author of the book The Oil Kings: How the US, Iran and Saudi Arabia Changed the Balance of Power in the Middle East, sees history repeating itself.

Cooper tells Inquirer the Saudis have been using oil as a weapon since 1973, when they imposed an embargo on the US to punish Americans for their support of ­Israel during the Yom Kippur War. In 1977 they pumped cheap oil into the market in an attempt to restrain the shah of Iran, whose military build-up and nuclear ambitions frightened Riyadh.

The Saudis were behind similar floods in 1985, 1991 and, most recently, in 2008.

“For the past several years, senior Saudi officials have reminded Tehran that they would be prepared to flood the market again to destabilise the Iranian economy,” Cooper says.

Iran, a Shia Muslim state, is regarded by Saudi Arabia, a Sunni state, as its main geopolitical adversary. “Flooding the market also swipes the Russians, who are bankrolling President (Bashar) al-Assad of Syria, Riyadh’s other mortal enemy,” Cooper says.

The geopolitical aftershocks from today’s events may not be apparent immediately. “Remember, the Saudis flooded against the shah in 1977 and his regime collapsed almost exactly two years later,” Cooper says.

“The Saudis intervened in the market in the late 80s and the Russian economy, which was very dependent on oil revenues, was destabilised in an act we now associate with the fall of communism,” he says.

Today, China has asserted itself as the lender of last resort, but the seeds of future turmoil have almost certainly been sown.

Some analysts think Beijing’s move to bail out Russia, on top of its recent aid for Venezuela and Argentina, signals the death of the postwar Bretton Woods system that has governed financial dealings among the world’s main economies since 1944.

They say it could also signal the beginning of the end for the linchpin role of the US in the global economy and Japan’s influence in Asia.

“If ever there were a time for President Barack Obama to accelerate his pivot to Asia, it is now,’’ Bloomberg’s Tokyo columnist William Pesek writes.

Stratfor, the intelligence briefing organisation formed by author George Friedman, has identified the winners and losers from lower oil prices and the dramatic shifts in the geopolitical landscape that may follow.

For the Middle East, Stratfor says, a sustained drop below $US90 a barrel could upset the stability that many of the region’s ­energy exporters have enjoyed following the tumultuous events of the Arab Spring. Most at risk are war-ravaged Baghdad and sanction-hit Tehran, which do not have the currency reserves of Saudi Arabia, Kuwait and the United Arab Emirates, and need an oil price of more than $US100 a barrel to balance their budgets.

The impact on Russia has already been made clear and may have long-term implications, including for Australian energy exports. Weaker oil revenues will undermine Russia’s ambitious 10-year defence-spending program and ultimately could also destabilise Putin and the Kremlin.

Stratfor says of all the countries affected by the drop in global oil prices, critical political repercussions are particularly likely in Venezuela. Public finances are already dangerously low in the country, unrest is building and there are signs the government in Caracas may not have the complete support of its security forces.

Among the winners from a lower oil price are China, Japan, Southeast Asia and the US.

As a leading energy importer, China will benefit from lower oil prices when it faces economic challenges on several fronts, including declining house prices, rising corporate and local gov­ernment debt, sluggish exports and rising costs across the board.

In the case of Japan, Stratfor says, anything that helps rejuvenate consumer spending is a boon to the Abe administration; however, lower oil prices make it harder for the Bank of Japan to achieve its goal of 2 per cent inflation.

Lower energy costs are also considered a net positive for Eur­ope where governments are still struggling to pull their economies out of the global financial crisis.

A sustained period of lower oil prices should provide a cushion for most countries in Southeast Asia from a weaker Chinese economy and the withdrawal of quantitative easing in the US.

Low global oil prices could give the military government in Thailand the resources needed to spur economic growth. Other net oil importers including Indonesia and The Philippines could feel similar effects, although state-owned energy firms in the region’s net exporters, such as Malaysia and Vietnam, could lose some income.

For the US, an oil-consuming juggernaut, low oil prices will undoubtedly benefit the economy. The US shale oil and gas revolution that caused oil production to increase from 5.5 million barrels a day in mid-2011 to nearly nine million barrels a day is adding to the overall health of the economy. Expanding US natural gas production has resulted in domestic natural gas prices that are far lower than international gas prices — about half of those in Europe and one-third of those in Asia.

According to Stratfor, energy costs will remain structurally lower for the US than for its competitors, further strengthening the country’s comparative advantage in various sectors.

These circumstances will continue underpinning a US manufacturing renaissance (even China has begun setting up shop for textile manufacturing in the southern US) and will continue fuelling the steady US recovery from the GFC, even as the Chinese and European economies continue to struggle, Statfor says.

In the case of Australia, Commsec chief economist Craig James says lower oil prices are considered a positive for consumer sentiment because petrol is the single biggest regular weekly purchase for most households.

Average households are saving about $40 a month on petrol compared with the same time last year.

But a prolonged fall in global oil prices could have a big impact on Australia’s ambitions to continue building its energy export business. An analysis by the Bureau of Resources and Energy Economics says Australia is on track to ­become the world’s largest exporter of liquefied natural gas before the end of this decade, accounting for about 17 per cent of global LNG compared with about 15 per cent for Qatar and 9 per cent for Indonesia.

This is what Tony Abbott had in mind when he declared on a visit to Houston last year that “Australia should be an affordable energy superpower, using nature’s gifts to the benefit of our own people and benefit of the wider world”.

In the light of more recent events, an analysis by Baker & McKenzie says it expects multiple energy projects not to proceed in Australia because of impending oversupply and market competi­tion.

The lower oil price will likely force some less commercially ­attractive projects to be shelved, it predicts.

Australia does enjoy some cost advantage over the US in shipping exports to Asian buyers, but Queensland Resources Council chief executive Michael Roach tells Inquirer long-term lower oil prices will have an impact.

He says the “cream” profits of the $30 billion Curtis Island LNG development lie in construction of the next six production trains, which are now more uncertain.

But Roach says it is important to remember that when the BG Group committed to the Curtis Island LNG project in November 2010, the oil price was $US70.

“No one was making an investment decision based on an oil price of $US100-plus,” he says.

“I look at the International Energy Agency’s world energy outlook and they are still quite bullish and predicting prices up to $150,” Roach adds.

In its December summary, OPEC says it expects oil demand to increase this year by about 1.12 million barrels a day to 92.3 million barrels a day.

Roach says the oil price volatility of recent months reflects a shift in the seat of power in global oil and gas supplies.

“The big story has been the turnaround in US fuel security, which has put the traditional producers in the position of having to try to reassert their position,” Roach says.

“OPEC really only controls about one-third of daily oil production at about 30 million barrels and non-OPEC countries about 58 million barrels.

“The big change has been US shale, which has transformed both the economics and geopolitics of energy worldwide.”

Roach says the good news for Australia is the global trade in gas is forecast to grow by 50 per cent by 2025, and Australia will be a significant player.

According to BREE, Australia’s share of China’s total LNG imports is forecast to rise from 23 per cent this year to more than 50 per cent by 2030.

China’s south is the main source of new LNG demand and is supplied primarily from exports based on coal-seam gas in Australia’s east and conventional gas in Australia’s west.

An increase in imports of natural gas from pipelines is expected to meet gas demand in China’s industrial heartland in the north.

Roach says there are issues about the relationship between Russia and China, particularly given China’s decision to help bail out the Russian economy.

But he says Australia is hedged to the extent that there is significant direct Chinese investment in the Queensland LNG projects.

“China has got a big stake in the Australian LNG industry and that offers some protection for the ­future,” Roach says.

But with the world oil price still in decline and the full impact ­unlikely to be known for several years, exactly how much protection ultimately will be required remains uncertain.

[Boon]

Demoralized oil traders give up betting on how low prices can go

Reuters
theguardian.com, Thursday 8 January 2015

http://www.theguardian.com/business/2015...es-traders

[CityFarmer]

I chose to post the article here. The energy sector bonds are bursting bubbles. The "repo" will blow the bubbles bigger and more damaging...

Big banks park beat-up energy sector bonds in U.S. money funds

BOSTON - Big European and American banks have found a productive place to park the energy sector's most distressed debt: the $2.7 trillion U.S. money market industry.

Barclays Bank plc, Credit Suisse and Wells Fargo and others get overnight and short-term loans from companies that run money market mutual funds such as Fidelity Investments, BlackRock Inc, American Beacon and others. The banks use the money to fund long positions in securities or to cover short positions. For collateral, the funds are accepting the junk-rated bonds of beat-up energy companies.

Even though the value of the bonds are in free fall as oil prices plummet, the money funds readily accept the debt, because it's a way to generate above-market yields in an industry hurt by near-zero interest rates. In 2014, the average yield for taxable money fund investors was a paltry 0.01 percent. Banks currently have about $90 billion outstanding in short-term and overnight loans backed by riskier assets that include corporate debt and equities.

The exact amount of junk-rated energy debt used as collateral was not available. But more than a dozen of the sector's mostly highly distressed issuers, including QuickSilver Resources, Black Elk Energy, Halcon Resources, Samson Investment and Sidewinder Drilling Inc, have had their bonds used as collateral, according to recent fund disclosures.

These so-called "other repurchase agreements" generate above-market yields for the funds, ranging anywhere from 20 basis points to 50 basis points. In contrast, repo loans backed by safe U.S. Treasuries can generate yields of about 10 basis points and less, according to recent fund disclosures.

Most money fund assets are in Treasuries, certificates of deposit and government agency debt. But some jarring discoveries in the types of collateral money funds accept on short-term loans to big banks can be found by investors who dig through industry disclosures.

A money fund run by Morgan Stanley recently disclosed, for example, an $8.25 million repurchase agreement with Credit Suisse, which used bonds issued by Sidewinder Drilling as most of the collateral. As oil prices have tumbled, so has the value of Sidewinder's 2019 bonds, falling about 44 percent since early October.

Credit Suisse declined to comment.

Money funds downplay the risk in the repo transactions backed by the junk-rated collateral. They say their ultimate backstop is the bank on the other side of the deal. Fidelity, the largest money fund operator in the industry, declined to comment on any specific transaction. In a statement, the company said, "We make an independent assessment on the counter-party credit quality in all repurchase agreements to ensure the counter-party represents minimal credit risk."

By contrast, No. 1 U.S. mutual fund company Vanguard Group plays it safe. The $133 billion Vanguard Prime Money Market Fund and the company's other money funds only accept U.S. government securities as collateral, company spokesman David Hoffman said.

"In times of stress, governments are far more liquid than other asset classes,” Hoffman said. “This is especially true with U.S. Treasuries, which are likely to rally during times of stress."

Federal Reserve Bank policymakers say they are worried that some banks rely too much on repo loans as a source of wholesale funding. They also point out how money funds make loans secured by assets they would quickly unload if the bank on the other side of the deal defaulted.

"What always worries you about wholesale funding is the run risk," John Williams, president of the Federal Reserve Bank of San Francisco, told reporters this week at an economic conference in Boston. "... Heavy reliance on wholesale funding, which is still there for certain institutions, is an important issue that we need to address and make sure our financial system is resilient to things going wrong."

Despite a host of new regulations for money funds and banks, some of the same elements of risk that led to a redemption run in the money fund industry and the failure of Lehman Brothers in 2008 remain intact. Treasury and Federal Reserve officials say more work needs to be done to address the risks of asset fire sales and redemption runs.

A redemption run on the Reserve Primary Fund in 2008 has been a rallying cry for reform after its exposure to Lehman Brothers debt prompted panicked investors to withdraw their money in droves. That run led the fund to "break the buck," a rare event in the money market fund industry that refers to a fund's net asset value falling below $1 per share.

In recent presentations, Boston Fed President Eric Rosengren has said there should be more disclosure about the composition of the collateral used in repo agreements. He said it would allow investors an opportunity to observe changes in financing patterns and might prevent risk taking that investors may consider excessive.

And this summer, before oil prices began their descent, bonds issued by Black Elk Energy Offshore Operations LLC were used as collateral in repo agreements with funds run by Fidelity, BlackRock Inc and Goldman Sachs' investment management arm, fund disclosures show.

But in recent months, Black Elk debt maturing later this year is not turning up as collateral in the latest round of money fund disclosures. The yield on its bonds has spiked as high as 75 percent in the past month, an indication of the bond market's dimming view the company can avoid default. REUTERS
http://www.todayonline.com/business/big-...epage=true