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13 February 2016

Press review 13-02-2016 - Volatility

This week pretty much started of with an outspoken warning by the Bank of International Settlements regarding the pile of debt accumulated by the energy industry in recent years. As asserted multiple times in this space, there is more than enough enough doubtful debt to prompt another worldwide financial crisis. Petrobras' outstanding debt alone is about the size of Lehman Brothers' in 2008.

With this motto, financial markets plunged to a liquidity run, again hitting European banks particularly hard. The financial crisis is far from solved in these parts and legislation intended to punish investors is adding fuel to the fire.

Both a cause and a consequence, petroleum weathered the high seas, posting variations of over 10% in two sessions: Tuesday and Friday. This high volatility is a most toxic input to an already ailing industry. As highlighted in previous reviews, it threatens not only many companies, but entire countries.

Business Insider
Volatility in the oil markets is now higher than during the financial crisis
Will Martin, 12-02-2016

Volatility in the price of oil is at its highest level since 2009, amid speculation in the markets about whether or not producers are ready to take action to try and boost prices, as first reported by Bloomberg.

Oil slumped to a 12-year low during trading on Thursday, but is up as much as 5% on Friday morning as the world's most important commodity bounces back.

Both major benchmarks, Brent crude, and West Texas Intermediate, surged back from big lows on Thursday. As of 10:30 a.m. GMT (5:30 a.m. ET) Brent is up by 5.1% to $31.59 per barrel, while WTI is up to $27.38, a gain of 4.5%.

The price of oil has been yoyo-ing massively over the past few weeks, with rises and falls of as much as 8% per day not uncommon. That volatility is reflected by the surge in the CBOE Oil Volatility Index, which has just passed its biggest peak since the 2008-09 financial crisis. The US based index jumped 7.3% on Thursday, and now stands at 77.79. Here's how that looks:

If in Europe the liquidity run is about the banking industry, there is no doubt which industry is troubling bond markets in the US. None of this was hard to anticipate.
Energy Debt Fuels Broader Malaise
Lisa Abramowicz, 12-02-2016

This will most likely go down as the year of the Great Energy Debt Crisis, a spiral that exacerbated an economic funk that roiled the world.

Companies are starting to go bankrupt. Banks are preparing for losses tied to oil and gas loans. And bond markets have all but closed to energy companies, especially the lowest-ranked ones.

Borrowing costs for U.S. junk-rated energy companies have soared to records, with yields on their bonds surging past 20 percent for the first time, exceeding the past peak of about 17 percent in 2008, Bank of America Merrill Lynch index data show. Moody's expects the U.S. default rate to reach the highest in six years in 2016, and a growing pool of investment-grade energy debt will most likely be downgraded to junk in the near future.
This broken market is closing the courtains for many petroleum regions. One of them is China, a country that had been flirting with its own "peak oil" for some years. It is now clear the Middle Empire has entered terminal decline, and the decline rate does not appear to be gentle.
Why Declining Chinese Oil Production Is Good for Global Prices

China is among the world's top five oil producers, but its fields are growing depleted and are increasingly expensive to pump. The country's leading companies are choosing to leave more of their oil in the ground and some analysts now say Chinese oil output may have peaked.

Cnooc Ltd., China's third-largest oil producer--which produces most of its oil from offshore fields--also said last month it expected output to decline by 5% this year, after years of rapid growth.

As China's production starts to decline, demand for oil from overseas should remain firm, which would be good news for prices, which have been languishing near multiyear lows amid a global supply glut and weak demand in the rest of the world.

"The situation in China is that they know there is significant below-ground potential in China but it is cheaper to import," said Peter Lee, an energy analyst at BMI Research, a unit of Fitch Group.
An unexpected exception in this market is Russia, whom seemed set to peak in 2014. Extraction slowly krept up throughout 2015 with a renewed drilling programme. The same government sources that hinted at a peak in 2014 are pointing to continued growth in 2016 - are they correct this time around?
The Barrel
Sanctions failed to take a bite out of Russia’s oil patch: Fuel for Thought
Rosemary Griffin, 08-02-2016

International sanctions against Russia introduced in 2014 turned out not to be the bogeyman they first seemed to be, and could in fact have played a key role in helping the Russian oil sector to not only handle the sharp price drop over the last year and a half, but make the industry more efficient in the long run.

When sanctions were implemented targeting the Russian oil sector’s access to Western financing and key Arctic, shale and deepwater technology, analysts saw them as major blow.

Forecasters speculated that Russian oil companies would run into problems trying to maintain drill rates, service loans in foreign currencies, and could struggle to maintain output. At the time the International Energy Agency estimated Russia’s crude production would fall by 80,000 b/d in 2015. And these forecasts came when oil was still trading at over $100/b.

Things haven’t quite panned out as predicted — Russia increased crude output in 2015 by 147,222 b/d year on year, to 10.73 million b/d, and energy ministry data for January indicates this trend is continuing into 2016.
Another recurrent theme in this space is the secular redesign of the world monetary system. As Iran returns in full to international markets, it also renews an old aim of dispensing US dollars in its trade agreements. Just one more piece of the puzzle.
Iran wants euro payment for new, outstanding oil sales
Raheb Homavandi, 07-02-2016

Iran wants to recover tens of billions of dollars it is owed by India and other buyers of its oil in euros and is billing new crude sales in euros, too, looking to reduce its dependence on the U.S. dollar following last month's sanctions relief.

A source at state-owned National Iranian Oil Co (NIOC) told Reuters that Iran will charge in euros for its recently signed oil contracts with firms including French oil and gas major Total, Spanish refiner Cepsa and Litasco, the trading arm of Russia's Lukoil.

"In our invoices we mention a clause that buyers of our oil will have to pay in euros, considering the exchange rate versus the dollar around the time of delivery," the NIOC source said.
In Iraq there are more signs of retreat by Daesh, with Shiite forces retaking the key city of Ramadi (or whatever is left of it). Make no mistake though: this war is likely years away from over.
Iraqi troops fully capture Ramadi, reopen road to Baghdad

Iraq said Tuesday its military completely recaptured the city of Ramadi, reopening a road to Baghdad after weeks of mop-up operations against Islamic State militants.

After losing Ramadi to an IS attack in May, Iraqi security forces, backed by U.S.-led coalition airstrikes, recaptured the center of the city in December.

However, Iraqi troops faced several more weeks of fighting with IS forces in neighborhoods to the east.

[...] On Tuesday, Iraqi officials said security forces had captured the eastern districts of Khalidiya and Husaybah and had "managed to open the Ramadi-Baghdad road that passes through Khalidiya."
If Daesh dwindles in Iraq and Syria it advances elsewhere. It is impossible to tell at this moment how long will this war last and what will be the ultimate fate of this country we once knew as Libya.
Broken Land
Borzou Daragahi, 02-07-2016

A howling wind filled the air with sand, enveloping the small desert outpost. Shivering from the January cold, a skinny, bedraggled man in mismatched desert camouflage fatigues, a scarf wrapped around his face, took a deep breath and stepped forward. He tightened his grip on his AK-47 as the car pulled up to the checkpoint. Without a helmet or bulletproof vest, he warily approached, asking for identification papers, searching for weapons and checking the trunk. This time there was nothing inside, save for some rope and a few empty burlap sacks, likely to be filled with wheat or barley for the drive back. He relaxed, and waited for the next car to arrive.

Just a few years ago, the land around this outpost, 180 miles southeast of the Libyan capital of Tripoli, was a nature reserve where the deposed leader, Muammar al-Qaddafi, and his entourage would come for retreats, hunting for wild game. The spacious villas that housed them are dotted around, now empty, looted for their gaudy fixtures and fittings. Inhabitants of a nearby village have mostly fled. Once a sleepy patch of desert, Abu Grein has now become the front line against the Libyan branch of ISIS, a gathering force now threatening to demolish what’s left of the country.
France is one of the very few countries in Europe that seems still committed to the energy transition. In recent days the ministry of environment announced a test programme to pave 1 000 km of roads with solar cells. The project taps on a technology developed in France using resin polymers to fix and protect the cells. The idea of solar roads has been around for a while and as has fuelled much debate. It will be positive to see this project go ahead to either confirm or dismiss the scepticism.
1000 km de routes solaires d’ici 2021 promet Ségolène Royal
Elisabeth Studer, 03-02-2016

Ségolène Royal a réaffirmé dimanche, sur le plateau de C Politique, l’objectif de 1000 kilomètres de routes solaires installées en France dans les cinq prochaines années. Selon la ministre, les « routes vont devenir des centrales photovoltaïques, sans venir empiéter sur les terres agricoles ».

Mais concrètement, kesako ? il s’agit de dalles solaires, développées par l’entreprise Colas, filiale du groupe Bouygues, posées à même le sol et capables de résister au trafic automobile sans s’altérer nous dit-on et produisant de l’énergie. Selon Colas, cette invention dénommée « Wattway » ne servira pas uniquement à se déplacer, mais également « à produire une électricité propre et inépuisable ». Pour permettre le passage des véhicules, y compris de celui des poids lourds de 44 tonnes, l’enrobé doit être extrêmement résistant. « Tout le contraire d’une cellule photovoltaïque de 200 micromètres d’épaisseur qui, elle, est très cassante » précise Philippe Raffin, directeur R&D chez Colas. Pour résoudre une telle équation, cinq ans de recherche ont tout de même été nécessaires, avec l’aide de l’Institut national de l’énergie solaire (Ines) basé à Chambéry. Au final, la solution n’est pas dans le développement de nouvelles technologies dans la photovoltaïque ou dans la construction de route : Colas et l’Ines ont déposé deux brevets dans le liant et la colle.
While Europe largely stalls the energy transition, it goes forward elsewhere. Marocco inaugurating the largest solar power plant in the world is likely an herald of things to come. The present costs of mature renewable energy technologies mean that growth will now take place primarily outside the OECD.
Associated Press
Morocco unveils massive solar plant
Samia Errazzouki, 04-02-2016

Morocco's King Mohammed VI unveiled one of the world's biggest solar plants Thursday, taking advantage of the Sahara sunshine and a growing global push for renewable energy.

The $3.9-billion project in the southern town of Ouarzazate, also known as Noor I, is the first phase of a project expected to provide 1.2 million Moroccans with power. Row after row of solar panels glisten in the sunlight, surrounding a power station in the center.

Climate Investment Funds, a global agency investing $435 million in the project, said it will be the world's biggest concentrated solar plant, meaning that it will store power to generate when the sun isn't shining. It said Morocco was chosen for the project in part because of its political stability, and because the government created a solar energy agency and introduced measures in 2012 to phase out fossil fuel subsidies.
Finalising is a musical suggestion at odds with the occasional proposal dropped in this review. May it be an expander of horizons.

Have a pleasant weekend.

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