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19 March 2016

Press review 19-03-2016 - The next phase of the cycle

The Brent index continued its rally this week, albeit in slightly less volatile sessions. The past four weeks the price of petroleum crept up 30%, a movement unimaginable just a decade ago. The futures curve remains in contango, but it is visibly flattening in the short term.

The petroleum market endures the supply destruction phase. The focus remains naturally on producing countries and companies and their financial owes. However, as Economics text books teach, the kind of dramatic market movements lived the past 18 months tend to spur reactions from the demand side. Petroleum consumption is steadily swelling, particularly in Asia. The stage is being set for the next phase in the market cycle.

Business Insider
China's demand for commodities remains amazingly strong
08-03-2016

China’s voracious appetite for raw materials is showing no signs of abating.

In the 12 months to February, China imported 340.43 million tonnes of crude oil, the largest annual total on record.

During the month 31.8 million tonnes of crude were imported, the largest February figure on record and up 24.4% on the levels of a year earlier.

For January and February combined, 58.49 million tonnes were imported, up 9.3% on the same period a year earlier.

Before diving into the usual financial troubles of the fossil fuel industry, it is important to take notice of the core issue wreaking havoc in equity and bond markets. Once more news emerge on ballooned reserve estimates used to lure investors into the industry that were nothing more than speculation. And again no one is to blame for millions lost in consequence of this practice.
The Growth Stock Wire
The Terrible Oil News Nobody Noticed
Matt Badiali, 16-03-2016

A terrible bit of news went unnoticed in the commotion amid the modest rebound in oil prices over the past two weeks.

While every news outlet shouted about Iran and OPEC, a U.S. energy icon quietly announced news that could potentially shatter the industry.

As I've explained recently, many oil companies are teetering on the brink of bankruptcy. But news out of Alaska could lead to disaster.

BP Prudhoe Bay Royalty Trust (BPT) – operated by the Alaskan division of oil giant British Petroleum (BP) – sells oil from the Prudhoe Bay oilfield. It just announced a 65% drop in its economic oil reserves.

We'll explain exactly what that means in a moment... but you can expect the numbers that the other area shale explorers release in the coming weeks will be even worse...

The court rulling of last week opening the "shale" default floodgates still reverberates. More troubled companies are now seeking similar judicial decisions allowing them to pass on their losses downstream.
OilPrice.com
Court Decision Could Accelerate Oil And Gas Bankruptcies
Dave Forest, 11-03-2016

[...] That ruling came Tuesday in the bankruptcy proceedings of Sabine Oil & Gas, detailed by Energy Law360. Where a New York judge ruled that bankruptcy allows Sabine to cancel contracts it holds with midstream firms on the company’s petroleum licenses in Texas.

Sabine held three separate contracts with pipeline firms in Texas, for the transport and sale of oil and gas that the company produced. These contracts came with clauses like “deliver or pay” features — where Sabine was obligated to send minimum volumes of production through the pipeline, or pay financial penalties to the pipeline operators.

[...] The decision opens the door for Sabine to sever the contracts as it restructures in bankruptcy. A strategy that other E&Ps immediately jumped on — with bankrupt producer Magnum Hunter Resources yesterday striking a deal to cancel four midstream contracts as it restructures.
No surprise then in seeing the almighty rating agencies jumping ship. The figures are still in the tens of G$, but should easily get to hundreds of G$.
MarketWatch
Energy sector defaults could go like dominoes
17-03-2016

Energy-sector bond defaults—and for some producers, bankruptcy risks—are piling up, and coal liabilities aren’t the only culprit. Oil-and-gas producers, suffering with low crude prices after a shale revolution made the U.S. a viable energy producer, are smothered under their own junk bonds.

Small- and medium-size U.S.-based producers, especially those that expanded with the shale boom, are most vulnerable; any blip in oil prices may not be high enough or fast enough to protect all producers. And just this week, at least two more warned about their near-term future. It’s a climate that’s driven some of this sector’s high-yield paper to trade at 30 cents on the dollar or less.

[...] Last week, Fitch raised its 2016 forecast for U.S. high-yield bond defaults to 6% from 4.5%, and said it expects energy and materials issuers to default on $70 billion of debt this year, including $40 billion for energy alone. The new rate of default is the highest that Fitch has ever forecast during a non-recessionary period, beating the 5.1% it forecast for 2000.
Elsewhere are state companies in risk of default. The troubles engulfing Petrobras have been followed in this review, but this is not the only state petroleum company in trouble. If total figures are not as large as those tied to Petrobras, Pemex seems to be facing a much harder outlook in the short term.
Wolf Street
Big-Oil Bailout Begins as Pemex’s Debt Spirals Down
Don Quijones, 16-03-2016

Pemex, Mexico’s state-owned oil giant, cannot seem to get a break these days. It notched up 13 straight quarters of rising losses. It now owes over $80 billion to international investors and banks. It needs to raise $23 billion this year to stay afloat. The cost of servicing that gargantuan debt mountain continues to rise. So it tries desperately to rein in its spending, without tackling — or even discussing — its endemic culture of corruption.

In recent days, Pemex received a 15 billion peso ($840 million) lifeline from three of Mexico’s homegrown development banks, Banobras, Bancomext and Nafinsa, to help the firm pay back some of its smallest providers, consisting mainly of domestic SMEs.

The loan was part of an arrangement cobbled together between the banks and the Mexican government. By today’s standards the amount involved is pretty meager, but the operation was about more than just raising funds: it was meant to restore confidence among both investors and suppliers in the firm’s ability to repay its debts.
In Iraq the depressed petroleum price is bringing an halt to the advance of the Shiite forces against Daesh. The social and political setting of Shiite Iraq is an issue to keep an eye on the months to come.
The Telegraph
Iraq runs out of money to take on Islamic State
Richard Spencer, 13-03-2016

Just as it is starting to turn the tide against Isil, Iraq is running out of money.

Behind the front lines of the Iraqi desert, where the Nineveh provincial police are training to retake their homes in and around Mosul, they are short of one thing: weapons.

“We have been regrouped here since the fall of Mosul,” said Major Ayman, standing over his line of men in blue uniforms. “We have been waiting here for five months but we have no weapons.”
It is against this backdrop that Russia and OPEC are moving to some sort of accord on petroleum output. The outcome of these negotiations is most likely to be more symbolic than practical, but so far it is a major factor supporting the present price rally.
Reuters
Russia eyes global deal on oil output in April, Iran seen exempt
Denis Pinchuk, 14-03-2016

A global deal to freeze oil production could be signed in April and exclude Iran, which has the right to boost output after years of sanctions, Russian energy minister Alexander Novak said on Monday after talks in Tehran.

Oil fell around 3 percent on Monday after Iran dampened hopes of a coordinated stabilisation of production any time soon, saying it would join such discussions after its own output had reached 4 million barrels per day (bpd).

Four of the world's leading oil producers - Russia, Saudi Arabia, Qatar and Venezuela - met in Doha last month, saying they were ready to hold output at January levels if other producers did the same.

A final agreement on an output freeze to support oil prices, which have fallen 65 percent since peaking in June 2014 due to oversupply, is seen next month, possibly again in Doha, Novak said.
Five years are passing on the Libyan Arab Spring. It is high time to remember the succession of action and decision that eventually destroyed this country.
CommonDreams
Revisiting the "Humanitarian" Intervention in Libya
Jeff Bachman, 17-03-2016

Five years ago, on March 17, 2011, the United Nations Security Council adopted Resolution 1973 (2011) authorizing "regional organizations or arrangements...to take all necessary measures...to protect civilians and civilian populated areas under threat of attack" in Libya. The resolution was adopted with ten votes for, none against, and five abstentions.

In explaining the reason for its abstention, India implicitly questioned the narrative propagated by the U.S., France, and the UK, which depicted Qaddafi as bordering on genocidal. India noted that Resolution 1973 authorized "far-reaching measures under Chapter VII of the United Nations Charter, with relatively little credible information on the situation on the ground in Libya."

India was right to question the credibility of the narrative that was employed to ensure the adoption of Resolution 1973. For starters, the protests were not as peaceful as the pro-intervention narrative suggests. Some protesters in Libya had taken up arms from the first day of the uprising on February 15, 2011, and many more began using violent means soon after. Further, based on the events prior to the adoption of Resolution 1973, there was no indication that Qaddafi's threats were aimed at anyone other than those who took up arms against his regime.
One more piece of the puzzle in China's Nuclear energy policy. Beyond an energy supply programme, China seems to be building some sort of technology diplomacy programme, using it as a vehicle to strengthen ties (and dependencies) with its neighbours.
Deutsche Wella
Nuclear energy booming in Asia
Thomas Latschan, 11-03-2016

When Sun Qin talks about the future of nuclear power, his eyes light up. In China alone, there are 31 nuclear power plants and another 24 are under construction, according to the International Atomic Energy Agency.

Now, the president of the China's National Nuclear Corporation wants (CNNC) wants to build 30 additional nuclear power stations - not only in China, but also in the neighboring states along the so-called "New Silk Road." CNNC has already exported six reactors abroad, but the Chinese want to expand further.

"We face very strong competition in the international nuclear market," says Sun Qin, adding that "countries like Russia, South Korea, Japan and the United States are all exploring the global nuclear market aggressively."

Five years after the Fukushima nuclear disaster, and thirty years after Chernobyl, the nuclear industry, in particular in China, is on the upswing.
And finalising this review a glance at the big picture. The predicament is not as rosy as this article alludes to, but it contains some interesting reflections on the dynamics of energy markets today.
Worldwatch Institute
From Omen to Opportunity: How Cheap Oil Is Accelerating Sustainable Energy Investment
Philip Killeen, 14-03-2016

Crashing out in February at $27 per barrel, crude oil prices have reached their lowest point in over 13 years, since the 2003 U.S.-led invasion of Iraq. Despite a modest recovery in March driven by expectations for reduced production, investors remain skeptical of underlying oil market fundamentals and are reducing their exposure. These selloffs have dragged down the stock prices of large conventional energy companies listed in the Standard & Poor’s 500 Index by 13 percent and have cost investors more than $703 billion since the record-high oil prices of June 2014.

Responding to these selloffs, oil companies have tightened their belts, decommissioning two-thirds of their rigs and sharply cutting investment in oil field exploration and development, while an estimated 250,000 oil workers have lost their jobs. A Wood Mackenzie report identified 68 major oil and natural gas projects—representing a combined value of $380 billion and output of 2.9 million barrels of oil equivalent (boe) per day—that have been put on hold since late 2014. Besides reducing operating costs, oil companies hope that these measures will have a stabilizing effect on the market by reducing productive capacity in the medium to long term.

No matter how quickly prices recover, the crude oil market is projected to continue contracting for the foreseeable future. As long as oil companies are forced to choose between floating high levels of debt for costly oil field exploration or depleting their strategic reserves at substandard market prices, investors will question their ability to shell out high dividends over the long term.
Have a great weekend.