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Items filtered by date: January 2020

Friday, 31 January 2020 18:30

SAUDIS PROMPT OPEC TO THE RESCUE

Saudi Arabia has opened a discussion about moving the upcoming OPEC+ policy meeting to early February from March, four OPEC+ sources said, after a swift slide in oil prices alarmed Riyadh. Worries over the economic impact of China’s coronavirus has rattled global markets, helping send the price of crude down to around $58 a barrel from above $65 a barrel on Jan. 20.

No final decision over the new date of the meeting has been made, and not all OPEC members are on board yet, with Iran a possible contender to oppose the move, the OPEC+ sources said.Russia was also not keen on advancing the meeting to early February, though it was not immediately clear whether Moscow had officially communicated its final position, the sources said.

One Russian oil source suggested that Moscow may want to reassure the market it is willing to advance the meeting to prevent oil prices from falling further.

OPEC officials and investors are trying to assess what economic damage the virus might
At 10:52 a.m. EDT on Thursday, WTI Crude was down 2.38 percent at $52.06 and Brent Crude was trading down 2.39 percent at $57.52, both flirting with bear market territory.

Since the outbreak of the coronavirus in China, oil prices have lost more than 10 percent, and are now at their lowest levels since early October 2019.

Even with Libya’s oil production plummeting by nearly 1 million barrels per day (bpd) due to the port blockade by forces loyal to General Khalifa Haftar, oil prices have seen downward pressure over the past week and a half as fears of oil demand destruction currently outweigh supply outages.

Yesterday’s EIA inventory report was also not supportive for oil prices, after the Energy Information Administration reported a build in oil inventories of 3.5 million barrels for the week to January 24. Analysts had expected a draw of 460,000 bpd, after last week the EIA reported a draw of 400,000 bpd for the seven days to January 17.

According to oil market analysts, until the impact of the Wuhan virus on the Chinese economy and oil demand becomes clearer, market participants will continue to be spooked by the specter of waning oil demand at a time when demand is weakest in the year.
The Wuhan virus outbreak and its economic fall-out on Asia, the engine room of the world, remains the most crucial issue facing oil markets, with any rally likely to have short half-lives,” Jeffrey Halley, senior market analyst at OANDA, told Reuters.

“There is the risk that sentiment gets hit further in the near term,” ING strategists said on Thursday, noting that “A number of international flights to China have been cancelled and if this trend continues in the coming days and weeks it will likely only deepen demand concerns.”

Yet, if losses in Libya’s oil supply to the market persist for longer, they would be enough to tip the oil market into deficit this quarter, ING strategists Warren Patterson and Wenyu Yao said.

Published in OIL MARKETS
Friday, 31 January 2020 18:12

CORONAVIRUS FEARS SHELVE BP BUY BACK

SHELL SHELVE OIL BUY BACK

The UK’s biggest company, Shell, will slow a $25 billion shareholder buyback to a trickle after tumbling oil prices forced it to put more money aside for a rainy day.

The oil major is currently undertaking the world’s largest shareholder buyback, returning cash made from a 2014 takeover of gas firm BG Group.

So far it has handed back about $15 billion to shareholders, including most UK pension funds and millions of retail investors, at a rate of around $3 billion per quarter. Shell today said the remaining $10 billion will be given back more slowly due to tougher conditions in the oil market. It will start with just $1 billion between now and April, meaning the buyback is unlikely to be finished as promised by the end of the year and may run into 2021.

That could be a headache for many fund managers who pencil in scheduled payments, forcing them to rejig their portfolios to manage cash flows.

“We remain committed to prudent capital discipline supported by world-class project delivery and are looking to further strengthen our balance sheet while we continue with share buybacks,” said Shell chief executive Ben van Beurden.

“Our intention to complete the $25 billion share buyback programme is unchanged, but the pace remains subject to macro conditions and further debt reduction.”

The cautious tone prompted shares to fall 4% to their lowest since 2017. Shares in rival BP also shed 1.3% on fears of a tougher energy market.

Shell’s profits for the period September to December halved from $5.7 billion to $2.9 billion due to lower prices for oil and gas and fears about the coronavirus’s impact on global growth.

The flu has ripped through China, the world’s biggest user of oil and gas, prompting fears of less consumption and an oversupply of oil.

 

 

 

 

Published in OIL MARKETS
Tuesday, 28 January 2020 19:48

OIL MARKETS GAUGE CORONAVIRUS EFFECT

OIL STEDIES AS MARKET GAUGE CORONAVIRUS

Both global oil benchmarks Dated Brent and WTI are currently trading at levels lower than when OPEC introduced their production cuts in December having plummeted to levels last seen in October 2019. Though WTI has clawed its way back to slightly above the $53 per barrel mark. The market is still trying to gauge the effect the coronavirus will haave on demand as an already weakened Chinese economy retards even further.

One effect of the coronavirus has been to spark a massive sell-off in prices of West Texas Intermediate, though it appears it has met an important contention near the $52.50 region per barrel on Tuesday. The WTI barrel has shed more than 20% of its value in 2020 of around the $66.00 mark recorded earlier in the month to Monday’s low near the $52.00 mark. U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading mixed on Tuesday as traders assess the latest news on the coronavirus crisis. The markets are trading inside yesterday’s trading range, which suggests the worst of the selling frenzy may be over. It maybe that the traders are moving into profit-taking

Oil price benchmarks have been able to reversethe downside somewhat on Tuesday in response to comments purportedly eminating from OPEC+ suggesting they might be prepared to extend the ongoing oil output cut agreement until June or even increase the reductions, always on the back of rising fears on the impact of the coronavirus on the global economy

Concerns about the coronavirus outbreak seem likely to hinder the global economy in the short term, but they seem to be downplayed on Tuesday. Reactions to the possibility of a pandemic have varied with some commentators describing it as 'overblown' the decline in oil prices however suggests a percieved slowdown of economic activity in China by the market actors. Oil investors are concerned that travel and transport restrictions will create a negative impact on growth in China and dampen demand for crude and related products against a backdrop of plentiful supply.

Dated Brent was up $0.16 or +0.27% at $59.48 on the ICE whilst WTI traded at $53.54 up $0.40 or +0.75%.

Conclusion

The outbreak of the coronavirus has brought with it an interesting imponderable that is difficult for the market to price. China as the worlds largest importer of crude oil is the largest single factor in assessing global oil demand growth. In spite of OPEC+ apparent willingness to cut production to ensure the oil narkets are balanced, such is the growth potential for crude oil of China that any economic downside will weigh heavily on global oil price sentiment. Additionally there are already rising concerns on the excess of crude oil supply in the markets. Supporting the later, and undermining any serious rebound, the IEA expects prices to remain capped during the first half of the year following a forecasted surplus of nearly a million bpd. Though it must be noted the IEA are far from infallible.

Even when the market factors in the variety of geopolitical factors, the market becomes no clearer. There is the potential for supply disruptions in places such as Libya a nd Iraq and the unlikely possibility of conflict between the US and Iran. Perversly in the event that prices do plummet than US shale may well be forced into production cuts as funding dries up. Just as 'Phase One' of the US-China trade agreement provided the market with optimism, along comes another Chinese puzzle

 

 

Published in OIL MARKETS

After trading as high as $65.65 on Jan. 8, WTI crude oil futures have fallenWTI crude oil traded around $53.14 on the NYMEX in early Monday trading, down almost $5 a barrel in the past week and only $3 short of a 52-week low . Oil began 2020 with a quick 7.5% gain as tensions between the U.S. and Iran escalated.
January has seen the price of WTI fall by over $8 per barrel a drop of around 13%. The market sees a decline in China’s economy as a result of the coronavirus and a reduction in demand for oil with China being the world’s largest importer of crude oil, after importing a record 10.12 million barrels per day in 2019. The oil benchmark collapse has taken place at a time when traditionally bullish inventory reports such as the EIA's most recent report, showed inventory fell by 400,000 barrels for the week ending Jan. 17, compared with analyst estimates of a 500,000 barrel build, has done little to arrest the plummeting prices.

This has created increased short interest in energy stocks which during the two-week reporting period ending January 15. Global concerns related to the impact of the coronavirus outbreak first revealed on January 7 have weighed heavily on oil stocks. Occidental Petroleum Corp. (NYSE: OXY) saw short interest soar by 31% to 27.92 million shares. Days to cover rose from two to three, and about 3.1% of the company’s shares were short. In the two weeks of the period, the share price increased by about 14.7%. The stock’s 52-week range is $37.25 to $68.83, and shares closed Monday at $41.24, down by about 1% for the day.

ConocoPhillips (NYSE: COP) short interest increased by 7% in the first half of January. Some 12.18 million shares were short, representing about 1% of the company’s total float. Days to cover remained at two, and the stock price remained essentially flat during the two-week period. Shares closed Monday at $61.04, down about 2.5% for the day, in a 52-week range of $50.13 to $71.01.

Chevron Corp. (NYSE: CVX) also saw short interest decrease by 2% to 21.11 million shares, which represents about 1.1% of the company’s float. Days to cover remained unchanged at four. In the two-week short interest period, the stock’s share price dropped by about 3.6%. Its 52-week range is $109.98 to $127.34, and it closed at $110.39 on Monday, down about 1.3% for the day. . Exxon Mobil Corp.’s (NYSE: XOM) short interest rose by 2% to 39.58 million shares, or 0.9% of the company’s float. In the two weeks to January 15, the share price fell by about 1%. The stock’s 52-week range is $64.70 to $83.49, and it closed at $64.74 on Monday, down about 2.4% for the day.

BP PLC (NYSE: BP) saw a drop of 22% in short interest during the first two weeks of January. About 0.1% of the total float, or 3.25 million American depositary shares (ADSs), were short, and days to cover remained less than one. The company’s shares traded up by about 2.6% over the period, and shares closed Monday at $37.44, down by about 1.8% for the day, in a 52-week range of $35.73 to $45.38.

 

Petrobras (NYSE: PBR), posted a jump of 30% in short interest during the two-week period. Some 23.24 million ADSs were short as of January 15, less than 1% of the total float. Petrobras closed at $14.21 on Monday, down by about 3.8% for the day, in a 52-week range of $12.68 to $17.90. Shares traded down by around 6.7% in the short interest period, and days to cover remained at one.

Published in OIL MARKETS
Tuesday, 14 January 2020 17:54

WHAT COST FOR OCCIDENTAL PETROLEUM ? OXY.N

It  now seems that the massive Hedge undertaken by Occidental Petroleum Corp(OXY.N) and reported as “costless” to its investors  at the time back in July is anything but and does not provide adequate downside protection for 2021. At the time Occidental’s priorities were to provide reassurance to apprehensive investors, many who opposed the Anadarko acquisition that their share dividend was secure in its wake.

The company strategy  was to execute a prompt and discrete hedge as possible, at little or no cost to the business.

Subsequent to the event  CFO Cedric Burgher said on an earnings call in August, “With the additional leverage from the Anadarko acquisition, these new hedges will strengthen our 2020 cash flow in a low oil price environment, and provide additional assurance that our dividend is safe, while we are deleveraging,”

It has however emerged through information published by Reuters that Occidental’s hedge exposes the company to a  potentially larger hit to future revenues and provides limited protection against falling oil prices.

According to Reuters, whilst Occidental fulfilled  its regulatory obligations by  disclosing  the financial details of the hedge in their  filings, the fact that the company took on the additional risk to secure a quick transaction in an attempt to avoid banker fees has  not been previously disclosed.

The hedge was arranged by Bank of America Merrill Lynch (BAC.N) and Citigroup (C.N), according to Reuters sources. The  hedge covered nearly 110 million barrels of oil, or 300,000 barrels a day, each for 2020 and 2021.

The hedge meant Occidental Petroleum Corp could sell the oil at a minimum of $55 a barrel in 2020, even if crude prices fell below that, to a limit of $45 a barrel; but the company's selling price was capped at $74.09, and it would forfeit any revenue earned from oil rising beyond that price.

The hedge effectively capped Occidental  revenues for 2020 and also 2021 but only provided downside protection for 2020 - a cockeyed deal sometimes referred to as a naked hedge.  That’s because it Limits  future receivables  and offers no protection against the possibility  of  oil  prices  falling.

Some analysts said investors should have been given more information about the potential implications of the hedge. David Katz, president and CIO of Matrix Asset Advisors remarked, “It seems very strange that they left a naked hedge in 2021 which capped upside but offered no downside protection,"

Occidental insists  it does not regularly hedge its oil sales because it does not want to give up potential revenue. The last time the company hedged was in 2005, also following an acquisition. In the summer of 2019, Occidental was under pressure to demonstrate that its dividend was being protected.

Acting for Occidental's , Bank of America Merrill Lynch and Citigroup sold Put and Call option contracts, aiming to use the proceeds to finance the acquisition of a put option locking in Occidental's oil revenues at $55 a barrel for 2020.

However attempting to execute such a big transaction  In illiquid private markets, can be difficult, and therefore costlier. In the case of Occidental's hedge, the banks were unable to raise sufficient  money from selling the  Put and Call Option contracts for 2020 alone to cover the cost of the hedge. It is understood that consequently to remedy the situation the banks sold $74.09 call options for 2021 limiting revenue for said year.

There are Analysts that believe that it was important and the right thing for Occidental to do, pointing out not taking any action and hoping that oil prices hold up is simply not an option

It does not help if as Occidental Petroleum Corp,  has been under the trauma of a   haemorrhaging share price which has lost about a 1/3rd of its value since the Anadarko acquisition. There is disgruntlement as many shareholders who were not allowed to vote did not like the deal. The CEO and Board have come under severe pressure from the likes of Carl Icahn is challenging Occidental's management for control of the board of directors.

Published in OIL MARKETS

THE DEATH OF THE IRANIAN PUPPET MASTER

In the wake of the  air strike at Baghdad airport which killed  Major-General Qassem Soleimani, the leader of Iran Revolutionary Guard elite Quds Force responsible for extraterritorial military and clandestine operations. Oil prices jumped to the highest level in more than three months on Friday. Brent crude ended the session up 3.6% at $68.60 a barrel, off the session peak of $69.50, the highest level since the mid-September attack on Saudi oil facilities. WTI crude settled up 3.1% at $63.05 a barrel. The session high reached $64.09 a barrel, its highest since April 2019. The assignation   sparked fears that an escalating conflict in the region could disrupt global oil supplies.

Tensions between the US and Iran have been simmering over the past year as Trump re-imposed sanctions on Tehran and in the aftermath of a missile and drone attack on oil installations of the Saudi Aramco company for which Washington accuses Iran. The Soleimani killing has brought those tensions back to the forefront, exacerbating crude oil market bullish sentiment of the back of crude supply disruptions, though the effect of the increased geopolitical risk remains unclear.

Despite the political fallout which will be substantial currently  according to Iraq’s Oil Ministry, all oil fields are stil  operating normally and production and exports have not been affected. Still, the oil futures market is already beginning to price in near-term supply tightness. Oil prices also found support after US crude inventories fell by the most since June tumbling  by 11.463 million barrels in the week ended December 27. Economists had forecast a drop of 3.288 million barrels.

Markets frequently misjudge the effect of geopolitics  and war. When Archduke Franz Ferdinand of Austria was assassinated in, the markets’ initial response was “Franz who?” Only when Austria-Hungary declared war on Serbia a month later did investors realize that there really would be a war, and they panicked, just the way they should have to start with.

Typically the market tends  to get it right more often than not. It is far more agnostic than  media analysts or political commentators. After the entirely predictable spike in oil prices in the immediate aftermath of the event, prices have retreated from their intra day highs. Setting aside any profit taking, the effect on oil prices was far less than the attack on the Saudi oil installations. The prospect of “War” seems to have a far less pronounced effect on a market which is substantially oversupplied

Published in OIL MARKETS
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