#prayfortheoiltraders appeared on Twitter yesterday as they were taken on a rollercoaster ride with Brent oil prices whipsawing down from 76 dollars to near 73 dollars per barrel even as all those holding $200bn of long oil futures contracts got what they were anticipating - Trump nixing the Iran Nuclear Deal. The expected price reaction eventually came 5 hours later when oil prices moved back up to where they started (the market having mostly priced in Trump’s braggadocio). At the time of writing, Brent prices have pushed above 77 dollars a barrel setting new highs – that is since the paradigm shift of oil markets in late 2014 (prices would still have to rise a further 50% to approach where they were in the first half of this decade).
When Columbus first set eyes on what is now Venezuela from the Gulf of Paria he described it as ‘heaven on earth’ and gave it its enduring nickname of the ‘Land of Grace’. But 500 years on and the country’s debt problems are as deep, and its list of economic woes as long, as the Orinoco River. The only grace talked about is the grace period on its mountain of debt - and yesterday’s expiration of one on a coupon payment - putting the country once again in ‘default’ (although the International Swaps and Derivatives Association’s have yet to formally declare it).
Yesterday, at the 172nd OPEC meeting in Vienna, OPEC and some key non-OPEC countries announced the extension of production cuts for 9 months through to 31 March 2018. The earlier agreement had looked for a 1.8 mb/d reduction in production. Khalid Al-Falih, the Saudi Energy Minister, noted that oil inventories are expected to fall below five-year averages before the end of the year but as Q1 is seasonally weak it made sense to push the cuts out until the end of March. Little was said in terms of an exit strategy other than the situation will be reviewed at the end of November and into 2018. Brent crude sold off on the back of this news trading around USD51.75 per barrel the time of writing but oil had rallied strongly ahead of the meeting already factoring in a lot of upside and the announcement did not exceed expectations.
The big news this morning, excluding further accusations of corruption in football from the Telegraph’s “sting” is an OPEC agreement. (Having always been of the opinion that certain managers didn’t go for the England job as there are no player transfers and hence no “brown packages” to subsidise holidays the Telegraph's findings come as no surprise.) Now what will be a surprise is if the OPEC deal lasts long enough to make a difference to the longer term pricing of crude.
It has been eight years since OPEC last agreed to cut production. This time round a very marginal cut has been agreed, from the current 33.4 million barrels a day (mbd) to the 32.5 to 33.0 mbd range, so 3% at most, Brent still rallied $2.82 on the news to $48.79; just over 6%.
According to a report out this morning from consultant Wood Mackenzie the price of Brent crude at around $50 a barrel has left about 30% of fields in the North Sea, one of the highest-cost regions, operating at a loss. Compounded by the uncertainty surrounding the political outlook caused by Brexit, more producers are looking to plug wells. Projected spending on decommissioning has jumped 16% since Oil and Gas UK produced their ten year forecast in 2014 rising to a cost of £16.9 billion for producers in the area.
The erosive effects of international trade and transaction sanctions on Russia have now persisted for over 2 years; they were first enacted in March 2014 in response to the annexing of Crimea.
Oil is now close to 6 month highs today, with Brent touching $47 (up over 70% from January’s ~$27 lows) and US WTI reaching $45 per barrel. This is even above Moody’s Brent forecasts of $43/BOE for as far out as 2018 ($33 and $38 are forecast for this year and next) which were all revised down to these levels on the 21st January earlier this year. At the time this significant $10 downward revision for current oil expectations came after a number of smaller reductions and was perhaps viewed as a line in the sand which if crossed could signal serious concern, not only for oil companies but, for the global economy. Even this low $33 estimate carried warnings that, “Moody’s would be likely to lower this estimate if such an upward trend were not to materialize over the next several months.” Following this fundamental shift a broad range of oil related credits underwent single and multiple notch downgrades across all rating agencies.
Hypothetically, what would be the official creditor position of someone who has a year’s salary in their bank but many years’ salary worth of valuable commodities buried in their backyard? Technically it would just be the one year’s salary - which is the equivalent to how we all traditionally measure countries’ government debts; but there’s an obvious omission in such accounting methods. For a number of governments with vast oil reserves who are facing moderate deficits concerns for their creditworthiness have grown to levels which perhaps have yet to fully account for the funds they could raise should they decide to privatise such assets or sell rights to such deposits.
As the oil glut continues to weigh heavy on black gold dependent economies, countries such as Mexico have employed spending cuts as a way to shield themselves from the ongoing pressures. A couple of weeks ago, the country’s Finance Ministry announced it will be slashing spending by an additional MXN 175bn ($10bn) in 2017, this is on top of the ~$7.5bn worth of cuts this year; or 0.7% of GDP. The spending cuts in 2017 assume crude will be priced at $35pb, this is above the pessimistic $25pb estimated for 2016, crude is currently ~$44pb; however unlike other oil producing economies, the government has the safety net of the ~$50pb revenue hedge this year.
Looking back on 2015 Mexico’s government risks being better remembered for the “El Chapo fiasco” in which the drug lord, Joaquín “El Chapo” Guzmán, escaped from, Altiplano, the ‘maximum security prison’, in July ‘15 and remained on the run until January ‘16. Adding to the humiliation, only following an interview with Sean Penn for Rolling Stone magazine did the authorities finally track him down and arrest him. The media love this sort of story and it has pretty much eclipsed anything positive the government might have done.
Data compiled by Bloomberg shows that the 838 companies which make up the MSCI Emerging Markets Index, on average, held a record $608 per share in cash or short-term investments at the end of last year. That’s up 34% from the previous year and the largest annual jump in over a decade.
This high level of liquidity is thought to come from delayed spending and reflects the growing concern for the outlook for world growth. We have particular concerns in regard to indebted nations, should a further downturn emerge and balance sheet stresses materialise.
It is reported that Mexico has won “trade of the year” and is set to receive over $6 billion for its oil hedges put on in 2014.
The government paid out $773 million in 2014 to lock in prices almost $30 a barrel higher than the average market price over the last year through a series of deals with banks including Goldman Sachs Group Inc., JPMorgan Chase & Co and Citigroup Inc.
Comrades, today sees the one year anniversary of when the Russian rouble was set free from central bank control, the first time in its post-Soviet history.
Twelve months ago the Russian central bank decided to stop depleting their foreign reserves and allow the rouble to fall, and it did, down over 38% over the last twelve months against the US dollar. This fall almost mirrors the fall in the oil price; over the same period brent crude is down 42%. So what have been the consequences of this currency devaluation?
Encouragingly, the second phase of the first round of the Mexican Government’s oil block auctions attracted more interest than the initial phase. Bids were made for 3 of the 5 blocks with estimates that these should attract USD 3.1bn in investment over the 25 year deal life. The step up in interest partly reflects more interesting geology, better legal and fiscal terms, and assets for extraction rather than exploration. But it also reflects improvements in the bidding process with the minimum threshold for any bid being revealed two weeks ahead of the bid dates and a USD 2.5m bid security guarantee for all contracts rather than each block . The third phase is due to take place in December this year with 25 onshore blocks up for auction which are expected to attract interest from local players. Thereafter, the deep-water fields are expected to be auctioned which are expected to generate a good level of interest from the global majors.