13 Jan 2016
TODAY
NEW YORK - U.S. oil stumbled below $30 for the first time in 12 years to levels that threaten the survival of many U.S. shale firms, spur more belt-tightening by oil majors and spell more pain for crude-producing nations and regions.
A seven-day losing streak fueled by concerns about a continued supply glut and fragile demand from China, the world's No. 2 consumer, wiped out almost a fifth of crude prices this year and 70 percent since mid-2014.
Traders have all but given up attempting to predict where the new-year rout will end, with momentum-driven dealing and overwhelmingly bearish sentiment engulfing the market. Some analysts warned of $20 a barrel; Standard Chartered said fund selling may not relent until it reaches $10.
And more of the world's biggest energy companies are conceding that it may be many years before prices recover. On Tuesday, U.S. crude futures traded below $50 through 2021.
British oil and gas giant BP Plc said on Tuesday it would slash 5 percent of its workforce in the face of the continued slump while Brazil's state oil firm Petrobras
cut its investment plan for the third time in six months.
Royal Dutch Shell Plc and Exxon Mobil Corp meanwhile have seen their stock decline by 11 and 4 percent respectively.
The latest cuts add to the hundreds of thousands of job lost and billions of dollars spending cuts throughout crude's 18-month slide from levels above $100 a barrel in the summer of 2014, a collapse that has run far longer and deeper than originally expected, reaching crisis point for some.
For Russia, which relies on energy for about half its budget revenues and 40 percent of exports, $30-a-barrel oil could wipe out in just over a year the nation's rainy day funds amassed during bull energy markets and blow a hole in its budget.
Even Saudi Arabia, whose policy of maintaining output to defend its market share even as prices slide has been blamed, together with the resilience of U.S. shale producers, for the persistence of the global supply glut, is feeling the squeeze.
In its 2016 budget unveiled late last month, Riyadh announced a series of spending cuts and reduction in subsidies as oil revenues shrink.
But with major U.S. energy lender Wells Fargo estimating that sustained prices below $40 per barrel, let alone $30, are too low for U.S. shale producers to survive in the longer run, the stakes are exceptionally high for the young industry that turned the United States into a leading oil and gas producer.
The rout has already pushed dozens of small firms into bankruptcy or turned them into "zombies" firms that barely manage to pay their bills and service debts, but do not earn enough to ensure sustained production and revenues ahead.
Stocks of U.S. energy companies lost more than 9 percent in the past nine trading days and the sector is expected to report a 70 percent annual drop in earnings per share for the fourth quarter, according to Thomson Reuters data.
There are few signs suggesting any near-term relief. The U.S. Energy Information Administration predicted on Tuesday that already heavily swollen global oil stockpiles would continue rising until the second half of next year.
NO BOTTOM
The prospect of a protracted slump has fueled expectations of a flurry of asset sales deals that could be possibly financed by private equity or hedge fund investors and law firms and banks have been beefing up their restructuring teams.
The latest slide, however, quashed hopes that the market may have already found its bottom and private equity investors are expected to hold off with buying any assets with action expected to shift to bankruptcy courts.
The U.S. West Texas Intermediate crude (WTI) benchmark briefly touched a low of $29.93, which was last seen in December 2003.
“With WTI now trading below $30, people are getting their minds wrapped around the lower-for-longer price scenario and … management teams and sponsors are starting to become resigned to the likelihood of an in-court solution,” said Matthew Hart, who leads the restructuring practice at Intrepid Partners.
The latest plunge has also deepened the gap between U.S. states such as Alaska, Oklahoma, North Dakota, Louisiana and New Mexico, which depend on production taxes to fund education and health care and the rest of the country, which has benefited from low gasoline prices.
SAVINGS AND SUVS
There are winners of the oil rout too.
Cheap gasoline and low heating costs have produced a windfall for the majority of U.S. consumers, which with a delay begins to show up in discretionary spending and savings.
The U.S. auto industry is also racking up record sales and profits, largely due to the resurgent popularity of trucks and sport utility vehicles fueled by gasoline prices at multiyear lows.
And some investors are still looking at the latest slide as a potential opportunity.
“It’s a wild cycle, but it’s so hard to predict where the bottom is,” said Gary Bradshaw, portfolio manager at the $1.9 billion Hodges Small Cap Fund. He says his firm has been buying small-cap natural gas firms in anticipation that the stocks will rebound soon, particularly if global events cause a quick tightening in oil supply.
“I think we’ll have a heck of a snap-back rally and crude will eventually, my guess, rebound to around $55 a barrel," he said. "We’re buying stocks thinking they’re awful close to getting washed out.”
REUTERS
US$10 - $20: That is how low oil prices could get
“In light of prices already falling towards US$30 without the increase in Iranian crude, it would seem that US$20 is a possibility,” Phillip Futures analyst Daniel Ang said.
By Tang See Kit, Channel NewsAsia
13 Jan 2016
SINGAPORE: As crude oil prices slide further to 12-year lows this week, market watchers are slashing their price forecasts yet again, with some predicting US$20 a barrel becoming a distinct possibility.
Analysts at the likes of Morgan Stanley, Goldman Sachs, Citigroup and Bank of America Merrill Lynch earlier this week lowered their oil price assumptions for 2016 to the US$20 level, while Standard Chartered was the most bearish with a call for oil to tumble as low as US$10 a barrel.
As of Wednesday’s early Asian trade, US West Texas Intermediate crude (WTI) traded at US$30.88 a barrel, nudging up slightly from Tuesday’s intra-day low of US$29.93 which was last seen in December 2003. Meanwhile, Brent crude traded at US$31.20 a barrel, after bottoming at US$30.34 on Tuesday.
[Note: West Texas Intermediate, and Brent Crude are the best quality crude oil and they are
Year-to-date, oil prices have lost nearly 17 per cent and are about 70 per cent lower from their peak in June 2014.
TOXIC MIX OF FACTORS
An increasing likelihood of a deeper devaluation in the Chinese yuan, also known as the renminbi, has been singled out as the prime culprit behind oil’s dismal start to the new year.
“China is an instigator of the recent selloff, as markets worry about China’s oil demand for the year,” Daniel Hynes, senior commodity strategist at ANZ, said in a telephone interview. "Markets continue to price in the worst scenario.”
Decelerating growth in the world’s top commodity importer has been fuelling fears of slowing demand - further squeezing a battered oil market already struggling with massive oversupply. More weakening in the yuan would render dollar-denominated oil even more expensive and deal yet another blow to demand.
“[Weak yuan] could lead to another round of commodity weakness and send oil into the US$20s,” Morgan Stanley’s analyst, Adam Longson, wrote in a report dated Jan 11.
Coupled with a strengthening US dollar, which has been given a boost following last week’s upbeat nonfarm payrolls report, it is unsurprising that market watchers continue to dial back their estimates for an oil recovery.
According to Phillip Futures analyst Daniel Ang, hedge funds are increasing their short positions on WTI crude, implying a sense of “strong bearishness”.
Meanwhile, news that Saudi Arabia is considering a float of state-owned Saudi Aramco, the world's largest oil producer, has also fuelled more uncertainties, according to Ben Pedley, head of investment strategy for Asia at HSBC Private Bank.
Saudi Aramco manages crude reserves that exceed 261 billion barrels. (AFP/Hassan Ammar)
NEAR-TERM RECOVERY UNLIKELY
For now, with supply unlikely to subside, global crude oil prices are struggling to find any support.
“Although US rig counts have been declining, this is not reflected in US crude production. This means that for the first half of the year, we should continue to see oil prices remain low,” Mr Ang from Phillip Futures said in an email interview.
US oil rig count — commonly used as an indication of drilling activity and future production levels — dropped by 20 to 516 in the weekend ending Jan 8, logging its steepest decline in two months.
“In light of prices already falling towards US$30 without the increase in Iranian crude, it would seem that US$20 is a possibility,” the Singapore-based analyst added.
For spread better IG’s Evan Lucas, the possibility of oil prices languishing at US$20 a barrel also seems like a certainty and will be a “dire problem as it will bring the bankruptcy question to bear”.
“There are several estimates that sub-US$30 a barrel would mean one third of US oil and gas players would go broke in six months,” the Melbourne-based analyst added.
One casualty of the ongoing slump in oil prices is British oil and gas company BP, which announced plans on Jan 12 to slash 5 per cent of its global workforce as it undergoes a US$3.5 billion restructuring programme.
- CNA/sk
'Sell everything' warns RBS as fears mount that mass sell-off is about to crash markets and oil could spiral towards $10 a barrel
RBS tells investors 'In a crowded hall, exit doors are small. Risks are high'
Mass sell-off could be as severe as the 2008 market meltdown, bank says
Oil price drop could see petrol fall to 86p a litre, says RAC
By TANYA JEFFERIES
Daily Mail
13 January 2016
Top banks set off warning sirens today with forecasts of a $10 a barrel oil price and a mass sell-off as severe as the 2008 market meltdown.
The oil price plunged again to $30 a barrel, and Standard Chartered said it might yet fall to a third of that. RBS told investors to sell almost everything, saying: 'In a crowded hall, exit doors are small. Risks are high.'
The blood-curdling warnings follow a torrid start to the year on financial markets, with billions of pounds wiped off stocks in the UK and elsewhere, as China struggles to control turbulent trading and oil continually spirals lower.
The FTSE 100 managed to finish up 1 per cent or 57.41 points at 5929.24 at the close today, but it only barely regained the ground lost yesterday.
London's top stock index saw £85billion wiped off its value after tumbling 5.2 per cent last week, during what is being dubbed the worst start to a New Year ever on world markets.
A string of banks including Barclays, Bank of America Merrill Lynch and Societe Generale have slashed their 2016 oil forecasts this week, while Standard Chartered cautioned that the price could plummet to $10 a barrel.
But RBS sounded the strongest alert, issuing advice to clients saying 'danger is lurking out there for every investor' and 'the downside is crystallising. Watch out. Sell (mostly) everything.'
It went on: 'In a crowded hall, exit doors are small. Risks are high.' Adding 'this looks very much like 2008', RBS suggested taking refuge in US and German government bonds.
UK motorists can look forward to lower petrol prices as the oil price tumbles, but the recent declines are causing chaos on financial markets which could end up tanking the global economy in the worst case scenario.
RAC fuel spokesman Simon Williams said: 'This latest prediction of oil hitting just $10 a barrel would have the potential to take petrol prices down to around 86p per litre – the last time we saw average prices this low was in early 2009.
'However, for prices to get this low the pound would have to get no weaker against the dollar than it is today.'
He added: 'At $10 a barrel, tax would account for around 84 per cent of the total price per litre – a clear indication of just how high a proportion of every litre we buy goes straight to the Treasury.'
Oil has been dragged lower by a supply glut, China’s weakening economy and stock market turmoil, as well as the strong dollar, which makes it more expensive for those using other currencies to buy oil.
Prices have also been driven lower by a threat that markets will be flooded by even more oil when sanctions against Iran are lifted shortly.
China has tried to impose draconian measures to halt wild bouts of selling on its markets, but to little avail so far.
Analysts have started to warn that what looked like a market correction in one of the world's biggest economies is becoming a full-blown crisis, which shows no signs of going away.
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