Courage & Conviction Investing⊕Follow(1,492 followers) Long/short equity, bonds, special situations, growth at reasonable price Send MessageGlobal oil inventories reached all time highs of 2.975 billion barrels. U.S. inventories stand at all-time highs of 482 million barrels.
Global oil supply exceeded demand by 1.47 million barrels per day in 2015. Despite healthy demand growth forecasted at 1.2 million bpd in 2016, supply will mostly likely outpace demand.
Saudi Arabia's $640 billion currency reserves and the potential for a Saudi Aramco IPO are a "checkmate" scenario for highly leveraged and high cost U.S. Shale producers.
Let me be clear, this isn't a direct buy or sell recommendation when it comes to oil of the U.S. Oil ETF (NYSEARCA:USO). Instead, this is a food for thought piece as I continue to read articles and commentary written by some SA authors and readers that suggest that oil will experience a sharp rebound in 2016. I am not smart enough to pretend that I can accurately forecast the future price of oil, but these articles seem to be based more on hope than rational thought or empirical evidence.
Unlike coal or natural gas prices, which are mostly U.S. centric markets because of the high costs to export, the oil market is truly a global market. Notwithstanding the rational adjustments for quality (light vs. heavy, sour and sweet, etc.) as well as transportation costs and currency adjustments, prices move in tandem, especially with the lifting of the U.S. export ban. The spread between Brent and WTI is near parity. As we can see below, compliments of the CME Group, spot oil closed Friday at $33 per barrel for WTI. One of the few glimmers of hope for oil bulls is the steep market contango that helps midstream owners of oil storage in various forms.
The world’s biggest energy companies have a tough decision to make amid languishing oil prices: Do they keep their coveted investment grade credit ratings or maintain century-old practices of paying shareholders annual dividends worth billions in cash?
Exxon Mobil Corp. and its peers are grappling with the collision course between the two, which appears unavoidable as crude continues to hover around $30 a barrel. Even with announced spending cuts that exceed $92 billion, producers are losing money on almost every barrel they take out of the ground. Paying dividends makes their cash shortfall even worse.
Four of the biggest Western oil companies—Exxon, Royal Dutch Shell PLC, Chevron Corp.and BP PLC—are poised to pay more than $35 billion in dividends to investors this year, an amount equal to about 40% of their combined cash flows, says Oppenheimer & Co. To do so, they face increased pressure to borrow, a strategy that has alarmed ratings firms.
“The question is, how bad are things going to get in 2016?” said Simon Redmond, director of oil and gas corporate ratings at Standard & Poor’s Ratings Services. “For a company to focus on continued cash distribution is not credit positive.”
As interest rates turn negative around the world, the Federal Reserve is asking banks to consider the possibility of the same happening in the U.S.
In its annual stress test for 2016, the Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period.
"The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities," the central bank said in announcing the stress tests last week.
In that particular simulation, the unemployment rate doubles to 10 percent, the same level it reached in the aftermath of the last financial crisis.
Three-month bill rates have slipped slightly below zero several times in recent years, including in September after the Fed delayed rate liftoff amid global financial market turmoil, touching a low of minus 0.05 percent on Oct. 2.
First, while the US embraces market mechanisms (mostly) and really believes that they tend to work (mostly), China really doesn’t like or trust them. The result, as in the wider economy, is festering instability.
Second, China’s equity market woes aren’t about technicalities, but reflect an array of underlying problems, which have undermined confidence. Stock prices are probably still expensive, both on conventional measures and more specifically because most listed companies, including banks, are vulnerable to the lingering and worsening problems of over-capacity, indebtedness, and slowing growth. Successful global Chinese companies such as Alibaba are listed in Hong Kong, not the mainland.
Third, China’s reform agenda, the backbone of what the government has trumpeted as economic transformation to a new economic development model, is stuck in the mud. Many reforms have succumbed to pushback or inertia, and even the political top brass appear to be downplaying reform now in favour of keeping the economy running at an unsustainably high rate.
The Chinese expression, “loud thunder, small raindrops,” describes perfectly the progress of these reforms, since they was launched with great fanfare in 2013. Many useful and necessary things have been done, notably in the finance sector, but in incremental steps that don’t really alter the institutional ways in which the economy works. For example, there is some reform of state enterprises, but not in ways that alter ownership structures or the pervasive nature of state monopolies. There is judicial reform going on, but it’s not possible to have an independent judiciary and the rule of law. More advanced reforms in finance, without parallel changes in the real economy, have exposed the economy to greater capital flight and financial instability.
Fourth, the volatility in China’s stock market cannot be divorced from what’s going on with the its currency, the renminbi. Last year’s mini-devaluation of 2 per cent was followed by about $250bn of market intervention to push the currency back up again, and for a while it stabilised at around RMB6.40 to the US dollar. Stability was certainly essential to strengthen the government’s successful case to get the renminbi admitted to the IMF’s Special Drawing Right late last year (an accounting unit, comprising the US dollar, Yen, Euro and Pound and now the renminbi, but one that carries status). But the authorities also introduced a series of restrictions on the ability of Chinese residents, companies and banks to export capital, and then launched a new currency index, comprising 13 currencies, as a reference rather than a target. The not so veiled implication was that the renminbi would be allowed to drop against a higher US dollar, if that should happen.
"You hear talk about the Russians wanting to reduce supply. They can't possibly because a good three-quarters of where they produce their oil is in very cold areas in Siberia. They don't have those pipes insulated, they have to continue to pump crude oil through there," Gartman said. "The Iranians and the Saudis hate each other. They have, for lack of a better term, a war going on — a gas price war. They're not going to let go."
The most important incentive to many of these countries is free cash flow, Gartman said.
"When you need cash flow, you produce and you don't really care where the end price is. You keep producing it."
In the longer term, Gartman sees oil in a $27-$47 range with many of the volatile swings behind it.
"The bear market has not ended in oil," said Gartman. "If we start to go sideways for four, five months, companies will become profitable again at these levels."
According to a new report from the Oxford Institute for Energy Studies (OIES), Gazprom might consider a strategy to flood Europe with cheap gas in 2016 to kill off U.S. LNG.
Such a scenario would be possible because Gazprom has 100 billion cubic meters of annual gas production capacity sitting on the sidelines in West Siberia, which can effectively be used as spare capacity, not unlike the way Saudi Arabia can ramp up and down oil production to affect prices. Gazprom’s latent capacity is equivalent to 3 percent of global production. This large volume of capacity is the result of investments that were made in a major project on the Yamal Peninsula back when gas markets looked much more bullish.
The approach would mirror Saudi Arabia’s strategy of keeping oil production elevated in order to protect market share, forcing the painful supply-side adjustment onto higher-cost producers. Crucially, Gazprom can produce and export gas to Europe at a much lower cost than LNG from across the Atlantic.
Gazprom’s cost to export gas to Europe stands at $3.50 per million Btu (MMBtu), according to figures from OIES. That easily undercuts the cost of landing LNG in Europe from the U.S., which OIES says costs American exporters $4.30/MMBtu. Even that is probably generous – other estimates peg U.S. LNG export costs to Europe at somewhere around $5/MMBtu for liquefaction and transportation, plus the cost of procuring the gas from U.S. gasfields, which today runs a little bit above $2/MMBtu.
None of this would be feasible if average breakeven prices were anywhere close to the $50-60 assumed by the consensus.
DVB Bank America has decided to arrest the drillship "Deepsea Metro II," as a result of the company which owns the ship, Chloe Marine Corporation, has defaulted on the loan on the ship and that the sales process has been ongoing since not August have not given results, reports Nordic Trustee Tuesday night.
Through different companies and a joint venture owner Odfjell Drilling 40 percent of the ship, which are laid buoys on Curacao. The remaining 60 percent of shares were handed over by Metro Exploration to bondholders in spring.
It was the bondholders who initiated the sales process of the ship which therefore have failed. DVB Bank, as one of the bondholders, has so taken the step to arrest the current drillship.
Odfjell Drilling has already written down the value of their belongings in the vessel to zero, and the company says to DN that the arrest of respect not "change the company's reality."
- We are familiar with the situation, but beyond that we have no comment, says Odfjell Drilling's communications director Gisle Johanson.
Director of Investor Relations, Lasse H. Johannsen, say they have been in contact with possible buyers of "Deepsea Metro II ', but no bids have been placed.
A new design for mammoth wind turbine blades longer than two football fields could deliver 50MW offshore wind turbines.