Pages

Saturday, August 15, 2015

Resisting $40/bbl, Russia & some ‘crude’ ratings

Following two successive week-on-week declines of 6% or over, last Friday’s close brought some respite for Brent oil futures, although the WTI front month contract continued to extend losses. In fact, the US benchmark has been ending each Friday since June 12 at a lower level compared to the week before (see graph, click to enlarge).
 
Will a $40-floor breach happen? Yes. Will oil stay there? No. That’s because market fundamentals haven’t materially altered. Oversupply and lacklustre demand levels are broadly where they were in June. We still have around 1.1 to 1.3 million barrels per day (bpd) of extra oil in the market; a range that’s held for much of 2015. Influences such as Iran’s possible addition to the global crude oil supply pool and China not buying as much have been known for some time.

The latest market commotion is sentiment driven, and it’s why the Oilholic noted in a recent Forbes column that 2016-17 futures appear to be undervalued. People seem to be making calls on where we might be tomorrow based on the kerfuffle we are seeing today!

Each set of dire data from China, inventory report from the Energy Information Administration (EIA), or a gentle nudge from some country or the other welcoming Iran back to the market (as Switzerland did last week) has a reactive tug at benchmarks. The Oilholic still believes Brent will gradually creep up to $60-plus come the end of the year, with supply corrections coming in to the equation over the remainder of this year.

Away from pricing, there is one piece of very interesting backdated data. According to the EIA, Russia’s oil and gas sector weathered both the sanctions as well as the crude price decline rather well.

For 2014, Russia was the world's largest producer of crude oil, including lease condensate, and the second-largest producer of dry natural gas after the US. Russia exported more than 4.7 million bpd of crude oil and lease condensate in 2014, the EIA concluded based on customs data. Most of the exports, or 98% if you prefer percentages, went to Asian and European importers.

Where Russian production level would be at the end of 2015 remains the biggest market riddle. Anecdotal and empirical evidence points to conducive internal taxation keeping the industry going. However, as takings from oil and gas production and exports, account for more than half of Russia's federal budget revenue – it is costing the Kremlin.

Finally, two ratings notes from Fitch over the past fortnight are worth mentioning. The agency has revised its outlook on BP's long-term Issuer Default Rating (IDR) to ‘Positive’ from ‘Negative’ and affirmed the IDR at 'A'.

The outlook revision follows BP's announcement that it has reached an agreement in principle to settle federal, state and local Deepwater Horizon claims for $18.7bn, payable over 18 years. “We believe the deal has significantly reduced the uncertainty around BP's overall payments arising from the accident and hence has considerably strengthened the company's credit profile,” Fitch said.

The agency added there was a real possibility for an upgrade to 'A+' in the next 12 to 18 months, depending on how things pan out and BP's upstream business profile does not show any significant signs of weakening, such as falling reserves or production.

Elsewhere, and unsurprisingly, Fitch downgraded the beleaguered Afren to ‘D’ following the management's announcement on July 31 that it had taken steps to put the company into administration. The company's senior secured rating has been affirmed at 'C', and the Recovery Rating (RR) revised to 'RR5' from 'RR6'.

As discussions with creditors aimed at recapitalising the company failed, the appointment of administrators was made with the consent of the company's secured creditors who saw it as an “important step in preserving value of Afren's subsidiaries”. It is probably the only “value” left after a sorry tale of largely self-inflicted woes. That’s all for the moment folks, keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.
To follow The Oilholic on Google+ click here.
To follow The Oilholic on Forbes click here.
To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2015. Graph: Oil benchmark Friday closes, Jan 2 to Aug 14, 2015 © Gaurav Sharma, August 2015.

No comments:

Post a Comment