Turkey's Russian connection: Bazaars to barrels

The Oilholic finds himself in a soggy Istanbul, with Turkey in the middle of election fever and the Black Sea in the grip of a Cold War style stand-off over Ukraine.

Before landing here, yours truly ran in to a Moody's spokesperson at BA's Heathrow T5 lounge. It seems that the ratings agency predictably sees Gazprom and Russia's banking sector taking a hit, if recent notes to subscribers are anything to go by. With 52% of Gazprom's exports to Europe currently routed through Ukraine and the country contributing up to 8% of its revenues, there is trouble ahead. Nonetheless, it can cope pretty well in the face of an escalation.

When it comes to the banking sector, Moody's reckons the aggregated exposure could be as high as US$30 billion. The Kremlin is likely to step in if needs be but it won't be needed as the figure equates to less than 2% of system assets. Interestingly, just before dashing off to our respective flights, our friend from Moody's gently nudged the Oilholic and quipped, "Wait till you get to Istanbul and see NATO member Turkey's exposure to Russia." And so this blogger came, he saw and he wondered!

We'll come to the barrels later, lets start with the bazaars first. Despite the unusually miserable weather, the city is packed with Russian tourists. From the metro to the tourist spots, you cannot escape Russian chatter in the background. "For sale" signs in retail outlets are up in two languages – Turkish and Russian. In expanding its tourism sector and wider economy, Turkey has welcomed Russian tourists and business investments with open arms including a favourable visa regime for over 10 years now.

The results are tangible. With the Turkish Lira in throes of unpredictability, every big ticket item – from designer stuff and marquee labels to high value Turkish handicrafts – is priced by retailers here in euros; with quite a few Russians around with more than a few euros.

Digressing from retail to banks, the exposure of Turkish banking institutions to Russia is harder to quantify as the current macroclimate in the country [not Ukraine & NATO] has conspired to turn the situation fluid. Unfortunately, no one wants to nail a figure on record as forex permutations are making life difficult extremely difficult for the analysts, but off record it is certainly not "as high as Ukraine."

Excluding exposure of Russian banks to Turkish infrastructure project finance exercises, $5 billion to 10 billion is a reasonable conservative guesstimate. From banks, rather crudely to barrels – Russia is Turkey's 6th largest export market. Mostly consumables, textiles and manufactured goods worth $3 billion were exported by Turkey to Russia in 2012.

What came back from Russian shores was $27 billion worth of imports including crude oil, distillates, natural gas and iron and steel that same year. Of the said figure, $17.26 billion were oil & gas imports! Using a dollar valuation at constant exchange rate (which has been anything but constant), we are looking at a 625% jump in Russian "imports" between 2002 and 2012. The said percentage need not be sensationalised as the starting point was a low base, but it gives you an idea of NATO Turkey's exposure to [and reliance on] Russia.

Furthermore, the Bosphorus is a major maritime artery for oil & gas shipments via the Black Sea. Exports from the Russian loading port of Novorossyisk by tankers via the Turkish straits have been rising steadily over the last 10 years. Recognising this, Turkey even has an embassy in Novorossyisk.

Recently, Poland's Prime Minister Donald Tusk, in sync with the Oilholic, was correctly berating Germany for its exposure to Russian gas and why it would give the EU a weaker hand over the Ukrainian tussle.

"Germany's reliance on Russian gas can effectively limit European sovereignty. I have no doubt," Tusk told reporters, ahead of German Chancellor Angela Merkel’s visit to his country. [Ouch!]

Maybe Tusk ought to look at fellow NATO member Turkey too. If the diplomatic row continues to escalate, Turkey would find it very hard to indulge in verbal or economic jousts with Russia. It took a very vocal stand with Syria, but one suspects it may not be the case this time around. Banks, bazaars and barrels could all feel the squeeze – it's what colleagues in the analyst community down here openly acknowledge.

However, you don't need them or the Oilholic. All you need to do is take the tram from Istanbul's Grand Bazaar through to Kabataş, the last stop on the European shore of the Bosphorus, between Beşiktaş and Karaköy. The journey will help you reach the same conclusions unaided by charts, graphs and economic gobbledegook. And here's hoping, the weather is kinder to you than it has been to the Oilholic. That's all for the moment from Istanbul folks! Keep reading, keep it 'crude'!

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

© Gaurav Sharma 2014. Photo 1: Eminonu Waterfont, Istanbul, Turkey Photo 2: Greek oil tanker Scorpio passes through the Bosphorus, Turkey. ©  Gaurav Sharma, March 2014.

Saudi’s ‘crude’ range, Fitch on Abu Dhabi & more

Petroleum economists are wondering if we have crossed a gateway to crude chaos? The magnificent one pictured (left) here in Abu Dhabi's Capital Garden is certainly no metaphor for the situation. Egypt is burning, Libya is protesting and US/UK/NATO are threatening [almost direct] action against Syria.

Add the US Federal Reserve's current stance on QE to the geopolitical mix and you get a bullish Brent price. Yes, yes, that's all very predictable. But when bulls run amok, all attention usually turns to Aramco's response. It is a well known fact that the Saudis like the crude oil price to remain within what economists prefer to describe as the "middle" ground. (You want your principal export to be priced high enough to keep you ticking, but not so high as to drive importers towards either consuming less or seeking alternatives).

Investment house Jadwa's research often puts such a Saudi comfort zone in US$80-90 per barrel price range. The Oilholic has been banging on about the same range too, though towards the conservative lower end (in the region of $78-80). The Emiratis would also be pretty happy with that too; it's a price range most here say they’ve based their budget on as well.

A scheduled (or "ordinary") OPEC meeting is not due until December and in any case the Saudis care precious little about the cartel's quota. Hints about Saudi sentiment only emerge when one gets to nab oil minister Ali Al-Naimi and that too if he actually wants to say a thing or two. As both Saudi Arabia and UAE have spare capacity, suspicions about a joint move on working towards a "price band" have lurked around since the turn of 1990s and Gulf War I.

Aramco's response to spikes and dives in the past, for instance the highs and lows of 2007-08 and a spike during the Libyan crisis, bears testimony to the so called middle approach. Recent empirical evidence suggests that if the Brent price spikes above $120 per barrel, Aramco usually raises its output to cool the market.

Conversely, if it falls rapidly (or is perceived to be heading below three digits), Aramco stunts output to prop-up the price. The current one is a high-ish price band. Smart money would be on ADNOC and Aramco raising their output, however much the Iranians and Venezuelans squeal. For the record, this blogger feels it is prudent to mention that Aramco denies it has any such price band.

Away from pricing matters, Fitch Ratings has affirmed Abu Dhabi's long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA' with a Stable Outlook. Additionally, the UAE's country ceiling is affirmed at 'AA+' (This ceiling, the agency says, also applies to Ras al-Khaimah).

In a statement, the agency said, oil rich Abu Dhabi has a strong sovereign balance sheet, both in absolute terms and compared to most 'AA' category peers. To put things into perspective, its sovereign external debt at end of Q4 2012 was just 1% of GDP, compared to Fitch's estimate of sovereign foreign assets of 153% of GDP. Only Kuwait has a stronger sovereign net foreign asset position within the GCC.

With estimated current account surpluses of around double digits forecast each year, sovereign net foreign assets of Abu Dhabi are forecast to rise further by end-2015. Fitch also estimates that the fiscal surplus, including ADNOC dividends and ADIA investment income, returned to double digits in 2012 and will remain of this order of magnitude for each year to 2015.

Furthermore, non-oil growth in the Emirate accelerated to 7.7%. This parameter also compares favourably to other regional oil-rich peers. Help provided by Abu Dhabi to other Emirates is likely to be discretionary. Overall, Fitch notes that Abu Dhabi has the highest GDP per capita of any Fitch-rated sovereign.

However, the Abu Dhabi economy is still highly dependent on oil, which accounted for around 90% of fiscal and external revenues and around half of GDP in 2012. As proven reserves are large, this blogger is not alone in thinking that there should be no immediate concerns for Abu Dhabi. Furthermore, Fitch's conjecture is based on the supposition of a Brent price in the region of $105 per barrel this year and $100 in 2014. No concerns there either!

Just a couple of footnotes before bidding farewell to Abu Dhabi – first off, and following on from what the Oilholic blogged about earlier, The National columnist Ebrahim Hashem eloquently explains here why UAE's reserves are so attractive for IOCs. The same newspaper also noted on Friday that regional/GCC inflation is here to stay and that the MENA region is going to face a North-South divide akin to the EU. The troubled "NA" bit is likely to rely on the resource rich "ME" bit.

Inflation certainly hasn’t dampened the UAE auto market for sure – one of the first to see the latest models arrive in town. To this effect, the Oilholic gives you two quirky glimpses of some choice autos on the streets of Abu Dhabi. The first (pictured above left) is the latest glammed-up Mini Cooper model outside National Bank of Abu Dhabi's offices, the second is proof that an Emirati sandstorm can make the prettiest automobile look rather off colour.

Finally, a Bloomberg report noting that Oil-rich Norway had gone from a European leader to laggard in terms of consumer spending made yours truly chuckle. Maybe they should reduce the monstrous price of their beer, water and food, which the Oilholic found to his cost in Oslo recently. That's all from Abu Dhabi, its time to bid the Emirate good-bye for destination Oman! Keep reading, keep it 'crude'!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo 1: Entrance to Capital Garden, Abu Dhabi, UAE Photo 2: Cars parked around Abu Dhabi, UAE © Gaurav Sharma, August, 2013.

Market Chatter on ‘Crude’ effects of Instability

As allied forces start bombing Libya and the full damage – both physical and reputational – to the nuclear generated power industry in wake of the earthquake in Japan is known, it is time to move beyond ranting about how much instability premium is actually there in the price of crude oil to what its impact may be. Using the Brent forward month futures contract as a benchmark, conservative estimates put the premium at US$10 but yet looser ones put it at US$20 per barrel at the very least.

It is also getting a bit repetitive to suggest that fundamentals do not support such a high price of crude, even if the geopolitics is taken out of it. Thing is even profit taking at some point is not likely to cool the hot prices in the short term and the market has already started chatting about the impact. The tragic earthquake in Japan has added another dimension. Until nuclear power generation gets back on track in Japan, in order to meet their power demand the Japanese will increase the use of hydrocarbons as they have no other choice.

Regarding the latter point, Ratings agency Moody's says that displaced demand from Japan's nuclear shutdown will shift to Asia-Pacific thermal-energy producers such as Australia's upstream Woodside Petroleum (Moody’s rating Baa1 negative), Indonesia's thermal-coal miner Adaro (Ba1 stable), Korea's refiner SK Innovation (Baa3 Stable), and Thailand's petrochemical firm PTT Chemical (Baa3 review for upgrade).

Renee Lam, a Moody's vice president in Hong Kong, says, "These firms and others in the region can capitalise on near- and longer-term displaced demand as Japan must now rely more on non-nuclear fuel." Lam also expects global crude prices to remain high, despite a near-term drop from dislocation in Japan.

She further notes, "Refinery shutdowns in Japan, accounting for 9% of Asian capacity and 2% of global capacity, have pushed up Asian refining margins. Strong margins benefiting non-Japanese, regional refineries should continue at least in the near term. We expect strong results for our rated refiners in the first half of this year."

Additionally, Fitch Ratings says airlines and European Gas-Fired Utilities Unprepared for Current Oil Spike and that the substantial increase in oil prices in a short time frame has caught many corporate energy consumers off guard, as they are not properly hedged to cope with such high oil price levels. In a scenario of sustained high oil prices, corporate issuers that are heavily exposed to oil-related commodities feedstock are likely to face a direct impact on their earnings.

In the agency’s view, management teams may be reluctant to hedge the oil price at these high levels, in anticipation of a softening in the oil price once geopolitical tensions subside. Fitch also considers it possible that banks might be less keen to finance oil option contracts at such high levels, as they do not want to take the risk of a continued rally in the price of crude.

As oil price volatility remained fairly low in 2010, airlines seem to have been hedging less and are now more vulnerable to the current spike. In the current high oil price environment, an increasing number of airlines are taking a wait-and-see approach in anticipation of a softening of the oil price and perhaps due to higher hedging costs. In Fitch's view, sustained oil prices well in excess of US$100 per barrel could negatively affect the operating performance and creditworthiness of high intensity corporate energy consumers and may also hamper the global economic recovery.

Analysts at SocGen CIB note that the forward curve for Brent is currently in backwardation (nearby premium, forward discount) for the next 5 years, reflecting concerns over growing physical tightness in the crude markets. Especially, in light of the NATO/allied forces bombardment of Gaddafi forces last night, the market is pricing in an extended Libyan shutdown of crude exports. About 1 million barrels per day of crude oil production has been cut and Libya’s major exporting ports are now closed.

As Nymex WTI-ICE Brent spreads have been less weak, SocGen analysts note that the front month spread has traded around -US$9.75/b on Tuesday vs -US$15/b one week ago. They opine that the recent strength of the WTI / Brent spreads has not really been due to the decreasing risk-premium of Brent, but more to very strong inflows of money on WTI-linked instruments.

In a note to clients last week, they note and I quote: “Indeed, the last CFTC COT report shows that the net position of the non-leveraged investments on WTI hit a new record high. This is so large that even the swap dealers now have a negative net position on WTI futures.”

I feel it is prudent to mention (again!!!) that this blogger, all main ratings agencies and a substantial chunk of commentators in the City believe that a large portion of the current oil price spike has been driven by speculative activity rather than supply fundamentals. Oil supply has remained more or less balanced as most other oil producing nations have raised their production levels in order to keep overall production largely unaffected – so far that is!

Finally, here’s an interesting segment of CNBC's Mad Money programme, where Jim Cramer talks oil n’ gas in the US state of North Dakota. It’s relatively small from a global standpoint, but could be important from an American one.

© Gaurav Sharma 2011. Photo: Oil Drill Pump, North Dakota © Phil Schermeister, National Geographic Society