The US$60 per barrel floor was well and truly breached on Friday as the
WTI dropped to $57.48 at one point. The slump is continuing into the current week as Brent lurks around $60 in early Asian trading.
The scenario that most said would set alarm bells ringing within the industry is here. Since no one is predicting the current supply glut to ease anytime soon, not least the Oilholic, that the readers should expect further drops is a no brainer. Odds have shortened considerably on
OPEC meeting well before June as was announced last month.
In the Oilholic’s humble opinion Brent could even dip below $50 fairly soon. However, supply constriction will eventually kick-in to support prices over the second half of 2015. In the interim, we’ll see a few interesting twists and turns.
As for oil and gas companies, Fitch Ratings reckons the much beleaguered
European refining sector is likely to end the year in much better shape than 2013. In the first edition of its
European Refining Dashboard, the ratings agency noted that refining margins in the third quarter rose to their highest level since at least the start of 2013 as “product prices fell more slowly than crude oil prices.”
The Oilholic feels it’s prudent not to ignore the emphasis on the words “more slowly”. Fitch says overcapacity and intense competition from overseas refineries still plague European refining.
“Further capacity reductions may be needed to restore the long-term supply and demand balance in Europe, while competition from Middle Eastern, Russian and US refineries, which generally have access to cheaper feedstock and lower energy costs, remains strong,” it added.
More generally speaking, in the Oilholic’s assessment of the impact of lower oil prices on the FTSE 100 trio of Shell, BP and BG Group; both Shell and
BP outperformed in the last quarter by 6% and 11% respectively, according to published data, while BG Group’s underwhelming performance had much to with
other operational problems and not the price of the crude stuff.
While published financial data is backward looking, and the slump in prices had not become as pronounced at the time of quarterly results as it currently is, it's not all gloomy. However, the jury is still out on BG Group. The company is responding with
incoming CEO Helge Lund waiting to take charge in March. Last week, BG Group agreed to sell its wholly-owned subsidiary QCLNG Pipeline Company to APA Group, Australia’s largest gas infrastructure business, for approximately $5 billion.
QCLNG Pipeline company owns a 543 km underground pipeline network linking BG Group’s natural gas fields in southern Queensland to a two-train LNG export facility at Gladstone on Australia’s east coast.
The pipeline was constructed between 2011 and 2014 and has a current book value of US$1.6 billion. “The sale of this non-core infrastructure is consistent with BG Group’s strategy of actively managing its global asset portfolio,” it said in a statement.
While largely welcoming the move, most analysts have reserved judgement for the moment. “The sale is broadly supportive to the company's credit profile. However, we will need to be comfortable with the use of proceeds and progress with BG's planned output expansion before we change the current negative outlook,” as analysts at Fitch wrote in a note to clients.
Reverting back to Shell and BP, the former has quietly moved ahead of the latter and narrowed the gap to market leader ExxonMobil. Strong downstream results helped all three, but Shell’s earnings recovery over the year, was the most impressive according to Neill Morton, analyst at Investec.
“Despite its modest valuation premium, we would favour Shell’s more defensive qualities over BP in the current uncertain industry environment,” he added. Let's not forget the Gulf of Mexico oil spill fallout that BP is still getting to grips with.
Moving away from FTSE 100 oil majors and refiners, UN Climate Change talks in Peru ended on a familiar underwhelming note. Delegates largely cheered at the conclusion (which came two days late) because some semblance of something was achieved, i.e. a framework for setting national pledges to be submitted at a summit next year.
The final communiqué which can’t be described as anything other than weak is available for
download here should it interest you. Problem here is that developed markets like lecturing emerging markets on CO2 emissions, something which the former ignored for most of 20th century. It won't work. Expect more acrimony, but hope that there is light at the end of a very long tunnel.
© Gaurav Sharma 2014. Photo: Refinery, Quebec, Canada © Michael Melford / National Geographic
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