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Wed, 24th May 2017

Anirudh Sethi Report

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Posts Authored by: “Anirudh Sethi”

Moody’s downgrades China’s rating to A1 from Aa3 and changes outlook to stable from negative -Full Text

Moody’s Investors Service has today downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.

The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows. While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.

The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced. The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen. The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account.

China’s local currency and foreign currency senior unsecured debt ratings are downgraded to A1 from Aa3. The senior unsecured foreign currency shelf rating is also downgraded to (P)A1 from (P)Aa3.

China’s local currency bond and deposit ceilings remain at Aa3. The foreign currency bond ceiling remains at Aa3. The foreign currency deposit ceiling is lowered to A1 from Aa3. China’s short-term foreign currency bond and bank deposit ceilings remain Prime-1 (P-1).

RATINGS RATIONALE

OIL – private inventory data shows smaller than expected draw for US crude stocks

Official oil inventory data comes out from the US on Wednesday morning. This is a private survey.

The data is available only to subscribers to the private company but it does tend to leak out, with media outlets (MSM and social) picking it up a few minutes after it hits.
The Reuters survey showed an expected draw of 2.7mln barrles on the week.
There is a draw, its smaller than that.

S&P puts 38 Brazilian financial institutions’ ratings on negative watch

S&P Global Ratings has placed the ratings of 38 Brazilian financial institutions on negative watch amid a political scandal that rocked the country’s markets.

S&P said it was placing the watch on the firms — meaning that their ratings are at risk of being lowered — because “the greater likelihood of an economic recovery delay, stemming from recent political developments, increases the risk for the credit fundamentals of the financial institutions operating in Brazil.”

S&P said the following companies were included in the negative watch:

•Caixa Econômica Federal SA

•Banco Nacional de Desenvolvimento Economico e Social SA

•BNDESPar-BNDES Participacoes SA

•Banco do Brasil SA

•Ativos SA Securitizadora de Creditos Financeiros

•Banco Bradesco SA

•Bradesco Capitalizacao SA

•Itau Unibanco Holding SA

•Itau Unibanco SA

Overnight US Market :US stocks end the day with modest gains

The  US major indices are ending the day with modest gains and closing near mid range levels.
  • The S&P is ending up 4.48 points or 0.19%. The high extended to 2400.85. The low to 2393.88.
  • The Nasdaq is ending up 5.093 points or +0.08%. Its high reached 6150.91. The low reached 6121.789
  • The Dow ended up +43.76 points or +0.21. The high came in at 20961.14. The low 20896.22.

OPEC Is Studying The Following Three Options Ahead Of Thursday’s Meeting

Last week, ahead of the OPEC meeting, BofA commodity analyst Francisco Blanch said the oil cartel faced three specific choices ahead of its May 25 meeting in Vienna, when it is widely expected to extend the November 2016 production cut:

  1. First, OPEC could cut production beyond the 1.2mn b/d agreed in December and encourage non-OPEC members to deepen the cuts.
  2. Second, OPEC could increase output aggressively and restart the oil price war.
  3. And third, OPEC could keep the cuts at the current levels for the next 6 to 9 months and hope for oil market demand conditions to improve.

BofA also presented the following table adding the proposed likelihoods of any given choice of action, of which a simple deal extension had the highest probability of taking place.

Today’s Stunted Oil Prices Could Cause Oil Price Shock In 2020

As oil prices remain unsteady and OPEC continues to make headlines every hour, the world is focused on oil’s immediate future. As Saudi Arabia announces plans to slash production and move their economy away from oil dependency, many industry insiders are predicting that the now over-saturated market will reach an equilibrium with higher commodity prices by 2018 and U.S. shale production will continue to grow along with global demand.

Robert Johnston, the CEO of one of the world’s biggest political risk consultancies, is unconvinced. In a speech made at the Association of International Petroleum Negotiators’ 2017 International Petroleum Summit, Johnston laid out his concerns for the future of oil.

Despite the recent dip in oil prices, industry experts have been predicting a supply-gap and rising oil prices for years. This is due in large part to an oil investment drought marked by two year of consecutive decline, a statistic that has no precedent in the oil industry. This year a report by the International Energy Agency concluded that if oil investment remains stagnant over the next few years, by 2020 we will see a significant increase in the price of oil as global demand continues to climb.

The IEA’s Executive Director Fatih Birol addressed these findings in a keynote address at the Atlantic Council Global Energy Forum in Abu Dhabi in January, announcing that no major oil projects were started in the last year and there were zero large oil discoveries “because there is no money for exploration. You find something if you look for it,” Birol said.

The potential supply gap has far-reaching implications that we are not ready to combat. Gas and oil are still fundamental to much of the world’s infrastructure, despite a steady increase of research and utilization of renewable energy resources. While electric cars continue to show a promising future, especially in the light of ambitious new green car policy initiatives in India and China, they still account for less than 2 percent of the world’s cars. And, as the global middle class continues to grow and exercise their buying power, the demand for oil will continue to grow alongside them.

The oil industry desperately needs new sources of oil, and they need new investors and technologies to find those sources quickly. There are currently a wide variety of techniques employed to find new deposits (seismic prospecting, well logging, gravity surveying, magnetic prospecting, and geochemical prospecting, etc.) but these are all methods with significant limitations in their ability to accurately estimate the size of new oil and gas deposits.

Many companies, including oil giant BP, have begun efforts to develop of artificial intelligence programs with algorithms that will allow them to find and drill with unprecedented accuracy in the future, but the technology is not yet ready. We can only hope that it will be ready by 2020 or that the IEA is wrong in their predictions.