“Moscow can no longer give Ukraine gas discounts due to the current drop in oil prices,” Russian President Vladimir Putin said Wednesday. The price must be comparable to that for other European countries, like Poland, he added.
Kiev currently purchases gas from Russia with a $100-discount per 1,000 cubic meters, and also receives reverse gas flows from Slovakia, Hungary and Poland.
In the second quarter of 2015, the final price for Russia’s gas deliveries to Ukraine has been set at $247.18 per 1,000 cubic meters.
Fitch Ratings has revised the Outlook on BP plc’s Long-term Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at ‘A’. A full list of rating actions is at the end of this commentary.
The Outlook revision reflects our expectation that BP’s funds from operations (FFO) adjusted net leverage is likely to exceed the guidance level of 2.5x in 2016-2019, reflecting expected cash outflows associated with the 2010 Macondo oil spill and lower oil prices. The largest payment the company is currently facing is the Clean Water Act (CWA) fine, which in the worst case could reach USD13.7bn. BP’s falling proved reserves as evidenced by the organic reserve replacement ratio consistently below 100% have also contributed to the Negative Outlook. The ‘A’ IDR reflects the company’s strong business profile and sufficient liquidity accumulated to handle Macondo-related cash outflows.
BP is a leading global integrated oil and gas (O&G) company with 2014 production of 1.93 million barrels of oil equivalent per day (MMbpd) (excluding equity affiliates) and well-diversified reserve base. Its credit profile is negatively affected by relatively high leverage and continued uncertainty around possible future payments related to the 2010 Macondo disaster.
KEY RATING DRIVERS
Higher Leverage Drives Outlook Revision
Fitch considers that ratings of O&G companies are dependent on how they react to lower oil prices and whether they will choose to keep credit metrics under control through capex, opex and dividend reduction, or resort to more borrowing. BP’s flexibility in responding to low oil prices is constrained by already high leverage and a need to preserve cash in front of still uncertain Macondo-related liabilities.
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The oil market is buzzing with intrigue over two derivatives deals last week that bore the signature of a large producer guarding against a price collapse.
A public database showed purchases of put options that pay out if crude falls below $53 a barrel in 2016. “Everybody was talking about it,” said Sean Ryan, co-head of oil options at ICAP, the broker.
Put options, common in commodity markets, give their owners the right to sell something at a given price by a future date. These two deals raised eyebrows because they were consistent with past transactions associated with Mexico’s programme for hedging its oil exports, the largest of its kind in commodity markets.
“It really looks a lot like the Mexico programme,” said a banker who has previously helped execute it, even as he emphasised he did not know if it was.
Oil traders scan for hints of Mexico’s secretive annual hedging programme because it can move markets. Mexico’s finance ministry, which oversees the operation, had no immediate comment on the recent trades.
Last year the government paid seven Wall Street banks $773m to lock in the sale of 228m barrels of oil in 2015 at $76.40 per barrel — well above the $49 a barrel its heavy, sour grade has averaged so far this year. The government in April said it again planned to hedge oil exports for 2016.
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We identify six key issues facing investors:
- US economy
- Brinkmanship in Athens
- Cyclical recovery in Europe
- BOJ policy response
- RBA meeting
- Oil prices
The March jobs data was a disappointment. The question is its significance. From a macro point of view, we would not place much emphasis on any one high frequency data point. From a technical point of view, it may encourage a continued consolidation/correction of the dollar’s Q1 gains, not only against the major currencies but also against many emerging market currencies.
The US dollar’s strength in Q1 was not matched be the economic performance. The weakness in Q1 already prompted the Federal Reserve to lower its growth projections, though Yellen has noted that even with the downgrade, it expects above trend growth for the year. The poor employment report is unlikely to change this assessment. The Fed’s Labor Market Conditions Index has already picked up a moderation in the labor market in Q1, where the monthly average has increased by 4.4 compared with 6.5 in Q4 14. The weekly initial jobless claims and continuing claims show underlying strength. The JOLTS report is expected to confirm this. Sectors like construction and leisure/hospitality, which are the most sensitive to weather were exceptionally weak in March.
We are reluctant to read too much into the weakness in Q1 economic activity. Over the last five years, there has been a clear pattern of weakness in the first part of the year. Consider than growth in Q1 has averaged 0.6% (quarterly annualized pace) compared with almost 2.9% for all the other quarters. In three of the five years, growth in Q1 was the slowest for the year (2010, 2011, 2014) and in one year it was the second weakest (2013).
Fed officials have argued that the headwinds in Q1 will prove transitory. This seems to be the most likely scenario. That said, the implications of the jobs report, especially the 0.1% fall in the average work week, suggests the quarter ended on a weak note. This would seem to have already been largely discounted by the market which means that March data may have less impact on prices. There will be headline risk from the minutes from last month’s FOMC meeting, but in terms of policy insight we would put more emphasis on the speeches by the Fed’s leadership in the coming days. NY Fed President Dudley speaks twice in the week ahead, after both Yellen and Fischer have given several speeches since the FOMC meeting.
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As we noted over the weekend when we showed a simple contango math calculation by SocGen according to which storage costs imply another 20% drop in Brent prices, now none other than Goldman – which has been oddly bearish on oil over the past few weeks – says that its Brent forecast remains at $40/bbl for two simple reasons: i) the global inventory glut is set to resume and ii) it’s the weather’s fault there has been a slowdown in the crude build-up.
From Goldman’s Damien Courvalin:
Clear skies after a perfect storm?
The global build in crude inventories has stalled: OPEC disruptions have returned, demand has been strong, refining margins are stellar and product markets are backwardated. And while the build in US inventories has surprised to the upside, E&Ps are exhibiting a faster focus on financial discipline than we had expected. Net, the past month has featured a reversal of the late 2014 perfect storm of bearish catalysts: weak demand, low disruptions and profligate spending. And while this reversal is consistent with a rational and efficient market response to the collapse in oil prices, the contribution of weather and the premature rally keep us expecting that prices will remain below the current forward curve in 2015.
Rather, a sunny spell soon to end
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The Russian ruble has recorded its biggest monthly gain since the early 1990s amid higher oil prices, an easing of the fighting in eastern Ukraine and a less intensive foreign debt repayment schedule as it claws back some of the losses it sustained during panic on currency markets last year.
The ruble climbed 11.5 percent in February to 61.7 against the U.S. dollar. That is the biggest monthly gain for over 20 years, business daily Vedomosti reported Friday citing Bloomberg data.
Over the same period the ruble rose by 13.2 percent to 69 versus the euro.
The rebound comes after the ruble lost about 40 percent of its value against the dollar last year amid dramatic volatility that peaked in December. The ruble dropped another 18.7 percent against the dollar in January.
The apparent stabilization of the currency has dispelled some predictions that the Russian economy is imploding, but experts caution against expectations of the ruble’s return to its early 2014 value, believing that the Russian government backs a weaker currency that is helping offset the impact of low energy prices on state income. >> Read More
08 January 2015 - 12:14 pm
With all the conspiracy theories surrounding OPEC’s November decision not cut production, is it really not just a case of simple economics? The U.S. shale boom has seen huge hype but the numbers speak for themselves and such overflowing optimism may have been unwarranted. When discussing harsh truths in energy, no sector is in greater need of a reality check than renewable energy.
In a third exclusive interview with James Stafford of Oilprice.com, energy expert Arthur Berman explores:
- How the oil price situation came about and what was really behind OPEC’s decision
- What the future really holds in store for U.S. shale
- Why the U.S. oil exports debate is nonsensical for many reasons
- What lessons can be learnt from the U.S. shale boom
- Why technology doesn’t have as much of an influence on oil prices as you might think
- How the global energy mix is likely to change but not in the way many might have hoped
OP: The Current Oil Situation – What is your assessment?
Arthur Berman: The current situation with oil price is really very simple. Demand is down because of a high price for too long. Supply is up because of U.S. shale oil and the return of Libya’s production. Decreased demand and increased supply equals low price. >> Read More
20 December 2014 - 9:20 am
Volatility in emerging Asian sovereign currencies and bonds shows the region remains exposed to contagion from developments elsewhere, Fitch Ratings says.
As was seen during the “taper tantrum” of 2013, there is some tolerance for market turbulence at current rating levels. Volatility per se would only become a rating driver if it started to have an impact on economic and financial stability, and/or the ability of sovereigns to finance themselves. However, episodes of market volatility since the “taper tantrum” suggest external liquidity and policy credibility have become increasingly important rating drivers for emerging Asian sovereigns as global US dollar funding conditions tighten.
Currencies fell and five-year CDS spreads widened for most emerging Asian sovereigns in the second week of December. The Indonesian rupiah and Malaysian ringgit saw notable moves, the former dropping to its lowest level against the dollar since August 1998 and the latter hitting a five-year low. Both currencies rose on 18 December as the ruble and oil prices strengthened and following perceived dovish comments from the Federal Open Market Committee, underscoring how developments beyond Asia-Pacific can drive investor sentiment. The rupiah was also supported by market intervention from Bank Indonesia. CDS spreads narrowed for most Asian sovereigns on 18-19 December. >> Read More
18 December 2014 - 23:57 pm
Robert Mabro, the veteran oil market observer, once said Opec should change its logo to a teabag “because it only works when in hot water”.
If that is the case, the oil producers’ cartel should have sprung into action long ago. Oil prices have fallen almost 50 per cent since mid-June to their lowest level in five-and-a-half years. Yet for the 12-nation group it is business as usual.
Led by Saudi Arabia, its largest producer, the cartel decided at its November meeting to hold output at 30m barrels a day despite calls from poorer members for production cuts to bolster prices.
Seasoned market observers are split on the reasons behind the decision at a time when supply is overwhelming tepid demand and prices are spiralling downwards.
Ali al-Naimi, Saudi Arabia’s oil minister, said on Thursday Opec had sought co-operation from other oil producers on output cuts, but “those efforts were not successful”. So it is pushing ahead with a passive strategy to let the market determine prices. >> Read More