Thursday, January 07, 2016

Oil Rout Extends Brent Crude’s 11-year Low
Neil Hume, David Sheppard and Anjli Raval
Financial Times

Brent crude sank to a fresh 11-year low beneath $33 a barrel in a continuation of the oil price rout on Thursday, with concerns about the Chinese economy triggering further selling by nervous investors.

The international oil marker fell as much as 6 per cent to $32.16 after China let the renminbi depreciate further in an effort to boost its slowing economy, a move that sparked a 7 per cent slide in its stock market.

China has been the engine of demand growth for the oil market during the past decade, rising from a bit-part player to overtake the US as the largest importer of crude and refined products in the world.

Beijing has also been buying millions of barrels for its strategic petroleum reserve.

“In the absence of any bullish catalysts, global oil prices continue to slide,” said Michael Wittner, analyst at Société Générale.

Other commodities were also hit hard by the turmoil in China. Copper, which is crucial to the profitability of mining houses such as Glencore, fell $129 to $4,491 a tonne, nickel $320 to $8,360 and zinc $55.50 to $1,489.

UK mining and energy shares fell, with Anglo American extending its record low by 9 per cent, and Antofagasta, the Chilean copper miner, and BHP Billiton, the Australian diversified miner, both down 5 per cent.

On the other side of the Atlantic, US oil prices slid to $32.10 — the lowest intraday level since December 2003 — before recovering to $32.82 a barrel. Spot prices for heavier grades of crude from the Canadian tar sands have fallen to less than $20 a barrel.

Elsewhere, the Opec basket price, made up of 13 different grades of members’ crude, dropped below $30 a barrel for the first time in 12 years on Wednesday from $31.21 the previous day.

One of the only commodities to gain was gold, which is viewed by some investors as a store of value.

The spot price rose 0.25 per cent to $1,096 a troy ounce.

“Gold is holding above its 50-day moving average in spite of a stronger dollar, helped by lower US yields and physical demand,” said UBS strategist Joni Teves. “Gold’s performance amid broader risk-off sentiment could be an opportunity to regain investor interest.”

A global supply glut has seen the price of oil drop by 72 per cent since the downturn began in the summer of 2014, shredding the budgets of oil-producing countries and forcing energy companies to reassess hundreds of billions of dollars in future spending plans.

The past 18 months now rank as one of the worst routs in oil market history, approaching the 75 per cent peak-to-trough decline seen during the financial crisis in 2008 and a 61 per cent drop in 1990-91 around the Gulf war.

“Rising inventories remain a key price burden for crude oil in the short term,” said Giovanni Staunovo, commodities analyst at UBS Wealth Management. “The market’s desire to see more immediate production adjustments may push prices deeper.”

Traders said concerns about demand growth in the US were also emerging after reports showed manufacturing activity slowing and the largest weekly increase in petrol stocks since 1993.

While traders cautioned the 10.6m barrel jump in US petrol stocks was at least partly due to year-end inventory management at refineries, investors are nervous about any signs of slowing demand.

Analysts at JBC Energy in Vienna said: “The oversupply already affecting large parts of the oil complex could now also be filtering into gasoline markets, which have been a rare positive feature of the recent oil market.”

Adding to the bearish tone, traders picked up on comments made by the chief financial officer of Shell who said the oil price could fell below $30 a barrel.

“Mr Henry repeated comments from a media interview earlier in the week that in the short term the oil price could well continue to fall from current levels to below $20/bl, or at least that’s what the Shell traders are telling their chief financial officer,” Barclays said in a report.

Oil price plunge curbs capital raising

Ed Crooks in New York
Financial Times

Capital raising by US independent oil companies slowed sharply in the second half of last year, in a sign of the growing financial pressure on the sector following the plunge in crude and natural gas prices.

US exploration and production companies raised just $3.26bn from equity sales, down from $14.6bn in the first half, according to Dealogic, the information service.

The companies, which led the US shale oil and gas boom over the past decade, also raised $4.57bn from issuing bonds from July to December, down from $23.9bn in the first half.

Financial constraints are forcing companies to continue to cut capital spending, which is expected to result in lower US oil production.

Pioneer Natural Resources, one of the larger US E&P companies, on Wednesday raised $1.4bn from selling shares, but it has low debts compared to many of its peers, and attractive assets in the Permian Basin of west Texas, which it says can earn good returns even at today’s oil prices.

Rob Santangelo, co-head of Americas equity capital markets solutions at Credit Suisse, one of the banks that worked on the Pioneer share sale, said investors were differentiating between companies.
“The stronger companies will continue to have access to the capital markets,” he said.

Of the three principal US shale oil regions, the Permian Basin has held up the best in the oil price slump. Production has risen by 19 per cent in the past year, compared to falls from their peaks of 13 per cent in the Bakken formation of North Dakota and 30 per cent in the Eagle Ford shale of south Texas.

Brent crude sank to a fresh 11-year low beneath $33 a barrel in a continuation of the oil price rout on Thursday, with concerns about the Chinese economy triggering further selling by nervous investors.

Other US oil companies focused on the Permian Basin have issued new shares in recent months, including Concho Resources, which raised $712m in October, and Parsley Energy, which raised $202m in December.

The continued decline in oil and gas prices in 2015 meant that many shares and bonds sold in the first half of the year are trading well below their issue prices.

Whiting Petroleum sold shares last March at $30. They were trading at about $7.90 on Thursday morning.

Halcon Resources raised $700m in April by selling senior secured notes, which this week were trading at 69 cents on the dollar.

The tighter financial constraints on US oil companies are expected to mean more bankruptcies and merger and acquisition activity.

The pace of bankruptcies was already picking up last year, with 13 North American oil producers going bust in the first half of 2015 and 28 in the second half, according to Haynes and Boone, a law firm.

RT Dukes of Wood Mackenzie, a consultancy, said he expected more companies to sell assets to shore up their finances, or to accept takeover bids.

“Capital is a lot more expensive now, and that’s a big part of what will drive the M&A market this year,” he said.

One source of capital that could become increasingly important this year is private equity. Private capital funds last year raised $57bn to invest in energy, according to Preqin, a data service, and more is being raised this year.

Financial sponsors such as private equity invested only $3.6bn in US exploration and production companies in 2015, according to Dealogic.

Mr Santangelo said: “It’s going to be tight for a while, but companies with good assets and good balance sheets have a good outlook for the medium to long term.”

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