The rally in oil prices sparked by several mentions of possible production cuts by Opec (Organisation of Petroleum Exporting Countries)-related ministers may not be sustainable until full cooperation is obtained from Opec and non-Opec members.
“Oil price volatility is here to stay until we see committed and concerted efforts by both Opec and non-Opec members to cut production in the oil rebalancing market,’’ said independent economist Lee Heng Guie.
There have been various reports on overtures made by the more desperate non-Opec members to cut production and conflicting reports of an accord between Russia and Opec members on the similar issue. Even the CEO of Russian oil giant Rosneft, Igor Sechin, had recently changed his tone, that he could possibly be open to output cuts. But most of the time, these reports were denied or not followed through and oil price sank back to their doldrums as the world is said to be drowning in oversupply.
Market players point out that there is too much distrust between de facto Opec leader and top oil exporter Saudi Arabia and No. 1 producer Russia, which had agreed to cuts in the past, but had only enacted very small ones in reality, said CNBC. The view is that Saudi Arabia will not be content until it has inflicted enough pain on its competitors, particularly US drillers.
At this stage, Russian producers are technically unable to reduce production right now because temperatures are so cold, said CNBC. Market players also believe technological innovation in the American oil patch has broken the established order in crude markets.While some see these reports on potential production cuts to be speculative, others believe that it is inevitable that major oil producers will have to meet.
“It’s an eventuality (that they will get together and talk on possible production cuts) if oil prices continue to fall.’’ said Vincent Khoo, head of research, UOBKayhian. In the short term, oil price is expected to be range bound between US$30 and US$40 per barrel unless total agreement on production cut is obtained from every major producer, said Danny Wong, CEO, Areca Capital.
“This is an opportunity to bottom fish before things improve in the second half. We have not seen oil prices at such low levels for a long time; like Warren Buffet’s investment style, we can consider accumulating oil-related stocks when most have lost hope,’’ said Wong.
Was the December US interest rate hike a mistake? Further rate hikes seem to be on hold as falling world stock markets and slowing economic growth prompt a relook at other tools that the US central bank may employ. In her testimony last week, Fed chair Janet Yellen told lawmakers she was studying ways to “be prepared” should falling world stock markets, concern about financial sector stress, and slowing economic growth translate into a recession or another financial crisis. Despite the possibility that US rate hikes may be on hold, emerging markets have little to cheer about.
“Yellen’s words of caution underlies the vulnerability of the global and US economy to continued financial volatility. Emerging markets are highly susceptible to external headwinds including event and policy risks in China, given the uncertainty over the yuan exchange rate policy,’’ said Lee. “At present, the focus is on oil price and China which may prompt investors to seek safe haven assets. It may take some time for the dust to settle before funds return to emerging markets,’’ said Wong.
Will the Fed have to abandon its interest rate normalisation path? “Yellen’s wait-and-see approach means that a March increase in interest rates is now off the agenda, but the Fed will require more evidence before abandoning its strategy of cautious tightening. With the spectre of 2008 looming larger, that evidence may not be long in coming,’’ wrote Larry Elliot in The Guardian. “She has lost quite a lot of credibility in the US Senate hearing,’’ said Pong who had held the view that patches of weak data in the US economy indicated a more cautious approach to raising rates.
Banking stocks in Europe and the US have come under a lot of pressure lately. China, emerging markets, the eurozone, oil and commodities are the five fears stalking the banking industry, said The Guardian.
In China, huge private debt, unfinished property and infrastructure projects and a stockmarket dominated by individual investors are among some of the concerns. Among emerging markets, Brazil is in recession; Nigeria, Russia and the Middle Eastern oil producers are badly hit by falling prices; heavy debtors Turkey, South Africa and Mexico are braced for corporate insolvencies in the wake of future US rate hikes; Malaysia, Thailand and South Korea, which depend on trade with China’s manufacturing sector, are facing a slowdown.
The European Central Bank has cut its ultra low main interest rate. While stock markets have welcomed cheaper borrowing costs, fears that European banks have returned to their bad old ways and become embroiled in risky lending has come to dominate discussions in the City, said The Guardian.
The debts in the oil industry are mind-blowing. The exposure to the oil sector of US and European banks amounts to about US$250bil although big losses on that money are unlikely, said The Guardian, quoting JP Morgan. The oil industry had US$455bil of bonds outstanding in 2006, but that figure increased to US$1.4 trillion by 2014, according to the Bank for International Settlements.
Oil companies had US$1.6 trillion of syndicated loans in 2014, although that does not take into account repayments or loans that were never drawn. Now that oil prices have tumbled, those debts look increasingly unsustainable, said The Guardian. In commodities, about US$2 trillion in bonds have been issued by mining companies since 2010, with many now rated as junk, said The Guardian, quoting Moody’s.
One of the hardest hit has been commodities giant Glencore, which has US$36bil of net debt and a market value of US$20bil. The financial sector’s exposure to Glencore could be as high as US$100bil, said The Guardian, quoting Bank of America. Glencore has insisted that it has plenty of financial room for manoeuvre if things get tight and it has since moved to cut its debts.
Among other commodities, copper price has more than halved to below US$2 per lb since 2011. China’s slowdown means that copper, used in electrical wiring among other things, is not in such demand. The economy of some countries such as Zambia, are built almost entirely on copper. Low metal prices could force mining-dependent countries to default on their debts.
There have been at least 31 profit warnings posted by Singapore-listed companies since the start of the year. Out of that, roughly a third, or at least nine warnings, were from companies that are either in the offshore and marine (O&M) sector or serve the industry. These O&M firms are not likely to be the last to warn of poor earnings, said The Singapore Business Times, quoting analysts.
More O&M firms in Singapore could take writedowns in the coming months following substantial capital expenditure cuts by upstream players. Columnist Yap Leng Kuen sees the world swirling in spiral effects from major economic and financial developments.
