Tag Archives: Oil Prices

$50 Oil for 15 Years Isn’t What Scares Bank of Russia Governor

Bloomberg, Oct 14, 2015

Elvira NabiullinaElvira Nabiullina

* Slow pace of economic overhaul is bigger worry for Nabiullina
* Russia remains hamstrung by corruption, weak institutions

Fifteen years of oil at $50 a barrel isn’t the worst nightmare for Russian central bank GovernorElvira Nabiullina.

“What worries me more is the pace of reforms in the economy that could stimulate private investment,” Nabiullina, 51, said in a Bloomberg Television interview on Tuesday. “What’s very important is a whole set of conditions to make Russia more attractive to private investments. And what’s worrisome is the pace of such changes.”

It’s a shot across the bow to PresidentVladimir Putin, who’s faced growing pressure from inside and outside the government for new measures to pull the world’s largest energy exporter out of its first recession in six years. While Russia has adjusted to the collapse in oil prices by allowing theruble to lose almost half its value since January 2014 and letting consumer demand bear the brunt of the downturn, its economy remains hamstrung by corruption and inefficiencies.

Russia ranks alongside Nigeria and Kyrgyzstan at 136th, out of 174 countries, in Transparency International’s 2014 ranking of perceived levels of corruption, down from 82nd in 2000, a year after Putin came to power. Its property rights rank 120th and the level of judicial independence 109th of 144 nations in the World Economic Forum’s latest Global Competitiveness Report.

Investment Crash

While compounded by U.S. and European sanctions and turmoil on commodities markets, the slump in Russian investment predates the standoff over Ukraine. It’s now reached 20 months, the longest stretch of declines since at least 1995, when Bloomberg started compiling the figures. September data set to be released next week will show capital spending fell 7.3 percent from a year earlier, according to themedian of 13 estimates in a Bloomberg survey.

The central bank forecasts the economy won’t return to annual growth until 2017, meaning Russia is on track for the longest recession in two decades. Gross domestic product will contract 3.9 percent to 4.4 percent this year and may shrink as much as 1 percent next year, according to a Bank of Russia forecast that projects oil staying at $50 in 2016-2018.

Putin’s Backing

While Putin scolded the central bank last year for not reacting more quickly to the currency crisis, he’s since rarely wavered in his support for Nabiullina, including her switch to a free-floating exchange rate last November. The policy shift was “correct and timely” despite “some negative consequences” for the economy and households, Putinsaid Tuesday at a conference organized by VTB Capital in Moscow.

The Bank of Russiasaid Wednesday that it won’t “artificially restrain the ruble rate,” responding to a report in the Financial Times that the government is discussing limits on how much the currency may strengthen against the dollar to ease the country’s economic dependence on commodities.

What Russia needs is a growth model based on crude prices that “aren’t very high,” according to Nabiullina, a former economy minister in Putin’s cabinet. The government, which relies on oil and gas for almost half of its revenue, is drafting next year’s budget by assuming an average oil price of $50 a barrel.

“The main thing for us now is to learn to live under the conditions of relatively low prices for oil,” Nabiullina said. “That’s the reality for which we must be mentally ready. The financial sector is ready for the reality that forced an adjustment in the balance of payments. Now the economy is adjusting to this reality”

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Shell CEO `Pulling Out All the Stops’ to Safeguard Dividends

Bloomberg, Oct 6, 2015

Ben van Beurden, chief executive officer of Royal Dutch Shell Plc, pauses during a session at the St. Petersburg International Economic Forum (SPIEF) in Saint Petersburg, Russia, on Thursday, June 18, 2015. SPIEF is an annual international conference dedicated to economic and business issues which takes place at the Lenexpo exhibition center June 18-20. Photographer: Andrey Rudakov/Bloomberg *** Local Caption *** Ben van Beurden Ben van Beurden, chief executive officer of Royal Dutch Shell Plc.

* Company also protecting planned share buybacks and investments
* Oil producer hasn’t cut dividend payouts for seven decades

Royal Dutch Shell Plc is “pulling out all the stops” to safeguard its dividend in a world where oil prices remain “lower for longer,” Chief Executive OfficerBen Van Beurden said.

Europe’s biggest oil company is also protecting a plan to buy back shares and keeping its investment program “steady for the future,” Van Beurden said in e-mailed comments before a speech in London on Tuesday.

Oil’s collapse in the past year has forced Shell and its peers to reduce costs, defer projects and hunker down for a prolonged period of low prices. Even with crude trading for about $50 a barrel, Van Beurden andBP Plc bossBob Dudley have made dividends their top priority. Shell has weathered market ups and downs for seven decades — including oil at less than $10 in the 1980s and 1990s — without cutting shareholder payouts.

The company is “geared to generate cash flow from operations and free cash flow in 2017 and beyond,” Van Beurden said. “Shell is planning for a longer period of low prices.”

Shell’s debt-to-equity ratio gives it the flexibility to maintain dividends, he said. The company expects to cut operating costs by about $4 billion, or 10 percent, this year and will reduce capital expenditure by 20 percent. The weakening oil market has forced Shell to shelve projects including an oil-sands mine in Canada and a liquefied natural gas terminal in Australia.

The oil slump drove Shell’s annual dividend yield to 8.1 percent on Sept. 28, the highest in at least 20 years. The measure — the annual return divided by the share price — was at 7.2 percent on Monday compared with 4.1 percent for the benchmarkFTSE 100 Index.

Some oil majors have mitigated the impact of crude’s decline by bolstering the share of natural gas in their output. The Hague-based Shell and Paris-based Total SA now produce more gas than oil and have promoted the fuel as a cleaner alternative to coal, which dominates electricity output worldwide.

“Gas is a fossil fuel, yes, but a crucial one for the building of a low-carbon future,” Van Beurden said. “When burnt for power, gas produces around half the CO2 and one-tenth of air pollutants that coal does.”

Carbon Pricing

The CEO reiterated his call for governments to put a price on carbon to “level the playing field for renewables” and gas.

Shell and Total were among six European oil companies thatcame together in May to call for carbon pricing as a way to spur cleaner energy production. In a letter to the United Nations’ top official in charge of climate talks, they said climate change was a “critical challenge for our world” and urged global leaders to set out long-term, ambitious policies.

“Governments should take the opportunity to put a price on carbon,” Van Beurden will say on Tuesday. “The issue is essentially about finding economic ways to invest in an energy transition.”

Almost 200 nations are set to hammer out a binding global agreement on carbon emissions in December during talks in Paris.

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Norway Seen Tapping Its Wealth Fund to Ward Off Oil Risks

Bloomberg, Oct 5, 2015

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* Oil wealth spending may outstrip petroleum income in 2016: DNB
* Government may be forced to make first withdrawal from fund

For Norway, the future may already be here.

The nation could as soon as next year start making withdrawals from its massive $830 billion sovereign wealth fund, which it has built over the past two decades as a nest egg for “future generations.” The minority government will reveal its budget plans on Wednesday and has flagged new spending measures and tax cuts.

Prime MinisterErna Solberg is trying to avoid a recession as a slump in the nation’s key commodity takes its toll on the $500 billion oil-reliant economy. Norway has already spent recent years using a growing chunk of its oil revenue to plug deficits while at the same time building the wealth fund. Now, with tax revenue from petroleum extraction down 42 percent on last year, budget spending in 2016 will probably outstrip income.

“We have reached a point where we will from now on see that the oil-corrected balance will be above the cash flow — that’s based on oil prices increasing slowly in the future,” saidKyrre Aamdal, senior economist atDNB ASA in Oslo. Tapping the fund’s returns marks a turning point that wasn’t expected to come for “several more years,” he said.

The government said in May its non-oil budget deficit, or spending in real terms, would be a record 180.9 billion kroner ($21.6 billion). With its crude output waning and prices falling, the government saw petroleum income dropping to 251.6 billion kroner this year, almost 30 percent lower than its October projections. Those estimates assumed oil at about $69 a barrel. Brent crude has averaged $56 so far this year.

Brent crude traded at $49.13 per barrel as of 8:20 a.m. in London.

The decline in oil prices has sent the krone down 13 percent over the past 12 months. Only the Brazilian real has performed worse.

Taxes collected on petroleum extraction reached 138 billion kroner in the first three quarters of the year, down from 238.2 billion kroner in the same period a year earlier, according to Statistics Norway.

Tapping the fund to cover budget needs comes at a time when the managers of the fund, set up to safeguard the wealth of future generations, warn that it alsofaces diminished returns ahead amid record-low interest rates.

Government officials and economists contend that only investment returns from the fund will be used for the budget, meaning it will not actually shrink in size. By using interest and dividends to cover the deficit, “no one will ever need to break the piggy bank,” saidKnut Anton Mork, senior economist atSvenska Handelsbanken AB in Oslo.

Oeyvind Schanke, chief investment officer for asset strategies at the Oslo-based fund, said in an interview last month it will be able touse the cash it gets from dividends and bond interest payments to make shifts in the portfolio, rather than having to sell assets.

But capital coming into to the fund has alreadystarted to dwindle. Inflows were just 17 billion kroner in the first half of this year, compared with a quarterly average of 60 billion kroner over the past 10 years.Central bank GovernorOeystein Olsen, who oversees the fund as head of the bank’s board, said in February that oil around $60 would mean transfers to the fund “may come to a halt.”

The government on Wednesday is also scheduled to release a proposal for tax reforms and outline how the wealth fund should implementa ban on investing in coal companies, which goes into effect Jan. 1.

“There is room for more active fiscal policy to stimulate in downturns,” DNB’s Aamdal said. He sees the government’s structural non-oil deficit rising by 31 billion kroner from last year.

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Kazakhstan Raises New Key Rate to 16% to Stem Currency Swings

Bloomberg, Oct 2, 2015

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* Kazakh currency is world’s most volatile after free-float move
* Central bank introduced new benchmark interest rate last month

Kazakhstan’s central bank raised its new base interest rate to tame the world’s most volatile currency, the tenge, which has struggled to find balance since policy makers moved to a free-floating exchange rate in August.

The overnight repo rate, which was set as the new benchmark after the central bank abandoned the currency peg, was increased to 16 percent from 12 percent, according to a statement on Friday.

Kazakhstan’scentral bank has been grappling with the effects of currency fluctuations after cutting the tenge loose to help companies compete with China and Russia, the central Asian country’s two largest trading partners. Thetenge, which had traded in a band around 185 to the dollar, has swung between 208 and 300 per dollar since August, and the central bank has spent more than $1 billion to smooth the fluctuations.

Policy makers have argued that there are no “fundamental macroeconomic factors” that could cause the tenge’s volatility. The central bank will act to smooth the tenge’s movements, though it won’t fight the trend if oil prices continue to decline, GovernorKairat Kelimbetov said in an interview with Panorama newspaper on Sept. 18.

The ruble has fallen 40 percent in the past 12 months as oil lost half its value, while the tenge is down 33 percent in that period.

Tenge, Inflation

While the weaker tenge helps local companies stay competitive, it also threatens to spur consumer prices. Annual inflation quickened to 4.4 percent in September, the fastest in five months.

Policy makers predict inflation will exceed the central bank’s medium-term target of 6 percent to 8 percent, while the government seeks to keep the rate below 10 percent this year. Consumer-price growth is likely to accelerate to 8.2 percent in December as the devaluation effect kicks in, according to Danske Bank A/S.

Still, while inflation remains low “we do not exclude further monetary easing, which would support the economy in 2016,” saidVladimir Miklashevsky, an economist at Danske Bank in Helsinki. “The dollar-tenge rate is still searching for a new equilibrium and the August devaluation will accelerate inflation in the near future.”

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Oil Speculators Most Bullish on U.S. Crude Price in Two Months

Bloomberg, Sep 21, 2015

best_chartOPEC Speculates $80 Oil by 2020.

* U.S. crude output seen falling the most since 1989 next year
* Almost 15,000 short oil bets closed out before Fed decision

Hedge funds slashed their bets on falling oil prices, leaving them the most bullish on U.S. crude futures in two months.

Money managers’net-long position in West Texas Intermediate rose by 14,821 contracts to 147,678 futures and options in the week ended Sept. 15, according to data from the Commodity Futures Trading Commission. That’s the highest level since July 7. In contrast, traders curbed their bullish positions in European benchmarkBrent by the most in a month.

The Organization of Petroleum Exporting Countries assumes crude prices will rise to $80 by 2020 as output falls elsewhere. U.S. production could sink by the most in 27 years in 2016 as the price rout extends a slump in drilling. Speculators closed out short positions two days before the Federal Reserve decided not to raise key U.S. interest rates.

“The market’s not as oversupplied as we think it is,”David Pursell, a managing director at investment bank Tudor Pickering Holt & Co. in Houston, said in a phone interview. “The news out of OPEC is more bullish, U.S. production is falling and demand is great right now.”

The U.S. benchmarkoil contract fell 2.9 percent in the report week to $44.59 a barrel on the New York Mercantile Exchange. Prices were up 3.4 percent at $46.19 as of 12:53 p.m.

Production Drop

OPEC assumes crude prices will rise by about $5 a year through 2020. Production from nations outside the group will be 58.2 million barrels a day in 2017, 1 million lower than previously forecast, according to an internal report. The impact of low prices is “most apparent on tight oil, which is more price reactive than other liquids sources,” according to the report.

U.S. output could sink by 400,000 barrels a day next year after a prolonged period of low prices forced producers to idle more than half the rigs seeking oil, the International Energy Agency said in a monthly report. That would be the largest one-year decline since 1989, according to U.S. government data.

“There is quite a discernible shift in sentiment because production declines are quite high,”Amrita Sen, chief oil market analyst for Energy Aspects Ltd. in London, said by phone. “There’s a realization that U.S. production is rolling over.”

Money managers reducedshort positions, or bets that prices will fall, by 14,569 contracts, CFTC data showed.Long positions, or bets on rising prices, increased by 252.

Other Markets

In London, money managers reduced their net-long position in Brent crude by 6,612 contracts to 161,846 in the period to Sept. 15, data from the ICE Futures Europe exchange showed on Monday.

In other markets, netbullish bets on Nymex gasoline rose 3.5 percent to 16,562, CFTC data show.Futures fell 4.9 percent to $1.3329 a gallon. Netbearish wagers on U.S. ultra low sulfur diesel expanded by 12 percent to 28,057 contracts. Dieselfutures dropped 5.9 percent to $1.50 a gallon.

The Fed decided not to increase rates for the first time in almost a decade as Fed Chair Janet Yellen said slower growth in China, the second biggest oil-consuming country after the U.S., contributed to volatility across markets and that overall financial conditions have tightened.

“By Tuesday, money managers were closing out their short positions because of the expectation that the Fed would leave rates unchanged, which they worried would mean the dollar stays weaker and commodity prices rise,”Andy Lipow, president of Lipow Oil Associates LLC, said by phone from Houston.

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