The bear market continues. Another week, another significant loss for oil prices. WTI neared breaking through the psychologically important $40-per-barrel threshold, as a litany of negative news pushed down oil prices. Peak driving season is nearing its end. More importantly, the refining maintenance season is set to begin. That potentially raises two negative forces slamming the markets at once – less oil demand, and more crude supply diverted into storage.
One important global trend to watch is the souring of the emerging market economies. Countries like the BRICs (Brazil, Russia, India, China), and other rapidly growing countries like Turkey, Indonesia, South Africa and Colombia, to name a few, have been a major source of economic growth in the past five years. These countries grew way faster than the developed world, which suffered from stagnant growth and a hangover of the financial crisis.
Much of the growth in emerging markets came from the commodity super-cycle, however, which has now suffered a once-in-a-generation bust. Resource extraction economies (particularly those in Latin America and Africa) capitalized on the voracious appetite for raw materials in India and China. But China’s dramatic slowdown, which could yet turn into something worse, was ill-timed. It is unfolding at the same time that a variety of commodities busted from too much supply: crude oil, natural gas and coal, to name a few.
The problem was summed up this week by the crushing blow inflicted on the share price of Glencore (LONDON:GLEN), the Swiss mining multinational that reported a huge loss this week for the first half of 2015. The stock cratered nearly 10 percent on Wednesday. The yield on Glencore’s bonds has jumped by a percentage point since July to 5.9 percent, an indication that the company’s debt is looking more risky. Glencore mines metals, minerals, oil and coal, and is taking a beating from the slowdown in China.
On top of slowing emerging market economies and the commodity bust is the potential tightening of monetary policy in the U.S., which could strengthen the dollar and depress currencies around the world further. A worldwide sell off in emerging market currencies is devastating market sentiment, and raising serious questions about oil demand. Russia’s ruble, Mexico’s peso, Nigeria’s naira and many others are under increasing pressure. The one thing they all have in common is a dependency on resource extraction and commodity export-driven growth.
In other words, emerging markets may no longer carry the weight of global growth. With the industrialized world still posting unimpressive growth rates, what comes next is unclear. The global economy is showing some significant cracks.
On to more oil news… Canada’s oil industry is under fire from multiyear lows in oil prices. Canada’s oil sands sell at a discount to WTI due to differences in quality and infrastructure bottlenecks, but Canadian grades are selling much lower because of the BP (LONDON:BP) refinery outage in the Midwest. While WTI is selling for around $40 per barrel, Canada’s oil sands are selling for about half of that. Some producers are losing money even on mature projects that only have operational costs. In other words, they are losing money on each barrel sold. Suncor Energy Inc (NYSE:SU), Cenovus Energy Inc (NYSE:CVE), and Canadian Natural Resources Limited (NYSE:CNQ) are just a few of the companies that are seeing their share prices crater. Much of the oil industry is facing major financial pressure from low oil prices, but Canada is probably suffering worse than others.
Moody’s downgraded the credit rating of ConocoPhillips (NYSE:COP) to A2 from A1. “The ratings downgrade reflects Moody's expectation that COP's financial leverage will remain high through 2017, with the company increasing its debt levels to fund negative free cash flow,” Gretchen French, Moody's Vice President, said in a statement. “We positively note that in the face of a weak commodity price environment, COP has taken a number of steps to lower its cost structure, increase its financial and operating flexibility, and maintain a strong liquidity profile. However, the A2 rating positions the company with more flexibility within the rating and relative to its peers.”
The U.S. government held an auction for offshore tracts in the Gulf of Mexico this week and the results were the worst since the early 1980s. Only five companies – led by BHP Billiton Petroleum (LONDON:BLT) – actually submitted bids; a low level of interest. Offshore oil companies are declining to put up the capital to acquire offshore acreage, preferring to focus on their existing holdings and some even looking to sell off assets to survive the downturn. Unlike shale drilling, which can be done in a matter of weeks or months for a few million dollars per well, offshore oil projects can take years to develop, costing billions of dollars. That is a luxury that most companies can’t afford right now.
The oil export debate continues to gain momentum in the United States. This week a key Democratic Senator voiced his support for increased oil exports. Sen. Robert Menendez (D-NJ), once an opponent of oil exports, framed his support as a tool to gain leverage over Iran. Menendez came out against the nuclear agreement that the Obama administration negotiated with Iran, and said that more oil exports would allow the U.S. to renegotiate a stronger deal. His argument ignored the fact that the rest of the international community won’t entertain a return to negotiations. And in any event, Sen. Menendez’s opposition probably won’t kill the deal.
But important for the issue of oil exports was his newfound support for removing the ban. There is growing support on both sides of the aisle to scrap the four decade ban, and the six-year low in oil prices only adds more urgency to the matter.
Nigeria is making strides in cleaning up its corrupt oil sector. New president Muhammadu Buhari has replaced the chief of the National Nigerian Petroleum Corporation with a former Exxon Mobil (NYSE:XOM) executive. From there, the new head of the NNPC got rid of all of the company’s executive directors and officials at related agencies have been forced into retirement or let go. The reshuffling and slimming down of the national oil company are impressive notes of progress for Buhari, who has aimed to create a leaner, business-like company. Another objective is to reduce oil theft, which Buhari has stated has run as high as 250,000 barrels per day. Clear progress on that front remains to be seen.