Tag Archives: Oil

Junk-Bond Risk Gauge Jumps as China Meltdown Adds to Energy Rout, by Sridhar Natarajhan and Michelle Davis

Posted on January 8, 2016 | Leave a comment

From Sridhar Natarajan and Michelle Davis at blomberg.com:

Premium on high-yield debt approaching most in three years

The goal is to `avoid land mines’ with oil at 12-year low

Junk-bond investors coming off their first losing year since 2008 are in the crosshairs again, as a stock-market meltdown in China and a plunge in oil prices cloud the outlook for debt sold by the least credit-worthy companies.

The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, surged as much as 21 basis points to 516 basis points, rising toward the highest mark in three years. The average borrowing costs for the riskiest portion of the high-yield market surged to 18.4 percent, Bank of America Merrill Lynch index data show, a level not seen since 2009.

“The whole world’s interrelated and you can’t get around that,” said Andrew Brenner, head of international fixed income for National Alliance Capital Markets in New York. “High-yield’s going to be under pressure just because oil’s under pressure. And you’re having this whole risk-off situation.”

The price of crude has plunged 10 percent this week and touched its lowest level since 2009, pushing the relative yield on energy-company debt to more than 13.5 percentage points, Bloomberg indexes show. The industry, which is clocking its worst performance on record, makes up about 15 percent of the junk-bond gauge.

‘Pointing Negative’

“With commodities, there are 10 things that can go right or wrong, and right now almost all of them are pointing negative,” said John McClain, a portfolio manager at Diamond Hill Capital Management Inc., in Columbus, Ohio, which oversees about $17 billion. “You want to avoid land mines in this market. You don’t want to be a hero. It’s not a time to reach.”

The People’s Bank of China cut the yuan’s reference rate against the dollar by 0.5 percent on Thursday, the biggest since Aug. 13, two days after a surprise devaluation. The Shanghai Composite Index tumbled 7.3 percent before trading was halted by new circuit-breakers that some criticized for exacerbating declines.

Later, the nation’s regulator said it was suspending the circuit-breakers.
China’s central bank further spooked the market when it announced that foreign-exchange reserves posted the first annual drop since 1992, spurring concern that capital flight from the world’s second-largest economy is accelerating.

To continue reading: Junk-Bond Risk Gauge Jumps 

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One Map That Explains the Dangerous Saudi-Iranian Conflict, by Jon Schwarz

Posted on January 8, 2016 | 1 comment

From Jon Schwarz on a guest post at theburningplatform.com:

The Kingdom of Saudi Arabia executed Shiite Muslim cleric Nimr al-Nimr on Saturday. Hours later, Iranian protestors set fire to the Saudi embassy in Tehran. On Sunday, the Saudi government, which considers itself the guardian of Sunni Islam, cut diplomatic ties with Iran, which is a Shiite Muslim theocracy.

To explain what’s going on, the New York Times provided a primer on the difference between Sunni and Shiite Islam, informing us that “a schism emerged after the death of the Prophet Muhammad in 632” — i.e., 1,383 years ago.

But to the degree that the current crisis has anything to do with religion, it’s much less about whether Abu Bakr or Ali was Muhammad’s rightful successor and much more about who’s going to control something more concrete right now: oil.

In fact, much of the conflict can be explained by a fascinating map created by M.R. Izady, a cartographer and adjunct master professor at the U.S. Air Force Special Operations School/Joint Special Operations University in Florida.

What the map shows is that, due to a peculiar correlation of religious history and anaerobic decomposition of plankton, almost all the Persian Gulf’s fossil fuels are located underneath Shiites. This is true even in Sunni Saudi Arabia, where the major oil fields are in the Eastern Province, which has a majority Shiite population.

As a result, one of the Saudi royal family’s deepest fears is that one day Saudi Shiites will secede, with their oil, and ally with Shiite Iran.

This fear has only grown since the 2003 U.S. invasion of Iraq overturned Saddam Hussein’s minority Sunni regime, and empowered the pro-Iranian Shiite majority. Nimr himself said in 2009 that Saudi Shiites would call for secession if the Saudi government didn’t improve its treatment of them.

The map shows religious populations in the Middle East and proven developed oil and gas reserves. Click to view the full map of the wider region. The dark green areas are predominantly Shiite; light green predominantly Sunni; and purple predominantly Wahhabi/Salafi, a branch of Sunnis. The black and red areas represent oil and gas deposits, respectively.

Source: Dr. Michael Izady at Columbia University, Gulf2000, New York

As Izady’s map so strikingly demonstrates, essentially all of the Saudi oil wealth is located in a small sliver of its territory whose occupants are predominantly Shiite. (Nimr, for instance, lived in Awamiyya, in the heart of the Saudi oil region just northwest of Bahrain.) If this section of eastern Saudi Arabia were to break away, the Saudi royals would just be some broke 80-year-olds with nothing left but a lot of beard dye and Viagra prescriptions.

To continue reading: One Map That Explains the Dangerous Saudi-Iranian Conflict

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Lower Oil Prices Are Shaking the World, by Larry Kummer

Posted on December 26, 2015 | Leave a comment

By Larry Kummer, editor of the Fabius Mexiumus website, at wol street.com:

The long-term effects will echo for a decade or more.

Oil prices fell by over half from June 2014 to January 2015 (Brent: $110 to $50), then another one-third since (to $35). Natural gas and coal prices have also plunged, partially due to the same forces but also from substitution.

These are the results from a modest slowing of demand growth and — more importantly — the decision of the Saudi Princes to wage the first financial war against next-gen oil producers, those that tap oil sands, shale fields, and deep ocean deposits.

This is how Bloomberg put it:

Saudi Arabia won’t be satisfied with another temporary rebound in oil prices, such as the one that occurred last spring: Their U.S. competitors would just increase output again. They must inflict permanent damage by demonstrating to investors that with shale, they can’t bet on any kind of predictable return.

This will not end quickly; the list of casualties will be long. Goldman found $1 trillion in “stranded” or “zombie” investments in oil fields — a year ago at $70 oil. At $35 oil the total would be much larger.

The end will come with the bankruptcy or restructuring of many next-gen oil corporations, followed by a newly empowered (and perhaps expanded) OPEC cutting production to bring spare capacity back to average (3 or 4 million b/day) — providing a valuable production cushion for the world economy’s supply of this vital input. The long-term effects will echo for a decade or more: a higher cost of capital for and depressed risk-taking in the petroleum and coal industries.

The bond market has already begun to price in the coming bankruptcies of oil and natural gas Exploration and Production companies. But the geopolitical implications remain largely unexplored.

To continue reading: Lower Oil Prices Are Shaking the World

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“Secret” Norwegian Report Details ISIS-Turkey Oil Trade As UN Vows To “Cut Off” Terrorist “Funding Sources, by Tyler Durden

Posted on December 19, 2015 | Leave a comment

From Tyler Durden at zerohedge.com:

“The resolution gives us more flexibility to go after those who are helping Isil [Isis], whether to move funds, to store funds or to earn funds”.

That’s from Adam Szubin, undersecretary for terrorism and financial intelligence at the US Treasury. Szubin is referencing a Security Council resolution proposed by Washington and Moscow that calls for a crackdown on Islamic State’s access to the international financial system.

As FT reports, the “rare meeting of Security Council member finance ministers also resolved to press other nations to enforce more rigorously existing rules that are designed to limit the flow of revenues, fighters and equipment to the Islamist militant group.”

And here’s a bit of largely meaningless rhetoric from the UN itself:

At its first ever meeting at Finance Ministers’ level, the United Nations Security Council today stepped up its efforts to cut off all sources of funding for the Islamic State in Syria and Iraq (ISIL) and other terrorist groups, including ransom payments, no matter by whom.

The Council also called on Member States to promote enhanced vigilance by persons within their jurisdiction to detect any diversion of explosives and raw materials and components that can be used to manufacture improvised explosive devices or unconventional weapons, including chemical components, detonators, detonating cord, or poisons.

“They (the terrorists) are agile and have been far too successful in attaining resources for their heinous acts,” Secretary-General Ban Ki-moon told the Council at the start of the debate. “As Da’esh (another name for ISIL) and other terrorist groups disseminate their hateful propaganda and ratchet up murderous attacks, we must join forces to prevent them from acquiring and deploying resources to do further harm,” he stressed.

Yes, “we must” keep the terrorists from “acquiring and deploying resources to do further harm.” The reason we call that “meaningless” rheotric is that it’s an insult to anyone who knows anything about the role some UN members play in financing and supplying ISIS.

Take this statement for instance: “The Council also called on Member States to promote enhanced vigilance by persons within their jurisdiction to detect any diversion of explosives and raw materials and components that can be used to manufacture improvised explosive devices or unconventional weapons, including chemical components.”

Well, for starters, we know that ammonium nitrate flows from Akcakale across the border to the Syrian town of Tel Abyad which has fallen into ISIS hands on a number of occasions. From a The New York Times piece published in May:

Ammonium nitrate has been a vital ingredient in some of the world’s most notorious terrorist attacks, including the bombing of the Oklahoma City federal building in 1995 and the bombings of the United States Embassies in Tanzania and Kenya in 1998.

It has also been widely used by militants in Iraq and Afghanistan, and by the Islamic State.

A bomb filled with about 45,000 pounds could damage 16 city blocks, Dr. John Goodpaster, a forensic chemist at Indiana University-Purdue University Indianapolis said, adding that there appeared to be at least 55,000 pounds in the pile of sacks waiting to enter the crossing [between Akcakale and Tel Abyad].

“That is a definite concern,” he said.

Turkish officials failed to explain why the substance was allowed to cross.

To continue reading: “Secret” Norwegian Report Details ISIS-Turkey Oil Trade

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When It Rains It Pours as China Unleashes Commodity Torrent, by Heesu Lee

Posted on December 9, 2015 | Leave a comment

From Heesu Lee at bloomberg.com:

Net oil-product exports surge to record; aluminum, steel rise
Flood threatens global producers, prompts trade disputes

There’s no let-up in the onslaught of commodities from China.

While the country’s total exports are slowing in dollar terms, shipments of steel, oil products and aluminum are reaching for new highs, according to trade data from the General Administration of Customs. That’s because mills, smelters and refiners are producing more than they need amid slowing domestic demand, and shipping the excess overseas.

The flood is compounding a worldwide surplus of commodities that’s driven returns from raw materials to the lowest since 1999, threatening producers from India to Pennsylvania and aggravating trade disputes. While companies such as India’s JSW Steel Ltd. decry cheap exports as unfair, China says the overcapacity is a global problem.

“It puts global commodities producers in a bad situation as China struggles with excess supplies of base metals, steel and oil products,” Kang Yoo Jin, a commodities analyst at NH Investment & Securities Co., said by phone from Seoul. “The surplus of commodities is becoming a real pain for China and to ease the glut, it’s increasing its shipments overseas.”

To continue reading: China Unleashes Commodity Torrent

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OPEC Is Dead——-R.I.P. by Ambrose Evans-Pritchard

Posted on December 6, 2015 | Leave a comment

From Ambrose Evans-Pritchard at The Telegraph via davidstockmanscontracorner.com:

The Opec cartel is to continue flooding the world with crude oil despite a chronic glut and the desperate plight of its own members, demanding that Russia, Kazakhstan and other producers join forces before there can be output cuts.

Brent prices tumbled almost $2 a barrel to $42.90 as traders tried to make sense of the fractious Opec gathering in Vienna, which ended with no production target and no guidance on policy. It reeked of paralysis.

Prices are poised to test lows last seen at the depths of the financial crisis in early 2009. The shares of oil companies plummeted in London, and US shale drillers went into freefall on Wall Street.

Oil tankers are lined up off the cost of Texas, a flotilla of crude storage across the world Photo: Alamy

“Lots of people said Opec was dead. Opec itself has just confirmed it,” said Jamie Webster, head of HIS Energy.

To continue reading: OPEC Is Dead—R.I.P.

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Russia Presents Detailed Evidence Of ISIS-Turkey Oil Trade, by Tyler Durden

Posted on December 3, 2015 | 1 comment

Turkey’s President Recep Tayyip Erdogan has said he will resign if anyone produced proof that Turkey was involved with smuggling oil from ISIS. Judge for yourself, but it appears Russia has done just that (not that the Russians are completely trusthworthy in such matters). As of 11:24 A.M., MST, there has been no announcement of Erdogan’s resignation. From Tyler Durden at zerohedge.com:

On Monday, Turkey’s sultan President Recep Tayyip Erdogan said something funny. In the wake of Vladimir Putin’s contention that Russia has additional proof of Turkey’s participation in Islamic State’s illicit crude trade, Erdogan said he would resign if anyone could prove the accusations.

Now obviously, conclusive evidence that Ankara is knowingly facilitating the sale of ISIS crude will probably be hard to come by, at least in the short-term, but the silly thing about Erdogan’s pronouncement is that we’re talking about a man who was willing to plunge his country into civil war over a few lost seats in Parliament. The idea that he would ever “step down” is patently absurd.

But that’s not what’s important. What’s critical is that the world gets the truth about who’s financing and facilitating “Raqqa’s Rockefellers.” If a NATO member is supporting this, and if the US has refrained from bombing ISIS oil trucks for 14 months as part of an understanding with Erdogan, well then we have a problem. For those who need a review, see the following four pieces [CLICK LINK TO ORIGINAL STORY FOR LINKS]:

• The Most Important Question About ISIS That Nobody Is Asking
• Meet The Man Who Funds ISIS: Bilal Erdogan, The Son Of Turkey’s President
• How Turkey Exports ISIS Oil To The World: The Scientific Evidence
• ISIS Oil Trade Full Frontal: “Raqqa’s Rockefellers”, Bilal Erdogan, KRG Crude, And The Israel Connection

Unfortunately for Ankara, The Kremlin is on a mission to blow this story wide open now that Turkey has apparently decided it’s ok to shoot down Russian fighter jets. On Wednesday, we get the latest from Russia, where the Defense Ministry has just finished a briefing on the Islamic State oil trade. Not to put too fine a point on it, but Turkey may be in trouble.

First, here’s the bullet point summary via Reuters:

RUSSIA’S DEFENCE MINISTRY SAYS RUSSIA’S AIR STRIKES IN SYRIA HELPED TO ALMOST HALVE ILLEGAL OIL TURNOVER

RUSSIA’S DEFENCE MINISTRY SAYS TURKISH PRESIDENT AND FAMILY INVOLVED IN BUSINESS WITH ISLAMIC STATE OIL

RUSSIAN DEFENCE MINISTRY SAYS WILL CONTINUE STRIKES IN SYRIA ON ISLAMIC STATE OIL INFRASTRUCTURE

RUSSIA’S DEFENCE MINISTRY SAYS KNOWS OF THREE ROUTES BY WHICH ISLAMIC STATE OIL IS DIRECTED TO TURKEY

RUSSIAN DEFENCE MINISTRY SAYS TO PRESENT NEXT WEEK INFORMATION SHOWING TURKEY HELPING ISLAMIC STATE

That’s the Cliff’s Notes version and the full statement from Deputy Minister of Defence Anatoly Antonov is below. Let us be the first to tell you, Antonov did not hold back.

In the opening address, the Deputy says the ISIS oil trade reaches the highest levels of Turkey’s government. He also says Erdogan wouldn’t resign if his face was smeared with stolen Syrian oil. Antonov then blasts Ankara for arresting journalists and mocks Erdogan’s “lovely family oil business.” Antonov even calls on the journalists of the world to “get involved” and help Russia “expose and destroy the sources of terrorist financing.”

“Today, we are presenting only some of the facts that confirm that a whole team of bandits and Turkish elites stealing oil from their neighbors is operating in the region,” Antonov continues, setting up a lengthy presentation in which the MoD shows photos of oil trucks, videos of airstrikes and maps detailing the trafficking of stolen oil. The clip is presented here with an English voice-over. Enjoy.

To continue reading: Russia Presents Detailed Evidence of ISIS-Turkey Oil Trade

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Former CIA Deputy Director Gives A Stunning Reason Why Obama Has Not Attacked ISIS’ Oil Infrastructure, by Tyler Durden

Posted on November 30, 2015 | 1 comment

From Tyler Durden at zerohedge.com

As we pointed out a week ago, even before the downing of the Russian jet by a Turkish F-16, the most important question that nobody had asked about ISIS is where is the funding for the terrorist organization coming from, and more importantly, since everyone tacitly knows where said funding is coming from (as we have revealed in an ongoing series of posts “Meet The Man Who Funds ISIS: Bilal Erdogan, The Son Of Turkey’s President”, “How Turkey Exports ISIS Oil To The World: The Scientific Evidence” and “ISIS Oil Trade Full Frontal: “Raqqa’s Rockefellers”, Bilal Erdogan, KRG Crude, And The Israel Connection”) [click to original article for links] few on the US-led Western Alliance have done anything to stop the hundreds of millions in oil sale proceeds from funding the world’s best organized terrorist group.

We concluded by asking “how long until someone finally asks the all important question regarding the Islamic State: who is the commodity trader breaching every known law of funding terrorism when buying ISIS crude, almost certainly with the tacit approval by various “western alliance” governments, and why is it that these governments have allowed said middleman to continue funding ISIS for as long as it has?”

To be sure, the only party that actually did something to halt ISIS’ oil infrastructure was Russia, whose bombing raids of Islamic State oil routes may not only have contributed to the fatal attack by Turkey of the Russian Su-24 (as the curtailment of ISIS’ oil flows led to a big hit in the funds collected by the biggest middleman in the region, Turkey, its president and his son, Bilal not to mention Israel which may have been actively buying ISIS oil over the past year) but prompted questions why the bombing campaign by the US-led alliance had been so woefully incapable of hitting ISIS where it truly hurts: its funding.

This past week, someone finally came up with a “reason” why the Obama administration had been so impotent at denting the Islamic State’s well-greased oil machine. In an interview on PBS’ Charlie Rose on Tuesday, Rose pointed out that before the terrorist attacks in Paris, the U.S. had not bombed ISIS-controlled oil tankers, to which the former CIA deputy director Michael Morell responded that Barack Obama didn’t order the bombing of ISIS’s oil transportation infrastructure until recently because he was concerned about environmental damage.

Yes, he really said that:

We didn’t go after oil wells, actually hitting oil wells that ISIS controls, because we didn’t want to do environmental damage, and we didn’t want to destroy that infrastructure.

In other words, one can blame such recent outbreaks of deadly terrorist activity as the Paris bombings and the explosion of the Russian passenger airplane over Egypt’s Sinai Peninsula on Obama’s hard line stance to not pollute the atmosphere with the toxic aftermath of destroyed ISIS infrastructure.

Brilliant.

To continue reading: Why Obama Has Not Attacked ISIS Oil

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One Chart Shows Where Oil Prices Could Be Headed, by Brian Weepie

Posted on November 28, 2015 | Leave a comment

From Brian Weepie, Growth Stock Wire, via wolfstreet.com:

There’s a rare extreme in the oil sector right now. The oil-to-U.S. dollar ratio, which reflects the relationship between the price of oil and the dollar, is near its lowest point in almost seven years.

When this ratio hit a low in 2009, the price of oil went on to soar 214% to its peak in June 2014. But if you think this extreme means oil prices could soon rally, you’re making a mistake…

As regular readers know, the dollar has broken out over the past year. It’s now stronger than it has been since 2003 versus other major currencies. The U.S. Dollar Index is up 40% since it bottomed in 2008. Historically, when the dollar rises, commodities like oil tend to fall. This is what we’ve seen this time around. The price of benchmark West Texas Intermediate (WTI) crude oil is down more than 60% since June 2014 – to around $40 per barrel.

As a result, the ratio between the price of oil and the dollar has fallen. It’s down around 68% since oil peaked.

For this ratio to return to its normal level of the past few years, the dollar would have to fall significantly or oil prices would have to rise. But the above chart only tells part of the story. Take a look at this longer-term chart of the oil-to-dollar ratio:

As you can see, while the oil-to-dollar ratio is approaching a nearly seven-year low, it can fall much further. In December 1998, this ratio bottomed at 0.11. That’s more than 70% below today’s levels. Oil cost $10.72 per barrel back then.

To continue reading: One Chart Shows Where Oil Prices Could Be Headed

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“On The Cusp Of A Staggering Default Wave”: Energy Intelligence Issues Apocalyptic Warning For The Energy Sector, by Paul Morelli

Posted on November 28, 2015 | Leave a comment

From Paul Morelli, at Energy Intelligence, via zerohedge.com (introductory paragraph by Tyler Durden):

The Energy Intelligence news and analysis creator and aggregator is not one to haphazradly throw around hyperbolic claims and forecasts. So when it gets downright apocalyptic, as it did this week in a report titled “Is Debt Bomb About to Blow Up US Shale?”, people listen… and if they are still long energy junk bonds, they panic.

The summary:

“The US E&P sector could be on the cusp of massive defaults and bankruptcies so staggering they pose a serious threat to the US economy. Without higher oil and gas prices — which few experts foresee in the near future — an over-leveraged, under-hedged US E&P industry faces a truly grim 2016. How bad could things get?”

The full report by Paul Merolli, a senior editor and correspondent at Energy Intelligence:

Debt Bomb Ticking for US Shale

The US E&P sector could be on the cusp of massive defaults and bankruptcies so staggering they pose a serious threat to the US economy. Without higher oil and gas prices — which few experts foresee in the near future — an over-leveraged, under-hedged US E&P industry faces a truly grim 2016. How bad could things get and when? It increasingly looks like a number of the weakest companies will run out of financial stamina in the first half of next year, and with every dollar of income going to service debt at many heavily leveraged independents, there are waves of others that also face serious trouble if the lower-for-longer oil price scenario extends further.

“I could see a wave of defaults and bankruptcies on the scale of the telecoms, which triggered the 2001 recession,” Timothy Smith, president of consultancy Petro Lucrum, told a Platts energy conference in Houston last week. Much has been made about the resiliency of US oil production in the face of low prices, but the truth is that many producers are maximizing their output — even unprofitable volumes — because they need the cash flow to service their debt (related). “As an industry, we’re at the point where every dollar of free cash flow now goes to paying back debt,” Angle Capital’s Steve Ilkay told the same conference. Ilkay, who advises North American producers on asset management, said during the boom years of 2012-14 about 55% of the sector’s free cash flow, which is calculated by subtracting capital expenditures from operating cash flow, was allocated toward debt repayment.

With West Texas Intermediate (WTI) stuck below $50 per barrel since August — and closer to $40 recently — the industry has responded with deeper cuts to capex and a greater focus on efficiency (EIF Nov.4’15). However, experts say this won’t be enough to avoid a bloody reckoning with persistent low oil and gas prices, as the sector grapples with some $200 billion-plus in high-yield debt, which it absorbed to finance the shale oil boom. Credit quality has been steadily deteriorating since June 2014, when WTI peaked at $108/bbl. Standard and Poor’s says there have been 19 defaults so far in 2015 across the US oil and gas industry, while another 15 companies have filed for bankruptcy. Besides those that have missed interest or principal payments, the default category also includes companies that have entered into “distressed exchanges” with their creditors, including Halcon, SandRidge, Midstates, Goodrich, Warren, Exco, Venoco and Energy XXI (EIF Jul.8’15).

To continue reading: “On The Cusp Of A Staggering Default Wave“

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