Article / 15 December 2014 at 14:18 GMT

Opec chief dashes energy hopes

Former managing editor, TradingFloor.com / Saxo Bank
Denmark
  • Opec's al-Badri confirms cartel's determination to maintain supply
  • Destruction of oil stocks being felt hardest at the margins
  • Emerging markets oil and gas sector borrowings top £135bn

By Martin O'Rourke

It wasn't exactly what anyone in the energy sector wanted to hear yesterday. Opec secretary general Abdullah al-Badri's reaffirmation of the cartel's commitment to keeping production levels unchanged sent energy stocks into yet another spin and will have only increased the fear that swathes of the sector could face devastation in the not-too-distant future.

Saxo Bank's head of commodities strategy Ole Hansen had already warned Friday of the "distress signals" emerging from a shale sector where some grades are selling at something like a $20/barrel discount to US benchmark WTI crude.

With WTI dropping to $56.25/b in the Asian session, the maths are not difficult. And what little support there may have been in the market for oil would have no doubt been sharply undermined by al-Badri's stance. 

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Abdullah al-Badri (left, seated) did little to help the energy sector yesterday with his reassertion of Opec's November 27 decision to keep supply at current levels. Photo: Thinkstock

"Opec's main objective is that non-OPEC producers should share the burden of the current slowdown in demand growth," says Hansen. "They are prepared to take a big hit in the short term to achieve that objective. Whether it will be Russia through lack of investments or the US through reduced shale production that eventually provide that result remains to be seen."

What's good for Opec of course is not necessarily what's good for the sector. A glance at the big oil majors shows the likes of BP, ExxonMobil, Shell, and Total have all seen their share prices fall by approximately 10-15% in the last month. 

BP's one-month range runs from a high of £448.20 (November 21) to a low of £385.65 (December 15) set against a 52-week high of £526.80. As far as the majors go, that kind of performance is about par for the course.

But it is in the margins that energy stocks are being hammered. Offshore driller Seadrill's travails have already been well-documented by Saxo Bank's head of equities Peter Garnry and in the last month, its share price has ranged from a high of $21.36 to a low of $11.06, barely a quarter of the 52-week high of $41.29. 

Just the merest of glances at BP's share price in comparison – and let's not forget that this is a BP that is still facing fallout from the Deepwater horizon oil spill disaster of 2010 in the Gulf of Mexico, as well as costly ventures in Russia – demonstrates where the real pain is being felt in the energy sector.

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BP's myriad problems include the continued fallout from the Deepwater Horizon oil spill
disaster of 2010, yet the recent decimation of energy stocks in the wake of the falling oil price demonstrate that the oil majors can ride this shockwave in relative comfort. Photo: Thinkstock

That kind of damage is being replicated elsewhere. Africa-focused oil explorer Tullow has seen its share price fall by more than 25% in the last month and its current share price of £367.30 compares to a year-high of £920. 

US-based explorer Apache has also seen its share price fall about 25% in the last month, Russia's Lukoil is down about 20% and oil services provider Schlumberger is also down by a similar margin. The list, to be frank, could go on and on.

"The excess capacity issues are largest among the service companies such as the offshore drillers as all these companies have made large investments based on assumptions of plus $100/b prices in the future," warns Garnry. "With excess capacity and debt financed fixed investments in the industry falling, prices have a multiplication effect on the bottom line."

"Major diversified energy companies such as ExxonMobil do not have the same sensitivity and the larger players also have better credit ratings," he says.

And there is yet another major problem brewing where borrowing from the oil and gas sector from international finance markets has reached massive levels. Emerging-markets borrowing among oil and gas companies topped $135 billion by the end of September, for example.

"The USD High Yield Energy Index says it all with its 1,000 basis point spread to US Treasuries reflecting the distress situation in the industry," says Garnry. "High leverage and investments fueled by debt are all always a problem when selling prices are coming down."

"If oil prices do not revert soon it would be a big surprise if a restructuring in the US energy industry did not come to surface," he adds. "It is also the issue among emerging market energy players."

Garnry nevertheless thinks talk of $30/b oil prices is premature.

"We are not in the $30/b camp as we believe the adjustment process will kick in long before we reach this level," he says.

As ever, geopolitics could be the energy sector's biggest friend here with Libya perhaps the likeliest of the various global suppliers of oil to fall victim to more turmoil. Libya's return to the oil supply markets to the tune of 800,000 b/d could come under very real threat soon, says Hansen.

"The return of Libyan oil after a one year blockade of the harbours at a time of slowing demand growth has probably been the single biggest reason why we ended up with this price weakness," he says. "Libya went from producing 200,000 to 800,000 b/d in a matter of months and the subsequent failure by other Opec members to reduce accordingly, triggered the current supply surplus." 

"Any renewed reduction from Libya would therefore remove some of the excess barrels which are slushing around looking for a buyer," says Hansen.

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 Turmoil in the likes of Libya, which outputs 800,000 b/d might be the energy sector's best
hope of a rise in the oil price and the avoidance of even more pain. Photo: Thinkstock

Martin O'Rourke is managing editor of TradingFloor.com, the online content platform for social trading leader Saxo Bank

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