The Singapore cracking margin against Dubai crude fell for the second straight trading session to $6.23/b Wednesday, its lowest in more than three weeks, undermined by softer light distillate cracks, Platts data showed Thursday.
The last time the spread was lower was January 4, at $5.99/b.
However the Singapore cracking margin in January to date, at $7.19/b, is still 43% higher than the average over full-year 2015 of $5.02/b.
The front-month naphtha/Dubai crack swap has fallen sharply this week, dropping $3.09/b from Monday’s close to $3.98/b Wednesday, the lowest the spread has been since November 11, 2015, then it stood at $3.77/b.
The sudden change in naphtha sentiment was brought about by a weaker demand outlook in the region due to naphtha steam cracker outages, while naphtha supplies in the region remained abundant.
The CFR Japan naphtha versus March ICE Brent futures or the cash crack fell $5.875/mt day on day to $66.10/mt Wednesday, the lowest since September 9, 2015, when the CFR Japan naphtha crack versus month one ICE Brent hit $64.575/mt.
The weaker Asian gasoline crack — the spread between front-month 92 RON gasoline swaps and front-month Dubai crude swaps — added to the slide in refining margins.
The spread fell $1.39/b day on day to $17.78/b Wednesday, the lowest since December 20, 2015, when it stood at $17.18/b.
However, the gasoline crack spread has averaged $20.13/b in January to date, up from $17.73/b over the same period of December.
The softer sentiment was led by weaker NYMEX RBOB futures, sources said.
The Asian benchmark Mean of Platts Singapore 92 RON gasoline crack to front-month ICE Brent futures fell to an average of $14.62/b this week from an average of $15.66/b last week, while the NYMEX RBOB crack at Asian close fell to $12.74/b from $14.49/b over the same period.
Colder temperatures in the US this month could curtail gasoline demand further, even as prices fall close to $1/gallon.
Gasoline stocks in the US rose 3.464 million barrels to 248.461 million barrels last week, above analysts’ expectations of a 1 million-barrel build, data released this week by the Energy Information Administration showed.
Implied demand slipped 138,000 b/d to 8.941 million b/d, 1% below the year-ago level.
The decline in cracks comes despite a slightly weaker Dubai crude market in January than in December following a sharp decline in outright global crude prices.
The front-month cash Dubai spread to same-month Dubai swaps has averaged minus $1.89/b to date in January, compared with minus $1.66/b in December.
Dubai-linked crude grades have seen strong buying interest from Asian refiners this month because of benchmark Dubai’s discount to Brent.
The second-month Brent/Dubai Exchange of Futures for Swaps or EFS has averaged $3.26/b in January to date, compared with $3.25/b in December.
The recent strength in fuel oil cracks has buoyed Asian refiners’ buying interest in medium and heavy sour crudes from the Middle East, pushing up premiums of grades including Upper Zakum, Oman, Qatar Marine and Banaco Arab Medium.
Platts margin data reflects the difference between a crude’s netback and its spot price. Netbacks are based on crude yields, which are calculated by applying Platts product price assessments to yield formulas designed by Turner, Mason & Co.
A number of recently completed and upcoming natural gas infrastructure projects are expected to increase the reach of natural gas produced in the Marcellus and Utica regions of the Northeastern United States (see map). These projects are intended to transport natural gas from production centers to consuming markets or export terminals.
Source: U.S. Energy Information Administration, natural gas pipeline State-to-State Capacity and Pipeline Projects spreadsheets Note: Capacity in 2015 reflects a combination of existing and planned or under-construction projects. Capacity in 2016 reflects only planned projects.
Over the past several years, natural gas production in the Marcellus and Utica areas has grown significantly: their combined growth of 12 billion cubic feet per day since 2011 accounts for 89% of the United States’s total growth in natural gas production. The Marcellus and Utica shale plays are located primarily in Pennsylvania, West Virginia, and Ohio. The pipeline infrastructure discussed here is mainly in the Northeast region, which includes Pennsylvania and West Virginia, but not Ohio, based on the regional breakouts in EIA’s natural gas pipeline data.
Partly as a result of strong domestic production growth, both domestic natural gas consumption and exports of natural gas by pipeline have increased, and exports of liquefied natural gas (LNG) from the United States are set to begin this year. However, because infrastructure projects often have longer lead times than production projects, infrastructure growth in the Northeast has not kept pace with production growth, and capacity has been insufficient to move natural gas out of the Northeast to demand centers and export locations.
In the past several months, several new pipeline projects have come online to move natural gas either to nearby market areas in the Mid-Atlantic area (New York, New Jersey, and Pennsylvania) or to feed into existing infrastructure that delivers natural gas to more distant regions, especially the U.S. Gulf Coast.
Key projects that came online in late 2015 or early 2016 include:
The Rockies Express Pipline (REX) reversal project had added westbound capacity to flow natural gas to the Midwest in 2014. In late 2015, Texas Eastern Transmission Company’s (Tetco) OPEN project added 550 million cubic feet per day (MMcf/d) of pipeline takeaway capacity out of Ohio.
Columbia Gas Pipeline’s East Side Expansion, a 310 MMcf/d project that flows natural gas produced in Pennsylvania to Mid-Atlantic markets.
Tennessee Gas Pipeline’s Broad Run Flexibility Project, a 590 MMcf/d project originating in West Virginia that moves natural gas to the Gulf Coast states.
Tetco’s Uniontown-to-Gas City project flows up to 425 MMcf/d of natural gas produced in the Marcellus region to Indiana.
Williams Transcontinental Pipeline’s Leidy Southeast project provides additional capacity to take Marcellus natural gas to Transco’s mainline, which extends from Texas to New York. From there, the natural gas serves Mid-Atlantic market areas as well as the Gulf Coast.
Source: U.S. Energy Information Administration
Several other projects plan to add natural gas transmission capacity later in 2016: The Algonquin Incremental Markets expansion project will add 342 MMcf/d of capacity to Algonquin Gas Transmission’s pipeline in the highly constrained New England region. The Constitution Pipeline will have the capacity to transport up to 650 MMcf/d of natural gas from the Appalachian Basin to the Iroquois Gas Transmission and Tennessee Gas Pipeline systems in New York, which will provide access to markets in the Northeast and New England. The Wright Interconnect Project expands Iroquois’s facilities and supports the Constitution Pipeline where the Iroquois and Constitution pipelines interconnect in Wright, New York.
Other projects currently under construction, including liquefaction projects in Maryland and along the U.S. Gulf Coast, will enable natural gas produced in the Appalachian Basin to reach markets overseas.
South Korea’s S-Oil Corp sees 2016 refining margins staying healthy and Asian refiners will benefit from growing oil demand during this year that outpaces increases in refining capacity, the company said on Thursday.
Surging refining margins for petroleum products helped boost fourth quarter 2015 net income to 80.6 billion won ($66.67 million) versus a loss of 272.2 billion won a year ago, the company said in an earnings statement to the Korea Exchange. Full year income was 676.6 billion won against a loss of 287.8 billion won a year ago.
Refining margins in 2016 will stay healthy as global incremental oil demand will outpace new refining capacity additions during the year, S-Oil, the country’s third-largest refiner, said in the statement. The company cited forecasts calling for over 1 million barrels per day (bpd) of new demand in 2016 against only 406,000 bpd of new refining.
Still, S-Oil considers major risks this year in the continuing Chinese economic slowdown and the potential for faster-than-expected U.S. interest rate hikes that could limit oil demand, said Ju-wan Bang, S-Oil’s head of finance, in a call on the earnings.
“With oil prices already low at $25-$26 a barrel in terms of Dubai crude, we don’t expect oil prices to make additional weakness and accordingly hurt the company’s performance,” said Bang.
“Yet if such risks continue long, it could slow down oil demand and worsen market margins,” Bang said, referring to the Chinese economic slowdown and U.S. rate hike factors.
S-Oil is currently maximising gasoline output, as its margin is healthier than that of diesel, said Bang, adding that gasoline output will increase dramatically in 2018 once its expansion project is completed.
The company will add a residual fuel oil upgrading system and an olefin production system through 2018 that will produce 405,000 tonnes per annum (TPA) polypropylene, 300,000 TPA of propylene oxide, and 21,000 bpd of gasoline.
S-Oil plans to shut its No.1 crude distillation unit (CDU) and a residue fluid catalytic cracking unit this year for maintenance, without providing exact timeline for the shutdown, it said in the statement. After the shutdown, it expects higher 18,000 bpd more diesel production.
S-Oil said on Wednesday that it had agreed to sell 1.34 trillion Korean won of oil products this year the trading arm of top shareholder Saudi Aramco, higher than sales of 1.2 trillion won contracted a year earlier.
Source: Reuters (Reporting by Meeyoung Cho; Editing by Himani Sarkar and Christian Schmollinger)
At a three-day conference in Riyadh this week, hundreds of Saudi Arabian officials and businessmen discussed ways to rescue the economy from low oil prices, by developing new industries and giving opportunities to the private sector.
Outside the luxury hotel where they met, worsening business sentiment and flagging consumer spending suggested the reforms may not come in time to prevent a deep economic slump.
As cheap oil pressures its currency and opens up a record state budget deficit of around $100 billion, Saudi Arabia – assisted by a small army of Western consultants who are believed to number in the hundreds – is plotting its biggest shake-up of economic policy in well over a decade.
Stakes in the operations of big state companies, including national oil giant Saudi Aramco, would be sold off; underused assets owned by the government, such as vast land holdings and mineral deposits, would be made available for development.
Parts of the government itself, including some areas of the national health care system, would be converted into independent commercial companies to improve efficiency and reduce the financial burden on the state. The number of privately run schools would rise to around 25 percent from 14 percent.
Meanwhile, the government would use its massive financial resources to help diversify the economy beyond oil into sectors such as shipbuilding, information technology and tourism, by awarding contracts to new firms and providing finance.
Proposals for some of these policies have been kicked around the government for years with no result. But the political momentum behind them is clearly stronger than it has ever been, as they are backed by a powerful new economic policy council chaired by the king’s son, Prince Mohammed bin Salman.
“This is a quantum leap in all aspects,” Abdullatif al-Othman, governor of the Saudi Arabian General Investment Authority, told the conference.
The problem for Saudi Arabia is that the difficult, complex reforms are expected to take years to implement. In the meantime, the kingdom will continue to depend heavily on oil, leaving it at the mercy of fluctuations in the price of crude.
To ease the drain on its reserves, the government has been forced into austerity steps that are slowing the economy from last year’s 3.3 percent expansion. In December, growth in the non-oil private sector hit its lowest since at least 2009; retailers say consumers’ discretionary spending is falling.
The government’s austerity budget for this year assumed a Brent crude oil price of about $40 a barrel, analysts estimate. If oil stays at its current levels of around $30, more austerity could be on the way.
Fadl al-Boainain, a prominent Saudi private-sector economist who attended the conference, said he welcomed officials’ emphasis on developing parts of the economy that had long been neglected because of the focus on oil.
But he added: “The overall economic situation does not support the great optimism that ministers expressed, and it does not support the indicators they referred to…
“There is a real concern in the private sector about spending cuts and the liquidity drain, which will increase borrowing costs. The sector is also worried about job cuts related to the economic changes.”
WINDOW FOR REFORMS
Three big areas of concern emerged at the conference. One is how finance will be provided to projects, such as a shipbuilding and repair complex that Aramco announced it would establish on the eastern coast, eventually creating as many as 500,000 jobs.
Market interest rates are rising sharply as commercial banks face a liquidity squeeze caused by smaller flows of new oil revenues. So the government may end up footing most of the bill, which would be costly and involve its inefficient bureaucracy.
Another challenge is creating the skilled Saudi workforce needed for new projects, in a country where some two-thirds of local workers are employed by the state, which offers cushy conditions and higher salaries. Aramco said it would leverage its own extensive training and education programmes to help develop a skilled national workforce.
In some cases, Saudi Arabia’s conservative culture may slow reforms. An all-woman panel at the conference discussed boosting the role of Saudi women in business, but women are not allowed to drive in the kingdom.
As many as a million foreign chauffeurs are estimated to be in the kingdom to drive women around. Eliminating the need for them could save household budgets hundreds of millions of U.S. dollars which the workers remit home annually but so far authorities have not said they are studying the politically sensitive issue.
The size of the central bank’s net foreign assets, $628 billion in November, suggests Saudi Arabia may have a window of several years to make its economy less vulnerable to oil prices before reserves fall to levels which would panic financial markets, making further spending on reforms much more difficult.
Meanwhile, the economy may struggle. An executive at a major Saudi company told Reuters that one million of the country’s roughly 10 million foreign workers might be sent home in the next year as businesses slowed and construction companies, hit by cut-backs in state contracts, laid off staff.
Saudi employees will not be laid off in the initial stages but that could conceivably happen next year, he said.
A foreign banker who has worked in Saudi Arabia for a decade said the direction of oil prices would ultimately decide whether it faced a slump as severe as the one suffered in the 1980s, when the economy shrank for several years.
If oil rebounds to around $60, pressure will ease, he said. If prices near $30 become entrenched for seven or eight years, “Saudi Arabia will have a very difficult time.”
Source: Reuters (By Andrew Torchia and Marwa Rashad, Additional reporting by Angus McDowall; Graphic by Vincent Flasseur; editing by Anna Willard)
Iranian banks will have to adjust to tougher international regulations and may need to offload non-performing loans into a “bad bank” to pick up where they left off when sanctions were imposed almost four years ago.
The banks will be crucial to deal-making and cash flow as Iran seeks to win business from foreign firms and attract investment to upgrade its infrastructure now that curbs have been lifted on its banking, insurance, shipping and oil sectors.
They are expected to be able to link up with international lenders to process transactions within a matter of weeks following a deal with world powers earlier this month curbing Iran’s nuclear programme.
But restrictions preventing U.S. banks dealing with the country will remain in place and Iran’s banks will have to contend with a financial world very different from when they were cut off in 2012.
“Isolation of Iran’s money market from international markets resulted in the inability of the Iranian banks to coordinate with international developments,” said Ali Sanginian, chief executive of privately owned Amin Investment Bank.
“This has led to these banks severely lacking in the areas of investment quality, capital adequacy, internal control and other safeguarding regulations in comparison to international standards,” said Sanginian, whose institution is Iran’s biggest investment bank with more than $1 billion of assets under management.
Many of Iran’s banks struggled with bad debt during the sanctions era. The situation was compounded by several banks having exposure to the country’s property market, which turned sour in 2012 leaving problem loans in the system.
Official data showed the ratio of non-performing loans to total loans was 13.4 percent in the Iranian month ending June 21, 2015. Market estimates point to nearly double that figure with the equivalent of $40 billion at the top end of estimates for non-performing loans.
“The biggest issues Iranian banks face is the high level of non-performing loans and the low capital buffers,” said Constantinos Kypreos, senior analyst at ratings agency Moody’s Financial Institutions Group.
Kypreos said the Iranian banking sector remains undercapitalised with a reported 2014 capital adequacy ratio of 6.8 percent versus a regional average capital adequacy ratio of over 13 to 14 percent.
“(With) concerns about the under-reporting of problematic loans, the sector is in need of substantial new capital,” he added.
Since the 2008 financial crisis, most banks must adhere to international capital standards, known as Basel III, which require them to bolster their balance sheets.
Some Iranian bankers expect the country’s central bank to impose those standards on them at some stage. When asked last week, a senior central bank official declined to comment.
Banks are also expected to take painful write-downs on many of the direct equity investments (DEIs) on their balance sheets.
“Today’s market value of these investments is much lower than what is shown on the books of respective banks,” said Parviz Aghili, chief executive of privately owned Tehran-based Middle East Bank.
“If we were to set off ‘doubtful loans’ and ‘DEIs’ of a bank against its capital (mandatory under Basel-III), then many Iranian banks will end up with a negative capital.”
Ali Amiri of ACL, an investment management firm focused on Iran with operations in Tehran, adds though that regulators may be able to help banks on that front.
“Introducing a bad bank where all these loans are cleaned out and put into that bank … is something that is being studied and looked at by the regulators inside Iran and seems to be an option,” he said.
“The situation is not dire.”
BAD DEBT LEGACY
The Iranian banking sector consists of eight state-owned and 19 privately owned banks which held a combined $582 billion in assets at the end of 2014, according to central bank data. By comparison, South Africa’s banking sector has over $400 billion in assets, while Turkey’s has about $800 billion.
State-owned Post Bank of Iran, Bank Sepah, Export Development Bank of Iran, Bank of Industry and Mine, and Bank Melli Iran did not respond to requests for comments for this article.
Middle East Bank’s Aghili said Iran’s banking sector would have to seek capital injections wherever it could for now, though winning investments from foreign banks will be tough given that global rules now make it more expensive for them to take minority stakes in other lenders.
“Banks – whether it is Chinese or Western – cannot really afford to make acquisitions around the world because the cost of managing and running these banks has become so expensive,” Aghili said.
Many international sanctions relating to Iran’s nuclear programme were lifted but most involving U.S. measures remain in place. Non-U.S. banks may trade with Iran without fear of punishment in the United States but U.S. banks may not do so, directly or indirectly.
European banks are still cautious though.
A senior manager at a large financial institution in Germany said: “We don’t want to be the pioneer. It would still be very complicated for us to do business with Iran because many U.S. sanctions are still in place.”
Amin Investment Bank’s Sanginian said there was still “some mistrust” between banks due to in part previous fines imposed by U.S. regulators.
“We even predict that some giant international banks … will refuse to cooperate with Iranian financial institutions,” he said.
“In order to mitigate these problems, some preliminary steps such as the establishment of regulatory rules based on international norms and conditions must be taken and, in short, we must move towards the international regulatory framework of Basel III.”
Source: Reuters (By Jonathan Saul and Tom Arnold, Additional reporting by Andreas Kroener in Frankfurt; Editing by Rachel Armstrong and Philippa Fletcher)
Weak data, such as Thursday’s durable-goods-orders report, signal that the Federal Reserve made “a major macro mistake” raising interest rates in December, said Danny Blanchflower, a Dartmouth College economist.
In December, not only did the Fed raise rates for the first time in nine years, but they signaled there would be four more hikes this year.
Now, “there’s a 50/50 chance the next move is a cut…as with all the other rate hikes since 2009 this one will have to be reversed,” Blanchflower, who leans dovish, said in an interview.
Traders who bet on rate hikes using fed funds futures contracts are now wagering that the Fed will next hike rates in September, according to CME FedWatch.
“The Fed has seriously lost credibility. No one believes them,” Blanchflower added.
The Fed’s ‘classic” mistake has been to underestimate the negative spillovers from the slowing of China, the worlds number-two economy, he said.
The Dartmouth economist, who was a former member of the Bank of England’s monetary policy committee, said the situation reminded him of 2008 when the U.K. thought it could avoid the subprime housing slowdown in the U.S. economy.
Blanchflower cited new figures in a Bloomberg article pointing to a steep slowdown in global trade.
In addition, the U.S. central bank doesn’t yet grasp that the decline in oil prices is not a positive supply shock but a signal of weak global demand, he said.
In its dovish policy statement released Wednesday, the Fed took out any reference to the balance of risks facing the economy, after saying in December that the risks were balanced.
“That’s a big admission of a mistake,” Blanchflower said.
In its statement, the Fed said it “is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”
Economic indicators are now pointing in the direction of a recession, Blanchflower said.
Eurozone businesses and households became markedly less upbeat about their prospects in January as financial markets world-wide tumbled in response to concerns about weaker growth prospects in China and other large developing economies.
The weakening of confidence is a setback for the eurozone economy’s modest economic recovery, since it may make households less willing to spend, and businesses less inclined to invest. If sustained in February, the waning of optimism would increase the likelihood that policy makers at the European Central Bank will decide to provide additional stimulus when they next meet in early March.
Warning that renewed falls in commodity prices had “significantly” weakened the outlook for consumer prices this year, the ECB’s governing council last week said it would reconsider its policy stance at that gathering, an indication that it is prepared to do more to support growth and lift the annual rate of inflation toward its target of just under 2% from 0.2% in December. In subsequent speeches, ECB President Mario Draghi has talked up the prospects of additional stimulus.
The European Commission Thursday said its Economic Sentiment Indicator-?which aggregates measures of consumer and business confidence?fell to 105.0 in January from 106.7 in December. That was the lowest reading since August, and marked a larger fall than the decline to 106.5 forecast by economists who were surveyed by The Wall Street Journal last week. However, the measure remained well above its average of 100.00 going back to 1990, an indication that eurozone business and consumers remain relatively optimistic.
“The European Commission’s survey bolsters the case for further ECB stimulus in March on both the inflation and growth fronts,” said Howard Archer, an economist at IHS Economics.
Among the eurozone’s five largest members, confidence weakened most sharply in Spain, which likely reflects a prolonged period of political uncertainty after inconclusive December elections. But confidence measures also fell sharply in Germany, the eurozone’s largest economy and its export powerhouse, and Italy. By contrast, confidence rebounded in France after a December dip following the terror attacks on Paris in the previous months, while Dutch businesses also became slightly more optimistic.
Manufacturers were most affected by the turmoil in financial markets and worries over the fate of China, with the eurozone measure of confidence in that sector falling to minus 3.2 from minus 2.0 in December. That reflected a reported thinning of order books, including export orders. But confidence also declined among service providers and construction companies.
Confirming a preliminary report released last week, the Commission said consumers also became less optimistic during the month, reflecting renewed concerns about the outlook for the eurozone economy. They also marked down their expectations for inflation over the coming 12 months, a development that will concern the ECB. Policy makers worry that lower oil prices will lead consumers to expect smaller increases for prices of other goods and services, which in turn would make it more difficult for the central bank to push the inflation rate toward its target.
Figures from Germany and Belgium released Thursday indicated that the annual rate of inflation in the eurozone picked up in January. Measured according to a common European standard, Germany’s inflation rate doubled to 0.4% from 0.2% in December.
But economists expect January’s pickup in inflation to prove short-lived, as declining energy prices feed into inflation measures over coming months. Speaking at a news conference last week, Mr. Draghi warned that consumer prices may even start to fall again after just four months of increases.
European Central Bank President Mario Draghi is putting his reputation on the line by talking up the prospects of additional stimulus for the eurozone, less than two months after he disappointed investors with a smaller-than-expected package of measures, analysts said.
In speeches over the past week, Mr. Draghi has doubled down on his unexpected pledge at last week’s news conference to “review and possibly reconsider” the bank’s ?1.5 trillion ($1.63 trillion) stimulus program in March.
Investors are anticipating something big. Yields on German five-year government bonds edged to successive record lows of around minus 0.25% this week, while 10-year yields fell close to a 9-month low, indicating investors expect more bond purchases.
Falling short again would likely undermine Mr. Draghi’s ability to soothe markets with his words, analysts said?a linchpin of the ECB’s crisis strategy.
Mr. Draghi’s aggressive stance echoes the buildup to the ECB’s December policy meeting, whose outcome hammered U.S. and European stocks and drove up the euro against the dollar.
Mr. Draghi had indicated at the preceding meeting in October that the stimulus would “need to be re-examined” at the following meeting, and subsequently underlined the bank’s resolve to “do what we must to raise” persistently low inflation in the eurozone.
In December, investors and economists concluded that the bank’s decision to expand its bond-purchase program and cut an already negative deposit rate to encourage lending was insufficient, given heightened expectations for more aggressive action.
Satisfying market expectations this time will be tough, analysts said, particularly because the ECB’s 25-strong governing council isn’t as united on the need for additional stimulus as Mr. Draghi has suggested, according to people familiar with the matter. Some economists also question whether the ECB is running out of tools to ramp up inflation after years of crisis measures.
“I don’t think [Mr. Draghi] is able to deliver,” said Carsten Brzeski, an economist with ING in Frankfurt. “I think he’s on the way to making the same mistake he made in October.”
The ECB doesn’t aim to meet investors’ expectations but they do matter because they affect euro exchange rates and interest rates, which in turn impact eurozone exports, business investment and growth.
It was Mr. Draghi’s pledge in July 2012 to do “whatever it takes” to save the currency union that helped draw a line under the region’s sovereign debt crisis.
The ECB President “had never really disappointed markets” before December, said Dario Perkins, an economist at Lombard Street Research in London. “He has to do something in March and it has to be significant. If not he will have a real credibility problem.”
Mr. Draghi has said recently he’s worried that a sharp drop in oil prices and headwinds from financial and commodity markets could entrench ultralow inflation in the eurozone.
“We are doing whatever is necessary to comply with our mandate, and we are not surrendering in front of these global factors,” Mr. Draghi said at last week’s news conference.
To satisfy investors, the ECB would need to significantly expand its bond purchases, Mr. Perkins said?either by increasing the ?60 billion it now buys each month—or by making the program indefinite, rather than expiring in March 2017, as now planned.
According to a Reuters poll published Wednesday, around 87% of economists expect the ECB to cut interest rates in March, and they see a 50:50 chance that the bank will also boost its asset purchases.
Mr. Draghi stressed last Thursday that the entire council had supported the decision to “possibly reconsider” the bank’s stimulus in March.
But while the council was unanimous on the need to “review” the bank’s stimulus, whether they will “reconsider” it is still open to debate, according to people familiar with the matter. That likely means there is no unanimity on more stimulus in March, the people said.
While Mr. Draghi would only need a majority of his colleagues to support fresh stimulus, going against the wishes of powerful members such as Germany’s Bundesbank poses risks for the ECB, even if it has happened before, analysts said. The Bundesbank opposed the ECB’s decision to launch bond purchases last year, and the program’s expansion in December.
Mr. Draghi appears confident. In Switzerland on Friday, he said the ECB had “plenty of instruments” with which to drive up stubbornly low inflation, as well as the “determination and the willingness and the capacity” to act.
According to the Reuters poll, only 53% of economists agreed that Mr. Draghi had plenty of tools at his disposal. The remaining 47% didn’t.
“In the short term, the ECB certainly doesn’t have the tools to shock inflation back up,” said Christian Schulz, an economist with Citi in London. Still, it has “a long list of tools” available that could still be “quite powerful,” including further cuts to the deposit rate, expanding the bank’s asset purchases and changing the parameters that restrict the bonds it can buy, Mr. Schulz said.
Another concern is that while the ECB may be reaching the limits of what its stimulus tools can achieve their unintended consequences are growing. .
“The side effects of this medicine, the longer it has been applied, are becoming stronger and stronger, and the curative effects of this medication [are] becoming weaker and weaker,” Axel Weber, the former Bundesbank president and current chairman of UBS Group AG, told an audience at the World Economic Forum in Davos on Friday.
Similar concerns were expressed at the ECB’s December meeting, according to minutes it published earlier this month. Some council members warned of “significant risks and side effects” associated with more government bond purchases, a tool that they argued should “be kept in reserve” in case of very adverse developments, such as deflation.
Some members also warned against a further cut to the ECB’s deposit rate, the interest on funds stored overnight with the central bank. Cutting that rate below minus 0.3%, where it currently stands, might lead “to a tightening instead of a further easing in financial condition,” as banks seek to recoup their losses on deposits by increasing loan rates?precisely the opposite of what the ECB wants to achieve.
European Central Bank President Mario Draghi over the past week has repeatedly talked up the prospects of additional stimulus for the eurozone, doubling down on his unexpected pledge to review the bank’s EUR1.5 trillion ($1.63 trillion) stimulus program in March.
Potentially complicating his efforts: The members of the ECB’s governing council aren’t as united on the course of action as he may want the world to think, people familiar with the matter said.
Mr. Draghi is putting his reputation on the line with his renewed focus on increased stimulus less than two months after the bank disappointed investors with a smaller-than-expected package of measures, analysts said. Investors are anticipating something big. Yields on German five-year government bonds edged to successive record lows of around minus 0.25% this week, while 10-year yields fell close to a nine-month low, indicating investors expect more bond purchases.
The ECB president had never really disappointed markets before December, said Dario Perkins, an economist at Lombard Street Research in London. “He has to do something in March, and it has to be significant. If not, he will have a real credibility problem.”
The ECB president stressed in his news conference last Thursday that the entire 25-member council had supported a decision to “review and possibly reconsider” the bank’s stimulus in March.
But while the council was unanimous on the need to review the bank’s stimulus, whether they will reconsider its size is still open to debate, according to people familiar with the matter. That likely means there isn’t unanimity on increasing stimulus in March, the people said.
In Bonn on Thursday, Jens Weidmann, the head of Deutsche Bundesbank, warned that the ECB should look through what he described as a “short-term, oil-price driven” drop in consumer prices as it decides whether to boost its stimulus program.
After stripping out volatile energy and food prices, so-called core inflation in the euro area is rising and “far from the deflation danger zone,” said Mr. Weidmann, who sits on the ECB’s governing council.
Unanimity isn’t needed to launch fresh stimulus, rather only a majority vote of the council. However, going against the wishes of powerful members such as the Bundesbank poses risks for the ECB, even if it has happened before, analysts said. The Bundesbank opposed the ECB’s decision to launch bond purchases last year, and the program’s expansion in December. Alienating Germany’s central bank raises longer-term questions about the ECB’s credibility because Germany represents more than a quarter of the eurozone’s economy.
“I don’t think [Mr. Draghi] is able to deliver,” said Carsten Brzeski, an economist with ING in Frankfurt. “I think he’s on the way to making the same mistake he made in October.”
Mr. Draghi had indicated at the meeting in October that the bank’s stimulus would need to be re-examined, and subsequently underlined the bank’s resolve to “do what we must to raise” persistently low inflation in the eurozone.
The bank’s December move to extend its bond purchases by six months through March 2017 and cut an already negative deposit rate by 0.1 percentage point to minus 0.3% failed to meet investors’ expectations, hammering stocks and driving up the euro against the dollar. A repeat would likely undermine the ECB president’s ability to soothe markets with his words, analysts said–a linchpin of the ECB’s crisis strategy.
It was Mr. Draghi’s pledge in July 2012 to do “whatever it takes” to save the currency union that helped draw a line under the region’s sovereign-debt crisis.
Mr. Draghi is taking a confident stance. In Switzerland on Friday, he said the ECB had “plenty of instruments” to drive up stubbornly low inflation, as well as the “determination and the willingness and the capacity” to act. Eurozone inflation was 0.2% in December, and the ECB expects it to remain very low or negative over the coming months, far off the bank’s target rate of just below 2%.
At exchange group Deutsche Börse AG on Monday, Mr. Draghi took the fight to his critics in Germany, listing and dismissing a series of common German arguments against keeping interest rates ultralow.
A sharp drop in oil prices and headwinds from financial and commodity markets could entrench ultralow inflation in the eurozone, Mr. Draghi said at last week’s news conference. “We are doing whatever is necessary to comply with our mandate, and we are not surrendering in front of these global factors,” he said.
Mr. Weidmann on Thursday conceded that downward pressures on consumer prices had increased, and that the ECB would likely need to “substantially” lower its inflation forecast for 2016.
But he warned against fixating on current price movements.
“In estimating risks to prices, we shouldn’t stare at current consumer price inflation rates like a rabbit at a snake,” Mr. Weidmann said.
To satisfy investors, the ECB would need to significantly expand its bond purchases, Mr. Perkins of Lombard Street Research said–either by increasing the EUR60 billion it now buys each month or by making the program indefinite.
A number of bank economists said they now expect the ECB to announce additional stimulus in March rather than June. Berenberg, J.P. Morgan and Royal Bank of Scotland all expect the ECB to increase its monthly bond purchases by at least EUR10 billion from EUR60 billion currently, and to cut its deposit rate by at least a further 0.1 percentage point.
Another concern is that while the ECB may be reaching the limits of what its stimulus tools can achieve, their unintended consequences are growing.
At the ECB’s December meeting, according to minutes published earlier this month, some council members warned of “significant risks and side effects” associated with more government-bond purchases–a tool they argued should be kept in reserve in case of very adverse developments, such as deflation.
Some members also warned against a further cut to the ECB’s deposit rate, the interest on funds stored overnight with the central bank. That could lead “to a tightening instead of a further easing,” as banks seek to recoup their losses on deposits by increasing loan rates–precisely the opposite of what the ECB wants to achieve.
Steel imports continued to target the EU market despite still relatively weak demand, low domestic prices and the weak euro in the second half of 2015. Going forward, abundant global supply and suppliers fighting for tonnage fuels uncertainty in the market. EU mills fear for losing further market share in the EU and abroad.
EU steel market
EU apparent steel consumption grew 2.7% y-o-y in Q3-2015. This mild increase in apparent demand basically reflects the impact of increasing inventories. The 29% y-o-y rise in imports in Q3 was too much to be fully absorbed by end-users. With real steel consumption stabilising around the level of a year earlier, the oversupply on the market ended up in stocks.
EUROFER Director General Axel Eggert said: “As feared, EU steel mills continued to struggle under these market conditions. The sharp rise in imports and a 13% drop in exports pushed total deliveries by almost 4% down compared with the same period of 2014. Ample global supply and the related fiercening fight for tonnage between suppliers depressed steel prices and fuelled uncertainty in the market”.
Meanwhile, customs statistics for Q4 signal that exports fell further, whereas imports continued to rise, thereby exceeding the already high average monthly import levels registered in Q2 and Q3. This compounded the impact of seasonal destocking in the final quarter of 2015 with steel buyers reducing stocks as much as possible. Q4 apparent steel consumption stagnated around the year earlier, weighed down by heavy destocking. Total apparent consumption is estimated to have grown by 2.3% in 2015.
The outlook for 2016 and 2017 is for a gradual further improvement in EU steel demand. Mr. Eggert commented: “The expected steady strengthening of end-user activity should translate into a mild growth of steel demand of on average almost 1.5% per annum. However, the key uncertainty with respect to actual market conditions for EU steel mills is third country exports. China should stop exploiting the export channel for its overproduction due to domestic steel demand having peaked. If this continues, EU mills will lose further market share, not only in the EU but also in their key export markets”.
EU steel consuming sectors
Activity growth of steel using sectors in Q3-2015 came in slightly below expectations. Growth was negatively affected by a stronger than anticipated drop in steel tube production. In contrast, sectors oriented towards consumer markets such as cars and white goods manufacturing have been doing better than expected owing to the robust boost from increased consumer spending during 2015. Total activity of the EU steel using sectors is estimated to have grown by 2% in 2015.
Prospects for 2016 and 2017 are mildly positive. Overall activity in steel using sectors is expected to remain on a steady but unspectacular growth track. Investment-driven sectors such as construction and mechanical engineering are forecast to gain momentum.
EU Economic Context
The EU economy entered 2016 on a solid footing, with the latest indicator readings boding well for economic fundamentals and business conditions in the quarters ahead.
Moreover, conditions look now right for capital investment to gradually take over the baton from private consumption as growth driver for the EU economy over the 2016-2017 period. With continued support from consumer and government spending as well as exports, the recovery in the EU looks set to becoming more broad-based and self-sustained. However, downside risks to the global economic outlook are seen remaining substantial, with particularly a potential negative impact from weaker than expected growth among major emerging markets.
The slump in crude oil prices has analysts and fund managers seeing potential value in selected oil and gas (O&G) stocks.
Maybank Investment Bank Bhd (Maybank IB) said in a report that the steep correction in O&G share prices offered “periodic, alpha opportunities” to pick up oversold, undervalued and sentiment-depressed stocks.
The research house added that while impairment risks and poor upcoming fourth quarter 2015 results are sentiment-negative, it however said that these were known events that have been largely priced in with the recent selldown.
“While we acknowledge that an absolute recovery is still a distance away, the volatility in crude oil and fall in O&G share prices have opened a window of opportunity to trade beaten down stocks,” it said yesterday.
Areca Capital Bhd chief executive officer Danny Wong concurred that some O&G stocks were oversold.
“Some of them have been seriously pared down, and valuation for these stocks are actually quite attractive. In light of the fall in oil prices, it is understandable to discard these stocks, but I do believe that oil price will bounce back,” he said.
Crude oil hovered at around US$30 per barrel yesterday.
Wong expected oil prices to pick up in the second half of the year.
“I think the price of oil is near the bottom. For some stocks, it will be best to hold on for the next six months as I believe they will rebound by then.”
Meanwhile, an analyst from a local bank-backed brokerage said while interest in O&G stocks was likely to be subdued until the price of oil stabilised and the market adjusts to the new oil price level, investors should prepare for a recovery.
“We believe investors should focus on oil service providers, such as Uzma Bhd and KNM Group Bhd, which are less sensitive to oil price movements or capital expenditure cuts, given their more stable, long-term contracts exposure.
Another analyst said investors of O&G stocks should consider “sticking their necks out” as now would be a good time to enter the market and pick up some energy stocks that had been pared down.
“We don’t believe oil prices are sustainable at the US$30 level and think stocks will, at some point, rally along with an oil price recovery.
“We think this is an opportune entry point to consider selectively adding oil service stocks.”
Maybank IB had upgraded Icon Offshore Bhd, Perisai Petroleum Teknologi Bhd, SapuraKencana Petroleum Bhd and UMW Oil & Gas Bhd to trading “Buy” with unchanged target prices.
The research house also maintained its “Buy” call for Dialog Bhd, which, with its three upstream assets/operations (namely Balai RSC, Bayan OSC and D35/D21/J4 PSC fields) had a low-grade impairment risk.
MIDF Research pointed out in an earlier report that Crude oil prices started 2016 on a steep downtrend as both Brent crude oil and West Texas Intermediate (WTI) crude oil had slipped by 24.1% and 22% respectively in just 14 trading days.
“The steep declines were largely due a slew of pessimistic news such as fear of rise in Iranian exports, International Monetary Fund’s downward revision for economic growth, turbulent Chinese stock market and swelling US crude inventories.”
An industry observer meanwhile opined that the local O&G stocks were not oversold, as there was a shortage of demand and growing supply or oil.
“Global economies have slowed down and demand has dropped,” he said, adding that the lifting of sanctions on Iran would exacerbate the matter.
Oil prices continued to plummet in reaction to the lifting of Iranian sanctions in a historic deal with the US earlier this month.
Iran, which was the second-biggest producer in the Organisation of Petroleum Exporting Countries (Opec) before sanctions were intensified in 2012, was targeting an immediate increase in shipments of 500,000 barrels a day according to its Deputy Oil Minister for Commerce and International Affairs, Amir Hossein Zamaninia.
According to reports, the nation plans to add another half million barrels within months.
Another industry observer said the US plans to lift its ban on crude oil exports would also aggravate the oil supply situation.
Congress voted in December to lift the 40-year-old ban on crude oil exports as part of a broader spending bill that averted the possibility of a government shutdown.
According to Bloomberg, the US produced more oil in 2013 than it imported for the first time in two decades, and in June 2015 it surpassed Russia and Saudi Arabia to become the world’s biggest producer of oil and gas.
Fitch Ratings has published a new report on the Latin American Oil & Gas Netback profiles of regional issuers.
Fitch-calculated half-cycle costs for most Latin American integrated oil and gas companies have generally remained below market prices and those of independent players are at or above current prices. The gap between prices and costs has almost vanished with WTI prices of $30 per barrel (bbl) and the average implied half-cycle cost for companies in the region at approximately $24 per barrel of oil equivalent (boe) during 2015. Fitch sees productions costs for players as average when compared with global peers.
Fitch sees that full-cycle costs, defined as the sum of production, interest, taxes and capital costs with a 15% return on capital, are currently above market prices for all of Latin American oil and gas companies. WTI was $30/bbl during recent weeks. The average implied full-cycle oil price break-even for companies in the region has come down to approximately $52/bbl in 2015 from approximately $68/bbl in 2014.
Geopark and Pacific find themselves at the highest risk due to low energy prices with Pacific already announcing interest payment suspension at the beginning of 2016. PDVSA is also at high risk of financial distress given its relatively high half-cycle costs. Petroleos Mexicanos (Pemex) and Ecopetrol S.A. seem to be in the best position to weather the current low oil price environment and Petroleo Brasileiro S.A. (Petrobras) and YPF S.A. continue to benefit from price controls in their respective markets.