Investors flee amid fears of market glut after world’s ‘big three’ producers reveal near-record output

A gas station worker pumps fuel into a car at a gas station of the Venezuelan state-owned oil company PDVSA in Caracas. (Reuters)
Updated 05 November 2018
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Investors flee amid fears of market glut after world’s ‘big three’ producers reveal near-record output

Reuters NY: The oil market’s two-year bull run is running into one of its biggest tests in months, facing a tidal wave of supply and growing worries about economic weakness sapping demand worldwide.
After topping out at more than $75 and $85 a barrel just a month ago, both US crude and Brent benchmark futures have grappled with near-relentless selling. For a time, prices had some support on hopes that renewed US sanctions on Iran would force barrels off the market.
That changed in the last week. The world’s three largest producers — Russia, Saudi Arabia and the US — all indicated they were pumping at record or near-record levels, while the US said it would allow waivers that could allow buyers to keep importing Iranian oil, lessening the threat of a supply crunch.
Those factors, along with a spate of recent weak economic reports out of China and other emerging markets, have shifted the conversation back toward worries about oversupply, and pushed US futures to lows not seen since April, interrupting an upward move that had consistently found support during the rally’s modest pullbacks.
The structure of the US crude futures curve had for several months indicated expectations for tighter supply, but future-dated contracts now suggest investors think markets could be awash in oil over the coming months.
“The magnitude of recent selling is strongly suggesting that global oil demand is weaker than expected as a result of tariff issues, especially between the US and China,” said Jim Ritterbusch, president of Ritterbusch & Associates.
There has been an exodus among speculators as well. In the last two weeks, net bullish bets on oil have declined to the lowest level in over a year. Selling notably accelerated on Thursday after US West Texas Intermediate crude futures fell below $65 a barrel, a level that had stood firm in previous selloffs during the summer and fall.
The oil market ran higher in anticipation of this week’s formal re-imposition of sanctions against Iran by the US, and on concerns that supply from producers like Saudi Arabia would not be able to make up the difference.
However, the US government said on Friday it will temporarily allow several countries, including South Korea and Turkey, to keep importing Iranian oil when US sanctions come back into force, sparing them for now from the threat of US economic penalties.
Still, some analysts believe the current selloff has come too far, too quickly. Major OPEC producers won’t be able to add more supply should it become necessary, particularly with production in Iran, Venezuela and Libya still at risk.
“A loss of 1 million bpd (barrels per day) from Iran, further declines in Venezuela, coupled together with geopolitical disruption in Libya and Nigeria could easily wipe out what little spare capacity we have left,” Bernstein analysts said this week.
Output from the Organization of the Petroleum Exporting Countries, led by Saudi Arabia, rose to levels not seen in two years. US production hit a record 11.3 million bpd in August, and Russia’s output rose to 11.4 million bpd, a post-Soviet era peak.
For US crude, the key area to watch is between $64.45 and $64.80, where prices had found support in the past, said Fawad Razaqzada, analyst at futures brokerage Forex.com. If oil dips below this point, “the path of least resistance would be to the downside,” he said.
For Brent, Razaqzada is watching the range between $69.50 and $69.60 a barrel, and if it were to slip below that, we could see a much larger correction, he said.


Gulf ratings untarnished by growing GRE debt

Updated 1 min 12 sec ago
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Gulf ratings untarnished by growing GRE debt

  • Head of equity research at Exotix Capital Hasnain Malik: Investors familiar with the Gulf fully expect debt issuance by governments and their related enterprises to increase
  • Hasnain Malik: The generally very strong financial position of sovereigns in the Gulf and their defensible exchange rates has provided a relative haven for global fixed income investors

LONDON: The sovereign ratings of Gulf countries remain unaffected for now by both the recent and planned debt-raising activities of government-related entities, according to S&P Global.
The agency published a research note on Tuesday following investor concerns about the implications of significant amounts of debt being raised by government-backed entities such as investment funds and oil companies.
Saudi Arabia’s Public Investment Fund (PIF) raised an $11 billion international syndicated loan in September this year, while in July, Saudi Aramco said it might consider acquiring a strategic stake in Saudi Basic Industries Corp. (Sabic) from PIF. This potential acquisition is likely to require funding of up to $70 billion, said S&P Global.
“So far, the level of GRE debt and the potential for these contingent liabilities — obligations that have the potential to materialize on a government’s balance sheet or more broadly affect its fiscal profile — being realized has not led to negative rating actions for Gulf Cooperation Council (GCC) sovereigns,” the S&P report said.
“If contingent liabilities do materialize, they have the potential to negatively affect sovereign ratings,” it added, using Mozambique as an example of where the restructuring of a government-guaranteed GRE loan led to a downgrade of the sovereign rating in 2016.

 

Hasnain Malik, head of equity research at Exotix Capital, said that most investors anticipated the Gulf region would ramp up debt-raising activities in the near future.
“Investors familiar with the Gulf fully expect debt issuance by governments and their related enterprises to increase. This is in line with their stated strategies,” he said.
“The more the debt that is taken on by government-related enterprises, the more that it will be lumped together with debt taken out by the sovereign in order to assess overall risk. But this is nothing new. Past discussions of the overall debt position of ‘Dubai Inc’ or ‘Qatar Inc’ have grappled with the issue of explicit and implicit government guarantees,” he said.
Rating agency Moody’s said last month that the multibillion-dollar PIF loan demonstrated that Saudi Arabia had a “strong ability to raise alternative funding in the capital markets,” according to its Oct. 17 report.
It then warned that a “significant reliance on broader public- sector borrowing to fund the diversification and development agenda would over time increase contingent liability risks for the sovereign.”
Malik said the region had retained its appeal to investors so far despite the potential rising GRE debt.
“In what has been a tougher environment for emerging market debt this year, the generally very strong financial position of sovereigns in the Gulf and their defensible exchange rates has provided a relative haven for global fixed income investors,” he said.
“The imminent inclusion into JP Morgan’s mainstream global indices of debt will likely put the region closer to the center of the average emerging market fixed income investor,” he said.
S&P Global rates 24 GREs in the Gulf region, with most of the companies enjoying the same rating as the sovereign.

FACTOID

S&P Global rates 24 GREs in the Gulf region.