Saturday, 25 July 2015

The Great Unravelling

Oil Warning: The Crash Could Be the Worst in More Than 45 Years
There's only one thing holding back a price rebound. It's a big thing


23 July, 2015


Morgan Stanley has been pretty pessimistic about oil prices in 2015, drawing comparisons with the some of the worst oil slumps of the past three decades. The current downturn could even rival the iconic price crash of 1986, analysts had warned—but definitely no worse. 

This week, a revision: It could be much worse

Until recently, confidence in a strong recovery for oil prices—and oil companies—had been pretty high, wrote such analysts as Martijn Rats and Haythem Rashed in a report to investors yesterday. That confidence was based on four premises, they said, and only three have proven true.

1. Demand will rise: Check 

In theory: The crash in prices that started a year ago should stimulate demand. Cheap oil means cheaper manufacturing, cheaper shipping, more summer road trip. 

In practice: Despite a softening Chinese economy, global demand has indeed surged by about 1.6 million barrels a day over last year's average, according to the report. 

2. Spending on new oil will fall: Check 

In theory: Lower oil prices should force energy companies to cut spending on new oil supplies, and the cost of drilling and pumping should decline. 

In practice: Sure enough, since October the number of rigs actively drilling for new oil around the world has declined about 42 percent. More than 70,000 oil workers have lost their jobs globally, and in 2015 alone, listed oil companies have cut about $129 billion in capital expenditures. 

3. Stock prices remain low: Check 

In theory: While oil markets rebalance themselves, stock prices of oil companies should remain cheap, setting the stage for a strong rebound. 

In practice: Yep. The oil majors are trading near 35-year lows, using two different methods of valuation. 

4. Oil supply will drop: Uh-oh 

In theory: With strong demand for oil and less money for drilling and exploration, the global oil glut should diminish. Let the recovery commence. 

In practice: The opposite has happened. While U.S. production has leveled off since June, OPEC has taken up the role of market spoiler.  


OPEC Production Surges in 2015


Source: Morgan Stanley Research, Bloom

Source: Morgan Stanley Research, Bloomberg

For now, Morgan Stanley is sticking with its original thesis that prices will improve, largely because OPEC doesn't have much more spare capacity to fill and because oil stocks have already been hammered.

But another possibility is that the supply of new oil coming from outside the U.S. may continue to increase as sanctions against Iran dissolve and if the situation in Libya improves, the Morgan Stanley analysts said. U.S. production could also rise again. A recovery is less certain than it once was, and the slump could last for three years or more—"far worse than in 1986."

"In that case," they wrote, "there would be little in analysable history that could be a guide" for what's to come. 



Not looking so good Down-Under

Aussie Dollar Tests Long-Term Trendline As China Contagion Spreads


24 July, 2015

Last week, we asked "Is Australia the next Greece?" It appears, judging bu the collapse in the Aussie Dollar, that some - if not all - are starting to believe it's possible after last night's 15-month low in China Manufacturing PMIAs UBS previously noted, China's real GDP growth cycles have become an increasingly important driver of Australia's nominal GDP growth this last decade. With iron ore and coal prices plumbing new record lows, a Chinese (real) economy firing on perhaps 1 cyclinder, and equity investors reeling from China's collapse; perhaps the situation facing Australia is more like Greece than many want to admit.
Australian consumers are more worried about the medium term outlook than at the peak of the financial crisis, and rightfully so...


As China plumbs new depths in manufacturing, just piling on Aussie's woes...



The Dollar is rising this morning but all eyes are on AUD as it tests a very long-term trendline...


h/t @RaoulGMI

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The problem is that Australia, after decades of effort to diversify, is looking ever more like a petrodollar economy of the Middle East, but without the vast horde of foreign currency reserves to fall back on when commodity prices fall.
Instead, Australians must borrow to maintain the standards of living that the country has become accustomed to, which even some Greeks will admit is unsustainable.

Charts: Bloomberg


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