Oil Price Slump Takes Its Toll On Emerging Markets

Friday, February 5, 2016

In the latest edition of the Numbers Report, we'll take a look at some of the most interesting figures put out this week in the energy sector. Each week we'll dig into some data and provide a bit of explanation on what drives the numbers.

Let's take a look.

1. Spending and dividends exceed cash flow

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- BP reported a $6.5 billion net loss for 2015, and announced another 3,000 job cuts. It was the worst result in decades for the British oil giant.
- Worrying for the company is the fact that underlying cash flow ($20 billion) does not cover both spending ($19 billion) and dividends ($6.7 billion).
- In 2014, BP only covered spending plus shareholder payouts by selling off assets. Since then it has improved cash flow by getting rid of share buybacks.
- Still, it has had to take on debt in 2015 to keep the dividends in place. Its debt ratio jumped from 16.7 to 21 percent over the course of 2015.
- ConocoPhillips became the first major U.S. oil company to reduce its dividend, when it announced on Feb. 4 that its payout would drop by more than 65 percent. But it may not be the last.

2. Gasoline demand grew briskly in 2015. It recently slowed

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- The two charts above from Reuters show that the collapse in oil prices spurred strong demand for gasoline in the United States as consumers took to the roads.
- U.S. vehicle sales in 2015 hit a record 17.5 million, a 5.7 percent jump from 2014. Demand for SUVs and other less efficient light trucks surged.
- Gasoline demand growth neared its highest level since well before the financial crisis in 2008.
- But in a warning sign for the economy, 2016 started off on a much softer note (second chart).
- January gasoline supplied over a 4-week average was well below 2015 figures for the same time of year, and also slightly below the ten-year average. The IEA, EIA, and OPEC have all predicted that oil demand growth would be lighter in 2016, but there is quite a bit of uncertainty as to how healthy the economy is right now. A sudden downturn in gasoline demand highlights those concerns.

3. Still profitable to drill somewhere

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- Parts of the Permian Basin and the Eagle Ford formation are still profitable at $30 per barrel, according to Bloomberg Intelligence.
- DeWitt County, TX, east of San Antonio, comes in lowest with a breakeven cost around $22.52 per barrel. The country produced 100,000 barrels of oil per day in November. The county lies within the Eagle Ford formation.
- Reeves County in the Wolfcamp (Permian basin) costs just a tad more than DeWitt.
- There has been a flock of capital that has been sucked out of higher-cost areas and redeployed in Texas, where upfront capital costs and overall breakeven costs are low.
- In its latest quarterly report, Chevron's CEO even said that his company scrapped projects in the Gulf of Mexico and Kazakhstan because capital would be better spent in the Permian.

4. Venezuela is inching closer to a 'credit event'

- A "credit event" may become impossible to avoid in 2016, according to a recent assessment from Barclays.
- The country is rapidly running out of options: Inflation tops 700%; cash reserves are dwindling; GDP contracted by 10% in 2015 and could fall by another 7% this year; the black market rate for the currency is more than 150 times weaker than the official exchange rate; and there is a shortage of basic goods.
- It is looking increasingly likely that the government will be unable to meet its debt obligations at some point this year.
- The Wall Street Journal reported that Venezuela flew in billions of bank notes to flood the economy, which could double the amount of money in circulation. Hyper-inflation could get worse and some are predicting Venezuela - a country with the world's largest oil reserves - could see its economy totally collapse relatively soon.

5. Emerging markets no longer the darling of investors

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- Emerging market debt is at its highest level since the financial crisis in 2008-2009.
- The supply-side boom in oil has helped to push commodity producers deeper into economic trouble.
- The problem is that emerging markets have increased in their significance for global growth. Emerging markets now account for 40 percent of global GDP, double the share in 1990.
- In the 1980s, commodity exporters saw a rash of defaults. Venezuela (mentioned above) could default soon. The IMF may extend emergency loans to Azerbaijan and Nigeria.
- Viewed another way, the collapse in oil prices has transferred somewhere around $3 trillion from commodity producers - often emerging market economies - to consumers.

6. U.S. Oil storage Now Counts 500 Million Barrels

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- Crude oil inventories spiked over the past three weeks, a surprise development that continues to weigh on oil markets.
- U.S. oil in storage has jumped to 502.7 million barrels as of the last week in January, exceeding the 490 million barrel record set in April 2015. That is also the highest level of oil storage in at least 80 years.
- Demand has softened and U.S. oil production remains shockingly resilient. The U.S. produced about 9.21 million barrels per day at the end of January, a level that has barely budged in months.
- The latest data points to a "lower for longer" mantra, with depressed oil prices persisting through 2016.

7. U.S. dollar weakens

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- The U.S. dollar weakened significantly over the past few days on speculation that the Federal Reserve may not follow through on its planned schedule to hike interest rates this year. Global financial turmoil and economic weakness looks like it might deter the Fed from raising rates.
- That speculation was bolstered on Wednesday when New York Fed President William Dudley said that U.S. growth could be altered from the global economic unease.
- This has been the largest decline in months. With extraordinary quantitative easing in Europe and Japan (including the introduction of negative interest rates), the dollar had strengthened quite a bit since last fall.
- The dollar index - which compares the greenback to a basket of 16 currencies - weakened 1.7 percent relative to the euro on February 4, and fell by 1.7 percent compared to the yen.
- The reasons for the sudden fall in the dollar go beyond Fed speculation. More positive than expected economic news from the UK triggered large short coverings.
- The dollar weakness helped push up oil prices, with WTI and Brent rallying 8 percent on February 3. Those gains were erased on Thursday when Saudi Arabia revealed a price cut for its oil, suggesting that it is not gearing up for coordinated production cuts through OPEC, and with the participation of Russia.

That's it for this week's Numbers Report. Thanks for reading, and we'll see you next week.