Commodities, Emerging Markets, Energy, Frontier Markets

IEA Cheif ‘Sounds Alarm’ On Oil Industry As Further Investment Cuts Seen

Oil drilling sunsetThe Executive Director of the International Energy Agency (IEA) says he is sounding the “alarm bells” on the oil industry amid turmoil that is set to drive further investment cuts.

Fatih Birol, Executive Director of the Paris-based IEA, says that the oil industry is set to further reduce spending in 2016 as oil prices remain low, signaling more pain ahead for oil and engineering firms.

So far this year, oil explorers have cut investment by 17 percent from 2015 levels and are likely to deepen the cuts, Birol told Bloomberg during an interview on the sidelines of the annual IHS CERAWeek conference in Houston, Texas.

Oil firms could top last year’s 24 percent reduction in investment this year and may further cut spending in 2017, Birol warned.

We are raising alarm bells about investments cuts,” Birol said. “The worst-case scenario is we see a third year of spending cuts” in 2017, he said.

“It’s easy for consumers to be lulled into complacency by ample stocks and low prices today,” Birol said in a speech he delivered at the IHS CERAWeek conference. “But they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant future.”

The oil industry has parked over 1,000 rigs and axed over 250,000 jobs, as of the end of November 2015, according to industry consultant Graves & Co. Oil services, drilling, and supply firms have bared the brunt of the downturn, with over three quarters of the layoffs.

The oil industry is in crisis as Brent crude, the global oil benchmark, has tumbled from an average of almost $100 a barrel in 2014 to about $30 this year, a plunge of 70 percent amid a global supply glut alongside a slowdown in global growth which is battering economies, markets, and companies.

Brent Crude Collapse

Chart courtesy of Bloomberg

According to The Wall Street Journal (WSJ), around 44% of the investment-grade bonds of oil-and-gas companies are trading at speculative, or junk, levels as of Feb. 11. That equates to about $199 billion of bonds overall.

Here is more from the WSJ:

A larger threat is faced by companies whose bonds are already marked speculative grade. If the $199 billion of investment-grade energy debt currently trading at junk prices is downgraded, the pool of high-yield energy-sector bonds would increase by 90%, said Rahim Shad, a senior high-yield analyst at Invesco.

This could push energy-sector bonds already trading at junk, to distressed level, as demand for that kind of risky debt has been limited, he said.

Shale drillers are “grievously wounded” and are about to be “decimated” in the coming months, said Mark Papa, the former EOG Resources Chief Executive Officer who helped create the shale industry more than a decade ago.

Last week, Saudi Arabia headlined a list of oil-producing nations whose sovereign debt ratings were cut by Standard & Poor’s (S&P) including Bahrain, Oman, Kazakhstan, and Brazil.

Bahrain was cut to BB from BBB-, putting it two steps below investment grade, or junk. Saudi Arabia was cut two levels to A- from A+. Oman’s rating was lowered to BBB- from BBB+. Kazakhstan was lowered to BBB- from BBB. And Brazil’s sovereign rating was cut deeper into junk, as Latin America’s largest economy was lowered by one level to BB with a negative outlook.

Last week, in an effort to stem the crisis, a preliminary deal was reached between Saudi Arabia and Russia to freeze oil output at near all-time levels, the first coordinated collaboration by the world’s two largest oil producers.

Qatar and Venezuela also agreed to freeze oil production and asked for others to follow. However, Iraq continues to boost production as it recovers from years of conflict and lack of investment, also Iran has resisted and said that it will not forgo its share of the market as it ramps up production following the lifting of sanctions.

Saudi Arabia’s Oil Minister damped hopes on Tuesday as he ruled out the possibility that the recently announced oil production freeze would lead to production cuts.

There is no sense wasting our time seeking production cuts,” Ali bin Ibrahim al-Naimi told energy executives at the IHS CERAWeek conference. “That will not happen.”

 

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