Oil Tanker Market Filling Up With UnSold Crude Oil

By CHRISTIAN BERTHELSEN
June 25, 2015 7:11 p.m. ET
3 COMMENTS
The oil-tanker market is heating up, a development some analysts say is a warning flare that signals further price declines for crude.

The Baltic Dirty Tanker Index, which tracks the rates to hire oil tankers plying 16 routes, has shot up 25% this month, as global oil output continues to grow. The index is now at its highest level since January 2014.

But an increasing number of these oil cargoes have nowhere to go. Oil producers and traders are rushing to lease tankers while they scramble to find buyers, effectively turning these ships into floating storage facilities. The oil-supply glut has worsened since the Organization of the Petroleum Exporting Countries earlier this month decided to maintain crude-output levels.

A recent rebound in oil prices has stalled amid copious supplies world-wide, and many market watchers are bracing for the resumption of a selloff that sent Brent crude, the global benchmark, tumbling to a six-year low in January. On Thursday, Brent fell 29 cents, or 0.5%, to $63.20 a barrel. A year ago, a barrel was $114.

“There’s a lot of crude oil that’s trying to find a home, so that’s good for the tanker market,” said Olivier Jakob, managing director of Petromatrix, a consulting firm based in Zug, Switzerland. But “that limits the potential for a crude-oil rally and puts pressure on the price.”

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Ships also are embarking on longer voyages than in past years, as sellers go farther afield to find buyers. That means fewer ships are available at any one time, which also has contributed to the upward pressure on tanker rates.

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Nigeria is proceeding with monthly tanker loadings even when cargoes from previous months’ auctions remain unsold, according to Morgan Stanley. Meanwhile, vessels recently chartered by a state-owned company in China and trading house Vitol Inc. are being used to store crude at sea on so-called Very Large Crude Carriers, which hold up to two million barrels of oil, according to shipping records and data from Thomson Reuters.

Almost 55 million barrels were stored on tankers last week, more than double the amount in January, according to Thomson Reuters. “The abundance of crude in the world has created some distressed cargoes,” said Erik Broekhuizen, head of tanker research at marine brokerage Poten & Partners. “In effect, they’re using tankers to store crude because they can’t find buyers.”

Oil traders earlier this year capitalized on the bounce in oil prices by selling crude that had been locked up in storage arrangements for months. But much of that oil ended up in onshore facilities or remained at sea without an end user, according to a June 23 note from research firm Energy Aspects.

Some analysts say an uptick in global demand is behind the rise in tanker rates, which can be seen as bullish—rather than bearish—for crude prices. U.S. refiners are running near maximum capacity to produce gasoline for drivers who are hitting the road for summer vacation. And China, the world’s largest oil consumer after the U.S., has been stockpiling crude for its strategic reserves.

But many analysts and traders say those factors are fleeting.

Another threat to tanker rates, independent of the oil market, is the industry’s tendency to quickly bring in new ships when rates are high. During the 2009 global recession, the combination of increased shipping capacity and slumping demand sent rates down nearly 80% in nine months, to the lowest levels ever registered by the index, which dates to the late 1990s. Euronav NV, an operator of more than 60 tankers based in Antwerp, Belgium, earlier this month agreed to buy up to eight new tankers for nearly $800 million, though it was careful to say the ships were already under construction and headed to market when it made the purchase, rather than adding further new capacity with fresh orders.

For now, though, investors are betting the good times for tanker operators will continue. Share prices for some of the world’s major tanker players have surged amid strong first-quarter earnings. Euronav, Teekay Tankers Ltd. and Tsakos Energy Navigation Ltd. are among the companies whose shares have hit multiyear highs recently.

“Tankers are making serious money, in what’s turning into the best tanker market since 2008,” Wells Fargo analyst Michael Webber said.

Janus Capital Management increased its holdings in Euronav, the largest fleet operator in the industry, by more than 40% in the first quarter, the most recent period for which records are available. York Capital Management LLC, a $27 billion hedge-fund firm, boosted its stake in Scorpio Tankers Inc., based in Monaco, to 9.1% at the end of March, from 5.5% last June. Shares of Scorpio are up 16% this year.

“The market has been so bad for so long,” said Adam Berger, portfolio manager for oil and gas holdings at $200 million hedge-fund firm Cougar Trading LLC, referring to tanker rates. The fund held a position in Bermuda-based Teekay Tankers as of its most recent filing. “Right now, the tailwinds seem to be getting better and better.”

But an upbeat view on the tanker market is a red flag for oil prices, analysts say.

“The disconnect between the markets is at unprecedented levels, and something has to give,” analysts at Energy Aspects wrote.

Write to Christian Berthelsen at christian.berthelsen@wsj.com

Why Saudis Decided Not to Prop Up Oil – WSJ

WORLD NEWS
Why Saudis Decided Not to Prop Up Oil
In American Shale Oil, A Perceived Threat to OPEC Market Share

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By JAY SOLOMON in Washington and SUMMER SAID in Dubai
Dec. 21, 2014 10:33 p.m. ET

In early October, Saudi Arabia’s representative to OPEC surprised attendees at a New York seminar by revealing his government was content to let global energy prices slide.
Nasser al-Dossary ’s message broke from decades of Saudi orthodoxy that sought to keep prices high by limiting global oil production, said people familiar with the session. That set the stage for Saudi Arabia’s oil mandarins to send crude prices tumbling late last month after persuading other members of the Organization of the Petroleum Exporting Countries to keep production steady.

Hard-hit countries like Iran, Russia and Venezuela suspected the move was a coordinated effort between the oil kingdom and its longtime ally, the U.S., to weaken their foes’ economies and geopolitical standing.

But the story of Saudi Arabia’s new oil strategy, pieced together through interviews with senior Middle Eastern, American and European officials, isn’t one of an old alliance. It is a story of a budding rivalry, driven by what Saudi Arabia views as a threat posed by American energy firms, these officials said.

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Shale-oil production in places like Texas and North Dakota has boosted U.S. output, displacing exports to the U.S. from OPEC members and adding to global oversupply.

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Mr. Dossary’s October message signaled a direct challenge to North American energy firms that the Arab monarchy believes have fueled a supply glut by using new shale-oil technologies, said the people familiar with the session.
Saudi officials became convinced they couldn’t bolster prices alone amid the new-crude flood. They also concluded many other OPEC members would balk at meaningful cuts, as would big non-OPEC producers like Russia and Mexico. If Riyadh cut production alone, Saudi officials feared, other producers would swoop in and steal market share.
Saudi oil minister Ali al-Naimi tested that conclusion just 48 hours before the Nov. 27 OPEC decision, meeting in Vienna with oil heads of several big producer nations to suggest a coordinated output cut. As he suspected going in, he couldn’t get an agreement, said people familiar with the meeting.

The option left: Let prices slide to test how long, and at what levels, American shale producers can keep pumping.

OPEC’s Nov. 27 move helped drive crude prices to below $60 a barrel from over $100 this summer. It fueled discord among OPEC’s members—and among other energy powers—who have grown accustomed to triple-digit oil prices padding their governments’ balance sheets.

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Mr. Naimi on Thursday said Saudi Arabia and OPEC had no choice but to keep production at current levels amid the price weakness.
“In a situation like this, it is difficult, if not impossible for the kingdom or OPEC, to take any action that may result in lower market share and higher quotas from others, at a time when it is difficult to control prices,” the official Saudi press agency quoted him as saying. Mr. Naimi didn’t respond to inquiries. Saudi oil-ministry representatives wouldn’t comment for this article.
The Saudi approach is part of a significant evolution in Riyadh’s relationship with Washington over the past decade. Close allies since World War II, the countries prospered on the kingdom’s providing a steady oil flow in exchange for America’s securing its borders.
But the U.S.’s emergence as an energy rival is testing this foundation in ways not yet widely appreciated, said U.S. and Saudi officials, as have major differences over American Middle East policies.
Saudi Arabia is taking a risk by letting oil prices plunge, said Arab, American and European officials. Saudi officials have said their economy can survive at least two years with low prices, thanks partly to the kingdom’s $750 billion foreign-exchange reserves. Arab officials believe many less-efficient producers will be driven out of the market.
Still, some oil-industry executives said, Riyadh and Mr. Naimi may underestimate how technology and the shale-oil boom have fundamentally altered energy markets. Many U.S. companies, they said, can make money or break even with oil below $40.
The move has also exposed cracks inside the Saudi ruling circle. In October, as the oil-price slide accelerated, billionaire Prince al-Waleed bin Talal, a nephew to King Abdullah, castigated Mr. Naimi in an open letter for appearing to shrug off price declines. Belittling the impact, he wrote, “is a catastrophe that cannot go unmentioned.”

OPEC’s Dilemma

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At about that time, Mr. Naimi’s deputy, Prince Abdulaziz bin Salman, another nephew of the king, worried to colleagues that the kingdom’s budget couldn’t bear lower prices long, said people familiar with the matter. The offices of Prince Abdulaziz and Prince al-Waleed didn’t respond to inquiries.
Saudi Arabia and its massive energy reserves have played a major role in shaping world affairs for 50 years. During the 1980s, the Reagan administration credited the Saudis with maintaining high oil production to drive down prices and weaken the Soviet Union’s finances. The price drop also fueled an economic recovery in the U.S.
A spokesman for the National Security Council on Sunday said Washington’s alliance with Saudi Arabia remains strong and focused on cooperation on numerous economic and security issues. “Our bilateral relationship is built on over 70 years of close cooperation whether it is counterterrorism, military to military training, educational exchanges, energy security, or bolstering trade and investment,” said NSC spokesman Alistair Baskey.
President Barack Obama ’s administration has worked closely with Saudi Arabia to try using energy markets to pressure Iran into constraining its nuclear program, according to U.S. and Saudi officials.
Beginning in 2009, U.S. officials coordinated with Saudi Arabia, the United Arab Emirates and Kuwait to assure major buyers of Iranian oil would have alternatives if they weaned themselves off Tehran.
The strategy helped the West cut by half Iran’s energy exports over the past three years, said Robert Einhorn, who coordinated U.S. sanctions on Iran in the Obama administration. “What made this possible was that the Saudis and others were able to produce more.”
But Washington’s relations with Riyadh have soured in recent years due to differences over the Obama administration’s handling of Middle East political instability. King Abdullah was incensed last year when Mr. Obama reneged on his pledge to launch military strikes against Syrian President Bashar al-Assad ’s regime following its alleged poison-gas use against civilians. Saudi officials also felt deceived after the Obama administration launched secret nuclear negotiations in 2012 with Iran, Riyadh’s regional rival.
OPEC: The Cartel is Standing Pat on Production, for Now

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“Saudi Arabia’s reliance on U.S. protection is a thing of the past,” said Nawaf Obaid, a visiting scholar at Harvard University’s Belfer Center who has advised the Saudi government on foreign policy. “The Saudis will remain America’s most important strategic partner in the Middle East, but not its closest.”
Washington is entering a new era in its Saudi Arabia relationship, although the alliance remains crucial to the global economy, said Amos Hochstein, the U.S. State Department’s special envoy and coordinator for international energy affairs.
“Our relationship with Saudi Arabia was never dependent on energy. Our relationship is evolving,” he said. “We will never be energy independent because it’s a global commodity. But we can be more efficient and self-sufficient.”
The American energy boom has further complicated relations, said U.S. and Saudi officials. Senior Saudi officials have appeared perplexed in recent months in gauging the impact of the American boom.
In late September, Ibrahim al-Muhanna, a top adviser to Mr. Naimi, said publicly in Bahrain he didn’t foresee oil prices falling much below $90 a barrel due to what he said was the high cost of extracting North American shale oil. He didn’t respond to inquiries.
The Saudis largely kept silent as prices kept falling. Then Mr. Naimi went on vacation in late September, removing himself from a public debate over whether OPEC should rein in production at its November meeting.
Mr. Naimi tended sheep before starting as an errand boy at Saudi Aramco, the national oil company. He worked his way to chief executive before becoming minister in 1995. He won a reputation for data-driven decision making. In the late 1990s, he focused on U.S. Midwest commercial crude-oil inventories—if levels got too high, OPEC needed to cut.
Which Oil Producers Are Breaking Even?

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Mr. Naimi’s comments can rattle or soothe oil markets. So his vacation’s timing puzzled many of his colleagues, said people familiar with the matter, and during his absence there was bickering inside the government about how to arrest the price decline. The question: whether to focus on stopping the short-term revenue impact of the price decline or to exploit the medium-term potential of its reducing competition from North American shale producers.
Meanwhile, OPEC members were slashing prices, often undercutting one another. In early November, Saudi Aramco cut prices to U.S. customers, a move aimed at locking in customers as shale output swelled, industry officials said.
Returning from his holiday, Mr. Naimi met with Venezuela’s foreign minister and its chief OPEC representative, Rafael Ramirez, on a Venezuelan resort island. Privately, the Saudi told his hosts he would support a production cut only if the Venezuelans could persuade producers inside and outside OPEC to participate, people briefed on the meeting said. A Venezuelan foreign ministry spokeswoman declined to comment.
Mr. Ramirez traveled to Russia, Algeria, Iran and Qatar to woo production-cut support. Two days before OPEC’s Nov. 27 meeting, he gathered senior energy officials from Russia, Mexico and Saudi Arabia—including Mr. Naimi—at Vienna’s Hyatt Hotel.
On the table was a proposal to take two million barrels a day off the market, officials familiar with the talks said. OPEC would shoulder the bulk of the cut, but Russia and Mexico were expected to trim a combined 500,000 daily barrels.
Mr. Naimi had expected Russia to balk, these people said. Indeed, the Russian delegates said they couldn’t cut production for technical reasons and because they might lose pumping capacity by shutting wells. An official at OAO Rosneft, the Russian state oil company, confirmed the meeting took place but denied there were discussions about an output cut.
The discussions never made it as far as what Mexico might be willing to do. “From the start, Russia made it clear that it wasn’t going to cut production, and the meeting ended there,” said a person familiar with the discussion. A Mexican energy-ministry spokesman didn’t respond to inquiries.
Mr. Naimi argued it was in everyone’s interest to take collective action and that the market would eventually force the Russians to cut. Russia, he said, couldn’t keep producing roughly 10 million barrels a day unless oil prices were over at least $100.
Mr. Naimi headed to the Nov. 27 OPEC meeting with King Abdullah’s support to align OPEC’s Arab states behind a policy of no production cuts and of defending market share, said people familiar with his mandate. The U.A.E., Kuwait and Qatar gave their support ahead of the meeting.
At the meeting, Mr. Naimi addressed other OPEC ministers, who were asked to leave aides outside the room. He conceded falling prices would be painful but said losing customers to U.S. shale would be worse, people briefed on his comments said.
Mr. Naimi wasn’t advocating forcing down prices to hurt U.S. shale producers, these people said, but was warning that if OPEC cut output, non-cartel crude would likely replace it. OPEC ministers agreed to keep their production ceiling unchanged.
Sell orders flooded oil markets. Shares in big producers tumbled, along with currencies of petro-states like Russia and Nigeria.
U.S. and Arab officials have privately gushed that the decline could undercut the ability of Tehran, Moscow and Caracas to play destabilizing roles globally, and have voiced optimism that Iran’s financial woes could force it into more nuclear concessions.
“If in the process, you have 30% off Iran’s income, fine,” said a senior Arab official involved in the oil deliberations. “If in the process, you shave 30% off Russia’s income, fine.”
There remains a risk prices don’t quickly recover. Some in the Saudi media have criticized Mr. Naimi for a policy they say could be disastrous for the kingdom’s economy. Riyadh depends on oil for 90% of its budget.
“All OPEC and non-OPEC officials are in a state of shock,” said Muhammad al-Sabban, a former adviser to Mr. Naimi, adding that a “ ‘wait and see’ is their only option.”
—Benoît Faucon, Sarah Kent and Kejal Vyas contributed to this article.
Write to Jay Solomon at jay.solomon@wsj.com and Summer Said at summer.said@wsj.com

Oil Crash Exposes New Risks for U.S. Shale Drillers

Photographer: Andrew Burton/Getty Images

U.S. shale oil production.

Tumbling oil prices have exposed a weakness in the insurance that some U.S. shale drillers bought to protect themselves against a crash.

At least six companies, including Pioneer Natural Resources Co. (PXD) and Noble Energy Inc. (NBL), used a strategy known as a three-way collar that doesn’t guarantee a minimum price if crude falls below a certain level, according to company filings. While three-ways can be cheaper than other hedges, they can leave drillers exposed to steep declines.

“Producers are inherently bullish,” said Mike Corley, the founder of Mercatus Energy Advisors, a Houston-based firm that advises companies on hedging strategies. “It’s just the nature of the business. You’re not going to go drill holes in the ground if you think prices are going down.”

Oil Prices

The three-way hedges risk exacerbating a cash squeeze for companies trying to cope with the biggest plunge in oil prices this decade. West Texas Intermediate crude, the U.S. benchmark, dropped about 50 percent since June amid a worldwide glut. The Organization of Petroleum Exporting Countries decided Nov. 27 to hold production steady as the 12-member group competes for market share against U.S. shale drillers that have pushed domestic output to the highest since at least 1983.

WTI for January delivery rose $2.41, or 4.5 percent, to settle at $56.52 a barrel today on the New York Mercantile Exchange.

Debt Price

Shares of oil companies are also dropping, with a 49 percent decline in the 76-member Bloomberg Intelligence North America E&P Valuation Peers index from this year’s peak in June. The drilling had been driven by high oil prices and low-cost financing. Companies spent $1.30 for every dollar earned selling oil and gas in the third quarter, according to data compiled by Bloomberg on 56 of the U.S.-listed companies in the E&P index.

Financing costs are now rising as prices sink. The average borrowing cost for energy companies in the U.S. high-yield debt market has almost doubled to 10.43 percent from an all-time low of 5.68 percent in June, Bank of America Merrill Lynch data show.

Locking in a minimum price for crude reassures investors that companies will have the cash to keep expanding and lenders that debt can be repaid. While several companies such as Anadarko Petroleum Corp. (APC), Bonanza Creek (BCEI) Energy Inc., Callon Petroleum Co., Carrizo Oil & Gas Inc. and Parsley Energy Inc., use three-way collars, Pioneer uses more than its competitors, company records show.

‘Best Hedges’

Scott Sheffield, Pioneer’s chairman and chief executive officer, said during a Nov. 5 earnings call that his company has “probably the best hedges in place among the industry.” Having pumped 89,000 barrels a day in the third quarter, Pioneer is one of the biggest oil producers in U.S. shale.

Pioneer used three-ways to cover 85 percent of its projected 2015 output, the company’sDecember investor presentation shows. The strategy capped the upside price at $99.36 a barrel and guaranteed a minimum, or floor, of $87.98. By themselves, those positions would ensure almost $34 a barrel more than yesterday’s price.

However, Pioneer added a third element by selling a put option, sometimes called a subfloor, at $73.54. That gives the buyer the right to sell oil at that price by a specific date.

Below that threshold, Pioneer is no longer entitled to the floor of $87.98, only the difference between the floor and the subfloor, or $14.44 on top of the market price. So at yesterday’s price of $54.11, Pioneer would realize $68.55 a barrel.

‘Better Upside’

David Leaverton, a spokesman for Irving, Texas-based Pioneer, declined to comment on the company’s hedging strategy. The company said in its December investor presentation that “three-way collars protect downside while providing better upside exposure than traditional collars or swaps.”

The company hedged 95,767 barrels a day next year using the three-ways. If yesterday’s prices persist through the first quarter, Pioneer would realize $1.86 million less every day than it would have using the collar with the floor of $87.98. That would add up to more than $167 million in the first quarter, equal to about 14 percent of Pioneer’s third-quarter revenue.

Exposure Cost

The strategy ensures that the bulk of Pioneer’s production will earn more than yesterday’s market price. The three-ways will also prove valuable if oil rises above the subfloor.

“What they have is much better than nothing,” said Tim Revzan, an analyst with Sterne Agee Group Inc. in New York. “But they left some money on the table that they could have locked in at a better price.”

Noble Energy used three-ways to hedge 33,000 barrels a day, according to third-quarter SEC filings. Assuming yesterday’s prices persist, Houston-based Noble will bring in $50 million less in the first quarter than it would have by locking in the floor prices.

Bonanza Creek, based in Denver, Colorado, set up three-ways with a floor of $84.32 and a subfloor of $68.08, SEC records show. If prices stay where they are, the company will realize $8.1 million less in the first quarter than it would have by just using the floor.

Ryan Zorn, Bonanza Creek’s senior vice president of finance, said that the comparison doesn’t take into account the advantages of the strategy. The proceeds from selling the $68.08 puts helped pay for the protection at $84.32, without which Bonanza Creek would likely have purchased cheaper options with a lower floor.

’Much Better’

“The other comparison is if we’d done nothing,” Zorn said. “I view it as being much better than being unhedged.”

Representatives for Anadarko, Noble, Carrizo and Parsley didn’t return e-mails and phone calls seeking comment.

“Because we’ve had high energy prices for so long, it could have given them a false sense of confidence,” said Ray Carbone, president of Paramount Options Inc. in New York. “They picked a price they thought it wouldn’t go below. It has turned out to be very expensive.”

Callon (CPE)’s first-quarter three-ways cover 158,000 barrels with a floor of $90 and a subfloor of $75, company filings show. Callon, based in Natchez, Mississippi, will get $3.3 million less that it would have realized by using the $90 floor, assuming prices stay where they are.

“Certainly, if we’d had the foresight to know prices were going to crater, you’d want to be in the swap instead of the three-way,” said Eric Williams, a spokesman for Callon. “Swaps make more sense if you knew prices were going to go down the way they did, but a few months ago everyone was bullish.”

To contact the reporter on this story: Asjylyn Loder in New York at aloder@bloomberg.net

To contact the editors responsible for this story: Dan Stets at dstets@bloomberg.net Richard Stubbe

The Russian Currency Crisis Just Got Even Worse DECEMBER 12, 2014 AT 3:56 AM Business Insider / Tomas Hirst

The Russian Currency Crisis Just Got Even Worse
DECEMBER 12, 2014 AT 3:56 AM
Business Insider / Tomas Hirst

The Russian rouble has fallen over 3% against the dollar in early trading, shrugging off the central bank’s attempt to halt the slide by raising interest rates.

The country’s central bank increased interest rates by 1% on Thursday to 10.5% in an effort to slow the pace of rouble falls. However, the currency has continued to track the oil price downwards as WTI crude dropped below $60 a barrel, down from $107 a barrel in June, and Brent slid to $63.12 on Friday.

At the time of writing $1 would buy you over 57 roubles, a new record level.

While the country still has around $416 billion in reserves and low government debt equal to only 9.2% of GDP, concerns have been focused on Russia’s corporate sector. In particular a number of Russian businesses borrowed heavily in dollars over the past few years, and repaying those loans is quickly becoming a much more expensive prospect.

Russia debt

Russian corporates are scheduled to pay around $35 billion on this debt in December and over $100 billion in 2015. These firms, and especially Russia’s banks, face major challenges funding this bill with Western sanctions freezing them out of global capital markets on the one hand and a weakening domestic economy putting pressure on profits on the other.

This problem is being compounded by concerns that the country’s financial sector may be running low on collateral that banks can use to access dollar reserves at the central bank. Usually it is the job of the central bank to provide emergency funding for a country’s financial institutions. In Russia this is typically done through what are known as “currency repo auctions,” in which banks offer collateral (like high-quality bonds) in exchange for access to currency, especially dollars, that they need to meet foreign-currency obligations.

Last week the Russian central bank cut the foreign exchange repo rate, the interest rate it charges on the currency it gives to banks. The rate fell from 1.5% above the London Interbank Offered Rate (Libor) — the benchmark interest rate at which banks lend to one another — to 0.5% above Libor. A lower interest rate should make it less expensive for banks to borrow from the central bank and therefore more appealing.

The rate cut illustrates that the central bank is growing concerned about the ability of Russian banks to meet their debt repayments. Underlining the point, in her statement following the interest rate hike on Thursday Elvira Nabiullina, head of the Russian central bank, announced that “the Bank of Russia plans to consider the introduction of foreign currency lending on the security of non-marketable assets”.

That suggests the central bank is considering expanding the types of assets that it will accept as collateral, by which it likely means accepting lower quality, less easily traded loans or financial securities. In other words, the state is having to take on more risk as the private sector struggles.

IEA cuts 2015 oil demand outlook despite plunging prices DECEMBER 12, 2014 AT 4:22 AM Business Insider

Paris (AFP) – Global appetite for oil will grow at a slower pace in 2015 than earlier thought despite plunging crude prices, the IEA said on Friday, warning that further drops in prices heighten the risk of social instability in some oil producing countries.

Oil demand for 2015 was now expected to grow by 0.9 million barrels a day to reach 93.3 million barrels, some 230,000 barrels less than the previous forecast, it said.

Crude prices have collapsed by more than 40 percent since June, and are now trading around $60 — levels last seen five years ago, as increased US shale production adds to oversupply.

But the cheap oil was not prompting more consumption.

Market share lost to renewable energy sources was unlikely to be replaced again by cheaper crude, the IEA said.

In the OECD rich countries, “a tepid economic recovery, weak wage growth and … deflationary pressures will further blunt the stimulus of lower prices,” it added.

Any boost that cheaper crude could give to oil importing economies would be offset — if not more than offset — by the damage done to oil producers.

In focus is Russia, which is hammered by the double whammy of sliding oil revenues and Western sanctions.

The IEA said it was making the biggest cut to Russian demand, now expecting it to drop to 3.4 million barrels a day, 195,000 barrels below last month’s estimate.

“Lower oil prices significantly dent potential export revenues in net oil exporting countries, slashing their income streams and in turn denting demand.

“In particularly cash-strapped economies, such as Venezuela and Russia, this impact is likely to be magnified as the risk of default escalates,” said the IEA.

“The resulting downward price pressure would raise the risk of social instability or financial difficulties if producers found it difficult to pay back debt,” it added.

Markets Continue to Slide on Oil Shock Currencies in Russia, Norway Fall to Multiyear Lows

By JOSIE COX WSJ
Updated Dec. 12, 2014 5:46 a.m.
Oil’s persistent slide continued to drive global financial markets Friday, sending currencies in Russia and Norway to fresh multiyear lows, and stocks in energy companies tumbling.

In early trade, the ruble surpassed 57 against the dollar for the first time on record. Norway’s krone hit a new five-year low against the euro and an 11-year low against the dollar as Brent crude slumped to $63 a barrel and West Texas Intermediate settled below $60—both five-year lows.

Russia’s central bank on Thursday raised its key interest rate to 10.5% from 9.5%, and its deposit rate to 9.5% from 8.5%, in an attempt to halt the ruble’s slide, but economists broadly agree that isn’t enough.

“In my view the risk of a full-scale currency crisis is still high and the Bank of Russia may have to use all tools at its disposal to stem ruble rout,” said Piotr Matys, a currency strategist at Rabobank. He said he had been expecting a 2.5-percentage-point increase in the key interest rate. “The decision taken proved insufficient.”

The ruble was battered earlier this year by geopolitical tensions and resulting sanctions, but its decline has been exacerbated in recent months by the oil shock, especially after the 12-member Organization of the Petroleum Exporting Countries last month rejected calls for drastic action to cut their output. Around 50% of Russia’s annual budget revenue stems from oil and gas exports.

Also on Thursday Norges Bankcut its key interest rate to 1.25% from 1.5% to combat slowing domestic growth, specifically citing the tanking price of oil. Norway is Europe’s biggest crude exporter and Norges Bank said in a statement that “activity in the petroleum industry is set to be weaker than projected earlier.”

The Stoxx Europe 600 index was trading 1.5% lower midmorning, with major losers including Afren PLC, Genel Energy PLC, Tullow Oil and Petrofac Ltd.

London’s FTSE 100 index, with a very high exposure to the oil and gas sector was down 1.6%, putting it on track for its worst weekly loss in around two years. In the U.S, the S&P 500 was indicated opening 0.6% lower on the day. Futures, however do not necessarily mirror moves after the opening bell.

The European subindex of oil and gas companies declined 1.8% and economists said that the chills were starting to filter into debt markets, too.

“Falling oil prices have sparked weakness in the U.S. high-yield markets, which amid thin liquidity is intensifying volatility across fixed income assets,” Barclays economists wrote in a note.

The CBOE Volatility Index, commonly considered a fear gauge of financial markets, rose 8% overnight, reflecting investors’ appetite for assets considered safest during times of stress. The yield on German 10-year government bonds hit a record low of 0.652%. Yields fall when prices rise.

Beyond oil, lasting jitters stemming from political uncertainty in Greece additionally pressured equities.

Earlier in the week, the Greek government announced that Parliament would vote on a new president on Dec. 17—two months ahead of schedule—to replace Karolos Papoulias, whose five-year term was slated to end in March.

The move sparked fears that Greece’s radical left opposition Syriza party could win national elections if presidential voting rounds fail to find a solution acceptable to all.

“We wouldn’t rule out the possibility that mainstream parties can cobble together the majority needed to win support for a presidential candidate. Nevertheless, the political outlook for Greece remains highly fraught,” Citigroup economists write in a note.

Athens’s main stock exchanged tumbled 7% on Thursday having already closed around 12% lower during Wednesday’s session. On Friday it opened lower but later retraced some of that move, to climb around 1.5% by midmorning.

The yield on the country’s 10-year government bond stood at 8.9% Friday morning, around 0.08 percentage point tighter on the day. Only earlier this week, however, it was around 7.2%.

Back in currency markets, the euro was marginally higher against the dollar at around $1.243, little changed after figures showed that factory output across the 18 countries that share the euro rose for the second straight month in October, albeit at a modest pace.

Employment and industrial production, however, remain well below their pre-crisis levels and there is no indication that the eurozone’s recovery is set to accelerate to a pace that would quickly create large numbers of new jobs or end a long period of very low inflation.

Many analysts expect the European Central Bank to announce a government bond purchase plan to stimulate the recovery as soon as its Jan. 22 meeting—a forecast that was reinforced by weak demand for the second installment of a four-year lending program for banks. Results for that were published Thursday.

— Paul Hannon contributed to this article

Write to Josie Cox at josie.cox@wsj.com

BUSINESS Oil’s Fall Puts a Chill on U.S. Drilling Energy Firms Slash Spending, Staff as Crude’s Decline Accelerates

By LYNN COOK and ERIN AILWORTH WSJ
Dec. 10, 2014 7:15 p.m. ET

U.S. energy companies are starting to cut drilling, lay off workers and slash spending in the face of an accelerating decline in oil prices, which fell to a fresh five-year low Wednesday.

The number of rigs drilling for oil in North Dakota and parts of Texas has started to edge down, new drilling permits have dropped sharply since October, and many companies say they are going to focus on their most profitable wells.

EOG Resources Inc. this week said it would shed many of its Canadian oil and gas fields, close its Calgary office and lay off employees there as it refocuses in the U.S. Matador Resources Co. of Dallas is contemplating temporarily leaving the prolific Eagle Ford Shale area in South Texas in favor of drilling elsewhere in Texas and New Mexico where it can make more money.

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Investors sold off shares of energy companies including EOG as the U.S. benchmark oil price fell to $60.94 on Wednesday. EOG lost nearly 3% to $86.79 while shale specialists Continental Resources Inc. and Chesapeake Energy Corp. both declined about 7%. Many of these U.S. independent drillers have lost half their value since June.

Shares of global energy giants have fared better than the independent U.S. companies because their refining operations are benefiting from cheaper oil. But some of the biggest are disclosing cutbacks.

BP PLC, which has been cutting back since the Deepwater Horizon oil spill in 2010, outlined a further $1 billion restructuring on Wednesday. ConocoPhillips , one of the biggest shale producers in the U.S., recently said it would spend 20% less next year on drilling wells, honing in on its sweetest spots instead of drilling its more expensive areas like Colorado’s Niobrara.

“At this point a contraction is unavoidable,” said Karr Ingham, economist for the Texas Alliance of Energy Producers.

One reason for the stock declines is investors are skeptical: Whatever their plans, U.S. companies produced 9.1 million barrels a day last week, the highest level since 1983, according to federal data. There is so much oil sloshing around the U.S. that refiners can’t use it all, so 1.5 million barrels of crude went into U.S. oil stockpiles last week.

ENLARGE
Some companies will be able to keep pumping even at lower prices, depending on the location and quality of their wells. Enterprise Products Partners LP, which operates pipelines and oil storage terminals across the U.S., said its analysis shows that the average well in many shale formations aren’t profitable at $60 oil. But wells considered high grade can withstand much lower prices. For instance, some wells in South Texas are profitable at prices of $30 a barrel, while the best in North Dakota’s Bakken area can only withstand a drop to under $50 a barrel.

Energy companies’ hedging strategies run the gamut from Continental Resources, which cancelled nearly all its price hedges and projected oil prices would soon rise, to Pioneer Natural Resources Co. of Irving, Texas, which has hedged 85% of its oil and gas output for 2015. Companies that hedged their production aren’t as exposed to falling prices and may not have to pump less or curb spending as quickly.

Surging American oil output has helped create a global glut of oil that has sent prices spiraling downward. The benchmark U.S. oil price, which briefly rose above $107 a barrel in late June, closed below $61 a barrel Wednesday, down 43% since its summer high.

Drilling permits issued in the U.S. dropped 36% between October and November, according to data from Drillinginfo, but remain 13% above their year earlier level.

Another sign of the energy industry’s pullback: the number of rigs drilling for oil in the Eagle Ford Shale in Texas has started to drop. Drilling in the nation’s second most active oil region hit a peak of 210 rigs in July but recently fell to 190 rigs.

These declines don’t necessarily mean that U.S. oil output will fall, said Greg Haas, a director at research firm Stratas Advisors in Houston, because companies are getting more efficient at drilling. “It used to be if the rig count dropped then oil production dropped, but not anymore,” he said.

In a sense, energy companies are a victim of their own success. EOG, Chesapeake and others learned to drill and frack wells faster and wring more from each well. Chesapeake says its initial production at new wells in the Eagle Ford improved by 65% over the last five years.

Houston-based EOG took 22 days to drill a well in South Texas in 2011; today it takes less than nine days. The company recently said it can earn a 10% profit after taxes even if oil prices were to fall to $40 a barrel.

However, companies with a lot of debt, low rates of return and little chance of drilling their way to better profitability will be hurt if crude remains below $75 a barrel, according to analysts at Global Hunter Securities.

Among the companies they cited was Triangle Petroleum Corp. Jon Samuels, president of the Denver-based independent explorer, said his company is profitable at the current price of oil.

Triangle’s shares are down 47% in the last two months. It is pushing vendors for cheaper prices for drilling equipment and contract labor in the new year, which should help bring down costs, he said.

“You’re going to see activity levels and spending go down substantially compared to this year,” Mr. Samuels said, adding that the stock market reaction to crude’s price drop has been overblown.

Write to Lynn Cook at lynn.cook@wsj.com and Erin Ailworth at Erin.Ailworth@wsj.com