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

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

Fed Bubble Bursts in $550 Billion of Energy Debt: Credit Markets By Christine Idzelis and Craig Torres – Dec 11, 2014, 10:59:52 AM

The danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt.

Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank AG. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for energy junk bonds will double to eight percent next year.

“Anything that becomes a mania — it ends badly,” said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management. “And this is a mania.”

The Fed’s decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns, raising concern that risks were being overlooked. A report from Moody’s Investors Service this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis.

Borrowing costs for energy companies have skyrocketed in the past six months as West Texas Intermediate crude, the U.S. benchmark, has dropped 44 percent to $60.46 a barrel since reaching this year’s peak of $107.26 in June.

Yields Surge

Yields on junk-rated energy bonds climbed to a more-than-five-year high of 9.5 percent this week from 5.7 percent in June, according to Bank of America Merrill Lynch index data. At least three energy-related borrowers, including C&J Energy Services Inc. (CJES ▼ -3.13% 12.07), postponed financings this month as sentiment soured.

“It’s been super cheap” for energy companies to obtain financing over the past five years, said Brian Gibbons, a senior analyst for oil and gas at CreditSights in New York. Now, companies with ratings of B or below are “virtually shut out of the market” and will have to “rely on a combination of asset sales” and their credit lines, he said.

Companies rated Ba1 and lower by Moody’s and BB+ and below by Standard & Poor’s are considered speculative grade.

Stimulus Effect

The Fed’s three rounds of bond buying were a gift to small companies in the capital-intensive energy industry that needed cheap borrowing costs to thrive, according to Chris Lafakis, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

Quantitative easing “has been one of the keys to the fast, breakneck pace of the growth in U.S. oil production which requires abundant capital,” Lafakis said.

One of those to take advantage was Energy XXI Ltd. (EXXI ▼ -1.39% 2.84), an oil and gas explorer, which has raised more than $2 billion in the bond market in the past four years.

The Houston-based company’s $750 million of 9.25 percent notes, issued in December 2010, have tumbled to 64 cents on the dollar from 106.3 cents in September, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They yield 27.7 percent.

Energy XXI got its lenders in August to waive a potential violation of its credit agreement because its debt had risen relative to its earnings, according to a regulatory filing. In September, lenders agreed to increase the amount of leverage allowed.

Bubble Risk

“We think the sell-off has been a little over done,” said Greg Smith, a vice president in Energy XXI’s investor relations department. “People are trading us as though we’re distressed.”

The company has “plenty of liquidity,” Smith said. “Come January we’ll be free cash flow positive,” which is “a rarity in this business,” he said.

The debt rout is one of the latest examples of a boom and bust in U.S. markets as unprecedented Fed stimulus fuels a hunt for yield. The fallout has been limited so far, yet the longer the Fed holds its benchmark lending rate near zero, the greater the risk of more consequential bubbles, according to former Fed governor Jeremy Stein.

“To the extent that highly accommodative monetary policy courts risks to the economy further down the road, there is more of a live trade-off than there was at 8 percent unemployment” said Stein, now a Harvard University professor.

Joblessness of 5.8 percent in November was about half a percentage point away from the Fed’s estimate of full employment, or the lowest level of labor market slack the economy can sustain before companies bid up wages.

Job Creation

Employment in support services for oil and gas operations has surged 70 percent since the U.S. expansion began in June 2009, while oil and gas extraction payrolls have climbed 34 percent.

“There are distortions in multiple markets,” said Lawrence Goodman, president of the Center for Financial Stability, a monetary research group in New York. “It is like a Whac-A-Mole game: You don’t know where it is going to pop up next.”

Fed Chair Janet Yellen said in a July 2 speech in Washington that she saw “pockets of increased risk-taking,” including in the corporate debt markets.

Midstates Petroleum Co. (MPO ▼ -11.56% 1.30) is spending about $1.15 drilling for every dollar earned selling oil and gas. Outspending cash flow is the norm for many companies in the U.S. shale boom.

Changing Environment

The Houston-based company’s $700 million of 9.25 percent notes due in June 2021 have plummeted to 53.5 cents from 108 cents at the beginning of September, according to Trace. The debt is rated Caa1 by Moody’s and B- by S&P.

Representatives of Midstates didn’t respond to phone calls and e-mails seeking comment.

Some borrowers are under pressure just a few months after selling new debt. Sanchez Energy Corp.’s $1.15 billion of 6.125 percent notes maturing in January 2023, issued this year, have tumbled to 77 cents from 101 cents in September, according to Trace. Proceeds from the bonds were partly used to fund a purchase of Eagle Ford shale assets from Royal Dutch Shell Plc. (RDSA ▲ 0.78% 25.97)

“The company has planned for and is poised to rapidly adapt to a changing commodity price environment,” Tony Sanchez, III, chief executive officer of Sanchez Energy, said in a statement yesterday.

The Houston-based company expects to fully fund its 2015 capital program from operating cash flow and cash on hand without drawing on its revolving credit line, the statement said.

Magnum Hunter

Sanchez Energy has never had positive free cash flow. Michael Long, chief financial officer, didn’t return a call seeking comment.

“Oil companies that have high funding costs in the Eagle Ford and the Bakken shale plays are the ones that are most exposed right now due to lower crude prices,” Gary C. Evans, chief executive officer of Magnum Hunter Resources (MHR ▼ -4.16% 3.46) Corp., said in a phone interview.

Magnum Hunter’s $600 million of 9.75 percent debt due in 2020 has tumbled to 84.5 cents from 109 cents in September, Trace data show. The notes are rated CCC by S&P and yield 13.9 percent.

Evans said Houston-based Magnum Hunter sold almost all of its oil properties over the last year and a half and is now predominantly a gas company.

Default Risk

“We’ve insulated ourselves,” Evans said. For other energy borrowers at risk, “the liquidity squeeze” will probably occur in March or April when banks re-calculate have much they may borrow under their credit lines based on the value of their oil reserves.

Deutsche Bank analysts predicted in a Dec. 8 report that about a third of companies rated B or CCC may be unable to meet their obligations should oil prices drop to $55 a barrel.

“If you keep oil prices low enough for long enough, there is a pretty good case that some of the weakest issuers in the high-yield space will run into cash-flow issues,” Oleg Melentyev, a New York-based credit strategist at Deutsche Bank, said in a telephone interview.

For Related News and Information: Junk Fervor Cools as Oil Rout Upends Energy Debt: Credit Markets Junk Backing Shale Boom Faces $11.6 Billion Loss: Credit Markets Shale Boom’s Allure to Wall Street Tested by Drop in Oil Prices Oil Slump Heaps Bond Losses in $50 Billion Glut: Credit Markets Drillers Piling Up More Debt Than Oil Hunting Fortunes in Shale

To contact the reporters on this story: Christine Idzelis in New York at; Craig Torres in Washington at

To contact the editors responsible for this story: Shannon D. Harrington at Caroline Salas Gage, Faris Khan

Energy’s unexpected jobs boom

Energy’s unexpected jobs boom

September 5, 2013: 10:17 AM ET

How America’s oil and gas revolution is helping consumers and workers.

By Daniel Yergin

<> on January 18, 2012 in Dimock, Pennsylvania.

FORTUNE — The rapid rise in shale gas and tight oil in the United States constitutes nothing less than a revolution in oil and natural gas. No longer can there be any doubt about the dramatic change in America’s energy position. U.S. oil production is up 50% since 2008, when we were supposedly slated to run out of oil. Natural gas production has increased by 33% since 2005, and shale gas alone now constitutes about 45% of total natural gas production.

This revolution is not just about energy production; it’s an economic story along several dimensions, whether measured in consumers’ pocketbooks, jobs, U.S. manufacturing output, or America’s increased competitiveness in the world economy. This has occurred amid a half-decade of deep recession and high unemployment. Indeed, without the boost from the unconventional oil and gas development, the U.S. economic picture would have looked even worse over the last few years.

According to a new study from my organization, IHS, entitled “America’s New Energy Future: the Unconventional Oil and Gas Revolution and the Economy — A Manufacturing Renaissance,” the unconventional energy boom increased average household disposable income in 2012 by $1,200 — a figure that is expected to grow to $2,700 by 2020. That boost is mainly the result of two factors. First, households are spending less of their total income on utilities, whether directly for less-expensive natural gas or by lowering the cost of electricity generated with natural gas. Secondly, lower energy costs have led to a reduction in the cost of goods and services within the broader economy.

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Government revenues are also seeing a boost on account of the rise of new energy production. The value chain associated with shale gas and tight oil contributed over $74 billion in additional federal and state government revenues in 2012 — that figure is expected to reach over $125 billion by 2020.

The unconventional energy employment picture is equally impressive. Unconventional oil and gas (this does not include conventional oil and gas) supported 2.1 million jobs in 2012 along the entire value chain. That number is expected to rise to 3.3 million by 2020. These jobs include people working in the shale gas and tight oil industry, in related industries such as oil services and information technology, and people whose jobs are supported by the increase in spending that has flowed through the economy.

These additional jobs are spread throughout the United States. New York State may count itself a holdout with its ban on hydraulic fracturing, or “fracking.” Notwithstanding the ban, almost 50,000 jobs in New York result from shale gas and tight oil activity in other states.

Abundant, low-cost natural gas — brought on by the emergence of shale gas — is also transforming America’s position as a manufacturer. It is boosting companies that make products that this new oil and gas industry needs, such as steel and pipes. It is important on an even larger scale for businesses that rely heavily on natural gas or electricity generated with natural gas — ranging from petrochemicals and fertilizer, to food producers and glass manufacturers. For these companies, low-cost natural gas is a game changer and will stimulate an estimated $350 billion of new investment in the United States over the next dozen years. Such growth would have seemed inconceivable half a decade ago, when the expectation was that American manufacturers — and the entire U.S. economy — would have to depend increasingly on high-cost imports of liquefied natural gas as well as high-cost domestic gas.

The price of energy is, of course, only one component in a company’s investment decisions, along with such other factors as market forces, competition, and regulatory and litigation risks. But energy costs are critical just the same, and have made the United States much more competitive in the world economy. In Europe, natural gas costs three times as much as in the United States; in Japan, it’s more than four times as costly.

Business leaders in Europe are aware of America’s current energy advantage, and they are sounding the alarm. The chief executive of Austrian steel company Voestalpine, Wolfgang Eder, declared that “the exodus” from Europe has already “started in the chemical, automotive, and steel industries.” Indeed, Voestalpine announced plans to build a half-billion-dollar plant in Texas to produce iron that it would ship back to Austria for fabrication into steel. European suppliers will follow their customers across the Atlantic, building new factories in the United States to be near their customers’ new factories.

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This summer, I asked IMF managing director Christine Lagarde what the development of shale gas means for Europe’s troubled economy. “Shale gas and the reduction in energy prices,” she said, is “certainly to the advantage of the U.S. relative to Europe.”

This advantage will be measured in growing exports of manufactured products from the United States — and more jobs. For Europe, this development only adds to its angst. For the United States, this demonstrates the widening opportunity resulting from the rise of unconventional oil and gas.

Daniel Yergin, vice chairman of IHS, is author of The Quest: Energy, Security, and the Remaking of the Modern World.

Posted in: Daniel Yergin, economy, energy, fracking, jobs, Shale gas, The Quest, Tight oil

J.P. Morgan Set to Launch Sale of Commodities Business Bank Plans to Kick Off Process in September


MARKETSAugust 19, 2013, 12:52 p.m. ET

J.P. Morgan Set to Launch Sale of Commodities Business

Bank Plans to Kick Off Process in September


J.P. Morgan Chase & Co. has told potential buyers of its commodities assets that it expects to kick off sale efforts in early September.


The bank plans at that time to circulate a memo that details the balance sheets and profitability of its physical-commodity assets, according to people familiar with the sale process.


J.P. Morgan said in July it was pursuing strategic alternatives for these assets, which range from metal warehouses to pipeline leases and power plants, including a possible sale. The bank hopes to sell the assets as one package, but depending on the interest of buyers it may have to sell them piecemeal.


Tightening regulations in the wake of the financial crisis have made it more difficult for banks to reap big profits from their commodities operations, as have softening commodity markets. Recently, U.S. regulators have increased their scrutiny of metal warehousing amid complaints from industrial consumers that long waits for metals such as aluminum and copper are driving up prices.


Dozens of firms have approached the bank to express tentative interest in J.P. Morgan’s assets, these people said. Their ranks include big international commodity traders, private-equity firms and foreign banks.


J.P. Morgan, the largest U.S. bank by assets, is among a handful of giant banks that expanded into physical commodities to complement their trading in financial derivatives in those markets.


Among the assets on the auction block are Henry Bath & Son Ltd., a global network of metals warehouses; agreements to control the output from a handful of power plants in the Southeast, as well as ownership stakes in power plants elsewhere; leases on oil fields, terminals and pipeline capacity in Canada; and leases for petroleum-storage tanks in the Gulf Coast, these people said.


One asset attracting heightened interest from some buyers is a contractual agreement J.P. Morgan has with Philadelphia Energy Solutions, a venture between Sunoco Inc. and the Carlyle Group that owns and operates a refinery. The bank provides cash and crude to the refinery, and then purchases the refined product to trade and resell into the market. The arrangement is regarded as an attractive asset because there are multiple ways to make money from it. Any transfer of J.P. Morgan’s interest in the agreement would have to be approved by other parties to the agreement.


Other assets may be more difficult to unload at a profit. J.P. Morgan is currently paying more to rent storage facilities for oil products than such leases would fetch on the open market. The value of these leases has declined in the last two years due to shifts in futures prices that no longer make storage profitable. “Some have value, and some have negative value,” one person said.


The people familiar with the sale process said they didn’t expect the bank to set opening prices on the assets. Rather, interested parties are expected to make offers based on the financial information provided, and the bank will evaluate bids on a case-by-case basis.