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Showing posts with label Oil price. Show all posts
Showing posts with label Oil price. Show all posts

Thursday, January 15, 2015

Will shale oil survive the price fall?

American shale oil enterprise WBH Energy filed for bankruptcy on January 4, 2015. This could be the beginning of a shakeout of shale oil enterprises. Since 2010, the debt of America's energy enterprises has increased 55 percent; meanwhile, the energy sector of S&P 1500 index has dropped rapidly. The shale oil revolution has not only been stricken by the low oil price, but also "abandoned" by investors. As liquidity runs short, small and medium-sized shale oil enterprises will either go bankrupt or be taken over if they survive the oil price crisis.


The reason for the oil price slump is becoming clearer: oversupply. However, since oil producers will not reduce output, the downward trend continues. Canadian heavy crude has dropped below 35 USD, a new low since February 2009. In the past six months, the price has fallen by 60 percent. We can say that the shale oil revolution is being blocked by the low oil price - in other words, it is being hindered by OPEC (Organization of Petroleum Exporting Countries), principally represented by Saudi Arabia. When the oil price dropped below 50 USD, OPEC had a meeting seeking consensus on maintaining oil output. The average production cost of OPEC is about 40 USD, while the cost of shale oil is above 60 USD. As long as the price is above 40 USD, OPEC can still make profit, but the shale oil enterprises will be squeezed out.

At the end of 2014, in order to exploit the market for US oil producers, the US Department of Commerce lifted the ban on the export of condensate oil. The US has ended its 40-year oil export ban to join in competition with the other oil producers, which means that on the one hand the US has become an international oil producer, while on the other hand shale oil has had a huge impact on the world energy structure, and the world oil market has excess production capacity. For the US, shale oil has provided a new economic growth point and provided additional chips when competing with other oil producing countries. Therefore, the US government will offer necessary supports to shale oil enterprises. However, the market cannot be easily manipulated by one or two countries. The US wanted a moderate drop in the oil price, which would stimulate its economy as well as "fix" those insubordinate oil producing countries. But the downward trend of the oil price has been irresistible, and now threatens the survival of the American shale oil industry.

Faced with the falling oil price, shale oil enterprises, with their relatively high production costs, have entered a crucial phase of life and death. Unless all the oil producing countries join hands to limit production and achieve a rebalancing of supply and demand, the oil price will not rebound in the short term. Saudi Arabia and the other Gulf countries blame the oil price crisis on the irresponsible behavior of non-OPEC oil producing countries, which in fact targets the shale oil producers.

TThe new energy industry is suffering under the impact of the falling oil price too. The stock price of electric vehicle producer Tesla is also in a slump. But for the shale oil enterprises, this is an issue of life or death. - (People's Daily Online)

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Saturday, December 20, 2014

Is the weakening Malysian ringgit a similar to 1997/98 crisis?

Economic troubles ahead but most don’t think it will be as bad as back then

We don’t see a crisis brewing in emerging Asia. But that is not to say there aren’t risks. We believe those risks are going to be mitigated and managed. Despite some portfolio outflows, we believe there is still sufficient liquidity in the market for some trading ideas

The weakening ringgit has caused anxiety. But is the economy in a similar situation to Malaysia’s worst ever crisis 16 years ago?

MANY Malaysians will still remember the Asian financial crisis of 1997/98. Nearly 20 years ago, the then crisis was responsible for the greatest capital market crash in the country and forced many structural changes we see today in the financial markets.

It was a time of great turmoil, with people losing their investments on a scale never seen since. Companies for years bankrolled on easy credit were leveraged to the hilt and crumbled under the weight of their debts as business evaporated and the cost of credit soared.

Shares traded on the stock exchange mirrored the scale of the troubles. The benchmark stock market index plunged from a high of 1,271 points in February 1997 to 262 on Sept 1, 1998. Words such as tailspin and panic were common in the financial section of newspapers and the chatter among market players as people scrambled to take action.

“More people are talking about it with the fall in the ringgit,” says a fund manager who experienced the difficult times in the late 1990s.

Triggering the crisis back then was the fall in the regional currencies, starting with the Thai baht. Speculators then zeroed in on other countries in Asia and Russia as the waves of attack on the currencies back then saw many central banks spending vast amount of foreign exchange reserves to defend their currencies.

Exhausting their reserves, those central banks requested for credit help from the International Monetary Fund to replenish their coffers.

Attacks on the ringgit and many other currencies in Asia sent the ringgit into freefall as the currency capitulated from a previously overvalued zone against the US dollar.

The ringgit dived into uncharted territory to around RM4.20 to the dollar before capital controls were imposed and the ringgit was pegged at RM3.80 to the dollar. The ensuing troubles were seen from the capital market to the property sector. Corporate Malaysia was swimming in red ink and huge drops in profit.

The shock from that period was different than what the country had seen in previous recessions. The last economic recession prior to that was caused by a collapse in global commodity prices and during that pre-industrialisation period before factories mushroomed throughout the major centres of the country, unemployment soared. Unemployment was not a major issue in 1997/98 like it was in the prior recession but the crunch on company earnings meant wage cuts and employment freezes.

With the drop in crude oil and now with the resurgence of the US economy, the flight of money from the capital market has began.

Deja vu?

Most would argue that no two shocks or crisis are the same. There is always a trigger that is different from before. From the Asian financial crisis, the world has seen the collapse of the dotcom boom which crushed demand for IT products and services. Then there was the severe acute respiratory syndrome (SARS) crisis and the global financial crisis in 2008/09. There were periods of intermittent volatility in between those periods but there was nothing in Malaysia to suggest trouble ahead.

Shades of 1998 though have emerged in this latest wave of turmoil but the situation now is not the same as it was back then.

“We don’t see a crisis brewing in emerging Asia. But that is not to say there aren’t risks. We believe those risks are going to be mitigated and managed,” says World Bank country director for South-East Asia, Ulrich Zachau.

The fall in crude oil prices, which has been the trigger for Malaysia, has sent the currencies of oil-producing countries lower, affecting their revenues and budgets. In South-East Asia, pressure has been telling on the ringgit and the Indonesian rupiah.

Reminiscent of the gloom and doom of 1997/98, the Indonesian rupiah tanked against the dollar to levels last seen during that period.

Intervention by the Indonesian central bank addressed the decline, but the situation is also different today then it was back nearly two decades ago.

“Bank Negara is still mopping up liquidity today,” says another fund manager who started work in Malaysia in the early 1990s.

Although liquidity is plentiful in Malaysia, money has been coming out of the stock market. Foreign selling has been pronounced this year and the wave of selling has seen more money flow out of the stock market this year than what was put in to buy stocks last year.

Equities is just an aspect of it as the bigger worry is in Government bonds where foreigners hold more than 40% of issued government debt.

“The fear is capital flight and people are looking to lock in their gains,” says the fund manager.

“The worry will start when people get irrational.”

Times are different

While the selling that is taking place in the capital markets is a concern, Malaysia of today is vastly different than it was during the 1997/98 period.

For one, corporates in Malaysia are not as leveraged as they were back then. Corporate debt-to-gross domestic product (GDP) ratio is below 100% but it was above 130% in 1998. Furthermore, corporate profits are still steady although general expectations have been missed in the last earnings season.

Secondly, fund managers point out that the banking system is in far better health today, better capitalised and seeing the average loan-to-deposit ratio below 100%. That loan-to-deposit ratio was much higher than 100% during the 1997/98 period and and as loans turned bad, the banks got into trouble.

“Fundamentally, we are much stronger now. That was not the case back then,” says a corporate lawyer.

“The worry though is on perception and denials that there is no trouble.”

The one big worry, though, is household debt. That ratio to GDP is crawling towards the 90% level while it was not even an issue back in 1997/98.

Sensitivity analysis by Bank Negara which looks at several adverse scenarios, such as a 40% decline in the stock market and bad loans from corporates and households shooting up, indicate that the banking system can withstand a major shock.

“The scenario-based solvency stress test for the period 2014 to 2016 incorporated simultaneous shocks on revenue, funding, credit, market and insurance risk exposures, taking into account a series of tail-risk events and downside risks to the global economic outlook.

“The simulated spillovers on the domestic economy were used to assess the compounding year-on-year impact on income and operating expenses, balance sheet growth and capitalisation of financial institutions, disregarding any loss mitigation responses by financial institutions or policy intervention by the authorities,” says Bank Negara in its Financial Stability and Payment Systems Report.

“Even under the adverse scenario, the post-shock aggregate TCR (total capital ratio) and CET1 (common equity tier 1) capital ratio of the banking system were sustained at 10% and 7% respectively, remaining above the minimum regulatory requirement under Basel III based on the phase-in arrangements which are consistent with the global timeline,” it says in the report.

Government finances and the current account

The line in the sand for Government finances seems to be at the US$60 per barrel level for crude oil prices. A number of economists feel the Government will miss its fiscal target of a 3% deficit next year should the price of crude oil drop below that level.

With oil and gas being such a big component of the economy than what it was in 1997/98, the drop in the price of crude oil could also spell trouble for the current account and cause a deficit in the trade account.

Those concerns have been highlighted by local economists and yesterday, Fitch Ratings echoed that worry.

“Cheaper oil is positive for the terms of trade of most major Asian economies. But for Malaysia, which is the only net oil exporter among Fitch-rated emerging Asian sovereigns, the fall increases the risk of missing fiscal targets.

“The risk of a twin fiscal and external deficit, which could spark greater volatility in capital flows, has increased. Malaysia’s deep local capital markets have a downside in that they leave the country exposed to shifts in investor risk appetite. Malaysia’s foreign reserves dropped 6.8% between end-2013 and end-November 2014, the biggest decline in Fitch-rated emerging Asia,” it says in a statement yesterday.

Despite the softness in the property market and corporates getting worried about their profits, the general feeling is that Malaysia will not see a repeat of 1997/98. The drop in the ringgit and revenue for crude oil will mean a period of adjustment but the cheaper ringgit will make exports more competitive.

The difference between then and now


The ringgit vs the dollar ...

The ringgit’s steep decline against the dollar has made it one of the worst performing currencies of late. That decline, although steep and having caught the attention of the central bank, is more down to the link with the decline in crude oil than structural issues to be worried about.
Capital ratios of banks ...

Banks today are far better capitalised then they were during the 1997/98 crisis, which forced the local banking industry to consolidate for their own good. Stress tests by the central bank suggests then even under adverse conditions, banks in Malaysia wil be able to withstand the shock associated with it.
Loans-to-deposit ratio ...

The ratio of loans against the deposit of banks have been rising but it is no where at the level before the Asian financial crisis in 1997/98. Banks too are aware of making sure it does not cross 100% and the development of the bond market means leverage risk has been diversified from the banking sector.

Businesses not as leveraged ...

One of the reasons corporate Malaysia was in trouble in 1997/98 was down to its leverage, or debt levels. Today. corporates are not as geared as they were back then and although that level is rising, their financial position and better cash balances and generation means they are able to better withstand a shock to the economy.

Household debt to GDP ...

This is the biggest worry. As households are leveraged despite the financial assets backing it, that means any economic weakness or shock will affect the ability to service loans taken to buy those assets. As consumer demand has been a big driver to the economy, any changes the affects the ability of consumers to continue spending will impact on economy growth and have an impact on non-performing loans in the banking sector.

Dropping current account surplus ...

The decline in the current account surplus means that the domestic economy has been growing strongly. There were concerns earlier and the prioritisation of projects was able to smoothen imports to ensure a positive balance of trade. The drop in crude oil prices could mean a deficit in the current account in the first quarter of next year but the weaker ringgit should translate to better exports and a better current account balance thereafter.

By JAGDEV SINGH SIDHU Starbizweek

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Sunday, December 7, 2014

Many Malaysians are too obsessed with politics & race instead of expanding economic cake


Sharing the same destiny

"Reading political blogs and getting into frenzy over race issues in social media seem to be the preoccupation of many Malaysians, when we all should be working together to achieve our economic growth target".

 "There's no point talking about how the economic cake should be cut when it is getting a smaller and needs to be expanded".

I AM worried about the economy of Malaysia as we head towards 2015, and I am sure many Malaysians also share my concerns over the uncertainties in the coming months.

All the assurances and figures given by our leaders, we are sorry to say, are no longer convincing as they don’t seem to connect with market sentiments and the realities on the ground.

If we only listen to all the glowing official reports, everything is supposed to be all hunky dory. In short, there’s nothing to worry about as the economy is on course and Malaysia is doing everything right.

Rhetoric by politicians and certain individuals, which smacks of racism and political bullying, are not going to help the economy. It can only worsen race relations in Malaysia and make investors think twice about us.

And if you listen to the palaver of some politicians, it sounds as if there are more pressing issues than the state of our economy to worry about. The impression given seems to be that the mundane issues of the economy should be left to the economists, businessmen and academics.

These are the delegates who see threats and ghosts from fellow Malaysians when there are none, but they are not able to see the huge economic challenges staring them in their faces.

Even if they are not business owners or part of Corporate Malaysia, they should be concerned about how these challenges will affect the ordinary people, including their livelihood.

This is the time when companies have to worry about paying the salaries of their staff, meeting targets, ensuring a clean sheet for the quarterly reports and planning for the next year.

The weak market sentiments and growing inflationary rates, coupled with the already tight wallets of many consumers, are hitting the lives of ordinary people hard. And even politicians too.

When companies don’t do so well, they have to cut down on operating expenses, reduce bonuses – possibly even increments – and do away with certain perks and privileges.

According to CIMB Research, the third-quarter results fell below consensus estimates, which was another reason for the weak overall stock market performance.

Based on the 117 listed companies the research house tracks, the percentage of stocks that missed expectations increased from 30% as at end August 2014 to 36% in the latest quarter.

Kenanga Research, meanwhile, said that during the third quarter, it “saw the highest number of companies under our coverage delivering below expectations results, or 40% of the stocks.”

These samplings provide a fair picture of the general performance of most companies listed on our stock exchange.

And it is, of course, not just the public companies but the private ones too that have to deal with these economic challenges.

In short, ordinary Malaysians have to brace themselves for a tougher year. Other economies like China and Singapore have also predicted lower single-digit growth for next year.

When the going gets tough, we will realise that many of us are living beyond our means, and the accumulated household debt will become problematic.

These are the substantial matters that we should all be talking about, not just at political meetings but also together as a nation.

We should all focus on expanding the economic pie and giving good suggestions on how to overcome these challenges.

It’s absurd to still talk about vernacular schools or sulk over the voting patterns of the Chinese voters in the last two general elections.

We are at a crucial juncture where the price of oil is sliding downwards and the ringgit is getting weaker. These are two factors that will have an impact on our Budget, which may even need to be revised.

The falling oil prices, which shows Malaysia’s exposure to external factors, pushed the ringgit to its lowest level since February 2010 against the US dollar on Thursday.

These grassroots-level politicians should be worried about the price of commodities, especially palm oil, as it would have a deep impact on the rural smallholders whom they claim to champion.

They should be asking our leaders if these would affect our vision to become a high-income developed nation by 2020, which is only just five years from now!

One does not need a degree in economics to know that our heavy reliance on the export of oil, palm oil and rubber for the country’s revenue means the decline in global prices for these commodities will hit us hard.

We are talking about the effects on our half-a-million rubber tappers and smallholders who are already struggling with the daily cost of living, as media reports predict over a 60% drop in earnings since early this year.

Felda Global Ventures Holdings Bhd reported its first quarterly loss of RM12mil for the quarter ending September, with its stock price taking a beating after the announcement.

Worse, the company only achieved 53% of the market consensus full year profit.

Just over the last one month, foreign investors have reportedly taken out over US$3bil (RM10.4bil) from the country.

Among us Malaysians, there seems to be an extreme obsession with politics, and there seems to be no real concern with business and economics.

Reading political blogs and getting into a frenzy over race issues in social media seem to be the preoccupation of many, when we all should be working together to achieve our growth target.

There’s no point talking about how the economic cake should be cut when it is getting smaller and needs to be expanded.

Some of us are remarkably arrogant and think that we are better than our neighbours because they are the ones who supply us with maids and construction workers.

This kind of thinking will be our downfall as these countries, with their bigger markets, quickly put their act together.

The depreciation of the ringgit, while making our exports more attractive in price, will also mean costlier food bills as we are a net importer of food.

All this may sound gloomy and even seem out of place as the year comes to a close and when most of us have to clear our leave and spend time with our families during the holiday season.

But the point to politicians who still live in a world of their own is that they should worry about the economy and how ordinary people live. After all, the reason they are in politics is to seek power and helm the government, which has to be responsible for many of these issues.

American civil rights leader Martin Luther King Jr once said: “We may have all come on different ships but we are in the same boat now.”

Some of us may still want to argue over this saying but make no mistake about it – as Malaysians, we share the same destiny.

The views expressed are entirely the writer's own

On The Beat by Wong Chun Wai

Wong Chun Wai began his career as a journalist in Penang, and has served The Star for over 27 years in various capacities and roles. He is now the group's managing director/chief executive officer and formerly the group chief editor.

On The Beat made its debut on Feb 23 1997 and Chun Wai has penned the column weekly without a break, except for the occasional press holiday when the paper was not published. In May 2011, a compilation of selected articles of On The Beat was published as a book and launched in conjunction with his 50th birthday. Chun Wai also comments on current issues in The Star.

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