Following last week’s downgrade of oil by S&P, this week oil companies are also having their credit status revised.
Standard & Poor's, the US credit rating agency, cut price assumptions last week for Brent and WTI, with a price of $US70 a barrel for Brent crude oil in 2015, against the previous $US80, and $US75 a barrel in 2016, instead of $US85. WTI was priced at $US65 a barrel for 2015 and $US70 for 2016.
S&P reported, “Over the coming weeks, we will be updating our forecasts, and we anticipate a number of corporate rating actions in the upstream and oil field service sectors.” This week that assumption was realized, with 3 of the major European oil producers being downgraded.
Royal Dutch Shell Plc (SHELL), Total SA (TOTAL) and BP Plc (BP), all had their outlook revised to negative. Low oil prices, a glut of supply and additional energy surpluses from the US shale industry are driving the oil production companies to a breakeven point of production versus profit. After oil prices falling 45% this year, Bloomberg reported the following figures, “Shell’s American depositary receipts fell 0.8 percent to $68.16 in New York. Each ADR is worth two shares in the parent company. BP’s ADRs, each of which is equivalent to six shares, fell 0.8 percent to $39.10. BP has an indicated dividend yield of 6.85 percent, followed by 5.7 percent for Total and 5.25 percent for Shell.” Bloomberg added, “The European companies also are burdened with relatively inflexible capital spending budgets because most contracts require cash infusions into oil and gas projects, S&P said.”
BP also faces a $16bn-$18bn fine from US government for the 2010 oil spill in the Gulf of Mexico, but they are arguing that the fine needs to be lowered due to the slump in price of crude since the summer penalty was handed down. Since June BP has seen shares fall from 526 to last week’s figure of 364, however this week has seen some reprieve for BP as shares went as high as 425 alongside a successful week on global indices.
In Standard & Poor's report on oil outlook, the research agency also noted expectations for ‘some stabilisation and ultimate recovery’ citing a lowering of production in high-cost wells. A report from November on production from Canada’s oil sands confirms this, and though the Canadian fields are forecast to grow even if oil averages US$85 a barrel over the next 25 years, Peter Howard, president and CEO of CERI says, “At $85, we are still seeing significant benefits across the board, but when you drop below that, if you drop below $80, you would actually start affecting developments, they would get pushed off and maybe cancelled.”
However this theory is not being taken on by OPEC as the Saudi oil minister, Ali al-Naimi, announced yesterday that, “It is not in the interest of Opec producers to cut their production, whatever the price is,” he told the Middle East Economic Survey. “Whether it goes down to $20, $40, $50, $60, it is irrelevant.” Saudi is protecting its market share above all things, with Mr Naimi saying that if Saudi reduced production, “the price will go up and the Russians, the Brazilians, US shale oil producers will take my share”.
In contrast, S&P were more constructive regarding America’s output, saying, "We do not foresee a dramatic drop in near-term US crude production, but we believe the rate of investment in growth is likely to slow with prevailing spot and futures prices."
MT4 chart: oil volatility is dependent on price, demand and supplies
MT4 chart: BP’s rise in share price
MT4 chart: Shell have also seen a rise in price share
Trade commodity & stock CFDs on STOCK.com with full training given to all clients