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Moody’s: Oil Supply Faces Oversupply Risk

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  • Moody’s: Oil Supply Faces Oversupply Risk

Oil and natural gas prices will be volatile in 2019, Moody’s Investors Service predicted in its annual report outlining key credit themes in oil and gas for 2019.

The report noted that while the recent announcement that OPEC and Russia would cut production helps alleviate concerns about oversupply, the pivotal questions in the coming year is whether OPEC and Russia would maintain their production discipline and what might happen in June, when the current agreement expires.

Moody’s expects the medium-term price band for West Texas Intermediate (WTI) crude, the main North American benchmark, to be $50-$70 per barrel (bbl), and North American natural gas at Henry Hub to average $2.50-$3.50/MMBtu.

“Market expectations for continued strong oil demand growth remain in place, despite concerns about slowing demand growth as a result of weaker economic growth, the impact of tariffs and a strong US dollar,” Moody’s Managing Director for Oil & Gas, Steve Wood said.

“Very high Saudi and Russian production, in particular, has heightened supply volatility, so whether OPEC and Russia maintain production discipline and renew agreements to limit output are key concerns going into the new year.”

Investors in exploration and production companies would continue to wait for better returns in 2019, Moody’s stated.

Although capital efficiency has improved and commodity prices are higher than in 2015-16, infrastructure constraints have lifted transportation costs, the report stated.

And though the oilfield services sector would see earnings increase by 10-15 per cent, they currently remain at low levels, and most of the recovery would occur only later in the year.

Conversely, refiners’ distillate margins would begin to expand from already strong levels in the second half of next year.

In North America, wide differentials for regional oil and natural gas would narrow as infrastructure coming into service in late 2019 and 2020 eases bottlenecks in the Permian Basin, western Canada and other regions, relieving stress on commodity prices.

Meanwhile, the Mexican energy sector faces risks from factors including a new government policy that shifts PEMEX toward refining and away from oil production, and Asian national oil companies contend with risks from volatile commodity prices, rising shareholder returns and evolving fuel-price regulations.

“While we will see only a gradual increase in rig activity in 2019, oilfield services (OFS) costs will likely rise over the medium term. Higher oil prices will encourage more production activity, which will stimulate already rising OFS prices, raising the breakeven cost of the marginal barrel and potentially raising medium-term oil prices.

“In North America, strong demand from shale producers is driving up pricing for high-calibre “super spec” drilling rigs, and for various production services. In Texas, strong economic growth and low unemployment have led to widespread labour shortages, escalating labour cost inflation. International activity is picking up in certain markets.

“But it will take higher oil prices to develop the more expensive conventional barrels that are ultimately needed to meet increasing global demand and offset natural production declines.

“Prices toward the upper end of the oil price-band will encourage increased supply as US production grows and OPEC countries reduce their compliance with their production quotas.

“Shale oil production in particular features relatively low extraction costs and short time lags from drilling to production, and shale’s drilling efficiencies have increased substantially over the past few years. US shale producers are paying increasing attention to capital discipline and return-focused performance, but even at current lower prices, we believe US shale production will continue to grow, increasing global production and keeping a lid on prices.

“We believe prices will remain largely within our expected range —although they will be volatile—amid increases in US shale production, reduced but still significant global supplies, and potential declining compliance with agreed production cuts, especially if growth in demand is more tepid,” the report added.

To the Vice President – Senior Analyst Exploration and Production (E&P), Amol Joshi, investors looking for higher shareholder returns would continue to wait in 2019, despite strides in capital efficiency and higher commodity prices since the 2015-16 downturn.

E&P revenues correlate closely to oil and gas prices, but profitability depends on numerous other factors, including operating costs, product mix and quality, transportation costs and financial policy. “While profitability influences valuation and shareholder returns, supply/demand imbalances and market sentiment can make investor returns volatile. E&P companies in 2019 will continue to exercise spending discipline and focus on capital efficiency.

“While labour inflation has increased their operating costs, rising production has largely contained their costs per unit. “Higher demand for OFS has raised the costs of drilling and completing onshore wells, but efficiencies have helped most E&P companies offset some of these higher capital costs. Still, elevated oil prices through most of 2018 did not benefit many producers in the Permian, the dominant US producing basin.”

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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South Africa’s Inflation Rate Holds Steady in May

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South Africa’s inflation rate remained unchanged in May, increasing the likelihood that the central bank will maintain current borrowing costs.

According to a statement released by Statistics South Africa on Wednesday, consumer prices rose by 5.2% year-on-year, the same rate as in April.

The consistent inflation rate is expected to influence the decision of the six-member monetary policy committee (MPC), which is set to meet in mid-July. The current benchmark rate stands at 8.25%, a 15-year high, and has been held steady for six consecutive meetings.

Central Bank Governor Lesetja Kganyago has repeatedly emphasized the need for inflation to fall firmly within the 3% to 6% target range before considering any reduction in borrowing costs.

“We will continue to deliver on our mandate, irrespective of how our post-election politics plays out,” Kganyago stated earlier this month in Soweto. “The only impact is what kind of policies any coalition will propose. If the policies are not sustainable, we might not have investment.”

While money markets are assigning a slim chance of a 25-basis point rate cut in July, they are fully pricing in a reduction by November.

Bloomberg Africa economist Yvonne Mhango anticipates the rate-cutting cycle to begin in the fourth quarter, supported by a sharp drop in gasoline prices in June and a rally in the rand.

The rand has appreciated more than 3% since Friday, following the ANC’s agreement to a power-sharing deal with business-friendly opposition parties and the re-election of President Cyril Ramaphosa.

In May, the annual inflation rates for four of the twelve product groups remained stable, including food and non-alcoholic beverages.

However, transport, alcoholic beverages and tobacco, and recreation and culture saw higher rates. Food prices increased by 4.3% in May, slightly down from 4.4% in April, while transport costs rose by 6.3%, up from 5.7% and marking the highest rate for this category since October 2023.

The central bank’s cautious stance on monetary policy reflects its ongoing concerns about inflation.

Governor Kganyago has consistently voiced worries that the inflation rate is not decreasing as quickly as desired. The MPC’s upcoming decision will hinge on sustained inflationary pressures and the need to balance economic stability with fostering growth.

As South Africa navigates its economic challenges, the steady inflation rate in May provides a measure of predictability for policymakers and investors alike.

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Ghana Reports Strong 4.7% GDP Growth in First Quarter of 2024

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Ghana’s economy showed impressive growth in the first quarter of 2024 with the Gross Domestic Product (GDP) expanding by 4.7% compared to the same period last year, according to Government Statistician Samuel Kobina Annim.

This represents an increase from the 3.8% growth recorded in the previous quarter and should provide a much-needed boost to the ruling New Patriotic Party (NPP) as the nation approaches the presidential elections scheduled for December 7.

The positive economic data comes amidst a challenging backdrop of fiscal consolidation efforts under a $3 billion International Monetary Fund (IMF) rescue program.

The government has been working to control debt through reduced spending and restructuring nearly all of its $44 billion debt.

This includes ongoing negotiations with private creditors to reorganize $13 billion worth of bonds.

The latest GDP figures are seen as a vindication of the NPP’s economic policies, which have been under fire from the main opposition party, the National Democratic Congress (NDC).

The opposition has criticized the government’s handling of the economy, particularly its fiscal policies and the terms of the IMF program, arguing that they have imposed undue hardship on ordinary Ghanaians.

However, the 4.7% growth rate suggests that the measures taken to stabilize the economy are beginning to yield positive results.

Analysts believe that the stronger-than-expected economic performance will bolster the NPP’s position as the country gears up for the presidential elections.

“The growth we are seeing is a testament to the resilience of the Ghanaian economy and the effectiveness of the government’s policies,” Annim stated at a press briefing in Accra. “Despite the constraints imposed by the debt restructuring and IMF program, we are seeing significant progress.”

The IMF program, which is designed to restore macroeconomic stability, has necessitated tough fiscal adjustments.

These include cutting government expenditure and implementing structural reforms aimed at boosting economic efficiency and growth.

The government’s commitment to these reforms has been crucial in securing the confidence of international lenders and investors.

In addition to the IMF support, the government has also been focused on diversifying the economy, reducing its reliance on commodities, and fostering sectors such as manufacturing, services, and technology.

These efforts have contributed to the robust growth figures reported for the first quarter.

Economic growth in Ghana has been uneven in recent years, with periods of rapid expansion often followed by slowdowns.

The current administration has emphasized sustainable and inclusive growth, seeking to ensure that the benefits of economic progress are widely shared across all segments of the population.

The next few months will be critical as the government continues its efforts to stabilize the economy while preparing for the upcoming elections.

The positive GDP growth figures provide a strong foundation, but challenges remain, including managing inflation, creating jobs, and ensuring the stability of the financial sector.

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World Bank Commits Over $15 Billion to Support Nigeria’s Economic Reforms

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The World Bank has pledged over $15 billion in technical advisory and financial support to help the country achieve sustainable economic prosperity.

This commitment, announced in a feature article titled “Turning The Corner: Nigeria’s Ongoing Path of Economic Reforms,” underscores the international lender’s confidence in Nigeria’s recent bold reforms aimed at stabilizing and growing its economy.

The World Bank’s support will be channeled into key sectors such as reliable power and clean energy, girls’ education and women’s economic empowerment, climate adaptation and resilience, water and sanitation, and governance reforms.

The bank lauded Nigeria’s government for its courageous steps in implementing much-needed reforms, highlighting the unification of multiple official exchange rates, which has led to a market-determined official rate, and the phasing out of the costly gasoline subsidy.

“These reforms are crucial for Nigeria’s long-term economic health,” the World Bank stated. “The supply of foreign exchange has improved, benefiting businesses and consumers, while the gap between official and parallel market exchange rates has narrowed, enhancing transparency and curbing corrupt practices.”

The removal of the gasoline subsidy, which had cost the country over 8.6 trillion naira (US$22.2 billion) from 2019 to 2022, was particularly noted for its potential to redirect fiscal resources toward more impactful public investments.

The World Bank pointed out that the subsidy primarily benefited wealthier consumers and fostered black market activities, rather than aiding the poor.

The bank’s article emphasized that Nigeria is at a turning point, with macro-fiscal reforms expected to channel more resources into sectors critical for improving citizens’ lives.

The World Bank’s support is designed to sustain these reforms and expand social protection for the poor and vulnerable, aiming to put the economy back on a sustainable growth path.

In addition to this substantial support, the World Bank recently approved a $2.25 billion loan to Nigeria at a one percent interest rate to finance further fiscal reforms.

This includes $1.5 billion for the Nigeria Reforms for Economic Stabilization to Enable Transformation (RESET) Development Policy Financing, and $750 million for the NG Accelerating Resource Mobilization Reforms Programme-for-Results (ARMOR).

“The future can be bright, and Nigeria can rise and serve as an example for the region on how macro-fiscal and governance reforms, along with continued investments in public goods, can accelerate growth and improve the lives of its citizens,” the World Bank concluded.

With this robust backing from the World Bank, Nigeria is well-positioned to tackle its economic challenges and embark on a path to sustained prosperity and development.

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