Monday, April 27, 2015

Deflation? Oil's 45 percent rebound could be markets' next headache

(Reuters) - Whisper it, but the next challenge for financial markets and policymakers may not be deflation, but the remarkable surge in oil prices from the six-year low touched in January.
Since then, Brent crude futures have risen 45 percent. If that is sustained or even increased throughout this year, inflation next year could rise significantly, posing questions for policymakers largely committed to ultra-loose policy.
No fewer than 27 central banks around the world have eased monetary policy to some extent this year in a battle against deflation, slowing growth or both.
These measures have ranged from interest rate cuts to bond-buying "quantitative easing" programs. All have been in response to the fall in inflation rates and inflation expectations driven by the 60 percent collapse in oil prices over the latter part of last year.
Investors' bets on the timing of the first interest rate increase from the U.S. Federal Reserve were pushed back to late this year or maybe even 2016, the euro plummeted and global stocks rose to new historical peaks.
But many of these market moves have stalled, some even reversing. Inflation assumptions baked into index-linked bonds have rebounded, the euro is up five weeks out of the last six, and asset prices of oil exporters such as Russia have recovered a large chunk of last year's dramatic oil-led slump.
"Deflation fears are overdone and we're seeing some upside surprises now, although risks of persistent low inflation remain," said Ruben Segura-Cayuela, peripheral euro zone economist at Bank of America Merrill Lynch in London.
"A positive oil shock has a detrimental effect on growth and activity, and could generate some volatility, " he said.
There are various estimates on how much changes in the oil price affect growth and inflation.
Brent crude futures have risen $20 from January's low to $65 a barrel LCOc1. That's a 45 percent increase. WTI futures CLc1 have jumped $15 from March's low to $58 a barrel. That's a rise of almost 40 percent.
Deutsche Bank's chief international economist, Torsten Slok, says a 50 percent increase equates to core U.S. inflation rising 0.9 percentage points a year later. That would lift inflation above the Federal Reserve's 2 percent target, which hasn't been met for three years.
Economists at UBS estimate that a $15 rise in oil would raise U.S. inflation by 0.6 percentage points over the next year, $25 would equate to 1.0 percentage point and $35 would add 1.4 percentage point.
Their equivalent estimates for the euro zone are: a $15 rise adds 0.5 percentage point to headline inflation, $25 equates to 0.8 percentage point and $35 equals 1.1 percentage point.
Even the most extreme of these scenarios is unlikely to sway the European Central Bank, the Fed or any major central bank from the course they are steering - a 1 trillion euro QE bond-buying spree from the ECB through September next year, and a probable rate rise from the Fed late this year.
And if monetary policy is unlikely to choke off any rebound in inflation expectations, that underlines the need for markets to build in higher future inflation rates than they were doing at the turn of the year.
Inflation markets have already reacted. The so-called five-year forward, which measures five-year euro zone inflation expectations in five years and is the ECB's favored gauge, has climbed to 1.7 percent from a record low beneath 1.5 percent.
This still falls short of the ECB's inflation target of "below, but close to" 2 percent, but Mario Draghi and his colleagues will be relieved it is at least moving in the right direction.
U.S. inflation expectations have also rebounded from multi-year lows. Two-year inflation expectations have risen to 1.6 percent from -0.16 percent as recently as mid-January, notes David Absolon, investment director at Heartwood Investment Management.
The 10-year breakeven rate, the difference between the nominal Treasury yield and the real yield on inflation-linked bonds, has risen to 1.9 percent from 1.53 percent.
That drift higher should continue as long as oil prices remain firm, lifting the breakeven rate back towards the longer-term average back above 2 percent, said Iain Stealey, fund manager of the JP Morgan Global Bond Opportunities Fund.
"We've already seen some movement. But there might still be room for that to continue further," he said.
Another area investors might look to gain from firmer oil prices is in U.S. high-yield bonds in the energy sector, which has outperformed the broader index this year as oil has recovered.

They've outperformed the wider high-yield market by about 240 basis points this year. Yields on energy bonds have fallen to 8.1 percent from a peak of 10.4 percent in December .MERH0EN. Those on the broader index have fallen to 6 percent from 7.3 percent over the same period 

Saturday, April 25, 2015

(Reuters) - Oscar-winning actress Sandra Bullock was named the world's most beautiful woman in 2015 by People magazine on Wednesday and laughed when she heard about the honor.
"No, really. I just said, 'That's ridiculous,'" she told the magazine.
Bullock, 50, who won a best actress Academy Award in 2010 for her role in "The Blind Side," said she found beauty in her role as a mother to her 5-year-old son, Louis.
"Real beauty is quiet. Especially in this town, it's just so hard not to say, 'Oh, I need to look like that," she said about Los Angeles. "The people I find most beautiful are the ones who aren't trying."
Bullock also credits her healthy diet, including green juice, and working out up to five times a week for helping to keep her grounded and balanced.
But it is her son who gives her the most joy. "You're not old, you're just happy," she quoted him as replying.
Bullock follows other Hollywood stars such as Lupita Nyong'o, Gwyneth Paltrow, Jennifer Lopez and Julia Roberts who have received the honor in previous years of the magazine's annual beautiful people issue.
Bullock will be providing the voice of a super villain in the upcoming 3D computer-animated comedy film "Minions."

The special issue of the magazine will hit newsstands on Friday.

Brent at 4-1/2 month high; U.S. crude up for sixth week

(Reuters) - Oil prices diverged on Friday, with Brent hitting 4-1/2-month highs on continued fighting in Yemen as U.S. crude fell on concerns of another upcoming stock build, though both benchmarks headed toward weekly gains.
Fighting between Yemen's warring factions raged in southern and central parts of the country, and air strikes from a Saudi-led coalition hit Houthi militia forces, creating more tensions over the security of Middle East oil supplies.
A softer dollar also lent support to Brent and formed a floor beneath falling U.S. crude prices.
Worries that crude stockpiles in the United States could hit a new record next week weighed on U.S. crude, even as overall demand for oil and fuel products, especially gasoline, picked up ahead of the peak summer driving season.
"It's a push-and-pull situation with the Yemen tensions giving Brent support while U.S. prices get pulled down as people steel themselves for another inventory rise next week," said John Kilduff, partner at New York energy hedge fund Again Capital.
Brent settled up 43 cents at $65.28 a barrel after hitting a Dec. 10 high of $65.80. Brent also finished up for a third straight week, gaining 3 percent this week.
U.S. crude closed down 59 cents at $57.15 a barrel, retreating from Thursday's 2015 high of $58.41. It rose for a sixth straight week, its longest such stretch since the first quarter of 2014. This week's gain was 2.5 percent.
After a sell-off between June and January driven by oversupply, oil prices seem to have found their footing in the last three months, gaining about 20 percent in April.
Even so, oil producers and Wall Street are at odds on whether the slump is over, with the financial community betting the recovery will be quicker than the industry expects.
On Friday, Societe Generale raised its 2015 average price forecast for Brent by $4.33 to $59.54 a barrel and for U.S. crude by $4.28 to $53.62.
Some analysts warn that recent price gains could encourage more U.S. shale oil production.
OPEC crude production, meanwhile, outstrips demand by nearly 2 million barrels per day.
Some oil majors are considering further spending cuts to deal with an extended period of low prices.

"The hard facts are rather speaking for low prices," said Eugen Weinberg at Commerzbank.

Thursday, April 23, 2015

Shares in Brazil's Petrobras slide after $17 billion charge RIO DE JANEIRO

(Reuters) - Shares in Brazil's state-run oil company Petrobras (PETR4.SA)(PBR.N) fell 5 percent on Thursday, a day after it reported the largest loss ever on $17 billion in charges, giving investors a deeper look at the fallout from a huge corruption scandal.
Preferred shares pared losses after a sharp opening selloff in Sao Paulo as traders weighed the greater transparency and new management struggling in the aftermath of a widespread scandal.
"Considering (PricewaterhouseCoopers) signed off on these results, the market perception is that there are no more surprises ahead," said Frederico Mesnik, a partner at investment firm Humaita in Sao Paulo. "The major issue weighing here is that the company is very leveraged."
The write-downs in the long-delayed audited results led Petroleo Brasileiro SA, the world's most indebted oil major, to post a 2014 loss of 21.6 billion reais ($7.2 billion), its largest ever.
Petrobras said 6.19 billion reais in charges were related to the corruption scandal. Prosecutors allege construction companies overcharged Petrobras for contracts and executives and politicians received kickbacks.
The loss puts further pressure on President Dilma Rousseff, who was chairwoman of Petrobras between 2003 and 2010, when much of the graft took place, adding fodder to the opposition's argument her interventionist policies have weighed on the company.
Many analysts viewed the publication of audited results as key to restoring credibility for Petrobras. Shares are up 10 percent this year on hopes the new chief executive officer, Aldemir Bendine, will help the company turn the page.
A Credit Suisse research note said "write-downs look sizeable enough to give credibility," but warned that the outlook from executives suggested the company may continue to struggle with a heavy debt burden and costly investments.
"'More of the same' in a stock that has rallied ... on the hopes of a true turnaround is a dangerous place to be in our view," the note added.

Tuesday, April 21, 2015

Iran wants OPEC to pave way for its extra oil production when sanctions lifted

(Reuters) - Members of the Organization of the Petroleum Exporting Countries (OPEC) should prepare for extra Iranian crude production when Western sanctions on Tehran are lifted, Iran's oil minister was quoted on Tuesday by state news agency IRNA as saying.
"We expect the members of OPEC to pave the ground for (an) increase of Iran's oil production that will reach global markets when sanctions are lifted," Bijan Namdar Zanganeh said during a meeting with his Venezuelan counterpart Asdrubal Chavez in Tehran, the agency reported.
Iran, once OPEC's second-largest producer after Saudi Arabia, hopes to boost crude exports by as much as 1 million barrels per day (bpd) if Tehran and six major powers finalize a nuclear agreement by a June 30 deadline.
Sanctions imposed by the European Union and the United States have halved Iran's oil exports to just over 1 million barrels per day since 2012. Lower oil prices have also caused pain for OPEC's less wealthy producers like Iran, which has repeatedly called for an output cut of OPEC's target daily production.
But Gulf OPEC members, including Saudi Arabia, have refused to cut output that is currently at 30 million bpd. Iran says an increase of its oil production will not cause a price crash. However, so far there is no sign of any willingness of other OPEC members to cut supply. OPEC's next meeting is on June 5.

Monday, April 20, 2015

BP says taking more oil from Iraq as payment

(Reuters) - BP (BP.L) has been lifting more crude oil cargoes in the past couple of months as payment for its work in southern Iraq, and is comfortable with that level of shipments, a senior executive of the oil company said on Monday.
Low oil prices and the fight against Islamic State have forced Baghdad to delay billions of dollars of cash payments which it owes to international oil companies (IOCs), so they have been allowed to take oil shipments instead.
Michael Townshend, BP's president in the Middle East, ‎said current total production from Iraq's giant Rumaila field was about 1.4 million barrels per day and was expected to remain steady in 2015.
"In terms of the position we have on Rumaila, the payments have picked up and I'm comfortable where they are," he told reporters in Abu Dhabi.
"We get paid by liftings...either out of Ceyhan or out of the south...We certainly got more liftings in the last couple of months." He did not give details of the liftings.
BP has also extended an agreement with Iraq's Ministry of Oil to help arrest declining production at the huge northern Kirkuk oilfield, Townshend said. Kirkuk is currently disputed between the central government in Baghdad and Iraq's Kurdish region.
"We had a letter of intent, which was for a year, and we extended that until the end of this year because there was a time last year where we couldn't do anything productive."
Under the deal, BP works on the Baghdad-administered side of the border with the Kurdish region, on the Baba and Avana geological formations. Kirkuk's third formation, Khurmala, is controlled by the Kurdistan regional government.
BP, along with other IOCs, is in talks with Baghdad ‎over the technical service agreements under which they develop Iraq's southern fields. Investments in the fields are made by the foreign firms, which are then supposed to receive per-barrel fees.
But low oil prices have made this arrangement difficult for the financially strapped Baghdad government. Iraq's finance minister told Reuters in March that Baghdad was planning to change the way it operated exploration and production contracts with companies such as Royal Dutch Shell, BP and Exxon‎.
This may eventually move Iraq for the first time to production-sharing contracts, in which revenues are divided, from service contracts in which oil firms are paid a set fee.
Townshend said IOCs had presented the Ministry of Oil with some proposed amendments to their contracts.
"‎They've asked for our ideas - they've asked all the IOCs for ideas," he said, declining to comment on whether the ministry had responded.

Oil falls on strong dollar and as Saudi output remains near record high

(Reuters) - Oil prices fell towards $62 a barrel on Monday on a strong dollar and as Saudi Arabian 
Oil Minister Ali al-Naimi said production would stay around 10 million barrels per day (bpd) in April.
Brent crude LCOc1 was trading down $1.20 at $62.25 by 1147 GMT, down from an intraday peak of $64.34. U.S. crude for May delivery CLc1 was down 74 cents at $55 a barrel, down from an early high of $56.65.
The dollar was up 0.47 percent against a basket of currencies .DXY, denting the price ofcrude oil. A strong greenback makes dollar-traded commodities like crude oil less attractive for holders of other currencies.
Production in the world's biggest crude exporter would stay near record peaks around 10 million bpd in April, Saudi Arabian Oil Minister Ali al-Naimi told Reuters on Monday in Seoul, where he is due to attend a board meeting of the state oil firm Saudi Aramco [SDABO.UL].
"I have said many times we will always be happy to supply to our customers with what they want. Now they want 10 million," he said.
Naimi earlier this month said Saudi Arabia produced 10.3 million bpd of crude in March, eclipsing a previous record of 10.2 million bpd, in what is seen as a move to defend market share against non-OPEC competition, including the United States.
U.S. oil drilling rigs fell for a record 19th straight week to the lowest since 2010, data from oil services firm Baker Hughes showed, which has helped lift prices from six-year lows reached in January.
Since the beginning of April, oil prices have risen around 17 percent, pushed up by reports of a possible dip in U.S. output, but Morgan Stanley warned that Saudi production could be more important than developments in the United States.
"We worry about the market's fixation on the U.S. ... OPEC production may be more important as production increased 1 million barrels per day month-on-month in March. Saudi Arabia alone added the equivalent of half of Bakken (the largest U.S. shale oilfield) production in a matter of months – far beyond any U.S. slowdown," the bank said in a note.
Hedge funds and other money managers raised their net long positions to a record 263,578 contracts in the week to April 14, according to data from InterContinental Exchange (ICE) (ICE.N) released on Monday.