Monday, February 8, 2016

Whoa, The Bank for International Settlements Talks Oil Death Spiral

A couple weeks ago we saw in the Financial Times:

IMF and World Bank move to forestall oil-led defaults
Officials from the International Monetary Fund and the World Bank are heading to Azerbaijan to discuss a possible $4bn emergency loan package in what risks becoming the first of a series of bailouts stemming from the tumbling oil price.

The Baku visit, which follows a currency crisis triggered by the collapse in crude, comes amid concern at the two global institutions over emerging market producers from central Asia to Latin America.

The fund and the bank have also been monitoring developments in other oil-producing countries such as Brazil, which is now mired in its worst recession in more than a century, and Ecuador. The oil-driven crisis in Venezuela has even raised the possibility of repaired relations between the fund and Caracas, a city IMF staff last visited more than a decade ago....MORE
Now the central bankers are getting nervous.
Ambrose Evans-Pritchard at the Telegraph, Feb. 5:

Oil market spiral threatens to prick global debt bubble, warns BIS 
The global oil industry is caught in a self-feeding downward spiral as falling prices cause producers to boost output even further in a scramble to service $3 trillion of dollar debt, the world’s top watchdog has warned.
The Bank for International Settlements fears that a perverse dynamic is at work where energy companies in Brazil, Russia, China and parts of the US shale belt are increasing production in defiance of normal market logic, leading to a bad “feedback-loop” that is sucking the whole sector into a destructive vortex.
“Lower prices have not removed excess capacity from the market, but instead may have exacerbated it. Production has been ramped up, rather than curtailed,” said Jaime Caruana, the general manager of the Swiss-based club for central bankers.
The findings raise serious questions about the strategy of Saudi Arabia and the core Opec states as they flood the global crude market to knock out rivals in a cut-throat battle for export share. The process of attrition may take far longer and do more damage than originally supposed.
Oil exporters are embracing austerity and slashing government spending, leading to a form of fiscal tightening that is slowing the global economy.
Speaking at the London School of Economics, Mr Caruana said the sheer scale of leverage in the oil and gas industry is amplifying the downturn since companies are attempting to eke out extra production to stay afloat. The risk spreads on high-yield energy bonds have jumped from 330 basis points to 1,600 over the past 18 months, amplifying the effects of the oil price crash itself.
The industry has issued $1.4 trillion of bonds and taken out a further $1.6 trillion in syndicated loans, driving up the combined energy debt threefold to $3 trillion in less than a decade.

While US shale frackers hog the limelight in the Anglo-Saxon press, many of these energy groups are giant "parastatals", such as Rosneft, Petrobras or China National Offshore Oil Corporation (CNOOC).

The BIS said state-owned oil companies increased debt at annual rate of 13pc in Russia, 25pc in Brazil and 31pc in China between 2006 and 2014, much it in the form of dollar debt through offshore subsidiaries. These oil companies do not respond to pure market pressures since they are cash cows for government budgets.
The nexus of oil and gas debt is just one part of an over-stretched financial system, increasingly exposed to the dangers of a “maturing financial cycle” and to punishing moves in the global currency markets....MORE