Oil price hurt by surging debt levels, says Bank for International Settlements
|09/07/2018||Posted by admin under 南京夜网||
The 50 per cent plunge in oil prices since the middle of last year cannot be solely blamed on falling demand and the battle between the United States shale industry and large Middle-Eastern oil producers over market share. Debt and futures trading have played an important role, according to new research from the Bank for International Settlements.
Since its 2014 peak of $US111.05 a barrel in June, Brent crude has slumped as much as 56.9 per cent. Since mid-January, oil has recovered more than 22 per cent and is trading around $US58.50 a barrel.
A huge increase in debt in the oil sector has exposed producers to solvency and liquidity risks, a new preliminary report from BIS says.
“The greater willingness of investors to lend against oil reserves and revenue has enabled oil firms to borrow large amounts in a period when debt levels have increased more broadly,” BIS said.
“Issuance by energy firms of both investment grade and high-yield bonds has far outpaced the already substantial overall issuance of debt securities.”
The value of assets held by energy companies have come down dramatically, thanks to the plunge in oil prices, meaning the debt is no longer backed by something as valuable as when it was originally sold.
The potential cost of borrowing, through the issuance of high-yield bonds, has increased close to 5 percentage points since the middle of last year, according to BIS.
“Against this background of high debt, a fall in the price of oil weakens the balance sheets of producers and tightens credit conditions, potentially exacerbating the price drop as a result of sales of oil assets, for example, more production is sold forward,” BIS said.
“Second, in flow terms, a lower price of oil reduces cash flows and increases the risk of liquidity shortfalls in which firms are unable to meet interest payments. Debt service requirements may induce continued physical production of oil to maintain cash flows, delaying the reduction in supply in the market.”
There is also the issue of emerging market oil producers having borrowed large amounts of money in US dollars. The US dollar has surged ahead against most currencies and this is creating larger debt for producers outside America.
BIS said that selling futures or buying put options have been ways for oil producers to hedge their exposure to volatile oil revenue.
“Since 2010, oil producers have increasingly relied on swap dealers as counterparties for their hedging transactions. In turn, swap dealers have laid off their exposures on the futures market as suggested by the trend increase in the CFTC [Commodity Futures Trading Commission] short futures positions of swap dealers over the 2009-2013 period,” BIS said.
But, with increased volatility, swaps deals have cooled on oil producers and have been less inclined to sell to them.
“In response to greater reluctance by dealers to take the other side of sales, producers wishing to hedge their falling revenues may have turned to the derivatives markets directly, without going through an intermediary. This shift in the liquidity of hedging markets could have played a role in recent price dynamics.”
The ‘financialisation’ of the oil market has played a significant role in its recent downturn, ANZ global head of financial markets research Richard Yetsenga said.
“I think what you’re seeing is US dollar liquidity has become less plentiful the last couple of years and it really started with [Ben] Bernanke talking about tapering in the first half of 2013,” Mr Yetsenga said.
“Since that period, I think you can identify a range of financial assets globally that have progressively reflected that more difficult liquidity market.”
Mr Yetsenga believes that the traditional supply-demand model for oil died 15 years ago, but the price was rallying higher in the 2000s, whereas now the financialisation model is working in the other direction and gearing down as liquidity leaves the market.
This story Administrator ready to work first appeared on Nanjing Night Net.