Three, four or more? As jittery financial markets once again obsessed over the number of times the US Federal Reserve might raise interest rates this year, already vulnerable stock indexes across the world came under renewed pressure. And crude tanked in sympathy.
Equity markets across the US, Europe and Asia began to tumble Tuesday and were poised for a fourth straight day of losses Friday.
Benchmark front-month Brent and WTI crude futures lost 3.9-4.6% cumulatively over Tuesday to Thursday and were in the red in intraday trading Friday, following the direction of stocks in Asia and Europe.
Two major events swayed sentiment in the financial markets this week. One was scheduled testimonies before the US House and Senate committees by the new Federal Reserve chairman Jerome Powell Tuesday and Thursday, which in sum signalled that the central bank was on course for at least three rate hikes through 2018 and possibly a fourth if the economy overheats.
The second, which sent a jolt through the markets Thursday and raised the hackles of US trading partners round the globe, was President Donald Trump’s plan to impose hefty tariffs on steel and aluminium imports into the country.
Trump said that import duties of 25% on steel and 10% on aluminium would be formally announced next week, although White House officials later said some details were yet to be ironed out. The news initially drove up shares of US steel and aluminium makers but triggered a broader selloff across the equity markets on fears that it will stoke inflation by raising input costs in a range of industries reliant on those metals.
Angry responses poured in from China, Japan, the European Commission and Germany, among others, and raised fears of a looming trade war that could have far-reaching economic repercussions.
Crude prices took a hit earlier in the week when the US Energy Information Administration reported a surprisingly large build of just over 3 million barrels in commercial crude inventories in the country for the week ended February 23.
But the bearishness snowballed, first with renewed fears in the financial markets over a hawkish Fed and next with Trump’s tariff plan. The dollar strengthened on the back of the strong interest rate hike worries but weakened amid the tariffs news, though not enough to support crude prices.
The bottomline is that the financial markets continue to have crude in a strangle-hold, which portends more volatility and bouts of weakness ahead.
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Headline crude prices for the week beginning 11 November 2019 – Brent: US$62/b; WTI: US$56/b
Headlines of the week
The year’s final upstream auctions were touted as a potential bonanza for Brazil, with pre-auction estimates suggesting that up to US$50 billion could be raised for some deliciously-promising blocks. The Financial Times expected it to be the ‘largest oil bidding round in history’. The previous auction – held in October – was a success, attracting attention from supermajors and new entrants, including Malaysia’s Petronas. Instead, the final two auctions in November were a complete flop, with only three of the nine major blocks awarded.
What happened? What happened to the appetite displayed by international players such as ExxonMobil, Shell, Chevron, Total and BP in October? The fields on offer are certainly tempting, located in the prolific pre-salt basin and including prized assets such as the Buzios, Itapu, Sepia and Atapu fields. Collectively, the fields could contain as much as 15 billion barrels of crude oil. Time-to-market is also shorter; much of the heavy work has already been done by Petrobras during the period where it was the only firm allowed to develop Brazil’s domestic pre-salt fields. But a series of corruption scandals and a new government has necessitated a widening of that ambition, by bringing in foreign expertise and, more crucially, foreign money. But the fields won’t come cheap. In addition to signing bonuses to be paid to the Brazilian state ranging from US$331 million to US$17 billion by field, compensation will need to be paid to Petrobras. The auction isn’t a traditional one, but a Transfer of Rights sale covering existing in-development and producing fields.
And therein lies the problem. The massive upfront cost of entry comes at a time when crude oil prices are moderating and the future outlook of the market is uncertain, with risks of trade wars, economic downturns and a move towards clean energy. The fact that the compensation to be paid to Petrobras would be negotiated post-auction was another blow, as was the fact that the auction revolved around competing on the level of profit oil offered to the Brazilian government. Prior to the auction itself, this arrangement was criticised as overtly complicated and ‘awful’, with Petrobras still retaining the right of first refusal to operate any pre-salt fields A simple concession model was suggested as a better alternative, and the stunning rebuke by international oil firms at the auction is testament to that. The message is clear. If Brazil wants to open up for business, it needs to leave behind its legacy of nationalisation and protectionism centring around Petrobras. In an ironic twist, the only fields that were awarded went to Petrobras-led consortiums – essentially keeping it in the family.
There were signs that it was going to end up this way. ExxonMobil – so enthusiastic in the October auction – pulled out of partnering with Petrobras for Buzios, balking at the high price tag despite the field currently producing at 400,000 b/d. But the full-scale of the reticence revealed flaws in Brazil’s plans, with state officials admitting to being ‘stunned’ by the lack of participation. Comments seem to suggest that Brazil will now re-assess how it will offer the fields when they go up for sale again next year, promising to take into account the reasons that scared international majors off in the first place. Some US$17 billion was raised through the two days of auction – not an insignificant amount but a far cry from the US$50 billion expected. The oil is there. Enough oil to vault Brazil’s production from 3 mmb/d to 7 mmb/d by 2030. All Brazil needs to do now is create a better offer to tempt the interested parties.
Results of Brazil’s November upstream auctions:
Global liquid fuels
Electricity, coal, renewables, and emissions