The stock prices of U.S. oil exploration and production (E&P) companies relative to the broader U.S. equity market index have declined since the start of the year. Lower stock prices could make it more difficult for U.S. E&P companies to raise the capital needed for their investment programs. Despite the implication of lower market capitalization, through the second quarter of 2019, the profitability and cash flow generation for the 42 U.S. oil producers the U.S. Energy Information Administration (EIA) regularly follows have increased since 2017, suggesting less reliance on capital markets to fund capital expenditure. EIA based this analysis primarily on the published financial reports of these 42 companies, so it is not necessarily representative of the sector as a whole because the analysis does not represent the financial situation of private companies that do not publish financial reports.
The combined cash from operations for these 42 companies totaled $19.2 billion in the second quarter of 2019, a year-over-year increase of $0.8 billion. In addition, these companies' combined capital expenditure totaled $18.5 billion, a year-over-year decline of $0.9 billion (Figure 1). Since the beginning of 2017, quarterly capital expenditures ranged between $16 billion and $21 billion. Growth in cash from operations has been larger than the growth in capital expenditures since mid-2017, and the two have been relatively consistent since mid-2018. This trend implies that the companies generally have been able to fund their capital expenditure programs increasingly through cash flow from operating activities and less from outside sources of capital, such as debt or equity. In fact, these companies have used more funds for financing activities such as reducing debt and repurchasing shares than they received from incurring debt and issuing shares since the second quarter of 2017.
The 42 companies' production and returns on equity have also increased since 2017. Production gains have come largely through productivity increases during this time, although some production growth is the result of companies that merged with or acquired assets from companies outside of this set of 42. By using longer laterals in horizontal drilling, as well as injecting more proppant per foot, U.S. E&P companies have increased average output per well. According to the 42 companies' income statements, however, upstream production costs did not increase at the same rate as total output growth through the second quarter of 2019, allowing the 42 companies to increase production and returns on equity while maintaining capital expenditures lower than $21 billion per quarter. The companies' combined return on equity and year-over-year production growth each reached 11% as of the second quarter of 2019 (Figure 2).
Despite the increase in returns, production, and cash flow from operations, the combined market capitalization for these 42 companies was $380 billion as of the end of the second quarter of 2019, a year-over-year decline of 28%. The stock prices for many of them continued to decline in the third quarter of 2019. The broader S&P Oil & Gas Exploration & Production Select Industry Index, which represents stock prices for 63 U.S. oil companies, recently declined to low levels relative to the broader U.S. equity market. When compared with the Russell 3000 Index, a stock index that represents almost all publicly traded equities in the United States, the S&P Oil & Gas E&P Index declined throughout the second quarter of 2019 and reached the lowest level since late 2000 in August (Figure 3).
Market capitalization and stock prices often indicate investors' forward-looking expectations and sentiment. In this case, relatively low stock prices for U.S. E&P companies may reflect investor beliefs that E&P companies' future growth or profitability potential is low. Similarly, a declining ratio with the broader Russell 3000 Index implies investors expect other sectors of the U.S. economy have greater growth potential than the U.S. E&P sector. This expectation suggests that investors may have some concerns about whether the profitability and production growth seen in the financial statements as of the second quarter of 2019 will continue.
Low stock prices indicate expectations of lower profits and growth for U.S. E&P companies. More directly, some E&P companies would not be able to raise as much debt or equity financing with a low stock price than they otherwise would. At the same time, more companies have been able to increase cash from operations and fund investment through retained earnings, effectively reducing the need for outside sources of capital. The ability of these companies to maintain similar returns and production growth rates through cash from operations will continue to depend primarily on crude oil prices, trends in productivity per well, and oilfield services costs.
U.S. average regular gasoline and diesel prices increase
The U.S. average regular gasoline retail price rose 10 cents from the previous week to $2.65 per gallon on September 23, 19 cents lower than the same time last year and the largest single week increase in the U.S. average regular gasoline retail price since September 4, 2017. The Midwest price rose by 13 cents to $2.59 per gallon, the Gulf Coast price rose by 12 cents to $2.35 per gallon, the East Coast price rose nearly 9 cents to $2.54 per gallon, the West Coast price rose over 8 cents to $3.34 per gallon, and the Rocky Mountain price increased by more than 4 cents to $2.70 per gallon.
The U.S. average diesel fuel price rose more than 9 cents to $3.08 per gallon on September 23, 19 cents lower than a year ago and the largest single week increase in the U.S. average diesel fuel price since September 4, 2017. The Midwest price rose by 11 cents to $2.99 per gallon, the Gulf Coast price rose by nearly 10 cents to $2.86 per gallon, the East Coast price rose by nearly 9 cents to $3.08 per gallon, and the West Coast and Rocky Mountain prices each rose by nearly 8 cents to $3.65 per gallon and $3.03 per gallon, respectively.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 1.0 million barrels last week to 99.7 million barrels as of September 20, 2019, 13.1 million barrels (15.2%) higher than the five-year (2014-18) average inventory levels for this same time of year. East Coast and Midwest inventories decreased by 1.2 million barrels and 0.9 million barrels, respectively. Gulf Coast and Rocky Mountain/West Coast inventories increased by 0.9 million barrels and 0.1 million barrels, respectively. Propylene non-fuel-use inventories represented 4.3% of total propane/propylene inventories.
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Technology has indeed changed the way we think, act and react. Every activity we perform is directly or indirectly linked to technology one way or another. Like everything else, technology also has its pros and cons, depending on the way it is used. Since the advancement in cyberspace, scammers and hackers have started using advanced means to conduct fraud and cause damage to individuals as well as businesses online.
According to the Federal Trade Commission (FTC), 1.4 million cases of fraud were reported in 2018 and in 25% of the cases, people said they lost money. People reported losing $1.48 billion to fraudulent practices in 2018. This has caused considerable loss to individuals and businesses. Global regulatory authorities have introduced KYC and AML compliances that businesses and individuals are encouraged to follow. However, banks and financial institutions have to follow them under all circumstances.
KYC or Know Your Customer refers to the process where a business attains information about its customers to verify their identities. It is a complex, time-taking process and customers nowadays don’t have the time or resources to deal with the government, consulate, and embassy offices for their KYC procedures. However, due to technological advancement, the identity verification process has been automated through the use of artificial intelligence systems. These systems seamlessly increase the accuracy and effectiveness of the identity verification process while reducing time and human efforts.
The following methods are used to digitally authenticate identities nowadays:
The use of artificial intelligence systems to detect facial structure and features for verification purposes.
The use of artificial intelligence systems to detect the authenticity of various documents to prevent fraud.
The use of artificial intelligence technology to verify addresses from documents to minimize the threat of fraudsters.
The use of multi-step verification to enhance the protection of your accounts by adding another security layer, usually involving your mobile phone.
The use of pre-set handwritten user consent to onboard only legitimate individuals.
Digital Document Verification
Document verification is an important method to conduct KYC or verify the identity of an individual. The process involves the end-user verifying the authenticity of his/her documents. In banks, financial institutions and other formal set-ups, customers are required to verify their personal details through the display of government-issued documents. The artificial intelligence software checks whether the documents are genuine or have been forged. If the documents are real and authentic, the digital documentation verification is completed and vice versa.
There are four steps that are mainly involved in the digital document verification process. First, the user displays his/her identity documents in front of the device camera. Then the document is critically analyzed by artificial intelligence software to check its authenticity. Forged or edited documents are rejected by the software. The artificial intelligence system then extracts relevant information from the document using OCR technology. The information is sent to the back-office of the verification provider and analyzed by human representatives to further validate the authenticity. Then the results are sent to the business or individual asking for the verification. The whole process takes less than five minutes.
The document authentication process can detect both major and minor faults in the documents. It can detect errors and faults in forged documents, counterfeed documents, stolen documents, camouflage or hidden documents, replica documents and even compromised documents. The verification process can be done on a personal computer or a mobile device using a camera. Although only government-issued documents are used for the authentication process, the following are accepted by most verification providers:
Govt ID Cards
Illegal and fraudulent transactions have dangerous consequences for both individuals as well as businesses. Losses due to scams and frauds trickle down at every level and ultimately have negative consequences on the whole system. Therefore it is imperative to conduct proper customer verification and due diligence in order to minimize the risks of fraud. Digital documentation verification plays a key role in the KYC process.
Headline crude prices for the week beginning 23 March 2020 – Brent: US$27/b; WTI: US$23/b
Headlines of the week
Crude oil prices have fallen significantly since the beginning of 2020, largely driven by the economic contraction caused by the 2019 novel coronavirus disease (COVID19) and a sudden increase in crude oil supply following the suspension of agreed production cuts among the Organization of the Petroleum Exporting Countries (OPEC) and partner countries. With falling demand and increasing supply, the front-month price of the U.S. benchmark crude oil West Texas Intermediate (WTI) fell from a year-to-date high closing price of $63.27 per barrel (b) on January 6 to a year-to-date low of $20.37/b on March 18 (Figure 1), the lowest nominal crude oil price since February 2002.
WTI crude oil prices have also fallen significantly along the futures curve, which charts monthly price settlements for WTI crude oil delivery over the next several years. For example, the WTI price for December 2020 delivery declined from $56.90/b on January 2, 2020, to $32.21/b as of March 24. In addition to the sharp price decline, the shape of the futures curve has shifted from backwardation—when near-term futures prices are higher than longer-dated ones—to contango, when near-term futures prices are lower than longer-dated ones. The WTI 1st-13th spread (the difference between the WTI price in the nearest month and the price for WTI 13 months away) settled at -$10.34/b on March 18, the lowest since February 2016, exhibiting high contango. The shift from backwardation to contango reflects the significant increase in petroleum inventories. In its March 2020 Short-Term Energy Outlook (STEO), released on March 11, 2020, the U.S. Energy Information Administration (EIA) forecast that Organization for Economic Cooperation and Development (OECD) commercial petroleum inventories will rise to 2.9 billion barrels in March, an increase of 20 million barrels over the previous month and 68 million barrels over March 2019 (Figure 2). Since the release of the March STEO, changes in various oil market and macroeconomic indicators suggest that inventory builds are likely to be even greater than EIA’s March forecast.
Significant price volatility has accompanied both price declines and price increases. Since 1999, 69% of the time, daily WTI crude oil prices increased or decreased by less than 2% relative to the previous trading day. Daily oil price changes during March 2020 have exceeded 2% 13 times (76% of the month’s traded days) as of March 24. For example, the 10.1% decline on March 6 after the OPEC meeting was larger than 99.8% of the daily percentage price decreases since 1999. The 24.6% decline on March 9 and the 24.4% decline on March 18 were the largest and second largest percent declines, respectively, since at least 1999 (Figure 3).
On March 10, a series of government announcements indicated that emergency fiscal and monetary policy were likely to be forthcoming in various countries, which contributed to a 10.4% increase in the WTI price, the 12th-largest daily increase since 1999. During other highly volatile time periods, such as the 2008 financial crisis, both large price increases and decreases occurred in quick succession. During the 2008 financial crisis, the largest single-day increase—a 17.8% rise on September 22, 2008—was followed the next day by the largest single-day decrease, a 12.0% fall on September 23, 2008.
Market price volatility during the first quarter of 2020 has not been limited to oil markets (Figure 4). The recent volatility in oil markets has also coincided with increased volatility in equity markets because the products refined from crude oil are used in many parts of the economy and because the COVID-19-related economic slowdown affects a broad array of economic activities. This can be measured through implied volatility—an estimate of a security’s expected range of near-term price changes—which can be calculated using price movements of financial options and measured by the VIX index for the Standard and Poor’s (S&P) 500 index and the OVX index for WTI prices. Implied volatility for both the S&P 500 index and WTI are higher than the levels seen during the 2008 financial crisis, which peaked on November 20, 2008, at 80.9 and on December 11, 2008, at 100.4, respectively, compared with 61.7 for the VIX and 170.9 for the OVX as of March 24.
Comparing implied volatility for the S&P 500 index with WTI’s suggests that although recent volatility is not limited to oil markets, oil markets are likely more volatile than equity markets at this point. The oil market’s relative volatility is not, however, in and of itself unusual. Oil markets are almost always more volatile than equity markets because crude oil demand is price inelastic—whereby price changes have relatively little effect on the quantity of crude oil demanded—and because of the relative diversity of the companies constituting the S&P 500 index. But recent oil market volatility is still historically high, even in comparison to the volatility of the larger equity market. As denoted by the red line in the bottom of Figure 4, the difference between the OVX and VIX reached an all-time high of 124.1 on March 23, compared with an average difference of 16.8 between May 2007 (the date the OVX was launched) and March 24, 2020.
Markets currently appear to expect continued and increasing market volatility, and, by extension, increasing uncertainty in the pricing of crude oil. Oil’s current level of implied volatility—a forward-looking measure for the next 30 days—is also high relative to its historical, or realized, volatility. Historical volatility can influence the market’s expectations for future price uncertainty, which contributes to higher implied volatility. Some of this difference is a structural part of the market, and implied volatility typically exceeds historical volatility as sellers of options demand a volatility risk premium to compensate them for the risk of holding a volatile security. But as the yellow line in Figure 4 shows, the current implied volatility of WTI prices is still higher than normal. The difference between implied and historical volatility reached an all-time high of 44.7 on March 20, compared with an average difference of 2.3 between 2007 and March 2020. This trend could suggest that options (prices for which increase with volatility) are relatively expensive and, by extension, that demand for financial instruments to limit oil price exposure are relatively elevated.
Increased price correlation among several asset classes also suggests that similar economic factors are driving prices in a variety of markets. For example, both the correlation between changes in the price of WTI and changes in the S&P 500 and the correlation between WTI and other non-energy commodities (as measured by the S&P Commodity Index (GSCI)) increased significantly in March. Typically, when correlations between WTI and other asset classes increase, it suggests that expectations of future economic growth—rather than issues specific to crude oil markets— tend to be the primary drivers of price formation. In this case, price declines for oil, equities, and non-energy commodities all indicate that concerns over global economic growth are likely the primary force driving price formation (Figure 5).
U.S. average regular gasoline and diesel prices fall
The U.S. average regular gasoline retail price fell nearly 13 cents from the previous week to $2.12 per gallon on March 23, 50 cents lower than a year ago. The Midwest price fell more than 16 cents to $1.87 per gallon, the West Coast price fell nearly 15 cents to $2.88 per gallon, the East Coast and Gulf Coast prices each fell nearly 11 cents to $2.08 per gallon and $1.86 per gallon, respectively, and the Rocky Mountain price declined more than 8 cents to $2.24 per gallon.
The U.S. average diesel fuel price fell more than 7 cents from the previous week to $2.66 per gallon on March 23, 42 cents lower than a year ago. The Midwest price fell more than 9 cents to $2.50 per gallon, the West Coast price fell more than 7 cents to $3.25 per gallon, the East Coast and Gulf Coast prices each fell nearly 7 cents to $2.72 per gallon and $2.44 per gallon, respectively, and the Rocky Mountain price fell more than 6 cents to $2.68 per gallon.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 1.8 million barrels last week to 64.9 million barrels as of March 20, 2020, 15.5 million barrels (31.3%) greater than the five-year (2015-19) average inventory levels for this same time of year. Gulf Coast inventories decreased by 1.3 million barrels, East Coast inventories decreased by 0.3 million barrels, and Rocky Mountain/West Coast inventories decrease by 0.2 million barrels. Midwest inventories increased by 0.1 million barrels. Propylene non-fuel-use inventories represented 8.5% of total propane/propylene inventories.
Residential heating fuel prices decrease
As of March 23, 2020, residential heating oil prices averaged $2.45 per gallon, almost 15 cents per gallon below last week’s price and nearly 77 cents per gallon lower than last year’s price at this time. Wholesale heating oil prices averaged more than $1.11 per gallon, almost 14 cents per gallon below last week’s price and 98 cents per gallon lower than a year ago.
Residential propane prices averaged more than $1.91 per gallon, nearly 2 cents per gallon below last week’s price and almost 49 cents per gallon below last year’s price. Wholesale propane prices averaged more than $0.42 per gallon, more than 7 cents per gallon lower than last week’s price and almost 36 cents per gallon below last year’s price.