Oil and Debt Dietrich Domanski, Jonathan Kearns, Marco J. Lombardi and Hyun Song Shin OPEC, 3 March 215 The views expressed are solely those of the authors and should not be attributed to the BIS Restricted
Shifts in production and consumption fall short of explaining oil price dynamics Oil price and unexpected oil market tightness Commodity prices Per cent Per cent 29 = 1 Production weaker than expected / consumption stronger than expected 1 2 175 15 25 1 125 5 Production stronger than expected / consumption weaker than expected 2 1 75 75 Dec 96 Dec 98 Jun 8 Mar 9 Jun 14 Mar 15 Lhs: Price 1 Rhs: 2 Production Consumption 3 5 9 1 11 12 13 14 15 Oil (Brent) Foodstuffs Metals 1 Change in quarterly average Brent crude oil spot price. 2 Cumulative deviation of growth from expectation at the start of the episode. 3 Cushing West Texas Intermediate (WTI), US market close time. Sources: US Energy Information Administration; Bloomberg; BIS calculations. Restricted 2
Debt and leverage have increased sharply US corporate bonds outstanding 1 Oil and gas producers: total debt to assets 2 USD bn USD bn Per cent 8 8, 32 6 6, 24 4 4, 16 2 2, 8 3 4 5 6 7 8 9 1 11 12 13 14 15 Lhs: Energy Rhs: All sectors Large US 3 Other US EMEs 3 26 / 213 / Median / 25th 75th interquantile range 1 Face value of Merrill Lynch high-yield and investment grade corporate bond indices. 2 Integrated oil, gas and exploration/production companies. 3 Companies with total assets in 213 exceeding $25 billion. Sources: Bloomberg; Thomson Reuters Worldscope; BIS calculations. Restricted 3
Credit spreads point to increasing risks in the energy sector Investment grade High-yield 6 6 2, 2, 48 48 1,6 1,6 36 36 1,2 1,2 24 24 8 8 12 12 4 4 97 99 1 3 5 7 9 11 13 All sectors Energy Sep 14 Mar 15 97 99 1 3 5 7 9 11 13 All sectors Energy Sep 14 Mar 15 Source: Merrill Lynch. Restricted 4
Oil production in the US continued surging Crude oil production 1 Days of supply of crude oil in US stocks 2 Deviation from one-year moving average 26 27 28 29 21 211 212 213 214 Louisiana North Dakota Texas 3. 2.5 2. 1.5 1..5. 4.5 3. 1.5. 1.5 3. 4.5 Jun 14 Sep 14 Dec 14 Mar 15 1 In million barrels per day. 2 Calculated as current crude oil stock level divided by refinery inputs of crude oil (as a proxy for demand) averaged over the most recent four-week period. The dark (light) grey range depicts the minimum and maximum values registered over the period 29 13 (1984 213) in the corresponding weeks of the calendar year. Source: US Energy Information Administration Restricted 5
Debt and ample oil supply will constrain oil producers Ratio of capital expenditures to cash flow 1 Per cent Rig counts 135 12 15 9 75 6 9 8 7 6 5 4 18 16 14 12 1 8 5 6 7 8 9 1 11 12 13 EMEs 2 Large US 2 Other US 45 3 6 Q1 214 Q2 214 Q3 214 Q4 214 Q1 215 Texas (lhs) Louisiana (rhs) North Dakota (rhs) 1 Median across integrated oil, gas and exploration/production companies in each category. 2 Companies with total assets in 213 exceeding $25 billion. Sources: US Energy Information Administration; Thomson Reuters Worldscope; BIS calculations. Restricted 6
Oil and finance ecosystem Restricted 7
The growing role of swap dealers as providers of hedge Merchants Swap dealers 6 3 3 6 9 7 8 9 1 11 12 13 14 15 Long Short 6 3 3 6 9 7 8 9 1 11 12 13 14 15 Source: Bloomberg. Restricted 8
A negatively-sloped supply curve for futures Merchants short positions and returns on oil price 1 Oil supply and hedging activity 3 Million barrels per day Million barrels 2 1 1 2 75, 5, 25, 25, 5, Change in merchants short positions 2,3 June 14 Feb 15 Jan 1 May 14 July 8 Feb 9 WTI crude oil spot price returns 2 4 1 2 1 2 2 4 7 8 9 1 11 12 13 14 Lhs: Rhs: 2 Non-OPEC total oil supply Merchants short positions 1 Weekly data (five-day moving average for oil price). The solid regression line indicates statistical significance at a 95% confidence level; the dotted lines indicate no statistical significance. 2 Futures and options short open positions on WTI light sweet crude oil traded at the NYMEX, in millions of barrels. 3 Twelve-month changes. Sources: CFTC; Datastream. Restricted 9
To wrap up The recent fall in the oil price is hard to rationalise Indebtedness in the oil industry has surged over the past years Falling oil prices and high leverage lead to financial strains The reaction of overindebted producers may have amplified the fall US shale oil production continued to grow Producers increased their hedging Restricted 1