Oil recovers some losses but the impacts continue

Lagos, Nigeria, Capital Markets in Africa — Crude oil prices recovered some losses last week, with Brent crude ending at US$32.18/bbm after falling to a 12-year low of US$27.88 on Wednesday. Prices still remain down YTD (Brent down 15% and WTI down 18%). The chairman of Saudi Arabia’s state oil company has recently commented that the collapse below US$30/bbm is “irrational” and that prices would be higher by the end of 2016.

However, the sustained pressures on oil prices continue to have wide-ranging impacts on markets, with credit spreads continuing to widen  and the Russian rouble hitting a new record low. The rouble fell as low as RUB85.573 per US dollar on Thursday as policymakers suggested they were prepared to let the currency fall with any further oil price declines. Elvira Nabiullina, Russian central bank governor, said she believed the rouble was close to its “fundamental levels”, while Kirill Dmitriev, head of Russia’s sovereign wealth fund RDIF, said the latest moves were “a very normal adjustment to the oil price”.

At the same time, credit default swap pricing continues to suggest that falling oil and commodity prices are impacting creditworthiness. Statistics from Markit show that 110 investment-grade companies now have CDS trading at levels that imply junk status (from 21 in November), with the widest spreads for miners or commodity traders. Countries with at least one investment grade rating but a CDS priced at junk include South Africa (340 bps), Russia (339 bps) and Turkey (301 bps). S&P have also recently stated that three times as many companies are at risk of a downgrade (on “negative outlook” ) than an upgrade and that the decline in creditworthiness in 2H 2015 was the steepest since the credit crisis in 2009.

China grew by 6.9% in 2015, according to the release of fourth-quarter figures. This figure was in line with Beijing’s target of “around 7%”, but is China’s slowest pace of growth since 1990. China has set a growth target for 2016 of 6.5%.  

In the meantime, Schlumberger, the world’s largest oilfield services company, last week announced 10,000 job cuts from its staff of 95,000 citing unscheduled and abrupt activity cancellations in 2015. Schlumberger also announced a $10bn share buy-back programme; the stock fell more than 18% in 2015.