Oil price slide takes the shine off European markets
It was a mixed day in the end for European shares. Comments from European Central Bank president Mario Draghi that the bank would do whatever was necessary to support the eurozone economy provided strong support at the outset.
But the slump in crude oil prices to a near seven year low following Friday’s inconclusive Opec meeting pushed shares off their best levels, with Wall Street opening sharply lower as energy companies dropped back. In the UK Royal Dutch Shell and BG fell 4% while BP was down 3%. In the US Chevron and Exxon are currently down around 4%, while France’s Total is nearly 1.5% lower. The closing scores showed:
- The FTSE 100 fell 14.77 points or 0.24% to 6223.52 after earlier rising to 6287
- Germany’s Dax added 1.25% to 10,886.09, down from its peak of 10.992
- France’s Cac closed up 0.88% at 4756.41
- Italy’s FTSE MIB edged up 0.07% to 22,037.17
- Spain’s Ibex ended down 0.36% at 10,042.4
- In Greece, the Athens market rose 0.21% to 608.85
On Wall Street the Dow Jones Industrial Average is currently down 129 points or 0.73%.
As for oil, Brent crude is 4.2% or $1.87 lower at $41.13, its worst level since February 2009.
On that note, it’s time to close up for the evening. Thanks for all your comments, and we’ll be back tomorrow.
Oil prices could fall still further, reckons Joshua Mahony, market analyst at IG:
The ability of the FTSE 100 to perform is clearly being hindered by tumbling oil prices, and with Brent hitting a new six-year low, the [likelihood] is that this will hold back this market for some time yet. As Shell, BG and BP lead the FTSE losers, the fate of the FTSE is in the hands of the dollar as another Fed fuelled dollar rally could send crude tumbling once more. With OPEC seeming less and less like a cartel and more like an audience with the Saudis, it is likely crude prices could fall further yet.
Meanwhile Opec is getting the blame from Capital Economics:
#Oil sell-off after #OPEC makes even ECB look good. Better to have announced something, even if less than hoped for, than nothing at all...
— Capital Economics (@CapEconComms) December 7, 2015
Analyst Connor Campbell at Spreadex said:
It is hard to tell what is having a bigger impact on the Dow Jones, the chunky losses for Chevron and ExxonMobil or lingering resentment towards the now almost certain December rate-hike set to appear next week. Given the sharp rise that greeted the (ostensibly) lift-off securing non-farm jobs report last Friday, it is likely that the plunging oil price has created the bigger pressure, even if a bit of dovish drag can’t be completely discounted.
Either way the Dow started the day down by around 100 points, in the process loping some of the more extravagant highs off the European indices.
With the Dow now down 114 points, here are the companies leading the fallers (notably Chevron and Exxon Mobil):
Here’s Larry Elliott’s take on the falling oil price. Our economics editor writes:
The latest attempt by Saudi Arabia to kill off the threat from US shale oil has sent oil prices slumping to their lowest level since the depths of the global recession almost seven years ago.
A barrel of benchmark Brent crude was changing hands at below $42 a barrel after the oil cartel Opec - heavily influenced by Saudi Arabia – decided late last week to continue flooding the global market with cheap oil.
With global demand weak, traders fear that Opec’s refusal to cut production despite the financial pain it is causing its members’ economies will lead to an ever-deeper world glut of crude.
Brent stood at $43 a barrel when business began in the City on Monday and fell steadily before receiving a fresh downward push when trading opened in New York.
The price fall, if sustained, will lead to lower inflation in oil-consuming nations through the knock-on effects on petrol, diesel, domestic energy prices and the cost of running businesses.
Lower crude prices may also delay or limit increases in interest rates. The Bank of England has already accepted that inflation – which currently stands at -0.1% – has stayed lower for longer this year than it anticipated.
Analysts believe the current slide in oil prices has come too late to persuade the US Federal Reserve, America’s central bank, to delay an increase in the cost of borrowing later this month, adding that the prospect of the first tightening of policy from the Fed since 2006 was an added factor in crude’s decline.
Larry’s full report is here:
Wall Street opens lower
The falling oil price has helped push US shares lower in early trading, with the Dow Jones Industrial Average currently down 90 points or 0.5%.
Chevron and Exxon Mobil are among the leading fallers, unsurprisingly with Brent crude sliding below $42 a barrel at one point and US crude 3% lower at $38.7.
The decline in the US market has taken some of the shine off European shares, with the FTSE 100 now up just 3 points.
Reuters has a good take on the situation:
Oil prices fell to their lowest in nearly seven years on Monday after OPEC’s meeting ended in disagreement over production cuts and without a reference to its output ceiling, while a stronger dollar made it more expensive to hold crude positions.
The Organization of the Petroleum Exporting Countries (OPEC) ended its policy meeting on Friday without agreeing to lower production.
For the first time in decades, oil ministers dropped any reference to the group’s output ceiling, highlighting disagreement among members about how to accommodate Iranian barrels once Western sanctions are lifted....
More here: Oil at lowest in almost seven years on OPEC inaction, strong dollar
Updated
Oil is also suffering from the prospect of a historic US interest rate rise next week.
That is pushing up the US dollar (and thus pushing down the price of commodities priced in dollars).
That is compounding the surprise after Opec didn’t manage to agree a production cut at last week’s meeting.
Tamas Varga, oil analyst at brokerage PVM Oil Associates in London, explains:
“A stronger dollar and the aftershock of Friday’s OPEC meeting are weighing on the oil market.”
Brent crude hits six-year low
Hold onto your hats, folks.
Brent crude, which is oil sourced from the North Sea, has just hit its lowest level since March 2009 as the oil rout escalates.
A barrel of Brent Crude is now changing hands at below $42 per barrel. That’s a drop of over 2.5%, or more than $1 per barrel.
Brent crude hits new 6 1/2 year low $41.895
— Ian M (@ian_murrell) December 7, 2015
That takes Brent down to levels not seen since March 2009, when the world economy entered recession following the collapse of Lehman Brothers.
Traders are citing the prospect of fresh oil gluts next year, as Opec members continue to pump crude into the market.
US crude is now almost within a dollar of its 2015 low - the $37.75 per barrel hit in August. That was the lowest since December 2008.
US crude falls through $39/barrel mark.
The US oil price has just fallen through $39 per barrel to hit $38.97, a new three-month low.
WTI crude falls below $39
— MineForNothing (@minefornothing) December 7, 2015
Crude prices are coming under new pressure as US traders arrive at their desks.
They’ve had a weekend to digest Opec’s confusing meeting on Friday, where the cartel was unable to agree new production levels (see earlier post for the backstory)
#Oil below $39 US as market absorbs #OPEC decision to boost production despite glut. Loonie falls to 74.25 cents US, lowest since June 2004.
— CBC News Alerts (@CBCAlerts) December 7, 2015
European stock markets are driving higher, as the delayed “Santa Rally” get underway.
The fall in the euro today has helped push Germany’s DAX up by 2%, recovering a decent chunk of last week’s losses.
Investors are taking heart from Mario Draghi’s Friday night speech, when he said there were “no limits” to the actions the ECB could take.
Conner Campbell of Spreadex explains:
Today’s trading is in sharp contrast to the post-Draghi plunge of last Thursday, and only so much can be attributed to an improved, but still lower than expected, region-wide Sentix investor confidence figure.
No, instead it appears that the ECB president managed to reassure investors at the weekend when he trotted out a fresh riff on his usual ‘whatever it takes’ spiel, stating that ‘there cannot be any limit to how far we are willing to deploy our instruments…to achieve [the central bank’s] mandate’.
Updated
Over in Brussels, eurozone finance ministers are gathering for a regular Eurogroup meeting.
There’s nothing too dramatic on the agenda - ministers are due to discuss banking supervision, the state of Greece’s bailout, and the general issue of pension reforms.
It’s the first eurogroup since Portugal’s new left-wing government took power, on a pledge to reverse austerity and deliver more growth. The EC is anxious, though, as Lisbon has not yet submitted a 2016 budget for inspection.
Pierre Moscovici, European commissioner, is urging them to hurry up....
#Portugal needs to submit draft budget asap insisted @pierremoscovici #Eurogroup
— SilviaAmaro (@Silvia_Amaro) December 7, 2015
There’s a smell of burning rubber, and burnt fingers, from Goldman Sachs today.
Goldman has abandoned its prediction that the euro would fall below parity with the US dollar next year, following the ECB’s underwhelming new stimulus package announced on Thusday.
It now thinks the euro will be trading around $1 in a year’s time, not smashing through that point to $0.95, as it previously expected.
Goldman's revised euro forecasts: 3-months $1.07 ($1.02) 6-months $1.05 ($1.00) 12-months $1.00 (0.95) End-2017 $0.90 ($0.80)
— Jamie McGeever (@ReutersJamie) December 7, 2015
Anyone who took Goldman’s advice last week is sitting on a loss.
The euro jumped from $1.053 to $1.098, after the ECB dashed expectations that it would boost its QE programme above the current level of €60bn/month.
The euro has dipped this morning, after Mario Draghi reiterated on Friday night that the ECB would take more action if needed.
It’s currently trading around $1.08, down from $1.089 at the open.
Updated
No prizes for spotting the correlation here:
So much for the idea that the ruble was set to decouple from oil. https://t.co/L0pxEtYrZi pic.twitter.com/7aMmoNpLlY
— Joseph Weisenthal (@TheStalwart) December 7, 2015
The Russian rouble is falling in parallel with the oil price.
Russia’s currency has hit its lowest level since August today, down 1% at 68.79 roubles to the US dollar.
Russia’s break-even price for oil production is around $100 per barrel, so the current situation is a headache for president Putin.
Moscow has already been forced to rewrite its 2016 budget this summer, following the slump in crude prices.
There’s no guarantee that America’s shale oil industry will throw in the towel, even if prices keep falling.
Analysts had expected more shale producers to collapse during 2015, in the face of Opec’s refusal to cut production. However, the sector has proved more resilient than expected - partly because firms have decided to press on, having invested money in building infrastructure when prices were much higher.
The Wall Street Journal flags up that US oil production could actually increase in 2016.
Here’s a flavour:
The situation has surprised even seasoned oil traders.
“It was anticipated that U.S. shale producers, the source of the explosive growth in supply in recent years, would be the first to fold,” Andrew Hall, chief executive of the commodities hedge fund Astenbeck Capital Management LLC, wrote in a Dec. 1 letter to investors reviewed by The Wall Street Journal.
“But this hasn’t happened, at least not at the rate initially expected.” He declined to comment further.
Why analysts see no end in sight for the global oil glut https://t.co/kEchjOaJ78 pic.twitter.com/nME20dh8Ts
— Wall Street Journal (@WSJ) December 7, 2015
Shale industry in firing line as Opec keeps pumping
Opec isn’t the only group who suffers from low energy prices.
Alternative suppliers, such as shale oil producers, are also in the firing line. If Opec sticks to its guns and keeps pumping oil, some rivals could be driven out of business.
Around a third of companies who have defaulted on their loans this year operate in the energy sector.
That’s mainly because the oil price is below the break-even point for shale producers; this chart from the Financial Times shows the trend:
Analyst at City firm Abshire Smith believes Opec has the shale industry in its firing line.
OPEC output has outstripped it for 18 consecutive months, according to data compiled by Bloomberg. Now the organisation says it will keep pumping as much as it does now – about 31.5 million barrels a day – effectively endorsing limitless output.
It seems the general consensus is that OPEC didn’t decide anything on Friday and have opted for the already present Saudi Arabia-led policy of pump, pump, pump until external rivals such as Russian / US shale drillers are squeezed out of market share.
And that means the oil sector will continue to be flooded with crude, pegging prices down.
The oversupply is certainly looking likely to continue into the New Year. Iran, for so long limited under sanctions relating to their nuclear program have promised to increase its production levels to a s much as 4 million barrels a day by the end of 2016, they currently only produce 3.3 million barrels.
More here: Is OPEC as we know it now dead?
Updated
The oil price is continuing to fall, as Opec’s failure to set new production targets last week continues to ripple through the markets.
US crude has now shed 1%, to $39.43 per barrel.
As this chart shows, many of Opec’s members are vulnerable to a protracted period of low energy prices.
(click here for a higher-resolution image)
Eurozone sentiment hits four-month high
Optimism among eurozone analysts and investors has hit its highest level in four months.
It’s a result that may vindicate the European Central Bank’s decision not to accelerate its bond-buying programme last week.
Sentix, the research group, reports that its monthly economic sentiment index has jumped to 15.7 this month up from 15.1 in November. Optimism about future prospects rose significantly.
That indicates Europe is outperforming the rest of the world, as it continues to recover from the debt crisis.
Sentix says that other major world regions appear to be slowing, with Japan back in recession. And it gives the credit to the ECB’s stimulus package, asking:
What would the Eurozone economy be without the ECB and its president Mr Draghi?
Updated
It’s a bad morning for investors in outsourcing group Serco.
Its shares tumbled by 12% at one stage, after it hit the City with a profit warning. Serco now expects to make a trading profit of just £50m, compared with analysts’ consensus forecast of £69m.
My colleague Sean Farrell explains what went wrong:
Serco, which makes about a quarter of its money from the UK government, is struggling to recover from a series of problems with government contracts, including overcharging the UK for monitoring criminals and mismanaging an out of hours health centre in Cornwall. Recently it apologised for using a stretch limousine to transport some asylum seekers from London to Manchester.
Rupert Soames, the grandson of Winston Churchill, took over running the company early last year. He repaired relations with the UK government, which had barred Serco and its rival G4S from new government outsourced work, and pledged to turn around operating performance by cutting costs and getting out of peripheral businesses....
More here:
Updated
Today’s fall in the oil price is bad for Opec’s members, and other oil producers. But it’s jolly good news for those who actually consume the stuff.
Cheaper oil has effectively been a stimulus to Europe’s economy, giving consumers more cash to spend (and giving central bankers an excuse to ‘look through’ the inflationary impact).
H. Kumar, managing director of India’s Mangalore Refinery & Petrochemicals Ltd, told Bloomberg that:
“Big oil consumers will take a lot of succor and refiners will get good sleep.”
Those consumers include all the major industrialised nations (as well as Opec members who refine crude oil):
The #world top 10 #oil consumers pic.twitter.com/eh7HzN8NrV
— Ahmed Ramzy (@AhmedRamzyR) December 7, 2015
Most shares are rising in London this morning, helping the FTSE 100 index of blue-chip companies recover from last week’s selloff.
U.K. stocks rebound from 3-week low as 85% of FTSE 100 advance https://t.co/O2vozBZYPf pic.twitter.com/uW2N7XQUhB
— Bloomberg Business (@business) December 7, 2015
Updated
BP and Royal Dutch Shell aren’t enjoying today’s stock market rally, though.
Shares in both oil giants have fallen by around 1%, putting them on the bottom of the FTSE 100 leaderboard:
As predicted, European stock markets are rallying in early trading.
Investors are putting the disappointment of last week’s ECB Day behind then, pushing equities higher across Europe. Germany is leading the way, with the DAX up around 1%.
Traders are taking solace from Mario Draghi’s new pledge that there is “no limit” to what he’ll do, if necessary (see opening post).
Updated
China's foreign exchange war chest shrink again
Newsflash from Beijing: China’s foreign exchange reserves have fallen again.
The People’s Bank of China has reported that FX reserves dropped to $3.44 trillion by the end of November, down from $3.53 trillion a month before.
It’s a bigger fall than expected; analyst had pencilled in reserves around $3.49 trillion.
CHINA - November-end Forex Reserves At $3.44 Trillion Vs Est Of $3.49 T
— Bloomberg TV India (@btvinticker) December 7, 2015
Back in the summer of 2014, China’s FX warchest totalled $4 trillion. It has been dipping into the reserves since to support the yuan.
More doom data from #China: FX reserves have dropped to $3.44tn at end-Nov from $3.5tn in Oct. pic.twitter.com/J6YWlpL1f4
— Holger Zschaepitz (@Schuldensuehner) December 7, 2015
Updated
The turbulence in the energy sector has also hit Germany industrial heartland.
New data shows that Germany industrial output rose by 0.2% in October, much weaker than the 0.7% rise expected by economists.
That follows a 1.1% slide in September, when German firms were hit by falling demand from overseas.
German energy producers reported that their production slumped by 5.9% in October.
If you strip out energy, and construction, production was up by 0.7% (the red line in this chart)
#Production in October 2015: +0.2% seasonally adjusted on the previous month https://t.co/dV5XhZhDBC pic.twitter.com/ctzBTXJu2z
— Destatis news (@destatis_news) December 7, 2015
Any increase in output is welcome, but it’s a little worrying that Germany didn’t hit expectations. That’s been something of a theme this autumn....
German industrial production misses expectations at 1st estimate for 6th month running - zero growth year-on-year https://t.co/hCuKMsKiVf
— Mike Bird (@Birdyword) December 7, 2015
Updated
At around $40 per barrel, oil is well below the break-even point of Opec’s members.
That means they’re still losing money on production, which could have a nasty knock-on impact on their budgets.
FXTM research analyst Lukman Otunuga warns that emerging market currencies could suffer:
With concerns elevated around the aggressive oversupply in the markets, investor sentiment will remain haunted towards oil in the short-term and selling in the commodity will resume.
This will consequently add pressures to those currencies that belong to economies which are reliant on oil exports.
Oil at lowest since August
Today’s selloff has pushed the oil price down to its lowest level since late August:
OPEC’s failure to set a production goal last week probably means oil prices will fall further, analysts say.
One key factor is that the Iranian market is opening up, meaning more crude will flow into the markets.
As ANZ bank puts it:
“The effective removal of the OPEC quota leaves the market in a more vulnerable position. Prices are likely to weaken this week as the market turns its attention back on U.S. supply.
With Iran exports likely to start increasing next year, this increases the likelihood of further weakness in crude oil markets.”
Oil price falls through $40/barrel
The oil price is coming under fresh pressure this morning, sending the cost of crude down to almost its lowest level this year.
The cost of a barrel of US crude oil has fallen by almost 1% in early trading to $39.61, below the $40 barrel mark. Brent crude - sourced from the North Sea - has shed 0.6% to around $42.75/barrel.
Crude back below $40 as #OPEC goes for market share not market price pic.twitter.com/RMK1zNwNYm
— Caroline Hyde (@CarolineHydeTV) December 7, 2015
The selloff comes after Opec failed to agree new production quotas at its meeting last Friday.
To the market’s surprise, and alarm, the cartel did not agree a production ceiling.
That means members will keep pumping oil at roughly current levels despite the glut that has driven prices down over the last year.
Reuters explains why oil traders are reacting badly:
A disagreement between Saudi Arabia and Iran meant that the group for the first time in decades didn’t even mention an output quota, which previously stood at 30 million barrels per day (bpd).
“Past communiques have at least included statements to adhere ... or maintain output in line with the production target (of 30 million barrels per day). This one glaringly did not,” Barclays bank said.
Updated
The Agenda: Markets expected to rally
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
It looks like investors may get their Santa Rally after all.
Shares are expected to rise in London and across Europe this morning, as traders recover their good spirits after last week’s turbulence.
Our European opening calls: $FTSE 6276 up 38 $DAX 10858 up 106 $CAC 4757 up 43 $IBEX 10167 up 88 $MIB 22219 up 198
— IGSquawk (@IGSquawk) December 7, 2015
As you may remember, shares plunged last Thursday after the European Central Bank disappointed the markets with its latest stimulus plan.
Over the weekend, Mario Draghi reminded traders that the ECB’s priority is to provide what the eurozone economy needs, not meet their expectations.
But he also embraced the spirit of his 2012 “whatever it takes” speech, declaring:
“There cannot be any limit to how far we are willing to deploy our instruments, within our mandate, and to achieve our mandate.”
And talk of “no limits” will obviously please investors.
Also coming up today....
There are two pieces of eurozone economic data to watch out for:
- The latest survey of German industrial production is being released now.
- At 9.30am we get the latest eurozone Sentix Investor Confidence report
We’ll be tracking all the main events through the day....
