In this briefing:
- Weekly Oil Views: Crude Remains at the Mercy of Fickle Financial Markets
- DNO Closes In On Faroe
- 2019: Five Key Elements to Watch for in the Oil Market
1. Weekly Oil Views: Crude Remains at the Mercy of Fickle Financial Markets
It has been anything but a happy start to 2019 for the stock markets, which remained under pressure as trading resumed in the new year. A clutch of weak manufacturing data for December – from China to the eurozone and the US – soured the mood for investors through last week.
That was followed by a rare revenue warning from Apple Inc (AAPL US) , citing slowing sales in China, which drew fresh attention to the vulnerability of American companies from the bitter trade war between the world’s two largest economies. The only assets that seemed to be in favour were the safe havens such as Gold (GOLD COMDTY) and the Japanese yen.
Beijing provided the first major lift to market sentiment on Friday, by lowering the reserve requirement ratio for Chinese banks, in a bid to inject more cash into the system. US Fed Chairman Jerome Powell signalling a “patient” approach to monetary policy in a panel discussion in Atlanta later in the day and a strong US jobs report for December completed the trinity of factors that closed the week with a rally in stock markets as well as crude.
Brent and WTI closed nearly 2% higher on the day, just above $57 and just under $48 respectively. Sentiment in the oil market was boosted by initial surveys showing a surprisingly large drop in OPEC production in December.
OPEC/non-OPEC cuts of 1.2 million b/d took effect on January 1 and should yield results in the coming weeks, but we expect crude to remain largely beholden to the twists and turns in the global economy. Just as in the broader financial markets, so in the oil markets, all eyes will now turn to the high-level trade negotiations between the US and China, due to be held in Beijing over January 7-8.
2. DNO Closes In On Faroe
On 26 November 2018, 28.22%-shareholder DNO ASA (DNO NO) announced a cash offer for Faroe Petroleum (FPM LN) of GBP 1.52/share, a 21% premium to the pre-announcement price on November 23rd, but a 44.8% premium to Faroe’s share price of GBP 1.05 as at 3 April 2018, the last business day before DNO announced its first acquisition of shares in Faroe.
This is a hostile offer with DNO openly criticising the management’s corporate-governance culture, share performance, operational abilities, and deal-making. An indication of the level of this hostility can be found in the circular to shareholders (page 9): “Since listing, no dividends have been paid and no capital otherwise returned to shareholders. Meanwhile, back at the ranch, the Faroe directors have been awarded a high number of share options at nil cost.” In response, Faroe’s board describes the deal as “opportunistic, unsolicited, and inadequate”, and has advised the shareholders to reject the offer.
The deal was initially conditional on receiving a minimum acceptance of 57.5% of Faroe’s total issued share capital; however after acquiring shares in the market, DNO announced yesterday it held 30% of issued shares in Faroe, triggering a mandatory offer, and Faroe is now therefore subject to takeover regulation, and the deal requires a lower acceptance threshold of 50%.
Currently trading slightly through terms. Together with shares accepting its offer, DNO currently has 43.1%.
The offer has now automatically been extended until the 18 January and DNO has until the 27 January to improve or revise the Offer. This may need a slight kiss to push it over the line.
3. 2019: Five Key Elements to Watch for in the Oil Market
As we turn the page into 2019, uncertainties over the world’s economic environment are stacked so high, that it would be presumptuous to try and read the fortunes of the oil market in great detail.
We expect plenty of volatility and surprises in a very event- and sentiment-driven environment for the oil market next year.
In this year-ender, we cast our eye over the first half of 2019, which promises to be action-packed, with major deadlines and signposts that could set the tone for the rest of the year.
We have identified the following five key elements that will shape the oil market:
- Economic sentiment to remain in the driver’s seat
- OPEC/non-OPEC compliance will be strong
- Demand growth rather than oversupply will be key
- Prices could rebound by end of Q1
- Wild cards: Iran sanctions, US recession
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