RETAILING

Oil price fall sparks market turmoil Fresh lows focus investor attention on economic ramifications

(…) The International Energy Agency cut its demand growth forecasts for 2015 on Friday, saying the rout in prices had so far failed to stimulate buying. Its comments sent crude prices to fresh five-and-a-half-year lows and brought the decline for the week to more than 10 per cent. (…)

The IEA, the wealthy nations’ energy watchdog, said in its closely watched monthly report that global oil demand will grow by 900,000 barrels a day in 2015 — 230,000 b/d less than the prior month’s expectations — to 93.3m b/d. (…)

The 2015 estimate for the so-called “call on Opec” — the amount of crude which the cartel needs to pump to balance the market — has been revised down by 300,000 b/d to 28.9m b/d, in line with Opec’s own revisions.

This is below the existing 30m b/d output target the cartel decided to stick to at its Vienna meeting last month, despite calls from some economically vulnerable countries — such as Venezuela — for a production cut to put a floor under plunging prices. (…)

While lower oil prices are seen being a boon for consumer spending, a broader concern is that the sharp decline from above $100 a barrel in June, may not just reflect excess supply, but rather signal less demand, suggesting the global economy is decelerating.

Slumping inflation expectations also suggest the global economy faces a worrying one-two punch of weakening growth and disinflation, a scenario that has rattled investors preparing for the end of the year.

Oil Prices Rebound on Disrupted Exports Oil prices rebounded as armed clashes in Libya over the weekend disrupted oil exports.

(…) Libya has declared force majeure on two key oil ports, a top oil official told The Wall Street Journal on Sunday, as armed clashes disrupted about half of the country’s crude export capacity. Samir Kamal, head of planning at Libya’s state-run National Oil Co., said oil flows from fields supplying the terminals have been interrupted.

The force majeure—which protects against any claims from oil buyers for the disruption—comes after Islamist militias that control Tripoli launched an offensive in the area against forces loyal to an internationally recognized government based in Eastern Libya. (…)

Nigeria’s Oil Unions Start Strike They Say Will Curb Exports

Nigeria’s crude oil output declined 3.2 percent to 2.18 million barrels a day when they last went on strike in September, data compiled by Bloomberg show. Nigeria pumped 2.3 million barrels of crude oil a day last year, 26 percent of Africa’s total output, according to BP Plc estimates.

‘It’s Starting’ — U.S. Drillers Idle Most Rigs in Years

Rigs targeting oil dropped by 29 this week to 1,546, the lowest level since June and the biggest decline since December 2012, Houston-based field services company Baker Hughes Inc. (BHI) said on its website yesterday. (…)

Rigs targeting U.S. oil are sliding from a record 1,609 after a $50-a-barrel drop in global prices, threatening to slow the shale-drilling boom that has propelled domestic production to the highest level in three decades. (…)

U.S. oil rigs will fall below 1,100 for the first time in three years, bottoming out at 1,073 in August, forecasts prepared by the Louisville, Kentucky-based energy data company Genscape Inc. show.

The Permian Basin lost the most rigs this week, falling by 20 to 548. Counts rose in natural gas-rich plays such as the Marcellus in the eastern U.S. and the Haynesville in the South.

Early slowdown signs emerge for U.S. oil states after crude slide

In Houston, Texas, the first oil industry layoffs have been announced, with realtors there predicting a sharp decline, up to 12 percent, in home sales next year.

Alaska’s 2015 fiscal year budget revenue forecast will have to be lowered by almost $2 billion, according to Fitch Ratings, because of the sharp drop in the state’s forecast crude prices. That will widen Alaska’s budget gap to almost $3.4 billion, Fitch said in a Dec. 11 report.

States such as Texas, North Dakota, Alaska, Oklahoma and New Mexico are all likely to feel strains next year, Wells Fargo Securities municipal analyst Roy Eappen said in a recent report.

Meanwhile, household sentiment in Texas, Louisiana, Oklahoma and Arkansas where memories of the catastrophic 1980s oil crash are still fresh, weakened in October more than any other region, according to a report by Decision Analyst Inc. (…)

The number of well permits fell almost 40 percent nationwide in November, according to industry data firm Drilling Info Inc., which means fewer jobs and less related business. (…)

Fed Likely to Stare Down Oil-Price Drop Federal Reserve officials are poised to stare down another oil-price shock, judging that the boost to consumer spending will be more important to their policy than the decline in inflation.

MORE ON NOVEMBER RETAIL SALES

(…) But the numbers trumpeted on the tube are seasonally adjusted. And when Stephanie Pomboy, the maven of MacroMavens, dug into the data, she found that the seasonal adjustment (fudge factor, to normal folks) artificially enhanced the results to a surprising extent. Specifically, she relates, the adjustment assumed a 0.3% decline in retail sales—even with all the frenetic promotions to lure shoppers into stores or online. When the statisticians assume a drop, they add back the fudge factor to offset the presumed seasonal influences.

In contrast, the Commerce Department had assumed robust retail-sales gains in previous Novembers—1.8% in 2013, 2.5% in 2012, 2.8% in 2011, Steph finds. Not since the recession times of 2008 and 2009 did Commerce assume a negative November for retail sales.

These fudge factors make it easier for reported numbers to top expectations. With the recovery purportedly getting stronger, “that doesn’t seem to make a whole lotta sense now, does it?” she writes in an e-mail. (Barron’s)

Cheaper Oil Will Actually Hurt Factory Sector’s Growth, Manufacturers Say Low oil prices are going to end up costing U.S. factories some of their growth next year.

(…) The upshot is going to be less manufacturing growth next year, according to new projections from the MAPI Foundation, the research arm of the Manufacturers Alliance for Productivity and Innovation. The group, based in Arlington, Va., says factory output will grow by 3.4% in 2015, rather than the 3.8% projected in early November.

“It’s kind of surprising,” because you’d expect cheaper oil to be a net positive, says Don Norman, MAPI’s director of economic studies. The problem is investments in shale development have grown so large that cutbacks there will overwhelm the gains. Mr. Norman estimates a quarter of the $1.02 trillion U.S. businesses poured into capital equipment this year went into oil and gas. (…)

Barron’s adds:

A wide swath of companies depend on strength in the oil patch—even though energy makes up just 9% of the S&P 500, it accounts for 30% of capital expenditures, says Jonathan Glionna, head of U.S. equity strategy for Barclays, who estimated last month that the drop in prices could sap $40 billion from capital budgets.

Oil Prices Pushing Down Business Costs, Not Just for Airlines, Shippers Businesses are paying less for everything from air freight to lubricants to synthetic rubber, showing that the steep drop in global oil prices is benefiting more than just consumers at the gas pump.

Ruble Decline Hits Multinationals

(…) The pain is sharpest for companies in Europe, where exposure to Russia is far higher than in the U.S. Carlsberg A/S, the world’s fifth-largest beer company by volume, has lowered its profit forecasts twice already this year and seen its shares drop more than 18%.

Many analysts expect the company’s growth in Russia next year will be canceled out by the weakening ruble.

“It is hard to see a solution just around the corner,” Carlsberg Chief Executive Officer Jørgen Buhl Rasmussen said on Thursday, referring to the ruble’s slump.

Carlsberg is Russia’s biggest brewer and generates around 40% of its earnings before interest and tax in Eastern Europe. (…)

Last month, Imperial Tobacco Group PLC singled out weakness in Russia as it posted a 7% decline in sales by volume across the company. Imperial’s rival British American Tobacco PLC has also highlighted concerns over the Russian economy.

U.S. and European companies have also had to cope with increased scrutiny of their operations from the Russian government, a strategy seen by experts as a response to Western sanctions against Russia following the conflict in eastern Ukraine.

Russian authorities have inspected a number of McDonald’s Corp. outlets for alleged sanitary violations, resulting in the closure of several restaurants. PepsiCo Inc. and Danone SA have both recently been accused by Russian politicians of using cheap and unhealthy ingredients in their products.

But the ruble is a major concern for many top executives. Unilever PLC, the world’s second-largest maker of consumer products after Procter & Gamble Co. , has said the falling currency in Russia has been part of its recent problems in emerging markets overall.

The company recently surpassed €1 billion ($1.25 billion) in sales in Russia, having entered the country in 1992, but has seen many of its gains in the past year wiped out by the ruble’s slide.

“The ruble is down, the Ukrainian currency is down. It is not helping,” Chief Executive Paul Polman said earlier this year.

The ruble’s slide has been especially painful for smaller companies that rely on Russia for large chunks of their business, particularly those in Central Europe and Eastern Europe.

German glassmaker Saint-Gobain Oberland AG on Friday issued a profit warning and said it would be unlikely to pay a dividend this year, blaming the macroeconomic situation in Russia and Ukraine.

Many Finnish companies have expanded into Russia during the past decade, including paint maker Tikkurila Oyj and premium tire maker Nokian Tyres PLC. Both have seen their share price fall sharply this year after the ruble’s weakness forced them to cut their profit guidance for 2014.

Finnish bakery chain Leipurin Oyj called off its initial public offering on Dec. 3, citing uncertainty caused by the ruble’s collapse.

Fitch Downgrades France

The ratings firm cut France’s rating to AA from AA+, bringing the country on a par with Abu Dhabi and Belgium, and two notches below the top triple-A rating.

Fitch took the decision to cut France’s rating after the government presented a 2015 budget in October that will cut the deficit far less than initially promised. As a result, the country’s debt mountain will keep growing to peak at nearly 100% of annual economic output, Fitch said.

“The 2015 budget involves a significant slippage against prior budget deficit targets,” said Fitch, which put France’s rating on negative watch in October. “The capacity of the public finances to absorb shocks has been significantly reduced,” the ratings firm added. Fitch’s outlook for France’s rating is now stable. (…)

Fitch also poured cold water on the French government’s plans to stimulate economic growth by cutting back on regulation that restrains competition. The planned overhauls announced earlier this week will do little to boost growth and help the country repair its finances, Fitch said.

“The quantitative impact of recent structural reforms is uncertain, and in Fitch’s view doesn’t appear sufficient to reverse the adverse trends in long-term growth and competitiveness,” Fitch said. (…)

CURRENCIES

• Yen Roils Currency Markets

Data from Morgan Stanley, which tracks market participant’s positions in major foreign-exchange currencies, shows that bets against the euro have entered “extreme territory,” at their most since July 2012, while bets against the yen are moderating. (…)

• Brazil’s Real Drops to Nine-Year Low as Gauge of Economy Shrinks Brazil’s real fell to a nine-year low as a gauge of Latin America’s largest economy unexpectedly contracted in October, adding to concern that President Dilma Rousseff’s new team will struggle to revive growth.

• Indonesia’s Rupiah Tumbles to 16-Year Low as Bonds Slide on Fund Outflows

Junk-Bond Worries Spread Beyond Oil

U.S. junk-bond prices have fallen 8% since late June, according to data from BarclaysPLC. One-third of that drop has come this month alone, putting the market on track for its worst annual performance since the financial crisis.

While much of the stress has been in the energy sector on the heels of the sharp decline in oil prices, lately the woe is spreading across the junk market.

Each of the 21 high-yield sectors in a U.S. junk-bond index tracked by J.P. Morgan Chase& Co. registered losses in the five days ended Dec. 9. (…)

A pullback from junk bonds is often a harbinger of a broader reassessment of risk across financial markets, raising the possibility that investors could turn more wary of stocks and other assets. (…)

A raft of postcrisis rules have hit securities-dealing banks, hampering the ability of those middlemen to cushion a selloff, especially in risky assets. Many say the changing role of those dealers is exaggerating the price drops, raising the risk of indiscriminate selling, or “fire sales.” (…)