Delayed economic relaunch of the developed economies, the US’s enhanced presence on the international oil market and the ‘war’ within OPEC all these have all led to the fall of the oil price to the lowest level of the last four years. This development is laying downward pressure on the stock market value of the companies operating in the oil and gas sector. Thus, following years when the oil and gas related stock market indices had a much better performance compared to indexes that reflect general economic evolution, the trend has been reversed. The fall of oil price to the USD 80 per barrel threshold has pulled down also the oil & gas stock market indexes during the latest part of the year, the negative trend being also sustained by reduced prognosis regarding oil demand. Despite of this far from being favourable environment to the oil and gas sector, there still were some companies that have registered a positive evolution. Among them, several Romanian companies!

The second half of 2014 has registered one of the most important oil price corrections on the stock exchanges and commodity markets: starting H2 this year the WTI crude oil price (the reference for the North American markets) has fallen by some 35 percent from USD 106.06 per barrel (on July 1) to USD 78.77 per barrel (on November 3); during the same interval the price of Brent crude oil (the reference for Europe) has fallen by 31 percent, from USD 110.84 per barrel to USD 84.9 per barrel (see the chart ‘Oil price on steep fall’). The oil price is thus showing an evolution defined, according to the financial markets’ terms, as a signal of entering a ‘bear’ market – term used for a strong negative trend.


Economic analysts say the price fall is caused, first of all, by the world economy’s slowdown as a whole and especially of the Chinese economy’s slowdown (the Chinese economy being one of the ‘engines’ driving world economy); this trend comes in a context in which the European Union, as a whole, is recording a continuous slowdown of its growth. Through the effects of cutting down the aggregate demand for oil, such negative evolutions concerning general economic activities are not only the reasons for the current drop of oil prices, but also the oil-price-on-step-fallmain rationale for re-evaluating the perspectives regarding output, demand and oil price for the following years; thus, OPEC (Organization of the Petroleum Exporting Countries) as well as the US Energy Information Administration (EIA – the relevant US agency) – two of the most credible entities that follow, analyse and release forecasts – have significantly cut their forecasts regarding the output and demand for oil, adjusting in the same downward direction their estimations regarding the oil price for the following years. For example, the World Oil Outlook released by the beginning of November 2014, reveals that OPEC has cut down its oil output estimates by 1.8 million barrels per day to 28.2 million barrels a day for the end of 2017, from the current output of 30 million barrels a day. OPEC has also reduced its forecast regarding the crude oil price from USD 105.7 per barrel in real terms (price level currently calculated for the ‘basket’ used as benchmark by the organisation) to USD 95 per barrel – the anticipated level for the end of 2020 (it needs to be stressed that, as reference, the market value of the ‘basket’ used as benchmark by OPEC was, by the end of October 2014, of USD 78.67 per barrel; the lowest level of the last four years).

Concomitantly, the EIA report released for October 2014 reads that the American specialists have reduced the Q4 price level forecast for WTI crude down to an average level of USD 80 per barrel and to USD 78 per barrel for 2015 – lower by USD 11 and USD 17 per barrel respectively than the previous forecasts; at the same time, price estimates for Brent oil have been cut down to USD 83 per barrel for 2015, USD 18 below the estimated price released a month before.

The OPEC and EIA forecasts are confirmed and completed by the ones released by other important players such as IEA (the Vienna based International Energy Agency) or by other private financial institutions specialized in analysing such trends.

Therefore IEA confirms the negative premises regarding the global oil demand for 2015 in the ‘Oil Market Report’ released by mid October 2014, estimating that its growth rate would be significantly lower than the one recorded until now; the Vienna based agency’s specialists have cut down the forecasts regarding oil demand in 2015 by 1.1 barrels per day (bpd) against the previous estimation, down to 93.5 billion bpd. The IEA anticipations regarding global oil demand were further supported by the price forecasts released by end October by Goldman Sachs, one of the biggest US investment banks: according to its forecasts, the oil price should reach the USD 80 per barrel by the end of the year (it already happened by the end of October; see the chart ‘Oil price on steep fall’) and could remain in the same area during 2015 as well.


The oil price evolution and the reduced forecasts for the following years are determined by several issues, besides the ones related to the slowdown of world economy growth; although the main influence is derived from the negative macro-economic evolution, the markets’ ‘nervousness’ during H2 2014 was amplified by other events too. Among them there is the rapid growth of US oil output (e.g. in 2014 the output was 4 million barrels per day higher than in 2008!) and also the significant appreciation of the American currency (as a result of the US economy advance); however, the main factor that has lead to the ‘fall’ of oil price in such a short interval, was the decision of some OPEC members to cut down the prices. Thus, during the second half of the year, Saudi Arabia (world’s main oil producer and one of the dominant players within OPEC) has set the trend to price decreases, by offering discounts to its Asian clients/partners. Following suit, Kuwait and Iraq responded to Saudi Arabia’s challenge in the same range of price cuts, and a real war has started on the market.


The above mentioned elements are the ones that released the first negative impulses to the companies operating in the oil and gas field. The companies faced on short term lower incomes from oil sales and, secondly, negative development perspectives. On medium and long term (especially following the review of forecasts on demand and prices) the negative impact is given by the fact that oil & gas companies face uncertain operational activities and uncertain development investments in new projects, as most of them have development strategies based on significantly higher price estimates than the current ones (obviously a lot higher than the anticipated price for the coming period). As a result, the oil industry might be soon facing the unpleasant situation to experience a strong negative effect following the enthusiasm noticed several years ago; at the time, following an extraordinary sudden change (let’s remember that after the prices had fallen to USD 35 per barrel due to the world economic crisis during 2008 - 2009, then the oil prices registered a spectacular recovery peaking up to USD 128 per barrel in the spring of 2012) the oil winners-of-the-stoxx-1800-oil-and-gascompanies invested huge amounts of money in new projects. Hence, according to EY estimates (one of biggest companies of financial consulting services and audit in the world) the most important companies in the energy field worldwide are involved in some 163 major projects (each reaching approx. USD 1 billion!) in the exploration and exploitation area, the total amount of their budgets peaking to USD 1.1 trillion; unfortunately, many of these projects are already behind schedule and have exceeded the budgets. As most of them were drawn up on a USD 100 per barrel forecast, the derived hazards are obvious. It comes as an enhanced pressure factor on stock exchange quotations for the companies in the field.


A first wave following these effects, events and pressures mentioned above is already reflected in the stock exchanges indexes related both to world oil & gas industry and regional level as well: e.g. from the start of H2 the stock exchange index STOXX 1800 OIL&GAS has lost nine percent of its value – it fell from 547 points (on July 1, 2014) to 496 points (by mid November). STOXX 1800 OIL&GAS is an index calculated and disseminated by Stoxx Ltd (the biggest world supplier of related financial products) which reflects the aggregate evolution of 108 of the losers-of-the-stoxx-1800-oil-and-gasmost important oil and gas companies from the developed countries; these companies are also included into the STOXX 1800 index, which shows the evolution of the most important 1,800 companies from the developed countries covering all sectors of activity (those being listed and traded on stock markets worldwide). Thus, STOXX
1800 OIL&GAS is a relevant indicator for the evolution of the companies active in the oil and gas industry, while STOXX 1800 is relevant for the general economic evolution of those states.

By mid November 2014, only 35 of the 108 companies included in the relevant index for oil and gas of the developed economies have registered stock markets positive developments during the last 12 months; three of them have stagnated while the rest of 69 companies registered negative developments. Among the companies with positive evolutions in top 10, according to the shares’ price increase, there were three Canadian companies, two from Australia and two from the US, as well as one from Spain, Japan and Denmark – the shares’ variation being of 18 to 86 percent (see the chart ‘Winners according to the STOXX 1800 OIL&GAS index’). At the other end, in top 10 most unfortunate evolutions on the market, there are three companies from the UK and Norway and one from Canada, the US and the Netherlands; the shares’ variation being of some -42 to -76 percent (see the chart ‘Losers according to the STOXX 1800 OIL&GAS index’).falling-indexes


The negative trend for the oil and gas companies traded on the stock exchanges is more evident for Western Europe and much more pronounced in Central and Eastern Europe: during the same interval (from the start of H2 this year until mid November) the STOXX 600 OIL&GAS index lost 17 percent of its value, while STOXX 300 OIL&GAS index lost 16 percent (see the chart ‘Falling stock exchange indexes’). The negative evolutions at this index level are the result of the negative evolutions registered by the companies: of the 33 companies winners-of-the-stoxx-600-oil-and-gasincluded into the STOXX 600 OIL&GAS index only eight have had positive evolutions during November 2013 - November 2014 (see the chart ‘Winners according to the STOXX 600 OIL&GAS index’); the rest of 15 companies have had negative evolution of the market price (see the chart ‘Losers according to STOXX 600 OIL&GAS index’). STOXX 600 OIL&GAS includes 33 oil and gas companies from Western Europe. The companies are selected from the STOXX 600 Europe general index, trying to create a representative geographic index for oil & gas sector in Western Europe. So, the STOXX 600 index reflects the evolution of the most important 600 companies in developed Europe across all sectors of activity, listed and traded on the capital markets in Europe. Thus STOXX 600 OIL&GAS index is relevant for the evolution of the oil and gas 


companies of Western European economies, while STOXX 600 is relevant for the entire economic evolution of the respective region.

As far as the STOXX 300 OIL&GAS index, it is made up of 26 oil and gas companies in Central and Eastern Europe, selected from the STOXX 300 general index (which is made up of 300 companies from all fields of activity in this part of Europe, being relevant for the entire evolution of stock exchanges and economies in Central and Eastern Europe). Only nine of the 26 companies from the oil & gas index have registered growths during the 12 months previous to November 2014, while 17, the rest of them, have had negative evolutions of up to -52 percent (see the charts ‘Winners of the STOXX 300 OIL&GAS index’ and ‘Losers of the STOXX 300 OIL&GAS index’ respectively).winners-of-the-stoxx-300-oil-and-gas


The negative evolution of the oil and gas industry at regional level (in Central and Eastern Europe or in Western Europe) as well as at international level (developed economies on the whole) is shown not only by the involution of the sector indexes, but also by the weaker evolution of the oil & gas indexes compared to general indexes – those representative for the entire economic evolution of the concerned states.

By mid November the STOXX 1800 OIL&GAS index had registered only a two percent growth on the previous 12 months, a three percent growth against the value registered by the end of 2013 and a 8.9 percent decrease (in losers-of-the-stoxx-300-oil-and-gasless than half a year!) starting H2 2014. For comparison, at the same moment in time (mid November 2014) the STOXX1800 general index (the ‘parent’ index!) had a 14 percent growth against the value registered 12 months ago and against the value by the end of the previous year, and also, unlike oil & gas index, a 7.3 percent growth during H2 (see the chart ‘Oil and gas industry vs. the economy in developed countries’).

Concomitantly, for the oil and gas industry in Western Europe (whose evolution is reflected by the STOXX 600 OIL&GAS index) the problems oil-and-gas-industry-vs-the-economy-in-developed-countriesseem to be much serious. The divergence between the oil & gas index and the one relevant for the entire economic development of the region, is much more evident: by mid November the STOXX 600 general index registered a four percent increase during the last 12 months, and had registered a 2.7 percent increase against the end of 2013; for the same intervals the index relevant for the oil and gas industry registered -7.2 percent and -6.9 percent respectively. Also, from the beginning of H2, the STOXX 600 index had a 2.2 percent decrease until mid November, while STOXX 600 OIL&GAS index had registered a more than 16 percent decrease (see the chart ‘Oil and gas industry vs. the economy in Western Europe’).oil-and-gas-industry-vs-the-economy-in-western-europe

Yet, by far, the weakest evolution of the sectorial indexes expressed in percentage points (as we have seen above!) as well as against the index that reflects the economic evolution as a whole, was registered in Central and Eastern Europe. This region being worst hit by the negative evolutions registered on the stock exchanges by the Russian companies affected by the US and EU sanctions. Among these companies we should mention Gazprom, whose shares had registered a fall of 28 percent by mid November 2014 during the latest 12 months; Novatek (-23 percent) or Gazprom Neft (-22 percent) – see the chart ‘Losers according to STOXX 300 OIL&GAS index’. At the other end, looking at a hypothetic top 10 of oil-and-gas-industry-vs-the-economy-in-eastern-europecompanies that registered growths on the stock exchanges (in such a standing there would be only nine of the 26 companies) there are, along with companies from Turkey, Slovenia and Russia, two Romanian companies: Transgaz, which registered a 25 percent growth of its shares’ prices, and Romgaz – with an almost insignificant advance of some one percent.

As a result of the mix of evolutions revealed above, the STOXX 300 OIL&GAS index had registered a fall of 21 percent by mid November compared to the value registered 12 months ago, a 17 percent fall against the value registered by the end of 2013 and a 16 percent decrease against the start of H2; for comparison, STOXX 300 index (general index, relevant for the overall evolution of the most important 300 companies across all fields of activity in Central and Eastern Europe – Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Macedonia, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey and Ukraine) had registered a decrease of 14 percent for the latest 12 months; STOXX 300 had also registered a fall of 10 percent against the end of 2013 and against H2 2014 (see the chart ‘Oil and gas industry vs. economy in Central and Eastern Europe’).oil-and-gas-industry-vs-the-economy-in-romania

A first conclusion to be drawn would be that, at least for the moment, the consequences of oil prices downfall for the industry are rather in the form of adjustment of shares’ prices for the companies in the field, adjustments that have led to cut gaps (revealed by the representative indexes) between the oil and gas industry and the real economy. At least this would be the conclusion after looking at the indexes’ evolution (the sector related ones and the general ones) relevant for the developed economies. It’s nevertheless true that, when looking at the relevant indexes for Western Europe and for Central and Eastern Europe, the situation is rather different as the consequences of the oil price downfall is much more intense; both areas (thus both sets of indexes) are much more under the influence of the evolutions of Russian listed companies – companies affected by the US and EU sanctions. Irrespective of the geographical region, it’s certain that the fall of the oil prices has had as obvious consequence the gap adjustment between the oil and gas industry evolution (shown by the indexes in the field) and the one of the real economy (revealed by the general indexes).

Drawing the conclusions – as, for the moment, the aggregate oil and gas industry at regional level seems to be going through adjustment and not necessarily a correction following the fall of oil prices. It is far from being a proportional correction in accordance with the oil prices downfall. On medium and long term the prospects are different: not only due to the current price of oil (low!) the changes are to be noticed in the balance sheets and in the 2015 financial results; if the anticipations regarding the price come true (no spectacular comeback above the USD 100 per barrel level – very unlikely in the current context!) these companies will be facing new and heavy blows. Such blows would affect incomes and investments and this trend has already started being included in the market prices and it will have a strong saying starting by 2015.

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December/January 2015

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