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BG Group could slip on oil skid”January 24 2015, 7:00am
Markets have been dominated by central bank action, with the European Central Bank taking centre stage following last week’s Swiss shock. Speculation for a €600 billion quantitative easing programme to be announced on Thursday sent equities to multi-month highs, despite the International Monetary Fund downgrading its forecasts for global growth and disappointing quarterly earnings from Johnson & Johnson, Bank of America and Citigroup.
Together with existing schemes to buy private debt and funnel hundreds of billions of euros in cheap loans to banks, the ECB announced a new quantitative easing programme will pump €60 billion a month into the economy. The €1.1 trillion programme will start in March and run until the end of September 2016 or until it perceives a sustained adjustment in the path of inflation.
The larger than expected easing programme gives the ECB room to manoeuvre and should help revive inflation expectations. Equities initially gained ground after the announcement, while bond yields fell to record lows.
Greece is the next hurdle for markets, ahead of their highly anticipated general election on Thursday. Current polls show the strongly left-wing Syriza party as the likely victor, which would lead to very difficult negotiations between Greece and the so-called “Troika” of the European Commission, the ECB, and the IMF. The outcome of these negotiations could set an important precedent for the evolution of the political debate among other nations.
According to a recent survey, the outlook for the German economy improved for a third successive month, as the Zew index of investor sentiment improved to its highest reading in 11 months. The expected quantitative easing should boost exports from the weakening Euro, which Germany should be the main beneficiaries of.
Better than expected growth data from China also helped investor sentiment after the world’s second largest economy expanded by 7.4% in 2014, marginally more than had been expected, but still the slowest pace of growth for 24 years and below its official target of 7.5%. A series of modest support measures from the Government helped stave off worries of a more dramatic slowdown, yet most economists expect a further slowdown in 2015.
The prospect of further ECB stimulus and improved data from China helped support oil prices, with Brent crude trading around $50 a barrel after dropping to $45.1 last week. An element of stockpiling has helped support prices, yet as inventories fill-up and oil supply continues to pump, many fear prices may be subject to further short-term weakness.
The minutes of the latest Bank of England policy meeting unexpectedly revealed a unanimous decision to leave rates at a record low of 0.5%. The recent decline in inflation means monetary tightening looks less likely in 2015, although the volatile oil price is likely to play a major factor.
Technical analysis of the FTSE 100 illustrates the 500 point gain on the blue-chips since last week, taking the index back up towards the 14-year highs at 6905. The sharp rise has taken the oscillators into acutely overbought territory with the RSI at its highest level for many years, indicating the recent momentum may be nearing exhaustion. Should the index surpass 6905 it opens the door to 7500, but the risk is to the downside with support seen at 6650, 6620 and 6565.
In conclusion, the ECB’s decision to pump additional liquidity into the financial system is undoubtedly good news for equities and may help to overcome the deflationary threat to the region. The market, however, has a habit of overreacting and after becoming acutely overbought it feels like the classic adage of “buy the rumour and sell the fact”. As the dust settles, investors focus will turn to Greece and the other headwinds that challenge the global recovery, so I believe the risk is skewed to the downside.
The oil and gas companies have continued to provide great volatility, with the sector among the biggest rises this week. An improvement in the general market combined with an element of stockpiling has halted the fall in oil prices, sending the likes of BG, BP and Shell 16%, 14% and 12% higher respectively.
The recovery in Brent from $45.1 to $49.4 a barrel is not exactly convincing given the extensive fall from $115 in just six months. The Chinese economy is likely to slow further this year, the US dollar is predicted to remain firm and the glut of supply from the US should continue to weigh on prices, especially as inventories fill-up.
BG Group’s (Epic: BG.) third quarter results on 28th October revealed net profit dropped 29%, while its output declined amid higher costs and lower global hydrocarbon prices. BG said its underlying earnings were $759 million, down from $1.1 billion a year earlier.
Once known for its rapid production growth, BG’s output has stuttered in recent years. Production slipped 2% to 569,000 barrels of oil equivalent in the third quarter, its lowest level since the third quarter of 2007 due to problems in Egypt, while the group had to make do with lower revenue entitlement from its operations in Kazakhstan. The company nonetheless maintained its guidance that full-year production would come in at the lower end of its 590,000 – 630,000 barrels of oil equivalent range.
BG’s disappointing results illustrated some impact of falling oil prices, as the group’s realised rate slipped to $103.9 per barrel in the third quarter from $111.7 a year earlier, yet the majority of the oil price falls occurred in the final quarter of the year.
Longer-term the outlook remains positive, with Queensland Curtis’s LNG project on track for first production in December, while the ramp-up underway at the groups interests in Brazil’s Santos Basin is gathering momentum and Helge Lund, the groups new CEO is due to takeover in March.
The above chart of BG Group illustrates the downward trend exhibited over the past year, with the moving averages intersecting to the downside. The recent spike caused the shares to test historical resistance at 920p, although with the oscillators rolling over in overbought territory, momentum appears to be fading.
Following this week’s rally the shares trade on 14.5x earnings, a premium to the sector, which looks too high short-term given the vulnerable technical outlook and the next update is likely to disappoint investors.
At the time of writing the share price is 910.9p, which traders might consider short-selling with near-term targets seen at 974.5p, 842.4p and 801p. A stop-loss at 942.7p could be employed to minimise loses.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in BG Group, but client accounts may. The material in this report has come from Simple Investments internal data sources, Simply Charts and BG Group’s corporate website.