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WHAT DO RUSSIAN SANCTIONS MEAN FOR BP EARNINGS?

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Jasper Lawler

Commentary by Jasper Lawler, Market Analyst, CMC Markets

Ahead of BP’s quarterly earnings report, Jasper Lawler looks at the impact of oil prices and the rising problems in the Middle East and Russia will have on the oil giant.

Within the report Jasper discusses:

  • How trouble in the Middle East and the rising tensions with Russia has impacted oil prices
  • The impact that Russian troops occupying Crimea in February has had on BP’s shares
  • How a rise in oil prices and Russian sanctions by US and Europe will impact BP’s future results
  • The expectations of BP’s shares

In the last six months, the energy sector has been the best performer of the S&P 500; up 15%. Along with trouble in the Middle East, the rising tension with Russia had helped oil prices move steadily higher, with Brent crude oil going from $106 per barrel at the start of the year, to as high as $116 in June. As integrated oil major, higher oil prices tend to be positive for the upstream part of BP’s business.

In late June however, the supply-shock in Iraq that resulted with a drop in crude oil prices, saw shares for diversified and upstream oil companies; BP included, suffer a setback.

BP had actually been the outperformer amongst the oil majors but when Russian troops moved in to occupy Crimea in February the stock’s relative outperformance peaked and never recovered. Since the US government’s sectoral sanctions against Russia including the energy sector in late June; BP’s underperformance has accelerated, rising only 2% and hugely underperforming major oil rivals Royal Dutch Shell, Exxon Mobil and Chevron, all up over 9% in the same period.

Jasper Lawler

Jasper Lawler

Since then BP’s shares have lagged behind its peers due to its strong ties to Russia, the world’s second largest oil-exporter which has been sanctioned by both the US and Europe since it annexed Crimea from Ukraine.

While a lot of its peers do have minority interests in Russia through oil prices and strategic partnerships with Russian oil companies, BP’s exposure makes it much more susceptible to political headwinds by way of its associations with Rosneft.

The latest US sanctions target specific Russian companies including Russian national oil company Rosneft but they do not, as yet, bar US companies from transacting with them nor do they freeze assets. The point is to starve the Russian companies of US dollar funding in order to exert political pressure on the Russian leader to rein back his political ambitions in Eastern Ukraine. The likely result would be a higher cost of funding for the likes of Rosneft, which will eat into earnings from any future investment without directly preventing any kind of strategic partnership.

Exxon has a substantial number of joint ventures with Rosneft while Chevron has a stake in a Russian pipeline. What sets BP apart from the pack however, is its 20% stake directly in Rosneft, thereby tying BP’s performance directly to the earnings of Rosneft.

In the first quarter Rosneft contributed 10% of BP’s profits, while this is significant; a reduction in that contribution would likely not be enough to impact BP maintaining its dividend of 9.75c per share that it announced last quarter. Widely considered a blue chip stock, BP attracts a lot of income investors who would be unlikely to sell due to short term price fluctuations and could act as buffer to any future declines.

A rise in oil prices or at least a stabilisation of recent declines should benefit BP’s share price but while Russia is being sanctioned by the US and Europe and BP maintains its 20% stake in Rosneft, the current trend in prices suggest BP risks continuing to underperform.

Last month saw its shares trade at its highest price since the environmental disaster of the Deepwater Horizon oil spill in the Gulf of Mexico in 2010, which cost the company billions of dollars in settlements.

BP, the world’s third largest oil company by revenue, will be releasing its quarterly earnings report on July 29th and is expected to earn 19c per share, down from estimates of 22c at the start of the year but still an improvement on the 14c earned in the same quarter last year. Revenue is expected to rise slightly to $95bn from the $94.7bn earned in Q2 a year ago.

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Barclays announces new trade finance platform for corporate clients

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Barclays announces new trade finance platform for corporate clients 1

Barclays Corporate Banking has today announced that it is working with CGI to implement the CGI Trade360 platform. This new platform will provide an industry leading end-to-end global trade finance solution for Barclays clients in the UK and around the world.

With the CGI Trade360 platform, Barclays will provide clients with greater connectivity and visibility into their supply chains, allowing them to optimise working capital efficiency, funding and risk mitigation. By utilising cloud based functionality for corporate banking clients, Barclays will also be able to offer a leading client user experience through easy access and real-time integration to essential information, combined with the latest trade solutions as the industry-wide shift to digitisation continues to accelerate.

This move underpins Barclays commitment to supporting the trade and working capital needs of their clients and reinforces a commitment to innovation that has been central to the bank for more than 300 years.

James Binns, Global Head of Trade & Working Capital at Barclays, said: “We are delighted to announce our move to the CGI Trade360 platform and to have started the implementation process. We have a longstanding partnership with CGI, and the CGI Trade360 platform will mean we can continue delivering the best possible trade solutions and service to our clients for many years to come.”

Neil Sadler, Senior Vice President, UK Financial Services, at CGI, said: “Having worked closely with Barclays for the last 30 years, we knew we were in an excellent position to enhance their systems. Not only do we have a history with them and understand how they work, but part of the CGI Trade360 solution includes a proof of concept phase, which is essentially seven weeks of meetings and workshops with employees across the globe to guarantee the product’s efficiency and answer all queries. We’re delighted that Barclays chose to continue working with us and look forward to supporting them over the coming years.”

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What’s the current deal with commodities trading?

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What’s the current deal with commodities trading? 2

By Sylvain Thieullent, CEO of Horizon Software

The London Metal Exchange (LME) trading ring has been the noisy home of metals traders buying and selling for over a hundred years. It’s the world’s oldest and largest metals market and is home to the last open outcry trading floor. Recently however, the age-old trading ring, though has been closed during the pandemic and, just a few weeks ago, the LME announced that it will remain so for another six months and that it is taking steps to improve its electronic trading. This news fits in with a growing narrative in commodities about a shift to electronic trading that has been bubbling away under the surface.

Something certainly is stirring in commodities. The crisis has affected different raw materials differently: a weakening dollar and rising inflation risks bode well for some commodities with precious metals being very attractive, as seen by gold reaching all-time highs. Oil on the other hand has had a tough year and experienced record lows from the Saudi-Russia pricing war. It has been a turbulent year, and now prices look set to soar. While a recent analyst report from Goldman Sachs predicts a bullish market in commodities for the year ahead, with the firm forecasting that it’s commodities index will surge 28%, led by energy (43%) and precious metals (18%).

Increasingly, therefore, it seems that 2020 is turning out to be a watershed moment for commodities, and it’s likely that the years ahead will bring about significant transformation. And whilst this evolution might have been forced in part by coronavirus, these changes have been building up for some time. Commodities are one of the last assets to embrace electronic trading; FX was the first to take the plunge in the 90s, and since then equities and bonds have integrated technology into their infrastructure, which has steadily become more advanced.

The slow uptake in commodities can be explained by several truths: the volumes are smaller and there is less liquidity, and the instruments are generally less exotic, essentially meaning it has not been essential for them to develop such technology – at least not until now. This means that, for the most part, the technology in commodities trading is a bit outdated. But that is changing. Commodities trading is on the cusp of taking steps towards the levels of sophistication in trading as we see in other asset classes, with automated and algo trading becoming ever prominent.

Yet, as commodities trading institutions are upgrading their systems, they will be beginning to discover the extent of the job at hand. It’s no easy task to upgrade how an entire trading community operates so there’s lots to be done across these massive organisations. It requires a massive technology overhaul, and exchanges and trading firms alike must be cautious in the way they proceed, carefully establishing a holistic, step-by-step implementation strategy, preferably with an agile, V-model approach.

The workflow needs to be upgraded at every stage to ensure a smooth end-to-end trading experience. So, in replacement of the infamous ring, these players will be looking to transform key elements of their trading infrastructure, including re-engineering of matching engines and improving communications with clearing houses.

However, these changes extend beyond technology. For commodities players to make a success of the transformation in their community, exchanges need to have highly skilled technology and change the very culture of trading. All of which is currently being done against a backdrop of lockdown, which makes things much more difficult and can slow down implementation.

What is clear is that coronavirus has definitely acted as a catalyst for a reformation in commodities. It is a foreshadowing of what lies ahead for commodities trading infrastructure because, a few years down the line, commodities trading could well be very different to how it is now, and the trading ring consigned to history.

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Afreximbank’s African Commodity Index declines moderately in Q3-2020

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Afreximbank’s African Commodity Index declines moderately in Q3-2020 3

African Export-Import Bank (Afreximbank) has released the Afreximbank African Commodity Index (AACI) for Q3-2020. The AACI is a trade-weighted index designed to track the price performance of 13 different commodities of interest to Africa and the Bank on a quarterly basis. In its Q3-2020 reading, the composite index fell marginally by 1% quarter-on-quarter (q/q), mainly on account of a pull-back in the energy sub-index. In comparison, the agricultural commodities sub-index rose to become the top performer in the quarter, outstripping gains in base and precious metals.

The recurrence of adverse commodity terms of trade shocks has been the bane of African economies, and in tracking the movements in commodity prices the AACI highlights areas requiring pre-emptive measures by the Bank, its key stakeholders and policymakers in its member countries, as well as global institutions interested in the African market, to effectively mitigate risks associated with commodity price volatility.

An overview of the AACI for Q3-2020 indicates that on a quarterly basis

  • The energy sub-index fell by 8% due largely to a sharp drop in oil prices as Chinese demand waned and Saudi Arabia cut its pricing;
  • The agricultural commodities sub-index rose 13% due in part to suboptimal weather conditions in major producing countries. But within that index
    • Sugar prices gained on expectations of firm import demand from China and fears that Thailand’s crop could shrink in 2021 following a drought;
    • Cocoa futures enjoyed a pre-election premium in Ghana and Côte d’Ivoire, despite the looming risk of bumper harvests in the 2020/21 season and the decline in the price of cocoa butter;
    • Cotton rose to its highest level since February 2020 due to the threat of storm Sally on the US cotton harvest, coupled with poor field conditions in the US;
    • Coffee rose 10% as La Nina weather conditions in Vietnam, the world’s largest producer of Robusta coffee, raised the possibility of a shortage in exports.
  • Base metals sub-index rose 9% due to several factors including ongoing supply concerns for copper in Chile and Peru and strong demand in China, especially as the State Grid boosted spending to improve the power network;
  • Precious metals sub-index, the best performer year-to-date, rose 7% in the quarter as the demand for haven bullion continued in the face of persistent economic challenges triggered by COVID-19 and heightening geopolitical tensions. In addition, Gold enjoyed record inflows into gold-backed exchange traded funds (ETFs) which offset major weaknesses in jewellery demand.

Regarding the outlook for commodity prices, the AACI highlights the generally conservative market sentiment with consensus forecasts predicting prices to stay within a tight range in the near term with the exception of Crude oil, Coffee, Crude Palm Oil, Cobalt and Sugar.

Dr Hippolyte Fofack, Chief Economist at Afreximbank, said:

“Commodity prices in Q3-2020 have largely been impacted by COVID-19. The pandemic has exposed global demand shifts that have seen the oil industry incur backlogs and agricultural commodity prices dwindle in the first half of the year. The outlook for 2021 is positive however conservative the markets still are. We hope to see an increase in global demand within Q1 and Q2 – 2021 buoyed by the relaxation of most COVID-19 disruptions and restrictions.’’

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