FT : Electricity generating companies have been threatened with fines and crimin

Ofgem suspects UK energy groups of manipulating wholesale prices
Concerns that companies are providing false information about generating capacity

Electricity generating companies have been threatened with fines and criminal prosecution if they are caught trying to manipulate the wholesale energy market after suspicious activities were reported to the industry regulator.

The warning relates to concerns that UK power companies could be trying to artificially inflate the selling price of their electricity by providing false information about the generating capacity they have available.
In a letter to companies this week, seen by the Financial Times, Ofgem said concerns had “been raised with us in respect of certain behaviours that may be taking place in the market”.
These concerns related to the accuracy of notifications that companies are required to make to National Grid, the system operator, and the rest of the market about available capacity and planned output.
Companies could potentially game the system by under-reporting their intended generation on a particular day to lower the market’s expectations for supply. This would push up prices, to the benefit of the company when it subsequently delivered more electricity than anticipated.
The potential rewards for such manipulation are heightened during the winter months, when energy demand is at its highest and special payments are available from National Grid to secure extra capacity when supplies run low.
Prices have risen as high as £1,500 per megawatt hour at peak times in recent weeks, compared with average wholesale prices below £50 for much of the year. One operator was paid as much as £2,500 per MWh during a supply crunch last year.
Spikes of this kind can greatly increase the profits of power generators and cause big gains or losses among energy traders; ultimately higher wholesale prices feed through to the bills paid by households and businesses.
People familiar with Ofgem’s thinking said the letter was intended as a “shot across the bows” of the industry, with the threat of a formal investigation if further signs of market abuse arise.
“Ofgem takes its responsibilities with respect to market conduct very seriously and monitors the market to probe potential breaches,” the letter said, highlighting the regulator’s power to “publicly censure, place unlimited financial penalties or institute criminal prosecutions”.
It marks the second time in just over a year that Ofgem has written such a letter. Whereas the previous warning in September 2015 covered a range of potential abuses, including manipulation by traders, this week’s is focused specifically on information disclosure by power generators.
Electricity markets have been especially volatile in recent weeks because of the temporary shutdown of several French nuclear reactors for safety checks and damage to power cables beneath the English channel — both of which have disrupted the flow of electricity from the continent which usually supplements domestic generating capacity.
Ofgem’s letter promises to further intensify political scrutiny of the power industry, which has also come under attack over its conduct in the retail market.
Ofgem this week launched a league table to name and shame suppliers with the highest proportion of consumers on expensive standard tariffs, less than a month after Philip Hammond, chancellor, said the government would “look carefully” at whether the retail market was “functioning fairly”.

FT : Why Russia will stick to its pledge to cut oil

Why Russia will stick to its pledge to cut oil
The Russian oil industry has the motivation and the ability to meet its pledge to lower production

Russia and other unaligned producers agreed earlier this month to join OPEC in cutting oil output, saying they would reduce supplies by 558,000 barrels per day. On top of Opec’s pledge to cut 1.2m b/d the path to a rebalanced oil market much is now clearer.

Oil prices have climbed from $48 per barrel in late November to $55 this week. At this point, commodity and equity markets are, however, beginning to ponder whether these pledged cuts will be realised.

This is not surprising given OPEC’s patchy record adhering to quotas and the participation of Russia and other non member countries. Some question how serious Russia might be about following through on its own 300,000 b/d commitment, while others wonder if Moscow even has the legal or technical ability to deliver those pledged cuts.

For our part, we think Russia is highly motivated to follow through with its proffered cut for two reasons.

First, Russia reportedly played a key role in both deals, with President Putin personally acting as a deal-maker between Iran and Saudi Arabia to bring the original OPEC deal and then committing Russia to a 300,000 b/d reduction to catalyse non-OPEC participation.

As such, the Russian government, including President Putin himself, have made a substantial reputational commitment to making the deal work. In that light, it is not surprising that the Kremlin has already begun detailing specific country-wide targets of 200,000 b/d of reductions for the first quarter of next year and an additional 100,000 by mid-year, signalling to oil markets its seriousness.

Second, the maths of higher prices versus lower production provides significant stimulus for the Russian government. This is based on the fact that oil taxation has traditionally provided almost half of the country’s tax revenue and because the Russian oil tax regime is highly geared to the price of oil.

For example, extraction taxes and export duties combined go up $8.3 per barrel for every $10 rise in oil prices. The net effect of a 300,000 b/d output cut and a $10 oil price increase would be a 28 per cent increase in oil tax revenues in US dollar terms, and 15 per cent in local currency terms, giving a material boost to the government’s efforts to balance its budget.

As for Russia’s ability to cut output and questions about the Kremlin’s legal authority to dictate production levels, while the government may lack formal control over output, it has substantial informal influence over the industry. We think Russia’s oil producers will be willing to work with the government to meet the production cuts.

Indeed, we think the first step in reducing output will likely involve the government asking producers for voluntary cuts.

Why would producers voluntarily reduce output? We think most Russian oil companies have at least some older fields that are at best marginally profitable, with economic rents predominantly going to the government as taxation: One large Russian oil company estimated in March that ‘over 30 per cent’ of its producing fields were uneconomic. While this could partly be due to the low oil prices at the time, it also lends credence to our suspicion that there may be a material amount of Russian production that remains on-line to generate tax revenues for the government than profit for the producing company.

Additional cuts could come from slowing brownfield drilling, a delayed but potentially powerful method of adjusting production. To illustrate, consider that a 15 per cent decline rate on 11.2m b/d of production implies Russian oil companies have to bring on 140,000 b/d of new production each and every month just to maintain current output levels. This calculation roughly fits the observed numbers in Lukoil’s West Siberian fields, where the company cut drilling by 40 per cent in early 2015 and quickly saw 8-9 per cent year-on-year production declines emerge, which didn’t stop until drilling was ramped back up this past summer.

Applying that 8 per cent decline rate to total Russian production would imply about 5 months needed to meet the entire 300,000 b/d production cut target. However, we would expect Russia to be a bit wary about encouraging that large of a drilling cut, as there would be undesirable knock-on effects on employment and economic activity until the production target was hit and the rigs put back in the field to stabilise production.

(BofA-ML) The Flow Show - Melt Up & Rally On

The Flows 
Great Rotation: huge weekly equity inflows ($21bn = 9th largest ever), bond outflows ($4.4bn = 7th consecutive week), cash outflows ($11bn), gold outflows ($0.7bn). 
Melt up: $63bn inflow to equities since election vs. $151bn outflows Jan-Oct.

Rally starts: The rally started in Feb. 2016 with a. bearish Positioning (BofAML Bull & Bear indicator = 0, cash = 5.6%, UW’s in EM & energy >2SDs), b. bearish Profits (PMI’s crashing toward 45, global EPS negative), c. Policy impotence (“Quantitative Failure”). 
Rally ends: The rally ends (correction likely Feb-April’2017) with a. bullish Positioning (BB index = 8, cash around 4%, OW’s in stocks, Japan & banks >2SDs), b. bullish Profits (global PMI’s >55, US wage growth >3%), c. Policy hawkishness (Fed/macro jacks up short end of yield curve).


* Asset Class Flows
Equities: $20.7bn inflows (9th largest week on record; note $31bn ETF inflows vs $10bn outflows from mutual funds) Bonds: $4.4bn outflows (7 straight weeks = longest streak in 3 years) 
Precious metals: $0.7bn outflows (5 straight weeks)

* Equity Flows
- EM: $1bn inflows (largest in 7 weeks) 
- Europe: $0.7bn inflows (only 8th week of inflows YTD) 
- Japan: modest $0.7bn inflows 
- US: $18.5bn inflows 
By sector: 12 straight weeks of financials inflows ($0.6bn), 6 straight weeks of REITs outflows ($1.2bn)

* Fixed Income Flows
- Inflows to TIPS 25 of past 27 weeks ($0.3bn) 
- 6 straight weeks of outflows from EM debt funds ($1.2bn) 
- 5 straight weeks of inflows to bank loan funds ($1.5bn) 
- Largest inflows to HY bond funds in 9 months ($4.7bn) 
- Largest outflows from IG bond funds in 21 weeks ($4.7bn) 
- 7 straight weeks of outflows from muni bond funds ($2bn) 
- Moderate outflows from Govt/Tsy funds ($1.9bn)

(Jefferies) Global Equity Strat. Europe 2017: All Alone at the Orphanage

Europe 2017: All Alone at the Orphanage

The bottom line is that Europe is cheap, the corporate sector in most cases is running free cashflow while investor sentiment is bearish. A change in the inflation temperature might be the first catalyst to reignite investor appetite. By a process of elimination the European equities score well on valuation although earnings assumptions look a little rich. One lesson learnt from the recent sell-off in US treasuries was the fact that low PE and PB stocks fared very well.

(MS) Telecoms set to rebound in 2017

Telcos underperformed the market by a very disappointing 15ppts in 2016. Positive themes for 2017 remain better top-line growth, cost cutting, operating leverage, valuation and dividends. We retain our Attractive industry view

Why did thesector underperform?Failed M&A (UK,France), regulation (BT Openreach, Enel fibre, Iliad Italy) and sector rotation (into cyclicals, Exhibit 3) drove underperformance (Exhibit 1). This was very disappointing, when considering better qtly results (Exhibit 43), EBITDA and DPS growth. 

Four reasons why weexpect better performancein 2017. 
1) Better revenue trends in fixed-line.
2) European mobile has finally turned positive (YoY growth). 
3) Cost-cutting & operating leverage. 
4) Compelling Euro Telco valuation and dividends. M&A could also re-surface as a theme (France, cable/mobile?). Cyclicals have outperformed defensive equities by 20ppts (YTD, Exhibit 3). 

(CS) Stocks for 2017 : Surprises PAckages

• Stocks for 2017. In this outlook report, we focus on identifying drivers in stocks that are independent of the macro environment to pick potential winners for 2017. This isn’t to dismiss the relevance of macro considerations and indeed what will be a likely year of ongoing political risks. In their recent 2017 Outlook, our Global Equity Strategists set out in detail how such factors will influence the investment backdrop. However, the inherent volatility and uncertainty that is likely to prevail and what, excluding commodities, remains a world of midsingle-digit EPS growth, still suggests the ability of companies to generate returns through their own efforts remains key. 
• We look for companies where a potential story of “change” in 2017 exists at the company to drive returns and in that regard reprise the theme of our 2016 stock picking report, 16 for 2016. This might be driven by M&A, a business portfolio shift, new management/strategy or a structural change in the dynamics of the market for a given company. In the investment summaries detailed by our analysts, we have highlighted where potential surprises in terms of catalysts lie on the 2017 calendar. Alongside our analysts’ assessments, our HOLT team have provided their valuation and style perspectives. 
• We include 16 stocks rated Outperform, 2 stocks rated Neutral and 2 stocks rated Underperform. The inclusion of Neutrals reflects where a transformational change may not be a central scenario but flags a potential credible development that would represent a material shift and move the needle should it happen. In Outperforms, where the story may already be tangible, we highlight names where our analysts believe it is not fully appreciated by the market. Finally, for our Underperform names, we flag potentially significant changes that, though perhaps less likely, would reverse hitherto negative sentiment. 
• Our surprise packages. The prevailing Outperforms in our stock list are Bankia, BAT, Danske Bank, Diageo, DONG Energy, DSM, Enel, G4S, IAG, IHG, LSE, Petrofac, Philips, Royal Dutch Shell, RPC Group and Zurich Insurance. Neutrals are Anglo American and H&M, and the ‘wild cards’ amongst our Underperforms are AstraZeneca and Burberry. For those who look back to our 2016 edition, they will find that 10 out of the 16 stocks outperformed their local index, suggesting that even in what seemed a very macro driven world, bottom-up drivers still mattered.


>>> Mediaset owner may look to acquire 10% of Telecom Italia as counter to Viven

Mediaset owner may look to acquire 10% of Telecom Italia as counter to Vivendi moves

Fininvest, the holding of the Berlusconi family, could look to acquire a 10% stake in Telecom Italia [BIT:TIT] to ward off moves on its subsidiary Mediaset [BIT:MS] by Vivendi [EPA:VIV], Italian language Carlo Festa blog reported.
The report cited market rumours noting that Fininvest has plenty of cash on hand but would also most likely need to take out a bank loan to help fund the buy.
The report added Vivendi has built up a 20% stake in Mediaset in the last few days and is also the controlling shareholder of TI.
TI has a market cap of EUR 15.97bn