Today’s Blog – Wednesday 29th July 2015

Introduction

In what must be a case of the curse of the blog, my quote yesterday from Glengarry Glen Ross which alluded to potential further job cuts in the oil industry, has been echoed by a number of stories in today’s media about said cuts:

  • Today’s Australian Financial Review (AFR) reports on further rounds of cost cutting and job losses at Super-Majors BP and Chevron.
  • Today’s The West Australian reports further job cuts at Woodside Petroleum Ltd (WPL).
  • Beach Energy Ltd’s (BPT’s) quarterly report foreshadows reductions in corporate costs.
  • Australian giant BHP (which sadly has not run its Petroleum operations from Australia for some years – probably to the detriment of its shareholders given the massive write-offs it has taken on its US shale acquisitions) – is reported to be cutting its Melbourne head office numbers to a paltry 300 (roughly equivalent to a small Government Department administrative function in South Australia).

Using the methodology from Glengarry Glen Ross, “Cadillacs” at the top will no doubt be safe, but “steak knives” and “you’re fired” could be the order of the day further down in organisations.

Commodity prices

Crude prices diverged overnight, with Brent closing down at US$53.30 and WTI ticking up to US$47.98.  The spread between the two has contracted US$1.50 this week alone.  Brent appeared to be still reacting to “events” in China, whilst WTI seemed to have perked up on the expectation of some better US inventory numbers coming out tomorrow.

In my view, any assumption about an imminent deal in the US to allow crude exports and hence close this spread through economic means would be optimistic.  Notwithstanding the rhetoric, there are likely few political actors in US politics who really want to wear the risk of a causal or coincident gasoline price rise being linked by the public, fairly or unfairly, to such a law change.

Henry Hub ticked up a few cents to US$2.82.  Looking at the medium term, Goldman Sachs has just put out a bear-ish outlook for US natural gas prices, trimming their forecast to US$2.75 for 2H 2015 and US$3.00 for 2016.  Only a cynic would ask what trade they are on the other side of – or is that the banking world of yesterday?

LNG

A contra-point to this bearish view on US gas prices could be taken from recent news that US liquefaction king Cheniere Energy is promoting sales to Croatia (hence taking on Gazprom).  US LNG exports cannot continue to materially expand remorselessly without an affect on the supply demand balance – and hence the Henry Hub price.

The extent to which it is the Marcellus/Utica which is the driving force in US gas markets was driven home by a recent EIA report that indicated that 85% of all gas production growth in the last 3 years had come from the region.  Cheniere’s Gulf of Mexico LNG exports commencing in less than 6 months could effectively make the Marcellus the swing gas producer for the World.

Recently we noted that the Russia-China Altai pipeline (now seemingly also called Power of Siberia 2) had hit some rocks.  However, further reports from Russian news services indicated that a deal could be “signed” by Putin with the PRC when he visits Beijing in September.  This seems highly unlikely – but politics not economics will drive this and Putin may be boxed in – with the likes of Cheniere’s actions incrementally assisting the competition against Russia.

Governments

Recent stories about excessive expense claims from Australian politicians pale slightly when compared to the extent of what their peers have been doing in Nigeria.

There the extent of the malfeasance is not a $5,000 helicopter ride – but a number of 1,000,000 bopd ending up in politicians pockets.  There are a few orders of magnitude difference between those two numbers.

Company news – Pura Vida Energy Ltd (PVD)

Yesterday’s speculation about some boring news about PVD possibly encountering shows in a secondary formation was in fact hopelessly optimistic.  In fact no reservoir was found.  Drilling continues towards the primary target – but the market crashed the share price ~55% yesterday on the initial news.  A broker contact sagely advised the blog that PVD should have announced the news on 3.30pm on a Friday.

Company news – Origin Energy Ltd (ORG)

The market reacted kindly to ORG’s otherwise prosaic news yesterday about progress at its Queensland APLNG project.  This, and the neighbouring Santos Ltd (STO) operated GLNG project, seem to be on track for first cargoes this quarter.

Company news – BPT

As noted above, BPT issued its quarterly report today.  Production for the coming year will be some ~25% down on FY2015 as capex and activity has dropped.  This is a particularly sharp drop year-on-year, but reflects an industry wide phenomenon – which will have to reduce global supply – and hence boost prices – in the medium term.

Quote of the day

It seems that President Putin cannot let his good friend Donald Trump make all the running in terms of outrageous grandstanding, viz yesterday’s sage advice to the Nobel Prize judges:

“I believe that people like Mr Blatter, the heads of major international sports federations, deserve special attention and gratitude from public organisations.  If anyone should be awarded Nobel Prizes, it is these people.”

Over to you Donald.

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