Today’s Blog – Wednesday 5th August 2015

Introduction

Today’s Australian Financial Review (AFR) picks up on some recent analysis from US “bond king” fund manager, PIMCO, which has relevance to oil markets.

PIMCO’s latest macro thesis is that the global economy (and hence the prices of assets likes bonds) is driven by what it calls “the three gluts” – an excess of savings, money and oil – and inter-relationships between the three.

Regular readers will know that this blog considers that there is a current excess of supply over demand in crude markets – but that it is virtually inevitable that the combination of recent massive cost/people cuts combined with the physics of oil-field depletion will lead to a tightening of supply such that the glut will be removed and indeed reversed in the medium term of ~2-3 years.

If or when this happens, the low inflation world posited by PIMCO will receive a major shock, savings will be called on for investments in restoring oil supplies – and the secular low interest world in which we live in may bottom out and positive real interest rates – and much higher nominal interest rates – will return.  That should see investors swing away from yield towards growth, risk and commodities.

Here’s hoping anyway, says this participant in the oil patch.

Commodity prices

Crude oil prices bounced up overnight, with Brent closing at US$50.22 and WTI at US$45.99.  The bounce could well have been of the dead cat variety – the major news items pushing prices upwards were a rise in Chinese stock prices (driven by fundamentals or the PRC’s “Operation Canute”?) and expectations of rising US oil inventories ahead of tomorrow’s official number.

The Henry Hub natural gas price closed up at US$2.81, driven not only by short term weather, but also by increasing market awareness of some data on declining production numbers from the key US gas basins.

LNG

Further to our report yesterday on the proposed Sakhalin-3 LNG project, Bloomberg reported overnight that Shell and Gazprom were in discussions about an asset swap deal that would involve Shell increasing its equity in Sakhalin-3 and in return Gazprom would receive a Shell asset somewhere else in the World.

A deal of this type would not only give Shell a greater share of what is a highly ranked LNG development possibility – but may also give it a chance to use mandatory divestments possibly required by competition authorities to drive a strategic deal, not just a cash one.

One possibility is that Gazprom could come into Australia – e.g. Shell could trade down its Queensland CBM acreage.  It would be interesting to see what Australia’s  political class would make of that, particularly given recent strife in the UN over MH17.

Governments – and LNG

The Canadian press has recently reported some puzzlement in British Columbia about the lack of any public response from Malaysian Government owned giant Petronas following recent legislative changes in the Province.  This change was designed to give fiscal stability and hopefully lead to a FID decision from the Petronas led Pacific Northwest LNG project.

This blog suspects that Malaysian politics is currently jammed up over the scandal about several hundred million dollars mysteriously transiting through the PM’s bank account.  Petronas is naturally a politicised institution and is likely to want to keep its head down over any and all issues at present (including in far away BC).

Company news – Santos Ltd (STO)

The Business Spectator reports this morning that STO is tipped to launch a $3B rights issue later this month.  This would be a blow to STO’s Board and Management, who have been steadfast in their assurances to the market that no such equity raise would be required.

The prevailing low oil price (and poor LNG spot prices for the likes of PNG LNG and GLNG)  mean that the ability of operating cash-flow to service STO’s debts is constrained.

If this raising goes ahead, it seems distinctly possible that STO may have to issue some “mea culpas” in terms of flagging changes at the top.

Company news – Origin Energy Ltd (ORG)

Markets yesterday reacted negatively to ORG’s block sale of its majority stake in Contact Energy.  That reaction occurred both on the ASX and also from a credit ratings agency.  This blog thought it a reasonable deal in the circumstances, but it appears equity markets thought the deal was poor given recent Contact share pricing and debt markets seemed to dislike the giving up of diversity in ORG cash-flows.

At least ORG had a non-core liquid asset to sell, which STO no doubt would like to emulate rather than undertake a rights issue.

Quote of the day

The Malaysian PM may take a hint from comedy character Father Ted Crilly, who was exiled on Ireland’s Craggy Island following the identification of some strange deposits in his bank account:

Father Ted: “That money was only resting in my account!”

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