Today’s Blog – Thursday 13th August 2015

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The world of oil “numbers” is a remarkably imprecise one, especially given the commodity’s status as the globe’s most important one, both economically and geopolitically.  This leads to the market reacting to the “numbers” that it most trusts – primarily those sourced from the US – and scratching their heads (or possibly more likely, averting their eyes) over the other numbers that don’t really add up.

A good recent example of this is the IEA’s recent report on demand/supply, which indicates that currently ~3 mmbopd are being produced in excess of oil consumption levels.  Any such surplus has by definition to go into storage.  However, the IEA’s numbers for OECD inventories indicates that in the last quarter these only increased by ~1 mmbopd.

The “missing” 2 mmbopd gap between these two could in theory be going into inventories that are not counted by the IEA (e.g. China’s SPR is very opaque).  But the more likely position is that oil production and/or demand have been mis-counted and future revisions will show that although the market is still currently long – it is not as long as some consider to be the case.

Commodity prices

Crude prices bounced back over-night – despite fears during the course of the trading day that another Chinese currency devaluation (after the previous day’s promise that there would be no more) was a negative sign of economic problems in the PRC.

Brent finished up at US$49.71 and WTI at US$43.31.  Official US inventory data was supportive, with a draw of 1.7 mmbbls (and gasoline stocks were also drawn down by 1.3 mmbbls – although distillate stocks increased by 3.0 mmbbls).

As is commonly the case, the price rise in the day was highly correlated with a fall in the USD.

The Henry Hub natural gas price increased to US$2.92, notwithstanding the EIA reporting inventory levels at their second highest ever for the time of year (although as I constantly note, this winter will be different – LNG exports will add to the normal heating load).


Emerging LNG powerhouse Cheniere Energy is growing the “risk” part of its business in addition to its significant liquefaction infrastructure assets on the Gulf of Mexico coast.  The company’s LNG trading arm has recently signed a deal to supply France’s EDF with up to 28 LNG cargoes at the port of Dunkirk (on a DES, or ex-ship, basis).  The pricing of the sales will be linked to a European gas pricing point – the Dutch Transfer Title Facility (TTF).

This presumably means that Cheniere is absorbing a lot of pricing risk/reward by buying at the Henry Hub linked US price and selling at the TTF price. This is yet another signal of the globalisation of natural gas prices as large differentials in a highly inefficient market start to be traded away.

Governments and fracking

The now SGX listed Linc Energy has made no formal market announcement in respect of the ABC news reports that we have flagged in recent days.  SGX reporting is presumably similar to ASX reporting in that bad news is rarely material.

On a different front, AGL’s MD responded to recent media speculation about his meetings with anti-CBM groups by saying that no decision had been made about the future of the company’s Gloucester Basin CBM asset.

Company news – AGL Ltd

AGL’s formal reserves report issued yesterday did incorporate a write down of 65 PJ of its Gloucester Basin reserves, for both technical and commercial reasons (no split was given).

AGL’s much larger Bowen Basin reserves, in Queensland’s north, were unamended (other than by production – although a reserves to production (R/P) ratio of ~50 would raise eyebrows in the US).  These reserves were not the subject of any independent audit in the year, unlike the Gloucester reserves.

Beach Energy Ltd (BPT)

No new news from BPT, but another snippet from the Q&A part of its strategy day yesterday: apparently cost savings of 15% of corporate costs can be made by cutting back flights and consultants – and that no staff cuts were required.  Who knew that so much was spent on flying and external advice!  (Of course if I was a shareholder I wouldn’t care what category of costs were cut – outcomes, whether delivered by a consultant flying Concorde or a 40 year employee, would be the main issue).

I don’t mean to pick on BPT here – as we have noted before, the whole industry’s highs and lows can be measured by whether fruit bowls are being offered (“we encourage healthy choices“) or withdrawn (“we have a laser like focus on costs“).

Quote of the day

The recent Chinese devaluation has of course attracted the attention of politicians around the world, including He Who Shall Not Be Named over in US.

However, we are a high-brow lot here on this blog, with a mission to educate our readers from the classics.  So here is one from Seutonius’ 122 AD “The Twelve Caesars”, back in the day when politicians could be considerably wackier than the above-mentioned One:

“Punishments were also inflicted on the Christians, a sect professing a new and mischievous religious belief; and Nero ended the licence which the charioteers had so long enjoyed that they claimed it as a right: to wander merrily down the streets, swindling and robbing the populace. He likewise expelled from the City all pantomime actors and their hangers on”.

Serves those pantomime actors right!

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