Today’s Blog – Wednesday 19th August 2015

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Introduction

Stock and commodity markets have one particularly large sword of damocles hanging over them at present – whether or not the US Federal Reserve will commence the process of returning interest rates to “normality” sooner or later.

Today the ASX is awash with “green”, after yesterday’s “red” day and the resource companies have been leading the volatility charge.  So much for the theory that commodities provide diversification away from equity/bond returns?

Commodity markets

Brent and WTI diverged again overnight, with the former falling to US$48.56 and the latter firming to US$42.37.  It appears that earlier in the day falls in Chinese equities spooked London, but then later on New York was boosted by good economic data from the US.

Henry Hub gas closed flat at US$2.72.

LNG

Russian’s Economic Development Minister was reported as saying that Gazprom’s expected production for 2015 would be at record lows.  All things being equal, this should be good news for LNG suppliers, as they should be capturing a good proportion of the market share that Gazprom is losing.

Russian media also recently aired an interview with a senior PetroChina executive who announced that the border crossing of the Power of Siberia pipeline (from Russia to China, East of Mongolia) will commence by the end of this year.  He also said that the project should be finalised on time (i.e. by 2018).  But he would say that.

In a signal of potential changes of leadership at the highest levels in the Kremlin, a long-time Putin ally at the head of Russia’s state owned railway company has been pushed out.  Media reports have speculated that further changes could even occur at the top of Rosneft and Gazprom, where previously unassailable Putin allies currently reign.  A driver for the change in the railways was a need to introduce operational efficiency rather than rely on (sqeezed) Government funds – an issue that also applies at the two massive oil and gas companies.

Governments and fracking

Total has said it is pulling out of a shale gas exploration project in Denmark due to poor drilling results.  This will no doubt please the groups who opposed the potential for fracking that was involved in this venture – and will let the Government off the hook over helping or hindering a potential new indigenous energy source.

To date, “shale” gas exploration efforts in the whole of Europe have either been blocked before they could start, or have delivered very poor geological results.  Not one molecule of gas has been commercially produced.

Company news – Santos Ltd (STO)

STO issued a media release (but not an ASX release – don’t ask me why) yesterday announcing that it has delivered first gas into its liquefaction plant at Curtis Island near Gladstone and that the first cargo is still due to set sail around the end of the current quarter.

On Curtis Island, the union movement is protesting against Australia’s trade agreement with China – the acme of irony given the destination of many cargoes from the plants thereon will be to the PRC.

Company news – Woodside Petroleum Ltd (WPL)

WPL issued its half year results this morning.  A couple of snippets:

  • Arguably the key upside value driver for WPL is its Browse LNG project. Nothing particularly new emerged on this.  On the key area of gas marketing, WPL’s presentation noted that this would be done on a “portfolio basis”.  It is not clear exactly what this means – presumably it could involve WPL taking on more trading risks (and rewards) than the traditional LNG model of locking in long term contracts before any FID.
  • Capital expenditure on the Kitimat LNG venture in British Columbia over the course of 2015 would be around $190M – on upstream (onshore) appraisal well drilling.  Given WPL is a minority partner in Kitimat, this appears to be a fairly aggressive program at current times.

Company news – FAR Ltd (FAR)

Mid-cap ASX company FAR is sitting on what is arguably the most interesting conventional oil discovery made by any Australian oil and gas company in the last few years – in offshore Senegal.

Today it provided the market with an update on its drilling program (operated by UK company Cairn Energy PLC) due to start later this year.  Two appraisal wells and now one exploration well will be drilled.

Quote of the day

Bond king Bill Gross’s recent view on the need for a rise in interest rates:

“There is no statistical reason per se for the Fed to raise interest rates, yet absent a major global catastrophe we are likely to get one in September. But the reason will not be the risk of rising inflation, nor the continued downward push of unemployment to 5%. The reason will be that the central bankers that are charged with leading the global financial markets – the Fed and the BOE for now – are wising up; that the Taylor rule and any other standard signal of monetary policy must now be discarded into the trash bin of history. Low interest rates are not the cure – they are part of the problem”.

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