Today’s Blog – Tuesday 6th October 2015

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The “events” side of the oil markets is currently focused on the escalating conflict in Syria.  One recent theory is that this be-knighted country is increasingly the site of a proxy war between the two largest crude producers, Saudi Arabia and Russia.  The theory goes on to conclude that the KSA will use its spare capacity to push the oil price down to US$30/bbl in an effort to squeeze the Russian economy and reduce its support for al-Assad in Syria.  In the view of this blog this theory not only over-estimates the KSA’s spare capacity – it also ascribes more Machievellian guile to the leaders of that country than their inability to manage the Haj suggests is appropriate.

On a more obscure, but potentially more interesting front, recent developments in China (in Hong Kong in particular) could provide some insights into what is arguably the key demand region for crude markets.  Yesterday saw the bringing of charges against Hong Kong’s previous administrative leader, Donald Tsang – and this followed unprecedented formal criticism of Asia’s richest man, Li ka-Shing, for “unpatriotically” rebalancing his asset portfolio away from China.

An economic study produced from the University of California earlier this year concluded that the majority of the oil price fall over the last year can be attributed to less than expected Chinese demand, as that country’s economy started to wither last year.  This is an interesting insight given the vast majority of oil market analysis has focused on the supply side.  China is the largest importer of crude and the second largest market after the US.  Unlike the US, its oil market is opaque.

Maybe this is the drawing of a long bow – but possibly the actions against Tsang and Li are signs that the Chinese economy is even weaker than otherwise seems to be the case – and this weakness could sustain the poor oil markets for some time, even with ongoing supply side improvements in the US.

Commodity prices

Crude prices closed strongly yesterday, with Brent at US$49.30 and WTI at US$46.28.  “Numbers” rather than “events” drove the markets, with asset markets generally performing well as the dreaded first interest rate hike in the US seemed likely to be pushed out by poorer-than-expected labour hire numbers issued on Friday.

Natural gas remained depressed at US$2.46.  Energy investment bank Tudor Pickering said in its daily note yesterday that it was revising downwards its Henry Hub price forecast for 2016.  It noted that El Nino alone could depress prices by 40 cents per each 10% increase in winter weather temperatures.


Last week there was the siting of a very rate bird in the LNG world – an FID decision on a liquefaction project.  This was in connection with a small floating LNG (FLNG) project located off-shore, Cameroon operated by NASDAQ listed shipping company, Golar.  This is not an integrated LNG project of the usual type – rather Golar will provide liquefaction services to an upstream joint venture led by private French company Perenco.

This project appears to have a few hurdles still to overcome – e.g. Perenco is said to not yet have secured a binding sales agreement.  The technical challenges faced by Golar are also large – it intends to convert a tanker into a FLNG vessel rather than construct such from scratch as Shell is doing for its Australian Prelude FLNG project.

However, if Golar is successful, then this could represent a whole additional wave of potential LNG projects, as it would allow the development of much smaller stranded gas assets than normally are required for LNG.

Governments and fracking

Last week the State of Pennsylvania (the second largest producer of gas in the US) announced a program to monitor seismic activity State-wide to measure whether fracking and the injection of produced water was causing any problems.  No such issues have been identified to date – unlike in Oklahoma – which has seen a much longer history of produced water injection.

This “baseline” measuring seems like a sensible move to this blogger – and one that other jurisdictions could consider following, in the US and elsewhere.  Queensland anyone?

Company news – Santos (STO)

Media reports in recent days have identified a few possible asset sales that STO might unveil in the short term.  Since it announced its asset fire-sale, STO seems to have pursued an active media management strategy, so the emergence of these rumours could well have substance behind it.

On the weekend it was reported that private equity backed Harbour Energy could be a possible acquirer of STO’s WA and Asian assets.  Today a slice of GLNG was reported as a possible sale.

STO’s Board is due to meet today and no doubt it would like to announce something.  Could we see the combination of say an asset sale for A$1.5 – 2.5B and a rights issue for a similar amount?

Quote of the day

From Exxon’s Rex Tillerson in 2012, commenting on his company’s US tight gas business – when natural gas prices were trading at low prices similar to today’s:

“We’re all losing our shirts today. We know we’re making no money”.

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