Today’s Blog – Wednesday 7th October 2015

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Introduction

Further to yesterday’s comments on the key – but arguably under-reported – role that the PRC plays in global crude markets, news has emerged about negotiations by Saudi Aramco to invest in China’s downstream oil industry.

Armco is said to be in discussions with Chinese Super-NOC, CNPC, about investing ~US$1.5B in refining and petrol station assets. The strategic rationale for the deal is to better capture market share in China – through asset ownership and also no doubt through enhanced guanxi.

Commodity prices

Crude oil prices had a great run yesterday, closing up ~5%, with Brent breaking through the US$50 barrier to US$51.92 and WTI closing at US$48.53.

A confluence of “numbers” and “technicals” were the key drivers (with “events” apparently playing a subordinate role – although we note that escalation risks from Russian involvement in Syria are already being manifest through tension with Turkey over air-space breaches).

On the “numbers” side, we saw: the US’s EIA report that US production fell 120,000 bopd in September – and its expectation of boosted demand in 2016 combined with less than previously forecast supply.  Additionally the USD fell somewhat.

On the “technicals” side we saw (as noted above) a break through the US$50 barrier and an associated rush to cover short positions.

And introducing a new driver to this blog’s pricing lexicon: “common sense”.  Shell’s CEO was reported as saying what many industry insiders consider to be the bleeding obvious – that in the medium term prices will have to go up to ensure marginal supply was brought on line – and that there were price spiking risks to the upside given the investment strike currently under-way.

Media reports also pointed out discussions between Russia and Saudi Arabia which could potentially lead to some joint production cuts.  In my view any such view is a very optimistic one.  (And one should note that although Russia is an autocratically controlled State, its oil industry is markedly more fractured than the Aramco monopoly in the KSA.  There is no single hand on the pumps in the Kremlin).

Finally, at Henry Hub there was little overnight change, with the market closing at US$2.47.

LNG

Current media chatter around the LNG industry is strongly bear-ish:

  • The Wall Street Journal reports that Chinese LNG demand has proved to be much less than anticipated by the industry.
  • Reuters notes that Asian spot prices are currently de-linked from the normal seasonal cycle as they face over-whelming secular bear factors.
  • Some analysts consider that Qatar – as the clear Saudi Arabia of LNG (note – they are actually far more dominant than the Saudis) – may use its position as the lowest cost producer to seek to push out higher-cost production.  Sounds familiar?

Governments 

Recently the Queensland Government announced a policy change which reduces the (already slim) chances of the Arrow LNG joint venture proceeding to development.  The new policy is designed to discourage fly-in-fly-out arrangements.  Nanny knows best!

Company news – AWE 

AWE has today reported a very strong flow rate from production testing of its (and Origin Energy’s [ORG’s]) Waitsia-1 well in the on-shore Perth Basin.  The flow rate from the first test zone (its a multi-stacked play) was ~25 mmscfd – and this was constrained by tubing capacity.  AWE’s shares have leapt accordingly.

This news should assist ORG in its recently announced plan to sell its Perth Basin assets.

Company news – Senex Energy (SXY)

SXY issued its monthly drilling report this morning.  It noted that next month would see the commencement of a four well drilling campaign fully funded by an ORG farm-in.

ORG has also recently flagged that its Cooper Basin assets are for sale and the cost of this farm-in program will no doubt be factored in by potential buyers (or if they optimists – unlikely in this market – its potential benefits).

Company news – Beach Energy (BPT)

BPT has also recently issued a report on its drilling campaign coming up in the Cooper Basin, with 16 wells of various types due to be drilled over the coming months (starting in Queensland and moving to South Australia).

This is clearly business-as-usual for BPT and the market still patiently awaits any developments over company consolidation in the Cooper.

Company news – Santos (STO)

The Australian Financial Review (the AFR – apparently the favoured communication mechanism for STO and others such as Woodside at present) today reported that the company could not yet select a new CEO until its asset base was settled upon.  This presumably reflected an off-the-record briefing following yesterday’s STO Board meeting.

The report again noted that selling the company’s Western Australian and Asian assets would likely be the preferred outcome for the company.

Quote of the day

“Saudi Arabia appears devoid of all prospects for oil”

– attributed to a Director of Anglo Persian Oil Company in 1926.

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