Today’s Blog – Friday 30th October 2015

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Readers – please note that blog services this week will be short and/or intermittent due to your blogster travelling


This week the US Government has – as part of a budget deal – initiated a program to start a sell-down its strategic petroleum reserve (SPR).  The aim is to sell 60 mmbbls over around 5 years from 2018.  This is just less than 10% of the current SPR.

The SPR was not designed to be a piggy-bank that could be raided to cover up the failure of Washington’s politicians to craft a sensible budget – but hey, that’s politics.

From an oil market point of view – this gives an additional and sustained supply overhang that (at least at present) it hardly needs.

Governments buying high and selling low is nothing unusual (there are lots of analogues – e.g. the UK selling off much of its gold bullion in the late 1990s at the then very low gold prices, just before the 21st Century’s renaissance in the “barbarous relic”).

At least the US has a SPR – in Australia we don’t – we instead blithely assume that commercial oil markets will work in any conceivable circumstance (or that our magnificent fleet of submarines will always keep sea lanes open….).  Accordingly the only Aussie SPR is the ever declining amount of commercial inventories held in our small and soon to be non-existent refining operations.

Commodity prices

Yesterday’s absent blog missed the large rise in oil prices that happened overnight on Wednesday.  The 5% gain on the day seemed to have fairly fragile foundations – a slightly less than expected inventory build in the US (with a fall at the key location of Cushing).

Last night, Brent closed down slightly at US$48.80 and WTI closed up a bit at US$46.06.  The market seems choppy and restive at present – and there are no “events” (other than the usual smiting in Syria) blowing the “numbers” off course.

The Super-Majors reported quarterly results this week.  As expected, the figures were poor to say the least.  A common refrain was that costs had been cut such that the companies could live at US$60 oil prices (and still pay dividends, etc).  Note – see current price above.

Large projects continued to be cut and/or abandoned.  As we constantly note, longer term supplies cannot help but be affected by these current cuts.

The Henry Hub natural gas price (note – now for the December contract, not the November contract we quoted earlier in the week) closed down slightly at US$2.26.  The horrors of the ~US$2 November price have been eased by the normal winter demand developments expected for December – but this is still a very lean price for gas producers to try and make a full-cycle profit from.

LNG and international gas

Singapore has this week hosted an international gas conference – Gastech.  The city-state itself continues to push hard on cementing its role as the trading/pricing hub for Asian LNG.  In my view, that role is now unassailable.

A consistent theme of the conference was that LNG prices would naturally move away from oil-linkages – and the producers, who used to resist this move, seem now much more on board with it.  For instance, a Statoil representative said:

“A commodity that is priced off itself and has a separate price established for that commodity is more robust than a price that is derived from some other commodity.”

Governments and fracking, etc

The proud(?) rural socialist tradition of Australia’s National Party was demonstrated again this week, with the party’s leader indicating his support for farmers being able to deny the rest of the population of Australia access to the minerals they own under the farmer’s land.

Such theft of property from one group and its free distribution to another can be achieved when the former don’t really understand that that is the consequence of such a policy.

This blog sees little chance of such a change being effected on a wide-scale basis – but it serves as another small platform to continually make small gains from.

Company news – Santos (STO)

The media in the last few days has added another possible asset sale by STO – its offshore Victorian assets – said to be the subject of US$0.5B offers.

STO should deliver on one or more of the deals it has been leaking to the media soon – if it does not, the alternative Scepter Partners offer will look increasingly compelling.

Company news – Oil Search (OSH)

The media war between OSH and its spurned suitor, Woodside Petroleum (WPL) continues.  The former’s CEO, Peter Botten, this week said that WPL’s assumptions that lower-for-longer oil prices might increase the chances of a deal happening was not valid.  He effectively said that “we have great growth assets, you don’t, what’s the oil price got to do with that?”.

In my view he is right – tight LNG markets make OSH relatively more attractive than WPL (and we are talking a scrip not a cash deal).  OSH has one or two of the five out of a hundred LNG projects that should make FID in the next five years.  WPL arguably has none.

Quote of the day

The IEA’s Executive Director, Fatah Birol, on the current oil-field investment strike:

“If it comes true, this will be the first time in two decades we will see oil investments declining for two consecutive years.  One should think about medium and long-term implications of this lack of investments.”

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