Today’s Blog – Monday 16th November 2015

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Introduction

Friday’s daytime trading in crude oil was bearish – backed by bad “numbers” from various sources (see more below).

Friday night’s terrorist attacks in Paris will also be a bear factor on oil markets in London and New York when they open later today (funds will seek havens in US dollars, gold, etc).  However, in the medium term, they are unlikely to drive oil markets other than in the worst of circumstances (i.e. ISIL induced chaos and even insurrection in the KSA and other Gulf States).

Such V-shaped responses have typically occurred post other terrorist attacks in recent years – i.e. they adversely affect short term sentiment but not medium term demand and supply.

But how feasible is it that ISIL could extend its caliphate to the KSA?  The latter has been fighting terrorism for some time, has a strong security State (but so does France), strong border controls, etc.  And in the long term, whoever was running the country would want to sell oil to the world – even ISIL will contain rationalists.

Arguably China is more exposed to the physical trade of Gulf oil than is the US or even Europe – but would it change its non-interventionist habits?  (Maybe it needs to find an old Yuan dynasty map which extends the nine-dash line a bit further West).

Commodity prices

Crude oil prices fell on Friday following negative “numbers” from the EIA, IEA and BHI.  Brent closed at US$44.47 (down more than 6% on the week) and WTI closed down at US$$40.74 (down even more at 8%).

The EIA’s Weekly Report showed yet another inventory build – of 4.2 mmbbls (mitigated somewhat by a gasoline draw of 2.1 mmbbld and a distillate build of 0.4 mmbbls).

The IEA reported that total global crude inventories were now a massive (and unprecedented) 3 billion barrels (or more than 4 US Strategic Petroleum Reserves).  Anecdotally this was illustrated by ~40 tankers lining up in the Gulf of Mexico to store crude from the Texas (and region) system, which was approaching “tank-tops”.

Then the BHI rig count was negative, with a small oil rig increase of 2 (and a gas rig decline of 6). This was the first rise for months – and although arguably statistically irrelevant, helped add to the gloom of the trading day.

Henry Hub closed at US$2.36 – down slightly over the week.  A recent EIA report noted that US gas exports to Mexico have increased 60% over the year to ~3.6 Bcf/day (in East Coast Australian terms, about twice our total daily demand).  Further increases are expected to fill new pipelines under construction.  Henry Hub would clearly be much lower if these exports were not occurring.

LNG and international gas

The EIA put out some good news for the gas industry at the end of last week – its projections that global gas demand would increase by 50% over the next 25 years.  Such projections don’t historically have a lot of predictive power (and neither do the future oil and gas price strips) – but they should provide some degree of animal spirits enthusiasm amongst the short term pain of low LNG prices and few projects proceeding.

Another ship making its way to the Gulf of Mexico has a different (and unfamiliar) shape than the crude tankers noted above – a LNG ship which is now making its way to Cheniere’s Sabine Pass liquefaction plant in Louisiana.  Test cargoes are expected to commence export in the first two months of 2016.

Governments

Independent Queensland Senator Glenn Lazarus (“the brick with eyes”) has successfully established a Senatorial Committee to examine coal seam gas “mining” in Canberra.

It will likely do nothing solid other than offer multiple public field days for “shut the gate” activists, fringe farming groups and luddites of all descriptions.

However, they could still be dangerous – and will lead into next year’s likely Federal election in Q3.

Company news – Woodside Petroleum (WPL) and Oil Search (OSH)

The Australian Financial Review (AFR) has now turned from the Santos (STO) soap-opera back to the WPL/OSH take-over game.  Today it reported (and it always has sources with their own agendas) that WPL was considering purchasing the PNG Government’s ~10% stake in OSH – and then using that as a platform to launch a full (scrip-based) takeover offer.

It is flogging a dead horse?  Many of its shareholders would say “yes”.  Or does it have a “cunning plan” of Blackadder-esque ingenuity?  The same shareholders would hope that Baldrick is not in charge of their corporate treasury.

Company news – STO

STO’s share price is under pressure – from falling crude prices, terrorist attacks, shorters (who are sometimes vilified more than the terrorists), and a lack of confidence in company leadership.

The share price is now not far from the rights issue price – much to the chagrin of the underwriters (whose usual definition of underwriting is “money for free”).

Further “events” – international or involving local market traders – may drive interesting outcomes for STO in the next few weeks until the rights issue closes.

Quote of the day

From President Charles de Gaulle – two lessons for France’s attackers:

“Patriotism is when love of your own people comes first; nationalism, when hate for people other than your own comes first”. 

“France has lost the battle but she has not lost the war”.

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