Today’s Blog – Monday 23rd November 2015

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Introduction

As Christmas looms, Goldmans Sachs are adopting the role of the Grinch of the oil patch.  The smart-but-tricksy bankers have recently changed their view that crude oil prices could test a low of US$30 – to a revised view that we could see US$20/barrel.

Goldman’s analysis now concludes that the combination of the current 3 billion barrels in storage (near tank-tops), ongoing over-production of ~1.5 mmbbls/day and – El Nino induced demand reductions (for e.g. Northern hemisphere heating oil) could combine to drive this pricing outcome.

Goldman’s have unlikely bed-fellows in this perma-bear view – the Venezuelans.  The near bankrupt South Americans are feverishly trying to persuade the Saudis in the lead-up to the December OPEC meeting to cut production to raise prices before they formally go broke.

Our view is that the chances of the Saudis doing so are slim – not because it would not work or make sense for them, let alone the rest of OPEC – but rather because the current KSA leadership will think it needs to show to its internal rivals that it has resolve.

Commodity prices

Crude prices rallied on Friday, with Brent closing up ~1% at US$44.66 and WTI performing even more strongly – up ~3% at US$41.90.  The key driver was a strong BHI rig report, which after last week’s upward blip, noted an oil rig decline of 10 (gas rigs were flat).

On the other hand, the Henry Hub gas price was smashed on Friday, closing down 5% (and 10% over the week) at US$2.14.   As we have continually flagged, this was all about the weather – with warm early winter conditions in the US.

LNG and international gas

This week Tehran is hosting The Gas Exporting Countries Forum (members do not include large exporters such as Australia, Canada – or  the soon to be large exporter, the US).

The Forum’s members include Russia, Qatar, Indonesia and Nigeria.  With 42% of global gas output this is higher than OPEC’s 1/3 share of crude markets.  However, evolving free markets, rather than cartels, are what is currently driving international gas trading.

As today’s daily Economist notes: “the golden age of gas is benefitting consumers, not producers”.

Domestic gas pipelines

Responses to last week’s announcement by the Northern Territory over the NEGI pipeline continue to come out.  Today’s The Australian newspaper reported the views of industry advisers RISC, which appear to be similar to our own.

That is, notwithstanding its comments, by entering into a Gas Haulage Agreement the Territory is taking on private-sector risk – and in any event the pipeline requires feedstock that has the nature of reserves not resources.

This story may run and run – for years if not decades, judging by the history of international pipeline projects.

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

The business press today has a few stories on the possibility of WPL reactivating its takeover approach to OSH.  These seem to have emerged as a result of an analyst field trip hosted last week by WPL.

However, nothing new has come out that resolves the conundrum of how to strike a price that would be acceptable to both groups of shareholders.

Company news – Origin Energy (ORG)

Also in today’s press was speculation that WPL could be a bidder for ORG’s Perth Basin assets in Western Australia.  That seems possible – but we do note that these are non-operated and onshore in nature, and hence not a great fit with WPL’s capabilities.

A bid from WPL would however come from an informed party with respect to the medium term prospects for Western Australia’s gas market.

Company news – Santos (STO)

STO’s largest shareholder, Chinese PE firm Hony (who presumably has no connections whatsoever to the Communist Party?!) lodged a revised substantial shareholder notice with the ASX on Friday. Its stake in the company had moved to 12.2%.  This is prior to the retail component of the current rights issue closing – after which it would move back down to 9.9% (as mandated in the 3 month standstill period agreed between STO and Hony).

Less formal news on STO came to this blog on Friday from a confidential source.  This news re-iterated our view set out in last week’s blog that next May’s STO AGM could be a great spectator sport.  This source speculated that aspects of the remuneration report to be voted on at the meeting could provide some very red meat to the company’s numerous unhappy shareholders….

Quote of the day

Unhappiness within OPEC?  Surely not.

“Nobody expected the oil price to go this low and it cannot stay here.  It doesn’t serve the interests of any country in the Gulf, oil producer or not.”  Ahmed Ali Al Sharyan, secretary-general at Bahrain’s National Oil and Gas Authority.

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