Today’s Blog – Monday 7th December 2015

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Introduction

As expected, OPEC’s meeting on Friday resulted in “no change”.  Al-Naimi’s promise before the meeting to “listen, then act” were honoured in the first part at least.

As there was some slight possibility that the meeting might have resulted in a concerted production cut, the elimination of that outcome resulted in a fall in oil markets on Friday (particularly in the US, given the time zones)  – see below.

OPEC is not a functioning cartel at present.  It cannot control prices and the wishes of the majority of its members have no governance mechanism to then be translated into outcomes.

Oil importing nation Indonesia formally re-joined OPEC.  Its large Sunni Muslim population (admittedly not Wahabist in nature) seems to be a greater impetus for membership compared to the status of its declining oil industry.

The accommodation of increasing Iranian production next year was typically fudged – by increasing the current so-called quota of 30 mmbopd to the actual production level of ~31.5 mmbopd.  This did nothing for oil markets in reality.  Iran – like everyone else in OPEC – will produce as much as it can.

Commodity prices

As noted above, oil prices fell on Friday.  Brent closed down ~2% at US$43.00 and WTI fell twice as hard (4%) to US$39.97.

The breaching of the US$40 price for the second time in a week is seen as important by those in the market with a “technicals” bent.  If this support pricing level is sustainedly breached, then falls to the “Goldman Sachs” level of US$20 could be seen in the next few months.

The weekly BHI rig count report was a bullish signal that was largely ignored in the more important context of “no change” from OPEC.  This saw another material weekly oil rig fall (of 10 rigs).

One recent news item of possibly greater interest for the bulls was speculation in the Wall Street Journal that the PRC will continue to materially build its Strategic Petroleum Reserve (SPR) next year – by up to a very significant 100 mmbbls.

That sort of ~300,000 mmbopd figure provides a lot of incremental demand side support to oil markets.  However, this is an opaque area, unlike weekly updates from the US on its inventory levels, including its SPR (which in contrast to China, Congress has voted to counter-cyclically sell down in order to raise cash at a time of poor oil prices).

Henry Hub closed flat at US$2.19 on Friday.

LNG and international gas markets

With rather bizarre timing, a recent meeting in Tehran of large gas producing nations such as Nigeria and Algeria called for a “gas OPEC” to be set up to try to control international gas pricing.

Note to these countries – check the current oil price you are receiving and what OPEC is doing about it.

Governments

On Friday Australia’s State and Federal energy ministers met to discuss issues such as the changing gas market in Eastern Australia.

Industry body APPEA was tasked with establishing an annual reporting mechanism on “unconventional” gas production.

It will be interesting to see how this is defined.  In the eyes of environmental activists, historical gas production seems acceptable, whilst so-called “unconventional” production from sub-surface horizons such as coal seams and tighter sandstones is morally more suspect.

But how do you draw a line between these in any legitimate technical sense?  Does a permeability line in the sand have to be drawn, with all production (if one could measure it, which one could not) on the high side being good and that on the other side being bad?

Company news – Santos (STO)

STO confirmed this blog’s speculation on Friday as to the commencement date of its new CEO, Kevin Gallagher – this will be at the start of February (he should be rested after his January holiday, unlike suffering STO shareholders).

Gallagher spoke at a conference in Perth last week about seeking new paradigms over the management of large resource developments in Australia, through different styles of relationship between operators and contractors (and he has benefitted from working for both).

The media has drawn conclusions about what this will mean for STO.  However, the effective outcome of the recent strategic review of STO is that it will not be undertaking any development projects for some years.  Instead, Gallagher’s job appears to be a dreary one of applying cash-flows from existing assets to debt repayments, dividends and dwindling operating costs.

Company news – Carnarvon Petroleum (CVN)

CVN is being carried through one of the more interesting oil exploration drilling campaigns in Australia at present.  Today it issued an investor presentation – which for other companies might signal an imminent capital raising.  However, CVN’s strong cash position would seem to make that unlikely for it.

Its current well is intended to hit target depth by the end of this month.  Any well testing (for a successful well) will not take place until the second half of next year.

Quote of the day

The Wall Street Journal’s current view of OPEC:

“OPEC has gone from being fearsome to marginal to ineffectual. The keys to forecasting the price of oil today are on North Dakota’s plains, Iranian negotiating tables and Chinese factories, not in Viennese hotel suites”.

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