Today’s Blog – Wednesday 9th December 2015

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Introduction

Over the course of this year we have occasionally commented on moves in Washington to remove the US’s archaic ban on crude oil exports.  Generally we have concluded that politicians would not want to be associated with a potential gasoline price rise – even if there was only a slim to non-existent causal link between the two.

However, we could well be proven wrong, with media reports coming out saying that there could be a deal done in DC this week on this.  The House of Representatives passed a bill removing the export ban back in October and  Democratic vetoes in the Senate and White House could be traded away in exchange for Republican support for the likes of ongoing renewable energy support.

What would be the consequences of any such change for world crude markets?  In theory, the WTI/Brent spread should close – raising the price of the former and reducing that of the latter.

All things being equal, that should reduce somewhat the pressure to cut US production – from a psychological as well as a economic perspective.  A smoothing out of the curve of US production declines would encourage crude market bears and lower prices would result.  Maybe not what the E&P industry lobbyists in DC are looking for, at least not in the short term.

Commodity prices

Crude’s big fall off since Friday’s OPEC meeting ameliorated somewhat yesterday, with Brent falling only 1% to US$40.19 and WTI closing down 0.4% at US$37.55.   During the course of the day Brent tested the below US$40 mark, but ultimately closed above this.  Crude has fallen nearly 10% since Friday – a similar percentage change to last year’s end of year OPEC meeting.

We see little short term catalysts for other than on ongoing slide. Expectations for tomorrow’s EIA inventory report are for another build.

The Henry Hub natural gas price was flat at US$2.07.

LNG and international gas

Reuters recently reported the views of Credit Suisse on next year’s Asian spot LNG prices – they will be “eye watering low”.

Australia’s continued ramp up of production into 2016 will greatly assist the Pacific Basin moving from being a net LNG importer to an exporter.  Spot cargoes over and above contract levels will be material and could push spot prices below US$5/mmbtu.

That would then feed-back into demands from buyers to change prices under their long term contracts.

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

WPL and OSH formally confirmed yesterday the story we noted in the morning – that the takeover offer by WPL for OSH (or as WPL’s Chairman disingenuously put it – the “merger” proposal) was no longer on the table.  Under Australia’s takeover laws, this official statement does not particularly limit WPL’s future course of action over OSH from a legal perspective.

What now for WPL?  Its mantra of being “disciplined” must risk clashing with the animal spirits and frustrations of its CEO.  Desires for the market for WPL to acquire high quality/low risk/cheap assets are still aspirational – notwithstanding low oil prices, few if any such deals are available.

Would WPL look at STO given its falling share price – or is there no STO share price low enough to remove WPL’s misgivings about that company’s mixed portfolio of assets.   Given STO’s still high gearing, there is a case that even at a zero share price, its enterprise value might still be considered too high.

What about Origin Energy’s (ORG’s) LNG assets in Queensland as a target for WPL?  As we have speculated before, the ORG Board could well willingly dispose of these.  They would give WPL an operated position, albeit in a resource – CBM – they did not like – and with LNG customers in the PRC that clash with disputes WPL is having over North West Shelf LNG supply contracts.

Company news – ORG

The Australian Financial Review (AFR) today reported that ORG’s sale process for its assets in the Cooper and Perth Basins would not be rushed – with any information memorandums not due to be issued for a few months yet.

This could be considered prudent given current oil prices.  However, on the other hand, such prices could be worse come February next year.  This would beg the question, is there a “reserve” price scenario under which the ORG Board would not sell?

Quote of the day

Last week’s OPEC meeting continues to dominate the market.  A summary from one of the many unhappy attendees at that meeting:

“We have no decision, no number,” Iranian oil minister Bijan Zangeneh

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