Today’s Blog – Tuesday 5th January 2016

Introduction

As well as making prognostications, the start of a new year is a time to look back and learn.  The top 5 lessons for this blogster from 2015 were as follows:

  1. Oil supply in the face of falling prices has been far more resilient than we expected.  This prevails across the globe – in the tight oil fields of the USA, the old Russian fields, in a falling-apart Iraq, for small Mom and Pop stripper wells, etc.  This is partly due to good old fashioned ingenuity in the face of adversity – and partly due the extreme prisoner’s dilemma that the industry faces (everyone should just cut production by 1-2% and the market would re-balance – but why do so if others won’t?).
  2. The US gas price continues to be ultra-low and well below break-even levels, even in the face of increasing exports by pipe and soon to be by boat.  And a massively lower rig count.  For 2015 this was arguably due to the afore-mentioned resilience combined with the very mild US winter.  We still expect US gas prices to rise materially – but as John Meynard Keynes famously said – The market can stay irrational longer than you can stay solvent.”
  3. Don’t believe in the conspiracy theories of an efficient Machievellian OPEC that is employing smart strategies to destroy US and/or Russian competition.  These guys cannot organise their equivalent of a p*ss-up in a brewery – the Haj.  OPEC is Saudi Arabia and there is a largely hidden “Game of Thrones” likely afoot in the Kingdom over the succession.
  4. “Events” in the Middle East in 2015 did not disrupt oil markets in meaningful ways – surprisingly so compared to other times in the oil market’s history.  This may of course change (see 3 above) – the key is where the “events” occur.  Syria is not a material oil producer.
  5. The “Golden Age of Gas” has yet to arrive – and indeed in many markets gas is being squeezed between coal and renewables.  LNG markets have accordingly been weak and their outlook is poor in the medium term.  It remains to be seen whether policy mechanisms will change this – the evidence is scant to say that they will, even in mature countries like Australia.

Commodity prices

Crude prices finished fairly flat yesterday, with Brent closing at US$37.27 and WTI at US$36.76.  However, during the course of the trading day there was much volatility, as markets tried to balance bullish news from Middle Eastern “events” (i.e. the shocking escalation of Sunni/Shia tensions induced by the KSA’s recent executions) and bearish news from Chinese stock-market falls.

Henry Hub closed down 2% at US$2.30.

LNG and international gas

With US LNG exports imminent, weak Asian demand and an “anybody but Gazrprom” buyer mindset, Europe is the destination of choice for the global LNG market at present.

However, we note that the warm winter weather being experienced in the US is also present across the Atlantic, and this, combined with economic weakness, has led to European gas storage levels being at 6 year highs.

Company news – AWE

AWE announced today that it (and partner Origin Energy [ORG]) has FID’ed stage one of its Perth Basin gas project.  Underpinned by a short term gas contract with retailer Alinta Energy, the joint venture has committed to connect a couple of cased-and-suspended recent delineation wells to existing production facilities.

Capturing market (albeit on confidential terms and only for small volumes for a couple of years) is arguably the key news item here.  The future of Western Australia’s gas market is currently clouded with uncertainty as massive volumes of “domestic reservation” gas from Gorgon and Wheatstone over-hang the supply side.

Company news – ORG

Yesterday’s Australian Financial Review (AFR) noted that ORG’s sale process for its Perth and Cooper Basin assets was on track to receive expressions of interest by the end of this month.

The AFR quoted an analyst from Citibank as estimating the value of ORG’s Perth Basin assets as being ~A$300M – a figure we note as being higher than the market cap of its partner AWE.

Analysts are less bullish on ORG receiving good (or indeed any) bids for its Cooper Basin assets.  We reflect on the strong competition between Santos and Beach Energy the last time (2006) a stake in this venture came on the market and note the vastly different animal spirits that now prevail.

Company news – FAR Ltd

FAR came out of yesterday’s trading halt this morning with good news on the testing program for its SNE-2 well offshore Senegal.  Strong and sustained flow rates of high quality oil were reported.

FAR’s share price has gone up 7% on this news.  In a bull market the response would likely have been an order of magnitude higher.

Quote of the day

The Donald dosen’t have a monopoly on colourful quotes, as evidenced by the following from Poland’s new Foreign Minister:

“As if the world, in a Marxist fashion, were destined to evolve only in one direction—towards a new mix of cultures and races, a world of vegetarians and bicyclists.”

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