Today’s Blog – Wednesday 6th December 2016

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Yesterday we set out the key lessons we had learned from 2015 and now we can no longer avoid making our predictions (that will invariably be wrong) for 2016.

  1. The first is the easiest (and hopefully the one that will be most wrong) – oil prices will remain dismal  throughout the year – and could well hit much lower points than the present price.  The fundamentals of excess supply, weak demand and record inventory levels make this an easy pick – with “events” being the main wild card that could disrupt things.
  2. International gas markets will also remain poor and we think no green-fields LNG projects will be sanctioned in 2016.  Brownfields’ sanctions will be limited to one or two.  LNG spot prices will fall not only with oil declines – but also may be crunched as US gas (with take or pay contracts for liquefaction capacity that are sunk) comes onto the market.  One bright spark will be delays in the Russian gas pipeline projects delivering into China.
  3. However, we think that US gas prices will rise (although we note we have called three or four of the zero last US gas price rises).  Increasing exports, the likely end of El Ninio induced warm weather, declining associated gas from e.g. the Eagle Ford and tightening capital market support for cash-flow negative companies should drive this outcome.
  4. OPEC will continue to demonstrate its utter incapacity to actually act as an effective supply cartel.  The only country – Saudi Arabia – that could try to make the body work will instead be dealing with intra-Princely rivalries rather than the good of the nation’s economy, etc.
  5. Industry consolidation will continue, with the other Super-Majors following in Shell/BG’s footsteps.  However, bumps could arise if NOCs try to play the same game – e.g. a Presidential election year is not the time to be making moves on US independents.

Commodity prices

Crude prices fell overnight, with Brent down ~1% to US$37.28 and WTI down more like ~2% to US$37.04.  The key short term “numbers” driver was the usual weekly analyst survey on expected inventory figures, which concluded there would be a build this week (although we note the very poor predictive power of this survey).

The other more interesting “events” factor was the market apparently coming to the conclusion that growing Sunni/Shia conflict in the Middle East (exemplified by the escalating tension between Saudi Arabia and Iran) could in fact be bad rather than good for oil markets.

Why so?  Because this conflict demonstrates OPEC’s weakness and foreshadows country-on-country competition for oil markets when Iranian sanctions are eased.  Indeed one analyst has characterised this unusual situation as:

“In essence, the Saudis are replacing the geopolitical risk premium with a previously unimaginable geopolitical risk discount.”

Henry Hub gas prices rose ~2% to US$2.34.

LNG and international gas

As we have noted before, Iran’s return to the body of normally trading nations (assuming this happens – and there are plenty of road-bumps in Washington and Tehran ahead) should weigh on international gas markets as well as crude markets.

Indeed one generally un-noted potential Sunni/Shia flash-point could be over Qatar and Iran’s exploitation of the massive South Pars gas-field that lies between the two nations.  Too date Qatar has very effectively exploited this asset to enrich itself (and certain FIFA executives).  In doing so it could well have been draining what Iran might argue is some of its share of the gas.  Which the Iranians might not like for some reason.

Company news – FAR Ltd

Yesterday we noted that FAR’s share price had only risen ~7% on what seemed on the technical face of it to be very promising news from a test of oil production from its offshore Senegalese asset.

However by the end of yesterday’s trading, all gains had reversed and today the share price has fallen.  FAR shareholders (ourselves included) are asking what do you have to do in this market to get some love?

FAR’s current delineation program continues – with the SNE-3 well due next.  An upgrade of reserves should follow – but will the market care even then?

Other company news

Very little is happening in the oil and gas part of the ASX, as the holiday season (apart from in the hard working blogging sector) continues.

Quote of the day

Many decades ago the Shah of Iran lamented that:

“It was to me an economic aberration that oil remained much cheaper than Evian mineral water.”

Note to readers: that aberration continues today.

One thought on “Today’s Blog – Wednesday 6th December 2016

  1. Saw yesterday another US shale co file for bankruptcy protection (Swift). Any thoughts on when we’re going to see US shale oil production plummet?

    Just came across this blog yesterday – is excellent


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