Today’s Blog – Wednesday 13th February 2016

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Introduction

Yesterday we reported that Morgan Stanley had joined the Goldman Sachs led ranks of investment bankers who were hailing the possibility of a US$20 oil price.

Now Standard Chartered has upped (or maybe more accurately, downed) the ante.  Its London head of commodities research has just come out with the following view:

“No fundamental relationship is currently driving the oil market towards any equilibrium.  Prices could fall as low as US$10.”  (Yes, that’s US$10).

London based industry commentator, Malcy’s Blog, has called this as a case of bankers seeking bragging rights (with what we would call a typical dash of Goldmans-envy) and has asked:

“Who will be the hero with a zero forecast I wonder?”

As we noted yesterday, the investment community is increasingly exasperated with E&P management, with a typical quote being the following recent one from a US broker:

“You have to make it obvious to them to stop.  They’re in denial.”

We think this latter view is too US-centric – although the US is clearly a key part of the current global over-supply, we consider the likes of Iran and Libya to be of possibly greater concern, given their ultra-low cost structure and political imperatives to produce.

Commodity prices

Crude prices have now fallen in every trading day of 2016.  Last night the fall was not as brutal as on Monday, with Brent closing down ~1% to US$31.08 and WTI ~2% to US$30.63.

WTI fell below the US$30 during the trading day.  We also note that certain Canadian crude blends are now receiving not much more than US$15.

Various media reports emerged overnight about increasing rumblings within OPEC (e.g. from Nigeria) about calls for an emergency meeting.  However, unless such rumblings come from Saudi Arabia they are in our view irrelevant for crude markets.

Henry Hub fell ~5% overnight to US$2.25, notwithstanding what now seems a more normal cold US winter.

LNG and global gas

Increasing media chatter is building over the imminent first LNG export cargo from the US (the lower 48 anyway), with reports that a vessel is now docking at Cheniere’s Sabine Pass facility in Louisiana.

As another sign of the changing times in LNG, Russian owned news agency Interfax has just reported that in 2015 Gazprom had its lowest ever production levels.

Company news – Shell and BG

Yesterday we noted that 1.7% shareholder in Shell, Standard Life, had flagged that it would not vote for the takeover of BG.

At the same time, Standard Life will vote its shares in BG in support of the takeover.  Logically this is coherent.  We think.

Company news – BP

Turning to the UK’s other Super-Major, another material round of upstream redundancies was announced yesterday by BP.  BP will reduce its upstream staff by 4,000 to less than 20,000.

When multiplied across the sector, that’s not a lot of remaining people upon which the world will rely for its most important energy sources once the current glut is cleared and in our view shortfalls could well rapidly emerge in the “medium” term.

Company news – Beach Energy (BPT)

The Australian Financial Review’s (AFR’s) reported today on BPT’s new CEO (note – he has not been invited to join the Board, which we think is poor corporate governance – presumably there are not enough seats in the BPT Boardroom following the Drillsearch (DLS) takeover).

An interesting disconnect appeared in the article – the AFR journalist considered that the new CEO’s M&A background might foreshadow further Cooper Basin consolidation, whilst UBS’s analyst thought that acquisitions outside the Cooper could follow.

In our view (which UBS seems to share) is that there are in fact very few Cooper Basin opportunities for BPT (outside Origin Energy’s current sale process).

Another interesting point from the AFR article was BPT’s Chairman pointing to his new CEO’s “experience in pipeline infrastructure”.  This presumably is due to the company’s previously expressed desire to sell midstream Cooper Basin assets (although in our long held view, the upstream-owned pipelines in that area are unlikely to be worth much given their age and unpredictable future throughput – the valuable asset in this area is the Cooper Basin JV’s gas storage facility).

Quote of the day

A recent quote from Reuter’s John Kemp which we consider apposite given the quotes in the Introduction section above:

“It makes no sense to talk about “long term” or “equilibrium” prices since the price of oil depends on too many factors which are all dynamic”.   

 

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