Please pass this blog on to others who might like to read it
The dominant force in crude markets so far in 2016 has been the imminent entry of Iran back into the body of free-trading crude exporters. Sanctions were formally lifted over the weekend.
The market has seen this as an overwhelming negative, primarily due to the spare capacity in terms of production that Iran can bring back on over various periods of time.
Additionally, Iran is said to have ~50 mmbbls sitting in floating storage ready to hit markets immediately (although we note this is one morning’s worth of global demand and a small fraction of total global inventories).
The consensus view on the production that Iran could quickly bring on is around 500,000 bopd. As we have noted before, some informed observers (e.g. Houston based energy focused investment bank, Tudor Pickering Holt – TPH) believe the true figure is less than this – more like 300,000 bopd – as currently 200,000 bopd is “washed” through Iraq for reporting purposes.
Estimates of the country’s medium term export capacity have a far wider band, but 1M bopd is a fairly standard figure. The time that it would take to bring this on is the great unknown, with Iran’s infrastructure generally considered to be “aging” or “decrepit”.
Now is not a good time for anyone or any country to be seeking investment dollars in the oil and gas space, as the whole industry is not exactly awash with funds. For instance, the Super-Majors have generally flagged they need much higher prices than current ones – say US$60/bbl – to sustain their current business models. The NOCs are more opaque – but they have calls on their resources from their owners, who are often Petro-States who themselves are bleeding at present.
We think the lure of Iran’s large reserve base will entice Super-Major interest, but the pace of investment will be much slower than the country would like due to the sheer unavailability of funds and a few likely political hiccups.
And did you know there is a US Presidential race going on? Given the possible outcomes (President The Donald is conceivable, notwithstanding all the jokes and quotes), we think that any US Super-Major will be pretty conservative about entering Iran.
The possible “technicals” floor of US$30/bbl was smashed on Friday. Brent closed down ~7 % at US$28.94 and WTI slightly less (~5.5%) at US$29.42. This was the first time in nearly 13 years that the US$30 price floor was breached at close.
Iran was the main factor, but stock and other markets generally had a shocker as well.
The weekly rig count from BHI – oil rigs down by 1 and gas rigs down by 13 – had no impact on the market.
The much more interesting issue for us – the length and nature of the “medium” term – and the inevitable recovery in oil prices thereafter – was again brought into focus by a widely reported-upon piece of analysis from Wood Mackenzie. This was an updated view on the projects which had not been invested in (Gregory: “The dog did nothing in the night-time. Holmes: “That was the curious incident.”)
Wood Mack’s new figure for the investments not made is now US$380B. That is a lot of oil and gas supply capacity that is no longer there – and demand keeps rising whilst existing assets keep depleting.
The Henry Hub natural gas price continued its recent fall, closing down 2% at US$2.10 on Friday. Higher than anticipated inventory numbers have been the key driver in the recent falls.
LNG and international gas
Although symbolic rather than market moving in terms of fundamentals, delays in the first LNG cargos from the lower 48 in the US might also be pressing on gas markets.
Cheniere Energy’s Sabine Pass project has recently flagged that its first exports will be delayed by a month or so due to some technical issues over plant instrumentation.
Company news – Australian E&P stocks generally
Today’s The Australian Financial Review (AFR) has flagged that following BHP’s large asset write-down of last week, other E&P companies listed on the ASX are likely to follow suit.
Given the fall in spot and future oil prices (and hence in oil-linked LNG prices) this is not surprising – particularly when one reviews the in-hindsight pretty high prices used by the likes of Santos (STO) in their asset value reviews last year.
We think large non-cash balance sheet write-downs (multi $Bs) from the likes of STO and Origin Energy (ORG) are an absolute given. The interesting issue will not be balance sheets per se – but what ratings agencies think. Unless oil prices bounce up pretty hard, we think the investment grades of STO and ORG will come under threat – and further equity raisings and asset sales may well be required from these two in particular.
Company news – Finder Petroleum
Finder is that rarest of beasts in Australia – an E&P company that has managed to remain private over a long period of time. Finder has been astute in acquiring acreage (largely in WA), undertaking relatively low cost seismic work thereon and then either selling out or using other people’s money to drill thereon.
Finder just announced that its founder and CEO, Jan Ostby, has had to retire for personal reasons – we understand due to illness. Best of luck, Jan.
Quote of the day
The Shah of Iran’s view on Saudi Arabia would not seem so different from those of his successors:
“Muslim brothers be damned; they’re our greatest enemies. You know yourself that I’m a Muslim, even a fanatical Muslim. But that does nothing to alter my opinion of the Arabs”.