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Yesterday we noted that crude oil supply side “spare capacity” was now arguably held in tanks rather than below the ground. Developing this theme further, we could characterise the last year’s oil price rout as being driven by something really very minor – namely the elevation by a few thousand feet of a few hundred million barrels of crude oil from sub-surface reservoirs into on-surface tanks.
There have no material discoveries to change the supply side. Indeed discoveries continue to be far less than consumption and that trend would have worsened last year and will be even worse this year (and the next few – exploration has been cut to the bone by companies large and small).
Looking at the oil market through a very different lens to the ones being used to set prices, we could make the case that the supply side has never been tighter:
- Global on-surface inventories cover at best 3 months demand.
- There is effectively no sub-surface spare capacity behind pipe, ex-Libya.
- Iranian and other OPEC spare capacity is mostly PUDs – i.e.money, time and expertise is required to produce it.
- Depletion continues from existing reservoirs at ~6% per annum.
- No material discoveries are being added from exploration.
- Adding reserves by increasing recovery factors in existing reservoirs mathematically cannot go on forever and faces diminishing returns.
Crude market participants clearly disagree with the above analysis, with further falls seen overnight. Brent closed at US$28.25 and WTI fell harder to US$26.55.
The weekly EIA stock report from the US is a day late due to Monday’s public holiday in the States. Pre-release estimates (which however seem to have little predictive powers) were gloomy, with a view that a ~3 mmbbl build will occur.
The Henry Hub natural gas price climbed a few cents to close at US$2.12.
LNG and international gas
Yesterday we referred to a Wall Street Journal on an internal email from Petronas CFO regarding capex cuts and speculated this would mean project delays for the likes of the company’s Western Canadian LNG project.
The email has now been published on-line (it is in fact from Petronas’ President) and explicitly said that:
“This means that we are going to have to defer some of our projects”.
Presumably it will also mean that Petronas – like virtually everyone else in the sector – will be considering material divestment opportunities. Whether non-traditional funds such as private equity will be prepared to take the oil price bet of making purchases just now remains to be seen in 2016.
Company news – Woodside Petroleum (WPL)
WPL put out its quarterly report this morning. There was little of interest in there from our perspective. We’ll leave it to the traditional banking analysts to provide readers with updates on dry stuff like percentage changes in production, etc.
All we noted was a good example from some comments from the CEO of an industry wide word du jour: namely his “unrelenting focus” on costs, etc. Phew – say investors, we were worried that his focus might only be “occasional“.
Fans of BHP will argue however that an “unrelenting” focus is not as exciting as a “laser-like” focus.
Company news – Origin Energy (ORG)
The Australian Financial Review (AFR) published a story today on one of our favourite themes – namely the positioning by ORG to potentially split-off or sell its upstream division (largely being its stake in APLNG in Queensland).
The AFR noted that this had long been resisted by the ORG Board (as who wants to reduce the size of one’s fiefdom – and who are those pesky shareholders anyway?). However, it noted that investors would be pressing the company on this over the next few months.
Company news – Senex Energy (SXY)
SXY issued its quarterly report today as well. Its current cash position of ~$100M puts its current EV at a very lowly A$40M – around half that of underground coal gasification company, Leigh Creek Energy, for example.
SXY is pursuing an investigation of the tight oil potential of the Murta formation in its extensive Cooper Basin acreage – partially funded by Halliburton. Extracting this would be highly unlikely to be economic at current oil prices – but if the “code” for this could be cracked, it could be very interesting in what we think is an inevitable return to higher oil prices.
Company news – Drillsearch Energy (DLS)
DLS issued a company update today (we are not sure why it did not wait for its quarterly report). The DLS and Beach Energy (BPT) “merger” vote is on track for next week.
The company disclosed the sale of its oil production interests in the Santos (STO) operated Tintaburra oil-fields in Queensland. Price was not mentioned. We can only conclude that the price was so fabulous that DLS did not want to publicise it in case it embarrassed the purchaser.
Quote of the day
From a recent UBS report on oil market fundamentals, some views which make a lot of sense to us:
“Much of the recent fall, we believe, is short-term momentum driven with limited reference to medium/long-term fundamentals but is not an unusual feature of the market when it tips out of balance….and is a product of OPEC’s decision to produce from its spare capacity rather than leaving crude in the ground.”