Today’s Blog – Friday 22nd January 2016

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Introduction

Bells ring at the bottom and tops of markets only in hindsight.  Many now consider that The Economist’s call on its front page in March 1999 that the world is “Drowning in Oil” was the tolling of a bell that then set off a 15 year bull market in crude.

This week we have heard two more calls that the world is again “drowning in oil” – from the lead editorial in today’s edition of The Economist and also as we quoted from the IEA earlier in the week.

Bells ringing anyone?

Commodity prices

Crude bounced sharply up overnight, with the US$30 mark breached at one point in the day in the US.  Brent closed at US$29.75 and WTI at US$29.85.

This was despite bad “numbers” from the weekly EIA report: crude inventories up by 4 mmbbls, gasoline up by 4.6 mmbbls, ameliorated by a fall in distillate stocks of 1 mmbbls.

The rise appeared to be the result of profit-taking by the bears – and also as a response to the news that the ECB would continue its ultra-loose monetary policy (arguably pouring another bottle of vodka into the punch – these central bankers are party animals).

The Davos Forum is currently underway in Switzerland and when not expressing incredulity about the ongoing political force that is The Donald (which he must love, as criticism from the Davos crowd would be seen as a massive endorsement by his supporters) the oil market has been on many lips.

BP’s CEO Bob Dudley noted that the oil price “has been low in the last year, I think it has been lower for longer but it is not lower forever.

And he was one of the optimists, with his predecessor, the sailing loving Tony Hayward saying that the world had “too much oil” (or dare we say it,  is “drowning” in oil?).

More bells ringing anyone?

The Henry Hub natural gas price does not seem to have evinced much comment at Davos (although I cannot tell for sure, as my invitation seems to have been lost in the mail again).  It closed up a couple of cents at US$2.14.

LNG and international gas

Progress is being made on what is likely to be one of the World’s most expensive LNG project – Yamal in Siberian Russia.   Its first ice-breaking ship has just been launched in Korea and also Reuters recently reported that US$15B of its total required financing of US$27B had been procured.

Alleged major shareholder in Yamal, one President Vladimir Putin, might want to celebrate these milestones with a nice cup of tea – no added teaspoons of polonium though, please!

Company news – Shell and BG

Shell noted this week that it would make 10,000 additional redundancies post the BG deal being closed (expected very soon).

As we noted when reporting BP’s redundancy program last week, there remains a potentially worryingly thin sliver of expertise left in the companies which will be required to deliver the oil and gas the world needs in a few years time.

Unless of course we don’t need to be concerned about that – the world is “drowning in oil” didn’t you know?

Company news – Origin Energy (ORG)

ORG released an ASX announcement yesterday regarding its debt financing position which appeared to give the market a lot of comfort – its share price soared on the news.

Company news – Santos (STO)

STO’s quarterly report was released today.  It contained a similar bullish tone to ORG’s announcement above regarding the company’s balance sheet.  The share price also reacted favourably to this.  The company was specific in stating that if its credit rating fell, that would have no consequences under its financing contracts.

However, in our view STO would be very reluctant to surrender an investment grade credit rating, for reputational as well as legal reasons.  Commercially, although its existing debt facilities may not be affected, its ability to enter into pipeline contracts, etc, would be compromised if it was of junk status.

Quote of the day

Possibly wishful thinking from Harvard Professor Niall Ferguson at Davos:

“By the time we get to March-April, it’s all over. I think there’s going to be a wonderful catharsis, I’m really looking forward to it: Trump’s humiliation. Bring it on.”

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