Today’s Blog – Monday 1st February 2016

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Introduction

Last week oil markets reacted bullishly to various confusing stories about “possible” collaboration between large producers (basically Russia and Saudi Arabia) to put in place production cuts.  In our view the reaction was overdone – and by the end of the week it appears that Rosneft spokesman Mikhail Leontyev agreed:

“Everything is possible in theory. It was possible a year ago, a month ago. Nothing new has happened. This frenzy is idiotic. It stems from the fact that people can’t read…Consultations with Opec happen all the time. All positions are well known, they have not changed in any way.”

On Friday this was brought home pithily by Houston based advisers Tudor Pickering Holt (TPH), who pointed out (again) the golden rules of OPEC:

“The 3 rules of OPEC…1) Listen only to Saudi Arabia and rules 2 and 3) refer back to rule #1”.

Commodity prices

Last week’s bullishness continued into Friday, with Brent up again at US$35.99 (up ~12% for the week) and WTI up somewhat less at US$33.62 (only ~4% for the week).

The return of a meaningful (particularly in percentage terms) Brent premium was presumably due to all the expected wonderful cooperation between Moscow and Riyadh which would reduce the supply of Brent priced sea-borne traded crudes.

Back in the “numbers” world, the BHI rig count on Friday was positive, with a reduction of 12 oil rigs and 6 gas rigs.  However, the market seems to have given up caring about rig counts.

Henry Hub finished the week up ~4% (7% for the week) at US$2.30, as inventory draw-downs were strong.

LNG and international gas

African LNG prospects received another boost last week, with a successful drilling program carried out by US independent Kosmos Energy off Senegal.  The mid case size of the discovered resource is now 17 Tcf – large enough for a standard onshore 2 train LNG development.  Reservoir quality appeared to be high.

Cooperation will be required between Senegal and Mauritania to allow a development to go ahead, given the cross-border nature of the asset.  This cannot be guaranteed, but an announced MOC showed good intent.

Both the East and West coasts of Africa now boast major potential LNG developments, based on large and apparently high quality reservoirs.  Politics can of course doom the best technical projects and this is the key advantage that Australia (and the US and Canada) possesses.

The global supply picture for gas seems to just get longer – which is very different than for oil, notwithstanding perceptions that we are “drowining” in the stuff (if we were, we would be seeing stories about multi-billion barrel high quality oil discoveries – which we are not).

Governments and fracking

Opponents of on-shore tight oil and gas exploration in the UK have found a new thing to complain about – a potentially carcinogenic key ingredient used in fracking known as “sand”.

A spokesman for the British Geological Survey accordingly posed the following question to the complaining green group (Friends of the Earth):

“What are they proposing? That we treat all beaches as contaminated land and pave them over?”

Company news – Santos (STO)

The Business Spectator this morning reported that STO may again seek to sell its stake in PNG LNG.  This is by far the company’s most valuable asset (although given current commodity and asset pricing, it will be less valuable at present than during the company’s strategic review process of last year).

The story presumably reflects ongoing concerns about STO’s balance sheet (and credit) weakness and its relatively few options over how to address these.

Company news – Woodside Petroleum (WPL)

In what is not exactly a first, WPL today announced that the Wheatstone LNG project (operated by Chevron) in Western Australia had been delayed – to mid 2017.

Quote of the day

The US Presidential race continues to fascinate and provide us with much good content for our quote of the day.  Views from and about The Donald are naturally the most colourful, as illustrated by the following tweet from Cher (ex spouse of US Congressman Sonny Bono):

‘Trump NOT Doing FOX Debate Cause Of MEGAN KELLY Some1 Get Him TOE SHOES, fkng PRIMA DONNA. HOW CAN HE FACE ISIS, HE CANT FACE A CHICK ON TV (sic).”

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