Today’s Blog – Wednesday 17th February 2016

Please pass this blog onto others who may be interested

The blog this week may be intermittent and/or short due to travel

Introduction

We mentioned in Monday’s blog that we were looking for a few counter-cyclical data-points and/or views to contradict the overwhelming meme that the world is currently “drowning in oil”.

An interesting piece of analysis published by OilPro recently looked for evidence as to how much of the current “crude” inventory levels are in fact crude (and therefore marketable and price-able as such) and how much is actually the different product that is condensate.  The two have a degree of substitutability – e.g. condensate can be blended with heavier oils to approximate WTI standard crudes – but refiners are increasingly rejecting such blends as being poor substitutes.

The analysis concluded that a good part of the current inventory levels (which in e.g. EIA reporting are aggregated) are in fact condensate.  Therefore, the true level of actual WTI standard crude inventories is materially less than the market thinks.  Thus future inventory run-downs of true crude could be much sharper than expected.

The qualitative level of data inputs into international oil markets is woeful on all sorts of fronts – from OPEC’s so called reserves, to aggregating volumetric measures (e.g. of crude, condensate, NGLs, etc) and calling them all crude (even though their energy contents by volume are different).

Commodity prices

The last two days have seen yet more extreme volatility on oil markets.  On Monday we saw rises of around 5% in both London and New York – driven largely by hopes that some sort of coordination between key OPEC countries and Russia might actually mean something.

Then reality set in on Tuesday, with Brent down ~8% to US$32.18 and WTI down ~6% to US$29.04.

The core of the news that had set the bulls running on Monday was an announcement from Saudi Arabia, Russia and some other OPEC countries that they would not increase production above January 2016 levels – subject to certain conditions.  By Tuesday the market had worked out that January levels were pretty much records for most of the parties involved, so the promise was accordingly a meaningless one.

Henry Hub continued to fall over the Monday and Tuesday, closing at US$1.90 yesterday.  The reason was of course ongoing mild weather.

International gas and LNG

Around a week ago India’s Power Minister issued a statement concerning joint Indian and Australian discussions over increasing supplies to the former from the latter.  The statement said that following recent meetings in Brisbane, the two parties would prepare a road map over the next two months to explore supplying cheap LNG to India.

Last time I looked, all of Australia’s LNG was owned and marketed by private sector companies – who would naturally be looking to sell at high rather than low prices.

The Australian Government has no role in selling LNG to India and the road map is clearly a road to nowhere – or the cynics might suggest, the sole outcome of an otherwise very pleasant trip to Queensland by the relevant Indian delegation.

Governments and fracking

A reader has recently reminded us that the new policy position of the opposition Labor Party in the Northern Territory about introducing the very original policy of having a “moratorium” over fracking in the Territory whilst conducting “studies” could threaten investment in the Territory.

We commented on this a few weeks ago – the position is demonstrably ludicrous and prima facie bad for the NT’s economy (e.g. bye, bye NEGI pipeline if the policy was followed).

The NT should watch the developing circus over on the East Coast that is Senator Glen Lazarus’ enquiry into CBM – starting off in the Queensland heartland of the industry – where he is dragging in the family of a farmer who committed suicide into his hearings.

The CBM industry actually (albeit indirectly) helped fund Lazarus’ entry into Parliament.  Without CBM in Queensland supplying Clive Palmer’s now flailing (but once prosperous) Queensland Nickel operation, the latter would not have been able to finance the political campaign of his party (including Lazarus) at the last election.

Company news – Woodside Petroleum (WPL)

WPL announced its annual results yesterday. I’ll leave it to the professional analysts to pick over the rather boring and predictable set of numbers therein.  The other key snippets we took from the results were:

  • Browse LNG is going nowhere for a long time – it was barely economic at much higher oil prices and the requirement that it have a positive NPV at current oil prices means it cannot reach FID anytime soon (or ever).
  • Kitimat LNG is a very long dated project at present.
  • WPL’s very gassy portfolio is only getting gassier – there are very little oil prospects in its inventory.  This is typical globally across Majors and independents.

Company news – Shell

The Shell takeover of BG finally officially closed this week.  In Australia that means more job cuts – particularly in Queensland.

Industry insiders will closely observe whether such cuts are made by merit – or, as expected, that existing Shell employees will do better than ex-BG staff.  Third party consensus in Queensland is that BG’s operations there have been head and shoulders above Shell’s.  If the better team is gutted – that will likely mean future expansions of LNG projects in the State will be harder to make.

Quote of the day

From Morgan Stanley analyst Martijn Rats:

“In commodity price downturns, oil companies tend to do four things: cut costs and capex, sell assets, borrow money and issue dividends in scrip. When downturns are not too protracted, these measures do little structural harm. At their nadir, these cycles typically prove attractive opportunities. However, we now forecast oil prices to stay below $35 to mid-2017. This means the downturn is at risk of moving into a different regime, one that hollows out asset bases which become too weak to service debt and dividend burdens that ultimately become too high.”

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