Today’s Blog – Monday 29th February 2016

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Introduction

Elections held in Iran on Friday appear to have delivered strong results for the reformists led by President Rouhani (counting is not yet over).  This should allow the country to pursue economic liberalisation with less opposition and give Iran’s undoubted prospects more breathing room.

The Australian Financial Review (AFR) stated today that “it is not clear if the election results could affect Iran’s willingness to agree in talks with OPEC and non-OPEC producers on a proposed output freeze to prop up crude prices”.

In our view, Iran will strongly pursue its own interests in oil markets irregardless of the political stripes of its governors – which means it won’t agree to freezing production at levels well below its capacity whilst the Sunni Gulf States and Russia produce flat out.

Accordingly, we don’t think crude prices will benefit from any medium term fillip as a result of the election.  Indeed, Rouhani may have to push even harder on this front in order to demonstrate his credibility to the wounded – but still powerful – conservativ elements such as the Supreme Leader and the Republican Guards.

Commodity prices

Crude finished fairly flat on Friday, with Brent closing at US$35.10 and WTI at US$32.78.  Over the course of the week, the overall direction was up, with rises of 6% for Brent and 11% for WTI.

BHI’s rig count issued on Friday continued to show declines (albeit at a lesser pace than the previous few weeks).  Oil rigs were down by 13 to 400 and gas rigs notched up 1 to 102.  Circa 500 rigs operating in all of the US is a pretty low number by any historical test.

Low oil prices continue to damage the economic prospects of companies and countries alike.  Last week the credit rating of Saudi Arabia fell a large two notches in one go.  Higher cost producers will not avoid ongoing credit reviews as oil prices persist to trade in the low US$30s.

At the individual employee level, another round of service sector carnage has started – with Halliburton last week announcing 8% of total positions (5,000) would go.  No doubt the rest of the sector will follow this soon.

We consider that these types of actions will make it much harder for US shale oil production to bounce back as some such as the IEA consider likely, even when prices recover.  The capabilities of the sector are being damaged and will not be instantly fixable in brighter times.

Henry Hub was flat on Friday (and over the week), closing at US$1.79.  The 2015/16 US winter is one of the mildest for the last 10 years and this is driving current natural gas markets.

LNG and international gas

Tudor Pickering Holt (TPH) suggested on Friday that Petronas’s FLNG project over the Rotan field (in JV with Murphy) will be delayed, notwithstanding its prior FID.

This demonstrates the high level of stress the current glut on the supply side is putting to bear on the LNG industry.

Additionally, no doubt the ongoing turmoil in Malaysian politics induced by the “Father Ted” behaviour of Prime Minister Najib Razak (“that money was only resting in my account!”) means that Petronas will wish to keep its head down, husband its fiscal resources and delay even sanctioned expenditure.

Company news – Woodside Petroleum (WPL)

News reports last week indicated that WPL was continuing to progress its efforts to develop a US liquefaction business – in partnership with California’s Sempra Energy over a project at Port Arthur, Texas.

In our view, it will prove challenging for WPL to obtain third party commitments to enter into long term take or pay commitments over new liquefaction capacity in the US, so this seems like a pretty long dated option for the company.

Company news – Beach Energy Ltd (BPT)

It was BPT’s turn to issue its half year results last Friday.  It suffered a A$634M write-down – mostly in the Cooper Basin.

Given the extent of the write-downs recently taken in the Basin by the likes of BPT, Santos and Origin Energy (ORG), the remaining gross book value there is getting pretty skinny.  The upcoming sale by ORG of its Cooper assets will soon put out a market value for the heartland of the Basin at least, which we expect will support this skinniness – or worse.

Quote of the day

The ability to make pithy quotes does not stop south of the Rio Grande, as captured by the following view from ex-President Vicente Fox:

“I’m not going to pay for that f**king wall!”

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