Today’s Blog – Monday 7th March 2016

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Introduction

The oil market has been quite perky over the last week or so – apparently driven by the bulls successfully hanging their (party) hats onto anything that looks positive and the bears not really getting a look-in, even when the “numbers” (primarily inventory related) are objectively bad.

In around 2 week’s time there is supposed to be scheduled a meeting of key OPEC players and the Russians – in Russia.  The Nigerians have been hyperbolic about this, with their oil minister Kachiwu saying that there will be a “dramatic price movement” and enthusing that:

“Both the Saudis and the Russians, everybody is coming back to the table”.

Well the Saudis might come to the table, but to us there seems little chance of al-Naimi reversing the position he bluntly stated at CERA in Houston recently and actually agreeing to production cuts.  Rather, the Saudi/Russian “freeze” (i.e. maintaining flat-out production) will continue.

Known for almost being as optimistic as the Nigerian oil minister, IHS’s Daniel Yergin sees light at the end of the tunnel (Woo-Woo!) this year:

“This freeze is really a bridge to the autumn, and the autumn is when you start to see the market more back in balance.”

We sincerely hope that he is right – and that the meaning of the “medium” in “medium term” is as short lived as that.  Our quick summary of the balancing forces:

The bull case: no spare capacity; the Middle East is a mess and not getting any better; US production declines to accelerate; Saudi summer in-country consumption not matched by a production crank-up; the Griswolds really get moving this driving season; – and of course the chance for “events”.

The bear case: DUCs; Iranian production increases; Libyan peace and an extra 1 mmbopd; ongoing “efficiencies” in the US; etc.

Too close to call?

Commodity prices

Crude prices finished a strong week (up ~10% overall in both London and New York) with Brent up ~5% on Friday to close at US$38.72 and WTI up slightly less (~4%) to US$35.92.

The drivers of the day were strong US jobs growth numbers (supporting demand) and on the supply side BHI’s weekly rig count numbers, which again showed a meaningful drop of 8 oil rigs and 5 gas rigs.

Henry Hub had a dismal week, closing down ~2% on Friday (down ~7% for the week) at US$1.67.  Gas inventories are nearly 50% above their “normal” level for the time of year.

LNG and international gas

A rare piece of good news from the demand side of LNG markets – Taiwan reported that its total demand in 2015 was 8% up year-on-year (whereas as we noted recently, demand fell in the core markets of Japan and South Korea).  Taiwan plans to phase out its nuclear power generation fleet and accordingly LNG demand should continue to grow there.

Company news – Woodside Petroleum (WPL)

The Australian Financial Review (AFR) contained a lengthy story on WPL’s operated Browse LNG project over the weekend.  This detailed a number of hurdles this project currently faces, not least the likely conflicting strategies and views of its various joint venture partners.

However the story did not mention the project’s biggest problem of all – one common to the other large greenfields LNG projects that are seeking sanction in locations from East Africa to Western Canada – a lack of the committed buyers required to underwrite the finance for a project.

Company news -LNG Ltd (LNG)

LNG today announced that it had extended its lease (for one year with another one year option) over part of Gladstone harbour known as Fisherman’s Landing.  LNG has long promoted this as potential site to host its bespoke liquefaction technology.

However, amongst other issues, LNG has no credible gas feedstock – and is in a State with other large and actually built liquefaction plants which are short gas.

Company news – Sundance Energy (SEA)

US tight oil specialist SEA recently received a speeding ticket from the ASX asking for reasons for its strong price rises.

The answer seems fairly clear to us – producers up at the high end of the cost spectrum (as US tight oil is) are the most highly leveraged to recent oil price rises.

Company news – Antares Energy (AZZ)

Another ASX listed player in US tight oil is “colourful” company AZZ.  Suspended from trading for some time due to disagreements with the ASX over disclosing details of a putative purchaser of its assets, it today disclosed this fact in an EGM notice for its convertible note holders.

The good detectives of on-line ASX chat-room, Hot Copper, have fired up their search engines this morning (including google maps streetview to check out the house of the CEO of the named purchaser) and have concluded that the buyer does not seem to have the deep pockets necessary to close a deal with AZZ.

Debt, low oil prices, distrust, etc, seem likely to combine in an unhappy ending for AZZ shareholders.

Quote of the day

Copied from this week’s The Economist, a quote from recently departed Aubrey McClendon celebrating the role of the landmen and deal-makers in the oil patch:

“Geologists and engineers were the important guys – but it dawned on me pretty early that all their fancy ideas aren’t worth very much if we don’t have a lease.  If you’ve got the lease and I don’t, you win.”

 

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