Today’s Blog – Tuesday 8th March 2016

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In a recent article on the growing political crisis in Lebanon (question – when was the last time there was actually stability and peace in the region – an early book of the Bible, if then?), The Economist brought together two of the favourite themes of this blog, The Donald and the KSA:

“Saudi Arabia sometimes acts with bombast and violence that makes it look like the Donald Trump of the Arab world” – Rami Khouri of the American University in Beiruit.

The un-decision of Saudi Arabia’s new leadership to not cut production at the November 2014 OPEC meeting is arguably analogous (in hindsight naturally) to The Donald’s famous plan to build a wall between Mexico and the US – and get the Mexicans to pay for it.

That is, the KSA decided to effectively kill the oil price and get “American shale” to pay for it.

Now private sector US oil companies are not doing that well just now, but the overall US economy (in which petroleum is only a small part unlike some other, sandier, places we can think of) is doing well.  Meanwhile, the KSA spent around US$15B of its rapidly diminishing sovereign wealth fund in one month in February.  So a lesson for The Donald if he becomes President – don’t do stupid things with the view that “someone else” will pay for it…..

Commodity prices

Crude markets are currently a Club Med holiday camp for incorrigible optimists, with yet another steep rise over-night, not driven by anything of substance other than a view that those nice, reasonable and honest people at OPEC and Russia might actually do something on the supply side in coming weeks.

Brent closed up ~5% to close over US$40 at US$40.98, whilst WTI also rose ~5% to close at US$37.88.  Incredibly oil prices have risen nearly 50% already since their lowest (intra-day) price this year.

Well known oil market commentator, Art Berman (somewhat less of a bull than the likes of the Nigerian Oil Minister – or indeed Daniel Yergin – who we quoted yesterday) demonstrated his disdain for the market at present through a recent Forbes article.  His key point:

“Oil prices should fall, possibly hard, in coming weeks. That is because fundamentals do not support the present price.”

HIs thesis is centred on the measurable – inventories – not what OPEC might do.  Of course “events” (as always) can come to the rescue of the bulls, as arguably has been the case recently with not only the endemic problems in Libya, but also material supply disruptions from Kurdistan and Nigeria caused by pipelines being cut.

A recent development that harms the demand side of oil markets in the medium term has emerged from China’s new 5-year plan.  This has pushed out the construction timing of the country’s strategic petroleum reserve (SPR), the filling of which has provided a reasonable additional source of demand over the last year or so.  In the longer term, the planned Chinese SPR is still well below the US’s in capacity (for a country that is far more vulnerable to oil supply shocks) – s0 we expect PRC SPR construction to continue for quite some years yet.

Henry Hub had a rare good day yesterday, closing up ~1% to US$1.69.

LNG and international gas

Reuters reported late last week that Asian LNG spot prices have continued to fall, with deliveries now being priced at US$4.30.

For the more expensive Australian LNG projects, that sort of number pays-back liquefaction and pipeline costs alone, with effectively zero being netted back to the gas-fields.  No doubt this leaves a lot of scope for arguments with Governments (and any private royalty owners) as to the meaning of the “wellhead value” upon which their royalty cheques should be based.

Company news – APA

The Pacman of the Australian energy infrastructure space, pipeline (and other stuff) group APA, announced yesterday an agreed takeover for listed asset owner, the Ethane Pipeline Income Fund  (EPX)- for A$130M.    EPX owns one asset – an ethane pipeline (who would have thunk it!) from Moomba to Sydney.

Infrastructure assets are extremely popular at present given their apparent financial similarity to bonds.  However, the value of EPX is highly dependent on how much ethane remains in the Cooper Basin to be delivered to Sydney.  So APA shareholders are taking reserves and even exploration risk, whilst paying for a bond.

The size of APA’s overall asset portfolio should balance out some winners and losers, but if interest rates rise materially, we would expect many infrastructure companies to demonstrate the old adage that it is only when the tide goes out do you get to see who is not wearing any swimming trunks.

ASX stocks generally

The Australian Financial Review (AFR) today contained an article outlining how many Chinese companies have sought ASX listings in recent years, mostly to the detriment of shareholders who have invested in them.  The AFR says:

“Cases like Sino [a failed Chinese ASX IPO where the Chairman tried to transfer all of the company’s money out of its bank account – no doubt taking a note from the playbook of certain Asian Prime Ministers we can think of] are adding to concerns among regulators and professional investors that some Chinese companies that have or are seeking Australian share market listings don’t meet Australian probity standards.”

Have these people never looked at the purer-than-the-driven-snow ASX small cap resource stocks promoted from say West Perth (to name a location purely at random)!?

Quote of the day

From the recently departed Nancy Reagan:

“For eight years, I was sleeping with the president, and if that doesn’t give you special access, I don’t know what does!”


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