Today’s Blog – Wednesday 23rd March 2016

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Introduction

Yesterday we mentioned the increasingly popular topic of the potential “missing barrels” in the world’s oil system.

These barrels are the difference between reported production, consumption and changes in OECD inventories.  In order to balance these numbers out, around 800,000 bopd are a non-attributed rounding item.

Bulls believe this rounding item is an over-statement of production (which uses various sources in the world – from the good but a few months late in the US  – to the bad from estimates from the Middle East based on e.g. tanker movements).

Bears believe the difference is largely as a consequence of the missing barrels going into non-OECD storage or un-recorded tankers.  Morgan Stanley issued a client note a few days ago which basically made this case – with the likes of China’s strategic petroleum reserve (SPR) being the likely largest inventory sink.

However, tanks have tops even outside the OECD – and arguably the tanks are much smaller to start with.  Plus, as we noted a few weeks ago, China’s latest five year plan is deferring further SPR construction.   And, the ship-storage contango numbers do not support the economics of missing barrels on boats.

The Case of the Missing Barrels is, in our view, a better platform for current oil prices than the hope that next month’s OPEC/Russia meeting in Doha will lead to a meaningful supply curtailment program.

Commodity prices

Like most internationally traded markets yesterday, the trade in crude had a close eye on the latest terrorist outrages in Europe, but ultimately concluded they had little impact.

Brent finished up slightly at US$41.72 and WTI dipped a bit to US$41.29.

Pre-Easter holiday trade-room torpor arguably had as big an effect as these “events”.

Henry Hub climbed 3% to close at US$1.86.

LNG and international gas

Recent news about the growing sea-trade in ethane shows that LNG is not the only internationally liberalising petroleum product.

Global chemical company Ineos has commissioned three ethane vessels with a primary aim of moving ultra-cheap US ethane to petrochemical plants in Europe and cargoes are now moving.  Ethane’s liquefaction point is much higher than methane’s (at about minus 100 degrees) and accordingly this venture – although much smaller in scale than LNG – is not as capital intensive.

Historically petrochemical processes requiring material ethane inputs have located where the ethane is.  Now more options have opened up – and international ethane prices should start to converge.

Ethane users in e.g. Sydney will no doubt be taking note – particularly in the context of rapidly depleting Cooper Basin ethane reserves. Whether the new owners of the “low risk infrastructure asset” that is the Moomba-to-Sydney ethane pipeline are also taking note is less clear.

Governments, fracking, etc

As we noted yesterday, Santos (STO) has just “let go” its Vice President in charge of its New South Wales coal-bed methane assets.  We consider it distinctly likely that this is an initial move in the company exiting these assets altogether (hopefully obtaining a small consolation cheque from the Government when doing so), or at best moth-balling them.

That would leave the State’s NIMBYs pleased with their victory in removing all material petroleum production from within their borders.  But in the medium term this may not please those myriad parties who actually find gas to be kinda useful in running businesses and heating homes, etc.

Company news – Woodside Petroleum (WPL)

WPL has made an announcement today which will surprise no-one who has observed the current very long state of LNG markets – the decision of the Browse joint venture not to take the project forward (at this time anyway).

WPL’s growth cupboard is pretty bare – and this formal acknowledgement of Browse’s ultra long dated reality will presumably put some further pressure on the company to make asset and/or corporate acquisitions.

Company news – Cooper Energy (COE)

COE has announced today that it has entered into a binding Heads of Agreement for gas sales from its offshore Victoria Sole asset with major gas buyer AGL.  The sale is for up to 53 PJ over 8 years – with options on additional volumes from the more troubling BMG neighbouring asset.  Naturally price was not mentioned.

The involvement of AGL in COE’s project should provide encouragement to smaller gas buyers to enter into similar deals.

We consider that COE’s JV partner in Sole – Santos (STO) – will not see it as a core asset under its new CEO.  This provides an obvious opportunity for COE – but a challenging one to take up given the difficult funding environment for the E&P industry – and its existing plans to obtain cash for its share of the development through some sort of sell-down.  A buy-more-to-sell-down-better plan could work for it – if it can juggle nimbly enough.

Quote of the day

Although we are at risk of having this blog renamed The Donald Observer, we thought the following quote from Australia’s ex-ambassador to Washington, Kim Beasley, was important given the plans of the next potential President to basically surrender the Western Pacific (eek – that’s where we live!) to China:

“who the Americans elect is not the business of foreign ex-ambassadors, but the calculation of the impact on relations is”.

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