Today’s Blog – Wednesday 6th April 2016

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Last week witnessed an “event” in the automobile industry that could have long term repercussions for the upstream oil industry – Tesla’s launch of a its new electric car – the Model 3.  In the first 2 days since launch nearly 300,000 vehicles were ordered – a number similar to the annual sales of America’s most popular models.

The media has focused on what this means for the traditional auto-makers.  However the question is also begged as to what it means for the long term demand for the most important crude oil products, gasoline and distillate (the latter might be more protected from electric vehicles at the industrial end – but there it is more vulnerable to LNG and CNG).

Of course electric vehicles need electricity, and here natural gas has a very substantial role – and arguably a growing one due to its clean burn at both local (particulate) and global (CO2) levels.

Demand for something as large scale and as ubiquitious as gasoline (with trillions of dollars of sunk costs) is a slow beast to change – but revolutions do happen – and as evidenced by the rapid and unexpected penetration of roof-top solar in Australia, can leave traditional energy suppliers flat-footed or even broke.

Commodity prices

Crude bounced back from recent falls overnight, with Brent closing up ~2% at US$38.27 and WTI up ~3% at US$36.56.  Some pretty soft words from Kuwait’s OPEC representative about Doha delivering a freeze were seized upon by the bulls.

This market seems to want to get to the “medium” term as soon as it can, without taking any more low price licks that the pessimists such as ourselves think are still due.

Henry Hub fell down from the $US2 mark overnight, closing at US$1.94.  We would like to think at least some of this is driven by news that the Panama Canal is restricting access to large boats (due to El Nino drought effects) and that this would reduce the ability of the likes of Cheniere Energy to make more sales to Asia using large LNG carriers – but as yet Henry Hub is not traded with an international view-point, only an American one.

LNG and international gas

Pacific LNG spot prices continue to fall, with US$4 now being seen in some North Asian deals.  Ouch! – arguably no-one, not even Qatar, makes much of a return at those prices (on a full cycle basis anyway).

Qatar is meanwhile ramping up its share of growing markets in Europe such as Holland, which doubled its LNG demand in 2015 – almost all of which was supplied by the Qataris.  The concept of market share capture and defence is not unique to the Saudis in oil markets.

Domestic gas and pipelines

As we noted yesterday, the developers of the new NEGI pipeline connecting the Northern Territory and Eastern Australia are taking a lot of risk for this type of infrastructure development.

This was further illustrated by a quote in today’s Australian Financial Review (AFR) from Central Petroleum’s Richard Cottee (who always delivers great quote), who pointed out the weakness of the commercial position that Jemena had created for itself by FIDing before contracts were struck:

“Once it was committed to be built, then neither the customers nor ourselves saw any reason why we had to compromise our commercial bargaining position on an artificial deadline when delivery was not going to occur until 2018”.

Service sector

The interminable acquisition of Baker Hughes by Halliburton (originally announced nearly 18 months ago) might finally have hit the rocks of US anti-trust actions, suggest recent reports from the States.

The distracting efforts put into this by the two merger parties have no doubt left arch-rival Schlumberger in an even stronger position than normal.  The anti-trust blocking of the merger may thus have left the sector’s behemoth in an even stronger market power position.

Quote of the day

With all the colourful texts flying around the US Republican Primaries, the following from Elon Musk is rather tame, but is reminiscent of “we’re gonna need a bigger boat” of Jaws fame (and hopefully for the oil industry that Great White is not coming for us too soon):

“Definitely going to need to rethink production planning.”








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