Today’s Blog – Wednesday 27th April 2016

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Introduction

Late last week Saudi Arabia’s de facto leader, Deputy Crown Prince bin Salman, made a wide ranging announcement about sweeping changes that he planned to introduce into the Kingdom to try to reduce its oil dependency.  This included the previously foreshadowed plan to IPO ~5% of Saudi Aramco – which was said to have a total enterprise value of ~US$2 trillion dollars.

We remain somewhat sceptical about the level of disclosures on reserves that will be made as part of this plan (if that it, it goes ahead – the current Saudi Game of Thrones is only in series one).

However, we can only applaud bin-Salman’s efforts in what must be pretty difficult cultural and political circumstances.

The Prince claims that by transferring the rest of Aramco to be managed by a more independent sovereign wealth fund that this will somehow reduce the Kingdom’s oil exposure.  That will be true if much greater sell-downs are made in the future – but would that be politically acceptable?

If we are right in our general thesis that oil markets will rise dramatically upwards in the “medium” term, then selling down more of Aramco at that time would make a lot of sense.

However – it would absorb a lot of the world’s capital markets’ allocation of dollars towards energy – and therefore could presumably make it tougher for others seeking equity from those markets at the same time.

Commodity prices

Crude oil prices rose ~4% overnight, with Brent closing at US$46.37 and WTI at US$44.66.  The latter is the highest price for WTI in 2016 to date and represents a ~70% increase from its February low point.

The price rise appeared to be driven by two main factors – a depreciating US dollar – and remarks from BP’s CEO, Bob Dudley, who appeared to have reversed his previous “lower for longer” mantra with the widely quoted:

“Market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year.”

A recent statement from another oil company – Permian specialist Pioneer Natural Resources – had less good news for oil markets – it announced that a US$50 oil price would see it increase drilling again.  One could take this with a grain of salt – the leaders of US independents are not known for being shy and retiring types – but if capital markets fund this more widely (a big if in our view), then it will add to supply sooner than we would otherwise expect.

Meanwhile over in our neck of the woods, Indonesia’s OPEC representative (note to Jakarta – Indonesia is an ex oil exporter and now a large importer) recently made some comments about the proposed oil price freeze – saying that he would like to see higher prices first.

It is almost charming to see this strange attitude of denying the reality of a net import balance, declining production, less foreign investment, etc – these can all be forgotten about through the stroke of a pen membership application to OPEC.

Henry Hub fell ~1% to US$2.03.

LNG and international gas

The first Gulf of Mexico cargo of LNG to Europe should be delivered soon – to Portugal.

At the same time, the FT reports that exports by pipeline to Mexico are increasing (and suitable design tolerance is hopefully being built in to deal with a certain Presidential candidate’s wall up above said pipes).

The Henry Hub price is arguably being held back in the face of these fundamentals by the lasting gas storage impacts of a very mild US winter.  If and when this inventory is burned down – then the price response should be interesting.

Company news – Exxon (XOM)

Recent bad news for the daddy of the oil patch – S&P has downgraded its debt rating from the very rare AAA to AA+.

This is the first time since 1930 that XOM has not held an AAA rating – which presumably tells us something about the depth of the current oil patch woes as well as the XOM specifics of a declining reserve replacement ratio and higher debt used to fund buy-backs and dividends.

Company news – Woodside Petroleum (WPL)

WPL’s credit rating was also recently downgraded (by Fitch).  Again a key factor behind this was the utilisation of cash to pay high dividends, with balance sheet strength being traded off accordingly.

Company news – Beach Energy (BPT)

BPT released a bullish corporate update this morning, providing updated guidance of a full fiscal year production increase as well as greater than anticipated cost savings following its acquisition of Drillsearch Energy.

We take the latter figures light heartedly – no external party ever sees the spreadsheets used to support such numbers – and usually there is an incentive to report the best number possible.

Quote of the day

As we have noted a couple of times recently, the Vampire Squids appear to have also joined the well paid Bob Dudley in changing their minds on oil markets, as illustrated by the following quote:

“The sentiment in commodity markets has clearly shifted toward being more bullish.” – Jeffrey Currie of Goldman Sachs

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