Today’s Blog – Tuesday 10th May 2016

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Introduction

Yesterday we noted that ~1 mmbopd of crude oil production was shut-in as a result of the wild-fires plaguing the Canadian province of Alberta.

Over-night we read two different numbers – both from reputable sources:

  • Houston based industry adviser Tudor Pickering Holt (TPH) reported in its influential daily note that the shut-in production was 1.6 mmbopd.
  • London based industry commentator “Malcy’s Blog” reported the shut-in figure as being 0.6 mmbopd.

This blog has often commented on the very poor (or even deliberately misleading) data that under-pins trading in the world’s biggest commodity market – crude oil.  However, that observation is normally primarily aimed at such centres of opacity as OPEC, Russia, etc.

When numbers about somewhere as well regulated and well known as Canada can be so wildly different, it shows up the wobbliness of the industry’s data-foundations even more.

Commodity prices

Crude prices fell fairly sharply overnight, with Brent down ~4% to US$43.52 and WTI closed down ~3% at US$43.24.

The bears seemed to conclude that the Canadian situation was not as bad as feared – and the worse than expected US job creation numbers released on Friday were factored into views on demand.  Also on the numbers side, a survey showed that inventories in the key location of Cushing had apparently built up last week by a material 1.4mm bbls.

Looking at the longer term, various media outlets have reported a recent study by US based consultants IHS that indicated that oil discoveries in 2015 had been the worse for 60 years – with only ~3 billion barrels added.  That is – around 3 months current crude consumption, or a R/P ratio of an utterly dismal 25%.

Henry Hub was flat at US$2.10.

LNG and international gas

Late last week Bloomberg ran a story about the medium term outlook for LNG markets – and in particular the likelihood of long term oil linked contracts being re-opened.

Bloomberg quoted London based advisers Energy Aspects, who echoed one of our key themes – that oil markets will tighten in the “medium” term – oil prices will accordingly rise – LNG contract prices will rise – but LNG spot markets will not rise due to their substantial long supply position.

Result – very unhappy buyers who will not take a “sanctity of contract” argument lying down.

Company news – Cooper Energy (COE)

COE has gone into a trading halt this morning, pending an announcement on a capital raise.   This will be first such raise for COE for many years, given its reasonable cash balance (generated from Cooper oil production and unusually not sprayed around in the boom times like almost everyone else).

The raise should put the company in a stronger position to supply the foundation equity contribution required to raise debt and structured finance over its flag-ship offshore Sole gas-field development, which it aims to FID later this year.

Company news – Origin Energy (ORG)

ORG’s CEO Grant King appears again in The Australian Financial Review today – talking about solar projects. So much more interesting than that ghastly upstream stuff that took his share price down from ~A$15 to A$5 per share!

Some points in the article are highly relevant for the future of domestic gas supplies in Australia (and indeed in many other locations).   ORG has recently entered into a long term PPA to buy solar power at a price of A$80/MWh.  That sort of price should make gas suppliers shudder – on a full cost recovery basis this is highly competitive with electricity generation CCGTs given current domgas pricing of ~A$8/GJ.

Gas in Australia is far from experiencing a glowing “bridge to a lower carbon future” period just now – rather it is being squeezed by a dumb-bell shaped supply side – with legacy but still cheap coal at one end and growing renewables at the other.

Quote of the day

As noted above, E&P companies in the boom years were not exactly known for wisely hoarding cash and building counter-cyclical capabilities (and CEOs would not have been rewarded for doing so – and had tenures much shorter than the cycle itself).

This phenomena reminds us of another quote from Warren Buffett at the recent Berkshire AGM:

“Having a full wallet is like having a full bladder, it gives you the urge to pee it away.”

 

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