Today’s Blog – Tuesday 31st May 2016

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Around a week ago the Australian Government’s Bureau of Meteorology called the end of the recent El Nino and the likely start of its counter-vailing Pacific weather system – La Nina (“the girl”).  Both weather systems are complex and have numerous potential global consequences.

The most interesting from an oil and gas perspective is the likely replacement of the very mild El Nino induced US winter weather just experienced with something potentially much colder.

US gas prices are struggling around the US$2 level at present, notwithstanding falling production and a very low rig count – due to larger than normal inventories overhanging the market.  However, when “normalised” to more average weather conditions, the US gas market is arguably short – and on the demand side is now increasingly selling into international markets (by boat and by pipeline) as well as the domestic one.

So a La Nina induced cold US winter 6 months from now could rapidly deplete gas inventories and send Henry Hub spiralling upwards – with implications not only for the US – but also for international gas markets – both those now directly contractually linked to Henry Hub and also those who take a cue therefrom.

Australian LNG suppliers will therefore be hoping La Nina puts some lipstick on their girly gas (excuse this laboured effort!).

Commodity prices

WTI did not trade in the US yesterday and Brent had a fairly quiet day, closing up just less than 1% to US$49.76.

The upcoming OPEC meeting on Thursday provides the context for the following recent quote from Citigroup’s Seth Kleinman:

“It might not look a victory compared with when oil was $100 a barrel, but the Saudi strategy is working as you’ve got significant production declines showing up in a lot of places, and prices are grinding higher.”

Although US production has declined since the infamous OPEC meeting of November 2014, it has done so by less than 1 mmbopd.  Compare this with recent declines in the OPEC countries of Nigeria, Venezuela, etc – which currently total around 3.5 mmbopd.  That is, the Saudi strategy has a direct causal link with major problems in its OPEC brethren – that are arguably getting worse.  This does not seem like a victory to us.

Henry Hub also did not trade yesterday.

LNG and international gas

Cheniere Energy is doing its bit to support our “Henry Hub is going to rise” thesis noted above – the second train at its Sabine Pass liquefaction facility is expected to start delivering cargoes in August.

And on the demand side, Poland will add itself to the list of LNG importing nations in June (why so given the large amounts of pipeline gas for sale from that friendly country somewhat to its East….?).

Company news – Oil Search (OSH)

The media reported today that OSH is currently addressing some regulatory issues from PNG’s competition authority – the ICCC – over its planned acquisition of InterOil.

Although such institutions can have minds of their own sometimes, we are confident that OSH’s strong support from the PNG Government will render this issue as only a box ticking exercise.

Quote of the day

The Economist this week reviewed a new book on how Shell took on incumbent Standard Oil around a 100 years ago. (Breaking Rockefeller: The Incredible Story of the Ambitious Rivals Who Toppled an Oil Empire – Peter Doran).

The following quote provides a tip to new energy industry aspirants – that good old vigorous capitalism rather than seeking Big Brother’s support is what is required to succeed:

“But if Royal Dutch Shell’s challenge to Standard Oil is any lesson, companies that develop alternative forms of energy will only become true challengers to Big Oil with guts, greed and better technology.”

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