Today’s Blog – Tuesday 14th June 2016

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We only have time for a shorter-blog today, so we will put on hold our promise to dig deeper in BP’s annual energy review for another day or two.

“Events” currently un-folding around the world have varying degrees of relevance for oil markets.

  • For instance, next week’s Brexit vote – if as increasingly seems possible, results in a “leave” outcome (although our view is that leaving will not necessarily follow such a vote), should provide a large boost to the US dollar and weaken global growth expectations – which should then damage the oil price.
  • Terrorism in Florida is being brutally exploited by The Donald.  Like the possibility of a Brexit, markets will likely not factor in what is currently a fairly wild-card outcome – his election.  If however that increasingly becomes possible – then financial and commodity markets could react in all sorts of unpredictable ways.  The dollar would likely be smashed, boosting oil, but fears for an orderly world in which growth was best sustained would act the other way.

Commodity markets

Crude was fairly volatile last week – doing well early then retreating later on – but did finish up 1-2%.  Friday saw fairly large falls of ~3% as the weekly BHI rig count showed gains for a second week running (three oil rigs and three gas rigs).

Monday’s trading was fairly flat to negative with Brent closing at US$50.06 and WTI at US$48.88.

Henry Hub had a good week, up 7%, but yesterday only traded flat, closing at US$2.56.

International gas and LNG

The couple of very large floating LNG projects in Asia – the recently commissioned Petronas project off Malaysia and Shell’s Prelude project off Western Australia are in the view of some white elephants that will not set up a new industry model, as supported by the following apposite quote:

“At $15 and above you can do anything, so everyone went and did everything,” said Trevor Sikorski, a natural gas analyst for Energy Aspects in London.

We could add a few other LNG things that were done “at US$15 and above” – like pretty much all the recent liquefaction adds in Australia.

Governments, fracking, etc

Environmental groups in the UK are continuing the fight against onshore gas exploration and development (under the banner of being anti “fracking”), with legal action foreshadowed against a recent decision to allow activity to go ahead in Yorkshire.  This demonstrates our view that any developments in the densely populated and rich (although possibly less rich post a Brexit) UK will be minor at best.

Company news

Yesterday was a public holiday in much of Australia, so when combined with a general lack of activity anyway (one needs cash and a strategy other than “cut costs” for that), company news was thin on the ground.

Quote of the day

Will the following prediction prove to be correct if oil prices continue to hang around – or rise – from current levels?  US oil execs will want to drill – but will capital markets let them?

“You start to have producers come back at $50, but a lot of them come in at $60.”– Mark Watkins, the Park City, Utah-based regional investment manager for The Private Client Group of U.S. Bank



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