Today’s Blog – Monday 11th July 2016

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Over the last year or so the oil industry has become increasingly familiar with an avian overhang hovering over the oil price – DUCs (drilled but uncompleted wells) in the US.

The likely true impact of these is a matter of keen debate – between those who see them as a large source of new supply that will be turned on in the next year or so, hence acting as a cap on crude prices – and the more cynical elements who believe they act as a way for companies to book lower quality reserves that will not be produced anytime soon, as doing so might demonstrate they are in fact contingent resources.

Another quite different type of duck is also emerging as a driver of gas markets.  This duck is the changing shape of daily electricity demand in locales with strong renewables (and solar in particular) penetration – such as Australia (where solar is still rapidly increasing – now at the industrial as well as household level) and California.

The following graph representing California’s duck-shaped changing daily electricity load shape illustrates the rapidity of the change:

Duck calif

The consequences of this change for the gas industry is that its traditional daily demand shape is now quite different.  Zero marginal cost renewables will push out the use of gas-fired generation from the middle of the day into the evenings in particular.

Supplying flat load gas (for electricity generation) will therefore be increasingly ill-fitting with the demand for gas – putting a premium on the suppliers of short term energy capacity services such as underground gas storage facilities, the hoped-for large scale battery technologies, etc.

Commodity prices

Crude prices on Friday recovered somewhat from Thursday’s rout, with Brent and WTI both up ~1% to close at US$46.74 and US$45.41 respectively.  However, over the course of the week they both fell by ~7% – the worst weekly performance in 6 months.

Good US jobs data helped the bulls on the day – and managed to overcome another bearish weekly BHI rig count, which had oil rigs up by 10 and gas rigs down by 9.

Henry Hub’s strong recent performance is clearly not (yet) bringing back many gas rigs.  The indice closed up ~1% on Friday at US$2.80 (but was also down ~6% for the week).

LNG and international gas

Shell is continuing to build upon acquired company BG Group’s strong LNG position in Singapore – last week it formally committed to a joint venture with the Island nation’s ship-building, etc, group Keppel Corp over a LNG bunkering operation there.

Singapore continues to build its position as the Asian hub for LNG – physically and trading wise.

Governments, fracking, etc

Australia now has a Government.  But will it be able to govern?  Not if doing so means going against the primary policy of all the small parties in the Senate – namely that they are for spending but against paying for spending.  However, a smart executive should still find ways to do things.

The implications for the oil and gas industry of this formation of a new Federal Government are not likely to be that material (Queensland based operations should however watch out for State based consequences of the re-emergence of Pauline Hanson as we noted last week).

But the chances of said Government actually doing something smart like Singapore is doing with LNG is sadly low.

Company news – BHP

BHP’s CFO noted in an interview in today’s Australian Financial Review (AFR) that it had been harder than expected for it to find high quality but cheap assets to acquire in copper and oil markets in recent times.  You don’t say!

Every other cashed up company (and private equity fund, etc) has had the same strategy – and owners of such assets have been able to keep owning them through the tough times.

It is only in the hyper-stressed sectors such as coal – where companies are going into administration and there is a genuine fear of long term secular doom – that the real bargains are available.

Company news – Elixir Resources (EXR)

At the rather smaller end of the market from BHP, micro-cap EXR announced on Friday that it was going into a trading halt prior to announcing a re-capitalisation and consolidation exercise.

This appears to be signs of yet another junior leaving the sector – the good brokers of Perth have no doubt found a high quality technology business to insert into the EXR shell and ramp it, er, we mean support the development thereof over the long term.

Quote of the day

A quote about Nymex traders which is currently equally apposite for the wider oil and gas industry:

“A friend used to say, ‘If I weren’t trading gasoline, I’d be pumping it’. Well, some of them are.” –  Raymond Carbone of Paramount Options

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