Today’s Blog – Wednesday 27th July 2016

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As the oil price continues to recede (see below), we note a somewhat bizarre story that emerged last week from the foundation stone of international crude markets – the Kingdom of Saudi Arabia.

This was in the first instance a report that the religious authorities in the country had renewed a fifteen year old religious Fatwa against Pokemon – in light of the current craze for Pokemon Go that is sweeping Australia, the US and other parts of the world.

Apparently the game promotes evils such as gambling – and even the theory of evolution! (I wonder where all the oil under the ground comes from….?).

The next day, some KSA authorities denied that this Fatwa had in fact been issued.

This rather minor story itself illustrates two competing urges in the Kingdom.  On the one hand modernisation and yearning to join the rest of the world – as embodied by deputy Crown Prince and de facto leader, Mohammed bin Salman (“roll up, roll up, buy your Aramco shares here – trust me on reserves!”).  And on the other hand, the continuing power of extreme Sunni-ism and the medieval nature of the world’s swing crude producer.

The Saudi Game of Thrones continues to be very opaque and this sort of story in its own way reflects major tensions behind the scenes that in some scenarios could erupt in ways that would be highly disruptive of oil markets.

Commodity prices

Well it certainly seems prescient that US$50 was the “anti-goldilocks” price that would encourage e.g. US rigs to come back on and then smash the price back down again.  The last two days have seen further ongoing falls in the crude price, which is now un-nervingly moving down towards US$40.  Brent closed at US$44.58 and WTI at US$42.67.

The rig count is still tiny compared to its peak – recent weeks have seen 53 of the 1,291 with-drawn rigs added back into service.  But it is the vibe of renewed activity – and high gasoline inventories in particular – that is worrying the market.

And unlike recent months, there is a distinct lack of “events” for bulls to hang their hats on.  That too shall pass though.

Henry Hub has also slipped a bit this week, closing at US$2.70.

LNG and international gas

We have recently commented on moves in Japan to remove “destination” clauses in LNG contracts.  Now we have seen a move by Indian LNG buyer Gail to use an “origination” clause in an LNG contract to seek to re-open its pricing terms.

Under an LNG purchase contract with Gazprom, Gail was supposed to be supplied with gas from the massive Arctic Shtokman but will instead get gas from its broader supply portfolio, including from Putin’s more favoured Arctic LNG project at Yamal.  Not in accordance with the contract says Gail – but if you reduce the price then we might be able to take your gas….

This is another move driven by the Indians and Japanese in particular at present to re-open LNG supply contracts through multiple means – in our view that tends to happen in commodity markets when contractual and spot prices have large discontinuities.

Company news – AGL

AGL today announced the formal entering into of a partnership with fund manager QIC to build a renewable energy fund of up to A$3B.  AGL will put in A$200M of equity and QIC A$800M.  This will be levered up threefold by debt on a project by project basis.

AGL will aim to make money in multiple ways from this fund: sell existing renewable assets; develop and sell new ones; provide project management and operating services; offtake electricity and renewable credits; etc.

There is not exactly a geared up A$3b fund looking to invest in Australian oil and gas ventures at present…..More like A$3.

And globally 2015 apparently saw more money go into renewables than the fossil fuels sector.  When one compares their comparative sizes, the un-relenting depletion factor and the limits to renewables growth rates – then an energy sector crunch becomes pretty much pre-ordained.

Quote of the day

Renewables were apparently gaining the upper hand back in 1974 in the James Bond movie, The Man with the Golden Gun:

“Coal and oil will soon be depleted, uranium is too dangerous, geothermal tidal control too expensive….Can you feel the stakes rising Mr Bond?  Hence the importance of the Agitator, described by Q as “the essential unit to convert radiation from the sun into electricity on an industrial basis!”




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