Today’s Blog – Monday 17th October 2016

Editorial

For much of this year we have been repeating the thesis that US$50 is the “anti-goldilocks” oil price – enough to induce more activity but not enough for the industry to “get well” again.

The primary causal factor underpinning the theory is captured very well in the following cartoon that was published last week:

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The US oil patch has good and bad aspects for the sake of this thesis:

  1. On the one hand it is under-pinned by dynamism, optimistic capitalist drive, can-do efforts and risk-taking.
  2. On the other hand it is under-pinned by dynamism, optimistic capitalist drive, can-do efforts and risk-taking.

With OPEC supposedly due to come to an agreement next month on cutting production (“please sir, you cut first, no I insist that you do so, kind sir”…ad infinitum) the question is being begged: was the last two years a massive OPEC-ian folly if its aim was to smash the still resilient US shale patch?  We think the question is wrong – OPEC did not have a finely honed strategy – rather it could not agree on a path and the outcome was one of default rather than choice.

But that does not change the outcome for the OPEC countries – a massive decline in wealth and an “opponent” in the US who is still trucking on.

Commodity prices

Crude prices were fairly flat post Friday’s trading (and over the course of the week), with Brent closing at US$51.95 and WTI at US$50.35.

The BHI weekly rig count had a rise of 4 oil rigs and 11 gas rigs (for the reasons why – refer to cartoon above).

US natural gas prices rose 3% last week (although had a decline on Friday itself) to close at US$3.28.  The EIA has just forecast a 10% increase in domestic gas demand as winter conditions are expected to revert to cooler conditions after last year’s mild winter.

International gas and LNG

The Russian and Turkish Governments last week announced progress on the sub-Black Sea Turk-Stream pipeline project.  In addition to supplying Turkey this pipeline is supposed to capture markets in Europe.

But the pipeline stops at the border of dynamic economy Greece.  So there is still some way to go before this (like many other international pipeline projects) becomes a reality.

Governments

South Australia’s opposition Liberal Party seems to have caught the socialist germs blowing over the border from their Western Australian supposedly conservative counter-parts.  Here they are not seeking to unilaterally change mining lease contracts – but rather are asking the State Government to take positions in coal-fired generation.

Laughable as it is, the position shows yet again how political “energy” is – usually from a position of utter ignorance.  South Australia no longer has any economically recoverable coal reserves following the exhaustion of the Leigh Creek coal-mine.

Unfortunately the State also has no economically recoverable gas reserves that have not been committed for sale elsewhere.  Recently the Government announced a program to spend A$24M to encourage diversity of gas supplies – but its mechanisms to do so are opaque (and this sum will  not go very far in the high cost Aussie gas patch).

Quote of the day

We recently came across some of Winston Churchill’s reporting in the immediate aftermath of the 1929 Wall Street Crash which we think illustrates that whatever the doubts over US dynamism are on the day, the sun will rise again:

“Under my very window a gentleman cast himself down fifteen storeys and was dashed to pieces.  No one could doubt that this financial disaster, huge as it is, cruel as it is to thousands, is only a passing episode in the march of a valiant and serviceable people who by fierce experiment are hewing new paths for man, and showing to all nations much that they should attempt and much that they should avoid.”

 

 

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