Today’s Blog – Wednesday 19th October 2016

Editorial

The two main bull factors in the oil market at present are the upcoming OPEC meeting in November – at which all industry observers hope the promises of some sort of production cut will take tangible form – and the, in our view, far more important inventory “numbers” trend.

The latter is illustrated well in the following chart (taken from well known US based industry blogger Art Berman):

berman_oct16

This very effectively shows that the market is now in balance – i.e. supply and demand are the same – with a downwards trend towards a negative balance that will chew through inventory balances if it continues.

Another US sourced graph – from Houston based industry bankers Tudor Pickering Holt (TPH) (who have not always exactly agreed with Art Berman…) emphasises this point about inventory numbers:

tph_graph_oct16

Over the last few months the crucial US inventory numbers have demonstrated a strong downwards trend – in contrast to the normal seasonal performance.

If OPEC was to actually follow through with its proposed cuts, the effect of that together with the already demonstrated market supply/demand dynamics will dramatically cut through excess inventories.

Result – potentially material price rises in 2017.

However, we do not put a lot of faith in OPEC actually delivering cuts. The more realistic question is – can the outcome of the meeting be presented as OPEC will do enough to persuade market sentiment, rather than physicals – then eventually inventory cuts will come to the rescue anyway.

This picture is really too soon to factor in the massive capex reductions made by the industry in the last two years (let alone the lack of much exploration for the longer term) – they will kick-in in the “medium” term – absent “disruption” (see below) – and its hello! $100 oil again.

Then the whole cycle starts again –  and this time, echoing the following US bumper sticker, we are confident that the motto of all our readers – and ourselves – will be:

banner

Commodity prices

Crude prices traced down less than 1% on Monday and then were up about the same amount yesterday, with Brent closing at US$51.77 and WTI at US$50.38.  The market seems to be in a semi-holding pattern waiting for the OPEC meeting and reacting to news items in connection therewith such as the Iranians saying on Monday (and we paraphrase): “cuts? oh you mean the cuts that other people will do, our production is increasing”.

Henry Hub has also been fairly flat so far this week, closing yesterday at US$3.26.

LNG and international gas

We love nothing more than an optimistic international pipeline venture – and the most optimistic in the world at present must be the “plans” to ship Russian gas to India, via such receptive transit nations as Pakistan or directly over Mount Everest, etc.

Shipping costs alone are estimated to be around US$10 per mmbtu – or nearly twice the current LNG spot price.  A lesser shipping cost has been quoted – if transit nations were to waive any charges…..thanks Pakistan, Kazakhstan, China, Nepal, etc, etc!

Disruption

We have recently quoted views from BP and BHP which stated that were no expectations inside those companies of electric vehicles materially reducing petroleum demand (but Mandy Rice Davies anyone?).

An interesting counter-point to these sanguine views recently came from Citibank’s head of energy strategy, Seth Kleinman, who was quoted in today’s Australian Financial Review as saying:

“We are in the early stages of an utter transformation of the energy business from a commodity business to a technology business…..Technology changes at a much faster rate than commodity businesses do……[EVs are] a next decade story”.

Company news – Quadrant Energy and Carnarvon Petroleum (CVN)

Exploration is not yet dead in Australia.

PE owned Quadrant and ASX listed CVN have just made what appears to be highly promising discovery in their Roc-2 well in the Carnarvon Basin.  Flow tests have produced up to 50mmscfd of gas and 3mbopd of condensate.

And the photo of the flare in CVN’s ASX is a doozy! CVN is up 35% so far today.

Quote of the day

Veteran oil industry analyst Philip Verlerger recently published an article called “Oil: An Ossified Industry”, which described the negative consequences for the industry from the competition from the sorts of disruption noted above:

“Three forces threaten to permanently transform the oil industry from riches to ruin: technical change, shifts in consumer preferences, and innovation.”

 

 

 

 

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