Today’s Blog – Tuesday 8th November 2016


Most readers will be painfully aware that crude oil prices have fallen at least US$5 – or ~10% – in the last week or so.

Upon reflection, the magnitude of this fall can in fact be read as a sign of strong support for oil – as the cumulative negative affects of an almost “perfect storm” of bear-ish factors has been only this 10%.

Take the following:

  • Last week’s EIA inventory build numbers – the worst on record.
  • Public OPEC brawling – allegedly including the KSA saying it will increase production “pour encourager les autres”.
  • Rising production from perennial basket cases Libya and Nigeria.
  • More rising production from the North Sea (where historically high production seems to be almost inversely correlated with low prices).
  • An increasing oil rig count in the US.
  • Increasing chatter – even from Shell’s CFO – about peak oil demand as electric vehicle penetration potentially goes vertical.

With that list a US$5 fall seems a pretty good outcome – evidence perhaps of a strong floor in the market?  (That will put the mockers on…..).

Commodity prices

Crude prices followed pretty much every other asset class yesterday (ex-gold) – an upwards move as the probability of a Trump election seemed to diminish as the FBI indicated that Hilary’s emails were mostly of the “I thought the meeting was at 10am your time, not 10am my time” category.

Brent went up ~1.4% to close at US$46.21 and WTI was up ~1.8% at US$44.88.

Henry Hub was also up ~1.8% at US$2.82.

LNG and international gas

Reuters reported late last week that Japan’s LNG buyers, led by JERA, will use price review clauses in long term contracts to push hard not only on price but also on other terms – including term itself.  The report noted in particular Japan’s falling population meant that its utilities did not want to commit to the traditional multi-decade purchase contracts.

Also reflecting a turn-around from the bull years, Japan’s Mitsubishi has just announced the sale of shale assets in British Columbia that it bought in 2010 for US$350M – for “an undisclosed sum” – which in any language means a big loss.

Governments, environment, etc

The negative environmental drumbeat from Oklahoma’s oil patch continues, with recent news of another earthquake with apparent causal links to oil field activities.  The State’s regulator responded by forcing the shut-in of a number of water injection well.

Imagine if that had happened in the likes of California – even Denver – let alone Australia – and shudder to think about how wide and long such a shut down could be in a less friendly juridisction than OK.

Company news – Oil Search (OSH)

OSH put out its monthly drilling report today.  Not much new was in there – other than the shock-horror fact of actual exploration taking place.

Meanwhile in PNG the Exxon takeover of InterOil is not quite done yet.  The founding CEO of InterOil Phil Mulacek has managed to use courtroom processes in the Yukon to get a stay on the agreed takeover.  His objectives are however opaque.  Exxon seem unlikely to pay greenmail money.

He is presumably somewhat delusional – as many entrepreneurs are – about the value of the company he built up and is going hard for the sake of his ego as much as his wallet.

Quote of the day

Another quote from The Economist’s obituary a few years ago on Marc Rich – whose role in turning oil markets from ones of long term contracts in a cosy club into one of spot markets is being replicated in LNG at present:

“Previously, all crude was tied up by the big companies in inelastic long-term contracts. Starting in Tunisia, Mr Rich began to buy and sell it for immediate delivery, like any other commodity. When the embargo bit after 1973 he was swimming in oil when the majors were struggling, and was able to sell it at a mark-up of as much as $14 a barrel. Some called that profiteering. Mr Rich called it a service charge. He could have demanded more, but that would have been ‘like taking candy from a baby.'”





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