Today’s Blog – Monday 28th November 2016

Editorial

For over a month oil markets have been focused on one thing: the OPEC meeting to be held this week on 30th November.  Prices have waxed and waned in the light of the latest news about who may or may not cut, what a freeze means, would a deal be stuck to, etc.

A number of scenarios suggest themselves as being most likely:

  1. No announced deal on Wednesday – which could well smash oil prices back down to below US$40.  There is already a good deal of optimism about a deal built into the current price.  This would not be a good outcome for anyone in OPEC – but might Saudi Arabia let all of the other freeloaders and whingers experience say 6 months more of pain and then re-visit freeze/cut plans in mid next year.
  2. A deal is announced – but in vague terms and doubts immediately emerge over whether parties will stick to this.  Again this should see prices fall, just not as badly.
  3. What looks like a credible deal is announced. This would have to include the Saudis and their immediate neighbours promising a >1 mmbopd cut and the Iranians at least saying they will freeze.  This should send oil prices well into the US$50s – with any higher prices likely requiring a persistent trend of inventory draws through next year.

We think the middle scenario is most likely – but it could again be of the “anti-Goldilocks” variety that will see oil struggle in the US$40s, with US$50 being a ceiling until the “medium” term consequences of the last two years’ investment strike starts to bite.

Commodity prices

Crude prices were hit hard on Friday as the Saudis indicated their irritation with non-OPEC parties (read Russia), as illustrated by the following anonymous quote from the KSA’s Government:

“Since OPEC has not reached agreement there is no need to have a meeting with non-OPEC. If these problems are still ongoing what is the point of meeting?”

This discordant note sent prices tumbling by ~4%, with Brent closing at US$47.24 and WTI at US$45.96.  Notwithstanding this Friday fall, over the course of the week prices had actually risen by 1%.

Henry Hub continued its recent positive streak, up 1.3% to US$3.07 on Friday – up 8% for the week.

LNG and international gas

Friday saw another FSRU project being formally announced – a Total led venture to import LNG into the Ivory Coast.  The JV includes Shell, a local company, a US power project developer, Azerbaijan’s NOC (!) and Golar LNG (who will presumably lease a vessel to the venture).

The project is said to be able to be ramped up from a relatively modest 10o mmscf/day to the more standard FSRU capability of 400 mmscf/day – and could in theory supply gas to power projects beyond Ivory Coast itself.

Turning to a traditional liquefaction project – today’s Australian Financial Review reported that the Inpex led (Total is a JV partner here as well) Icthys LNG project located in Darwin seems to be experiencing further delays – with first production now possibly moving out to 2018.

Company news – Central Petroleum (CTP)

CTP announced on Friday that it had selected boutique advisory firm Origin Capital to assist it in dealing with the recent takeover approach from Macquarie Bank.  To us the tone of the announcement supported the theory that CTP Management might be getting sick of persistent undercapitalisation in a public company environment and that ultimately being privatised could be a more attractive way of building the business (no doubt with some incentives involved).

Quote of the day

A phrase that could well be echoed in the corridors of power outside this Wednesday’s OPEC meeting:

“Am I jumping the gun, Baldrick, or are the words ‘I have a cunning plan’ marching with ill-deserved confidence in the direction of this conversation?”

 

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