Today’s Blog – Monday 5th December 2016


An ASX announcement this morning from Beach Energy (BPT) appears to us to contain a classic mixed message in terms of trying to say two contradictory things to two different audiences.

The announcement concerned the entering into of a one year gas sales agreement between BPT and large gas user Adelaide Brighton Cement, commencing from next month.

BPT’s CEO stated in the announcement: “we remain firmly of the view that gas supply pressure is increasing within east coast and southern markets.”

What does “gas supply pressure” mean here?  It depends on who is reading it:

  • We think that if you are a BPT shareholder it means that the supply side is is very tight and your company can accordingly secure favourable pricing terms.
  • On the other hand, if you are a Government, “pressure” means that there is growing supply side competition – with resulting benefits for consumers.

Commodity prices

Crude continued its post OPEC run upwards on Friday, albeit with less enthusiasm than the previous couple of days. Brent closed up ~1% to US$54.46 and WTI was also up ~1% at US$51.68.  Over the course of the week, Brent was up 15% whilst WTI was up a lesser 12% – reflecting the widening spread that we noted last week as being strong evidence that the market believes that US shale operators will start delivering more light sweet crude to the heavy oil configured US refinery fleet.

The BHI rig count will accordingly be watched closely over coming weeks as operators get a chance to deploy more rigs in response to OPEC.  Friday’s report showed a continuing upwards trend anyway – with oil rigs up 3 and gas rigs up 1.  In a few week’s time (i.e. after allowing for an appropriate lag time) if we get large oil rig increases – then we would expect oil prices to get capped or even get spooked downwards.

Henry Hub fell 2% on Friday to close at US$3.44 – but was still up 12% for the week.

LNG and international gas

Henry Hub might be in the mid US$3s – but that is still a very attractive number in nearly every other gas market in the world.  That was demonstrated by an EIA report issued last week which noted that it expected US to Mexico gas pipeline capacity to double from its current level of 7.3 Bcf per day in the next few years.

That sort of incremental demand could drive US prices higher (with a flow on effect in LNG contracts linked to Henry Hub) – but a counter-balancing force is the expected associated gas production that will ensue if the shale oil production increases speculated upon above go ahead.

Company news – BHP

Rare news last week (coincidental with the OPEC meeting – but serendipitous nonetheless) of a major offshore FID decision.  This was by operator BP over the massive Mad Dog 2 Gulf of Mexico oil development in which BHP has a 25% stake.  The cost of this project has declined to a mere US$9B compared to initial estimates in the boom times of US$20B.

Company news – DUET 

Energy infrastructure company DUET has advised today that it has received a takeover approach from Hong Kong based CKI Group (who already has a very large presence in this sector in Australia).

The price offered appears to be generous and we think this has a high chance of being consummated.

Media comments today have focused on issues such as regulatory approvals – particularly on the foreign ownership side.

Notwithstanding the post-Trump election view that the bottom of the 35 year interest rate cycle has been reached, this development appears to show that there is still a lot of interest in long term, low risk assets in countries like Australia.   Or a contrarian might say that this sort of deal is in fact the ringing of a bell that says interest rates are on the rise.

Quote(s) of the day

Two quotes from last week expressing the view that US shale is going to come back with a vengeance if prices rise much more:

“We do not believe that oil prices can sustainably remain above $55 per barrel, with global production responding first and foremost in the U.S.” Goldman Sachs

“Unlike in the past OPEC decisions, if prices move to around $60, a substantial amount of oil in United states is ready to come to the markets.” Fatah Birol, head of the IEA





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