Today’s Blog – Monday 16th January 2017

Blogging will remain short and/or intermittent this week due to travel 

Editorial

In a speech on Friday the head of the International Energy Agency (IEA), Fatah Birol, reminded us that for all the considerable interest in disruption to oil demand from the likes of electric vehicles, recent supply side behaviour could well dominate crude markets in the “medium” term.

Many media and industry commentators expect that US tight oil will fill any supply side gaps – but not Mr Birol, who has the following definitive opinion (and unlike e.g. the ebullient CEOs of the likes of Pioneer Natural Resources, he has no skin in the game of promoting US tight oil):

“We believe that this year, if there are no major oil projects starting, … in three to four years’ time we may see a significant supply-demand gap, with major consequences.  This will not be filled by shale oil”.

Mr Birol also reminded the market that in effect “this time is different” – in the sense that the >150 year old oil industry had never seen before the depth of the investment strike experienced since mid 2014.

Over in the US one piece of bullish news for shell-shocked industry participants – jobs data for November saw the first growth in oil and gas jobs in the States for more than 2 years (although with ~150,000 redundancies in that period, the couple of thousand of newsjobs added still has a long way to go).

Commodity prices

Crude prices fell around 1% on Friday (and ~3% for the week), with Brent closing at US$55.45 and WTI at US$52.37.  Some weak economic numbers from China, combined with concerns about OPEC cut compliance, were the key factors on the day.

The weekly BHI rig count numbers on Friday had the first fall in oil rigs (or 7) for around 4 months.  This was likely related to Festive season disruptions rather than being the start of a new trend.

Henry Hub closed up ~1% on Friday (and 4% for the week) at US$3.42.

LNG and international gas

As we noted last week, Russian gas “won” the war against LNG imports in Europe in 2016 – with an increase in sales of 12.5% – or around 6.5 Tcf in total.

Given Gazprom’s alternatives are much fewer than those available to the LNG suppliers – particularly as in effect the whole world has opened up for the latter – it has captured more market where it can, through price discounting (using the sunk costs in its massive pipeline network).

Disruption

The Australian Financial Review (AFR) today reported that Australia is experiencing the massive fall in large scale solar costs seen elsewhere to dramatic effect in 2016.  Although we are still a long way from the UAE’s <US$30/Mwh, a figure of A$69/Mwh was calculated for the country’s newest solar farms.

That’s less than current wholesale electricity prices – with no subsidies taken account of.

As we have noted before, a key competitive advantage solar has over fossil fuels is its very low discount rate – reflecting factors such as no exploration risks, no reservoir risks, ultra long term cash-flow profile, panel performance deterioration being much less than technology improvements, etc.

Company news – DUET

ASX listed gas and electricity company DUET has today announced it is recommending a takeover (through a scheme of arrangement) by Hong Kong’s massive CKI group (who already has very large investments in this area in Australia).  The deal seems likely to go through.  It should not affect how DUET currently does business – CKI’s management style has typically been conservative rather than disruptive.

Quote of the day

For those of us who recently expressed some concern about potential geo-political developments in the South China Sea, its actually quite comforting to see where the President-elect’s focus is really on:

 

 

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