Today’s Blog – Monday 1st May 2017

Editorial

Arguably the key dynamic in oil markets at present (as long as those pesky “events” stay away) is the apparent ability of US tight oil producers to ramp up their production in a ~US$50 oil environment – thereby nullifying much of the supply side effect of the current OPEC cuts.

One interesting recent data point that possibly ameliorates this dynamic was news from data agency Platts on US rig costs.  In the most recent quarter these had increased by 3.5% – i.e. many times the rate of inflation.

We have often reported on the two conflicting schools of thought about the “productivity” improvements made in the US oil patch since 2014.  On the one hand there are the optimists who claim that low prices have created an environment in which technical and other improvements have created material and enduring lower costs.  On the other hand there are those (including the CEO of Schlumberger himself) who say that much of the gains are short term and will bounce back – namely that the service companies have cut their rates to the bone just to keep work coming in – and as and when demand for their services increases, rates will go right back up.

The Platts data point provides some succour to the latter.  If this trend continues, then the likely level of growth in US tight oil will be more self-limiting than expected – therefore giving more space for supply side tightness to allow crude prices to rise.

Commodity prices

Crude prices rose slightly on Friday – but were flat to down on the week – with Brent closing up ~1% at US$52.05 and WTI up ~0.7% at US$49.33.  The BHI weekly rig count continued its relentless rise (almost entirely in the Permian) – with oil rigs up by 9 and gas rigs by 4.

Henry Hub was also up ~1% to US$3.28 – and was up ~6% for the week.

LNG and international gas

Cheniere Energy achieved yet another market-opening first last week – with Poland purchasing a spot cargo of LNG from Sabine Pass for June delivery.  This will be the first Gulf of Mexico gas to be delivered to Central/Eastern Europe.  What’s Polish for “Yah boo sucks, Gazprom”?

Also in Europe, moves are afoot by LNG suppliers to take advantage of changes in maritime shipping rules to reduce pollution that are already increasing demand for LNG to power ships.  Shell is leasing LNG bunkering space in Rotterdam, Repsol is supplying a vessel from a Spanish port and Total is generically aiming for 20% of the LNG marine fuel market within a few years.

Governments

The recent actions of the Federal Government to give itself the right to intervene in East Coast gas markets have been claimed as an escalation of sovereign risk by some commentators.  In our view the international industry would generally see that no Government would let a domestic market go unserved whilst exports were being made – and that errors made in Queensland were mostly made by the companies rather than the regulators.

What threatened as a much worse sovereign risk for Australia recently has been a review into the Petroleum Resource Rent Tax (PRRT).  Lobby groups who were apparently unable to draw a correlation between current low oil prices and current low PRRT take were claiming that Australia was not getting its “fair share”.

Thankfully reason appears to have prevailed and the PRRT seems safe in its current form for just now.

Company news – Santos (STO)

With STO’s AGM due to be held on Thursday this week, we note with interest that disgruntled Chinese shareholder ENN Group has just lodged a notice with the ASX indicating it has increased its stake in the company to nearly 13%.

Some media sources have speculated that the voting power that ENN might have could be higher than disclosed in such notices if one was to combine other “China-friendly” shareholders.  STO has few other large shareholders and 13% accordingly carries more weight than in companies with a larger institutional shareholder base.

Quote of the day

Regular readers will no doubt share our cynicism about the anti-intellectual depths that the anti-fracking crowd will go to – but the following recent quote from the Scottish press made even us pause for a moment or two:

“Water is one of three ingredients used to make whisky, and the purity of Scotland’s water is a fundamental part of the Scotch whisky brand. “Even the potential of water contamination from fracking in Scotland would be a seriously worrying development for the whisky industry and Scotland’s economy.”  Whisky expert Charles McLean

 

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