One of the less reported outcomes that emerged from last week’s OPEC meeting was an explicit plan by the Saudis to divert cargoes away from the US, with Energy and Industry Minister Khalid Al-Falih saying: “Exports to the U.S. will drop measurably.”
The rationale for this move was captured well by Bart Melek, a commodity strategist at Toronto Dominion Bank, who concluded:
“With OPEC now consciously trying to reduce flows into North America, it’s suggesting a faster than expected inventory unwind. There may be a bigger upside as we go into summer driving season.”
Our view is that there is nothing as likely to drive oil markets upwards as solid weekly “numbers” from the EIA’s inventory report. And if the Saudis can effectively drive material draw-downs by supplying less crude to the US in the first place – then they will obtain higher prices. The key to the success of the scheme is whether a “slop” effect will quickly or slowly emerge – that is – global demand and supply are not effected by the scheme, and will diverted Saudi cargoes have unintended price consequences elsewhere.
We think this “cunning plan” has a chance of working – at least for a while – as US inventory numbers are closely followed whereas the data quality on stocks elsewhere in the world is very poor.
Not much happened in oil markets overnight, due to the Memorial Day public holiday in the US. In London Brent rose a few cents to close at US$52.29.
Memorial Day is said to be the start of what is sometimes a great white hope for oil markets – driving season. The Griswolds to the rescue! However, some believe that the glory days of US driving are similar to those of the country’s comedy movies – not as good as they used to be in the 1980s.
Henry Hub was also closed for the day.
Whether the US will withdraw from the Paris climate agreement will apparently be determined this week. Media reports indicate the President is finely balanced between the opinions of the “adults” and what might in UK politics be called the “swivel-eyed loons”.
Our view is that economics rather than political gestures will determine the US’s emissions profile. If gas prices remain low then gas will beat coal in electricity markets. And if renewables continue on the cost trajectory illustrated by last week’s Arizonan solar PV price of <US$50/Mwh, then the overall share of primary energy markets taken up by fossil fuels in total will fall.
However, expect a lot of end-of-days cries whatever the Donald decides to do (if indeed a clear decision is made).
Company news – Santos (STO)
A strange story on STO was published by the Australian Financial Review (AFR) today. Strange that is, in terms of working out who leaked what and what was their intent. The story basically seemed to come from sources in the Government who alleged that STO is bullying some customers (including the iconic Arrium in Whyalla) to accept much higher gas prices.
We assume that behind the scenes there is a fierce dispute between STO and the Feds over the latter’s domestic gas reservation policy – and the media is a tool that is playing a role in that fight.
Company news – Origin Energy (ORG)
Speaking of parsing the media, another story in the AFR today concerned the sale or float of ORG’s upstream assets in the Lattice Energy vehicle. ORG has launched a roadshow to push the IPO option – at a price that was said to be “more than A$1 billion”.
This price seems to be quite a bit less than ORG’s agents were previously promulgating through media channels – where a figure closer to A$2 billion was being spruiked.
The change of tone may well indicate a change in expectations settings as feedback has been received by ORG over the trade sale value of Lattice.
Quote of the day
Apparently entering into the competition of world’s lamest threats, the Nigerian Oil Minister Emmanual Kachikwu recently said:
“If we get to a point where we feel frustrated by a deliberate action of shale producers to just sabotage the market, OPEC will sit down again and look at what process it is we need to do”.