David Fuller and Eoin Treacy's Comment of the Day
Category - Energy

    Gleanings: "When Smart People Talk, We Listen"

    Thanks to a subscriber for this report from Jeffrey Saut for Raymond James which may be of interest. Here is a section: 

    1. Invest in something when people say they never want to invest in it again, when they are throwing it out the window. Think about that.  We know people that liquidated their portfolios around the March 2009 lows vowing to never buy a stock again.  The same can be said about tech stocks as they were bottoming between November 2002 and May 2003.  Currently, the same thing is being said now about energy stocks, especially the midstream MLPs.

    2. Investing is both qualitative and quantitative. There is room for both disciplines (qualitative and quantitative) in one’s portfolio just like there is room for both passive and active investment management, although currently we favor active. 

    3. The more people ridicule and question you, the more likely you are probably onto a good thing no matter what it is. This was like us buying oil sands stocks in the late 1990s when everyone was buying tech.  Or like when we bought tech stocks near the end of 2002; and, what we are doing now in buying the out of favor energy stocks. 

    4. Don’t invest in an area just because it is depressed, find and wait for the change and invest just before it happens while still unrecognized by the market. My father use to tell me, “Good things happen to cheap stocks,” but stocks can stay cheap for a really long time if other investors do not recognize their cheap valuations.  The charts will tell you when other investors will recognize them too.


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    The World Is Creeping Toward De-Dollarization

    Thanks to a subscriber for this article by Ronald-Peter Stöferle for the Mises Institute. Here is a section:

    A clear signal that something is afoot would be the abolition of the Saudi riyal's peg to the US dollar. As recently as April of this year economist Nasser Saeedi advised Middle Eastern countries to prepare for a “new normal” — and specifically to review the dollar pegs of their currencies: “By 2025 it is clear that the center of global economic geography is very much in Asia. What we’ve been living in over the past two decades is a very big shift in the political, economic, and financial geography.”

    While the role of oil-producing countries (and particularly Saudi Arabia) shouldn't be underestimated, at present the driving forces with regard to de-dollarization are primarily Moscow and Beijing. We want to take a closer look at this process.

    There exist numerous political statements in this context which leave no room for doubt. The Russians and Chinese are quite open about their views regarding the role of gold in the current phase of the transition. Thus, Russian prime minister Dimitri Medvedev, at the time president of Russia, held a gold coin up to a camera on occasion of the 2008 G8 meeting in Aquila in Italy. Medvedev said that debates over the reserve currency question had become a permanent fixture of the meetings of government leaders.

    Almost ten years later, the topic of currencies and gold is on the Sino-Russian agenda again. In March, Russia's central bank opened its first office in Beijing. Russia is preparing to place its first renminbi-denominated government bond. Both sides have intensified efforts in recent years to settle bilateral trade not in US dollars, but in rubles and yuan. Gold is considered important by both countries.


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    2017 at the Three Quarter Pole

    Thanks to a subscriber for securing an invitation for me to attend Jeff Gundlach’s presentation yesterday which as always was an educative experience. 

    BHP, world's largest miner, says 2017 is 'tipping point' for electric cars

    This article by Clara Ferreira-Marques and Gavin Maguire for Reuters may be of interest to subscribers. Here is a section: 

    Balhuizen said he expected the electric vehicle boom would be felt - for producers - first in copper, where supply will struggle to match increased demand. The world’s top mines are aging and there have been no major discoveries in two decades.

    The market, he said, may have underestimated the impact on the red metal: fully electric vehicles require four times as much copper as cars that run on combustion engines.

    BHP, Balhuizen said, is well-placed, with assets like Escondida and Spence in Chile, and Olympic Dam in Australia. BHP said last month it was spending $2.5 billion to extend the life of the Spence mine in northern Chile by more than 50 years.


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    Oil Traders Empty Key Crude Storage Hub as Demand Booms

    This article by Rupert Rowling and Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:

    Oil traders are emptying one of the world’s largest crude storage facilities, located near the southernmost tip of Africa, as the physical market tightens amid booming demand and OPEC production cuts.

    Total SA, Vitol Group and Mercuria Energy Group Ltd. are selling crude they hoarded in Saldanha Bay, South Africa, during the 2015-2016 glut when the market effectively paid traders to store oil, according to people familiar with the matter, who asked not to be named discussing private operations. 

    Crude demand is now seasonally outstripping supply, tightening the physical market for some crude varieties to levels not seen in the last two years and encouraging traders to sell their stored oil.

    “The market is selling inventories from everywhere,” Mercuria Chief Executive Officer Marco Dunand said in an interview in Geneva.

    Although largely unknown outside the oil trading industry, Saldanha Bay is one of the world’s largest crude storage facilities, with the capacity to hold 45 million barrels in just six gigantic, partially-buried concrete tanks. By comparison, Cushing, the better-known U.S. oil storage center in Oklahoma that serves as the pricing point for the West Texas Intermediate oil benchmark, can hold about 75 million barrels in more than 125 tanks.


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    Oil Breaches $50 as Worldwide Energy Demand Outlook Brightens

    This article by Jessica Summers for Bloomberg may be of interest to subscribers. Here is a section:

    Oil topped $50 a barrel for the first time in more than a month amid heightened optimism that a demand resurgence is in the offing.

    Futures rose as much as 2.4 percent in New York, extending the longest upswing since July. Two of the most influential organizations in world oil markets -- the International Energy Agency and OPEC -- nudged their demand forecasts higher, signaling continued erosion of a global glut that has weighed on prices.

    Oil demand for 2017 will expand by the most in two years, the Paris-based IEA said on Wednesday. That followed OPEC’s increase of its estimate for how much crude buyers will seek from the cartel next year, driven by rising consumption in Europe and China. In the U.S., hurricane-driven refinery outages spurred fuel distributors to pull a record amount of gasoline from storage tanks to cope with shortages last week, government data showed.

    “The market is continuing to digest that information and realizing that the rebalancing process is working,” Mark Watkins, a Park City, Utah-based regional investment manager at U.S. Bank Wealth Management, which oversees $142 billion in assets, said by telephone.


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    Musings from the Oil Patch September 12th 2017

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section: 

    If a homeowner installs a charging station in his garage, there may not be much impact on the grid.  However, if all his neighbors do the same thing, there could be a problem.  Transformers are necessary to regulate the power flowing into a home, and they usually service multiple homes, generally four at a time.  A problem is that utility companies do not know exactly how much power is being used by a particular home relative to its neighbors until a transformer fails.  Upgrading transformers can be expensive and limited by weight limits for units mounted on power poles.  One estimate suggests moving from a 50KVA pad-mounted transformer serving four homes to a 75KVA unit costs about $3,000.   

    For underground power installations, upgrading the transformer units may be easier, but not necessarily less costly.  One study by the Institute of Electrical and Electronics Engineers says that the problem is at the local level.  If multiple Level 2 chargers that fully recharge a car in 2-3 hours, are plugged in at the same time at night, they may prevent transformers from cooling as they are designed.  Sustained excess current will eventually ‘cook’ a transformer’s copper windings, causing a short and blacking out of the homes attached to the device.  This problem was observed from a study of the habits of EV owners in an Austin, Texas suburb.  Over a two-month period, the residents tended to recharge their EVs at the same time – when returning from work – that coincided with air conditioning loads increasing along with the use of other appliances. 

    A similar study was conducted in the UK, which conducted an 18month study of resident habits when 100% were using EVs.  The study’s result show that at least a third of the UK’s power grid will need to be upgraded to support an EV sales rate of 40% of new car sales by 2023.  That doesn’t address the load issue if 40% of the entire UK vehicle fleet were plug-in EVs. 


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    Email of the day on the ground experience from the Texas panhandle

    I had the pleasure of spending several days with a friend who is an executive in a drilling company. He indicated that the recovery had brought a boom in drilling, but that customers were demanding the latest high-tech drilling rigs (faster, more efficient, much bigger pumps, able to drill longer laterals). This requires very large capital investments with uncertain payback times. Older, lower tech rigs are left unused, which creates dramatically lower rig utilization rates for drillers. Unfortunately, the past month has seen a bit of a slowdown, with some new tech rigs coming off of pads with no new contract (meaning the rig goes to the yard and sits, and the crew have no jobs). While this may be a short-term issue, it could alternatively be a sickly-looking canary.

    Unlike last year, when vast numbers of pump jacks were idle (indicating the well is not producing at that moment), this year more than 75% of the pump jacks I saw were pumping, and most looked well-maintained. Pump jacks do not normally pump full-time, as they shut down for maintenance, and when their storage tanks are full, etc. A lot of the oil in the area is pumped into tanks and then picked up by trucks. 

    The beef, pork, chicken, and nuclear weapon businesses all appeared to be thriving.

    Probably needless to say, but the Texas Panhandle is about 700 miles from the flooding.

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    How a Bird Charity's Battle Against a Wind Farm Backfired

    This article by Jess Shankleman for Bloomberg may be of interest to subscribers. Here is a section: 

    When plans for Neart na Gaoithe started being developed in 2008, Siemens AG’s 3.6 megawatt turbine was the most popular among developers. Now manufacturers are working on machines that could be four times bigger, helping companies like Dong Energy A/S build projects cheaply enough to make money at market prices. The collapse in oil prices has also helped lower offshore wind costs, by making the sea vessels needed to install projects cheaper to hire.

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    Hurricane Irma Strengthens to a Category 5 Storm

    This article by Abigail Morris and Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:


    Beyond the threat to people and property in the Caribbean, the focus so far is on agriculture with the storm, "being a case of being long orange Juice futures rather than gasoline futures," Jakob said.

    Irma will probably cross the northern Leeward Islands Tuesday into Wednesday, according to the NHC, which said it’s still too early to determine what impact it might have on the U.S. Hurricane warnings have been issued for the U.S. and British Virgin Islands, Puerto Rico, Vieques, and Culebra. Tropical-storm-force winds could arrive in the British and U.S. Virgin Islands and Puerto Rico by early Wednesday.

    About two-thirds of Florida’s citrus crop is located in the lower two-thirds of the peninsula. Frozen concentrated orange juice futures in New York already rose last week on speculation the storm could strike, though prices are down almost 30 percent since January.

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