Pickens on Oil Prices, Middle East Turmoil
Comment of the Day

March 08 2011

Commentary by Eoin Treacy

Pickens on Oil Prices, Middle East Turmoil

This interview of T. Boone Pickens by Tom Keene for Bloomberg TV may be of interest to subscribers, not least because of his mention of a natural gas act to be voted on before July 4th.

Eoin Treacy's view The clear divergence between USA quoted natural gas prices and the UK equivalent demonstrates how the surge in unconventional natural gas supply is affecting the US market. When we compare the Brent crude oil / UK natural gas price ratio with the WTI Crude / Henry Hub ratio, the difference is even more apparent. WTI crude has not been this expensive compared to natural gas in at least the last 20 years. On the other hand, even though Brent crude has rallied faster than WTI, UK natural gas prices have kept pace and the ratio remains at a comparatively low level.

While UK natural gas prices have been deregulated, most of Europe remains on a system that values natural gas according to the price of Brent crude. This has contributed to the UK natural gas price advancing while the US price is stagnant. A more important factor is that Europe has yet to exploit its reserves of unconventional natural gas. When unconventional gas becomes a more important component of European energy supply, we can reasonably expect countries to dispense with long-term contracts since they artificially inflate prices for end consumers.

T.Boone Pickens has long championed US energy independence. The USA's massive reserves of unconventional gas are currently helping to keep prices low. However in a capitalist system, when prices are low and supply abundant it is only a matter of time before new sources of demand appear.

Sasol announced today that it is acquiring another block of Canadian shale gas reserves from Talisman Energy. Here is a section from a relevant article from Reuters quoted in the Globe and Mail:

South African energy group Sasol said on Tuesday it would pay $1.05-billion for its second shale gas interest in Canada in a move to expand its gas portfolio.

Sasol said it would buy a 50 per cent stake in Talisman Energy's Cypress A acreage in the Montney Basin in Canada, where the company also bought a stake in Talisman's Farrell Creek assets last year.

The 57,000 acres of land covered by Cypress A represent an estimated contingent resource of 11.2 trillion cubic feet (tcf) of gas.

Sasol will pay an initial $263-million in cash, with the remaining $787-million in future development costs.

Sasol and Talisman are studying the possibility of establishing a gas-to-liquids plant in Canada. Sasol said the acquisition could allow for a scalability of the proposed plant.

Few companies are as ideally placed to benefit from the wide disparity of crude oil to natural gas and coal as Sasol. It coal-to-liquids and gas-to-liquids technology allows the company to create significant opportunities to benefit from demand for different products and the share price is increasingly reflecting this.

It broke out of its base in October, consolidated briefly above ZAR31,000 and remains in a consistent medium-term uptrend. As with many energy related investment vehicles, it has become somewhat overextended relative to the 200-day MA and is susceptible to a mean reversion whenever oil prices fall back, However, a sustained move below ZAR35,000 would be required to question the consistency of the medium-term uptrend.

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