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November 12 2019

Commentary by Eoin Treacy

Video commentary for November 12th 2019

November 12 2019

Commentary by Eoin Treacy

CLO Selloff Flashes Warning Sign to Junk Bond Market

This article from the Wall Street Journal may be of interest to subscribers. Here is a section:

CLOs resemble the mortgage-backed bonds that imploded in 2008, but very few defaulted in the credit crisis, a key driver of their recent popularity. Prices for their shares and bonds, however, plummeted at the time, and holders who sold out took heavy losses.

Now some CLO bond prices are falling again. That is because the riskier loans the CLOs own are dropping in value as the companies that borrowed them start running out of cash. CLO bonds rated double-B, which are among the riskiest CLO securities, returned about 10% this year through June. But recent declines, especially last month, erased most of the gains, giving holders a roughly 1% return this year through October.

That contrasts sharply with high-yield bonds: Many of the same companies to which CLOs lend issue junk bonds, which returned about 12% this year through October, according to data from S&P Global Market Intelligence.

“If you think that double-B CLOs are giving a warning sign, that says something about high yield,” said David Preston, head of CLO research at Wells Fargo & Co. “It’s hard to see how both markets can be right.”

Eoin Treacy's view -

The Energy sector is where the majority of spread expansion has taken place as higher cost, more leveraged, issuers have come under pressure. The relatively stable oil price at present is not high enough to rescue these issuers and the existential crisis gripping Chesapeake Energy is an example of the stress coming to bear on higher cost producers, particularly in a low natural gas price environment.



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November 11 2019

Commentary by Eoin Treacy

The next 6 months favor Cyclicals: Financials, Energy, Industrials, Tech, Materials

Thanks to a subscriber for this chart illustrated report by Barry Bannister for Stifel which may be of interest.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

I have some sympathy with the view that when everyone is short, the risk of a short covering rally greatly increases. That’s particularly true if Saudi Arabia succeeds in encouraging OPEC to further reduce supply to bolster the valuation of Saudi Aramco ahead of the IPO.



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November 06 2019

Commentary by Eoin Treacy

Brazil's Oil Flop a Warning for Majors and Aramco

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

Offshore oil investment was all the rage among Big Oil during the supercycle, with capital expenditure almost quadrupling in the decade up to 2014. That is the problem. The majors poured money into large, multi-year projects prone to delays and, because of their often bespoke engineering, spiraling budgets. The result: tumbling return on capital and an inability to dial back investment quickly when the oil crash hit in 2014. Roughly 3,000 new offshore projects sanctioned between 2010 and 2014 have either barely generated any value for oil companies or are expected to generate none at all, according to a recent study published by Rystad Energy, a consultancy:

More recent investments score better, mostly because the boom tailed off, with offshore capex falling by more than half between 2014 and 2018. That took the heat out of industry inflation; and, because of the bonfire of returns in the prior decade, oil majors got smarter about such things as standardizing offshore equipment design to cut costs and shorten schedules. The pace of new projects has picked up again after the slump. Exxon, for example, has effectively opened up an entire new offshore zone with its Guyanese fields.

Still, one look at the stock prices of oilfield services firms, especially offshore-focused types such as Transocean Ltd. and Noble Corp. Plc, tells you this investment wave is nothing like the tsunami of yesteryear. Bad memories combined with unease about both near- and long-term oil demand make bold bets on big, multi-year offshore projects a tough sell with investors more interested in payouts. Even Exxon’s success in Guyana gets overshadowed by the fact that the company’s capex bill leaves it borrowing to pay its dividend. And Exxon, like Chevron Corp. and other majors, has swung more of its spending toward shorter-cycle onshore fracking in North America.

Eoin Treacy's view -

Secular bull markets in commodities are defined by a step change in the marginal cost of production. During periods of what can best be described as a status quo the price of oil can range for decades. That reduces investment in new supply and the sector is unable to respond quickly when a new source of demand emerges. The massive investment to bring new supply to market takes time to evolve and that creates a secular bull market as new higher cost sources are brought online. 



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October 24 2019

Commentary by Eoin Treacy

Tesla's Surprise Looks Strangely Familiar

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

Tesla’s free cash flow, meanwhile, was positive for the second quarter in a row, at $371 million. Again, that is positive. Again, the number was flattered by Tesla underspending on its capex budget. Guidance for the year was $1.5 billion to $2 billion. Based on the low spending in the first half, the mid-point of Tesla’s range implied it spending an average of $610 million in the third and fourth quarters. Capex came in $225 million below that level, equivalent to 61% of the free cash flow. Tesla’s capex continues to come in lower than its depreciation expense, which is striking for a company with such expansive ambitions. The company puts this down to rising efficiency.

There is something ludicrous about the stock of a company already priced at $46 billion, or 422 times the 2020 GAAP earnings forecast, surging because it reported a small net profit rather than a small net loss (the consensus estimate was a negative $234 million). Ditto for a few hundred million of free cash flow largely explained by below-guidance capex. Tesla’s own forecast points to positive profits and free cash flow continuing, but which may suffer “temporary exceptions, particularly around the launch and ramp of new products.”

Eoin Treacy's view -

There is no doubt that Tesla is an expensive share but it’s ability to occasionally turn a profit confounds the highly vocal bearish community who point to the company as representing nothing more than a house of cards. At its most basic the company is producing vehicles many people aspire to own which is a positive. The very big question is whether it can continue to do so and make money at the same time.



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October 22 2019

Commentary by Eoin Treacy

Chile Unrest Has a Worrisome Message for the World

This article by John Authers may be of interest to subscribers. Here is a section:

The first is inequality. The Chicago Boys’ agenda delivered reasonably strong and stable aggregate growth, but Chile remains one of the most unequal countries on earth. It ranks as one of the leaders in inequality among members of the Organization for Economic Cooperation and Development, and, according to the World Bank, remains more unequal than either of its very different neighbors, Argentina and Peru. People are far angrier about a rising cost of living if it comes with a sense of injustice. 

Second, the catalyst was a proposal to raise public transport fares and Energy bills. There is ample evidence from across the world that these will incite rebellion like nothing else — a point that those who hope to reduce greenhouse-gas emissions via a carbon tax should bear in mind. The violent protests of the Gilets Jaunes in France were over higher gasoline taxes, which were seen as penalizing car-dependent people in the provinces while favoring metropolitan elites. Mexico in 2017 saw riots and protests against what was known as the “gasolinazo,” a 20% rise in fuel prices that was a part of the government’s partial privatization of Pemex, the  monopoly state oil company. Last year, Brazil was rocked by protests and a strike by truck drivers in response to fuel shortages and a sharp increase in the price of diesel.

Third, Chile lacks a populist movement, or a canny populist caudillo politician. Such a figure might have been able to use public anger for their own purposes, but would also have had a better chance to control it. For example, Mexico’s left-wing populist president Andres Manuel Lopez Obrador frequently led public protests, but successfully persuaded his followers not to resort to violence. In Chile, where conventional politics lacks a party or a personality to channel their grievances, protesters have resorted to self-destructive vandalism. Which is to say, while charismatic Latin American populists understandably tend to make western leaders nervous, Chile shows that they can perform a vital function. 

Eoin Treacy's view -

The Arab Spring originated in Tunisia in a protest over the price of bread. The unrest in Lebanon last week was a response to the proposed tax on WhatsApp users. The Hong Kong unrest probably has its roots in the rising cost of living. Chile’s protests are equally about the cost of living. Does that suggest, within a decade the world has gone from worrying about bread to bigger ticket purchases? The surge in asset price inflation against a background of largely stagnant wages is at least partly to blame for this deterioration in the political status quo.



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October 21 2019

Commentary by Eoin Treacy

Leveraged loans: how much do credit ratings understate the risks?

Thanks to a subscriber for this report from UBS which may be of interest. Here is a section: 

Two of the main arguments against higher loan defaults are lower rates and lack of covenants. On lower rates, we believe the transmission mechanism of lower rates to leveraged loans is comparatively weak. Our recent work has shown that LL yields are little changed year-over-year, in part because wider spreads have offset modest declines in LIBOR rates. Looking ahead, 4 rate cuts in 2020 could help loan issuers but there are likely offsetting factors. One is that this assumes loan spreads do not widen, which we think is unlikely, particularly heading into 1H20 with US GDP growth slowing to 0.3-0.5% in 1H20. Two is if rating agency downgrades persist (as we expect) the future cost of new funding for issuers increases substantially with each rating notch; our analysis shows the current spread differential between a B- and a CCC+ loan is c300bp. Three is that the Fed has less room to stimulate: only 38-52% of the rate relief provided in the last two cycles. 

On lack of covenants, the key driver of defaults historically is not covenant violations but insolvency and illiquidity. One of the more holistic papers compares these factors in triggering defaults and argues that low market asset value to debt is the key driver while, on average, covenants add limited additional information4. We believe lack of covenants will change the event of default, with more distressed exchanges likely. But it is not clear this is a good outcome. Covenants had weakened leading up to the '15-16 Energy default cycle, yet default rates were elevated (peak 22%) and many distressed exchanges failed with roughly half of firms re-defaulting. While loan downgrades to CCCs have been lagging those to B-, we are starting to see more evidence of downgrades to CCC. These decisions are primarily driven by weak operating performance, negative cash flow and capital structure unsustainability (even as issuers do not have maturities until 202022). Once a firm is downgraded to CCC, we believe the re-pricing in loan yields makes distressed exchanges likely, particularly in more stressed markets.

Eoin Treacy's view -

The race to secure a competitive yield has resulted in large quantities of debt being issued and the quality of issuers declining relative to the yield on offer. If a rising tide lifts all boats then the potential for shipwrecks to be revealed when the tide goes out is also a risk. Warren Buffett’s swimming naked remark comes to mind.

 



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October 14 2019

Commentary by Eoin Treacy

Oil Shipping Costs Soar to Highest Levels in 11 Years

This article by Costas Paris for the Wall Street Journal may be of interest to subscribers. Here is a section:

“There is a lot of confusion and uncertainty out there,” said Paolo d’Amico, head of Intertanko, a trade body representing tanker owners. “Everyone is afraid of being hit by the U.S., sanctions, rendering about 50 VLCCs untouchable.”

U.S. oil exports to Europe, which usually move in smaller tankers, hit a record 1.8 million barrels a day for the week ending Oct. 7, according to Kpler, an Energy market intelligence company. The figure is double the 924,000 barrels in the previous week. But shipments to Asia, which are typically done on VLCCs, were reduced almost in half to 508,000 barrels.

A Singapore broker said rates for some VLCC cargoes on sailings from the U.S. Gulf Coast to the Far East were more than $120,000 on Thursday. Average earnings for supertankers picking up cargoes from around the world hit $94,124 a day, up from $18,284 on Sept. 25, when Washington blacklisted the Cosco fleet.

“VLCCs to Asia are a rare commodity, the market is red hot and will stay that way while the U.S. sanctions on Cosco ships are in place,” said the broker, who asked not to be named because he isn’t authorized to talk to the media.

Eoin Treacy's view -

The Baltic Dirty Tanker Index broke out on the upside last week, to trade above 1500 for the first time since 2008. That follows the breakout in the Baltic Dry Index in August. The latter’s move has not been as pronounced but does highlight the additional pressure on the shipping sector from the impending implementation of the IMO2020 rules on ship emissions.



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October 11 2019

Commentary by Eoin Treacy

Melting Ice Redraws the World Map and Starts a Power Struggle

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

Shawn Bennett, deputy assistant secretary for oil and natural gas at the Department of Energy, said the U.S. was not concerned about competition. Growth projections for natural gas demand in India and other Asian countries are so high, and the need for supply diversification in Europe so acute that there’s little risk of a glut, he told Bloomberg. “Global demand for LNG is just going to grow,” he said.

The U.S. may be pushing back in more concrete ways. On September 30, the Department of the Treasury imposed sanctions on units of China’s Cosco Shipping Corp., over alleged breaches of U.S. sanctions against Iran. The move immediately hit the Yamal project’s LNG tanker routes because of Cosco’s share in one of the main shipping companies involved.

Still, for those who have been working in the Arctic for a long time, much of the geopolitical discussion sounds a little breathless. Last year, Russia’s Northern Sea Route carried 29 million tons of cargo, with projections rising to 90 million. The Suez Canal carries about 1 billion tons.

Eoin Treacy's view -

David and I predicted more than a decade ago that the USA would become Energy independent that that represented a gamechanger for the Energy sector that was completely underappreciated by markets. This chart suggests that reality, long promised, is now upon us.



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September 24 2019

Commentary by Eoin Treacy

How We Should Bust an Investing Myth

This article by Jason Zweig for the Wall Street Journal may be of interest to subscribers. Here is a section:

According to PitchBook Data, 66 companies valued at $1 billion or more have done initial public offerings from 2011 through mid-September 2019. A third of those IPOs came at prices below the value set in the companies’ last round of private funding. Bloom Energy Corp. , Cloudera Inc., Domo Inc., Reata Pharmaceuticals Inc., and Zynga Inc. all launched IPOs priced at least 40% lower than the valuation in their final private-funding round, according to PitchBook.

Perhaps that’s because conventional valuation methods may overstate what private funds’ venture holdings are worth. Often, several share classes are valued equally even though they aren’t all entitled to the same payoffs.

Or perhaps the brilliance of the private market is overstated. Consider a recent survey of nearly 900 venture capitalists.

Asked whether they “often make a gut decision to invest” in a fledgling company rather than relying on analysis, 44% of venture-fund executives said yes.

Which financial metrics do they use to analyze investments? “None,” admitted 9% of respondents. Only 11% quantitatively analyze past investment performance. A similar survey of private-equity executives found that they “do not frequently use” the methods that are standard among public investors for discounting the future cash their holdings might generate.

Eoin Treacy's view -

The “vision thing” as Bill Clinton was wont to say is not a topic that submits readily to discounted cashflows. That is particularly true of angel investing where one is taking bets on companies with no earnings not to mind profits. However, an investor that is investing in a company with billions in earnings and still running billion-dollar losses has to know they are not in the same game as an angel investor. After the first or second round of funding, the only rationale for investing is the wish to sell to a bigger fool later unless one is luck enough to latch onto a lottery scale winner.



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September 13 2019

Commentary by Eoin Treacy

It's A Fish-Eat-Fish World Scientists Want To Change That

This article by Jon Emont for the Wall Street Journal may be of interest to subscribers. Here is a section:

“If we take any more fish out of the ocean—what we call wild-caught—then literally the ecosystem could collapse,” said Alan Shaw, the chief executive of Calysta, a Menlo Park, Calif.-based startup that is among the first companies to use bacteria to convert natural gas into protein that can be used as an alternative fish feed. Calysta operates a factory in northeast England where its bacteria feed on methane producing single-cell proteins that are dried and packaged into pellets it calls FeedKind.

The company announced a $30 million investment from BP in June, which gave the British Energy giant the right of first refusal to supply natural gas to Calysta’s future factories. It already had a partnership with Thai Union, an Asian seafood giant, which says trial shrimp grown on Calysta’s bacterial protein taste the same as those fed traditional diets that include fish.

Eoin Treacy's view -

Fish farming remains a growth business with leverage to both the growth of the global consumer and the need to substitute global fish stocks with additional supply in order to feed all those people. Additionally, the desire to consume more protein and more “heart healthy” fats is on a growth trajectory.



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September 09 2019

Commentary by Eoin Treacy

A Wide Range of Testing Results on an Excellent Lithium-Ion Cell Chemistry to be used as Benchmarks for New Battery Technologies

Thanks to a subscriber for this report which may be of interest to subscribers. Here is a section from the introduction:

We present a wide range of testing results on an excellent moderate-Energy-density lithium-ion pouch cell chemistry to serve as benchmarks for academics and companies developing advanced lithium-ion and other “beyond lithium-ion” cell chemistries to (hopefully)exceed. These results are far superior to those that have been used by researchers modelling cell failure mechanisms and as such, these results are more representative of modern Li-ion cells and should be adopted by modellers. Up to three years of testing has been completed for some of the tests. Tests include long-term charge-discharge cycling at 20,40 and 55°C, long-term storage at 20,40 and 55°C, and high precision coulometry at 40°C.Several different electrolytes are considered in this LiNi0.5Mn0.3Co0.2O2/graphite chemistry, including those that can promote fast charging. The reasons for cell performance degradation and impedance growth are examined using several methods. We conclude that cells of this type should be able to power an electric vehicle for over 1.6 million kilometers (1 million miles) and last at least two decades in grid Energy storage. The authors acknowledge that other cell format-dependent loss, if any, (e.g. cylindrical vs. pouch) may not be captured in these experiments.

Eoin Treacy's view -

The potential electric vehicles with modern battery chemistries to run for upwards of 1,000,000 miles range is a serious gamechanger. That is particularly true for the haulage sector where diesel’s longevity and fuel efficiency have been unchallenged for decades.  



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September 02 2019

Commentary by Eoin Treacy

Indonesia Set to Halt Nickel Ore Exports From End December

This article by Wahyudi Soeriaatmadja  for the Straits Times may be of interest to subscribers. Here is a section:

Energy and Mineral Resources Minister Ignasius Jonan said on Friday that the nickel export curbs are "in line with President Joko Widodo's directives".

Indonesia's current account deficit reached US$31.1 billion (S$43.2 billion) in 2018. The widening deficits were an issue Mr Joko's political opponents frequently played up during his presidential campaign ahead of the April election. Mr Joko will be sworn in on Oct 20 to begin his second and final five-year term.

A senior government official had earlier argued that Indonesia could have recorded even higher deficits had the country not boosted efforts to climb up the value chain in the iron and steel sector, encouraging investors to build plants at home to process raw nickel into intermediate products such as stainless steel slabs.

Eoin Treacy's view -

Indonesia has long sought to gain more economic benefit from its commodity exports. That was particularly true of the tin market when exports were limited to refined products in 2013. The aim was to try and build up the domestic refining business but the collapse in prices in 2014 and 2015 killed off that idea. It now appears Indonesia is attempting to do something similar with nickel exports.



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August 30 2019

Commentary by Eoin Treacy

RBA Says Household Debt Could Complicate Future Rate Decisions

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

Reserve Bank of Australia comments in 2019/20 corporate plan released on website Friday.

“Over 2019/20 to 2022/23, the structure of the Australian economy will continue to evolve and economic shocks -- which, by definition, are not forecastable -- will occur. Movements in asset values and leverage may be more important for economic developments than in the past given the already high levels of debt on household balance sheets”

“Especially in the context of weak growth in household income, high debt levels could complicate future monetary policy decisions by making the economy less resilient to shocks”

“The flexible medium-term inflation target is the centerpiece of the monetary policy framework in Australia and has been well established for more than two decades. Since the early 1990s, it has provided the foundation for the bank to achieve its monetary policy objectives by providing an anchor for inflation expectations. The bank will remain alert to new developments that may have a bearing on the framework for monetary policy”

Eoin Treacy's view -

The Australian Dollar remains in a medium-term downtrend, moving to a new closing low today. With Energy and iron-ore prices declining and the domestic housing market in a parlous condition the RBA may be required to embark on the same counter deflationary measures other developed markets have endured over the last decade.



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August 29 2019

Commentary by Eoin Treacy

U.S. Glut in Natural-Gas Supply Goes Global

This article by Ryan Dezember for the Wall Street Journal may be of interest to subscribers. Here is a section:

Earlier this month Freeport LNG Development LP’s export terminal in a beach town south of Houston began buying and liquefying gas with the expectation of sending out its maiden cargo in September. The Freeport facility, the fifth to begin operating in the lower 48 states since the first opened in early 2016, should help push gas consumption from LNG exporters to a new high. Last week, a record nine LNG vessels left the U.S. carrying cargoes, according to Jefferies Financial Group Inc.

In July, LNG exporters consumed an average of about 6 billion cubic feet of gas per day, according to the U.S. Energy Information Administration. That is the most yet and is equal to roughly 7% of total U.S. gas production. Analysts expect demand from LNG facilities to absorb about 12% of total production by next summer as additional facilities start up and existing terminals boost their capacity.

But if those projects are delayed because of low prices overseas or if existing LNG plants slow down or take advantage of the lull to perform extended maintenance, then the domestic gas market could be swamped, sending prices even lower.

“If that demand goes away even for a couple months, it becomes a real problem for the balance of the market,” said Welles Fitzpatrick, an analyst with SunTrust Robinson Humphrey.

Eoin Treacy's view -

Natural gas is a commodity widely associated with the rise of the global middle class. As living standards improve, and infrastructure is laid down, demand for cleaner burning fuels trends higher. The big change in the market over the last few years has been the creation of the global market for natural gas. Prior to this it was primarily a regional market because of a lack of transportation options. Significant investment in LNG terminals all over the world is turning the USA, Australia and potentially Canada into natural gas exporting giants to compete with Russia and Qatar. That represents a significant change to the status quo.



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August 22 2019

Commentary by Eoin Treacy

Video commentary for August 22nd 2019

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: Baltic Dry Index rallying, Transportation Index weighed down by Energy, banks steady, Renminbi hits new low, the markets continue to signal a requirement for additional stimulus, gold steady, oil eases.
 



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August 16 2019

Commentary by Eoin Treacy

Musings From the Oil Patch August 13th 2019

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

Today’s Energy world is nothing like what it was prior to OPEC’s move.  It is even moving away from the model that evolved immediately after the price collapse.  Both of those models have been shunned by investors.  A new model is evolving in response to investor demands that Energy companies be profitable and return cash to investors.  This new model is evolving in response to the disconnect between Energy company fundamentals and their share prices.  That disconnect is evident in Exhibit 8, which tracks oil prices and stock indexes reflecting oil and oil service companies since mid-2014 when oil prices began sliding, before OPEC delivered its coup de grâce.  Oil company stocks (XLE) performed better during this period, largely because they pay dividends, offering investors income while waiting for share values to reflect higher oil prices.  Oil service stocks (OSX) fell steadily in this period, because of too much debt and shrinking market activity leading to substantial asset impairment and eroding company values.  

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

If we are indeed now in a period where Energy investors are more demanding of profits than production growth that is not great news for the fragmented nature of the shale oil sector. That suggests there is significant scope for consolidation to provide the profitability demanded by investors.



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August 13 2019

Commentary by Eoin Treacy

Email of the day on the ramifications of negative yields

See yield chart middle page 1.  How low (negative) can govt credit yields (-1%) go till the financial system freezes over?  Serious Q……………this negative yield stuff wasn’t taught in Economics 101.

There must be an absolute level of negative rates that destroys money velocity (V) as it means no one puts money in the bank anymore and lending gets restricted.  At -10% I wouldn’t lend to UBS.  What happens at say -5%?  Assuming a real rate of 3%, bank lending -after a margin of say 2%- would essentially be FREE (0%).  But what does that do to banking system integrity (banks make money but less of it as their margins collapse; their deposit base shrinks as they struggle to increase/ attract deposits………….not only do depositors go on strike but existing depos are decreased annually by negative yields!)….and what about regulatory oversight?….would CBs and regulators afraid of imprudent lending caused by needy borrowers at 0% step in to restrict the very process that they are trying to encourage via making money so cheap?  i.e. will they try to stop “BAD” lending.  How will they judge/enforce?

And where does inflation fit into this calculus?...without any inflation the interest rate structure/ yield curve that might restore banking margins is hard to normalize/ become positive again.

Or should governments everywhere borrow vast sums at negative rates for 50 years to finance a massive infrastructure spend (highways, 5G, clean Energy, railways etc.) i.e. “GOOD” lending?  Wouldn’t this raise rates and restore normality?  Then what debt / GDP levels are prudent (see Italy)?  I recall Argentina’s 100-year bond issue in 2017 at 7.9%, 3x over-subscribed by famished yield scavengers.

Investment implications

  • Negative bond yields unattractive versus investment in high quality equities paying well covered dividends, though it is certainly not a good world for poor quality companies who don’t
  • How is any of this bad for gold, whose carry cost is collapsing?

 

Just sharing some thoughts, largely written out of confusion

Eoin Treacy's view -

I think we are all in a state of disbelief at the willingness of investors to pour trillions into bonds with a negative yield. I have long wondered at the absence of any discussion of bond market convexity over the last decade. After all, shouldn’t we all have an interest in the sensitivity of bonds to changes in interest rates?



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August 09 2019

Commentary by Eoin Treacy

Email of the day - on European energy prices

This is by Benny Peiser who is the director of the GWPF. Some bold warnings about Europe's decline fuelled by its high Energy prices.

 

Eoin Treacy's view -

Outsized economic growth and the higher standards of living it delivers is the single best way of creating concern for lower emissions, a cleaner environment and creating greater efficiencies. We have plenty of empirical evidence that this is the case and yet it is still a hard sell for many politicians. The concentration of the argument on climate change is probably at the root of this problem. Instead we should be thinking about improving the human condition not as the problem but as the solution.



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August 07 2019

Commentary by Eoin Treacy

Central Bank Hunger for Gold Lifts Demand to Three-Year Hig

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

Nations added 374.1 tons in the first six months as Russia and China kept building reserves and Poland made a massive purchase. The trend is expected to continue, with a recent survey of central banks showing 54% of respondents expect global holdings to climb in the next 12 months.

Central banks around the world have added to reserves as economic growth slows, trade and geopolitical tensions rise, and authorities seek to diversify away from the dollar. Gold rallied to a six-year high in July, as expectations for lower U.S. interest rates and concerns about the economy boosted bullion’s appeal.

Spot gold edged lower Thursday, falling for a second day after the Federal Reserve signaled it probably won’t embark on a lengthy easing cycle. The metal declined 0.5% to $1,407.04 an ounce, paring this year’s gains to 9.7%.

Eoin Treacy's view -

Energy independence has afforded the USA the ability to be much more assertive on the geopolitical scene. The deployment of trade weapons, tariffs and sanctions etc is all the easier when you are no longer beholden to other countries for supply of a vital commodity. That necessarily results in a corresponding action from other countries which is to try and free themselves from their attachment to the Dollar. Building up gold reserves make sense from that perspective.



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August 07 2019

Commentary by Eoin Treacy

Tesla's big battery in South Australia is a "complete waste of resources," claims Nissan

This article by Simon Alvarez for Teslarati.com may be of interest to subscribers. Here is a section:

Thomas’ statement comes as he was discussing the new Leaf’s vehicle-to-grid/vehicle-to-home (V2G/V2H) system, which will allow the all-electric car to serve as a home battery unit. With the system in place, the Leaf will not only store Energy by plugging into a home or business; the vehicle could also serve the Energy back when needed. V2H is already in use in countries such as Japan, and a release in Australia is expected within six months. 

The Nissan executive noted that the Leaf’s V2G system has the potential to help homeowners save money, especially if the vehicle charges through a rooftop solar system during the day, and uses its stored Energy to power appliances and lights at night. 

“The way we distribute and consume Energy is fundamentally inefficient … what we need is flexibility in the system. It’s great that we’ve invested all this money in renewable Energy, but fundamentally we’re wasting most of that Energy because it’s all being generated in the middle of the day when we don’t really need it,” he said. 

Tim Washington, CEO of charging solutions provider Jetcharge, noted that Nissan V2H technology has a lot of potential, considering that vehicles spend much of their time just parked, or in the case of electric cars, plugged in. 

Eoin Treacy's view -

Tesla has battery manufacturing capacity so it produces batteries. Nissan produces cars so it is pushing a use case for cars to provide base load during periods of peak consumption.



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July 25 2019

Commentary by Eoin Treacy

Evaluating US Nuclear Competitiveness and its Future as a Carbon-Free Clean Energy Source

Thanks to a Keith Rabin for this interview of Dr.Robert F.Ichord. Here is a section:

Both Russia and China are strongly committed to domestic nuclear development, international nuclear power exports, and the development of small modular reactors (SMR) and advanced nuclear reactors. Russia is building seven third–generation VVER–1200 reactors domestically and over twenty internationally. China is building domestically about eleven indigenous units, not including the Russia VVERs, the French EPRs or the recently completed US AP–1000s. They have two reactors of the Hualong One design under construction in Pakistan near Karachi and one planned at Chasma, the site of older, smaller Chinese reactors. They are also pursuing deals in the UK, Romania and Argentina as well as Bulgaria and several other countries. These strong state–financed commitments create the domestic and industrial capabilities needed for future innovation as well as to establish long–term political and economic relationships with countries of strategic interest. US historical influence over international standards and regulatory system development is therefore being challenged as well as US overall foreign policy interests in democracy and open markets. South Korean and Japanese companies are also international competitors but remain long–time US collaborators.

According to the World Nuclear Association about 30 countries are considering, planning or starting nuclear power programs. These range from sophisticated economies to developing nations. Is nuclear a viable option for emerging and frontier economies and how does installation and utilization differ in these locations from developed economies in terms of safety, non–proliferation as well as political stability, environmental and regulatory standards, supporting infrastructure and other factors?

I believe there is a major shift occurring in the global nuclear industry from the industrial countries to the non–OECD countries. Most of future global electricity growth will be in these countries and they want to diversify and develop cleaner Energy systems. Despite the huge upfront costs, countries are deciding to accept attractive Russian and Chinese financing for these large, multi–billion dollar units. There is the national pride involved from joining the “nuclear club' as well as possible corruption in certain cases. Russia also offers military equipment as well as full fuel and operating services in its strategy to expand influence. Although both Russia and China have significant training efforts to develop local capacities, overall governance and transparency in a number of these countries is weak and the commitment to competent Nuclear Regulatory Commission (NRC)–like regulatory institutions is questionable. Although most of the countries have signed the Non–Proliferation Treaty (NPT) and the International Atomic Energy Agency (IAEA) Additional Protocol, the introduction of current nuclear power technologies in countries and regions – in which there are significant tensions and political conflicts, e.g. Middle East – raises serious concerns for US foreign policy.

Eoin Treacy's view -

The mining investment cycle of the early part of this century delivered on additional supply capacity. While the building plans for new reactors are impressive, they have been slowed by the Fukushima disaster and competition from other Energy sources. That has resulted in quite a bit of volatility for uranium miners.



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July 18 2019

Commentary by Eoin Treacy

Oil Dips as Russian Pipe Flow Is Restored, Earnings Are Mixed

This article by Alex Longley and Alex Nussbaum for Bloomberg may be of interest to subscribers. Here is a section:

Russian pipeline operator Transneft PJSC, meanwhile, said it resumed full flows from the country’s largest crude producer, Rosneft PJSC, after imposing restrictions amid concerns about contamination.

Oil has fallen all week as the specter of a renewed U.S.-China conflict dented the demand outlook, while American fuel stockpiles jumped. That’s overshadowed worries that Iran may shut down the Strait of Hormuz, a key chokepoint for much of the world’s oil shipments.

Eoin Treacy's view -

This week we have been treated to two examples of how much the Energy sector has changed. First a hurricane shut down most gas supply in the Gulf of Mexico and hit the New Orleans area which is where a lot of processing infrastructure is situated. The price of gas fell instead of rising because so the market no longer relies on the Gulf of Mexico as a swing producer.



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July 12 2019

Commentary by Eoin Treacy

Email of the day - on predicting in which direction a breakout will take

Hoping for a quick refresher, please. The Chart Seminar reinforces that stocks are either trending or ranging. What I am interested in are the indicators which may suggest a stock could breakout of its range (to the upside or downside) in the near term. Thanks for a wonderful service.

Eoin Treacy's view -

Thank you for this question which others may have an interest in. Markets either trend or range so every range is following by a breakout and vice versa. Ranges are explosions waiting to happen because ranges and boring relative to the trending phases. That means expectations for future potential deteriorate at just the same time that Energy is being stored up for the next breakout.



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July 08 2019

Commentary by Eoin Treacy

China Is Forcing Tourists to Install Text-Stealing Malware at its Border

This article from vice.com maybe of interest to subscribers. Here is a section:

Together with the Guardian and the New York Times, the reporting team commissioned several technical analyses of the app. Penetration testing firm Cure53 on behalf of the Open Technology Fund, researchers at Citizen Lab from the University of Toronto, and researchers from the Ruhr University Bochum as well as the Guardian itself all provided insights about BXAQ. The app's code also includes names such as "CellHunter" and "MobileHunter."

Once installed on an Android phone, by "side-loading" its installation and requesting certain permissions rather than downloading it from the Google Play Store, BXAQ collects all of the phone's calendar entries, phone contacts, call logs, and text messages and uploads them to a server, according to expert analysis. The malware also scans the phone to see which apps are installed, and extracts the subject’s usernames for some installed apps. (Update: after the publication of this piece, multiple antivirus firms updated their products to flag the app as malware).

Eoin Treacy's view -

Xinjiang is one of China’s buffer states which separates the heartland from its neighbours. It is also an Energy producer and bread basket so China has additional reasons to quell even a whiff of separatist sentiment. The extend of surveillance and re-education programs (incarceration) is unparalleled in modern history and is a testament to just how overtly authoritarian the administration is.



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July 04 2019

Commentary by Eoin Treacy

Email of the day on our investment philosophy.

New subscriber here and enjoying the site/audio. Anything on the site or audio that explains your philosophy on markets and approach? I've purchased your book as well so maybe that is the simple answer!

Eoin Treacy's view -

Welcome to the Service and thank you for this email which others may also have an interest in. Crowd Money was my best attempt at creating a companion guide to The Chart Seminar back in 2013 and the principles of crowd psychology and trend consistency covered in it are the basis for the analysis performed in this Service.

FullerTreacyMoney is a top down macro behavioural global strategy service. The best place to be in any market is in a consistent trend. In order to find the most consistent trends we scour the world. Having an appreciation of what a consistent trend is, how they evolve and how they end allows us to form trend running strategies.

There are really only two big factors in the market; crowds of people and monetary policy. Central banks kill off bull markets so we need to pay attention to what they do. Likewise, when oil is surging or when banks can’t make money that impairs liquidity creation so we need to monitor those markets. Of course, the opposite is also true. Central banks help create the liquidity conditions for bull markets to prosper and falling Energy prices improve industrial profitability. That also leads to an awareness of long-term cycles in the behaviour of crowds.

Liquidity is not enough. You also need a fundamental story or theme to animate investor interest over the span of secular bull markets. Big themes, supported by abundant liquidity are what drives long-term bull markets. That is why we focus on the rise of the global consumer, the accelerating pace of technological innovation and secular bear market in Energy

The evolving path of extraordinary monetary policy, rise of populism and geopolitical rivalry can all be viewed in the historical framework of liquidity and crowd psychology.  



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July 03 2019

Commentary by Eoin Treacy

India's Water Crisis Is Man-Made

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

Climate change activists have long argued that water will be the political flashpoint of the 21st century. Water-stressed India will likely be one of the first places to test that theory. The state of Tamil Nadu complains that it doesn’t receive its fair share of the waters of the Cauvery River; recently, the authority that nominally manages the river accused the government of neighboring Karnataka of holding onto water that it should have allowed to flow down to the Cauvery delta.


Things might get even testier up north, where more than a billion people depend upon rivers that rise in the Himalayas. Bangladesh and Pakistan feel that India is being stingy with river water.  Indian strategists constantly worry that China will divert water from the Himalayan rivers that rise in Tibet to feed the thirst cities in its own north.

The floods in Chennai are a warning. As the world warms, the rains on which India depends have become erratic: They frequently fail to arrive on time, and they fall in a more disparate and unpredictable pattern. The country can no longer afford to waste its dwindling resources.

A rapidly urbanizing and developing India needs to drought- proof its cities and rationalize its farming. Water-harvesting must be a priority, alongside mechanisms for groundwater replenishment. As it is, every summer is hotter and less bearable. If Indians run short of water as well, one of the world’s most populous nations could well become unlivable

Eoin Treacy's view -

India’s population is likely to exceed China’s sometime in the middle of the 2020s and peak around 1.6 billion sometime in the middle of the century. That’s a lot of people in a country that already seems crowded.

Generally speaking, water shortages are usually more about mismanagement of resources than an absolute lack of the precious commodity. There are exceptions of course but when rains fall every year the question is less about quantity and more about the quality of governance. In just the same way countries need clear national Energy, commercial, military and political action plans, national water managements plans are also necessary for the long-term welfare of populations.



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June 24 2019

Commentary by Eoin Treacy

The Future of Hydrogen

This report from EIA may be of interest to subscribers. Here is a section

The time is right to tap into hydrogen’s potential to play a key role in a clean, secure and affordable Energy future. At the request of the government of Japan under its G20 presidency, the International Energy Agency (IEA) has produced this landmark report to analyse the current state of play for hydrogen and to offer guidance on its future development. The report finds that clean hydrogen is currently enjoying unprecedented political and business momentum, with the number of policies and projects around the world expanding rapidly. It concludes that now is the time to scale up technologies and bring down costs to allow hydrogen to become widely used. The pragmatic and actionable recommendations to governments and industry that are provided will make it possible to take full advantage of this increasing momentum.

Hydrogen can help tackle various critical Energy challenges. It offers ways to decarbonise a range of sectors – including long-haul transport, chemicals, and iron and steel – where it is proving difficult to meaningfully reduce emissions. It can also help improve air quality and strengthen Energy security. Despite very ambitious international climate goals, global Energy-related CO2 emissions reached an all-time high in 2018. Outdoor air pollution also remains a pressing problem, with around 3 million people dying prematurely each year.

Hydrogen is versatile. Technologies already available today enable hydrogen to produce, store, move and use Energy in different ways. A wide variety of fuels are able to produce hydrogen, including renewables, nuclear, natural gas, coal and oil. It can be transported as a gas by pipelines or in liquid form by ships, much like liquefied natural gas (LNG). It can be transformed into electricity and methane to power homes and feed industry, and into fuels for cars, trucks, ships and planes.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The dramatic decline in natural gas prices and the abundant quantities being produced and in reserve mean that it is inevitable that new sources of demand will appear to take advantage. Since natural gas is one of the primary sources of hydrogen, it makes sense to promote fuel cell vehicles or range extenders for electric vehicles. How long it will take for this evolution to have an effect on the market is questionable, but it will probably be the catalytic event necessary to boost prices out of the long-term base. 



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June 21 2019

Commentary by Eoin Treacy

Maldives Holidays and SUVs Are Badges of Shame Now: Chris Bryant

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

The windshields of large cars parked in my Berlin neighborhood were plastered this week with angry
messages on lurid orange stickers. The owners were told that: “Driving an SUV causes serious climate damage,” “SUVs harm your unborn child,” and “Driving an SUV causes impotence.” That last one may have been a joke.

Sports utility vehicles have long been hated by the more civic-minded among us. They tend to consume more fuel, spew out more pollution and take up more parking space. It’s been suggested that their size and weight are also partly to blame for the rising number of pedestrian road deaths.

Eoin Treacy's view -

Angela Merkel has been Germany’s Chancellor for longer than anyone before her and her chosen successor has been deemed no longer fit for purpose. That leaves the competition to replace her wide open and it is increasingly likely that the next government will be heavily dominated by the Green Party. This will represent the latest iteration of the populist wave which in this case will see leftwing populists gain sway over a major economy.



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June 19 2019

Commentary by Eoin Treacy

Musings from the Oil Patch June 18th 2019

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here Is a section on the commodity/S&P500 ratio:

When we contemplate the market’s assessment of commodities versus stocks, we find the former, which includes oil and gas, to be at the lowest valuation point in at least 50 years.  Does this mean that the commodity market it being disrupted?  Peak valuation points occurred in 1973-74, 1990 and 2008.  Each peak was associated with spikes in oil prices caused by geopolitical events such as the Arab Oil Embargo, the First Gulf War and the Global Financial Crisis, which happened as oil prices traded in excess of $100 per barrel.  Likewise, each low has been associated with low oil prices – either absolute lows, or lows below more recent oil price ranges.  

With respect to the low points in the valuation of commodities versus stocks, the prior two lows were marked by excess stock market speculation about super-growth stock future earnings.  The 1998-99  Dot.com Bubble, which saw companies brought public with barely any revenues and no earnings, but lots of “eyeballs” on web sites or clicks on shopping sites, happened to also be associated with oil prices falling to $11 per barrel as the Asian currency crisis unfolded and a brief global recession occurred.  The 1970-73 low was marked by the market bubble created by the Nifty-Fifty growth stocks, as price-to-earnings ratios for these 50 super-growth companies soared to ratios in excess of 50 times next year estimates for earnings per share.  Of course, two Energy service companies – Schlumberger Ltd. (SLB-NYSE) and Halliburton Companies, Inc. (HAL-NYSE) – were part of this Nifty-Fifty stock group.  Crude oil prices at that point were in the $3 per barrel range, and there was a battle brewing between the seven largest global oil companies that ruled the international oil business and the Organization of Petroleum Exporting Countries over the value of a barrel of oil for tax and royalty calculations.  That tax battle lit the fuse that exploded after the Yom Kippur War involving Israel and Egypt in 1973, leading to the Arab Oil Embargo and the explosion in global oil prices.  

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

This ratio has been doing the rounds of pundit commentary for the last couple of years because commodities are trading at a such a record low level relative to stocks. Jeff Gundlach in particular has been predicting a resurgence in commodity prices because of their relative discount to stocks and one of the reasons private equity has been so interested in the Energy space is because of the relative discount to equities on offer, coupled with the prolific production profiles (and early payback) of unconventional wells.



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June 19 2019

Commentary by Eoin Treacy

Email of the day on gold in other currencies and stock market/commodity ratios:

I am enjoying the commentary as usual. 

I had two questions for which I would be grateful for your opinion:

I don't understand why gold should be priced differently in different currencies. One would have thought that the market would arbitrage out the differences. 

The second one is more general and applies to looking at long term trends such as that for oil versus the stock market. Could it not be argued that technology changes such as the advent of green Energy or electric cars or indeed new modes of producing oil (fracking, oil sands etc) render these charts ineffective as predictors of future price action?

I thank you and look forward to hearing from you in due course. 

Eoin Treacy's view -

Thank you for these questions which I’m sure will be of interest to other subscribers. Gold is a commodity and subject to supply and demand fundamentals just like everything else but it is also a monetary metal. That means it tends to trade more like a currency than a commodity.



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June 13 2019

Commentary by Eoin Treacy

Email of the day - on the USA's oil advantage:

Quick thought, following your comment on America's oil glut, and Morgan Stanley's report you highlighted.

I have been watching the difference in price between the WTI and Brent Crude for a long time now. The difference seems to vary between 10 and almost 20% depending on the day, with WTI obviously being the cheaper. Is it too SIMPLISTIC to say?

1) that US factories, offices, homes etc enjoy an enormous advantage over their global competitors with Energy costs being so much cheaper, not forgetting it already enjoys a significant tax advantage over many as well.

2) when the US does become a significant oil exporter, it can make a lot of profit, even by offering only minor discounts to the Brent price to attract business. Possibly more profit than from its LNG exports.

Eoin Treacy's view -

Thank you for highlighting these points. I’ve always been a fan of Ockham’s Razor. There is no need to get over complicated. The USA has a massive advantage in terms of its oil and gas production capacity. That is reshaping global geopolitics, it will have a meaningful effect on the balance of payments and it has already had a meaningful effect on the chemical industry because of reduced input costs.  one.



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June 12 2019

Commentary by Eoin Treacy

What if the US and China Reach a Trade Deal?

Thanks to subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

May 31 2019

Commentary by Eoin Treacy

Energy Prices Crash in Europe as Old and New Fuels Vie for Share

This article by Mathew Carr, Jeremy Hodges and Eddie van der Walt for Bloomberg may be of interest to subscribers. Here is a section:

“LNG is now so cheap it’s competing with coal almost,” said Caroline Bain, chief commodities economist at Capital Economics Ltd., who sees slowing demand for coal. “It’s not actually falling off a cliff. We think it’s going to be a long slow death rather than tomorrow.”

The price slump is one sign of Europe’s determination to phase out coal as it seeks to slash climate warming emissions without holding back the economy. Renewables are also in the fight for market share, with onshore wind and solar power “fast becoming cheaper than average power prices in Europe’s largest markets,” according to a research by BloombergNEF.

Front-month Dutch gas prices, a benchmark for Europe, plunged 50% this year as record volumes of LNG landed in northwest Europe. Coal for next year has dropped 30% after a mild winter left inventories at European ports unusually high.

“There’s too much coal,” said Hans Gunnar Navik, a senior analyst at StormGeo AS. As “natural gas out-competes coal,” renewable generation is replacing both of them, he said.

Eoin Treacy's view -

In the pricing of commodities supply is much more volatile than demand. Generally, bull markets don’t end because the market runs out of buyers but because new sources of supply appear to satiate demand. That is why we define secular bull markets in commodities in terms of a step up in the marginal cost of production.



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May 21 2019

Commentary by Eoin Treacy

Email of the day - on battery powered flight:

I loved Lex’s tongue-in-cheek view of lithium-on batteries. A useful Energy density chart that shows where lithium-ion batteries are - roughly in between lead batteries and liquid hydrogen.

Eoin Treacy's view -

Thank you for this story and I also enjoyed the tongue and cheek nature of the Energy density comparisons. I suppose it is no longer politically correct to point out that whale blubber has about 87% the specific density of kerosene which is better than lithium ion batteries. If that could be artificially replicated, we really could see whales fly.



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May 09 2019

Commentary by Eoin Treacy

Credit Market Shows Signs of Indigestion as Junk Tumbles

This note by Sebastian Boyd for Bloomberg may be of interest to subscribers. Here is a section:

It looks like this week's jumbo bond issues have provoked some indigestion after all. Older IBM bonds are widening as much as 25 bps, according to BVAL prices. Bristol-Myers Squibb is also underperforming other similarly rated debt. In both cases, it's the longer-dated debt and the 10-year area that seems to be suffering most. Meanwhile, the rest of investment grade is wider by a couple of basis points, but junk bonds are tumbling. Tuesday was the worst day since March, but it looks like today will be even worse. Week-to-date, the weakest sectors are materials and Energy, but today it's health care.

Not all of this is related to the macro headlines. CommScope bonds are 43 bps wider on average today after results missed the lowest estimate. Chaparral Energy's bonds are falling after sales missed. But the impressive breadth suggests its more than just some disappointing quarterly numbers: 92% of the 413 movers in the index are wider today.

Eoin Treacy's view -

High yield bonds tend to trade like equity and they have shared the impressive rally that began in December. With a pause underway in the stock market, a similar condition is affecting high yield bonds. One look at the chart will tell us this is an exaggerated headline.



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April 29 2019

Commentary by Eoin Treacy

Perspectives for the Clean Energy Transition

This report from the International Energy Agency may be of interest to subscribers. Here is a section:

In contrast to current trends, the Faster Transition Scenario sets out a vision for an extremely ambitious transformation of the Energy sector. Energy-related emissions peak around 2020 and drop 75% to around 10 gigatonnes of CO2 (GtCO2) per year by 2050. The carbon intensity of the power sector falls by more than 90% and the end-use sectors see a 65% drop, thanks to Energy efficiency, uptake of renewable Energy technologies and shifts to low-carbon electricity.

Electrification plays a major role in the transition, combined with clean power generation. Electricity’s share in final Energy reaches about 35% by 2050, compared to less than 20% today. That growth is mainly due to adoption of heat pumps in buildings and industry, as well as a swift evolution in transport. Efficiency improvements keep electricity demand for other end uses, such as lighting and cooling, relatively stable, while access to electricity improves worldwide.

Eoin Treacy's view -

One of the biggest challenges facing the environment is the emotionality of the debate. It is almost impossible to discuss objective facts versus subjective opinion. Until this century there was no record of a hurricane in the South Atlantic, but now there have been three. Baobab trees that stood for thousands of years in Africa are dying and coral bleaching is taking over an increasingly large percentage of the world’s reefs. These are facts that point toward a changing climate.



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April 18 2019

Commentary by Eoin Treacy

On Target

Thanks to Martin Spring for this edition of his ever-interesting letter. Here is a section on the coal market which I found particularly illuminating: 

While climate-change activists make a lot of fuss about the US, where emission of greenhouse gases has been in decline, they aren’t demonstrating loudly about China -- which attacks developed countries for not doing enough, while itself doing most to worsen it,

The New York Times reports that China, the world’s leading emitter of greenhouse gases from coal, now admits it’s burning up to 17 per cent more coal than its government previously claimed when it signed up for the Paris accord.

And it’s making things worse. Across China the government is building a fleet of new coal-fired stations with 259 gigawatts of capacity, while outside the country it’s financing even more new coal plants, providing $36 billion for 399 gigawatts.

“Chinese bankers and project planners like coal-backed projects because they are cheap,” says the Energy consultancy IEEFA. “While they are restricted by Chinese pollution and emissions targets at home, they are free to fund coal-backed projects abroad.”

Eoin Treacy's view -

The standard of living attained by China’s middle class has resulted in a clear call for cleaner air and the government is intent on showing progress. However, there is no getting around the fact that coal fired power stations are cheap to build and run and are very reliable. Moreover, China has plenty of experience building them and there is a ready market for coal in emerging markets, not least in India and increasingly Africa.



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April 18 2019

Commentary by Eoin Treacy

The World's Biggest Electric Vehicle Company Looks Nothing Like Tesla

This article by Matthew Campbell and Ying Tian for Bloomberg may be of interest to subscribers. Here is a section:

In automotive circles, Wang’s predictions of the combustion engine’s imminent demise often meet profound skepticism. Chinese sales of new-Energy vehicles, a category comprising plug-in hybrids, pure EVs, and fuel-cell cars, more than tripled from 2015 to 2018, but they still account for only 4.5 percent of the total. The doubters, he argues, underestimate the country’s capacity for reinvention. “The Chinese way is to replace everything at once,” Wang says. “When we switched from black-and-white to color TVs, it took three years. In the West it was 10. Going from feature phones to smartphones took about one year. In Europe it was three. Cars will be the same. It will go very fast.”

Eoin Treacy's view -

China is a massive oil and gas importer but has abundant coal reserves. It therefore has a clear incentive to use less gasoline and natural gas and more coal. Electric vehicles fit squarely into that equation. Since coal is massively polluting nuclear Energy is another growth industry in China.




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April 12 2019

Commentary by Eoin Treacy

Chevron Buys Anadarko in $33 Billion Bet on Shale Oil, LNG

This article by By Kimberly Yuen, Javier Blas and Kelly Gilblom for Bloomberg may be of interest to subscribers. Here is a section:

"Chevron’s deal for Anadarko escalates the race with Exxon Mobil for the Permian and delivery of synergies and efficiencies will be critical in narrowing or overtaking its peer’s returns." --Fernando Valle, industry analyst, and Jonathan Mardini, associate analyst

The deal may put pressure on Shell to seek assets in the Permian, where the Anglo-Dutch company has said it wants to grow. Oil executives and bankers had in the past speculated that Shell may buy Anadarko because they have adjacent acreage. Shell has in the past several months held talks with Endeavor Energy Resources LP, the largest privately-owned company in the Permian that bankers say might be valued at $10 billion to $15 billion.

Eoin Treacy's view -

Unconventional oil and gas production is more expensive than conventional supply but there is a lot more of it. The challenge for producers is to compress the cost of production as much as possible so that they can be competitive when prices occasionally decline. That is what is driving the desire to get economies of scale through acquisitions.

 



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April 04 2019

Commentary by Eoin Treacy

Musings from the Oil Patch April 3rd 2019

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on coal to gas power plant conversions:

With an investment of roughly 50% of the value of an operating coalfired power plant, the benefits of converting to natural gas for fuel can make economic sense, based on our estimates.  However, as every technical article we read discussing fuel conversions pointed out, each project is different and requires an extensive analysis before reaching a conclusion.  We will not bore you with the extended lists of issues to be considered.  Natural gas makes for a cleaner environment and operating facility, and also requires less ongoing maintenance.  Gas plants are also less labor intensive, which may become a greater consideration in the future with a tighter labor market and an aging labor force.  

Given the amount of natural gas resources in the world, it would be nice to say that this conversion option is a panacea for the expensive decarbonization efforts currently being proposed.  A global coal-to-gas conversion effort is not likely, even though we suspect many more switches could (may) be justified.  As the economics of the Joliet conversion highlights, the plant moved from a baseload to peaking status, which could be justified by current Energy economics.  We doubt all regions have similar economics that facilitate such a move.  The world will continue to remain dependent on an “all of the above” Energy slate for ensuring everyone has access to cost-effective electricity.  

Eoin Treacy's view -

Natural gas prices went negative in Texas over the last couple of days, as a result of a surge in supply from the Permian. A couple of years ago there were negative electricity prices in the same region as a result of all the wind power. These market anomalies help to highlight just how prolific production can be. Meanwhile US oil production is in excess of 12 million barrels a day.



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March 27 2019

Commentary by Eoin Treacy

Aramco to Buy $69 Billion Sabic Stake in Record Mideast Deal

This article by Matthew Martin, Dinesh Nair, and Archana Narayanan for Bloomberg may be of interest to subscribers. Here it is in full:

Saudi Aramco, the world’s biggest oil producer, will buy a majority stake in local chemical giant Sabic from the kingdom’s sovereign wealth fund for $69.1 billion.

The Middle East’s biggest deal will transfer a big slug of cash into the Public Investment Fund, helping Crown Prince Mohammed bin Salman finance his economic agenda. It also weights Aramco away from its core oil production business, pumping 10 percent of the world’s crude, and more toward the production of fuels and chemicals.

“This transaction is a major step in accelerating Saudi Aramco’s transformative downstream growth strategy of integrated refining and petrochemicals," Amin Nasser, chief executive officer of Aramco, said in the statement.

The deal, first mooted last year, values the Public Investment Fund’s 70 percent stake at 123.4 riyals per share according to a statement. The remaining shares, traded on the Saudi stock market, aren’t part of the transaction.

Eoin Treacy's view -

This merger is a clear signal of Saudi Arabia’s long-term intentions. They know as well as any of us that the USA is going to become a competitor for established Energy markets which means they have to produce more value-added products in order to compete with higher cost producers. That is particularly bad news for Canada and Brazil where supply bottlenecks, grades and deep water all represent challenges that are only likely to be overcome by higher prices.



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March 20 2019

Commentary by Eoin Treacy

Video commentary for March 20th 2019

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: Fed confirms dovish tilt. Dollar pulls back which boosts the outlook for Europe, commodity producers, commodities, Energy and gold. US Treasury yields compress, taking the conclusion that the next move in interest rates will be downwards. 



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March 12 2019

Commentary by Eoin Treacy

Oil 2019: Analysis and forecast to 2024

This summary report from IEA may be of interest to subscribers. Here is a section:

The United States leads global supply growth The United States continues to dominate supply growth in the medium term. Following the unprecedented expansion seen in 2018, when total liquids production increased by a record 2.2 million barrels per day (mb/d), the United States will account for 70% of the increase in global production capacity until 2024, adding a total of 4 mb/d.

 

Important contributions will also come from other non-OPEC countries, including Brazil, Canada, a resurgent Norway, and newcomer Guyana, which together add another 2.6 mb/d in the next five years. In total, non-OPEC production is set to increase by 6.1 mb/d through to 2024.

 

Among OPEC countries, only Iraq and the United Arab Emirates have significant plans to increase capacity. These gains have to offset steep losses from Iran and Venezuela, which are subject to sanctions and political or economic turmoil. As a result, OPEC’s effective production capacity falls by 0.4 mb/d by 2024.

The United States is also turning into a major player in the global oil trade
As a result of its strong oil production growth, the United States will become a net oil exporter in 2021, as its crude and products exports exceed its imports. Towards the end of forecast, US gross exports will reach 9 mb/d, overtaking Russia and catching up on Saudi Arabia. The transformation of the United States into a major exporter is another consequence of its shale revolution.

Greater US exports to global markets strengthen oil security around the world. Buyers of crude oil, particularly in Asia, where demand is growing fastest, have a wider choice of suppliers. This gives them more operational and trading flexibility, reducing their reliance on traditional, long term supply contracts.

Global trade is not simply a story for the United States. The second-largest increase in crude exports comes from Brazil, which ships an extra 0.8 mb/d of oil by 2024. Following Brazil, Norway is enjoying a renaissance and will overtake Kazakhstan and Kuwait in the next five years a remarkable achievement.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

“Unconventional oil and gas are gamechangers for the Energy sector” has been a refrain at this service for more than a decade and the full extent of that change is now becoming clear. When we first talked about the USA becoming Energy independent it sounded to many like a fanciful view but the country is already an exporter and will reverse decades of imports in the coming couple of years.



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March 07 2019

Commentary by Eoin Treacy

The Next Industrial Revolution: Computational Biology & Bioplatforms

Thanks to a subscriber for this article by James Currier at NFX, a private equity company focusing on biotech. Here is a section:

It bears mentioning that computational biology is objectively important. We’re talking about life itself: human DNA; the food we eat; infectious diseases; the evolution of species, and so on. "Biology is the only technology that can directly address fundamental problems facing the world like planetary and human health," says Arvind Gupta, Managing director & Founder of IndieBio and partner at SOSV. "These are world scale problems looking for technological solutions that will be developed in the next 20 years and those that do stand to create trillions of dollars of value". Rather than manufacturing tools for us to use, like cars or software, we’re now beginning to manufacture life itself.

Jennifer Doudna, co-inventor of CRISPR and co-Founder of Mammoth Biosciences(an NFX portfolio company) told us, "Scientists have spent centuries carefully studying how living things work. We have now entered into a new era of biology where it is possible to move beyond observation and towards rewriting the underlying code of living things, creating countless opportunities to improve the world we live in, from diagnosing and treating human disease to restoring the environment around us."

Further, something that has become clearer to us at NFX in the last three years: computational biology touches every industry. There are at least 90 companies worth over $20BN that are eyeing the CompBio space: agriculture; industrial; pharma; Energy companies; plus all the big tech companies, like AWS, Google, and Microsoft. (Microsoft, for example, DNA that it hopes can replace cumbersome tape drives).

All of these industries are looking deeper at computational biology, trying to see how it is going to impact them.

Eoin Treacy's view -

Healthcare represents virgin territory for big data because it throws off so much data. The human brain has yet to be mapped, and one of the primary reasons is because the quantity of data required to be processed is in the order of petaflops. Colloquially, that is the computing capacity of all of Google’s programming power.



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February 22 2019

Commentary by Eoin Treacy

U.S. Bets on China's Special Envoy in Trade Talks

This article by Lingling Wei and Bob Davis for the Wall Street journal may be of interest to subscribers. Here is a section:

While Chinese negotiators offered to stop providing government subsidies that distort prices and put Western rivals at a disadvantage, they haven’t so far produced a list of subsidies they would be willing to eliminate, the people said.

Instead, the Chinese side so far has focused its offer on greater purchases of U.S. agricultural and Energy products such as soybeans, crude oil and liquefied natural gas, they said.

Whatever deal is struck, the U.S. is also seeking guarantees it will be enforced and a means to resolve disputes.

“It’s one thing to write something on a piece of paper,” said Secretary of State Mike Pompeo on Fox Business Network on Thursday. “It’s another thing to have enforcement mechanisms. And I know our trade team is hard at work, making sure that the American people get that.”

Eoin Treacy's view -

How likely is it that the USA and China will reach a trade agreement? I think it comes down to two factors. What is it that the USA wants from a deal and what is China willing to give up?



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February 21 2019

Commentary by Eoin Treacy

Sustainability - Energy & Power Technologies

Thanks to a subscriber for this report from Canaccord Genuity which may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

There is plenty of evidence of renewed interest in the commodity sector this year and most particularly because of the perception that China is on the cusp of renewing stimulative measures following at least two years of combating leverage in the shadow banking sector.

The significant dip in the Baltic Dry Index over the last few months is a testament to the slowdown in global economic activity and is further evidence of the need for stimulative measures lest China experience a recession.



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February 12 2019

Commentary by Eoin Treacy

The Weak Spot in the Oil Market That Traders Are Missing

This article by Stephanie Ying for the Wall Street Journal may be of interest to subscribers. Here is a section:

Faltering demand in Germany has preceded weak industrial data, which raised fears of a continued slowdown in Europe’s largest economy. Industrial production dropped for the fourth straight month in December, and Germany’s economy contracted in the third quarter of 2018 for the first time since 2015.

Standard Chartered analysts warn that the weakness could spread to other parts of Europe, further undermining demand for oil.

German demand makes up a minor fraction of the world’s oil consumption; the country was the 10th largest oil consumer in 2016, accounting for 2% of the global total, according to the U.S. Energy Information Administration. Since China made up 13% of oil consumption as of 2016, a drop in Chinese demand growth would likely have a comparatively larger impact.

Additionally, signs of slowing demand in other parts of Europe haven’t materialized, Mr. Horsnell noted.

Eoin Treacy's view -

Saudi Arabia continues to cut back on supply which buoyed the market today. However, the reasons for this move are not only to support prices but also in response to the slowdown in the global economy which is being led by Europe and China.



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February 07 2019

Commentary by Eoin Treacy

Musings From The Oil Patch February 5th 2019

Thanks to a subscriber for this particularly detailed edition of Allen Brooks’ report for PPHB. Here is a section oil related equities:

Eoin Treacy's view -

A link to the full report and a section from it are posted in the Subscriber's Area. 

There is a mismatch between the statements from many politicians that the future of Energy is in renewables and the statements from industry insiders that confirm the profit margins from these businesses are nowhere near those of conventional fossil fuels. That virtually ensures the continued success of renewables is dependent on subsidies and/or priority offtake agreements to justify the considerable expense in building these operations.



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February 05 2019

Commentary by Eoin Treacy

Video commentary for February 5th 2019

February 05 2019

Commentary by Eoin Treacy

Morning Tack February 5th 2019

Eoin Treacy's view -

A link to the full report and a section from it are posted in the Subscriber's Area. 

Since the dawn of the first industrial revolution 250 years ago there has been a clear correlation between the Energy intensity of economies and economic growth. That is certainly still true in many emerging markets. However, when we look at highly developed economies like the USA and parts of Europe the Energy intensity of the economy is declining, but data intensity is rising.



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January 23 2019

Commentary by Eoin Treacy

China Risks Real Hard Landing This Time

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

In other words, in the past year, banking-system liquidity has risen by about a fifth, but net credit growth has fallen by about a third. The reason is clear. Shadow finance outstanding fell by a full 10% in 2018—by far the sharpest contraction on record.

Regulators realize they have a problem. They are now trotting out new central bank lending facilities to goad banks into extending credit to small enterprises. And the economy still has some cushions. Infrastructure investment is rising again. Consumers are struggling, but less than headlines would suggest.

Both of these bulwarks aren’t as strong as a couple of years ago—consumers are more indebted and a separate campaign against off-balance sheet infrastructure fundraising is still crimping investment. If the property market falls apart, China will be in serious trouble.

China’s inefficient financial system has long needed surgery. By excising the shadow banking system without a proper transplant to replace it, regulators risk killing the patient.

Eoin Treacy's view -

China’s headline government debt is comparatively small by international standards. However, its private sector debt is larger than the USA’s government debt. By first cutting off access to funding from the state banks, then cutting off shadow banking, then banning US Dollar loans, successive windows for funding have limited access of businesses to capital.



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January 22 2019

Commentary by Eoin Treacy

Email of the day on UK shale gas

I have just discovered the following page from the UK Gov regarding shale gas exploration/production.

I am reminded by how President Obama tried to block shale oil and shale gas production in the US with worries about water pollution, earth tremors and many other PC excuses. Luckily corporate America ignored him and the US is now totally Energy self-sufficient. I hope that British companies have the same attitude and can deliver what would be a real game changing Energy situation for the UK. Oil is now circa 18% cheaper in the US than the global price, combined with their corporate tax rate, gives them a massive global advantage. With the UK being so gas dependent, I really hope we can overcome these political shenanigans and give the UK the industrial and consumer advantage that the US currently enjoy. 

Eoin Treacy's view -

The UK became a net Energy importer in 2006. It’s hard not to draw a conclusion that the difficulties the country has experience since, from falling living standards, reduced competitiveness in manufacturing, the calls for disintegration of the union and Brexit were all exacerbated by the fact the UK used to be a major exporter and now sees its imports of oil and natural gas rise every year. There is absolutely no doubt the UK needs an Energy policy that makes independence a priority. The trouble is there is not much sign of urgency to tackle this issue.



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January 15 2019

Commentary by Eoin Treacy

How a Second Brexit Referendum Would Work: the Question, When It Will Happen And Who Would Win

This article by Harry Yorke for the Telegraph may be of interest to subscribers. Here is a section:

Who would win?

Ever since Mrs May unveiled her Chequers proposal in July, the polls have all shifted towards Remain.

Whilst Brexiteers continue to invest all of their Energy railing against the Prime Minister’s deal, the campaign for a so-called ‘People’s Vote’ has been gaining momentum.

According to a recent YouGov poll, which ranks Remain, May’s deal, and no deal in order of first preferences on a constituency by constituency basis, staying in the European Union now commands a lead in 600 of 632 constituencies surveyed.

But when the various options are polled in a head-to-head scenario, known as the Condorcet method, the results are very different.

They are as follows:

Whilst these various scenarios all indicate a shift towards Remain, the results are by no means decisive.

It is also worth remembering that Remain enjoyed a comfortable lead in the polls throughout the 2016 referendum and into polling day.

Eoin Treacy's view -

An historic defeat for a sitting prime minister would normally result in her ouster. A vote of no confidence will be held tomorrow but, even then, the Labour Party will need defections from the Conservative Party to force an election and that looks unlikely. The only clear conclusion is the UK is very unlikely to leave the EU at the end of March, regardless of what the outcome of political machinations over the next 48 hours will be. There simply isn’t enough time to push through an alternative, let alone a General Election or two-tiered referendum before the March 31st deadline. 



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January 07 2019

Commentary by Eoin Treacy

Indonesia Signals Return as Asia's Emerging Market of Choice

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

Indonesia is often seen as an emerging market bellwether with its high yields, strong economic growth and a reformist government, with foreign investors holding about 40 percent of local-currency bonds. The direction of its markets may provide clues as to whether the stress that swept developing nations last year may be coming to an end.

Federal Reserve Chairman Jerome Powell’s comments on Friday indicating a possible pause in rate hikes, an easing in China’s monetary policy, and hopes of improvement in trade tensions between Beijing and America have all combined to boost emerging markets on Monday.

“The rupiah looks to be on that nice catch-down trade given the Goldilocks’ moment that markets are reveling in,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Fed’s Powell humming all the right notes out of the markets song book has gone a long way” in boosting the rupiah, he said.

Eoin Treacy's view -

Indonesia is a commodity exporter, has a large young population, an evolving manufacturing sector, and while now an Energy importer is still an oil producer. With a reform minded administration it has exhibited relative strength this year not least because it got its currency devaluation done in 2015.



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January 03 2019

Commentary by Eoin Treacy

Brazilian Assets Soar as Bolsonaro Starts to Deliver on Promises

This article by Mario Sergio Lima and David Biller for Bloomberg may be of interest to subscribers. Here is a sectionBrazilian Assets Soar as Bolsonaro Starts to Deliver on Promises

In a speech at his swearing-in ceremony in Brasilia on Wednesday, Guedes promised a sweeping overhaul of the country’s state apparatus and business environment to unleash corporate potential and free future generations from debt.

"Private-sector pirates, corrupt bureaucrats and creatures from the political swamp have conspired against the Brazilian people," he said. "Excessive spending has corrupted Brazil." Bolsonaro has tapped Guedes, a graduate of the University of Chicago, to manage economic policy in a country hamstrung by rising debt, a gaping fiscal deficit and slow growth. Bolsonaro won the October election by a wide margin as part of a popular backlash against crime, corruption and economic malaise.

In his comments Wednesday, Guedes highlighted the urgency of the task ahead. "Our business class is chained down by interest rates, high taxes and labor costs," he said, adding that he believed the ideal tax burden would be around 20 percent of gross domestic product, rather than the current rate of 36
percent.

Earlier in the day, the new Energy minister, Bento Albuquerque, said Brazil would deliver on plans to capitalize Eletrobras, prompting shares in the state-run company to jump as much as 9.7 percent. He added that he would seek a lower tax burden and few subsidies in the electricity sector.

Eoin Treacy's view -

Markets tend to reward the efforts of right-wing populists because they promise to streamline bureaucracy, cut regulation and boost economic growth; all of which tend to improve sentiment towards asset prices. Bolsonaro’s decision to appoint a University of Chicago economist as his finance minister is a signal, he has growth and employment as his first set of priorities and that is likely to be appreciated by investors.



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December 18 2018

Commentary by Eoin Treacy

Oil Crashes to 1-Year Low as Dark Clouds Envelop Demand Outlook

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

“Oil has gotten caught up in all the panic you’re seeing,” said Bill O’Grady, chief market strategist at Confluence Investment Management LLC in St. Louis. “This is all about fears of a recession. It’s risk-off everywhere.”

A U.S. government report Monday forecast surging shale-oil production, adding to worries about a glut. In Moscow, Russian Energy Minister Alexander Novak said production is rising, although the country is preparing to implement output curbs to conform with an OPEC+ accord.

Crude’s mired in a bear market amid growing skepticism that cuts by the Organization of Petroleum Exporting Countries and its allies will be deep enough to prevent a surplus in 2019. The group’s efforts to balance the market have been undermined by the relentless growth in U.S. shale, which veteran crude trader Andy Hall said is making it harder to predict global supplies.

Eoin Treacy's view -

It’s all well and good to talk about the relentless growth of US shale but West Texas Intermediate at $46 is uneconomic for a substantial proportion of shale drillers. The response is going to be less drilling as soon as any hedges on supply run off. That is the great strength of unconventional wells. They are more capital intensive to bring online but their supply is elastic because continuous drilling is required to sustain production after initial prolific period. That give companies the ability to more closely match supply to demand than conventional wells.



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December 13 2018

Commentary by Eoin Treacy

Uranium price: best performer of 2018 set for more gains

This article by Frik Els for Mining.com may be of interest to subscribers. Here is a section: 

Struggling French nuclear giant Areva (rebranded as Orano this year) slashed production more than a year ago. In August Paladin put its Langer Heinrich mine in Namibia on care and maintenance, although this week the Sydney-based miner said it's working on a possible restart of operations with vanadium as a byproduct (vanadium is trading at record highs and the only metal outperforming uranium).

In a research note on Kazatomprom, BMO Capital Markets says the production discipline from top miners will break the trend of rising global uranium inventories following the Fukushima nuclear disaster in Japan in 2011 and prompt the first production deficit in more than a decade.

And

China has 42 operating nuclear reactors, 16 reactors under construction and a further 43 planned. At the end of November, the country's national uranium corporation bought control of the Rossing uranium mine in Namibia. China is also behind the only sizeable uranium mine to come into production in the past few years, the Husab mine in Namibia, although ramp there has been slow.

Eoin Treacy's view -

Japan is steadily firing up its shuttered nuclear plants and considering China’s demand for clean Energy it is unlikely to be deterred from continuing its construction program. Meanwhile when the world’s major producers find it more cost effective to buy in the spot market than produce the metal themselves then we know prices are depressed.



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December 07 2018

Commentary by Eoin Treacy

The U.S. Just Became a Net Oil Exporter for the First Time in 75 Years

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

The shift to net exports is the dramatic result of an unprecedented boom in American oil production, with thousands of wells pumping from the Permian region of Texas and New Mexico to the Bakken in North Dakota to the Marcellus in Pennsylvania.

While the country has been heading in that direction for years, this week’s dramatic shift came as data showed a sharp drop in imports and a jump in exports to a record high. Given the volatility in weekly data, the U.S. will likely remain a small net importer most of the time.

“We are becoming the dominant Energy power in the world,” said Michael Lynch, president of Strategic Energy & Economic Research. “But, because the change is gradual over time, I don’t think it’s going to cause a huge revolution, but you do have to think that OPEC is going to have to take that into account when they think about cutting.”

 

Eoin Treacy's view -

It feels like yesterday when we first started talking about unconventional gas, and later oil, as being gamechangers for the Energy sector. Looking back at the archives it was 12 years ago. The shift in US production from what looked like terminal decline to virtual Energy independence is something the market is still coming to terms with.



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November 23 2018

Commentary by Eoin Treacy

BP Starts Production at Massive North Sea Oil Development

This article Sarah Kent for the Wall Street Journal may be of interest to subscribers. Here is a section:

Clair Ridge is expected to reach a production plateau at a peak of 120,000 barrels of oil a day and is designed to run for 40 years. The companies are currently evaluating the potential for a third project within the field to expand output even further.

It’s BP’s sixth new project to start production this year, the latest marker of the company’s return to growth after years of retrenchment in the wake of its fatal blowout in the Gulf of Mexico. To pay for the 2010 disaster, which killed 11 people and caused the worst offshore oil spill in U.S. history, BP was forced to sell off billions of dollars of assets, shrinking its production.

But a string of new developments that started up over the past two years is reversing that trend, and BP is closing in on its ambition to regain its former size. The company’s production averaged 3.6 million barrels a day in the first nine months of the year, up nearly 3% compared with the same period in 2017. Output will receive a further boost from its recent $10.5 billion acquisition of BHP Billiton Ltd’s shale assets.

Eoin Treacy's view -

Saudi Arabia pumping at capacity is one factor in the decline of oil prices and speculation is rife whether that is a quid pro quo for President Trump’s assistance in Khashoggi assassination scandal.



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November 23 2018

Commentary by Eoin Treacy

Japan's Inflation Stalls at 1% as Risks to Price Gains Gather

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

Slow but steady improvement in Japan’s core inflation gauge has come to a halt as a host of forces gather that could see price gains begin to slow.

Consumer prices excluding fresh food rose 1 percent in October from a year earlier, as expected by economists. That’s just half way to the Bank of Japan’s 2 percent target with the prospect of falling Energy costs and lower charges from mobile-phone carriers pointing to weaker price growth ahead.

Eoin Treacy's view -

The decline in oil prices is a significant benefit for consuming nations like Japan, India and China. In that regard it is disinflationary rather than an outright drag on the economy. Nevertheless, Japan needs inflation so companies can regain pricing power and promote more dynamism in the economy.



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November 21 2018

Commentary by Eoin Treacy

Natural Gas Climbs as Record Cold Seen Draining U.S. Stockpiles

This article by Naureen S. Malik for Bloomberg may be of interest to subscribers. Here is a section:

Gas volatility has soared this month as bulls betting on winter supply constraints clash with bears expecting record production to overwhelm demand for the fuel. Prices soared more than 20 percent on Wednesday before tumbling the most on record the following day. Though output from shale basins is at an all-time high, exports have climbed as domestic consumption rises, leaving stored supplies at a 15-year seasonal low.

“We haven’t had this kind of weather in a long time where it gets cold right out of the block in November,” said Tom Saal, senior vice president of Energy trading at INTL FCStone Financial Inc. in Miami. “That puts the industry on notice that we are going to need a lot of gas this winter. We could see a lot volatility.”

Eoin Treacy's view -

The question is not whether there is enough gas to go around but rather how much of it can get to market in a timely manner. That points to a lack of pipeline infrastructure rather than a lack of basic resources.



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November 16 2018

Commentary by Eoin Treacy

China Is Giving the World's Carmakers an Electric Ultimatum

This article from Bloomberg News may be of interest to subscribers. Here is a section:

The world’s biggest market for electric vehicles wants to get even bigger, so it’s giving automakers what amounts to an ultimatum. Starting in January, all major manufacturers operating in China—from global giants Toyota Motor and General Motors to domestic players BYD and BAIC Motor—have to meet minimum requirements there for producing new-Energy vehicles, or NEVs (plug-in hybrids, pure-battery electrics, and fuel-cell autos). A complex government equation requires that a sizable portion of their production or imports must be green in 2019, with escalating goals thereafter.

The regime resembles the cap-and-trade systems being deployed worldwide for carbon emissions: Carmakers that don’t meet the quota themselves can purchase credits from rivals that exceed it. But if they can’t buy enough credits, they face government fines or, in a worst-case scenario, having their assembly lines shut down.

Eoin Treacy's view -

China is the world’s largest market for automobiles so what they decide is permissible within their market is likely to shape the plans of manufacturers for the globe. One of the primary reasons companies have been announcing plans for lots more electric and hybrid vehicles over the coming years is because of the Chinese mandates. That is the primary driver behind the capacity build in the battery sector which needs to ramp up substantially if the demand growth profile is to be reached.



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November 08 2018

Commentary by Eoin Treacy

OPEC Considers 2019 Oil Production Cuts in Yet Another U-Turn

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

Earlier in the summer, prices began to surge as the risk of production shortfalls from sanctions on Iran and Venezuela’s economic collapse rattled the market. Losses from those two OPEC members threatened the biggest supply disruption since the start of the decade and Brent crude eventually peaked above $86 a barrel last month.

Since then, big things have happened on the other side of the supply equation. OPEC has been in “produce as much as you can mode” to reassure consumers, according to Saudi Energy Minister Khalid Al-Falih. The kingdom has lifted output close to record levels, while Libya is pumping the most in five years. Unexpected waivers for buyers of Iranian crude have blunted the impact of U.S. sanctions.

Then there’s the small matter of American production growing at the fastest rate in a century, just as fuel demand is at risk from the slowdown in emerging economies and the U.S.-China trade war.

Eoin Treacy's view -

The Brent Crude price trended higher in a consistent manner for more than half of 2017 with each $5 range being one above another. Then the price pulled back by $10 in 2018 before rallying $20 from the low, pulled back by $10 and if consistent would have been expected to rally $20. However, the rally did not quite manage to extend its breakout by that much and has now experienced a much larger reaction. Additionally, the price is back below the trend mean. A deep short-term oversold condition is now evident but a clear upward dynamic will be required to check supply dominance.



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October 27 2018

Commentary by Eoin Treacy

Email of the day on California from an entrepreneur

Well, we have now sold our CA ranch overlooking Silicon Valley after 24 years of making it a better and better home. While the home got better, the political and economic climate just kept getting worse and worse. When we moved to CA (back in '81, several homes ago), it was still a land of opportunity and a bastion of free enterprise. Startups were everywhere, and engineers came in droves to work on exciting new technologies that made a real and important difference in the world. I came to Silicon Valley to work on some of the most exciting technologies, and to participate in building companies that made cool products for happy customers.

Gradually the atmosphere changed, with more and more socialist governments at every level, and. as happens with all socialist systems, a gradual move to a more fascist environment with more and more rules and less and less tolerance for opposing views. As governments at every level continued to grow, taxes grew. But at least as important were the increases in the costs of local services, and the costs of public utilities which were forced to use "green" Energy despite the substantially higher costs. "Green" businesses (like Tesla) were increasingly subsidized by ever increasing taxes. All the while the state has become less and less business-friendly.

Meanwhile respect for individual rights, respect for our constitution, and respect for our country declined, with local and state politicians and many of our representatives to the federal government taking actions and making statements that would be considered treason in almost all other countries around the world. These people preach hatred, condone violence against those who disagree with them, and seek to destroy the foundations of our Republic. These people have poisoned the atmosphere of California.

We are sad to leave our many friends here in Silicon Valley. And the food...

However, with each ending, there is a new beginning.

Our new beginning is in the high country of Arizona, where we start a new chapter in our lives. We are blessed that our daughter is moving with us, and also blessed with having found a new home that promises to continue our legacy of creating a great place to live. High on a ridge overlooking mountains and valleys, we start anew with optimism and a renewed love of the land and nature, in a place where our political views are welcome, and do not make us the enemy - love of freedom, respect for the constitution, honor for our real history, a firm belief in free enterprise and capitalism, steadfast commitment to individual rights, property rights, and the rule of law, and real love for our great country.

Eoin Treacy's view -

Thank you for sharing your perspective and good luck in building a new life in Arizona.

At The Chart Seminar, we define ranges as explosions waiting to happen but I am increasingly of the belief that this conclusion is not limited to markets but is applicable to all situations where crowds are present.

The breaking of the status quo, which is represented by debt-fuelled social democracy, has resulted in support for more extreme views. That has variously led to support for both extreme dictatorial and free market solutions. That imbalance between the political belief systems has resulted in a trend of polarisation that shows no sign of ending.



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October 24 2018

Commentary by Eoin Treacy

Musings from the Oil Patch October 24th 2018

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

The latest map (generated in early October) shows that natural gas combined cycle is the cheapest technology for large swathes of the eastern and western regions of the United States (light brown).  This conclusion is true even at a natural gas fuel cost of $5.07 per million British thermal units (MMBtu).  Solar PV is the cheapest power for most of Arizona, Colorado, Wisconsin, Minnesota and Missouri (purple).  Wind provides the cheapest power for much of the central U.S., New York, and small swathes of Appalachia (green).

What is most enlightening is a similar map showing the cheapest technologies based on current natural gas prices (in this case, $3.24/MMBtu).  In contrast to the previous map, this one shows natural gas winning in Arizona, much of the Panhandle of Texas, most of Oklahoma, and nearly half of New York.  The latter is amusing as Governor Andrew Cuomo (D) has banned the development of natural gas resources in the state by fracturing, including blocking new and expanded pipelines crossing the state to haul gas to New England. 

The significance of these two maps, especially the one utilizing current natural gas prices, is that natural gas wins in the battle to be the cheapest source of electricity in almost every region where solar and wind power are being forced into the grid via government mandates and/or subsidies.  An argument for emphasizing wind and solar is the significant declines in their capital costs – an 80% drop in the cost of solar panels in recent years, for example.  The reality is that when based on more precise cost data for building new power plants, wind and solar prove to be less competitive than touted by environmentalists and politicians.  Quite possibly, the message delivered by these maps is what is prompting the growing attacks against increased use of natural gas as a “bridge” fuel to a cleaner Energy world.  A truly competitive playing field for power fuels would leave renewables with a much smaller national footprint.  That might be an outcome utility customers would welcome.  

Eoin Treacy's view -

There is a broader question that has been largely left unasked by the investment community. Renewables are improving in cost and efficiency but they have not reached a point just yet where they are competitive with what are conventional sources. Even with the best of intentions there is no getting around the fact that the sun does not shine at night and there are plenty of days with no wind. Batteries are improving all the time but we are not at a point where back up fossil fuel supply can be closed and it could be years before that is the case. However, that is not the question I am referring to.



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October 18 2018

Commentary by Eoin Treacy

Email of the day on technological innovation

I continue to be amazed at the tremendous pace of technological advances in the EV and EV battery sector, including critical improvements in the time required to recharge, the longevity of the charge and the methods available to charge.  You may have already seen the following announcement as it is a few months old, and may well be aware of these developments. However, I have personally only just seen this article today, stating that China is in the process of building sections of a motorway that is electrically conductive and can recharge vehicles whilst continuing to drive at speeds up to 120km/hr (75mph). 

http://smarthighways.net/china-to-build-a-motorway-that-charges-electric-cars-as-they-drive/

Looking further into the process that enables such a development, apparently adding graphene to the concrete renders the road surface electrically conductive and enables it to recharge vehicles.  

https://www.energymatters.com.au/renewable-news/electric-cars-charge-driving/

There is also a pilot road currently being tested in Sweden that charges specially designed vehicles from an electrified track in the surface of the road.  I dare to venture that the latest technology being utilised in China would already render obsolete the cumbersome Swedish system!  

https://www.energymatters.com.au/renewable-news/electric-cars-charge-driving/

You often mention how the pace of technological developments influences markets and economies, however I am struggling to keep up with so many new developments in the various sectors. 

Eoin Treacy's view -

Thank you for this email and the attached links. I certainly sympathise with the feeling of occasionally being overwhelmed by the pace of innovation but if we focus on enabling technologies as a first principle exercise I don’t think we will go far wrong.



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October 16 2018

Commentary by Eoin Treacy

Email of the day on the effects of a weaker Rupee

Is a crashing Rupee good or bad for India? Big debates here. Exports more competitive, of course, but how far is these external accounts a driver of Indian growth? Isn't India one giant domestic economy and isn't therefore a stronger Rupee good in the shape of lower oil and Energy prices (rural villages) and overall business and consumer confidence? Happy for the community to discuss

Eoin Treacy's view -

Thank you for this question which has a number of facets and is likely to be of interest to the Collective. India has a large domestic economy and a large current account deficit. The reason it has such a large and persistent current account deficit is because its export sector is not sufficiently developed to counter balance domestic demand. That contributes to the persistent weakness of the Rupee.



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October 15 2018

Commentary by Eoin Treacy

Plenty of Oil, Just Not in the Right Places

This article by spencer Jakab for the Wall Street Journal may be of interest. Here is a section:

The market isn’t tight everywhere, though. As evidenced by prices, there are localized gluts and producers who would gladly put more supply on the market if logistics would oblige. U.S. benchmark crude futures, priced at Cushing, Okla., are $9.00 a barrel below Brent and cash prices in the prolific Permian Basin are even cheaper. A lack of pipeline capacity is to blame.

None of that holds a candle to western Canada at the moment. Western Canada Select crude cash prices are now $46 a barrel below Brent. Pipeline and rail capacity already was stretched and, according to JBC Energy, a gas pipeline incident in the Pacific Northwest has worsened the situation significantly. Refineries in the region have had to scale back operations and thus crude purchases.

Eoin Treacy's view -

West Canada crude is trading at its widest discount to Brent Crude since at least 2013. At $57, as of Friday’s close, that is enough of an incentive to use any means available to get the oil to market. If previous spikes in the spread are any guide that is exactly what we can expect over the coming months.



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October 09 2018

Commentary by Eoin Treacy

Rocketing vanadium price primed for 'Elon Musk moment'

This article by Frik Els for Mining.com may be of interest to subscribers. Here is a section:

Vanadium pentoxide (V2O5) which makes its way into so-called vanadium redox flow batteries used in Energy storage systems breached $20 a pound for the first time since 2005 this month. That’s a four-fold increase from the start of 2017.

Simon Moores of Benchmark Mineral Intelligence, a battery materials research and price discovery provider based out of London, says the recent success of lithium ion batteries being deployed in increasing larger systems that are exceeding 1GWh has brought to light the huge potential of the market for all types of battery technologies.

Vanadium flow batteries have lifespans of over 20 years without capacity loss, are non-flammable and can operate at any temperature. Another advantage over lithium ion is that this type of battery can be charged and discharged simultaneously making it highly suitable for large-scale storage from renewable sources such as solar and wind when connected to an electricity grid. Main downside is low Energy density which means comparatively large installations needed.

“If a vanadium battery producer steps forward with bold plans to produce vanadium flow at mass scale, giving the industry its Elon Musk or lithium ion moment, the potential for the technology to be the second most deployed ESS battery in the world is there,” says Moores.

“Raw material self-sufficiency is a critical component to this. At least a third of the cost of a vanadium flow battery is vanadium pentoxide which makes up the liquid electrolyte.

“If companies are thinking of creating the Gigafactory of vanadium flow batteries, they will either need to own a mine or implement a new pricing system where the fully recyclable vanadium in the battery is leased."

Eoin Treacy's view -

Battery technology is improving all the time and a race is on to develop models which will be the foundation of an electric vehicle. Concurrently, efforts are underway to develop batteries that can perform at scale for utilities which are increasingly reliant on renewables are inherently intermittent sources of Energy. Those are two completely different growth trajectories and given the different priorities it is quite likely there will be a number of potential solutions that eventually make it to market. 



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October 08 2018

Commentary by Eoin Treacy

Shell Approves Long-Awaited Canadian LNG Project

This article by Sarah Kent and Sarah McFarlane for The Wall Street Journal may be of interest to subscribers. Here is a section:

Shell and its partners’ commitment to the project, which will cost roughly $14 billion to construct, signals growing confidence in global gas markets, as rising demand diminishes the threat that new supplies entering the market will cause a glut. It marks the end of a seven-year effort, blighted by weak prices that pushed back the final investment decision on the project by two years.

The decision suggests the prospects are positive for other large gas-export projects. A cluster of developments are currently vying for approval in Qatar, Russia, Mozambique and the U.S. Yet in the U.S. the outlook is dimming.

Earlier this month, China imposed a 10% tariff on imports of super-chilled gas from the U.S. in retaliation to levies imposed by the Trump administration. China is the biggest source of new global LNG demand and is expected to be a voracious consumer in the coming years as a result of efforts to move away from smog-inducing coal-fired power. Its demand rose around 50% in 2017.

“Right now, this is not very good for American LNG projects working hard to take final investment,” said Morten Frisch, a U.K.-based independent gas industry consultant.

More than a dozen LNG projects are awaiting regulatory approval in the U.S., though analysts say only a few are likely to get the go ahead before the end of next year. If Chinese buyers fall away, those projects could become more difficult to finance.

Eoin Treacy's view -

Natural gas is abundant and is the natural alterative to coal as economies develop and urbanisation concentrates demand within cities which are easier to run utilities to. It is the clearest bridging commodity which has any hope of meeting emissions goals before next generation batteries eventually transform the economics of renewables. That could be a decade from now and even then, gas will remain an important resource for cooking, heating and cooling. 



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September 28 2018

Commentary by Eoin Treacy

Oil on Biggest Tear in Decade as Global Supply Cushion Vanishes

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

Fears are growing that the constriction of Iranian exports by U.S. sanctions and the collapse of Venezuela’s oil industry will leave a deep shortfall in the market. Those worries have only been stoked this week as key producers from Saudi Arabia to Russia and the U.S. signaled their reserves are off limits.

Some of the world’s largest oil producers and traders are warning that triple-digit prices could soon return, with negative consequences for the economy.

“There is concern in the market that the loss of barrels from Iran and Venezuela is not going to be made up for through extra supplies from particularly Saudi Arabia and Russia,” said Gene McGillian, manager of market research at Tradition Energy. “Worries about trade relations affecting economic growth have fallen away.”

Eoin Treacy's view -

Venezuela is unlikely to reverse supply declines under the current administration. Iran’s export capacity has bene constrained by sanctions. Libya is also struggling to increase supply. Meanwhile we seldom hear that Mexico’s supply has been trending lower for years and shows little sign of improving. The bright spot is Texas supply bottlenecks may be easing with a tightening spread between Midland and Cushing prices.



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September 24 2018

Commentary by Eoin Treacy

ECB's Draghi Sees Vigorous Pickup in Core Euro-Area Inflation

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

Mario Draghi said he sees a “relatively vigorous” pickup in underlying euro-area inflation, signaling
that the European Central Bank is well on track to raise interest rates late next year.

In testimony to the European Parliament, the ECB president said while headline consumer-price growth will only average around 1.7 percent a year through 2020, still below the goal of just under 2 percent, that stable outlook “conceals a slowing contribution from the non-core components” such as Energy and food prices.

“Underlying inflation is expected to increase further over the coming months as the tightening labor market is pushing up wage growth,” he said in Brussels on Monday. “Domestic price pressures are strengthening and broadening.”

The euro jumped half a cent on the remark, reaching the highest level since June. It traded at $1.1800 at 3:16 p.m. Frankfurt time. Bunds extended losses and the Stoxx 600 index fell to a session low.

The ECB will end its bond-buying program in December and expects to keep interest rates at record lows at least through the summer of 2019. Policy makers have acknowledged market expectations for a hike around the final quarter of next year.

Eoin Treacy's view -

The ECB has taken on a lot of additional responsibilities since the credit crisis but its one core mandate is to target an inflation rate close to 2%. With inflation rising and the ECB’s quantitative easing program ending the big question is whether the European economy will be able to grow quick enough to absorb inflationary pressures or whether stagflation is more likely?



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September 24 2018

Commentary by Eoin Treacy

Oil Traders Say $100 Coming as OPEC Strains to Fill Iran Gap

This article by Javier Blas, Heesu Lee, Alfred Cang and Dan Murtaugh for Bloomberg may be of interest to subscribers. Here is a section:

Major oil trading houses are predicting the return of $100 crude for the first time since 2014 as OPEC and its allies struggle to compensate for U.S. sanctions on Iran’s exports.

With Brent crude already jumping to an almost four-year high on Monday, that’s exactly the kind of price surge President Donald Trump has been seeking to prevent by pressuring the Organization of Petroleum Exporting Countries to raise production. Yet the cartel and its allies gave mixed signals at a meeting in Algiers on Sunday, ultimately showing little sign they would heed U.S. demands to rapidly push down crude prices.

OPEC’s reticence, combined with signs of accelerating supply losses from Iran, created a bullish mood the annual gathering of the Asian oil industry, traders, refiners and bankers in Singapore on Monday.

“The market does not have the supply response for a potential disappearance of 2 million barrels a day in the fourth quarter,” Mercuria Energy Group Ltd. co-founder Daniel Jaeggi said in a speech at the S&P Global Platts Asia Pacific Petroleum Conference, knows as APPEC. “In my view, that makes it conceivable to see a price spike north of $100 a barrel.”

Eoin Treacy's view -

Saudi Arabian official stated only last week that they are comfortable with the idea of oil trading above $80 so it is not so surprising that OPEC is not racing to increase supply not least since its members all rely on high oil prices to balance their budgets.



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September 13 2018

Commentary by Eoin Treacy

The United States is now the largest global crude oil producer

This article from the EIA by Candice Dunn and Tim Hess may be of interest to subscribers. Here is a section:

The United States likely surpassed Russia and Saudi Arabia to become the world’s largest crude oil producer earlier this year, based on preliminary estimates in EIA’s Short-Term Energy Outlook (STEO). In February, U.S. crude oil production exceeded that of Saudi Arabia for the first time in more than two decades. In June and August, the United States surpassed Russia in crude oil production for the first time since February 1999.

Although EIA does not publish crude oil production forecasts for Russia and Saudi Arabia in STEO, EIA expects that U.S. crude oil production will continue to exceed Russian and Saudi Arabian crude oil production for the remaining months of 2018 and through 2019.

U.S. crude oil production, particularly from light sweet crude oil grades, has rapidly increased since 2011. Much of the recent growth has occurred in areas such as the Permian region in western Texas and eastern New Mexico, the Federal Offshore Gulf of Mexico, and the Bakken region in North Dakota and Montana.

Eoin Treacy's view -

The embedded charts in this article tell an important story of renewal in the US onshore domestic supply market versus the relatively stagnant supply growth in both Russia and Saudi Arabia. 



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September 07 2018

Commentary by Eoin Treacy

MIT study sees nuclear power as integral to a low-carbon future

This article by David Szondy for NewAtlas.com may be of interest to subscribers. Here is a section: 

Much of this is a matter of intense debate, but one big problem is that if the world is to invest in a policy of deep decarbonatization by the year 2050, there is a real chance it can only be done at either massive expense or the price of much less electricity being available at higher costs, lower standards of living in both the developed and developing world, and even a shrinking global economy.

To prevent this from happening, the MIT study says that nuclear power with its zero-carbon emissions must play a much larger role in electricity generation on a global scale. Today, the total share of global nuclear power as a primary Energy source is a mere five percent, with very little growth in the West and some countries actually abandoning the technology.

Eoin Treacy's view -

If we wish to cut down on carbon emissions then renewables are certainly a way to do it but they do not get around the questions of sustaining base load when the wind does not blow or the sun does not shine. That means we need to have a lot more industrial sized batteries to store Energy for the proverbial “rainy day” or we need additional back up conventional generators. Nuclear is carbon neutral but is also prone to massive cost overruns and accidents, however rare, tend to influence public opinion for decades.



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September 04 2018

Commentary by Eoin Treacy

Musings From The Oil Patch September 4th 2018

We listened to Catherine Wood, founder and CEO of ARK Investment Management, LLC, expound to CNBC anchors why her firm was adamantly opposed to Elon Musk’s proposal to take Tesla, Inc. (TSLA-Nasdaq) private.  Her argument was that ARK’s research showed that by 2023 annual electric vehicle (EV) sales would be 17 million units per year worldwide.  Tesla, because of its focus on software, its ability to collect the driving mileage of its vehicle purchasers, and its vision about Mobility-as-a-Service (MaaS), coupled with its ability to create a fleet of four million EV taxis, would be worth nearly $1 trillion, in less than five years, earning shareholders a 17-fold return from the current share price.  

The day following this interview, Mr. Musk announced he was dropping the idea of taking Tesla private.  He stated that he changed his mind because his shareholders told him that they didn’t want him to make such a move.  Was Ms. Wood one of those shareholders Mr. Musk decided to listen to?  He had spent an incredible amount of time and Energy since his tweet about privatizing Tesla in preparing for the move, as well as defending himself from a Securities and Exchange Commission (SEC) investigation about possible investment fraud.  That inquiry will not go away as easily as merely changing his mind, and we have yet to hear from the plaintiffs’ attorneys.  

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The emissions cheating scandal and the increasing utility of electric vehicles means established auto manufacturers have to spend very large sums to retool and get electric vehicles to market. Audi announced yesterday it has started production of its electric SUV and Daimler said today that it is going to spend more than €10 billion to develop its electric vehicle fleet.



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August 27 2018

Commentary by Eoin Treacy

2030 Energy Mix: Key Regional Trends Marching Towards A Cleaner Future

Thanks to a subscriber for this report from DBS Group which may be of interest. Here is a section:

As can be seen from the table above, the trend of Energy efficiency improvements or declines in Energy intensity is not uniform across time periods for various country groups or for individual countries. For developed or high-income countries, the trend is most secular with improving efficiency in every time period as we move forward in time. However, for middle and low-income countries, periods of high growth may be associated with high Energy intensity, which could slow down the overall improvement rate. This is most apparent for China in the 2000-2010 timeframe, where very high GDP growth rates coincided with lower focus on Energy efficiency. Energy efficiency has now picked up again in the current decade, where Chinese GDP growth has moderated and a focus on environment friendly Energy practices has evolved. Move over to low-income countries like India, and it seems that improvements in Energy efficiency are lower in the current decade owing to higher economic growth. Thus, the Chinese pattern could repeat for emerging countries like India, which will likely moderate the pace of Energy efficiency improvements to an extent as we move toward 2030.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

It is easy to conclude high income countries are more efficient because they are more technologically sophisticated than developing economies. The secular trend toward greater Energy efficiency in high income countries and the corresponding evolution of technology is supportive of that conclusion.



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August 21 2018

Commentary by Eoin Treacy

Musings from the Oil Patch August 21st 2018

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

August 09 2018

Commentary by Eoin Treacy

U.S. Oil Vanishing From Chinese Tariffs Reveals America's Clout

This article from Bloomberg News may be of interest to subscribers. Here is a section:

The removal of U.S. crude from goods targeted by Chinese tariffs is a sign that America has become too big to ignore in the oil market.

Less than two months after threatening to impose levies on imports of U.S. crude, the world’s biggest oil buyer has now spared the commodity. Only fuels such as diesel, gasoline, propane will be hit with duties on Aug. 23, according to China’s commerce ministry. That’s after the nation’s buyers, including top refiner Sinopec, began shunning American supplies to avoid the risk of tariffs.

China’s original plan to target U.S. crude came at an inopportune time for the country’s buyers. Sinopec’s trading unit, Unipec, was embroiled in a dispute with Saudi Arabia, saying the producer’s prices were costly and cutting purchases just as it was boosting American imports. Two months on, refiners were faced with the risk of supply disruptions from Iran to Venezuela and paying more to take advantage of booming U.S. output.

“The U.S. has been and will remain the main source of incremental crude production globally,” said Den Syahril, an analyst at industry consultant FGE. “With several new refineries starting up over the next couple of years, China would thus be wary of taking a decision that could end up severely hurting its domestic refining industry.”

Eoin Treacy's view -

We’ve been saying for more than a decade that shale oil and gas were going to be gamechangers for the Energy sector. The reality today is that the USA has gone from being the biggest importer of oil to being the marginal source of additional supply in less than a decade. That has deep repercussions for the US economy, after all that is hundreds of billions that will no longer be flowing overseas.



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July 26 2018

Commentary by Eoin Treacy

Musings from the Oil Patch July 24th 2018

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. This week it contains some interesting commentary on natural gas. Here is an excerpt:

Natural Gas: The Forgotten Fuel’s Future Needs LNG Exports 

One can be forgiven if he/she believes only crude oil news is important to the Energy sector.  The volatility of crude oil prices, coupled with the OPEC meeting drama and President Donald J. Trump’s twitter campaign against high oil prices, provides opportunities for shocking headlines and non-stop commentary by the media.  On the other hand, if your business is tied to natural gas, you can be excused for believing it’s pretty boring since no one is talking about gas.   

Eoin Treacy's view -

                    



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July 25 2018

Commentary by Eoin Treacy

Monopolies have killed the marine diamond industry

Many thanks to Gavin Craythorne for this story about his unique and isolated industry which he wrote recently for the Daily Maverick. Gavin is a campaigner for the rights of small-scale marine diamond miners. 

 

The marine diamond industry is a unique sector of the global diamond mining industry and is indigenous to South Africa and Namibia. There are no other places on our planet where diamonds are mined from the seabed. These diamonds are among the most sought-after gems in the world, having survived the process of natural selection during the epic journey from their source to the sea, a journey which destroys all but the highest quality diamonds.

One would think that the seaside towns and villages where these diamonds are found would be thriving with successful diamond divers, cutters and polishers, jewellery craftsman and tourism entrepreneurs. But they are not.

The towns and villages along the Northern Cape littoral are among the poorest in South Africa with unemployment at unbearable levels. The South African marine diamond mining industry is a shadow of its former self and what remains of it today is so structurally imbalanced that 93 percent of the industry’s capacity is concentrated on only 27 percent of the concessions. More than two thirds of the concessions are effectively dormant with no job creation, skills development or any other form of mining benefits for the community, while almost three quarters of the industry has contracted.

For the exceptional economic potential in the industry to be unlocked, there must be enforcement of compliance to the Mining Charter (any of them will do as far as we are concerned) and theMineral and Petroleum Resources Development Act (MPRDA). It is clear to all reasonable people that the objects of the Act are appropriate for combating poverty, inequality and unemployment in South Africa.

Why then, in an industry wherein the Charter and the Act could make such a dramatic improvement in the socio-economic conditions of so many people, is there such an obvious lack of compliance?

It is due to our South African corporate culture of monopolistic greed coupled to political insiderism. Why else would a unique, highly specialised industry be handed over, lock stock and barrel, to people who know nothing about its workings and could not care less if it thrives or dies?

It is irrational to presume that individuals with no experience, no qualifications, no technical expertise, no mining vessels and no aptitude will be able to comply with the conditionalities of marine diamond concession ownership,ie perform the optimal exploitation of the resource and deliver sustainable economic development. And yet, here we are, in a death spiral.

Then there is the matter of moral hazard. What incentive is there for a concession owner to invest significant sums of capital, at considerable risk, in an extremely challenging industry they do not understand and which they can milk anyway at someone else’s risk, effort and expense?

This dynamic has led to the collapse of the industry and the hoarding of its minerals, a situation which the Equitable Access Campaign (EAC) very cogently warned the Department of Mineral Resources would happen if it continued to allow further concentration in the hands of Trans Hex. Unfortunately, the Minister was too busy fighting the Gupta’s Imperial Crown Trading battle all the way to the Constitutional Court to listen. At great cost to taxpayers for sure.

Well before the announcement of the Namaqualand Mines transaction, the EAC made every effort to engage with the owners of dormant and underutilised concessions in the Northern Cape to address the collapse of the diamond diving industry brought about by the effects of climate change, resource depletion, high operating costs and lack of equitable access. Our efforts were simply ignored and have continued to be ignored.

The formation of the EAC was a response by people from within the industry with many years of dedication to it and a deep understanding of its unique inner workings to the unfolding collapse of Namaqualand’s marine diamond mining industry.

The depletion of the low-hanging fruit coinciding with the arrival of climate change effects has brought about a harsh new reality in which a steep decline in seadays coupled with extreme weather events make diving for diamonds a very challenging and high-risk enterprise.

The haughty indifference on the part of Trans Hex, Alexkor and the Department of Mineral Resources, who continue to ignore the impact of climate change on small-scale marine miners in the face of alarming evidence-based information flowing from the EAC, is highly antagonistic of the MPRDA’s objects, not to mention contradictory of the Ramaphosa New Era.

Did we host COP17 just to impress the rest of the world?

The only intervention which can mitigate the negative impacts of climate change and resource depletion is the meaningful establishment of equitable access for small-scale marine diamond miners to the marine diamond deposits alongside our towns and villages.

The Mining Charter and the MPRDA are emphatic on transformation and sustainability in the mining sector through equitable access to mineral resources. The National Development Plan echoes these same imperatives, so too the King III code of conduct, quoted here as follows:

“Sustainability is the primary moral and economic imperative of the 21st century. It is one of the most important sources of both opportunities and risks for business. Sustainability considerations are rooted in the South African Constitution which is the basic social contract that South Africans have entered into.”

We think so too.

The EAC came into existence on April 28, 2010 at a meeting of concerned members of the Northern Cape small-scale marine mining community with the purpose of rebuilding the industry to take full advantage of its economic development potential.

This took the form of an undertaking to bring about the establishment of equitable access in our remote sector of the mining industry by taking our government at its word and using, to the full extent possible, the powers we naively believed were available to us through the BEE Mining Charter and the Minerals and Petroleum Resources Development Act.

At a series of special town hall meetings held in Port Nolloth shortly thereafter, the EAC introduced itself to the rest of the shallow water mining community and presented the Muisvlak Manifesto, our founding principles, which was duly endorsed in full by all the BEE small-scale marine mining companies of the Northern Cape.

During one of those meetings, Archie Ovies, a coloured small-scale marine mining contractor who, disillusioned by years of struggle and financial losses in our industry, made the following observation:

“Julle beteken absoluut niks nie en die charter beteken ook niks nie want julle het geen politike mag nie.” (You mean absolutely nothing and the charter also means nothing because you have no political power.)

So far, his words have proved to be prophetic.

In response, the EAC gave all present at the meeting a commitment to strive for the transformation and sustainability of our industry while giving our best efforts, going the distance and never backing down.

Our resolve is based on the fact that we are a unique seafaring mine community with highly specialised expertise, impeccable BEE credentials, an impressive track record, living next to a diamond resource which only we are capable of mining, yet which resource is rendered largely dormant by outsiders who hold the mining rights.

The presence or absence of equitable access will determine the success or failure of the entire mining industry in South Africa. Without it there can be no transformation and therefore no sustainability. The insiders would be wrong to think that their monopolies are unassailable. One way or another they will fall and surely, they realise this by now.

In 2004 President Thabo Mbeki was outraged at the comments made by Tony Trahar (then chairman of Anglo American) on the political risks in South Africa because the ANC government had given monopoly capital their entire wish-list only to get bad-mouthed over in The City.

The irony is that much of the political instability in South Africa today is due to a lack of shared growth, for which those who wield monopoly power must accept their share of responsibility. One only need consider the heavy case load of the Competition Commissioner to know this is true.

The entire shallow water mining industry is structured in two tiers. Up in the top tier are the concession owners, Trans Hex and Alexkor, who now jointly own all the concessions from the Orange River mouth to the Groenrivier mouth. One is controlled by Llewellyn Delport and the other by Mervyn Carstens, a good friend and former colleague at Trans Hex.

Down in the bottom tier are all the small-scale marine miners who do the mining. The small-scale miners would have no quarrel with this if the top tier were complying with the Mining Charter and the Act by providing equitable access. They do not and in fact fall very far short of their commitments as concession owners.

By allowing a more equitable, efficient, fair and developmental model to emerge, the concession owners could open the way for a dramatic improvement of the socio-economic conditions in the Namaqualand littoral. No question – a profound improvement.

Our industry can no longer support an unproductive and oppressive layer seeking to benefit on our behalf by clinging to a redundant rent-seeking culture – precisely what the MPRDA and NDP seek to eliminate.

The two-tier marine mining model has broken down under the weight of years of rental extraction that has impoverished the miners, killed innovation and blocked technical progress. The only solution for rebooting into a sustainable marine diamond mining industry is to ensure equitable access, thereby reigniting the entrepreneurial spirit of Texan oilman Sammy Collins and creating an appetite for innovation and risk. Precisely what the MPRDA and NDP prescribe and what the Fourth Industrial Revolution ruthlessly demands. It is also Industry 4.0 that holds the key to exhuming that ancient black swan buried beneath the delta.

The focus for the past four decades has been on the low-hanging fruit, the easy diamonds located in shallow water with little or no overburden. A long term sustainable future for the industry lies in deeper water, under many metres of sand and mud.

The inshore industry has mainly operated two types of vessels, ski-boats and under-25-ton deck-boats. These vessels have been effective for pursuing the low-hanging fruit where the water is shallow, the volumes of gravel are low, and the operational emphasis has been on agility to prospect.

Technically speaking, there has never been any mining conducted in shallow water because the diamond grades and gravel volumes are extremely erratic due to the hydro-dynamics of the surf-zone and the rugosity of the bedrock. Operators are in a perpetual mode of prospecting: no sooner does one find an area that has gravel, and which carries diamonds than it runs out and the hunt starts over again.

The Orange River delta alluvial fan which overlays the rich diamond megaplacer orebody is mostly absent from the surf-zone as the wave Energy prevents it from settling in any significant layer. The depth of the alluvial fan sediment correlates positively with distance from the shore and reaches depths up to 30m deep in the eye of the delta, the zone which is likely to regularly produce diamonds over a hundred carats in the future when the technology to mine there is ready.

Due to depletion of the surf-zone portion of the orebody, the operational emphasis must shift urgently towards earthmoving capacity to strip the sand and mud overburden, much like the terrestrial alluvial mining operations along the beaches of Namibia where Namdeb have deployed their beach accretion mining method for the past few decades.

However, it is one thing to chase an ore body with known grades into the ocean by holding back the sea using off-the-shelf capital equipment, it is an entirely different matter to design, build and operate your own capital equipment to do the same in an underwater environment that is literally as unpredictable as the weather and without a geological model.

Furthermore, when there are individuals in positions of power who can weaponise their monopoly control of the entire industry against active citizens who are merely using democratic means to pursue constitutional rights for an entire community, the business case is not very appealing, to say the least.

The need to pivot away from the surf-zone to deeper water where the orebody is covered by many metres of fine/heavy and sticky overburden, therefore poses not only a substantial technical challenge to the industry but also a substantial mindset challenge to the concession owners.

The first is a challenge for which neither Trans Hex nor Alexkor have been willing to risk one single cent towards developing a solution, and the second is a challenge that neither have been willing to engage upon in the slightest. Kragdaadigheid is their way as far as we can tell.

We have no problem with self-interest, our problem is with unenlightened self-interest.

Remember what Oom Anton (Rupert) said: “He who covets all, loses all.”

Eoin Treacy's view -

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July 13 2018

Commentary by Eoin Treacy

Global Crude Oil Supply-demand

Thanks to a subscriber for this report from Nomura which may be of interest. Here is a section:

The IEA forecasts that US crude oil production will increase 1,720,000bbl/day in 2018 and 1,190,000bbl/day in 2019. In the Permian region, which has been driving growth in output, the lack of pipeline capacity is likely to persist until 2019. Because of this, Midland oil prices are some USD14/bbl lower than the WTI price. With issues including rising production costs and a lack of engineers, too, we think US shale oil output is unlikely to substantially exceed current forecasts even if tightening supply-demand causes oil prices to rise. See our 11 July 2018 Global research report US crude oil output - Sharp slowdown in pace of increase in 2019.  We estimate that US production forecasts are predicated on WTI price assumptions of USD55-60/bbl for 2018 and USD60-65/bbl for 2019. We estimate WTI of around USD70-75/bbl were the aforementioned short supply to be made up with increased output in the US.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The USA’s onshore production of oil and gas continues to surge, fuelled by access to cheap credit. If we cast our minds back to 2015, private equity firms had amassed massive sums to invest in Energy and that has helped to fuel the surge in US supply over the intervening period.



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July 11 2018

Commentary by Eoin Treacy

Crude Crumbles Under Trade War That Imperils Economic Growth

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

“There’s no doubt that that uncertainty continues to weigh, not only on the crude oil markets, but really all markets,” said Brian Kessens, who helps manage $16 billion in Energy assets at Tortoise. As for the storage report, “there was a little bit of noise in the data. It just depends when the ships actually hit the docks.”

Oil topped $75 a barrel last week amid actual and anticipated supply disruptions from Canada to the Persian Gulf.

Saudi Arabia has promised to ramp up output to help cover shortfalls from other major suppliers, though some observers questioned the kingdom’s capacity to do so.

In the U.S. Gulf Coast region that includes refining centers in Texas and Louisiana, oil imports plunged by 1.13 million barrels last week, the steepest decline since September 2012, according to the EIA.

“There’s a sense that Saudi Arabia’s going to increase their exports to the U.S.,” Kessens said. “There’s a lingering sense in the back of people’s minds that we’ll see that a little bit later this summer.”

Eoin Treacy's view -

Oil prices have been firm because economic growth has been robust, OPEC had been reducing supply and major suppliers like Libya and Venezuela have dropped out of the market. News today that pro-government forces have retaken four of Libya’s export ports suggests supply will start flowing once more. Meanwhile the threat to China’s economy from a ratcheting up of tariffs is a simmering issue. 



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June 27 2018

Commentary by Eoin Treacy

Musings from the Oil Patch June 26th 2018

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

To appreciate how the Energy world is changing, two charts presented by Mr. Dale set the stage.  Global Energy growth last year was 2.2%, up from 1.2% in 2016, and above the 10-year average of 1.7%.  That robust growth came as a result of strong global economic growth, but also due to a decline in Energy productivity.  While the International Monetary Fund is warning of potential dark clouds on the horizon for global economic growth, its forecast remains robust, meaning Energy growth is likely to remain high.  

Also important is the difference in where Energy growth originated.  The driver for the above-average growth was the strength of the developed economies of the OECD, but also some deterioration in Energy productivity.  However, nearly 80% of the total Energy growth came from the non-OECD or developing economies of the world.  That is not surprising as they benefit from the global economic recovery, especially China.  China saw Energy demand grow by 3%, nearly three times its growth rate of the past several years.  That higher growth was driven by recoveries in numerous high-Energy sectors such as iron, crude steel and non-ferrous minerals.  Still, the high growth rate was well below China’s 10-year average rate, even though it was helped by a decline in Energy intensity that was more than twice that of the global economy.  

The picture of primary Energy fuel mix highlighted the title of Mr. Dale’s remarks – Two Steps Forward and One Step Back.  He pointed to the dramatic growth in natural gas and renewables as the two steps forward.  Combined, those two fuels accounted for 60% of the total growth in Energy fuels.  

The backward step was the growth in coal usage.  In 2017, global coal use rose by 1.0%, or 25 million tons of oil-equivalent, marking the first annual increase since 2012.  The increase was driven by India, although China’s consumption also rose after declines in the three prior years.  

Eoin Treacy's view -

Batteries might eventually remove the need for quite so much back up conventional power generating capacity as renewable penetration of the Energy market continues, but that is still some ways off. At present natural gas represents the happy medium between reliance on coal and the fact that renewables are not yet ready to stand on their own.



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June 22 2018

Commentary by Eoin Treacy

OPEC+ to Boost Oil Output After Saudis Secure Deal With Iran

This article by Wael Mahdi, Grant Smith and Nayla Razzouk for Bloomberg may be of interest to subscribers. Here is a section:

The final communique made no mention of whether the kingdom, or any other member, could compensate for losses elsewhere. Yet it said the group as a whole should strive for “overall conformity” of 100 percent, which in practice will only be achievable if those nations with spare production capacity step in to fill the gap left by others.

"The lack of specificity is bullish for prices,” said Joe McMonigle, senior Energy analyst at Hedgeye Risk Management LLC. “It’s a mystery oil production increase because we don’t really know the final numbers."

Eoin Treacy's view -

OPEC is going to raise production by maybe 1 million barrels a day which is less than it could have. That probably represents the difficulty that exists in getting Saudi Arabia and Iran to agree on anything and suggests the market will be tighter than might otherwise have been the case.



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June 19 2018

Commentary by Eoin Treacy

US Oil Firms Use Shale Know-How To Revitalize Old Oilfields

Thanks to a subscriber for this article from Reuters which may be of interest. Here is a section:

Wildcatters first pumped oil from the Austin Chalk nearly a century ago, but output reached its peak in the early 1990s even though the formation still contains about a billion barrels of crude, according to U.S. government's Geological Survey.

That is not unusual. Oil producers have historically extracted less than half the oil from any particular field because the rest has not been accessible at a profit.

That is changing in fields like the Austin Chalk.

Based on test wells and modeling techniques, Conoco believes long, horizontal wells with multiple fracks - a technique used often in shale fields - will deliver strong results from its acreage in the Austin Chalk.

"What we were seeing with some of the newer technologies work really well in the Austin Chalk," Conoco Chief Executive Ryan Lance told Reuters.

Some wells they have fracked in the Austin Chalk have produced more prolifically than shale wells. Wildhorse's newer Austin Chalk wells produced more than three times the initial output of wells at the Eagle Ford shale field, the company said this month.

EOG also said an Austin Chalk well it drilled this year in Texas produced nearly 3,000 bpd in its first month, more than twice the first month rate of a shale well it had completed in the Permian during the same period.

Eoin Treacy's view -

One of the oldest adages in the Energy business is “you find oil where your found oil” The benefit of employing new technology in proven grounds is that there is no risk the oil is not in fact there. That reduces the cost of drilling substantially if the technology can get to less accessible reservoirs.



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June 19 2018

Commentary by Eoin Treacy

On Target June 19th 2018

Thanks to Martin Spring for this edition of his ever-interesting letter which may be of interest to subscribers. Here is a section:

 

I think it very doubtful that Italy will either choose to leave the Eurozone or be forced out. Britain’s tortuous Brexit negotiations have made everyone in Europe aware of the horrendous complexities of such disengagements. And the Brussels elite will go to great lengths to avoid another country exiting European membership.

They may need to do so. The new government in Rome is determined to introduce cash handouts for less-wealthy citizens, big tax cuts, and state aid for troubled banks. If investors take fright at the prospect of a spending spree in Rome, which would be a serious breach of the European Union’s fiscal rules and produce major conflict with it and the European Central Bank, that could trigger a flight out of Italian assets by both foreigners and Italians.

There would be significant risk of that ballooning into financial disaster. Italy has the biggest debt-crisis potential in Europe, with public debt of €2.3 trillion. The available lending capacity of the EU crisis rescue fund for the whole of Europe is less than €380 billion -- a panic would overwhelm the euro currency system.

Clashes over money won’t be the only source of Rome’s warfare with Brussels, Berlin and Frankfurt. Stir in a big row over forced repatriation of illegal immigrants. And possibly trouble over the union’s anti-Russian policies (which the populists oppose). It all adds up to what seems certain to be an avalanche of conflict, with the European Union seriously distracted from addressing its other major issues.

Many of those stem from the lamentable failure of European leaders to convert people to the idea of sacrificing national sovereignty to bring about strong central institutions. That’s why Europe, despite being in aggregate the world’s largest economy, has no closely co-ordinated economic policies, depends on one superpower for its defence, and depends on the other for most of its Energy imports.

Eoin Treacy's view -

The European Union now appears likely to reform the immigration policy that has allowed millions of economic migrants into the region over the course of the last few years. It has taken the rise of populism in Italy and the accession of the far right leaning Alternative Fur Deutschland to the Bundestag to send a wake-up call to the status quo that the citizenry are unhappy with the course of policy.



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June 18 2018

Commentary by Eoin Treacy

Le Divorce Investment themes for the post-Transatlantic world

This report by Vincent Deluard for INTL FCStone may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

There is a realistic possibility that the USA could become Energy independent and is in fact already an exporter of oil and natural gas. The widening of the Panama Canal and receding ice around the North Pole have created new shipping lanes that did not exist a decade ago. Meanwhile if the USA is an exporter it has a reduced need to secure supply channels from the Middle East and we are already seeing greater ambivalence towards active engagement in that region.



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June 12 2018

Commentary by Eoin Treacy

Musings From The Oil Patch June 12th 2018

Thanks to a subscriber for this report edition of Allen Brooks’ ever interesting report for PPHB. Here is a fascinating section on Energy efficiency statistics over the last 50 years:

Eoin Treacy's view -

A link to the full report and a section from it are posted in the Subscriber's Area.

There is no doubt that battery efficiency is improving and new solar innovation is being revealed on almost a weekly basis. There are laudable reasons for seeking to reduce carbon and nitrogen oxide emissions in our cities all of us can support. However, the question many people are worried about is whether this is merely transferring a problem from cities to less populated areas.



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June 11 2018

Commentary by Eoin Treacy

Biggest Electric-Vehicle Battery Maker Soars 44% on Debut

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

Shares of the world’s biggest maker of electric-vehicle batteries jumped on their trading debut as investors bet on rising demand for new-Energy cars worldwide.

Contemporary Amperex Technology Ltd. rose by the maximum 44 percent to 36.20 yuan at 10:17 a.m. in Shenzhen, China, valuing the company at about $12.3 billion. The manufacturer sold a 10 percent stake at 25.14 yuan a share in its initial public offering on May 30.

Investors are confident that CATL, as the company is known, can fend off rivals including Panasonic Corp. and continue to win orders as automakers move toward electric vehicles. CATL, whose customers include Volkswagen AG, had reduced the size of its IPO by more than half compared with its original ambitions because of declining margins and a cap imposed by Chinese authorities on price-earnings ratios in IPOs.

 

Eoin Treacy's view -

CATL produces more batteries than Tesla and is likely to continue to do so well into the future considering the pace of factory building it has planned. China has every intention of dominating the battery sector both because it is the largest auto market but also because it has a clear aim to become globally competitive in auto exporting. Additionally, as an Energy importer it has a clear reason to reduce imports of oil if at all possible. That suggests China will be investing heavily in batteries for the foreseeable future.



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June 08 2018

Commentary by Eoin Treacy

Milestone claimed as experimental nuclear reactor reaches temperature of the Sun

This article by Nick Lavars for NewAtlas may be of interest to subscribers. Here is a section:

The pursuit of nuclear fusion is inspired by the collision of atomic nuclei in stars, which fuse together to form helium atoms and release huge amounts of Energy in the process. If we can recreate this process we could have an inexhaustible supply of Energy on our hands that brings no harmful by-products, such as carbon dioxide emissions or the radioactive waste generated at nuclear fission-based power plants like Fukushima and Chernobyl.

But to do that we need to create Sun-like conditions here on Earth, which calls to mind one requirement first and foremost – incredible amounts of heat. Tokamak Energy hopes to achieve this through what's known as merging compression, where running high currents through two symmetrical magnet coils generates two rings of plasma, or electrically charged gas, around them.

Eoin Treacy's view -

The ITER tokomak being constructed in the south of France is based on technology from the 1970s. It is coming at the problem of containing plasma by building a big containment unit which is costing upwards of $30 billion. Today, much stronger magnetic fields can be attained through the use of superconductors. That means experiments can be much smaller and cost a fraction of the ITER model.



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June 01 2018

Commentary by Eoin Treacy

Multiyear Plan for Energy Sector Cybersecurity

Thanks to a subscriber for this report which may be of interest. Here is a section:

Anticipating and reacting to the latest cyber threat is a ceaseless endeavor that requires ever more resources and manpower. This approach to cybersecurity is not efficient, effective, nor sustainable in light of escalating cyber threat capabilities. We must recognize today’s realities: resources are limited, and cyber threats continue to outpace our best defenses. To gain the upper hand, we need to pursue disruptive changes in cyber risk management practices.

DOE’s cyber strategy is two-fold: strengthen today’s Energy delivery systems by working with our partners to address growing threats and promote continuous improvement, and develop game-changing solutions that will create inherently secure, resilient, and self-defending Energy systems for tomorrow. 

Meaningful public-private partnership is foundational to DOE’s strategy. Facing an ever-evolving threat landscape requires a coordinated approach to improving risk management capabilities, information sharing, and incident response. The federal government has also historically funded innovative research, development, and demonstration (RD&D) that cannot be economically justified in private-sector markets. Today, this includes game-changing RD&D that will build cyber resilience into Energy systems for tomorrow.

Eoin Treacy's view -

The increasingly connected nature of the global economy, together with the modernisation of IT structures in key pieces of industrial and utility infrastructure has introduced risk premia that never existed before. A decade ago no one would have given credence to the view that a hospital could be shut down remotely or that police departments could be held hostage, yet that is exactly what has happened in the last 18 months. Securing Energy infrastructure is even more important now that the US is an exporter of oil and gas and because of rising geopolitical tensions.



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May 30 2018

Commentary by Eoin Treacy

They're Whispering the D-Word in Asia's Junk Market

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

Actually, it’s China’s fault: Non-investment-grade issuers from the mainland have already raised more than $30 billion, following a record $77 billion last year. China Inc. now has half the weighting of the Bloomberg Barclays Asia USD High-Yield Bond Index.

So if China sneezes, the rest of Asia gets sick. Global fund managers hesitate to deviate substantially from their benchmarks; the most likely action is fleeing the asset class altogether. Already, in the last month, global funds pulled more than $5 billion from emerging-market bonds, data provided by Jefferies Group show. 

And it looks like China may be catching something worse than a little cold: The feared D-word is being whispered. Beijing has already allowed China Energy Reserve & Chemicals Group Co. (which counts state oil behemoth China National Petroleum Corp. as a major stakeholder) to default, as well as a financing vehicle in Inner Mongolia. Will the authorities blink if private-sector enterprises miss their obligations? 

China is now on track to achieve an unhappy annual record. There have already been 19 bond defaults this year, totaling $3.1 billion.

Eoin Treacy's view -

China needs to allow defaults. The environment that existed previously where the government back stopped just about every form of egregious lending created an unsustainable level of risk in the shadow banking sector. Allowing defaults is a big part of trying to institute discipline in investors minds.



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May 25 2018

Commentary by Eoin Treacy

Saudis Signal Oil Output Boost, Offering Relief to Consumers

This article by Jack Farchy, Dina Khrennikova and Elena Mazneva for Bloomberg may be of interest to subscribers. Here is a section:

“Given current developments, with supply worries driving the price to $80, it would make perfect sense to remove the over-compliance by compensating for the shortfall from Venezuela,” said Ole Sloth Hansen, an analyst at Saxo Bank A/S in Copenhagen.

Excess cuts amounted to about 740,000 barrels a day in April, according to estimates from the International Energy Agency. Without compensating supply from other members, this number looks likely to expand as the U.S. re-imposes sanctions on Iran and the collapse of Venezuela’s oil industry worsens.

Whether the size of the supply increase is ultimately "a million, more, or less, we’ll have to wait until June," when OPEC and its partners will meet, Al-Falih said. Novak echoed that, saying “it’s too early now to talk about some specific figure, we need to calculate it thoroughly.”

Typically, OPEC operates by consensus, meaning members that have little prospect of boosting production -- Venezuela, Iran and Angola -- would have to agree to the proposal.

Saudi Arabia has recently shown willingness to push prices higher to bankroll domestic economic reforms and underpin the valuation of its state oil company in a planned initial public offering. That appears to be changing, with the Aramco listing delayed until 2019 and Brent crude flirting with the kingdom’s desired price of about $80 for most of this month.

Eoin Treacy's view -

The USA has re-imposed sanctions on Iran and no one is likely happier about that than Saudi Arabia. That is also likely to have a played a role in the decision to help rebalance the oil market. Brent crude is no longer in backwardation between the first and second months suggesting some of the near-term pressure on supply is easing.



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May 25 2018

Commentary by Eoin Treacy

Renewable energy: A green light to Copper Demand

Thanks to a subscriber for this report for BMO which may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

There is always a new demand led story in any bull market and renewables do represent such an opportunity. However, the success of that new idea is dependent on the conventional sources of demand remaining on a steady trajectory and it is in that regard that doubts tend to be raised about copper.



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May 21 2018

Commentary by Eoin Treacy

Email of the day another email on the CAPE and the merits of cash

In your 30th April response to my email, you say as follows "The only problem I have with comparing the current environment to that which prevailed from the early 1960s is that the market spent 13 years ranging from 2000 to 2013 so it would be unusual to begin another similar range so soon after the last one ended"

My response:  Yes, it is true that it would be unusual to "commence a similar such range so soon after the last one ended."  However, in this circumstance, there are a range of other very unusual related circumstances.

In the last 10 years, we have had a unique period of historically extreme money printing with very little consumer prices inflation as measured by the official CPI number, but this extreme period of money printing has caused very high asset price inflation - pushing many sectors back up into fairly extreme valuations as measured by historical norms.

We can also look at this phenomena from another. If we look at Professor Robert Shiller’s cyclically adjusted price/earnings ratio series commencing 1880, we can see that secular bear markets have typically ended with a single digit CAPE - at the end of a secular bear market, the cyclically adjusted P/E has been in the range of 5-7 in 1982 and 1921.

By contrast, the January 2018 peak in the US cyclically adjusted P/E of 33 was the second highest instance since 1880 - only being surpassed by the dot com peak in 2000 but surpassing the 1929 peak by a small margin.

So, by this (Shiller CAPE) normally fairly reliable valuation measure, the US share market on broad averages is at a fairly extreme level. I think it is fair to say that if you buy expensive assets, you should expect poor to bad average real returns over the following 10 years or so.

One last point to you 30th April comments, to the section where you say "The stock market is a better hedge against inflation than bonds because companies have the ability to raise prices and therefore dividends while bond coupons are fixed."  In a period of rapidly rising inflation like the 1970s, all listed securities including shares and bonds tend to do poorly because of the rapidly rising discount that needs to be applied when valuing such assets. By contrast, in Australia at least, during the 1970s, cash and hard assets like gold and commercial property were better investments. 

Eoin Treacy's view -

Thank you for this riposte to my answer to your original question posted in Comment of the Day on April 30th.



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May 21 2018

Commentary by Eoin Treacy

Beyond the Dollar Everything's Just Noise for Emerging Markets

This article by Netty Ismail, Ben Bartenstein, Lilian Karunungan and Alex Nicholson for Bloomberg may be of interest to subscribers. Here is a section: 

The combination of higher debt levels and share of debt denominated in foreign currency means many emerging markets are now more exposed to dollar appreciation than in 2009, amid signs the robust growth in developing economies may be slowing, the Institute of International Finance said in a May 17 note.

While the U.S. Treasury will sell some of its largest offerings since 2010 this week, a slew of Fed speakers may reiterate plans for gradual rate increases.

The selloff in developing nation currencies is hurting other assets.

Emerging-market local-currency government bonds declined for a sixth week, the worst run since 2016. Developing-nation stocks retreated 2.3 percent last week.

Eoin Treacy's view -

The last time there was angst expressed at the impact a resurgent Dollar would have on emerging markets was in 2015. The same arguments are being made today and it appears that the figures for US Dollar denominated debt are even higher.



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May 17 2018

Commentary by Eoin Treacy

Global surge in air-conditioning set to stoke electricity demand

Thanks to a subscriber for this article by Ed Crooks for the Financial Times which may be of interest. Here is a section:

Over the next 30 years, air-conditioning could increase global demand for electricity by the entire capacity of the US, the EU and Japan combined, unless there are significant improvements in the efficiency of the equipment, the IEA warned.

In a report released on Tuesday, the agency urged governments to use regulations and incentives to improve the efficiency of air-conditioning units, to avoid a surge in demand that could put strains on Energy supplies and increase greenhouse gas emissions.

Fatih Birol, the IEA's executive director, said: “This is one of the most critical blind spots in international Energy policy.”

Air-conditioning has had an enormous effect on the quality of life in hot regions, but its use is unevenly distributed around the world. About 90 per cent of homes in the US and Japan have air-conditioning, compared with about 7 per cent in Indonesia and 5 per cent in India.

Electricity used for cooling in the US is almost as great as the entire demand for power in Africa.

Eoin Treacy's view -

A link to the full article is posted in the Subscriber's Area.

There was a story a few years ago where world leaders were asked what the greatest invention of the 20th century was. Some said the electrical grid but the Prime Minister of Singapore said air conditioning. He opined that without it most people in the country would still be seeking shelter from the heat under the nearest tree.



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May 04 2018

Commentary by Eoin Treacy

War on coal making the world's top mine owners a lot richer

This article appeared in Mining.com and may be of interest. Here is a section:

Some of the more significant declines are occurring in China, the top mine operator, and financing for new supplies is drying up. That’s creating a windfall for the producers who remain.

“It’s a perverse consequence” of policies intended to combat climate change, said Julian Treger, co-founder of activist investor Audley Capital Advisors LLP. “It’s going to be very difficult for funders to provide capital to bring new coal assets online. We have a very interesting supply and demand picture being set up.”

Anglo American, which not long ago wanted to unload its coal assets, has seen income from the business triple since 2015 to become the mining company’s most profitable commodity. Last year, Glencore reported earnings from the fuel more than doubled, while BHP Billiton said it surged sixfold.

While global coal use and mine output has been dropping, production failed to keep pace with demand in 2016 for the first time in seven years, data compiled by BP Plc show. As supplies continue to drop, the amount available for export is shrinking. BMO Capital Markets says the 1 billion-metric-ton seaborne market will have a small deficit by 2021 and expand to 15 million tons in 2022.

Eoin Treacy's view -

Coal is about as unfashionable as one might imagine and it must be very difficult for companies to raise capital to increase supply considering how negative sentiment is. At the same time, coal is one of the world’s most popular sources of Energy and is indispensable in the production of steel. A good many coal companies when bust before prices started to recover in 2016 and supply is still constrained.



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