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December 23 2013

Commentary by David Fuller

EU leaves shale gas out of stricter law on environmental studies

Here is the opening from this report by Reuters:

BRUSSELS, Dec 20 (Reuters) – EU governments on Friday endorsed an outline deal on new rules to assess the impact on the environment of projects such as oil and gas exploration, after removing references to shale gas that had blocked agreement.

 Some European nations are eager to develop shale gas as they view the United States’ shale gas revolution and cheap Energy costs compared with Europe as a huge competitive advantage.

 But the geology in Europe is very different and public opposition is strong on environmental grounds. 

 Many of those keenest on exploiting shale gas, such as Britain, say extra EU regulations on the Energy form are unnecessary and would get in the way of its development.

 British Prime Minister David Cameron wrote to Europe Commission President Jose Manuel Barroso this month laying out his arguments against new rules for shale gas.

 On Friday, EU ambassadors approved a revised draft law, updating legislation first agreed more than two decades ago and for the first time including an assessment of a new project’s impact on climate change, EU diplomats said.

 In a statement, Valentinas Mazuronis, environment minister of Lithuania, which holds the EU presidency until the end of the year, said the reforms would streamline the process and set minimum requirements across the European Union.

 The proposals, endorsed by ambassadors on Friday, still need to be signed by the European Parliament and by ministers to become law.

 The parliament had called for mandatory shale gas impact assessments, but EU diplomats said negotiations between representatives of the Parliament, the Commission, the EU executive, and member states had been blocked until that requirement was dropped.

 So far, shale gas is already covered by 17 different pieces of EU legislation, but there is no specific law.  

David Fuller's view -

In other words, the EU having been forced to back off a complete ban on shale gas and oil developments has nevertheless introduced even more legislation sufficiently soaked in treacle to deter the development of individual countries’ Energy resources.  Why?

Call me cynical but there are two main reasons, I suggest.  1) A combination of militant greens and politicians beholden to renewable Energy suppliers do not want to see any new production of fossil fuels in Europe, even though natural gas from shale properties would lower the region’s CO2 emissions.  2) Competitively priced shale gas and oil in Europe would undercut the EU’s extremely expensive green Energy technologies.

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December 23 2013

Commentary by Eoin Treacy

Shenhua Buys $1.5 Billion of Assets From Parent in Expansion

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

Shenhua Energy, which generated 69 percent of its sales from coal and 29 percent from power production in 2012, according to data compiled by Bloomberg, is buying related companies as it seeks to broaden its earnings base.

The company said yesterday it plans to invest $90 million in a venture that will explore for shale gas in Pennsylvania. Last year, the company agreed to buy 3.45 billion yuan of assets from its parent, including stakes in three companies and rail cars.


Eoin Treacy's view -

Closer environmental scrutiny of coal fired power stations and competition from natural gas in the USA, and reduced demand for steel, has acted as a significant headwind for the coal sector globally. The result has been that it was among the worst performers this year. Some of the larger companies have attempted to diversify by either investing in value added products such as chemicals and/or producing coal seam gas. With natural gas prices at their highest level in a number of years the competitive disadvantage coal has been at is now being eroded. 


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December 19 2013

Commentary by Eoin Treacy

Natural Gas Climbs to Most Since July 2011 on Record Supply Drop

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

The size of the storage withdrawal also indicates that as onshore U.S. production grows, well shut-ins during cold weather are playing a bigger role in disrupting output than hurricanes have in recent years, said Schork and Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York.
"Going into the winter, the market appeared convinced that the industry was amply supplied,¡± Viswanath said. ¡°Now, however, in the aftermath of the very cold weather and the resulting high demand and freeze-offs, these assumptions are possibly being tested"
Gas production has fallen 25 billion cubic feet since the first week of December, mainly in the Rockies and the Midcontinent region, said Luke Larsen, an analyst at LCI Energy Insight, an Energy analysis and consulting company in El Paso, Texas. Daily output in the lower 48 states slid 2.7 percent to average 72.49 billion in the week ended Dec. 12.


Eoin Treacy's view -

This unexpectedly large withdrawal and its effect on inventories suggests that the oversupply situation which has depressed natural gas prices has come back to at least equilibrium. With prices above $4 a great deal more unconventional supply becomes economic, but suppliers are likely to want to see prices stabilise near this level before taking a risk on increasing output.
Natural gas has rallied impressively over the last month to test its high for the year near $4.40. A sustained move below $4.20 would be required to confirm resistance in this area and to delay potential for additional upside. 

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December 17 2013

Commentary by David Fuller

Australia to be an energy superpower by mid 2017

Here is the opening from this informative article by Ambrose Evans-Pritchard of The Telegraph (UK):

Australia is to become a global gas superpower by the middle of the decade and eliminate its current account deficit for the first time in almost 40 years, according to Morgan Stanley.

“Liquefied natural gas (LNG) exports from Australia could be the next big thing,” said the bank in a new report.

It predicted a “huge ramp-up” in LNG output that could transform the country’s economy, claiming that Australia could overtake Qatar by to become the world’s biggest exporter of LNG as soon as 2017 rather that 2030 as widely assumed.

By then Australia would be a major force in global Energy production, with LNG and coal exports together matching the country’s vast iron ore shipments.

Two-thirds of the world’s entire increase in traded LNG capacity is currently from Australia. While the US has a glut of natural gas from shale sources, it will be five to 10 years before it has the export terminals and infrastructure to sell large amounts on the global market.

This gives Australia a window of opportunity. It can benefit from the shortage of LNG supplies in Asia, especially in Japan where closure of nuclear reactors after the Fukushima disaster has left the country heavily dependent on gas imports. Gas is selling in Japan at almost $19 per British thermal units (BTU), compared to just $4.3 in the US.

David Fuller's view -

Well done Australia, for seizing the initiative in terms of tapping gas reserves and converting this key resource into LNG for Export.  I hope this article above is accurate in the forecast for 2017 and welcome feedback from Australian subscribers.

I have been concerned by the slow development of natural gas resources in Europe and also Asia, not least in terms of shale properties.  However, Australia’s progress and future exports are right in line with FT Money’s forecast of lower Energy prices in real (inflation adjusted) terms before the end of this decade.  

All this, Australia, and let me also add my hearty congratulations on a commanding Ashes victory.  It pained me, initially, but Australia’s inspiring, one sided victory was thoroughly deserved and good for the game of cricket.  I now hope to see some contests in the remaining two Ashes series matches.        

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December 16 2013

Commentary by David Fuller

Energy and Jobs. The transformation of Americas energy market is starting to have a direct impact on vital British [and European] industries

Here is the opening from this important editorial from The Times, which is relevant not only to Britain but also most countries which have chemicals industries:

“Welcome to Boomtown USA,” says the sign at the entrance to Williston, North Dakota. Its unemployment rate is under 2 per cent. Its gas flares are visible from space, and its pride at helping to reverse America’s long slide towards Energy dependency is palpable.

There are no such signs in Britain because there is still no large-scale British fracking industry. Instead the economy remains yoked to high Energy costs and low growth that compare well only with its sluggish European neighbours.

Britain’s Energy-intensive industries, chief among them chemicals manufacturers, are struggling with gas prices three times higher than in the United States. Electricity costs twice as much as in America and the chemicals sector across Europe is in a “fight to the death”, in the words of one analyst, as investment and jobs go elsewhere. Prompt steps must be taken to begin to bring them back. If the price is that the coalition’s green credentials are further undermined before the next election, it is one that must be paid.

For now, Europe’s largest maker of PVC is the giant chemical works owned by Ineos in Runcorn. It produces 38 varieties of polyvinyl chloride, used in hundreds of products from clingfilm and swimming pool liners to pharmaceuticals and drainpipes. It uses as much electricity, much of it from gas-fired power stations, as Liverpool. Historically it has exported much of its output to North America, but its future is now much less certain.

The Government’s Committee on Climate Change warned yesterday that low American shale gas costs as a result of fracking “could present a direct competitiveness risk to UK gas-intensive firms trading with the US”. The committee said that “in the longer term there is a risk that investment and jobs could relocate to the US”.

Viewed globally, this relocation is already under way. Taiwanese and Saudi chemicals firms are among those planning investments worth more than $90 billion in new US plants to take advantage of low Energy costs. From being a net importer two years ago, America expects to be exporting chemicals worth $30 billion a year by 2018. At the same time it is preparing to boost its gas liquefaction capacity by a third in order to sell its shale gas surpluses abroad.

The impact on British industry will be profound, and the policy imperatives are clear. The Government should, first, avoid the trap of committing itself to high prices for future Energy supplies when there is a clear possibility that wholesale prices will fall rather than rise in the medium to long term. That it has already guaranteed extravagant prices for power from new nuclear plants to woo foreign investors only makes it more important not to follow the same path for renewables. The result would be higher domestic Energy bills and the risk of steep job losses for the sake of self-imposed carbon targets not observed even elsewhere in Europe.

David Fuller's view -

Wake up politicians, and smell the coffee.  You are weakening your economies and increasing unemployment by driving away Energy dependent industries. 

This is not America’s fault.  In fact, the USA’s private sector has shown the way, by using technology, commonsense and commercial initiative to lower its dependency on often hostile Energy cartels.  Thanks to fracking technology, which the USA’s private sector invented, it has lowered its Energy costs and increased the efficiency of its economy.  In the ultimate riposte to militant green lobbyists, who would weaken our economies while darkening our homes and streets, the USA has also lowered its CO2 emissions by using fracking to produce much more natural gas.


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December 16 2013

Commentary by David Fuller

The Weekly View. Updating 10 Conditions for Sustainable Growth

My thanks to Rod Smyth, Bill Ryder and Ken Liu for their informative letter published by RiverFront.  Here is the opening

For economic growth to be self-sustaining, without extraordinary fiscal and monetary accommodation, ‘Main Street’ needs to feel confident about its employment and financial prospects, in our view.  Wall Street has clearly benefited from government and Federal Reserve policies – the stock market and earnings have risen to record levels – but the average household has struggled with depleted savings and stagnant incomes.  Moreover, government support has already begun to ‘taper – temporary payroll tax reductions have ended, unemployment insurance has been scaled back, food security programs have been cut, and sequestration remains in effect (although further spending cuts may soon be lifted in budget negotiations).  Given this backdrop, we think recent employment and manufacturing data are encouraging.  In The Weekly View, 6/22/09, we set forth ten conditions that we thought were necessary for a sustainable economic recovery.  When we last revisited this list on September 16, most of the conditions were met but still signaled below-average growth.  Since then, despite a government shutdown, the most recent data show that nearly all of our requirements have been fulfilled and continue to improve.  Thus, we expect accelerating year-over-year economic growth in 2014.   

David Fuller's view -

Please note - the RiverFront report is posted in the Subscrber's Area.

The RiverFront team did not specify how much accelerating growth they are expecting for the US economy. My own view is that modest GDP growth will continue given the Fed’s ongoing monetary stimulus, plus the USA’s inherent advantages of competitive Energy prices and an expanding lead in technological innovation.  

It is not quite five years since the USA’s credit crisis recession bottomed, so previously deleveraging consumers remain somewhat cautious.  Moreover, many families have seen little or no increases in their wages.  Chastened and more regulated banks are similarly cautious, particularly regarding business loans to small companies.  

There are some informative graphics in this issue of The Weekly View which may interest subscribers.  

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December 12 2013

Commentary by David Fuller

UK fracking chief pledges billions to villages

Here is the opening from this Sunday Times (UK) article which quotes the sensible, plain-talking Aussie who runs the private company Cuadrilla Resources (subscription registration required for the full article but a PDF is in the Subscriber’s Area.) 

THE founder of the controversial shale-gas explorer Cuadrilla Resources wants to hand towns and villages billions of pounds from fracking what he calls “the people’s gas”.

In his first interview in Britain, Allan Campbell, the Australian behind Cuadrilla, claimed his company has discovered “another North Sea”, but bemoaned the lack of political will to develop it.

“I’ve got a great admiration and fondness for this country from whence my ancestors came, but the regulatory and planning system here is just bullshit,” he said.

“There is no leadership, there is no oomph.”

The company claims to have discovered 200 trillion cubic feet of gas thousands of feet underground in Lancashire — sufficient to meet typical British demand for more than 50 years — but has been hamstrung by mounting opposition to fracking.

David Fuller's view -

For all the warnings and scare stories, how many fracking disasters from water table pollution to earthquakes and widespread desecration of the land are we hearing about in the USA today?  Very few and the benefits of fracking considerably outweigh the risks. 

The UK has extensive resources of shale gas and oil, extending from Cornwall to Scotland.  The development of this valuable resource would transform the UK economy, and obviously not just in the south. 

There is a political problem for the Conservative led government because it dare not offend anyone during the countdown to the next election which has to occur by 7 May 2015.  On current evidence the delays in fracking mean that it is unlikely to be lowering the UK’s Energy costs by that date.  What a pity. 

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December 11 2013

Commentary by David Fuller

Fracking Boom Pushes U.S. Oil Output to 25-Year High

Here is the opening of this informative article from Bloomberg:

U.S. crude production rose to the highest level in a quarter-century as a shale drilling boom in states such as Texas and North Dakota cut the need for foreign oil and pushed the country closer to Energy independence.

The U.S. pumped 8.075 million barrels a day in the week ended Dec. 6, a gain of 0.8 percent, or 64,000 barrels a day, the Energy Information Administration said today. It’s the most since October 1988.

“You can’t swing a cat without hitting a barrel of oil in North America,” saidStephen Schork, president of the Schork Group Inc., an Energy consulting firm in Villanova, Pennsylvania. “It’s amazing how quickly things can change.”

U.S. oil output grew 18 percent in the past 12 months, the fastest pace on record, boosting fuel exports and reducing reliance on imports, according to the EIA. The boom will make the country the world’s largest producer by 2015, five years sooner than last year’s forecast, the International Energy Agency in Paris said last month.


David Fuller's view -

Remember growing up with all those stories about how we were going to run out of oil, to the point of being impoverished and sitting in the dark?  They persisted right into the 21st Century.  People are still inventing reasons to avoid tapping their natural resources, and paying much higher prices for their Energy.  Who benefits from that?

 Technology is everything.  It improves our livelihoods, as most of us know.  We have only begun to see how it can reduce pollution, because that challenge was not sufficiently prioritised previously.     

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December 10 2013

Commentary by Eoin Treacy

Oil Market Outlook 2014

Thanks to a subscriber for this educative report from DNB which is sure to be of interest to subscribers. Here is a section:

Recently Lynn helms, the head of North Dakota's Department of Mineral Resources stated that 86% of the state¡¯s output has break even prices of 45 $/b or lower. This is much lower numbers that we have seen in earlier calculations. The break even price includes 10 % cost of capital and is after tax and royalties according to the Department. The break even prices for the top 4 counties in the Bakken field was said to be 40 $/b for Williams, 37 $/b for Mountrail, 26 $/b for McKenzie and 31 $/b for Dunn. These are low numbers, but note that they would be well-head break evens which means you will have to add maybe 5-15 $/b in transportation costs to reach a refinery. Still if the break even costs to reach the sea is 45 $/b plus 15 $/b, this is lower than the estimates we have operated with so far. We will probably have a test of the North Dakota Break even prices when we get the reported November numbers from the oil industry in North Dakota because in November the price for Bakken crude oil into the Clearbrook pipeline system was about 80 $/b. If this price was not low enough to dent any activity in the Bakken it may indicate that the break even costs are on their way down rather than up in North Dakota. According to Wood Mackenzie the break even price for Bakken is at 62 $/b. Also this is meaningfully lower than the 77 $/b we have been leaning on as the average Bakken break even price calculated by PIRA Energy. PIRA is however telling us that they are about to revise their break even calculations for the Bakken lower these days.

There are many numbers floating around and what we should probably focus on is the development reported by the key players in the shale industry. It is probably not very relevant to put any weight on what small insignificant producers may report of IP-rates, break even costs, drilling time, etc, etc. In the US shale oil industry (note this is not shale gas) there are 25 players that are behind most of the volume produced. We have made a list of these players in the Appendix. The largest shale oil player is by far EOG, but other players are on the rise. Note that this list of 25 players only includes 3 International Oil Companies (NOC¡¯s). This industry is in other words not at all driven by the large international integrated oil companies. Note that Royal Dutch Shell is not at the list at all. The largest of the oil supermajors is ConocoPhilips. Our point is that if you wish to follow the broad development of costs and efficiency in this industry you should focus on the 25 names mentioned in the Appendix. Don't waste effort in looking at the development for the very small players (unless you are evaluating investing directly in them of course.

Eoin Treacy's view -

At we have defined peak oil in terms of the rising cost of production and this is borne out in the fact that much of the new supply now reaching market is at a cost substantially above that of providers such as Saudi Arabia. As a result we can conclude that while the medium-term outlook for oil prices is for lower to lateral ranging, prices are unlikely to fall below the marginal cost of new unconventional production.

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December 09 2013

Commentary by Eoin Treacy

It is safe go to back in the water

Thanks to a subscriber for this educative report by Christeen So for CCB International which may be of interest to subscribers. Here is a section:

Policy tailwinds. We expect China waste and water names to continue to outperform backed by favorable government policies towards environmental protection. We see China’s waste-to-Energy (WTE) market continuing to expand in line with the government objective to lift the WTE-to-total treatment ratio from 20% in 2010 to 35% in 2015F. China’s wastewater treatment (WWT) market is likely to experience a gradual slowdown in new capacity additions as the WWT ratio continues to rise over the medium term; however, tariff hikes should mitigate the effect on earnings.

“Market has yet to factor in potential growth from new markets such as hazardous waste treatment (HWT) and water renovation projects. We believe HWT will become a new important income stream for China’s waste operators given increasing demand for third-party waste treatment and the higher returns it brings (levered IRR: 15-20%) compared with WTE (levered IRR: 10-15%). As China is still behind in its water renovation plans, we expect more investment in this area in the medium term; good news for WWT operators.

“Volume growth from new project wins, collection points growth, and M&A opportunities. We expect waste/waste water volume growth from project wins in both existing and new geographical areas, a rising number of waste/waste water collection points, and large-scale M&A. Watch for established SOE players with strong political connections, experienced management teams, solid“

Catalysts and risks. Near-term catalysts include (1) more lucrative waste/water project wins, (2) faster-than-expected penetration into new business segments, (3) additional supportive policies, and (4) large-scale value-accretive M&A. Downside risks to our view include (1) slower-than-expected new capacity expansion, (2) on-grid tariff, waste tipping fee, and water tariff cuts, and (3) rising interest rates.

Eoin Treacy's view -

The changing priorities of the Chinese administration from an outright focus on growth to a more nuanced, human capital, centred approach has obvious benefits for the environmental sector. Water treatment has been a particular beneficiary since China has substantial issues with providing ample water for its growing needs and related shares have rallied impressively. 

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December 06 2013

Commentary by Eoin Treacy

Putin Frees Russian Gas Chilled Amid Permafrost

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

Global LNG capacity will reach 468 million tons in 2018, from 295 million this year, according to Energy Aspects. That includes the expansion of output from Russia and excludes projects in East Africa and Cyprus that will probably be delayed into the next decade, said Trevor Sikorski, the consultant’s head of natural gas, coal and carbon.

There will be “enough room for everyone” in the LNG market and those with more competitive costs will benefit, Denis Solovev, a Novatek spokesman based in Moscow, said today by e-mail, citing earlier remarks by Mikhelson.

Putin pushed for the gas export law to increase the clout of Russia in global LNG markets. The nation is the world’s biggest gas exporter. It accounts for about 5 percent of LNG supply and 30 percent of pipeline deliveries, according to data
from BP Plc.

Eoin Treacy's view -

The creation of an increasingly large global LNG market necessitates not only that supply increases but that export terminals are built and that this valuable commodity is transported across long distances.

While the USA’s natural gas revolution has created bull markets in pipeline and rail shares, the global market represents an opportunity for tankers to transport LNG across oceans. While we can expect more ships to be built to service this market, at present there is a comparatively small number of pure plays.

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December 03 2013

Commentary by David Fuller

Shell to GE Lured by Gas-Fueled Ships on Record Supply

Here is the opening and a latter section of this informative article from Bloomberg:

Royal Dutch Shell Plc (RDSA), General Electric Co. (GE) and a company co-founded by T. Boone Pickens are planning investments in natural-gas-powered shipping as record U.S. output spurs the merchant fleet to use a new fuel. 

Clean Energy Fuels Corp., which Pickens helped start, will begin construction next year on the country¡¯s first fuel station for cargo ships running on liquefied natural gas in Jacksonville, Florida. Shell said in March it¡¯s planning LNG plants for the Great Lakes and Gulf Coast. GE, evaluating five locations, says the U.S. will need 50 to 100 small-scale plants for ships, trains, mining and trucks by 2025, each costing $50 million to $150 million.


Ship owners started switching to lower-sulfur diesel from bunker in northwest Europe and North America because of national and international anti-pollution rules phased in since 2005. LNG cuts sulfur emissions by 90 percent to 95 percent and also releases less carbon dioxide and nitrogen oxide, according to DNV GL. Alternatives include burning low-sulfur diesel or installing equipment called scrubbers that clean exhaust.

Rising demand could drive fuel costs higher. While U.S. natural gas futures plunged 74 percent to $3.960 per million British thermal units from the record reached in 2005, prices will average $4 in 2015 and $4.25 in the longer term, Morgan Stanley estimates.

LNG ship fuel would cost about $800 a ton in the U.S., $1,000 a ton in Europe and $1,200 in Asia, according to estimates by New York-based shipbroker Poten & Partners Inc. That compares with global prices of $1,300 for an equivalent amount of diesel and $950 for fuel oil with scrubbers.

David Fuller's view -

Natural gas is certainly well on its way to becoming the world¡¯s most important fuel, because of its availability, price, and considerably lower contribution to pollution.  

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December 03 2013

Commentary by Eoin Treacy

Canada Dollar Touches Lowest in Three Years on Rate Outlook

This article by Ari Altstedter and Andrea Wong for Bloomberg may be of interest to subscribers. Here is a section: 

The currency fell against the majority of its most-traded peers before a central-bank meeting tomorrow, when policy makers are projected to hold the benchmark interest rate at 1 percent.

A report last week showed third-quarter economic growth was the fastest in two years even as exports fell, frustrating the Bank of Canada's expectations for trade to drive growth as over-indebted consumers pare back.

"There's still a bias, there's a possibility somewhere down the road that the Bank of Canada possibly has another interest-rate cut," said David Bradley, director of foreign exchange trading at Scotia Capital Inc., a unit of Bank of Nova Scotia, by phone from Toronto. "With the announcement tomorrow, that's just kind of weighing on the Canadian dollar."


Eoin Treacy's view -

US domestic oil and gas supply growth continues to displace Canadian supply and makes developing additional markets for Canada¡¯s Energy resources a national priority. Since it will still be a few years before export facilities on the west coast come online, the country¡¯s export growth ambitions will need to rely on other sectors. Depending on how much exports are impacted, the possibility remains open that the Bank of Canada may decide to opt for additional easing in an effort to rebalance the economy towards domestic demand not least since the Canadian Dollar has been trading at historically high level for the last few years. 

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December 02 2013

Commentary by David Fuller

"Green energy could kill Britain's economy"

Here is the opening of another excellent article by Matt Ridley for The Times (subscription required to read the full article but a PDF version is in the Subscriber’s Area.)

The Chancellor is to knock £50 off the average Energy bill by replacing some green levies with general taxation and extending the timescale for rolling out others. On the face of it, the possibility that global Energy prices may start to fall over the next few years might seem like good political news for him, and some of the chicken entrails do seem to be pointing in that direction. There is, however, a political danger to George Osborne in such trends .

For Government strategists reeling from the twin blows of Ed Miliband’s economically illiterate but politically astute promise of an Energy bill freeze and the Energy companies’ price hikes, the prospect of lower wholesale Energy prices might seem heaven sent. But in many ways it only exacerbates their problems, for the Government is right now fixing the prices we will have to pay for nuclear, wind and biomass power for decades to come. And it is fixing those prices at quite a high level.

The more that oil, gas and coal prices drop, the worse these deals look and the more they threaten our economic competitiveness. The Liberal Democrats have not allowed the Chancellor to cut subsidies for the renewable Energy industry, the most regressive redistribution of wealth since the Sheriff of Nottingham was in his pomp.

They argue that what has driven Energy bills up threefold in ten years is mainly an increase in the wholesale price of Energy, rather than any great lurch towards subsidising renewables. True, but most of the lurch is yet to come and as wind power capacity quadruples by 2020, it will add £400 to average bills — not to mention driving up the price of Energy to industry, which will pass it on to consumers.

“There is not a low-cost Energy future out there,” said Ed Miliband when Secretary of State for Energy and Climate Change in 2009, at the time an enthusiast for discouraging Energy use by price rises. It even became fashionable to argue, when Chris Huhne filled that post, that higher prices would cut bills (yes, you read that right) by encouraging people to use less power.

Anyhow, the forces that have driven Energy prices up in recent years appear to be fading. Consider some of the reasons that oil and gas prices rose in 2011, the year Energy companies pushed up prices even more than this year. Japan suffered a terrible tsunami, shut down its nuclear industry and began scouring the world for gas imports to keep its lights on. At about the same time Libya was plunged into civil war, cutting off a key supplier of gas. Add in simmering tension over Iran, Germany’s sudden decision to turn its back on nuclear power, the legacy of a couple of cold winters and the lingering depressive effect on oil and gas exploration of low Energy prices from much of the previous decade, and it is little surprise that oil and gas producers pushed up prices.

Contrast that with today. Several years of high prices have driven a surge of new exploration. Deep offshore technology is advancing rapidly and huge gas fields have been found in the Mediterranean and in the Indian and Atlantic oceans. In the United States, the shale revolution has glutted both gas and oil markets, displacing imports. Iran is coming in from the cold, Libya is back on stream and Australia is preparing to export huge volumes of gas. Should the rest of the world start producing shale gas — China, Argentina, Poland and others are on the brink, even Britain might one day deign to join them — that would further add to supply.

David Fuller's view -

This is an excellent summary of what FT Money has been pointing out over the last four years, as the Archive will confirm.

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December 02 2013

Commentary by David Fuller

Email of the day (2) - On the cause of site teething problems:

“Hi David and Team, Thank you for outlining the background to the teething problems that your new venture is experiencing at present. I appreciate your candour and honesty in describing the difficulties you are facing and I assure you that as a very satisfied subscriber for many years you have my full support. Just take care not to overwork or neglect your health (I was very surprised to get an immediate response to an email sent by me on Monday at 11a.m. Japan time which meant that you were still working at 2 a.m.!)”

David Fuller's view -

Thank you so much for this generous and most thoughtful email.  I love being part of this interactive service and have plenty of Energy for the new challenge with colleagues I both like and respect.  However, I was very grumpy this morning because I knew subscribers would be concerned and I did not have time for the daily workout in the home gym.

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December 02 2013

Commentary by Eoin Treacy

Musings from the Oil Patch - an educative report

Thanks to a subscriber for this always educative report by Allen Brooks for PPHB dated November 26th. Here is a section: 

Wall Street is changing what it wants from producers active in the shale revolution. Until commodity prices, especially natural gas, move higher, the profitability of developing shale resources will be challenged. For some producers, depending upon the quality of their shale assets and the cost of their operations, there is still likely financial pain ahead. Service companies are struggling to ascertain the level of activity for the industry over the next few years and the types of equipment and services that will be in demand. This will help them decide where to invest. Service companies are also considering where to place their capital bets - North American shale plays, offshore or select international land and shale plays. Additionally, the service companies need to better understand which of their product and service business lines will be of long-term value and which ones they should dispose of. These considerations suggest the service industry is on the cusp of a restructuring. The recent announcement by Weatherford International (WFT-NYSE) that it plans to shed four business lines is a manifestation of that trend. We have also had National Oilwell Varco (NOV-NYSE) decide to split off its oilfield distribution business into a new company. Other corporate moves have involved offshore drilling companies announcing plans to establish MLPs and/or separate companies to hold segments of their current rig fleets. Some of these restructuring moves are designed to help boost capital returns to investors, especially those seeking yield. On the other hand, restructuring of the industry may be due to too many companies chasing the same business and the fact that many of these companies are owned by private equity firms needing to cash in on their investments.

Eoin Treacy's view -

To say that the surge in US unconventional oil and gas supply has been disruptive is an understatement. A measure of just how much of a change this has caused can be seen in how complicated it has been to identify clear winners within the Energy complex. A number of large companies paid too much for drilling rights and have been forced to accept write downs, others are now attempting to claw back costs by squeezing service companies. Concurrently rail is competing with pipelines to attract investment capital. Some of the greatest beneficiaries have been consumers such as utilities, chemical and industrial companies rather than the producers of natural gas.

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November 29 2013

Commentary by David Fuller

Euro-Area Inflation Holds at Less Than Half ECB Ceiling

Here is the opening of this informative article from Bloomberg:

Euro-area inflation stayed below 1 percent for a second month, less than half the European Central Bank's ceiling, underscoring the weakness in parts of the euro region's economy.

The annual rate rose to 0.9 percent from 0.7 percent in October, the European Union's statistics office in Luxembourg said in a preliminary estimate today. The median forecast in a Bloomberg News survey of 44 economists was for 0.8 percent. Separately, unemployment unexpectedly dropped to 12.1 percent.

The increasing inflation rate "is largely coming through because of base effects in Energy," said Guillaume Menuet, an economist at Citigroup Inc. in London. "Once these start to fall out of the calculation, it's quite likely by the spring of next year we'll have again more evidence of weakening price pressures."

Today's data mark the 10th straight month that the rate has been less than the ECB's 2 percent goal. The central bank unexpectedly cut its key refinancing rate by a quarter point to 0.25 percent on Nov. 7 to prevent slowing inflation from taking hold in a still-fragile euro-area economy. ECB President Mario Draghi said at the time that the region needs record-low borrowing costs to combat a "prolonged" period of weak consumer-price growth and "very high" unemployment.

Euro-area unemployment unexpectedly fell to 12.1 percent in October from 12.2 percent a month earlier. Economists had predicted the rate would stay unchanged, according to the median of 34 estimates.

After this month's surprise rate cut, ECB officials have said they still have options for easing monetary policy. Bloomberg News reported last week that policy makers are considering a smaller-than-normal cut in the deposit rate, currently at zero, to minus 0.1 percent, if stimulus is required.

David Fuller's view -

It is no surprise that the Euro region's economic recovery remains weak. However, this does not detract from the ECB's considerable achievements since 'super' Mario Draghi was appointed president on 1st November 2011.

Unfortunately, there is little that he can do about Europe's high costs for Energy. Fracking would certainly reduce this problem but it is not happening, at least not yet. I expect money supply to remain very stimulative and Draghi may wish to engineer the Euro somewhat lower.

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November 29 2013

Commentary by Eoin Treacy

Bankers Get Hand With Collateral in Boost to Debt

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

Pena Nieto, who took office a year ago, has negotiated with opposition parties to pass laws to spur competition in telecommunications, make teachers more accountable for performance and raise taxes to reduce the country's dependence on oil revenue.

The changes, including those from the Energy bill Pena Nieto sent to Congress, may boost economic growth to more than 5 percent within two or three years, central bank Governor Agustin Carstens said in an August interview. The banking bill alone may lift growth by 0.5 percentage point within two or three years, he estimated in May.

The economy has expanded this year at the slowest pace since the 2009 recession, with growth of 1.3 percent in the third quarter from a year earlier.

The banking initiative “together with the package of reforms discussed in the past two months helps to increase the potential growth of Mexico,” said Ociel Hernandez, a strategist at Grupo Financiero BBVA Bancomer SA. He recommends buying fixed-rate peso bonds due in 2036.

Eoin Treacy's view -

Pena Nieto, who took office a year ago, has negotiated with opposition parties to pass laws to spur competition in telecommunications, make teachers more accountable for performance and raise taxes to reduce the country's dependence on oil revenue.

The changes, including those from the Energy bill Pena Nieto sent to Congress, may boost economic growth to more than 5 percent within two or three years, central bank Governor Agustin Carstens said in an August interview. The banking bill alone may lift growth by 0.5 percentage point within two or three years, he estimated in May.

The economy has expanded this year at the slowest pace since the 2009 recession, with growth of 1.3 percent in the third quarter from a year earlier.

The banking initiative “together with the package of reforms discussed in the past two months helps to increase the potential growth of Mexico,” said Ociel Hernandez, a strategist at Grupo Financiero BBVA Bancomer SA. He recommends buying fixed-rate peso bonds due in 2036.

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November 29 2013

Commentary by Eoin Treacy

Japan Price Gauge Rises Most Since 98 in Boost to Abe

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

Households face the prospect of sustained inflation for the first time in almost a generation, a dynamic that could hurt spending unless wages begin to rise. The focus is turning to salary negotiations early next year that may determine the success of Abe's bid to reflate the world's third-largest economy.

“The data reflects the clear effect of rising import prices, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo. ”The tone is strengthening for Japan to emerge from deflation and that is helping to set conditions for wage increases.”

Eoin Treacy's view -

One of the greatest challenges in breaking Japan's deflationary cycle has been in changing consumer habits which became accustomed to delaying purchases in order to secure lower prices. Aggressively targeting the value of the Yen has boosted prices for imported goods, not least commodities and especially Energy. The next ingredient will be wage growth and we are already seeing signs of movement on this front with Nomura committing to increasing what it pays employees.

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November 29 2013

Commentary by Eoin Treacy

Monthly Oil - Short Term Bearish

Thanks to a subscriber for this informative chartbook by Torbjorn Kjus for DNB which may be of interest to subscribers. The full 192-page report is posted in the Subscriber's Area but here is section:

So far in 2013 we have issued 8 short term oil market reports. 5 of them have been bearish and 3 have been bullish. Directionally we have been correct in 5 out of the 8 reports. This is about spot on our long-term average performance which is 35 correct out of 55 published reports (64% correct). Our target is to have a hit ratio above 51% on the direction because the oil market is a flip of the coin market and the average participant should hence be at 50%. We conclude bearish in this 9th short term report of 2013. It is a little bit too early for the new year rally in oil prices that we have often seen and we see a fairly high risk in the short term for players taking profit on the currently very high Brent-WTI spread which is this time mainly caused by an unsustainably large Brent-LLS spread instead of mainly consisting of a large LLS-WTI spread.

Eoin Treacy's view -

This has been an eventful month in the Energy markets with the prospect of easing tensions with Iran dominating headlines. However, the prospect of increased tensions in Iraq remains a tailwind for Brent oil prices. Meanwhile, the continued revolution in domestic US supply has changed the historical relationship between the world's major oil contracts.

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November 27 2013

Commentary by Eoin Treacy

Email of the day (1)

on "cheap" Energy:

"There was a good article on Fracking in the Economist Magazine (still the best business magazine with no close second choices).  It was the 16-22 November issue. Sorry life has been to busy to bring this to your notice earlier.

"I am not taking sides in the argument of social versus business arguments for fracking. I personally not convinced Fracking is a cheap source of oil although in the short term it is providing the US with cheap gas.

"What I observe is fracking has created a collar in the oil market. If oil prices drop the frackers respond quickly and fracking stops. If oil prices rise frackers drill a lot more to meet the demand. T Boon Pickens commented recently that fracking is not in his experience cheap oil. I think we agree Mr Pickens knows the oil business in particular the economics of fracking.

"As the Economists Magazine article points out the economics of fracking is a combination of gas prices, other liquids and oil prices. I will not go into the boring arguments of the relative merits of different sources of gas. Australia has lots of gas. We always knew about coal seam gas (CSG) however the petroleum engineers used to tell us CSG was very poor quality gas with low heat qualities and of no commercial significance. Not a argument you hear today. 

"I guess the economics of fracking will improve. BHP are hoping they do. But unless they do improve even the dumb money (i.e. BHP) will get the hint and stop funding what has been so far a stupid idea.

"Hopefully see you in February at the Chart seminar."

Eoin Treacy's view -

Thank you for this insightful email which brings us to the question of what exactly the term cheap Energy means. We have described the peak oil argument, for much of the last decade, in terms of the rising cost of production. As you point out, geologists have known about coal seam methane, shale oil and gas, tight gas, methane hydrates etc for almost as long as the fossil fuel industry has existed. The commercial viability of these resources has always been dependent on the application of technology and the marginal cost of production.

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November 25 2013

Commentary by David Fuller

Deepak Lalwani's India Report

My thanks to the author for his informative report published by LALCAP. It is posted in the Subscriber's Area but here is a brief sample:

The Indian economy grew at 5%, a decade low, for the fiscal year to 31 March 2013. Growth slowed even further to 4.4% in Q1 (April-June 2013) of the current fiscal year to 31 March 2014. The Q2 (July-September) GDP figure is expected on 29 November, and fears remain that growth back to 5% looks optimistic. Investors are increasingly concerned that India is stuck in a stagflation (stagnant growth + high inflation) environment. The wholesale price index (WPI) rose to an eight-month high of 7% year-on-year, driven by more expensive Energy and manufactured goods. At the heart of India's inflationary pressure is a sharp rise in food prices which are threatening re-election prospects for the ruling coalition Government, led by the Congress party. Food inflation in October rose 18.2%. In the last 60 months food inflation has averaged over 12% per month. Onion prices have risen from Rs 20 per kilo last December to Rs 100 per kilo last month in Delhi and Bombay. The price of salt has rocketed in East India from about Rs 18 per kilo to well over Rs 100 per kilo. With five state elections in progress, the humble onion's power in toppling past Governments is focussing minds.

David Fuller's view -

To state the obvious, governance has never been easy in India's, large and ethnically diverse country. Its coalition governments have been weak and consequently beholden to minority factions. Nevertheless, the Congress Party appointed an impressive Reserve Bank of India Governor, Raghuram Rajan, in September.

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November 22 2013

Commentary by Eoin Treacy

Novartis Sets $5 Billion Buyback as It Seeks Faster Growth

This article by Eva von Schaper for Bloomberg may be of interest to subscribers. Here is a section: 

The drugmaker also said a review of its pipeline will lead to more approvals and higher sales by 2017. Novartis's stable of cancer drugs and sales are set to grow annually for the next five years, despite the anticipated loss of exclusivity on its cancer drug Gleevec, the company said.

The Alcon unit is now set to grow at a mid- to high-single digit rate. The company said last month group sales would do better than previously expected. Europe's biggest drugmaker by sales has begun a review of units such as its animal-health operation that lack global scale.

Novartis announced this month it would sell its diagnostics unit to Grifols SA for $1.68 billion, part of a strategic review of its market segments. The company now has three units with global scale, Jimenez said: pharmaceuticals, the eye-care business Alcon and the generics arm Sandoz. Novartis has said it wants its businesses to be among the industry leaders or it will consider divesting them.

Eoin Treacy's view -

The healthcare sector represents important cross currents from the perspective of a globally oriented thematic investor. From first principles the Energy, technology and healthcare sectors represent areas of research from which new inventions or discoveries can literally create value by changing forever how we live or lives. 

Healthcare tends to do this through investing in technological development which creates new therapies as well as lowering the cost and increasing the availability of existing products. The net result is that the sector is both large and diverse, with a comparatively small number of companies dominating the global market. 

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November 21 2013

Commentary by David Fuller

Email of the day

On the Larry Summers speech and BMW

"David, I enjoyed your comment on the Larry Summers speech. The BMW plant is not a car plant as such, it manufacturers carbon fibre for car manufacture back in Germany. The reason the two (German) partners went there was because of cheap Energy - something that doesn't exist in the Europe. Google opened a huge server farm there three years ago for the same reason. With shale gas (a game changer you said very presciently a while ago) the US must become, with mass automation, the prime location for new manufacturing. The more automation the more competitive advantage!

"Socially the issue seems to me to be not capital formation but cash re-allocation. The ceramic manufacturer in your response must be more profitable than when it had 3000 workers. The trick is how to harvest and then distribute the cash. A big question!!"

David Fuller's view -

Thanks for your interesting email. I know that the BMW plant in rural Washington is a bold move into carbon fibre, as I posted Bloomberg's article on the subject as my lead item on 15th November. And I agree that Energy costs of one-fifth of what is available in Germany was the key draw. 

The USA's competitive Energy costs, mainly thanks to fracking but also hydro-power for the BMW plant, are a phenomenal advantage which is certain to attract more high-tech manufacturing. This is also mentioned regularly in the Friday 'Big Picture' Audios.

The social issue that you point out is an important topic. Personally, I would rather see successful corporations and wealthy individuals redistribute profits within communities, rather than the government through higher taxes. Bill Gates and Warren Buffett have set excellent examples in recent years and others are following their lead. I hope to see more of this in the UK and other countries.

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November 19 2013

Commentary by David Fuller

The Weekly View: When Yellen Talks, People Listen

My thanks to Rod Smyth, Bill Ryder and Ken Liu for their ever-interesting letter, published by RiverFront. It is posted in the Subscriber's Area but here is the opening

Clarifying her view of quantitative easing (QE) asset purchases during her Senate confirmation hearing last Thursday, Federal Reserve Chairman nominee Janet Yellen said that, at this point, "the benefits exceed the costs." Although some within the Fed want to start reducing purchases and replace them with extended forward guidance on zero interest rates, Yellen seems to currently favor both forward guidance and keeping the purchase program in place for now. That said, she framed her dovish stance as promoting more robust economic growth to "regain the ground lost in the crisis and the recession" with the intent to end extraordinary monetary policies as soon as possible. Regarding the duration of QE, Yellen acknowledged that the Fed cannot expand its balance sheet forever: "The committee is focused on a variety of risks and recognizes that the longer this program continues, the more we will need to worry about those risks. So I do not see the program as continuing indefinitely… at each meeting we're attempting to assess whether or not the outlook is meeting the criterion that we've set out to begin to reduce the pace of purchases.

David Fuller's view -

Despite the USA's considerable economic advantages of very competitive Energy prices and a growing lead in technology, Janet Yellen is unlikely to find the US economy growing at the pace she would like for commencing QE tapering.

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November 18 2013

Commentary by David Fuller

Email of the day (3)

On manufacturing in Wisconsin

"Greetings from a loyal subscriber living in, as you put it in Friday's audio, "of all places, Wisconsin!" Obviously, you initially confused the states of Washington and Wisconsin as it relates to the new BMW facility. While Washington will benefit from the BMW plant, Wisconsin is no stranger to manufacturing being the headquarters location of companies such as Harley Davidson, Johnson Controls, Joy Global, Rockwell Automation, Kohler, SC Johnson (aka Johnson Wax), Snap-On Corporation and Oshkosh Truck Corporation to name a few. Combined with a strong German heritage, it is too bad BMW didn't find its way to "fly-over country". Keep up the great work and I look forward to remaining a loyal subscriber for many years to come!"

David Fuller's view -

I am not sure how Wisconsin found its way into my Audio, but thanks for pointing it out and enlightening me regarding the manufacturing importance of your state. The "of all places" quote above was not meant to sound disparaging, but I was intrigued that BMW was building this expensive plant in a small town of 20,000 people in the state of Washington. Really cheap Energy was clearly a key benefit, given BMW's ovens and furnaces used in the manufacturing of carbon fibre. I am sure competitive Energy prices will attract more manufacturing companies to the USA, including the state of Wisconsin. This could be a secular trend. Thanks also for you encouragement and enthusiasm for our service.

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November 18 2013

Commentary by David Fuller

China's Bold, Contradictory Reform

Here is the opening to this interesting editorial from Bloomberg

Call it policy presentation with Chinese characteristics. After the meeting of its leadership last week, China's Communist Party issued a muddled communique that aroused no great excitement. Then, on the weekend, well ahead of the usual schedule for such announcements, the party released a longer follow-up statement worth getting excited about.

It's radical stuff -- in principle, if not (yet) in policy. Maybe China's new president, Xi Jinping, aspires to be another Deng Xiaoping after all.

The "Decision on Major Issues Concerning Comprehensively Deepening Reforms" was nothing if not wide-ranging. Tucked inside it were the biggest headlines, so far as many foreign observers are concerned: China's notorious one-child policy is to be softened, and the system of arbitrary confinement to "re-education" in labor camps, a tool of political repression, is to be ended.

Most of the statement, though, is devoted to a comprehensive list of economic and financial reforms. This emphasis is deliberate: "The reform of the economic system is the focus of all the efforts to deepen the all-round reform." Many of the proposals echo the long-standing recommendations of pro-market advocates at home and abroad.

The statement calls for China's financial sector to be liberalized. There will be new private banks, as well as further moves toward exchange-rate flexibility, market-determined interest rates and capital-account convertibility. The blueprint calls for price reforms in water, Energy, transportation and telecommunications. Farmers will be given new property rights, including the right of succession and the ability to sell shares in their land or use it as collateral. The system of household registration, which controls workers' movement from countryside to city, will be eased (though curbs on migration to the biggest cities will remain).

David Fuller's view -

Bloomberg's second paragraph above summarises the reaction of numerous China watchers. Many of us hoped for another Deng Xiaoping when Xi Jinping was first appointed. He had more power than his immediate predecessors but the new President obviously did not have Deng's political stature. Consequently he had to negotiate his way and has successfully done so, judging from this abridged 60-point document.

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November 15 2013

Commentary by David Fuller

BMW Makes Lone Shift to Carbon Fibre to Gain Auto Edge

Here is the opening to this fascinating article by Chris Reiter for Bloomberg

Bayerische Motoren Werke AG (BMW)'s bid to save its cars from potential extinction starts with hundreds of thousands of fine white strands snaking upwards in a production hall in ruralWashington.

Looped through an almost mile-long course, what looks like the world's thinnest rice noodles will be stretched, toasted and eventually scorched black to create carbon fiber -- a material thinner than human hair and yet tougher than steel.

BMW will use the sleek, black filaments for the passenger frame of the i3 electric car, which goes on sale at dealers inGermany tomorrow and around the world in the coming months. It's the first effort to mass produce a car made largely from carbon fiber and represents the biggest shift in automobile production since at least the 1980s when the first all-aluminum car frames were made.

The strategy started taking shape six years ago, as Norbert Reithofer, then the newly appointed chief executive officer, examined trends affecting the industry and concluded that increased environmental awareness would likely prompt tougher emissions regulations that could make the future of autobahn cruisers like the 5-Series sedan unsustainable.

"Looking forward to 2020, we saw threats to our business model," Chief Financial Officer Friedrich Eichiner, who was head of strategic planning at the time, said in an interview in his sparsely furnished office in BMW's landmark four-cylinder headquarters building in Munich. "We had to find a way to bring models like the 6-Series, 7-Series and X5 into the future."

For BMW to continue to sell cars that live up to the company's "ultimate driving machine" claim, the manufacturer needed to offset those emissions with a viable electric vehicle for growing cities, where more and more potential customers would live. That was the start of the i3.

At the time, electric cars had the reputation of being sluggish because of the heavy battery needed to hold a charge capable of moving the car at least 100 kilometers (62 miles) -- the range considered necessary for daily use. That meant the car needed to be lighter to reduce the size and cost of the power pack and improve handling. The lightest and strongest material available is carbon fiber.

David Fuller's view -

There are a number of interesting points in this article which the introduction above only begins to touch on. For instance, why build a $100 million plant at Moses Lake Washington, a little town of approximately 20,000 people? Well, the local utility charges only 3 cents per kilowatt hour for hydro-power to run the plant's Energy-hungry ovens and furnaces. Bloomberg says this is less than one-fifth the cost of fuel in Germany. The town is also also appears to be reasonably close to a port.

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November 13 2013

Commentary by Eoin Treacy

Libya, Iran, Brent & the Other Side of the Equation

Thanks to a subscriber for this informative report focusing on Libya’s Energy sector. The full report is posted in the Subscriber's Area but here is a section

Turnaround season in US refining has caused a major oversupply of US crude, but international markets have been roiled by a surprise re-outage in Libya. In this note we focus on the Libya issue. We also address the countervailing improvement in US-Iranian relations and the upcoming decision on Chinese-Iranian oil imports sanctions exemption. We very briefly show Iraqi, other OPEC, and Saudi production. Notably, the 550kb/d fall in Iraqi production from 2012 highs to September 2013 lows was under-appreciated by the market, obscured as it was by Syria, Egypt, Libya, and Iran. Note: IEA non-OPEC supply forecasts of 1.8mb/d marginal growth for 2014 are for an all-time high.

Things can’t get worse in Libya
The 1mb/d+ outages that have characterized oil markets since the 2008 peak price have been due to Libya and Iran. To be clear, these are enormous outages that have clearly driven global (Brent) oil prices higher. For thirty years Libya, for all its international controversy, steadily supplied world oil markets with around 1.3mb/d of light sweet oil. Consensus was that the relatively small population of Libya, at around 6m, made it politically stable. Until it wasn’t. Now the country is in disarray, with factions independently taking control and interrupting oil exports. There is no single movement here, as we show in this note. However we do take the view that the situation in Libya cannot now get materially worse, with possibly less than 90kb/d of exports of light sweet crude, there is little left to lose, and plenty to gain. The country is working on a new constitution, and we think there is reason to believe that it is this process that is causing the upsurge in disruption by local interests.

A huge shift in Iran
’s newly-elected President Hassan Rouhani has ushered in a seismic shift in global geopolitics that has reverberated across the oil world, notably to the consternation of the Saudis and other Sunni Gulf oil states. With the all-important blessing of Iran’s Supreme Leader Ayatollah Ali Khamenei, as well as the country’s Parliament, Rouhani quickly reached out to US President Obama directly, and subsequently has moved Iran into nuclear talks over enrichment that had all but died under the leadership of previous President Ahmadinejad. Although nuclear talks in Geneva have ended, there is agreement to meet again as soon as November 20. Rouhani openly hopes for a deal to sanctions that have been the primary cause for the precipitous drop in Iranian oil production and exports. Intelligence suggests that the Obama regime is pushing Congress to soften its stance on sanctions while negotiations are underway, with a notable upcoming decision on the potential for an exemption for China to import Iranian oil, that needs a decision by December 2.

Eoin Treacy's view -

The Brent Crude – West Texas Intermediate spread remains a useful illustration of just how much the global oil market has changed. For decades Brent traded at a discount to WTI, this situation began to change from the early 2000s when the relationship became much more volatile. On the chart we can see that the last three years are distinctly different. As with any spread it is worth considering influences on both constituents.

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November 12 2013

Commentary by Eoin Treacy

Email of the day (1)

on agriculture prices and genetic innovations
“I thought I would give you a heads up before Friday's USDA report. Because of the Government shut down last month, the USDA was unable to collect many of their test plots, and this has led to questions about the validity of the report. The average guess for the corn yield is 159, up from 155 in September, and the average for soybeans is just under 43, up from 41.2.

“From farm reports and the countless test plots that I have seen, I think the trade is underestimating both crops, especially the corn crop. The growing season certainly had its problems. The latest planted crops ever, followed by the driest ever July and August for Iowa, Illinois and Indiana. So, it is of no surprise that the average guess for corn is 5 bushels below the record set in 2009. However, my data shows that the final yield will be above the previous record of 165. For, while the headlines shout that Mother Nature is winning the battle of Global Warming with the scientists, in a dark alley the Crop Scientists are giving Mother Nature a real hiding.

“Since last November I had kept a print out on my desk of a test plot of irrigated corn in Nebraska that averaged 304 bushels, with the top variety yielding 390. That print out was recently consigned to the bin as this year I witnessed 301 in Illinois as an average on non-irrigated corn with hardly any rain at all for July and August. Perhaps even more amazing is an average of 244 for a whole region on the Eastern seaboard, or 274 in S Michigan, with a 9 year previous average of 157, and a previous record of 208, all non-irrigated. From 2010 to 2012 the Corn Belt was visited by multiple biblical plagues which kept us from fulfilling the promises of the geneticist, but I believe that the top end of the corn yield has increased some 30 bushels in the last 4 years. There is an old adage "big crops get bigger" that should soon be changed to "big crops get much bigger".

“The soybean data that I have seen supports a yield north of 44, more than a bushel above the average guess. Last year's final bean yield surprised massively on the upside, and after many years of iffy bean yields, it looks like the soybean geneticist are also getting their act together. A 43 yield keeps the carry out tight, 44 plus makes it quite comfortable.

“It may be asking too much of our fickle and abused planet to give us both a good growing season in S America this winter as well as the Midwest next summer, but if it does, it should take prices down to levels that discourage acres , and we are a long way from those prices. One day we may wake up and realise that the cure for high prices was high prices.

“If I am right it could soon be "lights out" for the grain markets. That perhaps is apt and fitting, as the deserted grain pits in the CBOT building more and more resemble wards of a hospice.

“As you know, these are my thoughts only, as no one else would want to be tarnished with my reputation.”
Eoin Treacy's view - Thank you for this informative email which arrived last week and for your humility in sharing your views. Genetics represent the promise of a second green revolution that could help alleviate the issues relating to competition between Energy, food and high pricing. Your assertion that new seeds are contributing to higher yields is a welcome development from the perspective of consumers but one must wonder just how much of this news is already in the price.

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November 12 2013

Commentary by David Fuller

Email of the day (1)

More on the Climate Change debate
"Re jellyfish!-for what it's worth Christopher Booker-Sun Tel 9 days ago - said that the combined Antarctic and Arctic ice has had a mega freeze-and is back to normal more or less. Elizabeth Browning does appear to talk cool sense (and is relevant to jelly fish! - decadal Pacific oscillator, if you remember). A change from opinionated hysterics; I bet 99% of people who think they can "save the planet" (I'll do the jokes) have done zilch scientific homework. It's a farce."
David Fuller's view - Thanks for your thoughts and for pointing our Christopher Booker's articles on this subject for The Telegraph. Here is the opening from his article on 21st September: The ice is not melting, yet the scaremongers blunder on:

The news that hundreds of scientists and officials from all over the world are this weekend converging on Stockholm to discuss the next 2,000-page report from the UN's Intergovernmental Panel on Climate Change (IPCC) again highlights what is the most terrifying political conundrum facing our country today. Emerging in instalments over the next seven months, this report will try to convince the world, without a shred of hard evidence, that the prospect of catastrophic man-made global warming is "extremely likely".

The air is already thick with familiar claims and counterclaims, President Obama quotes yet another laughably silly paper trying to make out that "97 per cent of scientists" support the IPCC "consensus". Sceptics point out yet again that the lack of global warming over the past 17 years makes a nonsense of all those computer-model projections on which the IPCC has been basing its case for 23 years. And we can only look on this endlessly sterile non-debate with a suffocating sense of déjà vu.

Noting Barack Obama's 97% claim above I have to say, in the social science field of trend extrapolation, if subscribers heard that 97% of investors were predicting continuation rather than reversal, most of us would be looking to take the opposite view.

Can we say the same about trend extrapolations in natural science? Not really, although there is so much uncertainty, fear and opportunism surrounding the climate change debate that too many interpretations and forecasts are biased on the basis of social science.

Here is the opening from another Telegraph article by Hayley Dixon, published on 8th September: Global warming? No, actually we're cooling, claim scientists:

There has been a 29 per cent increase in the amount of ocean covered with ice compared to this time last year, the equivalent of 533,000 square miles.

In a rebound from 2012's record low, an unbroken ice sheet more than half the size of Europe already stretches from the Canadian islands to Russia's northern shores, days before the annual re-freeze is even set to begin.

The Northwest Passage from the Atlantic to the Pacific had remained blocked by pack-ice all year, forcing some ships to change their routes.

One ship has now managed to pass through, completing its journey on September 27.

A leaked report to the UN Intergovernmental Panel on Climate Change (IPCC) seen by the Mail on Sunday, has led some scientists to claim that the world is heading for a period of cooling that will not end until the middle of this century.

If correct, it would contradict computer forecasts of imminent catastrophic warming. The news comes several years after predictions that the arctic would be ice-free by 2013.

I have long been concerned that the debate over climate change is largely split along stereotypical right versus left political views, and the latter group has certainly won the public relations battle, at least up to now. Those who are global warming sceptics or even agnostics, are often described as ignorant or worse, being corporate industrial polluters on the scale of satanic mill operators from the Victorian era. In contrast, those on the left who forecast potential disaster are praised for being aware, clean and green, and trying to save the planet. They have received Nobel Prizes for their efforts. However, if the significant previous reduction in Arctic ice proves to be temporary, and it may judging from the latest evidence, those who have driven up our Energy bills, weakened our economies and blotted our landscapes with wind farm monstrosities will not be quickly forgiven.

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November 11 2013

Commentary by Eoin Treacy

Oil-to-gas switch in transportation

Thanks to a subscriber for this fascinating report from Deutsche Bank highlighting the point that while US natural gas exports will not take place until 2015, the adoption of technology that promotes the use of the commodity is already occurring. The full report is posted in the Subscriber's Area but here is a section
Economic benefits of gas as an oil substitute stay intact
We believe the impact of the gas tariff hike in July 2013 on vehicle fuel switching to natural gas is limited as the lengthened payback period is still economically attractive for conversion. The planned diesel/petro upgrade as a move to reduce emission will enhance the cost competitiveness of natural gas as a fuel substitute and offset the negative impact from rising natural gas price. There is also downside potential for natural gas price in China in the long term on increasing supply from unconventional gas and US LNG exports.

Environmental benefits and improving infrastructure/supply
Compared with gasoline and diesel, CNG and LNG are much cleaner and can significantly reduce transportation-related emissions. Many local governments have laid out aggressive plans to roll out natural gas applications in public transportation, as an important part of raising gas usage in the total Energy consumption mix. Accelerating construction of the gas refuelling station and strong growth in LNG imports will support continued growth in oil-to-gas switch in transportation.

Natural gas application in vessel and other areas; export market potential
LNG conversion in vessels could be another big growth driver with national development guidelines and target just released. Moreover, great potential exists in LNG-fuelled construction, drilling and mining machinery markets. As China is a pioneer in LNG vehicle application, domestic equipment players are well positioned to exploit overseas markets, especially the US market where gas price is most competitive vs. oil.
Eoin Treacy's view - It has been our view at FT Money since at least 2010 that the development of unconventional oil and gas resources represents a game changer for the Energy sector and the wider global economy. This is now reasonably well understood by governments less encumbered by climate ideology. China’s policy makers have committed themselves to working out how they can best make this change in global Energy dynamic work to their advantage. The obvious answer is to do whatever they can to produce more gas and consume more of it in preference to coal and oil.

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November 11 2013

Commentary by David Fuller

Behind the Scenes of Tokyo's Political Soap Opera

Here is the opening from this interesting column by William Pesek, published by Bloomberg
Shinzo Abe faces plenty of roadblocks in his quest to revive Japan's sluggish economy. His mentor wasn't supposed to be one of them.

Former Prime Minister Junichiro Koizumi is easily the most popular Japanese politician of the last 20 years. Not since Yasuhiro Nakasone in the mid-1980s had a Japanese leader made such a splash domestically and globally. Not coincidentally, both were keen reformers -- as Abe, too, claims to be.

After he left office in 2006, the now-71-year-old Koizumi seemed happy to stay in the shadows. That changed last month, when he made a very public about-face from his previous support of Japan's nuclear industry. "Nothing is as costly as nuclear power generation," Koizumi said in an Oct. 1 speech, arguing that Japan "could do well without" the dangerous reactors on its seismically active shores.

Since then, Koizumi has made a series of televised comments about the crisis at Fukushima, the dangers of atomic waste, the desirability of Japan (TPX) hawking nuclear hardware overseas, and the urgent need for green alternatives. His campaign is landing a major blow to Abe's revival plan. "Abenomics" claims to be firing three arrows -- monetary and fiscal stimulus, plus deregulation -- but there's a nonadmitted fourth: cheaper Energy. The anti-nuclear movement Abe sought to contain now has a bona fide political rock star on its side.
David Fuller's view - I do not doubt that Junichiro Koizumi's comments on nuclear power will resonate with many Japanese citizens. That is why I was surprised when Taku Yamamoto, Chair of the LDP's Energy Committee announced this new, central plan to reopen and run Japan's nuclear reactors, which I discussed on 23rd October. I also said I would welcome informed views on this subject and received this informative email from a Japanese subscriber two days later.

Meanwhile, my technical assessment of Japan on 23rd October still applies and USD/JPY looks more likely to move upwards from current levels over the medium term.

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November 08 2013

Commentary by David Fuller

Paper: China Plans 3rd Shale Gas Auction

Here is a middle section from this additional report from Reuters
The blocks to be auctioned will be located mainly in the southwest city of Chongqing as well as in the provinces of Sichuan and Hubei, the paper said, citing an industry source close to the Ministry of Land and Resources.

Compared with the second round of the auction, all the major Chinese state firms will participate, implying there is more confidence in the potential of the shale gas blocks. However, there is no interest yet from private companies, the paper said.

Results of the auction will be announced as early as January next year, the paper said, adding that resource rich blocks in the Erdos Plateau in Inner Mongolia may also be included in the sale.

Stymied by the cost of drilling and complexity of tapping shale gas, China has struggled in its bid to revolutionize its Energy supplies and unlock what may be the world's largest shale gas reserves by emulating the frenetic exploration and production of the U.S. shale boom.

But Chinese oil giant Sinopec is for the first time pumping shale gas from test wells in commercial quantities in what it hopes will be a breakthrough in the development of a badly needed new Energy source.
David Fuller's view - There are two important reasons why China has yet to develop its extensive shale oil and gas resources.

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November 08 2013

Commentary by David Fuller

Saudi Arabia Throttles Back from Record High Oil Output

Here is the opening of this article from Reuters
KHOBAR, Saudi Arabia, Nov 8 (Reuters) - OPEC heavyweight Saudi Arabia has cut back oil output that had held at record rates of around 10 million barrels a day for three months running to help offset a plunge in output from fellow OPEC member Libya.

The world's top oil exporter turned down the taps to 9.75 million barrels per day (bpd) in October - versus 10.1 million bpd the previous month, an industry source familiar with the matter told Reuters.

"I don't read too much into the Saudi reduction," said Richard Mallinson, geopolitical risk analyst at Energy Aspects.

"Production is still at a high level, summer demand may have eased a bit and the market was slightly better supplied."

The industry source said it was typical for there to be a reduction in the amount of crude oil burned for power generation at this time of year.

The kingdom's major oil customers say there was no sign of big Saudi cuts in exports last month and that the drop mostly reflected reduced domestic crude burning.

Riyadh lifted output to 10.05 million bpd in August, the highest since records begin in 1980, according to figures from the U.S. Energy Information Administration.

It pumped around that record rate during the third quarter before slowing down in October.
David Fuller's view - Saudi Arabia is still the swing producer in terms of global oil output. It increased production in August, as WTI crude was approaching the 2011 and 2012 highs just above $100 a barrel. More importantly, Brent crude was also approaching the upper side of its trading range over the last three years.

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November 05 2013

Commentary by Eoin Treacy

Comparing the CRB Index with the Continuous Commodity Index (Old CRB)

Eoin Treacy's view - There is often some confusion between which of these indices is more reflective of commodity prices generally so it is important to denote the differences in calculation. In simple terms, the CRB Index gives more weighting to Energy while the Continuous Commodity Index represents the original unweighted index that dates from the 1970s. The difference in calculation results in quite marked differences in performance. Just such a case is now evident.

The CRB Index has been negatively affected by the decline in Energy prices and broke downwards to new 16-month lows yesterday. A short-term oversold condition is evident but a clear upward dynamic would be required to pressure short positions.

The Continuous Commodity Index (CCI) is unweighted and has fallen for five of the last six weeks, returning to test the lows near 500. A short-term oversold condition is also evident here. At FT Money we have long expressed a preference for the CCI as an aggregate measure of commodity performance because of its lengthy back history and consistency of calculation.

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November 04 2013

Commentary by Eoin Treacy

On roads and rails, natural gas threatens diesel's dominance

Thanks to a subscriber for this informative article by John Kemp for Reuters. Here is a section
In 2012, the United States consumed almost 8.7 million barrels of gasoline per day and 3.7 million barrels of distillate fuels, most of them used in transportation, according to the U.S. Energy Information Administration.

Much of that diesel fuel was used in trucks, locomotives and high horsepower industrial engines, where its market share is now threatened by LNG and CNG.

The equipment needed to compress and liquefy natural gas, dispense it safely, store it on board, and use it in dual-fuel engines is being rapidly developed and installed across North America.

LNG as a transport fuel enjoys powerful backing from petroleum producers like Shell as well as major manufacturers and suppliers like Caterpillar and GE and oilfield services companies like Schlumberger and Baker Hughes.

The fuel market appears to be nearing a tipping point. If the present gap between natural gas and crude oil prices remains for another 2-3 years, it should be enough for natural gas to establish a major beach-head in the transport market, pitting crude oil in direct competition with natural gas.
Eoin Treacy's view - A fact often overlooked when considering the outlook for major oil companies is that both Exxon Mobil and Royal Dutch Shell produce more natural gas than oil. Therefore they have a vested interest in securing new customers and markets for their products.

High oil prices encouraged a supply response in unconventional resources which has since yielded substantial dividends for the USA. However, the high price environment in the rest of the world has also created an opportunity for investment in unconventional supply and substitution by natural gas.

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November 01 2013

Commentary by Eoin Treacy

Mexico: Opening Up âOne of the Worldâs Most Closedâ Energy Sectors

This article from Knowledge@Wharton may be of interest to subscribers. Here is a section
On the Texas side of the border, Eagle Ford Shale oil production has grown from just 352 barrels a day in 2008 to 362,936 barrels a day in 2012. Overall oil production in Texas has doubled — an increase of more than one million barrels a day — over the past four years, to a current pace of nearly 2.2 million barrels, according to the U.S. Energy Information Administration. Daily oil production in North Dakota has also skyrocketed in recent years. The robust development of the Mexican side of the Eagle Ford Shale alone would double Mexican oil production, according to Sherr.

Given the deterioration in its production volumes, does Mexico have any other alternative to pursuing these kinds of reform options? According to Kotschwar, “there is a real threat that if [the government doesn't undertake] this [reform], [it] will have to take less popular reforms, such as raising taxes” on income, as well as value-added taxes, in order to compensate for Pemex’s inability to generate more revenues for the federal government.
Eoin Treacy's view - Here is a link to a map of the Eagle Ford Shale from the EIA which appears to stop at the Mexican border. However geology pays no attention to national boundaries. It is reasonable to expect that Mexico has some of the same shale and tight oil and gas formations as Texas. Production of course is dependent on the differing regulatory structures evident in the jurisdictions.

Production generally deteriorates when oil companies are nationalised because the motivation for profit alters and political considerations take precedence. As Mexico’s middle class expands and its manufacturing prowess improves, demand for a more enlightened Energy policy, that can increase production, is likely to mount further. The country has remarkable Energy resources but it will probably need external partners if they are to be developed efficiently.

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October 30 2013

Commentary by Eoin Treacy

Guinness Atkinson Energy Brief

Thanks to the authors for this edition of their monthly report. The full report is posted in the Subsriber's Area but here is a section on the medium-term outlook for natural gas
A wall of new US gas demand is coming, starting in 2015: exports of gas via liquid natural gas (LNG); expanded export capacity into Mexico; coal plant retirements; gas' share of electricity generation growing; industrial in-shoring; natural gas vehicles. The question is: what price does a wall of supply need to meet this demand outlook? Our hunch is that in three years the gas price should be moving from 20% of the oil price ($3.50 gas is like $21/barrel oil) to 33% (if oil is $110 that is $36/barrel or $6.00 gas). That is 71% up on the $3.50 today and 118% up on 2012 average price of gas of $2.75
Eoin Treacy's view - Veteran subscribers will be familiar with the most basic law of supply and demand; when the price of a vital commodity drops, supply increases and substitution is possible - demand will increase.

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October 28 2013

Commentary by Eoin Treacy

Canadian Dollar Halts Three-Day Loss as Focus Shifts Fed Policy

This article by Ari Altstedter for Bloomberg may be of interest to subscribers. Here is a section
The currency fell the most last week since June after the Bank of Canada dropped a bias toward higher interest rates it had included in every policy statement for more than a year, even as it held the benchmark rate at 1 percent. The Fed, which starts a two-day policy meeting tomorrow, is unlikely to begin tapering the bond-buying program its used to lower interest rates and stimulate the economy, according to the median estimate of a Bloomberg economist survey.
Eoin Treacy's view - Among Canada’s many attributes are world class industrial and Energy resources, a land border with the world’s largest economy and a relatively small but educated population. However, the increasingly competitive position of both US Energy resources and manufacturing relative to Canada represent a challenge. Even though the US Dollar has been comparatively weak against most global currencies, it has been relatively steady against the Loonie, not least because the interest rate differential is only 100 basis points.

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October 28 2013

Commentary by Eoin Treacy

Aussie Strengthens Before Fed Meeting Tomorrow, RBA Stevens Talk

This article by Candice Zachariahs for Bloomberg may be of interest to subscribers. Here is a section
“The market is looking for further confirmation that tapering is still some time off, and if we do get that we’ll get some more U.S. dollar weakness,” said Jim Vrondas, the chief currency and payment strategist at OzForex Ltd. in Sydney. “We should see some reversal of the nervousness that we saw toward China and the Aussie dollar last week, and a move back toward the 97-cent mark.”

Australia’s dollar gained 0.2 percent to 96.06 U.S. cents as of 5:09 p.m. in Sydney after falling 1 percent last week, the biggest five-day decline since August. The Aussie rose 0.5 percent to 93.80 yen.

The currency will face selling pressure toward the 97.50 U.S. cent level, Vrondas said.
Eoin Treacy's view - A number of factors have combined to have a positive effect on Australian equities. Among these are the RBA’s resolve to stem the advance of the Australian Dollar, continued availability of liquidity on a global basis, the change of government to a more market friendly administration, industrial metal prices bottoming, Energy export facilities beginning to come on line and generally competitive yields.

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October 25 2013

Commentary by David Fuller

October 25 2013

Commentary by David Fuller

Email of the day

From Japan, on the country's changing policies regarding nuclear power

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Friday 25th October 2013

Political Dysfunction Harms U.S. Global Standing: Kerry - Here is the opening from this interesting article by Terry Atlas & Nicole Gaouette for Bloomberg:

Secretary of State John Kerry blamed the government shutdown that ended last week for fueling international doubts about America's commitment to global leadership, eroding U.S. standing and influence.

Kerry spoke yesterday as some of America's closest allies are criticizing U.S. electronic spying and questioning its resolve in confronting international crises. The discord risks undermining longtime alliances and support for the Obama administration's pursuit of negotiations with Iranand Syria.

Leaders in Israel and Saudi Arabia, the two closest U.S. allies in the Mideast, are faulting American moves regarding Iran's nuclear program and Syria's chemical arsenal. German Chancellor Angela Merkel and European leaders are echoing angry complaints from Latin America about U.S. surveillance. Asian diplomats, with China in their backyard, are questioning America's pledges to bolster their security after the U.S. backed away from a threatened military strike against Syria.

"It's the perception that there's an abandonment of a robust international agenda," said Ian Brzezinski, a senior fellow at the Atlantic Council, a Washington policy group. "In a world where America is seen as less engaged, our opponents will see more opportunity to assert their values."

"It's less likely to be conducive to the spread of democracy and rule of law," said Brzezinski, a former Defense Department official under President George W. Bush. "It creates a less stable world."

Ben Rhodes, President Barack Obama's deputy national security adviser, said complaints from overseas don't reflect a weakening of American influence, describing such gripes about U.S. power as a cyclical occurrence.

My view - There is little doubt that the ongoing US political impasse leading to brinkmanship over the debt ceiling and the recent partial government shutdown has undermined America's reputation for sound governance.

Nevertheless, there is also a 'damned if you do and damned if you don't' aspect to criticism of US international policies in the last few years. This reflects global anxiety over not only the decisions and events being questioned but also the uncertainty caused by domestic problems in most countries, not least due to weak GDP growth which compounds the difficulties of governance. Consequently, there is additional apprehension over what happens when the US really does exit from quantitative easing (QE).

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Email of the day - From Japan, on the country's changing policies regarding nuclear power:

"Thank you for your comments everyday. I enjoy the comments.

"As for the Japanese electric utilities reform, the reform of Japanese electric power utilities is under way. The generation units and the supply units of all the utilities will be separated. The bill will be introduced into the Diet this fall.

"On the other hand LDP have the discussion about the integration of the reactors' operations. One reason is the operation risks are too big for private enterprises. Another reason is the government want to export the power reactor units. The government needs stable and safe operations to avoid the bad reputations.

"Now several reactors' safety inspections are under way. These reactors will probably run next spring or summer. The Energy costs are high in Japan as you said. Japanese Economic Circles have been demanding restarting the reactors."
David Fuller's view - Thank you so much for responding to my request on Wednesday for insights on this topic. Your summary sounds like what I would describe as a 'virtuous circle' for Japan, in that everyone stands to benefit:

1) Japan needs cheaper Energy to propel its economic recovery and this will require nuclear power. 2) The Japanese public needs reassurance that a policy of centralised control and administration of nuclear power will avoid another Fukushima. 3) Japan's economy would benefit from a commercial nuclear power industry but first it needs to reassure potential buyers by successfully reviving its own domestic capacity.

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October 24 2013

Commentary by David Fuller

Are Those White Elephants In The Water?

This is an excellent column by Matt Ridley for The Times (UK) (may require subscription registration but a PDF is posted in the Subscriber's Area). Here is the opening
Here's a short quiz. Question One: which source of Energy is allowed to charge the highest price for its electricity? Question Two: which source of Energy is expected to receive the greatest capital expenditure over the next seven years? The answer to both questions is offshore wind.

Offshore wind farms are the elephant in the Energy debate. Today, the Energy department estimates that electricity prices are 17 per cent higher as the result of green policies and that this will rise to 33 per cent by 2020 or 44 per cent if gas prices fall, as many expect. Offshore wind is the single biggest contributor to that rise. Of the £15 billion a year that the Renewable Energy Foundation thinks consumers are going to be paying in total green imposts by 2020, the bulk will go to support offshore wind.

Britain is a proud leader in offshore wind. "The UK has more offshore wind installed than the rest of the world combined and we have ambitious plans for the future," says Ed Davey, the Energy Secretary. I wonder why that is. Could it be that other countries have looked at the technology and decided that it's far too costly? George Osborne says he does not want Britain out ahead on
green Energy. He should take a long hard look at why we are so far out ahead on this extravagant folly.

Currently we get under 3 per cent of our electricity from offshore wind, or less than 0.5 per cent of our total Energy. If Mr Davey's ambitions are realised and 20 per cent of our electricity comes from offshore wind in 2020, then we will need 20 gigawatts of capacity because wind turbines, even at sea, operate at less than 40 per cent of capacity. That's about six times what we have today and the cost of building it would be greater than the investment in nuclear Energy over the period
David Fuller's view - I have long been an opponent of wind farms because they are the most expensive and least reliable source of renewable Energy. They are also a monstrous blot on the countryside and for sea views, taking up far more space than any other sources of Energy, and for less output. They are murderous cuisinarts for birds and we are only beginning to understand the extent to which they adversely affect sleeping patterns for anyone living within approximately a mile of these towering, noisy eyesores.

The UK Government has been incredibly naïve about wind farms, and apparently no one more so than the Prime Minister. The current Energy Secretary mentioned above appears to have learned nothing and is little more than a cheerleader for a bad policy which he temporarily oversees. This incompetence has jeopardised Britain's Energy security and increased prices far more than would have been necessary with sensible policies, starting with fracking for shale oil and gas.

(There are 26 Archived articles and comments on this subject which you can access via the 'Search' facility shown upper-left, fourth item down. Click on that and it will open a window; type in wind farms and then click on the blue Search button to the right of the window.)

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October 23 2013

Commentary by David Fuller

Japan Mulls Plan for One Operator to Run All [Nuclear] Reactors

Here is the opening from this interesting Bloomberg article
Japan's government is discussing a radical overhaul of its nuclear power sector, the world's third largest, that would combine the nation's 50 operating reactors into a single company to rebuild an industry that's been effectively halted by the March 2011 Fukushima disaster.

The company would be owned by Japan's nine regional utilities, and two wholesalers Japan Atomic Power Co. and Electric Power Development Co. (9513), while the government and local reactor makers would give financial and technical support, Taku Yamamoto, who chairs the ruling Liberal Democratic Party's Energy committee, said in an interview.

Part of the profit from sales of the new company's electricity would be funneled toward the cleanup of Tokyo Electric (9501)Power Co.'s wrecked Fukushima atomic station and victim compensation, which combined may cost more than 11 trillion yen ($112 billion). The plan would keep Tokyo Electric alive to shoulder Fukushima costs and avert any blackouts in Tokyo, the host of the 2020 Olympics.

"The plan is based on Tepco's profits covering Fukushima costs without taxpayers' money and to increase the government's role in the nuclear industry," said 61-year-old Yamamoto. "Who's going to like a bankruptcy of Tepco? The company has to go on working hard for the Fukushima disaster until it dies."

Setting up a comprehensive nuclear-management company should help Japan expand its exports of reactors and operation skills as domestic electricity demand slows, Yamamoto said.

Tsuyoshi Numajiri, a spokesman for Tokyo Electric which is also known as Tepco, declined to comment on lawmakers' discussions to spin off nuclear operations at utilities, saying such plans are subject to change.
David Fuller's view - I was surprised to see this article because nuclear power has been a dead issue in Japan following the understandable public reaction to the Fukushima disaster in 2011. That will not easily or quickly change. Nevertheless, this plan may help and it sounds sensible.

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October 18 2013

Commentary by Eoin Treacy

Adjusting to reality

Thanks to a subscriber for this informative report from Standard Chartered focusing on the Middle East and North Africa. The full report is posted in the Subscriber's Area but here is a section
Social and political challenges in the wider Levant and North Africa are in stark contrast with the economic boom much of the GCC is enjoying. The GCC economies are benefiting from years of robust hydrocarbon dynamics, although they also face longer-term challenges.

Saudi Arabia is pouring resources into its longer-term development objectives, supporting healthy economic growth. Yet this brings inflation and concerns about productivity. Dubai‟s economy, which not long ago faced severe challenges, is performing extremely well against a backdrop of strong investment in the region, benefiting from its role as a trade and services hub. Jordan is now fast-tracking badly needed Energy reforms to slow the drain on government finances. Egypt‟s political transition is ongoing, and funding from the GCC is supporting the Egyptian pound (EGP) and the balance of payments. Reforms, however, have been delayed and look unlikely as long as social pressures and political uncertainty remain high.

We see three core themes for the region:

1. The need for subsidy reforms to reduce the load on government finances. While these measures may bring near-term pain, they are essential to reduce heavy subsidy burdens in the region.

2. Employment challenges are widespread, even in wealthy economies like Saudi Arabia. Creating sustainable employment opportunities is a priority.

3. The region needs to develop strong and robust legal systems, which are key to sustaining cross-border investment flows that are necessary to support economic growth and create employment.
Eoin Treacy's view - The Middle Eastern region has been among global laggards during the post credit crisis boom that has overtaken the majority of global stock markets. Political upheaval, violence and inflation have increased uncertainty. Changes in the administration of countries such as Libya have also resulted in oil production cuts However countries that have avoided the ravages of war, have been able to increase production and the economic outlook is turning more positive. The elevation of Qatar and the UAE from frontier to emerging market status by MSCI in June appears to have been a catalyst for improved investor sentiment. (Also see Comment of the Day on from June 5th).

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October 14 2013

Commentary by Eoin Treacy

Email of the day

on an addition to the Chart Library
October 14 2013

Commentary by Eoin Treacy

Martin Springâs On Target

Thanks to the author for this edition of his iconoclastic report. This month he kindly reviews Crowd Money but here is a section on the German utilities sector
German companies now have to pay almost three times as much for electricity as their American competitors, according to a Siemens study. One reason is that there’s no supply in Europe of cheap shale gas. Another is the cost of huge subsidies given to producers of wind, solar and biomass power.

Because of lack of a national grid, too much of that power is generated in the North, yet isn’t available where it’s needed, in the South. And because those supplies are so erratic, polluting coal-fired plants have to be used to make up the difference, increasingly being fuelled by imports from the US.

The German government has shut half the nation’s nuclear power production, and planned to close the rest. It’s committed to sourcing 80 per cent of its electricity from renewables by the year 2050. Subsidies for wind and solar power are now costing $23 billion a year, and forecast to total $735 billion by 2050.

Most of these extra costs are being loaded on consumers, with the pain greatest for those least able to afford them. More than 300,000 households are having their power shut off for lack of payment as winter approaches.

One consequence of the chaotic policymaking is that Germany’s emissions of greenhouse gases are actually rising, with older “dirty” power stations being reopened.

Energy policy, known in German as Energiewende (Energy turnaround), is an “unholy mess,” says FT editor Tony Barber.
Eoin Treacy's view - Iberdrola’s CEO highlights that the politically driven subsidies for wind and solar are not only affecting German consumers.

“More than 50 percent of the bill European consumers are paying today has nothing to do with power generation and networks, and that’s because of political decisions,” said Iberdrola’s Ignacio Galan. “That has already created a lot of distortions.”

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October 09 2013

Commentary by Eoin Treacy

The impact of rising east coast gas prices

Thanks to a subscriber for this detailed report from Deutsche Bank focusing on the Australian gas market. The full report is posted in the Subscriber's Area but here is a section
Access to LNG infrastructure and a demand side response will limit price rises.
We disagree with the premise that east coast gas prices must rise to international pricing equivalence. In our view the theoretical arbitrage opportunity for 3rd party gas seller to achieve LNG netback pricing will not eventuate. The three CSG-to-LNG projects currently under construction have sufficient reserves to meet their combined export requirements, suggesting no net additional supplies are needed from 3rd parties. In addition, we believe there will be a demand side response to rising gas prices, led by the power generation sector which currently represents c.30% of gas demand on the east coast. Higher gas prices imply power stations move up the cost curve and generate less, acting as a natural release valve to rising prices.

The impacts on the Australian economy are negative but manageable
Higher gas prices will inevitably lead to higher input costs for end consumers. However if prices increase to $6-7/GJ as we expect, there are no stocks within Deutsche Bank’s Australian coverage universe facing double digit earnings downside. In addition, mitigation opportunities led by increased Energy efficiency and fuel switching could see earnings impacts further reduced. We do not subscribe to the thesis of looming irrevocable damage to the Australian economy from higher Energy costs
Eoin Treacy's view - As Australia’s natural gas export capacity ramps up it is likely to offer a useful template for the USA where the debate continues on how committed the country should be to exports.

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October 01 2013

Commentary by David Fuller

The Threat of 'Abegeddon' From Taxes in Japan

Here is the opening for this interestingly sceptical column by Bloomberg's Asia-Pacific columnist, William Pesek
Posterity is watching carefully as Shinzo Abe goes ahead with a sales-tax increase aimed at getting a handle on Japan's huge debt burden, the world's largest. Unfortunately history may judge him no better than Ryutaro Hashimoto, the last Japanese prime minister to kill an economic recovery with ill-timed fiscal tightening.

That's not the conventional wisdom of the moment. Markets are euphoric over surging confidence among large Japanese manufacturers. September's jump in the quarterly Tankan (JNTSMFG) index -- to the highest levels since before the Lehman Brothers Holdings Inc. collapse in 2008 -- gave Abe just the tail wind he needed to raise the consumption tax to 8 percent from 5 percent starting in April 2014, with a further 2 percent increase in the cards for 2015.

Yet Abe is ignoring two things that could end his revival program, dubbed Abenomics: the precedent set by Hashimoto, Japan's 53rd prime minister, and the specter of inflation.

Hashimoto's 1997 sales-tax increase scuttled Japan's best chance at strong growth in a decade. By the time Hashimoto left office in 1998, business leaders were deriding him as Japan's Herbert Hoover, the 31st president who botched the U.S. exit from the Great Depression with badly timed austerity measures.

Inflation heightens the risk Abe is making the same mistake. The government hailed news last week that consumer prices are rising at the fastest pace since 2008 as a vindication of Abenomics. Yet the 0.8 percent jump in prices excluding fresh food in August was purely an Energy story, driving by a surge in costs for fuel imports.
David Fuller's view - All of William Pesek's remarks in the column above are relevant and no one ever thought that the challenge of reinvigorating Japan's economy was going to be easy. After all, there is the enormous government debt and the national loss of confidence over the last 25 years. The Fukushima disaster in 2011 has compounded Japan's Energy problems and the global economy is soft.


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September 30 2013

Commentary by David Fuller

September 27 2013

Commentary by David Fuller

Shale Gas Study Showing Minimal Methane Leakage Exposes Rifts in Enviro Movement

Here is the opening from the Huffington Post's article on this study
A new Environmental Defense Fund-University of Texas methane gas study has exposed deepening rifts in the environmental movement over the future of natural gas.

One of the central tenets of anti-shale gas activists -- such as green campaigner Bill McKibben, NGO's like Environmental Working Group or websites like Desmogblog -- is that methane leaked during the hydraulic fracturing extraction process makes natural gas more carbon polluting than coal carbon. The assertion that 'natural gas is bridge to a low carbon Energy future' is a sham, they claim. But a growing number of progressive-minded Energy experts at the EDF, Natural Resources Defense Council, Council on Foreign Relations and elsewhere are taking a more science-based approach, and letting the empirical evidence guide their views.

Indeed, methane is a potent greenhouse gas, so leaks could theoretically wipe out the documented climate benefits with respect to reduced carbon emissions of natural gas, a comparatively clean fossil fuel. But the fears were based almost entirely on a contested study presented as a letter and released two years ago by two Cornell University scientists who claimed catastrophic levels of methane were being leaked by fracking operations.

In its most recent estimate based on ancient data extending back to 1990 to the Paleolithic era of shale gas extraction technology, the Environmental Protection Agency had estimated that "natural gas systems" emit about 1.3 percent of total natural gas production. Many in the natural gas industry had asserted that this estimate was outdated and way too high, while anti-fracking campaigners said it understated the methane leakage problem.

Now we almost certainly know the answer. Released September 23, the report led by David Allen at the University of Texas found that methane emissions from new wells being prepared for production, a process known as completion, captured 99 percent of the escaping methane -- on average 97 percent lower than the 2011 EPA estimates. It is the most comprehensive shale gas emissions study ever undertaken on methane leakage, covering 190 well pads around the United States.

Energy experts and environmentalists celebrated the finding that almost all the escaping methane could be captured by state of the art equipment. "The good news is that under EPA regulations issued in April 2012 most fracked natural gas wells will have to capture or flare methane during well completions staring in 2015," wrote Dan Lashof on his blog at the Natural Resources Defense Council.
David Fuller's view - This is welcome news and another triumph for technological innovation. If you agree, tell your politicians because the world needs to use more natural gas and fracking provides access to the shale reserves in most countries

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September 27 2013

Commentary by David Fuller

The World's Climate Scientists Explain How to Avoid Drastic Global Warming: It's Not Easy

Here is the opening for this interesting summary of the Intergovernmental Panel on Climate Change (IPCC) report
Humans are warming the planet. Climate scientists are 95 percent sure of this - as sure as they are that cigarette smoking causes cancer. That's one takeaway from the big new climate report by the Intergovernmental Panel on Climate Change, which began rolling out Friday.

The major report synthesizes the vast array of climate science research out there. Humans have pushed temperatures higher by burning fossil fuels, clearing forests, and other activities. If we keep emitting greenhouse gases, that will lead to more ice melt and higher sea levels in the decades ahead.

None of this is too surprising. Climate scientists have known that humans are warming the planet for many years - their confidence has gone up, but the conclusion has stayed the same.

Even so, it's worth reading through the summary of the IPCC report to see what else the climate panel has to say. There are some new details here, including the critical point that humans will have to keep the vast majority of their fossil-fuel reserves in the ground if we want to keep global warming below 2ºC, the level deemed "dangerous" by world leaders.

1) Humans are in control of how much the planet will heat up in the decades ahead. We can choose 1ºC (or less) of global warming. Or we can choose a drastic 4ºC.

This may seem like an obvious point, but it's worth dissecting. The IPCC report notes that there's typically a fair bit of natural variability in the climate system, thanks to volcanic eruptions, solar cycles, and various ocean processes. As a result, we're likely to see some fluctuations in global temperatures for years to come - the recent slowdownis a perfect example - even as the long-term trend is upward.
David Fuller's view - I have had a good look at the official summary of the IPCC report released today, and you will not be surprised to hear that it is an uncomfortable read. However, its' 'solution', and apparently only for part of the problem, at least in terms of what IPCC has said so far, is to significantly reduce the use of fossil fuels.

We already know that not a single developed country has had much 'success' in doing this, and the cost has been uncompetitively high fuel costs and a risk of future blackouts, as we face here in the UK. More importantly, developing countries and not least those with high populations have made it very clear that they are not going to reduce their consumption of fossil fuels. Their priority is GDP growth because they know that higher fuel costs would be devastating for their numerous citizens who still live in conditions of severe poverty.

We can reduce CO2 emissions with natural gas and the new generation of nuclear Energy. Simultaneously, we can develop less costly technologies for capturing CO2 when using fossil fuels. Additionally, it should not be beyond the ability of today's rapidly developing technologies to suck CO2 emissions out of the atmosphere.

(See also: Four Numbers Say Wind and Solar Can't Save Climate, posted on 23rd September, and This Car Runs on Gas Made Out of Thin Air, posted on 6th September 2013

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September 23 2013

Commentary by David Fuller

September 23 2013

Commentary by David Fuller

Amid Economic and Safety Concerns, Nuclear Advocates Pin Their Hopes on New Designs

Here is a sample from this informative article from Time Science & Space
The challenge of nuclear waste - another factor that has held back new construction in the U.S., since no one can agree where to put it - is also at the heart of another atomic start-up. TerraPower is experimenting with a traveling-wave reactor design, which would largely eliminate the need for uranium enrichment. (Traveling wave refers to the fact that fission occurs bit by bit in the reactor core, as if a wave of Energy were slowly spreading through it, rather than in the entire core all at once as in standard fission.) In conventional reactors, composition of the isotope uranium-235 has to be increased in the fuel before it becomes fissile. TerraPower's reactor design could use the depleted uranium found in nuclear waste, burning it for decades without refueling. That revolutionary potential is what attracted Bill Gates, who is one of TerraPower's main funders. "We think we could have a prototype by the early 2020s and become the commercial reactor of choice by the 2030s," says John Gilleland, TerraPower's CEO
David Fuller's view - These are promising developments and new nuclear projects offer the best and most practical long-term solutions to our Energy problems.

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September 23 2013

Commentary by David Fuller

Four Numbers Say Wind and Solar Can't Save Climate

Here is the opening and some additional samples from this informative column by Robert Bryce for Bloomberg
This month, the Intergovernmental Panel on Climate Change will begin releasing its fifth assessment report. Like earlier reports, it will undoubtedly lead to more calls to reduce emissions of carbon dioxide worldwide.

As the discussion unfolds, I would urge everyone to keep four numbers in mind: 32, 1, 30 and 1/2. These are the numbers that explain why any transition away from our existing Energy systems will be protracted and costly. Let's take them in sequence.

First, 32: That's the percentage growth in carbon dioxide emissions that has occurred globally since 2002. In the past decade, these emissions have increased by about 8.4 billion tons. And nearly all of that has happened in the developing world. In Asia, emissions rose 86 percent; in the Middle East, 61 percent; and in Africa, 35 percent.

In the U.S., meanwhile, carbon dioxide emissions were 8 percent lower in 2012 than they were in 2002, largely due to a surge in shale gas production, which has reduced coal use. In Europe, carbon dioxide emissions have been essentially flat for a decade.

That 32 percent increase in global carbon dioxide emissions reflects the central tension in any discussion about cutting the use of coal, oil and natural gas: Developing countries -- in particular, fast-growing economies such as Vietnam, China and India -- simply cannot continue to grow if they limit the use of hydrocarbons. Those countries' refusal to enact carbon taxes or other restrictions illustrates what Roger Pielke Jr., a professor of environmental studies at the University of Colorado, calls the "iron law of climate policy": Whenever policies "focused on economic growth confront policies focused on emissions reduction, it is economic growth that will win out every time."

Over the past 10 years, despite great public concern, carbon dioxide emissions have soared because some 2.6 billion people still live in dire Energy poverty. More than 1.3 billion have no access to electricity at all.

Now to the second number: 1. That's the power density of wind in watts per square meter. Power density is a measure of the Energy flow that can be harnessed from a given area, volume or mass. Six different analyses of wind (one of them is my own) have all arrived at that same measurement.

Wind Energy's paltry power density means that enormous tracts of land must be set aside to make it viable. And that has spawned a backlash from rural and suburban landowners who don't want 500-foot wind turbines near their homes. To cite just one recent example, in late July, some 2,000 protesters marched against the installation of more than 1,000 wind turbines in Ireland's Midlands Region.

Consider how much land it would take for wind Energy to replace the power the U.S. now gets from coal. In 2011, the U.S. had more than 300 billion watts of coal-fired capacity. Replacing that with wind would require placing turbines over about 116,000 square miles, an area about the size of Italy. And because of the noise wind turbines make -- a problem that has been experienced from Australia to Ontario -- no one could live there.


Now let's turn to the third number: 30. This represents the massive scale of global Energy use, which is about 250 million barrels of oil equivalent per day, or the output of about 30 Saudi Arabias. (Since the 1970s, the Saudis have produced about 8.2 million barrels of oil per day.) Of that 30 Saudi Arabias of daily Energy consumption, we get 10 from oil, nine from coal, seven from natural gas, two from hydro and 1 1/2 from nuclear.

That remaining 1/2 -- the final number -- represents the amount of Energy we get from all renewable sources, not counting hydropower. In 2012, the contribution from all of those sources amounted to about 4.8 million barrels of oil equivalent per day, or roughly one-half of a Saudi Arabia. Put another way, we get about 50 times as much Energy from all other sources -- coal, oil, natural gas, nuclear and hydropower -- as we do from wind, solar, geothermal and biomass.
David Fuller's view - If we are going to reduce global carbon dioxide emissions anytime soon, meaning within the next five to ten years, countries need to take two important steps: 1) Increase the production of natural gas which exists within shale formations in most countries; 2) Build new nuclear power stations.

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September 19 2013

Commentary by David Fuller

Email of the day

On the cost of 'Gulf of Mexico Oil Riches'
"I refer to your recent item on oil/gas riches in the Gulf of Mexico.

"As these are at great depth, the recovery cost must be very high. This should help to place a floor under the oil price

"Any idea what cost of production would be? Maybe one of the Energy experts, who read Fullermoney may wish to contribute."
David Fuller's view - My guess is that only the oil companies involved know approximately what the eventual cost of production is likely to be. However, we do know a big portion of it, in that figure of over $100 million to drill each of these deep wells. Fortunately the success rate is high and they are already certain that the resource is massive, according to the article. Additionally, the increased drilling activity confirms the optimism of these large oil producers.

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September 18 2013

Commentary by Eoin Treacy

Musings from the Oil Patch

Thanks to a subscriber for this edition of Allen Brooks' ever interesting report on the Energy sector. Here is a section
We have discussed in many previous articles the reasons why social trends are undercutting vehicle miles driven – the growing use of the Internet for working and for shopping, the preference for social contact through electronic medium rather than personal contact for our teenagers and youth, and housing and work patterns that favor the use of alternative modes of transportation over personal vehicles. The cartoon below addresses why America's teenagers are not getting their driver's licenses. It is hard to see many of these factors changing soon.

We remain convinced that Toyota's view of future new car sales in the U.S. will prove more accurate than the forecasts calling for an ever upward sales projection. In the early 2000s, before the financial crisis, when yearly car sales were in 19-20 million units a year range, the market was in a bubble supported by the housing bubble and the use of home equity loans to finance all sorts of consumer spending including new vehicles. We believe that U.S. social and demographic trends impacting the amount of driving will prove stronger than auto forecasters who believe we will return to historic auto-buying patterns. None of these beliefs are overly negative for the outlook for the auto industry or those businesses closely associated with new car sales, however, increased vehicle fuel-efficiency mandates will take a toll on the volume of gasoline sales meaning a challenging future for the petroleum industry. That outlook needs to be assessed in light of the other trends at work in the U.S. and North American Energy market, all of which could result in the U.S. reassessing its prohibition against crude oil exports.
Eoin Treacy's view - Gasoline prices have been ranging within a somewhat triangular pattern since early 2011 and have dropped from the July peak near $3.25 to test the progression of higher reaction lows. While some steadying is to be expected in the current area, a clear upward dynamic will be required to check the downward bias.

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September 18 2013

Commentary by David Fuller

Merkel gambles on big energy shift

Here is the opening of this informative article published by Power Engineering
Energy-conscious to an extreme, Olaf Taeuber relies on just a single 5-watt bulb that gives off what he describes as a ''cozy'' glow to light his kitchen when he comes home at night. If in real need, he switches on a neon tube, which soaks up all of 25 watts.

Even so, he found himself seeking help last week to fend off a threat from Berlin's main power company to cut off his electricity, one of a growing number of Germans left unable to pay their soaring Energy bills. He is among those feeling the immediate effects of Chancellor Angela Merkel's most ambitious domestic project: Germany's energiewende, or Energy revolution, under which the country is shutting down its nuclear power reactors, discouraging coal-fired plants and encouraging a near-complete shift to renewable Energy sources.

''Often, I don't go into my living room in order to save electricity,'' said Mr. Taeuber, 55, who manages a fleet of vehicles for a local social services provider. ''You feel the pain in your pocketbook.''

''Energy poverty,'' as Germans now call it, is just one of the many problems confronting Ms. Merkel's plan, the likes of which has never been tried - not just in Germany, but in any major industrial country. Energy prices in Germany - the highest in Europe - have spiked 30 percent over the last five years as costs have risen with the transition. Providers pulled the plug on an estimated 312,000 German households unable to pay their bills in 2011, according to official figures.

Newly constructed offshore wind farms churn unconnected to an Energy grid still in need of expansion. Carbon emissions actually rose last year as oil- and coal-burning plants were fired up to close gaps in Energy supplies. Energy-intensive industries have begun to shun the country for fear of the even steeper costs ahead.
David Fuller's view - Arguably, this is a brave move by Mrs Merkel and Germany but is it entirely rational? Opinions will obviously vary on the emotive topic of expensive green Energy versus fossil fuels such as crude oil and, increasingly, natural gas. These are obviously much cheaper if produced domestically. However, with a troubled Middle East and other Energy exporters keen to see prices just below levels that could weaken global demand (crude oil Brent and WTI), we have not yet reached the point where Energy costs are likely to be permanently lower in real (inflation adjusted) terms, due to increased global supplies. Upside breakouts from these trading bands shown above would certainly be a headwind for the global economy.

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September 18 2013

Commentary by David Fuller

African states push back on Chinese oil deals

Here is the opening for this interesting article from the NYT & IHT, using the latter paper's headline
NIAMEY, Niger - In Niger, government officials have fought a Chinese oil giant step by step, painfully undoing parts of a contract they call ruinous. In neighboring Chad, they have been even more forceful, shutting down the Chinese and accusing them of gross environmental negligence. In Gabon, they have seized major oil tracts from China, handing them over to the state company.

China wants Africa's oil as much as ever. But instead of accepting the old terms, which many African officials call unconditional surrender, some cash-starved African states are pushing back, showing an assertiveness unthinkable until recently and suggesting that the days of unbridled influence by the African continent's mega-investor may be waning.

For years, China has found eager partners across the continent, where governments of every ilk have welcomed the nation's deep pockets and hands-off approach to local politics as an alternative to the West.

Now China's major state oil companies are being challenged by African governments that have learned decades of hard lessons about heedless resource-grabs by outsiders and are looking anew at the deals they or their predecessors have signed. Where the Chinese companies are seen as gouging, polluting or hogging valuable tracts, African officials have started resisting, often at the risk of angering one of their most important trading partners.

"This is all we've got," said Niger's oil minister, Foumakoye Gado. "If our natural resources are given away, we'll never get out of this."
David Fuller's view - There are two important aspects to this situation: 1) Africa's governments are becoming worldlier, which is certainly in their own interests; 2) Worldwide demand for crude oil, natural gas and all other forms of Energy can only rise as the global economy recovers.

Currently, few developed economies have secured their future Energy supplies at internationally competitive costs, although many still have a window of opportunity in which to do so. The main exceptions are Canada, the USA, Norway and Australia. Yes, they have their own domestic supplies of crude oil and natural gas. However, most other developed economies could improve both their Energy supplies and costs if they prioritised development of their own shale resources. The USA pioneered this technology and has utilised it increasingly successfully, with little evidence to date of serious earthquakes or the contamination of water supplies predicted by naysayers.

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September 17 2013

Commentary by Eoin Treacy

North Dakota Oil Production Posting A Huge Jump In July

Thanks to a subscriber for this update on US onshore oil production from the Bakken formation from DNB. The full report is posted in the Subscriber's Area but here is a section
According to the Industrial Commission of North Dakota the number of drilling permits in July was 178 while it rose to 276 permissions in August, which is by far the highest number of drilling permits issued in a month so far this year. This suggests we should expect further large hikes in output going forward.

After having posted the largest Year-on-Year increase of crude oil output in May-2012 of 280 kbd, the growth had fallen every month since then to 157 kbd in June and most people had expected the growth to continue to drop for the coming months. Hence it is interesting to note that the year on year growth for July in North Dakota jumped back up to 198 kbd. Even if oil production in North Dakota should not increase any more from now to the end of the year, the year on year growth will average about 140 kbd for the remaining 5 months of the year.

The average rig count per month in North Dakota has fallen from 185 rigs in January to 182 rigs in July according to the Industrial Commission of North Dakota. According to Baker Hughes the number of horizontal rigs working in the Bakken was 157 in July and 159 in August. In July last year there were 209 horizontal rigs working in the Bakken, yet production was 199 kbd lower. This fact is quite telling for what is going on in this industry. Efficiency is improving quicker than many though possible and it is no longer possible to count the number of rigs to get a feel for how many wells will be drilled.
Eoin Treacy's view - The revolution in unconventional oil and gas supply continues to be a game changer for the Energy sector. However, due to the high prices paid for drilling rights and the ensuing collapse of natural gas prices, the stock market performance of many shale gas companies lagged the wider market as they adjusted to the new pricing environment. In many cases this necessitated migrating to shale oil properties, not least in the Bakken and Eagle Ford formations. That process has ended and shares are responding favourably once more.

While shale oil and gas have been making headlines this is by no means the only source of additional supply likely to affect the Energy markets over the next decade. Offshore and particularly deep water drilling also represent important opportunities for the sector. A piece contrasting the performance of these two portions of the Energy sector in Comment of the Day on January 18th 2013, which highlighted the outperformance of the offshore drilling sector may be of interest.

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September 17 2013

Commentary by David Fuller

Blow to Abenomics as Japan shuts last nuclear reactor

My thanks to a subscriber for this informative article by Ambrose Evans-Pritchard of The Telegraph (UK). Here is the opening and also a section from the conclusion
Japan has switched off its last nuclear reactor and will have to rely on imported oil and gas to power its industrial machine for the rest of the year, bowing to anti-nuclear sentiment as controversy rages over the botched handling of the Fukushima clean-up.

Failure to revive Japan's nuclear industry is a major setback for premier Shinzo Abe, who had hoped to restart at least eight of the country's 50 reactors this year to cut reliance on ruinously expensive crude oil and liquefied natural gas (LNG). While a surge in output from solar and other renewables has plugged a gap equal to three reactors, it too comes at a high cost.

Mr Abe's dash for growth after 15 years of deflation and perma-slump depends crucially on affordable Energy, but Japanese companies must now pay three times as much as US rivals for power.

Tokyo says it costs four time more produce power from oil compared to coal or nuclear reactors, creating an incentive to build new coal plants.

The cost squeeze threatens to offset gains from a 20pc fall in the yen against the dollar since Mr Abe first signalled his monetary blitz last year. It has also wiped out Japan's trade surplus, leading to deficits in 2011 and 2012 for the first time in over 30 years. Junko Nishioka from RBS said this takes away a key shield protecting Japan against a bond market crisis.

Nuclear power provided a third of Japan's electricity before the Fukushima melt-down in February 2011, when all plants were switched off.


For now, at least, Mr Abe's broader economic gamble is working. The Bank of Japan's vow to purchase $75bn a month of Japanese bonds and double the monetary base by mid-2014 has been electrifying. Growth was 4.1pc in the first quarter and 3.8pc in the second quarter, making Japan the fastest-growing economy in the G7 so far this year.

The question is whether it is a monetary "sugar rush" or a genuine revival. Failure to find affordable Energy quickly could prove the Achilles Heel of Abenomics.
David Fuller's view - I maintain that Abenomics is a winning formula for Japan but Energy costs are the biggest obstacle. Given Japan's long history of nuclear horrors - from Hiroshima and Nagasaki in 1945 to Fukushima in 2011 - it is understandable that its citizens will not tolerate the reopening of these plants.

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September 13 2013

Commentary by David Fuller

Wildcatter Hunch Unlocks $1.5 Trillion Oil Offshore U.S.

Here is the opening section for this important discovery and development story by Edward Klump for Bloomberg
Texaco Inc. geologist Robert Ryan didn't suspect he was helping change the Energy future of the Gulf of Mexico when he gave the go-ahead for a well that would break the world record for deep-water drilling.

The project known as BAHA, undertaken in 1996 by Texaco and its partners, Royal Dutch Shell Plc (RDSA), Amoco Corp. and Mobil Corp., was a dry hole. That normally would've made it a flop. Instead, BAHA's discovery of oil-rich sands where none were thought to exist was the first step in unlocking a $1.5 trillion trove of crude that's revived the prospects of a body of water many thought had long ago given up most of its fossil-fuel riches.

Just as technology has allowed explorers to tap vast new oil and natural gas supplies in onshore shale fields, it's now reinventing the Gulf. BAHA was the first deep-water well to try plumbing the Lower Tertiary, a layer of the earth's crust formed more than 25 million years ago after mammals had replaced dinosaurs as the dominant life form.

A series of recent finds in the ultra-deep has profoundly changed the thinking on U.S. offshore geology, with 2013 seeing the Gulf of Mexico become one of the most promising frontier oil plays in the world and the fastest-growing offshore market.

New seismic equipment and computer power has allowed explorers to see into once-invisible layers of rock. Engineering innovations enable them to drill five miles into the earth through waters more than 10,000 feet deep, where temperatures are more than hot enough to boil water and high pressures approach the weight of four cars resting on one square inch.

The Gulf is heading for record deep-water output equivalent to almost 2 million barrels of oil a day in 2020, according to industry researchers Wood Mackenzie Ltd. The U.S. estimates about 15 billion barrels of recoverable oil remain to be found in the Lower Tertiary.

While most U.S. shale fields have now been identified and mapped, the Gulf is seen as having much bigger yet-to-be-discovered potential -- 48 billion barrels of oil compared to the 13 billionbarrels estimated for onshore and coastal oilfields, according to U.S. data.

Investment is pouring in, with 42 drilling rigs operating in 1,000 or more feet of water as of Sept. 9 -- 35 percent more than four years earlier, according to U.S. data on the Gulf. By the end of 2015, 60 rigs are slated to be working in the deep water off U.S. shores, estimates Brian Uhlmer, an analyst at Global Hunter Securities LLC in Houston.
David Fuller's view - This is a fascinating and hugely significant discovery and development project which is only now coming into production. Importantly, technology is once again proving that Mother Earth remains a cornucopia of oil and gas supplies for our rapidly developing global economy. Indeed, it actually underpins our global economic expansion for many more decades, during which renewable Energy sources, led by solar power, will be refined and perfected to the point where they can eventually become the major sources for our inexhaustible Energy requirements.

Lest future generations take this almost for granted, think back over the second half of the last century and the earlier years this century. Most forecasters were convinced that recoverable supplies of global oil were rapidly diminishing. They feared that the free world would be held to ransom by a dwindling, mostly despotic and unstable group of Energy suppliers. They forecast that Energy prices would only rise in real rather than inflationary terms.

Fullermoney has forecast that technological innovation would result in a much more favourable outlook for both Energy supplies and their real cost before the end of this decade, not least since US oil companies invented hydraulic fracturing technology, commonly know as fracking

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September 11 2013

Commentary by David Fuller

Eagle slaughter: Wind farms kill 67 eagles in 5 years

Here is the opening from this alarming but all too predictable report from The Washington Times
WASHINGTON (AP) - Wind Energy facilities have killed at least 67 golden and bald eagles in the last five years, but the figure could be much higher, according to a new scientific study by government biologists.

The research represents one of the first tallies of eagle deaths attributed to the nation's growing wind Energy industry, which has been a pillar of President Barack Obama's plans to reduce the pollution blamed for global warming. Wind power releases no air pollution.

But at a minimum, the scientists wrote, wind farms in 10 states have killed at least 85 eagles since 1997, with most deaths occurring between 2008 and 2012, as the industry was greatly expanding. Most deaths - 79 - were golden eagles that struck wind turbines. One of the eagles counted in the study was electrocuted by a power line.

The president of the American Bird Conservancy, Mike Parr, said the tally was "an alarming and concerning finding."
David Fuller's view - This is a disgrace and Fullermoney is among others who have long described wind farm technology as Cuisinart for birds.

The plight of eagles understandably attracts headlines but think of the many thousands of smaller birds that are being killed by windmills, and barely noticed, if at all.

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September 06 2013

Commentary by David Fuller

Ice Melting Faster in Greenland and Antarctica in UN Leak

Here is the opening to this interest report from Bloomberg
Ice in Antarctica and Greenland is disappearing faster and may drive sea levels higher than predicted this century, according to leaked United Nations documents.

Greenland's ice added six times more to sea levels in the decade through 2011 than in the previous 10 years, according to a draft of the UN's most comprehensive study on climate change. Antarctica had a fivefold increase, and the UN is raising its forecast for how much the two ice sheets will add to Earth's oceans by 2100.

The changes in the planet's coldest areas are a "very good indicator" of a warming planet, according to Walt Meier, a research scientist with the U.S. National Aeronautics and Space Administration.

"It's an early warning system," Meier said by phone fromNASA's Goddard Space Flight Center in Greenbelt, Maryland. "When you think about a couple of degrees of warming, in the U.K. or U.S., it's not something that would be too noticeable, whereas in an area of snow and ice, it can have a huge effect. With sea ice, minus 1 to plus 1 is the difference between skating on the ice and swimming in the ocean."
David Fuller's view - We cannot afford to assume either that this is not happening or that it is only a temporary anomaly. Of course our increasing human population and developing technologies are warming the planet. However, I suggest the solution is not to throw the world into economic depression by banning fossil fuels. We need a variety of Energy sources to prosper, including fossil fuels while they remain competitive.

The solutions to our human contributions to global warming can be found in our technologies. After all, we put carbon dioxide in the atmosphere and have the incentive to take some of it back out, if it is a potentially useful resource, as other articles including the previous one above on "gas made out of thin air" suggest.

Note: There appears to be a contradiction in this article, if I am reading it correctly. The second paragraph above says that Antarctica's ice is also melting more quickly. However, the 'Melt Season' section at article's end says: "The extent of Antarctica's sea ice 'very likely' increased 1.2 percent to 1.8% percent a decade over the same period."

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September 03 2013

Commentary by Eoin Treacy

Rebirth of the Cold War

Thanks to a subscriber for this interesting report by Lucas Hermann and colleagues at Deutsche Bank. The full report is posted in the Subscriber's Area but here is a section
European gas volumes in 2013 may be well below their 2008 peak but with spot prices hitting new seasonal highs you'd be hard pressed to know it. With indigenous supply collapsing and LNG diverting to Asia, a market that should be in the doldrums looks poised to see prices breaking to the upside. As Gazprom's market share moves towards record levels and its export supply hits new peaks we worry quite where Europe expects to go next for its gas. We conclude that despite sub-par gas demand growth to 2020 European prices are moving to a new phase, with US LNG imports much needed if Russia's ever growing dominance and high pricing is to be contained.

Back in Gazprom's embrace
We are concerned. With indigenous gas production in steady decline, Norwegian output at peak, gas storage levels at five year lows and the start-up of material Asian-focused LNG capacity unlikely to begin in earnest for another 12-18 months European gas pricing looks increasingly to be balanced on a knife's edge. Influenced by an unusually severe winter, Europe is again caught in Gazprom's embrace and with it confronting elevated, oil-linked pricing. For Europe's IOC gas suppliers, not least Statoil, a new golden age is just arriving.

Whoops – we forgot about where to source forward supply
Moreover, after five years during which, perhaps deluded by the promise of unconventional gas, the continent's utility buyers and aggregators have been reluctant to commit to new supply be it LNG or pipeline gas, we question where a recovering Europe will source its much needed future supplies. With the delivery of European unconventional gas if anything moving backwards, North African stability in question and additional Caspian flows unlikely pre-2019 (and even then set at a paltry 10bcm) home-grown options look narrow.
Eoin Treacy's view - One can't but have a pessimistic attitude to Europe's Energy security when so many public officials have invested political capital in debunking unconventional supply initiatives. It is therefore notable that the European commissioner for Energy, Geunther Oettinger, was today quoted saying “Germany needs to keep option of shale gas open as it makes Putin nervous”.

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September 02 2013

Commentary by Eoin Treacy

Batista's OGX Soars as Rout Boosts Ibovespa Weighting: Rio Mover

This article by Denyse Godoy for Bloomberg may be of interest to subscribers. Here is a section
OGX has the third-highest weight in the Ibovespa at 5.21percent, according to data compiled by Bloomberg. That compares with 0.92 percent on Aug. 30, the data show. BM&F Bovespa SA is considering excluding stocks trading for less than 1 real, or penny stocks, from the Ibovespa, which is otherwise weighted just by trading volume, according to a statement on the exchange operator's website.

“Shares slumped on Friday as foreign investors massively sold because OGX would not be part of the MSCI Brazil anymore,” Sandro Fernandes, a trader at Geraldo Correa, said by phone from Belo Horizonte, Brazil. “Today shares are rallying because some funds needed to buy more stock as OGX's weighting on the Brazilian benchmark increased.”
Eoin Treacy's view - The Bovespa Index has been ranging with a downward bias for more than two years and dropped abruptly from May to a July low near 44000. The heavy weighting of Energy, resources and banking shares has been a headwind for performance and OGX in particular has been a concern. (Also see Comment of the Day on July 30th.

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August 27 2013

Commentary by David Fuller

While Britain Dithers, the world is fracking

Here is the conclusion from this forceful article from The Times (UK) (note, subscription registration required but a PDF version is in the Subscriber's Area
Russia imagined that Gazprom would bring its gas customers to heel by threatening a big winter freeze that would reach as far as Germany, but even Bulgaria has used a global gas glut to renegotiate the price down by 20 per cent. Meanwhile Azerbaijan, Kazakhstan and Turkmenistan have become rival suppliers with the Trans-Anatolian Natural Gas Pipeline bypassing Russia entirely. For the first time since the 1989-90 revolutions much of Europe can look forward to being totally free of a Russia that under Vladimir Putin is regressing to bullying Soviet pathologies. In the longer term, Europe may also benefit from the huge offshore gas reserves of Cyprus, Israel and Lebanon.

Which brings us back to Europe's noisy Green Luddites and the politicians who pander to them. Angela Merkel has signalled the closure of Germany's remaining nuclear power plants, even as her country will still import nuclear-generated Energy from France and Poland. Her Energy policy is as much of a mess as ours, with northerly offshore wind farms lacking connection with southern industries. The Italian Government has also caved in to environmental lobbyists over deep-water oil prospecting in the Adriatic. Judging from opinion surveys, the Poles would happily frack but, for the time being, their geology makes this prohibitively expensive. Britain should grab a piece of this global action as soon as possible - perhaps with a sovereign wealth fund so that the fruits are not squandered.

Despite his Cotswolds affinities, David Cameron has unambiguously endorsed fracking. He says local communities will receive economic benefits and there'll be minimal impact on a countryside that is no more "scenic" than northern Britain, and which was "industrial" itself when charcoal was used in the iron industry. It is just inhabited by people who know how to bounce the media better than those in Cheshire or Cumbria.

Since the PM cannot give this truly existential issue his undivided attention, amidst attending to Syria or gay rights abuses in Russia, he should designate an articulate champion who can make the case for shale gas with the urgency our Energy crisis demands. Michael Fallon is the obvious choice. Or is Energy policy - and hence what folk pay for such basic rights as heat and light - going to be dictated by the likes of Bianca Jagger and Dame Vivienne Westwood in what, to coin a second new word, is starting to look like a "celebocracy" as well as "chummocracy"?
David Fuller's view - I favour lobbying for fracking in the UK or wherever one lives, if your country also has considerable reserves of shale gas and oil. The benefits will be cheaper Energy costs, as we see in the USA, contributing to a more vibrant economy for many decades.

If you liked the article above and can log-on to The Times, you may also be interested in the mostly sensible emails which follow

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August 23 2013

Commentary by Eoin Treacy

Tesla Model S receives top marks in NHTSA safety testing

This article for GizMag by Angus MacKenzie may be of interest to subscribers. Here is a section
Tesla reports that the all-electric sedan received a 5 stars in every NHTSA category. Only 1 percent of all manufacturer vehicles achieve a five star rating and the NHTSA does not publish a star rating above 5. However safety levels better than 5 stars are captured in the overall Vehicle Safety Score (VSS) provided to manufacturers. The S scored a record 5.4 VSS rating and set a new record for the lowest likelihood of injury to occupants.

The test scores are based on figures obtained during front, side, rear and rollover incidents. Tesla's high front collision score was achieved in part due to its large front crumple zone. With no massive gas/diesel engine up front, the Model S' front hood becomes more effective in diffusing Energy because the entire zone being dedicated to safeguarding occupants.
Eoin Treacy's view - While Tesla has made waves in the electric car sector by delivering on the type of range people require of a car that costs from $64000 to $85000, the fact that it is also an industry leader in safety will help to alleviate concerns consumers might have about what is still a very new technology.

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August 23 2013

Commentary by Eoin Treacy

Every U.S. Home Becomes a Power House in Utility Grid's Twilight

This article by Christopher Martin, Mark Chediak and Ken Wells for Bloomberg highlights some important dynamics in the Energy markets. Here is a section
“Renewable Energy is so unlike fossil fuel Energy,” says John Farrell, a senior researcher with the Minneapolis-based Institute for Local Self-Reliance, a group pushing distributed generation. “You don't need large amounts of capital to build it, you don't need to produce it all in one place and use high- voltage transmission lines to transport it somewhere else. The idea that we would continue to have a centralized form of ownership and control of that system is really inconsistent with what the technology enables.”

Farrell is a supporter of distributed power. However, the Bernstein Energy industry black book, a kind of bible of Energy trends published by Sanford C. Bernstein that's followed devoutly by institutional investors, also predicts that parity in the cost of unsubsidized solar and conventional electricity will radically change the Energy dynamic.

“The technology and Energy sectors will no longer simply be one another's suppliers and customers,” the report finds.

“They will be competing directly. For the technology sector, the first rule is: Costs always go down. For the Energy sector and for all extractive industries, costs almost always go up. Given those trajectories, counter-intuitively, the coming tussle between solar and conventional Energy is not going to be a fair fight.”
Eoin Treacy's view - My view – Themes such as the growth in natural gas supply from what were previously considered unconventional sources, the high price of Energy encouraging efficiency, the pace of technological development and a regulatory environment heavily skewed in favour of wind and solar is creating a highly disruptive environment for utilities. Those that keep pace with change will survive and possibly thrive. The outlook is likely to be much more uncertain for those that fail to innovate.

The Dow Utilities Average (P/E 14.4, DY 4.07%) has a long record of dividend growth and competitive yields and it performed impressively from the 2009 lows as demand for investments with defensive characteristics increased. The Average surged higher from November in a manner inconsistent with the previous three-year uptrend and subsequently experienced its largest decline since early 2009. The net result is a loss of momentum with prices currently trading at the same level as this time last year. A sustained move above 500 will be required to reaffirm medium-term demand dominance and question current scope for additional volatility and ranging.

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August 22 2013

Commentary by Eoin Treacy

Email of the day (1)

on the medium to long-term outlook for oil
“Please find attached a report plus slides from DNB Markets on the long term trends of the oil market. DNB got considerable media coverage with their bold – and disputed – forecast in the summer of 2012 that 2013 and 2014 oil prices would drop from the levels seen in 2011 and 2012. So far DNB has been right. Well, since last summer many other analysts have had to change their earlier optimistic (i.e. high) oil price scenarios to take into account the shale revolution and weaker demand. DNB Markets confirms its earlier predictions of cheaper oil in coming years, but not a return to cheap oil as such. The report includes a good overview of the North American shale revolution.”But does that mean Saudi Arabia will choose to cut to protect prices this time? We are not sure. The fact is that Saudi Arabia does not really need a certain oil price to balance their budget, the kingdom needs revenues. The revenues from oil sales are a function of both price and volume. It is of course not a factor of price alone. Here is some food for thought when it comes to what kind of strategy Saudi Arabia will choose the coming years:

Currently Saudi Arabia is producing about 9.8 million b/d which at 100 $/b is worth 358 billion USD per year. If as an example Saudi Arabia have to cut output by 1.5 million b/d to 8.3 million b/d to maintain 100 $/b, revenues will drop to 303 billion USD per year. How far can the oil price drop and still provide the same revenues of 303 billion USD per year? The answer is 85 $/b. Saudi Arabia could in other words earn the same oil revenues by maintaining production at 9.8 million b/d and let the oil price slip to 85 $/b as the kingdom would receive by cutting output to protect the oil price. This is just an example to illustrate the strategic choices that could soon face Saudi Arabia. The benefit for the kingdom of maintaining output at a higher level to a lower oil price is that it would provide a larger oil market share for them, and also probably higher global oil demand.

What the kingdom will choose to do is not “written in stone”. During the 1980's the Saudis cut massively to protect the oil price but changed that tactic after losing too much market share and then targeted volume instead. This time it might be a better strategy to let prices slide towards 85 $/b instead. The Saudis are fully aware of the cost curves for the shale oil industry and they know that many sellers would disappear if the oil price drifted lower than 80 $/b. Why not let the market take care of this adjustment and just let oil prices slide 15-20%? As already described if the price falls more than that, then non-OPEC will come to the rescue instead and start cutting output (drilling less shale wells).
Eoin Treacy's view - It has been our view at Fullermoney since at least 2010 that shale oil and gas represent a game changer for the Energy sector, not least because the additional supply unlocked with new technology and an innovative state of mind among wildcatters changes the dynamics of the market.

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August 20 2013

Commentary by Eoin Treacy

Peru to welcome US$15bn in copper mining projects from 2013-2015

This article by Dorothy Kosich for Mineweb may be of interest to subscribers. Here is a section
Peru's Minister of Energy and Mines Jorge Merino Tafur said $15 billion in mining project programs are now underway that will raise Peru's copper production by 1.3 million to 2.8 million tonnes by 2016.

These projects are scheduled to commence operations between 2014 and the first half of 2015, he noted.

Among these projects are Chinalco's $4.8 billion Toromocho Copper Project in Peru's Junin region with production scheduled to begin in December; Glencore/Xstrata's $5.2 billion Las Bambas copper project in the Cusco Region, scheduled to commence production in May or June of 2015; and the $5 billion expansion of Freeport-McMoRan's Cerro Verde copper mining joint venture, which is slated to start production by 2015.

Merino noted that the country has other great projects like Southern Copper's Tia Maria, the long-delayed Tambogrande gold project, Anglo American's Quellaveco and Michiquillay copper projects, Rio Tinto's La Granja Copper Project and other polymetallic deposits, which he suggested should be exploited to bring more development around the country.
Eoin Treacy's view - The Oyo Tolgoi mine came online in the last few months, bringing to fruition an almost decade long struggle to develop Mongolia's vast mineral wealth. However while the mine represents a large source of new supply, it is by no means the only major project slated to come on line in the next few years. Latin America and Africa remain significant supply growth candidates as the above article demonstrates.

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August 15 2013

Commentary by Eoin Treacy

Email of the day (1)

on solar innovation
"Thank you for the chart showing the efficiency of various types of solar panel. Here is a popular press article just published making the point that solar is now nearly ready to compete - without subsidy - even with low priced coal and gas.

"The technology is advancing rapidly and there are more recent advances not mentioned in the chart nor the newspaper article. Graphene may have the potential to trump the best of existing technology by delivering over 60% efficiency in capture of sunlight.

“So, no need for those ugly inefficient subsidized windmills!

“I observe that the share price of some solar power companies has sky-rocketed in recent months, with some being up 4-5x this year.

“What a wonderful age of opportunity we live in!"
Eoin Treacy's view - I share your optimism about the future and thank you for these informative articles which help to highlight the pace of technological innovation in solar cells and how this is altering perceptions of the sector's viability for electricity production. As you point out solar cell manufacturer shares have been rallying impressively since January. (Also see Comment of the Day on July 19th) It is worth considering the cause and effect of the rally in renewable Energy shares.

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August 13 2013

Commentary by Eoin Treacy

Email of the day (2-4)

on additions to the Chart Library
“Please could you add the share Tableau Software (DATA on NYSE) to the chart library. This company IPO'd in May and is now trading around double that level so worth looking at the chart. Many thanks"


“Please add Energy Assets Group (EAS) to the chart library”
Eoin Treacy's view - Thank you for these suggestions which have been added to the Chart Library

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August 13 2013

Commentary by Eoin Treacy

Email of the day (1)

on solar innovations
“An interesting technology development in Energy production. Fullermoney readers may be interested in this video report on research into the printing of solar cells just like Australia's polymer banknotes.”
Eoin Treacy's view - Thank you for this informative article highlighting the different ways in which solar power production can be enhanced. The evolution of polymer solar cells evokes the trade-off that occurred in chip manufacture with the advent of cheap memory in the 1980s. This allowed Intel's higher Energy consumption models to dominate until ARM gained an advantage in handheld devices where heat and Energy consumption trumped brawn.

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August 13 2013

Commentary by Eoin Treacy

State Council issues policies to form a Rmb4.5tn market

Thanks to a subscriber for this interesting report by Michael Tong and Jun Ma for Deutsche Banks which may be of interest to subscribers. The full report is posted in the Subscriber's Area but here is a section
On 11 August, China's State Council published a detailed set of guidelines to boost the environmental protection and Energy conservation industries and ncrease their domestic demand and improve their economic structure. The State Council aims to raise the total output value of the environmental protection industries to Rmb4.5 trillion (USD730 billion), or a CAGR of 15%, by 2015 to form a new pillar industry for Chinese economic growth. In this note, we provide a summary of this newly announced policy document and a list of the major players which may benefit from increasing investment and expanding market demand as a consequence of strong government support.

Guiding principles
The faster development of the Energy conservation and environmental protection industries should 1) stimulate potential market demand to form a new economic growth driver, 2) expand domestic consumption, stabilize growth, and optimize the economic structure, 3) improve the environmental quality of certain livelihoods and accelerate ecological development.

A Rmb4.5 trillion market by 2015
By spurring technological innovation and expanding demand for green and Energy-saving products and related services, the government aims to grow the Energy conservation and environmental protection industries at a CAGR of 15% or above, with total industrial output value to reach Rmb4.5tn by 2015.

Key areas of environmental protection
Key areas of environmental protection: denitrification and desulphurization equipment, new water treatment technologies and equipment, integrated system solution for solid waste treatment, technologies for remediation of contaminated soil, development and application of environmental monitoring instruments.

Key areas for Energy conservation
Key areas for Energy conservation: high-efficiency boilers, high-efficiency electrical motors, regenerative combustion technology and equipment, new Energy vehicle technologies, industrialization of semiconductor lighting technology
Eoin Treacy's view - The success of China's development plans rests on enhancing the productivity of its human capital. Improving the living conditions of its citizens through the provision of sewage, clean air and fertile land are among the administrations priorities as the economy transitions to more of a services and valued-added focus.

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August 12 2013

Commentary by Eoin Treacy

German Utilities Hammered in Market Favoring Renewables

This article by Tino Andresen for Bloomberg may be of interest to subscribers. Here is a section
While utilities across Europe have seen demand dwindle, those in Germany are also contending with a phase-out of nuclear Energy. RWE and EON acknowledge the decision to close all reactors by 2022 forces them to abandon plants they had counted on to produce income for years.

Smaller competitor EnBW Energie Baden-Wuerttemberg AG said last month it will shut four plants in Marbach and Walheim following “a drastic fall in revenue.” The utility expects earnings from generation and trading to plunge as much 40 percent this year.

The shift from fossil fuels has also hurt other operators in the country. Vattenfall AB, a Swedish utility with coal and nuclear plants in Germany, announced plans July 23 to split off non-Nordic units after writing down $4.6 billion. It will have to cut investments and push through deeper cost cuts, it said, partly blaming the failure of nations to align policies.

“The idea of an integrated European Energy market is in shambles,” Chairman Lars G. Nordstroem said last month. “Energy politics is becoming increasingly national. Everyone looks at their natural assets and their policies.”
Eoin Treacy's view - Nothing highlights Europe's Energy disadvantage more than the underperformance of the utility sector. Not only is the Eurozone a major Energy importer without a significant domestic supply of oil and gas, but a number of countries have embarked on an ideological quest to introduce renewable Energy at uncompetitive rates.

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August 12 2013

Commentary by Eoin Treacy

China 's Stocks Jump to Two-Month High on Economic Optimism

This article by Weiyi Lim for Bloomberg may be of interest to subscribers. Here is a section
The China Securities Regulatory Commission will make decisions regarding financing for real-estate projects based on examinations of the company and opinions of the Ministry of Land and Resources, according to a statement posted on the regulator's website on Aug. 9.

“There's optimism developers will be allowed to raise funds again,” Zhou Lin, an analyst at Huatai Securities Co., said by phone from Nanjing . “Investors are also putting money now into cyclical stocks such as Energy and property because of the recent macro data.”

Chinese factory production increased 9.7 percent in July from a year earlier, retail sales advanced 13.2 percent while fixed-asset investment excluding rural households grew 20.1 percent in the first seven months of the year, according to the statistics bureau.
Eoin Treacy's view - While the focus of media attention has been on how well Wall Street has performed relative to other markets, it is probably also worth considering that the Fed has provided one of the most accommodative monetary environments in history while countries such as China and, more recently India, have been attempting to curtail speculation. This has contributed to China 's stock market being one of the worst performers globally over the last two years.

Since economic growth has returned to a level monetary authorities have signalled they are reasonably happy with, the odds are now in favour of a lighter hand in terms of how the financial and real estate sectors are dealt with.

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August 09 2013

Commentary by David Fuller

August 07 2013

Commentary by Eoin Treacy

BHP's CEO Sees U.S. Shale Expansion as Mineral Demand Grows

This article by Elisabeth Behrmann for Bloomberg may be of interest to subscribers. Here is a section
Asian Energy demand, including from China, is helping drive the development of about $180 billion of liquefied natural gas projects in Australia, BHP's home country. The nation is forecast to surpass Qatar as the world's largest exporter of LNG by the end of the decade.

“We're not yet investing in export terminals in the U.S., we're simply producing the gas,” Mackenzie said. “But I do believe that Australian LNG will face stiff competition from U.S., Canada and Africa to supply the next tranche of LNG into Asia.”

The U.S. Energy Department is weighing 20 applications for LNG export terminals. Hydraulic fracturing of shale rock formations from Texas to West Virginia has boosted supplies of gas in the U.S., helping the nation overtake Russia as the world's biggest producer of the fuel in 2009.BHP, due to report earnings on Aug. 20, expects annual economic growth in China to moderate toward 6 percent over the next two years, Chief Financial Officer Graham Kerr said in April. China, whose economy grew 7.9 percent last year, the slowest since 2008, accounts for 30 percent of BHP's sales
Eoin Treacy's view - One of the great challenges for any mining operation is how to replace reserves at attractive prices. For a global miner such as BHP Billiton, the challenge is to deploy cash effectively to ensure not only reserve life but diversification so that the company is not overly impacted by moves in an individual commodity.

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August 07 2013

Commentary by David Fuller

Irwin Stelzer: Get drilling now and break the grip of energy's bad guys

Here is a sample from this hard-hitting article published by The Sunday Times (note: subscription registration required but a PDF version is in the Subscriber's Area)
No fracking in my back yard is the latest variant of the Nimby phenomenon that pits local against purported national interests, most notable in battles to prevent wind machines in "my back yard", the construction of a new runway at Heathrow, a high-speed train through the world's most scenic countryside, and other facilities that just might contribute to national economic growth at the expense of inconvenience and annoyance to local residents. Since most representation in democratic Britain is provided by MPs keenly attuned to their constituents' desires, it is no surprise that local impact often takes precedence over the national interest.

Which is the case with Energy supply. If Britain desperately needs anything just now, it is more rapid economic growth. It is inarguable that ample supplies of low-cost Energy are an important driver of such growth, and that Energy shortages, or high-cost supplies, can make a nation less competitive internationally.


Indeed, there is more to play for here than "mere" low-cost Energy. One is environmental quality - natural gas is the least-polluting fossil fuel, and anyone who thinks that fossil fuels will not be a dominant Energy source for the foreseeable future is kidding himself. Another is independence from the bad guys who unfortunately sit on the bulk of the world's oil and gas reserves - or did until fracking set America on the road to becoming the world's largest producer.


If the beneficial effect of the reduction of the geopolitical power of nasty regimes doesn't persuade Britain's policy makers to allow shale gas development to proceed on a measured basis, monitoring the environmental impact and distributing the benefits fairly, consider this: billions in inbound investment and thousands of new jobs. Better that than a prolonged dose of austerity.
David Fuller's view - This is a good, short summary by Irwin Stelzer. Some of his comments may irritate those who are concerned about climate change, specifically the pollution created by mankind and our extensive use of fossil fuels.

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July 31 2013

Commentary by David Fuller

Scientists make "Impossible Material" ⦠by accident

Here is a brief section from this informative scientific article from Gizmag
In an effort to create a more viable material for drug delivery, a team of researchers has accidentally created an entirely new material thought for more than 100 years to be impossible to make. Upsalite is a new form of non-toxic magnesium carbonate with an extremely porous surface area which allows it to absorb more moisture at low humidities than any other known material. "The total area of the pore walls of one gram of material would cover 800 square meters (8611 sq ft) if you would 'roll them out'", Maria Strømme, Professor of Nanotechnology at the Uppsala University, Sweden tells Gizmag. That's roughly equal to the sail area of a megayacht. Aside from using substantially less Energy to create dryer environments for producing electronics, batteries and pharmaceuticals, Upsalite could also be used to clean up oil spills, toxic waste and residues.
David Fuller's view - When in commercial production, this sounds like it has the potential to be extremely useful.

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July 31 2013

Commentary by David Fuller

Adding up China's debt to rein it in

Here is a section from this informative column by James Saft, first published by Reuters under a different title from the above, which the International Herald Tribune introduced
Reuters) - Like William the Conquerer before him, Premier Li Kequing is initiating his own Domesday survey in China, and this time the attempt to curb local abuses of power will have global economic consequences.

China's State Council, chaired by Premier Li, has ordered the National Audit Office to begin auditing what could total $2 trillion or $3 trillion of debt taken on by local governments.

The Audit Office will suspend other work and give all staff "crash" training so that auditors can begin fanning out across the country this week, according to a report by the state-run People's Daily.

The clear implication is that China is seeking to rein in local governments, which have helped along what is clearly a boom and may be a bubble by borrowing and spending freely on local development. For China, this will act as another brake on already slowing growth. For the rest of the world, it means less demand, especially for the kinds of raw materials and Energy which go into real estate development and infrastructure .
David Fuller's view - What China's new government is doing is positive for the longer term but a headwind which has slowed its economic juggernaut at a time when the world's other powerful regions are also underperforming.

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July 30 2013

Commentary by Eoin Treacy

OGX beyond the Hype

This blog post by Mark McHugh focusing on OGX may be of interest to subscribers. Here is a section
It was naive to expect that OGX was somehow going to remain immune from the scrutiny of the market forever. There exist undoubtedly huge potential and strong indications that OGX will be successful—a world scale resource base, Energy sector experienced management team and board, and a good liquidity position. However, there is still little tangible on which to base a full evaluation at this time—hence investors in some senses are placing bets on the upside. Early results have been seized upon and have taken-on disproportionate significance. Moreover, exploration companies like OGX, are notoriously high risk, volatile and will have erratic earnings during the early stages of development. OGX can only be properly assessed in the future, based on its long-term performance in consistently finding and producing oil and gas in profitable, commercial quantities.

Meanwhile, Eike Batista and OGX's management must accept the blame for their current predicament. It is an inevitable consequence of their hard sell, raising unrealistic expectations in the market with little substance to back it up. Even so, the share price debacle has had a positive side—it appears to have created a realignment of company objectives as part of the natural transition towards development and production. Consistent with this, there appears to be greater realism in target setting.
Eoin Treacy's view - The collapse of OGX has been making headlines because of the losses taken by its CEO Eike Batista, who has seen his wealth deteriorate by more than $33 billion in less than 18 months. The company's assets include both shallow and deep water reserves as well as other valuable resources. A number of news items are now talking about a fire sale, where stronger participants will have the opportunity to pick up at least some of these attractive assets at fire sale prices.

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July 30 2013

Commentary by David Fuller

Why Are Banks Selling Aluminium Anyway?

Here is the opening from an informative editorial by Bloomberg
The largest U.S. banks are accused of causing problems in markets ranging from Energy to aluminum. Regardless of whether they're guilty of market-rigging, as critics say, the charges raise another question: Why are the banks active in these businesses in the first place?

Part of the answer is a point we've stressed before: They're among the country's most subsidized enterprises. The Federal Deposit Insurance Corp. and the Federal Reserve, both backed by taxpayers, provide an explicit subsidy by ensuring that banks can borrow money in times of market turmoil. Banks that are big and connected enough to bring down the economy enjoy an added implicit subsidy: Creditors will lend to them at low rates on the assumption that the government won't let them fail.

The subsidies arose because banks perform a special public service. The lending they do and the payments they process are crucial to the functioning of the economy. Problem is, access to cheap, subsidized financing gives banks a big advantage if they move into markets beyond their core business. That's great for the banks, but it distorts the competitive landscape.

Consider the recent mini-scandal in the aluminum market. Taxpayer subsidies gave the banks an edge in holding the metal. Subsidized financing -- made particularly cheap by the Fed's efforts to stimulate the economy with near-zero interest rates -- encouraged banks and their clients to build bigger stockpiles than they otherwise would have, tying up supplies. If the bets were to go wrong and lead to distress at a big bank, the Fed would have to provide emergency financing for an activity that taxpayers never intended to support.

Commodities are just one area in which the largest U.S. banks have sought to expand at taxpayer expense. Aside from trading and issuing securities and derivatives, they have gotten into water utilities, electricity generation, natural-gas distribution and even the operation ofChicago's parking meters. The full extent of the sprawl is hard to assess due to a lack of public disclosure.

There's no good economic reason for banks to be in such businesses. All they bring to the table is their privileged access to cheap financing. The solution is twofold: Reduce the subsidies and confine them as much as possible to the lending and payments businesses that legitimately require taxpayer backing.

In principle, much can be achieved within the framework of existing legislation. Regulators can reduce the implicit subsidy by requiring banks to fund themselves with more loss-absorbing equity, thus making them less likely to require government bailouts. The so-called Volcker rule, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, can limit banks' ability to use the remaining explicit subsidies for speculative trading. The Fed also has great leeway in deciding what activities it considers complementary to, or naturally flowing from, the core business of banking.
David Fuller's view - In the realm of unintended consequences, there are considerable risks if behemoth banks are speculating in commodity futures, including inviting institutional clients to participate in tracker funds. This can quickly destabilise the thinly traded commodity futures markets, as we last saw with serious consequences in 2008. I have long maintained that the surge in commodity prices, not least crude oil, was a bigger factor in the severe recession which followed than most people realised.

Here is one short paragraph from a longer discussion of this problem from my lead article comments on Tuesday 8th July 2008:

"Thereafter it should be a matter of common sense. After all, if Energy and food prices continued to spiral higher with the help of tracker funds over the next few months, the gains in those investments would soon be more than offset by the deflationary impact of a severe global recession on most of one's non commodity assets. In other words, it would be a Pyrrhic victory."

A week later I was queried on this point in an interesting email which remains relevant to today's discussion: "On investments in commodity futures".

Today, we are much closer to legislation which would restrict banks from speculating / investing in commodity markets, as you will see near the end of today's leader article posted above.

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July 25 2013

Commentary by David Fuller

Megan McArdle: Obama's Speech is a Confession of Impotence

Here is the opening from this good but sobering column published by Bloomberg
"What we need," President Barack Obama told a group in Galesburg, Illinois, today, "isn't a three-month plan, or even a three-year plan, but a long-term American strategy, based on steady, persistent effort, to reverse the forces that have conspired against the middle class for decades."

nequality, layoffs, economic insecurity -- it's a conspiracy! Sounds sinister . . . and yet, in a way, oddly comforting. A conspiracy is something you can do something about: find the villains and slay them. On the other hand, titanic and impersonal forces like globalization and technological progress are harder to vanquish.

Unfortunately, there's no easy villain to be conquered, no easy fix to bring the middle class back to the glory days of the 1950s and 1960s. Inequality and economic insecurity are rising everywhere in the developed world, not just in America. This is not a matter of policy tweaks or bad, greedy people. It's a matter of seismic shifts in the global economy.

Nonetheless, in his speech, Obama claimed that he could do something about the ills facing us -- that he had a plan to bring back the bourgeois boom. But the strategies themselves were less than promising.

"The first cornerstone of a strong and growing middle class has to be an economy that generates more good jobs in durable, growing industries," the president told his audience. "Over the past four years, for the first time since the 1990s, the number of American manufacturing jobs hasn't gone down; they've gone up. But we can do more."

"So I'll push new initiatives to help more manufacturers bring more jobs back to America. We'll continue to focus on strategies to create good jobs in wind, solar, and natural gas that are lowering Energy costs and dangerous carbon pollution. And I'll push to open more manufacturing innovation institutes that turn regions left behind by global competition into global centers of cutting-edge jobs."

Obama has been promising green jobs for years, and failing to deliver them for just as long. There's little evidence that more environmentally friendly Energy sources will be net job creators. The middle class may enjoy bluer skies if we convert more of our power generation capacity to wind and solar. But we've no reason to think that they'll enjoy more green in their wallets.

The manufacturing innovation institute, meanwhile, is just another iteration of an idea that's been around for longer than Barack Obama has. Go to any Rust Belt city and you'll find research campuses, innovation institutes and similar institutions named after hopeful politicians who promised that a new manufacturing base would coalesce around this exciting agglomeration of creative minds. Unfortunately, in most instances it has turned out that manufacturing bases would rather coalesce around cheap land, low taxes and acres of uncongested freeway.

Besides, the problem in America is not that we suddenly lost our manufacturing mojo. In fact, we're still very good at it; according to the Boston Consulting Group, the inflation-adjusted value of our manufacturing output has more than doubled since 1972. But our manufacturing employment is down by one-third, because production is highly automated in most industries. Even small metalworking operations now use computer-aided design and robots as much as they do grizzled machinists.
David Fuller's view - Following on from the last sentence above, manufacturing bases also need competitive Energy costs. I maintain that the USA would be struggling to avoid recession, had it not been for private industry's invention and utilisation of fracking technology. However, that was opposed by President Obama, at least until it became obvious that fracking was lowering the USA's Energy costs, which were enticing manufacturing businesses back to America and creating more jobs in the process than any other programme.

The bigger long-term problem for employment is automation, due to this era of accelerating technological innovation. Wonderful technologies are making many of us more efficient, and corporations are the biggest beneficiaries. However, as technological innovation increases, it is replacing jobs more rapidly than they are being created elsewhere. This is a problem for all developed economies and increasingly, also for developing economies.

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July 19 2013

Commentary by Eoin Treacy

July 19 2013

Commentary by Eoin Treacy

WTI Sheds Busted Benchmark Status as Glut Ebbs: Energy Markets

This article by Moming Zhou for Bloomberg may be of interest to subscribers. Here is a section
“The speed that it happened was eye-opening,” Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said by phone. “A lot of people made money from it but it also caught a lot of people off guard. We also saw severe contraction in the Brent versus WTI spread.”

Since the start of 2012, new and reversed pipelines have boosted capacity to Houston from the central U.S. by almost 1.2 million barrels a day, with 850,000 more coming online by the end of the year, according to data compiled by Bloomberg. Inventories at Cushing, Oklahoma, the delivery point for WTI futures, have dropped 11 percent from a record 51.9 million barrels in January, according to EIA data.

Enterprise Products Partners LP and Enbridge Inc. switched the direction of the Seaway pipeline last year to move barrels to the Houston area from Cushing. Planned expansions by Magellan Midstream Partners LP's Longhorn pipeline, TransCanada Corp.'s southern leg of Keystone XL and Sunoco Logistics Partners LP's Permian Express line will also divert supplies from Cushing.
Eoin Treacy's view - The flood of oil moving towards Houston which has been diverted from the Cushing facility has contributed to a backwardation right across the oil futures curve highlighting the short-term supply deficit at the main storage terminal. This migration has also led to the spread between Brent crude and WTI contracting from record highs above $25 to negative territory today. This reasserts the historical premium WTI has enjoyed over Brent but the question now is how sustainable the situation is?

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July 19 2013

Commentary by Eoin Treacy

Investment Implications of a Stronger $

Thanks to a subscriber for this detailed report from Deutsche Bank which may be of interest to subscribers. The full report is posted in the Subscriber's Area but here is a section
earnings, and profound impacts on oil and commodity prices
Dollar cycles impact equity multiples because they reflect and drive capital flows. Dollar cycles impact earnings through a complex variety of channels encompassing both top line and margins, but go well beyond the obvious translation impacts on foreign earnings and competitiveness. The dollar is a key driver of oil and commodity prices with a higher dollar negative for prices.

With the dollar's current up cycle still in its early stages, we see significant divergences in regional equity market, sector and individual
stock performance for some time to come. Key top-down strategic themes are:

Multiple over earnings: overweight the US on prospective capital inflows;
Regionally, long commodity importers and short commodity exporters;
Overweight the drivers (growth and rates) of the US dollar up cycle; US financials benefit, bond-like payout sectors Telecoms and Utilities lose;
Underweight Energy and Materials.

There are several common themes in company analyst views on the impact of a higher dollar on industries and individual stocks:

Higher USD revenue and assets are positive, higher USD costs and liabilities are negative; Japanese companies in most sectors benefit disproportionately given their export focus, while global European companies also benefit as most have large US operations;
FX market hedging practices vary widely across industries and firms;
Cost and revenue impacts go beyond the direct translation/ competitiveness effects; such as for US retail;
Market structure will determine whether FX changes are passed on or accrue to margins; oligopolistic markets likely to see benefits to margins;
FX exposure of the industry and not just the individual company matters as currency moves realign competitor cost advantages;

EM banks negatively exposed to tightening local liquidity;
Strategic implications (cross border M&A; cash repatriation; on versus offshoring) likely to be mixed.
Eoin Treacy's view - It has been quite some time since a Dollar bull market has been a realistic consideration. At present the Dollar is a favoured currency by process of elimination rather than a compelling bullish theme. For example, the devaluation of the Yen and the associated pressure this puts on other Asian currencies, continued stress on the European economy and the weakness of commodity investment for the Australian Dollar, Canadian Dollar and other commodity related currencies leaves the US Dollar as one of the few relatively appealing alternatives.

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July 18 2013

Commentary by David Fuller

Bloomberg: Lift the Ban on U.S. Oil Exports

Here is a section from this informative editorial
The last time serious talk about exporting oil was heard in Washington, the Soviet Union still loomed, the Reagan Revolution had yet to take place and the National Basketball Association had an equitable distribution of talent.

It was the 1970s, and with the Arab oil embargo a fresh memory and fears that domestic drilling had peaked, Congress instituted fuel-economy standards for cars, an Energy-conservation program for consumer products and the Strategic Petroleum Reserve. It also banned all exports of U.S. oil except for small amounts to Canada.

Four decades later, that ban is threatening to put a damper on the shale-oil boom in the U.S., and Congress or the president should find a way to reverse, or at least temporarily suspend, it.

Consider how drastically the U.S. oil picture has changed. Production has increased to 7.4 million barrels a day from 5 million in 2008, thanks to new methods of extracting oil from deep rock using horizontal drilling and hydraulic fracturing, or fracking. In the past year alone, these techniques have boosted output by a million barrels a day.


The point is, unless some of the shale oil is exported, it will be stranded, or simply left in the ground. And though to some environmentalists that may sound like a tempting prospect, it would not reduce global consumption of oil -- just the consumption of U.S. oil. Lessening total use will take efforts more directly targeted to that end, including programs to develop renewable Energy and efficiency and to put a price on carbon emissions.

By increasing exports even as it continues importing oil, the U.S. can exercise maximum flexibility in world oil markets. It can keep U.S. oil flowing, encouraging further exploration and drilling. And it can help maintain relatively stable gasoline prices, because these are largely determined by world markets.
David Fuller's view - Those in the USA who oppose the exporting of oil from their country cite two arguments: 1) It would be a selfish, short-term gain and deprived future generations of this valuable resource; 2) We should stop polluting the planet by producing and burning fossil fuels.

The first argument above has been around for decades, and it has been proved to be wrong as the technology for extracting oil has progressed. It is a finite resource but the invention of fracking (long described by Fullermoney as a 'game changer') not to mention future improvements in extraction techniques, should ensure that known reserves of oil and gas last into the next century, at the current rate of production.

As for the second argument above, Fullermoney understands the environmental risks, and maintains that the world needs some luck regarding the future rate and nature of climate change. We have to take that risk because if the world stopped using fossil fuels, the global economy would be plunged into the severest of depressions. So we need time and ever improving technologies, to both reduce CO2 emissions and also extract CO2 from the atmosphere. Additionally, we need time to improve the efficiency of solar and other renewable Energy sources. We also need time to improve and construct new generation nuclear plants.

Will it all work? Hopefully, and awareness of the problems is sufficient to ensure an increasing technological effort on all fronts.

By exporting oil, even if only a small amount, the US can help its own economy and also global GDP growth. Japan, the USA's most important Asian ally, would be an obvious candidate. Oil exports would increase the US's influence in this industry, and encourage other countries to tap their own shale reserves. It might also pull some of the speculative funds out of the oil market.

Despite generally soft commodity markets, oil prices have rallied (WTI & Brent), and further strength would weigh on global GDP growth which is still struggling from the lingering effects of the credit crisis recession. Brent crude is not yet a problem as it is only recovering from the lower side of its range for the last two-and-a-half years, but the amber warning lights will be flashing if it approaches $120.

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July 17 2013

Commentary by David Fuller

Bernanke Says Fed Bond Purchases Not on 'Preset Course'

Here are some highlights from Bloomberg's interesting report on the Fed Chairman's statement
Federal Reserve Chairman Ben S. Bernanke said the central bank's asset purchases "are by no means on a preset course" and could be reduced more quickly or expanded as economic conditions warrant.

"The current pace of purchases could be maintained for longer" if inflation remained too low, the outlook for employment became less favorable or "financial conditions -- which have tightened recently -- were judged to be insufficientlyaccommodative to allow us to attain our mandated objectives," Bernanke said today to the House Financial Services Committee.

If the economy improved faster than expected, and inflation rose back "decisively" toward the central bank's 2 percent target, "the pace of asset purchases could be reduced somewhat more quickly," the 59-year-old Fed Chairman said in prepared testimony. The Fed would also be prepared to increase the pace of purchases "for a time, to promote a return to maximum employment in a context of price stability."

The Fed chairman's remarks highlight the Federal Open Market Committee's desire to assure that the economy and labor markets have sufficient momentum before reducing its $85 billion in monthly bond purchases. Treasury yields have jumped since June 19, when Bernanke outlined a possible timetable for tapering purchases.


In today's testimony, the Fed chairman described labor markets as "far from satisfactory, as theunemployment rate remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high."

While risks to the economy have diminished since late last year, Bernanke said, "the risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery."

The slow pace of the recovery means that it remains "vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated."


Bernanke and policy makers have had to gauge how much government spending cuts and higher tax rates are sapping consumer confidence and growth. JPMorgan Chase & Co. economists estimate that an expiration of tax breaks could reduce take-home pay this year by more than $100 billion.

Retail sales climbed 0.4 percent last month, about half of what economists forecast, and the figures showed households are replacing outdated vehicles and furnishing new homes while cutting back on electronics and meals outside the home.

"The consumer is under pressure," said Bob Sasser, chief executive officer of Chesapeake, Virginia-based discount retailer Dollar Tree Inc. "They're now facing higher taxes," a weak job market, "and the uncertainty around the economy," Sasser told analysts and investors on a conference call in May.

The U.S. faces a "very troublesome and challenging recovery," Kendall J. Powell, chairman and chief executive officer of Minneapolis-based General Mills Inc., said in a June 26 conference call with shareholders and analysts.

Still, Fed stimulus has helped fuel a housing-market rebound and this year's 17.5 percent surge in the Standard and Poor's 500 Index of stocks.


Slack in the labor market, including 7.6 percent unemployment last month, helped keep inflation for the 12 months ending May a full point below the Fed's 2 percent goal, reducing the odds of any tightening based on that measure. the participants on the FOMC. In December, when the committee expanded the program of $40 billion in monthly buying of mortgage bonds with purchases of $45 billion of Treasuries, about half of FOMC participants wanted to halt the stimulus around the middle of this year, according to minutes from the meeting.

The language suggests that concern over the risks from the program extends beyond the four Fed regional bank presidents who have publicly spoken out against it: Esther George of Kansas City, Jeffrey Lacker of Richmond, Richard Fisher of Dallas and Charles Plosser of Phildelphia.
David Fuller's view - Ben Bernanke is inevitably a somewhat controversial figure, although obviously not due to his mild and studious demeanour. Instead, it is entirely because of the power and influence his unprecedented quantitative easing (QE) policies wield over the US economy and financial markets.

I have no issue with this, recalling that Mr Bernanke was appointed Fed Chairman precisely because he was the academic expert who said he knew how to avoid a repeat of the USA's 1930s Depression, and also a lengthy Japanese-style deflation. Today, we can credit him with avoiding another depression. However, we know there are some deflationary pressures in the US and also the global economy, not least because of the depression in parts of Europe, plus slumps experienced by South American resources economies following China's slowdown.

The US economy has recovered somewhat but is far from robust. While this is consistent with the data I have previously cited, stating that 'it takes at least five to seven years to recover from a credit crisis recession', it would be premature to call Mr Bernanke's QE's experiment an unqualified success. Moreover, half the Fed appears to believe that the risks of QE now outweigh the potential additional benefits.

What is beyond any doubt is that Wall Street (S&P 500 & Russell 2000) has been a big beneficiary of QE, which has also helped to lift a number of other stock markets, in addition to their own national policies. Nevertheless, US equities are currently clear outperformers, as you can see from this chart of the DJ World Stock Index Ex USA.

Is this outperformance due to the USA's three strong cards which I often mention: 1) competitive Energy costs thanks to fracking; 2) superior technology in many areas; 3) many of the most successful corporate Autonomies?

They are certainly bullish factors, not least for the long term. However, a number of momentum players have clearly genuflected before Mr Bernanke and bought on the back of his QE largess. Wall Street is overbought, albeit still in form, but susceptible to a disappointment which will most likely be confirmed by the next clear downward dynamic. To see what those can look like, note the key day reversal which occurred on May 22nd.

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July 16 2013

Commentary by Eoin Treacy

Crude Supply Drops to Five-Month Low in Survey

This article by Moming Zhou for Bloomberg may be of interest to subscribers. Here is a section
Refineries boosted their operation as gasoline consumption increased to an 11-month high in the week ended July 5, the EIA, the Energy Department's statistical arm, said last week. Fuel demand is highest from the last weekend in May to the Labor Day weekend in early September, the prime U.S. vacation period. West
Texas Intermediate crude has jumped 10 percent in July.

“We've got the peak driving season,” Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based Energy consultant, said by phone yesterday. “Crude oil is refined into products and that refining process is going to draw down inventories. Another crude draw would be supportive for WTI prices.”
Eoin Treacy's view - The recent strength in oil prices and the underperformance of gasoline has weighed on the crack spread upon which refiners rely. The 3:2:1 spread failed to sustain the breakout to new ten-year highs in February and has since halved. It found support last week and additional follow through to the upside this week would suggest more than temporary demand dominance.

Despite a strong performance in the latter half of 2012, the US refining sector has for the most part experienced its deepest pullback in a number of years. Tesoro and Valero posted some of the shallower reactions and found at least temporary support last week in the region of their 200-day MAs. They will need to continue to find support above last week's lows if the benefit of the doubt is to be given to medium-term potential for additional upside.

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July 16 2013

Commentary by David Fuller

Email of the day (1)

On my recent Audios
"Perhaps it is my imagination but your Monday audio seemed more upbeat than recent big picture audios. Your recent audios have suggested a pullback in the US markets to around or below the 200 day ma followed by extended ranging. This would clearly affect most world markets. Monday's audio included a possible 30% lift in the Japanese market in the next few months and very positive comments about the US. With this scenario do you not feel that world markets would follow, suggesting another leg up in the bull market? Many world markets, including emerging ones have seen significant pullbacks so are not overbought."
David Fuller's view - I do not think it was your "imagination" and thanks for bring this up so that I can clarify my views for all subscribers.

A number of leading stock markets, which had been rallying since late last year, pushed higher above their 200-day moving averages in April and May than we had seen previously during the rally. Overextensions of this type are unsustainable and most of the indices fell back to test and even break their MAs before recovering somewhat in recent weeks.

I did think that the S&P 500 would also test and temporarily move below its rising MA, but it has yet to do so, probably because Ben Bernanke's last statement was seen as quite bullish in terms of interest rates remaining low. I think Bernanke has been quite consistent but the markets took fright when he mentioned an eventual tapering of quantitative easing (QE) in May.

The S&P 500 and other leading indices such as Japan's Nikkei 225 are once again overbought on a short-term basis. I maintain that leading stock markets are now in a somewhat choppy, ranging environment which could persist for a lengthy period, not least because the next big change in monetary policy will be a programme of tapering and eventually ending QE.

Our longer-term view of the US is quite positive, largely because of: 1) Its competitive Energy costs, thanks to fracking; 2) Its lead in many technologies, which appears to be increasing; 3) The dominant role of its Autonomies, which should mostly increase in strength and overall profitability as the global economy eventually recovers.

However, I believe the Monday Audio also mentioned some short-term hurdles for the US stock market: 1) Its latest rally is somewhat overextended; 2) Valuations have generally increased following the strong rally since last November; 3) Growth in corporate profits is slowing; 4) Economic growth does not appear to be the White House's top interest or priority.

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July 15 2013

Commentary by Eoin Treacy

A wealth of diversity

Thanks to a subscriber for this informative report concentrating on Sub Saharan Africa. Here is a section
South Africa is more susceptible to global risks, and has seen a slowdown in domestic growth momentum. Recent market volatility has limited countercyclical policy options. We lower our 2013 South Africa GDP forecast to 2.2% (2.7% previously). Elsewhere in Africa, demand is more resilient. Angola, Cote d?Ivoire, Ghana, Zambia, and a swathe of new resource economies in East Africa should all see medium-term trend growth of c.7%.

Fears that Africa will be hit hard by a moderation in China?s growth trend are misplaced. While much of Africa?s growth impetus remains domestic, trade with China continues to increase.

The impact of QE tapering on Africa will not be uniform. More liquid markets that have seen a higher level of foreign investor participation are more vulnerable. Nonetheless, with a tapering of QE now largely discounted, we expect domestic fundamentals to reassert themselves.

We maintain an Overweight duration and FX weighting on Nigeria, we are Overweight duration on Ghana, but Neutral on the Ghana cedi. We maintain a Neutral duration stance on South Africa, and Underweight FX weighting on the rand. We are Neutral duration in Kenya and Uganda, given a less favourable demand/supply outlook. We remain Neutral duration on Zambia given expectations of tighter liquidity.
Eoin Treacy's view - Sub Saharan Africa is interesting from a number of perspectives, not least because of the improving standards of economic and fiscal governance evident in a number of countries. Additionally, as one of the world's major population growth centres, the region has the capacity to post outsized economic growth, provided governance remains on an improving trajectory. The discovery of significant new Energy resources in East Africa should also act to improve the fiscal position of respective governments over future decades.

The Nigerian Index found support three weeks ago, at the upper side of the underlying trading range; having unwound the majority of its overbought condition relative to the 200-day MA. A sustained move below 34,500 would be required to question medium-term recovery potential.

Botswana has paused in the region of the 2008 peak in what has so far been a relatively gradual process of mean reversion. Ghana has a relatively similar pattern. Kenya found support last week in the region of the 200-day MA. Namibia hit a medium-term peak in January and has since experienced its deepest pullback in at least two years. The Index rallied impressively last week but a sustained move back above 950 will be required to confirm a return to demand dominance beyond the short term.

This additional report from IJG Securities focusing on Namibia, kindly forwarded by a subscriber, may also be of interest to subscribers.

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July 15 2013

Commentary by David Fuller

To Re-Start Nukes, Japan Must Raze 'Nuclear Village'

Here is a sample from this interesting editorial by Bloomberg
The governing coalition led by Japan's pro-nuclear Liberal Democratic Party is predicted to win a majority in the July 21 Upper House elections.

That prospect might alarm the almost half of all Japanese citizens who say they don't want to restart the 48 nuclear reactors that remain offline for safety checks after the March 2011 earthquake and tsunami that triggered a catastrophic meltdown. Even now, engineers are struggling to contain the radioactive water seeping into the groundwater under the crippled Fukushima Dai-Ichi facility.

Yet nuclear power, which before the tsunami generated almost 30 percent of Japan's electricity, is reliable, safe and climate-friendly, and should remain part of the country's Energy mix. The challenge Japan faces is to tear down the "nuclear village" -- the collusive nexus of government and industry that drove the country to pursue atomic Energy at the expense of its citizens' safety.

The relationship was so cozy that even months after the disaster, more than 50 ex-government officials were still working at the Tokyo Electric Power Co. (9501), Fukushima's operator.

Last September, Japan's previous government took an important first step by creating theNuclear Regulation Authority. Unlike the Nuclear and Industrial Safety Agency that it replaced, the NRA is not housed within the Ministry of Economy, Trade and Industry, which aggressively promoted Japan's nuclear industry. The new agency has been granted more bureaucratic independence and has strict rules governing personnel transfers -- once you work there, for instance, you can't go back to your ministry. Already, the NRA has declared that the Tsuruga reactor of the Japan Atomic Power Co. sits on an active seismic fault, a finding that could keep the plant closed and lead to the company's collapse.
David Fuller's view - Prime Minister Shinzo Abe will know that Japan's expensive and largely imported Energy supplies represent one of the biggest hurdles faced by his economic recovery. Therefore, restarting Japan's nuclear programme is essential. However, this will encounter significant and justified opposition if the government only reopens nuclear power stations, following inspections, of plants that are currently closed.

To address the nuclear safety issue, Japan needs a medium to longer-term programme, including the following steps: 1) Permanently close the Tsuruga reactor, mentioned above, and any others that the NRA regards as unsafe; 2) Announce that only stations approved by the NRA will be reopened, but only for a limited period because they are 'old nuclear' in terms of technology; 3) Commence a 'new nuclear' programme, based on improved technologies, and locate these plants in regions that do not sit on seismic faults.

Japan needs to focus on all competitive and reliable sources of Energy, from oil and gas, including shale projects, to nuclear, hydroelectric and solar. Where these are not economically feasible within Japan's national territory, they can be developed in conjunction with Energy industries in less developed countries. As a high-tech economy, Japan has the skills to become a leader in Energy development programmes.

Meanwhile, helped by a reinvigorating economy, Japan's stock market recovery is already well on its way to qualifying as a cyclical bull market. A return to the 18,000 - 20,000 region appears achievable during the remainder of this year. Additionally, subject to competitive Energy costs, Japan is a candidate for a secular (long-term) uptrend.

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July 10 2013

Commentary by Eoin Treacy

WTI Oil Surges to 14-Month High as U.S. Crude Inventories Plunge

This article by Mark Shenk for Bloomberg may be of interest to subscribers. Here is a section
Cushing inventories dropped 2.69 million barrels to 47 million last week, the report showed. Supplies reached a record 51.9 million barrels in the week ended Jan. 11 .

“We're seeing a reordering at Cushing, which is very supportive to WTI,” said John Kilduff, a partner at Again Capital LLC, a New York hedge fund that focuses on Energy. “Cushing is no longer a bottleneck as new delivery routes have become available because of investment in pipelines and rail.”

Refineries operated at 92.4 percent of capacity, up 0.2 percentage point from the prior week and the highest level this year. Utilization rates usually peak during the summer months when U.S. gasoline demand rises.

Gasoline stockpiles unexpectedly fell 2.63 million barrels to 221 million. Inventories of distillate fuel, a category that includes heating oil and diesel, advanced 3.04 million to 123.8 million. Supplies of both gasoline and distillate fuel were projected to advance 1 million barrels in the Bloomberg survey.
Eoin Treacy's view - Both Brent Crude Oil and West Texas Intermediate are trading in backwardation right across the futures curve suggesting not only short-term but potentially medium demand dominance. Considering the widely held perception of slowing global growth, the market may currently be more heavily influenced by the internal machinations of producing, storing and transporting the commodity and concerns surrounding Egypt.

West Texas Intermediate continues to extend the break back above $100 and a sustained move below that level would be required to question potential for additional upside. Brent Crude has been less explosive but is also extending its breakout from a short-term range.

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July 09 2013

Commentary by Eoin Treacy

New All Time Highs on NYSE.AMEX and NASDAQ

Eoin Treacy's view - The relative strength of the US Dollar, the outperformance of the banking sector and the Russell 2000 breaking upwards to new all-time highs are all noteworthy and can be considered positives from the perspective of stock market investors. The speed with which the S&P500 rallied from the October/November lows to the June peak and the size of the subsequent pullback suggests that some time is required for the market to regroup before significant new highs can be sustained.

However, even assuming that the wider market is likely to range, some shares are already breaking upwards to new all time highs. I used the Chart Library's High/Low Filter to identify companies on the NYSE, AMEX and NASDAQ exchanges that have posted new all time highs in the last five days. I then used Bloomberg to create a table displaying market cap, P/E ratio, dividend yields, price, the latest value for the 200-day MA and the industry subsector. I then segmented the results by companies with a market cap of greater than $1billion and those with a smaller market cap. A number of ETFs also appeared in the results and I grouped these at the end of the list.

A delegate at the May venue for The Chart Seminar mentioned that my view of the world seemed to be like that espoused by Peter Diamandis and Steven Kotler in their book, Abundance: The Future is Better Than You Think. I just finished reading it. The central premise of the book is that technological innovation is occurring at an exponential rate, that change is occurring at such a prodigious pace that the vast majority of people have no conception how much their lives are likely to change and that the shortage of resources we are all accustomed to dealing with is likely to become a thing of the past. I found it a compelling read and the optimism expressed is welcome, particularly when many pundits seem to spout nothing but pessimism. We can only guess at the timeline of exactly when these innovations will make a difference to our lives and at Fullermoney we will of course be guided by the price action.

The book came to mind when viewing the results of the above filter this morning. Of the ETFs, the Powershares Aero & Defence, Powershares Dynamic Biotech & Genomics, Powershares Dynamic Technology and Vanguard Consumer Discretionary have all posted new all-time highs in the last five trading sessions. Here are the top-10 holdings for each: Powershares Aero & Defence, Powershares Dynamic Biotech & Genomics, Powershares Dynamic Technology and Vanguard Consumer Discretionary. Veteran subscribers will be familiar with many of these shares from the various chart reviews posted in the Comment of the Day over the last five years. Many of these companies represent the confluence of major themes we have highlighted for a number of years i.e. the greatest urbanisation in history, the increasing pace of technological innovation and the potential for Energy prices to trend lower in real terms from the latter half of this decade. The Autonomies represent a group of some of the most globally oriented companies we believe are most likely to benefit from these themes.

Some of the most noteworthy chart patterns include:

Carefusion completed a three-year base in January and continues to trend consistently higher. The most recent reaction is similar to that posted in March and a break in the progression of higher reaction lows would be required to question medium-term scope for additional upside.

Applied Industrial Technologies is an intermediary for industrial parts. In common with W.W. Grainger, it continues to trend consistently higher.

Stericycle completed a two-year range in March and found support near $105 from mid-June. A sustained move below that level would be required to question medium-term scope for additional upside.

Western Digital is particularly noteworthy for its low valuations. The share broke emphatically out a three-year base in April and while somewhat overbought in the short-term; the upside can continue to be given the benefit of the doubt provided it holds above the 200-day MA.

Whole Food Markets formed a reasonably orderly consolidation between October and May and a sustained move below $48 would be required to question medium-term scope for additional upside.

EnPro Industries is in the process of completed a six-year base and a break in the progression of higher reaction lows would be required to question medium-term upside potential.

Moog Inc broke successfully above $50 in May before consolidating for six weeks. It reasserted the medium-term uptrend last week and a sustained move below $50 would be required to begin to question medium-term upside potential.

It occurs to me that the outperformance of a significant portion of the military industrial complex may be influenced by the increasingly potent civilian applications of their technology.

Despite widespread pessimism about the pace of the US economic expansion, the fact that such a large number of restaurants, retail chains and regional banks are in positions of outperformance would suggest that there is cause for medium-term optimism.

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July 09 2013

Commentary by Eoin Treacy

Email of the day (2)

on shale oil
“There was also an excellent piece by Matt Ridley on shale oil last week which increased my own understanding in some specific areas. It may also be of interest to the collective.”
Eoin Treacy's view - Thank you for this enthusiastic article which may be of interest to subscribers. Here is an important section:

Thanks to faster and cheaper drilling (which means less-rich rocks can be profitable) and things such as “zipper fracturing”, where two parallel wells are drilled and alternately fractured to help to release oil for each other, the oil recovery rate is rising from 2 per cent towards 10 per cent in places. Gas is now nearer 30 per cent. Well productivity has doubled in five years.

Now the Bakken is being eclipsed by an even more productive shale formation in southern Texas called the Eagle Ford. Texas, which already produces conventional oil, has doubled its oil production in just over two years and by the end of this year will exceed Venezuela, Kuwait, Mexico and Iraq as an oil “nation”.

Then there's the Permian Basin in west Texas, which looks as big as the other fields, and the Monterey shale in California — the source rock for all California's ordinary oilfields — which, at 15 billion recoverable barrels, could be bigger than the Bakken and Eagle Ford combined, according to a new report prepared for the Energy Information Administration.

Political lobbying represents one of the greatest threats to the USA's ability to develop its natural resources using the technological prowess the country is so noted for. Texas and California may as well be in different countries such is the difference in their respective Energy policies. Texas has long fostered wildcat explorers and innovators while California prefers to believe in the ability of technology to overcome the need for fossil fuels regardless of the impact this has on pricing and how long it may take.

Solar technology holds great promise over the medium to long-term but in the meantime producing as much cheap oil and gas will be essential to enhance economic productivity and to tackle the USA's trade and budget deficits.

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July 09 2013

Commentary by David Fuller

IMF Reduces Global Growth Outlook as U.S. Expansion Weakens

Here is the opening for this relevant report from Bloomberg
World economic growth will struggle to accelerate this year as a U.S. expansion weakens, China's economy levels off and Europe's recession deepens, the International Monetary Fundsaid.

Global growth will be 3.1 percent this year, unchanged from the 2012 rate, and less than the 3.3 percent forecast in April, the Washington-based fund said today, trimming its prediction for this year a fifth consecutive time. The IMF reduced its 2013 projection for the U.S. to 1.7 percent growth from 1.9 percent in April, while next year's outlook was trimmed to 2.7 percent from 3 percent initially reported in April.

"Downside risks to global growth prospects still dominate," the IMF said in an update to its World Economic Outlook. It cited "the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the U.S. leads to sustained capital flow reversals."

The fund urged central banks in wealthy nations facing low inflation and economic slack to keep injecting stimulus until recovery is entrenched, saying rising longer-term interest rateshave hurt emerging markets the most. The developing economies need to be alert for financial risks if the "anticipated unwinding" of the U.S. Federal Reserve's bond-buying program reverses capital flows, the IMF said.

"The growth in the U.S. has slowed down, and they're catching up to that," Jay Bryson, a global economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said after the IMF released its report. "This is not the U.S. economy of the 1990s that was a locomotive for the rest of the world" though the U.S. remains "one of the primary engines of growth."
David Fuller's view - Wall Street has seen a good recovery over the last three weeks, fuelled by money coming out of cash, bonds, and emerging markets. The appeal of US equities has been apparent for several years and is not difficult to appreciate. Here is a brief summary of America's advantages, frequently referred to by Fullermoney during the bull market to date:

1) The USA has a huge advantage in terms of competitive Energy costs among large, developed economies, thanks to its invention and utilisation of fracking technologies, enabling it to tap its large reserves of shale gas and oil.

2) The success of fracking technology has helped to reinvigorate America's inventive, entrepreneurial culture, which is pulling away from other countries, in an era of exponential technological innovation, long forecast by Fullermoney.

3) The USA has the largest number of successful, multinational corporate Autonomies, by far. These leading firms have become increasingly powerful, despite the valuation contraction cycle often discussed by Fullermoney over the last dozen years.

These dynamic themes bode well for the longer term. However, the powerful additional stock market rally experienced by the USA and a number of other countries since mid-November 2012, increased valuations and led to overextensions relative to the trend means, approximated by 200-day moving averages, as you can see from the S&P 500 Index.

Currently, US indices are near their highs, at a time when a strengthening dollar, slowing global economy, and higher US taxes have reduced the growth rate in corporate profits. Nevertheless, global investors view the USA as a safe haven in an uncertain world that has seen Treasury bond yields rise in recent months.

America is somewhat safer for investors, despite an administration that is not known for its economic prowess. Among equities, favour relative strength, but watch out for overextensions relative to MAs, and expect some market turbulence over the medium term.

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July 08 2013

Commentary by David Fuller

Fuel the Future

Here is a sample from this excellent editorial by The Times (UK) (subscription registration required, PDF also provided)
Danny Alexander read out a blizzard of numbers yesterday to put flesh on the bones of the coalition's plans for capital spending on infrastructure. None of them was as significant as a figure he left out - the British Geological Society's latest estimate of Britain's shale gas reserves. The BGS says more than 1,300 trillion cubic feet of gas lie under Yorkshire and Lancashire alone.

The multiplier effects of big public spending projects on the wider economy are always uncertain. The effects of discovering a mother lode of relatively cheap Energy on your doorstep are not.

The industrial might of the United States in the early 20th century was built on cheap domestic oil. North America's recovery since the 2008 crash - sluggish but still enviable by European standards - has been fuelled largely by the rapid exploitation of shale oil and gas reserves from the Dakotas to California. Their effect on domestic Energy prices and American Energy security has been so dramatic as to make a sideshow of President Obama's vision of a US industrial future based on wind turbines and solar cells.

A similar transformation of national Energy supply is possible in Britain. It could create tens of thousands of jobs, boost tax revenues, improve a lopsided balance of payments, end British Energy dependence on foreign gas suppliers and exert steady downward pressure on domestic prices.

The figures are compelling. The estimate of 1,300 trillion cubic feet is of "gas-in-place" rather than gas that is known to be commercially recoverable. But at the accepted US rate of 10 per cent recoverability, the figure still represents a 26-fold increase on the last BGS estimate for the same area from 2010. Even at an extremely conservative 1 per cent recovery rate, the figure means Britain has two and a half times more shale gas in what is known as the Bowland/Hodder formation than was thought three years ago.

And from the conclusion:

Without growth, every element of a spending review looks hopeful at best. With growth, hope begins to look plausible, and nothing underpins it more reliably than cheap, domestic Energy. Greenpeace would naturally like the world to use less of it, but it has no monopoly on environmental concern and local gas is greener by far than imported gas, or coal. It is time to drill.
David Fuller's view - We are all green at heart and Planet Earth needs some luck in terms of the rate of climate change. Meanwhile, we will all be better off by tapping our national supplies of shale gas, which has approximately half the CO2 emissions of coal, and lowering our Energy costs in the process.

If more of our economies experience a satisfactory rate of GDP growth, there will be additional funds for vital scientific work, including addressing the challenges of climate change. Conversely, where GDP growth continues to slow, in part due to expensive and less reliable sources of Energy, millions of people could easily be worse off than the likely consequences of climate change currently suggest.

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