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August 15 2016

Commentary by David Fuller

Vast National Gamble on Wind Power by Britain May Yet Pay Off

Wind power has few friends on the political Right. No other industry elicits such protest from the conservative press, Tory backbenchers, and free market economists.

The vehemence is odd since wind generates home-made Energy and could be considered a 'patriotic choice'. It dates back to the 1990s and early 2000s when the national wind venture seemed a bottomless pit for taxpayer subsidies.

Pre-modern turbines captured trivial amounts of Energy. The electrical control systems and gearboxes broke down. Repair costs were prohibitive.

Yet as so often with infant industries, early mishaps tell us little. Costs are coming down faster than almost anybody thought possible. As the technology comes of age - akin to gains in US shale fracking  - the calculus is starting to vindicate Britain's vast investment in wind power.

The UK is already world leader in offshore wind. The strategic choice now is whether to go for broke, tripling offshore capacity to 15 gigawatts (GW) by 2030.  The decision is doubly-hard because there is no point dabbling in offshore wind.  Scale is the crucial factor in slashing costs, so either we do it with conviction or we do not do it all. My own view is that the gamble is worth taking.

Shallow British waters to offer optimal sites of 40m depth. The oil and gas industry knows how to operate offshore. Atkins has switched its North Sea skills seamlessly to building substations for wind. JDR in Hartlepool sells submarine cables across the world. Wind power is a natural fit.

We live in a world that has just signed the COP21 climate deal in Paris. That implies a steadily rising penalty on carbon emissions. It also implies that those dragging their feet on renewables will ultimately be punished, as the Chinese have grasped.

David Fuller's view -

Many of us opposed wind farms well over a decade ago because they were expensive, nosy, inefficient eyesores and a devastating Cuisinart for birds.  Yes, costs are coming down rapidly due to size, mass production and especially accelerating technological innovation, unfolding before our very eyes.   

You would not want to live anywhere near these increasingly massive War of the Worlds machines, but they are now considerably more efficient.  Moreover, the evolution of batteries will largely resolve intermittency problems over the next five years.  Celebrate the increasingly important source of renewable Energy from wind power but spare a thought for the birds lost and also the disturbance of sea mammals by offshore wind farms.   

A PDF of AE-P’s article is posted in the Subscriber’s Area.



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August 12 2016

Commentary by Eoin Treacy

Theresa May may become one of the most radical western leaders of the century

Thanks to a subscriber for this article by Lawrence Solomon for the Financial Post which may be of interest to subscribers. Here is a section:

Under May’s approach, shale gas royalties that would ordinarily go to governments and quasi-governmental agencies will instead be directed to the residents in the communities hosting the developments. The BBC estimates individual households will be receiving as much as £10,000 ($16,800) under May’s plan; other estimates arrive at higher sums – as much as £65,000 per household lucky enough to be near large shale gas deposits. May’s plan is now expected to wash away local opposition to fracking and unleash the development of Britain’s massive shale gas resources, estimated by the British Geological Survey at 1,300 trillion cubic feet of shale gas, equivalent to a 500-year supply at current gas consumption levels.

This torrent of Energy will benefit more than the local residents who until now saw only drawbacks to shale gas development in their community. The abundant supply of gas will lower Energy costs throughout the country, relieving residential and business consumers alike and convincing British industries – which have been leaving Britain due to its high Energy costs – to not only stay but also to expand their operations in the U.K.

The May approach isn’t limited to shale –  it will apply to developments of all kinds, whether other resource developments, industrial complexes or airport expansions. Through what she calls her blueprint for development projects, May will be converting the development delayer known worldwide as NIMBY (Not In My Back Yard) into PIMBY (Please In My Back Yard), a development accelerator. Residents will effectively become pro-development lobbyists whenever they determine a development personally benefits more than discomforts them.

 

Eoin Treacy's view -

By voting for change the UK has an unparalleled chance to literally throw out the rule book and adopt policies that would have been anathema to the Brussels bureaucracy. Royalties for landowners close to extractive industries has been a major enabler for the growth of the US Energy sector and could have a transformative effect on the UK economy, not least because a great deal of its shale is in the north of the country which was particularly hard hit by the closing of collieries. 



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August 11 2016

Commentary by David Fuller

Dow, S&P500, Nasdaq Close at Records on Same Day for First Time Since 1999

Here is the opening of tonight’s interesting comparative report from The Wall Street Journal

Major U.S. stock indexes set records again Thursday, the first time since Dec. 31, 1999, that the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite have hit those milestones on the same day.

The rally was sparked by higher oil prices and earnings reports from U.S. retailers that weren’t as weak as feared.

Consumer-discretionary and Energy stocks led broad gains across the market. The Dow industrials rose 118 points, or 0.6%, to 18614, above its previous record close of 18595 hit July 20. The S&P 500 gained 0.5% and topped its Aug. 5 record. The Nasdaq Composite added 0.5%, surpassing its previous high set at Tuesday’s close.

Investors are “into stocks because there’s nowhere else to go,” said Tim Rudderow, president of Mount Lucas Management, which oversees $1.6 billion.

Shares of Macy’s rose 17% as the department-store operator reported better-than-expected sales and said it plans to close 100 stores. Kohl’s gained 16% after reporting a surprise increase in profit even as it cut its earnings forecast for the year.

The two retailers were the S&P 500’s best performers Thursday, but they were still among the worst over the past 12 months. Retail-store owners have been hit in part by the growth of Internet-based competitors, and even Macy’s well-received results included a sharp drop in quarterly profit and another period of declining sales.

David Fuller's view -

Yearend 1999 was not the most auspicious time for Wall Street.  Veteran subscribers may recall that it was the beginning of the end of the last secular bull market.  However, the S&P 500 and the Nasdaq Composite carried higher into 2Q 2000 before commencing their bear market.

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August 11 2016

Commentary by David Fuller

Holy Grail of Energy Policy in Sight as Battery Technology Smashes the Older Order

Here is the opening and also a latter section of this informative article by Ambrose Evans-Pritchard for The Telegraph:

The world's next Energy revolution is probably no more than five or ten years away. Cutting-edge research into cheap and clean forms of electricity storage is moving so fast that we may never again need to build 20th Century power plants in this country, let alone a nuclear white elephant such as Hinkley Point.

The US Energy Department is funding 75 projects developing electricity storage, mobilizing teams of scientists at Harvard, MIT, Stanford, and the elite Lawrence Livermore and Oak Ridge labs in a bid for what it calls the 'Holy Grail' of Energy policy.

You can track what they are doing at the Advanced Research Projects Agency-Energy (ARPA-E). There are plans for hydrogen bromide, or zinc-air batteries, or storage in molten glass, or next-generation flywheels, many claiming "drastic improvements" that can slash storage costs by 80pc to 90pc and reach the magical figure of $100 per kilowatt hour in relatively short order.

“Storage is a huge deal,” says Ernest Moniz, the US Energy Secretary and himself a nuclear physicist. He is now confident that the US grid and power system will be completely "decarbonised" by the middle of the century.

And more on Hinkley Point:

Perhaps the Hinkley project still made sense in 2013 before the collapse in global Energy prices and before the latest leap forward in renewable technology. It is madness today.

The latest report by the National Audit Office shows that the estimated subsidy for these two reactors has already jumped from £6bn to near £30bn. Hinkley Point locks Britain into a strike price of £92.50 per megawatt hour - adjusted for inflation, already £97 - and that is guaranteed for 35 years.

That is double the current market price of electricity. The NAO's figures show that solar will be nearer £60 per megawatt hour by 2025. Dong Energy has already agreed to an offshore wind contractin Holland at less than £75.

Michael Liebreich from Bloomberg New Energy Finance says the Hinkley Point saga will be taught for generations as a case study in how not to run a procurement process. "The obvious question is why this train-wreck of a project was not killed long ago," he said.

Theresa May has inherited a poisonous dossier, left with the invidious choice of either offending China or persisting with a venture that no longer makes any economic sense. She may have to offend China - as tactfully as possible, let us hope - for the scale of the folly has become crushingly obvious.

Every big decision on Energy strategy by the British government or any other government must henceforth be based on the working premise that cheap Energy storage will soon be a reality.

This country can achieve total self-sufficiency in power at viable cost from our own sun, wind, and waters within a generation. Once we shift to electric vehicles as well, we will no longer need to import much oil either. Rejoice.

David Fuller's view -

Modern Energy industries are among the biggest beneficiaries of the accelerated rate of technological innovation.  The primary incentive is ‘needs must’.  For this reason the US Energy Department is currently, albeit belatedly, funding approximately 75 projects dedicated to improving electricity storage capacity.  Other countries with developed research capabilities are following a similar path.  Electricity storage costs are plummeting and forecast to reach $100 per kilowatt hour before long.  This will largely remove the ‘intermittency’ problem which is currently still the main downside for solar and wind power. 

Against this background, governments should reconsider proposals for 20th century Energy programmes, of which the UK’s Hinkley Point project is a classic example.  It was hastily proposed on the basis that Energy costs could only move higher - a dubious premise as we now know.  In fact, Energy prices will plummet in the years ahead, for countries which develop modern and increasingly efficient Energy policies including solar, modern nuclear and also natural gas which is readily available via fracking in many countries and the least polluting fossil fuel by far.  

The Hinkley Point project, far from providing a helpful source of Energy, would saddle the UK with uncompetitive Energy costs for at least 35 years, damaging economic prospects in the process.

A PDF of AE-P’s column is posted in the Subscriber’s Area.  



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August 10 2016

Commentary by Eoin Treacy

Musings from the Oil Patch August 9th 2016

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

Many of the nuclear power plants that were built in the 1960s and 1970s are now approaching the end of their commercial lives. The challenge is that nuclear power plants have the potential for very long operating lives, often on the order of 80 years, meaning that those older plants might have an additional 20 or 30 years of operating life remaining. The issue is that over their very long lives, these nuclear plants require extensive and costly periodic upgrades and repairs. In order to finance these modifications, the plants must generate significant profits during their operating lives. Low coal and now low natural gas prices have undercut the price of nuclear power, often making these plants the highest cost fossil fuel plants in utility company portfolios. These economic challenges ignore the fact that nuclear power plants have the highest operating ratios of all power plants, meaning that they produce power when people need it and that the power output is carbon-free. 

And

Low natural gas prices have seriously undercut the power prices for the nuclear power plants upstate, to the point that the owners – Exelon (EXC-NYSE) and Entergy – have threatened to shut down the plants. If that were to happen, New York State’s plan to have half its power coming from clean Energy sources by 2030 would be doomed. In fact, the state has determined that if the nuclear power plants were shut, local utilities would have to rely on power from power plants fueled by dirty gas and coal. That would detract from the governor’s clean Energy goal. That goal is why Gov. Cuomo has fought the use of hydraulic fracturing in the state to tap greater supplies of locally produced natural gas. Natural gas, although cheaper than the governor’s favored three sources of clean Energy, would have released more greenhouse gases, but it is likely that the cost to consumers would have been less than what will happen in the future. Gov. Cuomo has championed a plan that was embraced by New York’s Public Service Commission and will force utility customers in the state to pay nearly $500 million a year in subsidies designed to keep the three upstate nuclear power plants operating. The Indian Point plant will not receive any subsidy funds because downstate power prices are sufficiently high that the plant can earn a profit.

According to the Public Service Commission, starting in 2017, the subsidies will cost utility ratepayers in New York State $962 million over two years. However, the overall cost of the clean Energy program to utility customers would be less than $2 a month, according to the Public Service Commission. The chairman of the commission said that state officials had calculated the social and economic benefits of the program, including the reduction of carbon emissions, lower prices for electricity and more jobs in the electricity generation business, and that these benefits would be greater than the cost of the subsidies. Environmental groups are fighting back, claiming that while they supported the governor’s plan to mandate the purchase of renewable Energy by utilities, they viewed the magnitude of the subsidies that could amount to several billion dollars over the 12 years to 2030 as a mistake. Exelon, the owner of two of the three up-state nuclear power plants applauded the Public Service Commission announcement and pledged to invest $200 million in the plants next year if the plan is approved.

Environmentalists who are serious about clean Energy should pay attention to the comments of Michael Shellenberger, the president of nonprofit research and policy organization Environmental Progress. He said that nuclear power plants produce so much more Energy than other forms that they can be more environmentally friendly than even renewables when all the mining, development and land disturbances are taken into account. As Mr. Shellenberger put it, “from the whole life-cycle analysis, it’s just better.” Of course, on the other side of the issue is someone such as Abraham Scarr, director of the Illinois Public Interest Research Group, a consumer advocate group, who said, “We should be building the 21st century Energy system and not continuing to subsidize the Energy system of the past.”

Eoin Treacy's view -

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

The above paragraphs highlight just how much of an influence low natural gas prices have had on the utility sector and the broader Energy mix. Closing down nuclear plants because the cost of upgrades and repairs cannot be justified when competition with natural gas is so intense suggests demand for the commodity is going to intensify in coming years if nuclear is not subsidized. 



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August 09 2016

Commentary by David Fuller

Britain Faces a Nasty Shock When the Global Energy Cycle Turns

Here is a middle section of this timely and informative article by Ambrose Evans-Pritchard for The Telegraph, which I managed to see while on holiday:

The BGS [British Geological Survey] thinks there are 1,300 trillion cubic feet (TCF) of gas resource in the Bowland, enough in theory to replace the North Sea and profoundly change British fortunes.

"Four or five years ago the recovery rate in the US was 10pc and now they are moving towards 20pc. I don't see why we can't do that in the Bowland," Stephen Bowler, the chief executive of IGas. Anything like that would be enough to meet Britain's entire annual consumption of 2.7 TCF through the 21st Century.

IGas is in partnership with Total, GDF Suez, and INEOS, expects initials flows in the Bowland in early 2017, building up to commercial output within two or three years.

Those on the cutting edge are exasperated by the static critiques of the hydraulic fracturing, typically five years out of date. The gains in technology, seismic imaging, computer data, and smart drills are moving at lightning speed.

New methods allow for three, six, or even ten wells to be drilled from the same pad,  greatly reducing disruption. Walking rigs move on the next spot without the need for the vast fleets of vehicles that bedevilled the early years of shale. Fracking remains 'dirty', but less than a decade ago. The BGS says that most early stories of water contamination have been false alarms.

British geologists are better prepared. They have already pre-collected readings on methane levels that will enable them to detect any leakage from fracking wells. "They never had that data in the US so we will have a much better handle," said Mr Gatliff.

Burning gas emits CO2 of course - albeit half as much as coal - but fracking is still a net plus for global warming if it displaces imports of liquefied natural gas (LNG) from places like Qatar. LNG must first be frozen to minus 160 degrees Centigrade and then shipped across the world. A study by Cambridge Professor David Mackay concluded that LNG's carbon footprint is 20pc higher than shale gas.

David Fuller's view -

The title of the article above would be redundant if Britain moved swiftly and competently to develop its fracking potential.  BGS is cautious to a fault in its forecasts for the UK’s shale gas recovery capability, but we know there is plenty of this important resource underground.  It would be madness not to use it, given the rapid development in fracking technology over the last ten years. 

See also: Britain Must Seize the Benefits of Fracking, an editorial from The Telegraph which I posted yesterday.    

A PDF of AE-P’s article is posted in the Subscriber’s Area.



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August 08 2016

Commentary by David Fuller

Britain Must Seize the Benefits of Fracking

Here is the opening of this editorial from The Telegraph:

For a country as reliant upon imported Energy as Britain, the discovery of substantial deposits of shale gas might seem a godsend. In America, the exploitation of shale has been transformative, with the country set to become self-sufficient in Energy by 2020.

Here, by contrast, nothing much has happened beyond the drilling of a number of test wells, every one greeted by objections from green campaigners and local residents.

The Government recognises the potential and has offered favourable tax treatment to shale gas producers and a fast-track planning procedure to get projects under way. But the biggest barrier to a commercial fracking programme remains public opposition. In order to counter this, wealth funds from the proceeds of fracking were proposed, to pay for new community amenities in affected areas.

David Fuller's view -

The UK economy would be a lot stronger in future decades if we had cheaper Energy.  This would benefit just about every household in the country.  Yes, the extraction process is messy but fracking is considerably safer, cleaner and more efficient than ten years ago.  The government is right to reward households in the regions subject to fracking as compensation for any inconvenience.

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July 27 2016

Commentary by Eoin Treacy

Musings From the Oil Patch July 26th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB which contains an interesting discussion on the longevity of products but here is a section on the liquefied natural gas market:

In recent months, two LNG cargoes from Cheniere Energy’s (LNG-NYSE) Sabine Pass export terminal in Louisiana have been delivered to Kuwait and Dubai. So far, since it began shipping LNG in February, Cheniere has sent cargos to seven countries, including Argentina, Chile, Brazil, India, Portugal, Dubai and Kuwait. The shipments to the Middle East reflect the soaring demand for Energy in these countries. (As a testament to the nation’s Energy demand issue, Saudi Arabia recently disclosed it has been drawing on its domestic oil inventories to meet the summer Energy demand surge and to avoid having to further boost oil production above the country’s current 10.5 million barrels a day rate.) As all he countries in the Middle East have rapidly growing populations, their domestic demand is growing and tends to soar during the hot summer months. Most of these countries have large natural gas resources, but other than Qatar, which is currently the world’s largest LNG exporter, they are less developed. We expect the rest of the countries in the region will step up the pace of their natural gas resource development.

In order to appreciate the market potential for cheap U.S. natural gas, Kuwait’s LNG imports exploded from one million tons in 2012 to 3.04 million tons last year, according to the Middle East Economic Survey. We know that Saudi Arabia has been ramping up its drilling for natural gas in order to power more of the country’s water desalination plants and electricity generators. By using more domestic natural gas, Saudi Arabia will be able to reduce the volume of crude oil burned to power these facilitates. That will enable Saudi Arabia to have more of its crude oil output available for export and to generate income for the government, rather than burning it under utility boilers. For the meantime, we expect more U.S. LNG cargos will find their way to the Middle East. Those LNG exports will help to tighten the domestic gas market and send natural gas prices higher as we move into 2017, but we are not sure that the Middle East will become a long-term U.S. LNG export market. But the industry will take whatever demand it can find it now.

Eoin Treacy's view -

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

For much of the last century natural gas was in such abundance that it had no economic value and was burned off as a by-product of oil drilling. With increasing demand for less polluting, but Energy dense resources, to provide heating, cooling and cooking natural gas has experienced a renaissance. 



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July 26 2016

Commentary by Eoin Treacy

US to create nationwide network of EV charging stations

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

The US government has announced "an unprecedented set of actions" to pump up the country's plug-in electric vehicle market, including US$4.5 billion in loan guarantees to create a nationwide network of commercial scale and fast charging stations. The initiative to push for greater electric car adoption calls for a collaboration between federal and state agencies, utilities, major automakers and other groups.

The initiative will identify zero emission and alternative fuel corridors across the country, to determine the best locations to put in fast charging stations, as part of the Fixing America's Surface Transportation (FAST) Act.

As part of a partnership between the US departments of Energy and transportation, a 2020 vision for a national fast charging network will be developed, with potential longer-term innovations that include up to 350 kW of direct current fast charging. According to the administration, a 350 kW DC system could charge a 200-mile-range battery in less than 10 minutes. For comparison, Tesla just boosted some of its Superchargers' power capacity to 145 kW, which is claimed the fastest currently available.

Eoin Treacy's view -

Governments are getting behind the need for a jump in the efficiency of batteries. If electric vehicle range anxiety is truly to be overcome batteries that can power a car all day, with the air conditioning on, while charging my phone and iPad as I listen to the radio are required. Many people feel they need a workhorse that can fulfil just about any task rather than just commuting. Continued high demand for light trucks is testament to that which is probably why Elon Musk gave a nod to heavier vehicles when announcing his latest growth plan last week. 



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July 22 2016

Commentary by Eoin Treacy

Fracklog in the Biggest U.S. Oil Field May All But Disappear

This article by Ryan Collins and Meenal Vamburkar for Bloomberg may be of interest to subscribers. Here is a section:

Crude in the $40- to $50-a-barrel range may wipe out most of the fracklog in Texas’s Permian Basin and as much as 70 percent of the inventory in its Eagle Ford play by the end of 2017, according to Bloomberg Intelligence analyst Andrew Cosgrove. While bringing them online is the cheapest way of taking advantage of higher prices, the wave of new supply also threatens to kill the fragile recovery that oil and gas markets have seen so far this year.

“We think that by the end of the third quarter, beginning of the fourth quarter, the bullish catalyst of falling U.S. production will be all but gone,” Cosgrove said in an interview Thursday. “You’ll start to see U.S. production flat lining.”

Drillers that expanded operations in U.S. shale fields found that sidelining wells was the easiest way to cut costs when oil and gas prices plunged. Since then, these wells have been “just sitting around, basically waiting for a better price to come along,” said Het Shah, an analyst at Bloomberg New Energy Finance.

U.S. oil producers extended the biggest shale drilling revival since last summer as rigs targeting oil and gas in the U.S. rose by 7 to 447 last week, according to Baker Hughes Inc. Dave Lesar, chief executive officer of Halliburton Co., the world’s largest provider of hydraulic-fracturing work, said Wednesday that the market in North America has turned and that he expects a “modest uptick” in drilling in the second half of the year.

 

Eoin Treacy's view -

Unconventional wells are much more expensive than conventional wells but come with some interesting advantages that protect producers from volatility. They have very prolific early production rates which helps to quickly pay off the multi-million dollar cost of setting them up. They then enter a period of time when production falls precipitously. If prices are not high enough to invest in boosting production through fresh drilling then it drillers have the luxury of time as they wait for prices to recover, after all the oil isn’t going anywhere. 



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July 20 2016

Commentary by David Fuller

The Future of Big Oil? At Shell, It Is Not Oil

Here is the opening of this interesting article from Bloomberg:

At Australia’s Curtis Island, you can see Big Oil morphing into Big Gas. Just off the continent’s rugged northeastern coast lies a 667-acre liquefied natural gas (LNG) terminal owned by Royal Dutch Shell, an engineering feat of staggering complexity. Gas from more than 2,500 wells travels hundreds of miles by pipeline to the island, where it’s chilled and pumped into 10-story-high tanks before being loaded onto massive ships. “We’re more a gas company than an oil company,” says Ben van Beurden, Shell’s chief executive officer. “If you have to place bets, which we have to, I’d rather place them there.”

Van Beurden is betting on gas projects such as Curtis Island to address the central challenge facing all oil giants: how to survive in a world moving ever faster toward new ways of producing and consuming Energy. A crucial element of Shell’s pivot toward gas was its $54 billion takeover of BG Group. The deal, which closed in February, gave the company Curtis Island, other massive LNG plants, and gas fields from the U.S. to Kazakhstan. It now has a 20 percent share of the global LNG market, scores of giant gas tankers prowling the seas, and double the production capacity of its closest competitor, ExxonMobil.

David Fuller's view -

People of my generation grew up with the seemingly secure ‘miracle’ of cheap and abundantly available crude oil.  However, from the mid-1970s onwards this vision faded into increasing anxiety over finite resources which were rapidly being depleted.  We were told by visionaries, Energy experts, scientists, religious leaders, political parties and national governments that we faced a grim future in which the lights would go out against a background of declining GDP growth and economic collapse.  These views were still widely held beyond the turn of the century.    

This 20th century version of Malthusian catastrophe theory is no longer credible today, thanks to our accelerating rate of technological innovation which is arguably mankind’s greatest achievement. 

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July 20 2016

Commentary by David Fuller

Britain Needs A Can-Do Attitude revolution, With Solutions Rather Than Whining

The challenge for the optimists is to reunite the two Britains. They need to inspire and assuage the angry Remainers, showing all but the most die-hard that the future can be rosy; and they must reach out to those Leavers who feel that they haven’t benefited enough from globalisation.

All groups in society have a responsibility to take part in this project to rebuild Britain for a post-Brexit 21st century. Entrepreneurs and firms need to propose the reforms they believe are required to allow our economy to prosper outside of the EU: we need to hear solutions, not whining, from business. The same is true of other professionals, from university administrators to architects to the police forces, as well as from the charitable sector. Britain needs a “can‑do” revolution, with as many positive ideas as possible from all quarters and perspectives. The question is no longer whether or not to Brexit – it’s how to make it work as well as possible for the whole country.

The Government, for its part, needs to unveil a three-fold programme to woo the sceptics. The first pledge should be to turn Britain into the nation that is the most open to trade of any Western economy in five years’ time. To reach this target, the Government would seek to limit the reimposition of tariff or non-tariff barriers with the EU, while urgently pursuing as many free-trade deals as possible with faster-growing economies worldwide.

The second pledge should be to make the UK the most entrepreneur-friendly country in the West by 2020. This would include tearing up red tape, cutting tax, making it easy for tech firms to continue to hire skilled migrant talent, and encouraging universities to become incubators for start-ups.

Last but not least, the Government should make an explicit promise to Britain’s poorer groups and regions that their opportunities will drastically improve. The free school programme should be turbo-charged by allowing for-profit companies to open new ones, starting in the north of England and Wales before being rolled out nationally; new selective schools should be opened, as part of an extension of parent choice; much more land should be made available for building in the south of England; and expensive green Energy rules should be ditched. Britain is also in desperate need of several low-tax, low-regulation new enterprise zones near universities in poor parts of the North and Wales, with a vision and management structure similar to London’s Canary Wharf.

David Fuller's view -

Governance is Everything, as this service never tires of saying.  Britain is fortunate to have a Prime Minister as intelligent, experienced and increasingly respected as Theresa May.  There are also plenty of other successful leaders, some in Parliament and many more from all professions and backgrounds across the country.  Britain has a proud history of entrepreneurial spirit and will relish the independence that Brexit promises.   There is no external obstacle in the path of this country’s future success.

A PDF of Allister Heath's column is posted in the Subscriber's Area.



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July 20 2016

Commentary by Eoin Treacy

TerraForm Global Rises amid Talks with SunEdison to Sell Stake

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

TerraForm Global and SunEdison are in talks regarding “a jointly managed sales process and accompanying protocol for managing the marketing process,” according to a presentation posted on TerraForm Global’s website Tuesday. SunEdison is currently involved in the biggest ever sale of clean Energy assets after filing for bankruptcy protection in April with $16.1 billion in liabilities. It has not announced a process for selling its controlling stake in TerraForm Global or its sister yieldco TerraForm Power Inc.

TerraForm Global, a yield company formed by SunEdison to buy clean power plants built by SunEdison outside of the U.S., owns 917 megawatts of solar and wind Energy plants, mostly in southeast Asia and South America. The company had revenue of as much as $52 million in the first quarter, according to the presentation.

It also reported preliminary losses of as much as $350 million for the second half of last year, and a preliminary loss of as much as $8 million for the first quarter of this year.

TerraForm Global has not filed results since the third quarter because it relies on SunEdison for some accounting systems, and the parent company’s results are also delinquent.

Eoin Treacy's view -

Financial engineering contributed to SunEdison’s demise because it divested itself of income producing assets while holding onto liabilities. That worked fine while oil prices were high, demand for solar plants was surging and credit was easy to come by. The decline in oil, natural gas and particularly coal prices questioned the profitability of solar plants and the share collapsed. 



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July 13 2016

Commentary by Eoin Treacy

Oil Tumbles After U.S. Fuel Stockpiles Unexpectedly Increase

This article by Mark Shenk for Bloomberg highlights the nuanced picture evident in the crude oil market. Here is a section: 

U.S. gasoline demand dropped 0.9 percent to 9.67 million barrels a day last week as refiners produced 10.2 million barrels a day of gasoline a day.

"The gasoline data is very bearish," said Thomas Finlon, director of Energy Analytics Group LLC in Wellington, Florida.

"Gasoline production is outstripping demand by more than 500,000 barrels a day." Stockpiles of distillate fuel, a category that includes diesel and heating oil, surged 4.06 million barrels, the most since January.

Gasoline futures for August delivery dropped 4.2 percent to $1.37 a gallon. August diesel tumbled 5.2 percent to $1.3865 after earlier touching $1.3782, a two-month low.
Seasonal Highs

U.S. crude supplies fell 2.55 million barrels to 521.8 million last week, EIA data show. Inventories remain at the highest seasonal level in at least a decade. Analysts surveyed by Bloomberg had forecast a 3 million barrel decline. The industry-funded American Petroleum Institute said stockpiles climbed 2.2 million barrels last week.

"Crude supplies are down a little, but it doesn’t change the overall picture," Finlon said. "They remain at historic highs for this time of the year."

 

Eoin Treacy's view -

Efforts led by Saudi Arabia to knock higher cost competitors out of the market have been partially successful with the result US production has decreased while the fire in Alberta has been an additional headwind for Canadian supply. However economic growth has yet to be spurred by this development with the result stockpiles are higher than might otherwise have been expected. 



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July 12 2016

Commentary by David Fuller

China Has No Historic Rights in South China Sea, Rules Hague Tribunal

An international tribunal on Tuesday ruled against China's territorial claims in the South China Sea, after the Philippines challenged Beijing's right to exploit resources across vast swathes of the strategic waters.

In a 497-page ruling that risks stoking further tensions in South-East Asia, a Hague-based arbitration court said there was no legal basis for China to claim historic rights over the waters of the South China Sea and that it had breached the Philippines' sovereign rights with its actions.

China immediately said it would defy the decision, which it described as “null and void” with “no binding force”.

“China neither accepts nor recognises it,” the foreign ministry said.

Beijing had refused to take part in the tribunal proceedings, with officials saying the tribunal had "no juristiction".

China claims almost all of the Energy-rich waters in the South China Sea, through which about $5 trillion (£3.8 trillion) in ship-borne trade passes every year. 

Neighbours Brunei, Malaysia, the Philippines, Taiwan and Vietnam also have claims.

The panel said there was no legal basis for China to claim historic rights to resources within its so-called nine-dash line, a boundary that is the basis for its claim to roughly 85 per cent of the South China Sea.

It said China had interfered with traditional Philippine fishing rights at Scarborough Shoal, one of the hundreds of reefs and shoals dotting the sea, and had breached the Philippines' sovereign rights by exploring for oil and gas near the Reed Bank, another feature in the region.

None of China's reefs and holdings in the Spratly Islands entitled it to a 200-mile exclusive economic zone, it added.

Beijing responded by saying the Chinese government would not accept “third party dispute settlement” with regards to territorial issues.

“China's territorial sovereignty and maritime rights and interests in the South China Sea shall under no circumstances be affected by those awards,” the foreign ministry said in a statement.

The ruling also said China had caused permanent harm to the coral reef ecosystem in the Spratlys, charges China has always rejected.

David Fuller's view -

This situation is now as dangerous as China chooses to make it, and Xi Jinping’s regime may have already gone too far.  Markets are sensibly adjusting to a less alarming Brexit situation, at least so far as Great Britain is concerned, but now face a potentially serious problem in the South China Sea.

This item continues in the Subscriber’s Area and contains a number of share reviews, plus a PDF of the article.  



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July 08 2016

Commentary by David Fuller

UK Startups Can Shine In a Post-Brexit World

Matt Clifford is the co-founder and chief executive of Entrepreneur First, the five-year-old UK accelerator program, which has produced 75 startups since launch. One of their companies, Magic Pony was sold to Twitter for $150m just last month.

It is just the kind of company you might think would suffer in the immediate aftermath of last month's vote by the UK to leave the European Union. But apparently not. In fact, he had closed three seed investment deals since the result was announced. 

Two weeks on from the referendum results, tech startups are swamped by uncertainty. The overwhelming majority – roughly 87pc according to a recent survey – were opposed to Brexit.

But European investors like Index Ventures and Local Globe insist they are remain bullish on London as a tech hub and will continue to actively invest there because of tax benefits, strong technical universities such as Cambridge, Oxford and Imperial College, and the UK’s large English-speaking market – a combination that’s tough for other European cities to beat.

The persistent “We are open for business” refrain might seem hollow to some, particularly in light of the tech sector’s unequivocal Europhilia. But anecdotal evidence suggests that unexpected windows of opportunity are slowly opening up.

For instance, many agree that there could be unexpected opportunities for financial services disruption that fintech startups are best placed to grab. But first, let’s examine the major concerns being raised about the state of the UK tech sector.  

David Fuller's view -

In an ideal world, the UK economy would have moved smoothly into the post-Brexit era.  However, ideal worlds have usually been pipe dreams.  Therefore, it is better to have started in chaos and panic, to which people are now responding with some sensible, promising ideas, than the other way around.   

Governance is everything has long been a mantra of this service.  I would not underestimate the sense of Energy and opportunity that can now be inspired by good leadership, from the top down, backed by appropriate incentives.  The UK will have a rough third quarter, for understandable reasons.  Thereafter, it should be improving, regardless of what happens to the EU.

A PDF of this article is posted in the Subscriber’s Area.



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July 08 2016

Commentary by David Fuller

U.K. to Add 300 Staff to Negotiate Post-Brexit Trade Ties

The U.K. government plans to add as many as 300 specialist staff to its trade team in an effort to build new relationships outside the European Union, Business Secretary Sajid Javid said.

Javid announced the plans ahead of a trade visit to India Friday. He will meet officials in New Delhi to push for an agreement between the two countries by the time Britain officially leaves the EU. Chancellor of the Exchequer George Osborne is due to visit China this month to press his commitment to a “golden era” in relations with the country.

"Following the referendum result, my absolute priority is making sure the U.K. has the tools it needs to continue to compete on the global stage," Javid said in a statement. "Over the coming months, I will be conducting similar meetings with other key trade partners, outlining the government’s vision for what the U.K.’s future trade relationships might look like."

Prime Minister David Cameron is stepping down in September, leaving the task of leading negotiations to take Britain out of the EU to his successor, who will be either Home Secretary Theresa May or Energy Minister Andrea Leadsom. She will have to decide when to trigger the formal start of two years of exit negotiations with the EU, manage the trade-offs involved and lead efforts to establish new commercial relationships with countries around the world.

David Fuller's view -

This is a positive move by Sajid Javid who is wasting no time in negotiating Britain’s new trade deals with the world’s growth economies and also former Commonwealth nations. 

Two years to leave the EU sounds very arbitrary and an awfully long time to leave a failing association.   



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July 08 2016

Commentary by Eoin Treacy

Nvidia's GTX 1060 is VR-ready and affordable

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

The GTX 1060 is also fully VR-ready, meaning you can expect a smooth experience using it with the Oculus Rift or HTC Vive. The card is also a lot more Energy efficient for VR gaming, consuming just 120 watts of power during use.

Perhaps the biggest news is the price point of the GTX 1060, which is set at US$249 – less than half the $549 launch price of the performance-comparable GTX 980.

Alongside rival AMD's just-launched RX 480 GPU, the cost of building a VR-ready PC is significantly lower than it was at the launch of the Rift and Vive, dropping from roughly $950 to around $800 or less. That's still a hefty sum, but it'll likely make VR more appealing for PC gamers who have been holding off until now.

 

Eoin Treacy's view -

Virtual reality applications require major upgrades in both graphics cards and processing power. Gaining access to the enhanced sensory experiences on offer therefore means spending on new phones for a basic version or new computers and other hardware for the best in class. 



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July 06 2016

Commentary by Eoin Treacy

UK listed gold miners

Eoin Treacy's view -

Last year the Rand collapsed but gold prices were reasonably steady. With the fall in Energy prices corporate profits of South African gold miners improved and with returning investor interest the Johannesburg Gold Miners Index turned to outperformance early this year.

The Index failed to sustain the break below 1000 in August then surged higher from early January and continues to improve in line with the breakout in gold prices. While that is in nominal terms, it is an impressive performance nonetheless. 

 



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July 06 2016

Commentary by Eoin Treacy

First Solar Quits TetraSun in Shift to All Thin-Film Panels

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

When First Solar acquired TetraSun, it was producing cadmium-telluride panels with maximum efficiency rates of 13.3 percent, the amount of Energy in sunlight that’s converted to electricity. TetraSun had 21 percent efficiency at the time and the potential for improvement.

The company’s latest cadmium-telluride cell reached a record 22.1 percent efficiency in a laboratory. That’s higher than the best multicrystalline polysilicon cell at 21.3 percent, according to data from the National Renewable Energy Laboratory.

SunPower Corp., which uses a purer form of silicon, has the most efficient panels, with 24.1 percent.

“First Solar has achieved surprisingly good results for its thin-film technology,” Jenny Chase, an analyst at Bloomberg New Energy Finance, said in an e-mail. “First Solar may have felt there was little point in competing in an area where they have no unique advantage over other silicon manufacturers.”

 

Eoin Treacy's view -

The above story highlights how solar panel companies can become the victims of their own success. By purchasing Tetrasun, First Solar was hedging its development of a new product but it is arguable whether that would have worked since there are other cost effective manufacturers of those panels, not least in China. In such a highly competitive market, where the risk of new technologies evolving outside a company’s internal ecosystem is nontrivial, companies might be better off having conviction in their own products than competing on legacy technology. 



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June 30 2016

Commentary by David Fuller

Three Hours That Turned Boris Johnson From Winner to Also-Ran

Here is a section from this topical article from Bloomberg

Gove had lost patience with Johnson in the days after the shock Brexit vote, according to a person familiar with the justice secretary’s thinking, speaking on condition of anonymity. Efforts to get him to win over other key players in the Tory Party failed, leading to a much wider field than expected. Energy Minister Andrea Leadsom was among those that Gove had hoped Johnson could win to his team. After meeting Johnson, she decided to run against him.

“We were striving and struggling not just for a dream ticket, but a dream team,” Raab told the BBC. “Putting together a really strong unifying team was an absolute condition. When that fell away, I think that Michael felt things had changed.”

Gove’s announcement came just as Home Secretary Theresa May was preparing her own 9:30 a.m. launch. It could not have been timed better for her. While the former allies were knifing each other, unable to say what leaving the EU was going to look like, May appeared to announce, in the words of Johnson’s biographer Andrew Gimson, that here was “the grown-up candidate.”

May, who supported Cameron’s campaign to stay in the EU, had a plan. Her speech showed commitment to follow the vox populi. She said that there would be no second referendum, no early election, and she sounded like she meant it. She made serious points at Johnson’s expense, saying the country needed “strong leadership and a clear sense of direction,” and she made jokes at Johnson’s expense: “The last time he did a negotiation with the Germans, he came back with three nearly new water cannon.” Weighty, firm, funny -- the many male Tory lawmakers in the room could have been forgiven for thinking of a previous Conservative leader, Margaret Thatcher.

David Fuller's view -

There are plenty of surprises in this Brexit drama of rapidly changing events.  I thought Boris Johnson could have won but as the leader of Brexit he might have had a difficult time healing the Conservative rift.  Politics within the Party can be ruthless but I take the many candidates for PM as a healthy sign. 

Theresa May is the current frontrunner and a likely unifier, so there would be no need for an early general election.  



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June 28 2016

Commentary by David Fuller

Now the Vote Is Over, Let Us Move On With Six Steps to a Bright Future

It is easy to see what a messy, bad Brexit looks like. The UK gets shut out of a huge market. Inward investment gets put on hold amid months of uncertainty. The trade deficit starts to blow out, the pound keeps sinking, and joblessness rises as the economy tanks. But what does a good Brexit look like? Here are six key demands business should make of new prime minister as he or she negotiates with Brussels, Berlin and Paris.

First, don't obsess about access to the Europe market. In the first instance, Britain should go for the Norwegian model, with full access to the single market, in return for accepting most of its rules, and paying a more modest financial contribution to Brussels. But if Angela Merkel and François Hollande want to be difficult about that, then forget it. Our trade with the EU has been sinking like a stone for the last decade - down from 55pc of our exports to 44pc over the last 10 years. The very worst that can happen is the EU imposes tariffs of roughly 4pc on our goods. But since the pound has just devalued by around 8pc, companies exporting to Europe can easily absorb that and still cut prices. The most important move is to get the new trading arrangement sorted quickly and to start focusing on the rest of the world.

Two, let's prepare our application to join other trade blocs. We are on the North Atlantic, so there is no reason we shouldn't join the United States, Canada and Mexico in Nafta (its combined GDP is $3 trillion more than the EU, by the way). There is no reason why the rules shouldn't be tweaked to allow us to join the new Trans Pacific Partnership as well. Switzerland has signed a free trade agreement with China, and why shouldn't we - surprise, surprise, but Swiss exports to that country have quadrupled in a decade. The sooner we build alternatives to the EU market and forge our own trade agreements with economies that are growing far faster, the quicker the world will be convinced Brexit doesn't matter much.

Thirdly, push through a wave of deregulation. The Left will hate it, but Britain's economic future is now clear. We will be a free-wheeling offshore state that acts as a bridge between Europe and the rest of the world. Think Singapore, except bigger and with worse weather.

We should scrap EU-mandated labour market regulations and social protections as fast as possible. There is no reason why we should accept European limits on how many hours people do in the office - so long as we have a minimum wage in place, which we do, then it is up to every individual how long a shift he or she wants to put in. Issues such as parental leave can be freely agreed between companies and staff. Employers who want to hire lots of young women, the best educated, most skilled part of the workforce, will be generous; others less so. But business can decide for itself.

Fourthly, drop specific taxes. The City faces a huge challenge in adjusting to Brexit. There is no point denying that a lot of mainstream corporate business will start to move to Frankfurt. One move that would help it a lot would be scrapping the bank levy - it is currently forecast to bring in more than £900m a year, cash the industry could use to get it through a difficult period. Next, we should scrap Energy taxes and rules that have made power more than twice as expensive in Europe as it is in the United States. That will help the manufacturing industry as it battles with the potential loss of some orders from Europe. The more help we can give to specific sectors of the economy, the faster it will recover.

Fifthly, upgrade our infrastructure. The cost of government borrowing has dropped to record lows and the Bank of England may need to print more money to stimulate the economy. We should relax on austerity and spend some money on better transport links and rebuilding roads, water and power systems. A flash new London airport would make us far more open to the world than anything the EU has done in the last decade - and send out a great signal that the UK was still open to international business.

David Fuller's view -

These are positive suggestions for not only economic recovery but also prosperity.  Matthew Lynn is correct to start with saying we should not be obsessing over access to the EU market.  Some EU leaders may be difficult to negotiate with, not least Jean-Claude Juncker whose appointment as European Commission President was opposed by David Cameron.  Junker strongly favours ‘more Europe’, if only to deter member countries from pushing for their own versions of Brexit.  However, the EU has far more to gain from keeping trade terms open with the UK, given the trade imbalance.  Germany’s automobile manufacturers would be among the most aggrieved if they did not.

This item continues in the Subscriber’s Area where a PDF of Matthew Lynn’s article is also posted.



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June 27 2016

Commentary by Eoin Treacy

Musing from the Oil Patch June 27th 2016

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

This inverse relationship between the value of the U.S. dollar and the price of crude oil has been very clear for most of this century. Will it continue in the future? More than likely it will, partly because, while the relationship is logical, it has become a short-term trading indicator. In the past several weeks, after WTI reached and surpassed the $50 a barrel threshold, one could virtually answer the question of what happened to oil prices each day if you were told what happened to the value of the U.S. dollar that day.

After watching this ying and yang of oil price movements and the value of the U.S. dollar, we were interested in the two-page chart on the profits of the Fortune 500 companies by sector over the past 20 years. We cut out the pages and scanned the chart (Exhibit 7 below), shrinking it to fit on one page. Unfortunately, we lost the 1995-1996 part of the chart, but the visual impact of the chart remains relevant.

What struck us while looking at the chart was the huge bulge in Energy profits during 2005-2012 before they started contracting and then collapsed after oil prices dropped at the end of 2014. The Energy sector profits during that period were driven by high oil prices - $80-$100+ per barrel, even after adjusting for the 2008-2009 financial crisis and recession. As Energy profits mushroomed during the era of high oil prices and the shale revolution, it was easy for Wall Street to convince investors to throw money at exploration and production and oilfield service companies who were leading America to the promised land of Energy independence. The Energy stocks were soaring as analysts and investors fell in love with the shale revolution that married horizontal drilling with massive hydraulic fracturing to produce huge volume of natural gas, natural gas liquids and tight oil. Remember that it was during this era that we were assured that we had hundreds of years of cheap natural gas supply. One Wall Street firm even wrote a report explaining how this revolution was turning us into ‘Saudi America.” 

The chart shows clearly what happens when an ill-founded boom collapses. As you scan the lower right hand corner of the chart, it is very difficult to see the thin black line reflecting current Energy sector profits, or what is left of the thick line that existed throughout most of the 2000s. In fact, if oil prices hadn’t climbed back to $50 recently, it is possible that the thin line would become impossible to see as there wouldn’t be any profits. Many investing in Energy today are hopeful that one day in the foreseeable future that thin black line will once again become a thick black line. We are comfortable is saying the line will be thicker, we just don’t know how thick it will eventually grow and when that will be.

Eoin Treacy's view -

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

The Dollar Index failed to sustain the move below 92.5 in May and has now bounced back above the 200-day MA. Considering the size of the upward dynamic a retest of the upper side of the 18-month range, near the psychological 100 is now looking more likely than not. 



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June 23 2016

Commentary by David Fuller

Solar Power to Grow Sixfold as Sun Becoming Cheapest Resource

Here is the opening of this topical article from Bloomberg:

The amount of electricity generated using solar panels stands to expand as much as sixfold by 2030 as the cost of production falls below competing natural gas and coal-fired plants, according to the International Renewable Energy Agency.

Solar plants using photovoltaic technology could account for 8 percent to 13 percent of global electricity produced in 2030, compared with 1.2 percent at the end of last year, the Abu Dhabi-based industry group said in a report Wednesday. The average cost of electricity from a photovoltaic system is forecast to plunge as much as 59 percent by 2025, making solar the cheapest form of power generation “in an increasing number of cases,” it said.

Renewables are replacing nuclear Energy and curbing electricity production from gas and coal in developed areas such as Europe and the U.S., according to Bloomberg New Energy Finance. California’s PG&E Corp. is proposing to close two nuclear reactors as wind and solar costs decline. Even as supply gluts depress coal and gas prices, solar and wind technologies will be the cheapest ways to produce electricity in most parts of the world in the 2030s, New Energy Finance said in a report this month.

“The renewable Energy transition is well underway, with solar playing a key role,” Irena Director General Adnan Amin said in a statement. “Cost reductions, in combination with other enabling factors, can create a dramatic expansion of solar power globally.”

David Fuller's view -

My guess is that even these optimistic forecasts will be significantly exceeded by 2030, as the solar power industry becomes progressively more efficient.  Moreover, the accelerated rate of technological innovation will lead to new forms of solar power which are all but unimaginable today.

This item continues in the Subscriber’s Area.



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June 23 2016

Commentary by Eoin Treacy

IBM to deliver 200-petaflop supercomputer by early 2018

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

More supercomputer news this week: The US is responding to China’s new Sunway TiahuLight system that was announced Monday, and fast. First, the Department of Energy’s (DOE) Oak Ridge National Laboratory is expected to take delivery of a new IBM system, named Summit, in early 2018 that will now be capable of 200 peak petaflops, Computerworld reports. That would make it almost twice as fast as TaihuLight if the claim proves true. (We had originally reported in 2014 that both Summit and Sierra would achieve roughly 150 petaflops.)

TaihuLight (pictured below) now sits at number one on the twice-yearly TOP500 list of the fastest supercomputers in the world, with a Linpack benchmark score of 93 petaflops and a claimed peak of 124.5 petaflops. The latest TOP500 announcement Monday caused a bit of a stir. Not only is TaihuLight roughly three times faster than China’s Tianhe-2, the prior champion, but it also uses no US-sourced parts at all for the first time, as it’s powered by Sunway 260-core SW26010 processors that are roughly on par with Intel Xeon Phi, as well as custom proprietary interconnect.

 

Eoin Treacy's view -

Supercomputers might be a somewhat esoteric topic but the fact China has developed the fastest computer in the world without requiring US sourced components is a major testament to the technological competence it has achieved. In turn that should help Chinese researchers to further develop artificial intelligence and big data projects. 



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June 22 2016

Commentary by Eoin Treacy

California's Last Nuclear Plant Is Closing, Edged Out by Renewables

This article by Jim Polson and Jonathan Crawford for Bloomberg may be of interest to subscribers. Here is a section: 

Economics have achieved what environmentalists have sought for years: the shutdown of California’s nuclear power plants.

PG&E Corp. is proposing to close two reactors at Diablo Canyon in a decade that would end up costing more to keep alive as California expands its use of renewable Energy, Chief Executive Officer Tony Earley said Tuesday. They won’t be needed after 2025 as wind and solar costs decline and electricity from the reactors becomes increasingly expensive, he said.

Diablo Canyon became California’s only operating nuclear power plant after Edison International three years ago shut its San Onofre plant north of San Diego after a leak. Tuesday’s announcement follows decisions this month to retire three other U.S. nuclear plants struggling to make money amid historically low power prices and cheap natural gas.

“It’s going to cost less overall as a total package than if you just continued to operate Diablo Canyon,” Earley said. “It’s going to operate less because of the Energy policies that are in place.”

 

Eoin Treacy's view -

Nuclear in North America and Europe suffers from a boy who cried wolf problem. By over promising on cost and production and under delivering, particularly on safety, public ambivalence has grown substantially. That’s an unfortunate development because new nuclear technologies really do hold the potential to fulfil earlier promises, but they are unlikely to be built in either North America or Europe. China is now the primary bastion of support for developing nuclear technology and is already exporting its designs to other countries. 



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June 22 2016

Commentary by Eoin Treacy

Musk's Solar Lifestyle Idea Has One Big Flaw

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

The commercial success of Musk's vertical integration idea hinges -- in terms of turning a profit rather than generating a high market capitalization -- on battery technology that would have mass rather than niche appeal. The assumption upon which Musks' concept -- and Tesla's $32.3 billion market capitalization -- is built is that Tesla is betting on the right battery technology and no one will come up with a much better one. That is the big hole in the donut: The assumption is far from safe.

Cheap and reliable Energy storage is central to the idea of an off-the-grid, solar-powered household. Such a home needs Energy at night, when the sun isn't shining: It has fridges, air conditioners and other appliances running, and a Tesla charging in the garage. So it needs a good battery, and Tesla's Powerwall doesn't necessarily fit the bill -- if only because the cost of the Energy it supplies, including amortization, is higher than grid prices. Because of this, and given the high price of Tesla cars, the lifestyle on offer is an expensive statement. In terms of cost and convenience, it's not competitive with the traditional grid-and-fossil fuel model.

 

Eoin Treacy's view -

Let’s call Tesla Motor’s acquisition of SolarCity what it is; a bailout. The tide of highly attractive subsidies for solar has turned. NV Energy, Warren Buffett’s Nevada utility, successfully argued that it should not have to bear the full cost of the electrical grid when solar producers get to use it for free and get preferential rates on the electricity they supply. That represented a major upset for SolarCity in particular but also highlighted a deeper challenge for the solar leasing business model which has contributed to increased scepticism among investors about the prospects for related companies. The big question is whether other states, particularly in the sun-belt will announce similar charging structures. 



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June 20 2016

Commentary by David Fuller

OPEC Chasm of Doom

Here is the opening of this informative article from Bloomberg:

OPEC's members are divided by many things: language; size; politics; sometimes outright war.

And money. Don't forget money.

If you want to understand why OPEC has responded to its current crisis with all the cohesion of cat herding, some numbers in the Energy Information Administration's "OPEC Revenue Fact Sheet," published on Tuesday, provide some important clues. First up, estimated revenue, adjusted for inflation:

Tight Oil

OPEC's real net oil export revenue is expected to be the lowest since 2003

The estimate for this year, $337 billion in real terms, is barely a third of 2012's peak -- and, uncannily, exactly the same as the consensus forecast for the combined revenue of Exxon Mobil and Chevron in 2016. Of course, those two only have to pay their employees, creditors and shareholders. OPEC's members have about 700 million people to answer to, roughly double the amount in 1980. So, on a per capita basis, those numbers look worse:

David Fuller's view -

Note the charts in this article, including: “The gap between OPEC’s haves and have-nots in terms of oil export revenue.  



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June 20 2016

Commentary by Eoin Treacy

U.S. Gasoline Demand Is Likely to Slide

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

Even the low end of the forecast by Wood Mackenzie, which provides in-depth analysis for a wide range of clients including large oil companies, utilities and banks, is a more bullish outlook for electric-car adoption than many oil-and-gas companies have espoused.

Spencer Dale, the chief economist of Energy company BP PLC, said last week in Houston that while he expects electric cars to start gaining traction, the internal-combustion engine still has significant advantages over electric alternatives and widespread adoption won’t happen in the next two decades.

“It will still take some time,” Mr. Dale said. “Electric vehicles will happen. It is a sort of when, not if, story.”

The electrification of the automobile has evolved more slowly than some expected, in part thanks to low fuel prices and limited battery life that meant drivers had to recharge every 100 miles. But more capable cars are coming to market as tightening air-pollution regulations in places such as Europe and China force auto makers to engineer better electric vehicles.

The U.S. market today remains tiny, with pure electric cars amounting to less than 1% of total sales so far this year. But Tesla’s decision to build cars with sizable batteries that can run for more than 200 miles before recharging has led a number of competitors to double down on their own electric-car designs.

 

Eoin Treacy's view -

Tesla remains the standard bearer for electric cars because, more than any other company, it has succeeded in marketing a car people aspire to own. However it is not the only, or even the biggest company manufacturing electric vehicles. In fact Tesla’s success ensures it will deal with a lot more competition as incumbent manufacturers release their own models. 



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June 17 2016

Commentary by David Fuller

Expect Much Higher Oil Prices As the Cycle Comes To an End

In my last article for OilPrice.com (May 16, 2016), I laid out my reasoning for a prediction that the Global Oil Markets would soon be back in balance. Picking an exact date when an oil cycle will end is difficult, but they do call them “cycles” for a reason. This cycle is no different than all of the others that came before it. Oil producers and consumers respond to price changes, which brings supply & demand back into balance, just like they always do.

The last six major oil price cycles lasted an average of two years. This one started in July, 2014.

On June 14, 2016 the International Energy Agency (IEA) issued their monthly Oil Market Report. In the report the IEA revises their first quarter increase in global demand forecast from a 1.4 to 1.6 million barrel per day year-over-year increase. They are also forecasting a big spike in demand of 1,270,000 barrels per day from the 2nd quarter to the 3rd quarter. Since demand ALWAYS spikes in the 3rd quarter, this was not a surprise to anyone.

Since this cycle has been so severe, I predict that it will not end well for speculative traders that continue to short oil futures. If some of you purchased a gas guzzling SUV because you believed the talking heads that said oil would never sell for $100/bbl again, you may want to consider a smaller second car.

• Global oil production in May was 590,000 barrels per day less than it was a year ago.

• Nigeria’s oil sector is under attack and the situation seems to be getting worse

• OPEC production fell by 110,000 barrels per day as increases in Iranian production were more than offset by big losses in Nigeria, Libya and Venezuela

• Global demand is up 1,600,000 barrels per day year-over-year as Chinese demand has held up and demand from India is very strong

Canadian wildfires at their peak took 1,500,000 barrels per day off the market. This production should be restored in the 3rd quarter. The situations in Nigeria, Libya and Venezuela are much worse. Inf fact, there is now concern that the government in Venezuela may collapse under the debt load created by low oil prices.

The direction of the oil market should now be crystal clear to everyone. Demand growth is relentless. The products refined from oil are essential to a high standard of living on this planet. We will all complain when gasoline is back over $3.00/gallon, but we will continue to pay for it. Within 6 to 9 months, demand for oil should exceed production. High storage levels provide a cushion, but oil prices will continue to ramp higher.

David Fuller's view -

Dan Steffens is correct in saying that there is always an oil cycle.  In fact, commodities have long been among the most cyclical of all markets.  He is also right in saying that demand for oil is clearly rising – have a look at the graph in his report.  Yes, production of oil is falling as demand is rising.  That is what happens in a cyclical commodity market. 

However, Dan Steffens is also overlooking some important factors, one of which is even more important than all of his bullish points combined. 

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June 17 2016

Commentary by Eoin Treacy

Oil Pares Biggest Weekly Drop Since April as Dollar Declines

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

“There is some rebalancing, and I believe the oil price will be in the region of $50, maybe $55 for the rest of the year,” Paolo Scaroni, deputy chairman at NM Rothschild & Sons and former chief executive officer of Eni SpA, said in a Bloomberg television interview. “I personally believe there is a cap. If prices go beyond $60, shale oil producers will start all over again.”

Rigs targeting crude in the U.S. rose by 9 to 337 this week, capping the first three-week gain since August, Baker Hughes Inc. said Friday. Explorers have dropped more than 1,000 oil rigs since the start of last year.

 

Eoin Treacy's view -

Crude oil accelerated to its January low and has since staged in an impressively consistent rally which has seen prices almost double. This has resulted in Energy companies being a major contributor in the ability of the wider market to rally from the January lows. For example the majority of the top 10 best performers on the S&P500 year-to-date are Energy/resources related. 



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June 15 2016

Commentary by David Fuller

Watch These Synthetic Leaves Suck CO2 Out of the Sky

Here is the opening of this interesting article from Bloomberg on reducing a problem which is contributing to climate change:

We’ve added more than half a billion tons of carbon to the air since the industrial revolution. This device could help clean it up.

What about all the carbon we've already poured into the atmosphere? If only there were a device that could take some of it back out.

Researchers at Arizona State University’s Center for Negative Carbon Emissions are working on one. They discovered a commercially available resin that can grab carbon dioxide at low concentrations when the material is dry and release it when the material is moist. The CO2 it collects could be stored underground, used in greenhouses, or fed to algae for biofuel production.

"Right now, we are taking carbon out of the ground. We then convert the Energy into something useful. Then there’s a third step that we ignore—namely, to clean up after ourselves," said Klaus Lackner, the center’s director.

Technology can solve all manmade atmospheric problems and it is obviously in our interests to do so.  The process described in the article above will be unobtrusive in the process.  Scientific developments which help the planet are a no brainer and will most likely eventually make a profit in the process. 

David Fuller's view -

The accompanying video is more informative than the article.   



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June 15 2016

Commentary by Eoin Treacy

A Circular Reference: Ushering In A New Era For Natural Gas

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

Previously a commodity with volatile price swings due to a domestic market that was short supply, the outlook for natural gas through 2020 shows a well supplied market capable of delivering to growing demand sources. There will be s-t dislocations (weather / infrastructure constraints) and the introduction of LNG exports will re-couple the U.S. to the global economy, but we see an emerging theme of natural gas entering a range bound period of $3-3.50/mmbtu. The 5 year build up in demand (2013-18) now looks to be meeting up with the 10 year buildup in supply (2005-15), creating a period of price equilibrium with upward and downward pressures on both sides.

Demand – Focus On The Known Drivers
After a 15 year period of stagnant consumption (1995-2009), demand for natural gas has enjoyed consistent growth over the past 5 years (2-3Bcfpd annually), a trend we expect to pick up through 2020. The drivers of growth are visible – power generation, industrial use, and Mexico exports – and will provide a base level of consumption growth. The reemergence of natural gas on the global scene via LNG exports has also long been a theme and will be additive to demand, though the quantifiable impact is tough to point to as capacity utilization will vary based on global prices and supply. We estimate ~6Bcfpd of export demand in 2020 in our base case, which is needed to balance the S/D outlook. In total, we see demand growth approaching ~98Bcfpd by 2020 (ex pipeline imports) up from ~78Bcfpd in 2015.

Supply – Filling Demand Needs…Just Need More Pipeline Capacity
U.S. supply has increased ~50% over the last 10 years to ~75Bcfpd, a rate of growth not witnessed since the 1960-1970s and following a brief pause in 2016/17, we anticipate growth to resume in 2018. We see four key trends from our supply forecast: 1) Supply is ~2Bcfpd below demand (weather normalized) in 2016/17 but ~3Bcfpd oversupplied in 2018, 2) Northeast supply growth increases by ~9Bcfpd in 2018, driven by the pipeline build out, 3) The bull case for supply by 2H18 is based on demand as the Northeast has excess pipeline capacity, and 4) The Northeast isn’t the only source of growth as we anticipate the Haynesville and Associated Gas Basins to return to growth by 2018, and implementing new technology could support growth elsewhere. Our forecast grows to meet demand and fills storage with enough deliverability in 2018, creating a more range bound environment with equal s/d pressures.

 

Eoin Treacy's view -

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

The natural gas market was the original recipient of the innovations that led to the boom in unconventional supply. Since then it has offered an object lesson in the ramifications of how that is likely to play out for other commodities where supply is surging not least oil. The greatest beneficiaries have been consumers who have seen prices for essential Energy commodities decline to levels not preciously imaginable. That has also resulted in demand increasing not least from substitution which has also benefitted consumers in other sectors. 



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June 14 2016

Commentary by Eoin Treacy

Musings from the Oil Patch June 14th 2016

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

As electricity is gaining importance in the nation’s Energy mix, the role of electric vehicles is being promoted by environmentalists who see them as a way to end the use of petroleum. These same groups are pushing electric cars as the perfect vehicle for autonomous vehicles that are envisioned as a way to reduce the number of cars needed in future economies, with concomitant less use of petroleum fuels. As they build their case, we have been overwhelmed by articles praising the increase in the number of electric vehicles in today’s vehicle stock and how they will (need to) grow in order to fulfil the UN climate change agreement. 

A recent electric car article offered the chart in Exhibit 3 (next page) showing how the number of these vehicles in the world have grown. The chart reflects the cumulative total between 2010 and 2015, showing dramatic growth. Because it is cumulative, the growth is deceiving. More important is the penetration rate of electric vehicles into the world vehicle fleet. 

As the chart shows, the global industry has over 1.2 million electric vehicles on the world’s roads – but that is out of an estimated one billion vehicles. The point is that for all the dramatic growth (which presentation charts can make look impressive) in the number of electric vehicles on the roads, they barely register as a component of the global vehicle fleet total.

An interesting area for research into the success of electric cars is to see how many of them are owned by governments – federal, state and municipal – along with ones purchased by utility companies in an effort to demonstrate their environmental sensitivity. Our guess is that in the U.S. these buyers would account for the largest portion of the electric vehicles on the road. That would suggest that real consumers – not those motivated by making political statements – are not embracing electric vehicles, despite the concerted efforts of governments to promote them through mandates and financial

If we look at the dark green portion of each bar that represents the number of electric cars in the United States, the country has gone from a minimal number in 2010 to 400,000 vehicles in 2015. Yes, that is dramatic growth, but the 2015 number is less than half the number President Barack Obama called for to be on America’s roads. More telling is the difference between the height of the dark green portion of the bar in 2014 and 2015, showing that the industry added slightly over 100,000 vehicles. That number comes in a year when the U.S. auto industry produced and sold over 17 million vehicles. The penetration of electric cars into the American vehicle stock is paltry as 400,000 units barely registers in a fleet of about 300 million vehicles on the road. 

Eoin Treacy's view -

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

Electric vehicles (EVs) are on an exponential growth curve. However we are still in the very early stages of that growth where big numbers do not equate to large numbers of vehicles on the road. For example Tesla’s orders for more than 400,000 Model 3s is equivalent to the entire US fleet of EVs on the road today. With that kind of growth rate it’s important to keeps one’s feet grounded in reality. 



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June 13 2016

Commentary by Eoin Treacy

Batteries Storing Power Seen as Big as Rooftop Solar in 12 Years

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

The spread of electric cars is driving up demand for lithium-ion batteries, the main technology for storage devices that are attached to utility grids and rooftop solar units.

That’s allowing manufactures to scale up production and slash costs. BNEF expects the technology to cost $120 a kilowatt-hour by 2030 compared with more than $300 now and $1,000 in 2010.
That would help grid managers solve the intermittency problem that comes with renewables -- wind and solar plants don’t work in calm weather or at night, creating a need for baseload supplies to fill the gaps. Today, that’s done by natural gas and coal plants, but the role could eventually be passed
to power-storage units.

The researcher estimates 35 percent of all light vehicles sold will be electric in 2040, equivalent to 41 million cars.

That’s about 90 times the figure in 2015. Investment in renewables is expected to rise to $7.8 trillion by then, compared with $2.1 trillion going into fossil-fuel generation.

“The battery industry today is driven by consumer products like computers and mobile phones,” said Claire Curry, an analyst at Bloomberg New Energy Finance in New York. “Electric vehicles will be the driver of battery technology change, and that will drive down costs significantly.”

The industry still has a long way to go. About 95 percent of the world’s grid-connected Energy storage today is still pumped hydro, according to the U.S. Energy Department. That’s when surplus Energy is used to shift large amounts of water uphill to a reservoir so it can be used to produce electricity later at a hydropower plant. The technology only works in areas with specific topographies.

There are several larger-scale battery projects in the works, according to S&P Global. They include a 90-megawatt system in Germany being built by Essen-based STEAG Energy Services GmbH and Edison International’s 100-megawatt facility in Long Beach, California.

“Utility-scale storage is the new emerging market for batteries, kind of where electric vehicles were five years ago,” said Simon Moores, managing director at Benchmark Mineral Intelligence, a battery researcher based in London. “EVs are now coming of age.”

 

Eoin Treacy's view -

Innovation in the chemistry that supports batteries has been a lot more difficult to achieve than the Moore’s law related enhancements that have been commonplace in chip manufacturing and increasingly in solar technologies. Nevertheless as the requirement for storage grows increasingly urgent, the capital expended on R&D is expanding and innovations are being achieved. In the meantime economies of scale through larger manufacturing plants are helping to drive efficiencies. 



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June 10 2016

Commentary by Eoin Treacy

Energy in 2015: A year of plenty

Thanks to a subscriber for this edition of BP’s annual report by Spencer Dale which may be of interest. Here is a section:

The increasing importance of renewable Energy continued to be led by wind power (17.4%, 125 TWh). But solar power is catching up fast, expanding by almost a third in 2015 (32.6%, 62 TWh), with China overtaking Germany and the US as the largest generator of solar power.

The older stalwarts of non-fossil fuels – hydro and nuclear Energy – grew more modestly. Global hydro power increased by just 1.0% (38 TWh), held back by drought conditions in parts of the Americas and Central Europe. Nuclear Energy increased by 1.3% (34 TWh), as rapid expansion in China offset secular declines within mainland Europe. This gradual shift of nuclear Energy away from the traditional centres of North America and Europe towards Asia, particularly China, looks set to continue over the next 10-20 years.

And

The key lesson from history is that it takes considerable time for new types of Energy to penetrate the global market. Starting the clock at the point at which new fuels reached 1% share of primary Energy, it took more than 40 years for oil to expand to 10% of primary Energy; and even after 50 years, natural gas had reached a share of only 8%.

Some of that slow rate of penetration reflects the time it takes for resources and funding to be devoted in scale to new Energy sources. But equally important, the highly capital intensive nature of the Energy eco-system, with many long-lived assets, provides a natural brake on the pace at which new energies can gain ground.

The growth rates achieved by renewable Energy over the past 8 or 9 years have been broadly comparable to those recorded by other energies at the same early stage of development. Indeed, thus far, renewable Energy has followed a similar path to nuclear Energy.

The penetration of nuclear Energy plateaued relatively quickly, however, as the pace of learning slowed and unit costs stopped falling. In contrast, in BP’s Energy Outlook, we assume that the costs of both wind and solar power will continue to fall as they move down their learning curve, underpinning continued robust growth in renewable Energy.

Indeed, the path of renewable Energy in the base case of the Energy Outlook implies a quicker pace of penetration than any other fuel source in modern history. But even in that case, renewable power within primary Energy barely reaches 8% in 20 years’ time.

The simple message from history is that it takes a long time – numbering several decades – for new energies to gain a substantial foothold within global Energy.

 

Eoin Treacy's view -

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

The evolution of renewable Energy technology represents a major paradigm shift for the Energy sector not least because the cost of production continues to decrease independently of the oil price and environmental concerns result in a compelling case for adoption. In tandem with wind and solar, the rollout of electric vehicles is a related but separate development which is likely to represent a continued headwind for demand growth.



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June 02 2016

Commentary by Eoin Treacy

A Cautionary Tale from the '80s for Today's Loan Participations

Thanks to a subscriber for this article by Christopher Whalen for the American Banker. Here is a section: 
 

 

Since 2013, the federal regulatory agencies have been warning banks and investors about the potential risks in leveraged lending. These warnings have been both timely and prescient, particularly in view of the ongoing credit debacle in the Energy sector. In addition to the well-documented credit risk posed by leverage loans, we believe that the widespread practice of selling participations in leveraged loans represents a significant additional risk to financial institutions and other investors from this asset class.

While regulators have appropriately focused on the credit risk component of leveraged loans held by banks and nonbanks alike, the use of participations to distribute risk exposures to other banks and nonbank investors also raises significant prudential and systemic risk concerns. The weakness in oil prices, for example, has caused investors to cut exposure to companies in the Energy sector. This shift in asset allocations caused by the decline in oil prices has negatively impacted prices for leveraged loans and high yield bonds. In some cases, holders of these securities are attempting to exit these exposures by securitizing the participations.

The investor exodus away from leveraged loans with exposure to the petroleum sector brings back memories of the 1970s oil bust, an economic shock that led to the failure of Penn Square Bank in 1982, the subsequent failure of Seafirst Bank later in that year, followed by Continental Illinois Bank in 1984. Before its failure, Penn Square technically continued to "own" — and service — loan interests held by other banks with participations. As receiver for the failed bank, the Federal Deposit Insurance Corp. deemed those investors to be nothing more than general creditors of the failed bank's estate. Those participating banks lost their entire investment.

 

Eoin Treacy's view -

Leveraged loans issuance overtook the 2007 peak a couple of years ago. That fact is bemusing to many people who remember claims that bankers would never again engage in such activity. Yet with interest rates so low and the demand for yield so high the rationale for issuing to less than optimal borrowers is hard to resist. 



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June 01 2016

Commentary by Eoin Treacy

Musings from the Oil Patch June 1st 2016

Thanks to a subscriber for this edition of Allen Brooks' Energy report for PPHB. Here is a particularly interesting section on autonomous trucking: 

The new topic being opened by efforts such as Otto and the platooning demonstration in Europe is the impact on fuel and labor costs within the trucking industry. In the United States, trucks drive 5.6% of all vehicle miles and are responsible for 9.5% of highway fatalities, according to Department of Transportation data. Because heavy-duty trucks have a significantly lower fuel-efficiency performance, they account for a larger share of diesel fuel consumption than diesel cars or other types of equipment. Because diesel fuel is included in distillates, we cannot determine the exact weekly volumes. However, we know that for the week ending May 20, distillate volumes of slightly over 4 million barrels a day represented 20% of total fuel supplied in the U.S. By examining the latest inventory data, distillates are broken down by the amount of sulfur in the fuel. Diesel fuel for vehicle use needs to be low sulfur – 15 parts per million or less. That fuel category accounted for 88% of all the distillate in storage, therefore we would think this is a reasonably close approximation of the highway quality diesel fuel being supplied to the U.S. market. If 62% is used by over-the-highway trucks, then the daily consumption is approximately 2.2 million barrels. Improved fuel savings from autonomous technology could eventually account for upwards of 200,000 barrels a day in savings. 

Autonomous vehicle technology is being hailed as a way to reduce the number of accidents. The largest impact of the technology, however, may be on the employment of truck drivers. There are more than three million truck drivers in this country. According to the American Trucking Associations, the truck industry accounts for one of every 15 jobs in the United States. By eliminating the need for second drivers on many trucks due to the ability of the primary driver to fulfill his rest obligations while the truck drives itself, there will be a negative employment impact from autonomous technology. 

Although perceived as a negative, autonomous technology might actually become a positive as the trucking industry deals with an aging workforce and a less-than-attractive employment career as long-haul driving can be tedious and keeps drivers away from home for extended time periods. While younger drivers enjoy the first and last miles of truck driving, they wish to avoid the boring portion, which autonomous technology would eliminate. In the U.S., according to consultant Oliver Wyman, by 2023 it is projected that there will be shortfall of 240,000 drivers, or approximately 8% of the estimated current number of truck drivers. 

Canada has a similar employment outlook for its highway trucking industry. According to the Canadian Trucking Alliance there are about 300,000 long-haul truck drivers. Similarly, the Canadian Trucking Alliance estimates that the Canadian industry will have a shortfall of 48,000 drivers by 2024 — about 15 per cent of the total driving force – due to an aging workforce and a less-attractive employment career. 

Another impact of autonomous technology for trucks is that vehicles can be kept on the highway for more hours per day. That could not only reduce the need for additional drivers, but it could also reduce the cost for transporting goods, further contributing to deflationary forces in the economy. 

All of these considerations influenced our previous article’s conclusion that autonomous trucks were more likely to be on the roads before autonomous cars. That may be why Mr. Levandowski left Google. He said that his decision to leave was motivated by being eager to commercialize a self-driving vehicle as quickly as possible. At Google, he was responsible for drafting legislation to permit self-driving vehicles, which ultimately became law in Nevada. While certain states such as California have motor vehicle regulations that would prohibit the idea of trucks traveling on the freeway with only a sleeping driver in the cab, other states currently do allow it. “Right now, if you want to drive across Texas with nobody at the wheel, you’re 100 percent legal,” said Mr. Levandowski. Stay tuned for self-driving trucks on a freeway near you. 

Eoin Treacy's view -

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

The technology behind autonomous vehicles is progressing towards greater utility and it makes sense that haulage vehicles represent the primary source of demand considering the high cost of fuel, personnel and regulations. It represents an additional example of the deflationary role technology has and the benefits that accrue to consumers as a result. 



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May 26 2016

Commentary by David Fuller

Germany and the U.S. Have Different Ideas About Energy

Here is the opening of this topical article from Bloomberg:

The share of Germany's electricity generated from renewable sources has tripled during the past decade, to 30.1 percent. That's impressive, especially when compared with what has happened in the U.S.

On the other hand, the percentage of Germany's electricity generated by burning coal isn't all that much lower than it was a decade ago, and is higher than it was in 2010. In the U.S., coal's share has been falling a lot in recent years.

Both countries are going through major shifts in how they keep the lights on, but they're very different shifts. Germany is in the midst of a large-scale, government-driven Energy transition toward renewables (the "Energiewende"). The U.S. has also favored renewable Energy with tax incentives and other subsidies, but the effort has been modest compared with Germany's. Here, the big news has been rising natural gas production thanks to fracking, plus pressure on utilities from the government and private groups to shut coal-fired power plants.

So which country is doing a better job of shifting its Energy mix? It depends on your priorities. The Germans have long been uncomfortable with nuclear power, and in 1998 made plans to phase out its use by 2022. There was some hemming and hawing in subsequent years, but after the 2011 Fukushima reactor accident in Japan, the government recommitted to the 2022 phase-out. Since 1998, nuclear power has gone from supplying 27.5 percent of German electricity to 18.1 percent.

David Fuller's view -

The article above does not address critical point regarding average costs of electricity in Germany, the USA and a number of other countries. 

However, another article from OVO Energy shows three separate bar graphs for average Energy costs in over a dozen countries, based on: “How much does electricity cost”, and “Electricity prices relative to purchasing power”.  On average, electricity prices are almost 200 percent higher in Germany than in the USA.  That is why heavy manufacturing firms have been moving some of the factories out of Germany and other European countries, and moving them to the USA and other nations which have lower Energy costs. This will continue to be reflected by comparative GDP for countries over the longer term.  



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May 26 2016

Commentary by Eoin Treacy

Oil Erases Gains After Exceeding $50 for First Time This Year

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

Brent for July settlement decreased 12 cents to $49.62 on the London-based ICE Futures Europe after. The contract earlier climbed as much as 1.6 percent to $50.51. The global benchmark crude was at a 15-cent premium to WTI.

"We’re seeing a steady decline in U.S. production, which is going to continue, and outages around the world," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $4.3 billion. "This doesn’t mean we’re going to continue going higher; a lot may be priced in. It was a lot easier being bullish oil with sub-$40 prices than it is near $50."

U.S. crude production dropped for an 11th week to 8.77 million barrels a day, the Energy Information Administration reported Wednesday. Crude inventories slid by 4.23 million barrels last week, exceeding an expected drop of 2 million. Stockpiles at Cushing, Oklahoma, the delivery point for WTI and the nation’s biggest oil-storage hub, fell by 649,000 barrels.

 

Eoin Treacy's view -

Brent Crude Oil has posted an orderly rebound from its January low and has almost doubled in the process. A progression of higher reaction lows is evident with reactions of between $5 and $6 constituting entry opportunities along the way. A reaction of greater than $7 would be required to question the consistency of the advance. Nevertheless the round $50 area represents a psychological level for many investors so it would not be surprising to see prices pause in this area. 



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May 24 2016

Commentary by David Fuller

Saudi Arabian New Oil Plan Makes OPEC Redundant

Here is the opening of this informative article from Bloomberg:

Saudi Arabia, one of the founders of OPEC, is sounding the group’s death knell.

The world’s biggest crude exporter has already undermined OPEC’s traditional role of managing supply, instead choosing to boost output to snatch market share from higher-cost producers, particularly U.S. shale drillers, and crashing prices in the process.

Now, under the economic plan known as Vision 2030 promoted by the king’s powerful son, Deputy Crown Prince Mohammed bin Salman, the government is signaling it wants to wean the kingdom’s economy off oil revenue, lessening the need to manage prices. Moreover, the planned privatization of Saudi Arabian Oil Co. will make the nation the only member of the Organization of Petroleum Exporting Countries without full ownership of its national oil company.

“The main take-away from Saudi Vision 2030 is that there’s just no role for OPEC,” Seth Kleinman, head of European Energy research at Citigroup Inc. in London, said by phone on May 16. “Or, you can have an OPEC without Saudi Arabia, which just isn’t much of an OPEC.”

The first change of oil ministers in more than 20 years may also recast the country’s relationship with OPEC. The group’s 13 members, which contribute about 40 percent of the world’s supply, gather in Vienna on June 2.

King Salman on May 7 replaced Ali al-Naimi, the most influential voice in OPEC and the architect of current Saudi oil policy. While there’s likely to be considerable continuity, his replacement, Khalid Al-Falih, is an ally of Prince Mohammed, who scuppered a plan al-Naimi had supported for capping production. When producers considered freezing output to curb a global glut in April, the young royal’s view that no deal was possible without Iran prevailed, and talks collapsed.

“We don’t care about oil prices,” Prince Mohammed said in an April 25 interview in Riyadh. “$30 or $70, they are all the same to us. We have our own programs that don’t need high oil prices.” Benchmark Brent crude was trading at $48.11 a barrel on Tuesday at 11:23 a.m. in London.

David Fuller's view -

OPEC will not be missed.  Cartels are power arrangements for maximising profits at everyone else’s expense. 

Oil prices will remain volatile but the current surplus of supply will prevent the strong recovery that some commentators have forecast.  Even as the global economy eventually recovers and the record amounts of crude in storage are gradually reduced by consumption, the advance of technology has enabled more conventional oil to be produced than was imaginable less than a decade ago.  Supplies may be finite but there are also vast quantities of shale oil, largely untouched.   

Meanwhile, technology will continue to hasten declines in costs for renewable forms of Energy, led by solar.  Most countries now have the capacity to lower their Energy costs.  However, Energy prices paid by business and consumers will vary considerably among nations, subject to their willingness to utilise all forms of available Energy, plus their individual taxation policies on these vital resources.    

(See also: OPEC Brings Oil Price War Home in Pursuit of Asia Cash - Oct 20, 2015)



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May 23 2016

Commentary by David Fuller

Why China Is Having So Many Problems Ramping Up Wind Power

China holds the record as the world’s top wind installer, accounting for about a third of the total global installed wind capacity. The United States trails in second place, accounting for just more than 17 percent. But despite its higher total capacity, China still isn’t putting out as much wind-generated electricity as the United States. In other words, it has built the technology, but it just is not able to use it to the max.

New research, published Monday in the journal Nature Energy by researchers from Tsinghua University in Beijing, Harvard University and other U.S. and Chinese universities, examines a handful of factors thought to be responsible for the discrepancy, using a mathematical approach to evaluate the relative importance of each.

Wind turbines can produce only as much Energy as the wind provides — so the researchers were interested in whether differences in wind flow could account for some of China’s problems. But they found that these differences played a relatively small role. Although the United States tends to get superior winds nationwide, the researchers point out that China has approached this issue by promoting more development in the regions with the best wind resources, mostly to its north and northeast.

Instead, the findings suggest that the primary challenges to wind power in China involve lower turbine quality, delayed connections to the grid and grid operators failing to transmit wind power to users in favor of other Energy sources, such as coal — all of which play about equally important roles.

These issues are capable of putting a substantial dent in China’s wind electricity output, it turns out. The researchers noted that in 2012, China’s wind-generated electricity was 39.3 terawatt-hours less than that of the United States.

“This is a large number — larger than the total amount of wind power generated in the United Kingdom in 2015, which can power around 8 million UK homes,” wrote Joanna Lewis, an associate professor and expert on China’s Energy landscape at Georgetown University, in a comment on the new study, also published Monday in Nature Energy.  

To evaluate the quality of turbines in China — which, the authors note, has not been done in previous studies — the researchers used the output from a specific type of wind installation (the GE 2.5 megawatt turbine) as a standard for comparison, concluding that overall turbine quality in the United States is higher than in China. They chalked up the quality issues to a need for “technology catch-up” in domestically produced turbines, which account for most of the installations in the country. The fix in this case is relatively simple: The authors recommend a short-term switch to more international suppliers, while focusing on domestic research and development efforts and technology transfer agreements with other nations in the long term.

David Fuller's view -

Credit to China for being the world’s fastest developing economy, even as it struggles with monumental transformational challenges, which it is also attempting to resolve in record time. 

This item continues in the Subscriber’s Area.



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May 20 2016

Commentary by Eoin Treacy

What you should know about China's new energy vehicle (NEV) market

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

About two-thirds of Chinese cities exceed the air pollution limits specified by the Environmental Air Quality Standards, according to China’s State Information Center. Rapid increase in internal combustion engine (ICE) vehicle ownership and the consequent traffic congestion, especially in large Chinese cities, are perceived to contribute significantly to carbon dioxide and other harmful gas emissions, and the level of inhalable particulate matter (PM). This makes China one of the most polluted countries in the world.

To curb environmental pollution and improve air quality, various countries have implemented or tightened policies to gradually reduce fuel consumption and/or harmful gas emission. China also has tightened requirements for emission and fuel consumption. Since the country had a slower start in emission controls (Figure 6), it should be one of the fastest to tighten emission controls to catch up with developed countries (e.g. the EU and Japan) (Figure 7).
While countries have multiple means to lower auto emission, e.g. diesel adoption and using conventional hybrid engine technologies, China has placed a greater emphasis on using electric vehicle (EV) or plug-in electric vehicle (PHEV) technologies. To this effect, the State Council in 2012 issued a roadmap for China’s NEV industry development, The 2012-2020

Development Plan for Fuel-efficient and New Energy Vehicle Industry. 
According to the plan, the government targets an accumulated NEV (including EVs and PHEVs) sales volume of 500k units by 2015 and 5m units by 2020E, with an annual NEV production capacity of 2m units by 2020E. Despite rapid growth in NEV sales volume in 2012-14, the absolute sales volume was meager in China, making up less than 0.2% of its vehicle sales during the period and falling way short of its 2015 target ownership level. However, NEV sales catapulted in 2015 at a 3.4x YoY growth rate and made up 1.3% of China vehicle sales (Figure 8). Aggregate NEV sales also approached closer the 2015 target NEV fleet size. In our view, soaring demand for NEVs in China is fueled by massive government subsidies and policy support (to be discussed in the next section).

 

Eoin Treacy's view -

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

China has a massive pollution problem and perhaps more importantly it is now a political liability as an increasingly vocal middle class demand a healthier standard of living. Additionally China’s geopolitical considerations are never far from the minds of its leadership. The fact China does not have the domestic Energy resources necessary to fuel its economic growth represents a challenge for policy markets. 



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May 10 2016

Commentary by Eoin Treacy

Oil Rises From Two-Week Low Amid Libya, Nigeria Supply Fears

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

Oil rose from a two-week low on concern that supplies from Nigeria and Libya, holders of Africa’s largest crude reserves, will be disrupted.

Futures advanced 2.8 percent in New York. Royal Dutch Shell Plc and Chevron Corp. are evacuating workers from the Niger Delta because of deteriorating security, a union official said.
In Libya, some fields will be forced to halt output unless a port blockade is lifted, according to the National Oil Corp.

Canada’s oil-sands companies curbed supply as wildfires ripped across Northern Alberta last week. Gains accelerated as global equities rose.

"The market is getting support from the disruption in Canadian oil sands production and increased threats to output in the Niger Delta," said Gene McGillian, a senior analyst and broker at Tradition Energy in Stamford, Connecticut.

"The underlying fundamentals remain weak. If not for supply disruptions and the decline in U.S. production, prices would be lower."

Crude has rebounded from a 12-year low earlier this year on signs the global oversupply will ease as non-OPEC output declines and regional supply faces threats in Africa and Canada.

 

Eoin Treacy's view -

Oil prices have been the subject of a great deal of media coverage over the last few months not least because of Saudi Arabia’s court politics. There are so many moving parts to this market that we can really only be guided by the price action as an arbiter of what people are doing with their money. 



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May 09 2016

Commentary by David Fuller

After 20 Years, OPEC Bids Farewell to Saudi Arabia Oil Chief

Here is the opening of this topical article from Bloomberg:

Saudi Arabian Oil Minister Ali al-Naimi, the architect of the 2014 switch in OPEC policy that’s since roiled the Energy market, companies and entire economies from Mexico to Nigeria, is leaving his post.

An 80-year-old who rose from modest Bedouin roots, al-Naimi headed the ministry for almost 21 years, steering the world’s largest crude exporter through wild price swings, regional wars, technological progress and the rise of climate change as a key policy concern.

“During my seven decades in the industry, I’ve seen oil at under $2 a barrel and $147, and much volatility in between,” al-Naimi told a gathering of the who’s who of the American oil industry in February in Houston. “I’ve witnessed gluts and scarcity. I’ve seen multiple booms and busts.”

The departure of al-Naimi, who for years could move markets just by uttering a few words, is the latest sign of how the country’s young Deputy Crown Prince Mohammed bin Salman is stamping his authority over oil policy. Khalid Al-Falih, chairman of Saudi Arabian Oil Co., the state-owned producer, will replace him as minister of Energy, industry and mineral resources. Al-Falih is known to be close to King Salman and to Prince Mohammed.

“Khalid has been integral to the current oil policy of Saudi Arabia and has worked very closely with the deputy crown prince,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University in New York and a former White House oil official.

While al-Naimi enjoyed a relatively free hand to implement oil policy under King Fahd and King Abdullah, his room for maneuver seemed to have narrowed since last year’s accession to power by King Salman and the growing influence of his 30-something son, Prince Mohammed.

At the April 17 meeting in Doha where producers discussed a possible production freeze to shore up prices, al-Naimi lacked authority to complete a deal, according to his Russian and Venezuelan counterparts. The view of Prince Mohammed, who had insisted that no accord was possible without Iran, eventually prevailed and the talks collapsed.

David Fuller's view -

All change as Deputy Crown Prince Mohammed bin Salman ups the stakes in this war of attrition.  Consumers and oil importing countries will be the long-term beneficiaries.   



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May 09 2016

Commentary by Eoin Treacy

Lithium 101

Thanks to a subscriber for this comprehensive heavyweight 170-page report on lithium. If you have questions on the lithium sector the chances are they will be answered by this report. Here is a section: 

Global lithium S&D analysis highlights opportunity for high-quality assets
The emergence of the Electric Vehicle and Energy Storage markets is being driven by a global desire to reduce carbon emissions and break away from traditional infrastructure networks. This shift in Energy use is supported by the improving economics of lithium-ion batteries. Global battery consumption is set to increase 5x over the next 10 years, placing pressure on the battery supply chain & lithium market. We expect global lithium demand will increase from 181kt Lithium Carbonate Equivalent (LCE) in 2015 to 535kt LCE by 2025. In this Lithium 101 report, we analyse key demand drivers and identify the lithium players best-positioned to capitalise on the emerging battery thematic. 

Global lithium demand to triple over the next 10 years
The dramatic fall in lithium-ion costs over the last five years from US$900/kWh to US$225/kWh has improved the economics of Electric Vehicles and Energy Storage products as well as opening up new demand markets. Global battery consumption has increased 80% in two years to 70GWh in 2015, of which EV accounted for 35%. We expect global battery demand will reach 210GWh in 2018 across Electric Vehicles, Energy Storage & traditional markets. By 2025, global battery consumption should exceed 535GWh. This has major impacts on lithium. Global demand increased to 184kt LCE in 2015 (+18%), leading to a market deficit and rapid price increases. We expect lithium demand will reach 280kt LCE by 2018 (+18% 3-year CAGR) and 535kt LCE by 2025 (+11% CAGR). 

Supply late to respond but wave of projects coming; prices are coming down 
Global lithium production was 171kt LCE in 2015, with 83% of supply from four producers: Albemarle, SQM, FMC and Sichuan Tianqi. Supply has not responded fast enough to demand, and recent price hikes have incentivized new assets to enter the market. Orocobre (17.5ktpa), Mt. Marion (27ktpa), Mt. Cattlin (13ktpa), La Negra (20ktpa), Chinese restarts (17ktpa) and production creep should take supply to 280kt LCE by 2018, in line with demand. While the market will be in deficit in 2016, it should rebalance by mid-2017, which should see pricing normalize. Our lithium price forecasts are on page 9.

 

Eoin Treacy's view -

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

The cost of lithium ion batteries falling rapidly and the fact this is occurring at the same time solar cells costs have been trending lower is a major incentive for installations of both technologies; increasingly in parallel. With costs coming down and technology improving growth in demand is a major consideration as factories achieve scale and miners invest in additional supply. 



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May 05 2016

Commentary by Eoin Treacy

Negative interest rates are the dumbest idea ever

This interview of Jeff Gundlach by Christoph Gisiger for Finanz und Wirtschaft may be of interest to subscribers. Here is a section:

Energy companies are playing an important role in the junk bond sector. What would oil at $ 38 mean for the credit markets?

Just like oil, the high yield market has enjoyed the easy rally. I think it’s basically over. I don’t see how you are supposed to be all fond off high yield bonds, since they are facing enormous fundamental problems. I thought people would learn their lesson but the issuance in the years 2013/14 was vastly worse than the issuance in 2006/07. Also, in the bank loan market covenant lite issuance rose to 40% in 2006/07. In this cycle it climbed to 75%. The leverage in the high yield bond market is enormous and you’re about to have a substantial increase in defaults. I wouldn’t be surprised if the cumulative default rate in the next five years were going to be the highest in the history of the high yield bond market.

What would be the consequences of that?
We are now in a culture of default. There is no stigma about defaulting anymore. During the housing crash, homeowners walked away from their mortgages. That was the beginning of a massive tolerance of default. Today, people talk about Puerto Rico defaulting like it’s nothing. But if Puerto Rico defaults why won’t some clever person in Illinois say: «Let’s default, too! » Constitutionally, Illinois is not allowed to default, but Puerto Rico wasn’t either. For Illinois it just seems impossible to pay their pension obligations. And then, what about Houston, what about Chicago, what about Connecticut? I am surprised that people have lost their focus on the enormity of the debt problem. Remember, in 2010 and 2011 there was such a laser focus on the debt ceiling in the US and we were worried about Greece. Nobody is worried anymore. People are distracted by this negative interest rate experiment. 

 

Eoin Treacy's view -

The first time I visited Boston was about four years ago and there was a sign from Prudential above the Charles which proclaimed “We have $1 trillion under management”. That’s an impressive number but what popped into my head was “What do they own?” The answer of course is that a great deal of that money is invested in bonds. In fact regulators insist conservative portfolios, aimed at the pensions market, have to own bonds in order to ensure some degree of security that future liabilities can be met. The fact bonds have been in a 35-year bull market has only bolstered the sector’s “risk free” credentials. 



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May 04 2016

Commentary by Eoin Treacy

Gasoline Demand Is A Red Herring For The Oil Market

Thanks to a subscriber for this article by Art Berman covering US gasoline demand. Here is a section:

Meanwhile, net gasoline exports are at record high levels. Exports have increased 1,443 kbpd since June 2005.

So, consumption has increased but remains far below pre-2012 levels. Production is again approaching earlier peak levels but most of the increased volume is being exported. The belief that U.S. consumption is approaching record highs is simply not true.

Americans Are Driving More But Using A Lot Less Gasoline

Americans are driving more than ever before. Vehicle miles traveled (VMT) reached an all-time high of 3.15 trillion miles in February 2016 (Figure 2).

VMT have increased 97 billion miles per month (3%) since the beginning of 2015 and gasoline sales have increased 187 kbpd (2%). The rates of increase are not proportional.

For example, VMT was fairly flat from mid-2011 until oil prices collapsed in September 2014 yet gasoline sales fell more than 1 million barrels per day during the same period. Americans traveled the same number of miles but used a lot less gasoline. Even with the VMT increase since 2015, sales are still 539 kbpd less than in January 2009.

 

Eoin Treacy's view -

Generally speaking Energy demand represents a constant long-term growth trajectory because so much of the global economy depends on Energy consumption to fuel growth. However the evolution of electric and CNG vehicles, as well as increasingly stringent emissions regulations reflect an additional consideration that was not so much of a factor previously.



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April 29 2016

Commentary by Eoin Treacy

Commodities Overtake Stocks, Bonds With Best Rally Since 2010

This article by Marvin G. Perez for Bloomberg may be of interest to subscribers. Here is a section: 

The gains come after five straight years of annual losses when slowing Chinese demand and rising output produced a global supply overhang for most commodities. The rout hurt producers including Exxon Mobil Corp., Freeport-McMoRan Inc., Glencore Plc and Anglo American Plc, who boosted production following a decade-long so-called super cycle of rising consumption and higher prices.

“I believe with what we’ve witnessed early in 2016 will be the trough for the commodity markets,” Albanese said on a conference call after Vedanta reported quarterly earnings.

Oil prices in New York are up about 19 percent this month in New York, the largest increase since April 2015. U.S. crude output declined for a seventh week, according to data Wednesday from the Energy Information Administration. Futures traded at $45.60 at 11:45 a.m. on the New York Mercantile Exchange.

 

Eoin Treacy's view -

Crude Oil is by far the largest, most liquid commodity market and represents a significant cost in the production and transportation of other commodities. The falling cost of Energy was a major enabler for marginal producers remaining in business so the subsequent rally has been a catalyst for increased interest right across the commodity spectrum. 



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April 28 2016

Commentary by David Fuller

The Biggest Windmills Now Make Jumbo Jets Look Tiny

Here is the opening of this informative article from Bloomberg:

 Often derided as a blot on rural landscapes, wind turbines got bigger and stronger than ever anyway. The next generation are even larger and designed to withstand an Arctic battering. 

The granddaddy of them all is a machine with rotors that cut a 164 meter (538 foot) swath made by a Vestas Wind Systems venture with Mitsubishi Heavy Industries. A single blade is 80 meters, about the entire wingspan of an Airbus A380 jumbo jet. In the intensely competitive wind turbine business, it’s rare for executives to allow a close-up look of what they’re developing, lest they tip off rivals. Vestas allowed Bloomberg News to visit and photograph the prototype units this month.

As they got bigger, the units became more efficient, boosting global installations 23 percent last year to a record 63.5 gigawatts, which at full tilt would be about as much as what flows from 63 nuclear reactors. Wind is now the most installed form of low-carbon Energy. While few people outside the industry noticed, the trend lifted shares and profit of manufacturers from their crash during the financial crisis. Vestas is due to report its fifth consecutive increase in quarterly profit on Friday, overcoming a slump that forced it to cut 3,000 jobs since 2011.

Even the plunge in crude prices since  2014 has failed to derail industry growth.

“The doubling of turbine size this decade will allow wind farms in 2020 to use half the number of turbines compared to 2010,” said Tom Harries, an industry analyst at Bloomberg New Energy Finance. “This means fewer foundations, less cabling and simpler installation -- all key in slashing costs for the industry.”

The average turbine installed in Europe was 4.1 megawatts last year, 28 percent larger than in 2010, according to the London-based researcher, which expects 6.8 megawatts to be the norm by 2020. Harries said Siemens has hinted it’s working on a 10 megawatt turbine.

Standing in northern Denmark, where fjords cut through flat farmland, MHI Vestas Offshore Wind has erected the world's most powerful turbine. The turbine produces 8 megawatts of power, enough for about 4,000 homes. It could challenge the lead in offshore wind accrued by Siemens, which has almost two-thirds of installed capacity, according to BNEF. MHI Vestas is in second place, with 19 percent.

A Siemens spokesman said a 7-megawatt turbine the company is working on has a “track record of reliability” that will reduce costs for customers. It won its biggest contract for the machine on Wednesday from the Spanish utility Iberdrola, which will buy 102 turbines valued at as much as 825 million pounds ($1.2 billion).

The 80-meter blades of the MHI Vestas V164 make the machine almost as high as the Times Square Tower in New York, and are so large that they were “a nightmare” to transport on narrow country roads, Jens Tommerup, chief executive officer of the venture, said in an interview. This prototype is built for use offshore and has been tested on land since January 2014 at the wind turbine field in Osterlid, managed by the Technical University of Denmark. The goal is to spot faults before they enter service.

David Fuller's view -

As with all technologies, windmills are becoming more efficient, which is obviously very good in terms of the Energy produced.  Aesthetically, I do not like them.  They remind me of the invasion machines from H.G. Wells memorable science fiction novel: The War of The Worlds, first serialised in 1897.  If you live within earshot of a windmill the effects can be very disturbing.  Nevertheless, we will see more of them around the globe because their technology is improving and they are helping us to inch closer to a world in which our Energy is mainly of the renewable variety.   



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April 27 2016

Commentary by Eoin Treacy

Email of the day on inflation expectations and rates

You've drawn attention to the 12 month T-bill rate a couple of times over the past week. Additionally, it is also very instructive to monitor inflation expectations to gauge what is discounted in terms of the future direction of interest rates. The five-year “breakeven” rate, a market measure of inflation expectations derived from comparing the yield of Treasury Inflation protected bonds (Tips) and conventional Treasuries, has climbed from a low of 0.95% in early February, to 1.56% now. It peaked at 2.4% in October 2012 after reaching an unprecedented minus 0.9% in 2008. 

Movements in Tips have tended to reflect investor expectations about future consumer price inflation, and these have been stoked by the recent rise in oil prices and a weaker dollar, which means higher import prices. In fact, the breakeven rate has been rising in tandem with oil prices since February. Interestingly, the “core” US inflation rate, which strips out the impact of volatile components such as Energy and food, has also been rising. The current buying of Tips reflects a view that the cycle of dollar strength and commodity weakness has come to an end. 

Like you and David, I also think that commodities have bottomed. However, there are no signs of strong underlying demand and inflationary pressures from the real economy at the moment. Furthermore, Janet Yellen, the Fed chair, has cast doubts on the durability of the recent pick-up in core inflation and inflation expectations, arguing that the case for moving cautiously on interest rates was still strong. It is not surprising that she would say that given that the Fed has reduced the likely number of rate rises this year. 

My view is that the US breakeven rate will rise with commodity prices which will push conventional yields up and stock markets down but I don't believe that oil prices, for example, will get anywhere near the previous peak for the reasons discussed by this Service. Thus bond yields too will peak at a much lower level. The collapse in commodity prices in the last few years has distorted valuations in various markets and there will be a ripple effect across the other asset classes.

 

 

Eoin Treacy's view -

Thank you for this thoughtful email and for highlighting breakeven rates which I have not looked at in a while. I watch the 12-month yield because if gives us a good indication of how the bond market is pricing the risk of the Fed raising rates. 



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April 26 2016

Commentary by David Fuller

Saudi Prince Vows Thatcherite Revolution and Escape From Oil

The reform blueprint is inspired by a McKinsey study – Beyond Oil – that laid out how the country can double GDP over the next fifteen years and reinvent itself with a $4 trillion of investment across eight industries, from electrical manufacturing, to cars, healthcare, metals, steel , aluminium smelting, solar power, and most surprisingly tourism. McKinsey warned that half-hearted reform risks disaster, and bankruptcy.   

There is some logic to the Vision2030 plan given Saudi Arabia’s access to cheap Energy. Delivery is another matter. “We have seen these sorts of transition plans before and they never come to much,” said Patrick Dennis from Oxford Economics.

“I don’t think they can pull this off. The riyal peg is grossly overvalued and that makes it even harder. We think market pressures will become overwhelming if there is little evidence of real reform by 2018.”  

Under the plan, Riyadh will sell up to 5pc of the state oil giant Aramco to global investors, and convert the secretive behemoth into a modern company with transparent accounts.

He valued the group at $2 trillion but this figure is plucked out of thin air. Investment funds have demanded a steep discount before buying into partial privatisations of this sort in Russia and other petro-states with a weak rule-of-law, fearing that they may be held hostage to politics.

The aim is to transfer the proceeds into the country’s sovereign wealth fund, using the money to diversify into global investments. These will generate a non-Energy income in the future along the lines of the Norwegian petroleum fund.

It is unclear how this Saudi fund can plausibly reach $3 trillion unless oil rises back above $100 a barrel, and stays there for a long time. The country is currently depleting its foreign exchange reserves by $10bn a month to cover a budget deficit still near 15pc of GDP, drawing down its overseas wealth to fund its military build-up, a war in Yemen and life-support for Egypt, as well as paying state salaries.

The Saudis may have left it too late to break oil dependency in time, especially as renewable Energy reaches parity and the COP21 climate accords signal a move to worldwide carbon pricing. India is already examining plans to switch its entire transport system to electric power.

David Fuller's view -

I hope Prince Mohammad bin Salman succeeds, as that would be best for a degree of stability in the Middle East.  However, I agree with all the reservations in this article above and also others which I have published.  Nevertheless, at least the Prince has ambition, Energy and a plan for dragging his country into the 21st century.  Good luck to him.

This item continues in the Subscriber's Area where a PDF of AE-P's article is also posted.



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April 22 2016

Commentary by David Fuller

San Francisco Passes Law Requiring New Buildings to be Topped With Solar Panels

My thanks to a subscriber for this article from Gizmag.  Here is a section:

San Francisco has passed a law requiring all new buildings below 10 stories to have solar panels installed on their rooftops. It becomes the first major US city to mandate solar panel installations on new constructions and forms part of a wider vision to generate 100 percent of its electricity via renewable Energy.

The Better Roofs Ordinance was passed unanimously by the city's Board of Supervisors, and will apply to new constructions both commercial and residential from January next year, according to the San Francisco Examiner.

"Activating underutilized roof space is a smart and efficient way to promote the use of solar Energy and improve our environment," says Supervisor Scott Wiener, who introduced the legislation in February. "We need to continue to pursue aggressive renewable Energy policies to ensure a sustainable future for our city and our region."

Other governments around the world have adopted similar policies, including the states of Maharashtra and Haryana in India. Dubai also plans to make rooftop solar panels mandatory for all buildings starting in 2030, as part of the Dubai Clean Energy Strategy 2050. More locally, the smaller Californian cities of Lancaster and Sebastopol introduced compulsory rooftop solar panels in 2013.

David Fuller's view -

 

Hardly a month goes by without reports of new developments within the solar industry which increase the variety, flexibility and overall efficiency of these installations.  Our ability to capture and generate power from the sun’s rays is limited only by our imagination.   

  (See also: 3D solar towers offer up to 20 times more power output than traditional flat solar panels, and Solar Panels made three times cheaper and four times more efficient.)



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April 22 2016

Commentary by Eoin Treacy

TerraForm Power Believes It Has Sufficient Liquidity to Operate

This note by Will Daley for Bloomberg may be of interest to subscribers. 

Even if some SUNE obligations are not fulfilled, TERP expects to continue operating

Defaults may now exist under many of TERP’s non-recourse project-debt financing pacts (or such defaults may arise in the future) due to SUNE bankruptcy filing, delays in preparation of audited financial statements

Defaults “are generally curable"; TERP will work with its project lenders to obtain waivers and/or forbearance agreements

No assurances can be given that waivers, forbearance agreements will be obtained

 

Eoin Treacy's view -

SunEdison rallied impressively from its 2012 lows following the adoption of a quickstep leveraged strategy aimed at acquiring or building solar Energy power plants while simultaneously divesting of the completed assets into two MLPs. This saddled the parent with the risk of acquisition and building without holding onto the residual cash flows from a working utility once completed. The strategy was predicated on the rapid pace of solar installations persisting indefinitely. They do not appear to have factored in the role a drop in oil prices would have on that business model. 



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April 20 2016

Commentary by Eoin Treacy

Mining the balance sheets

Thanks to a subscriber for this report from Goldman Sachs dated February 29th. Here is a section:

Our commodities analysts believe that China’s demand for commodities will normalise to a level consistent with its GDP/capita, as the economy transitions from investment-led (i.e. where the government pays) to consumption-led (i.e. where the consumer pays). In short, fewer roads, buildings, bridges and airports, and more cars, air conditions, fridges and the like. This part of an economy’s development is less commodity-intensive, and we expect China’s commodity demand evolution to follow a more conventional path. This suggests a significantly lower level of demand than that seen through 2003-2014.

The implication for the supply-demand balances of the major metals is that without a significant change on the supply-side of the equation, oversupply will widen and prices will fall further

Which brings the argument back to liquidity. We would argue that mines don’t close through choice, but because they have to. Typically, this point comes when a company runs out of funds to meet its obligations (liquidity). We have seen African Minerals and London Mining join and leave the London stock market and their mines close - the capital markets were not prepared to continue to fund losses.

Ultimately, if demand does not return, then the industry’s current position could prove to be something of a holding pattern. Keep producing, drive more productivity and cost reduction and wait for the capital markets to pass judgement when the more weakly positioned companies need to refinance.

Eoin Treacy's view -

The role of Energy prices in the total cost of production for mining operations is a topic that does not appear to be covered by this report. Yet, it is a major consideration for miners and declining oil prices were a key factor in the ability of very marginal operations remaining viable. That is one of the primary reasons why the rebound in oil prices has been a positive catalyst for commodities. 



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April 19 2016

Commentary by David Fuller

Saudis Are Going for the Kill But the Oil Market Is Turning Anyway.

The collapse of OPEC talks with Russia over the weekend makes absolutely no difference to the balance of supply and demand in the global oil markets. The putative freeze in crude output was political eyewash.

Hardly any country in the OPEC cartel is capable of producing more oil. Several are failed states, or sliding into political crises. 

Russia is milking a final burst of production before the depleting pre-Soviet wells of Western Siberia go into slow run-off. Sanctions have stymied its efforts to develop new fields or kick-start shale fracking in the Bazhenov basin.  

Saudi Arabia’s hard-nosed decision to break ranks with its Gulf allies at the meeting in Doha - and with every other OPEC country  - punctures any remaining illusion that there is still a regulating structure in global oil industry. It told us that the cartel no longer exists in any meaningful sense. Beyond that it was irrelevant.

Hedge funds were clearly caught off guard by the outcome since net ‘long’ positions on the futures markets were trading at a record high going into the meeting. Brent crude plunged 7pc to $41 a barrel in early Asian trading, but what is more revealing is how quickly prices recovered.

Market dynamics are changing fast. Output is slipping all over the place: in China, Latin America, Kazakhstan, Algeria, the North Sea. The US shale industry has rolled over, though it has taken far longer than the Saudis expected when they first flooded the market in November 2014. The US Energy Department expects total US output to drop to 8.6m barrels per day (b/d) this year from 9.4m last year.

China is filling up the new sites of its strategic petroleum reserves at a record pace. Its oil imports have jumped to 8m b/d this year from 6.7m in 2015, soaking up a large part of the global glut.  Some is rotating back out again as diesel: most is being consumed in China.

Goldman Sachs says the twin effect of rising demand and supply disruptions across the world is bringing the market back into balance, leading  to a “sustainable deficit” as soon as the third quarter. The inflexion point could come sooner than almost anybody expects if a strike this week in Kuwait drags on as oil workers fight pay cuts. The outage is already costing 1.6m b/d.

Kuwait’s woes are the first taste of how difficult it will be for the petro-sheikhdoms to impose austerity measures or threaten the cradle-to-grave social contracts that keep a lid on dissent across the Gulf.

David Fuller's view -

 

While I had seen this article in The Telegraph and was planning to use it, I also received this email from a subscriber today:

I am sure you have read the above. He is saying precisely what you said many moons ago, but the conclusion is I think somewhat different.

Thanks, and yes, he does have a different conclusion which I will comment on below but first here is the article’s headline from the printed edition:

Saudi Arabia’s strategy has killed Opec – the cartel is now irrelevant

OPEC was rapidly losing control, thanks to technology.  However, the Saudis have hastened this process by flooding the market.  This was always going to be a Pyrrhic victory at best and it cut every oil producers’ revenue much more quickly than was necessary.  They could have kept prices at least $30 to $40 higher for the lengthy medium term by making some marginal supply cutbacks, rather than flooding the markets with oil. 

That opportunity was lost, so what happens next?

This item continues in the Subscriber’s Area, where a PDF of AE-P's article is also posted.



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April 19 2016

Commentary by Eoin Treacy

Australia's Stevens Posits Whether Policy Has Reached Its Limits

This article by Michael Heath for Bloomberg offers a window on the thinking of a major central banker approaching the end of his tenure so with little to lose. Here is a section: 

Australian central bank Governor Glenn Stevens speculated that monetary policy may have reached its limits in spurring economic growth and suggested this could explain why markets are being easily rattled.

“Monetary policy alone hasn’t been, and isn’t, able to generate sustained growth to the extent people desire,” Stevens said in a speech in New York on Tuesday. “Maybe we need to be clearer about what we can’t do. Monetary solutions are for monetary problems. If there are other problems in the underlying working of the economy, central banks won’t be able to solve those.”

The irony here is that Stevens, who has resisted the global movement to further easing and kept his benchmark rate at 2 percent for almost a year, is facing a currency that has reversed course in the past three months and threatened his push to broaden Australia’s growth drivers. He warned in minutes of this month’s policy meeting Tuesday that the Aussie’s appreciation could complicate efforts to rebalance the economy away from mining.

Stevens, who is in the final months of his 10-year stint at the helm of the Reserve Bank of Australia, also questioned in the notes of his speech whether central banks and their unorthodox policies are solely responsible for the decline in long-term interest rates. 

“Monetary policy is not supposed to be able to affect real variables -- like real interest rates -- on a sustained basis,” he said. “Presumably, changes in risk appetite, subdued growth and expectations that growth will continue to be subdued have also played a role in lowering real rates.”

 

Eoin Treacy's view -

The need for Australia to develop additional sources of economic growth outside the resources sector was a major focus of attention while the price of commodities was falling. With the rebound in Energy, industrial resources and soft commodities now underway the urgency of that drive is less pressing. In fact it is likely to act as headwind because the RBA will be less inclined to ease monetary policy when commodities are doing well. 



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April 18 2016

Commentary by David Fuller

Aiming at Iran, Saudi Arabia Mixes Oil Policy With Politics

Here is the opening of this topical article from Bloomberg:

After taking over defense and economic planning, Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman has now stamped his authority over oil policy.

In so doing, the 30-year-old son of King Salman upended the Saudis’ decades-long approach of separating commercial from political considerations. Over the weekend, Saudi officials quashed an agreement among major oil producers in Doha to freeze output due to Iran’s refusal to participate, a sign the regional rivalry is infecting the market.

“Everything at Doha was about politics,” said Yasser Elguindi, an oil analyst at Medley Global Advisors, a consultant that advises large hedge funds.

The change means that everyone exposed to Energy prices, from oil majors such as Exxon Mobil Corp. to traders like Vitol Group BV, will have to heed the opaque politics of the Middle East -- and the House of Saud. With Saudi Arabia and Iran weathering one of their worst diplomatic crises since the Islamic revolution in 1979 installed a Shiite theocracy in Tehran, and both countries taking opposite sides in civil wars in Syria and Yemen, the oil market should brace for a wild ride.

“The fact that Saudi Arabia seems to have blocked the deal is an indicator of how much its oil policy is being driven by the ongoing geopolitical conflict with Iran,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University in New York and a former White House oil official.

David Fuller's view -

This looks like a power play by Deputy Crown Prince Mohammed bin Salman.  Is he just reminding everyone within OPEC that he is in charge?  Does he want them to pressure Iran into line?  It is anyone’s guess and this remains a difficult situation.

The most interesting development concerns what is happening in the markets.

This item continues in the Subscriber’s Area.



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April 12 2016

Commentary by David Fuller

Oil Surge Fuel Stocks to Metals as Demand for Haven Assets Ebbs

Here is the opening of this topical article from Bloomberg:

Oil rallied above $42 a barrel, buoying stocks and commodity prices worldwide amid a revival in optimism over the global economy.

Energy shares in the Standard & Poor’s 500 Index surged the most since February after Russia and Saudi Arabia were said to have forged a deal on freezing oil output. Metals jumped, bolstering the Bloomberg Commodity Index and offsetting the impact of the International Monetary Fund’s warning on global stagnation. The yen fell versus all its major peers, as Treasuries and German bunds slid amid diminished demand for haven investments.

Crude oil is extending its 14 percent climb this year amid prospects a drop in U.S. shale production will help ease a global glut in the commodity. Traders are focused on a meeting in Doha set for April 17, where major producers, including Russia and Saudi Arabia, are due to discuss arresting production. Speculation the oil market could soon find some enduring stability is helping to prop up equities, even as investors brace for what’s projected to be the worst American earnings season since the global financial crisis. The Federal Reserve’s pared timeline for interest-rate increases is also supporting gains.

“There’s continued positive sentiment that is a function of a more dovish Fed as well as continued oil price strength and weakness in the dollar,” said David Spika, the Dallas-based global investment strategist for GuideStone Capital Management. “Oil prices have really been the driver of sentiment, with a high positive correlation.”

David Fuller's view -

While the Doha meeting this Sunday may be only another small step, the reality is that oil producers are still burning through cash reserves at today’s prices.  Oil is no different from any other commodity; less production is the key to higher prices.  Most of this year’s rally to date has come from short covering.  

(For considerably more coverage of industrial commodities and precious metals, please listen to the Audio.)



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April 08 2016

Commentary by Eoin Treacy

Oil Market `Fooled' by Freeze Talks Seen Better Off Gauging U.S.

This article by Sharon Cho and Serene Cheong for Bloomberg may be of interest to subscribers. Here is a section: 

While global producers are “buying time” and waiting for the focus to shift from the oversupply to rising demand, U.S. producers will “absolutely” be the ones driving the potential rebalancing of the oil market, according to Hansen.

“No doubt, because they have the ability to react much quicker to price changes,” he said, referring to U.S. producers. He warned that a price surge to $55 to $60 a barrel may prompt drillers to pump more. Others including Goldman Sachs Group Inc., UBS Group AG and IHS Energy have also said a recovery in crude may sputter once prices go high enough to keep U.S. oil flowing.

After surging to 9.6 million barrels a day last year, the highest level in more than three decades, daily U.S. production has dropped to about 9 million as of early April. Meanwhile, the number of rigs drilling for oil in the U.S. has dropped to the lowest level since 2009.

Still, the market may reach equilibrium in 2017, according to Hansen. The International Energy Agency has warned that investment cuts taking place now because of the Energy downturn increase the possibility of oil-security surprises in the “not-too-distant” future.

 

Eoin Treacy's view -

The USA is an increasingly important swing producer of crude oil which is not a condition many people predicted before last year. Unconventional oil and gas remain gamechangers for the sector and the increasing potency of the US on Energy prices as a supplier rather than just a consumer is a part of that.



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April 07 2016

Commentary by David Fuller

Time to Stop Dancing With Equities on a Live Volcano

Corporate earnings peaked at $1.845 trillion (£1.3 trillion) in the second quarter of 2015, and recessions typically start five to seven quarters after the peak. "We will not be dancing on the volcano like so many others," said Saint-Georges.

If we are lucky it will be a slow denouement with a choppy sideways market going nowhere for another year as the US labour market tightens, and workers at last start to claw back a greater share of the economic pie. 

The owners of capital have had it their way for much of the post-Lehman era, exorbitant beneficiaries of central bank largesse. Now they may have to give a little back to society. Yet this welcome “rotation” spells financial trouble.

Strategists Mislav Matejka and Emmanuel Cau, from JP Morgan, have told clients to prepare for the end of the seven-year bull run, advising them to trim equities gradually and build up a safety buffer in cash. “This is not the stage of the US cycle when one should be buying stocks with a six to 12-month horizon. We recommend using any strength as a selling opportunity,” they said.

Their recent 165-page report on the subject is a sobering read. The price-to-sales ratio (P/S) of US stocks is higher than any time in the sub-prime boom. Share buy-backs are at an historic high in relation to earnings (EBIT). Net debt-to-equity ratios have blown through their historical range.

This is happening despite two quarters of tighter lending by US banks. Spreads on high-yield debt have doubled since 2014, jumping by 300 basis points even after stripping out the Energy bust. The list goes on; the message is clear. “One should be cutting equity weight before the weakness becomes obvious,” they said.

David Fuller's view -

There are a number of good points in this article, inspired by the bearish 165-page report from JPMorgan mentioned above, which I assume Jamie Dimon would have encouraged given his recent comments.

This item continues in the Subscriber’s Area where some conflicting evidence is illustrated and discussed.  A PDF of AE-P’s article is also available.



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April 06 2016

Commentary by Eoin Treacy

The bin-Salman Interview What Does It Mean?

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

The announcement of this meeting has been very supportive for the oil price as it led to a large short covering by financial players, since a deal to freeze production should limit the potential downside in oil prices. Now with the statements by MBS in the Bloomberg interview last week, the outcome of this freeze deal is much more uncertain. In the interview MBS said that Saudi Arabia will only freeze output if Iran and other major producers do so. If all countries agree to freeze production, we’re ready," MBS said . "If there is anyone that decides to raise their production, then we will not reject any opportunity that knocks on our door.” This stands in contrast to prior statements from the Saudi Oil Ministry and from Russia which had suggested that a freeze deal could happen without any commitment from Iran. The market took this statement very negatively for the oil market because Iran has made no indications that they will join the freeze deal and even if they did, most analysts would probably doubt that production from Iran would be frozen anyway.

If Saudi Arabia indeed see any chance that a freeze deal cannot be accomplished then it is relevant to ask the purpose of even arranging the meeting. If a meeting is held and Saudi does not accept a deal without Iran participating then we believe a deal will not happen and if a meeting is held without a successful deal, then the oil price may drop quite significantly on that kind of news. Would that be in Saudi Arabia’s interest. Would MBS like to see a lower price again to inflict even more pain on the other global oil producers and hence set the stage for higher prices later? It seems odd that MBS is not coordinated with the oil ministry in this issue, but could his statement have been meant for domestic politics? And is it not very strange if MBS in the last minute should undermine the Russian effort to achieve this now famous freeze deal? Is this a negotiating trick to achieve something in return from the Russians vs Iran in Syria or other places?

The problem with this statement from MBS is that he outranks everyone else in Saudi when it comes to economic policy as he heads the newly formed Economic Council. This implies that if he actually means what he is saying here, there will be no production freeze deal in Doha, because we are confident that Iran will not take part in any production freeze deal. Before this statement by MBS we were 90% certain that there would be a production freeze deal coming out of the Doha meeting, because why hold this meeting if a freeze is not already agreed? It would, as described above, send the oil price in tailspin if a meeting was arranged and ended up with no agreement. After the MBS statements we see the chances for a freeze deal meaningfully reduced, maybe down to 50%.

If the meeting to hold the freeze deal in Doha is cancelled or if it is held without a successful outcome we would reduce our short term (3-month) price target for Brent which is currently 45 $/b. We would however not do anything with out 6-month target of 55 $/b and our 12-month target for 65 $/b. Our 24-month target (currently 70 $/b) on the other hand may be adjusted slightly higher due to the extra damage that may be inflicted to the supply side of a potential revisit to 25-35 dollar oil prices.

On Monday this week the Russian Energy Minister Alexander Novak however stated that “Russia can conduct extra talks with Saudi Arabia on oil output freeze before the meeting in Doha on April 17th”. Novak also stated that he is confident that an agreement will take place. This suggests that maybe the statements from MBS in the Bloomberg interview last week may have been meant for his domestic audience. Also the Kuwait OPEC governor Nawal Al-Fuzaia said on April 5 that there are indications that oil producing countries in both OPEC and non-OPEC are poised to agree on a production freeze to January levels. This statement seemed to give the market some restated confidence that there could still be a freeze deal in the Doha meeting on April 17th. But nonetheless the MBS interview last week has added a lot more uncertainty to the April 17th meeting than what the oil market would prefer. 

Eoin Treacy's view -

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

Brent crude prices firmed today on positive inventory data but the result of the April 17th meeting between major OPEC and non-OPEC producers is a major consideration for traders.

Saudi Arabia is fighting wars on three fronts and higher oil prices would certainly help with affording this adventurism as well as its highly accommodative domestic social programs. While Iran remains its greatest competitor for regional hegemony and the administration will not wish to give it any advantage, economic factors will probably take precedence. 



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April 05 2016

Commentary by Eoin Treacy

Email of day on the long-term outlook for energy resources

Yer man, while I often feel like I am part of the new old economy. I am not concerned in the near term that electric vehicles will have mass adoption. I am puzzled how the electrical grid will power all these new super cars? Coal which is the worst emitter of GHG's is the primary source of electrical generation in North America and that is being phased out for natural gas as you know. The environmental movement is flawed with hypocrisy and makes no economic sense. In Canada the govt has chosen to demonize the oil and gas industry which funds the majority of our social services and yet we bail out Bombardier and the auto industry. I sound like a grumpy old man.

Eoin Treacy's view -

Thanks for this topical comment to a piece I posted on Friday. It’s been a long time since we shared an apartment in London; when we were both new to London, and I’m glad you’re still in the heat of the action in Calgary. I think everyone finds it hard not to be grumpy when things are not going one’s way at any age. 

This article from the state.com from 2014 estimates that if every car in America was an electric vehicle it would represent only about a 30% increase in electricity demand because electric vehicles are more efficient. 



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April 04 2016

Commentary by David Fuller

Why Your Utility Bill Is Still Rising Even When Power Is So Cheap

Here is the opening of this topical article from Bloomberg:

Record-low costs for power in the U.S. haven’t translated into lower monthly payments for consumers.

As the price of electricity in the eastern U.S. fell by half over the last decade, utilities raised monthly bills for residential customers by 26 percent, according to government data. Consumer advocates say the power companies are using falling electricity costs as cover to raise other charges. Utilities counter that it’s payback for billions of dollars worth of government-mandated improvements to long-neglected infrastructure.

It’s “a good thing that Energy prices have fallen off and allowed the required capital to be installed and be done without impacting the consumer,” said Exelon Corp. Chief Executive Officer Chris Crane in an interview during a conference organized by Bloomberg New Energy Finance in New York on Monday.

Electricity itself makes up about a third of the average utility bill, down from about half just eight years ago, thanks to a flood of cheap fuel, natural gas extracted with fracking from tight-rock formations. The rest of the retail charges are for delivering supplies, including adding enough capacity to handle demand surges.

David Fuller's view -

The too often postponed infrastructure repairs are clearly necessary and obviously not just in the USA.  Imagine how much worse this situation would have been if technological innovation had not led to lower prices for crude oil and natural gas

In another example, Japan still faces higher Energy costs because it understandably closed all its nuclear reactors following the Fukushima meltdown.  They previously provided almost 30 percent of Japan’s electricity.  Japan is increasing its solar and wind power but this currently produces less than 15 percent of its electricity.  Consequently, Japan has had to import more coal, oil and natural gas.  This situation is only just beginning to improve as Japan is gradually reopening some of its nuclear reactors, in what are regarded as geologically safer regions, following additional safety measures.   

Most countries should benefit from lower Energy costs in years ahead as renewables become more efficient, oil and gas prices stay low and new nuclear is used more widely. 

 

 



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April 04 2016

Commentary by Eoin Treacy

We interrupt this rally to bring you...fundamentals

Thanks to a subscriber for this report from Deutsche Bank focusing on the mining sector which may be of interest to subscribers. Here is a section: 

The rally year to date reflects a rotation into sectors benefiting from a weaker US dollar, Chinese stimulus and the oil price rebound more than it reflects the slowly improving fundamentals - and we think each of these positives is now priced in. The sector has re-rated to a P/NPV of 0.86x, in line with the average trough multiple since 2003. It's the same for earnings multiples, where we now forecast a sector 2017e PE of 30x, well above the average trough PE of 9x, and the 17x of the most recent low in May 2015. We prefer Rio at 0.76x P/NPV compared with BHP at 0.92x. We have downgraded Glencore to Hold (0.8x NPV), but prefer it to Anglo (0.6x) given deleveraging progress.

FCF now healthy across the sector and gearing coming down
The 1Q16 commodity price recovery, with the oil price and producer currency weakness early in the quarter, plus continued ‘self-help’, has boosted free cash flow across the sector. 17 of the 19 companies under our coverage are now producing free cash flow after dividends in 2017. FCF yields average 10% for the big four diversified miners and 8.4% for the whole sector next year. Gearing is also reducing: we forecast a drop from 26% in 2015, to 22% in 2016 and 16% in 2017.

Lots for sale, lots of window shopping, no real buying…yet
A few companies are starting to use their balance sheets in selective M&A, but for rich multiples which are too high for most to justify when downwards pressure on long-term commodity prices prevails: today we have cut our LT copper price by 7% to USc300/lb and our LT iron ore price by 14% to US$57/t. There is a lot of window shopping going on, but valuations have run hard very quickly and we think both buyers and quality “for sale” assets remain scarce. 

 

Eoin Treacy's view -

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

The commodities sector was about as unloved as is possible late last year and an impressive short covering rally has taken place over the first quarter. A similar move in oil prices has been the catalyst for renewed interest in miners because somewhat higher Energy prices will have helped to push marginal supply out of the market. 



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March 30 2016

Commentary by David Fuller

Global Longest Bull Run Endures Tumult as Foreigners Return

Here is the opening of this informative article from Bloomberg:

Malaysia’s Energy exports are tumbling, its prime minister is battling corruption allegations and corporate profits are weakening. With all that, the Southeast Asian nation is also home to the world’s most resilient bull market for stocks.

Overseas funds are piling in at the fastest pace in Southeast Asia. Kuala Lumpur’s benchmark equity gauge has more than doubled from its 2008 lows without succumbing to a 20 percent drop. Tan Ming Han says he knows its secret: the lowest volatility among the region’s markets. It’s an environment where a growing army of investors are willing to miss out on the highest highs if that means they also avoid the biggest crashes.

“Sometimes, too much excitement can cause a panic attack -- especially with volatile markets,” said Tan, senior investment manager at Amundi Malaysia. “Boring is sometimes beautiful.”

Sentiment remains stubbornly buoyant in Malaysia, home to some of the region’s highest dividends, as the country’s $166 billion pension fund underpins demand for equities with share purchases. Even after the FTSE Bursa Malaysia KLCI Index climbed 12 percent from a three-year low in August, it trades near the cheapest relative to global equities in almost a decade.

David Fuller's view -

South East Asia’s so-called ‘Little Tiger’ stock markets had been out of favour for a lengthy period but Malaysia’s KLCI (p/e 18.67 & yield 3.04%) bottomed in August 2015 with a big upside weekly key reversal following a plunge to almost 1500.  Currently, there is no evidence that this recovery is over and the 200-day (40-week) MA has turned upwards, although overhead supply is likely to be a headwind at somewhat higher levels.

This item continues in the Subscriber’s Area.



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March 30 2016

Commentary by David Fuller

Eight Things Chinese Money Is Buying in America Right Now

Here is the opening of this informative article from Bloomberg:

Chinese companies, driven by favorable government policies and a desire to gain overseas assets, are on an unprecedented acquisition spree in the U.S. They've announced a record $40.5 billion of U.S. deals this year, already nearly double the amount for all of 2015. Here's a sample of what Chinese money is buying. 

Strategic Hotels & Resorts Inc.'s portfolio includes Four Seasons properties in Austin and Silicon Valley, as well as the Intercontinental Miami and Chicago. China's Anbang Insurance Group Co. is paying about $6.5 billion to buy the hotel group from Blackstone Group LP—just three months after the New York-based private equity firm acquired it.

Anbang is also currently the lead bidder for Starwood Hotels & Resorts Worldwide Inc., after twice topping Marriott International Inc.'s bid. Starwood owns real estate valued at about $4 billion, including the St. Regis in New York. Anbang's latest offer values Starwood at about $14 billion.

General Electric Co. agreed to sell its appliances business to China's Haier Group Co. for $5.4 billion in January—$2 billion more than Electrolux AB had agreed to pay for the business before the deal collapsed amid opposition from the U.S. Justice Department. Haier will need antitrust approval from authorities in the U.S., Mexico, Canada, and Colombia.

Zoomlion Heavy Industry Science & Technology Co., a Chinese industrial machinery manufacturer, is pursuing Westport, Conn.-based cranemaker Terex Corp. After Terex agreed to a merger with Finnish competitor Konecranes Oyj, Zoomlion made an unsolicited counter-bid in January; last week it upped the offer to $31 a share.

China's richest man agreed in January to buy Legendary Entertainment LLC, producer of Godzilla and the Dark Knight trilogy and co-producer of Jurassic World, for as much as $3.5 billion. Wang Jianlin is set to become the first Chinese person to control a Hollywood film company.

David Fuller's view -

 

This is not a repeat of earlier efforts by China’s government, using companies it controlled, to controversially attempt to acquire strategic US assets, from Energy to important high-tech businesses.  Instead, apparently independent Chinese companies and exceptionally wealthy individuals are moving a record $40.5 billion into the US during the first quarter of 2016 alone, by paying over the odds for mostly consumer-related businesses. This looks like the latest effort in China’s difficult transition from a heavy manufacturing economy to one that is driven primarily by consumer demand.   



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March 24 2016

Commentary by David Fuller

Email of the day 1

More on Brussels:

This assessment [see Wednesday’s lead item] does not surprise me. I travel to Brussels several times a year to EU meetings. Much of the city appears to be slowly degenerating with little sign of refurbishment of buildings or infrastructure. New buildings are mostly EU-related. Traffic is awful. The Eurostar station (Brussels-Sud) is from the 19th century and on return home London St Pancras/Kings Cross looks marvelous, with colour, Energy and modernity totally lacking in Brussels. Though Belgium still surprises with very good food and beer!

David Fuller's view -

Subscriber feedback and other thoughts of general interest are always appreciated.

I suspect the food and wine have been good for centuries, a few wars aside, and I hope they are a favourable omen for Brussels’ future.  As for Parcras/Kings Cross, I can remember when they were very rundown and their revival is further evidence of London’s dynamism.  However, this cannot be taken for granted – we have a very important mayoral election on 5th May.   



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March 23 2016

Commentary by David Fuller

The Big Question for This Election: What Makes America Great?

In two months on the road covering the 2016 presidential primaries, I've seen the U.S. going through something of an identity crisis, after decades of dominance. The candidates are talking about what the voters are thinking about: What does it mean for America to be great? 

To a traveler, America's greatness is revealed in simple, visual ways. Everywhere, even in sparse rural areas, there's a healthy bustle of activity. Americans get up early, and they find it hard to keep still. At a Florida intersection, I watched a man expertly juggle a mattress-store sign to attract customers. He might hold the sign for minimum wage, but that's not why he juggles it.

The whole country is never in repose; an Energy runs through it that you won't find anywhere else, and a sense of constant, habitual competition is ever-present. This is the biggest economy in the world, and it feels like it. It feels like a great nation.

To the presidential candidates, however, the issue of greatness is debatable.

David Fuller's view -

America’s most attractive and inspirational quality of the 20th Century, in my opinion, was that in this nation of immigrants people believed that they had the freedom and opportunity to achieve their realistic ambitions.

I believe that was an important key to America’s greatness.    



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March 22 2016

Commentary by Eoin Treacy

Musings from the Oil Patch March 22nd 2016

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

Mr. Burns, a long-time financial journalist and the creator of the “Couch Potato” investment portfolio, authored a column recently pointing out the dilemma faced by retirees who wished to finance their retirements without assuming any risk, or as he titled it, “How to cope with the great yield famine.”

The column, published about two weeks ago, pointed out that the last time anyone earned 6% on a six-month certificate of deposit (CD) was December 2000. The lowest yield on a six-month CD immediately after the dotcom market crash was 1.01% in June 2003. The highest yield on a six-month CD since June 2003 was 5.22% in July 2006. Today, according to Bankrate.com, the highest yield on a six-month CD nationwide is 1.10%, but the vast majority of banks offer less than 0.15%.

He then went on to figure out the retiree’s needs and how much capital was required to meet those needs risk-free. The monthly premium for Medicare Part B is $121.80, or $1,461.60 a year. To earn that much money from a 0.15% CD you would need to keep $974,400 on deposit. For most Americans that is a large sum, but it is not a problem since Social Security deducts the payment from your monthly check.

The official federal poverty level income for a family of two for 2016 is $15,930. To generate that income from a risk-free CD at 0.15% interest, you need to deposit $10,620,000. To finance a poverty-level retirement with a risk-free investment portfolio means you have to maintain $11,594,400 of your assets on deposit in those low-yielding CDs, which would place you among the top 1% of wealthy Americans. Think about that. If you don’t want to accept financial risk in your retirement, you must be in the top group of Americans in terms of wealth. The rich are poor! In order to keep our world spinning and boost its growth rate, there are no risk-free avenues available for ordinary Americans. Recognition of this condition, coupled with the stock market’s volatility, may be fuelling a portion of the anger we are seeing among the electorate today. This situation will also be an anchor on how fast our Energy needs grow.

 

Eoin Treacy's view -

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

The impact on savers of the near zero and increasingly negative interest rates we are now presented with represents a major challenge for savers. A subscriber left this comment on a piece I posted Friday and I believe it is well worth repeating here:

“I find it very concerning that central bankers, like finance ministers, never discuss the distortions produced in the future savings markets by the NIRPs.

“Pension funds and insurance companies are suffering even more than banks, but no one is discussing this. It seems to me that in the medium term the dysfunction of markets under NIRP will continue to produce counterproductive effects on risk appetite, which will negate the aim to increase risk acceptance by investment in business assets (as opposed to just paper).”

 



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March 15 2016

Commentary by Eoin Treacy

Email of the day on next generation batteries

Have you seen this :- World First: Graphene Battery Plant Gears up for 2016 Commercial Production Spanish company Graphenano has introduced a graphene polymer battery it says could allow electric vehicles to have a maximum range of up to 497 miles. The battery can also be charged in just a few minutes, is not prone to explosions like lithium batteries, and can charge faster than a standard lithium ion battery by a factor of 33. The batteries are expected to be manufactured in Yecla, Spain and will have an Energy density of 1,000 Wh/kg. For perspective, conventional lithium batteries have an average Energy density of just 180 Wh/kg. To top it all off, the battery does not exhibit memory effect, a phenomenon in which charging a battery multiple times lowers its maximum charge

Eoin Treacy's view -

Thank you for this snippet and no I had not previously heard of Graphenano but it captured my attention because it sounds almost too good to be true. 



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March 11 2016

Commentary by Eoin Treacy

MLP Investors Face Tax Hit On Top of Big Losses

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

The issue stems from the fact that Linn is taxed as a master limited partnership, or MLP, rather than a corporation, a popular arrangement among Energy companies when oil prices were soaring.
In good times, that status allowed income to flow straight through to investors without the Internal Revenue Service taking a cut at the corporate level. Linn distributed some billions of dollars of cash to investors as U.S. Energy production boomed.

But the collapse in oil and gas prices has exposed the structure’s double-sided risk: Investors with potentially worthless shares—or units, as they are known—may nonetheless owe taxes on debt that is forgiven in a bankruptcy or an out-of-court restructuring.

That is because MLPs pay no corporate taxes and instead pass certain tax burdens, along with a share of their income, to investors. Debt forgiven in a restructuring counts as noncash income, or “cancellation of debt income,” which creates a tax liability for investors without an associated cash distribution.

The roughly 60% plunge in oil prices since the summer of 2014 already has sent a number of Energy companies into bankruptcy court, and more are expected to follow. Fitch Ratings expects the default rate for U.S. high-yield Energy bonds to rise to 11% by the end of the year, compared with 1.5% for bonds outside the battered Energy and metals-and-mining sectors.

A gusher of bankruptcies and debt restructurings could be especially painful for MLP investors, most of whom are individual investors. Big institutions like BlackRock Inc., as well as many endowments and foreign institutions, can’t legally own partnership units or don’t want to, given their complexity.

 

Eoin Treacy's view -

I’ve given talks and conducted The Chart Seminar all over the world but I was never asked about the tax implication of a decision to sell until I came to the USA. The tax code is complex, rates are high and sometimes tax savings can reside where you might not expect them such as in trusts. The details described above highlight some of the reasons why the MLP sector underperformed so acutely while oil prices were falling but with such a panic to get out, is the bad news already in the price?



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March 09 2016

Commentary by Eoin Treacy

US agency reaches 'holy grail' of battery storage sought by Elon Musk and Gates

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

But the biggest breakthrough is in the area of Energy storage. “I think that’s one area where we have delivered big time,” Williams told the Guardian.

The battery storage systems developed with Arpa-E’s support are on the verge of transforming America’s electrical grid, a transformation that could unfold within the next five to 10 years, Williams said.

The most promising developments are in the realm of large-scale Energy storage systems, which electricity companies need to put in place to bring more solar and wind power on to the grid.

She said projects funded by Arpa-E had the potential to transform utility-scale storage, and expand the use of micro-grids by the military and for disaster relief. Projects were also developing faster and more efficient super conductors, and relying on new materials beyond current lithium-ion batteries.

The companies incubated at Arpa-E have developed new designs for batteries, and new chemistries, which are rapidly bringing down the costs of Energy storage, she said.
“Our battery teams have developed new approaches to grid-scale batteries and moved them out,” Williams said. Three companies now have batteries on the market, selling grid-scale and back-up batteries. Half a dozen other companies are developing new batteries, she added.

 

Eoin Treacy's view -

Battery technology is the missing link in the supply chain between generating electricity via wind and solar and meeting requirements for base load. Until the last decade investment in batteries was puny compared to what has gone into other sectors. However the high oil price environment created an incentive to develop more efficient ways of generating and storing Energy. Some of that is now coming to fruition and it is likely to have a transformative effect on electricity costs and the potential for electric cars. 



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March 08 2016

Commentary by Eoin Treacy

Musings From The Oil Patch March 8th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever thoughtful report for PPHB which may be of interest. Here is a section:

To demonstrate how dramatically the outlook for petroleum demand growth has changed, we compared common year demand estimates from the 2004 and 2015 AEO forecasts and found the following data points: 2015 – 43.94 vs. 32.76 QBtus; 2020 – 46.97 vs. 33.16 QBtus; and for 2025 – 50.42 vs. 32.64 QBtus. These represent forecast differences between the 2004 and 2015 AEO forecasts of -25.4%, -29.4% and -35.3%, respectively. 

It is our belief that this dramatically altered long-term outlook for petroleum is at the heart of the Saudi Arabian oil strategy. High oil prices have hurt demand growth prospects while at the same time encouraging the development of high-cost, long-lived petroleum resources. These high oil prices have provided an umbrella for expensive alternative Energy sources and, given the global embrace of climate change and anti-fossil fuel policies and mandates, made petroleum’s long-term outlook even less rosy. In the U.S. where producers could sell everything they produced, few gave any thought to the shifting demand outlook globally and the role that domestic production growth would play in altering that outlook. 

Recognizing that the outlook for petroleum demand is lower requires a mindset change for oil company CEOs; something we sense is just now beginning to sink in. While oil CEOs talk about lowered production growth forecasts as a result of low oil prices and the forced reductions in their capital spending plans, recognition that there are substantial low-cost oil reserves in the world held by countries desperate for income is beginning to resonate. Zero production growth in a declining demand business may not be the worst outcome for oil companies. Without production volume growth, maximizing profitability becomes even more important. Determining how to organize and manage a company in this new black-swan-world of shrinking oil demand will be the real challenge. 

Eoin Treacy's view -

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

I have not previously seen historic figures for how expectations of demand growth have inflated over the last decade. We know that China’s booming steel industry encouraged new mines to open and existing iron-ore miners to increase supply. The exact same thing happened in the Energy market and the problem now is that those demand growth forecasts have to be recast in the light of China’s moderating growth rate and the increasingly efficient use of Energy on a global basis. 



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March 07 2016

Commentary by David Fuller

Has This Commodity Rally Got Legs?

The commodity bulls are now roaring after Monday's near 20-per-cent jump in the price of iron ore, which sent shares in miners such as BHP Billiton, Rio Tinto and Fortescue Metals sharply higher.

The euphoric mood continued in trading overnight, helping to push oil prices higher. Brent crude, the global benchmark, climbed 5.5 per cent to a 2016 peak above $US40 a barrel. It is now 50 per cent above the 12-year low it hit in intraday trading in January. US West Texas Intermediate joined in the recovery, surging 5.5 per cent to $US37.90.

Oil prices have climbed on hopes the major oil producers will strike a deal to limit supply after Russia, Saudi Arabia, Venezuela and Qatar agreed last month to freeze output at January levels. These hopes were bolstered overnight, after the United Arab Emirate's Energy minister said that current prices meant it made no sense for any country to increase production.

"This is all good news for balancing the market", Suhail bin Mohammed al-Mazrouei told reporters. "We just need to be patient."

But not everyone is convinced that commodity prices will continue their upward surge. Some analysts argue that price gains in industrial metals, such as iron ore, are largely dependent on hopes that China will introduce more aggressive policies to stimulate growth.

The bulls are hoping that, faced with slowing economic activity, Beijing will abandon its efforts to steer its economy away from heavy industry, and towards services. They're betting that China will boost spending on major infrastructure projects, which will boost demand for steel (China accounted for about half of the world's steel output last year).

But more bearish analysts point out that iron ore prices will quickly drop if Beijing's efforts to boost growth fall short of expectations.

David Fuller's view -

In grappling with this question we will continue to hear a great deal about China, which is the world’s largest consumer of many commodities.  Sure, China is obviously important but with commodities supply is always the most significant variable. 

Will commodity exporters increase production rapidly now that industrial resources are off their lows?  Well, some may but that is the equivalent of sitting on the wrong end of the branch which you are sawing off the tree. 

Meanwhile, the cure for low commodity prices is low prices, which encourage increased consumption at a time when all-important supply is also decreasing. 
 



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March 04 2016

Commentary by David Fuller

Oil Companies Turn to Solar

Here is a latter section of this interesting and informative article by Nick Hodge of Outsider Club:

But perhaps the most convincing evidence that solar is here and it's competitive is that oil companies are now using it to make oil extraction cheaper and cleaner.

Late last year news began coming out that the oil industry was turning to solar to help it pump crude.

Royal Dutch Shell (NYSE: RDS), Total (NYSE: TOT), the Kuwait State Oil Company, and Oman's sovereign wealth fund have teamed up to create a solar company called GlassPoint.

It is building a massive solar installation in the Oman desert to create steam to help pump oil. That one project will save more carbon than all electric cars sold so far by Tesla (NASDAQ: TSLA) and Toyota (NYSE: TM) combined.

What's more, using solar to help power an oilfield makes total economic sense. Up to 60% of the operating expenses at heavy oil fields are for fuel purchases.

So at a time when oil companies are cutting costs — curtailing exploration and laying off tens of thousands of workers — they are still interested in spending for projects that can reduce costs.

And that means solar.

Petroleum Development Oman, which is partly backing GlassPoint, accounts for 70% of the nation's oil production and 100% of its gas supply.

It is highly indicative that it is turning to solar to complement its fossil fuel operations.

This is only going to continue through 2030, as solar continues its march toward becoming the world's dominant source of electricity.

As that happens, the companies that improve solar technology and reduce its costs are going to be the biggest winners for investors.

 

David Fuller's view -

Fuller Treacy Money has long maintained that solar power would dominate not only renewable Energy but also prove to be more successful than any fossil fuel, due to its unique advantages.

This item continues in the Subscriber’s Area, where a PDF of the article is also posted.



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March 04 2016

Commentary by Eoin Treacy

Don't panic about high-yield defaults

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

An alternate view is that US high yield, with or without the commodities sector, remains within the trading range we have seen since 2010. The European market is similar. In other words, high yield has been behaving much as it has throughout the post-financial crisis period which has witnessed several episodes of major market stress. These include Greece in 2010, the US rating downgrade in 2011, the eurozone crisis in 2011/12, and the China equity meltdown in August 2015. During these periods, high-yield spreads gapped out as investors feared a re-run of the 2008-09 experience when spreads and defaults soared. 

This time around, things are a bit different in that spreads have widened on account of macro concerns combined with genuinely higher defaults in the Energy and materials sectors (Figure 2). Investors must distinguish these two issues. Sure, macro concerns do keep mounting – prominent on the radar recently are US growth slowdown, China devaluation fears, slumping commodity prices, health of emerging market economies, European banks, the shift to negative interest rates and Brexit. But the view on the broader highyield market should have very little to do with the commodity cycle or the longevity of the recovery. Rather, it should have everything to do with whether one believes policymakers will keep muddling through or if they are about to make an error that plunges the global economy into another 2008-09 crash. 

If one believes policymakers will not make a significant blunder then high-yield is probably not on the verge of a default debacle, even if macro risks are on the rise. Even in the event of a major crisis, it is likely defaults will not reach the levels of recent cycles. Looking closely at past credit cycles provides some useful lessons.

Since 1970 there have been four major default cycles and one minor one in the mid-1980s (Figure 3). Note that while the default rate has averaged about four per cent over these 45 years, it is not a mean-reverting relationship – default rates are either low or high. Some have warned that hitting four per cent is an ominous sign beyond which defaults will likely keep rising much higher. However, the four per cent default level was breached thrice in the 1980s and again in 2012 without significant further increases. There is nothing sacrosanct or cataclysmic about hitting four per cent; every cycle has to be evaluated on its merits.

The business and default cycles of the past 45 years have mostly shared two broad characteristics – the Treasury yield curve has flattened and inverted and there has been explosive growth in corporate debt other than bonds. In the past three cycles a third factor has been asset bubble conditions in one or more sectors which caused these cycles to be particularly vicious. None of these three conditions conclusively exists now. 

Eoin Treacy's view -

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

This is one of the most bullish reports on bonds I’ve seen in quite a while and thought subscribers would benefit from a fresh perspective. One argument I have also seen proposed which makes sense is that while low oil prices have been a harbinger of defaults in the Energy sector, the rebound will remove some of the pressure so the pace of defaults might be lower that currently priced in. 

 



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March 02 2016

Commentary by David Fuller

Shale Oil Is Not the Only Nemesis for Saudi Arabia

Here is the opening for this interesting article from Bloomberg:

Even if Saudi Arabia wins its struggle with U.S. shale producers over market share, it will face a new billion-barrel adversary.

It won’t be regional nemesis Iran, a resurgent Iraq or long-standing competitor Russia. The answer will be more prosaic: Even when overproduction ends, a stockpile surplus of more than 1 billion barrels built up since 2014 will remain, weighing on prices. Inventories will keep accumulating until the end of 2017, the International Energy Agency forecasts, and clearing the glut could take years.

“We may get to the end of the year, and even though supply and demand are in balance, the market shrugs and says ‘So what?’ because it’s waiting for proof of inventory draw-downs,” said Mike Wittner, head of oil markets at Societe Generale SA in New York. “Moving from stock-builds to balance might not be enough.”

Since it was unveiled in late 2014, Saudi Arabia’s strategy to bring the world’s oversupplied oil markets back into balance by squeezing competitors with lower prices has proved grueling, dragging crude down to less than $30 a barrel last month. While a gradual decline in U.S. production signals supply will stop growing, the second act of the process may prove the longest as stockpiles slowly contract.

For a historical precedent, Goldman Sachs Group Inc. points to the oil glut that developed in 1998 to 1999 as demand plunged in the wake of the Asian financial crisis. Crude prices kept falling even as the Organization of Petroleum Exporting Countries made output cuts in March and then June of 1998, slipping below $10 a barrel in London in December of that year. It wasn’t until stockpiles in developed economies started dropping in early 1999 that the recovery took shape.

David Fuller's view -

This is a useful reminder and I think we should always keep an eye on stockpiles, wherever possible, for any commodity of interest. 

I maintain that Saudi Arabia cannot achieve more than a pyrrhic victory from its efforts to curtail global production of crude oil through oversupply.  Moreover, this crude strategy (pun intended) will have made more long-term adversaries than friends.

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February 26 2016

Commentary by David Fuller

Energy Price War Spreads to Gas as US Shale Storms Global Market, Stalks Russia

The US has exported its first shipment of natural gas in a historic move that shifts the balance of power in the global Energy market and kicks off a struggle with Russia for market share. 

Surging US supply over the next five years threatens to break the Kremlin's dominance over Europe's gas market, and is already provoking talk of a "Saudi-style" counter attack by Moscow to drive US shale gas frackers out of business before they gain a footing.

At the very least, it sharpens a global price war as liquefied natural gas (LNG) bursts onto the scene, and closes the chapter on the 20th century system of pipeline monopolies. Gas is starting to resemble the spot market for crude oil, with the same wild swings in prices and boom-bust cycles.

A seven-year, $11.5bn project by Cheniere Energy finally came to fruition this week as the first LNG cargo left Sabine Pass in Louisiana - in a special molybdenum-hulled ship at -160 degrees Centigrade - destined for Petrobras in Brazil. "It is a big day for our natural gas revolution," said Ernest Moniz, the US Energy secretary.

Speaking at the IHS CERAWeek summit in Texas, he said the emergence of the US as a gas superpower is a geopolitical earthquake, though he has always been coy about the exact intention. "It is a change in the Energy security picture," he said.

The US is ramping up LNG exports to almost 130bn cubic metres a day (BCM) by the end of the decade, roughly equal to Russia's gas exports to Europe. This may rise to 200 BCM and possibly beyond as the shale industry keeps finding once unthinkable volumes of gas.

Mr Moniz said the world had been expecting the US to be a huge importer of LNG before the shale shock. The mere fact that this is no longer the case turns the market upside-down, and is a key reason why LNG prices have been in free-fall across the world.

The shift to net exports is something that almost nobody expected. Mr Moniz predicted that the US will match Qatar, and possibly exceed it to become the world's biggest exporter of LNG by 2020. 

The US is still a net importer of natural gas but that is because Canadian pipelines supply New York and Detroit. However, it does not alter the overall picture.

Martin Houston, chairman of Parallax Energy, said the US may account for a quarter of the world's LNG market within a decade, and is so efficient that it can deliver gas to Europe for as little as $5 per million British thermal unit (Btu) despite the high cost of liquefaction and shipping.

David Fuller's view -

This article is well worth reading in full because it is about a monumental development – cheap Energy forever – at a time when investors are agonising over China, the EU and negative interest rates.  That is not a misprint; I did say cheap Energy forever, thanks to technology. 

This item continues in the Subscriber’s Area, where AE-P's article is also posted.



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February 25 2016

Commentary by David Fuller

Here is How Electric Cars Will Cause the Next Oil Crisis

With all good technologies, there comes a time when buying the alternative no longer makes sense. Think smartphones in the past decade, color TVs in the 1970s, or even gasoline cars in the early 20th century. Predicting the timing of these shifts is difficult, but when it happens, the whole world changes.

It’s looking like the 2020s will be the decade of the electric car.

Battery prices fell 35 percent last year and are on a trajectory to make unsubsidized electric vehicles as affordable as their gasoline counterparts in the next six years, according to a new analysis of the electric-vehicle market by Bloomberg New Energy Finance (BNEF). That will be the start of a real mass-market liftoff for electric cars.

By 2040, long-range electric cars will cost less than $22,000 (in today’s dollars), according to the projections. Thirty-five percent of new cars worldwide will have a plug.

This isn’t something oil markets are planning for, and it’s easy to see why. Plug-in cars make up just one-tenth of 1 percent of the global car market today. They’re a rarity on the streets of most countries and still cost significantly more than similar gasoline burners. OPEC maintains that electric vehicles (EVs) will make up just 1 percent of cars in 2040. Last year ConocoPhillips Chief Executive Officer Ryan Lance told me EVs won’t have a material impact for another 50 years—probably not in his lifetime.

But here’s what we know: In the next few years, Tesla, Chevy, and Nissan plan to start selling long-range electric cars in the $30,000 range. Other carmakers and tech companies are investing billions on dozens of new models. By 2020, some of these will cost less and perform better than their gasoline counterparts. The aim would be to match the success of Tesla’s Model S, which now outsells its competitors in the large luxury class in the U.S. The question then is how much oil demand will these cars displace? And when will the reduced demand be enough to tip the scales and cause the next oil crisis?

David Fuller's view -

Asking OPEC spokesmen and leaders of international oil companies about the impact of electric vehicles (EVs) on oil consumption over the next decade or two is similar to asking the manufacturers of buggy whips about the prospects for automobile manufacturers in 1910.  In other words, they could not hope to be objective about a monumentally important new technological development which threatened their industry. 

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February 24 2016

Commentary by Eoin Treacy

Musings from the Oil Patch February 23rd 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report which this month highlights the toll low prices are taking on Texas oil companies. Here is a lengthy section: 

For example, the surprise decision by Southwestern Energy (SWN-NYSE) to lay off 40% of its staff, or more than 1,100 employees, and shut down all its drilling rigs after having recently moved into a massive new headquarters building shocked the industry. Likewise, ConocoPhillips (COP-NYSE), after defending its dividend through the first year of this downturn even at the cost of laying off staff, finally caved and cut its quarterly dividend by two-thirds from 74-cents to 25-cents per share. ExxonMobil (XOM-NYSE), after reporting weak earnings results for its fourth quarter, followed up last Friday by announcing it had failed to replace its production last year for the first time in 22 years, announced a 25% cut in its 2016 capital spending plans and the suspension of its share repurchase program. These steps are designed to reduce the drain in the company’s cash balances. Another optimist, Pioneer Natural Resources (PXD-NYSE), after signaling late last year that it might actually increase its 2016 capital spending by 20%-30% as a result of the multiple attractive exploration opportunities it has in its Permian Basin acreage, announced a 10% capex cut this year, which means it will be forced to cut in half the number of drilling rigs it operates, going from 24 at year-end 2015 to 12 by mid-year 2016. The latest industry bombshell was Devon Energy’s (DVN-NYSE) announcement just last week that it was slashing its 2016 capital spending by 75% and laying off 1,000 employees, or about 20% of its staff. The shock from this announcement had barely been digested when Devon announced the sale of up to 69 million shares of stock and raising potentially $1.6 billion in cash to shore up its balance sheet. The cash infusion also helps the company by reducing the pressure to depend partially on selling assets to help fund capital spending. 

The sale of stock by Devon is another example of the continuing ability of Energy companies to tap capital markets, something a growing number of observers believe is prolonging the needed spending reduction that will cause oil output to fall off materially and set the stage for a recovery in prices. According to Bloomberg, the Energy industry has announced plans to raise $4.6 billion in new equity, accounting for nearly 30% of all new equity raised so far this year. The amount of equity being raised is almost evenly split among three deals – Pioneer Natural Resources, Hess Corporation (HES-NYSE) and Devon. Each of these deals was upsized from their original announcement reflecting high levels of demand from investors betting not only the individual companies surviving but that their share prices will soar when the oil price rises and Energy industry fortunes improve. 

The $4.6 billion equity raise so far this year compares with the $7.8 billion raised by exploration and production companies during the first two months of 2015, the fastest pace in raising new equity in over a decade. An interesting question is whether the capital raised in early 2015 has been wasted? If we consider what has been happening to companies within the E&P and oilfield service sectors, the oil price collapse is finally ending the corporate and investor strategy of “pretend and extend.” That strategy means that company executives have been selling lenders and investors on the view that a turnaround is just around the corner, so if they will just give them a little more time (and money?) the companies will be fine. As this strategy evaporates, the battle lines are drawn between managements and their owners. A change in the past is that many of the owners of the companies are investors who specialize in distressed securities. As a result, the struggle over how to redo the capital structure of Energy companies becomes more intense as debt-owners, who have legal claims against the assets of the company, fight to gain the most ownership and thus stand to benefit the most whenever the share price recovers. 

Many of these recapitalization struggles are being fought in the esoteric world of corporate bankruptcy law. The last great boom for the local bankruptcy industry occurred in the period of the 2008 financial crisis and the recession that followed. For Energy, the greatest bankruptcy boom was the demise of the industry in the 1980s bust. A recent article about the state of the bankruptcy business, in response to the collapse in oil prices, was in The Houston Chronicle. The article included a graphic showing the number of Chapter 11 (the section of the bankruptcy law that provides for restructuring of financially distressed companies rather than liquidations of companies that is conducted under Chapter 8 of the code) filed in the Southern District and the State of Texas. In 2015, the number of bankruptcies filed in the Southern District approached close to those filed in 2008, the start of the financial crisis. The article cited a survey of 18 bankruptcy legal experts by The Texas Lawbook calling for a doubling of filings this year. 

The fallout from the low oil prices and the hefty cash outlays producers have been making to play the shale revolution and/or to continue to generate cash flows is showing up in the growing number of exploration and production companies filing for bankruptcy. The Houston Energy practice of the law firm Haynes & Boone is tracking those filings for both E&P and oilfield service companies in the United States and Canada. As of the listings on their web site, as of early February, 48 E&P companies and 44 oilfield service companies have filed since the start of 2015. The total of secured and unsecured debt involved in these bankruptcy filings totals $25.1 billion, split $17.3 billion for E&P companies and $7.8 billion for oilfield service companies.

Eoin Treacy's view -

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

This is the most comprehensive reporting of the measures taken by Texas Energy companies to preserve capital I have seen. I chose to reproduce it because it should serve as a useful record for subscribers look as this transition unfolds. 



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February 23 2016

Commentary by David Fuller

OPEC Has Failed to Stop US Shale Revolution Admits Energy Watchdog

The current crash in oil prices is sowing the seeds of a powerful rebound and a potential supply crunch by the end of the decade, but the prize may go to the US shale industry rather Opec, the world's Energy watchdog has predicted.

America's shale oil producers and Canada's oil sands will come roaring back from late 2017 onwards once the current brutal purge is over, a cycle it described as the "rise, fall and rise again" of the fracking industry.

"Anybody who believes the US revolution has stalled should think again. We have been very surprised at how resilient it is," said Neil Atkinson, head of oil markets at the International Energy Agency.

The IEA forecasts in its "medium-term" outlook for the next five years that US production will fall by 600,000 barrels per day (b/d) this year and 200,000 next year as the so-called "fracklog" of drilled wells is finally cleared and the global market works off a surplus of 1m b/d.

But shale will come back to life within six months - far more quickly than conventional mega-projects and offshore wells - once crude rebounds to $60. Shale output is expected to reach new highs of 5m b/d by 2021.

This will boost total US production of oil and liquids by 1.3m b/d to the once unthinkable level 14.4m b/d, widening the US lead over Saudi Arabia and Russia.

Fatih Birol, the IEA's executive director, said this alone will not be enough to avert the risk of a strategic oil crisis later in the decade, given the exhaustion of existing wells and the dangerously low levels of spare capacity in the world.

David Fuller's view -

Long-term forecasting is more guesswork than analysis, not least as there are too many variable factors.  Additionally, most forecasts are influenced by an element of hopeful self-interest.  Considering these factors, what can we conclude about the International Energy Agency’s forecasts?

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February 23 2016

Commentary by David Fuller

Saudi Arabia to U.S. Oilmen: Cut Costs or Get Out of Business

Here is the opening of this report from Bloomberg on a confrontational meeting in Houston:

The world’s most powerful oilman brought a harsh message to Houston for executives hoping for a rescue from low prices: high-cost producers -- many of them sitting in the room -- need to either “lower costs, borrow cash or liquidate."

For the thousands of executives attending the IHS CERAWeek conference, the message from Saudi Arabia oil minister Ali al-Naimi means deeper spending cuts, laying off more roughnecks and idling drilling rigs.

"It sound harsh, and unfortunately it is, but it is the most efficient way to rebalance markets," Naimi told the audience in Houston on Tuesday.

As many as 74 North American producers face significant difficulties in sustaining debt, according to credit rating firm Moody’s Investors Service. Shale explorers from Texas to North Dakota will be “decimated” in coming months amid a wave of restructurings and bankruptcies, said Mark Papa, the former EOG Resources Inc. chief executive officer who helped create the shale industry more than a decade ago. The survivors will be more conservative, Papa, who is now a partner at private-equity firm Riverstone Holdings LLC, said during a panel discussion on Tuesday.

The message will resonate beyond the American Energy industry as declining spending, rising debts and layoffs are starting to spread to Main Street, with the impact spreading from regional banks in Oklahoma to the economies of cash-strapped Venezuela and Brazil.

For the oil industry itself, the warning is a sign of more months -- and perhaps years -- of financial pain. The S&P 500 Oil and Gas index has fallen roughly 60 percent since mid-2014 to its lowest since 2009. The debt of junk-rated U.S. oil companies is yielding more than 20 percent, the highest in at least 20 years, according to Bank of America Corp.

Naimi told the executives in Houston that Saudi Arabia believed that freezing oil production -- as it just agreed with Russia -- would be enough to eventually balance the market. Over time, high-cost producers will get out of the business, and rising demand will slowly eat up the oversupply, he said. The International Energy Agency believes that means another two years of low prices.

The freeze agreement isn’t "cutting production. That is not going to happen," Naimi said.

David Fuller's view -

Well, Ali al-Naimi has chutzpah and this is certainly a game of attrition.  It may also be a game of high-stakes poker.  Every oil producer is losing, so who will blink first?

That remains to be seen but the economic damage is already considerable and increasing.  The US is both a loser within its oil sector and a big winner in terms of national consumption of oil.  If the US wants to up the ante, it can subsidise its oil sector.    



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February 23 2016

Commentary by Eoin Treacy

The Fed: No longer to the rescue

This article by Russ Koesterich for Blackrock may be of interest to subscribers. Here is a section: 

In the past, soft growth, tightening financial conditions and falling inflation expectations would have at least provoked a response from the Fed. Although we still believe that central banks in Europe, Japan and probably China will continue to ease, the Fed is in a bit of a bind. Economic data, particularly manufacturing, are soft while inflation expectations remain near multi-year lows. That said, most measures of realized inflation are improving. U.S. core inflation is now running at 2.2%, the fastest pace since the fall of 2008. Prices on imported goods, both oil and non-Energy-related products, continue to fall, but housing and medical inflation are accelerating.

The Fed is unlikely to raise interest rates four times this year, as it suggested last December, but will the central bankers wait out all of 2016? Probably not, yet this is exactly what the futures market is suggesting. As such, any hikes would represent a more hawkish stance than the market is currently discounting. If this occurs in the context of a stronger dollar, it will represent a further tightening of already challenging financial market conditions.

For investors, there are several implications. First, the Fed is unlikely to provide the same backstop for asset prices as it has in recent years. Second, in a world in which central bank policy is both less available and less potent, volatility is more likely to remain above its historical average.

Finally, today's inflation expectations are most likely too low. Even in a world of slow growth, weak productivity and diminishing labor market slack, inflation may be higher than today's diminished expectations suggest. Under this scenario, Treasury Inflation Protected Securities (TIPS) may represent a good long-term opportunity.

 

Eoin Treacy's view -

This is a useful summary of some of the background issues that are currently affecting investor confidence. The Fed is now less likely to step in to support prices at the first sign of trouble and that represents a change to the status quo which has prevailed since 2009. That’s a major evolution and helps to explain why the main Wall Street indices have been largely rangebound for more than a year. 



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February 17 2016

Commentary by Eoin Treacy

Berkshire Expands Energy Investments With Kinder Morgan Stake

This article by Noah Buhayar and Joe Carroll for Bloomberg may be of interest to subscribers. Here is a section:

“It strikes me as a business that’s right up his alley,” said Jeff Matthews, an investor and author of Buffett-related books. “It’s a business that’s going to last for a long time,” he said. And the stock has “gotten crushed,” creating an opportunity to buy at an attractive price.

Oil drillers, gold miners and rig operators have sacrificed dividends to conserve cash amid tumbling prices in oversupplied commodity markets. When Kinder Morgan cut its dividend, it pledged not to issue any new shares through the end of 2018.

Shares Jump
Kinder Morgan jumped 7.5 percent to $16.79 at 6:50 p.m. in extended trading in New York. Berkshire’s portfolio is closely watched by investors for clues into how the billionaire chairman and his backup stock pickers are thinking. Newly disclosed holdings often send shares higher.

One of Buffett’s deputy investment managers, Todd Combs or Ted Weschler, could be responsible for the investment. Both have been building portfolios at Berkshire and tend to make smaller bets than their boss.

“Our guess is that it’s Todd or Ted,” said Tony Scherrer, director of research at Smead Capital Management, which oversees about $2.1 billion including Berkshire shares. “It’s not insignificant, but it doesn’t smell like a straight-up Buffett move to us.”

Energy Bets
Other closely watched investment managers added holdings in the Energy industry during the fourth quarter. David Tepper’s Appaloosa Management bought shares of Kinder Morgan and Energy Transfer Partners LP, while Seth Klarman’s Baupost Group increased its positions in Antero Resources Corp., an oil and gas producer, and Cheniere Energy Inc

Eoin Treacy's view -

At the Daily Journal AGM in 2014 Charlie Munger mentioned that Berkshire was set to become the biggest utility in the country. The acrimonious dispute with solar companies in Nevada highlights its participation in that power market but that only gives a small window on the kinds of businesses Berkshire seems to buy. The short answer could be that they tend to buy companies whose products are used every day. That’s as true of Coca Cola as it is of railroads, electricity and now pipelines. 



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February 16 2016

Commentary by David Fuller

Saudi Arabia, Russia to Freeze Oil Output Near Record Levels

Here is the opening of this topical article from Bloomberg:

Saudi Arabia and Russia agreed to freeze oil output at near-record levels, the first coordinated move by the world’s two largest producers to counter a slump that has pummeled economies, markets and companies.

While the deal is preliminary and doesn’t include Iran, it’s the first significant cooperation between OPEC and non-OPEC producers in 15 years and Saudi Arabia said it’s open to further action. Oil pared gains after the accord was announced, signaling traders see no immediate end to the global supply glut.

The deal to fix production at January levels, which includes Qatar and Venezuela, is the “beginning of a process” that could require “other steps to stabilize and improve the market,” Saudi Oil Minister Ali Al-Naimi said in Doha Tuesday after the talks with Russian Energy Minster Alexander Novak. Qatar and Venezuela also agreed to participate, he said.

Saudi Arabia has resisted making any cuts in output to boost prices from a 12-year low, arguing that it would simply be losing market share unless its rivals also agreed to reduce supplies. Naimi’s comments may continue to feed speculation that the world’s biggest oil producers will take action to revive prices.

“The reason we agreed to a potential freeze of production is simply the beginning of a process” over next few months,” Naimi told reporters. “We don’t want significant gyrations in prices. We don’t want a reduction in supply. We want to meet demand. We want a stable oil price.”

David Fuller's view -

Markets were soon disappointed with this surprise announcement because it did not change anything in terms of current oil production. However, it is an important achievement because, as savvy Saudi Oil Minister Ali Al-Naimi said, because it is the “beginning of a process” which could require “other steps to stabilize and improve the market.” 

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February 16 2016

Commentary by Eoin Treacy

Chance discovery puts graphene electronics closer to mass production

This article by Dario Borghino for Gizmag may be of interest to subscribers. Here is a section: 

The scientists had built a solar cell by placing graphene on top of the high-performance semiconductor copper indium gallium diselenide (CIGS), which in turn was stacked on top of soda-lime glass (SLG), the same industrial-grade glass used for windows and bottles. When the researchers measured the baseline performance of the cell before proceeding to dope the graphene, they found to their surprise that the graphene had already been doped to the ideal level.

As they later discovered, this was because the sodium ions in the glass spontaneously transferred to the CIGS semiconductor by surface contact, and from there to the graphene, creating a concentration of impurities that happened to dope the graphene in just the right concentration.

Crucially, this method doesn't require high-temperature, chemical or vacuum processes, and the doping remained strong even when the cell was exposed to air for several weeks. What's more, the same method could also be applied to combinations of semiconductors and substrates other than CIGS and glass, where the concentration of doping impurities that reach graphene can be fine-tuned by inserting an insulating layer of the right thickness.

 

Eoin Treacy's view -

Graphene has been a long time coming and it has not quite reached commercialisation yet. but the number of discoveries relating to it continues to increase and its potential is undiminished. We don’t know when the key mass production breakthrough will be made but it will be particularly transformative for the battery sector which remains in need of a major breakthrough to revolutionise Energy storage. 

 



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February 12 2016

Commentary by David Fuller

Best Bank Rally Since 2012 Lifts Europe Stocks From Two-Year Low

Here is the opening from this Bloomberg report:

Rebounds in lenders, miners and Energy producers pushed European stocks to their biggest gains in three weeks.

Commerzbank AG jumped 18 percent, the most since 2009, after saying it returned to profit. That eased concerns that the region’s lenders will fail to find a way to remain profitable in a low-rate environment, which sent them to their biggest plunge since August 2011 on Thursday. Deutsche Bank AG climbed 12 percent after saying it will buy back about $5.4 billion of bonds. Energy producers posted their biggest surge since 2008 and miners their biggest since 2009 as commodities rallied.

The Stoxx Europe 600 Index rose 2.9 percent, rebounding from its lowest level since 2013. Data showing that the region’s recovery kept its momentum also helped sentiment: Germany led the euro area’s growth to 0.3 percent in the fourth quarter, matching economists’ forecasts.

“Markets have been scrabbling for a story -- we’ve changed our focus on fears about China, oil, financials and central banks in such a short time,” said Ben Kumar, an investment manager at Seven Investment Management in London. His firm oversees about $13 billion. “It’s crazy that the market is priced for recession and a complete failure of the financial system. But you wouldn’t want to call it the end of the rout quite yet. Nobody wants to be the first bull now.”

 

David Fuller's view -

Most stock markets are deeply oversold relative to their 200-day moving averages, but investors remain fearful.   

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February 12 2016

Commentary by Eoin Treacy

China Could Have a Meltdown-Proof Nuclear Reactor Next Year

This article by Richard Martin for the MIT Technology Review may be of interest to subscribers. Here is a section:

Construction of the plant is nearly complete, and the next 18 months will be spent installing the reactor components, running tests, and loading the fuel before the reactors go critical in November 2017, said Zhang Zuoyi, director of the Institute of Nuclear and New Energy Technology, a division of Tsinghua University that has developed the technology over the last decade and a half, in an interview at the institute’s campus 30 miles south of Beijing. If it’s successful, Shandong plant would generate a total of 210 megawatts and will be followed by a 600-megawatt facility in Jiangxi province. Beyond that, China plans to sell these reactors internationally; in January, Chinese president Xi Jinping signed an agreement with King Salman bin Abdulaziz to construct a high-temperature gas-cooled reactor in Saudi Arabia.

“This technology is going to be on the world market within the next five years,” Zhang predicts. “We are developing these reactors to belong to the world.”

Pebble-bed reactors that use helium gas as the heat transfer medium and run at very high temperatures—up to 950 °C—have been in development for decades. The Chinese reactor is based on a design originally developed in Germany, and the German company SGL Group is supplying the billiard-ball-size graphite spheres that encase thousands of tiny “pebbles” of uranium fuel. Seven high-temperature gas-cooled reactors have been built, but only two units remain in operation, both relatively small: an experimental 10-megawatt pebble-bed reactor at the Tsinghua Institute campus, which reached full power in 2003, and a similar reactor in Japan.

Eoin Treacy's view -

Regardless of the cost, China needs to import fossil fuels. From a national security perspective that’s a problem. Despite the fact the pace of growth is moderating the requirement the country is going to have for Energy means they have little choice but to fund any and every potential technology to supply their market. Nuclear is a big part of that and China is now the largest test bed for new reactor designs in the world. They will inevitably seek to capitalise on that investment and China is going to be a major competitor in the construction of nuclear reactors globally. 



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February 10 2016

Commentary by Eoin Treacy

Musings From the Oil Patch February 10th 2016

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

One aspect of the presentation we found interesting as a sign of Saudi Arabia’s thinking about the long-term outlook for the oil business was a discussion of research efforts underway at the company’s newest research center located in Detroit. That facility was opened last November. Its focus is fuel technology and improved engines, but also strategic transport analysis. The latter effort involves scenario analysis of future transportation markets including ultimately issuing white papers on the topic.

With respect to their core technology focus, they are targeting passenger and commercial fuels and engine technologies. From descriptions of some of their research efforts, it seems they are focused on autonomous vehicle development, although that term was never used. Mr. Al-Tahini said that the over-arching research goal is to produce the most fuel-efficient vehicle with the lowest emissions.

Our take-away from that part of the presentation was that at some point in the past, Saudi Arabian officials began considering the forces at work reshaping the transportation business, a market dominated by crude oil. One broad trend impacting that market is demographics, but there is little Saudi Arabia can do to change the impact. Understanding these trends and their impact on the market is critical for long-term planning.

In recent years, the environmental movement has aggressively targeted the fossil fuel industry, which has resulted in a tightening of fuel-efficiency and carbon emission standards, the elimination of fuel subsidies in a growing number of countries around the world, and a strong push to urbanize the population and increase transportation alternatives. All of these forces will impact the growth of the transportation fuels market.
Given those forces, we have concluded that Saudi Arabia believes that oil demand may be closer to a peak than previously thought. This does not mean that the oil industry is going out of business anytime soon, but rather that its growth will slow in the future. Market share growth for Saudi Arabia will need to come from someone else’s share, which means increased price competition. It also means trying to slow the development of alternative Energy sources. Knocking out future oil sands and deepwater oil output as well as marginally shrinking shale oil opportunities will all benefit Saudi Arabia’s long-term market potential. Any negative impact on the oil output of other significant producers such as Russia, Iran and Iraq, coupled with boosting demand would all help Saudi Arabia. Lastly, technological developments that enable Saudi Arabia to reduce the cost and extend the life of its oil fields would also help the kingdom’s future. While none of this is new to our thinking, Mr. Al-Tahini’s presentation provided confirmation of what we think is motivating Saudi Arabia’s actions.

 

Eoin Treacy's view -

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

How Saudi Arabia views the market for its products matters. If they truly believe that the peak in demand growth has been reached that would help to explain the beggar thy neighbour approach that has been adopted over the last year. Major oil companies have responded by shelving expansion plans, Alberta put off its desire for more royalties from its producers and we can expect to hear a lot more about refracking in the unconventional supply sector. 



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February 08 2016

Commentary by David Fuller

What Executives Say About the Possibility of a U.S. Recession

Here is the opening of this topical article from Bloomberg:

Executives across corporate America are being asked for their views on whether a recession is in the offing.

Growth in the U.S. decelerated to a 0.7 percent annualized rate in the fourth quarter as companies contended with a slower global economy. The median probability for a U.S. recession in the next 12 months jumped to 19 percent in last month’s Bloomberg survey of economists, the highest since February 2013.

As stock and oil prices slide, executives are offering their perspectives on the economy in conversations with analysts and investors. These comments were collected by Bloomberg from earnings calls, meetings and conferences the past three weeks.

John Thain, chairman and chief executive officer, CIT Group Inc.: 
“Given the recent performance of the equity market and our stock price, the market seems to indicate a recession is imminent. I don’t see that. Low Energy prices do not cause recessions. While the Energy sector itself is weak, the U.S. economy is still growing." (Feb. 2)

Stephen Schwarzman, chairman and CEO, Blackstone Group LP: 
“While it’s always possible that a market correction becomes something more significant, we, at Blackstone, do not see a recession in the U.S. We do believe that global GDP growth is slowing, and we’ve seen a slowdown within certain sectors and regions in our global portfolio as a result." (Jan. 28)

David Fuller's view -

Stock markets are better indicators of investor sentiment than economic prospects.  Today, investors are frightened by uncertainty; excessively choppy market action due to high-frequency trading; forced sales by sovereign wealth funds, all of which are contributing to what will eventually be a healthy contraction in valuations.  



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February 08 2016

Commentary by Eoin Treacy

Credit Market Risk Surges to Four-Year High Amid Global Selloff

This article by Aleksandra Gjorgievska and Tom Beardsworth for Bloomberg may be of interest to subscribers. Here is a section:

Exchange-traded funds that hold U.S. junk bonds slid to their lowest levels in almost seven years. BlackRock’s iShares iBoxx High Yield Corporate Bond exchange-traded fund and SPDR Barclays High Yield Bond ETF both fell to the lowest levels since 2009.

Financials and Energy were the two investment-grade sectors that added the most risk in the U.S., Markit CDX North American Indexes show. In high yield, Energy, communications and health care fared the worst.

Chesapeake Energy Corp., the U.S. natural gas driller that’s been cutting jobs and investor payouts to conserve dwindling cash flows, lost more than half it stock market value Monday after a report that it hired a restructuring law firm.

The company’s bonds led losses among high-yield debt on Monday. Chesapeake’s notes due March 2016 tumbled to a record to 74.5 cents, from 95 cents last week, while its bonds maturing in 2017 fell to an all-time low at 34 cents.

“Broad oil weakness has now turned into distressed Energy cases, which investors view as possibilities of higher risk of restructuring or debt exchanges," Ben Emons, a money manager at Leader Capital Corporation. “Nothing has been announced of that matter but markets move quicker ahead of such possibility happening."

 

Eoin Treacy's view -

Regardless of the answer, when someone asks whether a default is imminent one has to conclude that the situation is troubling. This is as true of Chesapeake today as it was of Greece, Portugal et al a few years ago. 

Chesapeake’s 2017 6.25% Senior UnSecured bullet bond now yields 150% suggesting very few people think it will make its last coupon payment due in July.   

 



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January 29 2016

Commentary by David Fuller

Decision On Oil Cut Only Possible If All Exporters Agree, Russian Energy Minister Says

Here is the opening from this topical report from Bloomberg:

A decision on cutting oil production is possible only if all crude-exporting nations are in agreement and there’s no timing for talks, Russia’s Energy Minister Alexander Novak said.

“We’re ready to discuss the issue of cutting oil output volumes” but not ready for a decision, Novak said Friday in an interview with Bloomberg Television. “We’re ready to consider the possibility; this should be a consensus. If there’s a consensus, it makes sense.”

Oil pared gains after Novak’s comments. Prices closed at the highest in three weeks on Thursday after Novak said that the Organization of Petroleum Exporting Countries and other producers may meet to discuss output. Traders have looked for signs of cooperation between producing nations after a global glut of crude pushed prices to a 12-year low. The head of OPEC this week called on producers outside the group to assist in reducing the oversupply, signaling once again its members won’t make output cuts alone.

“There’s no set date” for a meeting, Novak said. “As far as I understand they are discussing it with other possible participants.” Russia has taken part in such consultations before and “nothing new happened,” he said.

David Fuller's view -

A carefully hedged statement, for sure.  We also know about all the rivalries, to put it mildly, between oil producers.  However, these considerations pale into insignificance against the background of today’s reality.

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January 28 2016

Commentary by Eoin Treacy

The Bigger Picture A Global & Australian Economic Perspective

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

There are signs that the strength in household goods expenditure is losing steam, possibly reflecting the recent cooling of the housing market spearheaded by Sydney. That said, the more recent data on retail spending continues to be relatively resilient, underpinned by improving trading conditions, while a lower AUD has encouraged tourism spending. ABS retail turnover growth for November (0.4%) was slightly below October (0.6%) to be 4.1% y/y, around the trend seen since late 2014. Meanwhile, NAB’s Online Retail Sales Index for November showed a 0.7% m/m rise in online spending. Despite soft wages growth, we expect a modest pick-up in consumer spending growth through to 2016, driven by a gradual reduction in households’ saving ratio and strong employment growth.

The Sydney housing market has clearly cooled, having recorded two consecutive months of price declines, while momentum in the Melbourne market has also slowed -but not as much as Sydney. Other capital cities experienced mixed outcomes in December. Recent property market outcomes are consistent with our view that prices growth will increasingly come under pressure as credit restrictions on investor lending bite, in combination with subdued incomes and slowing population growth/rising supply. We have maintained our previous forecast for much slower house price growth in 2016 (2%), although risks to the downside have escalated even more, especially in the apartment market.

Signs of stronger non-mining investment remain hard to find in the official data (especially the expectations data), while inevitable declines in mining capex continue – and could well become more pronounced given further falls in commodity prices. Despite significant signs of improvement in the business landscape, the NAB Business Survey reports that firms are still apparently gun-shy on investment. A fall in capacity utilisation in the December Monthly business survey has probably not helped, nor would recent financial market uncertainties. That said, we remain hopeful that AUD depreciation will eventually assist investment in trade exposed industries. Dwelling investment has been a little softer than expected in recent quarters, yet record high numbers of dwellings in the construction pipeline suggest the positive contribution to growth is likely to continue – although the cooling housing market will likely stem the flow of new projects.

 

Eoin Treacy's view -

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

A firmer tone on Energy markets represents a tailwind for Australia as LNG shipping capacity comes on line. In fact with the rationalisation of China’s steel industry Australia needs Energy to play a significant role in exports to make up for the loss of revenue from coal and iron-ore. If we take that a step further it is reasonable to expect the Australian Dollar to be more heavily influenced by moves in the oil price than was previously the case. 



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January 28 2016

Commentary by Eoin Treacy

Who owns the sun

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

Buffett’s company has also bought renewable Energy through long-term contracts. Last year, NV Energy signed up to purchase power from a giant First Solar installation outside Las Vegas for $38.70 per megawatt-hour. Analysts said at the time that it was one of the cheapest rates on record. Commissioners cited projects like that for why it made no sense to continue encouraging net metering in Nevada. If the goal is to put more solar on the grid, it’d be far cheaper for NV Energy to procure it.

This, of course, is of little consolation for the Nevadans who’ve already blanketed their roofs with solar panels. The public outcry seems to have registered with NV Energy. On Jan. 25 it said it would ask the commission to allow existing net-metering customers to stick with the old system for two decades in some instances. “A fair, stable, and predictable cost environment is important to all our customers,” Paul Caudill, the utility’s president, said in a statement. The commission will soon rehear that portion of the case.

Even if the utility’s proposal is accepted, it may not go far enough for the solar industry. The December decision could be challenged in court—or taken straight to voters. SolarCity and other groups are trying to get the issue on the November ballot.

Caught in limbo are people such as Dale Collier. The day after the commission hearing, he showed off a 56-panel system on his home in the Las Vegas suburb of Henderson. It cost him about $48,000 to install in 2011. SolarCity hadn’t yet set up shop in Nevada, so he paid for it by refinancing his house. The system took his NV Energy bill down to about $80 a month from the $330 it used to average, he says. One year, he got a $1,355 check from NV
Energy because his solar power was helping the utility meet its renewable Energy requirements. “It was the smartest thing I’d ever done,” he says. “Now, it’s the stupidest thing I’ve ever done.”

Collier had planned to retire from his job flying small cargo planes. But he doesn’t want to stop working until he has a better handle on his monthly bills from Buffett’s utility. “If it goes totally haywire, I’m going to look at batteries,” he says. “I’d love to just go off the grid totally, and tell them to f--- off.”

 

Eoin Treacy's view -

The acrimonious battle between legacy utilities and distributed supply represented by solar has come to a head in Nevada. There is a great deal at stake and emotions are running high, not least because people have invested a lot of money and risk a profit turning into a loss.

If we look at the situation with a clear perspective the upkeep of the electrical grid is not free. Both utilities and consumers use it to buy and sell electricity. Therefore it makes sense that both should contribute to its upkeep. That was the central argument proposed by NV Energy and it’s hard to argue with. 



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January 27 2016

Commentary by David Fuller

The Strategic View: The Correlation Between Oil & Equities Is Not a Sign of Recession: Time To Start Buying

My thanks to Michael Jones for his excellent report published by RiverFront Investment Group.  Here is a brief sample from the opening:

Based on conversations with our partner financial advisors, one of the most troubling and confusing aspects of recent market volatility is the close connection between the oil market and the stock market.  If oil prices fall during the trading day, then equity prices almost inevitably follow oil lower.

Falling oil prices are typically seen as beneficial to global consumers, and equity prices outside the Energy sector historically tend to be largely immune to or even benefit from cheap oil.  The few times in history that oil and stock prices have fallen in tandem were driven by the onset of a global recession.  Thus, despite robust US job gains, improving new home sales, and the positive impact of lower gas prices on their personal finances, investors are increasingly fearful that the close correlation between oil and equities is once again signaling a recession and the potential for a market crash similar to 2008.  We strongly disagree.  

David Fuller's view -

This is a well-argued, sensible report by Michael Jones.  I strongly recommend it to our subscribers.

A PDF of the report is posted in the Subscriber’s Area.



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January 26 2016

Commentary by Eoin Treacy

Mansion Prices Are Falling Across America

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

The stronger dollar is driving South American buyers away from the 23,000 condos in the pipeline for Miami’s downtown area, said Peter Zalewski, owner of South Florida development tracker CraneSpotters.com. Buyers signed about one-fourth fewer pre-construction contracts last year than in 2014, according to Anthony M. Graziano, senior managing director at Integra Realty Resources Inc., which tracks condo data for the Miami Downtown Development Authority.

In nearby Sunny Isles, Florida, faraway currency fluctuations are endangering the sale of a $3.7 million condominium. A Colombian woman who put down a 50 percent deposit is fretting over how she’ll cover the other half over the next year, said her agent, Mauricio Rojas. The Colombian peso, dragged down by the commodity slump, has lost about 30 percent of its value since she signed the contract in December 2014.

In Houston, the plunge in oil prices to a 12-year low is killing the luxury boom. Sales for homes priced at $500,000 or more dropped 17 percent in December from a year earlier, according to the Houston Association of Realtors.

 

Eoin Treacy's view -

The strength of the US Dollar represents a headwind for the luxury real estate market, at a time when many foreign buyers have seen the value of their domestic currencies decline from what were in many cases historic peaks. Rationalisation in the Energy service sector is an additional headwind for places like Texas, Pennsylvania and North Dakota. However that’s not what piqued my attention today. 



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January 26 2016

Commentary by Eoin Treacy

Musings From the Oil Patch January 26th 2016

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

With oil prices dropping and E&P companies cutting their spending, the answer to our question of what is the sound of another shoe dropping is becoming clear. It is the sound of pink slips landing on employees’ desks. Living within one’s cash flow has taken on greater meaning for companies today. Unfortunately, the major operating costs are employees, especially when there isn’t much to do. Reducing costs to stay within cash flow means laying-off employees. Last Thursday afternoon, Houston and the oil patch were shocked by Southwestern Energy’s (SWN-NYSE) announcement that it was terminating 1,100 employees, or 44% of its labor force, as it deals with low oil and gas prices. The third largest natural gas producer indicated it had no drilling rigs operating and was reducing its capital spending plans for the year. 

The next day, leading oilfield service provider Schlumberger Ltd. (SLB-NYSE) announced plans to reduce its workforce by 10,000 in response to low commodity prices and low oilfield activity. Since the third quarter of 2014, Schlumberger has cut 34,000 employees, representing 26% of its workforce. The company also stated in its fourth quarter earnings release that it doesn’t see an increase in oilfield activity until 2017. This view is rapidly being embraced by the industry and shaping all staffing and capital spending decisions. 

Leading forecasting groups – the International Energy Agency, OPEC, IHS, Wood Mackenzie – are embracing the view that the current low oil prices will force the industry to further cut its activity during the first half of 2016 and that natural attrition in production will drop global oil supplies, despite the addition of possibly 300,000-500,000 barrels a day of oil exports from Iran this year. These groups also see demand continuing to grow, although uncertainty about the health of the Chinese economy is becoming a significant wildcard in the forecasts. On balance, these forecasters see the imbalance of global oil supply and demand, which has existed for the past two years, will return to a more balanced condition by the second half of 2016. A balanced market will allow bloated global petroleum inventories to start shrinking, which sets the stage for higher oil prices in the third and fourth quarters of 2016 and still higher prices in 2017. It will be the combination of continued oil demand growth, matched by a stable supply outlook and declining inventories, that drives an upturn in oilfield activity in the first half of 2017. The challenge for the Energy industry will be getting back those employees receiving pink slips now.

Eoin Treacy's view -

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

The same subscriber added the following anecdote: 

Interestingly enough, the massive layoffs of the 1980's have not YET repeated themselves in the Texas Panhandle, where vast numbers of conventional wells continue to pump. One specialist contractor in drilling supervision said (to my brother over the weekend) that he was still as busy as he could handle, and my nephew just hired on to a drilling company as a roustabout. Interesting anecdotal information - not perhaps strongly suggestive of anything in particular, of course.

 



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January 22 2016

Commentary by David Fuller

Why Much Cheaper Oil Is Not All Good News

After a week of turmoil, there was relief in the markets and for everyday investors on Friday. The FTSE 100 finished the week higher, giving a desperately needed fillip to the country’s depleted ISAs and pension pots; and the price of oil recovered a little. In the past, a rebound in the price of crude would have been seen as a blow, at least outside Scotland – but these days, we seem to have started cheering each time it goes up.

Why? Have we lost the plot, or is it right for the UK, paradoxically now a major net oil importer as a result of the demise of the North Sea industry, to hope for a stabilisation of the price of oil? The answer is that oil’s slump remains good news, on balance, for consumers and manufacturers. With oil production contributing far less than before to our GDP, the direct downside on that front is small.

But there are counterbalancing factors, reasons why it makes sense for the financial markets to worry, even if the ultra-pessimists are wrong.

So why is it different this time? There are five main reasons. The most interesting is that many analysts are worried about a looming Energy and commodity debt crisis. Firms borrowed to invest, including for fracking and shale; but it seems that this credit could turn out to be the new subprime mortgages. The worry is that as the Energy and commodities bubble continues to burst, a tidal wave of bad debt could engulf the financial system, in a repeat of the crisis of 2008.

David Fuller's view -

This is a far cry from the crisis of 2008 for the USA, in my opinion.  We are only talking about the US Energy sector, which is certainly not insignificant but the general public benefits from low oil prices.  In 2008 the entire US financial system and housing market was adversely affected by ‘liar loans’ and collateralized mortgage obligations (CMO’s).

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January 21 2016

Commentary by David Fuller

The World Has Discovered a $1 Trillion Ocean

Here is the opening of Bloomberg’s article by Eric Roston on this significant development:

As chairman of investments at Guggenheim Partners, Scott Minerd thought he had a realistic view on how big an economic challenge climate change poses.

Then, at a Hoover Institution conference almost three years ago, he met former U.S. Secretary of State George Shultz. Minerd recalled him saying: “Scott, imagine that you woke up tomorrow morning, and the headline on the newspapers was, 'The World Has Discovered a New Ocean.’” The opening of the Arctic, Shultz told him, may be one of the most important events since the end of the ice age, some 12,000 years ago.

And while Shultz’s spokesman couldn’t confirm the conversation, there’s no doubting the melting of the Arctic ice cap, and the unveiling of resources below, presents mind-boggling opportunities for Energy, shipping, fishing, science, and military exploitation. Russia even planted its flag on the sea floor at the North Pole in 2007.

Energy and shipping have been first up. Norway made its national fortune drilling in northern waters, and Arctic fossil fuel exploration has become a more prominent part of U.S. Energy policy. Melting ice means that in summer months, cargo can travel approximately 5,000 km from Korea to New York, rather than the 12,000 km it takes to pass through the Panama Canal. Warming waters also open up access to commercial fish stocks, making the Arctic a growing source of food.

David Fuller's view -

The headline and text of Eric Roston’s article clearly view the opening of the Arctic for commercial ventures as a huge opportunity.  Well, trade routes through the Arctic will be convenient for some but technological advances already ensure that we have more than enough oil, gas and minerals.  This is confirmed by today’s low prices for these resources.  That may change some day but I think the continued and even accelerating advance of technology will provide the industrial resources, or even better substitutes, that the world will require. 

The melting of Artic ice is also further confirmation of climate change in the form of global warming.  This will have some very negative consequences, most likely starting with an increase in the rate of rising sea levels.  The article mentions fishing but not any of the negative consequences.  The last thing our dwindling fish stocks require is the plundering of their last refuge as factory ships sweep up critical supplies.       



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