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September 12 2016

Commentary by David Fuller

Parliament Calls for Carbon Capture to Revive British Industry and Slash Climate Costs

A high-level Parliamentary inquiry has called for a massive national investment in carbon capture to revive depressed regions of the North and exploit Britain's perfectly-placed network of offshore pipelines and depleted wells.

Lord Oxburgh's cross-party report to the Government has concluded that the cheapest way to lower CO2 emissions from heavy industries and heating is to extract the carbon with filters and store it in the North Sea oil.

The advisory group said the technology for carbon capture and storage (CCS) is ready to go immediately and should cut costs below £85 per megawatt hour by the late 2020s if launched with sufficient conviction and on a large scale, below the strike price for the Hinkley Point nuclear project. 

It could be fitted on to existing gas plants or be purpose-built in new projects, and could ultimately save up £5bn a year compared to other strategies. Unlike other renewables CCS does not alter with the weather or suffer from intermittency. It can be “dispatched” at any time, helping to balance peaks and troughs in power demand. 

“I have been surprised myself at the absolutely central role that CCS has to play across the UK economy,” said Lord Oxburgh, a former chairman of Shell Transport and Trading.

“We can dramatically reduce our CO2 emissions, create tens of thousands of jobs, and give our domestic industry a great stimulus by making use of technologies which are now well understood and fully proved,” he said.

No other country is likely to take the plunge first since few have the magic mix of industrial hubs, teams of offshore service specialists, and cheap, well-mapped, sea storage sites all so close together. “CCS technology and its supply chain are fit for purpose. There is no justification for delay,” says the report, to be released today.

Lord Oxburgh said the state must take the lead and establish the basic infrastructure in the early years.

The report called for a government delivery company modelled on Crossrail, or the Olympics Authority, taking advantage of rock-bottom borrowing costs. It could be privatised later once the CCS has come of age.

The captured CO2 is potentially valuable. Some could be used for market gardening in greenhouses, to produce biofuels, or for industrial needs.

Most CCS in North America is commercially exploited to extract crude through enhanced oil recovery by pumping CO2 into old wells, a technology that could give a new lease of life to Britain’s depleted offshore fields. “We could keep North Sea production going for another hundred years,” said Prof Jon Gibbins from Sheffield University.

David Fuller's view -

In this exciting new, varied and fast changing era of Energy, tech-savvy nations should way outperform over the longer term.  What Energy systems will they have?

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



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September 07 2016

Commentary by David Fuller

Email of the day

On the post Brexit future for Britain:

David, I have the impression that City AM is running a series of articles to raise spirits in the City in this first week back from the holidays. Well, not a bad thing to do in comparison with the post-Brexit stuck-in-the-mud approach of some other papers I won't name. I particularly like this article in today's edition of city AM.

This is a truly uplifting article. It makes so may good points it is hard to choose one or two (though I know you will agree that London is the coolest place to live on the planet). Its main point is that wages in China have increased 5 fold in 3 years and at the same time, after one region in the USA, "the next most competitive location is the British Midlands from Birmingham to Manchester and beyond, plus the High Tech triangle that runs between King’s Cross, Cambridge and Oxford." I travel the world a lot and my impression is exactly as recorded in this article. I am very excited about the post Brexit future for Britain.

 

David Fuller's view -

Thanks for a very interesting and enthusiastic email of general interest.  (Note for subscribers: I have attached the two links which came with this email so that you can access them without leaving the Fuller Treacy Money site.)

There is certainly no harm in raising spirits in the City or anywhere else, with genuine good will and realistic optimism. What those of us who favour Brexit need to avoid is hubris – a repellent and destructive state of mind.  There are big, exciting challenges ahead, requiring a realistic can-do spirit. We also need to encourage rather than alienate disheartened Remain voters.  The UK needs their Energy and constructive input.  Personally, I remain very optimistic about Brexit, but I do not underestimate the challenges. 

Incidentally, Pippa Malmgren, who wrote the article for City A.M. above is an interesting contributor.  An American and successful businesswoman, she was a financial advisor to President George W Bush, before moving to London where she now lives and works.  Similarly, the author of this email is a key participant in the High Tech triangle which runs between King’s Cross, Cambridge and Oxford.   



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September 07 2016

Commentary by Eoin Treacy

Enbridge May Have Just Touched Off a 'Supermajor' Race for Pipes

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

With Enbridge Inc. planning a $28 billion takeover of Spectra Energy Corp., some investors say the industry’s in store for more deals as pressure mounts on the likes of Enterprise Products Partners LP and Kinder Morgan Inc. to follow suit. The biggest pipeline deal of the year foreshadows a feeding frenzy as those companies that survived the collapse in oil and natural gas prices step up the hunt for bargains. TransCanada Corp. got the ball rolling with the $10.2 billion purchase of Columbia Pipeline Group Inc. earlier in the year.

“We’ve just come through a very tumultuous period,” said Libby Toudouze, a partner and portfolio manager at Cushing Asset Management in Dallas. “Being able to survive the trough in the Energy cycle, especially one like this last one that was so long, means you have to be bigger, faster, stronger.”

Enbridge’s deal would vault the Calgary-based company into North America’s largest Energy pipeline and storage player. It could also mark the beginning of the "supermajor" era for the industry, according to Rebecca Followill, head of research at U.S. Capital Advisors, since it might “light a fire in the bellies” of the larger pipeline players, setting off a wave of consolidation that could accelerate through the end of 2016.

“Enterprise Products Partners is the other big 800-pound gorilla out there,” Toudouze said. “This puts a little more pressure on them to try to do something in the space.”

 

Eoin Treacy's view -

The MLP sector, which is heavily weighted by pipelines, crashed lower with oil prices. The high leverage employed in the business models of pipeline companies was a major contributing factor in this underperformance. However with increased evidence that oil prices have hit medium-term lows, the relative resilience of North American economic growth and continued low interest rates, it is a natural time for companies to think about acquisitions. 



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September 02 2016

Commentary by Eoin Treacy

The Credit Strategist

Thanks to a subscriber for receiving permission to post this edition of Michael Lewitt’s ever interesting report. Here is a section on junk bonds:

Junk bonds may be rallying but it has little to do with corporate credit quality, which keeps deteriorating. As of the end of August, 113 companies had defaulted on their debt in 2016, already matching the total number of defaults from 2015. The year-to-date default count was also 57% higher than a year earlier. In case anyone is paying attention (it appears they are not), the last time defaults were this high was in 2009 when 208 companies failed during the financial crisis. Standard & Poor’s is now projecting that the annual default rate will hit 5.6% by June 2017 with 99 junk-rated companies expected to default in the 12 months ending June 2017. That would significantly exceed the 79 U.S. companies that defaulted in the previous 12-month period ending June 2016, which resulted in a 4.3% default rate. While low oil prices are a major contributor to this ugliness, Energy companies only accounted for 57% of the defaults in the 12 month period ending in June 2016. That means that there is plenty of distress to go around

Even more disturbing is the fact that defaults are rising rapidly while many leveraged companies continue to enjoy low borrowing costs courtesy of the Federal Reserve. If interest rates were remotely normalized, the default rate would already be well above 5% and heading to the high single digits. None of this appears to bother investors, who are chasing yield in the rare places they can find it, which is always in all the wrong places. As a result, the normal spread-widening that occurs when defaults spike is not occurring, which is a very unhealthy phenomenon because it signals high levels of risk-taking and complacency on the part of investors. 

The history of the modern junk bond market teaches that most returns are earned in compressed periods after the market suffers a sharp sell-off. The rest of the time, investors are pushing water uphill as they invest in securities that offer poor-to-mediocre risk-adjusted returns until the point when the bottom falls out and they suffer catastrophic losses. There is good reason why very few credit hedge funds or other large investors made any money in junk since mid-2014, when the market began a sharp sell-off that coincided with the slide in oil prices and the slowdown in China. This sell-off ended early this year when the market began to rally based on the realization that the Federal Reserve lacks the intellectual capacity to understand the consequences of its own policies or the moral courage to change them. But investors are chasing zombies because numerous companies are not generating enough cash flow to reduce their debts or repay them when they mature. Instead, they are just living on fumes and waiting for the day of reckoning when their debt matures and they can’t pay it back. More of them will hit the wall when their debt comes due and they can’t refinance it at a reasonable interest rate because they are financially infirm. Standard & Poor’s is telling us that more of these companies are heading to the boneyard. Investors should be selling rather than buying this risk.

Eoin Treacy's view -

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

I don’t think there is any argument that central bank measures to inflate asset prices through, previously unimaginably, low interest rates and outright purchases of bonds have had a distorting effect on asset prices. In fact that was the whole purpose of the policies in the first place. After-all quantitative easing was conceived to avoid an even more calamitous crash and succeeded on many fronts.  The problem is that we are now more than seven years into an era of extraordinary monetary policy and the self-sustaining robust growth that could upend dire warnings of overvaluations has been slow to appear. In fact because much of the G7 is contending with weak growth the extent of the dislocation in valuing bonds has increased. 



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August 31 2016

Commentary by David Fuller

We Should Seize the Benefits of Brexit Sooner Rather Than Later

The new trade department has exciting scope for free-trade agreements. For 43 years trade has been the ''exclusive competence’’ of the EU. During the referendum we were told that no one would want to do deals. But countries are queuing up.

The most worthwhile agreements are with fast-growing emerging economies that have high tariffs. As long as we remain in the EU there is no chance of deals with the two biggest countries – India ended talks with the EU in frustration at 28 member states demanding exclusions and China will not accept the EU’s political conditions for talks. But China has a deal with Switzerland, and India is negotiating one. Both would be keener still for one with us. Deals involving 28 countries take forever but bilateral trade deals typically take less than two years. And we can ensure they cover crucial UK industries such as services, which many EU deals exclude.

And:

Every week that we delay Brexit costs the British taxpayer nearly £200 million in membership fees. So both the Treasury and Health (which will have first call on extra spending) should be pushing for a speedy exit.

Although we will still be able to recruit EU nurses if we wish, leaving should be a stimulus to the NHS and our universities to expand training. At present we turn away up to three quarters of British applicants for nursing courses.

The new Department for Business, Energy and Industrial Strategy will want to incorporate all EU law and regulations into UK law to give business certainty and enable it to prune, amend and replace items which are unnecessarily burdensome. Assuming the UK retains the Climate Change Act commitment to reduce emissions by 80 per cent it will be able to reduce the cost of doing so by scrapping EU renewable targets.

David Fuller's view -

Full-Brexit will be the most promising step the UK has taken in decades.  Mrs May’s government will lower taxes to confirm to the world that we are open for business and the most entrepreneurial economy in Europe, with the world’s leading international financial centre. 

What about our current trade partners in the EU?  In the days immediately following full-Brexit we should not be surprised if Germany and our other trade partners within the EU signal that they remain open for business. 

(See also: May Spells Out Immigration Limits as the First Brexit Red Line, reported by Bloomberg)



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August 31 2016

Commentary by Eoin Treacy

D.E. Shaw Considering Major Stake in TerraForm

This article by Nathan Reiff appeared in Investopedia and may be of interest to subscribers. Here is a section:

D.E. Shaw is one of the most recent companies to express an interest in buying SunEdison's shares of TerraForm. Shaw already owns about 6.7% of TERP shares following a negotiation made to forgive SunEdison debt. While this is a significant stake already, it is nowhere near SunEdison's huge percentage of ownership of the company. By purchasing up additional "Class B" shares in TerraForm, D.E. Shaw would attempt to capitalize on SunEdison's bankruptcy declaration by acquiring one of its most valuable holdings.

Golden Concord has also recently made it known that it is interested in purchasing now-defunct SunEdison's shares of TERP stock. The company, which is China's largest new Energy company that is not government-owned, no doubt also sees a prime investment opportunity. For both D.E. Shaw and Golden Concord, however, added interest in SunEdison's stake in TERP means that the competition for those shares is rising, and the price is likely to go up as well. Throughout Monday, August 29, shares of TERP were trading at higher levels as a result of the increased interest.

 

Eoin Treacy's view -

To coin a pun “solar has been under a cloud of late”. Last year’s decision by Nevada to side with established utilities and force solar power providers to help pay for the grid, which they had being using for free, foreshadowed wider questioning of the subsidies on which the installation sector has relied upon. The bankruptcy of SunEdison and Tesla bailing out/absorbing SolarCity are both symptomatic of the challenges facing the sector. 



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August 30 2016

Commentary by David Fuller

British Sovereignty Depends on Leaving the EU and the Single Market

Here is the conclusion of this apt column by Gerard Lyons for The Telegraph:

To regain sovereignty and to have a sensible points-based migration system it is necessary to be outside both the EU and the Single Market. That should rule out the Norway option.

That fills some with fear, but it should not. The UK is remaining global in its focus, while at the same time ensuring more share in success through a better migration and domestic economic policy.

There is every reason to expect us to remain a strong and attractive economy in which to invest, while key challenges we face – like our twin deficits – are not the result of Brexit.

Now it is possible the UK may agree a specific deal with the EU. After all, they need the City, and also we are a huge export market for them. But we can’t assume anything.

Hence we should proceed based on leaving and trading under the World Trade Organisation (WTO). On that basis, we can leave at the end of Article 50 being concluded, whatever happens.

The UK is already a member of the WTO and it is there to facilitate trade, not stop it. Outside the EU, we can trade freely under WTO rules and reduce import tariffs.

If we accept that is what would happen if we leave, then that should give the UK greater bargaining power in any EU negotiation. Also, from that base, in time, we could conduct trade deals in our best interests, focused on services, with fast growing markets as well as with the EU.

It is people and firms that trade, not bureaucrats. Being competitive and having something that others want to buy are key. Globalisation, the internet and technical change point to new networks, and highlight that ideas and trade in the 21st century know no bounds.

Dr Gerard Lyons is Chief Economic Strategist at Netwealth Investments and an adviser to Parker Fitzgerald.

David Fuller's view -

If “Brexit means Brexit”, as the PM has repeated, it really should be a swift process of total withdrawal from the EU.  Then, and only then, can the UK government negotiate freely with other nations, including those of the EU.  Anything less than a total withdrawal will waste time and Energy in the web of EU rules and regulations designed to prevent countries from leaving. 

PM Theresa May’s biggest challenge may be to gather all the UK support she can for this transition, although the EU is unintentionally helping with its own policies, including the tax claim against Apple and Ireland.    

A PDF of Gerard Lyons' column is in the Subscriber's Area.



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August 30 2016

Commentary by Eoin Treacy

The Frozen Concentrated Orange-Juice Market Has Virtually Disappeared

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

Americans drank less orange juice in 2015 than in any year since Nielsen began collecting data in 2002, as more exotic beverages like tropical smoothies and Energy drinks take market share and fewer Americans sit down for breakfast.

When they do drink orange juice, they aren’t drinking it from concentrate.

Frozen concentrated orange juice was invented in Florida in the 1940s, primarily as a way to provide juice for the military, readily storable and easy to ship. But frozen juice has been losing favor for years.

Not-from-concentrate orange juice surpassed the concentrated orange-juice market in the 1980s. Now, the 1.4 million gallons of frozen concentrate that Americans drink each month pales in comparison to the 19.1 million gallons of fresh juice consumed each month, Nielsen said.

Louis Dreyfus Co. is scaling back the one citrus facility in Florida that is devoted entirely to concentrated orange juice. The commodities giant is laying off 59 of the plant’s 94 workers as its sells the operation that packs frozen concentrated orange juice into cans for retail.

 

Eoin Treacy's view -

Changing consumption habits where people are more concerned not only with the taste but the quality of the foods they consume are having wide ranging effects on the commodity markets. To most people frozen orange juice does not taste as good as a freshly squeezed navel or Valencia orange. However since squeezing one’s own oranges is both time consuming and expensive the vast majority of orange juice consumed comes from either concentrate or is pasteurized. 



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August 25 2016

Commentary by David Fuller

Email of the day

On UK should declare unilateral free trade:

Note: You can access the links in the email below because they were provided by the subscriber and I have loaded them so that you will not be removed from this site when you close them, unlike with links in newspaper articles which I post.

I mentioned briefly when we met a couple of weeks ago that the UK should declare unilateral free trade as it leaves the EU. We didn't get time to explore the thinking behind this so I have collated here some articles which set out the case, very compellingly in my view. First, an article in today's City A.M.  

Roger Bootle, whom I know you respect, has also proposed unilateral free trade. I believe you published this article when it first appeared.

He says "If we declared unilateral free trade, we would immediately cut through the doubts concerning a possible trade deal with the EU and put ourselves in the driving seat with regard to any future negotiations. Because this policy would involve abolishing tariffs on imports from the rest of the world, it would reduce prices and intensify competition in the UK market. Continental exporters would find they would only be able to sell to us at lower prices. The industries that would suffer, such as the German car industry, would put pressure on their governments for a deal with us, which we might accommodate – if it suited us. With one bound, we would be free."

Bootle was one of the very few economists who actually analysed the pros and cons of EU membership and published a book (The Trouble With Europe) arguing the case. Few politicians or economists went to such lengths. One who did is Patrick Minford. He has also written compellingly on this topic and the pdf attached goes into the issue in some detail.

The counter-argument has been put by Martin Wolff in the Financial Times in an article titled "Brexiteers' idea of unilateral free trade is a dangerous fantasy."

This was written before the referendum, and is in tune with the FT's opposition to leaving both before and after the referendum outcome. He finishes by dismissing the idea saying "Forget free trade: the UK will not return to the 19th century." Oops... wasn't that the century in which Britain was Great?

Wolff appears to favour tariffs. In contrast Minford has this to say to those who argue that universal free trade would not work for the UK: "It relies on the idea that under Brexit the UK would move to being a protected economy with tariffs and barriers against the rest of the world including the EU, much as it was back in the 1970s when it was ‘the sick man of Europe’. Yet after three and a half decades of market reforms since those grim times, the UK is now largely a free market economy and Brexit would allow it to join the global market as a free trading nation, able to buy its goods and services from the world market at world prices, and ready to sell its products to the world at those world prices too.

Incidentally, the most egregious article I have seen was this one in the FT arguing that voters should not have been given a referendum as the decision was too complicated (presumably for lesser mortals than the author.)

Incidentally, the most egregious article I have seen was this one in the FT arguing that voters should not have been given a referendum as the decision was too complicated (presumably for lesser mortals than the author.)

What the author conveniently forgets is that the decision to join was made by referendum - presumable he was OK about that. Then, despite his argument that we are not wise enough to decide these things by referendum, he illogically finishes by arguing for a second vote! I guess this is in true EU style: 'Come on you peasants, vote until you give the right answer.' Emotion always trumps reason once belief and self-interest are involved.

I lived and worked in Switzerland for a while and became impressed with their referendum system, held several times each year with many questions each time. The politicians role is to implement what the voters want. Switzerland may be the only true democracy on the planet, and the country wonderfully exemplifies the complete opposite of the attitude in that FT article and the attitude of the EU. Switzerland has a record of many centuries of effective governance and harmony despite having 4 totally distinct races and languages. It's also one of the wealthiest countries perhaps because of these factors. If the EU had been established on the Swiss model maybe it could have achieved similar prosperity, harmony and long-term survival as Switzerland. But the EU model is in many ways the opposite.

As you know, I voted Remain. I could have voted either way, but the desire to avoid breakup of the UK swung my vote. But now that the democratic decision to leave has been made I am fully behind the decision and actually rather happy about it. But we could mess it up by haggling deals with an EU which will be unable to do anything fast or effectively and which will assume it has the upper hand. During my long career as a senior executive in industry I attended several coaching courses on negotiation skills. The most important thing I learned was the concept of BATNA - be very clear what is your 'Best Alternative To A Negotiated Agreement.' You are negotiating from a very weak position if you are not absolutely clear about how you can reasonably walk away. If there is no negotiated agreement with the EU then the willingness of the UK to open to free trade across the world is by far the best option. It may anyway be the best solution.

Which leaves my one remaining concern, the stability of the UK. Phillip Johnson outlined one potential solution that makes very good sense to me, if not maybe for a certain power-hungry politician in Scotland! Though her country-folk may be wiser than her if it came to a vote.

What are your thoughts for and against unilateral free trade?  Do you see any major negatives?

Best wishes

David Fuller's view -

Thanks for a terrific email, certain to be of interest to subscribers in the UK, Europe and probably beyond.  I also appreciate the informative links and reports. 

Replying to your points, I have also posted Telegraph articles by Patrick Minford, Roger Bootle and others on free trade.  It makes sense as we will obviously want to be trading with the world, where possible, not just the protectionist, socialist, slow-growth EU.  Also, we do not want to be slavishly following the EU’s tortuous rules on leaving the Eurozone, which are mainly designed to lock countries in.  

Free trade is desirable, I believe, although it is certainly not without risks.  A number of our industries will be alarmed over the prospect of free trade, even if we have reciprocal agreements with many countries.  China springs to mind, as does any other country with state-controlled industries.  Consider steel - how can you protect Port Talbot or any other industry which China would like to bankrupt through state subsidies, so that they would have greater access to our market? Perhaps we don’t trade with China, although I would be reluctant to close doors on any important country.  Perhaps we need to have a few strategic industries, such as Port Talbot steel, which receive preferential treatment such as very inexpensive Energy, for instance.  Other companies would want similar subsidised benefits, but then we would be moving away from free trade. These are challenges, albeit manageable.

Re the FT, it has some good columnists and contributors but too many bad ones in its desire to be the EU’s socialist business (oxymoron?) English language paper.  The article by Richard Thaler is shocking, as you point out. 

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August 25 2016

Commentary by Eoin Treacy

Musings from the Oil Patch August 24th 2016

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

The Obama administration’s Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) released their Phase II fuel efficiency and greenhouse gas emissions regulations for heavy-duty trucks. This group includes the largest pickup trucks sold as well as the traditional 18-wheelers on the highways. The standards are to be phased in between the 2021 and 2027 model years. The existing standards, which were designed for the 2014 through 2018 model years, will remain in place until the new standards take effect.

The heavy-duty truck standards come as the government has just begun negotiations with auto manufacturers over the final fuel efficiency ratings for light-duty vehicles where the industry is lagging behind the targets in the standards. Heavy-duty trucks are the second largest and fastest growing segment of the U.S. transportation system measured by their emissions and Energy use. They currently account for about 20% of carbon emissions, yet only account for about 5% of the vehicle population. 

Carbon emissions from transportation is now the largest contributor to overall greenhouse gas emissions. Three charts showing annualized sector shares of total emissions confirm this conclusion. It should be noted that the country’s total carbon emissions peaked in January 2008 and have declined steadily since. On an absolute basis, over the past 8 1/3 years there are 1,410.1 million metric tons of less carbon emissions, or a decline of 16.2%. The transportation sector contributed about 9.1% of that decline. The significance is that transportation’s emissions dropped 6.4% over that time span while overall emissions declined 16.2%. The overall figure reflects the sharp decline from coal’s use due to the shale revolution and low natural gas prices along with static electricity consumption. At the same time, the decline and then flat trend in vehicle miles driven coupled with more fuel-efficient autos also helped reduce the transportation sector’s emissions. One can see these trends at work by looking at the sector shares in 1973, 2008 and 2016.

The United States has done well in reducing its carbon emissions by 16.2% since the start of 2008. The weak economy and Energy revolution have been primarily responsible. Going forward, the Energy policies targeting the transportation sector, coupled with technological improvements in overall Energy use, will become more important in driving down carbon emissions. Thus, the reason for the heavy-duty truck standards. They have support from the industry and truck manufacturers who see economic opportunities from more efficient engines. The Independent Truck Owners Association estimates the new standards will add $12,000-$14,000 to the cost of new tractors, which often cost upwards of a quarter of a million dollars, but they hope to recover those higher costs through improved fuel efficiency.

 

Eoin Treacy's view -

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

The surge in supply of natural gas coupled with the fact it is both cleaner than other fossil fuels and domestically available is supporting a revolution in developing new sources of demand. Toyota is now marketing is hydrogen fuelled Mirai automobile in the USA where the hydrogen will be sourced from natural gas. Improving the efficiency of the heavy vehicle fleet is a laudable goal and will also improve the environment so it can be viewed as a win win which is dependent on natural gas prices staying competitive. 



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August 24 2016

Commentary by Eoin Treacy

UK Industrial Revolution 2.0

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

Potential GDP growth slowed in the UK after the debt crisis and Brexit is another structural shock. Monetary policy does not have the ability to correct these impairments. A structural policy is required, for example, the priority being given by new British PM, Theresa May, to the industrial sector within economic policy. An industrial renaissance is the objective.

We motivate the need for industrial strategy through the new information based theory of economic growth. Over time, knowledge and knowhow is created and embodied into products. The more specialized these products and the broader the range produced, the more complex the economy. Complexity is a medium- to long-term predictor of economic growth.

The UK is not coming from a standing start. The UK has retained or created industrial strengths in sectors from cars and industrial machinery to aerospace and defense. The sizeable depreciation of sterling and relatively low production costs give UK industry an advantage. These cyclical benefits can be secured with a structural policy aimed at maximizing R&D (knowledge) heavy, high-skill (knowhow) manufacturing.

A modern industrial strategy is about creating the right environment for new products and markets to emerge and jobs and income to grow. A successful neo-industrial policy requires a holistic approach. We discuss four areas likely to appear within an industrial strategy: infrastructure (including digital), Energy, skills and innovation. Policies here could enhance complexity and the economy’s capacity to generate, share and use information. A consistent policy approach with long-term commitments could counterbalance Brexit-related uncertainty.

The Chancellor, Philip Hammond, is expected to ease the UK’s austerity policy by year-end. We argue the fiscal adjustment needs to be seen through the lens of industrial strategy. Public sector funding costs are extremely low and the Bank of England has re-started gilt-based QE. After the referendum the government has a reason and opportunity to maximize the benefits via an industrial policy.

 

Eoin Treacy's view -

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

As we pointed out ahead of the referendum, the UK had a big choice to make. It could become a vassal state subject to an increasing autocratic central government or it could throw out the rule book and refashion itself into a free market example of dynamism that would benefit from its proximity to, but separation from, a much larger neighbour.  I described this latter option as the Hong Kong solution and it would appear to be what the UK is now moving towards. 



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August 24 2016

Commentary by Eoin Treacy

A Grim Outlook for the Economy, Stocks

Thanks to a subscriber for this interview of Stephanie Pomboy expressing a bearish view which appeared in Barron’s. Here is a section:

The presumption supporting equity prices is that all the bad news we’ve seen this year has been due to anomalies—the lagged effect of the strong dollar and weaker Energy prices as well as Brexit. Everyone is looking for a significant second-half rebound for earnings and GDP—when the clouds will part and the sun will come out. I strongly believe that won’t happen, in large part because of inventories. Inventory accumulation has been explosive.

What’s caused this growth in inventories?
It isn’t because companies ramped up production. Companies aren’t using cheap capital to increase production and capital expenditures, but are lavishing money on shareholders instead. They bought the lie that consumer spending would turn up any moment, and produced at the same pace. Now they find themselves with a monster inventory overhang. Inventory-to-sales ratios across a variety of industries—manufacturing, machinery, autos, wholesale—are at the highest level since 2009. In prior inventory liquidation cycles, nominal GDP growth is cut in half during the liquidation phase. As for profits, we’re starting with five negative quarters and we haven’t even begun the inventory liquidation cycle. So the second half will be a real eye-opener.

In your view, today’s too-low rates will cause the next financial crisis. Describe it.
In the past rates that were too high were the trigger. Not this time. No. 1, we have basically bankrupted corporate and state and local pensions by having rates at these repressive levels. If you lay on top of that a decline in equity prices, there will be a scramble to plug holes in pensions. Obviously if a state or local government has to divert funds to plugging its pension, it won’t build more roads. The corporate sector has the luxury of kicking the can down the road, and because their spending has been on buybacks, not plants and equipment, the economy would suffer less. For S&P 1500 companies, the pension deficit is roughly $560 billion, but for state and local governments, it’s $1.2 trillion. According to the Center for Retirement Research, if you used a more conservative discount rate, the unfunded liability would go to $4 trillion.

No. 2, you’re pushing consumers to the brink as they try to save enough for retirement at zero rates. You’re already seeing a reluctant return to credit-card usage, a clear sign of distress—they are charging what they previously paid with cash. The credit-card delinquency rate is picking up.

 

Eoin Treacy's view -

The way people generally think about pensions is that you accumulate a pot of money over your lifetime, purchase an annuity with a yield greater than your living costs and a maturity that extends to the end of one’s life. Of course that is not realisable in practice so pension funds have to manage the duration of the overall portfolio so they can plan to meet future liabilities with some degree of accuracy. 

The problem is that in formulating their models they typically assume a 7% yield. That’s OK when nominal interest rates are somewhere close to that level but with rates close to zero, for nearly a decade, they have no choice but to rely on capital appreciation to make up for the absence of yield. The alternative is to take on a lot more risk to capture the yield they require. For example, and this is obviously not a recommendation, Rwanda’s senior unsecured US Dollar B+ 2023 bond currently yields 6.195%. 

 



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August 22 2016

Commentary by David Fuller

Carbon Capture Can Drive a 21st Century Revival of British Industry

Renaissance beckons for the once great industrial hubs of northern England and Scotland, and the unexpected catalyst may be stringent global climate controls.

What looks at first sight like an economic threat could instead play elegantly to Britain's competitive advantage, for almost no other country on earth is so well-placed to combine Energy-intensive manufacturing with carbon capture at a viable cost.

The industrial clusters of the Tees Valley and the Humber are linked by a network of pipelines to depleted and well-mapped oil and gas fields in the North Sea, offering rare access to infrastructure for carbon storage deep underground.

Liverpool has old wells of its own offshore in the Irish sea. Scotland's heavy industry in Grangemouth and the Forth have feeder pipelines to the Golden Eye.

Such sites may not be worth much today - with carbon prices in Europe too low to matter at barely $5 a tonne - but the COP21 climate deal agreed in Paris last December transforms the long-term calculus.

It implies a tightening regime of higher carbon penalties for the next half century, ending in net zero CO2 emissions. Once prices approach $50 a tonne the equation changes. Beyond $100 it inverts the pyramid of Energy wealth: profits accrue to those with access to the cheapest low carbon power.

"Storage will be much more valuable than the fossil fuels themselves. If you are an Energy-intensive industry in the middle of Europe and you don't have C02 storage, you're stuffed," said professor Jon Gibbins from Edinburgh University.

David Fuller's view -

This is interesting and entrepreneurial long-term thinking.  I believe we will hear more of it following Brexit because the UK has voted to retake control of its destiny.  That is an exciting and positive development which will inspire additional creativity and economic development.  



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August 22 2016

Commentary by David Fuller

Why the UK is Using Less Energy, but Importing More, and Why It Matters

The UK is in the midst of an Energy revolution. Since the late 1990s the Government has committed to using cleaner Energy, and using less of it.

Billions of pounds have been invested in renewable Energy sources that generate electricity from the wind, waves and plant waste.

At the same time the UK has managed to cut its Energy use by almost a fifth as households and businesses have steadily replaced old, inefficient appliances and machinery with products that use far less Energy to run. Energy demand has also fallen due to the decline of the UK’s Energy-intensive industries, such manufacturing and steel-making.

But Government data shows that the UK’s reliance on Energy imports is at its highest since the Energy crisis of the late 1970s, raising serious questions over where the UK sources its Energy and what a growing dependence on foreign Energy means for bills and for security.

In a leaner, greener Energy system, why is the UK more dependent on foreign Energy sources than it has been in more than 30 years?

David Fuller's view -

The short answer is that the UK has largely run out of commercially viable North Sea oil at today’s prices.  It has also made a commendable push into renewables while cutting back on the use of coal.  However, this has been an expensive policy and the country faces an increasing risk of Energy shortages. 

Fortunately, there is a medium-term solution to this problem if the government moves quickly.

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



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August 22 2016

Commentary by David Fuller

Email of the day

On nuclear fission being the bane of human civilization: 

Nuclear fission will ultimately be the bane of human civilization. There are no solutions for storing spent fuel which is stored in pools around reactor sites and will remain deadly for uncounted future generations. The innards of reactors wear out in a several decades but remain deadly to life for tens of thousands of years. How will they be dismantled and stored safely? Multiply these hazards by future reactors yet to be built to imagine the legacy we are leaving. Renewable Energy is the only way.

David Fuller's view -

Well said.  You are correct and I have not mentioned this often enough. We can reduce the risk with individual reactors by converting to new nuclear but containment of deadly spent fuel from reactors still leaves lethally dangerous sites which have to be cordoned off for ever.  The tradeoff, I suggest, is that even 20th Century nuclear power shortens far fewer lives than any fossil fuel.  Meanwhile, renewable Energy is one of the long-term solutions to our requirements but many more people would die prematurely from hardship if we could only use renewables today.  The other long-term solution, which many of us had hoped to see and surely our grandchildren will, is nuclear fusion. 

See also: Why Nuclear Fusion Is Always 30 Years Away, from Science for the Curious Discover.



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August 18 2016

Commentary by David Fuller

Britain Should Leap-Frog Hinkley and Lead 21st Century Nuclear Revolution

It is hard to imagine now, but Britain once led the nuclear revolution.

Ernest Rutherford first broke the nuclei of atoms at Manchester University in 1917. Our Queen opened the world's first nuclear power plant in 1956 at Calder Hall.

Such were the halcyon days of British atomic confidence, before defeatism took hold and free market ideology was pushed to pedantic extremes.

Most of Britain's ageing reactors will be phased out over the next decade, leaving a gaping hole in electricity supply. By historic irony the country has drifted into a position where it now depends on an ailing state-owned French company to build its two reactors at Hinkley Point, with help from the Chinese Communist Party.

The horrors Hinkley are by now well-known. The European Pressurized Reactor (EPR) is not yet working anywhere. The Olkiluoto plant in Finland is nine years late and three times over budget. EDF's Flamanville project is not faring much better.

What is clear is that the costs of 'old nuclear' have spun out of control everywhere in the developed world. It is too expensive to keep trying to refine an inherently dangerous technology dating back sixty years in a Sisyphean attempt to make it less threatening after Chernobyl and Fukushima.

The capital cost of new nuclear plants in Europe and the US has risen from $1,000 per kilowatt in the 1970s to around $5,500 today in real terms. Hinkley will be nearer $8,000. Hence the lapidary term 'negative learning' coined by Yale scientist Arnulf Grubler.

The standard light water reactors were solid workhorses in their day - and averted huge releases of CO2 from fossil fuels - but they operate at 100 times atmospheric pressure. They need costly containment structures  to prevent an explosive release of deadly radioactive gases across hundreds of miles. 

 

This nuclear cost spiral has been happening just as solar and wind costs plummet, and the verdict is in. The nuclear share of global power has dropped to 10.7pc from 17.6pc in 1996. Ten new reactors were built last year, but eight were in China. In Europe they are shutting down.

There is an alternative. Research into a radical new wave of safer, cleaner, and cheaper reactors is suddenly reaching critical mass, some are entirely compatible with the intermittency of wind and solar.

This is what Theresa May should be looking at as she launches her industrialisation drive and fashions an Energy policy fit for the 21st Century.

The Washington think tank Third Way has identified fifty advanced reactor projects in North America, including eight based on molten salt fuel, ten on liquid-metal, and some based on fusion designs.

David Fuller's view -

It is beyond comprehension that any intelligent person with a reasonable understanding of competing Energy developments in 2016 could think that the Hinkley Point white elephant was a good idea.  This was a short-term pre-Brexit political decision which should never have been seriously considered.  It totally ignored economic risks, given EDF’s reworked and risky Heath Robinson technology, plus the company’s catastrophic delays and soaring costs on Finland’s Olkiluoto Island and France’s own Flamanville project on the Cotentin Peninsula.  

 Prime Minister Theresa May wisely put Hinkley Point on hold, to the consternation of French and Chinese officials, before leaving for her walking holiday in Switzerland.  If her advisors are up-to-date on our worldwide Energy revolution and the Hinkley Point debate, Mrs May will be able to resume her sensible overhaul of Britain’s Energy policies on return.  These commenced with realistic financial incentives for people living in regions where fracking needs to occur.  However, the delicate diplomatic issue, for which she will not thank David Cameron or George Osborne, concerns Hinkley Point.  The plain truth is that it does not add up and would be a costly disadvantage for the UK over 35 years. 

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August 18 2016

Commentary by David Fuller

Oil Prices Break Back Above $50 a Barrel

Oil prices broke above $50 a barrel for the first time in five weeks as hope that the world’s largest suppliers may act to cut the glut in global supply continues to drive prices higher for a sixth consecutive day.

Brent crude moved above $50 a barrel for the first time since early July on Thursday morning before dipping back to $49.70 later in the day. But by the afternoon the market surged well above the key earlier highs to around $50.80 a barrel.

The recent rally in prices, from lows under $42 a barrel just two weeks ago, began late last week after Saudi Energy minister Khalid bin Abdulaziz Al-Falih said the Oraganization of Petroleum Exporting Countries would meet in Algeria next month to discuss measures to stabilise oil market prices with major producers outside of the cartel.

The rally found further support earlier this week after Russian Energy minister Alexander Novak said that his country - the world's third largest supplier of oil - was involved in the early discussions

Shakhil Begg, an analyst with Thomson Reuters, said oil prices bounced back as continued short covering activity sustained a rally which has propelled prices by more than 20pc since the lows of early August.

David Fuller's view -

The Saudis’ 2H 2014 attempt to replay their successful 1970’s script - increasing oil supplies and driving the price down to knock out high cost producers - was always going to fail in the current era.  They were really targeting US shale oil production, without understanding the importance of this quantum technological leap which was beginning to tap billions of gallons of previously inaccessible oil, at increasingly commercial prices. 

In fairness to the Saudis, they were not alone.  In fact, most western oil analysts also failed to grasp the potential of this rapidly developing new technology.  They talked about high drilling costs, rapid depletion rates within a few months, while polluting water tables and triggering earthquakes.

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August 17 2016

Commentary by David Fuller

Sinking Coast In Louisiana Is a $100 Billion Nightmare for Big Oil

Here is the opening of this informative article from Bloomberg:

From 5,000 feet up, it’s difficult to make out where Louisiana’s coastline used to be. But follow the skeletal remains of decades-old oil canals, and you get an idea. Once, these lanes sliced through thick marshland, clearing a path for pipelines or ships. Now they’re surrounded by open water, green borders still visible as the sea swallows up the shore.

The canals tell a story about the industry’s ubiquity in Louisiana history, but they also signal a grave future: $100 billion of Energy infrastructure threatened by rising sea levels and erosion. As the coastline recedes, tangles of pipeline are exposed to corrosive seawater; refineries, tank farms and ports are at risk.

“All of the pipelines, all of the things put in place in the ’50s and ’60s and ’70s were designed to be protected by marsh,” said Ted Falgout, an Energy consultant and former director of Port Fourchon.

Louisiana has an ambitious -- and expensive -- plan to protect both its backbone industry and its citizens from this threat but, with a $2 billion deficit looming next year, the cash-poor state can only do so much to shore up its sinking coasts. That means the oil and gas industry is facing new pressures to bankroll critical environmental projects -- whether by choice or by force.

“The industry down there has relied on the natural environment to protect its infrastructure, and that environment is now unraveling,” said Kai Midboe, the director of policy research at the Water Institute of the Gulf. “They need to step up.”

Every year in Louisiana, more than 20 square miles of land is swallowed by the Gulf. At Port Fourchon, which services 90 percent of deepwater oil production, the shoreline recedes by three feet every month. Statewide, more than 610 miles of pipeline could be exposed over the next 25 years, according to one study by Louisiana State University and the Rand Corporation. Private industry owns more than 80 percent of Louisiana’s coast.

The land loss exacerbates another natural threat: storm-related flooding, like that affecting Baton Rouge now. As days of heavy rainfall caused water to overrun levees along several tributaries this week, Exxon Mobil Corp. began shutting units at its Baton Rouge refinery, the fourth-largest in the U.S. About 40,000 homes in southeastern Louisiana have been affected by the devastating flooding, and at least 11 people have died.

In Louisiana, marshes, swamps and barrier islands can mitigate flooding, soaking up rainfall like a sponge and reducing storm surge. But as the land erodes, storms advance without a buffer, and Louisiana's flood protection systems become less effective. The state estimates that damage from flooding could increase by $20 billion in coming years, if the coastline isn't reinforced.

David Fuller's view -

This is an interesting and somewhat worrying article, well worth reading for three perspectives: 1) climate change (they don’t mention it but I would stay well clear of floodplains; 2) oil refiners which are at risk because their processing plants are in coastal areas; 3) the state of Louisiana, with the help of the US Government, really took careless BP to the cleaners over their drilling accident.  This has set a precedent which other governments with needy regions will be tempted to emulate.      



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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.

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



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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.    

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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.

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



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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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