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September 14 2017

Commentary by Eoin Treacy

Oil Breaches $50 as Worldwide Energy Demand Outlook Brightens

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

Oil topped $50 a barrel for the first time in more than a month amid heightened optimism that a demand resurgence is in the offing.

Futures rose as much as 2.4 percent in New York, extending the longest upswing since July. Two of the most influential organizations in world oil markets -- the International Energy Agency and OPEC -- nudged their demand forecasts higher, signaling continued erosion of a global glut that has weighed on prices.

Oil demand for 2017 will expand by the most in two years, the Paris-based IEA said on Wednesday. That followed OPEC’s increase of its estimate for how much crude buyers will seek from the cartel next year, driven by rising consumption in Europe and China. In the U.S., hurricane-driven refinery outages spurred fuel distributors to pull a record amount of gasoline from storage tanks to cope with shortages last week, government data showed.

“The market is continuing to digest that information and realizing that the rebalancing process is working,” Mark Watkins, a Park City, Utah-based regional investment manager at U.S. Bank Wealth Management, which oversees $142 billion in assets, said by telephone.


Eoin Treacy's view -

Saudi Arabia’s decision to sell a part of Aramco with the aim of setting a valuation so they could borrow against the balance led investors to conclude it believes oil prices are in terminal decline. Anecdotal evidence it is planning to delay the IPO has had the opposite effect on sentiment and is contributing to recent strength. 

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September 08 2017

Commentary by Eoin Treacy

Hurricane Irma set to squeeze a lot more than just Florida's oranges

This article by Myra Saefong may be of interest to subscribers. Here is a section:

Frozen concentrated orange juice for November delivery OJX7, +2.98% rose 5.3 cents, or 3.8%, to $1.461 a pound in Thursday dealings on the ICE Futures U.S. exchange. It’s up more than 9% so far this week and is poised for the highest settlement since mid-May.

“The damage to the orange crop is twofold: both short term disruption but also, to the extent crops are completely destroyed, it could have a longer term effect since it takes a few years to grow an orange tree to production, thus limiting supply for a longer period,” said Alan Konn, partner and managing director of Price Asset Management.

Cotton prices have also rallied. December cotton CTZ7, +0.23%  settled at nearly 75 cents a pound Tuesday, the highest since mid-June, though prices pulled back Wednesday and Thursday.

Cotton markets are also nervous because Harvey did an as yet uncalculated amount of damage in Texas,” which is the country’s top grower of cotton, said Gilbertie. “And if Irma affects Georgia, the country’s number three producer of cotton, the U.S. cotton industry will be dealt an immensely damaging blow.”

Eoin Treacy's view -

Energy companies will be working day and night to overcome the challenges Hurricane Harvey represented and refining capacity will likely be back online in the relatively near future. If orchards are damaged by a hurricane, debris can be cleared away the trees cared for but one still has to wait lost fruit to grow again. 

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September 07 2017

Commentary by Eoin Treacy

How a Bird Charity's Battle Against a Wind Farm Backfired

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

When plans for Neart na Gaoithe started being developed in 2008, Siemens AG’s 3.6 megawatt turbine was the most popular among developers. Now manufacturers are working on machines that could be four times bigger, helping companies like Dong Energy A/S build projects cheaply enough to make money at market prices. The collapse in oil prices has also helped lower offshore wind costs, by making the sea vessels needed to install projects cheaper to hire.

Eoin Treacy's view -

I’ve haven’t seen a satisfactory solution for the problem of wind turbines impact on migratory bird populations regardless of the fact offshore turbines help create artificial reefs for sea life. However, the economies of scale that can be gained from going offshore has altered the wind turbine sector beyond recognition. 

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September 06 2017

Commentary by Eoin Treacy

Investment Gurus Counsel Catching Reform Tailwinds in Latin America

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

“The broad outperformance in Latin America -- particularly Argentina, Mexico, and Brazil -- speaks to the broad reform programs we have seen in each of these countries and the stable backdrop these reforms have provided,” said Kofi Bentsi, a money manager focused on emerging-market corporate bonds at Pimco, the second-largest U.S. fixed-income management firm. He says Argentina and Brazil are likely to continue to outperform. 

Jim Barrineau, the co-head of emerging-markets debt at Schroders in New York, said the region has benefited from a combination of the highest yields among emerging markets and improving economies, especially in Argentina and Brazil, which overcame deep recessions. This backdrop, he says, tends to favor corporate bonds over government securities.

“They are more responsive to changes in economic growth,” said Barrineau, who helps oversee Schroders’ $520 billion in assets. His emerging-market bond fund has outperformed 81 percent of peers this year.

Eoin Treacy's view -

The LME Metals Index has been on a recovery trajectory since January 2016 and has rallied to break a lengthy medium-term downtrend.
The CRB Index, which is skewed by Energy prices, has been ranging below 200 since late 2015 but is currently bouncing, having found support in June. 

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August 25 2017

Commentary by Eoin Treacy

Thorium salt reactor experiments resume after 40 years

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


Working in cooperation with the European Commission Laboratory Joint Research Center, NRG's SALt Irradiation ExperimeNT (SALIENT) is a multi-stage experiment aimed at turning Thorium Molten Salt Reactors (TMSR) into an industrial scale Energy source with commercial possibilities.

According to advocacy group Thorium Energy World, the first phase of the experiment is focusing on removing the noble metals produced by the thorium fuel cycle. That is, the metals created in the steps in the nuclear fission process where the thorium transmutes into uranium before splitting to give off Energy.

Once this has been achieved, the next step will be to determine how well commonplace materials used in the construction of TSRMs stand up to the corrosive high-temperature salt mixture or to find alternatives to keep down maintenance and operation costs. These might include an alloy of nickel called hastelloy, or Titanium-Zirconium-Molybdenum (TZM alloy

The ultimate goal is to create TMSRs that are modular and scalable to meet local Energy demand, yet provides 24-hour power that is available year round. In addition, using molten salts mean that refueling can take place while the reactor is still in operation, drastically reducing downtimes.

Eoin Treacy's view -

Molten Salt reactors never got the go ahead in the early days of nuclear development because of the difficulty of producing weaponised materials from them. In the current age that is one of the primary points in their favour since what we need is a non-proliferation friendly design that is less susceptible to meltdowns. Nevertheless, it will be years before we have a working prototype.  

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August 17 2017

Commentary by Eoin Treacy

Musings from the Oil Patch August 15th 2017

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

In total, between 2010 and 2040, the EIA expects Energy demand to grow by 54.4%.  Liquids fuels are projected to grow over this period by 37.7%, while natural gas growth will soar 78.7%.  In physical terms, natural gas (93 QBtus increase) consumption will grow by nearly a third more than oil’s use (68 QBtus), while coal consumption (34 QBtus) will increase by barely over half of the growth in liquids’ consumption.  Nuclear power increases the least of all the fuels (19 QBtus), but posted one of the largest percentage gains (+67.9%) due to its small base in 2010.  Most interestingly, the Other category, which includes renewables, is predicted to increase consumption by 74 QBtus, or an impressive 128.5% gain.   

A consideration that should not be overlooked is where this growth is happening.  Exhibit 3 (next page) shows Energy consumption divided between the developed countries of the world (OECD) and the developing ones (non-OPEC).  The difference in Energy demand growth between these two groups is astounding.  The OECD economies will increase their Energy use by 15.8% compared to the 87.5% growth projected for non-OECD economies.  For a domestic exploration and production company, this may seem to be a worthless consideration, but now that the United States has become an oil exporter, the health of the global oil market should be of increased interest to the executives of these E&P companies.   
What the EIA forecast demonstrates is that the portfolio shifts underway at several major integrated oil companies – BP, Royal Dutch Shell (RDS.A-NYSE) and TOTAL S.A. (TOTF.PA) – from crude oil to natural gas resource exploitation, are founded on the expectation that the world’s Energy market has entered a new era that will be dominated by natural gas.

The quest for cleaner fossil fuels, in response to global pressure to reduce carbon emissions, has focused on increased use of natural gas, which has considerably fewer carbon emissions than either crude oil or coal.  That explains why natural gas was initially embraced by environmentalists as the “bridge fuel” to a cleaner Energy mix until renewable fuels could mature sufficiently to become the “carbonless fuel” for the future.  The double-digit price at that time may explain why the environmentalists loved natural gas as it provided a price umbrella over expensive renewables.   


Eoin Treacy's view -

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

The major oil companies have been reporting reserves on an Energy equivalent basis for more than a decade which tends to paper over the transition that has been made from oil to gas production. It’s no exaggeration to state that companies like Royal Dutch Shell, Total and Exxon Mobil might better be described as major gas companies rather than major oil companies. 

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August 09 2017

Commentary by Eoin Treacy

Elon Musk Inspires World's Top Miner to Target Electric Vehicle Boom

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

“As we delved in to understand more about the lithium-ion battery market, it became clear that demand from EVs was accelerating,” Haegel said Wednesday in an interview. “It also became clear that we had competitive advantages.”

As a result, BHP approved a $43 million project to begin production at its refinery from April 2019 of nickel sulfate, a product needed for lithium-ion batteries. The move will make BHP the top exporter of the material, Haegel said in Kalgoorlie, Western Australia.

Global nickel demand could more than double by 2050, fueled in part by rising electric-vehicle sales, Bloomberg Intelligence analyst Eily Ong wrote in a June report. Demand for nickel from lithium-ion batteries may rise to more than 190,000 metric tons a year by 2030 from about 5,200 tons in 2016, Bloomberg New Energy Finance analyst Julia Attwood forecast in April.

Eoin Treacy's view -

Lithium, nickel and cobalt are the primary metals used in the manufacture of lithium batteries. With demand for large batteries from the transportation and utility sectors growing the mining and refining sectors are scrambling to keep up.


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August 08 2017

Commentary by Eoin Treacy

Email of the day on batteries

Welcome back from China, I would also reciprocate the glowing comments
on Saturdays missive.

FYI attached please find some headlines from the Asian Nikkei, unfortunately I am not a subscriber, but for all the battery fanatics following you and I agree with the view that battery technology is a game changer. I thought you would be interested in the following :

Eoin Treacy's view -

Battery technology was a fringe industry for a long time because there was no compelling commercial reason to invest the money required to develop it. That changed when oil prices surged higher and consumers were forced to begin to think about economizing to reduce how much they were spending on Energy

The dynamics that have unfolded in the Energy sector are a perfect example of how high prices influence spending decisions by producers and economizing by consumers while low prices have the opposite effect. These long-term dynamics contribute to the long-term cyclical nature of markets. 

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August 04 2017

Commentary by Eoin Treacy

Germany Giving Gigafactory a Home in Latest Challenge to Tesla

This article by Brian Parkin for Bloomberg may be of interest to subscribers. Here it is in full:

German executives are preparing to announce a new home for a lithium-ion battery plant designed to rival the output at Tesla Inc.’s Gigafactory.

Terra E Holding GmbH will choose one of five candidate sites in Germany or a neighboring country next month to build its 34 gigawatt-hour battery factory, Frankfurt-based Chief Executive Officer Holger Gritzka said in an interview. The former ThyssenKrupp AG manager has helped to assemble a consortium of 17 German companies and won government support for the project, which will break ground in the fourth quarter of 2019 and reach full capacity in 2028, he said.

"The battery factory is the latest sign that German industry, the motor behind the world’s fourth-biggest economy, is gearing up for a new stage in the Energy revolution. Lithium- ion batteries can help stabilize intermittent flows of wind and solar power on electricity networks. They’re also projected to power millions of plug-in cars expected to roll off German production lines beginning early next decade.

“We have to be better in process technology than competitors, a constant step ahead,” said Gritzka, who emphasized that Terra E will be counting on Germany’s competitive edge in manufacturing robotics and automated production to make money.

Global battery-making capacity is set to more than double by 2021, reaching 278 gigawatt-hours, up from about 103 gigawatt-hours in the second quarter, according to Bloomberg New Energy Finance. Asia electronics makers including South Korea’s LG Ltd. and Samsung SDI Co. currently control the market. Tesla will become the world’s No. 2 battery maker once it finishes building its $5 billion, 35 gigawatt-hour Gigafactory in Nevada, according to the London-based researcher.

Merkel’s Endorsement

Some of Terra E’s consortium members also may become its clients, according to Gritzka, who declined to name companies participating. The project, which won 5.2 million euros ($6.2

million) in subsidies from Germany’s Ministry of Education and Research, expects to need upwards of a billion euros before completion, the CEO said.

Terra E will be seeking strategic investors that are attracted by the government-paid research embedded in Terra’s technology and Chancellor Angela Merkel’s endorsement of the company, said Gritzka. In May, Merkel broke ground at another 500 million-euro plant to assemble lithium-ion Energy-storage units for Daimler AG, which produces Mercedes-Benz and Maybach luxury cars.

Terra E will focus its batteries on stationary units, Gritzka said. The project aims to tap an emerging market for mobile and non-automotive power and storage, said Gritzka. The bet rests on projected faster demand for lithium storage in the next decade.

Eoin Treacy's view -

Germany’s dominant automotive sector is under pressure following the diesel cheating scandal which continues to remain an open sore, as various cases make their way through the US courts system. 

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August 01 2017

Commentary by Eoin Treacy

Musings from the Oil Patch August 1st 2017

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

Since these solid-state batteries can be packed more tightly, more power can be put into the same space occupied by a current lithium-ion battery, significantly boosting a vehicle’s range.  Another advantage of these solid-state batteries is that they can handle higher charging currents safely.  That allows for faster charging times, assuming the remote charging stations are equipped with more powerful charging current equipment.   

According to the patent applications, solid-state batteries are less susceptible to temperature variations than liquid electrolyte batteries, which is a hidden issue for many EVs who suffer lost power and range due to extreme heat and cold.  Additionally, solid-state batteries eliminate the need for many of the safety features of current lithium-ion batteries, which will help boost their relative cost advantage, thereby improving the economics for EVs.   


Eoin Treacy's view -

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

The prize for innovation in the battery sector cannot be overstated. Energy storage represents the lynchpin for the evolution of the renewable Energy, transportation and utility sectors. The company that can get a better battery with high Energy density and faster charging capabilities to market first will quickly gain market share because the cost advantage it will derive will be so acute. 

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July 31 2017

Commentary by Eoin Treacy

Tesla's Model 3 Arrives With a Surprise 310-Mile Range

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

Three hundred ten. 

That’s the electric range of a $44,000 version of Tesla’s Model 3, unveiled in its final form Friday night. It’s a jaw-dropping new benchmark for cheap range in an electric car, and it’s just one of several surprises Tesla had in store as it handed over the keys to its first 30 customers. 

Tesla has taken in more than 500,000 deposits at $1,000 a piece, Chief Executive Officer Elon Musk told reporters ahead of the event. This has created a daunting backlog that could take more than a year to fulfil—and that was before Musk took the stage in front of thousands of employees, owners, and reservation-holders to lift the curtain on the
company’s most monumental achievement yet.

“We finally have a great, affordable, electric car—that’s what this day means,” Musk said. “I’m really confident this will be the best car in this price range, hands down. Judge for yourself.”

Eoin Treacy's view -

This graphic from the above article is perhaps the most relevant part of the story. The cost per mile of range continues to trend lower while range is trending higher. The range of 310 miles is making headlines but the cost of $160 per mile for the battery is also a record and more important from the wider spectrum perspective of the growth of the Energy storage sector. 

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July 21 2017

Commentary by Eoin Treacy

Letter to the Editor of the New York Times from Sunrun's CEO

I thought this letter by Lynn Jurich may be of interest to subscribers. Here it is in full:

“After Rapid Growth, Rooftop Solar Programs Dim Under Pressure From Utility Lobbyists” (news article, July 9) got it right that traditional utilities are fighting to undercut competition and customer choice by targeting state solar policies, “particularly net metering, which credits solar customers for the electricity they generate but do not use and send back to the grid.”

Rooftop solar growth, however, is inevitable. More than one million consumers across the country are already powering their homes with rooftop solar. By 2022, residential solar capacity will more than triple, according to GTM Research estimates.

The utility lobby is intentionally distracting regulators from focusing on the real threat to affordable Energy: billions of dollars of grid expansion proposals with virtually guaranteed profits and requests to subsidize nuclear plants. Rooftop solar competition forces utilities to control their costs.

Policy leaders who dig into the facts know that rooftop solar, plus home batteries for solar storage, will modernize our grid, provide more affordable clean power to everyone and create more American jobs.


Eoin Treacy's view -

The combative tone of this letter to the editors highlights the fact that the battle between utilities and solar companies is far from over. If we distil the arguments down to their core. Utilities have a vested interest in preserving their near monopoly on supply of electricity and the grid on which it travels. Solar companies want to create as large a market for their products as possible and rooftops are an important part of their growth strategy. To that end they have developed innovative pricing models and relied on sharing the grid so electricity can be sold. 

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July 19 2017

Commentary by Eoin Treacy

Musings from the Oil Patch July 19th 2017

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

The latest topic of interest in the oil and gas business is the lack of new discoveries given the cutback in capital investment in keeping with Mr. Dudley’s “capital diet.”  What does this mean for the industry’s future?  The International Energy Agency (IEA) has sounded the alarm over sharply higher oil prices in the 2020-2022 time frame due to a lack of industry capital spending.  With capital spending cut by 25% in 2015 and by another 26% in 2016, prospects are increasing for a growing gap in the future output trajectory for oil.  Current expectations call for a modest increase in capital spending during 2017, but that increase could prove overly optimistic should oil prices fail to recover in the second half.   

The IEA warned in its Oil 2017 report of a possible imbalance between demand and supply growth, leading to the smallest global spare production capacity surplus in 14 years by 2022.  That conclusion is based on demand growth for 2016-2022 of 7.3 million barrels per day (mmb/d), which exceeds the projected supply growth of under 6 mmb/d.  A possible relief valve might be the growth in U.S. shale output.  As Dr. Fatih Birol, the IEA’s executive director put it: “We are witnessing the start of a second wave of U.S. supply growth, and its size will depend on where prices go.”  He went on to say, “But this is no time for complacency.  We don’t see a peak in oil demand any time soon.  And unless investments globally rebound sharply, a new period of price volatility looms on the horizon.”

The supply shortage view seems to be gaining traction among oil and gas industry professionals.  Halliburton Company’s (HAL-NYSE) Mark Richard, senior vice president of global business development and marketing, told the World Petroleum Congress that “You’ll see some kind of spike in the price of oil, maybe somewhere around 2020, 2021."  This fits with Bernstein Research’s latest oil price downgrade.  The firm now sees oil prices exhibiting a U-shape cyclical pattern: after having declined from over $80 a barrel in 2014, they traded in the $40s for 2015-2016, and will now be flat at $50 for 2017-2018 before slowly climbing back to $70 by 2021.   


Eoin Treacy's view -

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

Synchronised global economic expansion is generally positive for Energy consumption and most particularly in emerging markets where the bulk of Energy demand growth is expected to originate. How quickly battery technology advances to quell range and charging time questions is likely to represent a significant a key arbiter for whether bullish forecasts come to fruition over the next five years. 

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July 18 2017

Commentary by Eoin Treacy

What If Big Oil's Bet on Gas Is Wrong?

This article by Jack Farchy and Kelly Gilblom for Bloomberg may be of interest to subscribers. Here is a section:

Driving the shift has been a sharp decline in the cost of building new renewable power –- which, unlike generating electricity from coal or gas, is almost free to run after the initial capital investment has been made.

“Wind and solar are just getting too cheap, too fast" for gas to play a transitional role, said Seb Henbest, lead author of the BNEF report.

The consultant estimates that onshore wind and solar power are already competitive with coal and gas in Germany, and that within five years they will be cheaper to build than new coal and gas plants in China, the U.S. and India. By the late 2020s, it will start to even be cheaper to build new onshore wind and solar power than run existing coal and gas plants.

The trends that are undercutting optimism about the global gas outlook are already playing out in Europe. Natural gas demand remains well below a 2010 peak, as greater Energy efficiency, rapid adoption of renewables and resilient coal consumption cut into its market share.

The IEA does not see European gas demand returning to its 2010 high. In its base case scenario, European gas demand would be at the same level in 2040 as in 2020.


Eoin Treacy's view -

Since the majority of globally traded natural gas is tied to long-term contracts producers have some security in the investments they made. However, a decade of high oil prices created the perception of long-term outsized profits and the reality is likely to be more modest. The extent to which coal will survive as a fuel stock against increasingly high regulatory barriers as well as innovation in storage solutions are likely to be key determinants in the success of what have been massive investments in natural gas which has contributed significantly to global supply. 

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July 14 2017

Commentary by Eoin Treacy

An email from David

Health: My thanks to subscribers for your thoughtful emails of support and best wishes for a speedy recovery.  I wish I had better news to share with you but here is a brief description of the reality.

My operation on 7th July was considerably more debilitating than I had expected.  Unfortunately my atrial fibrillation returned after a few days and I still have some fluid in my lungs. Consequently my mobility remains extremely limited. Therefore I do not have either the Energy or concentration to resume my career at this time. I will focus on rest, recovery and a more holistic treatment of my condition, mainly from a healthier environment in North Devon.

Stock markets: In my opinion stock markets are even more fascinating than ever. A period of uncertainty and fear persists but that is far less dangerous than euphoria. As always there are many medium-term hurdles to be cleared, not least the eventual normalisation of interest rates. The longer-term outlook remains extremely promising, not least for successful technology companies.

Your Fuller, Treacy Money Global Strategy Service: We are very fortunate to have Eoin Treacy with his calm, experienced and forensic study of global stock markets, best observed on price charts. These seldom move in isolation so Eoin also monitors global bonds, currencies and commodities on a similar basis, knowing that sharp moves in these instruments can affect sentiment. Consequently he can see potentially significant changes in relative strength or weakness more quickly than most other observers. This perspective is invaluable, ensuring that Eoin is less distracted by market noise.

Kind regards,


Eoin Treacy's view -

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July 07 2017

Commentary by Eoin Treacy

Musings from The Oil Patch July 6th 2017

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

While U.S. production grew slightly in 1978, and then remained stable until 1983 before once again growing. The emergence of the North Sea as a significant new oil supply basin (UK and Norway) as well as Mexico’s offshore oil success demonstrated the power the sustained higher oil prices had on creating new supplies. The impact of new supplies contributed to OPEC’s collapse.

At the same time oil supply outside of OPEC started growing, oil consumption in the developed world (OECD) fell, which is demonstrated by the United States and Europe consumption curves in Exhibit 13. Those two regions are the key part of the OECD. Non-OECD consumption continued growing. As the chart shows, the demand reduction was significant, and was key to crippling OPEC’s pricing power as was the growth in new oil supplies.

As we look at the factors helping to reshape today’s oil market, environmental pressures, especially the potential impact of electric vehicles, coupled with the impact on oil demand growth that will come in response to efforts by countries to decarbonize their economies, can be considered the equivalent of the 1970s oil price shock to global oil demand. Demand will continue to grow for the foreseeable future, but the annual rate of growth is likely to continue to slow until it eventually goes negative. Lower demand is coming at the same time oil companies are reducing well breakeven prices insuring more supplies in the future. These improved E&P economics is broadly similar in impact to the opening of new oil supply basins that occurred in the 1970s and 1980s. Just as the opening of new supply basins had a long-term impact, the reduced well breakeven prices will also have a long lasting impact. We can argue about how long the impact will last, but it is likely to last much longer than we expect.

History does not repeat, but it does rhyme, as suggested in the famous quote. In our view, the current oil industry downturn is rhyming more with the 1982-1986 cycle than with the 2008-2011 one. If that is true, then the industry may be looking at an extended period of low oil prices just as the industry experienced following the 1981 oil price peak. That span extended for 18 years as oil prices averaged below $45 a barrel, or the very long-term average of inflation adjusted oil prices, with the brief exceptions of the First Gulf War and 9/11. BP plc CEO (BP-NYSE) Robert Dudley’s comments in early 2015 that the industry needed to learn to live in a “lower for longer” environment seem to be proving accurate. That means the oil industry must continue adjusting its cost structure. The oil companies will need to keep their staffing lean, employ the best drilling and completion technologies available, and manage their balance sheets appropriately to succeed in the future. This environment doesn’t mean that there is no future for the oil industry. It means that corporate strategies must constantly be reassessed within a broader Energy industry panorama subject to external pressures that will only grow in the future.


Eoin Treacy's view -

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

“The cure for high prices is high prices” has been an adage in the commodity prices for decades and is no less true of oil prices. After almost a decade of high prices a great deal of additional supply has been brought to market. However, the advent of new technology which has allowed previously inaccessible reserves to be accessed, namely shale oil and gas, and the subsequent success in reducing the cost of extraction continue to represent gamechangers for the sector. That is before we begin to talk about the emerging trend of refracking; where wells that are past their peak output can be revitalized at a substantially lower cost.  

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July 04 2017

Commentary by Eoin Treacy

Energy Stat: Is "Fake News" Driving Down Oil Prices?...

Thanks to a subscriber for this report from Raymond James which takes a bullish opinion on oil prices. Here is a section:

Myth #2: U.S. shale production growth is going to flood the market at $35/bbl.
The fear of massive U.S. oil supply growth at oil “breakeven” prices of $35-40 per bbl is the other panic button that most investors (and many sell-siders) have been happy to push over the past few months. Yes, there are many U.S. horizontal (especially Permian) operators that can make solid incremental well returns at $35-40 per barrel if and only if they do not include any costs other than the drilling and completion costs of that next well. The problem with this type of analysis is twofold: 1) It is definitely not capturing the fullcycle returns where companies must include lifting, overhead, interest expenses, and other sunk costs. On a full cycle basis, very few U.S. E&P companies are actually generating positive returns at oil prices below $50/bbl, and 2) There is simply not enough cash being generated by U.S. E&P companies at oil prices below $50 to justify current drilling and completion activity and some of the U.S. supply growth forecasts that are now starting to appear. In fact, at current oil prices (of around $45/bbl) we estimate that the U.S. E&P industry as a whole will outspend cash flow generated by a whopping 50% this year! That amount of outspend is simply unsustainable and means the unfettered U.S. oil supply growth assumptions in a sub-$50 oil world are highly, highly unlikely.

We would also point out two other important points on this emerging U.S. supply growth panic. First, we have historically had one of the most aggressive (and accurate) U.S. oil supply growth models on the Street. Despite this, our global oil supply demand equation still suggests a meaningfully undersupplied oil market for the remainder of this year. In fact, if we go back to the beginning of this year (six months ago), our 2018 U.S. oil supply growth estimate of 1.3 million bpd was high on the Street and at least 500,000 bpd above consensus estimates at the time. Note that our current U.S. supply estimate is actually down about 500,000 bpd from our estimate a year and a half ago (early 2016) because of downward revisions in U.S. industry cash flows and emerging oil service equipment bottlenecks. In our opinion, forecasts of 2018 U.S. supply growth of 2.5 million bpd at oil prices below $50/bbl are simply not doing the math. Secondly, the longer-term fear of too much U.S. supply growth at $50/bbl ignores the fact that there is another~30 million bpd of OPEC and ~50 million bpd of non-OPEC supply (across a variety of geographies, both short-cycle and long-lead-time) that will likely be declining in a few years. Solely considering U.S. supply growth would be a “one hand clapping” approach: that is to say, it gives an exaggerated impression of how much global supply is actually growing. In 2017, for example, at least three significant nonOPEC producers – China, Mexico, Colombia – are posting sizable declines. Several others – Russia, Norway, Argentina – are flattish. Longer term, 2018 is shaping up to be the cyclical trough year for global long-lead-time project startups (down close to 50% versus 2016 levels) meaning non-U.S. oil supply growth will likely come under significant pressure in 2019 and beyond.



Eoin Treacy's view -

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

I think it’s fair to say that a lot of unconventional supply becomes uneconomic around $45 but starts making money anywhere above $55 so the big question is the extent to which producers hedged their exposure when prices were north of $55 at the beginning of the year. That is likely to be key variable in whether they are making money in the current environment. 

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June 30 2017

Commentary by Eoin Treacy

China Is About to Bury Elon Musk in Batteries

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

Roughly 55 percent of global lithium-ion battery production is already based in China, compared with 10 percent in the U.S. By 2021, China’s share is forecast to grow to 65 percent, according to Bloomberg New Energy Finance.

“This is about industrial policy. The Chinese government sees lithium-ion batteries as a hugely important industry in the 2020s and beyond,” Bloomberg New Energy Finance analyst Colin McKerracher said.

In all, global battery-making capacity is forecast to more than double by 2021 to 273 gigawatt-hours, up from about 103 gigawatt-hours today. That’s a huge opportunity, and China doesn’t want to miss it.

“The Gigafactory announced three years ago sparked a global battery arms race,” said Simon Moores, a managing director at Benchmark Mineral Intelligence. “China is making a big push.” 
But don’t count Tesla out. The company, based in Palo Alto, California, plans to announce locations for up to four new factories by the end of 2017. (It’s exploring at least one site in Shanghai.) And there are few, if any, individual Chinese battery companies that can match the scale of Tesla’s production toe to toe.   


Eoin Treacy's view -

China went from pretty much nowhere to become the dominant force in solar cell manufacturing in a relatively short time because of unwavering government support and could easily achieve the same feat in batteries. That is quite apart from similar objectives being pursued in South Korea and Japan. 

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June 21 2017

Commentary by Eoin Treacy

Why Britain Has to Be Really Nice to Norway and Russia

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

Already buffeted by political chaos at home and abroad, the U.K. gas market must now operate without its biggest stabilizing force: the giant Rough gas storage facility under the North Sea.
The planned permanent shutdown of the Centrica Plc site, able to meet 10 percent of peak demand in winter, means Britain is becoming even more reliant on imports of liquefied natural gas or pipeline fuel from Russia and Norway. That sets up the possibility that traders would have to outbid Japan, the world’s biggest LNG buyer, and others to keep millions of homes warm.

Political uncertainty is making the supply game even riskier, with rules for international gas pipelines clouded in mystery as the U.K. negotiates an exit from the European Union.

And the diplomatic crisis this month involving Qatar, the nation’s largest LNG supplier, caused gas prices in Britain to jump the most since January as two tankers were diverted.
“It takes two weeks for a cargo of LNG to arrive from Qatar, which is not a politically stable place right now,” Graham Freedman, principal analyst for European gas and power at Wood Mackenzie Ltd. in London, said by phone.“That does raise the political implications quite a lot, along with Brexit. So it’s a perfect storm in terms of security of supply for the U.K.”
Last winter as much as 94 percent of the country’s gas came from sources other than storage. More than half of that was imports, mainly through pipelines from Norway. Statoil ASA, Norway’s state-owned producer, has repeatedly said it doesn’t plan to significantly boost exports, but can divert more fuel to Britain if needed.

Eoin Treacy's view -

The graphic contained in this article highlighting the UK’s transition from being an Energy exporter to importer represents a major inflection point for the economy which was exacerbated by the repercussions of the global financial crisis. 

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June 21 2017

Commentary by Eoin Treacy

June 20 2017

Commentary by Eoin Treacy

Musings From the Oil Patch June 20th 2017

Thanks to a subscriber for this report by Allen Brooks’ for PPHB. Here is a section on the rig count:

At the same time, U.S. oil output continues growing in response to the increase in the number of working drilling rigs. As a result, the International Energy Agency (IEA) is projecting that U.S. oil output will grow by almost 5% on average this year, and by nearly 8% in 2018, overwhelming projected demand growth and re-establishing the glut environment. This forecast is creating concern about the success of OPEC’s strategy of cutting its output. The pessimistic view of crude oil prices rests on the belief that the slow pace in reducing oil inventories will create an environment where cheating on production cuts occurs, making it impossible for demand growth alone to drive oil prices higher. The optimists, including OPEC, believe that its strategy is working, it will merely need more time – hence the nine-month extension rather than a six-month one.

What we know is that the lift in oil prices sparked a drilling rig recovery in 2016, which has continued into 2017, and has become the fastest industry recovery in history. Although the recovery has been the fastest, it has yet to reach the levels of the recoveries of 1979 and 2009. The current weakening of crude oil prices is likely to cut short this rig recovery below the levels reached in those earlier recoveries, unless something else is at work in the oil patch.


Eoin Treacy's view -

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

Something interesting has occurred in the oil market as prices have declined almost $10 over the last month. When the front month price was close to the $60 in January the spread between it and the two-year future was about $1. Now it’s closer to $4. 

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June 16 2017

Commentary by Eoin Treacy

Many Rivers to Cross Decarbonization breakthroughs and challenges

Thanks to a subscriber for this report from J.P. Morgan Private Bank which may be or interest. Here is a section: 

New York. This is more of a theoretical exercise, since in NY, wind/solar comprise only 3% of electricity generation. But in principle, NY could also reduce CO2 emissions to 90 MT per GWh in exchange for a ~15% increase in system costs. One difference vs California is that NY’s build-out would start from a much lower base. The other difference is that storage is less optimal given lower NY solar capacity factors. Instead, a more cost-effective approach to reaching the deeper 60% emissions reduction target would be to build more wind/solar and discard (“curtail”) the unused amount, and not build any storage.

Conclusions. Scale and innovation are creating cost-benefit tradeoffs for decarbonizing the grid that are more favorable than they were just a few years ago, even when including backup thermal power costs. However, this is likely to be a gradual process rather than an immediate one. Bottlenecks of the past were primarily related to the high capital cost of wind, solar and storage equipment. The next phase of the renewable electricity journey involves bottlenecks of the future: public policy and the construction/cost of transmission are two of the larger ones7. As is usually the case with renewables, there’s a lot of hyperbole out there. The likely trajectory: renewables meet around one third of US electricity demand in 2040, with fossil fuels still providing almost twice that amount

Eoin Treacy's view -

Energy storage solutions have been evolving for a long time but the advances in battery technology has potential to revolutionise the sector. However he cost of those batteries still needs to come down a lot for them to truly have a transformational impact on the cost of generating and storing Energy. What is clear from the above report is that the continued build out of renewable Energy solutions, with or without storage, represents an additional cost for consumers over the lengthy medium term without a major advancement in battery technology.  

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June 14 2017

Commentary by Eoin Treacy

Copper demand from electric vehicles to be nine times higher by 2027

This piece from the International Copper Association may be of interest to subscribers. Here is a section:

Electric vehicles use a substantial amount of copper in their batteries, and in the windings and copper rotors used in electric motors. A single car can have up to six kilometers of copper wiring. The metal is also required for busbars, used to connect modules and cells in battery packs, and in charging infrastructure.

Whilst most cars use internal combustion engines that require up to 23 kg of copper, the IDTechEX research found that a hybrid electric vehicle uses 40 kg of copper, a plug-in hybrid electric vehicle uses 60 kg, a battery electric vehicle 83 kg, and a hybrid electric bus 89 kg. A battery-powered electric bus can use 224–369 kg of copper, depending on the size of battery used.

“Copper has the highest conductivity of any non-precious metal, and plays an important role in all Energy production, but it is particularly important for future sustainable technology applications such as electric vehicles,” said Colin Bennett, Market Analysis and Outreach, ICA. “Copper increases the efficiency and reliability of these vehicles and is itself a sustainable material, as it is 100% recyclable without loss of properties.”


Eoin Treacy's view -

The automotive sector is betting big on electric vehicles while also attempting to figure out how autonomy will function and what that means for ownership and miles driven assumptions. With battery technology improving all the time and with considerable investment flowing into the sector the potential for the electric vehicle market to grow from its current relatively modest footprint is considerable. 

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June 09 2017

Commentary by Eoin Treacy

Renault plans foray into energy market with mega battery

This article by Christoph Steitz and Edward Taylor for Reuters may be of interest to subscribers. Here is a section:

Large batteries can help stabilize the primary reserve electricity market, which is responsible for ensuring the grid has at least 50 Hertz. Carmakers can also earn money competing with conventional power stations to guarantee the provision of electricity during periods of high demand or volatility.

"We forecast the combined market for electric passenger vehicles, electric buses and battery storage to increase eight-fold to over $200 billion by 2020, a five-year compound annual growth rate of more than 50 percent," Berenberg analysts said.

With about 4 million electric cars expected to be on the roads by 2020, vehicle manufacturers looking at ways to recycle batteries, including Tesla, which already sells everything from solar panels to batteries and electric cars.

Daimler, BMW, Volkswagen and China's BYD Co Ltd are also exploring so-called second-life storage projects with batteries.

That includes partnerships such as the recent collaboration between BMW and Vattenfall, in which the luxury automaker will deliver up to 1,000 lithium-ion batteries to the Swedish utility for storage projects this year.

"What will end up happening is that BMW and Daimler will ... become utilities themselves," said Gerard Reid, founder of Alexa Capital LLP, a corporate advisor in the Energy, power infrastructure and technology sectors.

"They use Vattenfall now because they need to learn but I think the amount of batteries coming back will be so big that I think they'll end up engaging directly with the end customer themselves. And they've got the brand name to do that."  


Eoin Treacy's view -

The diesel scandal took a heavy toll on the growth ambitions of a number of auto manufacturers. There are now scrambling to come up with a way of ensuring their next clean Energy gambit is successful. Since the batteries going into electric vehicles are a lot like bigger versions of those in phones we know that they lose capacity after a few hundred recharges. That means finding new uses for old batteries is a major field of endeavour if the price is to be kept under control. 

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June 07 2017

Commentary by Eoin Treacy

Concerned about the Paris Agreement? There's still hope through girls' education

This article by Rebecca Winthrop and Christina Kwauk for the Brookings Institute may be of interest to subscribers. Here is a section:

The good news is that the most effective intervention is not even in the Paris Agreement. Empowering girls and women through a combination of education and family planning is the number one thing the world can do to address climate change, ahead of switching to solar Energy, wind Energy, or a plant-rich diet. Investing in both girls’ education around the globe and enabling women access to contraception and reproductive healthcare would result in 120 gigatons of carbon reduced by 2050, a staggering amount compared to the 90 gigatons that could be reduced by better management of harmful chemical refrigerants like chlorofluorocarbons (CFCs).

Demographers, global development specialists, and education advocates have long known about the connection between girls’ and women’s empowerment and smaller, more sustainable families. Research suggests that the difference in family size for a woman with 0 years of schooling compared to a woman with 12 years of schooling is about four to five children. And several studies have projected slower population growth if all girls around the world receive a secondary school education—as much as two billion fewer people on the planet for 2050 than if current fertility rates persist, and over five billion fewer people by 2100. Indeed, reaching a sustainable population growth rate could be realized even more quickly if the 225 million women around the world who want to avoid pregnancy but do not have access to contraception or control over their reproductive lives were given access to safe and voluntary family planning. The majority of these women live in the world’s 69 poorest countries, and it’s no coincidence that many of these countries are where girls have the hardest time going to school.


Eoin Treacy's view -

It boggles the mind that there is still debate on the issue of female education. Not only is there a strong body of research on the social and developmental benefits of giving girls equal access to education but there are also clear environmental and conservation benefits as well. At its most basic it just makes sense for any country to give itself a leg up by investing in the brain of every citizen to ensure the most productive people actually achieve their economic capacity. It really is that simple. 

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June 06 2017

Commentary by David Fuller

Email of the day 1

On Theresa May’s disappointing campaign:

Bullying, yes, and the British always tend to support underdogs. But the Tory campaign has allowed the debate to swing away from Brexit onto domestic, where Labour is generous and Tories realistic. Generosity is more attractive than reality. Her U Turn on Social Care -why introduce a radical domestic change mid-term when you are already incumbent and don't need to? - had many good points but she allowed Labour to characterize it as austerity. Overall, the Tory campaign has lacked bite and Energy, allowing opponents to pitch it as arrogant and unnecessarily austere. A Trump factor - disenchantment with the political class - also works against the Tories and in favour of outsider Corbyn and the innumerate amateurism of his acolytes.

David Fuller's view -

Many thanks for your astute summary. 

We can be sure the Brussels bureaucrats will be enjoying Theresa May’s comeuppance.  It will be a painful but also valuable lesson, assuming she survives this election.

(See also: Matthew Lynn’s apt column for The Telegraph: 2017 is the Worst Possible Year for Britain to Experiment with Corbyn-omics, posted on Monday)  

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June 02 2017

Commentary by Eoin Treacy

U.S. Won't Change Efforts to Cut Emissions Post-Paris: Tillerson

This note by Katia Dmitrieva for Bloomberg may be of interest to subscribers. Here it is in full:

Secretary of State Rex Tillerson says the U.S. won’t change “ongoing efforts" to reduce greenhouse gas emissions in the future, despite pulling out of the Paris climate accord.

U.S. “has a terrific record on reducing our own greenhouse gas emissions It’s something I think we can be proud of and that was done in the absence of a Paris agreement," he tells reporters before meeting at State Dept with Brazilian Foreign Minister Aloysio Nunes Ferreira


Eoin Treacy's view -

The revolution in unconventional supply has contributed more to the USA’s ability to combat emissions than any form of renewable Energy because it has made coal uncompetitive. The evolving argument for the development of fracking techniques to develop geothermal Energy sources is another reason why the USA is likely to meet its emissions targets without being party to an international agreement. The Energy intensity of the countries like China and India is still in its major growth phase and the question of global emissions rests on their ability to innovate. 

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May 31 2017

Commentary by Eoin Treacy

Trouble Brews for OPEC as Expensive Deep-Sea Oil Turns Cheap

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

The falling costs make it more likely that investors will approve pumping crude from such large deep-water projects, the process for which is more complex and risky than drilling traditional fields on land. That may compete with OPEC’s oil to meet future supply gaps that the group sees forming as demand increases and output from existing wells naturally declines.

Saudi Arabia’s Al-Naimi left his post shortly after his speech targeting high-cost producers, and his successor Khalid Al-Falih organized production cuts by OPEC and some other nations that are set to run through March 2018. In a speech in Malaysia this month, Al-Falih bemoaned the lack of investment in higher-cost projects and said he fears the lack of them could cause demand to spike above supply in the future.

Warnings from OPEC of a looming shortage are “overstated and misleading,” Citigroup Inc. said in a report earlier this month. The revolution in unconventional supplies like shale is “unstoppable” unless prices fall below $40 a barrel, and deep- water output could grow by more than 1 million barrels a day by 2022, according to the bank.

Royal Dutch Shell Plc in February approved its Kaikias deep-water project in the U.S. Gulf of Mexico, saying it would break even with prices below $40 a barrel. That followed BP Plc’s decision in December to move forward with its Mad Dog Phase 2 project in the Gulf, with costs estimated at $9 billion compared to $20 billion as originally planned.

Over the next three years, eight offshore projects may be approved with break-even prices below $50, according to a Transocean Ltd. presentation at the Scotia Howard Weil Energy Conference in New Orleans in March. Eni SpA could reach a final investment decision on a $10 billion Nigeria deep-water project by October.

Eoin Treacy's view -

Oil producers spent a decade investing in additional supply and while they went right on investing until prices declined, the reality is that a lot of that investment was in new technology which is now being used to drive prices down while exploration has been abandoned. 

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May 31 2017

Commentary by Eoin Treacy

The End of Cheap Chocolate? Cocoa Futures Surge Most on Record

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

Ivory Coast growers have sold 950,000 tons of cocoa beans from the 2017-18 main crop as of May 27, according to a person familiar with the matter. The main crop, which starts Oct. 1, is the larger of the country’s two annual harvests.

“That’s a pretty big upfront sale, and it’s probably the reason why prices are rallying,” Jack Scoville, vice president for Price Futures Group in Chicago, said in a telephone interview.

Some growing regions in Ivory Coast and Ghana, the second-largest producer, have been dry and need moisture to aid early crop growth, according to Gaithersburg, Maryland-based MDA Weather Services. Trees are also stressed from a lack of moisture in Indonesia’s Sulawesi region.

Eoin Treacy's view -

There has been a great deal of diversity in the performance of individual commodities but weakness in the agricultural sector has been a primary contributor to the underperformance of the Continuous Commodity Index. The abrupt decline in Energy prices has been a more recent factor. Nevertheless there is now some diversity coming into the agricultural sector which suggests they need to be treated on their individual merits. 

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May 25 2017

Commentary by Eoin Treacy

Some reflections on Japanese monetary policy

This article by Ben Bernanke for The Brookings Institute may be of interest to subscribers. Here is the conclusion:

If all goes well, the BOJ’s current policy framework may yet be sufficient to achieve the inflation objective. We’ll have to wait and see. If not, there are relatively few options available. The most promising possibility—should we get to that point—is more explicit coordination of monetary and fiscal policies. Monetary policy that is aimed at limiting the impact of fiscal expansion on the government’s debt could both make fiscal policymakers more willing to act and increase the impact of their actions. The BOJ may be reluctant to take such a step. In the possible future state that I am contemplating, however, there would be no real alternative other than to abandon the fight to raise inflation and, perhaps, even to accept a new bout of deflation. After such a long and valiant effort to end deflation and raise interest rates from their effective lower bound, that would be a most disappointing outcome.

Eoin Treacy's view -

Japan has had modest success with attempting to foment inflation but so far has failed to embed the belief prices are going to rise among the populace. The deflationary forces of technological innovation and lower Energy prices have particular meaning for Japan quite apart from the fact the yield curve is flat and at nominally low levels. 

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May 24 2017

Commentary by Eoin Treacy

The Big Green Bang: how renewable energy became unstoppable

Thanks to a subscriber for this article by Pilita Clark for the FT which may be of interest. Here is a section: 

“I have been early twice in financing the low carbon Energy transition,” says Bruce Huber, cofounder of the Alexa Capital advisory group. “But we feel it’s third time lucky.”

One reason for his optimism is what he calls the “tectonic plateshifting” in the car industry that is driving down the cost of Energy storage. Storing clean power has long been a holy green grail but prohibitive costs have put it out of reach. This has begun to change as battery production has ramped up to meet an expected boom in electric cars.

Lithium ion battery prices have halved since 2014, and many analysts think prices will fall further as a slew of large battery factories are built.

The best known is Tesla and Panasonic’s huge Nevada “gigafactory”. Tesla claims that once it reaches full capacity next year, it will produce more lithium ion batteries annually than were made worldwide in 2013.

It is only one of at least 14 megafactories being built or planned, says Benchmark Minerals, a research group. Nine are in China, where the government is backing electric cars with the zeal it has directed at the solar industry.

Could this lead to a China-led glut like the one that helped drive solar industry writeoffs and crashing prices after the global financial crisis?

“It’s something to watch,” says Francesco Starace, chief executive of Italy’s Enel, Europe’s largest power company.

The thirst for electric cars, not least in China, means “the dynamics of demand are completely different” for batteries than for solar panels, he adds.

Still, Enel’s internal forecasts show battery costs falling by about 30 per cent between 2018 and 2021 and it is among the companies already pairing batteries with solar panels to produce electricity after dark in sunny places where power is expensive, such as the Chilean desert.

Eoin Treacy's view -

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

The main objections to renewable Energy are focused on intermittency and their reliance on subsidies. However economies of scale and the application of technology represent reasons for why we should be optimistic these can be overcome over the medium term. That represents a significant challenge for both the established Energy and utility sectors. 

Right now we are talking about a time when solar and wind will be able to compete without subsidies on an increasing number of projects. However if we continue on that path there is potential for the sector to be a victim of its own success because the lower prices go and the more fixed prices are abandoned the greater the potential for volatility in Energy pricing. 

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May 22 2017

Commentary by David Fuller

After Her Election Victory, Theresa May Must Develop an Economic Programme

Just as the Labour Party has recently moved to the left, so Mrs May has moved, at least presentationally, towards the centre, and in some respects to the left of centre. This seems curious, unless you give importance to the ambition of supplanting the Labour Party as the natural party of government in just about all parts of the country. But what is the point of supplanting the Labour Party if in order to do this you have to become the Labour Party?

I am suspending judgment. We are in an electioneering phase, when politicians are liable to say extraordinary things. Mrs May would be well advised to keep her economic and financial policy prognostications as vague as possible. In particular, she should avoid making expensive spending promises that use up fiscal room for manoeuvre, and she should avoid restricting the Chancellor of the Exchequer’s options on tax by making pledges not to raise one sort of tax or another.

In that regard, last week’s manifesto was just about acceptable, despite some continuing guarantees on the state pension, the re-affirmation of “free at the point of use” for the NHS, and the pledge not to raise the rate of VAT.

But some ideological issues need to be straightened out. There seems to be a presumption in Mrs May’s circle that government intervention is good for “the many”, whereas markets are good only for “the few”. This presumption is completely wrong. When markets work well they work for everybody, especially for people at the bottom end of the income distribution, who lack the contacts and sharp elbows to further their interests in a system dominated by controls and rationing. Markets give them power and choice.

Of course, markets do not always work well. And this should provide the defining theme of Mrs May’s new government. But there are many parts of the economy where what we need is not less of the market but more, including in the provision of health and education services, especially for the “JAMs”, the “Just About Managing”.

David Fuller's view -

In attempting to seize Labour seats, Mrs May should not be alienating her most loyal constituency.  She will need their support and Energy in the post-Brexit environment.  To succeed in the manner every current supporter of Brexit wishes, the UK economy will need to be very attractive, not least to entice inward investment from other countries and their companies.

There are two advantages which can be achieved immediately following the June 8th General Election: 1) Lower taxes for individuals and also corporations; 2) Competitive employment policies to increase the talent available for 21st Century industries. The UK should be a beacon for talent, much of it home grown but with Companies free to import the skills sets which they may not be able to find locally.  It is ludicrous for the Government to impose a tax on talent from overseas of £2000 per annum per person as it is currently doing. 

(See also: UK companies to pay £2,000 a year for each non-EU worker, from Quell)

A PDF of Roger Bootle's column is posted in the Subscriber's Area.

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May 19 2017

Commentary by Eoin Treacy

China successfully mines flammable ice from the South Sea

This article by Cecilia Jamasmie for may be of interest to subscribers. Here is a section:

During the mining trial done at a depth of 4,153 feet, engineers extracted each day around 16,000 cubic metres of gas, with methane content of up to 99.5%, Minister of Land and Resources Jiang Daming said.

The new Energy source, while revolutionary, is not exempt of risks. The release of methane into the atmosphere as permafrost melts is regarded for those who believe in climate change as one of the worst potential accelerator mechanisms for it. Methane hydrate is also hard to extract, which makes the cost of producing it high.

Test drillings have also taken place in the US, Canada and Japan, with the latter announcing earlier this month that it was successful at producing the natural gas on the pacific coast and will continue mining it for around three to four weeks.

Sources of methane hydrate are so large that the US Department of Energy has estimated the world's total amount could exceed the combined Energy content of all other fossil fuels.


Eoin Treacy's view -

Methane hydrate is uneconomical using today’s methods of extraction and current prices However, its existence highlights the important fact that any argument referring to peak oil must be prefaced with details of costs of production and timeframes. There is no shortage of natural gas or fossil fuels for that matter. Their supply is limited only by a combination of technological innovation and price. Technology is improving all the time so it is inevitable that major important countries like China and japan will continue to work on how to bring down the cost of methane hydrate.

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May 16 2017

Commentary by Eoin Treacy

Third Well to Help Meet Demand for Geothermal Heating in Boise, Idaho

This article by Parker O’Halloran for may be of interest to subscribers. Here is a section

According to Colin Hickman, a spokesman for Boise Public Works, “We’re getting to a place where the amount of space downtown that we’re heating we felt it was the right time to bring on the third well to ensure that we have redundancy, in case something happens during the winter months, during our peak season so we have some back up for the customers on geothermal heating,”

Interestingly, a third well was dug in 1982, however, it has been not in use. Hickman says this third well is needed. These particular wells in Boise have geothermal water that is approximately 177 F (80 C) degrees when it comes out of the ground and is then pumped in insulated pipes to the downtown locations where the water heats the buildings.

“The buildings will basically take the heat out of that water, use it for their heating purposes in their building, and then that water goes back to Julia Davis Park, and there’s an injection well there that puts that water back into the earth,” Hickman said.

Hickman adds that Boise should be proud of its geothermal system as it eliminates the use of fossil fuels, it’s renewable and it’s an economic driver that will bring businesses in that are interested in this type of renewable energies to the Boise area.

Geothermal Energy use in Boise dates back to the 1890s.

Eoin Treacy's view -

Geothermal Energy has been around for a long time but has been totally reliant on the confluence of shallow heat vents and abundant water. However, it occurs to me that with the advances in hydraulic fracturing and horizontal drilling there is potential for cross pollination between the oil services and renewable Energy sectors. 

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May 16 2017

Commentary by Eoin Treacy

Inflation, El Nino, and Fishmeal

Thanks to a subscriber for this report from Jeffrey D.Saut for Raymond James. Here is a section:

Some inflation numbers were reported last week. They read: April PPI jumped 0.5% month/month, +2.5% year/year; +2.2% year/year was expected. Meanwhile, core PPI increased by 0.4% month/month, +1.9% year/year; +0.2% month/month and +1.6% year/year were expected. The inflation report reminded us of something Pippa Malmgren (a policy consultant to numerous presidents) said to us at a recent national conference. She opined that when inflation goes from 1% to 2.5%, or maybe even 3.0%, it’s a really big deal; and we agree. Shortly after parsing those inflation figures I read something about the El Niño that is expected to “hit” in the back half of 2017. As paraphrased from the eagle-eyed David Lutz’s blog “What Traders Are Watching,” (Jones Trading):

The headline read, “Full-Fledged El Niño Increasingly Likely in Second Half 2017.” The U.S. government’s Climate Prediction Center (CPC) last month forecast El Niño conditions would prevail by the end of the northern hemisphere summer, but put the probability at only 50 percent. Most El Niño indicators have strengthened since then so the probability is likely to be revised higher when the CPC issues its next forecast later in May. Aussie’s wheat crop could see further drought damage. Sugar cane will also be impacted. Dryness in Southeast Asia could depress harvest levels of crops including rice and sugar in Thailand, Robusta coffee in Vietnam, and will add stress to rubber and palm oil trees in Indonesia and Malaysia. El Niño has also been linked to a weaker Indian monsoon and lower than average rainfall could affect crops including rice, wheat, cotton, and sugar. Indian farmers are large buyers of gold, and analysts at UBS last year raised concerns that a potential weak monsoon could hit purchases of the precious metal. El Niño has tended to impact cocoa production in West Africa. Meanwhile, Peru’s anchovy catch is almost always affected by the weather event, and is the main ingredient for fishmeal. Interestingly, this “fishmeal” inference made me recall that a severe El Niño was responsible for the term "core inflation," which excludes food and Energy prices in its inflation figures for those of you who don't eat or drive.

Eoin Treacy's view -

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

Inflation has been largely absent from official figures for what feels like a long time and the bond market is still of the opinion that it is not about to make a comeback anytime soon. However there are increasing signs that wage demands are rising and that can’t but contribute to the official inflation figures eventually. 

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May 15 2017

Commentary by David Fuller

Oil Price Indicators Flash Buy as OPEC Expectations Grow Bigger

Price curve? Check. Technical markers? Check. The oil market just got bullish and that’s left OPEC with little room for maneuver when it meets in Vienna next week.

After the Energy ministers of Saudi Arabia and Russia talked up the potential for the Organization of Petroleum Exporting Countries and other nations to extend output cuts into early 2018, the crude market took off. OPEC’s preferred market structure returned, with nearer contracts at a premium further along the curve, with Brent and West Texas Intermediate crude rising above their key 200-day moving averages in intraday trading.

“Now they have to deliver,” said Ole Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen. “You could argue that an awful lot of positive news has been priced in and they need to deliver for that to be sustainable.”

coalition of OPEC nations and allies including Russia last year agreed to cut output by about 1.8 million barrels a day, starting in January. After the move initially boosted prices, concerns that it wouldn’t be sufficient to counter-act surging U.S. production pushed WTI below $44 a barrel. Producer nations, acknowledging they won’t achieve their target of returning global inventories to their five-year average by the time the original deal expires at the end of June, look likely to agree an extension at a meeting in Vienna on May 25.

As traders in Europe hit their desks on Monday morning, Brent crude jumped above its 200-day moving average. Early in May, a break below that marker sparked a sell-off with prices at their lowest since the last OPEC meeting at the end of November. The global benchmark also broke on Monday above another key technical marker, the 50-day moving average, for the first time since April 19.

“If you were short you cover, if you were flat you start acquiring length and if you were long you add to or keep those positions,” said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd. in London. “If there’s going to be a rollover longer than the second half of this year, I think the market will strengthen even after the meeting.”

David Fuller's view -

Interestingly, the press has been full of stories about how large long-term holders of the big multinational oil companies have been selling these top income producers since the beginning of 2017.  They were eventually joined by short sellers, forcing Brent Crude prices sharply lower in the second half of April. 

This item continues in the Subscriber’s Area where two other articles are also posted. 

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May 12 2017

Commentary by Eoin Treacy

Stretching Thin

Thanks to a subscriber for this heavyweight 114-page emerging market fixed income focused for report from Deutsche Bank which may be of interest. Here is a section on Saudi Arabia: 

Large FX buffers buy time despite high fiscal breakeven KSA also has a high fiscal breakeven, expected to reach USD84 in 2017 according to the IMF and somewhat lower according to our estimates at USD72. As such fiscal reform is a priority, but over USD500 billion of SAMA reserves and the potential for part-sale of oil assets give flexibility of timing. However, arguably, the size and conservative nature of the Kingdom makes early reform a necessity.

Saudi Arabia’s approach to breaking its hydrocarbon habit has been to undertake something akin to a revolution in the country, as outlined in the Vision 2030 document and the shorter-term National Transformation Program 2020. The challenges are significant, given the elevated fiscal breakevens, delivering 11% budget deficit in 2017. Ambitions for achieving a balanced budget by 2020 (“Fiscal Balance Program 2020”), suggests the bulk of the social and economic overhaul should be front-loaded. 

The National Project Management Office (NPMO), announced in September 2015 and tasked with moving projects forward in a coordinated fashion, has stalled. Furthermore, headline projects such as the Makkah Metro or the North-South rail line have been pushed out. Of the USD1 trillion pipeline, the only actual new project awards have been limited to Aramco investments. Until the NPMO is fully in place, any major project awards will be exceptions.

By contrast the establishment of the Bureau of Capital and Operational Spending Rationalization – an entity aimed at reviewing the feasibility of projects less than 25 per cent complete has moved forward with a review of some of the SAR1.4 trillion of projects in development. On the first round, approximately SAR100 billion of costs have been cut. Some projects will be cancelled, others retendered or converted to self-financing PPP-style contracts, but the certainty is that these cannot continue to be financed substantially from the public purse. There has also been additional controls on current spending with cuts in civil service allowances. The switch from an Islamic contract year to a slightly longer Gregorian one amounts to a 3% pay cut.


Eoin Treacy's view -

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

With significant reserves Saudi Arabia has time to deal with a relatively low oil price environment and the effect that is having on its fiscal condition. Rolling back spending commitments would leave the country in a much healthier position to compete considering its abundant resources and low cost of production. The new administration has embraced the need for change both in terms of domestic reform and investing in sectors outside of Energy. The soon to launch $100 billion Softbank Technology Fund is a case in point. 

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April 26 2017

Commentary by Eoin Treacy


Eoin Treacy's view -

The weakness in precious metals, Energy contracts and particularly soft commodities has resulted in the Continuous Commodity Index breaking below the trend mean and it is now testing the November lows above the psychological 400 level. A short-term oversold condition is now evident but upside follow through on Tuesday’s upward dynamic will be required to signal more than temporary steadying in this area. 

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April 24 2017

Commentary by David Fuller

Exxon, Shell Join Ivanka Trump to Defend Paris Climate Pact

Here is a brief section of this interesting article from Bloomberg:

As President Donald Trump contemplates whether to make good on his campaign promise to yank the United States out of the Paris climate accord, an unlikely lobbying force is hoping to talk him out of it: oil and coal producers. 

A pro-Paris bloc within the administration has recruited Energy companies to lend their support to the global pact to cut greenhouse gas emissions, according to two people familiar with the effort who asked not to be identified.

Cheniere Energy Inc., which exports liquefied natural gas, became the latest company to weigh in for the pact to cut greenhouse gas emissions in a letter Monday to White House Energy adviser G. David Banks. 

"Domestic Energy companies are better positioned to compete globally if the United States remains a party to the Paris agreement," Cheniere wrote. The accord "is a useful instrument for fostering demand for America’s Energy resources and supporting the continued growth of American industry."

Exxon Mobil Corp., previously led by Secretary of State Rex Tillerson, Royal Dutch Shell Plc and BP Plc also have endorsed the pact.

The industry campaign to stick with the Paris accord comes amid deep divisions in the Trump administration over the carbon-cutting agreement. Both the president’s daughter, Ivanka Trump, and her husband, Jared Kushner, a White House special adviser, have urged the president to stay in the deal, along with Tillerson. 

Climate Change Pact That Made History Now Faces Trump: QuickTake

On the other side are senior adviser Stephen Bannon and Environmental Protection Agency Administrator Scott Pruitt, who on Friday said "we need to exit" the pact.

Gas producers and exporters are highlighting the value of the agreement, which could help prod a worldwide move toward that fossil fuel.

Exxon Mobil argued in a letter last month that U.S. slashed its carbon emissions to 20-year lows because of greater use of natural gas, and "this success can be replicated globally” as part of the accord.

BP spokesman Geoff Morrell said the company continues to support the Paris deal, noting that "it’s possible to provide the Energy the world needs while also addressing the climate challenge." And Shell spokesman Curtis Smith said the company remains "strongly in favor" of the agreement.

What Trump’s Climate Views Might Mean for World: QuickTake Q&A

Coal producers Cloud Peak Energy Inc. and Peabody Energy Corp. also are lobbying in favor of the accord, even though the miners could be disadvantaged by a global shift toward cleaner sources of electricity. Cloud Peak pitches the Paris agreement as a platform for the U.S. to advocate using carbon capture and other high-efficiency, low-emissions technology to generate electricity from coal.

Trump is nearing a decision on whether he will fulfill repeated pledges to withdraw the U.S. from the accord he previously derided as "bad for U.S. business." The White House postponed a planned Tuesday meeting of senior administration officials, including Pruitt, Tillerson, Kushner and Bannon, to go over the pros and cons of staying in the agreement, according to an aide citing a scheduling conflict.

David Fuller's view -

There is not a single good reason that I have heard for leaving the Paris Climate Pact.  Stay in and at least you know what everyone is saying, and you can agree or disagree, and offer any other suggestions. Leave the Pact and you will be regarded as a petulant pariah state.  The USA should be at the table of any important international Pact, if only in the interests of good will. 

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April 24 2017

Commentary by Eoin Treacy

Musings From the Oil Patch April 18th 2017

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

The worst downturn in the history of the oil industry has been followed by the fastest drilling rig recovery in history. From massive layoffs and corporate restructurings, oil and gas and along with oilfield service companies have had to switch gears and figure out how quickly and profitably they can grow along with the current recovery. As someone mentioned, the industry has crammed a year’s worth of rig activity growth into a few months – something that is creating a challenge for the oilfield industry. 

As the Energy companies are about to start reporting financial results for the January - March 2017 period, numerous oilfield service company managements have already signaled that the numbers will likely not reflect the levels of profitability Wall Street analysts had expected due to the costs of responding to the explosion in activity, especially following OPEC’s surprise output cut to help drive a recovery in oil prices. From the rapid climb in the rig count, it is clear that not only had investors and analysts bought into the recovery scenario, but so too had exploration and production (E&P) company managements. 

There is an expression in English literature that “all things come to those who wait,” but that isn’t the case in the oil patch – especially if one wants to make money. In reality, the expression “the early bird gets the worm” is more appropriate to describe how people in the E&P business operate, but it is taking a toll on the pace of the recovery in oilfield service company profits. Service company managers have had to spend money to reactivate equipment and re-crew them before they can actually earn revenue. The more aggressive a company has been, or is, in ramping up its idle equipment, the greater are the costs incurred. At the present time, everyone is comfortable in the belief that the delay in gratification – increased profits – will be worth the effort, and the wait. Whether that proves a correct assumption or not will depend on how the recovery continues unfolding and what happens to well costs, which is what is driving the increased activity. Everyone has to make money going forward for the recovery to be sustained. That doesn’t mean, however, that everyone will enjoy the levels of profitability experienced during the era of $100+ a barrel oil prices. But, unless people make money, the industry will not be able to support additional activity, or possibly even support the current level of work. So where are we in this recovery?


Eoin Treacy's view -

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

Unconventional oil and gas wells are more expensive to drill and have prolific early supply surges which peak quickly. That means operators are uniquely positioned to respond to lower prices by cutting back on drilling and to higher prices by stepping up drilling. It might not be great news for worker job security but it means the USA is increasingly the swing producer in the global oil market. 

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April 21 2017

Commentary by David Fuller

Gigantic Wind Turbines Signal Era of Subsidy-Free Green Power

Here is the opening of this encouraging article from Bloomberg:

Offshore wind turbines are about to become higher than the Eiffel Tower, allowing the industry to supply subsidy-free clean power to the grid on a massive scale for the first time.

Manufacturers led by Siemens AG are working to almost double the capacity of the current range of turbines, which already have wing spans that surpass those of the largest jumbo jets. The expectation those machines will be on the market by 2025 was at the heart of contracts won by German and Danish developers last week to supply electricity from offshore wind farms at market prices by 2025.

Just three years ago, offshore wind was a fringe technology more expensive than nuclear reactors and sometimes twice the cost of turbines planted on land. The fact that developers such as Energie Baden-Wuerttemberg AG and Dong Energy A/S are offering to plant giant turbines in stormy seas without government support show the economics of the Energy business are shifting quicker than anyone thought possible -- and adding competitive pressure on the dominant power generation fuels coal and natural gas.

“Dong and EnBW are banking on turbines that are three to four times bigger than those today,” said Keegan Kruger, analyst at Bloomberg New Energy Finance. “They will be crucial to bringing down the cost of Energy.”

About 50 miles (80 kilometers) off the coastline in the German North Sea, where the local fish and seagulls don’t complain about the view of turbines in their back yards, offshore wind technology is limited only to how big the turbines can grow. Dong has said it expects machines able to produce 13 to 15 megawatts each for its projects when they’re due to be completed in the middle of the next decade -- much bigger than the 8-megawatt machines on the market now.

Just one giant 15-megawatt turbine would produce power more cheaply than five 3-megawatt machines, or even two with an 8-megawatt capacity. That’s because bigger turbines can produce the same power from a fewer number of foundations and less complex grid connections. The wind farm’s layout can be made more efficient, and fewer machines means less maintenance.

“Right now, we are developing a bigger turbine,” said Bent Christensen, head of cost of Energy at Siemens Wind Power A/S, in a phone interview. “But how big it will be we don’t know yet.”

David Fuller's view -

I did not predict this 3 to 4 years ago but I am delighted that wind power is now becoming much more competitive and self-sufficient.  I still have concerns about maintenance costs relative to solar power but we will see.  One should not underestimate technological innovation in this era. 

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April 20 2017

Commentary by David Fuller

Why the Market for Fossil Fuels Is All Burnt Out

If Helm is to be believed the oil market downturn is only getting started. The latest collapse is the harbinger of a global Energy revolution which could spell the end-game for fossil fuels. These theories were laughable less than a decade ago when oil prices grazed highs of more than $140 a barrel. But the burn out of the oil industry is approaching quicker than was first thought, and the most senior leaders within the industry are beginning to take note.

In the past, the International Energy Agency (IEA) has faced down criticism that its global Energy market forecasts have overestimated the role of oil and underplayed the boom in renewable Energy sources. But last month the tone changed. The agency warned oil and gas companies that failing to adapt to the climate policy shift away from fossil fuels and towards cleaner Energy would leave a total of $1 trillion in oil assets and $300bn in natural gas assets stranded.

For oil companies who heed Helm’s advice, the route ahead is a ruthless harvest-and-exit strategy. This would mean an aggressive slashing of capital expenditure, pumping of remaining oil reserves while keeping costs to the floor and paying out very high dividends.

“They’d never do it because no company board would contemplate running a smaller company tomorrow than today. It’s not in the zeitgeist of the corporate world we’re in, but that’s what they should do,” Helm says.

BP and Royal Dutch Shell are slowly shifting from oil to gas and making even more tentative steps in the direction of low-carbon Energy. But Helm is not entirely convinced that oil companies have grasped the speed with which the industry is undergoing irrevocable change.

“As the oil price fell, at each point, oil executives said that the price would go back up again,” says Helm. “What the oil companies did was borrow to pay their dividends on the assumption that this is a temporary problem. It’s my view that it is permanent,” he adds.

For a start, there is scant precedent for the price highs of recent decades. Between 1900 to the late Sixties oil prices fluctuated in a range between $15 a barrel to just above $30 a barrel – even through two world wars, population growth and a revolution in transport and industry.

It was geopolitical events which caused oil prices to surge by more than $100 a barrel following the Middle East oil embargoes of the late sixties and early seventies. They collapsed back to $20 by the Eighties.

So, what drove oil prices to the heady levels of $140 a barrel just less than 10 years ago?

“China,” says Helm, barely missing a beat. “If you look at both the rapid growth in emissions and the rapid growth of oil, fossil fuel and all commodity prices, it was while China was doubling its economy every seven years. This is a phenomenal rate.

David Fuller's view -

Oil prices spiked above $140 a barrel in 2008 because of supply reductions from OPEC countries, not least due to regional wars.  This has never been fully recognised as a huge factor in what is generally remembered as the credit crisis recession which followed.  

In 2009 OPEC lowered production once again, leading to a move back above $120 a barrel two years later.  By 2014 subsidised renewables were gradually eroding the market for crude oil. However, the really big change was the US development of fracking technology, leading to a surge in the production of crude oil and natural gas. 

We should always remember these two adages, particularly with commodities: 1) the cure for high prices is high prices.  These lower demand somewhat but the bigger overall influence is an increase in supply.  Conversely, the cure for low prices is low prices.  Demand increases somewhat when prices are lower but more importantly, supply is eventually reduced. 

How have these adages influenced commodity prices in recent years and what can we expect over the lengthy medium term?

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

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April 10 2017

Commentary by David Fuller

Nuclear Fusion Energy News: Infinite Power by 2030 with Nuclear Fusion Reactor?

Nuclear fusion Energy has often been sarcastically said to be always 30 years away. This scientific inside joke is meant to suggest we will never have the technology to make a working commercial nuclear fusion reactor. But despite the disappointments and failed promises over the last 50 years, the latest news suggests we might have reached a turning point in fusion Energy research.

Many people confuse nuclear fusion reactors with nuclear fission reactors. But fission operates on the principle of placing enough fissionable radioactive material – uranium or plutonium – together that a chain reaction will take place in which particles given off by the fuel smash into other atoms in the material to produce excess Energy.

This reaction has to be carefully managed through various means – including non-fissionable control rods – to avoid a disastrous runaway reaction.

But all of the concerns that people have about fission reactors – and these concerns are definitely justified following the incidents at Chernobyl and Fukushima – don’t apply to a fusion reactor. Nuclear fusion reactors cannot melt down, explode, or otherwise fail catastrophically in a way that threatens the environment.

If a nuclear fusion reactor did have a problem, it would simply stop working. In addition, the nuclear fusion Energy production process produces very little radioactive waste – and what waste is produced has a much shorter half-life than the long-lasting, highly dangerous radioactive byproducts created by fission.

Another advantage that a commercial fusion reactor would have over fission reactors is that fissionable materials are extremely difficult to find and process for use, making them very expensive and essentially a limited resource. A nuclear fusion reactor would likely use deuterium, which can be extracted from ordinary seawater in virtually unlimited quantities.

Energy production via a nuclear fusion reactor has been on the wish list of many governments around the world, which is why an international project known as ITER was established to construct a massive experimental tokamak fusion reactor. As reported by the Manufacturer, the purpose is to confirm the feasibility of large-scale production of fusion Energy.

The ultimate goal of the project is for ITER to be the first fusion reactor to achieve the production of more Energy than it requires to operate. Reaching this breakeven point has been the Holy Grail of fusion research. Thirty-eight nations have joined this effort to construct the experimental ITER reactor in southern France – with the cost being astronomical.

However, the scientists, engineers and bureaucrats running this program admit that it will be many decades – perhaps as far away as 2050 – before an actual commercial reactor based on ITER will be in operation.

It has become virtually a mantra for nuclear fusion Energy researchers that bigger is, in fact, better when it comes to building a nuclear fusion reactor. This is why governments are pouring tens of billions of dollars into the construction of the colossal experimental ITER reactor – that itself will not produce Energy for consumption.

Fortunately, a number of other private organizations and companies around the world are trying to make fusion power a reality much quicker, perhaps even as soon as 2030. In addition, several individual governments have their own private nuclear fusion Energy programs apart from ITER.

David Fuller's view -

Nuclear fusion has long been the holy grail of global Energy, with no Parsifal equivalent in sight.  That may be changing, although it would not make a great opera.  However, more wealthy people, governments and university science departments are investing increasingly large sums of money to achieve nuclear fusion.   

When they succeed, which I would define as generating far more Energy than they use in the process of creating nuclear fusion, it will be the greatest invention of all time. 

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April 05 2017

Commentary by Eoin Treacy

Musings from the Oil Patch April 4th 2017

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

As we contemplate the next cycle, we cast our view back on the industry’s history. The last great cycle came out of the explosion in oil prices in the latter half of the 1970s due to geopolitical events, but realistically it resulted from the peaking of U.S. oil output and the transferring of pricing power to the OPEC cartel. What broke the back of that price explosion was new, large sources of oil – offshore basins in the North Sea and West Africa, in particular, along with Alaska. Those were the resources that drove the industry over the subsequent 30 years. Shale is what is driving the industry now, and likely will drive it for the foreseeable future. What could that mean for oil prices? Look at Exhibit 1 where we show the inflation-adjusted oil prices from the late 1960s to 2016. After the bust of the early 1980s, the oil price traded for 18 years without ever going above $45 a barrel in current dollar prices except in response to one-off geopolitical events. 

The recent oil price bust followed a much longer period of super-high oil prices than in the 1970s. To our way of thinking, we are likely to experience another extended period of lower, but stable, oil prices. Will it be 18 years? We don’t know. Will oil prices stabilize around $45 a barrel? We don’t know. Might the price range be $55-$60 a barrel? It could be. Will it be $70 a barrel or more? We doubt it, except for brief periods. This isn’t because we think history always repeats itself, but rather because the oil industry is fighting maturing economies around the world, meaning slower demand growth. Developing economies are where oil demand is growing the fastest, but those countries have the benefit of employing the most recent equipment designs and technologies, suggesting their economies will be much more Energy-efficient than earlier developing economies at the same point in time. Think about how no country now would consider string telephone wires to allow communication – cell towers are the answer. The oil industry is also fighting a global push to de-carbonize economies in order to fight the damage of climate change, which has the potential to significantly lower global oil consumption growth.

Eoin Treacy's view -

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

This piece rhymes very strongly with our long-held view that shale oil and gas represent game changers for the Energy complex. This has resulted in US onshore shale now representing an important swing producer for the global market. 

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April 04 2017

Commentary by Eoin Treacy

Email of the day on desalination

Dear Eoin, concerning today's posting on the water situation, I recently visited one of Israel's 5 water desalination plants. Over the last 10 years Israel has totally overcome its historic water shortage problem by desalinating sea water. It has done so in collaboration with Veolia. In addition this new technology is being exported worldwide. Once again we have an example of how human genius is applied to important problems and how new technology is overcoming them. Great to be able to be positive when pessimism reigns around the world.

Eoin Treacy's view -

Thank you for this first-hand account and I agree that solving Israel’s water challenges is a significant victory for a country where water security is highly politicised. This article from MIT Technology Review carries more information. Here is a section: 

The Sorek plant incorporates a number of engineering improvements that make it more efficient than previous RO facilities. It is the first large desalination plant to use pressure tubes that are 16 inches in diameter rather than eight inches. The payoff is that it needs only a fourth as much piping and other hardware, slashing costs. The plant also has highly efficient pumps and Energy recovery devices. “This is indeed the cheapest water from seawater desalination produced in the world,” says Raphael Semiat, a chemical engineer and desalination expert at the Israel Institute of Technology, or Technion, in Haifa. “We don’t have to fight over water, like we did in the past.” Australia, Singapore, and several countries in the Persian Gulf are already heavy users of seawater desalination, and California is also starting to embrace the technology (see “Desalination Out of Desperation”). Smaller-scale RO technologies that are Energy-efficient and relatively cheap could also be deployed widely in regions with particularly acute water problems—even far from the sea, where brackish underground water could be tapped.

Earlier in development are advanced membranes made of atom-thick sheets of carbon, which hold the promise of further cutting the Energy needs of desalination plants.


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March 29 2017

Commentary by David Fuller

Britain is the Least of European Problems

The European Union is encircled on the outside, split three ways on the inside, and is saddled with a corrosive currency union that is still not established on workable foundations and is likely to lurch from crisis to crisis until patience is exhausted.

Europe’s economic “Lost Decade”, and the strategic consequences that stem partly from this failure, have emboldened enemies and turned the Continent into a dangerous neighbourhood. The EU now badly needs a friend on its Atlantic flank.

While it would be undignified for any British government to exploit these circumstances (and Theresa May is certainly not doing so) this is the diplomatic and military reality as Britain triggers Article 50.

Along an expanding arc across the East, the EU faces a pact of autocrats. Russia and Turkey are moving closer to an outright alliance - an ideological hybrid like Molotov-Ribbentrop - that cuts at the heart of Nato. Both are openly at war with the post-Second World War liberal order.

The Kremlin is meddling in the Baltics, the Balkans, and the EU’s internal democracies. Vladimir Putin acquired a military edge during the Energy boom - when the EU was disarming to meet austerity targets - and now enjoys a window of opportunity to extract maximum advantage.

In the West, the EU faces Donald Trump. This is a US president who refused to shake the hand of German Chancellor Angela Merkel. For the first time since the launch of the European project in the 1950s, the US no longer sees the EU as an asset in the diplomatic equation. Many in the White House would happily see it broken up.

This means that Washington will no longer allow the eurozone to use, or misuse, the International Monetary Fund for its own internal purposes. The implications are already apparent in talks over Greece, but they do not stop there.

It would be lamentable statecraft for EU leaders to pick a fight with Britain in these circumstances. For all the noise over Brexit, the UK is really the least of their problems. A clash would be worse than futile, as Italian premier Paulo Gentiloni said in London. Key figures in Germany, Poland, and Spain have repeatedly made the same point.

As the initial bitterness over Brexit fades, EU leaders are pleasantly surprised to learn that they, like many, misunderstood the referendum. Britain is not resiling in any way from Western liberal principles. It upholds all its strategic commitments to Europe through Nato, and is stepping up its defence EU’s eastern border with infantry and aircraft; it remains a champion of global free trade (more so than the EU itself); it has stuck by its climate pledges.

The country does not have a populist government. The Prime Minister could hardly be more cautious and proper, a child of the vicarage. She has defended the European cause in US Republican circles, almost as if she were its ambassador. Her cordial overtures have for the most part been received well in EU capitals and the upper echelons of the Commission.

The constitutional caveat, of course, is that Britain will act as an independent nation. It cannot accept the permanent jurisdiction of the European Court over almost all areas of UK law and policy, the baneful and masked consequence of the Lisbon Treaty.

It was always on the cards that the UK would have to extract itself from a venture that spends most of its Energy trying to hold the euro together. Monetary union must evolve into a full-fledged federal state, with a single EMU treasury, fiscal system, and government, if it is to survive. Britain obviously cannot be part of such a structure. Trying to obfuscate this constitutional fact helps nobody.

In short, nine months after the referendum, Europe’s leaders are reconciled to the necessity of separation. The debate has moved beyond the false dichotomy of soft and hard Brexits. Most welcome the clarity of British withdrawal from the single market, recognising that it may be healthier for both sides than a messy fudge based on the hybrid Norwegian model. Scotland’s Nicola Sturgeon is barking up the wrong tree if she really thinks that the EU is pushing hard for Brexit Britain to stay in the single market.

There are, of course, discordant notes, especially in France, where much of the political elite is stuck in a time-warp. Emmanuel Macron, the electoral boy-wonder, offers little beyond ideological pedantry and the old EU Catechism when it comes to Brexit.

He is apt to dictate absolutist terms with an imperial tone. No such terms are imposed on Canada in its trade pact with the EU, and for obvious reasons: Canada is an independent state.

I doubt he will succeed in trying to chastise Britain since he also wants an unbreakable “Franco-German position” on Article 50 talks, and Germany has different interests. The old Rhineland axis was in any case rendered obsolete by the fall of the Berlin Wall. Any attempt to reconstitute it will merely underscore France’s painfully subordinate role in what has become (to the dismay of the German people) a German Europe. Better for France to hang on to the tight Franco-British defence and security pact for a little strategic ballast.

With or without Brexit, the EU has to keep living with the error of monetary union, so destructive that one leading voice of the French establishment has written a book, La Fin du Rêve Européen, calling for the euro to be broken up in order to save what remains of the European project.

The eurozone is horribly split into the creditor and debtors blocs, each with clashing macro-economic interests, and each clinging to their own narrative of what happened in the debt crisis. Quantitative easing by the European Central Bank and a cyclical economic upturn have masked the tension over the past two years, but the underlying North-South rift is still there.

The ECB will have to taper and ultimately end its bond purchases as global reflation builds. The markets know that once Frankfurt rolls back emergency stimulus, as it must do to avert a political storm in Germany over rising prices, Italy, Portugal, and Spain will lose a buyer-of-last-resort for their debt.

The core problem remains: the conflicting needs of Germany and the South cannot be reconciled within EMU. The gap in competitiveness and debt burdens is too great. They should not be sharing a currency union at all.

As matters now stand, Italy’s anti-EU Five Star movement leads the polls by a six-point margin with 32pc of the vote. The four anti-euro parties are likely to win over 50pc of the seats between them in the Italian parliament in the elections early next year.

David Fuller's view -

This is one of the most realistic and comprehensive assessments of the European Union’s political situation that we are likely to see, in my opinion.  Moreover, it is discussed in the context of the Western world. 

What is not mentioned in this fine article above, is the credit which the European Union has been generously given by other commentators, not least from across the Atlantic, for maintaining post WWII peace throughout much of Europe. 

I will quibble with this because the EU was not actually created before 1993, following the Maastricht Treaty, otherwise known as the Treaty on the European Union.  Considerably earlier, The European Economic Community (EEC) was created in 1957.  It was more familiarly known as the Common Market and also the European Free Trade Association (EFTA).

Peace within Europe or any other global region, I suggest, is more likely maintained by independent, democratic governments with successful economies.  This is what the European Common Market / EEC / EFTA, actually achieved, to their considerable credit. 

Sadly, the Maastricht Treaty’s creation of the EU in 1993 marked the beginning of the end for Continental Europe’s self-governing and mostly economically successful countries, which were being homogenised in what became the biggest bureaucracy ever created. 

The introduction of the Euro in 1999, purely for political reasons, has been nothing short of a tragedy in term of declining economic performance and rising unemployment.  Moreover, this failing system has become fractious, not only among European countries but also within individual nations, leading to populist uprisings.

What about Europe’s financial markets?

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

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March 29 2017

Commentary by Eoin Treacy

Email of the day on hydrogen versus electric vehicles

I hope you are well. I was wondering what you thought of this article (Japan gambles on Toyota’s hydrogen powered car) about Toyota’s lack of faith in electric vehicles because 'a battery breakthrough is not in prospect'

Eoin Treacy's view -

Thank you for this email raising an important issue regarding Energy density. Here is a section from the article:

Fuel cell vehicles, by contrast, need all the manufacturing skills of a car company. “From the industrial strategy point of view, fuel cell technology is extremely difficult, it’s in the world of chemistry not machinery,” says Hiroshi Katayama at the advanced Energy systems and structure division of the ministry of economy, trade and industry (METI). If auto technology goes down the hydrogen path, Japan will be well placed. But if it doesn’t, Tokyo will have made a major miscalculation.

Toyota’s faith in hydrogen is best understood by looking at a car it never made: a pure electric vehicle. For the 20 years since it invented the Prius hybrid, Toyota has been the carmaker best-placed to launch a fully electric vehicle. It had the batteries, the motors and the power electronics but chose not to deploy them because of concerns about range limits, refuelling time and the risk of batteries degrading as they age.

It has announced plans for its own electric vehicle to exploit the demand from the premium segment opened up by Tesla and to meet emissions standards in the US and China. Yet Toyota’s fundamental doubts about battery-powered vehicles have not gone away.

The long dreamt-of Sakichi battery would store Energy at the same density as the chemical bonds in petrol: roughly 10,000 watt-hours per litre — enough to power a family car for hundreds of kilometres on a single tank. The low Energy density of the best batteries, about one-twentieth that of petrol, is why today’s electric cars have limited range.

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March 27 2017

Commentary by Eoin Treacy


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

Investors should be particularly sensitive to indicators that are associated with being in a misaligned world. This analysis can be applied both to sunk capital and new investment. For companies with low growth capex, margins on existing production will clearly be more important than incremental value creation or destruction on new investment. For high growth companies, returns relative to the cost of capital on new investment will be more critical. 

Investors should be wary of high-carbon companies where decarbonisation is likely to be demand driven (for example coal generators facing lower production as subsidised renewable production is built). However there may be value opportunities where decarbonisation is supply driven (for example restrictions on coal production, or forced coal closures could increase margins on remaining capacity even while overall volumes drop). 

Investors should look for low carbon companies in sectors where supply constraints are likely to be more significant than demand constraints as volumes grow. They should be wary of sectors where the mechanisms for growth are likely to drive down returns (for example long asset lives with technological progress and short-term market pricing). 

By understanding the positioning of companies in the matrix of volume and value, investors can make an informed judgment. Market valuations can be set against current opportunities and future expectations. Shareholder engagement can help ensure the right corporate strategy

Eoin Treacy's view -

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

Governments need revenue so regardless of what one’s feelings are with regard to climate there is a strong potential for higher taxes, particularly in Europe which is a major fossil fuel importer. The impetus for similar taxes in Energy producing nations, not least the USA, is less compelling.  

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March 24 2017

Commentary by David Fuller

Time for Trump to Learn From Reagan

It’s crunch time in America. The financial markets surged on Donald Trump’s election, on the assumption that his economic policies would, on balance, be pro-growth. Yes, Wall Street rightly loathes protectionism and the tech industry in particular is opposed to proposed restrictions on immigration – but business as a whole hopes that the President’s policies on tax, healthcare, spending, banking, regulation, Energy, infrastructure and, maybe even in time, monetary policy would be neo-Reaganite.

It’s still too soon to tell how all of this will pan out, but time is running out for the Trump administration on the economic front. It needs to get a lot more done a lot more quickly. There is, of course, healthcare reform. But the first real, tangible piece of good news has come from a very different area: there has now been some genuine movement on Energy, with the Keystone pipeline authorisation. That is good news: the US needs to embrace all kinds of domestic Energy production, and other countries should follow suit. The shale revolution 
has already transformed the US economy, which would be in a far weaker place without it.

But while Trump has delivered on Energy, he will need to turbocharge the rest of his agenda if he wants to keep on side those in business and Wall Street who thought that, despite his many downsides, the new president would end up improving the US economy overall.

Reagan ought to be the Republican role model: a true believer in free market economics, he was a brilliant, lucid and powerful advocate for individual liberty. He cut marginal tax rates and simplified the tax system, while slashing the number of pages in the Federal Register from 70,000 in 1980 to 45,000 in 1986, as a note by Adam Slater from Oxford Economics reminds us.

He did what very few politicians manage: he genuinely took an axe to red tape, deregulated extensively and simplified what rules remained. By contrast, the regulatory burden rocketed under Barack Obama. The Fraser Institute’s index of economic freedom confirms that America became a more free-market and economically liberal economy during the 1980s; in recent years, it has fallen back drastically.

David Fuller's view -

Many of Trump’s economic policies are not that different from Reagan’s.  However, Trump should have prioritised economic policies from the first days of his administration, rather than wasting his initiative on political disputes and repealing Obama’s healthcare programme.  This has been politically divisive, while policies for economic stimulus would have had much more cross-party support.  They may be harder to pass in future.     

Ironically, perhaps today’s realisation by Trump and Paul Ryan that they do not currently have sufficient support to repeal the Affordable Care Act cause them to refocus on policies for increasing GDP.

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March 23 2017

Commentary by Eoin Treacy

Energy Stat: Are Electric and Autonomous Vehicles Heading Down the Road to Peak Oil Demand?

Thanks to a subscriber for this fascinating report by Pavel Mulchanov for Raymond James which may be of interest. Here is a section:

There is no law of nature that dictates that global oil demand must eventually reach a peak and then begin an irreversible decline. The well-known “law” of Hubbert’s Peak applies to supply, not demand, and the advent of modern technology (fracking, horizontal drilling, enhanced recovery, etc.) has led to a fundamental rethink of whether oil supply will peak after all. In this context, we see comments such as the one from Shell, suggesting that peak demand will come first, rendering peak supply a moot point.

There is no direct historical precedent for worldwide demand for a major Energy commodity to peak on a sustained basis. (Sorry, whale oil doesn’t count.) Despite all of the regulatory and other headwinds, for example, global consumption of coal is still growing. But it is true that there is precedent for national and even regional demand to peak. Coal demand in Europe peaked in the 1960s, and has since fallen to substantially lower levels. Oil demand in Japan peaked in the 1990s. Oil demand in Europe peaked more recently, in 2006, one year after the U.S. By definition, a peak is something that can only be known in retrospect, but with a decade having passed, it seems abundantly clear that European oil demand will never get back to its pre-2006 levels. With regard to the U.S., the situation is less clear-cut because of the demand recovery in recent years, but 2005 may well be the all-time peak. The theory of peak global oil demand holds that when enough parts of the world reach a peak, a global peak will result, because the few places still growing will not be enough to offset the decliners. In this sense, the theory is conceptually valid. Thus, we would not argue with the notion that peak oil demand is a matter of time. The real question is: how much time?


Eoin Treacy's view -

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

I had not previously seen the statistics about peak demand for Europe and Japan so I found this report enlightening and commend it to subscribers. Peak demand is an important theme and explains why Saudi Arabia guards its Asian markets so jealously; offering discounts again as recently as two weeks ago. Asia and Africa represent the two big growth markets for international oil products just as they represent the major growth areas for coal consumption. 

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March 21 2017

Commentary by David Fuller

Big Oil Plan to Buy Into the Shale Boom

American shale with gusto, planning to spend a combined $10 billion this year, up from next to nothing only a few years ago.

The giants are gaining a foothold in West Texas with such projects as Bongo 76-43, a well which is being drilled 10,000 feet beneath the table-flat, sage-scented desert, and which then extends horizontally for a mile, blasting through rock to capture light crude from the sprawling Permian Basin.

While the first chapter of the U.S. shale revolution belonged to wildcatters such as Harold Hamm and the late Aubrey McClendon, who parlayed borrowed money into billions, Bongo 76-43 is financed by Shell.

If the big boys are successful, they’ll scramble the U.S. Energy business, boost American oil production, keep prices low, and steal influence from big producers, such as Saudi Arabia. And even with their enviable balance sheets, the majors have been as relentless in transforming shale drilling into a more economical operation as the pioneering wildcatters before them.

“We’ve turned shale drilling from art into science,” Cindy Taff, Shell’s vice president of unconventional wells, said on a recent visit to Bongo 76-43, about 100 miles (160 kilometers) west of Midland, Texas, capital of the Permian.

Bongo 76-43, named after an African antelope, is an example of a leaner, faster industry nicknamed “Shale 2.0” after the 2014 oil-price crash. Traditionally, oil companies drilled one well per pad—the flat area they clear to put in the rig. At Bongo 76-43, Shell is drilling five wells in a single pad for the first time, each about 20 feet apart. That saves money otherwise spent moving rigs from site to site. Shell said it’s now able to drill 16 wells with a single rig every year, up from six in 2013.

With multiple wells on the same pad, a single fracking crew can work several weeks consecutively without having to travel from one pad to other. At Bongo 76-43, Shell is using three times more sand and fluids to break up the shale, a process called fracking, than it did four years ago. The company said it spends about $5.5 million per well today in the Permian, down nearly 60 percent from 2013.

“We’re literally down to measuring efficiency in minutes, rather than hours or days,” said Bryan Boyles, Bongo 76-43’s manager.

Exxon, Shell, and Chevron will be able to spend more than independents can for service contracts and prime drilling acreage. But if the majors pursue acquisition deals, as they’ve done before, the wildcatters stand to reap the benefits.

Exxon invested big in shale in 2010 when it bought XTO Energy Inc. in a deal valued at $41 billion. For years, however, the major companies spent little on shale, instead focusing on their traditional turf: multibillion-dollar engineering marvels in the middle of nowhere that took years to build. The wells that Big Oil drilled were mostly in deep water, where a single hole could cost $100 million, rather than shale wells that can be set up for as little as $5 million each.


Chevron said it estimates its shale output will increase as much as 30 percent per year for the next decade, with production expanding to 500,000 barrels a day by 2020, from about 100,000 now. “We can see production above 700,000 barrels a day within a decade,” Chevron Chief Executive Officer John Watson told investors this month.

Exxon said it plans to spend one-third of its drilling budget this year on shale, with a goal to lift output to nearly 800,000 barrels a day by 2025, up from less than 200,000 barrels now. The company doubled its Permian footprint with a $6.6 billion acquisition of properties from the billionaire Bass family. Darren Woods, Exxon’s new CEO, said shale isn’t “on a discovery mode, it’s in an extraction mode.”

David Fuller's view -

The US is now the swing producer of crude oil, increasing output in the Permian Basin and other sites when prices are attractive relative to production costs, while cutting back domestic supplies and buying in oil when they are much lower. 

Prices of WTI Crude oil have fallen back from $55 this month, mainly because US production has increased sharply and some OPEC producers are quietly abandoning their previously announced ‘cutbacks’.  Russia promised OPEC that it would lower production but that was mainly due to the freezing weather in Siberia during January and February, and they have been increasing production subsequently. 

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March 21 2017

Commentary by David Fuller

IEA Warn $1.3 Trillion of Oil and Gas Could be Left Stranded

The International Energy Agency (IEA) has warned oil and gas companies that failing to adapt to the lower carbon Energy agenda could lead to over a trillion dollars worth of assets being abandoned by 2050.

The IEA estimates that a step-change in climate policy away from fossil fuels and towards cleaner sources of Energy would leave a total of $1 trillion of oil assets and $300bn in natural gas assets stranded.

The report, undertaken in partnership with the International Renewable Energy Agency, said the move to reduce global greenhouse gases could hold “significant consequences for the Energy industry” if companies fail to adapt their portfolios in the wake of the Paris Agreement.

Oil majors including BP and Shell are already adjusting the balance of future investment with a bias towards gas rather oil.

In the past BP’s has focused on oil for 60pc of its portfolio while gas has made by the difference, but last year this ratio flipped in favour of gas. Shell has made moves towards gas production and transport with last year’s £35bn acquisition of BG Group, a leader in producing and shipping cargoes of liquefied natural gas in the global market.

The agency warned that keeping to the Paris deal would require carbon emissions from the Energy sector to peak before 2020 and fall by more than 70pc from today’s levels by 2050.

This would require the share of fossil fuels used to create Energy to halve between 2014 and 2050 while the share of low-carbon sources - such as renewables, nuclear and carbon capture - would more than triple worldwide to make up 70pc of Energy demand in 2050.

David Fuller's view -

The IEA makes a good point although I think its estimates are too low.  There is vastly more oil and natural gas around the globe and most of the potential shale sites have yet to be touched.  Additionally, with technological improvements continuing, consider the adage: If you want to produce more oil, just go back to where you found it before because the supply has not been depleted.    

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

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March 20 2017

Commentary by Eoin Treacy

Google Might Run the Power Grid More Efficiently

This article by Diego Marquina and Jahn Olsen for Bloomberg may be of interest to subscribers. Here is a section:

The best way to send the right economic signals that reflect constraints is through locational marginal pricing – having different power prices in different parts of the grid.

This is a politically unpopular mechanism, as it would see prices go up in zones of large demand – potentially industrial areas.

The alternative is grid investment. But the costs are huge, as is the case for the bottleneck between Scottish wind farms and English demand centers. The 2.2 gigawatt HVDC cable currently being built there has an estimated cost of 1 billion pounds. Yet National Grid estimates as much as 8GW of additional transmission capacity could be required by 2030, on that particular border alone.

Less human involvement might be part of the solution. Google’s DeepMind recently announced they are exploring opportunities to collaborate with National Grid. It has been successful elsewhere -- DeepMind demonstrated its immense potential by reducing cooling costs in an already human- optimized datacenter by 40 percent.

Setting it loose on the extremely complex and quite probably over-engineered National Grid, with its many overlapping services and mechanisms, its rules of thumb and its safety margins, could provide novel ways to ensure system reliability cheaply and efficiently. DeepMind’s CEO conservatively hinted that it might be able to save up to 10 percent of the U.K.’s Energy usage without any new infrastructure. Step aside, humans.


Eoin Treacy's view -

Artificial Intelligence (AI) is rapidly finding its way into systems which had previously always been managed by humans. You might have heard of the Google Deep Mind team’s victory against the Go world champion. It represented a landmark not so much because it overcame a human; we’ve seen that in chess before. It was the manner in which the victory was achieved that is so important. 

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March 10 2017

Commentary by David Fuller

Race to Bottom on Costs May Cause Oil to Choke on Supplies

Here is the opening of this topical article by Bloomberg:

Houston hosted two events this week: the nation’s largest Energy conference and the town’s famous rodeo. They have more in common than you’d think.

In both cases, the key for top performers is how efficiently they perform. For cowboys, it means tightly controlling every muscle to stick on a bucking bronco. For Energy executives, it means controlling every cost to lower the break-even price and survive what’s been a wild ride on the oil market.

When companies can lower the price at which they break-even, it means they can approve more projects and produce more oil, keeping dividends safe and investors happy. The risk: By drilling up their share price, they can also end up drilling down the price of oil. Welcome to 2017, the year after a two-year market rout made companies more efficient. At the CERAWeek by IHS Markit conference this week, fears of too much supply were palpable.

"Everyone is driving break-even prices down," Deborah Byers, head of U.S. oil and gas at consultants Ernst & Young LLP in Houston, said in an interview at the meeting, the largest annual gathering of industry executives in the world. "It isn’t just shale companies; it’s everyone, from deep-water to conventional."

As the conference was ongoing, those fears took physical form as West Texas Intermediate, the U.S. crude benchmark, plunged 9.1 percent this week, closing below the key $50-a-barrel level for the first time this year. It settled at $48.49 on Friday.

The slump came as Scott Sheffield, chairman of Pioneer Natural Resources Co., said prices could fall to $40 if OPEC doesn’t extend its existing agreement to cut production. Shale billionaire Harold Hamm, the CEO of Continental Resources Inc., warned undisciplined growth could "kill" the oil market.

The buzzword was efficiency. In panel discussions and keynote speeches, executive after executive tried to outdo rivals in announcing their low break-even prices. Eldar Saetre, head of the Norwegian oil giant Statoil ASA, told delegates that break even for his company’s next generation of projects had fallen from $70-plus to "well below" $30 a barrel.

David Fuller's view -

Analysis of the international oil market today is simple, albeit very different from what the industry has experienced in earlier decades.  Thanks to technology, oil companies around the world can now produce more crude at $50 a barrel than the global economy can consume.  Furthermore, the average cost of production is still declining and is likely to be considerably lower ten to twenty years from now. 

The world will never run out of oil, even when the global economy is booming with the help of cheaper Energy prices.  This is not because the supply of oil in the ground is infinite, which it is not.  Instead, the world is approaching peak oil demand within the next decade, because other forms of Energy continue to become more competitive, thanks to technology, and they cause less pollution.

The only way oil prices can move considerably higher than today’s levels for both Brent and WTI crude, is if production is sharply curtailed, for one reason or another.  While theoretically possible, this is unlikely beyond the short term, if at all.  

(See also this week's earlier comments.)

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March 09 2017

Commentary by David Fuller

US Shale Surge Overwhelms Oil Market as OPEC Splits Deepen

Oil prices have plunged to the lowest level this year as US shale producers boost output at an astonishing pace and crude inventories keep rising, triggering a wave of selling by hedge funds with record speculative positions.

The US surge threatens to neutralise cuts agreed by the OPEC cartel and a Russia-led group of producers last November, potentially delaying a full recovery of the market until 2018 or even later. 

Texas light crude fell $48.90 a barrel on Thursday after yet another surprise jump in US stocks. Prices have slid 8pc in three days and have broken through key levels of technical support, dousing enthusiasm for commodities across the board. 

America's shale frackers have slashed cost so far that they can now produce large volumes at a break-even price of $35 or lower in the prolific Permian Basin, the twelve-layered 'crown jewel' of West Texas, where land auctions have reached $60,000 an acre in core zones.

Continental's legendary wild-catter Harold Hamm said drilling is coming back so fast, and on such a large scale, that it threatens to overwhelm the global industry. "We are on something of an equal basis today with OPEC. We need to be careful not to overproduce. It has to be done in a measured way or else we’ll kill the market," he said at the CERAWeek Energy forum of IHS Markit in Houston.

The US rig count has almost doubled to 756 since touching bottom last May. The productivity per rig has soared as longer lateral drills, "geological steering", and precision "clustering" triple extraction rates in some sweet spots.  The decline rate of the wells has dropped from 65pc to 35pc a year since 2013.

“The consequence has now become alarmingly visible. US crude oil production is growing. And it is growing strongly," said Bjarne Schieldrop from SEB.

Raghdaa Hasan from Statoil said US producers have restored almost all the losses of the slump in just four months, lifting production by over 500,000 b/d. "US shale has proved itself really resilient. They are able to pour significant output into the global system," she said at CERAWeek.


The shale rebound has combined with events in the Middle East to seriously rattle the day-to-day oil markets. The Iraq's oil minister, Jabbar Ali Al-Luiebi, stunned traders with predictions at CERAWeek that his country would lift output by almost a million barrels a day (b/d) to 5m in the second half of this year. 

Such an expansion would further flood the global market before it has come close to rebalancing. It is matched by similar rhetoric from Libya, which has already doubled output to 700,000 over recent months and is ultimately eyeing 2.2m b/d.


It had been assumed that the Saudis would do whatever it takes to push oil back up to a band of $60 to $70 in order to smooth the way for a $100bn part-privatisation of the state oil giant Aramco next year, the biggest public offering ever. This is no longer so certain.

Patrick Pouyanné, chairman of the French group Total, said OPEC is going to have to bite the bullet and accept much longer cuts. "The fact is, we still have build-ups in U.S. inventories. If OPEC wants to rebalance the market, then they'll have to extend the agreement. It will take a year to 18 months to really have an impact on inventories," he said in Houston.

David Fuller's view -

OPEC’s fragile agreement to cut supplies has fallen apart well before its official review date in June.  Short covering and some speculative buying pushed the price of Crude Oil (weekly & daily) temporarily into a range either side of $55 for three months. 

However, Russia never delivered its agreed supply cuts.  Now everyone in OPEC will increase supplies while prices remain above $40.  US shale producers in the Permian Basin, which have never been part of OPEC, are in the strongest position.  They can ramp up production very quickly when prices are firm, as we have seen in recent months.  Even more importantly, they can reduce output very quickly, when prices are less attractive, while preparing additional wells for the next price rise.

Most oil producers were overly dependent on $100 plus prices which we may never see again.  Those with large populations face a rough time, burning through reserves and facing huge declines in their standard of living.   

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

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March 09 2017

Commentary by David Fuller

Green van Beurden of Shell Warns On Looming Peak Oil Demand

Shell's chief executive Ben van Beurden has warned global Energy leaders to brace for the shock of falling oil use as soon as the 2020s, warning that those who trivialise the threat of climate change will exhaust public tolerance for fossil fuel companies if they are not careful.

"We have to acknowledge that oil demand will peak, and it could already be in the next decade. It could happen. There are people who believe it will grow forever but I don't subscribe to that," he told the CERAWeek Energy forum of IHS Markit.

Mr van Beurden said the industry is skating on thin political ice - notwithstanding the election of Donald Trump in the US - and needs to shore up its flank. "Social acceptance is just disappearing. I do think trust has been eroded to the point that it is becoming a serious issue for our long term future," he said.

"This is the biggest challenge of my career. We're under a lot scrutiny and pressure. It is not a rational discussion any more, it's emotional," he said. Regulators across the world are starting to demand that fossil fuel companies account for 'stranded assets' and financial risks from climate change, leading in turn to a shareholder pressure on the boards.

Claims of peak demand are anathema in the US oil capital of Houston. "Wishful thinking," said Chevron's chief John Watson. Saudi Arabia's Energy minister Khalid al-Falih said talk of peak demand is ridiculous and ultimately dangerous, discouraging vitally-needed investment before alternatives are on offer. "They are compromising the world's Energy security," he said.

Mr van Beurden advised the oil and gas industry to take an activist approach to show that it takes the threat of global warming seriously. Shell is already the biggest provider of renewable Energy in the US through its wind farms. It is planning to invest $1bn a year in green technologies, and carbon capture and storage.

"You can be too early on this, as we discovered to our detriment. You have to get the timing right," he said. This time the stars are finally coming into alignment as renewable costs fall to parity with fossils.

Shell can afford the luxury of this 'moral' position because it has already made the switch to natural gas, the lone fossil fuel winner of the Paris Agreement on climate change. Gas emits roughly half the C02 of coal in power generation. It is also the perfect back-up for intermittent solar and wind.

“The largest contribution Shell can make to reducing emissions globally in the near term is to continue to grow the role of natural gas,” he said. The company has finished integrating BG following the $52bn takeover in 2016, creating a gas giant and $4bn of synergies this year. "We have taken a tremendous amount of cost out," he said.

The BG merger is one prong of the strategy. The recent sale of $8.5bn of oil sands acreage in Canada is another. Shell is today far less exposed to the political risk of climate change.

The group has not abandoned oil, although it has pulled out of Alaska where it wasted $9bn on a "dry well". Mr van Beurden said the regulatory overkill in Arctic waters, married with high costs, made it pointless to continue.

David Fuller's view -

Ben van Beurden is a brave man, having entered the wounded lions’ den at the CERAWeek Energy forum of HIS Markit in Houston, and delivered this message.  I trust he came away unscratched.

I think he is right.  In fact, I said so, more or less, in Monday’s Comment of the day.  I won’t repeat all those points but you can either scroll back to Monday, or use these two links to access Email of the day 2 on crude oil, and also AE-P’s earlier article: Permain Shale Boom in Texas Is Devastating for OPEC.

Oil is obviously an immensely important commodity.  However, its days as a fuel are now in decline, for all the reasons mentioned above.  That will not change.  However, oil is a very useful chemical, both today and in the foreseeable future.  That will be no consolation for oil producers because both the demand for oil and its price will be much lower a decade from now.

These changes are entirely due to our era of accelerating technological innovation.  To appreciate the significance of this, just consider the example of oil over the last decade.  In fact, only a few years ago experienced commentators were still telling us that the world was rapidly running out of crude oil.  Today, I suggest there is far more oil available than the world will ever require.

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

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March 09 2017

Commentary by Eoin Treacy

China Inflation Heads Off in Two Directions

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

China's consumer-price index in February was up just 0.8% from a year earlier, Beijing reported Thursday, slowing from January's 2.5% pace, while the producer-price index--which measures production costs at the factory gate--was up 7.8%, its biggest jump since September 2008.

It is the CPI, which eased largely due to food prices, that most economists see as more indicative. The sharp rise in input costs for manufacturers reflects how low commodity prices were a year ago, and should moderate as that factor fades. Both consumer and producer prices will soften if the overnight plunge in global oil prices proves to be the beginning of a longer slide. Oil's biggest one-day drop in more than a year followed news of record U.S. stockpiles, though prices recovered a touch during Asian trading hours Thursday.

Still, going even further down the rabbit hole, it seems unlikely that China's surprisingly weak inflation reading will lead the central bank to relax. CPI inflation may be far short of the government's 3% target, but the People's Bank of China has a more urgent task than goosing prices: preventing financial risk, from ballooning debt to asset bubbles, from wrecking the economy.

"Despite lower-than-expected inflation, the PBOC will continue to raise money-market interest rates because the overarching theme for China this year is deleveraging," said Liu Dongliang, senior economist at China Merchants Bank.


Eoin Treacy's view -

China’s producer prices have been rising because of the weakness of the yuan, higher Energy prices and the trend of higher wages without commensurate improvements in productivity. 

It’s looking increasingly likely that oil has rolled over so that will remove some pressure from both the CPI and PPI figures over the coming months in both absolute and year over year comparisons. However the renminbi is still trending lower and wages are still rising. Against that background the central bank’s attempts to control the shadow banking system while also encouraging the domestic economy highlights just how fine a line it is treading in terms of monetary and fiscal policy. 


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March 08 2017

Commentary by David Fuller

Saudis Lose Patience on OPEC Cheating, Lash Out at Irresponsible Anti-Fossil Campaign

Saudi Oil Minister Khalid al-Falih has lashed at Western leaders for promoting the 'myth' of peak oil demand and scare-mongering over vast stranded resources in the fossil fuel industry, accusing of them committing a grave disservice to mankind.

The defiant minister said the campaign of attacks on the high-carbon sector will deter trillions of dollars of vitally-needed investment, leading to a disastrous Energy crunch once the current glut is cleared.

"They are doing nothing less than compromising the world's Energy security. It will lead to damaging oil price spikes, and more acute poverty for developing countries," he said, speaking at the IHS CERAWeek summit in Houston.

Mr al-Falih said Saudi Arabia welcomes wind, solar, and other renewables but warned that they cannot quench Asia's "insatiable demand" for more oil or meet supply as global Energy demand doubles by 2050.

For now the problem is the opposite one. The oil market is over-supplied and inventories remain near record levels, despite an accord last November by OPEC and a Russia-led group of states to cut output by 1.2m barrels a day (b/d).

Mr al-Falih admitted that the global crude market has not yet tightened enough and complained that some countries are cheating on cuts. "It has been slower quite frankly than I had thought in the first two months of this year," he said.  

"Saudi Arabia will not allow itself to be used by others. The agreement is for the benefit of all, and needs to be addressed by all. We cannot accept free riders," he said.

The minister said his country would back cuts only for "a restricted period of time" and warned speculators with big long positions on crude oil derivatives that they should not expect the Kingdom to back-up their bets by choking supply.

"I would caution not to tempt investors into irrational exuberance, or into wishful thinking that OPEC or the Kingdom will underwrite the investments of others at our expense and long-term interests."

It is a strong hint that the Saudis may not agree to extend the deal when it expires in June. OPEC officials have been meeting oil traders at the CERAWeek forum to probe what is happening in the parallel futures market. They have been told that the funds may close their positions en masse and trigger a fresh price crash if OPEC returns to pumping at will.

Traders say Russia has cut barely half the 300,000 b/d pledged, similar to the late 1990s when Moscow never followed through on promises. The country's oil minister Alexander Novak told the forum that Russia would deliver by end of April, but also said dismissively that there are "more important issues to talk about" than the OPEC deal. He digressed instead into the issue of currency wars.  

David Fuller's view -

So the Russians have only honoured half of their agreed oil production cut – what a surprise.

Meanwhile, OPEC producers may quietly increase their production following today’s downward dynamic Brent Crude (weekly & daily).  It also helps to have the Permian Basin, easily one of the world’s largest deposits of shale oil, in Texas.   

Saudis remain in a state of shock, due to the USA-led accelerated rate of technological innovation which has made US shale so competitive.  I think their forecasts for “damaging oil price spikes” are wishful thinking.  The Saudi riyal remains pegged to the US$ but for how long?  The risk of a massive devaluation before the end of this decade is increasing. 

(See also: Email of the day 2 “On crude oil” posted on Monday, 6th March, and also AE-P’s excellent article: Permain Shale Boom in Texas Is Devastating for OPEC)  

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

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March 08 2017

Commentary by Eoin Treacy

New Research Could Turn Water Into the Fuel of Tomorrow

This article from caught my attention and I thought it may be of interest to subscribers. Here is a section:

“What is particularly significant about this study, which combines experiment and theory, is that in addition to identifying several new compounds for solar fuel applications, we were also able to learn something new about the underlying electronic structure of the materials themselves,” Neaton said in a Caltech press release.

To discover these new photoanodes, the team combined computational and experimental approaches. A Materials Project database was mined for potentially useful compounds. Hundreds of theoretical calculations were performed using computational resources at the National Energy Research Scientific Computing Center (NERSC), together with software and expertise from the Molecular Foundry. Once the best candidates for photoanode activity were identified, it was time to test those materials in the laboratory.

The materials were simultaneously tested for anode activity under different conditions using high-throughput experimentation. This was the first time these kinds of experiments had been run this way, according to Gregoire.

“The key advance made by the team was to combine the best capabilities enabled by theory and supercomputers with novel high throughput experiments to generate scientific knowledge at an unprecedented rate,” Gregoire said in the press release.


Eoin Treacy's view -

There has been great deal of commentary in the media about the advances in artificial intelligence and how it is represents a threat to employment across a number of fields. A broader perspective to the easy application of massive computing power is the scale that can be brought to experiments through computer simulation and data analysis. Artificial intelligence represents a major facilitator for technological innovation. Coupled with rapid prototyping and CRISPR the potential for unprecedented change in a range of sectors, stretching from materials to healthcare, is looking increasingly like the base case.  

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March 06 2017

Commentary by David Fuller

Let Us Have a Reforming Budget at Last

A number of measures have already been announced to come into effect this year, including a 2 percentage-point increase in the insurance premium tax and a cut in corporation tax. The Chancellor may well modify some of these measures.

He will surely concede some form of compensation for firms severely hit by the resetting of business rates. But, above all, he must keep current government spending under a very tight rein to allow the Government room for manoeuvre later.

Mind you, all this is going to seem pretty thin gruel. Could we please have some more? In particular, as I said last year, it would be good to have, if not a vision (and “Spreadsheet Phil” apparently doesn’t do “the vision thing”) then at least a glimpse of how the tax system is going to develop.

In fact, very few Chancellors find themselves able to embrace radical reform of the tax system. Usually, they are too busy grappling with the Government’s deficit to have either the resources or the time.

This is true now, and whatever Energy is left is fully absorbed in preparing Britain for Brexit. Yet reform is badly needed. In so many ways, our current tax system is both irrational and inimical to economic growth.

Perhaps we can forgive Mr Hammond his first, and last, boring March Budget. But there should not be any more like it. Tax reform and making the most of Brexit are not alternatives. Indeed, as Britain faces its future outside the EU in a turbulent and risky world, one of the best things that a Chancellor can do is to ensure that the tax system does the most to attract and retain businesses in Britain, and encourages new business formation, innovation, investment and work.

Mr Hammond will not make progress towards these objectives by doing next to nothing, whichever month is graced with his inactivity.

David Fuller's view -

Given what we have seen of Theresa May’s government so far, and the uncertainty regarding Brexit and what she will be seeing from the EU during the next year or two, I think she and Philip Hammond will be very prudent with the Budget and economic policy generally, until the UK has effectively left the EU.  That will mark the start of bolder Budgets.

A PDF of Roger Bootle’s column is posted in the Subscriber’s Area.

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March 03 2017

Commentary by David Fuller

If Philip Hammond Cannot Deliver a Radical Conservative Budget Now, When Will He ever be Able to?

To be Chancellor of the Exchequer is, normally, to be the second most important politician Britain. The Blair-Brown years can be seen as a double act, followed by a catastrophic solo act. The Thatcher-Lawson years were an age of Tory radicalism, setting the conditions for the prosperity that followed. But no one speaks about a May/Hammond axis - in fact, not many speak about Philip Hammond at all. Our Chancellor has a gift for invisibility, honed throughout his political career. Unkind souls dismiss him a nodding dog, appointed for loyalty rather than ability.

Being underestimated in this way suits Mr Hammond rather well because over the last few months, he has been perhaps the most consequential member of the Cabinet, vetoing some of Theresa May’s stranger ideas. She has suggested making it harder for foreigners to buy British companies, for example, and capping the pay of chief executives. She raises such ideas in a sub-committee of her Cabinet members where Mr Hammond kills them off. I’m told that he is a sight to be behold in such meetings, speaking more bluntly than anyone else would dare. Outside No10 he’s seen as the dull-but-dutiful “spreadsheet Phil”. Inside, he has been Hammond the Hammer.

So it’s unfair to judge him by his first, rather underwhelming mini-Budget. His achievement so far lies in what he has saved us from: a 1970s-style industrial strategy, or a set of diktats forcing companies to put random workers on their boards. Barely a word of his resistance has leaked to the press, so the Prime Minister still trusts him and is guided by him. To her immense credit she’s serious about the Cabinet committee process, as is he. For mistakes not made, the record (so far) is excellent. But the record in radicalism? This is another matter entirely.

With the Labour Party a danger only to itself, there might never be a better time for Tory boldness. Instead, Mr Hammond seems fearful. He started his Chancellorship in the foetal position, waiting for the Brexit crash that he and other Cabinet Remainers warned about: the 500,000 job losses, the instant recession, the house price crash. Instead, economic growth accelerated and tax revenues have surpassed forecasts made even before the referendum. This hasn’t cheered him one bit. In the Cabinet Brexit committee, he rolls his eyes when Andrea Leadsom tries to suggest that everyone should lighten up because things will be fine. Even now, the Chancellor genuinely believes that they won’t.

To be sure, Britain faces plenty of uncertainty as we untie the knot with the European Union. It’s either thrilling or terrifying, depending on your point of view – calling for either daring or caution. And Mr Hammond is choosing caution: radicalism, he thinks, can wait.

This fits a depressingly familiar theme. Under David Cameron, the Conservatives were haunted by fear of the Labour Party and signed up to its ruinous levels of tax-and-spend. In government, Cameron was hamstrung by coalition with the Liberal Democrats. Even after winning a majority, Osborne somehow felt the need to implement Labour policies such as the minimum wage – almost as an apology for victory. It has been so long since we saw a confident Tory budget that even the Tories seem to have forgotten what one looks like.

The basics are pretty simple. Conservatism is a belief the countries and communities are stronger and fairer if more money and power are left in the hands of the people, rather than by government. That individuals take wiser decisions for themselves than any politician can take on their behalf. This isn’t an ideology, as such, just an observation that lower taxes, regulatory restraint and sound money is a formula that has worked everywhere that it’s been tried.

David Fuller's view -

I am grateful to Philip Hammond for his outspoken comments in cabinet meetings which have squashed some of the daft left-wing suggestions mentioned above. This government does not have to adopt senseless Labour Party policies to attract more Labour voters.  However, it does need to reawaken the aspirational interests of traditional Labour voters, which it can start doing by helping the economy in the manner of Margaret Thatcher.  Today’s equivalent would include more houses, lower taxes and sensible, competitive Energy policies.

A PDF of Fraser Nelson's column is posted in the Subscriber's Area.

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February 24 2017

Commentary by Eoin Treacy

The second stage of disruption

This article by Alex Pollak for Loftus Peak appeared in Australia’s Livewire letter and may be of interest to subscribers. Here is a section:

But it’s what inside that counts. Autos and components are a significant part of consumer discretionary, as are media, retail and staples including food. A major component of Industrials is transport – road, rail, marine, airline, construction material and heavy trucks.

Virtually all the automakers have electric and self-driving models in the works. But, as we have noted before, the more successful they are with these, the more the potential for write-offs in their internal combustion engine business – which is basically the whole business.

Banking disruption has started but hasn’t hit the mainstream – yet.

But fund managers typically invest looking to the existing make-up of the global economy, through the GIC’s sectors, which are composed of the companies in those industries. So the fund manager will have investment in oil, automakers, Energy and transport, at time when those sectors are heading for massive disruption. In essence, the fund manager is investing by looking backwards!
This is a poor long-term strategy, and one which has already begun to cause drag in portfolios which are underweight ‘technology’ shares (because they form a small part of the index, at the expense of sectors like basic materials and utilities, which are large now but are de-weighting as disruption takes hold.)

We are at a particular point in the economic history where disruptive companies are moving into industries which were previously considered inviolable, companies which couldn’t be damaged because demand for the underlying physical good was thought to stretch out to the horizon. In fact, the demand may still be there, but the way it is delivered, because of technological change, is affecting virtually all industries.

It's why we invest in disruption, and the reason our returns have been solid.


Eoin Treacy's view -

Technological innovation is accelerating at an exponential rate and it is having a transformative effect on just about everything. That is why we concentrate so heavily on the sector. Technology is deflationary in many respects but it is perhaps better to think about that influence in terms of lower costs contributing to better margins. That gives a clear advantage to the originators of disruptive technology as well as early adopters. 

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February 23 2017

Commentary by Eoin Treacy

Renewed Love for Gold into Early 2017

Thanks to a subscriber for this report from RBC, dated February 13th, which may be of interest. Here is a section:

Through the first month of 2017, global commodity AUM flows have shifted course as funds have returned to precious metals and out of Energy. This was a reversal in pattern from that seen through Q4/16, which saw total outflows of $20.5B in precious metals holdings and inflows of $8.4B into Energy. This corresponded to a 0.7% increase in TSX weighting for precious metals to 7.3% and a 1.3% decline in Energy in January. However, despite the promising start to the year for precious metals, total commodity AUM still sits 13% below the $123B seen in September 2016 and the current TSX weighting of 7.75% still sits 1.9% below the high of 9.6% seen in July 2016.

This month, we have seen an acceleration of inflows into physical gold ETFs, which we view as a positive sign fundamentally, and believe that we will continue to see inflows due to geopolitical concerns, persistence of low real rates globally, and growing US inflation expectations. We would recommend that investors focus on companies with attractive margins, solid balance sheets, organic growth opportunities and a consistent operating strategy.

Eoin Treacy's view -

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

Following an impressive rally in early 2016 Total Known ETF Holdings of Gold followed the trajectory of the gold price and pulled back below the trend mean. A rally back towards 60 million ounces is currently underway and a sustained move above that level would lend credibility to the view that a low of more than temporary significance has been found. 

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February 23 2017

Commentary by Eoin Treacy

Saudi Arabia $2 Trillion Aramco Vision Runs Into Market Reality

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

Even within the Saudi government, doubts are emerging. A person familiar with the flotation, who asked not to be named, said last week Aramco in its current form would probably be worth about $500 billion because a lot of its cash goes toward taxes and future investors won’t have a say on investments in non-core areas. Another person familiar with IPO talks put the figure at a little less than $1 trillion if investors base the valuation on Aramco’s ability to generate cash.

Selling a 5 percent stake would therefore raise at least $25 billion, still enough to match Alibaba Group Holding Ltd.’s unparalleled 2014 offering and dole out millions of dollars of fees to the advisers hired to manage the sale, namely JPMorgan Chase & Co., Moelis & Co. and independent consultant Michael Klein.

The $2 trillion estimate was initially put forward by Deputy Crown Prince Mohammed bin Salman last March. There are two key issues, according to interviews with a dozen industry analysts, investors and executives, who asked not to be named because of the sensitivity of the matter.

The first is that it’s premised on a simple calculation: Take the 261 billion barrels of reserves Saudi Arabia says lie under oil fields like the onshore Ghawar and offshore Safaniya, and multiply by $8 (a benchmark used to value reserves). An independent auditor is assessing Saudi reserves, the second- biggest worldwide, before the IPO.

Eoin Treacy's view -

When is the best time to IPO your company? When you can get more for it than you think it is worth. Saudi Arabia is one of the only participants in the oil business which has to have a really long-term perspective. Exxon Mobil and BP put out long-term forecasts for the Energy market stretching into the 2030s but Saudi Arabia tends to think in 50-year timeframes. 

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February 22 2017

Commentary by David Fuller

Trump Eyes Easing Obama Rules for Sprawling Pipeline Network

Here is the opening of this article from Bloomberg:

The hints of a pipeline spill are subtle: the hiss of rushing fluid, a streak of rainbow sheen. Tucked far below ground, a ruptured line can escape notice for days or even weeks, especially in the backcountry, where inspectors rarely venture. 

Regulators in the waning hours of the Obama era wrote rules aimed at changing that, and the industry is looking forward to the new administration rolling them back. The Pipeline and Hazardous Materials Safety Administration “has gone overboard,” said Brigham McCown, a former head of the PHMSA who served on President Donald Trump’s infrastructure transition team. “They built a Cadillac instead of the Chevrolet that Congress told them to build.”

The oversight agency, an arm of the U.S. Department of Transportation, is just one of many where Barack Obama’s policies are in the Trump team’s sights. The battle lines are predictable, with companies on one side and safety and environmental activists on the other. What’s particularly worrying the latter is timing, because the rules could be upended as new shipping routes go into service across the country.

The president, a fan of fossil fuels, has revived two controversial pipelines, TransCanada Corp.’s Keystone XL and Energy Transfer Partners LP’s Dakota Access. They would add 2,300 miles (3,700 kilometers) to the U.S. network with room to transport 1.1 million barrels a day. As it is, there are more than 200,000 miles of pipe cutting across the country carrying crude, gasoline and other hazardous liquids -- about 18 billion barrels worth annually. Many other projects are on the map; in Houston alone, planned lines are expected to increase capacity by 550,000 barrels a day in the next few years.

“I’m terrified about what is going to happen under Trump,” said Jane Kleeb, president of the Bold Alliance, a coalition of groups opposing Keystone XL. “My worry is that they will just budget-starve PHMSA.”

Read More: Why Keystone counts

While Obama was president, the PHMSA budget grew by 61 percent. Then, seven days before Trump’s inauguration, the agency finalized a ruletoughening up inspection and repair demands, mandating, for example, that companies have leak-detection systems in populated areas and requiring they examine lines within 72 hours of flooding or another so-called extreme weather event. The American Petroleum Institute, the oil and gas industry’s main trade group, characterized it all as overreaching and unnecessary.

David Fuller's view -

The extraction of industrial resources from the earth has always been a messy business.  Pollution risks remain although they are declining in the 21st Century, thanks to technology, regulation and more sensible management. 

Effective Energy independence is a key aspect of the USA’s long-term GDP growth potential.  It means that the USA can produce more Energy domestically when prices are higher, perhaps even selling some excess capacity, or increase imports of Energy when they are lower.  An effective pipeline system is necessary for Energy efficiency in a large country such as the USA.    

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February 17 2017

Commentary by Eoin Treacy

Beyond The Supercycle How Technology is Reshaping Resources

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

First came the “fly-up,” the price spike on world markets for oil, gas, and a broad range of natural resources that began in 2003. Then came the abrupt bust, as prices tumbled and global spending on natural resources dropped by half in the course of 2015 alone. Now, even as resource companies and exporting countries pick up the pieces after this commodity “supercycle,” the sector is facing a new wave of disruption.1 Shifts taking place in the way resources are consumed as well as produced—less noticed than the rollercoaster commodity price ride but no less significant—will have major first- and second order effects on both the sector and the global economy. These shifts are the result of technological innovation, including the adoption of robotics, Internet of Things technology, and data analytics, along with macroeconomic trends and changing consumer behavior.

We see three principal effects of this technological revolution:
Consumption of Energy will become less intense as people use Energy more efficiently thanks to smart thermostats and other Energy-saving devices in homes and offices, and the use of analytics and automation to optimize factory usage. Transportation, the largest user of oil, will be especially affected, by more fuel-efficient engines and by the burgeoning use of autonomous and electric vehicles and ride sharing.

Technological advances will continue to bring down the cost of renewable energies such as solar and wind Energy, as well as the cost of storing them. This will hand renewables a greater role in the global economy’s Energy mix, with significant first- and second-order effects on producers and consumers of fossil fuels.

Resource producers will be able to deploy a range of technologies in their operations, putting mines and wells that were once inaccessible within reach, raising the efficiency of extraction techniques, shifting to predictive maintenance, and using sophisticated data analysis to identify, extract, and manage resources.

Scenarios we have modeled suggest that these developments have the potential to unlock $900 billion to $1.6 trillion in incremental cost savings throughout the global economy in 2035, an amount equivalent to the current GDP of Indonesia or, at the top end, Canada. As a result of lower Energy intensity and technological advances that improve efficiency, Energy productivity in the global economy could increase by 40 to 70 percent in 2035. We believe these changes will have profound implications not just for companies in the resource sector and for countries that export resources, but also for businesses and consumers everywhere.


Eoin Treacy's view -

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

The long-term cycles of supply and demand can be boiled down into the simply maxim that high prices encourage consumers to be efficient and suppliers to invest in expansion. Low prices encourage consumers to use more while suppliers are forced to be more efficient. Following a decade long super cycle producers are now much more efficient while consumers are really only beginning to increase demand as economic growth picks up. 

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February 15 2017

Commentary by David Fuller

U.S. Spy Agencies, FBI Probing Trump Team Russia Calls, Officials Say

Here is the opening of this disturbing article from Bloomberg:

U.S. intelligence agencies and the FBI are conducting multiple investigations to determine the full extent of contacts that President Donald Trump’s advisers and associates had with Russia during and after the 2016 campaign, according to four national security officials with knowledge of the matter.

Several agencies are conducting the inquiries into Russia’s efforts to meddle in the U.S. election and coordinating as needed, said the officials, who requested anonymity to speak about sensitive matters. The investigations predate the dismissal of retired Lieutenant General Michael Flynn as national security adviser on Monday.

Trump associates whose activities the agencies are examining include his former campaign chairman Paul Manafort, Energy consultant Carter Page, longtime Republican operative Roger Stone and Flynn, two of the officials said. Manafort, in a statement to Bloomberg, said he “never had any connection to Putin or the Russian government -- either directly or indirectly -- before during or after the campaign.”

The FBI has two parallel ongoing investigations, one official said. A counterintelligence investigation is looking at Russian espionage activities and to what extent, if any, they involve communications with or collusion by U.S. officials. The second, a cybersecurity investigation, is probing the hacking of U.S. political groups and operatives.

For example, investigators are focusing on a phone call Flynn had in December with Sergey Kislyak, Russia’s ambassador to the U.S., which was intercepted by intelligence agencies and shared with the FBI, the two officials said. The FBI interviewed Flynn about that communication shortly after Trump was inaugurated.

Leading congressional Republicans have joined calls by Democrats for a deeper look at contacts between Trump’s team and Russian intelligence agents Wednesday, indicating a growing sense of political peril within the party as new reports surfaced of extensive contacts between the two.

Senate Intelligence Committee staff started collecting information in January on its broader probe of Russia’s alleged interference in last year’s election, according to Democrat Senator Joe Manchin of West Virginia, who sits on the panel. Manchin said Wednesday he expects the committee to begin calling in witnesses starting later this month. Among those he would like to see testify are Flynn, Manafort and former acting Attorney General Sally Yates, who was fired after she refused to defend Trump’s executive order on immigration.

David Fuller's view -

This beggars belief. 

Worryingly, Trump has made far more enemies than friends since winning the US presidential election. This will both isolate and distract President Trump, to the detriment of his office. 

The smart move by Trump would be to welcome the multiple investigations by US intelligence agencies and the FBI, while promising full cooperation. 

This item continues in the Subscriber’s Area and discusses Wall Street.

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February 13 2017

Commentary by Eoin Treacy

Silicon will blow lithium batteries out of water, says Adelaide firm

Thanks for a subscriber for this article by Benn Potter for the Australian Financial Review. Here is a section:

Chairman Kevin Moriarty says 1414 Degrees' process can store 500 kilowatt hours of Energy in a 70-centimetre cube of molten silicon – about 36 times as much Energy as Tesla's 14KWh Powerwall 2 lithium ion home storage battery in about the same space.

Put another way, he says the company can build a 10MWh storage device for about $700,000. The 714 Tesla Powerwall 2s that would be needed to store the same amount of Energy would cost $7 million before volume discounts.


Eoin Treacy's view -

A race is underway to develop new types of batteries and, for the foreseeable future, there is room for a number of competing technologies. The reason for this is the pace of innovation is slower than in other sectors but also because Energy storage is required for widely differing sectors. Batteries need to be small and light for handheld devices, big and have almost infinite recharging capabilities for utilities and need highly efficient power to weight ratios for transportation. That suggests there is ample potential for a number of different technologies to play roles in all of these sectors. 


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February 09 2017

Commentary by Eoin Treacy

Musings from the Oil Patch February 7th 2017

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

Prior to OPEC’s Vienna Agreement last November, putting oil in storage because of its higher future value was a strong motivation for growing storage volumes. Now the curve is much flatter, and for oil priced three years in the future, that price is lower than the current one, providing a strong disincentive for putting oil in storage. Backwardation plays a significant role in oil producers’ decisions to hedge their production since they risk the potential of the price moving higher if the more traditional contango environment returns. As Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors LLC put it, "What happens to the curve does depend on how the OPEC cuts will be carried out. The oil futures curve is indicating that the current OPEC cuts are here to stay for a while." U.S. oil producers will be very happy if that proves to be the case. While history would suggest otherwise, the pending (early 2018) initial public offering for Saudi Arabia’s state oil company, Saudi Aramco, an important component of its domestic economic restructuring effort, might force the country to hold its output down much longer than it has indicated. The reality may be that hundreds of small U.S. oil producers may screw up Saudi Arabia’s grand plan while hurting speculating oil traders with their record bullish oil price bet. A lower future oil price after a record bullish oil futures bet would be consistent with our recent history.

Eoin Treacy's view -

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

BP and Exxon Mobil spend a great deal of time and effort producing annual reports on Energy use and issue predictions on how it will evolve over the time. That helps keep investors informed on how the companies plan to mobilise capital to take best advantage of how they see events unfolding. Saudi Arabia, as the world’s largest low cost producer, does not issue public annual reports. However its plans to IPO the company tell us more than any report ever could about the conclusions the Saudi Arabian administration has reached about the future of the oil market.

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February 06 2017

Commentary by Eoin Treacy

Email of the day - on nickel's underperformance

Do you know why Nickel is not joining in the commodity boom and whether eventually it might? Wonderful service

Eoin Treacy's view -

Thank you for your kind words and this question which may be of interest to other subscribers. Indonesia has historically been the primary supplier of nickel but from 2014 it toyed with banning exports of ore in an effort to stimulate domestic production of refined metal This article from Stratfor, dated October 12th carries some additional detail. Here is a section:  

The decision to delay the ban once again, announced by the acting chief of the Energy and Metals Resources Ministry on Oct. 4, comes as little surprise. Though foreign investors have committed some $12 billion to build 27 smelters nationwide in the past four years, anecdotal reports and trade data indicate that much of that money has yet to generate higher exports of refined metal products. In one example, the value of Indonesian exports of raw nickel ore — of which the country was once the world's largest producer — has collapsed. In 2013, the year before the first ban took effect, it stood at $1.65 billion, but by 2014 that figure had dropped to $85 million; by 2015, it had fallen to zero. Though exports of refined nickel products rose in 2014 from 2013, they, too, plunged in 2015 and continued to decline in value through the first four months of 2016. Nickel is not unique in this respect, either: The value of metal ore exports as a whole has collapsed, and that of most refined metal products has stagnated or declined.

The 2014 ban came on the heels of a slowdown in China's economy and a dip in metals prices, caused in part by the increasing ore supplies of key competitors such as the Philippines. Low prices then undercut investor interest in building smelting facilities, as did uncertainty surrounding the status of Indonesia's regulations. Meanwhile, the lack of even minimal support infrastructure for construction operations meant that the companies that agreed to build smelters often found themselves responsible for building and funding roads, power generators and other basic utilities to support them. Nevertheless, despite these headwinds, many smelting projects are still underway or in the planning stages.


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February 03 2017

Commentary by Eoin Treacy

Australia's record-breaking mining exports hint of new sector boom

This article by Cecilia Jamasmie for may be of interest to subscribers. Here is a section:

The encouraging data sharply contrasts with the record deficit of $4.3 billion the country recorded only 12 months ago.

HSBC chief economist Paul Bloxham told AAP the export boom should considerably boost company profits, dividend payments, share prices and wages in the mining sector.

His comments will be tested beginning next week, as some of Australia's top mining companies including Rio Tinto (ASX, LON:RIO), BHP Billiton (ASX:BHP), Newcrest Mining (ASX:NCM) and South32 (ASX:S32) are set to start reporting their 2016 results.

This is only the second monthly trade surplus Australia has recorded in nearly three years, which evidences once again the country’s continued reliance on and vulnerability to changes in commodities markets.

The news comes on the back of a report from the Department of Industry, Innovation and Science, which predicted that Australia’s mining and Energy export earnings would jump by 30% between 2016 and 2017, hitting a small yet encouraging record of $204 billion.


Eoin Treacy's view -

Australia exported more than a billion tons of iron ore last year for the first time. At the same time prices broke out of a more than yearlong base so higher volumes were greeted with higher prices which has certainly helped to improve the country’s trade balance. The surge in coking coal prices due to temporary shortages will also have acted as a short-term boost. However with coking coal now well off its peak it is less likely to represent the same positive influence on trade this year. 

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January 30 2017

Commentary by Eoin Treacy

Tesla's Battery Revolution Just Reached Critical Mass

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

Three massive battery storage plants—built by Tesla, AES Corp., and Altagas Ltd.—are all officially going live in southern California at about the same time. Any one of these projects would have been the largest battery storage facility ever built. Combined, they amount to 15 percent of the battery storage installed planet-wide last year.

Ribbons will be cut and executives will take their bows. But this is a revolution that’s just getting started, Tesla Chief Technology Officer J.B. Straubel said in an interview on Friday. “It’s sort of hard to comprehend sometimes the speed all this is going at,” he said. “Our storage is growing as fast as we can humanly scale it.”

A Fossil-Fuel Disaster
The new battery projects were commissioned in response to a fossil-fuel disaster—the natural gas leak at Aliso Canyon, near the Los Angeles neighborhood of Porter Ranch. It released thousands of tons of methane into the air before it was sealed last February.

In its wake, Southern California Electric (SCE) rushed to deploy Energy storage deals to alleviate the risk of winter blackouts. There wasn’t any time to waste: All of the projects rolling out this week were completed within 6 months, an unprecedented feat. Tesla moved particularly nimbly, completing in just three months a project that in the past would have taken years. 

Eoin Treacy's view -

The Porter Ranch gas leak made headlines in Los Angeles all last summer but it was a blessing for Tesla because it gave the company an opportunity to demonstrate how it can deploy its batteries at scale in a tight timeframe. 

Batteries are an essential piece of the renewable Energy, electric vehicle puzzle. Every innovation that brings down battery costs has an outsized effect on a host of other sectors. Tesla, with its now completed giga-factory, is well placed to benefit from these emerging themes. 


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January 20 2017

Commentary by Eoin Treacy

Donald Trump's Presidency: A Look at His Proposed Policy Shifts

This compendium from the Wall Street Journal of some of the primary issues facing the incoming US administration may be of interest to subscribers. Here is a section on Energy:

At the top of Mr. Trump’s Energy and environmental agenda will be unraveling Obama administration policies that touch on everything from carbon emissions to water.

Much of the action out of the gate will focus on rolling back regulations. Mr. Trump has said he would withdraw Mr. Obama’s signature policy to address climate change, a rule that cuts power-plant carbon emissions. The rule already has faced legal challenges and has been temporarily blocked by the Supreme Court.

The Trump administration, with the help of the Republican-controlled Congress, also will work toward repealing an Environmental Protection Agency rule bringing more bodies of water under federal jurisdiction. Also targeted for repeal: Interior Department rules that require tougher standards for coal mining near streams and that set new standards for emissions of methane, a potent greenhouse gas, from oil and natural-gas wells on federal lands.

While the Trump administration can’t unilaterally repeal most rules right away, it has several options. The EPA and other agencies can immediately start the process to withdraw regulations, and they can relax compliance requirements over time. Meanwhile, Congress can pass measures nullifying rules that have been completed most recently.

Immediately confronting Mr. Trump is a decision regarding the Dakota Access oil pipeline, which extends from North Dakota to Illinois and is nearly built except for a crossing of a Missouri River reservoir.

Mr. Trump may also have a decision to make on the Keystone XL oil pipeline if its developer, TransCanada Corp., reapplies for a State Department cross-border permit the Obama Administration denied in 2015.

On the campaign trail, Mr. Trump said he would withdraw the U.S. from the global climate agreement signed in Paris in late 2015. He couldn’t immediately pull out of the agreement, but he could begin the process of withdrawing.


Eoin Treacy's view -

I watched the end of the inauguration speech at my club following my Friday morning HIIT class and the facial expressions of the desk staff were a picture of just how much work needs to be done to reunite the country. High Energy costs, high healthcare costs, high education costs and no wage growth combined to create the conditions that got Trump elected. He is going to need to deliver on solutions to some of those problems if he is going to receive the second term he wishes. 

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January 09 2017

Commentary by David Fuller

Some 2017 Impressions

My thanks to a subscriber for this 16-page illustrated report by James W Paulson, Ph.D, Chief Investment Strategist at Wells Capital Management Inc.  Here is the first page:

Welcome to the New Year! The current economic recovery turns nine this summer making it the third longest in U.S. history. However, this calendar-old recovery still appears young at heart. It has not yet sustained a real growth rate above 3%, has never been driven by excessive borrowing or lending nor produced a significant capital spending or housing cycle. Moreover, because it has only recently returned to some semblance of full employment, it has yet to seriously aggravate inflation. Yields about the globe remain near all-time records lows and the Federal Reserve is only now beginning to finally normalize monetary policy. Finally, despite an almost three-and-a-half fold increase in the U.S. stock market from its 2009 low, this bull market has never generated a broad-based public run into equities.

Perhaps for the first time in this recovery, we expect animal spirit behaviors; those originating from confidant businesses, consumers and investors, to increasingly characterize both the economy and the financial markets in 2017. Essentially, this furthers trends already evident during the last few months of 2016. After almost a two-year hiatus, economic growth recently accelerated and broadened about the globe. This rare synchronization in the economic recovery comes just as the U.S. has finally returned to full employment. Consequently, improved economic growth is also aggravating inflation and interest rate concerns.

Although broader economic growth, a restart of the earnings cycle and the election of a pro-business U.S. president have recently combined to boost confidence and awaken the animal spirit throughout the private sector, it also represents a quandary for the financial markets. The stock market begins the year surging to new highs as confidence in the durability of the economic recovery improves. However, the bond market is being battered by rising inflation expectations and recognition that the artificially low yield structure orchestrated about the globe during this recovery may finally be ending.

Here are some specific impressions for the economy and the financial markets in 2017.

Economic growth

The 2017 economic outlook is shaped by many important factors including a synchronization of economic policies about the globe, an economic recovery which is broadening both globally and within the U.S., a refresh and restart of the profits cycle, an end to the global manufacturing recession and collapse in commodity prices, the potential for awakening animal spirits and the increasing likelihood that a

recession is still multiple years away.

Synchronized global economic policies

Not only has global economic growth been persistently subpar, it has never been synchronized. Economic policies typically conflicted during this expansion and economic boats around the globe have seldom risen together. While the U.S. has persistently employed stimulus, other developed and emerging economic policies have often been restrictive. While Japanese policy officials were hesitant earlier in this recovery, today, similar to the U.S., they are implementing full-out central bank balance sheet stimulus. Likewise, the eurozone, which earlier adopted fiscal tightening, is now also fully embracing monetary stimulus. Moreover, the oil crisis has forced Energy-based economies like Canada and Australia, which earlier felt sheltered from many ongoing global struggles, to also boost accommodation.

Consequently, as illustrated in Charts 1 and 2, in the last couple years, policy officials everywhere have simultaneously attempted to improve the economic

recovery. Already, signs of a synchronized global economic bounce are materializing and we suspect this will become more obvious as the year progresses.

David Fuller's view -

There is a lot to like in this global report which I commend to subscribers.  After eight years of mostly negative comments, including a number of very bearish reports from so many analysts and strategists, this is the most bullish detailed report by far that I have seen since the 2008 crash. 

Market sentiment has steadily improved since Trump’s surprise presidential election.  This is despite many alarmist forecasts in anticipation of a Trump administration, albeit mostly from the left-leaning press.  Clearly the money men are delighted to see a President-elect who is interested in the US economy, and promises a number of stimulative policies.  This has led to a number of upside breakouts, often from multi-year trading ranges from trading ranges, and not just among US indices.     

In fact, James Paulsen mentioned “animal spirit”(s) 24 times in the report above.  Is that a record?  He also mentioned “synchronized” or “synchronization” of economic policies eight times. 

This item continues in the Subscriber’s Area where James Paulsen’s report is also posted.

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January 06 2017

Commentary by David Fuller

Icelandic Volcanic Heat May Be the Perfect Solution to UK Energy Crunch

Iceland is the answer to our prayers. The country has a surfeit of cheap electricity from volcanoes and melting glaciers that is either sold for a pittance, or goes to waste.

The Icelanders would dearly love to sell this power to us at global prices to pay down the banking debts of 2008. Britain would dearly love to buy it from them as our coal plants and ageing nuclear reactors are shut down, with little to replace them beyond the variable winds of the North Sea.

Advances in high voltage technology make it possible to transmit Iceland's low-carbon power to the industrial hubs of northern England by underwater cables with an Energy leakage of just 5pc, and probably at lower costs per megawatt hour (MWh) than the nuclear power from Hinkley Point. And unlike nuclear, the electricity is 'dispatchable'.

“We can turn it on and off in fifteen minutes to half an hour. It is the only battery that is really available today for green Energy,” said Hordur Arnarson, head of Iceland’s national utility Landsvirkjun.

It is hard to imagine a more elegant back-up for the UK's vast experiment in off-shore wind, the backbone of British electricity by the late 2020s.

Combined with interconnectors from Holland and France - and soon Norway - it could plug much of the intermittency gap through the dog days of a windless anticyclone. The power can flow both ways: surges in North Sea wind could be stored in Nordic reservoirs.

Roughly 70pc of Iceland's electricity comes from hydropower through glacial run-off. This is mostly sold to aluminium smelters for a derisory price. Water washes over the top of the dams for parts of the year because the island has no way of selling the excess Energy.

Hydro could probably provide the UK with one gigawatt of stable baseload, but then there is the tantalising potential of geothermal power from the island's 350 volcanoes as well.

The advances in drilling are breath-taking. An Icelandic project backed by the US National Science Foundation is currently boring the deepest hole ever attempted into the fluids of the inner earth at Reykjanes on the Mid-Atlantic Ridge. As of late December it had reached a depth of 4.626 kilometres, approaching temperatures of 500C.

The team aims to stop just short of the magma, at 200 times atmospheric pressure, where hot rock mixed with sea water releases ‘supercritical steam’ with enormous Energy. This is the Holy Grail of geothermal power, if it can be extracted safely in a thermal mining cycle.

David Fuller's view -

Drilling to just short of the magma – what could possibly go wrong?  Hollywood has a new topic (Ice-hot?) for next summer’s splat film. 

Seriously, it is another triumph for technological innovation that the capture and transmission of this Energy is even considered feasible.  It may be so but costs in the region of the appallingly expensive and outdated Hinkley Point nuclear project are hardly encouraging.  If lower costs are worth considering, and they certainly should be, fracking for natural gas is a much better idea for the UK and many other countries over the next two decades.

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

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January 06 2017

Commentary by Eoin Treacy

World's Worst Commodity Radioactive for Investor Portfolios

This article by Joe Deaux, Natalie Obiko Pearson and Klaus Wille for Bloomberg may be of interest to subscribers. Here is a section:

“It’s the world’s best asset in the world’s worst market,” said Leigh Curyer, chief executive officer of NexGen Energy Ltd., a Vancouver-based uranium producer. “I don’t think there’s a mine profitable at current spot prices. This short-term spot price isn’t reflective of the cost of producing a pound globally.”

The outlook isn’t entirely bleak. Losses are forcing uranium mines to cut production or close, which may eventually create a supply crunch, while accelerated building of nuclear plants in China and India could help revive demand. But it may take a while for those developments to take hold, according to a report last month from Morgan Stanley, which said it can’t identify any medium- or long-term driver for prices.

Uranium extended its fade last year even as most other raw materials recovered. The Bloomberg Commodity Index of 22 items posted its first annual gain since 2010, advancing 11 percent.


Eoin Treacy's view -

When Tata Motors bought Land Rover it held onto the name for obvious reasons. It knew it didn’t stand a chance of selling a luxury vehicle under the moniker Tata Motors. If nuclear Energy could do the same it would be in a much better position. Reactors being built today bear little resemblance to those which have garnered such a bad reputation over the last number of decades. However that is not the point. Public opinion is not yet in favour of uranium fuelled Energy and there is little evidence that is about to change not least because it simply does not have a high profile credible spokesperson to champion it. 

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January 04 2017

Commentary by David Fuller

Sir Tim Barrow Appointed as UK Ambassador to the EU

Theresa May has appointed Sir Tim Barrow, a career diplomat, as the new British ambassador to the EU in Brussels, replacing Sir Ivan Rogers, who quit on Tuesday.

Her decision means she has ignored calls from within the Tory party to appoint a wholehearted Brexiter – possibly from outside of the civil service – to the job.

Rogers, the head of UKRep – in effect the UK embassy in Brussels – resigned in frustration on Tuesday urging his fellow civil servants to provide impartial advice, and stand up to muddled thinking. He also made clear he thought that the UK government not only lacked an agreed exit strategy, but also a coherent exit negotiating team.

Barrow was the UK ambassador to Moscow until 2015 and in March 2016 succeeded Sir Simon Gass as political director at the Foreign Office. He has extensive European experience and acted as first secretary at UKRep. His appointment is also a victory for the Foreign Office, which lost the UKRep post to former Treasury officials in 2012.

May is due to trigger article 50, to formally start EU talks, in March, requiring her to urgently recruit someone committed to delivering Brexit, but also knowledgeable about how the labyrinthine EU works.

Barrow said: “I am honoured to be appointed as the UK’s permanent representative to the EU at this crucial time. I look forward to joining the strong leadership team at the Department for Exiting the EU and working with them and the talented staff at UKRep to ensure we get the right outcome for the United Kingdom as we leave the EU.”

A Downing Street spokesperson called Barrow “a seasoned and tough negotiator, with extensive experience of securing UK objectives in Brussels”. They added: “He will bring his trademark Energy and creativity to this job, working alongside other senior officials and ministers to make a success of Brexit.”

David Fuller's view -

Theresa May certainly needs a British ambassador who is committed to delivering a successful Brexit.  Sir Tim Barrow apparently has the presence and credentials for this important task, including being “knowledgeable about how the labyrinthine EU works”.  However, the UK should not be playing the labyrinthine game, designed to deter countries from leaving the EU.  Until EU negotiators fully understand that a quick, hard Brexit is not only a possibility, but would also be preferred by many UK citizens and businesses, negotiations will be a waste of time.   

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January 04 2017

Commentary by Eoin Treacy

Lithium producers can't expand fast enough to meet demand: An interview with Orocobre CEO Richard Seville

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

So the project was one of those moments when you look back on it where we did the hard analytical work, drew a conclusion, acted on our judgement, and it worked and went according to expectations.

I don’t mean picking a certain price I just mean a general trend. I’m quite proud of that actually and sometimes the detail work is really valuable. We’ve redone it recently to understand the hard rock sector and the conversion plant capacity in China. Although that’s harder than what we did in Chile I think we got a pretty good understanding.

That again supports the view that supply growth is being over estimated and over simplified and that it will take longer—just like we did—and there will be delays because of complications in China and offtake and everything will slip because it always does.

So when you look at the supply/demand curve, our view is that it (lithium market) goes very tight for a number of years. And the first relief, if it is relief, will really be that period around 2020.


Eoin Treacy's view -

The only way to get around the fact many sources of renewable Energy are intermittent is through storage. Right now lithium is the benchmark electrolyte for batteries’ and a great deal of research is going into developing better anodes and cathodes to boost Energy density, safety, recharging speed and cost. That suggests the lithium product cycle still has a long way to run which is benefit for miners of the element not least as new potential demand growth drivers evolve. 

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December 29 2016

Commentary by Eoin Treacy

Musings from the Oil Patch December 28th 2016

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

With the election of Donald Trump as the nation’s 45th president, there are signs environmental restrictions on fossil fuels will be loosened and more room will be made for fossil fuels. That will be a significant shift in the recent trends for environmental and Energy regulation. Whether it significantly alters the current trajectory for the dirtiest of our fossil fuels – coal – remains to be seen. Clearly, short of an outright ban on renewable Energy plants, the current backlog of new, cleaner power plants will not change, so our near-term Energy mix will continue to shift toward more renewable fuels. The issue for the Energy industry is whether the economic trends in place boosting renewable fuels are altered and slow down the pace of additions of new renewable fuel plants. That will partially depend on whether current renewable fuel mandates and subsidies are renewed once they reach their expiration dates, or even if they are outright cancelled early.

At the present time, businessmen, Energy executives and consumers are struggling to understand the true economics of electricity. Analysts have strived to produce cost estimates for electricity produced by different fuels in such a way that they can be analyzed on the same basis. Standardized cost estimates provide a means to assess the impact on different fuel sources of various environmental policies. The process is called levelized cost of electricity. This tool enables direct comparison of electricity costs from power plants fueled by either fossil fuels or renewables. One drawback from this tool is that it assumes every kilowatt of power generated has the same value to consumers regardless of when during the day it is produced. It ignores the reality that during summer days in the southern regions of the United States, electricity to power air conditioners in the afternoon when temperature reach their highest levels is of greater value to consumers than during the middle of the night when temperatures drop.


Eoin Treacy's view -

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

Electricity pricing is a moving target for both Energy companies and environmentalists alike. The challenge is to deliver Energy when it is most required rather than when it is easiest to produce and the only way of solving that issue for renewables is with storage or back-up conventional capacity. 

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December 15 2016

Commentary by David Fuller

World Energy Hits a Turning Point: Solar That Is Cheaper Than Wind

Here is the opening of this interesting article from Bloomberg:

A transformation is happening in global Energy markets that’s worth noting as 2016 comes to an end: Solar power, for the first time, is becoming the cheapest form of new electricity. 

This has happened in isolated projects in the past: an especially competitive auction in the Middle East, for example, resulting in record-cheap solar costs. But now unsubsidized solar is beginning to outcompete coal and natural gas on a larger scale, and notably, new solar projects in emerging markets are costing less to build than wind projects, according to fresh data from Bloomberg New Energy Finance

The chart below shows the average cost of new wind and solar from 58 emerging-market economies, including China, India, and Brazil. While solar was bound to fall below wind eventually, given its steeper price declines, few predicted it would happen this soon.

“Solar investment has gone from nothing—literally nothing—like five years ago to quite a lot,” said Ethan Zindler, head of U.S. policy analysis at BNEF. “A huge part of this story is China, which has been rapidly deploying solar” and helping other countries finance their own projects.

This year has seen a remarkable run for solar power. Auctions, where private companies compete for massive contracts to provide electricity, established record after record for cheap solar power. It started with a contract in January to produce electricity for $64 per megawatt-hour in India; then a deal in August pegging $29.10 per megawatt hour in Chile. That’s record-cheap electricity—roughly half the price of competing coal power. 

“Renewables are robustly entering the era of undercutting” fossil fuel prices, BNEF chairman Michael Liebreich said in a note to clients this week.

David Fuller's view -

It is entirely logical that technology will continue to lower the cost of solar power, until it is the cheapest source of Energy by far.  After all, it neither has to be discovered and then extracted, nor does it need refining.  It is free Energy, arriving every day from the largest nuclear reactor within our solar system - by far.  The means of capturing solar Energy are multiplying at a rapid rate, particularly within urban areas where it is most needed.  Storage of solar Energy is limited but this too will change, now that it is a priority.   

This item continues in the Subscriber’s Area and contains an additional article.

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December 14 2016

Commentary by David Fuller

Putin Game Is to Neuter and Divide the West, and He Is Succeeding

And now your goal, as Mr Putin, is nothing less than European impotence. You want to make it impossible for them to pursue hostile actions such as sanctions on your cronies, expanding Nato or refusing to build new gas pipelines. If that can be achieved, your regime will be richer financially, safer politically, and seen at home as the tough and effective leadership that helps the average Russian to ignore the parlous long‑term state of the country. 

With the election of Mr Trump, there is a path to fulfilling this goal, provided it is done with care and cunning. First it involves consolidating the position of Bashar al-Assad in Syria, regardless of how much violence has to be unleashed before Trump’s inauguration. That opens the way to offering the new US administration an end to the war in Syria on Russia’s terms, with Mr Assad in power in most of the country, and the whole world able to see that you can count on Russia as an ally, but never trust the support of the West. 

Having dealt with that early in 2017, the next step is to use it as the basis for a rapprochement with America, but cautiously, so that congressional critics of Mr Trump are not given too much ammunition. A good way to disarm suspicion is to offer to go back into one or two of the international agreements – on arms control and nuclear facilities – recently abrogated by Moscow. There will be some relief and even praise in the Western media, hailing a “new era” in relations and analysing Mr Putin’s good diplomacy and return to responsibility. 

Simultaneously, the extraordinary success and skill being developed by Russia in manipulating Western elections will offer rich pickingsin 2017. The universal assumption for many years that social media and the internet would be agents of freedom has left most people slow to grasp that new technologies can be turned into powerful means of authoritarian power – for the first time reaching deep into other nations and societies. 

Mr Trump has already disavowed the CIA’s findings that Russian hacking was designed to promote his victory. That the president-elect of the USA refuses to believe well-founded research by his own agencies is an unmitigated triumph for Moscow. Such tactics can now be used to promote the election of pliable candidates across Europe, with the scope to fund them as well. 

The French National Front has already borrowed €9 million from a Russian bank. A combination of donations and social media operations can help to push disorientated European voters the right way. Recent months have seen a pro-Russian president elected in Bulgaria, and a new government friendly to Moscow in Moldova. The Netherlands rejected the EU treaty with Ukraine in a referendum, and growing parties like the Five Star Movement in Italy have Russian ties. 

Add a bit of military intimidation and internal agitation in the Baltic States – one third of Latvians are ethnic Russians – and another part of Europe will feel weakened. Then subtly help opposition parties in Germany’s autumn elections to undermine Angela Merkel. Manipulate politics in Montenegro so it doesn’t want to join Nato. Hug Serbia and keep Bosnia paralysed by the same techniques. Keep pushing up the price of oil by deals with the Arabs, so that Russian gas is sought-after. 

Do all these things and soon the EU, particularly without the UK, will lack the will to challenge Russia. In foreign affairs and Energy policy, Europe is only as strong as its weakest link, and soon this strategy will make sanctions impossible, western security weaker and buying Russian Energy impossible to resist. Mr Putin will be able to do as he wishes, with whom he wishes.

Mr Trump is a great advocate of doing deals. The first step in doing a good deal is to have your eyes open to the strategy of the other side. Europeans certainly need to spend more on defence. 

But America needs to see what could be about to unfold: under cover of better relations, the division, weakening and neutering of the West. 

David Fuller's view -

‘Once a KGB operative, always a KGB operative’.  This old adage certainly applies to Putin, who had a rough two years following the collapse of crude oil prices in 2H 2014.  Naturally, Russian citizens did far worse. 

However, Putin is in a somewhat stronger position today.  Brent Crude oil is trading above $50 following the belated decision to reduce supplies somewhat, in line with OPEC.  For Russia, this is probably no more than the reality that it will see another reduction in output due to the harsh Siberian winter.  Having invested heavily in military equipment, Russia has also increased the sale of weapons to Iranians and other regimes which are either unable to buy from the West or disinclined to do so.  At home, Moscow’s constant stream of daily propaganda, along with Putin’s ‘heroic’ ability to see off evil doers, continues to embellish his tough guy patriot image.  So far, this is just enough to keep a lid on protests at home, although this may not always be the case. 

This item continues in the Subscriber’s Area, where a PDF of William Hague’s column is also posted, along with another article.

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December 14 2016

Commentary by Eoin Treacy

Musings from the Oil Patch December 13th 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:

From GM’s viewpoint, it needs to generate sufficient ZEV credits to avoid sharp fines or being shut out of the California market entirely. One analysis went as follows: In 2015, GM sold 219,962 vehicles in California. To avoid fines, it needs state-awarded ZEV credits equal to 14% of the units sold, or 30,794. That can be achieved by selling 7,698 Bolts that earn GM four credits each, or 10,082 Chevy Volt plug-in hybrids, or a combination of the two. What GM understands is that ZEVs are compliance vehicles, so pricing the Bolt to both achieve its ZEV credit needs and take market share from other auto manufacturers can be a smart strategy, even if they are losing so much money per unit. If GM can earn more ZEV credits than it needs, those can be sold to other manufacturers who are falling behind their ZEV credit goals. This is all part of the clean air gambit in which companies that are “doing more than they need to” in meeting certain thresholds find that they hold pieces of paper that increase in value over time and can be successfully monetized. Selling $139 million of excess ZEV credits was what enabled Tesla Motors (TSLA-Nasdaq) to achieve third quarter profits on a GAAP basis. 

But what are the economics of electric vehicles for buyers? The Associated Press’ automobile writer recently test drove the GM Bolt and interviewed the executive in charge of marketing it. Virtually everyone acknowledges that the car lacks outstanding design, but the word the GM exec uses to describe the Bolt is “practical.” For tech-savvy Millennials that sounds more like their grandma’s car. However, the Bolt is the first electric vehicle to get over 200 miles per charge (238 miles, exactly). It does have lots of interior space, a near-silent ride and emits no tailpipe emissions. Moreover, the Bolt can go from zero to 60 miles per hour in 6.5 seconds, out-muscling some muscle cars. Even more important, the Bolt is now at showrooms in California and Oregon, while its prime competitor – the Tesla Model 3 – will not be available until the end of 2017.

The problem for the Bolt is its cost. The list price is $37,495 including shipping. After the federal tax credit of $7,500, the purchase price drops to $29,995, to which you need to add roughly $1,200 for a 240-volt home charging station, bringing your out of pocket expense to own a Bolt to $31,195. For comparison, a comparably equipped, gasoline-powered Chevy Cruze compact hatchback with automatic transmission costs $23,670 with shipping, a difference of $7,525. 

Eoin Treacy's view -

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

For a car GM is losing $9000 on, the price of $37,500 is still steep even if someone is dedicated to the ideal of an emission free future. That cost is going to have to come down if predictions of widespread uptake are to prove credible. The pace at which the Energy density of batteries is doubling (around 5 years) is too slow to suggest the cost is going to come down quickly through technology alone. That is part of the reason Tesla is investing so heavily in economies of scale when building its battery manufacturing capacity. 

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December 07 2016

Commentary by Eoin Treacy

Electric Cars May Take an OPEC-Sized Bite From Oil Use

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

Wood Mackenzie’s view echoes the International Energy Agency, which last month forecast global gasoline demand has all but peaked because of more efficient cars and the spread of EVs. The agency expects total oil demand to keep growing for decades, driven by shipping, trucking, aviation and petrochemical industries.

That’s more conservative than Bloomberg New Energy Finance’s forecast for EVs to displace about 8 million barrels a day of demand by 2035. That will rise to 13 million barrels a day by 2040, which amounts of about 14 percent of estimated crude oil demand in 2016, the London-based researcher said. Electric cars are displacing about 50,000 barrels a day of demand now, Wood Mackenzie said.


Eoin Treacy's view -

There is the world of difference between predicting that electric vehicles will account for an increasingly large portion of the global automobile market and predicting that aggregate demand for crude oil will decline meaningfully.  

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December 05 2016

Commentary by David Fuller

Stakes Are High In Showdown for British Future Energy Strategy

Here is the opening of this topical article from The Telegraph:

It is high noon for Britain’s fledgling Energy policy. Years of failed interventions, arbitrary green targets and damaging subsidies will come to a head in this week’s capacity auction, when we will either see investors commit to building desperately needed new power plants or simply walk away. 

The stakes could not be higher, for the Government and for those policymakers who believed they had designed a credible strategy to keep the lights on.

How have we got here and why does so much in this sector now hang on a complicated and little-known auction process? 

The overriding issue remains the urgent need to replace old coal-fired power stations, which have served the UK since the 1960s, with new plants that burn natural gas to generate electricity. At this stage, we can forget Hinkley C, as it will not be ready in time.

These gas-fired power stations,  known as CCGTs, can be built relatively quickly, are much cheaper than new nuclear plants, and are 50pc cleaner than coal; however, they are years behind schedule, because of a failure by government to deliver the right investment landscape.

David Fuller's view -

Very few economies are relatively strong without competitive Energy costs.  The UK has not been in this position since North Sea oil revenues from approximately 1981 through 2003 went into significant decline thereafter, leading to increased Energy import dependency from 2004 onwards (see graph which Telegraph subscribers can access via the link above).  

Thereafter, inadequate long-term planning by successive UK governments, combined with EU group think on leadership in emissions control.  Unfortunately, this was achieved at the cost of future Energy supplies.  Until this problem is adequately addressed by the government, commencing with extensive fracking, UK Energy costs will remain higher than necessary and supplies will be barely adequate. 

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

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November 30 2016

Commentary by Eoin Treacy

Top Ten Market Themes For 2017: Higher growth, higher risk, slightly higher returns

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

8. Inflation: Moving higher across DM
‘Reflation’ is the theme du jour following Donald Trump’s unexpected emphasis on infrastructure spending in his acceptance speech on election night. Since then, market participants have been hard at work trying to figure out the policy agenda that Trump the president might pursue (distinct from the rhetoric of Trump the candidate). What seems clear to us, as argued above, is that economic issues, notably tax cuts, infrastructure spending and defense spending, are high on the agenda — a recipe for reflation.

There was a strong case for rising inflation in the US even before Trump’s victory. Our call for higher rates in long bonds this past year was premised more on a repricing of inflation risk and inflation risk premia than on a rise in real rates. And, globally, we expect rising Energy prices to push up headline CPI across the major advanced economies in early 2017. After years of deleveraging and highly accommodative monetary policy, we expect inflation to gain momentum in 2017 just as many countries are shifting their policy focus to fiscal instruments. For example, we are forecasting large boosts to public spending in Japan, China, the US and Europe, which should fuel inflationary pressures in those economies. Moreover, having had to work so hard for so long to get inflation even to the current low levels, the major central banks in developed markets sound increasingly willing to let inflation run above 2% targets

Eoin Treacy's view -

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

As recently as early this month a significant number of investors were betting the discount rate was never going to go up. That has definitely changed with the bond markets rapidly pricing in the potential for inflation to pick up as fiscal stimulus is expected to kick in. 

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November 29 2016

Commentary by David Fuller

Solar-Panel Roads to Be Built on Four Continents Next Year

My thanks to a subscriber for this fascinating article from Bloomberg.  Here is the opening:

Electric avenues that can transmit the sun’s Energy onto power grids may be coming to a city near you.

A subsidiary of Bouygues SA has designed rugged solar panels, capable of withstand the weight of an 18-wheeler truck, that they’re now building into road surfaces. After nearly five years of research and laboratory tests, they’re constructing 100 outdoor test sites and plan to commercialize the technology in early 2018.

“We wanted to find a second life for a road,” said Philippe Harelle, the chief technology officer at Colas SA’s Wattway unit, owned by the French engineering group Bouygues. “Solar farms use land that could otherwise be for agriculture, while the roads are free.”

As solar costs plummet, panels are being increasingly integrated into everyday Materials. Last month Tesla Motors Inc. surprised investors by unveiling roof shingles that double as solar panels. Other companies are integrating photovoltaics into building facades. Wattway joins groups including Sweden’s Scania and Solar Roadways in the U.S. seeking to integrate panels onto pavement.

To resist the weight of traffic, Wattway layers several types of plastics to create a clear and durable casing. The solar panel underneath is an ordinary model, similar to panels on rooftops. The electrical wiring is embedded in the road and the contraption is topped by an anti-slip surface made from crushed glass.

A kilometer-sized testing site began construction last month in the French village of Tourouvre in Normandy. The 2,800 square meters of solar panels are expected to generate 280 kilowatts at peak, with the installation generating enough to power all the public lighting in a town of 5,000 for a year, according to the company.

For now, the cost of the Materials makes only demonstration projects sensible. A square meter of the solar road currently costs 2,000 ($2,126) and 2,500 euros. That includes monitoring, data collection and installation costs. Wattway says it can make the price competitive with traditional solar farms by 2020.

David Fuller's view -

Theoretically, this is an interesting idea and an ambitious challenge.  I hope it can be perfected although the overall cost, safety and susceptibility to damage may be too great for existing technologies.  Nevertheless, it shows the incredible adaptability of solar technology, in terms of projects both great and small.   

The sun is the greatest source of Energy with which we have any personal experience.  The number of manmade products exposed to sunlight, which can be captured and turn into Energy, is practically unlimited.  

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November 29 2016

Commentary by Eoin Treacy

Musings From the Oil Patch November 29th 2016

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

You read it here first – tomorrow the members of the Organization of Petroleum Exporting Countries (OPEC) will announce an agreement to limit its output. You will have to wait for the details, and more importantly you will have to wait to see whether OPEC members actually do what they say they will do. For those of us who have seen this show before (often with even greater drama/showmanship), the issues with every OPEC agreement are the details and then its execution. Often the details and the execution are not what the public is led to expect at the time of the announcement. 

OPEC has little choice at this point but to attempt to salvage some degree of respectability, especially following the debacle of the Doha meeting last spring at which a preconceived agreement blew up at the last minute. We are not going to debate the viability of OPEC as a cartel – to us it has always been an excuse to travel to Vienna and Europe for shopping and partying. On the other hand, OPEC does play an important role in helping to corral a number of important crude oil producers into supposedly one voice, although the power of that voice has been diminished by the evolution of Energy markets over the last 25 years, and especially in the last few years. 

The key factor for the oil market that OPEC understands is that it is in a recovery mode. That is not due to a miracle, or can be attributed to the efforts of anyone in particular. Rather, it is the result of economic discipline being restored to the oil market. Fewer uneconomic prospects are being drilled. Assets are moving from weak hands into stronger hands – hands that don’t necessarily have to drill in order to generate revenue to attempt to keep the doors of the companies open. 

Additionally, companies are figuring out how to operate more efficiently – fewer employees, more efficient operations and employing greater technology. Producers at the moment have benefited from destroying the pricing structure of the oilfield service industry, enabling the producers to lower operating costs. The producers have driven oilfield service company prices down to levels that are not sustainable for the long-term. Short-term gains for producers will have to yield to higher oilfield service prices if the producers wish to have the equipment, technology and employees that deliver the field services that they need. The question becomes how quickly oilfield service prices rise and how much of those increases can be offset by further efficiency gains. 

Eoin Treacy's view -

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

This is a logical argument. If OPEC cannot act in unison to fulfil its role as a swing producer then what purpose does the group have as anything more than a talking shop? If they fail to announce a deal it will signal the group’s increasing irrelevance so they have little choice but to announce something. Quite whether they can succeed in implementing anything is another subject entirely. 

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November 28 2016

Commentary by Eoin Treacy

Email of the day on electric cars and overall pollution

With regard to electric cars decreasing the world's need for fossil fuels, how is the electricity going to be generated? I have heard the Netherlands, who are one of the world leaders in using electric cars, have had to build three new generating plants already to meet the demand and these are coal fired. It is true that electric cars will laudably reduce urban pollution, where 85% of CO2 generation is created. But CO2 production will simply be transferred to rural areas, where electricity generating plants are normally situated. Energy consumption not be reduced and, since the Energy production will be a two-step procedure instead of a single stage, it may well be increased.

Eoin Treacy's view -

Thank you for this email which raises important questions and highlights that the Energy sector is not suitable for a one size fits all solution. I agree that an electric vehicle is, on aggregate, only as clean as the fuel used to generate its power. This graphic from is a useful barometer for how successful countries are in that regard. 

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November 24 2016

Commentary by David Fuller

OPEC Last Push for Oil-Cuts Deal Shifts Focus to Iran, Russia

Here is the opening of Bloomberg’s latest report on the attempt at this forced marriage:

OPEC’s final push to implement the Algiers supply accord and boost oil prices shifted focus to Iran and non-members such as Russia as Iraq appeared to reverse its opposition to output cuts.

The extension of shuttle diplomacy -- including a visit to Tehran from an architect of the September agreement and an unusual Vienna breakfast with non-OPEC ministers -- comes after an OPEC committee failed this week to hammer out details of how producers will share the burden of cuts. With less than a week until the crucial Vienna ministerial meeting, the refusal of just one major producer to participate could scuttle the whole deal.

Algeria’s Energy Minister Noureddine Boutarfa will travel to Tehran on Saturday in an effort to bring a deal closer, said a person familiar with the matter, who asked not to be identified because the information isn’t public. Algeria is the ninth-largest producer in OPEC and has limited international clout, but in September played a central role in clinching the preliminary agreement on output cuts that had eluded its more formidable counterparts throughout the two-year oil slump.

Boutarfa will also meet his Iraqi counterpart in Vienna on Nov. 28 or 29, although that country is now less of a problem after positive statements from Baghdad, the person said.

Oil prices rose Wednesday as Iraqi Prime Minister Haider Al-Abadi said his country would shoulder part of the burden of output cuts. That assertion still leaves unresolved the significant issue of exactly how much the country would reduce, and from what level, said a Gulf OPEC delegate. Iraq has been disputing the OPEC supply estimates that would form the basis of cuts, saying they underestimate its production.

David Fuller's view -

What a humiliating experience these negotiations must be for OPEC’s main participants, not that they will receive much sympathy.  Nevertheless, frackers in the USA will regard any success by OPEC plus Russia in cutting oil supplies as an early Christmas present, and with good reason.  Any price rise above $50 will increase their profits and also production.  Additionally, it will enable them to lock in higher prices for the future by hedge shorting more distant contracts in this contango market.  Jan ’17 Brent crude currently sells at $49, with prices rising gradually over the next 12 months.  The most liquid distant contract is Dec ’17, which closed today at $53.71.     

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November 24 2016

Commentary by David Fuller

Uranium: the Unloved Metal Whose Price Is Poised to go Radioactive

The belief is that utilities are becoming “uncovered”; with spot prices so low, they have resisted locking themselves into long-term contracts. This could leave them scrabbling for supply at the end of the decade, giving producers the upper hand on prices.

It’s a view shared by analysts at Cantor Fitzgerald, who predicted this year that a “violent increase” in uranium prices was on the way.

Cantor predicts that up to 80pc of the uranium market could be uncovered by 2025. Moreover, it believes demand will outstrip supply, saying: “The low-price environment has choked off exploration activity for uranium and we are at the point where there are not enough uranium projects in the pipeline that can adequately meet the coming demand.”

Peter Reeve, executive chairman of Aura Energy, describes the spot price as an “irrelevance”.

“I don’t believe the supply side is what’s hitting the spot price. It’s more just speculators playing that part of the market,” he says. 

Aura, which like Berkeley is listed in Australia, joined Aim in September, with a view to progressing uranium projects in Mauritania and Sweden.

Reeve also believes a “demand avalanche” is coming. Uranium is a relatively common metal, found in rocks and even seawater. Locating it in the right concentrations can be difficult, however. 

As Reeve says: “It’s not found near London or Paris. It’s all in very curious locations. That doesn’t make it easy to get at or develop.”

David Fuller's view -

What goes around, comes around. The world needs nuclear power but serious accidents are understandably terrifying, as we know from: 1) Three Mile Island March 28 1979, 2) Chernobyl April 26 1986, and 3) Fukushima Daiichi March 11 2011.  These incidents have left deadly, very long-term contamination in their nearby surrounding regions. 

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

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November 23 2016

Commentary by David Fuller

Oil Supply Crunch to Hit in 2019 as Investment in New Projects Dries Up

An oil supply crunch could hit as soon as 2019 as investment in new projects dries up following the price crash, leading analysts have warned.

Delays and cancellations of projects by cash-strapped Energy giants mean the volumes of new crude production coming onstream will not be enough to make up for the decline from existing fields and meet growing demand, Barclays analysts said in a research note.

They forecast that 2019 would see the "the lowest year for new capacity" on their records, which stretch back to the Nineties, with just 1.2m barrels per day (bpd) of new supply.

By contrast, decline from existing fields and growing demand would together equal 4m bpd, resulting in a gap of almost 3m bpd.

"2019 marks a juncture where supply becomes a concern. With current volatility and oil price uncertainty, project sanction approval continues to be difficult," they wrote.

The analysis comes after the International Energy Agency last week warned that the world was headed for another boom and bust cycle in the oil market, with supply shortages likely to cause rapid price increases by the early 2020s.

The IEA said that if project approvals remained at current lows through 2017, it was "increasingly unlikely that supply will be able to meet the rising demand without rapid price increases".

The Barclays analysis is even starker, suggesting that a supply crunch in 2019 may already be unavoidable.

Given long lead times for many projects that it is monitoring "no decision now makes 2019-20 start-up an impossibility", the analysts warned.

"Inventories could help fill the gap, as will the phased ramp-up of onshore developments and shorter development brownfield, but by then we feel it is not a question of the US shale ramping back up, but how much it can produce to fill the gap and how high an oil price is needed," they said.

Oil prices have rallied to near to $50 a barrel for Brent crude in recent days on rising optimism that Opec will agree new production curbs at a meeting in Vienna next week, helping to rebalance the market from the current supply glut. 

But the Barclays analysis suggests that regardless of whether Opec decides to cut next week the fundamentals are tightening and that an increase in production by the cartel may actually be needed within the next couple of years to fill a looming gap.

Ole Hansen, head of commodity strategy at Saxo Bank, said: "Crude oil has rallied strongly, despite headwinds from a rising dollar, in response to increased speculation that Opec will finally succeed in reaching a deal to cut production on November 30. The latest move once again highlights the cartel's role as a major driver of oil market volatility. 

"On the assumption a deal to cut production by a minimum of 800,000 barrels can be struck we could see Brent crude oil once again challenge the ceiling around $54 per barrel."

However, he warned: "The initial move would be driven by short-covering and once that is done the market may pause and retrace in the realisation that Opec's ability to comply with its own production targets have been very poor in recent years."

David Fuller's view -

I do not agree with this forecast.  No disrespect to the International Energy Agency but I cannot think of any commodity agency which does not predict higher prices in most of their forecasts.  If prices are low, they use that as a determinant of higher prices at a future date.  This has sometimes worked given previous inflation and global GDP growth.  What the agency is not factoring in, is the increasing wish to reduce consumption of crude oil because of CO2 emissions. 

Even more importantly, oil has gone from supply tightness to abundance, thanks to technology.  Today, oil is much easier to find and most importantly, onshore oil can be produced far more cheaply thanks to the vast quantities available in shale formations.

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November 22 2016

Commentary by David Fuller

OPEC Oil Cut Nears as Battered Saudis Bow to Indomitable US Shale

Twisting the knife deeper, the US is still drilling extra wells. The latest Baker Hughes rig count rose by two to 452 last week. Frackers have sold forward their production with hedge contracts, guaranteeing future supply whatever now happens.

"They took advantage of the window for a few weeks when oil was higher and locked in hedges of around $52 for 2017, and $55 for 2018," said Mr Hansen.

Esther George, the head of the Kansas Federal Reserve, told an oil forum on Friday that the average price needed by shale drillers to make a profit has fallen from $79 to $53 over the last two years as technology matures. Many are making money at prices well below that.

She had a warning for those who expect a return to business as usual in world oil, predicting that a "large amount" of production would come on stream as soon as prices push through the mid-50s. "I do not see much room for price appreciation," she said.  

Markets have grown cynical about Opec rhetoric on cuts. Yet it is increasingly clear that Saudi Arabia has genuinely reversed course under the new Energy minister, Khaled al-Falih, and this has changed the character of the Vienna meeting entirely.

The Kingdom can no longer afford to fight a grueling war of attrition to force rivals out of the market. While it has succeeded in killing off $200bn of investment in deep-water projects, Canadian tar sands, and other high-cost ventures, this has come at a very high price.

The Saudis have been burning through foreign exchange reserves at a rate of $10bn a month, and contrary to general belief their usable reserve buffer is relatively thin. They face an internal banking and liquidity squeeze, a construction crash, and have had to tap the global bond markets on a large scale to pay their bills.

"The Saudis are the ones that have suffered the biggest hit in revenue and face the most financial pain, and it has gone on a lot longer than they ever anticipated," said Mr Fyfe.

Austerity policies are biting in earnest, threatening the social contract of cradle-to-grave welfare that underpins the Wahhabi regime. Cuts in salaries, perks, and allowances have reduced take-home pay for lower level state employees by as much as 60pc in some cases.

Intelligence analysts say the Saudi-led war in Yemen is proving far more expensive than admitted, suggesting that the budget deficit is significantly higher than the official figure of 13pc of GDP. It recently emerged from Pentagon papers that the Saudis have lost 20 of their state-of-the-art Abrams tanks.

Helima Croft from RBC says the Saudis are now throwing their full diplomatic weight behind the search for a deal, though markets have not yet grasped the significance of this. If the Saudis want a deal, a deal is what will almost certainly happen.

Crucially, they need a much firmer oil price to have any chance of floating a 5pc share of state oil company Saudi Aramco for a very ambitious $100bn. The country is about to release secret details about the true extent of Saudi reserves, frozen at a constant 260bn barrels since the inception of the modern oil age - a patently absurd estimate.

David Fuller's view -

Saudi Arabia’s Tadawul All Share Index has had a good bounce since retesting the January low last month.  If it were to push above 7000 and hold those gains beyond the very short term, it would suggest to me that someone or more likely some group of investors was anticipating higher prices for Brent Crude Oil than current supply/demand figures suggest. 

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November 18 2016

Commentary by David Fuller

The Chancellor Must Return to His Roots With a Swashbuckling Autumn Statement

It will be hard for some to believe but Philip Hammond was once a colourful, buccaneering entrepreneur, the opposite of the grey-suited bean-counter he now purports to be. As a schoolboy in Essex, the man who today serves as our Chancellor of the Exchequer made good money renting out church halls for discos, before graduating to trading cars made at the local Ford factory.

He had a knack for spotting a profit opportunity and struck his first real deal aged just 24, when he bought out his employers’ medical products division for just £1. Over the years, Hammond had his fair share of successes as well as failures, like all entrepreneurs, but ended up making millions from a range of property and construction, manufacturing and Energy businesses.

People don’t really change, which is why I’m hopeful that Hammond may rediscover his risk-taking instincts and ditch the ultra-cautious, lugubrious and bizarrely pessimistic persona he has acquired since entering politics. The world has shifted dramatically in the past five months, and Britain desperately needs a dose of the old, glass half-full Hammond. 

Governments must deal with reality as it is, not as they hoped it would be, and this applies even more to Trump’s triumph – which Downing Street neither predicted nor wanted – than it does to Brexit. Nobody knows, at this stage, whether Trump’s presidency will implode in an orgy of demagoguery, protectionism and corruption, or whether it will confound its critics by governing in a neo-Reaganite manner. 

Realpolitik must thus be the order of the day. Given the inflammatory elements of Trump’s campaign, the Government needs to remain vigilant; but it should also seek to make the most of the new world order and the imminent pro-Brexit and pro-growth shift in Washington. This is where Hammond comes in. Brexit alone would have required a radical response from the Chancellor; Brexit, Trump and the growing likelihood that strains in the eurozone will eventually reach breaking point make this an urgent necessity. 

His first Autumn Statement next week is the first real opportunity for the May Government to regain the initiative and to show that it has an exciting, optimistic plan for our post-Brexit prosperity. Hammond cannot afford to be hemmed in by the pessimistic consensus – the same duff predictions that claimed that the Brexit vote would trigger an immediate collapse in growth and jobs. He needs to break free from the constraints of the Treasury’s models.

The Chancellor should start off by pointing out – diplomatically, of course – that the rise in the deficit is largely the doing of his predecessor: the previous predictions never had any hope of coming true, Brexit or no Brexit. He must then retain an iron grip on almost all areas of current spending, while announcing his own, deliberate but carefully controlled loosening in fiscal policy. 

The first big change is that the Chancellor needs to be much more radical on tax, and unveil at least one flagship measure to improve incentives to work and invest. He should commission a major review of the tax system, with the aim of drastically simplifying and flattening it.

David Fuller's view -

I agree with Allister Heath’s advice.  Brexit is no time for timidity at the Treasury.  Chancellor Hammond should be doing all that he can to help Britain become an even more entrepreneurial, low-tax, free-trading economy.  This would inspire talent across the United Kingdom, while also attracting foreign expertise and investment in our pro-business economy.  

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November 18 2016

Commentary by Eoin Treacy

Collision Course

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

While Energy market watchers have highlighted President-Elect Trump’s nod towards drilling and fracking, we believe that a Trump administration will have a larger impact on the US demand side of the ledger. The two key regulations which, if repealed, could drive US gasoline demand materially higher are the Corporate Average Fuel Efficiency Standards (CAFE) and the Renewable Fuel Standard (RFS). The potential impact of a Trump presidency on US gasoline demand is not one that should be underestimated. After all, US gasoline demand comprises of nearly 10% of total global oil demand and has been the sole bright spot in the OECD region, which has otherwise been trending lower on a structural basis since the recession. The potential repeal of aforementioned regulations is unlikely to make a difference in his first 90 days in office, but it is a rather bullish potential catalyst in the quarters and years to come.

Eoin Treacy's view -

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

An additional bullish potential outcome for gasoline prices is that the millennial generation is increasingly turning towards car ownership after a delayed start which should at least put a partial floor under demand. 

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November 18 2016

Commentary by Eoin Treacy

Musings from the Oil Patch November 15th 2016

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

Another issue that has yet to be addressed is a proposed ban on oil tankers operating off British Columbia’s coastline that would effectively shut down the development of an oil export terminal at Kitimat and thus kill the proposed Enbridge (ENB-NYSE) Northern Gateway oil export pipeline. If the tanker ban is put in place, it will force the development of the Trans Mountain pipeline as the primary West Coast oil export pipeline. That would leave the Trudeau government to deal with TransCanada Corp.’s (TRP-NYSE) Energy East oil pipeline project to move Western Canadian oil to the East Coast where it could be exported to the U.S. East Coast or Europe. Despite being the “environmental” prime minister, Mr. Trudeau is recognizing that without more oil and gas export opportunities, his nation’s economy, which depends on a healthy Energy economy, will suffer with many social and financial repercussions.

The Canadian federal government’s decision about Trans Mountain on December 19th will be an important milestone for the nation’s Energy business. There are still numerous other policy decisions that must be addressed before Canada develops a full-scale oil and gas export expansion regime, but the first steps appear to have been taken last week.

Eoin Treacy's view -

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

Anyone who has ever been to Vancouver will understand how important pristine maritime conditions are when they sit down to taste some of the city’s delectable seafood. Whether it is salmon, sushi or Cantonese style seafood all are on par with what is on offer anywhere else in the world. However despite a deep interest in preserving the province’s wonderful maritime resources there are bigger questions that need to be addressed. 

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November 17 2016

Commentary by Eoin Treacy

Is the EV finally coming of age?

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

One important breakthrough will be increasing the Energy density of the battery through being able to cram more cells into the same volume of battery packs. The battery density doubled between 2009 and 2016, and this is definitely not the end. Just like with the technological development of the personal computer, there is something similar to a 'Moore's Law' in the battery development: currently, we recognize an annual improvement rate of 14 percent, which is quite immense."

Although 14 percent is significant, it's only just a start when it comes to battery technology. At the moment, electric cars make use of lithium-ion batteries, the type pioneered by the Tesla Roadster back in the mid-2000s. Schenk says there's plenty of improvement to come in lithium-ion tech, but greater leaps forward are in the pipe.

"New technologies, and especially those aimed at material-related improvements, plus ever-increasing production volumes leading to further price decreases, will determine the development stages of the next few years," Schenk says. "Within the next decade a major technological leap is expected with lithium-sulphur systems, and these are set to revolutionize costs and operating range as extraordinarily relevant buying criteria for electric vehicles."

Already, improvements to battery chemistry are starting to pay off, and people are starting to buy electric vehicles in greater numbers. Renault, one of the largest players in the European electric game, sold 23,087 electric cars in 2015 - a 49 percent increase on its 2014 numbers.


Eoin Treacy's view -

Advances in battery technology have been slower to manifest than in microprocessors because of limitations in chemistry but perhaps more importantly because there has just not been enough incentive for companies to spend money on innovation. 

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November 16 2016

Commentary by David Fuller

Global Dollar Shock Threatens Fresh Financial Storm, Warns Watchdog

The soaring US dollar is causing mounting strains for the global financial system and ultimately threatens to set off a full-blown banking crisis in emerging markets, the world’s top’s economic watchdog has warned.

“We have all the symptoms of a dollar shortage,” said Hyun Song Shin, chief economist at the Bank for International Settlements.

The warning came as the closely-watched dollar index (DXY) appeared close to breaking through key resistance levels to a 14-year high, a move likely to trigger a stampede into the US currency as hedge funds and momentum traders join the chase.

The danger is that the powerful and immediate effects of financial tightening will “swamp” any trade benefits for the rest of the world from Donald Trump’s stimulus plans and a stronger dollar, even for countries that export heavily to the US. “It may not be very good news for anyone,” Mr Shin told a specialist forum at the London School of Economics.

The BIS estimates that dollar debt outside US jurisdiction - and therefore lacking a direct lender of last resort - has risen five-fold to $10 trillion over the past 15 years.

It has spiked to $3.3 trillion in emerging markets. This is chiefly due to the leakage of cheap dollar funding from the US while quantitative easing was in full flow. The debts will have to be rolled over in a stronger currency and at a much higher rates.  

What is less understood is that the surging dollar automatically squeezes the balance sheet of banks in Europe and Japan through the complex structure of swap contracts. “The dollar is everywhere,” said Mr Shin.

David Fuller's view -

This service pointed out in 2H 2014 that the Dollar Index (DXY) (monthly historic & weekly) was breaking up out of its base formation and commencing a secular bull market recovery, fuelled by the USA’s Energy independence, increasing technology lead, and its dominant, multinational corporate autonomies. 

We also pointed out that DXY had completed its initial upward leg near the 100 level in 2Q 2015, and that the subsequently loss of upside momentum confirmed the commencement of what was likely to be a lengthy medium-term consolidation before the bull market resumed. 

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November 16 2016

Commentary by David Fuller

A $900 Billion Oil Treasure Lies Beneath West Texas Desert

In a troubled oil world, the Permian Basin is the gift that keeps on giving.

One portion of the giant field, known as the Wolfcamp formation, was found to hold 20 billion barrels of oil trapped in four layers of shale beneath the desert in West Texas, the U.S. Geological Survey said in a report on Tuesday. That’s almost three times larger than North Dakota’s Bakken play and the single largest U.S. unconventional crude accumulation ever assessed. At current prices, that oil is worth almost $900 billion.

The estimate lends credence to Pioneer Natural Resources Co. Chief Executive Officer Scott Sheffield’s assertion that the Permian’s shale endowment could hold as much as 75 billion barrels, making it second only to Saudi Arabia’s Ghawar field. Pioneer has been increasing its production targets all year as drilling in the Wolfcamp produced bigger gushers than the Irving, Texas-based company’s engineers and geologists forecast.

“The fact that this is the largest assessment of continuous oil we have ever done just goes to show that, even in areas that have produced billions of barrels of oil, there is still the potential to find billions more,” Walter Guidroz, coordinator for the geological survey’s Energy resources program, said in the statement.

David Fuller's view -

US Energy independence will persist well beyond its need for oil as a fuel.  That is a remarkable advantage because the USA will have the lowest Energy costs of any developed economy, and not just because of its oil and gas, which are now transition fuels until they are no longer required and have been replaced by renewables.

What about other countries? 

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November 15 2016

Commentary by Eoin Treacy

OPEC, Russia Expand Diplomatic Push to Secure Oil-Cuts Deal

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

OPEC embarked on a final diplomatic effort to secure an oil-cuts deal, with its top official heading on a tour of member states as Russia scheduled informal talks in Doha this week with nations including Saudi Arabia.

The behind-the-scenes diplomacy follows an unannounced meeting in London between OPEC Secretary-General Mohammed Barkindo and Saudi Minister of Energy and Industry Khalid Al-Falih, said one OPEC delegate. Just two weeks before the group’s Nov. 30 ministerial meeting in Vienna, Saudi Arabia, Iraq and Iran are still at odds over how to share output cuts, said another delegate. 


Eoin Treacy's view -

OPEC and Russia have succeeded in talking oil prices up on two separate occasions over the last few months and the announcement of this meeting would appear to be a fresh attempt to jawbone prices higher. The reality is that agreeing to cut production means each country that agrees to comply risks losing market share to those who don’t. In ordinary times securing broad agreement would be difficult but Saudi Arabia, Iran and Iraq do not have the finances to absorb such a risk right now and additionally are all prosecuting wars, which are not cheap. 

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November 11 2016

Commentary by David Fuller

Trump Victory Bodes Well for Investors, for Now

With benefit of hindsight, what’s extraordinary is how few professional investors saw it coming. Mr. Trump was derided as the candidate of “uncertainty,” which markets typically abhor, and many of his stated policies are vague, incoherent or inconsistent. But there was nothing uncertain about his overall pro-growth, pro-business and America-first tendencies, now backed by the firepower of a Republican House and Senate.

He is, after all, a real estate developer.

“We see tremendous opportunity for economic growth,” said John Engler, a former governor of Michigan who is now president of the Business Roundtable, an influential group of chief executives that was often at odds with Mr. Trump during the campaign, especially over trade and immigration. Now that the results are in, though, Mr. Engler sees a silver lining. “The Republicans understand,” he said, “that they’re on the spot to produce results.”

Simon Lack, founder of SL Advisors, an investment advisory firm and operator of a mutual fund that focuses on Energy, carried the theme further. “Trump’s win is unambiguously positive” for many sectors of the economy, “especially Energy infrastructure,” he said.

The doomsayers also ignored a century of market reactions to presidential elections. “We’ve done extensive research that suggests presidential elections don’t affect markets,” said James Stack, president of InvesTech Research. “The reality is that the market is influenced to the greatest extent by economic factors and monetary policy.”

“In almost all technical and macro aspects, this is still a bull market,” Mr. Stack said, and Mr. Trump’s election does not change that.

Markets generally rally the day after a presidential election, said Jeffrey Hirsch, editor of the Stock Traders Almanac, because elections, whatever their outcome, eliminate a measure of uncertainty. “It doesn’t matter if it’s a Republican or Democrat,” he said. Returns tend to be higher when an incumbent president is replaced or the party in power changes, as happened this week. And previous instances of the election of both a Republican president and Republican Congress have been followed, on average, by a first-year performance of 14 percent.

There are more specific reasons as well that investors applauded Mr. Trump’s victory:

David Fuller's view -

Trump’s immediate projects are likely to be sensible infrastructure spending, personal and corporate tax cuts, and deregulation.  These could transform sentiment and show positive results much more quickly than some commentators have suggested.  They should also be of considerable long-term benefit to the US economy.  

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