Other than public debt and equity, the E&P industry has also been seeking other sources of capital. Drawing down bank credit lines has been one avenue, but lower oil prices will mean reduced asset values, especially as some of the assets will be redlined because they have been in the undeveloped category for too long so will be considered uneconomic. With the upcoming bank loan redeterminations, we expect to see increased E&P sector financial stress. In March, the last time loan redeterminations were conducted, oil averaged $71 per barrel. Now, the average is $57 a barrel; helped by the spring run-up in oil prices. By the fourth quarter, it is possible the average oil price will be in the $40s. A 40% haircut in the borrowing base will impact 2016 E&P spending.

The E&P industry has also lived off its earlier production hedges. As a result, some companies were being paid in the $90s a barrel for their output, but most of those high-priced hedges are running out. An analysis by investment banker Simmons & Company International and quoted by The Wall Street Journal, cited 36 U.S. oil producers with hedges covering 33% of their 2015 output at an average of $80 a barrel. Next year, those companies only have 18% of their output hedged, and at an average price of only $67 per barrel. Those high-valued hedges during the first half of this year was a reason why layoffs and G&A cuts were not severe, if at all. Management teams’ days of living in a world of unreality is rapidly coming to an end, and the pain will be severe.

Another source of capital for the Energy business has been private equity - pools of capital that can be used to start new companies, buy companies on which to build much larger companies, and to provide capital for companies to grow. Data for the past three years (Exhibit 10) shows that private equity invested $43 billion in 2012, $36 billion in 2013, but only $11 billion in 2014. Private equity deals this year have been sparse as fund managers struggle to find attractive deals in an environment in which it is difficult to assess what companies are worth. That also explains why deal-making in 2014 was down sharply from the prior two years. 

As a result of the 2010-2014 period of high oil prices and expectations that these prices would only go higher in the future, private equity targeted the Energy business due to its large capital needs. Virtually every major private equity firm raised one or more Energy-focused funds. Those private equity firms who have ploughed the oil patch for years were easily able to raise large new funds off their successful track records. With billions of dollars sitting in these Energy-focused private equity funds, finding and executing deals has become a high-pressure effort. 

Increasingly, private equity managers are recognizing that this potential avalanche of capital seeking Energy deals is their biggest problem. It has, and is, leading to overvalued deals. As long as this money has to be put to work due to the mandates of the funds, the pain in the industry is likely to continue. The Energy business truly needs to have the capital flow turned off, not merely turned down. Only then can the industry washout occur and the healing begin. 

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

The Energy sector remains in a state of flux and the stress some of the more overleveraged companies are coming under has seen yields almost double in the last two years. BBB Energy 5-year yields are not at high absolute levels relative to history but the trend remains clear. 

Stepping back for a moment, on September 3rd, Tesla’s Founder Elon Musk reiterated his commitment to source materials from Nevada. However, that pledge did not necessarily mean another sourcing deal, announced so soon, or that it would be for lithium. Other materials besides lithium will be required. Cobalt and graphite, (among others), will also be needed to feed Tesla’s massive giga-factory in Nevada. I find this agreement to be highly noteworthy in the sense that Tesla’s growing need for lithium, perhaps more so than that for cobalt and graphite, represents the single most important raw material need. I imagine that other lithium agreements will be signed in coming months. Without question, Nevada wants further lithium deals to come from Nevada.

The fall in oil prices has had a knock-on effect on most Energy related sectors as the relative economics of various alternatives have changed. Lithium miners have been no exception and this has been despite the fact lithium prices have not fallen. Demand for lithium-ion batteries in everything from consumer goods to cars and planes has helped fuel major investment and a large number of explorers are now listed. However securing an agreement to supply Tesla’s factory is a major coup for Pure Energy.

It’s possible that if China’s coal consumption dramatically declines, India will be there to fill the hole. Macquarie estimates that by 2025, India’s Energy demand will rise 71 percent, with coal taking the lead among oil, gas, hydro, nuclear and others. The south Asian country is already the second-largest importer of thermal coal, and it might very well surpass China in the coming years. Macquarie writes:

Although all Energy use will rise [in India], coal is the major theme as consumption and local production are both set to almost double by 2025 on the back of large-scale coal power plant construction plans.

The group adds that, unlike China, India has no present interest in reigning in its use of coal. Most emerging markets, India included, recognize that coal is an extremely affordable and reliable source of Energy, necessary to drive economic growth.

Even if these predictions don’t come to fruition, the consensus is that we haven’t yet seen peak coal use in Asia. Estimates vary depending on the agency, but everyone seems to agree that demand in the medium-term will rise before it retreats. A 2014 MIT study even suggests that Chinese coal consumption could rise more than 70 percent between 2012 and 2040.

 

North America and Europe engage in a great deal of navel gazing when it comes to climate change and yet US emissions have been falling because of natural gas boom and the EU has seen aggregate emissions decline not least because of its sluggish economic recovery. The main future contributors to carbon emissions are the up and coming developing economies. If governments are truly interested in tackling the issue, doing everything possible to help China and India migrate from coal is in everyone’s interest. This is no small task because above all else coal is cheaper now than it has been in a decade. 

The press has been touting the "sharp drop in rig counts" as evidence of an imminent slowdown in oil production, headlining off the drop of 18 rigs in the week ending 9/11. Now if we look at the facts, we are at 652 oil rigs versus 635 2 months ago. Last I checked, 652 is more than 635. Oil rigs dropped 10 in the past week. Gas rigs have been in a pretty clear, slow downtrend for most of this year.

Now of course a drop of 10 oil rigs in a week may sound like a lot to the untrained ear (which most journalists appear to have), but 10/662 = 1.51%, which is not exactly a blow-off-the-socks change. In fact, it is within the normal ebb and flow of wells being taken down to move to the next location, rigs offline for maintenance, etc.

I think the IEA's prediction of "slamming the brakes" on the production of shale oil (see http://www.ft.com/intl/cms/s/0/15e4dc9a-585e-11e5-9846-de406ccb37f2.html ) needs to be taken with a somewhat wait-and-see attitude. Low prices will ultimately bring down high-cost production, but economists' predictions about oil production costs just might have included too much sunk cost and not factored in enough efficiency gains in the oil patch. This just could further reinforce the notion that oil prices will stay lower for longer than most in the financial media expect.

Thank you for this informative email and chart contributed in the spirit of Empowerment Through Knowledge. Technological innovation is enhancing just about every area of our lives but its’ influence on the Energy sector is particularly poignant. 

As you know, Australian exports are based on building capacity to fulfil 'firm' long term 'take or pay' contracts. I anticipate some of the capacity will have to be mothballed rather than go to spot markets if the 'takers' default on the contracts. You do not mention Canada, where there are logistical problems and governmental changes threatening production for export.

Thank you for these relevant points in response to my piece on LNG on Friday. Considering the stress the Canadian Energy sector is currently under it is debatable whether West Coast export facilities will be built. This site from the British Columbia government highlights the fact that ground has not yet been broken on any of the proposed projects. 

Hope isn’t a strategy – but what can you tell me about this chart?   It’s the Canadian Energy index.  What signs should I be looking for?

This has been a very active week in just about all markets but the only emails from subscribers I received in the last two days were focused on the Energy market. I chose to publish this one because it’s from a normally very calm person but the stress he is feeling is evident in the wording. 

Hi Eoin, I love my daily read of your great service.

What is your opinion on Royal Dutch Shell, I am under water by about 30% not counting dividends.

Thank you for this question which is sure to be of interest to other subscribers and I’m delighted you’re enjoying the service. The steep decline in a large number of sectors, particularly Energy has left a lot of people in a similar dilemma. My first thought is that with a share yielding 7.71% today it would be rash to ignore the dividend even if the yield was lower when you purchased it. 

This analyst made a couple of other interesting observations. He said he questioned E&P management teams about their view of the level for oil prices that would generate returns similar to those earned when crude oil was at $90 a barrel and finding and development costs were much higher than today’s. In his view, the consensus was that $60-$70 a barrel is the “new $90 a barrel” oil given lower well costs and improved corporate efficiencies. He also said that producers acknowledged that returns were “skinny” with crude oil in the low $40s a barrel. We aren’t sure what “skinny” equates to, but we suspect not much profit, if any at all.

We were interested in his other observation, which dealt with how producers are coping with the current environment. He said that producers seemed to be reverting to the “1980’s playbook.” What does that mean? How about drilling within cash flow and attempting to hold production flat. What novel concepts! What someone who didn’t live through the ‘80’s and ‘90’s might not understand is that the playbook resulted from there not being cheap capital and private equity money available then. In fact, following the demise of Continental Illinois Bank in Chicago and Penn Square Bank in Oklahoma City, commercial banks almost outlawed Energy lending in the 1980’s as it was considered too speculative, so there was virtually no new capital available. Today, we live in a world driven by easy money policies globally, meaning zero interest rates, which contributed to the high oil prices of 2009-2014 and the surge in capital flowing into private equity funds. A recent quote from economist and money manager Gary Shilling highlights this phenomenon and its damage to the Energy industry. He said:

“The oil optimists noted that earlier high oil prices, aided by low financing costs, had pushed up production, especially among U.S. frackers. Low prices, they reasoned, would curb production, especially since fracked wells tend to be short-lived and the cost of drilling new ones exceeded the depressed prices. But a funny thing happened on the way to $80 oil: The rally stopped dead in its tracks at about $60 in May and June, then slid to the current $42, a new low. “Me? I'm sticking with my forecast of $10 to $20 a barrel.”      

 

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

This Service is not bullish of oil prices over the medium-term and we have been vocally proclaiming how much of gamechanger shale oil and gas are for years. However $10 - $20 is an aggressive forecast even in an environment where major producers such as Saudi Arabia and Iran are competing for market share and prices are working on a ninth consecutive week to the downside. 

A surprise devaluation of the renminbi has raised the stakes of an economic slowdown in China for global companies that have relied on the country as the engine of growth around the world.

All of that comes at a time when companies already have been buffeted by falling oil prices and a rising US dollar. Valuations, in the US at least, look stretched at 17 times for the S&P 500.

“We all knew that China’s economy was under pressure but the devaluation was an indication that it is worse than expected and that is a problem for corporate earnings,” says Nicholas Colas, chief market strategist at Convergex.

Blue-chip UK, US and eurozone companies in sectors long dependent on China, including carmakers, miners and luxury goods retailers, have endured the brunt of selling by investors this week. This comes when companies in the Energy, materials and industrials sectors have been lagging badly for much of this year, with falling commodity prices suggesting demand from China has slipped into a much lower gear.

“Companies with sales of 20 per cent or more to China have been penalised in the market, but so have those that are tied to commodity prices where demand from developing regions has been key to the former super cycle thesis,” says Tobias Levkovich, head of US equity strategy at Citi.

“First and foremost has been the idea that Chinese demand wanes and the world is left with a glut of production and inventory that causes price discounting for everything from drugs to electronics to cars (and well beyond just oil and iron ore), which compresses corporate profits worldwide,” he adds.

Now the question facing equity investors is whether China’s devaluation can help bolster overall growth and demand for the products and services sold by global companies from the US and Europe. While share prices were stabilising in Europe and the US on Thursday, many believe the pressure is not likely to let up soon.

“In Europe, they’ve been banking on their exports looking cheaper — 40 per cent of European gross domestic product is exports — and the problem is again the Chinese are jumping on board to drive growth through an increase in exports,” says David Lebovitz, global market strategist at JPMorgan Asset Management.

Many investors are panicking over China’s economic slowdown and stock market volatility.  That said, the Shanghai A-Shares Composite Index is still higher on the year by 13.82% in US Dollar terms.   

This item continues in the Subscriber’s Area.

Amazon.com Inc. held a Prime Day on July 15 to mark its 20th anniversary, featuring reduced prices on television sets, lawnmowers and other goods. The company said the promotion helped to drive orders surpassing Black Friday, an annual U.S. sales event following the Thanksgiving Day holiday that kicks off the year-end shopping season.

The job market is giving consumers the wherewithal to keep spending. Payrolls grew in July by 215,000 workers following a 231,000 gain in the prior month, and the jobless rate held at a seven-year low of 5.3 percent.

Low Energy prices and cheaper imports have acted as an enabler for consumers which has helped Consumer Staples shares retain a position of relative strength. However, that does not negate the fact the retail sector remains intensively competitive particularly between bricks and mortar stores and online platforms. This has forced the former to open e-commerce sites while some youth oriented brands now maintain physical locations so potential customers can try on items but then buy them online. 

We are not convinced that the stock market needs higher commodity and oil prices in order to continue to rise. In our view, the shift in the direction of commodity prices since 2010 reflects a transfer of the benefits of higher commodity production from producers to consumers. That means basic industries and consumers should be the beneficiaries of falling commodity prices. Long-term, commodity prices should climb in response to increased consumption, which will drive up corporate earnings that are necessary to support higher share prices. A higher stock market can come without oil prices reaching new all-time highs, but they need to be higher than current levels for Energy company earnings to rebound, that is unless substantial operating costs can be removed from the Energy business. The Energy business may get both, and investors will benefit from increased share prices. Unfortunately, this isn’t likely until sometime in 2016.

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

It strikes me as odd that anyone thinks you need a high oil price to support a bull market in equities outside the Energy sector. The stock market does not need high oil prices to rally but it does need the perception that the future will be better than the past to justify progressively higher prices. Admittedly this is often associated with higher Energy demand.

The concentration of revenues in the Energy sector that occurred as a result of the high Energy price environment is over. This has acted as an incentive for mergers. Consumers will be medium-term beneficiaries as Energy savings accrue and spending power improves. But what about the short term?

The new reactor is designed for basic research on fusion and also as a potential prototype power plant that could produce 270MW of electrical power. The basic reactor concept and its associated elements are based on well-tested and proven principles developed over decades of research at MIT and around the world, the team says. An experimental tokamak was built at Princeton Plasma Physics Laboratory circa 1980.

The hard part has been confining the superhot plasma — an electrically charged gas — while heating it to temperatures hotter than the cores of stars. This is where the magnetic fields are so important — they effectively trap the heat and particles in the hot center of the device.

While most characteristics of a system tend to vary in proportion to changes in dimensions, the effect of changes in the magnetic field on fusion reactions is much more extreme: The achievable fusion power increases according to the fourth power of the increase in the magnetic field.
Tenfold boost in power

The new superconductors are strong enough to increase fusion power by about a factor of 10 compared to standard superconducting technology, Sorbom says. This dramatic improvement leads to a cascade of potential improvements in reactor design. 

 

This is a difficult time in markets and some caution is warranted however short-term volatility has no effect on the rate of technological innovation that remains perhaps the most bullish medium-term consideration for investors. Economic development is predicated on access to abundant, reasonably priced Energy and fusion technology represents a powerful potential enabler which is why it is so exciting. We will always need more Energy and the challenge is how to generate it as cleanly as possible. 

When we look at their price patterns, there is some technical support at current levels for both [crude oil and oil shares] (see horizontal lines above).  Sentiment in the short term is getting close to a pessimistic extreme (see Weekly Chart below), but the primary trends (not shown) are still firmly down.  Interestingly, our chart above shows the Energy sector’s relative performance has clearly broken below its March low, whereas oil prices have not.  This observation suggests to us that Energy investors are now coming to terms with the idea of lower oil prices for a longer period of time.  We think they are right, and the risk for oil prices is that they ultimately break down to a lower low, potentially even re-testing the 2008 lows in the mid-to low-$30s price range.  Should that occur, the fundamental case for a longer term bottom would be more compelling as it would likely solicit both a supply and a demand response.  Our current fundamental view on oil prices is that a trading range is forming with an upside cap somewhere between $60 and $70, which is where the short-term supply from US producers will increase.  As yet, we do not have a strong fundamental view regarding the bottom of the range.  In the meantime, we suggest patience.  

The key variable with any commodity is usually supply.  Currently, the world is awash with oil.  Traditional producers did not anticipate the technological developments, including fracking, which have produced additional supplies of crude oil.  Shocked by their significant loss of revenue, they have responded by increasing production.  The Saudi’s, in particular, are waiting, expecting, hoping… that higher-cost production slumps. 

This item continues in the Subscriber’s Area, where The Weekly View is also posted.

If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.

The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states.

The Saudis took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn.

Bank of America says OPEC is now "effectively dissolved". The cartel might as well shut down its offices in Vienna to save money.

If the aim was to choke the US shale industry, the Saudis have misjudged badly, just as they misjudged the growing shale threat at every stage for eight years. "It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run," said the Saudi central bank in its latest stability report.

"The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience," it said.

One Saudi expert was blunter. "The policy hasn't worked and it will never work," he said.

By causing the oil price to crash, the Saudis and their Gulf allies have certainly killed off prospects for a raft of high-cost ventures in the Russian Arctic, the Gulf of Mexico, the deep waters of the mid-Atlantic, and the Canadian tar sands.

Consultants Wood Mackenzie say the major oil and gas companies have shelved 46 large projects, deferring $200bn of investments.

The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek Energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year - and not only by switching tactically to high-yielding wells.

Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. "We've driven down drilling costs by 50pc, and we can see another 30pc ahead," said John Hess, head of the Hess Corporation.

It was the same story from Scott Sheffield, head of Pioneer Natural Resources. "We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days," he said.

The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. "The freight train of North American tight oil has kept on coming," said Rex Tillerson, head of Exxon Mobil.

The Saudi’s have or had larger reserves from the sale of conventionally produced oil and gas than other Energy exporters but they are all in trouble. 

The first remarkable fact about US shale oil and gas production that we are hearing about more frequently is the speed and efficiency with which this technology has developed, significantly lowering costs in the process. 

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

Bristow was preceded at the presentation by Randgold Chairman, Chris Coleman, who reminded those present that Randgold was formed almost exactly 20 years ago when the gold price was at a virtual all-time low. The point here being that the current low gold price is not as bad as it was back then, and Randgold has thrived since its very beginnings, in both lower and higher gold price environments.

Bristow continued on the same theme, saying that in terms of the gold price in real terms, Randgold was nearly back where it started! He re-iterated the company has always followed a basic strategy that allowed it to be able to continue to build, while many of its peers were still trying to figure out how to survive in the current gold price environment. “I’ve always tried to do the opposite to the industry and grow in the troughs,” Bristow said to Richard Quest of CNN. Randgold has not wavered from its strategy of only developing good-sized projects offering strong returns at $1000 gold and this policy has held it in good stead.

As far as the Q2 figures were concerned, not surprisingly, Bristow tended to dwell more on the positive aspects of the results. These included a solid all-round performance from its operations, with improvements in grade, throughput and recovery, leading to a new gold production record and a higher profit compared with Q1 in the face of a declining gold price. 

 

Gold miners are now trading at around the same levels relative to the gold price as they did before the commodity bull market. This highlights just how unsuccessful the sector on aggregate has been in controlling cost inflation. However as Energy prices pull back and wage inflation moderates, or even contracts, the ability of miners with reasonable debt loads to prosper should improve. This means we can expect some wide variation in returns between miners. 

The premium that Southern California drivers are paying over the national average is at its highest ever, Jamie Court, president of the nonprofit Consumer Watchdog, said at a news conference in Los Angeles Wednesday. He was joined by billionaire environmentalist Tom Steyer.

“The Golden State is getting gouged,” Court said. “The money that’s being made from the pockets of California gas consumers is lining the pockets of the oil refiners.”

California-blend gasoline is produced by refineries within the state and in a few other parts of the U.S. and the world.

Output of the blend by in-state refineries dropped to 6.5 million barrels in the week ended July 24, California Energy Commission data show.

While the refinery fire has contributed to high California pump prices, there are other factors such as the second-highest gasoline taxes in the country and environmental rules that boost costs, Braden Reddall, a spokesman at Chevron Corp., said in an e-mail.

“While it is easy for groups like Consumer Watchdog and individuals like Tom Steyer to take one factor in our earnings out of context, what can’t be taken out of context is the fact that many policies backed by Steyer are already increasing fuel prices for California consumers,” Reddall said.
Gasoline Cargoes

The high pump prices are temporary and should decline as gasoline cargoes arrive in greater numbers from abroad, Allison Mac, West Coast petroleum analyst at Gasbuddy, said in a phone interview Wednesday.

“Prices should be dropping at a higher rate than we have been seeing and that’s because of the imports,” she said. “The last couple of days, massive cargo ships arrived alleviating what was causing the prices to spike.”

 

At Costco, which is about the cheapest sellers of gasoline, prices have fallen 40¢ per gallon in the last five days which is about 10%. This suggests the supply shortage which has kept prices high is easing. While competition from imports may represent a challenge for refiners the continued weakness in oil prices is probably a more important factor.  

Sergio Marchionne had a funny thing to say about the $32,500 battery-powered Fiat 500e that his company markets in California as “eco-chic.” “I hope you don’t buy it,” he told his audience at a think tank in Washington in May 2014. He said he loses $14,000 on every 500e he sells and only produces the cars because state rules re­quire it. Marchionne, who took over the bailed-out Chrysler in 2009 to form Fiat Chrysler Automobiles, warned that if all he could sell were electric vehicles, he would be right back looking for another govern­ment rescue.

So who’s forcing Marchionne and all the other major automakers to sell mostly money-losing electric vehicles? More than any other person, it’s Mary Nichols. She’s run the California Air Resources Board since 2007, championing the state’s zero-emission-vehicle quotas and backing Pres­ident Barack Obama’s national mandate to double average fuel economy to 55 miles per gallon by 2025. She was chairman of the state air regulator once before, a generation ago, and cleaning up the famously smoggy Los Angeles skies is just one accomplish­ment in a four-decade career.

Nichols really does intend to force au­tomakers to eventually sell nothing but electrics. In an interview in June at her agency’s heavy-duty-truck laboratory in downtown Los Angeles, it becomes clear that Nichols, at age 70, is pushing regula­tions today that could by midcentury all but banish the internal combustion engine from California’s famous highways. “If we’re going to get our transportation system off petroleum,” she says, “we’ve got to get people used to a zero-emissions world, not just a little-bit-better version of the world they have now.”

This is tough love for automobile companies.  They will struggle to adapt and the costs will be high, at least initially, as we know from Sergio Marchionne’s remarks above.  However, cleaning up our planet has to be one of our most important policies.  It is not only a measure of our civilization, but also a key to our species’ long-term survival.

Mary Nichols is smart, successful and growing influence internationally.

Here policy on fuels is another long-term blow for the crude oil industry.     

After reporting its lowest profit since 2009 and cutting in half its plans for buybacks this quarter, Exxon Mobil’s vice president of investor relations Jeffrey J. Woodbury told analysts on a conference call: ‘‘Fundamentally, we’re committed to our shareholders to continue to provide a reliable and growing dividend.”

Said Chevron Corp. chief financial officer Patricia E. Yarrington on her company’s earnings call: “We said we would cover the dividend from free cash flow in 2017. We stand by that commitment.”

Chevron is paying almost 5 percent of its share price in dividends, the most since 1992 and near the highest above 10- year Treasury yields in data going back to 1991. It’s one of 19 Energy companies in the S&P 500 with dividend yields above 10- year notes, and in recent weeks it exceeded Verizon Communications Inc. as the highest yielding blue chip in the Dow Jones Industrial Average.

Can’t you almost taste the salt-water taffy, kids? Like others who have addressed the “are we there yet” question in recent months, Martin Adams at Wells Fargo offers a less-than-satisfying answer: not quite yet, kids.

 

The Energy sector offers an interesting perspective on the motivations of investors in purchasing shares over the last number of years. Often the size of the buyback program has been a more alluring factor than the dividend. The low interest rate environment has played a role in this preference and helps to throw light on why the security of Energy companies’ dividends are receiving less attention than the fact that they will be buying less of their shares. 

America's Energy rebirth is the gift that keeps on giving for the economy. But this year, it's more about construction than drilling holes in the ground.

While the collapse in oil and gas prices since the middle of last year caused Energy companies to slash investment in oil wells, Thursday's report on second-quarter GDP showed an interesting dynamic taking shape — investment in factories has been running full bore.

It may be surprising on the surface, given that manufacturing has simmered down this year on the heels of a weaker global economy, but spending on all types of production facilities increased at a 65 percent annualized pace in the second quarter. That was almost enough to offset a 68 percent plunge in investment in wells and mines that marked the biggest drop in 29 years.

Outlays for factory-related structures jumped even more from January through March -- surging at a 95 percent pace. Over the last four quarters, investment in plants increased an average 64 percent, the strongest since records began in 1958.

We have heard far more about slowdowns in the oil and gas industries, and obviously not just in the USA.  However, is this surge in factories evidence that the benefits of cheaper Energy are now beginning to be realised? 

This item continues in the Subscriber’s Area.

The key is the locations of the pads: Thync believes it's found the right target areas to tweak your brain's natural stress responses in one direction or the other. One strip is designed to produce a calming effect ("calm vibe") while the other strip makes you feel more alert ("Energy vibe"). And each "vibe" also has three sub-categories within it, varying in intensity and length of time.

It's like choosing a workout program, only instead of doing squats or lunges, the technology does the work for you. You just sit there and enjoy the results.

If this all sounds pretty far-out, like something a burned-out space junkie would be using in an 80's-era sci-fi novel, we completely understand. But for me, it works exactly as advertised, either relaxing or energizing me (or both) – not only while I'm using it, but for several hours afterwards.

Skeptics will also be quick to question whether Thync is just an expensive placebo effect. And while this is only one person's experience and opinion – take it as you will – I don't see how there's any way that's the case with me. If this is a placebo, then all the pot, caffeine and meditation I've ever tried must be as well.

This product would appear to claim many of the same benefits as electroshock treatment but with more nuanced application and without the amnesia associated with the more violent treatment. Thync is still a privately held company but if the product does as it says and represents a non-chemical treatment for stress and lack of motivation then an IPO will be a potentially attractive proposition. 

The scenario Mr. Faber outlines reflects one of our underlying beliefs, which is that the commodity boom of the first decade of the new century has spurred a significant commodity output expansion, fueled by the easy money policies of the United States, and now followed Europe, Japan and China. The capacity expansion is leading to a long-term decline in commodity prices that will benefit consumers rather than producers. This trend is long-term, and at times may appear not to be working because of near-term news and economic events. However, over 5- and 10-year periods, macro trends will drive investment returns. 

In a presentation we gave at a 2010 Decision Strategies Oilfield Breakfast meeting, we offered this view on the macro trend for Energy. We suggested that the past trend that benefitted Energy producers would shift to benefitting Energy consumers. For example, petrochemical companies benefit from lower-priced and readily-available natural gas and natural gas liquids supplies while producers struggle with extremely low natural gas prices. In that presentation, we attempted to crystalize our view by suggesting an investment trade for the next decade even though we were no longer in the business of researching and recommending stocks at that time. Our suggested trade was to buy Honeywell (HON-NYSE) and sell ExxonMobil (XOM-NYSE). THIS SHOULD NOT BE CONSIDERED AN INVESTMENT RECOMMENDATION.] We decided to see how this trade has developed. The chart in Exhibit 9 shows the stock prices for the past five years, in which Honeywell has outperformed ExxonMobil. 

Our point in bringing up this trade is to highlight that what often appears evident in the near-term about industries and companies often changes as time enables new fundamentals to play out. In this case, remember that in 2010 the Energy industry had just emerged from the 2008 financial crisis and 2009 recession that cut Energy demand and caused oil and gas prices to collapse. In 2010, oil prices had rebounded and were on their way to multiple years of oil prices of $100 a barrel. Remember when the head of Chevron (CVX-NYSE) described $100-a-barrel oil as “the new $20-a-barrel oil”? Presently, that assumption appears questionable, but it is quite possible the statement may still prove accurate. If not, then the future for oil and gas will not be like the past. The challenge is to determine what the future might look like and how best to capitalize on changing Energy industry and investment trends. 

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

The Supply Inelasticity Meets Rising Demand bull market that began in 2002/2003 succeeded in delivering additional supply and perhaps more importantly the capacity to increase supply. More than any other factor this has contributed to the decline in prices evident in the industrial metal complex as well as Energy futures. 

For nearly a decade David and I have been banging the drum that unconventional oil and gas would be game changers for the Energy sector and that consumers would be the greatest beneficiaries. Nothing has happened to change that view.  

There’s bullish talk about a coming pick-up in global economic growth, but for the moment, the signals are negative. Trends in the global economy look increasingly ominous.

Global trade is sluggish. In the first four months of the year, it rose only 2 per cent in volume terms, fell 12 per cent in dollar terms, year-on-year. Exports of Asian countries that are particularly sensitive indicators are looking awful.

Investment in expanding productive capacity is weak. The gap between new orders and stocks held by manufacturers is the poorest in three years.

Inflation is trending downwards in the US, Europe, China and Japan, with the rise in consumer prices in purchasing-power terms down over the past two years from 3 per cent to 1.2 per cent.

The OECD – the think-tank of mature economies – has cut its forecast for growth this year from 3.7 per cent to 3.1. The US is only expected to grow 1.1 per cent according to the Atlanta Fed’s latest GDP Now model. Europe and Japan are forecast to deliver minimal growth, while the most dynamic constituent of the world economy, China, is losing momentum.

Of course, there are some positive factors to counter the gloom. The fall in oil prices, by improving users‟ spending power, is adding 0.25 percentage points to economic growth. Central banks show no sign of retreating from their extreme money and credit creation policies to stimulate growth. In the US unemployment continues to fall, wage gains have started to gain traction, the housing market is looking better.

This is an interesting section and Martin Spring gives plenty of reasons why he still thinks global GDP growth will remain weak for many more years.  He could be right and obviously no one knows for sure.  I have repeatedly said in recent months that if may take two or three more years before we see a clear improvement in global growth.  Fortunately, the more enlightened governments and central bankers understand the challenge.  They are also addressing it, from the USA to India and obviously many more countries. 

They are also doing so in an environment of globalisation and accelerating technological innovation.  These changes are not without significant challenges, but the long-term benefits are likely to be far greater.  We already see this in so many areas, from the development of increasingly influential corporate Autonomies, to lower Energy costs, and previously unimaginable developments in biotechnology.  This is not just a limited or theoretical net gain for mankind.  Look at the increasing growth in the world’s middle classes over the last decade and counting.         

Martin Spring's On Target is posted in the Subscriber's Area.

“We’ve been talking with the national labs about it,” she says, noting the Department of Energy has a new loan guarantee program for advanced nuclear reactors. “There’s really good buy-in from DOE for developing a wide range of technologies.”

Even if all goes well, Dewan says, it will take at least a decade to develop a commercial molten salt reactor. She’s optimistic it will happen and welcomes the work of other nuclear startups.

“It’s so cool how much new development is occurring,” says Dewan, the grown-up version of the sixth grader who managed to produce light by connecting a water wheel to a generator. “It makes me excited for the industry.”

 

I posted a similar article from the Brookings Institute in February  which also talked about the potential of new reactor designs to change the nuclear industry beyond recognition. These are big ideas and will require big money to help realise them but the potential for a truly ground breaking innovation is worth the investment. The problem right now is that there is not a great deal of appetite for Energy investment in any shape as oil prices trend lower and budgets are slashed.  

In some ways, India has been preparing for a deal for several months, re-engaging Iran at the highest levels. Since February, the Indian national security advisor, transport minister and foreign secretary have traveled to Iran, and the foreign minister intended to do the same until her meeting was postponed. Most recently, Prime Minister Narendra Modi met with President Hassan Rouhani on the sidelines of the Shanghai Cooperation Organisation summit in Ufa, Russia last week. He reiterated an invitation for Rouhani to visit India and said he looked forward to visiting Iran as well.

India never stopped engaging with Iran and some of the recent trips may have taken place even in the absence of the deal. There are certain imperatives for the relationship that make it important for India regardless (mentioned below). Furthermore, after spending its first year focused on India’s immediate neighborhood, the Asia-Pacific and the G-7, the Modi government has made clear its intention to “look west” over its second year, including with high-level trips to Central Asia (completed), Israel, Palestine, Jordan, and Turkey (for the G20 summit). This engagement becomes easier and more crucial for Delhi with the Vienna deal, which has implications for India in the Energy, economic and geopolitical spheres.

And 

Indian oil and gas companies have been active in Iran in the past – albeit not without problems – and they will likely consider returning. State-owned oil and gas company ONGC has been trying to win the rights to develop a block in the Persian Gulf that it had discovered years ago. A delegation of petroleum ministry and state-owned Energy company officials visited Iran in the spring to explore other opportunities. In the private sector, Reliance Industries, which had investments in and exported refined products to Iran, might also take another look at upstream projects and the possibility of resuming exports of petroleum products. At its peak in 2008-09, India was exporting over $1 billion worth of petroleum products to Iran; after Reliance stopped exporting, there was a sharp decline in that figure to less than $50 million in recent years.

 

As a major consumer of Energy products and with very little in the way of domestic resources India has had little choice but to engage with Iran throughout its period of isolation. Iran will be keen to develop its export markets in order to boost income and potentially displace some of its regional competitors. Both China and India represent obvious growth markets. 

Imagine parking your $300 million boat for months out in the open sea, with well-paid mechanics hovering around it and the engine running.

The Gulf of Mexico and the Caribbean Sea have become a garage for deepwater drillships -- at a cost of about $70,000 a day each. It’s either that or send your precious rig to a scrapyard.

The dilemma underscores how an offshore industry that geared upfor an oil boom is grappling with a bust. Rig owners are putting equipment aside at unprecedented numbers as customers including ConocoPhillips pull back from higher-cost deepwater exploration. That’s helped make Transocean Ltd. and Ensco Plc two of the three worst performers in the Standard & Poor’s 500 Index over the past year.

“Most contractors have never seen an environment like this, where demand is falling as quickly as it is,” David Smith, an analyst at Heikkinen Energy Advisors in Houston, said in a phone interview. “It’s been a big headache, and the problem is that we’re not halfway through.”

A growing glut of newly built exploration vessels looked worrisome enough before the oil rout. Now it’s beginning to look disastrous.

Shipyards continue to roll out new units to meet orders made during the boom, but the rig providers may not need them anymore. As contracts expire, many producers may not renew them, and some are being canceled.

A big problem for all crude oil producers is the speed with which the oil price slumped.  Of course it has happened before and the plunge was even more dramatic in 2008.  However, prices recovered relatively quickly because OPEC producers reduced supplies and others followed this lead. Speculators also bought crude oil.

This item continues in the Subscriber’s Area.

All that being said, it is somewhat surprising that the wholesale-related MLP stock prices are soft, despite decent margins and overall stable fuel demand and strong profitability.  For example, CrossAmerica Partners LP (linked with CST) is down 29% from last year's high, strong Global Partners LP is down 26%, and Sunoco LP is down 38%.

Granted, equity supply continues, as indicated by the initial public offerings of GPM Investments and Empire Petroleum Partners. However, these are relatively small equity offerings of $100 million apiece, not normally enough to kill the overall equity side, unless the demand for these equities has tapered off considerably. What might be wrong with this seemingly good picture for downstream MLPs? Let me offer some possibilities:

Oil prices. Should oil prices drop much further than now assumed by the marketplace, all downstream petroleum margins could suffer over time. Most vulnerable might be U.S. refiner margins, which are currently “to the moon,” because of the wide WTI-Brent crude-oil spread and the lunacy that U.S. producers cannot export their crude oil, yet U.S. refiners can export products at world-market prices--ah, heaven! Lower oil prices could impact margins in general as working capital requirements decline, and, more importantly, the 1% discount for prompt pay offered by branded refiners becomes worth less to middleman distributors. Perhaps Wall Street simply feels the “bloom is off the rose” for anything oil related for now.

Are purchase multiples too high? There has been spirited competition for M&A deals from MLPs, but equally from refiner-marketers such as Marathon/Speedway and Shell, as well as from many solid retail oriented players who want to use their strong cash flows and credit lines to expand, yet find organic growth too slow. Thus, there is a huge urge to merge by many players, as on Wall Street in general these days. MLPs have the absolute need to grow their dividends but, depending on their complicated structures, have quantifiable EBITDA multiple limits as to what they can pay and still have the acquisitions be accretive to earnings. And, as we all know, not all acquisitions work as planned, so the need can increase to acquire more to stay ahead of earnings. Many are fortunate because the interesting web of MLPs, general partners, sponsors, long-term financing vs. short-term financing, and lines of credit give them a smorgasbord of financing options while most interest rates are at historic lows. It’s a chief financial officer's best dream--or nightmare.

Interest rates. For whatever reason, unforeseen right now, might interest rates go higher than anticipated?

 

Selling pressure in the Energy sector has been indiscriminate with major producers, service companies and pipelines deteriorating. A great deal of bad news is being priced in, not least since oil prices have so far failed to recover. An additional question on many minds will be whether Saudi Arabia will be more or less likely to continue to pump record volumes with the removal of sanctions on Iran. 

Powerful speculators have launched an unprecedented attack on the world gold market, driving prices to a five-year low as commodities wilt and the US Federal Reserve prepares to tighten monetary policy.

Spot prices slumped by more than 4pc to $1,086 an ounce in overnight trading after anonymous funds sold 57 tonnes of gold in Shanghai and New York, choosing the moment of minimum market liquidity in what appears to have been a synchronized strike intended to smash confidence.

Spot prices slumped by more than 4pc to $1,086 an ounce in overnight trading after anonymous funds sold 57 tonnes of gold in Shanghai and New York, choosing the moment of minimum market liquidity in what appears to have been a synchronized strike intended to smash confidence.

Ross Norman, a veteran gold analyst at brokers Sharps Pixley, said sellers dumped 7,600 contracts covering 24 tonnes on the Globex exchange in New York in a two-minute span after it opened late on Sunday night.

A further 33 tonnes were sold at almost exactly the same time in Shanghai. The combined hit of 57 tonnes in such a short period is an extraordinary event in the world’s relatively small gold market.

“They choose the optimal moment in the early morning and when Japan was closed for a holiday to get the biggest bang for the buck. It was clearly ‘short’ traders using leverage to trigger (technical) stops,” he said.

The price later regained some of its ground, allegedly as the profiteers cashed in jackpot gains on options that they also had. “It was a trade within a trade,” said Mr Norman.

The slide came as the Bloomberg commodity index hit a 13-year low, dragged down by the slump in base metals and Energy. Gold has fared better than other commodities over recent months - trading on its safe-haven status during the Greek crisis and China’s equity crash - but it now risks being sucked into the vortex as well.

Michael Lewis, commodities chief at Deutsche Bank, said the “fair value” for gold is around $750. This is based on an index of eight indicators, such as oil, copper, income per capita and equity prices, that dates back to the early 1970s. Gold tends to “mean revert” over time.

This is one of the best articles on gold that I have seen for a very long time.  I commend it to all subscribers and have also posted a PDF version in the Subscriber’s Area for your convenience. 

The latest bear raid for gold described above is fascinating.  The simultaneous selling of 57 tonnes, of which 24 tonnes were on the Globex exchange in New York, and 33 tonnes in Shanghai, was a massively well organised raid. 

Moreover, in China’s command economy, I assume that the Shanghai sale could not have occurred without government knowledge and probable participation.  This is very likely because the sale came shortly after China’s central bank issued the suspect and bearish figure of 1,658 tonnes in bullion reserves. 

This detailed and chart-illustrated analysis continues in the Subscriber’s Area, where a PDF of The Telegraph article is also posted.  

The rout in commodities deepened with prices touching the lowest since 2002 as the prospect of higher U.S. interest rates sent gold tumbling.

Raw materials are losing favor with investors as the dollar gains amid signals from Federal Reserve Chair Janet Yellen that the central bank may raise rates this year on the back of an improving U.S. economy. Higher borrowing costs curb the attractiveness of commodities such as gold, which doesn’t pay interest or give returns like assets including bonds and equities.

The Bloomberg Commodity Index dropped as much as 1.4 percent, falling for a fifth day in the longest stretch of declines since March. Gold futures sank to the weakest in more than five years while industrial metals, grains, Brent crude and U.S. natural gas also slid as a measure of the dollar climbed to the highest since April 13.

Expectations for global GDP growth are cautious for the second half of 2015, not least because of slumping commodity prices.  However, growth could also improve given stimulative monetary policies and cheaper Energy prices at least six-and-a-quarter years after the worst credit crisis recession since the 1930s.  It usually takes at least this long for economies to recover from a cycle of extensive corporate and private deleveraging, leading to falling tax revenues, as we have been seeing.  

Halcon Resources Corp. almost ran into trouble with its banks in June 2013. And again in March 2014. And in February 2015.

Each time, the shale driller came close to violating debt limits set by its lenders, endangering a credit line that provided as much as $1.05 billion in much-needed cash. Each time, Halcon’s banks, led by JPMorgan Chase & Co. and Wells Fargo & Co., loosened their restrictions, allowing Halcon to keep borrowing.

That kind of patience may be coming to an end. Bank regulators have issued warnings on the risks involved in lending to U.S. drillers, threatening a cash crunch in an industry that’s more dependent than ever on other people’s money. Wall Street has been one of the biggest allies of the shale revolution, bankrolling thousands of wells from Texas to North Dakota. The question is how that will change with oil prices down by half since last year to $50.36 a barrel.

“Lenders in general are increasing pressure on oil companies either to raise more equity or do some sort of transaction to pay down their credit lines and free up extra cash,” said Jimmy Vallee, a partner in the Energy mergers and acquisitions practice at law firm Paul Hastings LLP in Houston.

The benefits of lower oil prices, while significant, are spread thinly throughout economies.  In contrast, the problems for producers of oil and gas at lower prices are considerable and therefore highly visible.  This can have a knock-on negative effect, affecting banks with loans to the Energy sector, the number of people employed in the oil and gas industries, tax revenues from these sectors, and economic slumps in previously booming oil towns.  

This item continues in the Subscriber’s Area.

India has made an exceptional commitment to solar Energy by raising its 2022 target five-fold to 100GW and its Renewable Energy target to 175GW. The government has announced an unprecedented policy push and states are providing the necessary infrastructure. Annual investments in solar could surpass investment in coal by 2019-20, with USD 35bn committed by global players. For local IPPs, solar has to be an inherent part of their expansion strategy, as RE obligations become strictly enforceable and cost of coal power increases. NTPC, Adani and RPWR are ahead in this development cycle which  adds 10-15% to our current valuations. NTPC is our top pick.

We raise our solar power forecast by 240%
Global majors have committed USD 35bn+ to the Indian solar sector. By 2020, annual solar power capacity additions and investments could surpass those in coal power projects. We are raising our solar power forecasts by 240% to 34GW by 2020. This is on the back of strong commissioning (4.5GW), even stronger pipeline - under construction (~5.1GW), and new projects (~15GW). By then, renewables could account for a significant 20% of power capacities in India, per our forecast. Private sector interest is decisively moving towards solar from coal power, and we foresee numerous opportunities of fund-raising, yield co-structuring and M&A activity.

RE can reach 20% of capacity but we see challenges to higher penetration
(1) Transmission constraints and integration of diurnal power into the grid are risks, without peak-load management capability. Solar absorption in Rajasthan could see challenges like wind in Tamil Nadu, given policy target of 25GW solar vs. peak-demand of 11GW. (2) A further risk is the enforcement of RE purchase obligations (RPOs) given weak finances of state distribution cos, and hence large-scale absorption of solar could be a concern (INR 170bn additional burden by 2020E). (3) Other issues include financing, land acquisition, limited domestic manufacturing, and returns/reliability of baseline data. 

Impact on the thermal power producers 
Solar could have a significant impact on day power rates, given that generation peaks between 9am and 6pm. In turn, this could reduce the coal requirement by ~8% or 70mnt by 2020E, largely impacting the highest cost of power, i.e., imported coal – leading to large savings (~USD 17bn/pa).

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

India has highly favourably demographics but if that dividend is to be realised the country needs to embark on a long-term policy of industrialisation. Narendra Modi’s government understands what has to be done and is gradually making the changes needed to unlock India’s considerable development potential. 

On its path to industrialisation China built huge numbers of coal fired power stations which facilitated growth but poisoned the air. It is now faced with an environment challenge that is proving expensive to correct. India has the potential to  partially circumvent at least these challenges by taking advantage of improvements in technology that were not available to China when it began to industrialise. 

While there really was nothing unique in the observations they shared about the investment process or the desirable criteria, the scary fact was (is) the volume of private equity money seeking a home in the Energy industry. According to Mr. Ryder, Energy private equity investing as a percentage of total Energy sector merger and acquisition activity had climbed from under 2% in 2000 to over 20% in 2014. During the first quarter of 2015, the Energy private equity funds were investing at that slightly greater than 20% rate until the announcement of the $70 billion BG Group (BG-NYSE) and Royal Dutch Shell (RDS.A-NYSE) deal. We have not yet seen updated figures so we don’t know how the current state of the industry may have changed in the second quarter.

As the First Reserve article pointed out, the increased size of the investment pools forced the group to abandon its proven strategy of making smaller investments in smaller enterprises. First Reserve was forced to increase the size of its investments, meaning it needed to invest in larger deals. This investment shift is an economy of scale issue. To hold to its original investment philosophy, First Reserve would have had to make many more investments in each fund stretching the human resources of its investment team. It would have also potentially diluted the potential investment returns anticipated when putting the fund together, although given the performance of those funds a broader pool of investments might have provided them with better results. At the same time it was being forced to alter its investment strategy, First Reserve may also have been a victim of the “feeding frenzy” among Energy private equity funds and non-Energy new entrant private equity funds that could have inflated deal valuations. That feeding frenzy may have been the biggest problem if one believes that since the financial crisis in 2008-2009, the Energy industry has been in a long-term downturn, just as happened during the 1980’s. We remain concerned about the magnitude of private equity money seeking investment opportunities in the Energy business. We concluded our prior article on Energy private equity funds with the following observations, which we still believe are correct.

“The uniformity of thinking among private equity players is a bit scary. Group-thought is usually not a successful strategy. The volume of public capital is not only surprising, but discouraging if one believes the industry needs to experience pain before a true recovery can begin. Lastly, in looking at the presenters and the audience, there were very few present that experienced the 1980’s forced re-structuring of the Energy business following the bullish experience of the 1970’s. In our discussions that day, we encountered another old-timer who referenced the 1980’s downturn starting in 1982, three years before when most who look at the industry’s history think it began. We were there then, and this guy had it exactly right. This industry is headed for significant change.” In our view, the industry’s changes are just now beginning to emerge. 

 

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

The Energy sector has gone through a decade long investment cycle predicated on developing previously uneconomic resources that were justifiable at a price structure above $40 and more often above $60. It is reasonable to expect that more than a little of that investment capital was used to bring resources into production with a considerably higher price point. As a result the natural progression for a sector going through a consolidation is rationalisation. 

Mexico waited 77 years to invite foreign oil producers back into its borders. That was one year too many.

The move to lure tens of billions of dollars from the likes of Exxon Mobil Corp. will be put to the test for the first time at an oilfield auction on Wednesday. With oil prices down by about half since last year, five of 38 potential bidders including Glencore Plc, Noble Energy Inc. and even Mexico’s state-owned oil producer have pulled out.

President Enrique Pena Nieto moved to end the state monopoly after poor drilling infrastructure and technology failed to reverse a decade-long production decline that reduced government revenue. To lure investments now, Mexico will probably get a much smaller share of profits than it would have a year ago.

“They shaped expectations at a $100-per-barrel market and we are way off that now,” Wilbur Matthews, chief executive officer of San Antonio-based Vaquero Global Investment, which oversees more than $100 million of assets including oil-producer bonds, said by phone July 10.

 

Favourable geology doesn’t just stop at the border between Texas and Mexico. Officials must have been looking on with envy as the shale boom took off in the US south west. Mexico’s state owned oil company dealt with declining output. Today’s news of Iran reaching an agreement to end sanctions and increase oil exports is another reason for Mexico to ramp production. The country will not get the same price they were hoping for from producing unconventional supplies and boosting offshore but it has little choice but to develop these reserves if the hole in its budget is to be repaired. 

I'm looking for your view again on the Canadian Energy sector.  I obviously am aware of the effect technology has had on the shale boom etc...I do disagree with most assertions that there is a flood of supply in oil at these price levels.  Anyway, aside from that- how do we go into this massive global GDP growth phase and not require an abundance of resources of all kinds?  Technology has brought on supply but they require much higher prices to break even.  Help me reconcile how we have this huge growth backdrop and yet the market is pricing in disaster levels in Canada?  Is the Energy sector forever dead or is this a tremendous buying opportunity?   Thanks as always. Hope you and your family are well.

Thank you for a question sure to be of interest to the Collective. My family are all in rude health thank you. The oil sector has a lot of moving parts so let’s try to pick it apart. 

Saudi Arabia is pumping oil like it is going out of fashion and in a sense it is. The evolution of solar in particular, but also other renewables, batteries, electric cars, hydrogen fuel cells and the migration of work onto the cloud mean that oil now has challengers both as a transport fuel and for heating. 

Still, hydrogen-fuelled cars have two main advantages over their battery-powered rivals, said Salim Morsy, a New-York based analyst for Bloomberg New Energy Finance.

“They are faster to refuel and have much longer ranges than electric ones,” the analyst said. “It can take just five minutes to refuel a hydrogen car for a range of 400 miles, compared to up to a seven hour charge for an electric vehicle to travel just 200 miles.”

Linde says Energiepark Mainz could help put an end to the criticism that hydrogen fuel cells are only marginally more environmentally friendly than traditional combustion vehicles, and allow the gas to be extracted anywhere there’s wind and water. BMW AG is also starting tests of a vehicle powered by hydrogen this month.

 

In 1874 Jules Verne hypothesised in the Mysterious Island “water will one day be employed as fuel, that hydrogen and oxygen of which it is constituted will be used”. It’s been a long time coming and we are not there yet but producing hydrogen cheaply and cleanly represents a major breakthrough in the potential for it to be reused as a transport fuel. Toyota putting the Mirai into production represents a major bet that the technology has reached commercial utility.   

The significance of the oil sands on global oil supply cannot be ignored. Over the past five years, oil sands output has grown by 1.1 mmb/d, fully one-fifth of the total oil production growth for North America. The impact of lower oil prices on the oil sands cannot be missed. Early in 2014, Western Canada Select, a heavy oil price market, was selling at $86 a barrel. By the end of March, that marker was trading below $30 a barrel. This is when, according to oil industry consultant Rystad Energy, new oil sands projects require a price of $100 a barrel in order to breakeven. What’s been the impact of the price decline on the Canadian oil industry?

In February, Royal Dutch Shell (RDS.A-NYSE) withdrew its application to build a new 200,000 barrels per day (b/d) mine at Pierre River, north of Fort McMurray. In May, the company announced it would delay for several years a new 80,000 b/d in situ oil sands project at Carmon Creek near Peace River. The significance of these projects is highlighted when one realizes that Shell currently operates 225,000 b/d of oil sands production. Other projects are being delayed as companies plan to bring much smaller in situ projects into production at a delayed pace in order to manage their cash flow and capital investment requirements.

A June 16th report from Ernst & Young LLP projects a 30% decline in Canadian oil sands spending, bringing this year’s investment to $23 billion, down from an expected $33 billion. The result of this spending decline and the announcements by several producers to stop or delay new oil sands mines and in situ projects means total oil production will be 17% lower by 2030 compared to the target output in the 2014 forecast provided by the Canadian Association of Petroleum Producers (CAPP).

In addition to cutting new investment, oil sands producers are looking at ways to cut their operating costs to help improve their breakeven prices. Suncor Energy (SU-NYSE), a significant oil sands producer, has said it plans to replace 800 dump truck drivers with automated trucks at its oil sands mines. That move, which is a huge boost for autonomous vehicle technology, is projected to save the company C$200,000 per driver.

 

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

Decisions to postpone or cancel spending on new projects has long-term consequences for oil supply growth forecasts not least when this situation is not limited to Alberta. Oil and gas companies are cutting expenditure wherever they can in order to remain profitable in what could be a persistently low price environment, at least relative to the levels that prevailed until a year ago. 

U.S. coal shares jumped after the Supreme Court struck down the Obama administration’s mercury and acid gases power plant rule, saying it hadn’t considered the billions of dollars in costs before issuing the rule.

Arch Coal Inc. jumped as much as 19 percent, Peabody Energy Corp. climbed 15 percent and Alpha Natural Resources Inc. was up 14 percent in intraday trading after the ruling was announced Monday.

The court’s decision calls into question an Environmental Protection Agency rule that targets mercury and acid gases. The rule has led to the closing of dozens of coal-fired power plants over the last two years.

 

It’s been a long time since coal caught a break and a great deal of bad news is already in the price. Coal is dirty, antiquarian, low tech and contributes to pollution but is cheap and abundant.  Over the last few years investors and regulators have concentrated on the former points and forgot the latter ones. Coal is the feed stock for a substantial portion of electricity production and today’s decision will mean that fewer power stations in the USA will need to be closed as a result of stringent regulations. 

In conventional water splitters, the hydrogen and oxygen catalysts often require different electrolytes with different pH — one acidic, one alkaline — to remain stable and active. “For practical water splitting, an expensive barrier is needed to separate the two electrolytes, adding to the cost of the device,” Wang explained.

“Our water splitter is unique because we only use one catalyst, nickel-iron oxide, for both electrodes,” said graduate student Haotian Wang, lead author of the study. “This bi-functional catalyst can split water continuously for more than a week with a steady input of just 1.5 volts of electricity. That’s an unprecedented water-splitting efficiency of 82 percent at room temperature.”

Wang and his colleagues discovered that nickel-iron oxide, which is cheap and easy to produce, is actually more stable than some commercial catalysts made of expensive precious metals.

The key to making a single catalyst possible was to use lithium ions to chemically break the metal oxide catalyst into smaller and smaller pieces. That “increases its surface area and exposes lots of ultra-small, interconnected grain boundaries that become active sites for the water-splitting catalytic reaction,” Cui said. “This process creates tiny particles that are strongly connected, so the catalyst has very good electrical conductivity and stability.” 

The challenge for a hydrogen fuelled economy has always been in delivering the gas at an acceptable price. More recently the fact the majority of hydrogen is produced from natural gas has acted against it as a potential solution because of environmental concerns. Technological innovation has the potential to change that scenario if a scalable, low Energy solution can be delivered.

Toyota is making a big bet on hydrogen fuel cells with its Mirai vehicle due for release this summer. Removing a reliance on natural gas from the fuel cycle would represent a major selling point for the vehicles. 

One trader told Reuters that by entering bids on screen that no seller is in a position meet, a bidder could artificially push up prices.

"The way you do that is by the timing and size of those parcels," the trader said.

As the market is not particularly liquid, bids and offers help inform pricing on the API 4 index, which is calculated using data gathered by Argus and IHS McCloskey.

Traders said that the concerns over artificially high bids pushing up coal prices on the API 4 index had cut the volumes traded.

API 4 trade volumes between January and May fell by almost a third from a year earlier, data published by the CME and ICE exchanges showed.

The index is the world's third largest behind the API 2 benchmark for northern European coal markets and globalCOAL's Newcastle benchmark index for thermal coal in the Asia-Pacific.

 

Coal has been a benighted sector as Energy prices have declined and regulations tightened in an effort to reduce emissions. The possibility that HFT type trading practices have extended to the illiquid commodity markets is not a welcome development and suggests short-term volatility may increase. 

US Coal prices remain in an accelerating downtrend and a clear upward dynamic will be required to pressure shorts. The activism of the Environmental Protection Agency (EPA) and low cost of natural gas are at least partly responsible for the underperformance of US prices relative to global benchmarks.

Solar developers say the introduction of such contracts, which would protect investors from the expected depreciation of the rupee over the next 25 years, would overcome one of the last remaining obstacles to new investments and cement India’s position as the next big destination for renewable Energy groups.

“The scale-up will happen extremely rapidly,” says Tejpreet Chopra, chief executive of Bharat Light & Power, which plans to quintuple its wind and solar output in India to 1,000 megawatts (1GW) in the next few years. “The good news is that at least the government is showing intent. In order to do this scale of projects, we’re going to need foreign capital.”

Piyush Goyal, the minister responsible for power and renewable Energy, launched bold plans a year ago to provide electricity 24 hours a day for all Indians by 2019, partly from ever cheaper green power: the plan for the solar sector is to spend $100bn to raise capacity from just under 4GW today to 100GW by 2022. An estimated 400m Indians lack basic access to electricity. Coal remains India’s most important Energy source, supplying more than half of all power stations.

According to a graph in the article above, only China, Japan, the USA, and UK will be adding more solar capacity in 2015.  Moreover, with Narendra Modi leading India, this rapid development will continue for many more years.

To grow rapidly, India needs vastly more Energy.  This is certainly possible and, preferably, India will be able to phase out most of its reliance on coal within the next 20 years.  In today’s world, good leadership can modernise a third-world economy in a little over a generation.  

The market is at an interesting juncture. The S&P is up less than 2% this year and been largely rangebound since late last year. A somewhat lengthier range after a particularly consistent advance suggests supply and demand have come back into equilibrium. Among the arguments propounded by the cautious camp are that valuations, not least the CAPE have increased and earnings have deteriorated. There is fear that the Greek issue will spill over into a bigger problem and that the Fed may raise interest rates in September. 

Among the more optimistic arguments are that banks are outperforming, technological innovation is delivering new products which have the potential to improve productivity and Energy prices are less of a headwind. Global central banks are also flooding the market with liquidity but the Fed has stopped adding new money.

Applications for U.S. unemployment benefits remained below 300,000 for a 14th straight week, a sign of labor market strength that will help fuel U.S. growth.

Jobless claims rose by 2,000 to 279,000 in the week ended June 6, a Labor Department report showed Thursday in Washington. The median forecast of 48 economists surveyed by Bloomberg called for 275,000. The four-week average of initial applications also crept up.

The data indicate employers are retaining workers in anticipation of a pickup in demand this quarter after a slow start to the year. Combined with a spring spurt in payrolls, the employment picture bodes well for household spending, the biggest part of the economy.

“There’s not much going on in the way of layoffs, they remain low,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, who projected claims of 280,000. “The labor market is reasonably good. Consumer spending is getting support from the labor market clearly and from some income growth.”

Another report Thursday showed a pickup in May retail sales. The Commerce Department said purchases last month jumped 1.2 percent, reflecting broad-based gains from auto dealers to clothing retailers to department stores, after a 0.2 percent April gain.

Since the first week of March, applications for unemployment benefits have been below the 300,000 level that economists say is consistent with an improving job market.

This is encouraging since I have read that at least 40,000 people have been laid off in the US Energy industry over the last several months, mainly from the shale oil sector. 

Better economic figures since weak Q1 are certainly welcome although they have been pushing US 10-Yr Treasury yields higher, at least until today as we have just seen a downside key day reversal.  This suggests a temporary pause and consolidation before Treasury yields resume their recovery. 

This item continues in the Subscriber’s Area.

Daimler is entering into business in the field of stationary Energy storage plants with its one hundred percent subsidiary Deutsche ACCUmotive. The first industrial-scale lithium-ion unit is already on the grid and is being operated by the partner companies The Mobility House AG and GETEC Energie AG. For business with private customers in the area of Energy storage in Germany, Daimler AG is planning to collaborate with EnBW AG. Daimler is also aiming to enter into cooperation with other sales and distribution partners both in Germany and at international level. "Mercedes-Benz Energy storages provide the best confirmation that lithium-ion batteries Made in Germany have a viable future," says Harald Kröger, Head of Development Electrics/Electronics & E-Drive Mercedes-Benz Cars. "With our comprehensive battery expertise at Deutsche ACCUmotive we are accelerating the transition to sustainable Energy generation both on the road and in the field of power supply for companies and private households. The technology that has proven its worth over millions of kilometres covered in the most adverse conditions, such as extreme heat and cold, also offers the best credentials for stationary use. We have been gathering initial experience in this field since 2012."

Daimler was in the news last month for its introduction of driverless haulage vehicles to Nevada following the state’s legislation on autonomous vehicles. The company’s entry into the domestic and commercial Energy storage sectors is equally ground breaking and suggests it has ambitions of being a pioneer in the future of transportation and Energy storage. 

More importantly, when we look at total natural gas import volumes and the percentage originating from Canada, we can see (Exhibit 13) how important imports and Canada’s share were until total imports peaked in the winter of 2007-2008 and began to slide. As gas import volumes peaked, the Canadian share declined and other supply sources expanded, in particular LNG volumes from the Caribbean. In recent months, LNG and other gas supply sources declined, leaving Canadian pipeline gas as our sole import volumes.

The dilemma for Canada is that without either more rapid growth in U.S. natural gas consumption or a decline in U.S. gas output, Canada’s ability to ship more of its gas production to the U.S. will be capped, or possibly worse shrink. This is a reason why Canadian politicians need to work harder to open other export opportunities for its natural gas and oil output. Without them, Canada’s petroleum industry will face an extended period of depressed activity as it is highly likely that Canadian natural gas prices will remain depressed and volumes shipped out will show no growth, not a good outlook for either Canada’s economy or its petroleum industry.

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

The USA’s unconventional oil and gas revolution has done Canada no favours. A failure to develop additional export markets has left the country at the mercy of an explosion in supply from shale oil and gas wells in the USA and it will still be a number of years before even the most optimistic plans for additional export options are realised. This should be a national priority for such a resource dependent country but handwringing about the environmental consequences and continued dependence on a fickle US judiciary has delayed export projects. 

Mr Tsipras's article is a thinly-disguised warning that Greece may choose to default on roughly €330bn of debt in the biggest sovereign default ever, and pull out of the euro, rather than breech its key red lines.

The debts are mostly to European official creditors and the European Central Bank. The situation has become critical after depositors withdrew €800m from Greek banks in two days at the end of last week, heightening fears that capital controls may be imminent.

Mr Tsipras's choice of words also implies that Greece may turn its back on the Western security system, presumably by shifting into the orbit of Russia and China.

The article comes as Panagiotis Lafanzanis, the Energy minister and head of Syriza's powerful Left Platform, returns from Moscow after securing a provisional deal with Gazprom to build part of the "Turkish Stream" gas pipeline through Greece.

The EU is both an economic and political union. Much of the commentary has focused on the ramifications of Greece leaving the Euro, defaulting on its debts and refusing to engage with its creditors. On the political front, tighter relations with Europe’s geopolitical rivals represent an additional consideration since Greece is also a member of NATO. 

This article from GlobalSecurity.org highlights how Turkey controls the Bosporus, Sea of Marmara and the Dardanelles but ships exiting the strait from the Black Sea transit through both Turkish and Greek territory in the Aegean. Increasingly friendly relations between a tactically important NATO member and Russia will be a cause for concern. It is therefore open to question whether Europe’s geopolitical interests will trump economic considerations during continued tense negotiations with Greece. 

I am trialing your service. You speak in the daily service about your and David's favourite views. Could you tell me where I can find these and also could you recommend how I can get the best understanding of value from your site. Many thanks.

Thank you for taking the time to trial our service. FullerTreacyMoney is content rich so we understand that it may be overwhelming for new subscribers to figure out how best to use what we offer.

Every day we post a number of articles in Comment of the Day which we believe are of interest either in themselves or because they related to major issues or investment themes. We record a daily audio commentary to put what happened that day in context and to point our short-term movements in the market. As someone just getting acquainted with the Service I would suggest listening to one of the Friday Audios. This is when we put forward our longer-term outlook for the various different asset classes and would be the most accessible way of figuring out where we stand on various topics.   

I would also suggest playing around with the Chart Library. Add instruments you are interested in to your Favourites so you can monitor your portfolio and watch list. Our comprehensive globally oriented Chart Library is updated daily with close to 15000 stocks, bonds, indices, funds, currencies and commodities.

We also tell you exactly what we are doing with our own money both from a trading and investment perspective as it happens.

We spend a great deal of time identifying investment themes and have a strong record of being early. If you click on the Investment themes tab in the main menu (located in the middle of the black bar) you will be presented with two different category searches. Every article we write is categorised by whether it falls into one of our major themes (Energy, Technology, Precious Metals/Commodities, Autonomies, China, India, Japan etc.) as well as into individual “Tags”.

For example if you are interested in the broad China sector. The vast majority of the articles we write relating to the topic can be found under the China tab. If you are interested in an individual subject or company such as Citic Securities you can search the Tags for the name of the company or subject. You can also browse the Tags by clicking on one of the letters on the Investment Themes page.  

In late 2014, Global Bioenergies started up the fermentation unit for a pilot program to produce gaseous isobutane from renewable biomass sugars such as corn-derived glucose. Gaseous isobutane is a sort of raw material for the petrochemical industry that can then be refined into a variety of plastics, fuels and other applications.

The next step in the process was to run the material through a conditioning and purification process, allowing it to be collected and stored in liquid form under pressure. Some of it was then sent to Germany to be converted into isooctane fuel, creating a pure, 100 octane gasoline.
"To me this is a historic moment," says Global Bioenergies CEO Marc Delcourt. "It is the first time that we have produced real gasoline from plants."

Isooctane is currently used as an additive to improve fuel quality, but could also be used a stand-alone fuel. Audi calls the final, refined form of the fuel "e-benzin" and claims that it burns clean due to its lack of sulfur and benzene. Also, its high grade enables it to power engines using high compression ratios for more efficiency.

Audi will test the fuel composition and conduct engine tests to see how it performs before eventually trying it out in vehicle fleets. Delcourt says he could see it being used in consumer cars on a large scale "very soon."

"We thinking we're bringing green-ness to a field that desperately needs green-ness," says Rick Bockrath, vice president for chemical engineering at Global Bioenergies. "It's basically how we're moving away from an oil-based economy towards something that has a renewable, sustainable future to it."

 

This follows a story from a month ago talking about how Audi produced a diesel fuel from air and water through a chemical process. Today’s story is a further iteration of this concept.

In the last month we have also learned that artificial photosynthesis has been achieved. Here is a section from an article by Lynn Yarris for Lawrence Berkeley National Lab: 

Scientists with the U.S. Department of Energy (DOE)’s Lawrence Berkeley National Laboratory (Berkeley Lab) and the University of California (UC) Berkeley have created a hybrid system of semiconducting nanowires and bacteria that mimics the natural photosynthetic process by which plants use the Energy in sunlight to synthesize carbohydrates from carbon dioxide and water. However, this new artificial photosynthetic system synthesizes the combination of carbon dioxide and water into acetate, the most common building block today for biosynthesis.

“We believe our system is a revolutionary leap forward in the field of artificial photosynthesis,” says Peidong Yang, a chemist with Berkeley Lab’s Materials Sciences Division and one of the leaders of this study. “Our system has the potential to fundamentally change the chemical and oil industry in that we can produce chemicals and fuels in a totally renewable way, rather than extracting them from deep below the ground.”

It’s not quite the Great Satan — at least, not yet. But it’s an enemy that the Iranian regime and the people can unite against

Now that Iran’s Islamic government is close to a nuclear deal with the US and other world powers, the traditional “death to America” slogan is losing its lustre but the loathing of Saudi Arabia is gaining appeal.

Though this is happening by accident more than design, driven by a stand-off in Yemen between Iranian and Saudi proxies, it is blissfully convenient for Iran’s rulers.

Iranians never learnt to hate America despite their leaders’ best efforts to whip up resentment. It certainly won’t grow easier to convince them of devious American plots if a nuclear accord is signed.

When it comes to Saudi Arabia, however, Shia Iranians are happy to bash their Sunni neighbour. Persian-Arab enmity goes back centuries; Iranian-American hostility is only a few decades old. “People in Iran love Americans, and Saudi Arabia is the one country that everyone hates,” one political analyst tells me. “If it’s not the Great Satan it’s only because it’s not that important.”

Indeed, in my own meetings in Iran, there are sometimes awkward moments: someone casually drops a disparaging remark about Arabs then realises I come from Lebanon and reassures me Iranians love the Lebanese but less so Gulf countries. In Lebanon, of course, Iran has Hizbollah, its most prized proxy.

I heard Saudi leaders denounced as “immature children” who bomb fellow Muslims in Yemen and join hands with jihadi terrorists in Syria and Iraq. It’s impossible to convince anyone that the Islamic State of Iraq and the Levant (Isis), which threatens the Saudi regime possibly even more than it threatens Iran, is not a Saudi creation. The notion that Saudi Arabia should reject an Iranian role in the affairs of other Arab states also meets with incredulity. A common language (Arabic) doesn’t give one country the right to claim authority over another, say Iranian officials.

Thanks to technology, the USA no longer has the same vital interests in the Middle East, although it would understandably like to prevent the region’s wars and terrorism from spreading westward.  If ongoing Sunni-Shia conflicts threaten the Middle East’s oil production, the USA can quickly ramp up its shale oil output, avoiding a repeat of recessions caused by earlier Energy crises.  

Many other countries could do the same.  If they follow the USA’s Energy policies, from shale oil and gas to solar-led renewables, in 20 to 30 years time the Middle will have the luxury of consuming all of its own oil and gas.

The FT article is posted in the Subscribers' Area.    

Looking somewhat like a giant reed gently swaying in the wind, the new Vortex bladeless wind-driven generator prototype produces electricity with very few moving parts, on a very small footprint, and in almost complete silence. Designed to reduce the visual and aural impact of traditional spinning-blade turbines, this new device takes advantage of the power contained in swirling vortices of air.

Many opponents of spinning wind turbines point to their supposed danger to birds and other flying animals, as well as their rather noisy operation and – particularly in commercial installations – their enormous size. Though these may well be excuses by those who prefer to stay with older electricity generating technologies that they know and trust, standard wind-driven turbines do have these issues and this tends to hold back their universal acceptance and use.

This is where the creators of the Vortex bladeless believe that their device has the advantage. A relatively compact unit, it relies on the oscillation of its reed-like mast in reaction to air vortices to move a series of magnets located in the joint near its base to generate electricity.

Though obviously not as efficient as a high-speed, directly wind-driven turbine, this is offset by the fact that the Vortex has fewer moving parts and is, according to the creators, up to 80 percent more cost effective to maintain. Coupled to the notion that it supposedly has a greater than 50 percent manufacturing cost advantage and a 40 percent reduction in its carbon footprint compared to standard wind turbines, the system also seems to offer direct economic advantages.

We've explored a number of bladeless wind-turbines before – the Solar Aero turbine being one (though, by definition, not really bladeless as it merely covered the spinning blades with a housing) and the Saphonianbeing another. The latter being more of a true bladeless "turbine," it still required hydraulic actuation of pistons to generate electricity, so its efficiency was probably not all that great (and, to be perfectly frank, it was not strictly a turbine either as it had no spinning parts).

The Vortex, on the other hand, is purported to take advantage of the swirling motion of wind and not direct force like the aforementioned units. This means that it can generate Energy from the repeating pattern of vortices (known as the Kármán vortex street), which are generated as the air separates to pass by a blunt body, such as the Vortex structure itself.

This also means that groups of Vortex units can be huddled closer together as the disruption of air movement in the wind stream is nowhere near as critical as it is when positioning standard, blade-driven wind turbines. This will also help ameliorate the inherent efficiencies in each unit as they can be grouped much closer together than their standard turbine counterparts and, therefore, potentially generate more power per square meter.

For years I have ranted about contemporary windmills and wind farms, because of their expense, maintenance costs, inefficiencies, noise, ecological damage to birds and other wildlife, and visual blight on the landscape.  In contrast, the vortex bladeless turbines are a vast improvement. 

What never ceases to amaze me, although I comment on it all the time, is the incredible inventiveness of people all over the world, in response to a needs-must requirement to protect ourselves and our planet from potential calamities such as manmade global warming and ‘peak oil’.  In fact, only a decade ago it was still fashionable to assume that the cost of crude oil would continue to rise remorselessly, ruining our economies in the process.  Today, thanks to technology, ever higher oil prices are only an OPEC pipedream. 

This item continues in the Subscribers’ Area.

The long-term positive macro story is still largely intact

● We met with a number of technocrats in place in key ministries who seem

well in command of their brief. We heard no complacency as yet on the need

for reforms.

● Quiet progress on longer-term structural reforms in some areas (National

Infra Fund, reducing Energy subsidies, direct transfer of subsidies).

● Significant progress on increasing coal production and dealing with

transport/environment clearance bottlenecks.

● Recognition that the MAT was an 'own goal' and committed to defusing the

problem.

● Feeling that corruption levels are diminishing and ease of doing business is

improving.

● Strong conviction that some big-ticket reforms will in fact occur, especially

GST, where we heard widespread agreement that if passed, this would have

significant positive impact.

● Near-term progress has been slower than expected

● Passing reform legislation through Parliament is proving an obstacle (the

opposition is focusing on polarizing issues like land reform, and retain control

of the Upper House)

● Lack of progress in addressing balance sheet problems for PSU banks and

corporates, limiting appetite for private investments

● General sense that onshore monetary conditions are tight and, in our view,

over-optimism about near term RBI easing

● Rural incomes/spending under stress due to weak commodity prices and

lower government spending, with no obvious near term relief

These and the other points mentioned sound reasonable to me.  India (weekly & daily) from the time Narendra Modi threw his hat into the electoral ring in September 2013, before peaking at 30000 in early March of this year.  I have maintained that it would experience a well deserved consolidation before eventually moving higher. 

This item continues in the Subscribers’ Area, where the list of bullet points is also posted..

It is possible that what is happening in China with respect to EVs and hybrid vehicles is a precursor of how America’s vehicle sales and distribution models will work. In response to air pollution and vehicle congestion in major cities, China has begun a strategic initiative to build EVs and is encouraging foreign manufacturers and their partners to join the effort. China expects as many as 40 new EV models go on sale in the country this year, triple the number of new EV models available two years ago. As described in an article in Business Week, Toyota Motors (TM-NYSE) will only market an EV in China as it is committed to hydrogen-powered vehicles as a better alternative to EVs elsewhere. In fact, its dedication to hydrogen-powered vehicles is why Toyota ended its all-electric Rav4 EV crossover partnership with Tesla Motors, Inc. (TSLA-Nasdaq).

China has new emission guidelines that call for a 28% improvement in average per vehicle fuel consumption by 2020, something that likely requires manufacturers to embrace plug-in EVs. Since China controls the permitting of new manufacturing facilities, automakers are almost forced to embrace EVs if they want to have plants capable of manufacturing new vehicles. According to an analyst with A.T. Kearney in Shanghai, China, all the new EV models coming to market may enable the industry to get 1-2 million EVs and other new Energy vehicles on the country’s roads by 2020. That achievement, however, will still fall well short of the government’s target of five million EVs being on the road.

While China may be the model, the technology still is short of delivering a reasonably-priced EV with a traveling range similar to that of an ICE vehicle, or roughly 200 miles on a single charge. There is also the issue with fast charging of EVs, as drivers will measure charging times against the length of time they must spend at the gas pump filling up their ICE vehicle. Environmental concerns are an important consideration for EVs, but they were largely bought by people more interested in impressing their neighbors with their statement about environmental concern than their economics. The fact these clean-fuel vehicles are now being traded in for conventionally-fueled vehicles at an accelerating rate suggests that economics are clearly trumping environmental considerations. Whether this is a good thing or not remains to be seen, but the fact it is happening tells us how powerful the pocketbook is for consumer purchasing decisions. It also tells us that auto manufacturers need to address the shortcomings of EVs and hybrids if they want them to become a competitive auto market segment. Then again, those manufacturers may just elect to let the draconian U.S. fuel-efficiency standards force consumers to buy these less desirable vehicles.

 

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

As the world’s largest car market, China’s regulatory structure will make waves around the world. If China is insisting on electric vehicles in order to contain pollution then car manufacturers will have little choice but to build them. 

An additional thought with regard to range anxiety: A large number of people, at least in Southern California lease they vehicles. In order to get the best price for the vehicle at the end of the lease, mileage has to be kept low. This means that many people rent a car for long trips and use their own car for commuting. I wonder if it is conceivable that the same model will expand beyond SoCal with the advent of electric vehicles which may or may not have overcome their range issues within the next decade. 

We expect Brucejack to have sizeable production and free cash flow
Based on Pretium Resources' June 2014 feasibility study and starting from 2018, we believe the Brucejack deposit has the ability to produce average annual life-of-mine (LOM) gold production of 404.1koz at an all-in sustaining cost (AISC) of CAD 500/oz for 18 years, post an initial capital cost of CAD 811.9m.

We initiate with a BUY rating and a target price of CAD 10.88/share.
Our target price is based on a sum-of-the-parts valuation composed of the following: 1.0x NPV9% of our LOM assumptions for the Brucejack project, balance sheet items, the after-tax PV9% of general and administration and exploration costs, PV7% of the after-tax interest costs, financing assumptions and in-the-money (ITM) instruments.

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

The post credit crisis environment has been difficult for explorers as Energy prices surged, access to credit was restricted and gold prices fell from their 2011 peak. More recently the outlook has improved not least because Energy prices no longer represent so much of a headwind and gold prices have stabilised. The rationalisation that has purged the sector of wildcat investors has resulted in leaner, more disciplined and cheaper operations. This is reflected in the valuation of the Gold BUGS Index relative to the bullion price. 

The CCI which is the unweighted Old CRB, fell from 700 in 2011 to a recent low above 400. It has at least steadied, not least because Energy markets have stabilised and industrial metals have been exhibiting relative strength. The consistency of the fall from above 550 has now been broken, but a sustained move above the 200-day MA will be required to confirm more than temporary steadying. 

New Energy Technologies Inc (WNDW US Equity) 2.0240  has recently changed their name  to SOLAR WINDOW TECHNOLOGIES.(WNDW US Equity) 2.0240   They are closer to production than  Ubiquitous Energy

Thank you for pointing out this name change which has a more marketable ring to it than New Energy Technologies. I've been watching the company for a number of years. If I recall correctly T.Boone Pickens was an early investor and I learned of the company following an interview he gave on CNBC 

I've been watching the share since in the hope they would come through with a marketable product. 

Silver has been mined for thousands of years. But for most of the 20th century it was the poor man’s precious metal, its value eclipsed by the enduring lure of gold.

The first big revolution in silver came in 1492 with the discovery of the New World, which opened up mining of the metal on a scale not previously seen. In the centuries that followed Hernán Cortés and the conquistadors’ destruction of the Aztecs, Peru, Bolivia and Mexico accounted for three-quarters of all world production and trade in the metal.

Today, more than 877m ounces of silver are mined annually and the metal is increasingly being employed in new industrial processes. A major catalyst for demand over the next decade will be in the production of solar Energy.

Silver is a key component in crystalline silicon photovoltaic (PV) cells. According to IHS, demand for solar power is set to increase by 30pc to 57 gigawatts of electricity in 2015. China alone is expected to install something in the region of 17 gigawatts of solar capacity by the end of the year, creating huge potential demand for silver.

This is the first bullish news that I have heard about silver since it peaked near $50 just over four years ago.

This item continues in the Subscribers’ Area.

In sum, there is great potential for storage both in front of the meter and on the customer side of the meter. Costs need to come down, but the longer-term trajectory indicates that this will happen, and policies and regulations to incentivize storage need to continue to be implemented to spur the creation of markets. The DOE's QER is a step in the right direction, calling for the establishment of a framework and strategy for storage and flexibility. 

In the near-term, it is likely that most of the market development and storage capacity deployed will be at the grid-scale in competitive markets such as PJM, but the SCE procurement certainly highlights the impact of supporting policy and regulation in spurring competitively procured PPA-type arrangements. In addition, California's investor owned utilities have initiated the first round of storage auctions in response to the state's mandate, with final project selection and submission to the California Public Utilities Commission for approval this coming fall.  

In the longer-term, solar-plus-storage could become increasingly economic on the customer side. Indeed, as Hamilton of the Electricity Storage Association described, the three biggest storage markets in the residential sector are California, Arizona, and Hawaii and what they all have in common is lots of solar. But beyond selected markets, residential-scale storage systems such as Tesla's PowerPack won't likely lead to mass defection from the grid in the next five to 10 years. The important point, however, is that Tesla's announcements and all the other recent news is exciting because it shows the progress and potential of a technology with multiple applications and benefits across the grid, providing something for everybody.

 

In my review of utility grade Energy storage companies last week, I highlighted that the sector has been in existence for a number of years but it is Tesla's high profile into the sector that has ignited media interest. We are still in the very early stages of this evolution and it is likely to persist into the lengthy medium term. 

Besides Prince Mohammad bin Salman’s role as minister of defense, which to date has not been a monumental success as the battle with the Iranian-backed Houthi rebels in Yemen has produced little other than destruction of that country and a humanitarian disaster, he also has been handed responsibility for the council dealing with economic reform. King Salman appointed Labor Minister Adel Fakeih, a former chairman of Savola Group, a food company, as minister of economy and planning. In January, King Salman appointed Azzam bin Mohammed Al-Dakhil, a board member on several private companies, as minister of education. He also named Mohammed Al Jadaan, an advisor to Morgan Stanley and Clifford Chase in Saudi Arabia, to head the capital markets authority. This is quite important as on June 15th the country’s stock exchange will open to direct foreign investment. Saudi Arabia will become one of the largest emerging market indexes available to investors.

And

Two trends in the crude oil trading market will help shape the future of oil prices. One is the action of commodity traders who seem to have thrown in the towel in late March on their bets that oil prices would continue to fall. (See Exhibit 17 above.) The traders have since added to their long trades, meaning they expect prices to continue rising. But the ETFs for oil have suddenly witnessed huge outflows of money that will put downward pressure on crude oil prices as futures contracts, which the funds hold, are sold to meet the redemptions. The Wall Street Journal reported that one ETF, the United States Oil Fund LP, experienced a $2.7 billion cash outflow in April. That fund was holding about 11% of the June crude oil futures contracts’ total open interest. Will the commodity traders tossing in their towels be the buyers of the contracts the ETFs are selling? If yes, then oil prices will not retreat. If the answer is no, then look for near-term downward pressure on oil futures prices.

 

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

Saudi Arabia remains in a state of transformation both politically and economically as it responds to the elevation of a new generation to power, continued strife along just about all of its borders, Energy price volatility and a massive young population. Opening up the country to direct foreign investment raises the question of what foreigners might be allowed to buy? The stock market is a natural destination for investment flows. 

Ed Miliband might want to hold off measuring for curtains in No. 10 Downing Street just yet as Conservative incumbent David Cameron stages a comeback in the betting market on the eve of the election.

William Hill Plc, the biggest U.K. bookmaker, gives Labour leader Miliband and Cameron the same chance to be prime minister, with the odds on both at 10-11, meaning a successful 11 pound ($16.70) bet wins 10 pounds. Last month, William Hill had Miliband as favorite, as did Betfair, which now gives both an even shot.

Opinion polls indicate neither Cameron nor Miliband will win enough seats tomorrow to govern the U.K. without the support of smaller parties. Odds show the most likely next government is a Labour minority, given the Scottish National Party has offered to support Miliband. Yet the Conservatives will win the most seats and votes, odds show.

I think Cameron needs at least 15 more seats than Miliband, taking him over 300, to be sure of forming the next government.  Polls are not reflecting this but they can be inaccurate.  Betting shops are a fraction closer, as are the UK’s financial markets which have remained stable.

Conservatives underestimated Miliband’s Energy for the campaign and this could be costly.  Also, Conservatives lost the word game.  All leftwing types now describe the most socialist policies as ‘progressive’.   Conservatives were branded as the ‘austerity’ party and until the last few days only George Osborne seemed to talk about responsible governance. 

I found it a depressing campaign, woefully short of leadership, not to mention humour with the exception of Boris Johnson who will surely be the next leader of the Conservative Party.      

If the storage breakthrough is coming, it seems obvious it would happen in California, which has long led the U.S. in supporting alternative Energy. The state has the most demanding fuel-efficiency standards for cars, as well as incentives that have made it the biggest market for solar power in the U.S.

California “is often a lab” for the rest of the country, said Brian Warshay, an analyst at Bloomberg New Energy Finance. It will “continue to be so on the storage front.”

Older methods of trying to store power have existed for decades, including pumped hydropower facilities in which water is sent to higher elevation reservoirs and released through lower turbines to produce electricity when demand is high.

 

Here is a link to Tesla’s website where they highlight some of the key features of the Powerwall battery. Perhaps the most important consideration today is that almost no one has a battery in their home and that in a decade it could be commonplace. I reviewed the residential battery sector on April 23rd. 

As much as smoothing out supply and demand curves for electricity use in the home are interesting, the industrial and utility sectors are just as exciting. 

This was a useful update on the solar industry and Canadian Solar in particular. CSIQ's chart pattern seems to show 1 year range between $20 and $40. Maybe time for a breakout?

Thank you for this topical article. . Here is a section: 

Along with government incentives to combat global warming, a more natural economic process in the marketplace is driving quick growth in demand for solar power. Cheaper panels and cheaper batteries mean that not too long from now consumers will simply put solar panels on their roofs because that is cheaper than buying electricity off the grid.

The U.S.-based Rocky Mountain Institute warned earlier this month that utilities in the U.S. Northeast stand to lose as much as half of residential sales by 2030 as customers install solar and battery-storage systems and generate their own power.

To keep up with this increase in demand, Canadian Solar plans to almost double its own panel capacity from 2013 levels, Qu said. Along with supply from original equipment manufacturing, total capacity will reach more than 4 gigawatts, he said.

Resolution of the Greek crisis did not take a definitive step forward with the finance ministers meeting in Riga. The controversial move to secure cash reserves from local governments buys Greece several weeks, but the ECB appears increasingly uncomfortable with its rising ELA exposure to Greece. At the same time, Alexis Tsipras’ popularity is starting to wane. The clock is ticking. Our baseline remains unchanged but the risks are high and rising. 

Keep an eye on Italy over the next two weeks – the country faces a relatively low risk of a high impact event. The final vote on the new electoral law in the Lower House is a key fork in the road for PM Renzi’s institutional reform process and probably for the future of his government. We think that the balance of probability is largely in favour of PM Renzi and that the electoral law should pass. The risks are not negligible, however.

Finland’s Centre Party will lead the formation of the new government. A coalition of three parties is probably required to facilitate a coherent reform agenda, which could include the EU-skeptical Finns party. We would downplay the risks to Greece as the Finns party has toned down its rhetoric and is keen to join the government. At worst, Finland could be a source of delay.

The April Flash PMIs disappointed with the euro area composite falling 0.5 points to 53.5 (market expectation: 54.4). Both France and Germany missed expectations by a non-negligible margin. However, the euro composite remained above Q1 levels and is consistent with GDP growth slowing only marginally from 0.5% qoq in Q1 to 0.4% in Q2, in line with our expectations. Other euro area data surprised to the downside too and SIREN-Surprise fell into negative territory for the first time in four months. Nevertheless, SIRENMomentum appears to confirm upside risk relative to our (1.4% yoy) and Bloomberg consensus projections (1.4% yoy) for 2015.

Next week sees the first April CPI prints in the euro area. The risks are to the downside of consensus. We see scope for inflation to rise in H2. There is evidence of the weaker currency in imported inflation, but we don’t expect the impact on producer and consumer prices to be evident until H2.

 

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

The ECB has taken on a great deal of additional responsibility in the last decade but its one core mandate is to target an inflation rate of close to but below 2%. Inflation figures can’t but surprise to the downside considering the decline in Energy prices and the knock-on effects this has for prices of other goods. However we also know that these factors will wash out of the statistics within six months. At that point the likelihood of deflationary pressures easing, not least because the ECB has reversed monetary policy, will improve. 

There is not a great deal of evidence to suggest QE supports economic growth. On the other hand we have ample evidence to support the view that it inflates asset prices and puts downward pressure on the respective currency. 

Among the oil producers, support for reforms that proved elusive when revenues were booming may now be forthcoming. Last month’s election of Muhammadu Buhari in Nigeria on a strong anti-corruption platform could prove to be an opportunity in this regard. Lower oil revenues are intensifying the momentum to diversify the oil economies, particularly in Angola and Nigeria.

Most countries in Africa are Energy importers and will benefit from lower oil prices. Many are also largely producers of soft commodities, which should be less sensitive to the slowdown in capital spending in China.

On balance, we think that the region’s centre of economic gravity will shift towards the less resource-intensive countries of east Africa, including Ethiopia, Kenya, Mozambique, Tanzania, and Uganda. They are economically more diverse and beginning to form a relatively large and well-integrated regional market. Investment flows, including from China, have already begun to shift in this direction.

These countries likely stand a better chance of delivering the structural transformation that will be needed to create jobs. This will be critical as half of the one billion new workers set to join the global labour force over the next twenty-five years will do so in frontier Africa.

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

There is no doubt that the run up in commodity prices has been of benefit to African countries not least farmers since agriculture continues to account for the majority of employment. As the above report highlights falling oil prices represent an opportunity for Energy importers particularly in East Africa. In many respects, this is a story from the last decade. Africa’s demographics are what is likely to animate investor interest over the next few decades. 

Sunfire claims that analysis shows the properties of the synthetic diesel are superior to fossil fuel, and that its lack of sulphur and fossil-based oil makes it more environmentally friendly. The overall Energy efficiency of the fuel creation process using renewable power is around 70 percent, according to Audi.

"The engine runs quieter and fewer pollutants are being created," says Sunfire CTO Christian von Olshausen.

The fuel can be combined with conventional diesel fuel, as is often done with biodiesel fuels already.

The Dresden pilot plant is set to produce about 42 gallons (160 l) of synthetic diesel per day in the coming months, and the two companies say the next step is to build a bigger plant.

"If we get the first sales order, we will be ready to commercialize our technology," von Olshausen says.

Sunfire anticipates that the market price for the synthetic diesel could be between 1 and 1.5 Euros per liter, which would be nearly competitive or a little more expensive than current diesel prices in Europe, but the actual figure will be largely dependent on the price of electricity.

 

One of the issues hydrogen fuel cell and similar technologies face is that they are dependent on the availability of cheap electricity to drive the process of separation or combination. The commercial utility of a water-to-diesel project as outlined above will be contingent on the cost of electricity coming down. As such the improving efficiency of solar cells and improvements in battery technology represent a major step forward for such technologies as the cost of electricity would be free from volatility and could conceivably trend lower in real terms over time. 

Oil needs to recover to $65 a barrel for U.S. drillers to tap a pent-up supply locked in shale wells and unleash more crude on markets than is produced by Libya.

Dipping into this “fracklog” would add an extra 500,000 barrels a day of oil into the market by the end of next year, Bloomberg Intelligence said in an analysis on Thursday. Producers in oil and gas fields from Texas to Pennsylvania have 4,731 idled wells at their disposal.

Prices are rebounding from a six-year low after drillers idled half the nation’s oil rigs, slowing the shale boom that boosted production to the highest in four decades. The number of wells waiting to be hydraulically fractured, known as the fracklog, has ballooned as companies wait for costs to drop. That could slow the recovery as firms quickly finish wells at the first sign of higher prices.

“Once service costs come down and drillers begin to work through their higher-than-normal backlog, the market should start to price in that supply coming online,” Andrew Cosgrove, an Energy analyst for Bloomberg Intelligence in Princeton, New Jersey, said by phone. “It may act as a cap on prices.”

U.S. oil futures tumbled by more than $50 a barrel in the second half of last year amid a worldwide glut of crude. West Texas Intermediate for June delivery fell $1.16 to $56.58 a barrel at 11 a.m. on the New York Mercantile Exchange.

Oil production in the lower 48 states would rise to 7.67 million barrels a day in the fourth quarter of 2016 if drillers start shrinking their fracklogs by 125 wells a month in October and put some rigs back to work, Bloomberg Intelligence models show. The U.S. fracklog has more than tripled in the past year, with oil wells making up more than 80 percent of the total.

‘Service costs’ are at least partially a euphemism for oil workers, who were very highly paid at the height of the fracking boom in early 2014, and have subsequently been laid off by the industry since the price for crude oil plunged.  Oil sector employment will pick up, albeit at lower salaries, when WTI crude is in the high $60s.  Above that region employment and fracking production will accelerate until it caps prices once again. 

This item continues in the Subscribers’ Area.

The US shale industry has failed to crack as expected. North Sea oil drillers and high-cost producers off the coast of Africa are in dire straits, but America's "flexi-frackers" remain largely unruffled.

One starts to glimpse the extraordinary possibility that the US oil industry could be the last one standing in a long and bitter price war for global market share, or may at least emerge as an Energy superpower with greater political staying-power than Opec.

It is 10 months since the global crude market buckled, turning into a full-blown rout in November when Saudi Arabia abandoned its role as the oil world's "Federal Reserve" and opted instead to drive out competitors.

If the purpose was to choke the US "tight oil" industry before it becomes an existential threat - and to choke solar power in the process - it risks going badly awry, though perhaps they had no choice. "There was a strong expectation that the US system would crash. It hasn't," said Atul Arya, from IHS.

"The freight train of North American tight oil has just kept on coming. This is a classic price discovery exercise," said Rex Tillerson, head of Exxon Mobil, the big brother of the Western oil industry.

Mr Tillerson said shale producers are more agile than critics expected, which means that the price war will go on. "This is going to last for a while," he said, warning that any rallies are likely to prove false dawns.

The US "rig count" - suddenly the most-watched indicator in global Energy - has fallen from 1,608 in October to 747 last week. Yet output has to continued to rise, stabilizing only over the past five weeks.

There is no doubt that US fracking is a very adaptable business and the combination of technology and experience is making the industry much more efficient.  Nevertheless, today’s higher production will wane at current prices, as the yield from shale formations inevitably declines rapidly, necessitating additional drilling slightly further along the shale formation.  Companies will be less willing to continue drilling with WTI crude in the $50s region, especially as their hedged prices at higher levels begin to expire in 2016.  Additionally, plenty of oil industry workers have been laid off this year and it will take a little longer to get them back if the price of oil does rise.

This item continues in the Subscribers’ Area.

Jackson Family Wines, based in Santa Rosa, has a new partnership with Tesla involving battery storage and several vehicle charging stations, according to the February issue of Wine Business Monthly. The winery declined to comment.

Mack Wycoff, Wal-Mart’s senior manager for renewable Energy and emissions, said the company is intrigued by Energy storage. “Instead of pulling electricity from the grid, you discharge it from the battery,” he said. “Ideally you know when your period of peak demand is, and you discharge it then.”

Mike Martin, Cargill’s director of communications, declined to provide details about how the company plans to use Tesla batteries at the Fresno plant. The 200,000-square-foot facility, one of the largest of its type in California, produces nearly 400 million pounds of beef each year.

Janet Dixon is director of facilities at the Temecula Valley Unified School District in southern California, which plans to install solar panels at 20 of its 28 schools this summer. Dixon said that SolarCity is the solar provider, and five of the facilities will have Tesla batteries.

“We spend roughly $3 million a year on electricity, and most of that is lighting and air conditioning,” said Dixon. “We are going solar to reduce our overall costs and the battery storage should help us manage our peak demand.”

Tesla trades on aggressive multiples. Since its car sales are a fraction of even the smallest auto manufacturer, it will be quite some time before the company will compete on that front even if one assumes that large numbers of people will be driving electric vehicles 10 years from now. Batteries are a much bigger story for Tesla which is why they are investing so much capital in building a “gigafactory” which they anticipate will deliver the economies of scale necessary to drive down the cost of their products.

At the present moment almost no one has a battery in their home. As solar technology improves and the prospect of containing volatility on Energy spending becomes a realistic possibility demand is likely to increase. At the present moment the solar cells companies like SolarCity are installing in homes are not particularly efficient. However, as the efficiency rates of laboratory tested products reach commercialisation the Energy generation capacity of one’s home will rapidly improve. Therefore the efficiency of solar and the potential demand landscape for home batteries are linked. 

There are many reasons why China’s biggest oil companies should be dusting off their files on acquisition targets: cheap oil, the beginnings of global consolidation, and the nation’s rising crude consumption among them.

If it's not at the top of the priority list, it’s because state-owned giants such as PetroChina Co. and Sinopec have their hands full. Weathering government corruption probes and its plans to remake the public sector are bigger considerations for the year ahead.

Amid speculation that Royal Dutch Shell Plc’s purchase of BG Group Plc will spur a round of mega deals, China could find itself on the margins, swapping assets or buying smaller companies rather than bidding for the majors. That could prove a lost opportunity for the world’s most Energy-hungry nation, as its reserves decline and import needs are forecast to rise to two-thirds of consumption by the end of the decade.

PetroChina’s president, Wang Dongjin, said in March that the company is looking at many businesses overseas, although its ambition could be limited to asset swaps to reduce transaction costs.

That thinking hasn’t changed after the Shell-BG announcement earlier this month. Buying large global rivals would be politically difficult and suck up too many resources, according to a company official who asked not to be named as the information isn’t public. Instead, China’s biggest oil and gas producer is seeking individual assets that can give immediate returns, the person said.

In addition to the corruption probes mentioned above, I think China’s big, state-owned oil companies are wary because with Brent Crude at $62 today, we now know that they paid over the odds for oil resources during the three previous years. 

This item continues in the Subscribers’ Area.  

We came away with several impressions from the two presentations and our discussions with fellow attendees. First, as we mentioned earlier, the vultures who circle over every disastrous industry are circling over Energy with high expectations that road-kill victims will soon be available. Second, there are a lot of smart investors looking for the right opportunity to “buy into the Energy industry at the bottom.” To us, that means there is too much money chasing a limited number of quality investments. That also likely means pricing on deals initially will be too high. The private equity investors believe these early investors may have to wait longer for the returns they are traditionally expecting. Fortunately, or unfortunately, the availability of public money is delaying the typical industry cycle pattern for private equity returns.

The uniformity of thinking among private equity players is a bit scary. Group-thought is usually not a successful strategy. The volume of public capital is not only surprising, but discouraging if one believes the industry needs to experience pain before a true recovery can begin. Lastly, in looking at the presenters and the audience, there were very few present that experienced the 1980’s forced re-structuring of the Energy business following the bullish experience of the 1970’s. In our discussions that day, we encountered another old-timer who referenced the 1980’s downturn starting in 1982, three years before when most who look at the industry’s history think it began. We were there then, and this guy had it exactly right. This industry is headed for significant change.

 

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

One of the problems faced by fundamental or value investors at a time when interest rates are low, liquidity abundant and valuations elevated is that there is a dearth of opportunities. When a decline such as we have seen in the Energy sector occurs, they have little choice but to deploy capital because there are so few other low prices opportunities. This at least partially explains the ease with which private equity firms have been able to raise capital. The problem is that with so much money chasing opportunities prices will rise for troubled assets and the eventual rationalisation of the sector will be delayed. 

Xi and Premier Li Keqiang are trying to defuse that debt bomb, rein in banks and local governments and promote the nation’s stock markets as a primary way for innovative and smaller companies to raise capital.

Both leaders say they’ve mapped out more than 300 reforms that over time will reduce state intervention in the economy. Among the initiatives is scaling back Energy-price controls that favor manufacturers. The changes are also designed to improve the social safety net and encourage market-driven deposit rates to get Chinese families saving less and spending more.

Few countries with the scale of China’s credit boom have escaped unscathed without experiencing some sort of banking crisis. Research by Michael Pettis, a finance professor at the Guanghua School of Management at Peking University, shows that “every investment-led growth miracle in the last 100 years has broken down.”

Avoiding that fate requires a high-wire balancing act for the government. It needs to wind down the torrent of investment -- 49 percent of China’s GDP from 2010 to 2014 -- without cratering the economy and worsening the situation for indebted local governments or the bad-debt burden of Chinese banks.

“Our goal is to keep China’s economic operation within the proper range,” Premier Li said in a March 31 interview with the Financial Times that was published Wednesday. Achieving the 7 percent target this year “won’t be easy” and requires “vision, perseverance and courage,” Li said, as cited by the newspaper.

Selling slower growth now for greater prosperity later isn’t an easy political sell, even in a one-party state. Xi faces entrenched interests that favor the status quo, such as state-owned nonfinancial enterprises that have $16 trillion in assets and local governments that have benefited from big public works projects and thriving real-estate markets.

There’s also the risk of a disorderly de-leveraging in the banking sector and the jobs-intensive property market. Any crisis there could take growth rates well below the government’s target of about 7 percent. China is already home to income-inequality levels on par with Nigeria and Mexico.

Throw higher unemployment into the mix and the risk of social unrest rises.

I have sometimes described China’s economy and stock market as interesting enigmas.  For this reason I have also learned to be wary of highly opinionated forecasts for China from Western commentators. 

However, I have developed some helpful guidelines for monitoring and China’s stock markets.

This item continues in the Subscribers’ Area.

India agreed to buy C$350 million ($285 million) of uranium through 2020 from Canadian producer Cameco Corp. to fuel its expanding fleet of nuclear reactors.

The accord was announced Wednesday as Indian Prime Minister Narendra Modi visited Ottawa, the first such trip by a PM from that nation in a generation. Cameco stock rose the most in five months in Toronto.

India is the fastest growing market for nuclear power after China. The nation is extending electricity supplies to serve more of its 1.24 billion population. It operates 21 reactors; another six are being built and due to come online by 2017.

While nuclear power isn’t the cheapest option, it’s preferable from an environmental perspective, Modi said. “This is an effort to save the world from global warming and climate change,” Modi told reporters.

India’s Department of Atomic Energy will acquire 7.1 million pounds of uranium concentrate, Saskatoon, Saskatchewan-based Cameco said in a statement.

“This is a new port of entry, if you will, for Cameco’s uranium and we’re glad to have it open,” Chief Executive Officer Tim Gitzel said in a phone interview.

Cameco rose 5.7 percent to C$20.07 in Toronto, the highest close since Dec. 3.

Since India has a pollution problem to rival China’s, this is a sensible move and Modi has gained another Western ally.  I assume that nuclear is replacing more of India’s coal-powered utilities, which are certainly cheaper but also the biggest polluters.  

The world's most innovative regions just got a $900 billion-a-year stimulus package.

With oil prices still down about 50 percent since June, the global economy is benefitting. The IMF estimated in December that the price crash could boost GDP worldwide by 0.7 percent. But those benefits aren't shared equally.

Bloomberg New Energy Finance (BNEF) estimated some of the biggest winners and losers in the map above. Net oil importers like the U.S., Europe, and Asia are getting a nearly $900 billion economic stimulus from cheaper oil prices. The Middle East and Russia are getting stuck with the bill.

"I believe we are in an era of lower oil prices in the medium term and also in the longer term," Michael Liebreich, founder of BNEF, said in a presentation at the group's annual summit on Tuesday. "We have cheap oil, cheap gas, cheap renewables. We are definitely in an age where supply is not constrained."

Note: The calculations for the map are based on a $5 drop in natural gas price and $50 drop in oil price. The estimates use import/export volumes from 2011 to 2013, which would exclude the expansion in U.S. oil since then.  

Developing Asia Pacific has the biggest winners, led by China and India.  Europe is next, Norway excepted.  The US does benefit but probably not by the $180bn shown, because America’s shale industry is now at least temporarily in retreat.   

Professor Donald Sadoway remembers chuckling at an e-mail in August 2009 from a woman claiming to representBill Gates. The world’s richest man had taken Sadoway’s Introduction to Solid State Chemistry online, the message explained. Gates wondered if he could meet the guy teaching the popular MIT course the next time the billionaire was in the Boston area, Bloomberg Markets magazine will report in its May issue.  “I thought it was a student prank,” says Sadoway, who’s spent more than a decade melting metals in search of a cheap, long-life battery that might wean the world off dirty Energy. He’d almost forgotten the note when Gates’s assistant wrote again to plead for a response.

A month later, Gates and Sadoway were swapping ideas on curbing climate change in the chemist’s second-story office on the Massachusetts Institute of Technology campus. They discussed progress on batteries to help solar and wind compete with fossil fuels. Gates said to call when Sadoway was ready to start a company. “He agreed to be an angel investor,” Sadoway says. “It would have been tough without that support.”

Sadoway is ready. He and a handful of scientists with young companies and big backers say they have a shot at solving a vexing problem: how to store and deliver power around the clock so sustainable energies can become viable alternatives to fossil fuels.  How these storage projects are allowing utility power customers to defect from the grid is one of the topics for debate this week at the Bloomberg New Energy Finance conference in New York. Today’s nickel-cadmium and lithium-ion offerings aren’t up to the task. They can’t run a home for more than a few hours or most cars for more than 100 miles (160 kilometers). At about $400 per kilowatt-hour, they’re double the price analysts say will unleash widespread green power. “Developing a storage system beyond lithium-ion is critical to unlocking the value of electric vehicles and renewable Energy,” says Andrew Chung, a partner at Menlo Park, California–based venture capital firm Khosla Ventures.

The timing for inventors—and investors—may finally be right. Wind turbines accounted for 45 percent of new U.S. power production last year, while solar made up 34 percent of fresh capacity worldwide. Storing this Energy when the sun isn’t shining or a breeze isn’t blowing has remained an expensive hurdle. Battery believers say that’s changing. They’ve invested more than $5 billion in the past decade, racing to get technologies to market. They’re betting new batteries can hold enough clean Energy to run a car, home, or campus; store power from wind or solar farms; and make dirty electricity grids greener by replacing generators and reducing the need for more fossil fuel plants. This market for storage capacity will increase almost 10-fold in three years to 2,400 megawatts, equal to six natural gas turbines, Navigant Consulting says.

Energy storage is the missing link for renewables such as solar, so these developments are encouraging and will be a welcome boost for the sector.

Just think – up until about a decade ago numerous gloomy forecasters told us that we faced a frightening, dark and interminable period of economic decline because of Energy shortages.  Today, Energy prices are lower due to an abundance of supply from not only fossil fuels but more importantly, increasingly viable renewables led by solar.  We can thank technology for this favourable situation.  

The notion of a Western rapprochement with Tehran has been in play since mid-2013, when Hassan Rouhani replaced Mahmoud Ahmedinejad as president. At a stroke, instead of a firebrand religious hardliner, Iran was represented by a seemingly moderate cleric, English-speaking and with a doctorate in law from a British university.

Within months of taking office, Rouhani was at Davos, Alpine hob-nobbing with the best of them, doing his bit to charm the Western and West-leaning global elite.

“Our country has never sought, nor seeks, anything other than peaceful technology,” he opined in early 2014, securing not only the start of this latest thaw in Iranian-US relations, but also an interim agreement to access much-needed foreign exchange reserves. “Iran is open for business,” Rouhani has said, at a string of international summits since, using a near identical text each time.

“Come and visit us and see the investment opportunities for yourselves.” Over the last 18 months, the Iranian president has consistently argued that his country, “within the next three decades, could become a top-10 global economy”. Funnily enough, he is right.

In 2012, the year before Rouhani took office, Iranian GDP shrank by over 5pc, the economy gripped by sanctions and enduring its worst financial crisis for at least two decades. Since then, growth has returned, in part because sanctions have slightly eased. Independent Western analysts now estimate 2014 GDP at around $450bn (£304bn), placing Iran comfortably among the world’s 30 largest economies – ahead of both Austria and Taiwan.

But this country is still massively under-achieving. Along with its natural commodities, Iran also boasts a highly-skilled, near-universally literate population, with a vigorous median age of just 28. Its numerous universities, while far from gender-friendly, have long-produced a steady stream of well-qualified scientists and engineers.

In the mid-1950s, real per capita GDP was just four-fifths that of Turkey, Iran’s ancient rival. Over the 20 years that followed, free trade and economic dynamism meant growth was strong, with GDP per head soaring to more than two-and-a-half times that of Turkey.

Then came Ayatollah Khomeini’s 1979 revolution, with its theocratic clampdown on enterprise, which sent the economy spiralling downward.

As such, Iran missed the emerging markets revolution that, from the 1980s onwards, ignited the rapid expansion of economies like China, India and Turkey.

Iranians are now, once again, much poorer than their Turkish neighbours. Rouhani has pledged to reverse that, stating repeatedly that he wants to “join the rest of the global economy”, positioning Iran as, potentially “the most exciting emerging market on earth”.

Using history as our guide, we know that it can take just one key leader to either make or break a country’s fortunes for many years.  This is especially true in non-democratic societies where there is no orderly mechanism for removing the unreliable.

President Hassan Rouhani of Iran is an interesting case in point, who replaced the deeply unpopular and aggressively hostile Mahmoud Ahmedinejad in mid-2013.  A smiling, English speaking and apparently mild mannered cleric with a law degree from a British University, he has been a likely candidate for negotiations, although he is not the Supreme Leader.  That is 75 year old Ali Khamenei, who succeeded Ruhollah Khomeini in 1989. 

This item continues in the Subscribers’ Area.

It is reasonable to assume that the world will still be consuming plenty of crude oil in 20 to 30 years’ time, despite renewables and climate change concerns.  However, the Saudi gamble is that low prices can curb both global oil and renewables production sufficiently to keep prices reasonably high. 

It may work for a few years but cannot reverse technological progress which ensures cheaper production costs for all forms of Energy, whether fossil fuels or renewables over the longer term. 

This item continues in the Subscribers’ Area.

Q. Ten months after coming to power, what would you consider your major achievements?

A. Achievements have to be seen with reference to the past. In what situation did the people bring us to power? And what is the situation now? Is there a policy paralysis anymore? No. Is there a transparency issue? No. Is there stagnancy in governance? No. Instead, there is dynamism.

Our vision and commitment is towards the country's progress, its place in the world and the happiness of its people. We have taken a series of measures which has restored faith in our capacity to deliver with transparency, efficiency and speed. We are looking at the interests of the poor of the country and their empowerment. Initiatives like the Jan Dhan Yojana, Swachh Bharat Abhiyaan and Soil Health cards are aimed at giving more income and a better quality of life to the common man and also transform perceptions about our country. Our focus on Beti Bachao and on generation of renewable Energy is a demonstration of the fact that we not only care for the present but also for the future generations. The direction of our government is reflected in the recent enabling Union Budget, a futuristic railway budget, the pooling of gas for stranded power plants and for fertiliser plants. These show our firm commitment towards a prosperous and powerful India.

Good governance with good intentions is the hallmark of our government. Implementation with integrity is our core passion. We have converted certain adversities born of legacies into opportunities. The recent conclusion of the auctions in coal and spectrum establishes that the curse of scam and corruption is avoidable and transparency possible if there is political will.  Former prime ministers have been talking about leakage in subsidies. Our initiative of distribution of LPG subsidy through direct bank transfer is a shining example of our concrete strategy for helping the poor and the marginalised. For the first time, we have come out with a sound social security umbrella for the weaker sections. The Make in India campaign has taken off and is backed with skill development. It is going to open new vistas for employment for the youth.

We have restored the global credibility of India in terms of its politics, governance and economy. This is because the growth of the economy has been restored.  We have left behind countries like China in terms of our GDP growth. We have left behind the US in terms of steel production. The current account deficit has come down. Global institutions like the IMF, OECD and others are predicting even better growth potential in the coming months and years. India is, thus, back on the global radar.

If you have any interest in India, and most subscribers do because I have talked about it more than any other country and market since Narendra Modi, threw his hat into the electoral ring over a year ago, you are likely to find this candid interview fascinating.   

I have previously described Narendra Modi’s challenge as Prime Minister, in successfully managing India’s huge and unwieldy democracy, as the modern day equivalent of the Labours of Hercules.  What you will see in this interview is the powerful intellect, eye for detail and extraordinary drive of this Prime Minister.  He has enormous Energy and a formidable business brain as we saw when he previously led the State of Gujarat.  Fortunately, he has no rajah background or pretensions, recognising that India will not fulfil its potential without educating and creating opportunities for its poorest people, in addition to its huge middleclass.  India is the ultimate challenge for democratic governance, but with enormous potential, which Narendra Modi aims to develop.    

(See also: India Outlook Raised by Moody’s While Fitch Sees Faster Growth)

Shell, which helped pioneer the process of liquefying gas for shipment aboard tankers decades ago, and rivals such as Chevron are betting LNG will play an increasing role in emerging economies seeking alternatives to dirtier Energy sources such as coal.

The fundamental logic of a merger “always existed, what has happened in the last month is that it has become very compelling from a value perspective,” Van Beurden said on a conference call on Wednesday.

The new company will be the largest producer of LNG among international oil companies and gas is a “very important” component of the deal, he said.

Buying BG also brings Shell a share in Brazil’s largest deepwater fields, consolidates its position in Australia’s gas industry and allow more participation in the U.S.’s emergence as a LNG exporter.

Shell will pay 383 pence in cash and 0.4454 of its B shares for each BG share, the companies said on Wednesday. That’s equal to about 1,367 pence a share, valuing BG at about 47 billion pounds, a premium of about 50 percent on BG’s closing share price yesterday.

To win over shareholders, Shell pledged cost savings of $2.5 billion, asset disposals of at least $30 billion within four years and a giant share buyback of $25 billion from 2017 to 2020.

This is a bold and also controversial move by Shell.  Bold because Shell is betting its future on natural gas and wants to be the biggest player in this sector.  Controversial because Shell is paying a hefty price for BG, presumably because it has confidence in the takeover candidate’s portfolio and is also hoping to deter rival bids from American companies, which have the benefit of a stronger currency. 

This item continues in the Subscribers’ Area where three other articles are also posted.  

The Shanghai Composite Index rallied to the highest level since March 2008, as large-company shares jumped on speculation the government will take more measures to boost the world’s second-biggest economy.

Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., the nation’s biggest lenders, advanced at least 2.6 percent. PetroChina Co., the No.1 Energy company, increased 3.6 percent. China CNR Corp. and CSR Corp. both surged 10 percent after the trainmakers said their merger got regulatory approvals.

The Shanghai Composite rose 2.5 percent to 3,961.38 at the close. The benchmark gauge extended gains over the past year to 92 percent, the best performing major global index among 93 measures tracked by Bloomberg, amid speculation the central bank will extend cuts in borrowing costs and on increased use of leverage to buy stocks.

“It’s a bull market and funds keep flowing into the market,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co. “The market will continue to rise unless we see signals of a crackdown from regulators.”

The CSI 300 Index rose 2.2 percent. The Bloomberg China-US Equity Index added 1 percent in New York Monday. Mainland and Hong Kong markets were closed on Monday, with the latter set to resume trading on Wednesday.

The penultimate paragraph above may be the most helpful for actively managed funds.  

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Saudi Arabia’s escalating intervention in Yemen is a high-stakes gamble that risks back-firing in a series of complex ways, ultimately endangering Saudi oil infrastructure and the security of global Energy supply.

Military analysts say there is little chance that air strikes by a Saudi-led coalition of Sunni countries will subjugate the Iranian-backed Houthi forces in Yemen. It may require a full-blown invasion by land forces to secure control. Large concentrations of Saudi armour and artillery are already massing near the border, though this may simply be a negotiating ploy.

The longer the conflict goes on, the greater the risks that it will stir up internal hatred in a country that has traditionally been relatively free of sectarian violence. Adam Baron, from the European Council on Foreign Relations, said the inflammatory comments about the Sunni-Shia struggle by politicians across the region are becoming “self-fulfilling prophecies”.

Al-Qaeda in the Arabian Peninsular (AQAP) – thought to be the most lethal of the jihadi franchises, and a redoubt for Saudi jihadis – already controls a swathe of central Yemen and is the chief beneficiary of the power vacuum.

AQAP can plan terrorist strikes against Saudi targets from a deepening strategic hinterland with increasing impunity. All US military advisers have been withdrawn from Yemen, and much of the country’s counter-terror apparatus is disintegrating. It is becoming harder to harry al-Qaeda cells or carry out drone strikes with precision.

The great unknown is whether a protracted Saudi war against Shia forces in Yemen – and possibly a “Vietnam-style” quagmire – might tug at the delicate political fabric within Saudi Arabia itself. The kingdom’s giant Ghawar oil field lies in the Eastern Province, home to an aggrieved Shia minority.

“If the Saudis continue this war – and if they keep killing civilians – this is going to create internal instability in Saudi Arabia itself,” said Ali al-Ahmed, from the Institute for Gulf Affairs in Washington.

Large numbers of Saudi youth are disaffected. An estimated 6,000 have been recruited by al-Qaeda and a further 3,000 have fought for ISIS in Syria and Iraq. While the Saudis have a formidable security apparatus, with a 30,000-strong force guarding the oil infrastructure, the risk of infiltration is high even among clans linked to the royal family.

Two al-Qaeda suicide bombers in a pipeline attack in 2006 were scions of the ruling elite, one a close relation of a leading Wahhabi cleric and the chief of the religious police.

The perpetually troubled Middle East is rapidly sliding into the world’s most dangerous power struggle, with potentially international implications.  For once the epicentre of tensions in the region is not Israel’s perennial struggle with the Palestinians.  Moreover, this crisis cannot logically be blamed on American intervention in the region, although a few commentators will inevitably persist with this theme for political reasons.

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In two claimed firsts, researchers at the University of Manchester have produced both the first commercial application of graphene and the world's first graphene light-bulb. It is expected that this new device will have lower Energy emissions, cheaper manufacturing costs, and a longer running life than even LED lights. And this isn't just a pie-in-the-sky prototype, either. The team who developed it believes that the graphene light-bulb will be available for retail sale within months.

To that end, the University of Manchester has partnered with the UK company Graphene Lighting PLC to produce the new bulb and share in the profits of its sales. This will also make certain that the University is directly advantaged by commercial products being developed out of their National Graphene Institute (NGI).

"This lightbulb shows that graphene products are becoming a reality, just a little more than a decade after it was first isolated – a very short time in scientific terms," said Professor Colin Bailey, Deputy President and Deputy Vice-Chancellor of The University of Manchester. "This is just the start. Our partners are looking at a range of exciting applications, all of which started right here in Manchester. It is very exciting that the NGI has launched its first product despite barely opening its doors yet."

The University of Manchester told us that the light bulb comprises a traditional LED coated in graphene which transfers heat away from the LED, prolonging life and minimizing Energy usage.

My guess is that graphene will prove to be indispensible in the widest range of products over the next decade.  Practically everyone will benefit from this but the question remains: what is the best investment opportunity in grapheme?

The four biggest private-equity firms have raised about $30 billion to invest in Energy deals. They don’t all agree on how to spend that money.

Carlyle Group LP is prepared to bet that oil prices have bottomed out and sees now as the best time to deploy its money, co-founder David Rubenstein said last week. Apollo Global Management LLC says the sell-off in oil isn’t over yet and the highest-returning deals are still on the horizon.

“There will be attractive opportunities to buy now,” Rubenstein said March 23 at the SelectUSA Investment Summit in Washington. Greg Beard, who leads Energy investing at Apollo, sees a different timeline: “The worst, the problems, are yet to come,” he said in an interview last month.

Private-equity firms are trying to take advantage of crude’s 54 percent plunge since June, which has made targets cheaper. Carlyle, Apollo, Blackstone Group LP and KKR & Co. raised about $30 billion in the past 18 months for Energy- related deals.

How and when they spend that money depends on their view on the future direction of oil. Apollo, led by Leon Black, has recently bought debt of companies struggling to meet their repayments because the firm expects oil will remain at multiyear lows, potentially allowing it to take control later. Carlyle has raised billions to acquire companies in leveraged buyouts because it expects oil to start rising, allowing it to sell its holdings at a profit later.

“Oil prices will come back a bit,” Rubenstein said. “If you can buy now at relatively low prices and hold on for a few years, you’re going to do quite well.”

 

The speed with which the major private equity firms have been able to raise large pools of capital to invest in the Energy sector is a testament to just how much liquidity is still sloshing around the system. There are plenty of opportunities to acquire attractive assets as overleveraged players are squeezed by lower than expected prices for both oil and gas. The fact that private equity has already become so active suggests they will aid in base formation development. However base formation development and recovery are not the same thing. 

The MTA Symposium drew a record number of attendees this year, from all over the world, which is a further testament that we remain in a persistent bull market. This year’s theme was on beating the benchmark which set me to ruminate on the role of career risk and fees in sustaining an environment where the majority of mutual funds underperform. I concentrated the first part of my presentation on highlighting how equal weighting, dividends and currencies contribute to total return, The second part of my presentation talked about international exposure and how the Autonomies benefit from major themes such as the rise of the global middle class, the accelerating pace of technological innovation and the lower price of Energy in real terms. Here is a link to the pdf. 

Congratulations to Walter Deemer, a long-time friend of FullerTreacyMoney, for whom this year’s conference was a lap of honour in thanks for his decades of service to the field of technical analysis. 

One of the more interesting presentations I attended was from a company creating market timing tools from Twitter feeds. iSentium takes in posts from approximately 300,000 active twitter users, employs a keyword search and plots the trend of mentions of the company. While they claim to cover 7000 instruments it appears that the most liquid universe in terms of social media is approximately 100 instruments, primarily liquid ETFs. They have plans to expand their coverage and what they can do with their data but I suspect growth will be dependent on the number of Twitter feeds increasing substantially. There is definitely something of interest in the garnering of trading ideas from social media for short-term traders, not least during market events such as earnings announcements, but it still appears to be an immature sector. 

We continue to believe that we are in the middle innings (5^th or 6^th inning) of an equity bull market in the US, and we do not currently see the next bear market on the horizon.  Equity valuations remain “fair” according to our Price Matters discipline, and global accommodation has raised the likelihood that the current bull market could go into extended innings.  We are also encouraged by the fact that earnings expectations for US companies have been significantly reduced recently as analysts have quickly incorporated worst-case scenarios for crude oil and currencies into their financial models.  We expect that these rushed estimate reductions will prove overly pessimistic and too one-sided in nature, failing to consider the many positive economic implications of cheap gasoline and a strong dollar.

Wit that macro outlook in mind, we wanted to highlight some of the changes we have been making recently in the domestic equity portion of the RiverFront portfolios.

If the Fed intervened, commencing on March 13^th, as I have been saying, then the US Dollar Index headwind has certainly been checked.  Moreover, it could easily range sideways to somewhat lower for a considerable time.  If so, that will help the price of WTI crude oil move a little higher, as it is priced in US Dollars.  These two factors would lend support to the optimistic view from RiverFront.

Over the longer term, I maintain that the US Dollar will move higher in a likely secular uptrend led by the USA’s technology lead and near Energy independence.  

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As small U.S. oil producers struggle to remake their business models, the bankruptcies are already beginning to be announced with Quicksilver (KWKA-OTC), a Barnett gas shale producer being the most recent company to file for court protection. Continued low natural gas prices and now low oil and natural gas liquids prices are straining the finances of E&P companies, and in some cases oilfield service firms. We are seeing frequent announcements of E&P company asset sales, capital spending cuts and employee layoffs. We also see numerous announcements of companies hiring advisors signaling that more restructuring activity is on the horizon.

Indicative of the challenges facing Energy companies with substantial debt loads is shown in Exhibit 14, which plots the rates for the high-yield (HY) debt market overall and for the Energy sector within that market. As shown, immediately before global oil prices began to slide last year, the spread between Energy HY and overall HY yields was almost non-existent. As oil prices fell at the end of 2014, the Energy HY rate soared as the financial weakness of highly leveraged Energy companies was highlighted.

The most surprising phenomenon (for us) this year has been the receptivity of public equity and debt markets to offerings from Energy companies. As Dealogic has reported, so far this year, Energy equity offerings have accounted for 12% of total U.S. equity issuances, or roughly $8 billion. The firm also reports that the pace of Energy debt issuance has remained consistent with the pace the sector experienced over the past five years, as companies have sold $5.6 billion in new bonds. It appears investors are happy to back Energy companies with the expectation crude oil and natural gas prices will rise from current levels in response to global Energy demand growth and prospects that supply additions will be limited or even decline, as producers cut back their drilling. How much this view is shaped by a hoped-for-cut in output this spring by OPEC, Russia and Mexico that would shoot oil prices sharply higher is unknown, but we suspect that possible scenario does play a role.

 

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WTI crude oil prices have at least stabilised in the region of $40. However, a meaningful catalyst in the form of sharply lower output or significantly above target demand will likely be required to spur a return to demand dominance beyond the short term. The wide divergence between current pricing and where oil was expected to trade when so much money was invested in additional supply from expensive and technically difficult regions is undoubtedly causing problems for less well-capitalised companies. 

There will be additional bankruptcies and private equity firms are eager to make acquisitions at distressed valuations. However an additional perspective is to conclude the only way companies have a chance of meeting their debt obligations is to increase output and that supply has to get to market. 

The sun provides infinitely more Energy than anything else that mankind could possibly access.  Moreover, there may be no limit to the variety of solar panels that can be created.  Solar is on the way to becoming our dominant source of Energy, probably within 25 years.  

(Bloomberg) -- U.S. oil producers are issuing new shares of stock at the fastest pace in more than a decade, looking to investors for a cash lifeline to pay down debt and keep drilling as crude prices continue to sink.

Tapping equity markets has become the best option for companies such as Dallas-based RSP Permian Inc., which announced March 17 it’s seeking to raise as much as $232 million by selling additional shares. Calgary-based Encana Corp. and Noble Energy Inc. of Houston also have issued shares in the past two months to reduce debt.

That brings funds raised in the first three months of the year to about $8 billion, more than 10 times the total in the same period last year. As the continued slide in oil prices further crimps cash flows, banks are pressuring these companies to shore up their capital and reduce debt to lower servicing costs and provide wiggle room.

“There aren’t really any better alternatives right now,” Chad Mabry, an analyst at MLV & Co. LLC in Houston, said in a telephone interview.

A growing acceptance that low prices will persist has convinced producers to turn to equity markets while they still can, he said. “They’re preparing for the worst.”

Few saw issuing new stock as an attractive option when the oil market first started crashing late last year because it would dilute the value of stock held by existing shareholders at a time when their holdings already were hurt by falling prices.

As recently as December and January, many producers assumed there would be little interest in pouring more money into the sector, and that funding from debt or equity wouldn’t materialize, said Rob Santangelo, co-head of equity capital markets Americas for Credit Suisse Group AG.

That began to change in February when prices seemed to stabilize and frozen credit and equity markets opened up. The $8 billion in stock issued in the first three months of 2015 is the highest of any quarter in more than a decade. If the pace continues, sales of new equity would surpass the total of 2008 and 2009 combined, the last time oil prices crashed, according to data compiled by Bloomberg.

The surge in equity offerings, even with the dilution of existing shareholders, now is widely considered the lesser of evils versus expensive borrowing or asset sales at reduced prices, said Troy Eckard, whose Eckard Global LLC owns stakes in more than 260 North Dakota shale wells.

This is the flexibility of the capitalist system.  For relatively new oil companies formed as the shale boom took off a few years ago, the ability to issue shares today provides a considerable lifeline now that they need it.  This will disappoint countries which are primarily oil producers because the majority of private sector shale oil firms are not about to disappear as quickly as many sprang to life. Some will merge and all will rely on technology to increase their efficiency.  Shale drillers are here to stay, for so long as we need crude oil.  

“U.K. stocks have had a strong rise given the headwinds,” Richard Hunter, head of equities at Hargreaves Lansdown Plc in London, said by phone. “Mining, oil and bank stocks make up a big part of the index, and we all know the difficult time these three sectors have had. Despite that, the FTSE 100 has managed to make progress.”

It’s been a good week for the benchmark: Chancellor of the Exchequer George Osborne on Wednesday unveiled higher economic growth and lower deficit and unemployment forecasts along with help for the North Sea oil industry. The latter has helped Energy stocks trim declines spurred by a rout in oil and metals prices. Banking shares have been hurt by a series of scandals ranging from manipulation of interest-rate benchmarks to tax- evasion schemes.

Even with the FTSE 100 at a record, the advance in British equities this year is about a third that of gains in European peers, which was boosted by additional stimulus from the region’s central bank.

Clicking through the constituents of the FTSE-350 sector Indices section of the Chart Library, we can see that the UK stock market’s rally is well supported, It is also worth noting that the banking, resources and oil & gas sectors are no longer acting as headwinds, have all found at least near-term support this week. 

We are in the final stages of testing for the new filter system and hope to re-launch it soon. Perusing the results of this high/low filter for the FTSE-350 we can see that the majority have been trending for some time which highlights just how much of a brake the above sectors have represented for the UK stock market. 

In the table, the columns represent performance over 1 month, 3 months, 6 months, 12 months, 3-years and 5-years. It will only show data for when the respective share has hit a new high. Therefore at the top of the table you will see all the columns are filled because prices have hit new five-year highs while further down the list a share may only have hit a new 3-month high. 

China’s capital outflows concern may be tempered after the Fed’s comments, and the PBOC will likely become more flexible as worries about a weaker yuan ease, Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp., said in an interview.

China is in talks with the International Monetary Fund to include the yuan in the institution’s basket of reserve currencies, PBOC Deputy Governor Yi Gang said in Beijing on March 12. The currency will decline 0.22 percent the rest of this year to 6.21 a dollar at the end of 2015, according to the median estimate in a Bloomberg survey.

“The fundamentals are still bullish for the yuan with the government’s plan to make it a reserve currency,” said Scotiabank’s Tihanyi. The PBOC fixings also send a “strong signal” that the authorities favor a stable currency, he said.

 

The Renminbi can be viewed from a number of different perspectives. For some it represents how much of an advantage China has gained from devaluing its currency more than twenty years ago. For others it represents the challenges experienced by manufacturers as its value has increased over the last decade. For still others its stability is a totem for the increasingly vital role China plays in the global economy. 

The Chinese authorities have made clear they want to make the Renminbi as international as possible. Opening up the financial markets, encouraging competition, insisting on the currency being used as a medium of international trade and other measures are all designed to achieve this goal. As the largest Energy importer, the benefit of sourcing supply denominated in one’s domestic currency is obvious but for that goal to be reached the currency will have to be globally fungible which is not the case just yet. 

Asia (China, South Korea, Taiwan and India), in contrast, are net oil importers and benefit from falling Energy prices.  Furthermore, many of their largest companies export to the US and are thus helped by a strong dollar, which effectively makes their products cheaper for American buyers.  Thus, Asia ex-Japan is the only EM region with earnings and stocks near record highs, whereas Latin America and Eastern Europe remain well below peak levels.  Valuations in Asia ex-Japan remain near average levels, while we do not expect major currency depreciation among Asian nations, we think they are feeling pressure to weaken their exchange rates.  Therefore, while Asia ex-Japan is our favourite among EM, e prefer DM overall (especially on a currency-hedged basis).  

Well, there is a lot of concern about currencies but is it justified?  People like the US market, backed by the strong USD, but the S&P 500 is only up +1.97% so far this year.  In contrast, the Euro has been the weakest currency but the Euro Stoxx 50 is up +4.55% in USD since QE was announced by the ECB.  It is by no means an exception because the French CAC is +5.64%, German DAX +9.03%, Italian MIB +6.43%, Holland’s AEX +4.92% and Sweden’s OMX +5.53%, all in USD terms so far this year.  In the Asia-Pacific region, Japan’s Nikkei 225 is +11.63%, Australia’s ASX 200 + 4.14%, China’s Shanghai Comp +10.16%, Taiwan’s TAIEX +4.83%, South Korea’s KOSPI +4.94% and India’s SENSEX +5.65%, again all in USD this year.

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“David, what if a country produces more of a high quality product as a result of their own technological innovations and they can hardly store it anymore and you are not allowed to sell it on the international markets and your product has a superior quality and is sold at a considerable lower price than the lower quality product produce abroad what would you do? What if companies like GE, Pentair, Caterpillar etc suffer due to decreasing sales because of this and if US banks are occurring losses due to this law; what would you do? What if a lot of jobs are at stake? Apparently there was a meeting last Friday with the White House. Isn't this a great opportunity for President Obama to lift the export ban on WTI?  These are as you said before very interesting times. Maybe BP an RD wouldn't like it but the European autonomies and consumers would like it for sure. Maybe a nice trade, going long WTI and short Brent.”

Many thanks for a very interesting and topical email from The Netherlands, beautifully introduced to show the insanity of the policy to which you are referring.  My guess is that President Obama is not very interested in economic matters.  Moreover, he favours green Energy policies and mistrusts the oil industry, which is unlikely to have voted for him.  He certainly did not encourage fracking, which has been a godsend for the US economy.  More importantly, it is now the single most important factor in today’s much cheaper oil prices, which will help the global economy to recover over the next few years.

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The structure of global economic growth is once again undergoing a fundamental transition, shifting away from the prevailing model of China as the world’s factory and advanced economies as the drivers of consumer demand. In its place, a more heterogeneous, multipolar framework is emerging with both manufacturing and final consumption more broadly spread across the globe.

Whereas the Commodities Supercycle was characterized by rapid, synchronized global demand growth centered on the rise of China, we expect the coming decade to feature slower, more geographically diverse, less synchronized demand growth. The drivers of natural resources demand are spreading across the globe in new ways. For oil, demand growth should increasingly come from the Middle East. For coal, the same is true of India. Only in base metals does China’s predominance look to remain unchallenged. As a result, the traditional practice of analyzing commodities demand based on the US, China and Europe will become less relevant as the drivers of incremental demand come increasingly from the “Emerging 5”: India, ASEAN, the Middle East, Latin America and Africa.

However, no large emerging market is likely to rise up to the point where China has now come to a landing. The most cited potential successors, India and Brazil, are based on democratic institutions unlikely to provide the consensus required to sustain high fixed asset investment levels. Japan and Europe could do this from the 1950s through the 1970s due to the imperative of post-WWII reconstruction. The “Asian tigers” also succeeded, but under what were initially authoritarian systems.

I particularly agree with the first and last paragraph of this opening summary by Citi’s distinguished team of commodity analysts. 

I discussed part of this subject on 9^th March, in response to my opening article by Andrew Critchlow of The Telegraph: Miners Pray the Commodities Collapse Has Hit Rock-Bottom.  

Taking a somewhat longer-term view than Citi above, here is my initial reply from the 9^th:

Mining has always been the most cyclical of industries.  Nevertheless, this cycle has been longer for two main reasons: 1) The 2008 credit crisis has lengthened the global economic slowdown; 2) Accelerating technological innovation has made mining much more efficient. 

Consequently, the closest parallel for mining is with the oil and natural gas extraction industries.  However, they will learn more from mining because its bear market started earlier.  Fifteen to twenty years ago, and earlier still, the main fear was that the world was running out of these resources.  What we have learned is that technology can locate additional resources much more easily and enable us to extract them far more efficiently.  There is also a third factor in addition to the two mentioned in the paragraph above: 3) Technology has created new materials which will reduce demand for industrial resources.

Demand for crude oil and eventually natural gas will decline in decades ahead, as the efficiency with which solar Energy is produced continues to increase.  Similarly, demand for industrial metals will decline as they are replaced by graphene, ceramics and plastics. 

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Friedel offered a broad axiom: “The more innovative—the more breaking-the-mold—the innovation is, the less likely we are to figure out what it is really going to be used for.” Thus far, the only consumer products that incorporate graphene are tennis racquets and ink. But many scientists insist that its unusual properties will eventually lead to a breakthrough. According to Geim, the influx of money and researchers has speeded up the usual time line to practical usage. “We started with submicron flakes, barely seen even in an optical microscope,” he says. “I never imagined that by 2009, 2010, people would already be making square metres of this material. It’s extremely rapid progress.” He adds, “Once someone sees that there is a gold mine, then very heavy equipment starts to be applied from many different research areas. When people are thinking, we are quite inventive

Samsung, the Korea-based electronics giant, holds the greatest number of patents in graphene, but in recent years research institutions, not corporations, have been most active. A Korean university, which works with Samsung, is in first place among academic institutions. Two Chinese universities hold the second and third slots. In fourth place is Rice University, which has filed thirty-three patents in the past two years, almost all from a laboratory run by a professor named James Tour.

 

The intersection of graphene, solar innovation and concern for the environment suggest that the greatest application of the material will be in the Energy sector. The issue is that a number of issues with mass production and just getting graphene to perform as hoped remain to be solved. There is no reason to believe they will not be solved but the lead time to getting marketable products and earnings is an unknowable. 

Consider the crash effort at the Joint Center for Energy Storage Research in suburban Chicago. Within five years, researchers want to create one or more battery types that can “store at least five times more Energy than today’s batteries at one-fifth the cost,” according to George Crabtree, an agreeable silver-haired scientist who runs the U.S. Energy Department-backed battery-research skunk works.

Harvard University, the Massachusetts Institute of Technology, leading-edge technology companies like Elon Musk’s Tesla Motors Inc. and scads of startups are getting into the act. Some are seeking to double the capacity and dramatically cut the costs of the lithium-ion battery, the standard in iPhones and electric vehicles. Others are working on mega-scale battery systems using novel chemistries that could cheaply store enough Energy to help power entire cities.

Battery entrepreneurs have begun to even talk like revolutionaries. “The ability for a battery company to change the dynamics of the world is what has got us excited,” says Bill Watkins, chief executive officer of Imergy Power Systems Inc., a Fremont, California, startup working on utility-scale batteries. “We can actually make a big difference here. I call it democratizing Energy.”

As the former CEO of Seagate Technology Plc, the Silicon Valley digital storage maker, Watkins can speak from experience about tectonic technology shifts. In 1980, a Seagate five- megabyte hard drive that rendered floppy disks obsolete was a $1,500 PC add on. These days, drives holding two terabytes of data -- equivalent to two million megabytes --  can be had for a retail price of under $200.

What’s primarily driving the battery revolution is the phenomenal growth of rooftop and other forms of solar Energy and an awakening by renewable Energy advocates that storage is the lagging piece of the transformative puzzle. Solar now powers the equivalent of 3.5 million American homes and accounted for 34 percent of all newly installed electricity capacity last year.

Wind supplies enough electricity for the equivalent of about 14.7 million U.S. homes, about the same as 52 coal-powered generating plants, according to the Wind Energy Foundation.
An exponential breakthrough in battery capacity and cost would bulldoze the limitations to adopting renewable Energy on a massive scale, be a potent weapon to fight climate change by lowering carbon emissions and potentially bring billions of dollars in profits, never mind fame, to the winners. The knock on renewables is that while fossil fuels keep the power on all the time, solar fades when the sun doesn’t shine and wind power fizzles when the wind doesn’t blow – unless you have a way to store the excess for when you need it.

“What’s holding back solar and wind isn’t their availability but the fact that the technology to generate renewable Energy has lept far ahead of the capacity to store and deploy it round the clock as needed,” says Crabtree of the Joint Center project, which is run out of the federal Argonne National Laboratory.

Prophesies of Energy revolutions always come with caveats, of course, and some researchers note that an exponential breakthrough in battery storage and cost has been forecast for more than a decade and still hasn’t arrived. “Of all these other battery technologies people promote, how many of them are real?” says Jeff Dahn, a professor at Dalhousie University in Nova Scotia who continues to plug away at making stronger and cheaper lithium-ion batteries. “All that remains to be seen.”

 

When we first started writing about the massive investments in battery technology as early as 2010 there was a great deal of enthusiasm about how batteries were going to make the case for renewable Energy more compelling than ever. However, the difficulty of innovating in the chemical sector and the lead time in bringing new methodologies to market was underestimated. 

European natural gas prices have been falling during the past year, largely due to the drop in global oil prices. Most natural gas contracts in Europe have their delivered price tied to indices that reflect the level of and changes in crude oil prices. January’s delivered gas price has declined 5.9% from December’s $9.83 per million British thermal units (Btus). Versus a year ago, the delivered gas price has fallen by 20.2% to the January price of $9.25/mmBtus from $11.59/mmBtus. In response to the arrival of more LNG supplies into Europe, Gazprom has reduced its price demands slightly while also improving the financing and delivery terms.

The fact that Statoil and Lithuania have been negotiating the recently announced LNG contract for 4-6 months signifies that the huge competitive advantage U.S. LNG exporters anticipated when they started filing for permits to build the new export terminals has slowly dissipated. Lower crude oil prices have dragged down oil-linked LNG pricing terms in Asia and Europe, even as U.S. natural gas prices remain entrenched in a trading range below $3 per thousand cubic feet (Mcf). U.S. LNG exporters fully anticipate that domestic gas prices will remain below $4/Mcf giving them a significant cost advantage when delivering LNG into the Asian and European markets, but that was when Asian and European LNG prices were in the double digits, and in some cases the high double digits. Continued weak economic activity in these regions is further contributing to the narrowing of the gas price gap between delivered LNG prices in those markets and U.S. natural gas prices.

The arrival of additional supply, especially from the four new Australian export facilities just beginning to ship gas, is compounding the downward pressure on global LNG prices. As U.S. export terminals begin to near service, the pressure to secure markets for surplus U.S. natural gas will force shippers to seek the best deals available. As noted in the Statoil/Lithuania LNG deal, the contract terms are non-binding, suggesting that Lithuania will be looking for even better terms in future contracts. As reported, Lithuania has already signed an additional 16 non-binding agreements with companies that currently supply about half the world’s LNG. Does this suggest Europe will become a highly competitive LNG market with buyers playing one supplier against another? If so, it could mean the owners of the new North American LNG export terminals may regret their decisions to build them.

 

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Europe has a laundry list of issues that have retarded growth not least public policy and labour inflexibility. The cost of Energy is another that has been a major headwind but the changing landscape of the market is removing that as an obstacle. Europe has a well- developed natural gas pipeline structure and has the capacity to receive shipments from just about anywhere. The changing Energy environment is not particularly good news for companies that have invested heavily in US export potential but the existence of this infrastructure represents a bonus for the global economy because supply will be plentiful. A great deal of LNG capacity will reach the global market in the next year or two. This couldn’t be better news for the global economy since it will reduce some of the demand for oil. 

Since it seems the longer end of the 12-month forward Brent curve is anchoring up at around 66-68 $/b and we see limited upside for that part of the Brent price curve in the coming couple of months, we believe it will have to be mainly the spot Brent price that will have to do the job of creating the expanding contango required to incentivize the traders to continue to buy crude oil. Since global demand for crude oil will probably continue to drop seasonally until May, we believe the turning point for crude buying for crude processing (and not for storage) will be late April or early May. From then on and into late summer we should see more demand for crude oil as global refineries are ramping up their runs.
 
This will remove the worry of continuous crude stock builds as the market turns to build products instead (where stock levels are much lower). The acid test for the global oil market will then be what happens to global refinery margins when throughput is ramping up after May. Will oil consumption then be strong enough to withstand all the extra supply of products? That question can however be put aside for later reports closer to the summer. Before that, we believe in a bearish couple of months for the Brent price.

We do not subscribe to the view that Brent will fall into the 30’s, which we have seen advocated by several other analysts the past month or so. If the one-year ahead Brent price has an anchor in the 66-68 $/b range is should not be possible for the front of the market to drop much lower than the low 50’s because then it will pay of to store crude on ships and traders will be willing to buy the crude.

 

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

The collapse in oil prices over the last year helps to hammer home the conclusion that the bull market in oil prices is over. It is open to question whether we have already seen the peak in oil demand but if not we are a lot closer to that event that we were a decade ago. The evolution of competing sources of Energy is occurring so rapidly that the risk of oil shares disappointing over the medium to long-term has increased fairly substantially. 

“Dear David, I was interviewed by Forbes Magazine following my presentation on the Third Industrial Revolution last week at the Markets Now evening. The interview was published yesterday and it is available at this link.

“It provides a summary of the main factors that drive industrial revolutions, which I covered in the first part of my talk. Subscribers who could not attend Markets Now last week may be interested in this summary - which is much shorter than my 2 hour presentation! However, the Forbes article does not cover the investment opportunities which were of course the most important part of the talk. Those are available to subscribers on the slides you posted.”

Many thanks for this email and the link to your excellent interview with Forbes Magazine.  A small number of fortunate subscribers were mesmerised by your presentation and Q&A session at the last Markets Now, and many more saw your presentation, posted here last Wednesday.  The Forbes article, partially reproduced below, will generate considerable interest, as will your next presentation at Markets Now on an entirely different topic of considerable interest.  

de Vasconcelos: So what will the Third Industrial Revolution impact the most?

Brown: Eventually everything, but the early movers have been USA-led computing, IT, internet companies and social media sites, which have grown to global behemoths faster than ever in history. These in turn have driven biotechnology as the genome at last begins to impact. Both went through a hype phase in the 1990s, then a bust, then the real winners emerged. That is a typical pattern over the initial 15-20 years of a breakthrough technology. Solar power has been driven mainly by Germany and more recently China, though the USA is catching up fast. Current solar systems have only 10-20% efficiency in sunlight capture but new materials will take this into the 50-100% range very soon now. And battery storage technology is advancing rapidly.  Additive manufacturing (aka 3D printing) will replace our old material and Energy-wasteful methods. Robotics is beginning to spread out of factories with Japan, Germany and China leading the charge, though expect the USA to catch up and contribute to innovation. Nanotechnology will mature in the 2020s. The Internet-of-Things is a few years away, and it will probably drive the next phase of healthcare advances, but needs more stable internet, better security and cheaper components before it can take off. And machine learning /AI will be a game-changer for humanity, beginning to impact within the next decade. The new finance is now appearing through Africa-led mPesa, followed by Google GOOGL +0.55%-wallet and Apple-pay etc. The US internet giants are registering as banks, they have very cheap infrastructure and billion-size customer bases and are likely to challenge patriarchs of the current financial system. There is much innovation in finance in the UK too. We see positive deflation all over the world as a result of these lower-cost and more-efficient solutions to human needs.

de Vasconcelos: So where are we in the Third Industrial Revolution?

Brown: Industrial revolutions take decades to play out. We have barely started in this one. Remember that the first and second Industrial Revolutions involved only Western Europe and its off-shoots, whereas this one is truly global. And online education is available to everyone for the first time ever. OECD projections indicate the world will become about 10 times wealthier during this century, and these advances certainly support their case. Exciting times!

David Brown is assessing the current economic outlook in the context of two previous industrial revolutions.  Moreover, the panoply above is certainly no less exciting or revolutionary than anything else that has occurred throughout human history, and it is occurring at a much more rapid pace.  

This item continues in the Subscribers’ Area. 

Neuromorphic technology
Computer chips that mimic the human brain

Even today's best supercomputers cannot rival the sophistication of the human brain. Computers are linear, moving data back and forth between memory chips and a central processor over a high-speed backbone. The brain, on the other hand, is fully interconnected, with logic and memory intimately cross-linked at billions of times the density and diversity of that found in a modern computer. Neuromorphic chips aim to process information in a fundamentally different way from traditional hardware, mimicking the brain's architecture to deliver a huge increase in a computer's thinking and responding power.

Miniaturization has delivered massive increases in conventional computing power over the years, but the bottleneck of shifting data continuously between stored memory and central processors uses large amounts of Energy and creates unwanted heat, limiting further improvements. In contrast, neuromorphic chips can be more Energy efficient and powerful, combining data-storage and data-processing components into the same interconnected modules. In this sense, the system copies the networked neurons that, in their billions, make up the human brain.

Neuromorphic technology will be the next stage in powerful computing, enabling vastly more rapid processing of data and a better capacity for machine learning. IBM's million-neuron TrueNorth chip, revealed in prototype in August 2014, has a power efficiency for certain tasks that is hundreds of times superior to a conventional CPU (central processing unit), and more comparable for the first time to the human cortex. With vastly more computing power available for far less Energy and volume, neuromorphic chips should allow more intelligent small-scale machines to drive the next stage in miniaturization and artificial intelligence.

Potential applications include: drones better able to process and respond to visual cues, much more powerful and intelligent cameras and smartphones, and data-crunching on a scale that may help unlock the secrets of financial markets or climate forecasting. Computers will be able to anticipate and learn, rather than merely respond in preprogrammed ways.

IBM was a major contributor to the above article and as a result it mentions a number of areas where the company has a competitive advantage. We have all marvelled at the ability of its Watson program to compete against humans in real life tests of mental agility and at the company’s continued ability to develop cutting edge technology. However there has been a gap between development and delivery that has resulted in a lacklustre performance.

The U.S. Securities and Exchange Commission requires drillers to calculate the value of their oil reserves every year using average prices from the first trading days in each of the previous 12 months. Because oil didn’t start its freefall to about $45 till after the OPEC meeting in late November, companies in their latest regulatory filings used $95 a barrel to figure out how much oil they could profitably produce and what it’s worth. Of the 12 days that went into the fourth-quarter average, crude was above $90 a barrel on 10 of them.

So Continental Resources Inc., led by billionaire Harold Hamm, reported last month that the present value of its oil and gas operations increased 13 percent last year to $22.8 billion. For Devon Energy Corp., a pioneer of hydraulic fracturing, it jumped 31 percent to $27.9 billion.

This year tells a different story. The average price on the first trading days of January, February and March was $51.28 a barrel. That means a lot of pain -- and writedowns -- are in store when drillers’ first-quarter numbers are announced in April and May.

“It has postponed the reckoning,” said Julie Hilt Hannink, head of Energy research at New York-based CFRA, an accounting adviser.

Oil prices have bounced from their January lows but nowhere near enough to alter the average pricing for the year to date.  In fact since the pace of the short-term advance has moderated there is an increasing possibility that the short covering rally is over. This opens up potential for a retest of the low. If oil follows anything like the path natural gas took following its 2008 crash, prices could range for a prolonged period. Such an environment would require some major adjustments by the drilling sector.
 

As the company’s first foray into selling directly to the home Energy storage market, the batteries are expected to get plenty of attention just by virtue of the attached Tesla label. And it should be an improvement from the home batteries Tesla has been quietly supplying to its sister company, the solar panel maker SolarCity, located up the road from Tesla in San Mateo, California. Those batteries are currently available in select markets within California, and only through SolarCity. The new batteries would be more widely available.

Tesla would face plenty of competition for their batteries, with names like Bosch, GE and Samsung involved. Honda has unveiled a demonstration smart home that features a rechargeable home battery, along with an electric vehicle, solar panels and geothermal heat pump, and is driven by an Energy management system.

Researchers from both Harvard and MIT have developed flow batteries for renewable Energy storage, while Bloom Energy’s fuel cell boxes act as a power source as well as an Energy storage device.

One area where Tesla might stand out is in cost. Tesla assembles its battery packs from battery cells provided by Panasonic, and is about to do it on a massive scale as soon as 2016 at its gigafactory currently under construction in Nevada. Such an economy of scale – producing 50 gigawatt-hours of battery capacity each year – is expected to push the company’s car battery costs down by 30 percent. Based on the same technology, Tesla's home battery costs should come down as well.

 

The same efficiency gains observed in how Moore’s Law is applied to semiconductors can also be seen in solar technology. This has changed how companies perceive the growth of the domestic Energy production sector. This requires a much more flexible electric grid and a utility sector that will have to evolve if it is to avoid obsolescence. As the potential to cut one’s personal expenses through the application of technology develop, homebuilders will be happy to see that the benefits of owning a new home equipped with the wide range of modern gadgetry is becoming increasingly convincing. 

A contributing factor for the weak economic activity in recent years has been countries holding the line on their currencies. That attitude may be changing, which could be good news for Energy demand as currency devaluations are designed to pump up economies. According to a study written by economic historian Barry Eichengreen of the University of California, Berkeley, the countries that were the first to engage in monetary easing, in this case the break with the gold standard, recovered the fastest. In 1931, it was Britain that broke from the gold standard first and the first nation to recover. Today, we are relearning this history.

Since the U.S. was the first country to engage in massive monetary easing in 2008, our economy was the first to recover. As counted by investment bank Evercore ISI, there have been some 514 monetary easing moves by central banks over the past three years. According to Morgan Stanley’s (MS-NYSE) global strategists, there are now 12 central banks around the globe that have recently moved to ease their monetary policies. As this was happening, U.S. monetary authorities are discussing increasing interest rates and in effect becoming the recipient of deflationary pressures driven out by those countries easing their monetary policies. Because China has tied its currency to that of the United States, it will also receive deflation.

The prospect of raising interest rates in the U.S. has led to a strengthening of the dollar, which has been a contributing factor to the fall in oil prices and other commodity prices. As pointed out by the Morgan Stanley analysts, not everyone can be a winner in the currency wars. Therefore, there will be one or more losers, with the U.S. and China on the short end of the stick right now. Given the recent weakening statistics in retail sales, home building and now certain regional manufacturing data in the U.S., one wonders whether the Federal Reserve will not hike interest rates this year as broadly expected. We are also seeing moves by the Chinese government to ease its monetary policy to help bolster its local and regional governments and their banks to offset the flow of currency out of the country. Being tied to the U.S. dollar, the renmimbi has had an upward bias as the dollar has strengthened. That trend induced Chinese companies to borrow outside of the country expecting to be able to pay off the loans with cheaper local currency. Now, the renmimbi continues to weaken within a very tight band in response to the currency outflows. China monetary authorities struggle with whether to weaken its currency and stimulate economic growth, but that move runs the risk of leading to an increase in corporate bankruptcies. Is it possible that we could soon see every country engaged in monetary easing trying to promote its own economic self-interest? What would that mean for future Energy demand and oil prices?

 

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

Japan’s decision to embark on broad based monetary easing in order to kick start inflation in its economy was the catalyst for the competitive devaluation we now see just about everywhere. Various international currency agreements such as Bretton Woods I and II or the Plaza Accord eventually run their course and a rebalancing occurs as one country or another seeks an advantage. Eventually the process is taken to extremes, which creates the conditions necessary to encourage governments to agree to support multilateral intervention. We are still a long way from such a move. 

There are American political leaders in both parties who talk about having an “all of the above” Energy policy, implying that they want to build everything, all at once. But they don’t mean it, at least not really. In this country, we don’t need all of the above—virtually every American has access to electric power. We don’t want it—we have largely stopped building coal as well as nuclear plants, even though we could. And we don’t underwrite it—the public is generally opposed to the government being in the business of Energy research, development, and demonstration (aka, RD&D).

In China, when they talk of “all of the above,” they do mean it. With hundreds of millions of Chinese living without electricity and a billion more demanding ever-increasing amounts of power, China is funding, building, and running every power project that they possibly can. This includes the nuclear sector, where they have about 29 big new light water reactors under construction. China is particularly keen on finding non-emitting forms of electricity, both to address climate change and, more urgently for them, to help slow the emissions of the conventional pollutants that are choking their cities in smog and literally killing their citizens.

Since (for better or for worse) China isn’t hung up on safety regulation, and there is zero threat of legal challenge to nuclear projects, plans can be realized much more quickly than in the West. That means that there are not only dozens of light water reactor plants going up in China, but also a lot of work on experimental reactors with advanced nuclear designs—like those being developed by General Atomic and TerraPower.

There are exciting things happening in the nuclear sector at present as technology catches up with the early aspirations of the industry in the decade following World War II. However, while computer modelling and mathematical work is relatively cheap, building test reactors and overcoming the necessary regulatory hurdles is expensive and beyond the scope of the even the best funded start up. 

The reality is that with cheap oil and gas the USA just does not have the incentive to drive the next stage of nuclear research. China and India need the technology. The pace with which they are polluting their cities is unsustainable and represents a growing headwind to the development of the services and knowledge based economies that will further their development goals. As a result they have a great incentive to explore any technology that can deliver a semblance of Energy independence.