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February 22 2018

Commentary by Eoin Treacy

The lithium ion battery and the eV Market

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

Eoin Treacy's view -

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

Battery chemistry is complicated and the rate at which Energy density doubles is about every five years. That’s quite a bit slower than the 18-month pace of doubling of efficiency seen in the semiconductors sector on which Moore’s Law is based. 



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February 21 2018

Commentary by Eoin Treacy

Musings from the Oil Patch February 20th 2018

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

The attacks on the oil and gas industry in the U.S. for its methane emissions have been based on reports and estimates of the volume of leaks from its drilling and transportation activities.  Fighting these leaks is in the companies’ best interests because it will help the bottom lines as less natural gas will be lost to the atmosphere and income will be enhanced.  Fixing the leaks on their own is also a way the oil and gas industry can hope to stave off further debilitating regulations.  Now, however, the industry is hopeful of an easing of the methane containment rules for companies drilling and producing natural gas from federal lands by the Trump administration.  

 

While the discussion about methane leak control for the oil and gas industry is dominating the headlines, there remains a huge untapped source of natural gas in the form of methane hydrates under the ocean that some governments are working to exploit.  These hydrates are where molecules of methane gas are entrapped within an ice lattice.  They form under very low temperatures or high pressures, or a combination of the two.  They are usually found on the outer continental shelves around the world.  (They have been found in the pink areas of the global map in Exhibit 18.)  The challenge is that they have been difficult (risky) to mine, as well as costly.  They have the potential to blow up any vessel attempting to extract the hydrates from the sea floor.  The U.S. Bureau of Ocean Energy Management (BOEM) estimates that the U.S. has 51,338 trillion cubic feet of methane hydrate gas resources.  If only half of BOEM’s estimate is realized, there are 1,000 years of supply based on the current consumption rate of natural gas in the United States.

 

Last year, China, a country with significant needs for more natural gas but lacking success in finding and developing meaningful reserves, has been experimenting with tapping methane hydrates.  The country’s focus is on hydrates situated in the South China Sea, which helps explain China’s attempt to claim territorial rights to that area of the Pacific Ocean.  At the same time, Japan, another nation lacking adequate Energy resources, has successfully extracted methane hydrates from an area offshore the Shima Peninsula.  The implications of successful development of methane hydrate mining by either or both countries would be significant for the future of the global liquefied natural gas (LNG) business.

Eoin Treacy's view -

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

If one were looking for a single reason China is so interested in claiming the South China Sea, then methane hydrates are probably the answer. The existence of such vast resources is no secret. Just like shale oil and gas, geologists have known about methane hydrates for years. However, they have been largely irrelevant to the Energy sector because of the cost of production. 



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February 16 2018

Commentary by Eoin Treacy

Worldwide Threat Assessment of the US Intelligence Community

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

Continued global space industry expansion will further extend space-enabled capabilities and space situational awareness to nation-state, nonstate, and commercial space actors in the coming years, enabled by the increased availability of technology, private-sector investment, and growing international partnerships for shared production and operation. All actors will increasingly have access to space-derived information services, such as imagery, weather, communications, and positioning, navigation, and timing for intelligence, military, scientific, or business purposes. Foreign countries—particularly China and Russia—will continue to expand their space-based reconnaissance, communications, and navigation systems in terms of the numbers of satellites, the breadth of their capability, and the applications for use.

Both Russia and China continue to pursue antisatellite (ASAT) weapons as a means to reduce US and allied military effectiveness. Russia and China aim to have nondestructive and destructive counterspace weapons available for use during a potential future conflict. We assess that, if a future conflict were to occur involving Russia or China, either country would justify attacks against US and allied satellites as necessary to offset any perceived US military advantage derived from military, civil, or commercial space systems. Military reforms in both countries in the past few years indicate an increased focus on establishing operational forces designed to integrate attacks against space systems and services with military operations in other domains.

Russian and Chinese destructive ASAT weapons probably will reach initial operational capability in the next few years. China’s PLA has formed military units and begun initial operational training with counterspace capabilities that it has been developing, such as ground-launched ASAT missiles. Russia probably has a similar class of system in development. Both countries are also advancing directed-Energy weapons technologies for the purpose of fielding ASAT weapons that could blind or damage sensitive space-based optical sensors, such as those used for remote sensing or missile defense.

Of particular concern, Russia and China continue to launch “experimental” satellites that conduct sophisticated on-orbit activities, at least some of which are intended to advance counterspace capabilities. Some technologies with peaceful applications—such as satellite inspection, refueling, and repair—can also be used against adversary spacecraft.

Eoin Treacy's view -

Satellites represent key pieces of military infrastructure without which many advanced pieces of modern military equipment do not work.  Therefore, it is inevitable that space become a theatre in any future conflagration. 



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February 07 2018

Commentary by Eoin Treacy

Musings from the Oil Patch February 6th 2018

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

Eoin Treacy's view -

If Asia and indeed Africa follow the trend of Energy usage in the OECD then it is logical to expect more gas fired power generation and more gas used for cooking. At the same time the evolution of the electric vehicle represents a growing challenge for gasoline demand over the medium-term. At the same time electricity demand is likely to trend higher and gas will play a part in the Energy mix along with renewables, batteries, nuclear and coal. These are medium to long-term considerations which Energy executives will need to come to terms with but what about right now?



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January 31 2018

Commentary by Eoin Treacy

Interview with Nobuo Tanaka, Chairman, Sasakawa Peace Foundation

Thanks to a subscriber for this interview with a former executive director at the IEA. Here is a section:

Some countries are saying they can depend 100% on renewables. That may be possible in small countries - but for sake of security we need alternatives and backup supply. This is true even with advances in battery technology and the fact that today more than 50% of capacity growth is now coming from renewables - so this is clearly the future. Costs are declining and they are able to provide a decentralized source of electricity, and even in Japan nuclear is becoming much more costly than renewables and power companies need to do a much better job integrating decentralized renewable generation into their system and their role can be much larger than before. Before the problem was costs were very high for renewables, not only in terms of production but also in terms of management and integration - so dealing with the large-scale generation that comes from nuclear and other major facilities was preferred. Today, however, advances in digitalization and information technology makes it more feasible to manage decentralized and more numerous facilities. Electric vehicles are also coming and all of these changes make renewables far more probable.

This is exactly what China is aiming at and they are moving to become major providers of clean power for electric vehicles, digitalization and other purposes. Bottom line - the price of electricity is key for national competitiveness. China today has one of the cheapest sources of electricity in the world and Japan one of the highest. How can we compete? It is impossible. We import gas at twice the price of US so we need to use cheaper renewables with integrated decentralized system to bring costs down. That is unavoidable and we must act as soon as possible.

Eoin Treacy's view -

National security and global competitiveness are two sides of the same coin for many countries but this is most especially the case in terms of Energy security. For nations heavily dependent on imported oil and gas, nuclear was, previously, an attractive answer to the question of how their economy might survive commodity price volatility. However, with the increasing efficiency of renewables the outlook is changing because with solar, wind and geothermal more countries than ever have a real chance to become Energy independent. 



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January 31 2018

Commentary by Eoin Treacy

Shale Sends U.S. Output Past Historic 10 Million-Barrel Mark

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

 

U.S. oil production surged above 10 million barrels a day for the first time in four decades, another marker of a profound shift in global crude markets.

The milestone comes weeks after the International Energy Agency said the U.S. is poised for "explosive" growth in oil output that would push it past Saudi Arabia and Russia this year. New drilling and production techniques have opened up billions of barrels of recoverable U.S. oil in shale rock formations in the past 10 years, reversing decades of declining output and turning the nation into an exporter.

The news also comes after the Organization of Petroleum Exporting Countries decided last year to extend an agreement with several non-OPEC members to curb output in response to a global supply glut fed in part by shale. That agreement was finally showing signs of working, with prices emerging from a three-year downturn. After falling near $26 a barrel in 2016, the global benchmark oil price climbed above $70 a barrel in January, and the U.S. price is following suit. Yet, increasing output from the U.S. may threaten rising price.

“You are starting to see a little bit of a shift in market sentiment on oil given the fact that production is really starting to ramp up,” Joseph Bozoyan, a portfolio manager at Manulife Asset Management LLC in Boston, said by telephone.

“These U.S. production numbers are starting to take the wind out of the sails of the crude oil market.”

Eoin Treacy's view -

The USA is the world’s most important swing producer because its production figures are market driven rather than being forced to fund government vanity projects or social programs. The fact it is now the world’s largest producer and exporting both oil and gas is further evidence of its increasing influence on the global market and also helps to explain why the USA is no longer as concerned with ensuring the status quo in the Middle East. 



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January 19 2018

Commentary by Eoin Treacy

Speculation Grows That OPEC Will End Cuts Early as Prices Rise

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

"I don’t think the deal per se will end" as inventories near the five-year average, said Bjarne Schieldrop, chief commodity analyst at SEB AB. The Declaration of Cooperation -- the 2016 accord that first established the group of 24 oil producers-- will still stand, but be modified to allow for production cuts to gradually unwind from mid-2018, he said.

Giovanni Staunovo, commodity analyst at UBS Group AG, expects a similar outcome. Citigroup Inc., whose data show that global oil stockpiles are already back in line with the five- year average, predicts a summer agreement to ramp up production.

The oil producers themselves say they’re sticking to the plan. While Russia’s Energy Minister Alexander Novak told reporters on Jan. 12 that the meeting in Oman could include discussion of mechanisms for gradually exiting the cuts, four days later he affirmed that the pact should continue. Ministers from the United Arab Emirates, Iraq and Kuwait also insisted there’s no need to change tack.

Eoin Treacy's view -

Sometimes it is imperative to keep an eye on the price action. Over the course of the last few days I’ve seen one headline after another reporting the ‘collapse’ in oil prices or the major reversal seen from the intraday peak. I’m reminded of Mark Twain’s quip “the report my death was an exaggeration.” 



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January 18 2018

Commentary by Eoin Treacy

Fed Is Targeting the Wrong Inflation

This article by Danielle DiMartino Booth rhymes with my view that inflation is understated in the official statistics. Here is a section: 

Consumers are increasingly asking: Is this a need or a want? A discernible gap between the rate of price increases for necessities and the one for discretionary purchases is putting the Federal Reserve’s tightening path at risk of veering off course.

Making matters more difficult, the Fed’s preferred inflation gauge does a pitiful job of capturing the quandary facing many households that live paycheck to paycheck. The so- called core PCE is the central bank's go-to inflation metric. It is derived by netting out the necessities of food and Energy from personal consumption expenditures. But the core PCE also minimizes the weight of rent and over-emphasizes health care due to Medicaid and Medicare’s inputs.

Classify the following items within the core PCE as necessities and then track them as an aggregate using what we can call the Household Budget Inflation Gauge. Included are food and nonalcoholic beverages, fuels, clothing, housing, utilities, health care, health insurance, homeowners’ insurance, auto insurance, higher education and the phone, utility and internet bills. As of the latest reading, these costs are rising at a 2 percent rate compared with last year.

Now throw all of the rest of the discretionary items into what we can call the Household Wish List Inflation Gauge and you will see that these items’ prices have been rising at a pace of 1.5 percent.

Yet if you insist on comingling these baskets and then throwing out food and Energy, you will by flying as blindly as the most dovish members of the Federal Open Market Committee.

Eoin Treacy's view -

The triumph of the subscription model means that there is an increasing number of calls on income that did not exist a decade ago. Only today my iPhone told me I needed to upgrade my iCloud storage. Netflix is now a staple for many households, Amazon Prime has hundreds of millions of subscribers. Microsoft has also successfully transitioned to a subscription model with Office 365. 



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January 08 2018

Commentary by Eoin Treacy

$900M Australian rare earths mine given state approval

This article by Andrew Topf for Mining.com may be of interest to subscribers. Here is a section:

The company is also looking at a joint venture with OCI Company Ltd. to build a separation plant in South Korea.

According to Arafura the Nolans Bore rare earths-phosphate deposit is "one of the largest and most intensively explored deposits of its kind in the world." The deposit contains a JORC-compliant mineral resource of 56 million tonnes at an average grade of 2.6% TREO that extends to 215 metres below the surface. Two-thirds of the contained rare earths are in the measured and indicated category.

Arafura estimates the project would create an investment of about $900 million in Central Australia, as well as 250 to 300 permanent jobs.

An environmental approval from the Australian government and a final approval from the state government still need to be obtained.

The mine could supply up to 10% of world demand for neodymium and praseodymium, used in the manufacture of magnets for wind turbines, and electric vehicles.

Eoin Treacy's view -

Rare earth metals represent vital parts of the evolving technology sector and not least for renewable Energy, batteries, defence and computing. Since China dominates the sector and has already demonstrated it is willing to use its position as both a geopolitical and economic tool, there are solid arguments for developing more varied sources of supply. 



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January 03 2018

Commentary by Eoin Treacy

Commodities Roiled as Arctic Blast Takes Hold

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

Prices for the heating fuel rose to the highest in a month as the U.S. burned the most natural gas ever on Monday, breaking a record set during the so-called polar vortex that blanketed the nation’s eastern half with arctic air in 2014, Bloomberg News reports. America consumed 143 billion cubic feet of gas as temperatures dipped to all-time lows on New Year’s Day, topping the previous high of 142 billion from four years ago, data from PointLogic Energy show. Ice in the Hudson River delayed fuel-barge deliveries, as the government warned of a home heating-fuel shortage from the East Coast to Texas. Natural gas prices have jumped 19 percent from a 10-month low on Dec. 21. U.S. retail diesel prices averaged $2.87 a gallon on New Year’s Day, the most since June 2015, according to AAA.
 

Eoin Treacy's view -

I drove up to Big Bear Lake Tuesday afternoon and there is no sign of the cold wracking other parts of the USA. Talk around town is much more about global warming and the shortening season because of the lack of snow. We took ski lessons this morning which is responsible for the late posting of Comment of the Day and the Subscriber’s audio for which I apologise.  



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December 21 2017

Commentary by Eoin Treacy

Financial Markets in 2018: The Times They Are A Changing

Thanks to a subscriber for this article by Pamela Rosenau for Forbes which may be of interest. Here is a section: 

As correlations among stocks and other assets classes break down, there will be a significant divergence in the performance of “quality” assets versus “junk” assets.  A prudent money manager should be prepared for this market shift by focusing on shorter duration assets, which goes for both credit and equities.  I expect longer duration equities, such as growth stocks with lower near-term earnings to underperform more value oriented stocks such as consumer staples, telecom, and Energy sectors, on which I have focused.  Today’s market appears to be the inverse image to the early 1980s.  Back then, investors were misled into hiding out in cash as stocks were perceived as too expensive in a high interest rate environment.  Today, very few hold cash as stocks appear cheap relative to low bond yields.  This is a backward looking strategy derived from a relative value argument that is no longer operable.  I suggest more than a little risk aversion, as I have maintained, would be prudent in times like this.  As I have often said -- preserving capital is paramount, not winning friends. 

Eoin Treacy's view -

Money has been pouring into ETFs over the last couple of years which is a testament to the success of the low fee argument, against a background where the success of momentum strategies has reduced the allure of stock picking. The success of the ETF business has contributed to the consistency of the trends evident on the primary Wall Street indices and the low volatility condition that has prevailed over the last six months in particular. 



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December 19 2017

Commentary by Eoin Treacy

Musings From the Oil Patch December 18th 2017

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

A section from this report is posted in the Subscriber's Area. 

Eoin Treacy's view -

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

Autonomous vehicles represent as much of a gamechanger for the Energy sector as unconventional oil and gas did a decade ago. No one knows whether it will be 2030 or 2040 when they become ubiquitous but the important point about artificial intelligence is that it only needs to learn a lesson once. It might take millions of lines of code and an equal number of pictures to teach a computer a lesson but the work only needs to be done once. By contrast, every human needs to learn to drive on an individual basis and the Pareto Principle dictates that most of us are not particularly good at it. 



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December 19 2017

Commentary by Eoin Treacy

Sugar industry likely to see record global production of 192m tonnes

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

According to Informa's Agribusiness Intelligence, an industry research and analysis firm, the biggest driver behind the record output this year will be the European Union, India and Thailand.

Despite this, sugar cane diversion to ethanol production in Brazil means global prices will remain high as the country will produce less sugar in 2018-19.

Agribusiness Intelligence said that in October, for the first time in more than a year, there was a year-on-year increase in local sales of ethanol of 11% in Brazil. This accelerated to a plus of 16% in the first half of November.

"The most important reasons for the attractiveness of ethanol versus sugar are: the relatively high price of gasoline at the pump, an advantageous tax structure, recovering fuel demand as the Brazilian economy is moving out of recession and the low sugar price."

Meanwhile, within the EU, the market is still responding to the scrapping of production quotas for sugar refined from sugar beet, which is creating a huge jump in production. In the EU, 20 million tonnes of sugar will be produced by the end of 2017-18 which is an increase of 3 million tonnes compared to the previous year.

"This growing trend has not been supported by domestic consumption which has been declining in the EU steadily over the last few years. This will have a direct impact on the trade balance of EU countries, with imports declining and exports could double to as much as 4 million tonnes by the end of 2017-18," the analysis firm added.

Eoin Treacy's view -

Synchronised global growth helps to boost demand for all commodities but Energy is particularly affected since OPEC is attempting to curtail supply. That is helping Brent Crude prices hold above the $60 area. Meanwhile it improves the allure of producing ethanol for Brazil because of the arbitrage consumers benefit from as long as sugar prices are low. 



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December 11 2017

Commentary by Eoin Treacy

Brent Reaches Highest Since 2015 After Forties Pipeline Shutdown

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

Brent crude in London reached its highest since 2015 as a key North Sea pipeline shut down.

The Forties Pipeline System, one of the most important oil conduits in the world, is to be fully halted after a crack was discovered, the link’s operator Ineos said. The announcement boosted pricing that had been largely muted over the last week following an OPEC-led agreement by major producers to extend output curbs through the end of 2018. The Brent rally pulled New York futures up near $58 a barrel.

At the same time, the U.A.E.’s Energy minister said Monday the group may draft a strategy in June to end the curbs if the market is no longer oversupplied. Brent, the global benchmark, rose as high as $64.71 a barrel while West Texas Intermediate climbed to as high as $57.86 a barrel.

“Brent is ripping,” said Bob Yawger, director of futures at Mizuho Securities USA Inc. in New York. “You really don’t have a lot of spare barrels before the supply situation becomes a problem.”

In addition, the WTI-Brent spread will “widen and encourage U.S. exports,” he said.

The pipeline system feeds crude to the Hound Point export terminal near Edinburgh in Scotland. At over 400,000 barrels a day, the supplies that flow through the link are the single largest constituent part of the Dated Brent grade that helps to settle more than half the world’s physical oil prices.

 

Eoin Treacy's view -

The Forties pipeline has more of an effect on pricing than its size merits because Brent is such an important benchmark for the global oil industry. The big question is how long it will take the leak to be sourced, fixed and whether they will then use this opportunity to run other maintenance. 



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December 04 2017

Commentary by Eoin Treacy

Russian Ships Near Data Cables Are Too Close for U.S. Comfort

Thanks to a subscriber for this article by David E.Sanger and Eric Schmitt for the New York Times. Here is a section: 

The issue goes beyond old worries during the Cold War that the Russians would tap into the cables — a task American intelligence agencies also mastered decades ago. The alarm today is deeper: The ultimate Russian hack on the United States could involve severing the fiber-optic cables at some of their hardest-to-access locations to halt the instant communications on which the West’s governments, economies and citizens have grown dependent.

While there is no evidence yet of any cable cutting, the concern is part of a growing wariness among senior American and allied military and intelligence officials over the accelerated activity by Russian armed forces around the globe. At the same time, the internal debate in Washington illustrates how the United States is increasingly viewing every Russian move through a lens of deep distrust, reminiscent of relations during the Cold War.

 

Eoin Treacy's view -

The USA is now the world’s largest oil producer, and its economy is not as dependent on Energy as other major producers. At the other end of the spectrum Russia and Saudi Arabia are also major producers but their economies are close to totally dependent on Energy. Just how much of a gamechanger unconventional oil and gas supply is cannot be underestimated as the geopolitical implications continue to unfold. 



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December 04 2017

Commentary by Eoin Treacy

Mars and beyond: Modular nuclear reactors set to power next wave of deep space exploration

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

Rated at 10 kilowatts, the Kilopower reactor puts out enough power to support two average American homes and can run continuously for ten years without refueling. Instead of plutonium, it uses a solid, cast uranium 235 reactor core 6 inches (15 cm) in diameter. This is surrounded by a beryllium oxide reflector with a mechanism at one end for removing and inserting a single rod of boron carbide. This rod starts and stops the reactor while the reflector catches escaping neutrons and bounces them back into the core, improving the efficiency of the self-regulating fission reaction. Until activated, the core is only mildly radioactive.

And

The design is modular, so the self-contained reactor units can be hooked together to provide as much power as and where it's needed, whether it's a deep space probe or a Martian outpost. According to Lee Mason, STMD's principal technologist for Power and Energy Storage at NASA Headquarters, the technology is "agnostic" to its environment, allowing it a wide range of applications.

 

Eoin Treacy's view -

Small, modular and safe reactors, that can be produced in factories and transported to their destination via regular roads represent perhaps the only feasible future for the nuclear industry. The fact NASA is moving ahead with such designs, for its own purposes, increases the potential similar programs will find utility in the wider economy. 



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November 21 2017

Commentary by Eoin Treacy

Musings From The Oil Patch November 21st 2017

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

Between 2010 and 2016, coal’s share of U.S. Energy fell from 23% to 15.8%, while renewables’ share climbed from 1.7% to 3.7%.  In the EU, coal’s share fell from 16% to 14.5%, and renewables more than doubled its share, going from 3.9% to 8.3%.  This emissions and economic progress by the EU is in jeopardy following the election of President Trump who is determined to boost U.S. oil, natural gas and coal industries, and push back on green mandates and subsidies.  The EU’s response has been to isolate the United States for its climate position.  Their strategy for overcoming high Energy costs and exposure to Energy disruptions is to make people choose expensive renewable Energy in the guise of it being the only logical choice when confronted with the alternative of a disastrous environmental outcome if we continue burning fossil fuels.  

As the EU’s strategy seems not to be working as well as planned, it has become more radical with governments seeking to ban internal combustion engine cars.  This, its leaders believe, will force American auto companies to compete in the marketplace of zero-emission vehicles.  Little is mentioned about the fact that the carbon emissions legacy associated with building electric cars requires years of driving them before it is neutralized.  Electric car promoters also never mention the environmental and social costs of mining the rare earth minerals required in rechargeable batteries.  If fairly presented, people might question whether there are other alternative solutions that are less-costly and do more to mitigate the environmental hazards of electric batteries and renewable Energy sources.  

While the goal to level the economic playing field with respect to Energy’s cost in manufacturing remains an EU objective, the path to achieving that goal has changed.  The choice presented is impending environmental disaster with continued use of fossil fuels versus feeling good about saving the planet with high cost renewables and zero-emission electric vehicles.  Expect more of rhetoric as we move forward.  Maybe President Trump understands that the climate change movement is really an economic war in the guise of climate change.

Eoin Treacy's view -

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

The simple fact is the EU imports a lot of its Energy and the USA is close to being Energy independent. Quite whether the EU is so cynical in its attempts to pioneer high cost power is questionable, but if everyone were to adopt the same cost base for Energy production it would certainly create a more level playing field for a lot of important industries and help European competitiveness.  



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November 21 2017

Commentary by Eoin Treacy

ASEAN: The infrastructure push

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

Infrastructure plays a crucial role in the region’s economic, social and environmental development, including boosting regional connectivity. Greater connectivity of the transport infrastructure enhances logistical efficiency and supports the growth of investment, trade and commerce while reducing business costs. While countries have invested in infrastructure to varying extents over the years, development has been gaining momentum, with more than US$275bn key pipeline projects across ASEAN, as we detail in this report.

Singapore: To fulfil Singapore’s 6.9mn population target (+25% from the current size) by 2030, the government is steering infrastructure development towards greater public network connectivity, usage of personal mobility devices, as well as usage of digitalisation to transform the city state into a Smart Nation. These infra developments, amounting to US$44bn will help Singapore cope with population increase and prevent traffic congestion.

Malaysia: In the 10th Malaysia Plan (2011-2015), the government highlighted its commitment to infrastructure development. One focus is on building railways (MRT 2, MRT 3, LRT 3) to alleviate traffic congestion. Another focus is on connecting rural areas to urban clusters to ensure equitable development through the Pan Borneo Highway. Infrastructure growth is driven by China, having committed US$34bn (RM144bn) to infrastructure projects such as the East Coast Rail Link, Kuantan Industrial Park and Melaka Gateway. 

Indonesia: In the post-Suharto era, infrastructure development stalled and has not been able to keep up with economic growth amid the commodities boom. The inefficient transport network has resulted in acute distribution bottlenecks, driving up logistics cost. When President Jokowi took office, he diverted a portion of the Energy subsidies to infrastructure development. Through priority infrastructure projects totalling US$41bn, the government seeks to boost connectivity in the archipelago to increase business competitiveness.   

Eoin Treacy's view -

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

In a period of synchronised economic expansion it is natural for emerging markets to engage in infrastructure development since credit is generally still accommodative and the need remains compelling. That will also help to lay the foundation for future growth as the region evolves economically amid a trend of generally improving standards of governance. 



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November 16 2017

Commentary by Eoin Treacy

World's Biggest Wealth Fund Wants Out of Oil and Gas

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

 

Norway, which relies on oil and gas for about a fifth of economic output, would be less vulnerable to declining crude prices without its fund investing in the industry, the central bank said Thursday. The divestment would mark the second major step in scrubbing the world’s biggest wealth fund of climate risk, after it sold most of its coal stocks.

“Our perspective here is to spread the risks for the state’s wealth,” Egil Matsen, the deputy central bank governor overseeing the fund, said in an interview in Oslo. “We can do that better by not adding oil-price risk.”

The plan would entail the fund, which controls about 1.5 percent of global stocks, dumping as much as $40 billion of shares in international giants such as Exxon Mobil Corp. and Royal Dutch Shell Plc. The Finance Ministry said it will study the proposal and decide what to do in “fall of 2018” at the earliest.

Eoin Treacy's view -

Norway’s proposal to diversify its exposure to the oil sector makes sense but the timing of the decision, ahead of the proposed Saudi Aramco IPO and after the successful sale of Abu Dhabi’s Adnoc retail gasoline stations’ business says more about the trauma of the crash lower from above $100 than the state of the sector at present. 



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November 09 2017

Commentary by Eoin Treacy

Rio Tinto joins race for stake in world's largest lithium miner

Rio Tinto joins race for stake in world’s largest lithium miner – This article by Cecilia Jamasmie for Mining.com may be of interest to subscribers. Here is a section: 

 

El Mostrador suggested Tinto Rio had already made a bid, potentially trumping Chinese companies Sinochem, Tianqi and GSR Capital, all of which had also expressed interest in SQM.

The news came on the heels of PotashCorp and Agrium announcing Tuesday that China’s ministry of commerce had approved the merger, but required the sale of PotashCorp’s minority holdings in Arab Potash Company and SQM within 18 months of closing, and Israel Chemicals Ltd. within nine months.

SQM, which has a market value at just over $15 billion, produced roughly 44 million tonnes of lithium carbonate last year and is developing new projects in Chile and Australia.

Rio's current incursion in the lithium market is mostly limited to its 100%-owned lithium and borates mineral project in Jadar, Serbia, which is still in the early stages of development.

Eoin Treacy's view -

Rio Tinto generates 68% of its revenue from iron-ore and aluminium. Diamonds and minerals, copper and Energy make up the balance of its operations in that order. Despite enthusiasm about lithium SQM generate about 26.5% of its revenue from the metal, with plant nutrition (32.2%) and potassium (20.8%) also representing major businesses for the company. 



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November 09 2017

Commentary by Eoin Treacy

Britain risks a nuclear dead end by spurning global technology leap

Thanks to a David for this article from Ambrose Evans-Pritchard in the Telegraph. Here is a section: 

A few million will be put aside for ‘blue sky’ research but the real money will go to a consortium led by Rolls-Royce to develop a series of 440 megawatt SMRs for £2.5bn each, drawing on Rolls’ experience building PWR3 reactors for nuclear submarines. The company bills it as part of a “national endeavour’ that will create 40,000 skilled jobs. It requires matching start-up funds of £500m from the state. 

I find myself torn since these ambitions are commendable. They revive a homegrown British sector, akin to the success in aerospace. It is exactly what Theresa May’s industrial strategy should be. Rolls-Royce is a superb company with layers of depth and a global brand. It could genuinely hope to capture an export bonanza.  

Yet the venture looks all too like a scaled-down version of Sizewell, plagued by the same defects as the old reactors, less flexible than advertised, and likely to spew yet more plutonium waste.  

Rolls Royce insists that the design is novel and can slash costs by relying on components small enough to be manufactured in factories. “Everything can be cut down to size and put on a lorry,” said a spokesman.  

Rolls-Royce has said the design can slash costs by relying on components small enough to be manufactured in factories It aims for £65 MWh by the fifth plant, dropping to £60 once the scale is ramped up to seven gigawatts (GW), with exports targeting a putative £400bn global market.  

 

Eoin Treacy's view -

A decade ago the UK went from being an oil and gas exporter to an importer, as the North Sea oil fields hit peak production, and the cost of production began to rise. That represents a considerable headwind to growth from a sector which had been a tailwind for decades previously. When people bemoan declining living standards and the rising cost of living, one of the first places to look has to be the Energy sector and absence of a clear strategy to promote Energy independence. 



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November 07 2017

Commentary by Eoin Treacy

Musings From The Oil Patch November 7th 2017

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

The euphoria that greeted the production cut agreement announcement lifted oil prices above $50 a barrel, a critical threshold for market confidence.  As global oil inventories failed to drop as the market expected, investors turned on the commodity as well as Energy stocks, sending their prices lower.  Since the oil price drop in early 2007, prices have largely traded between the low $40s a barrel to now above $54, with a brief excursion as low as $26.  The narrow price range reflected global oil inventories remaining relatively flat, until recently.  As oil inventories started falling a few weeks ago, we are now in a period favorable for higher prices.  

Today, we are firmly planted in an oil market reflecting positive price momentum.  Better projected oil demand growth seemed to be the initial factor that helped lift the oil market.  The International Energy Agency (IEA) upped its demand growth estimates for the second half of 2017.  About the same time, U.S. shale producers began shedding oil drilling rigs in response to weakening oil prices and as they sensed a need to rebuild investor confidence in their financial health.  Producers had to dispel the image of exploration and production (E&P) companies as destroyers of capital, a label the industry’s record seemed to warrant.  Disciplined capital spending, meaning living within a company’s cash flow in order to not have to borrow money or sell more equity to fund the overspending, appears to be the new mantra for E&P companies.  The latest survey of E&P company spending plans versus cash flow demonstrates that overspending remains high.  This may signal that it will take time for companies to generate positive cash flow.  

In recent weeks, as Brent oil prices have risen at a faster rate than WTI oil, the forward oil price curve moved into backwardation, meaning that barrels of oil able to be delivered immediately are worth more than if they are stored and delivered in the future.  This price disparity is further impacted by the cost of storing the oil.  Backwardation encourages holders of oil in storage to begin selling those barrels, which has accelerated the shrinking of global oil inventories.   

Eoin Treacy's view -

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



Comparing these two futures curves for Brent Crude oil and West Texas Intermediate we see that the backwardation is most acute in Brent while West Texas Intermediate is in contango over the first four contracts. That highlights the continued incentive domestic US suppliers have, to pump and export into the global market; picking up a more than $5 spread in the process. 



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November 06 2017

Commentary by Eoin Treacy

A resignation, detentions and missiles: 24 hours that shook the Middle East

This article by Tamara Qiblawi for CNN may be of interest to subscribers. Here is a section:

Saudi Arabia was still putting out the fires caused by the missile attack when state TV announced the onset of an anti-corruption crackdown led by the crown prince. Over 17 princes and top officials were arrested on graft charges, according to a list obtained by CNN and cited by a senior royal court official.

The list includes billionaire business magnate Prince Alwaleed bin Talal, who owns 95% of Kingdom Holding, which holds stakes in global companies such as Citigroup, Twitter, Apple and News Corp.

The list also includes formal head of the royal court Khaled Al-Tuwaijri, Saudi media mogul Waleed Al-Ibrahim and Prince Turki Bin Nasser.

"Some of the wealthiest figures in the Arab world are in apprehension today," said military analyst Riad Kahwaji.
"This is unprecedented. We're seeing it for the first time and it's definitely causing shockwaves across the region."

 

Eoin Treacy's view -

On October 19th 2015 I wrote this: 

To think of Saudi Arabia as having to go to the market for money is a misrepresentation of just how much capital the kingdom has. Let’s think of the country more as a feudal kingdom than the democracies we are accustomed to. It is not beyond the realm of possibility that the various princes who have accumulated impressive wealth based on the largesse of the crown could be called upon to supply the state with arms, capital or soldiers in just the same way that dukes and earls would have done in feudal Europe.

 



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November 03 2017

Commentary by Eoin Treacy

Fossil-Fuel Friendly Tax Plan Spares Oil, Not Solar or Tesla

This article by Alex Nussbaum, Brian Eckhouse and Emma Ockerman for Bloomberg may be of interest to subscribers. Here is a section:

The House proposal protects three provisions that save explorers billions of dollars annually, while chopping a few others.

The legislation preserves the use of last-in-first-out accounting rules, also known as LIFO. The rules let companies value crude stockpiles at the price they’re selling for, rather than the original purchase cost. The bill also allows continued deductions of so-called intangible drilling costs and preserves a measure that lets explorers reduce taxable income to reflect the depreciation of reserves.

All three were thought to be in jeopardy as Republicans searched for offsets to pay for lowering taxes elsewhere.
Eliminating the drilling and depletion provisions alone would force Energy companies to pay about $25 billion in additional taxes between 2016 and 2026, Congress’s Joint Committee on Taxation estimated last year.

The House bill would also end two smaller breaks for “marginal" oil wells and enhanced oil recovery projects, which involve older oil and gas fields. That would cost drillers about $371 million over ten years, the committee estimated.
The plan spares “the Holy Grail of E&P tax breaks" by maintaining the intangible drilling costs provision, analysts at Houston investment bank Tudor Pickering Holt & Co. said in a research note Friday. Between that and a plan to cut the corporate rate from 35 percent to 20 percent, the legislation would be “a net positive for oil and gas," they wrote.

 

Eoin Treacy's view -

The US oil and gas business represents a major opportunity for the economy to reduce its trade deficit with oil producers or even to become a net Energy exporter. Renewables represent an equally important part of that goal since every barrel of oil not consumed at home is available for export. It therefore makes sense from a strategic perspective to support both from a regulatory and tax perspective. However, Energy is about the most politically charged of all sectors, not to mention being competitive between source and others. Therefore one tends to be favoured over the other depending on the tone of the administration in power. 



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October 26 2017

Commentary by Eoin Treacy

FAAMG: A Bubble In The Making?

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

FAAMG: The music continues to play We continue to be bullish on the global Information Technology (IT) sector, mainly due to our positive view on the semiconductor and software sub-segments. Global IT is benefiting from a macro environment, which is characterised by accelerating growth and rising rates that support IT companies due to their low financial leverage and high operating leverage. Global IT stocks are trading at a forward P/E of around 18x, broadly in line with the sector’s long-term historical valuation multiple average. As a result, we believe that the good growth perspectives of the sector are not yet fully reflected at current levels.

However, within the IT segment, we would like to take a closer look at the FAAMG group (Facebook, Amazon, Apple, Microsoft, Google). Those five stocks have been the main performance drivers of the underlying IT and consumer indices and now represent around 13% of the S&P 500, roughly the same weighting as the US Energy sector.
 
A recession would be needed to trigger a bubble burst. 
While we agree that the share price performance of the FAAMG group may look like a bubble in the making, we would stress the fact that bubbles only tend to burst when the underlying market moves into a recession. According to our economists, global growth should accelerate towards the end of the year and stabilise at current levels in 2018. Leading indicators in all major regions around the globe support this forecast and thus a recession looks highly unlikely in the foreseeable future.

 

Eoin Treacy's view -

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

The US technology sector continues to represent some of the clearest beneficiaries of the evolution of the digital economy where data is a valuable asset. While companies like Microsoft and Facebook look quite different on the surface they both see their growth deriving from gathering, parsing, interpreting and selling data. The evolution of the home speaker/digital assistant market being simultaneously pushed by Apple, Amazon and Google are all symptomatic of their desire to secure consumer cashflows by being the conduit for data. 



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October 24 2017

Commentary by Eoin Treacy

Musings from the Oil Patch Ocotber 24th 2017

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

If you are Saudi Arabia, a one-product (oil) economy, and you are watching the aggressive adoption of government policies around the world to stop the sale of internal combustion engine cars, you have to be concerned.  Given that France and the UK have announced bans on the sale of ICE vehicles by 2040, auto industry executives are assuming China will adopt a similar date.  The Netherlands just adopted a 2025 ban on the sale of new ICE cars, with a 2030 date for all ICE cars to be off Dutch roads.   

For China, the world’s largest car market, having sold over 28 million cars last year (nearly a 14% year-over-year increase), the banning of ICE vehicles will shrink the need for, and eventually eliminate motor fuels, which will have a material impact on Saudi Arabia’s long-term oil export opportunities.  When considering that Saudi Arabia has been fighting Russia and Iran to gain an increased share of the Asian, and especially Chinese, oil markets, anything threatening the long-term success of that fight is of concern, even if it is a future event.
   
 Is the industrial policy to ban ICE vehicles a signal of the impending end of the Petroleum Age, much like Sheik Yamani predicted?  Is that prospect part of the motivation behind Crown Prince Salman’s plan to sell off a portion of Saudi Aramco, either in an initial public offering or through a direct sale to sovereign wealth funds to raise money now for diversification investments?  In a way, current industry developments and future prospects are similar to the forces that drove OPEC’s formation in 1960.  A brief review of history may help put into perspective why OPEC is struggling to remain relevant now, and will likely continue to struggle in the future. 

 

Eoin Treacy's view -

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

The argument about the exact timeline for when renewables will represent a dominant position in the Energy mix and in the transportation sector continues to receive a great deal of attention. However, the bigger picture is that Energy providers, who have little choice but to adopt very long-term perspectives, have already concluded that the heyday of the oil market has passed. That should help to inform our view of what the medium-term perspective on the Energy markets is. 



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October 23 2017

Commentary by Eoin Treacy

Venezuela's Behind on Its Debt and Facing Two Huge Bond Payments

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

Venezuela could still also make the payments on time. While $10 billion in foreign reserves isn’t much for a country that now owes some $140 billion to foreign creditors, it’s still enough to pay the bills for a while.

And the Maduro government has surprised the bond market before, making payments the past couple years that many traders had anticipated would be missed. Some of those now betting that these next two payments will also be made actually point to the $350 million currently overdue on the other notes as an encouraging sign. Those arrears indicate, they contend, that officials are prioritizing the payment of bonds with no grace period at the expense of those they can put off without penalty.

Even if Venezuela can make the payments due this year, investors say that, unless oil prices stage some sort of miraculous comeback, they still see default as an inevitable outcome. Credit-default swaps show they’re pricing in a 75 percent chance of a PDVSA default in the next 12 months and 99 percent in the next five years.

 

Eoin Treacy's view -

Venezuela represents a problem for bond investors because it could either be a one-off default or be the thin end of the wedge for distressed Energy producers. The fact PDVSA sinkable bonds are now trading at a spread of 526 basis points, versus 200 last week, suggests investors are increasingly skeptical the government is going to be able to make principal payments when they mature on November 2nd. 



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October 11 2017

Commentary by Eoin Treacy

Email of the day on Mexico

I'm forwarding to you the most recent free, weekly commentary of Michael Drury, in house economic analyst for McVean Traders, a Memphis (Tennessee) based commodities broker-dealer. I find the commentary, an evaluation of the current status of the Mexican economy, to be quite lucid and educative. Perhaps others of your readers would find it so, too?

Warm regards and with great appreciation for the service you render.

 

Eoin Treacy's view -

Thank you for your kind words and this report which may also be of interest to subscribers. Here is a section:

At the Bank of Mexico, much of the conversation centered on Mexico’s current very high rate of inflation – which is largely due to surging Energy costs after deregulation of the electricity sector a year ago.  As with Japanese VAT tax increases, these reforms caused a pig in the python effect as they work their way through reported annual CPI increases.  Mexico’s CPI should plunge lower toward 4% early  next year as the Energy hikes pass out of the data.  This is still high compared to the 3% target, but should drift within the 1% acceptable band around the target.  The Bank sees more recent data as confirming that new inflationary pressures (which were mostly from the pass through effect of higher Energy cost) are small.  As a result, recent hikes in the central banks reference rate are expected to end – though they will not be quickly reversed.  The combination of sticky rates and plunging inflation suggest a threat to Mexican growth from sharply higher real interest rates.  However, real economic growth has surprised to the upside recently, while high inflation has reduced the burden of earlier debt accumulation.  Long term interest rate appear already to have peaked as Bank rate hikes are ending. 

One perennial problem for Mexico is a low domestic savings rate and underdeveloped financial markets.  Combined with the earlier commitment to the view that all Mexican oil is a resource for the people and so no foreign ownership should be allowed, this meant that Mexican oil resources were underutilized and inefficiently operated.  However, as the deregulation of the telecom industry has shown, competition increases consumer options and lowers prices.  Private firms (from Italy and Houston) have recently found 3.4 million barrels of oil – out of an estimated 9 billion in Mexican reserves.  Perhaps those figures will have to be revised higher.  However, issues concerning crossownership and the upcoming election – where Obrador is campaigning for a roll back of Energy reforms -- are clouding the speed with which these huge finds will be developed.  

 



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October 10 2017

Commentary by Eoin Treacy

Not Business as Usual

Thanks to a subscriber for this heavyweight 329-page report from Deutsche Bank which may be of interest. Here is a section:

Not business as usual for the oilfield services industry 
This is an industry that is still in transition, and these are companies that still need to navigate this transition. The commercial development of tight oil reserves in the US was disruptive and it derailed the normalization of the cycle. The business models that worked last cycle will not necessarily work again this cycle. We believe in the long term, the oilfield service franchises that will be the winners will be those that evolve with innovative business models, and those that acquire or invest in niche technology leaders. 

Pressure pumping demand poised to recover to 2014 highs 
The biggest common denominator among our top picks is exposure to pressure pumping. As US producers tailor their drilling programs to focus increasingly on their core acreage and best wells, there will be a disproportionate mix of leading edge, longer lateral wells with tighter stage spacing and higher sand loadings. This will drive the average completion intensity per well even higher, which should restore the demand for horsepower to the 2014 highs despite a lower rig count.

 

Eoin Treacy's view -

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

Oil service companies have been among the primary targets for cost cutting by major oil producers. As wave after of wave of rationalization gripped the sector during the oil price collapse the major oil producers cancelled green field sites, abandoned deep-water drilling and committed to a lower for longer price forecast which dramatically altered their spending plans. The result was that the oil service sector is now a fraction of the size it attained at the oil peaks in 2008. That is before one considers the current optimism for electric vehicles, renewable Energy and domestic batteries. 



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October 09 2017

Commentary by Eoin Treacy

During Irma's Power Outages, Some Houses Kept The Lights On With Solar And Batteries

This article by Adele Peters for fastcompany.com may be of interest to subscribers. Here is a section: 

Of course, if a storm is strong enough to tear solar panels off a roof and the battery can’t recharge, this type of system wouldn’t work for long. It’s also expensive: A single Powerwall unit, which can store 14 kilowatt-hours of Energy, costs $5,500 plus supporting hardware and installation that can cost up to $2,000. A similar battery from Mercedes-Benz ranges from $5,000 to $13,000 for a 20 kilowatt-hour system including installation. In the U.K., where Ikea now sells both solar panels and batteries, its batteries are also nearly $4,000 at current exchange rates. Beyond cost, if someone rents an apartment or house and can’t install solar panels, it’s not an option.

But the cost is likely to drop, and battery storage and solar power could also be used in community solar projects, where customers don’t have solar panels at their own homes, but invest in or buy power from a nearby microgrid. In Orlando, customers can buy solar Energy from a 12-megawatt solar farm built on top of a landfill; while the power is currently sent back to the grid, in the future, it’s possible that it and other community solar farms could use batteries to provide local backup power from multiple locations in emergencies.

 

Eoin Treacy's view -

Microgrids, batteries and solar cells have the potential to grow exponentially as costs come down and business models evolve. There are two additional points that are likely to prove attractive to consumers as well as government. The first is that the utility network is likely to be a target in any future war and foreign governments have already demonstrated both the intent and ability to tamper with it. 



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October 09 2017

Commentary by Eoin Treacy

Spain Warns Catalonia Independence Bid Risks Economic Meltdown

This article by Maria Tadeo, Esteban Duarte, and Angeline Benoit for Bloomberg may be of interest to subscribers. Here is a section:

Spanish 10-year bonds rose, with the spread over German bunds narrowing by six basis points at 11:38 a.m. in Madrid to 119 basis points. Spain’s benchmark stock index has lost about 1.2 percent since Catalans voted in defiance of the Constitutional Court, while Catalan companies including lender CaixaBank SA are moving their legal bases out of the region.

Nadal, the Energy minister, suggested Catalonia would be jeopardizing electricity supplies and communications networks. Catalonia has little control over Energy supplies and is reliant on the big Spanish companies that, in theory, could suspend service and turn the lights off.

“It so terrible a scenario the idea of independence, that everything won’t work from the single moment from which independence is declared," Nadal said in a Bloomberg Television interview. "There will be a problem in the Energy sector, there will be a problem in the telecom sector, in the financial sector of course.”

 

Eoin Treacy's view -

The only way an independent Catalonia can function would be to introduce capital controls. There is already evidence of capital flight with Caixa Bank, for example, moving its headquarters to Madrid. If the Catalan administration does in fact wish to declare independence they have no time to waste. 



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October 04 2017

Commentary by Eoin Treacy

Shale Oil What the Thunder Said

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

After a year-long investigation, we challenge the orthodoxy on shale oil. Breakevens will deflate from $50/bbl to c$25-30/bbl. Ultimate production potential is 25-30Mbpd by 2025-30, overwhelming agency forecasts for 5-7Mbpd. The implications extend far beyond the oil industry.

What has changed is our perception of shale oil as a new technology paradigm: a digital revolution, offering 50-70% further productivity gains. Unlocking the full potential requires $100bn pa of upstream investment to be attracted by improving economics. Requisite political support is also warranted by reshaping global geopolitics and manufacturing, in favour of the US.

But world-changing trends are rarely realised in smooth trajectories. The conventional oil industry will contest shale’s ascent. International costs will continue deflating. Tax regimes will be overhauled to reinvigorate investment. Incumbent producers must compete with shale. OPEC’s last resort may be to incite periodic oil price volatility, potentially as soon as 2018.

Investing in this era is challenging. Our models now assume sustained deflation, averaging $46/bbl oil to 2020. The forward curve is too optimistic. Complacent companies will disappoint shareholders. But the leading European Majors are becoming remarkably resilient and can at least preserve equity value.

The prize lies in shale, with 25% upside and lower risk than conventional oil, even amidst low, volatile oil prices. US Super-Majors will capture the opportunity, by pivoting to short-cycle investment. Chevron is preferred. Shorter term bottlenecks will also emerge, benefiting select Oil Services.

Eoin Treacy's view -

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

The Energy sector is in a state of flux. That is the natural reaction to a prolonged period of high prices which encourage economisation, greater technological innovation and investment in more supply. We now see a broad spectrum of responses to high prices which have contributed to better efficiency and more potential options for both production of electricity and storage as well as uses for electricity. Meanwhile oil is likely to remain a vitally important commodity for the foreseeable future not least as the global economy continues to industrialise and the chemical industry innovates the cracking process to prioritise commodities as the market demands. 



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October 04 2017

Commentary by Eoin Treacy

Micro-grids at the threshold

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

Batteries allow micro-grids to tap multiple revenue streams: Storage is helping micro-grid to transition beyond suppliers of just back-up power. Aggregation of storage and generation assets within a micro-grid creates a VPP and is capable of providing much-needed resiliency services to the central grid. Demand for these services is more than doubling every five years due to rising renewables in the generation mix. In Europe, this trend will likely continue considering targets to increase renewables by 20% by 2020. 

Block-chain and batteries make electricity trading possible: Utilities in the US and Europe are trialling block-chain technology, which, coupled with storage, can enable electricity trading within and also between micro-grids. Unhindered electricity trading is necessary if we are to overcome the intermittent, geographical and seasonal limitations of renewables. Batteries only offer a limited solution as overcoming these issues in the absence of fossil fuel generation would need uneconomic oversizing of storage capacity. 

Smart grid will be based on storage, micro-grids and electricity trading: We forecast the grid-connected micro-grid market globally to grow to $10bn by 2021 from under $0.5bn in 2016. Battery storage (residential and large) is estimated to play a major role and we expect 30GWh of micro-grid, which translates into a $5bn market opportunity by 2021. Fuel cells could be important for micro-grids as they are the most efficient generation technology – 15% adoption of fuel cells in microgrids will translate into 7.5Gw of demand and a market worth more than $2bn.       

Eoin Treacy's view -

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

Electricity traders have represented one of the largest demographics at The Chart Seminar over the last few years. At least part of the reason for that interest in Behavioural Technical Analysis is because it is a market with a bewildering array of fundamental inputs; coming with a slew of local considerations which contribute to volatility. That is before one considers the innate volatility of the Energy markets. Therefore, an understanding of crowd psychology, the rhythm of markets and how one market can affect another are valuable tools which are going to be all the more important as the Energy markets fracture with the growth of microgrids. 



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October 03 2017

Commentary by Eoin Treacy

Chinese EV market nearing 2% penetration

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

In 2016 Chinese electrical vehicle makers represented 43% of the global EV market, or 873,000 units, overtaking the United States for the first time, according to a July report by McKinsey & Company. The report notes that not only did China up its share of the EV market by 3% compared to 2015, it also made gains on the supply side of EVs including components such as lithium-ion batteries and electric motors. "One important factor is that the Chinese government provides subsidies to the sector in an effort to reduce fuel imports, improve air quality, and foster local champions," McKinsey explained.

The Chinese government has announced that "new Energy vehicles" (NEVs, which includes hybrids) should account for 8% of the passenger vehicle market by 2018, 10% by 2019 and 12% by 2020, according to EV Volumes.com.

Eoin Treacy's view -

Anyone who has spent any time in Beijing over the winter knows how badly the entire north east of the country needs to combat air pollution. On my first strip in 2005 I developed a cough as if I have been smoking my entire life that only let up once I got back on the plane home. If anything, the air is worse today than it was then. 



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October 02 2017

Commentary by Eoin Treacy

China sees new world order with oil benchmark backed by gold

This article by Damon Evans for the Nikkei news agency may be of interest to subscribers. Here is a section: 

China's move will allow exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan. To further entice trade, China says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong.
"The rules of the global oil game may begin to change enormously," said Luke Gromen, founder of U.S.-based macroeconomic research company FFTT.

The Shanghai International Energy Exchange has started to train potential users and is carrying out systems tests following substantial preparations in June and July. This will be China's first commodities futures contract open to foreign companies such as investment funds, trading houses and petroleum companies.

And 

The existence of yuan-backed oil and gold futures means that users will have the option of being paid in physical gold, said Alasdair Macleod, head of research at Goldmoney, a gold-based financial services company based in Toronto. "It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either," Macleod said.

 

Eoin Treacy's view -

This is an interesting gambit from China because while it is the biggest importer of oil it is the largest producer of gold. The futures contract is not yet active but for oil producers who are not happy to transact in Dollars, physical gold has definite attractions. It also raises the stakes in China’s attempts to establish the Renminbi as a viable reserve country. 



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September 28 2017

Commentary by Eoin Treacy

Gleanings: "When Smart People Talk, We Listen"

Thanks to a subscriber for this report from Jeffrey Saut for Raymond James which may be of interest. Here is a section: 

1. Invest in something when people say they never want to invest in it again, when they are throwing it out the window. Think about that.  We know people that liquidated their portfolios around the March 2009 lows vowing to never buy a stock again.  The same can be said about tech stocks as they were bottoming between November 2002 and May 2003.  Currently, the same thing is being said now about Energy stocks, especially the midstream MLPs.

2. Investing is both qualitative and quantitative. There is room for both disciplines (qualitative and quantitative) in one’s portfolio just like there is room for both passive and active investment management, although currently we favor active. 

3. The more people ridicule and question you, the more likely you are probably onto a good thing no matter what it is. This was like us buying oil sands stocks in the late 1990s when everyone was buying tech.  Or like when we bought tech stocks near the end of 2002; and, what we are doing now in buying the out of favor Energy stocks. 

4. Don’t invest in an area just because it is depressed, find and wait for the change and invest just before it happens while still unrecognized by the market. My father use to tell me, “Good things happen to cheap stocks,” but stocks can stay cheap for a really long time if other investors do not recognize their cheap valuations.  The charts will tell you when other investors will recognize them too.

 

Eoin Treacy's view -

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

Many investors seeking to follow the buy-low-sell-high maxims laid out in this report are hunting for sectors that look cheap by historical standards. The most obvious candidate is the Energy sector which is still struggling with the profound changes unconventional supply have wreaked, not to mention the anticipated surge in demand for electric vehicles. 



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September 20 2017

Commentary by Eoin Treacy

Proterra Catalyst E2 MAX Sets World Record And Drives 1,101.2 Miles On A Single Charge

This press release contains some impressive statistics and may be of interest to subscribers. Here is a section: 

Today Proterra, the leading innovator in heavy-duty electric transportation, announced it has set a world record for driving the longest distance ever traveled by an electric vehicle on a single charge at the Navistar Proving Grounds in New Carlisle, Indiana. Proterra’s 40-foot Catalyst E2 max traveled 1,101.2 miles this month with 660 kWh of Energy storage capacity. For the last three consecutive years, Proterra has demonstrated improved range and battery performance. Last September, Proterra drove 603 miles with 440kWh of Energy storage, and in 2015, Proterra drove 258 miles with 257kWh of Energy storage on a single charge. This year’s world record range marks exceptional performance improvements over prior years, and underscores Proterra’s commitment to innovation and accelerating the mass adoption of heavy-duty electric vehicles.

“For our heavy-duty electric bus to break the previous world record of 1,013.76 miles — which was set by a light-duty passenger EV 46 times lighter than the Catalyst E2 max — is a major feat,” said Matt Horton, Proterra’s chief commercial officer. “This record achievement is a testament to Proterra’s purpose-built electric bus design, Energy-dense batteries and efficient drivetrain.”

Beyond meeting transit agencies’ range requirements, the Catalyst E2 max is poised to make a significant impact on the transit market because of its low operational cost per mile compared to conventional fossil fuel powered buses. According to Bloomberg New Energy Finance, lithium-ion battery prices have dropped by roughly 72 percent since 2010, and the economics for batteries continue to improve. Between li-ion battery cost savings and improving vehicle efficiency, electric vehicles represent the most disruptive mode of transport today.

“Driven by the best cost savings-per-mile, we believe the business case for heavy-duty electric buses is superior to all other applications, and that the transit market will be the first to transition completely to battery-electric powered vehicles,” said Ryan Popple, Proterra CEO. “Early electric bus adopters like our first customer, Foothill Transit, have paved the way for future heavy-duty applications, like motor coaches and commercial trucks. As we see incumbents and more companies enter the heavy-duty EV market, it has become very apparent that the future is all-electric, and the sun is setting on combustion engine technology.”

 

Eoin Treacy's view -

One of the primary arguments often trotted out to combat ambitious forecasts about the future of long haul and large passenger vehicles is the battery would have to be so large and heavy as to make the endeavor untenable. 



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September 20 2017

Commentary by Eoin Treacy

Oil Traders Empty Key Crude Storage Hub as Demand Booms

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

Oil traders are emptying one of the world’s largest crude storage facilities, located near the southernmost tip of Africa, as the physical market tightens amid booming demand and OPEC production cuts.

Total SA, Vitol Group and Mercuria Energy Group Ltd. are selling crude they hoarded in Saldanha Bay, South Africa, during the 2015-2016 glut when the market effectively paid traders to store oil, according to people familiar with the matter, who asked not to be named discussing private operations. 

Crude demand is now seasonally outstripping supply, tightening the physical market for some crude varieties to levels not seen in the last two years and encouraging traders to sell their stored oil.

“The market is selling inventories from everywhere,” Mercuria Chief Executive Officer Marco Dunand said in an interview in Geneva.

Although largely unknown outside the oil trading industry, Saldanha Bay is one of the world’s largest crude storage facilities, with the capacity to hold 45 million barrels in just six gigantic, partially-buried concrete tanks. By comparison, Cushing, the better-known U.S. oil storage center in Oklahoma that serves as the pricing point for the West Texas Intermediate oil benchmark, can hold about 75 million barrels in more than 125 tanks.

 

Eoin Treacy's view -

We are in a period of synchronized global economic expansion so that should be generally positive for commodity demand, all other factors being equal. The hurricanes which hit the US and meant that the strategic reserve was tapped means it will need to be refilled while refineries will be running at capacity once they get back on line to make up for lost time.



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September 19 2017

Commentary by Eoin Treacy

Email of the day on wind farms

In my trip last week across the Texas Panhandle, I observed a continuing explosion in the number of power-generating windmills (picture is from last year's trip). Last year, vast numbers of these were not operating - this year, most are, suggesting that the power lines to major cities (e.g. Dallas-Ft. Worth) are now working and that purchase contracts are now in place. I spoke at length with a friend who farms a dozen or so square miles there about this subject, which he is very knowledgeable about.

Ah, but all is not well. The company that built hundreds of windmills in around 2002 up in the (windy) OK Panhandle has gone bankrupt, and the windmills are being torn down for scrap. Alas, the cost of these reclamation efforts are not fully covered by the original reclamation bonds bought by the now-bankrupt company, meaning either the farmers who own the land or the government (taxpayers) will have to cover the cost. Meanwhile, the productive farmland that was used for these remains unusable and unproductive until they are torn out, including their huge concrete bases. A 15-year life is not what anyone was promised...

When a farmer agrees to allowing windmills to be built on his land, he is effectively giving up on irrigating that land using modern, efficient center-pivot irrigation systems. Dryland wheat yields 1/4 that of irrigated wheat in the best rain years (which are few and far between), and 10% or less in dry years (lots of years). Most now grow at least some corn, and corn is not a dryland crop in these parts. Yes, he could go back to the horribly inefficient and water-wasting row irrigation method, but that has serious long-term aquifer depletion issues, as well as cost of pumping and labor cost increases. The windmills themselves, the power lines, and the access roads all reduce the crop acreage. Annual payments to the farmers make up for some of this, and some farmers do make money on the windmill contracts, but many smart farmers are turning down the offers. 

Despite all this, the building boom continues, and like all booms, will ultimately lead to substantial overcapacity, bankruptcies, finger pointing, and pain. With over 50% of the power generated being consumed by power line losses, it is not clear that such projects will ever create significant profits before government (taxpayer) subsidies are counted.

 

Eoin Treacy's view -

Even in the windiest locales onshore wind has a hard time being economic and the turbines installed 15 years ago bear little resemblance to those being erected today. European manufacturers have been promoting offshore turbines the size of skyscrapers. They are betting on scale to achieve efficiency gains and Denmark’s Dong Energy made headlines a few months ago by winning contracts to install offshore turbines with no subsidies from the German government. Of course, it remains to be seen if it can in fact deliver on its promise. 



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September 18 2017

Commentary by Eoin Treacy

Gold in correction mode

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

Precious metals: Gold has dropped to a 2½-week low of $1,315 per troy ounce this morning amid increased risk appetite among market participants. Gold in euro terms is trading at only around €1,100 per troy ounce. The Dow Jones Industrial Average and S&P 500 indices in the US had both climbed to new record highs on Friday. The rise in stock markets is continuing in the Asian region today. What is more, bond yields in the US have increased significantly of late, which makes gold less attractive as an alternative investment.

Presumably this is also why Friday saw the second consecutive daily outflow from gold ETFs. Portugal’s credit rating was upgraded on Friday evening by the ratings agency S&P, achieving an investment grade rating again for the first time since January 2012. Ireland was also upgraded, this time by the ratings agency Moody’s. Wednesday could see further volatility on the gold market, as this is when the US Federal Reserve meeting will take place.

If the market’s currently low rate hike expectations increase as a result of the meeting, this is likely to weigh on the gold price. According to the CFTC’s statistics, speculative financial investors further expanded their net long positions in gold in the week to 12 September, putting them at 253,500 contracts now. This was already the ninth weekly increase in a row.
The price rise to a 13-month high of just shy of $1,360 was thus driven largely by speculation. Given that the gold price is now trading considerably lower, positions have presumably been squared in the meantime

 

Eoin Treacy's view -

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

We are in a period of synchronised global economic expansion where central banks are only just beginning to turn the corner towards tightening; with the USA’s Federal Reserve in the lead. Commodities no longer share the trending commonality evident at the dawn of the commodity boom in the early 2000s. Industrial resources including palladium are recovering while Energy and agricultural prices have been subject to a great deal of volatility. 



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September 15 2017

Commentary by Eoin Treacy

Electric Vehicle Boom: ICE-ing The Combustion Engine

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

Many manufacturers undertaking all-solid-state battery R&D Manufacturers that aim to make all-solid-state batteries commercially available in 20202025 include Toyota, Sekisui Chemical, Hitachi Zosen, and Ohara. There have been announcements also from Panasonic, Samsung Electronics, Daimler, Sony, and Hyundai Motor about R&D efforts, but it is not clear when these companies aim to start mass production. BYD says it has set up a research team that is focused on all-solid-state batteries. Bosch, which is the largest auto parts maker, has acquired the all-solid-state battery startup Seeo, while household appliance maker Dyson entered the battery industry with its acquisition of Sakti3. This suggests there are growing expectations for the potential use of all-solid-state batteries not only in automobiles, but also in household appliances. 

Advantages of all-solid-state batteries 
An all-solid-state battery has the potential to offer not only greater Energy density, but also greater safety as well as flexibility in terms of operating temperatures. The advantage of these batteries is that they do not contain electrolyte solution, which is flammable and can react to temperature changes. The batteries also do not require separators, which eliminates the risk of damaged separators causing the battery to short-circuit. Moreover, sulfur-based solid electrolytes have the potential to substantially reduce recharging times as they demonstrate greater ion conductivity than electrolyte solution. 

Disadvantages of all-solid-state batteries 
We think the technological hurdles hampering mass production are the main drawback for all-solid-state batteries. Manufacturing all-solid-state batteries will require new production processes including pressing (in the case of sulfur-based batteries) and sintering (oxide-based batteries). In the case of sulfur-based batteries, which appear to be a strong candidate for automobiles, there is a risk that the sulfur-based solid electrolyte will react with moisture to create hydrogen sulfide. Companies are considering ways around this issue, which include housing the battery in a solid case to reduce the risk of it being damaged, or incorporating a hydrogen sulfide gas detector that would raise the alarm early. On the production side, it has been suggested that all-solid-state battery factories should have a super-dry room with a dew point of -100 degrees. There are also concerns that when all-solid-state batteries are used in automobiles, the vehicle’s vibration may reduce interface stability. It would appear that Toyota therefore faces a number of hurdles to overcome if it is to be ready to commercialize such batteries in 2022.   

 

Eoin Treacy's view -

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

Innovations in the Energy sector have profound effects on all financial markets by reducing the cost of production and transportation of just about everything. That is why batteries represent the lynchpin for the dawn of a new Energy future where electricity becomes a local industry and transportation is no longer dependent on extraction of resources from politically unpalatable regions. 



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September 14 2017

Commentary by Eoin Treacy

Oil Breaches $50 as Worldwide Energy Demand Outlook Brightens

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

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

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

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

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

 

Eoin Treacy's view -

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



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September 08 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

Eoin Treacy's view -

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



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September 07 2017

Commentary by Eoin Treacy

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

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

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

Eoin Treacy's view -

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



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September 06 2017

Commentary by Eoin Treacy

Investment Gurus Counsel Catching Reform Tailwinds in Latin America

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

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

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

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

Eoin Treacy's view -

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



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August 25 2017

Commentary by Eoin Treacy

Thorium salt reactor experiments resume after 40 years

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

 

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

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

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

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

Eoin Treacy's view -

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



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August 17 2017

Commentary by Eoin Treacy

Musings from the Oil Patch August 15th 2017

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

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

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

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

 

Eoin Treacy's view -

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

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



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August 09 2017

Commentary by Eoin Treacy

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

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

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

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

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

Eoin Treacy's view -

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

 



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August 08 2017

Commentary by Eoin Treacy

Email of the day on batteries

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

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

Eoin Treacy's view -

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

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



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August 04 2017

Commentary by Eoin Treacy

Germany Giving Gigafactory a Home in Latest Challenge to Tesla

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

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

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

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

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

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

Merkel’s Endorsement

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

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

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

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

Eoin Treacy's view -

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



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August 01 2017

Commentary by Eoin Treacy

Musings from the Oil Patch August 1st 2017

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

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

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

 

Eoin Treacy's view -

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

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



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July 31 2017

Commentary by Eoin Treacy

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

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


Three hundred ten. 

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

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

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

Eoin Treacy's view -

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



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July 21 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 19 2017

Commentary by Eoin Treacy

Musings from the Oil Patch July 19th 2017

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

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

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

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

 

Eoin Treacy's view -

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

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



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July 18 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 14 2017

Commentary by Eoin Treacy

An email from David

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

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

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

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

Kind regards,

David

Eoin Treacy's view -

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July 07 2017

Commentary by Eoin Treacy

Musings from The Oil Patch July 6th 2017

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

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

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

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

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

 

Eoin Treacy's view -

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

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



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July 04 2017

Commentary by Eoin Treacy

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

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

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

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

 

 

Eoin Treacy's view -

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

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



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June 30 2017

Commentary by Eoin Treacy

China Is About to Bury Elon Musk in Batteries

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

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

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

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

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

 

Eoin Treacy's view -

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



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June 21 2017

Commentary by Eoin Treacy

Why Britain Has to Be Really Nice to Norway and Russia

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

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

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

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

Eoin Treacy's view -

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



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June 21 2017

Commentary by Eoin Treacy

June 20 2017

Commentary by Eoin Treacy

Musings From the Oil Patch June 20th 2017

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

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

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

 

Eoin Treacy's view -

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

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



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June 16 2017

Commentary by Eoin Treacy

Many Rivers to Cross Decarbonization breakthroughs and challenges

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

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

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

Eoin Treacy's view -

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



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June 14 2017

Commentary by Eoin Treacy

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

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

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

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

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

 

Eoin Treacy's view -

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



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June 09 2017

Commentary by Eoin Treacy

Renault plans foray into energy market with mega battery

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

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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June 07 2017

Commentary by Eoin Treacy

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

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

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

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

 

Eoin Treacy's view -

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



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June 06 2017

Commentary by David Fuller

Email of the day 1

On Theresa May’s disappointing campaign:

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

David Fuller's view -

Many thanks for your astute summary. 

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

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



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June 02 2017

Commentary by Eoin Treacy

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

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

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

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

 

Eoin Treacy's view -

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



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May 31 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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May 31 2017

Commentary by Eoin Treacy

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

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

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

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

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

Eoin Treacy's view -

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



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May 25 2017

Commentary by Eoin Treacy

Some reflections on Japanese monetary policy

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

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

Eoin Treacy's view -

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



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May 24 2017

Commentary by Eoin Treacy

The Big Green Bang: how renewable energy became unstoppable

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

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

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

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

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

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

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

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

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

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

Eoin Treacy's view -

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

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

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



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May 22 2017

Commentary by David Fuller

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

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

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

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

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

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

David Fuller's view -

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

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

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

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



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May 19 2017

Commentary by Eoin Treacy

China successfully mines flammable ice from the South Sea

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

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

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

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

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

 

Eoin Treacy's view -

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



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May 16 2017

Commentary by Eoin Treacy

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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May 16 2017

Commentary by Eoin Treacy

Inflation, El Nino, and Fishmeal

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

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

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

Eoin Treacy's view -

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

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



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May 15 2017

Commentary by David Fuller

Oil Price Indicators Flash Buy as OPEC Expectations Grow Bigger

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

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

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

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

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

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

David Fuller's view -

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

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



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May 12 2017

Commentary by Eoin Treacy

Stretching Thin

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

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

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

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

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

 

Eoin Treacy's view -

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

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



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April 26 2017

Commentary by Eoin Treacy

Commodities

Eoin Treacy's view -

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



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April 24 2017

Commentary by David Fuller

Exxon, Shell Join Ivanka Trump to Defend Paris Climate Pact

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

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

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

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

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

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

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

Climate Change Pact That Made History Now Faces Trump: QuickTake

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

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

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

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

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

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

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

David Fuller's view -

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



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April 24 2017

Commentary by Eoin Treacy

Musings From the Oil Patch April 18th 2017

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

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

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

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

 

Eoin Treacy's view -

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

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



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April 21 2017

Commentary by David Fuller

Gigantic Wind Turbines Signal Era of Subsidy-Free Green Power

Here is the opening of this encouraging article from Bloomberg:

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

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

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

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

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

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

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

David Fuller's view -

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



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April 20 2017

Commentary by David Fuller

Why the Market for Fossil Fuels Is All Burnt Out

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

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

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

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



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April 10 2017

Commentary by David Fuller

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

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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



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April 05 2017

Commentary by Eoin Treacy

Musings from the Oil Patch April 4th 2017

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

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

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

Eoin Treacy's view -

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

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



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April 04 2017

Commentary by Eoin Treacy

Email of the day on desalination

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

Eoin Treacy's view -

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

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

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

 



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March 29 2017

Commentary by David Fuller

Britain is the Least of European Problems

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

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

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

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

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

What about Europe’s financial markets?

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



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March 29 2017

Commentary by Eoin Treacy

Email of the day on hydrogen versus electric vehicles

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

Eoin Treacy's view -

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

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

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

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

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



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March 27 2017

Commentary by Eoin Treacy

Decarbonisation

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

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

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

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

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

Eoin Treacy's view -

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

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



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March 24 2017

Commentary by David Fuller

Time for Trump to Learn From Reagan

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

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

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

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

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

David Fuller's view -

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

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



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March 23 2017

Commentary by Eoin Treacy

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

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

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

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

 

Eoin Treacy's view -

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

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



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March 21 2017

Commentary by David Fuller

Big Oil Plan to Buy Into the Shale Boom

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

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

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

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

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

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

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

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

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

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

And:

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

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

David Fuller's view -

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

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

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March 21 2017

Commentary by David Fuller

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

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

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

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

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

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

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

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

David Fuller's view -

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

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



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March 20 2017

Commentary by Eoin Treacy

Google Might Run the Power Grid More Efficiently

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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March 10 2017

Commentary by David Fuller

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

Here is the opening of this topical article by Bloomberg:

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

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

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

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

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

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

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

David Fuller's view -

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

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

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

(See also this week's earlier comments.)



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March 09 2017

Commentary by David Fuller

US Shale Surge Overwhelms Oil Market as OPEC Splits Deepen

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

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

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

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

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

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

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

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

And:

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

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

And:

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

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

David Fuller's view -

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

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

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

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



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March 09 2017

Commentary by David Fuller

Green van Beurden of Shell Warns On Looming Peak Oil Demand

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

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

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

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March 09 2017

Commentary by Eoin Treacy

China Inflation Heads Off in Two Directions

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

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

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

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

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

 

Eoin Treacy's view -

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

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

 



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March 08 2017

Commentary by David Fuller

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

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

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

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

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March 08 2017

Commentary by Eoin Treacy

New Research Could Turn Water Into the Fuel of Tomorrow

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

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

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

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

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

 

Eoin Treacy's view -

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



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