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August 17 2018

Commentary by Eoin Treacy

Uranium: Time "U" move?

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

August 17 2018

Commentary by Eoin Treacy

Long-term themes review August 15th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Let me first set up the background; I believe we are in a secular bull market that will not peak for at least another decade and potentially twice that. However, it also worth considering that secular bull markets are occasionally punctuated by recessions and medium-term corrections which generally represent buying opportunities. 



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August 07 2018

Commentary by Eoin Treacy

Musings From the Oil Patch August 7th 2018

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB which may on this occasion focuses on the impending IMO 2020 regulations for ship emissions. Here is a section:

Eoin Treacy's view -

A link to the full report and a section from it is posted in the Subscriber's Area.

The Baltic Dry Index has base formation characteristics and exhibits a rounding characteristic associated with accumulation over the last five years. The pace of scrapping older ships is increasing as shipping rates are low and scrap prices are high so that will create a supply inelasticity environment eventually. Retrofitting costs of older ships both to comply with tighter emissions standards and new ballast water regulations mean the pace of scrapping is likely to increase.



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July 26 2018

Commentary by Eoin Treacy

Musings from the Oil Patch July 24th 2018

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. This week it contains some interesting commentary on natural gas. Here is an excerpt:

Natural Gas: The Forgotten Fuel’s Future Needs LNG Exports 

One can be forgiven if he/she believes only crude oil news is important to the energy sector.  The volatility of crude oil prices, coupled with the OPEC meeting drama and President Donald J. Trump’s twitter campaign against high oil prices, provides opportunities for shocking headlines and non-stop commentary by the media.  On the other hand, if your business is tied to natural gas, you can be excused for believing it’s pretty boring since no one is talking about gas.   

Eoin Treacy's view -

                    



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July 17 2018

Commentary by Eoin Treacy

Long-term themes review July 17th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.



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July 16 2018

Commentary by Eoin Treacy

Trump Says U.S. to Compete With Russia for Europe Gas Market

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

But Europe may have difficulty attracting gas cargoes from overseas, given higher prices in Asia. The WGI spot LNG assessment for Northeast Asia was $10.30 per million British thermal units on July 9, while U.K.’s National Balancing Point gas futures traded at $7.50 on Monday.

Longer term, gas export project developers in the lower 48 states may face delays as they wait for regulatory approval. Sefcovic called the U.S. approval process “redundant” and said it needed to be revamped.

Gazprom is Europe’s largest gas supplier and provides more than a third of the region’s needs in the fuel. Its chief executive officer, Alexey Miller, confirmed in June its plan to start laying the pipes in the next couple of months and to open the Nord Stream 2 link by late-2019. The project would cut Russia’s dependence on Ukraine and help meet additional demand for the fuel in the EU in next two decades as local production falls.

Meanwhile, Russia is unperturbed by the prospect of American LNG supplies to Europe. They “will never catch up with and will never surpass” Russian gas exports to the region, Miller said in June.

Eoin Treacy's view -

Gas is increasingly an international traded commodity with global markets expanding as more countries transition away from a reliance of coal for power generation and heating and from solid fuel or electricity for cooking. The USA has the potential to be a major gas exporter since it has more of the commodity than it knows what to do with but it will have a hard time competing with Russia for Europe’s market.



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July 16 2018

Commentary by Eoin Treacy

Long-term themes review June 22nd 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

I realise this summary at 4600 words is getting rather lengthy which is why I decided to right another book to more fully explore the issues represented by the rise of populism and what that means for markets and the global economic order. I’ve agreed an August/September deadline so hopefully it will be available this year.



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July 13 2018

Commentary by Eoin Treacy

Global Crude Oil Supply-demand

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

The IEA forecasts that US crude oil production will increase 1,720,000bbl/day in 2018 and 1,190,000bbl/day in 2019. In the Permian region, which has been driving growth in output, the lack of pipeline capacity is likely to persist until 2019. Because of this, Midland oil prices are some USD14/bbl lower than the WTI price. With issues including rising production costs and a lack of engineers, too, we think US shale oil output is unlikely to substantially exceed current forecasts even if tightening supply-demand causes oil prices to rise. See our 11 July 2018 Global research report US crude oil output - Sharp slowdown in pace of increase in 2019.  We estimate that US production forecasts are predicated on WTI price assumptions of USD55-60/bbl for 2018 and USD60-65/bbl for 2019. We estimate WTI of around USD70-75/bbl were the aforementioned short supply to be made up with increased output in the US.

Eoin Treacy's view -

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

The USA’s onshore production of oil and gas continues to surge, fuelled by access to cheap credit. If we cast our minds back to 2015, private equity firms had amassed massive sums to invest in energy and that has helped to fuel the surge in US supply over the intervening period.



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July 12 2018

Commentary by Eoin Treacy

Musings from the Oil Patch July 10th 2018

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. This week it contains some interesting commentary on estimates of sea level rises but here is a section on electric vehicle demand:  

There are many reasons why EVs are popular in California.  Continuing to lead national social trends, the large population of wealthy entertainment and technology people love to show off their social awareness credentials, while taking advantage of lucrative financial and other driving benefits by purchasing EVs.  Those benefits are being reduced as EV car manufacturers reach the limits at which federal tax subsidies for EVs are eliminated.  The state has recently decided to double down and boost spending to subsidize EV sales.  What is interesting, however, has been the elimination of the right to drive EVs in High Occupancy Vehicle (HOV) lanes in Southern California with one person, as too many vehicles have slowed lane speed and increased accident risk when EVs are entering and exiting HOV lanes.  When the Toyota Prius lost use of HOV lanes, sales fell the following year.  Prepare for similar shocks.  

Eoin Treacy's view -

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

Tesla will soon or potentially already has achieved 200,000 vehicles in sales which will mean that the $7500 subsidy buyers receive when taking delivery of cars will disappear. That’s a headache for the hundreds of thousands of people waiting to get their model 3s.



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July 11 2018

Commentary by Eoin Treacy

Crude Crumbles Under Trade War That Imperils Economic Growth

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

“There’s no doubt that that uncertainty continues to weigh, not only on the crude oil markets, but really all markets,” said Brian Kessens, who helps manage $16 billion in energy assets at Tortoise. As for the storage report, “there was a little bit of noise in the data. It just depends when the ships actually hit the docks.”

Oil topped $75 a barrel last week amid actual and anticipated supply disruptions from Canada to the Persian Gulf.

Saudi Arabia has promised to ramp up output to help cover shortfalls from other major suppliers, though some observers questioned the kingdom’s capacity to do so.

In the U.S. Gulf Coast region that includes refining centers in Texas and Louisiana, oil imports plunged by 1.13 million barrels last week, the steepest decline since September 2012, according to the EIA.

“There’s a sense that Saudi Arabia’s going to increase their exports to the U.S.,” Kessens said. “There’s a lingering sense in the back of people’s minds that we’ll see that a little bit later this summer.”

Eoin Treacy's view -

Oil prices have been firm because economic growth has been robust, OPEC had been reducing supply and major suppliers like Libya and Venezuela have dropped out of the market. News today that pro-government forces have retaken four of Libya’s export ports suggests supply will start flowing once more. Meanwhile the threat to China’s economy from a ratcheting up of tariffs is a simmering issue. 



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July 10 2018

Commentary by Eoin Treacy

Shipowners on Pace to Scrap $1 Billion in Oil Tankers This Year

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

Some 1,000 vessels are broken up every year and their steel and other metals are melted or simply stacked up and sold to factories. The yards in the Indian subcontinent recycle around 80% of all ships, with the remainder going to China and Turkey, although Beijing has said it will suspend scrapping starting next year.

The average age of VLCCs going to scrap this year is 18.8 years, the youngest since 2013, according to VesselsValue. A ship’s average operational age is around 25 years, but after 15 years in the water, the vessel has to go through an extensive survey to determine if it is seaworthy. “An average survey costs about $2 million, and you have to do it again at 20 years, so a number of owners opt to scrap instead,” Mr. Sharma said.

The oil glut is also sending offshore rigs to scrapyards. It is a relatively new business that has boomed over the past five years, as the cost of drilling at sea is much higher than inland exploration. At least 18 rigs have been broken up so far this year, compared with 46 last year, according to GMS.

Eoin Treacy's view -

The cost of maintaining a fleet of aging ships has risen considerably over the last few years because of the imposition of the long-awaited restrictions on bilge water discharge and environmental restrictions on diesel fuel. That is in addition to the cost of supporting vessels in a hostile maritime environment. These costs are helping to remove excess inventory from the market after a lengthy bear market.  



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June 27 2018

Commentary by Eoin Treacy

Musings from the Oil Patch June 26th 2018

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

To appreciate how the energy world is changing, two charts presented by Mr. Dale set the stage.  Global energy growth last year was 2.2%, up from 1.2% in 2016, and above the 10-year average of 1.7%.  That robust growth came as a result of strong global economic growth, but also due to a decline in energy productivity.  While the International Monetary Fund is warning of potential dark clouds on the horizon for global economic growth, its forecast remains robust, meaning energy growth is likely to remain high.  

Also important is the difference in where energy growth originated.  The driver for the above-average growth was the strength of the developed economies of the OECD, but also some deterioration in energy productivity.  However, nearly 80% of the total energy growth came from the non-OECD or developing economies of the world.  That is not surprising as they benefit from the global economic recovery, especially China.  China saw energy demand grow by 3%, nearly three times its growth rate of the past several years.  That higher growth was driven by recoveries in numerous high-energy sectors such as iron, crude steel and non-ferrous minerals.  Still, the high growth rate was well below China’s 10-year average rate, even though it was helped by a decline in energy intensity that was more than twice that of the global economy.  

The picture of primary energy fuel mix highlighted the title of Mr. Dale’s remarks – Two Steps Forward and One Step Back.  He pointed to the dramatic growth in natural gas and renewables as the two steps forward.  Combined, those two fuels accounted for 60% of the total growth in energy fuels.  

The backward step was the growth in coal usage.  In 2017, global coal use rose by 1.0%, or 25 million tons of oil-equivalent, marking the first annual increase since 2012.  The increase was driven by India, although China’s consumption also rose after declines in the three prior years.  

Eoin Treacy's view -

Batteries might eventually remove the need for quite so much back up conventional power generating capacity as renewable penetration of the energy market continues, but that is still some ways off. At present natural gas represents the happy medium between reliance on coal and the fact that renewables are not yet ready to stand on their own.



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June 22 2018

Commentary by Eoin Treacy

OPEC+ to Boost Oil Output After Saudis Secure Deal With Iran

This article by Wael Mahdi, Grant Smith and Nayla Razzouk for Bloomberg may be of interest to subscribers. Here is a section:

The final communique made no mention of whether the kingdom, or any other member, could compensate for losses elsewhere. Yet it said the group as a whole should strive for “overall conformity” of 100 percent, which in practice will only be achievable if those nations with spare production capacity step in to fill the gap left by others.

"The lack of specificity is bullish for prices,” said Joe McMonigle, senior energy analyst at Hedgeye Risk Management LLC. “It’s a mystery oil production increase because we don’t really know the final numbers."

Eoin Treacy's view -

OPEC is going to raise production by maybe 1 million barrels a day which is less than it could have. That probably represents the difficulty that exists in getting Saudi Arabia and Iran to agree on anything and suggests the market will be tighter than might otherwise have been the case.



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June 21 2018

Commentary by Eoin Treacy

Long-term themes review May 16th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a summary of my view at present:



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June 12 2018

Commentary by Eoin Treacy

Musings From The Oil Patch June 12th 2018

Thanks to a subscriber for this report edition of Allen Brooks’ ever interesting report for PPHB. Here is a fascinating section on energy efficiency statistics over the last 50 years:

Eoin Treacy's view -

A link to the full report and a section from it are posted in the Subscriber's Area.

There is no doubt that battery efficiency is improving and new solar innovation is being revealed on almost a weekly basis. There are laudable reasons for seeking to reduce carbon and nitrogen oxide emissions in our cities all of us can support. However, the question many people are worried about is whether this is merely transferring a problem from cities to less populated areas.



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June 12 2018

Commentary by Eoin Treacy

Truckers Protest High Gas Prices in Spotty Strikes Across China

This article by Te-Ping Chen for the Wall Street Journal may be of interest to subscribers. Here is a section:

While trucker protests in China have occurred in the past amid complaints of road tolls, fuel prices and excessive fees, Geoff Crothall, spokesman for the labor monitoring group, said he couldn’t recall trucker protests of a similar scale. He estimated thousands of truckers participated.

As they have the world over, gas prices have risen in China this year, by 8.6%, according to data from the Ministry of Commerce. Taxes and other fees generally make gas more expensive in China than the U.S., and on top of that the government sets the prices, lagging changes in international oil markets by 10 days or more.

China’s National Development and Reform Commission, which sets those prices, announced Friday that it would cut the retail price of gasoline and diesel by 130 yuan ($20.29) per ton for gasoline and 125 yuan per ton for diesel. The new prices, effective this past Saturday, reflect a recent retreat in global oil prices. In the central province of Anhui, a transportation hub where protests occurred, gasoline now costs $3.99 a gallon, and diesel $4.04 a gallon.

Rising fuel costs have elsewhere prompted worker frustrations to spill over, most notably in Brazil, where protesters blocked highways and halted shipments of food, fuel and medicine before the government called in the military to help end the strike. Other trucker protests have also recently broken out in Iran.

Eoin Treacy's view -

Trucking has been all over the news recently with strikes in China and Brazil over high fuel prices and low pay while the USA is in dire need of 50,000 drivers.  These trends point to the fact the USA is close to full employment so attracting workers is becoming an issue while all three countries share upward pressure on wages. Higher shipping rates are inflationary because it will put pressure on companies to cover the increasing costs by raising prices for the end customer.



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June 11 2018

Commentary by Eoin Treacy

Biggest Electric-Vehicle Battery Maker Soars 44% on Debut

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

Shares of the world’s biggest maker of electric-vehicle batteries jumped on their trading debut as investors bet on rising demand for new-energy cars worldwide.

Contemporary Amperex Technology Ltd. rose by the maximum 44 percent to 36.20 yuan at 10:17 a.m. in Shenzhen, China, valuing the company at about $12.3 billion. The manufacturer sold a 10 percent stake at 25.14 yuan a share in its initial public offering on May 30.

Investors are confident that CATL, as the company is known, can fend off rivals including Panasonic Corp. and continue to win orders as automakers move toward electric vehicles. CATL, whose customers include Volkswagen AG, had reduced the size of its IPO by more than half compared with its original ambitions because of declining margins and a cap imposed by Chinese authorities on price-earnings ratios in IPOs.

 

Eoin Treacy's view -

CATL produces more batteries than Tesla and is likely to continue to do so well into the future considering the pace of factory building it has planned. China has every intention of dominating the battery sector both because it is the largest auto market but also because it has a clear aim to become globally competitive in auto exporting. Additionally, as an energy importer it has a clear reason to reduce imports of oil if at all possible. That suggests China will be investing heavily in batteries for the foreseeable future.



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June 08 2018

Commentary by Eoin Treacy

Milestone claimed as experimental nuclear reactor reaches temperature of the Sun

This article by Nick Lavars for NewAtlas may be of interest to subscribers. Here is a section:

The pursuit of nuclear fusion is inspired by the collision of atomic nuclei in stars, which fuse together to form helium atoms and release huge amounts of energy in the process. If we can recreate this process we could have an inexhaustible supply of energy on our hands that brings no harmful by-products, such as carbon dioxide emissions or the radioactive waste generated at nuclear fission-based power plants like Fukushima and Chernobyl.

But to do that we need to create Sun-like conditions here on Earth, which calls to mind one requirement first and foremost – incredible amounts of heat. Tokamak Energy hopes to achieve this through what's known as merging compression, where running high currents through two symmetrical magnet coils generates two rings of plasma, or electrically charged gas, around them.

Eoin Treacy's view -

The ITER tokomak being constructed in the south of France is based on technology from the 1970s. It is coming at the problem of containing plasma by building a big containment unit which is costing upwards of $30 billion. Today, much stronger magnetic fields can be attained through the use of superconductors. That means experiments can be much smaller and cost a fraction of the ITER model.



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June 04 2018

Commentary by Eoin Treacy

Cobalt price: Congo production surges

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

Supply risks for cobalt are centred on the Democratic Republic of the Congo which is responsible for two-thirds of world output. And the country’s share will only increase over the next five years as Chinese investment in new mines come on stream.

The central African nation's output of cobalt – as a byproduct of copper production – is already soaring as top producer Glencore's operations in the country ramps up again after a refurbishment period.

The DRC produced 296,717 tonnes of copper in the first quarter of 2018, up 8.2% over the same period last year, the central bank said in a report on Thursday. Cobalt production in the first quarter of 2018 rose 34.4% to 23,921 tonnes. Global production last year was around 117,000 tonnes.

Eoin Treacy's view -

The oldest adage from the commodity markets is the cure for high prices is high prices. Cobalt is up 400% already so on the supply side there is real pressure to increase supply. On the demand side consumers are investing heavily in coming up with new chemistries to reduce cobalt intensity.



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June 01 2018

Commentary by Eoin Treacy

U.S. Oil Poised for Weekly Loss as Record Output Weighs on Price

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

While hedge funds invested in U.S. oil are betting pipeline bottlenecks will make Texas crude even cheaper, trading giants are seeing an opportunity to export millions of barrels as shale output continues to surge. For now, American price moves have favored the financial players. Meanwhile, Brent climbed last month following President Donald Trump’s decision to reimpose sanctions on Iran, and as Venezuelan output plunged amid an economic crisis.

Also at the forefront of investors’ minds is OPEC and the allies’ next step on output cuts. Saudi Arabia and Russia said last week that they are considering boosting production to ease potential supply disruptions in Iran and Venezuela after a global surplus was eliminated. Most producers weren’t consulted about the proposal, and officials from several producers said they disapproved of raising output.

 

Eoin Treacy's view -

The spread between West Texas Intermediate and Brent Crude is currently at $8.50 which is beginning to make headlines but the gap between the two benchmarks has been rising steadily for the last couple of years and broke out this week. The difference has been as high as $12 and even $16 as recently at 2014 so the argument for boosting exports is likely to be a hot topic of conversation in the USA.

 



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May 29 2018

Commentary by Eoin Treacy

Musings from the Oil Patch May 29th 2018

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

 

Eoin Treacy's view -

A link to the full report and a section from it are posted in the Subscriber's Area. 

There is no argument that the goal of reducing carbon emissions is a laudable one. However, shuttering the nuclear industry in Germany, which has neither a history of seismic or tsunami activity, is another example of how blind adherence to ideals rather than reality on the ground results in less than optimal outcomes. This is another symptom of the wider problem inside the EU where observance of ideals is prioritized over the needs of the population.



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May 29 2018

Commentary by Eoin Treacy

Oil Slips After Saudi-Russian Revival Talk `Popped the Bubble'

 

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

 

“Clearly, the commentary from Russia and Saudi Arabia popped the bubble,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund. “There’s some legitimate skepticism about whether or not they will follow through. There is going to be nervousness right up until next month’s meeting.”

Eoin Treacy's view -

It is looking increasingly likely that a process of mean reversion is now underway for the oil price. The commitment to lower supply by both OPEC and Russia was one of the primary drivers behind the persistence of the advance over the last 18 months and that now appears to be over.



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May 25 2018

Commentary by Eoin Treacy

Saudis Signal Oil Output Boost, Offering Relief to Consumers

This article by Jack Farchy, Dina Khrennikova and Elena Mazneva for Bloomberg may be of interest to subscribers. Here is a section:

“Given current developments, with supply worries driving the price to $80, it would make perfect sense to remove the over-compliance by compensating for the shortfall from Venezuela,” said Ole Sloth Hansen, an analyst at Saxo Bank A/S in Copenhagen.

Excess cuts amounted to about 740,000 barrels a day in April, according to estimates from the International Energy Agency. Without compensating supply from other members, this number looks likely to expand as the U.S. re-imposes sanctions on Iran and the collapse of Venezuela’s oil industry worsens.

Whether the size of the supply increase is ultimately "a million, more, or less, we’ll have to wait until June," when OPEC and its partners will meet, Al-Falih said. Novak echoed that, saying “it’s too early now to talk about some specific figure, we need to calculate it thoroughly.”

Typically, OPEC operates by consensus, meaning members that have little prospect of boosting production -- Venezuela, Iran and Angola -- would have to agree to the proposal.

Saudi Arabia has recently shown willingness to push prices higher to bankroll domestic economic reforms and underpin the valuation of its state oil company in a planned initial public offering. That appears to be changing, with the Aramco listing delayed until 2019 and Brent crude flirting with the kingdom’s desired price of about $80 for most of this month.

Eoin Treacy's view -

The USA has re-imposed sanctions on Iran and no one is likely happier about that than Saudi Arabia. That is also likely to have a played a role in the decision to help rebalance the oil market. Brent crude is no longer in backwardation between the first and second months suggesting some of the near-term pressure on supply is easing.



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May 25 2018

Commentary by Eoin Treacy

Renewable energy: A green light to Copper Demand

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

Eoin Treacy's view -

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

There is always a new demand led story in any bull market and renewables do represent such an opportunity. However, the success of that new idea is dependent on the conventional sources of demand remaining on a steady trajectory and it is in that regard that doubts tend to be raised about copper.



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May 24 2018

Commentary by Eoin Treacy

Petrobras Punished by Wall Street for Caving on Fuel Prices

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

The reaction was swift and severe. Petrobras Chief Executive Officer Pedro Parente woke up this morning to a wave of downgrades from the same Wall Street analysts who had been praising him since he took the helm of the state-controlled oil producer two years ago.

Bank of America Merrill Lynch, Morgan Stanley and Credit Suisse Group AG all cut their recommendations after Parente announced a 10 percent cut in wholesale diesel prices late Wednesday to help the government negotiate an end to a nationwide truckers strike that has wrought havoc on Latin America’s largest economy.

“The just announced diesel price reduction in response to truckers’ protest is likely to materially damage Petrobras’ perceived independence in a way that may be difficult to recover,” Frank McGann, an analyst at Merrill Lynch, wrote in a report where he cut his recommendation on the company’s American depositary receipts to neutral and his price objective to $17.

“We think that the investment case for Petrobras has been seriously damaged, and the risk profile has risen.”

While Parente said Petrobras isn’t bowing to pressure and that the temporary measure doesn’t mean a change in its pricing policy, shares extended losses in after hours trading to as low as $13.40 in late New York trading.

Eoin Treacy's view -

Petrobras is a major constituent in global high yield benchmarks so its decision to cut price against a rising oil price environment is not especially good news. Along with Turkey and Argentina, the risk in the high yield sector has increased this year.



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May 17 2018

Commentary by Eoin Treacy

Global surge in air-conditioning set to stoke electricity demand

Thanks to a subscriber for this article by Ed Crooks for the Financial Times which may be of interest. Here is a section:

Over the next 30 years, air-conditioning could increase global demand for electricity by the entire capacity of the US, the EU and Japan combined, unless there are significant improvements in the efficiency of the equipment, the IEA warned.

In a report released on Tuesday, the agency urged governments to use regulations and incentives to improve the efficiency of air-conditioning units, to avoid a surge in demand that could put strains on energy supplies and increase greenhouse gas emissions.

Fatih Birol, the IEA's executive director, said: “This is one of the most critical blind spots in international energy policy.”

Air-conditioning has had an enormous effect on the quality of life in hot regions, but its use is unevenly distributed around the world. About 90 per cent of homes in the US and Japan have air-conditioning, compared with about 7 per cent in Indonesia and 5 per cent in India.

Electricity used for cooling in the US is almost as great as the entire demand for power in Africa.

Eoin Treacy's view -

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

There was a story a few years ago where world leaders were asked what the greatest invention of the 20th century was. Some said the electrical grid but the Prime Minister of Singapore said air conditioning. He opined that without it most people in the country would still be seeking shelter from the heat under the nearest tree.



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May 17 2018

Commentary by Eoin Treacy

Email of the day on the high cost of electric vehicle subsidies

I just returned from a very eye-opening trip to Arizona, visiting Scottsdale (in the Sonoran desert) and the mountains of Northwestern Arizona. We flew into Phoenix and drove a lot. We saw zero Teslas. I'm told there are a few around Phoenix. But with the poor performance of electric vehicles in both cold and hot environments, it probably should not be shocking.

Going to Arizona from California is like going from lala land, where the majority of people are drinking weird kool-aid, to the real world, where people work for a living, dislike taxes, and are really concerned about the massive influx of Californians who are oddly leaving their dream state.

Electric car enthusiasts here in CA get the pleasure of paying $0.38/kwh for their electricity, FAR above the advertised $0.12/kwh, thanks to tiered billing and some of the highest real electric rates in the nation. When an electric car is parked in every driveway, neighborhood power distribution systems will be grossly overloaded (recharging typically starts after 6pm and finishes before 8am, compressing the "average" load on power networks). So, these systems will have to be replaced at taxpayer or ratepayer expense, with lower income people getting no benefits but definitely sharing substantially in the costs.

All this means that one of the highest tax states in the Union will become far higher taxed, both in direct taxes and indirect taxes like state mandated burdens on electricity ratepayers. Meanwhile gas taxes remain some of the highest in the nation, and will only go higher, putting yet more burden on the lower income folks. 

Meanwhile, the exodus of retirees naturally accelerates.

Eoin Treacy's view -

Thank you for this illuminated article. Filling up in California right now is definitely resulting in sticker shock with premium at $3.67 at Costco and testing $4 on the westside of LA. Electric vehicles have come a long way in terms of both efficiency and range but still have a long way to go in order to fully displace the internal combustion engine. Thanks also for the educative report from Continental Economics which I’m sure will be appreciated by subscribers. Here is a section:



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May 16 2018

Commentary by Eoin Treacy

The Coming Scramble for Middle Distillates

Thanks to a subscriber for this report from Morgan Stanley 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.

The futures curves for crude oil, gasoline, gasoil and heating oil are all in backwardation which confirms there is a supply shortage. OPEC and Russia’s curtailment of supply coupled with the re-imposition of sanctions on Iran and Venezuela’s implosion at certainly part of the story. The surge in supply from unconventional supplies is also pulling pressure on refineries because of the differing grades from what they are set up to receive.



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May 15 2018

Commentary by Eoin Treacy

Musings from the Oil Patch May 15th 2018

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

Eoin Treacy's view -

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

If the USA’s increasingly powerful position as a swing producer of oil and gas is reducing the need for it to play the part of the global police force then what can we conclude from China launching its first domestically produced aircraft carrier this week?



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May 15 2018

Commentary by Eoin Treacy

Long-term themes review April 10th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a summary of my view at present:



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May 11 2018

Commentary by Eoin Treacy

Elysis: A New Era for the Aluminum Industry

This press release today announcing a joint venture between Rio Tinto and Alcoa, with technical input from Apple, may be of interest to subscribers. Here is the key point apart from being carbon free:

A NEW ERA FOR THE ALUMINUM INDUSTRY

There’s a new, revolutionary way to make aluminum. It eliminates all direct greenhouse gases. And it produces pure oxygen.

 The technology can create more aluminum in the same size smelting cell as the traditional process. And it can be installed in new facilities or retrofitted for existing ones.

Eoin Treacy's view -

What I think will surprise many people is that a test facility has been running at Alcoa’s Pittsburgh test facility since 2009 so this is not some far-off pipe dream but it already has a proof of concept and is primed for commercialization. The first commercially oriented industrial project is expected to begin producing aluminium in 2024.



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May 04 2018

Commentary by Eoin Treacy

War on coal making the world's top mine owners a lot richer

This article appeared in Mining.com and may be of interest. Here is a section:

Some of the more significant declines are occurring in China, the top mine operator, and financing for new supplies is drying up. That’s creating a windfall for the producers who remain.

“It’s a perverse consequence” of policies intended to combat climate change, said Julian Treger, co-founder of activist investor Audley Capital Advisors LLP. “It’s going to be very difficult for funders to provide capital to bring new coal assets online. We have a very interesting supply and demand picture being set up.”

Anglo American, which not long ago wanted to unload its coal assets, has seen income from the business triple since 2015 to become the mining company’s most profitable commodity. Last year, Glencore reported earnings from the fuel more than doubled, while BHP Billiton said it surged sixfold.

While global coal use and mine output has been dropping, production failed to keep pace with demand in 2016 for the first time in seven years, data compiled by BP Plc show. As supplies continue to drop, the amount available for export is shrinking. BMO Capital Markets says the 1 billion-metric-ton seaborne market will have a small deficit by 2021 and expand to 15 million tons in 2022.

Eoin Treacy's view -

Coal is about as unfashionable as one might imagine and it must be very difficult for companies to raise capital to increase supply considering how negative sentiment is. At the same time, coal is one of the world’s most popular sources of energy and is indispensable in the production of steel. A good many coal companies when bust before prices started to recover in 2016 and supply is still constrained.



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May 01 2018

Commentary by Eoin Treacy

Musings From the Oil Patch May 1st 2018

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

The Bloomberg article highlighted the plight of Big Oil.  Its weighting in global equity indices is at a 50-year low.  Of the MSCI World Index’s 100 biggest stocks, only six are oil producers.  Within the Standard & Poor’s 500 Index, Exxon Mobil Corp. (XOM-NYSE), which a decade ago was the largest company, has fallen to ninth place, and investors are requiring higher dividend yields to sustain the share price.  So, what’s the problem for Big Oil?  Simple.  There is a perception that the world is awash in oil at the same time its long-term demand may be falling due to the public’s embrace of climate change policies promoting renewable energies and electric vehicles.  

Institutional money manager Kevin Holt of Invesco Ltd. was quoted in the Bloomberg article saying, “Earnings have started to come through but no one believes it’s sustainable.  That’s why the stocks haven’t worked even though the commodity has gone up.  Everyone’s saying they don’t believe it.”  

Stock market valuations are the collective view of investors as to the future earnings and dividend prospects for companies.  Current low valuations are a manifestation of the industry’s negative perception.  Mr. Holt is certainly correct about oil prices.  Since the start of this year, Brent/WTI prices have climbed 12.2%/13.3% through April 23rd.  If we go back to the oil price low of 10 months ago, prices have soared by 66.7%/61.4%.  In the past, an increase in oil prices of those magnitudes would have sparked a meaningful recovery in oil company and oil-related company share prices.  

A report by the oilfield service research team at Barclays delivered a similar message about their universe of stocks as cited by Bloomberg about Big Oil.  The most telling chart shows a nearly complete correlation (0.96) between the movement in oil prices and the value of the Philadelphia Oilfield Service Stock Index (OSX) between January 2012 and January 2016.  However, from June 2017 to April 2018, the correlation has fallen to only 0.06.  And, June 2017 marked the low price for crude oil!  

Eoin Treacy's view -

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

One of the biggest consensuses in the markets at present is that the future is going to be carbon free, and not in a couple of decades but imminently. There is no doubt that electric car penetration is rising, particularly in China, but it will still be years before it reaches even 10% of the global fleet. I think there is reason for optimism about the future of carbon emissions based on technological improvements alone but perhaps enthusiasm has overtaken the reality represented by the market.



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April 30 2018

Commentary by Eoin Treacy

Email of the day on the long-term outlook and potential for inflation

In your 10/April long-term themes review, you said: "So, the big question many people have is if we accept the bullish hypothesis how do we justify the second half of this bull market based on valuations where they are today? ..... However, the answer is also going to have to include inflation. "

My thoughts, not in any particular order:

If we look at Robert Shiller's research ~1870-now, on the US share market, his studies show that historically, extreme valuations in the US share market (as assessed by cyclically adjusted P/E ratio) have always been followed by poor average real return over the following 10-20 years."
You point to inflation as to how a secular bull market (in nominal terms implied) can now occur for the US share market (by implications I think you are reflecting on the US share market) over say the next 10-15 years (say).  You use the experience of Argentina and Venezuela as justification for your argument - where from memory, there was hyperinflation in the periods to which you refer.

First, I do not think you are suggesting hyperinflation for the USA .... mismatch 1.
For Argentina and Venezuela, I think their currencies also crashed. I do not think you are suggesting the US dollar is going to crash. Possible mismatch 2.
Rather than a comparison with Venezuela and Argentina, perhaps a better analogy is to the period in the USA following the late 1960s, when US share markets where at quite high valuations (though not nearly as expensive as now on a CAPE basis). Following the peak valuations of the late 1960s, the US share market went sideways (with some large dips) over the next 16 years or so.

In summary, I am not sure that your argument is particularly robust.  Yes, the technological revolution is a critically important new phase which will have a huge impact over the next 10 and 20 years..... and there may well be a secular bull market in that sector ... but does that really mean that the technology sector by itself will take the whole S&P500 with it in a secular bull market for the next 10 or 20 years?

Your thoughts?

Eoin Treacy's view -

Thank you for this question which gave me plenty of room for thought. My first reflection is that one of the benefits of this service is the Socratic dialectical method unfolds in real time as these big topics offer endless room for discussion and revision. I spent a good deal of time talking about long-term cycles in the Big Picture Video on the 27th which you may find of interest. 



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April 27 2018

Commentary by Eoin Treacy

World's lithium king is ready to unleash a flood of new supply

This article from Bloomberg appeared in Mining.com and may be of interest. Here is a section:

“There is a legitimate concern on the side of battery manufacturers about long-term availability of supply,” said Daniel Jimenez, an SQM vice president who recently estimated that the industry will require a capital investment of $10 billion to $12 billion in the next decade to meet demand.

The green light to mine vastly more lithium, combined with pending changes in its ownership structure, has suddenly put SQM in the sights of several global mining companies, including London-based giant Rio Tinto Group. Among the most aggressive bidders is China’s Tianqi Lithium Corp., which has offered to buy SQM shares at a 20 percent premium, Eduardo Bitran, the former head of government development agency Corfo, said earlier this year.

“Tianqi owning the stake would be another step towards overall Chinese consolidation of the lithium industry,” Chris Berry, a New York-based energy-metals analyst and founder of House Mountain Partners LLC., said in an email.

Eoin Treacy's view -

SQM’s growth projections have been among the chief catalysts in the decline of lithium miners over the last few months. The big question is how quickly demand picks up over the next decade to absorb additional supply. Lithium was a supply inelasticity meets rising demand market from 2013 but really only garnered interest in the last couple of years as the shares turned to outperformance. Supply is now increasing so we are likely to see more volatility in the respective shares. This story further highlights China's intention to be the dominant force in the electric car sector. 

 

 



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April 26 2018

Commentary by Eoin Treacy

Musings from the Oil Patch April 16th 2018

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

Eoin Treacy's view -

A link to the full report and a section from its are posted in the Subscriber's Area.

Major companies, like Exxon Mobil and Royal Dutch Shell, transitioned from being majority oil producers’ years ago. While they still report in energy equivalent barrels the reality is that the majority of their production is natural gas. As a comparatively clean fuel, which tends to see demand increase as living standards improve, the long-term outlook for gas demand appears to be relatively secure.



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April 17 2018

Commentary by Eoin Treacy

The de-dollarization in China

This article by Giancarlo Elia Valori for ModernDiplomacy.eu may be of interest to subscribers. Here is a section:

As further sanction, the United States has removed Iran from the SWIFT network, the well-known world interbank transfer system, which is also a private company.

Iran, however, has immediately joined the Chinese CIPS, a recent network, similar to SWIFT, with which it is already fully connected.

Basically China’s idea is to create an international currency based on the IMF’s Special Drawing Rights and freely expendable on world markets, in lieu of the US dollar, so as to avoid “the dangerous fluctuations stemming from the US currency and the uncertainties on its real value “- just to quote the Governor of the Chinese central bank, Zhou Xiaochuan, who will soon be replaced by Yi Gang.

In the meantime, Russia and China are acquiring significant amounts of gold.

In recent years China has bought gold to the tune of at least 1842.6 tons, but the international index could be distorted, as many transactions on the Shanghai Gold Exchange are Over the Counter (OTC) and hence are not reported.

Again according to official data, so far Russia is supposed to have reached 1857.7 tons.

Both countries have so far bought 10% of the gold available in the world.

Meanwhile, Saudi Arabia has already accepted payments in yuan for the oil sold to China, which is its largest customer. This is a turning point. If Saudi Arabia gives in, sooner or later all OPEC countries will follow suit.

Eoin Treacy's view -

I find these arguments about the petrodollar to be very interesting. The establishment of the Dollar’s dominance in global trade was a masterstroke of diplomacy when the Saudi Arabians agreed to exchange Dollars for investment opportunities and military security. However, that was also at a time when the importance of oil to the global economy was growing.



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April 10 2018

Commentary by Eoin Treacy

Saudi Arabia Is Said to Signal Ambition for $80 Oil Price

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

Saudi Oil Minister Khalid Al-Falih has also sounded increasingly hawkish in public, suggesting that OPEC should keep tightening the oil market even through the cartel is close to meeting its goal of cutting crude inventories in industrialized countries back to their five-year average.

In an interview in New York last month, he said today’s price near $70 a barrel hadn’t been sufficient to stimulate investment in the industry, which remains significantly below levels seen before 2014’s price crash.

"That tells me that the pricing signals that have come out of the recovery haven’t been sufficient," he said, without giving a target for prices.

The Saudi Ministry of Energy didn’t immediately respond to a request for comment.

Domestic Policy
Riyadh’s desire for higher prices is driven by domestic policy imperatives. Although Saudi Arabia’s budget deficit has narrowed sharply as oil has recovered, Prince Mohammed has set out an ambitious and expensive economic and social reform program. He also needs to pay for the kingdom’s increasingly drawn-out military entanglement in Yemen.

While there’s little indication the Saudis are prepared to deepen their oil cuts to achieve $80, at the very least the aspiration suggests they’ll keep with the current measures until the price goal is closer. Riyadh is counting on declining Venezuelan oil production, the likely imposition of new U.S. sanctions on Iran, and continued demand growth to absorb U.S. shale production.

Eoin Treacy's view -

In addition to sanctions on Iran, the deteriorating relationship Europe and the US have with Russia is exerting an influence on oil prices which closed above $70 today and in dynamic fashion. That is going to act as an incentive to increase supply among various higher cost producers such as shale properties, tar sands and deep water, though that supply is going to take time to come to market.

 



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April 03 2018

Commentary by Eoin Treacy

Musings From the Oil Patch April 3rd 2018

Thanks to a subscriber for this edition of Allen Brooks’ everinteresting report for PPHB. Here is a section on autonomous vehicles:

Eoin Treacy's view -

A link to the full report and a section from it are posted in the Subscriber's Area. 

Google’s Waymo is obviously the leader based on the above statistics in what is likely to be a transformational technology; once commercialised. Nevertheless, this is still an emerging technology that, despite its potential, needs further innovation to reach the point where drivers are optional.



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March 22 2018

Commentary by Eoin Treacy

Long-term themes review March 7th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a brief summary of my view at present.



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March 20 2018

Commentary by Eoin Treacy

Musings From the Oil Patch March 20th 2018

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

Eoin Treacy's view -

Both a section from the report and a link to a pdf are posted in the Subscriber's Area.

Shale oil is typically of the light variety which is used for gasoline production rather than diesel. Europe has favoured diesel for a long time and the aftermath of the Volkswagen cheating scandal suggests it will be using less in future. A lot of the new supply that has become economic over the course of the last 15 years has been of the heavy variety but that is now changing with the evolution of US domestic onshore tight resources. That represents a significant retooling risk for European refineries while the US sector will also need to evolve to cater to the prolific supply coming on line domestically.



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March 16 2018

Commentary by Eoin Treacy

New study rips into cobalt, lithium price bulls

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

Prominent commodities research house Wood Mackenzie this week released a report on battery materials that forecasts a decline in the price of cobalt and lithium this year which would turn into a rout from 2019 onwards.

Woodmac is not lowballing demand growth for lithium and the authors expect demand to grow from 233 kilotonnes (kt) in 2017 to 330kt of lithium carbonate equivalent in 2020 and 405kt in 2022, but:

… the supply response is under way. Yet it will take some time for this new capacity to materialise as battery-grade chemicals. As such, we expect relatively high price levels to be maintained over 2018. However, for 2019 and beyond, supply will start to outpace demand more aggressively and price levels will decline in turn.

According to Woodmac data, spot lithium carbonate prices on the domestic market in China are already down 6% from December levels to around $24,500 a tonne while international market prices have remained robust rising to $16,000 at the end of February.

Eoin Treacy's view -

Lithium and cobalt represent the freshest iterations of the supply inelasticity meets rising demand condition that contributes to the cyclicality of mining ventures. Batteries are now big business and with Volkswagen saying this week that it is willing to outspend Tesla on batteries by the early 2020s the demand portion of the market is well affirmed.



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March 15 2018

Commentary by Eoin Treacy

Pipeline Stocks Sink as FERC Kills Key Income-Tax Allowance

This article by Stephen Cunningham, Tim Loh and Jim Polson for Bloomberg may be of interest to subscribers. Here is a section:

Wells Fargo & Co. analyst Michael Blum said the broad selling was an overreaction, because the effects would be felt only on partnerships with a large amount of interstate pipelines.

"It’s definitely a negative, but it’s not Armageddon for MLPs," Jay Hatfield, a New York-based portfolio manager at the InfraCap MLP exchange-traded fund, said by telephone. "And it’s not as if it affects every asset in every single MLP."

Even among interstate pipelines, it’s unclear how much the ruling will impact different assets, Selman Akyol, an analyst at Stifel Nicolaus & Co. wrote in a note Thursday. That’s because these pipelines can charge rates based on a different agreements -- there are "cost of service" rates, which will be affected, as well as market-based rates or negotiated ones, which won’t be impacted. What’s more, "cost of service" rates are partly built on aspects that have nothing to do with taxes -- including maintenance and depreciation costs for the pipeline.

"This adds a layer of uncertainty to the group, and we do not expect it to be cleared soon," Akyol said in the note. “We anticipate companies will provide disclosures around cost of service exposure and potential impact to cash flow.”

The decision could further the trend of MLPs converting into corporations -- or simply selling interstate pipelines affected by this change in policy to existing corporations such as Kinder Morgan Inc., Hatfield said.

Eoin Treacy's view -

Master Limited Partnerships are generally highly leveraged because taking out debt to fund the construction of pipelines is feasible considering the reliability of the cashflows that arise from it once it moves into service. However as with any leveraged balance sheet how it is treated for tax is a thorny issue which has resulted in a sharp sell-off today as the investors concluded it was better to sell first and ask questions later.



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March 14 2018

Commentary by Eoin Treacy

Commodities Daily

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

The cocoa price has soared by 33% in New York and by 28% in London since the beginning of the year. Thus cocoa has achieved the best price performance of all the commodities we track this year – with the exception of carbon. The Coffee and Cocoa Council (CCC) of Ivory Coast, the world’s largest cocoa producer, apparently wishes to curtail its cocoa production. The first step is to count the plantations. Depending on the result, the distribution of higher-quality seeds and plants for the 2018/19 season is then to be temporarily suspended. The aim is to combat the overproduction that saw cocoa prices forced to multi-year lows at the end of last year. According to the International Cocoa Organization, global supply exceeded demand by 300,000 tons in the 2016/17 crop year. The surplus is set to decline to a good 100,000 tons in the current crop year 2017/18. Deficits are needed to reduce the cumulative surplus, as was the case on the oil market a good year ago. OPEC brought this about by cutting production, and Ivory Coast appears to want to follow a similar strategy for cocoa. If the CCC has its way, Ivorian cocoa production will be lowered from 2 million tons now to 1.7-1.8 million tons within two years. Ivory Coast has a good 40% share of the cocoa market, which is even somewhat higher than OPEC’s share of the oil market.

Eoin Treacy's view -

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

I was trading cocoa back in August for rather modest profits because I was hoping it would complete its base formation. I grew impatient with the ranging, and probably would not have held in any case during the steep decline posted in December, but there was certainly a case for buying it back at the January lows. The price has now surged higher to emphatically complete its base formation and while increasingly overbought in the short term, a clear downward dynamic would be required to check momentum.



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March 13 2018

Commentary by Eoin Treacy

Volkswagen Steps Up Tesla Rivalry in $25 Billion Battery Buy

This article by Chris Reiter and Christoph Rauwald for Bloomberg may be of interest to subscribers. Here is a section:

 

Volkswagen AG secured 20 billion euros ($25 billion) in battery supplies to underpin an aggressive push into electric cars in the coming years, ramping up pressure on Tesla Inc. as it struggles with production issues for the mainstream Model 3.

The world’s largest carmaker will equip 16 factories to produce electric vehicles by the end of 2022, compared with three currently, Volkswagen said Tuesday in Berlin. The German manufacturer’s plans to build as many as 3 million of the cars a year by 2025 is backstopped by deals with suppliers including Samsung SDI Co., LG Chem Ltd. and Contemporary Amperex Technology Ltd. for batteries in Europe and China.

With the powerpack deliveries secured for its two biggest markets, a deal for North America will follow shortly, Volkswagen said. In total, the Wolfsburg-based automaker has said it plans to purchase about 50 billion euros in batteries as part of its electric-car push, which includes three new models in 2018 with dozens more following. 

Eoin Treacy's view -

Volkswagen needs a new strategy if it is going to get past the diesel scandal, so embracing batteries whether for all-electric or hybrid vehicles is a solution. By committing to such a large purchase of batteries it will overtake Tesla as the largest consumer and this announcement helps to backstop demand for the world’s largest battery producers as well as the miners that produce the requisite metals.



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March 05 2018

Commentary by Eoin Treacy

OPEC Must Rethink Plans as $60 Oil Brings New Glut, IEA Says

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

"Established producers need to reconsider their production plans quickly and substantially in light of the huge production increase from U.S. shale," the agency’s Executive Director Fatih Birol said Monday on the sidelines of the CERAWeek by IHS Markit conference in Houston. Asked whether he was referring to OPEC nations, Birol said: "All OPEC producers are established producers."

The Organization of Petroleum Exporting Countries and allies including Russia, Mexico and Kazakhstan agreed to cut production in late 2016 in an effort to clear a glut in crude inventories. They defied the skeptics by going deeper than their pledged curbs and maintaining them for long enough to deplete the bloated stockpiles.

Yet the strategy has also backfired by unleashing “a new wave of growth from the U.S.” that leaves little space for OPEC to increase output once the cuts expire at the end of the year, according to the agency’s report.

The U.S. will dominate global oil markets for years to come, satisfying 80 percent of global demand growth to 2020, the IEA said. Supplies from other non-OPEC nations will make up the rest.

Eoin Treacy's view -

US unconventional supply is elastic since the pace of production can only be sustained by continued drilling. When prices are high production can be hedged out as far as two years which ensures profitability. At the same time, drilling multiple horizontal wells is a capital-intensive exercise and the sector has been issuing a great deal of debt to fund production in the hope prices will stay higher for longer.

 



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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

Email of the day on the potential for downtrends

Your recent assessments of the markets appear to be that a period of ranging is likely to be followed by markets going up again. Of course, whilst no one knows what the future will be, I wonder why you don't see the greater likelihood of markets turning down after some consolidation. With the amount of US debt increasing, interest rates increasing, and stock market levels already high by historical standards, are you not more concerned that markets, being forwards looking, might be more likely to head down than up? Esp. since markets struggle when interest rates go above 3%? I appreciate your talk of share rotation, but a rising tide lifts all boats and surely the opposite is true when markets tank?

Eoin Treacy's view -

Thank you for these questions which I think everyone asks from time to time. For someone in our position of attempting to forecast the outlook for markets the most important thing we have to remember is that markets rise for longer than they fall but when they fall they often do so quite quickly. However, they do not fall without first exhibiting topping characteristics. 



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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 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

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 23 2018

Commentary by Eoin Treacy

Musings from the Oil Patch January 23rd 2017

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

A section from the 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.

Brent Crude oil has not pulled back by more than $5 since June and continues to trend higher in a reasonably consistent staircase step sequence uptrend. Consistent trends are usually the easiest to analyse, so we can say with confidence that a reaction of more than $5 would be required to question the consistency of the advance. 



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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 11 2018

Commentary by Eoin Treacy

Email of the day China, Currencies, Inflation and Gold

In the video today, you emphasized the significance of recent moves by China regarding its currency and inflation.  These issues were discussed in length in a Mises Institute report which will be of interest to many readers.

Eoin Treacy's view -

Thank you for this interesting article which is representative of monetary conservativism that is a central theme in decrying the loss of purchasing power in fiat currencies since the abandonment of gold as a monetary base. 



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January 09 2018

Commentary by Eoin Treacy

Musings from the Oil Patch January 17th 2018

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

A section from the 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.

Saudi Arabia is not exactly the most politically secure place in the world right now which is going to have an influence on the valuation of Saudi Aramco. Exxon Mobil is the company that tends to get the most accommodative treatment from investors because of its long history of dividend increases and good governance. The big question for Saudi Arabia, regardless of reserves, is what kind of discount the market will demand for accepting the governance risk attached to the company. That is especially true with the UK having had to alter disclosure rules in its efforts to secure the IPO. 



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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 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 19 2017

Commentary by Eoin Treacy

Supply cuts a 'step change' for uranium price

This article by Frik Els for Mining.com may be of interest to subscribes. Here is a section:

The announcement made by uranium giant Cameco in November that it’s suspending operations at its flagship McArthur River mine in northern Saskatchewan and surprisingly deep three-year cuts by Kazakhstan’s state-owned Kazatomprom provide a "step change" for uranium prices says a new report on the sector from Cantor Fitzgerald equity research.

On Monday, the world largest producer of uranium, surprised the beleaguered market with a larger than expected cut to production of its own.

Two weeks ago, Kazakhstan’s state-owned Kazatomprom announced intentions to reduce its output of U3O8 by 20% or 11,000 tonnes (around 28.5m pounds) over the next three years beginning in January 2018. According to the company roughly 4,000 tonnes will be cut in 2018 alone "representing approximately 7.5% of global uranium production for 2018 as forecast by UxC."

Cameco's shuttering of McArthur River for ten months is expected to reduce production by 13.7m pounds in 2018 translating to a combined 42.3m pounds of expected production that has been removed from the market. In 2018 alone, the reduction will be about 24.1m pounds of U3O8 or about 15% of Cantor Fitzgerald's prior forecast of 158.4m pounds of output.

Eoin Treacy's view -

The price of commodities is set by the marginal cost of production and when two of the largest producers’ shutter facilities, it means prices have fallen to uneconomic levels. Uranium isn’t exactly fashionable but it is still required to fuel reactors all over the world. If supply is being curtailed prices will have to rise to attract producers back into the market. 



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December 15 2017

Commentary by Eoin Treacy

This is how much copper, nickel, cobalt an electric vehicle world needs

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

The London-based research company modelled metal requirements across the supply chain – from generation and grid infrastructure through to storage, charging and vehicles – based on relatively modest penetration of EVs in the total global vehicle market out to 2030.

According to the study as early as 2020, when EVs would still make up only 2% of new vehicle sales, related metal demand already becomes significant, requiring an additional 390,000 tonnes of copper, 85,000 tonnes of nickel and 24,000 tonnes of cobalt.

Based on an EV market share of less than 32% in 2030, forecast metal requirements are roughly 4.1m tonnes of additional copper (18% of 2016 supply). The move away from gasoline and diesel-powered vehicles would need 56% more nickel production or 1.1m tonnes compared to 2016 and 314,000 tonnes of cobalt, a fourfold increase from 2016 supply.

Eoin Treacy's view -

Miners went through a decade of investing in supply and then prices collapsed. They were forced to cancel exploration and to focus on free cash flow. Appetite for investing in additional new supply is low but there are obvious demand drivers coming from the electric car market. 



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November 30 2017

Commentary by Eoin Treacy

OPEC and Russia Ready to Extend Oil-Supply Cuts Through 2018

This article by Elena Mazneva, Laura Hurst and Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:

OPEC and Russia are ready to extend their oil production cuts until the end of next year to ensure global stockpiles keep falling and prices maintain recent gains.

All OPEC members and Russia, the biggest producer outside the group to join the deal, agree the cuts should last until the end of 2018, according to delegates in Vienna to attend Thursday’s meeting. On Wednesday, a committee charged with overseeing the agreement on behalf of the whole group also recommended extending until the end of next year, two delegates said.

"Everybody’s working toward that nine-month extension,” Nigerian Petroleum Minister Emmanuel Kachikwu said in a Bloomberg television interview.

Eoin Treacy's view -

OPEC’s strategy to restrict supply in order to raise prices took more than a year to reduce excess inventories and improving global growth has certainly helped to achieve that goal. Surging supply from domestic onshore US sources continues to represent a challenge and not least as exports pick up. That has ensured the run-up in prices has not been more aggressive. 



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November 23 2017

Commentary by Eoin Treacy

Mine Shutdown Heats Up Uranium Prices

Thanks to a subscriber for this article from Barron’s which may be of interest. Here is a section:

Cameco (ticker: CCJ), which provides roughly 17% of the world’s uranium production, announced on Nov. 8 that it will temporarily suspend production at its McArthur River mining and Key Lake milling operations in Canada by the end of January. It blamed weakness in uranium prices, which it said had fallen by more than 70% since the Fukushima accident in March 2011. McArthur River is the world’s largest high-grade uranium mine.

The news sent weekly spot prices for uranium up by nearly $3, to $23 a pound, on Nov. 13, according to nuclear-fuel consultancy Ux Consulting. Weekly prices stood at $20.25 a pound on Nov. 6, ahead of the announcement, holding in the tight range of $19.25 and $20.75 they had traded at from late May. January uranium futures traded on Globex settled at $24.40 on Thursday. “This is the last gasp of the uranium bear market,” says Christopher Ecclestone, a mining strategist at investment bank and research firm Hallgarten & Co., adding that the market is likely to “perk up” from here

Eoin Treacy's view -

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

Uranium prices have stabilized near $20 following news of a supply disruption. The fact that closure was voluntary helps to highlight just how much stress the sector is under. The Fukushima disaster has set back the cause of uranium by at least a decade despite the reliability and abundance of the power it provides and the inherent safety of generation IV reactors.



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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 20 2017

Commentary by Eoin Treacy

The Chart Seminar

Eoin Treacy's view -

It is always a pleasure to meet subscribers but doubly so when we get to spend two days together discussing the outlook for psychological makeup of the market, where we are in the big cycles and which sectors are leading and which are showing relative strength. I had three big takeaways from last week’s seminar in London.

As anyone who has attended the seminar will know, I do not have examples but offer delegates the opportunity to dictate the direction of the conversation. That ensures the subject matter is relevant to what they are interested in and also highlights the fact that subject matter is applicable to all markets where an imbalance between supply and demand exists. The second benefit of allowing delegates to pick the subject matter is that it is offers a window into what is popular in markets right now and what might be getting overlooked. 



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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

Email of the day on feudalism in the modern era

I was thinking back to our dinner at the club in LA, and remembering that you stated that the Princes of the Sauds owed allegiance to their King, comparing them to the Barons of Europe in the middle ages. You said that sooner or later, the finances of the Kingdom would have to be enhanced, and that the Princes would be called upon to do so, just as the Barons of long ago were required to collect taxes and give treasure to the Crown. The parallels between today in the Kingdom of Saudi Arabia and those days so long ago are amazing!

We have now seen the first round of the tax collection begin, and those who were arrested were quite likely opposing the new "taxes", if not plotting actual rebellion (in which case they will almost certainly be executed). There is a clear message here for the rest of the Princes...

Now this is the stuff that historians truly love. 

 

Eoin Treacy's view -

Saudi Arabia has been held together by a series of transfers and concessions to families and tribes that agreed to set aside their enmity in return for a share in the nation’s oil wealth. That worked well as long as the population was small and oil revenues trended higher amid a century of oil’s dominance of the global economy. 



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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 08 2017

Commentary by Eoin Treacy

Venezuela Will Seek to Restructure Debt, Blaming Sanctions

This article by Katia Porzecanski, Patricia Laya, Ben Bartenstein, and Christine Jenkins for Bloomberg may be of interest to subscribers. Here is a section: 

Prices on PDVSA’s $3 billion of bonds maturing in 2027 were quoted at 20 cents on the dollar at 9:23 a.m. in London, according to pricing source CBBT. Venezuelan government bonds maturing in 2018 slid 16 cents on the dollar to 63 cents, while longer-maturity debt was little changed.

Even after the oil producer known as PDVSA made an $842 million principal payment Oct. 27, the nation is behind on about $800 million of interest payments. All told, there’s $143 billion in foreign debt owed by the government and state entities, with about $52 billion in bonds, according to Torino Capital.

Sanctions imposed in August by the U.S. have made it difficult to raise money from international investors, and effectively prohibit refinancing or restructuring existing debt, because they block U.S.-regulated institutions from buying new bonds. It’s an unprecedented situation for bondholders, who have limited recourse as long as sanctions are in effect.

“I decree a refinancing and restructuring of external debt and all Venezuelan payments,” Maduro said. “We’re going to a complete reformatting. To find an equilibrium, and to cover the necessities of the country, the investments of the country.”

 

Eoin Treacy's view -

$60 is a big level for many higher cost private sector oil producers. It’s a number many companies have quoted as they struggled with cutting costs while prices traded below economic levels. Their fortunes are improving now that prices are at two-year highs. Venezuela’s breakeven is well above current levels so the recent rally is less of a salve, while bond payments are a constant drain on revenues. 



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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 27 2017

Commentary by Eoin Treacy

Brent Oil Tops $60 for First Time Since 2015 Amid OPEC Optimism

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

Both the global benchmark and its U.S. counterpart have rallied in October amid increasing belief that the Organization of Petroleum Exporting Countries will agree to cut output later into next year, helping to work down global inventories. Statoil ASA’s Chief Executive Officer Eldar Saetre said in a Bloomberg Television interview that he continues to see strong demand and the oil market is “definitely balancing.”

“People are starting to price in the OECD inventories moving back towards normalized levels into later 2018,” Brad Hunnewell, senior equity analyst at Rockefeller & Co., said by telephone.

U.S. Army Colonel Ryan Dillon, a spokesman for Operation Inherent Resolve, the U.S.-led coalition against the Islamic State said in a Twitter message Friday that he “incorrectly” said in an interview with Kurdish Rudaw news agency that there was a cease-fire between Iraqi and Kurdish forces. A rally in WTI immediately followed his message. Iraqi Prime Minister Haider Al-Abadi suspended operations by federal forces for 24 hours in disputed areas to allow a joint Iraqi and Kurdish team to deploy forces, Sumaria TV reported.

 

Eoin Treacy's view -

Synchronised global economic expansion is generally positive for commodity prices. With OPEC at least limiting supply that is helping to support prices. Saudi Arabia also has a vested interest in getting prices as high as possible over the next year as it burnishes the appeal of the Saudi Aramco IPO. 



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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 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 05 2017

Commentary by Eoin Treacy

More Lean, More Green

Thanks to a subscriber for this report from Goldman Sachs dated June 5th which is no less relevant today and may be of interest to subscribers. Here is a section:

We expect the costs of wind and solar to fall below the level of European power prices in the early 2020s (Exhibit 4). As costs fall below the price of the marginal technology, we expect utilities to ramp up their renewables installations, to keep/gain market share in the generation mix. We expect this to significantly change the generation mix in Europe, and would expect thermal technologies (mainly coal and gas) to be negatively impacted in terms of output. We would expect most governments (aside from those keen to protect a particular technology, such as domestic coal) to support this, as it should help reduce carbon emissions and lower electricity tariffs.  

Profits for wind developers/manufacturers to accelerate We estimate that the reduction in costs for wind/solar that we forecast will trigger a 30% step-up in annual global renewables investment (MWs) globally, post 2020, for the main European developers (Exhibit 7). We expect this trend to accelerate net income growth to c.2.5% (2017-36E) from 1.5% currently (Exhibit 8). 

For the European wind turbine manufacturers, we expect an average step-up in annual revenues of c.17% globally over 2017-36E, vs. 2017E (9 pp higher than previously anticipated), boosting annual net income by 58%. We estimate that this will support an equity value c.15% higher than we previously anticipated for the manufacturers.  

Our forecasts assume a significant change in the generation mix only in Europe: therefore, we would see upside to our renewables estimates if we were to extrapolate this globally.

 

Eoin Treacy's view -

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

When thinking about the march of technology we need to force ourselves to think about the consequences of something that is happening today on the future. The pace of innovation is accelerating; often in an exponential manner so the linear trajectory of our personal experience is often not the best way to think about the how markets will evolve. It would be easy to look at the wind or solar sector today and conclude it is not yet competitive but technology is changing so quickly that it is almost inevitable it will be cost competitive in future. That is the whole point of the exponential way of thinking Ray Kurzweil pioneered. 



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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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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 28 2017

Commentary by Eoin Treacy

The World Is Creeping Toward De-Dollarization

Thanks to a subscriber for this article by Ronald-Peter Stöferle for the Mises Institute. Here is a section:

A clear signal that something is afoot would be the abolition of the Saudi riyal's peg to the US dollar. As recently as April of this year economist Nasser Saeedi advised Middle Eastern countries to prepare for a “new normal” — and specifically to review the dollar pegs of their currencies: “By 2025 it is clear that the center of global economic geography is very much in Asia. What we’ve been living in over the past two decades is a very big shift in the political, economic, and financial geography.”

While the role of oil-producing countries (and particularly Saudi Arabia) shouldn't be underestimated, at present the driving forces with regard to de-dollarization are primarily Moscow and Beijing. We want to take a closer look at this process.

There exist numerous political statements in this context which leave no room for doubt. The Russians and Chinese are quite open about their views regarding the role of gold in the current phase of the transition. Thus, Russian prime minister Dimitri Medvedev, at the time president of Russia, held a gold coin up to a camera on occasion of the 2008 G8 meeting in Aquila in Italy. Medvedev said that debates over the reserve currency question had become a permanent fixture of the meetings of government leaders.

Almost ten years later, the topic of currencies and gold is on the Sino-Russian agenda again. In March, Russia's central bank opened its first office in Beijing. Russia is preparing to place its first renminbi-denominated government bond. Both sides have intensified efforts in recent years to settle bilateral trade not in US dollars, but in rubles and yuan. Gold is considered important by both countries.

 

Eoin Treacy's view -

Oil and its derivative products are used in every country in the world so it is logical that the acquiescence of major suppliers to a Dollar standard is a necessary condition of the USA’s international currency hegemony. However, it is not the only consideration. 



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September 27 2017

Commentary by Eoin Treacy

2017 at the Three Quarter Pole

Thanks to a subscriber for securing an invitation for me to attend Jeff Gundlach’s presentation yesterday which as always was an educative experience. 

Eoin Treacy's view -

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

There were a number of interesting points raised but I believe the most relevant for subscribers’ centre on what he said about shrinking the Fed’s balance sheet, the outlook for the Dollar, commodity markets, the relative attractiveness of emerging markets and his best guess for when to expect the next recession.



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September 26 2017

Commentary by Eoin Treacy

BHP, world's largest miner, says 2017 is 'tipping point' for electric cars

This article by Clara Ferreira-Marques and Gavin Maguire for Reuters may be of interest to subscribers. Here is a section: 

Balhuizen said he expected the electric vehicle boom would be felt - for producers - first in copper, where supply will struggle to match increased demand. The world’s top mines are aging and there have been no major discoveries in two decades.

The market, he said, may have underestimated the impact on the red metal: fully electric vehicles require four times as much copper as cars that run on combustion engines.

BHP, Balhuizen said, is well-placed, with assets like Escondida and Spence in Chile, and Olympic Dam in Australia. BHP said last month it was spending $2.5 billion to extend the life of the Spence mine in northern Chile by more than 50 years.

 

Eoin Treacy's view -

Copper is currently in contango suggesting a short-term supply deficit is not what has driven prices higher over the last couple of months. The outage at Escondido which restricted supply was a consideration that contributed to the gain but was not enough to push the futures curve into backwardation. Enthusiasm about the demand vector electric vehicles represents for metals like copper, nickel, lithium and cobalt could be a better explanation despite the fact these represent medium rather than short-term considerations. 



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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 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 13 2017

Commentary by Eoin Treacy

Musings from the Oil Patch September 12th 2017

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

If a homeowner installs a charging station in his garage, there may not be much impact on the grid.  However, if all his neighbors do the same thing, there could be a problem.  Transformers are necessary to regulate the power flowing into a home, and they usually service multiple homes, generally four at a time.  A problem is that utility companies do not know exactly how much power is being used by a particular home relative to its neighbors until a transformer fails.  Upgrading transformers can be expensive and limited by weight limits for units mounted on power poles.  One estimate suggests moving from a 50KVA pad-mounted transformer serving four homes to a 75KVA unit costs about $3,000.   

For underground power installations, upgrading the transformer units may be easier, but not necessarily less costly.  One study by the Institute of Electrical and Electronics Engineers says that the problem is at the local level.  If multiple Level 2 chargers that fully recharge a car in 2-3 hours, are plugged in at the same time at night, they may prevent transformers from cooling as they are designed.  Sustained excess current will eventually ‘cook’ a transformer’s copper windings, causing a short and blacking out of the homes attached to the device.  This problem was observed from a study of the habits of EV owners in an Austin, Texas suburb.  Over a two-month period, the residents tended to recharge their EVs at the same time – when returning from work – that coincided with air conditioning loads increasing along with the use of other appliances. 

A similar study was conducted in the UK, which conducted an 18month study of resident habits when 100% were using EVs.  The study’s result show that at least a third of the UK’s power grid will need to be upgraded to support an EV sales rate of 40% of new car sales by 2023.  That doesn’t address the load issue if 40% of the entire UK vehicle fleet were plug-in EVs. 

 

Eoin Treacy's view -

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

The rollout of electric vehicles, which is anticipated to ramp up as manufacturing capacity for both batteries and cars comes on line in the next few years, is going to put strain on the electrical grid both from a generating and traffic perspective. While it can be argued how much additional supply with be required, the introduction of charging stations to the residential environment will certainly increase the consumption of electricity at individual homes. 



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September 12 2017

Commentary by Eoin Treacy

Email of the day on the ground experience from the Texas panhandle

I had the pleasure of spending several days with a friend who is an executive in a drilling company. He indicated that the recovery had brought a boom in drilling, but that customers were demanding the latest high-tech drilling rigs (faster, more efficient, much bigger pumps, able to drill longer laterals). This requires very large capital investments with uncertain payback times. Older, lower tech rigs are left unused, which creates dramatically lower rig utilization rates for drillers. Unfortunately, the past month has seen a bit of a slowdown, with some new tech rigs coming off of pads with no new contract (meaning the rig goes to the yard and sits, and the crew have no jobs). While this may be a short-term issue, it could alternatively be a sickly-looking canary.

Unlike last year, when vast numbers of pump jacks were idle (indicating the well is not producing at that moment), this year more than 75% of the pump jacks I saw were pumping, and most looked well-maintained. Pump jacks do not normally pump full-time, as they shut down for maintenance, and when their storage tanks are full, etc. A lot of the oil in the area is pumped into tanks and then picked up by trucks. 

The beef, pork, chicken, and nuclear weapon businesses all appeared to be thriving.

Probably needless to say, but the Texas Panhandle is about 700 miles from the flooding.

Eoin Treacy's view -

Thank you for this trip report which I’m sure will be appreciated by subscribers. Relatively low prices, at least compared to a few years ago, put pressure on services businesses to employ the most sophisticated technology which requires fewer people and more capital. That benefits larger companies with the financial heft to prosper while it is likely to have a negative effect on smaller operations. 



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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 05 2017

Commentary by Eoin Treacy

Hurricane Irma Strengthens to a Category 5 Storm

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

 

Beyond the threat to people and property in the Caribbean, the focus so far is on agriculture with the storm, "being a case of being long orange Juice futures rather than gasoline futures," Jakob said.

Irma will probably cross the northern Leeward Islands Tuesday into Wednesday, according to the NHC, which said it’s still too early to determine what impact it might have on the U.S. Hurricane warnings have been issued for the U.S. and British Virgin Islands, Puerto Rico, Vieques, and Culebra. Tropical-storm-force winds could arrive in the British and U.S. Virgin Islands and Puerto Rico by early Wednesday.

About two-thirds of Florida’s citrus crop is located in the lower two-thirds of the peninsula. Frozen concentrated orange juice futures in New York already rose last week on speculation the storm could strike, though prices are down almost 30 percent since January.

Eoin Treacy's view -

Hurricane Katrina hit New Orleans in 2005. Hurricane Harvey hit Houston in 2017 and in between we have seen some of the quietest storm seasons in years. I think that is worth remembering that when so many stories running right now talk about accelerating climate change. Hurricane Irma has not yet made landfall but at Category 5 it is going to create a lot of damage somewhere. If Irma makes landfall it will be the first time the USA is hit by two such powerful storms in one season.   



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September 01 2017

Commentary by Eoin Treacy

Email of the day on cobalt

Nickel is an important metal in itself for battery technology, but 2/3 of nickel goes into stainless steel, so from this perspective nickel isn't a very highly leveraged play on battery advances. Whilst Cobalt is a by-product of nickel mining, it is my understanding that this is mainly the case from lateritic nickel deposits, and there is a much lower % of cobalt by-product from deep mines. 

Eoin Treacy's view -

Thank you for this educative email, from a subscriber who literally wrote the book on mining economics. I agree that not every nickel company produces cobalt which is why the three large miners I mentioned all specifically state they do produce it. 



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August 31 2017

Commentary by Eoin Treacy

August 30 2017

Commentary by Eoin Treacy

Musings from the Oil Patch August 29th 2017

Thanks to a subscriber for this edition of Allen Brook’s ever interesting report for PPHB. Here is a section on lithium and cobalt:

We don’t know the details behind the Morgan Stanley electric vehicle forecast, but we know there are both more and less aggressive forecasts.  We wonder if those forecasters have considered the potential constraints from lithium carbonate supply.  There is a greater issue with cobalt, which accounts for 58% of a battery by weight, more than the lithium in a battery, and consumes 42% of all cobalt output.  The problem is that cobalt supplies are smaller and about 60% comes from the Democratic Republic of Congo, which is controlled by war lords and relies on child labor for mining the ore.  The governments we will have to deal with to meet the demand for rare minerals to meet electric vehicle forecasts present many moral and financial question marks.  In fact, when we were in Tibet earlier this summer, we followed Chinese trucks hauling bags of lithium carbonate from mines to shipping depots.  That supply is likely committed to the Chinese electric vehicle industry, which needs it to meet its anticipated growth outlook.   

As a result of the growing demand for lithium and other rare minerals, their prices are climbing, and in some cases at alarming rates.  Since 2015, lithium prices have quadrupled, while cobalt prices have doubled.  What will rising prices and limited availability mean for the forecasts of ever cheaper batteries?   

 

Eoin Treacy's view -

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

Forecasts for where lithium and cobalt demand is going to be in 2025 are being used to drive investment in new supply today, but it takes years to bring new supply to market. In that window between when demand increases and supply responds there is room for prices to increase meaningfully; in a rerun of the Supply Inelasticity Meets Rising Demand dynamic that animated the commodity bull market from the early 2000s. 



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August 29 2017

Commentary by Eoin Treacy

Harvey Recharges Offshore as Crippled Houston Counts the Cost

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

Gasoline futures in New York extended gains a sixth session Tuesday as more than a million barrels of fuel-making capacity was knocked offline; and natural-gas fields and offshore-drilling rigs shut down. The motor fuel advanced 0.4 percent to $1.7183 a gallon at 5:09 a.m. New York time.

Ports along a 250-mile stretch of Texas coast were closed to tankers. Twenty-two vessels laden with a combined 15.3 million barrels of crude from as far afield as Brazil and Colombia were drifting off the coastline, waiting for the all clear.

Ten of the state’s 25 refineries are shut down, accounting for about half the 6 million barrels per day of capacity, said Christi Craddick, chairman of the three-member Texas Railroad Commission, which regulates the industry. Companies will have to wait for floods to recede before they can evaluate damage, she said.

“Hopefully within the next week to two weeks, we’ll see refineries back online,” Craddick said.  

 

Eoin Treacy's view -

Hurricane Katrina resulted in a surge in natural gas prices because so much supply depended on Gulf of Mexico platforms. The rise of onshore shale supplies has reduced reliance on offshore gas so hurricane Harvey has had little impact on gas prices. On the other hand, gasoline refining is heavily concentrated on the Gulf coast and not least around Houston. Therefore, it is the commodity most likely to be affected by hurricane induced damage. 



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August 24 2017

Commentary by Eoin Treacy

Harvey Likely to Be First Hurricane to Strike Texas Since 2008

This article by Brian K Sullivan and Melissa Cheok for Bloomberg may be of interest to subscribers. Here is a section: 

“It could intensify right up to landfall on Friday,” said Jeff Masters, co-founder of Weather Underground in Ann Arbor, Michigan. “I expect a Category 1 hurricane at landfall, but I cannot rule out a Category 2.”

Harvey is expected to bring multiple hazards including heavy rainfall, storm surge and possible hurricane conditions to parts of the Texas coast on Friday. Heavy rainfall is expected to spread across portions of south, central and eastern Texas and the lower Mississippi Valley from Friday through early next week and could cause life-threatening flooding, according to the advisory.

The Gulf Coast from Corpus Christi, Texas, to Lake Charles, Louisiana, is home to nearly 30 refineries -- making up about 7 million barrels a day of refining capacity, or one-third of the U.S. total. It’s in the path of expected heavy rainfall. Flooding poses risks to operations and may cause power failures.

 

Eoin Treacy's view -

The last few years have been particularly quiet hurricane seasons and even though Harvey will struggle to exceed category one its location ensures there will be plenty of precipitation falling in the Corpus Christ through Louisiana areas which will disrupt businesses. 



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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 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 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 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 11 2017

Commentary by Eoin Treacy

Lithium-rich countries risk missing the boat on electric batteries boom

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

As Tesla Motors begins to build the world’s largest lithium-ion battery in Australia and other vehicle makers such as Volvo get on board the electric vehicles train, concerns are rising over the environmental footprint of mining that and other materials used in car batteries, as well as their eventual disposal.

According to analysts at UBS, by 2025 the market will need 12 times the battery capacity currently available. At the same time, only 5% of lithium-ion batteries get recycled, versus more than 90% of those used in conventional vehicles, reports Financial Times:

“One of the challenges of making battery recycling economically viable is the quantity of battery material that is needed to keep utilisation rates of recycling facilities sufficiently high,” say analysts at Morgan Stanley. “The risk, therefore, is there may not be the necessary infrastructure in place in time for the first significant wave of EV batteries to reach end of life.”

Demand for the commodity has been rising as of late, which in turn has caused prices to more than double in the past 18 months.

The need for the metal is expected to triple by 2025, but not all the countries rich in lithium are taking advantage of the boom. At the same time, new actors are emerging worldwide.

 

Eoin Treacy's view -

This article carries a number of interesting graphics on which countries have the largest lithium reserves and which are the largest producers. With demand for the metal expected to multiply over the next decade a supply inelasticity meets rising demand growth model is in place at least until the necessary infrastructure to produce and recycle the metal has been built which could take another few years. 



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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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