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September 14 2023

Commentary by Eoin Treacy

Drilling Three Miles Sideways Brings Risks for Shale Operators

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

“It’s a risk-reward decision, because if something bad happens at 18,000 feet, that’s an expensive mistake,” Kaes Van’t Hof, president of Diamondback, said on a call with analysts. The company has even gone sideways deep under the home of company chief Travis Stice. So far, he said, the results of the longer laterals have been positive. “The drilling guys can do it, there’s no doubt about that.”

Pioneer, the largest independent producer in the Permian, has an inventory of more than 1,000 future wells that run at least 15,000 feet horizontally — or about 2.8 miles — and some even exceed 18,000 feet. That’s about 3.4 miles, or the length of 50 football fields. The longer horizontal wells generate more oil, cost less per lateral foot and require fewer vertical holes and fracking workers, Pioneer’s president and incoming chief executive officer, Rich Dealy, said on an August conference call.

Servicers, the hired hands of the oil patch, are for the most part eager to take on these kinds of risky, big-ticket jobs. An average 2-mile lateral well costs $6.5 million, all in, compared to around $9 million for a 3-mile lateral well, according to data from Bernstein. Pioneer and Diamondback didn’t say whether they’ve had any problems when they extend the laterals or how much they’ve spent, though Dealy said on the call that the roughly 3-mile laterals result in capital savings of about 15% per foot. Longer horizontals are particularly popular in the Marcellus Shale of the US Northeast as well as the Midland Basin of the Permian in Texas.

Eoin Treacy's view -

Unconventional wells are more capital intensive. The surge of capital chasing returns in a zero rate environment fuelled the initial surge in the early 2010s. Today capital decisions are more disciplined. They rely on higher expected prices and returns and less on acreage because access to capital has been constrained. The success of the anti-carbon movement and higher rates have led that transition.



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September 13 2023

Commentary by Eoin Treacy

Nuclear power could see its biggest expansion in decades, leading to increased demand for uranium

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

"Growing interest in nuclear Energy is being seen around the world," said Freebairn, noting this his company has been highlighting events in Eastern Europe and North America.

For now, nuclear power provides around 10% of the world's electricity, according to the International Energy Agency.

It comes from roughly 440 reactors in 31 countries with about 390 gigawatt electrical (GWe) capacity, according to UxC's Hinze. If total power demand grows by 2% to 3% as agencies like the IEA predicts over the next 10 to 20 years, and nuclear power keeps it share of the total in the 8% to 10% range, then Hinze expects nuclear power should reach at least 500 GWe by 2040 and as high as 550 GWe.

That would represent a roughly 40% growth over the current market size, he said.

There are potential downside risks to nuclear power growth, including competition from fossil fuels and renewables, but since nuclear power is "already not a huge share of the market, it would make sense that its growth can continue regardless of how the other Energy fuels fare," Hinze said.

Eoin Treacy's view -

The uranium price war is over. Kazakhstan flooded the market with supply between 2011 and 2016. That forced several smaller miners out of business. Even Cameco closed mines and supplied long-term contracts by buying spot on the open market. The introduction of the Sprott Uranium ETF helped to soak up available supply and was instrumental in setting up the conditions for the current recovery.



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September 12 2023

Commentary by Eoin Treacy

Oil Extends Rally as OPEC+ Cuts Set Up Tightest Market in Decade

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

Oil rallied to a 10-month high as production cuts by leaders of the OPEC+ cartel strain global supplies, a setup that’s projected to create the tightest crude market in a decade in the months ahead.

Global benchmark Brent climbed above $91 a barrel, and West Texas Intermediate topped $89, both fresh highs for the year. The gains are already showing signs of filtering into fuel markets, with US gasoline prices at the highest seasonal levels in a decade and diesel — the global economy’s workhorse fuel — pushing past $1,000 a ton in Europe.

Oil markets may experience a shortfall of 3.3 million barrels a day in the fourth quarter, the most constrained market in more than a decade, according to a report Tuesday from the Organization of Petroleum Exporting Countries. The US Energy Information Administration will publish its monthly market report later Tuesday, with the International Energy Agency’s outlook due Wednesday.

Eoin Treacy's view -

Bull markets in commodities can occur for several reasons. Those that last for more than a year or two are the result of a jump in demand and an inability to sufficiently increase supply to cater to it.

At present, OPEC is intentionally restricting supply with the intention of supporting prices. It is working.  Non-OPEC supply is not increasing quickly despite high prices.



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August 31 2023

Commentary by Eoin Treacy

Russia Agrees on Further OPEC+ Oil-Export Cuts, Novak Says

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

Russia has agreed with its OPEC+ partners on further cuts to its crude exports, Deputy Prime Minister Alexander Novak told President Vladimir Putin.

“We have agreed, but we’ll announce main parameters next week,” Novak said at a televised government meeting with Putin.  

Russia has pledged to curb its crude exports by 500,000 barrels a day in August, then taper the curbs to 300,000 barrels a day next month. On Wednesday, Novak said that Russia was discussing extending the September export reduction into October, according to media reports.

Eoin Treacy's view -

OPEC+ have announced production cuts close to the first of the month for each of the last three months and there does not appear to be an end in sight. Most OPEC+ members cannot afford prices to fall much below $75. That suggests they will continue to do what is necessary to ensure prices remain above that price point.



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August 23 2023

Commentary by Eoin Treacy

The Manhattan Project to Wean the US Off Russian Uranium

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

In 2021, Urenco had no plans to expand in the US. But standing in a vast storeroom in Eunice crammed with ready-to-ship canisters, each filled with more than 2 tons of enriched uranium and worth $1 million, Keith Armstrong, the company’s chief of staff, said orders have increased almost 25% in the past year as the world tries to avoid Rosatom. 

Armstrong, who has worked at Urenco for 11 years, said Moscow’s militarism had jolted the industry and exposed gaping vulnerabilities. “The invasion of Ukraine changed the market dramatically,” he said. “It went from a static state to ‘we need to expand now.’”

Eoin Treacy's view -

There has been a great deal of speculation about Russia’s potential to enforce an embargo on oil and gas exports. That ignores the country’s clear need to earn foreign income as well as the difficulty in capping supply from oil wells drilled into permafrost. It is much more likely Russia could use its dominant position as a nuclear fuel provider to squeeze the US and European economies.



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August 14 2023

Commentary by Eoin Treacy

Email of the day on nuclear energy

I am a pre-subscriber, but I was a little underwhelmed by the portion of today's first item, from David Brown, that I have access to.

He doesn't say who the "real expert" that he quotes on the new Energy system is.    A nuclear power station is a controlled version of a nuclear bomb, thus the enormous amount of Energy available. I fully concede that today's power stations are completely safe in their operation. But of course, there is the question of safe disposal of the waste, which the extract doesn't address;  and also the security required for that waste, to prevent it getting into rogue hands.

It is irritating to have statistics such as coal being 4000×, gas 100× and hydro 30× more dangerous than nuclear, without any detail as to how these figures are calculated (although that detail would require a lot more space).

Just because someone writes in such a haughty fashion doesn't necessarily make him an expert.   Top scientists usually write with courtesy, and with a degree of humility, acknowledging that they could still be wrong, since the world of atoms and nuclei may still have some surprises up its sleeve for us.

I do concede, however, that, since I do not have access to the full discussion, some of these points may have been raised there.

Many thanks Eoin, for the commentary that I do have access to.   Your commentary on extracts often clarifies points which seemed obscure, and is always full of common sense!

Eoin Treacy's view -

Thank you for this question and if you are interested in a deeper discussion then I encourage you to subscribe. In short, the data about nuclear safety is well understood. However, the perception of safety is very different. For example, spending your life breathing in noxious fumes is much more likely to lead to health complications than living near a nuclear power plant.

This kind of statistic is akin to the fact you are more likely to be killed crossing the road than in a plane crash. The simple fact is we are less intimidated by the familiar. If we have the will to change, it will happen. The primary question is as a society do we want to talk about decarbonizing, or do we want to do something about it?



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August 11 2023

Commentary by Eoin Treacy

Global Oil Demand Hits Record and Prices May Climb, IEA Says

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

But in the meantime, world markets are tightening, leaving oil inventories in developed nations about 115 million barrels below their five-year average, according to the report. Global stockpiles are set to deplete by a hefty 1.7 million barrels a day in the second half of the year, and preliminary data appears to confirm declines in July and August, the IEA said.

Major consuming nations have criticized the Saudis and their allies in OPEC+ for constricting supplies, warning that a renewed inflationary spike would squeeze consumers and endanger the global recovery. Nonetheless, Riyadh has said it could deepen current cutbacks if necessary. 

Output from the Organization of Petroleum Exporting Countries and its partners plunged last month to near a two-year low as the Saudis implemented a unilateral cut of 1 million barrels a day. Russia, a fellow member of the coalition, is also reducing exports.

Eoin Treacy's view -

Saudi Arabia has ambitious infrastructure construction underway and that does not come cheap. They have a vested interest in sustaining a higher for longer price environment to supplement the budget and ensure social harmony. Russia also has an obvious incentive to support prices.

Meanwhile, non-OPEC investment in additional supply has been meagre over the last several years. Companies have been cautious about announcing production investment because of the potential for backlash from the media. That changed over the last several months with both BP and Shell announcing more investment but that takes time to come to fruition.



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August 03 2023

Commentary by Eoin Treacy

Saudis Extend 1 Million-Barrel Oil Cut, Say Can Be Deepened

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

Saudi Arabia extended its unilateral oil production cut by another month, and said it could be prolonged further or even deepened. 

The leader of the Organization of Petroleum Exporting Countries will continue the cutback of 1 million barrels a day — launched last month — into September, according to a statement on state Saudi Press Agency. That will hold output at about 9 million barrels a day, the lowest level in several years. Crude futures jumped. 

The measure — which comes on top of supply curbs Riyadh was already making with others in the OPEC+ producers group — is intended “to reinforce the precautionary efforts made by OPEC+ countries with the aim of supporting the stability and balance of oil markets.” Its ally Russia also said it will extend its export curbs, but taper them slightly.

Eoin Treacy's view -

The global oil market has been finely balanced but that is now changing. The USA’s Strategic Reserve is largely empty. As suppliers reduce the availability of crude oil, the ability of alternative sources to boost production is limited. Meanwhile, global economic activity is not falling quick enough to reduce demand to keep the market balanced.



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July 27 2023

Commentary by Eoin Treacy

Oil Rallies to $80 as US Economic Growth Improves Demand Outlook

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

Oil rose to the highest since April as signs of economic strength in the US improved the outlook for demand, outweighing concerns about a price correction based on technical factors.

West Texas Intermediate settled above $80 a barrel as US economic growth exceeded expectations and speculation mounted that the Federal Reserve is nearing the end of its monetary tightening cycle. But crude is trading in overbought territory on its relative strength index for a third day, raising the threat of a pullback. 

“Crude extending the bullish rally, led by ‘risk back on’ sentiment in the equity markets, is keeping the buyers present in the crude space,” said Dennis Kissler, senior vice president for trading at BOK Financial Securities. Yet “the market has gone up too far, too fast with speculative buying, and that is creating the overbought condition, so we should see some erratic corrections soon.”

Eoin Treacy's view -

Crude oil markets remain tightly balanced. Stronger GDP coupled with weaker PCE inflation data helped to boost the perception of demand dominance today. The downside is the higher oil prices go, the greater the likelihood inflation will be slow to moderate. It’s a good news/bad news story.



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July 14 2023

Commentary by Eoin Treacy

Extreme Heat Strains the Mexican Power Grid Earlier in the Summer

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

While it is hard to know for sure what is causing the power shortages, it is common practice for the National Center for Energy Control to disconnect neighborhoods from the electric network to prevent the system from failing, says Flores. They do this to avoid bigger and harder-to-fix problems, Barrios says.

Citizens dealing with power outages are scrambling to adjust to the disruption and danger. Luis Alejandro Calderón, an American citizen who lives in Nuevo Laredo, Tamaulipas, and his wife had to sleep on their balcony because they didn’t have electricity, and the heat inside was unbearable. The power shortage lasted more than 40 hours, so they stayed in a hotel in another area the next night, and a lot of their food went bad.

“We have never had to deal with anything like this,” he said. “When there is a power cut, electricity is usually back in 15 minutes.”

Mexico typically surpasses the peak Energy demand from the previous year in July, but this year it already happened, leaving many worried that the coming weeks could hold even worse blackouts. “This is a product of the climate emergency, and that is not the government’s responsibility, but it is their responsibility to build an electric system that is prepared for this,” Barrios said.

Eoin Treacy's view -

Hot summers expose the biggest issue for electricity utilities. Demand is increasing faster than they are building new supply. Population growth, improving economic activity and rising living standards contribute to demand growth. The trend of EV demand growth and air conditioning demand are boosting the need for more electricity generation and transmission infrastructure everywhere.



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July 12 2023

Commentary by Eoin Treacy

Inflation at 3% Flags End of Emergency, Turning Point for Fed

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

None of this means it’s game over in the fight against price pressures — especially for the Fed, which is widely reckoned to be locked-in to another interest-rate increase later this month. Still, there’s now a better-than-even chance that a July 26 hike, which would take the benchmark US rate to 5.5%, could be the last in quite a while. 

That’s the way markets were betting after Wednesday’s data. Yields on short-term Treasury yields plunged, stocks rose, and the dollar was headed to the lowest in more than a year by one measure – all in anticipation that the Fed might ease up.

‘Coming to End’
“The new data could give the Fed reason to debate whether any further rate hikes after this month are needed,” wrote Ryan Sweet, chief US economist at Oxford Economics. “This tightening cycle by the Fed is likely coming to an end.”

Eoin Treacy's view -

CPI is back inside the pre-pandemic range but the core figure is still at elevated levels. That represents a partial win for the  Federal Reserve. The challenge is regular CPI is supposed to be more prone to volatility than the core figure.

Jerome Powell has stated he is focusing on the core services less housing figure. That has been steady around 4.5% since August 2022 and is the primary data point suggesting inflation is sticky. Nevertheless, traders are betting the July hike will be the last in this cycle. 



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June 12 2023

Commentary by Eoin Treacy

Oil Extends Losses as Goldman Forecast Adds to Demand Concerns

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

Oil extended losses as Goldman Sachs Group Inc. cut its price forecast again, adding to a drumbeat of concerns about the outlook for demand.

West Texas Intermediate slumped below $68 a barrel after Goldman — which has had one of the more bullish forecasts for crude — made its third downward price revision for the global benchmark in six months, trimming its estimate to $86 for the end of the year on rising supplies and waning demand.

“Beyond the fact that a vocal crude bull cut their crude forecast again, physical market indicators also are shaking confidence of bulls expecting the market to shift from a surplus to a deficit in the coming months,” said Rebecca Babin, a senior Energy trader at CIBC Private Wealth. “Time spreads, which are the holy grail for traders assessing supply and demand dynamics, continue to deteriorate, fueling a massive risk aversion and prompting shorts to maintain pressure on prices.”

Eoin Treacy's view -

Most commodity research focuses on supply because that is where the most volatility happens most of the time. Demand, by comparison, is more predictable and increases annually most of the time. It is when volatility creeps into demand projections that prices tend to swing around most because now two variables are present so outcomes are much more uncertain. 



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June 02 2023

Commentary by Eoin Treacy

Hubert's Peak Is Here

Thanks to a subscriber for this report from Goehring & Rozencwajg. Here is a section on shale oil production growth: 

Conventional wisdom believed the industry had improved its drilling and completion of shale wells. The ability to stay in the zone, the choice, and the volume of proppant and fluid were all said to have resulted in sharply higher drilling productivity. Wall Street and the Energy industry both promoted a consistent narrative. We felt there were several unanswered questions and undertook a study to consider what was driving surging well productivity. If the industry had radically improved drilling techniques, it would ultimately be bearish for the sector. A previous low-quality Tier 2 location could now be transformed, through enhanced drilling and completion techniques, into a top-quality Tier 1 well. As a result, the inventory of best wells would explode, and the shale basins would continue to thrive for years to come. Modeling well performance is hugely complex. Shale basins are highly nonlinear with high degrees of variable inter-dependence. As a result, traditional statistical techniques, such as the linear regressions used by most analysts, fall short. We turned to advanced methods, including machine learning and neural networks, and achieved surprising results. Instead of improved drilling techniques, we concluded that two-thirds of the improved productivity between 2013-2018 came from favoring the best drilling locations. In 2013, 22% of Midland wells were Tier 1. By 2018, Tier 1 represented 50% of all wells. Since a Tier 1 well is nearly twice as productive as a Tier 2 well, the migration from lower to higher quality areas drove a massive amount of the improved well productivity.

Eoin Treacy's view -

There is significant difficulty in assessing the production profile of shale fields because constant drilling is required to both grow and sustain production. If the shale drillers have been following the Energy sector’s equivalent of “rich veining”, then it would be reasonable to expect they will be reluctant to invest in additional new supply until prices are higher enough to secure their margins. 



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June 01 2023

Commentary by Eoin Treacy

EPW Committee Advances Risch, Crapo Nuclear Energy Bill

Here are some of the key details of the nuclear bill passed today. 

Develop and Deploy New Nuclear Technologies

The bill reduces regulatory costs for companies seeking to license advanced nuclear reactor technologies.
The bill creates a prize to incentivize the successful deployment of next-generation nuclear reactor technologies.
The bill requires the NRC to develop a pathway to enable the timely licensing of nuclear facilities at brownfield sites.

Preserve Existing Nuclear Energy

The bill modernizes outdated rules that restrict international investment.
The bill extends a long-established, indemnification policy necessary to enable the continued operation of today’s reactors and give certainty for capital investments in building new reactors.

Strengthen America’s Nuclear Fuel Cycle and Supply Chain Infrastructure

The bill directs the NRC to establish an initiative to enhance preparedness to qualify and license advanced nuclear fuels.
The bill identifies modern manufacturing techniques to build nuclear reactors better, faster, cheaper and smarter.

Authorize funds for Environmental Cleanup Programs

The bill authorizes funding to assist in cleaning up legacy abandoned mining sites on Tribal lands.

Improve Commission Efficiency

The bill provides flexibility for the NRC to budget and manage organizational support activities to ensure the NRC is prepared to address NRC staff issues associated with an aging workforce.
The bill provides the NRC Chair the tools to hire and retain highly-specialized staff and exceptionally well-qualified individuals to successfully and safely review and approve advanced nuclear reactor licenses.
The bill requires the NRC to periodically review and assess performance metrics and milestone schedules to ensure licensing can be completed on an efficient schedule.

Eoin Treacy's view -

The cost of building new nuclear facilities is the most common counter argument for expanding the sector. Two of the biggest cost centres are the regulatory morass that needs to be traversed to get a new project permitted and the fact that many reactors are unique designs. Adjusting regulations to take technological innovations into account and building reactors on assembly lines could greatly reduce the cost of construction. 



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May 09 2023

Commentary by Eoin Treacy

Fire on 'Shadow' Tanker off Malaysia is Extinguished, Search Continues

This article from Maritime-Executive.com may be of interest. Here is a section: 

During a press briefing in Malaysia, the Russian captain of the vessel described the situation saying that he had discovered a fire amidship early afternoon on Monday. The initial discovery of smoke was followed by one or more loud explosions which he said shook the vessel, broke the windows, and rendered most of the communications systems inoperable.

“The fire on the upper deck destroyed our aerial, none of the communication equipment was functioning,” the captain told NST TV in Malaysia. “I had to use the walkie talkie …I finally got in touch with our engineer via the walkie talkie but by then all our safety boats were destroyed.” 

The captain said the desperate crew had gone into the water in their life jackets and luckily two ships were in the immediate area to assist with the rescue. He said in the confusion with the crew going in all directions it had been impossible for him to get a head count. He said the fire was also being spread by windy conditions.

Eoin Treacy's view -

The tankers carrying Russia oil around the world can’t be insured. That means the only ships anyone is willing to send on those journeys are decrepit and old. Most are probably on the verge of being scrapped. It is only a matter of time before one of these vessels sinks, with a full cargo onboard. That will create an international incident where no one will take responsibility and there will be no insurance cover. 



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April 19 2023

Commentary by Eoin Treacy

The Age of Energy Insecurity

Thanks to a subscriber for this article from Foreign Affairs. Here is a section:

Even with redoubled efforts to produce more clean Energy at home, the United States and others will still depend on China for critical minerals and other clean Energy components and technologies for years to come, creating vulnerabilities to Chinese-induced shocks. For instance, in recent months, China has suggested that it may restrict the export of solar Energy technologies, materials, and know-how as a response to restrictions that Washington imposed last year on the export of high-end semiconductors and machinery to China. If Beijing were to follow through on this threat or curtail the export of critical minerals or advanced batteries to major economies (just as it cut off rare earth supplies to Japan in the early 2010s), large segments of the clean Energy economy could suffer setbacks.

Traditional Energy heavyweights are also recalibrating their positions in response to the changing geopolitical landscape in ways that increase Energy security risks. Saudi Arabia, for instance, now sees its global stance differently than it did in the decades that followed the famous “oil for security” bargain struck by U.S. President Franklin Roosevelt and Saudi King Abdulaziz ibn Saud on Valentine’s Day in 1945. Riyadh is now far less concerned with accommodating Washington’s requests, overt or implied, to supply oil markets in ways consistent with U.S. interests. In the face of a perceived or real decrease in U.S. strategic commitment to the Middle East, Riyadh has concluded it must tend to other relationships—especially its links to China, the single largest customer for its oil. The kingdom’s acceptance of China as a guarantor of the recent Iranian-Saudi rapprochement bolsters Beijing’s role in the region and its global status. Relations with Moscow have also become particularly important to Saudi Arabia. Regardless of the invasion of Ukraine, the Saudi government believes that Russia remains an essential economic partner and collaborator in managing oil-market volatility. It will therefore be extremely reluctant to take positions that pit the Saudi leadership against Putin.

Eoin Treacy's view -

A war is underway in the Energy markets. Suppliers are intent on sustaining high prices and eco-warriors fervently hope high prices will wean the world from its addiction. Consumers are caught in the middle and have little in the way of choice as they face increasing regulatory and infrastructure costs.  



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April 18 2023

Commentary by Eoin Treacy

EU Hydrogen Quotas Raise Global Demand For Green Molecules

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

European Union (EU) lawmakers have agreed on the world’s first binding quotas for using renewable hydrogen (H2) and derived fuels. The March 30, 2023 rules will create significant demand for renewable H2, mandating existing industrial hydrogen users replace at least 42% of their demand with renewable H2. They also mandate at least 1% of transport Energy to be H2-based.

Member states should ensure 42% of existing industrial H2 demand is renewable by 2030, rising to 60% by 2035. The industry quota targets companies such as fertilizer and methanol producers, but excludes refineries, which are covered under the transport mandate. Member states will be legally required to adopt this agreement as national law and the European Court of Justice will determine penalties for states that fail to comply.

In transport, fuel suppliers need to replace 5.5% of final Energy demand with H2 or advanced biofuels, with a minimum target of 1% for H2-based fuels by 2030. BNEF expects the hydrogen share to be closer to the minimum goal as meeting the combined target using H2 alone would require extensive use of the molecule in road transport. Advanced biofuels had already reached a 2.1% share in transport by 2021.

Eoin Treacy's view -

The EU remains committed to the zero carbon emissions quest and is pioneering the development of markets in alternative Energy. High carbon emission prices are one half of the strategy and subsidies for wind, solar, biomass and hydrogen are the other half. 



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April 03 2023

Commentary by Eoin Treacy

Biden Has Limited Options to Respond to OPEC+'s Oil Cut

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

4: Export Curbs
Other levers the Biden administration has at its disposal include limiting the export of gasoline and diesel. The White House considered that option last year as a potential means to tame pump prices, which reached an all-time high in June, but it never pulled the trigger. Analysts said moving ahead with the curbs could backfire and actually lead to higher prices in some parts of the US.

“If we go into the summer with gasoline at $4 a gallon, I would think they would also revive consideration of product export restrictions,” said Bob McNally, president of consultant Rapidan Energy Group and a former White House official. “If this leads to an overtightening of the oil markets — as they say in the Navy, stand by for heavy rolls.”

Requiring oil companies to store more fuel in inside the US — mandatory stockpile requirements that were considered last year in response to previously low fuel inventories — is an option that could return to the table as well if gasoline prices remain high, McNally said.

Eoin Treacy's view -

OPEC+ needs high Energy prices to come close to balancing their budgets. The last thing they want is the profound volatility of the last few years where oil prices have swung from lows near -$40 to highs near $130. The fact the USA is Energy independent and no longer a big buyer from OPEC+ means it is a competitor in supply and therefore unable to dictate terms to the group. 



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March 15 2023

Commentary by Eoin Treacy

Oil-Options Covering Adds To Market Chaos, Fueling Crude Selloff

This note for Bloomberg may be of interest. Here is a section: 

Exposure to plummeting oil prices via the options market has forced some financial firms to dump crude futures, accelerating a selloff that has sent prices plunging to the lowest in over a year.  

Banks and other financial institutions typically take on futures positions to offset some of the price hedging they do for oil producers and other customers. But as oil prices collapse rapidly, the firms’ exposure rises, forcing them to exit their futures positions in a strategy known as delta hedging.

That’s driving some of the day’s selloff, UBS Group AG analyst Giovanni Staunovo said in a note. A massive number of WTI options contracts that were sold at $70 and $75 a barrel needed to be covered once oil futures crashed below those levels, market participants said. For Brent, more than 24,000 put options were open at $80 and $75 a barrel for May, both levels that were breached this week.    

“Financial institutions now need to avoid having a price risk on their balance sheets,” Staunovo said in his note. “So, they are selling crude futures to offset the risks, amplifying the rout.”       

Eoin Treacy's view -

The oil futures curve is still in backwardation but the gap between the 1st and 2nd month continuation charts is quite narrow and beginning to contract again. Generally, the turn in the spread between the 1st and 2nd months coincides with significant reversals in the oil price. Only three weeks ago the move into backwardation was supporting the view prices would resolve on the upside. That’s been negated by the breakdown yesterday. 



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March 14 2023

Commentary by Eoin Treacy

Bank of America Has Biggest Losses in Bond Portfolio Among Peers

This article from Barron’s may be of interest. Here is a section: 

Banks don't have to record losses on changes in those securities' value, cutting into their capital, unless the debt is sold. Still, holdings in that bucket, which carry minimal or no credit risk, were nonetheless showing a loss of about $109 billion at the end of 2022 due to the rise in interest rates over the past year.

This compares with losses of $36 billion for a similarly classified bond portfolio at JPMorgan Chase (JPM), $41 billion for Wells Fargo (WFC), and $25 billion at Citigroup (C) and just $1 billion at Goldman Sachs Group (GS), based on each company's 10-K filings with the Securities and Exchange Commission..

Attention on banks' bond losses has increased since regulators seized Silicon Valley Bank on Friday. SVB Financial, the lender's parent, had a $15 billion unrealized loss on its $91 billion held-to-maturity bond portfolio. That was equivalent to nearly all its $16 billion of tangible capital.

Eoin Treacy's view -

It’s cruel irony that banks are currently experiencing a version of negative equity when homeowners have only been made whole after 15 years of waiting for price to recover following the Global Financial Crisis. The recovery will also be similar. Either they will need to make bigger profits, write-off the loss, be bailed out by the government or Fed, and lastly for bonds and stocks to make a full recovery. 



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March 01 2023

Commentary by Eoin Treacy

Email of the day on precious metals and buying Ukrainian stocks

Could you please share your thoughts and help on the following two issues.

1. It seems that gold and silver found some kind of support after recent decline, both on the upper side of the underlying ranges, at about $1,800 and $21 respectively. Do you think, it can be so? Should we await them ranging for significant amount of time, as they usually do? Can this be just a short-term support after which decline will continue? And what about platinum?

2. Baron Rothschild is credited with saying, “The time to buy is when there's blood in the streets, even if the blood is your own.” Also, John Templeton bought shares of more than 100 companies at the beginning of the WWII. I think, some investors may consider it worthwhile to look at the Ukrainian stock market today. But it is rather small, and information is poor.

In the chart library, it is even not clear what is the main stock index. With your resources, maybe you can look if there are any instruments available for international investors, be it Ukrainian ETFs or mutual funds. At East Capital, that specializes at East European markets, I found none. The same, at Franklin Templeton. Ukrainian leading firm Dragon Capital seems to offer just brokerage services and private equity, not asset management. I suppose, the Ukrainian market is too small to be considered for a separate fund but may be, say, an East European fund with Ukrainian stocks can be found. Also, 10-15 years ago, the Warsaw Stock Exchange, in an attempt to become the regional financial centre, courted Ukrainian companies as well so some of them can be listed there.

Eoin Treacy's view -

Thank you for these topical questions. Let me take them in reverse order. I share your instinct in looking at potential opportunities in Eastern Europe because valuations will have certainly improved as a result of the war. However, it is also worth considering that the war is not over. In buying today one is taking the bet the war will be resolved favourably and minority shareholder interests will be respected in future. 



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February 27 2023

Commentary by Eoin Treacy

France Forges Pact to Make Nuclear Part of EU Clean Energy Shift

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

“The US, the UK, South Korea, China, India and even Japan are contemplating using nuclear Energy as an important means to decarbonize their economies, and we need to be on the same level playing field,” Pannier-Runacher said Monday.

The next battleground is a definition of “green hydrogen” in an EU directive known as RED3, which would set targets for using the fuel in industry and transport. France is pushing for nuclear to be considered a clean Energy source, while countries such as Spain and Germany are focusing on hydrogen derived from renewables such as wind or solar.

The EU sees hydrogen as a key pillar of its efforts to slash emissions by 55% by 2030. The outcome of the negotiations could jeopardize a flagship project to pump the fuel from Barcelona to Marseille and then onto Berlin via a pipeline, known as BarMar or H2Med.

France’s Hydrogen Pipeline With Spain at Risk Over Green Rules For “green investments,” France has already reached a compromise with Germany to allow nuclear Energy and natural gas to receive funding from environmental investors. While that added the two Energy sources to the so-called EU taxonomy — a list of activities deemed in line with the bloc’s transition to climate neutrality — there are still concerns the move could divert investment away from renewables.

The French initiative was welcomed by a number of other EU nations. “We are happy that nuclear somehow came back to the discussion in the EU  — years ago it was kind of a forbidden topic,” said Anna Moskwa, Poland’s minister of climate and environment. “It is of our common interest to build stable sources, that is why Poland decided to develop nuclear.”

 

Eoin Treacy's view -

There is nothing quite like a war on the border to focus minds on the need for Energy security. Nuclear reactors are reliable and each one lasts for decades. That does not mean they are free and there is certainly room to improve efficiencies in construction. However, many of the issues associated with budget overruns have to do with planning delays and custom part manufacturing. Both of these obstacles can be overcome by settling on a smaller design and building more of them. 



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February 21 2023

Commentary by Eoin Treacy

US Natural Gas Futures Slump to a 28-Month Low on Warm Weather

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

US natural gas futures slumped to the lowest in 28 months as weather forecasts have shifted milder since last week, further eroding the prospect for heating demand this winter.

Gas for March delivery dropped 4% to $2.183 per mmbtu as of 8:51 a.m. in New York
Futures touched $2.168 earlier, the lowest since Sept. 2020

Weather across the eastern two-thirds is looking warmer next week when compared with Friday’s outlook, with above-usual temperatures expected for southern states: Maxar.
See WHUT for a map of latest 6-10 day weather forecast: NOAA

“The market appears ready to push natural gas steeply lower until storage surpluses stop ballooning and/or production responds more vigorously to lower prices,” analysts at EBW AnalyticsGroup said in a note to clients

Eoin Treacy's view -

Natural gas prices are accelerating lower and swiftly approaching the psychological $2 area for Henry Hub. The warm weather for this time of year is depressing prices in the short term. Nevertheless, natural gas is an essential commodity for the global economy and lower prices will ultimately encourage demand and suppress supply. 



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February 02 2023

Commentary by Eoin Treacy

Oil's Pipe Dream

This article for Javier Blas for Bloomberg may be of interest. Here it is full: 

For years, Energy experts modeling the impact of 2050 net zero targets on oil demand had the advantage that the deadline, and the incremental steps to getting there, were a long way off. If time proved their scenarios wrong, they’d be long forgotten anyway. 

But now, those first intermediate waymarks are around the corner, and they look increasingly farfetched.

Earlier this week, BP Plc published its annual Energy Outlook, presenting three scenarios — not forecasts — for how oil demand may evolve. The Net Zero path, broadly in line with the goals of the Paris Agreement, is difficult to reconcile with current trends.

In such a narrative, BP’s model shows global oil consumption collapsing to 21 million barrels a day by midcentury, down from about 98 million today.

Ignore 2050 and focus instead on the intervening milestones, starting with 2025. In just two years’ time, BP’s Net Zero scenario sees oil demand 4 million barrels a day lower than it is now. That would mean removing the equivalent of Germany’s entire consumption in 2024 and repeating that feat again the following year. 

Every oil forecast I’ve seen shows demand rising in 2023, and the few 2024 projections already published — including one from the US government — see growth continuing.

Looking further ahead, BP’s Net Zero readout suggests demand would need to plunge a further 9 million barrels a day from 2026 to 2030, falling to 85 million a day by the end of the decade. That equates to eliminating the consumption of France each year and, on the final year, striking out Italy as well.

Then the really difficult period starts. The scenario sees the world using just 70 million barrels a day in 2035, requiring the annual removal of 3 million a day. That equals the demand of Japan, currently the world’s fourth-largest consumer.

Net zero models look increasingly at odds with short-term trends. It’s possible oil demand can sink by 2050, but is it going to plummet in a matter of months and keep falling precipitously every year for the next decade? No.

Eoin Treacy's view -

Politicians talk a good game on containing carbon emissions, but have no real solution for how to avoid massive cuts to living standards in achieving them. Environmentalists have been inveighing against the evils of coal for decades but global consumption continues to hit new highs. Is there any reason to expect oil to be any different? That suggests demand will migrate to less well off countries where the reality of survival trumps environmental concerns.



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January 04 2023

Commentary by Eoin Treacy

Oil's New Year Slump Deepens Below $75 as China Concerns Grow

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

Crude’s dwindling levels of open interest have left it open to sharp swings in recent months, and a failed attempt to break above its 50-day moving average this week has done little to improve the technical picture. While sanctions against Moscow over Russia’s war in Ukraine dragged its oil flows to 2022 lows late last month, that’s been of little relief to bulls so far this year. 

The impact of a pre-Christmas freeze that hobbled refinery capacity in some parts of the US should also become clearer in inventory data this week, with the industry-funded American Petroleum Institute’s figures due later. In the short-term, that has lowered crude processing capacity in North America and is also weighing on prices. 

“We’ve seen these big freeze-offs in the US and that has meant that the crude balance has actually weakened,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., said in a Bloomberg TV interview, referring to US refinery closures due to cold weather. “There’s a few more weeks of softness I would think.”

Eoin Treacy's view -

The weakness in the oil sector has little to do with Chinese demand questions. Instead, the illiquidity of the futures market is an increasingly troubling issue because it increases volatility. Open interest in front-month Brent Crude contracts is back at 2015 levels and trending lower.



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December 01 2022

Commentary by Eoin Treacy

US Seeks Halt to Oil-Reserve Sales to Refill Depleted Stockpiles

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

The Biden administration is seeking to stop sales from the Strategic Petroleum Reserve mandated by Congress so it can refill the emergency reserve, a move that could impact the release of 147 million barrels of crude oil.

The Energy Department is seeking to cancel or delay sales mandated by Congress in fiscal years 2024 through 2027 so that it can move forward with a White House plan to refill the oil reserve when crude prices reach around $70 a barrel, an agency official told a Senate committee Thursday. Congress has mandated the sale of 147 million barrels of oil to pay for unrelated legislative initiatives during that time frame, including 35 million barrels in fiscal 2024, according to data compiled by research firm ClearView Energy Partners. 

“It doesn’t make sense for us to be releasing oil while we’re trying to refill the SPR,” Doug MacIntyre, the department’s Deputy Director for the Office of Petroleum Reserves, said in testimony before the Energy and Natural Resources Committee. “We can’t fill and release from the same site at the same time.”

Eoin Treacy's view -

It would be easy to conclude the US government had never heard the maxim “buy low, sell high” when they decided to put the floor for purchases at $70. Of course, if we instead think of the USA as a major Energy producer, with an administration that is attempting to force a migration away from dependence on oil, higher prices for longer make sense.



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November 30 2022

Commentary by Eoin Treacy

EU Is Hooked on Russia LNG and Paying Billions to Keep It Coming

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

“Russian LNG has to continue to flow,” said Anne-Sophie Corbeau, a researcher at Columbia University’s Center on Global Energy Policy. “We need that on the global LNG balance: it is already tight enough as it is. I think most European countries are indeed happy to turn a blind eye on this.”

Among European nations, only the UK and Baltic states have stopped buying Russian LNG. By contrast, Russian oil has been widely shunned by buyers across the region, and an EU ban is set to come into force on Dec. 5.
 
A complete embargo on Russian gas has never been seriously considered, given the scarcity of global supply and the potential for an even tighter market next year. Yet the EU has made efforts to find alternative supplies. In March, the bloc pledged to replace almost two-thirds of its gas imports from Russia this year, with most of the new volumes coming in the form of global LNG.

Russian gas now makes up less than 10% of the region’s supply of the fuel, down from more than a third last year, but the share of LNG in Russia’s deliveries is close to half.

 

Eoin Treacy's view -

There is a great deal of discussion about the prospect of a price cap on Russian oil and gas exports. This is the alternative to a full embargo on Russia imports which are slated to go into effect next week. Since Europe still relies on Russia for 10% of its gas, the “price cap” is a virtual necessity to keep economic activity moving even if it is impossible to enforce effectively. That suggests a deal will be reached in coming days.



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November 21 2022

Commentary by Eoin Treacy

Saudis Deny Report of Discussion About OPEC+ Oil-Output Hike

This article from Bloomberg may be of interest to subscribers. Here it is in full:

Saudi Arabia denied a report that it is discussing an oil-production increase for the OPEC+ meeting next month, and said it stands ready to make further cuts if needed. 

Crude futures pared earlier losses, trading 1.8% lower at $86.04 a barrel as of 5:18 p.m. in London. 

“The current cut of 2 million barrels per day by OPEC+ continues until the end of 2023,” Saudi Energy Minister Prince Abdulaziz bin Salman said in a statement via the Saudi Press Agency. “If there is a need to take further measures by reducing production to balance supply and demand, we always remain ready to intervene.”

Oil futures earlier dropped as much as 6.1%, dipping below $85 a barrel for the first time since September, after the Wall Street Journal reported that the kingdom and other members of the group were considering raising output by as much as 500,000 barrels a day. 

That would have been a major reversal after the Organization of Petroleum Exporting Countries and its allies decided in October to cut production by 2 million barrels a day. US President Joe Biden has slammed the move, saying it endangers the global economy and aids fellow OPEC+ member Russia in its war in Ukraine.

After an initial rally following the cuts agreement, crude prices have declined as the economic outlook deteriorates and China continues to grapple with Covid-19 outbreaks. OPEC twice reduced its forecasts for global oil demand, and Prince Abdulaziz has said the group will remain cautious due to “uncertainties” about the health of the global economy. 

Saudi Arabia has already cut oil exports sharply this month to deliver on the OPEC+ agreement, according to data from Energy analytics firm Kpler Ltd. The cartel’s next meeting is scheduled for Dec. 4.

Eoin Treacy's view -

The oil market is very finely balanced so it is unlikely there will be a unanimous agreement to cut or increase supply. The global economy is slowing and China will be grappling with the coronavirus for at least the next 18 months. At the same time, European sanctions on Russian oil are due to go into effect in the next coupe of weeks and that is likely to be a significant source of volatility.



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November 17 2022

Commentary by Eoin Treacy

LNG Is Proving a Pricey Alternative to Russian Gas Supplies

This article from Bloomberg may be of interest to subscribers. Here it is in full:

The disruption to oil flows caused by Moscow’s missile attack on Ukraine underscored the need for Europe to find alternative sources of Energy. But the LNG that the continent is seeking as a long-term replacement for Russian natural gas won’t come cheap.

There’s already a shortage of vessels to deliver liquefied natural gas due to a surge in demand, and a cold snap would increase global competition for tankers. Traders are paying at least 50% more to secure the ships, meaning higher costs for importing nations. Some of the newest, Energy-efficient vessels are reportedly fetching up to $200,000 a day - almost double current rates.

A record 40 LNG tankers are now at sea, waiting for European prices to increase once winter sets in, according to shipowner Flex LNG Ltd. There are already bottlenecks at some ports, mainly in the UK and the Netherlands. That’s due to a limited number of facilities to handle the influx and storage tanks that remain near full with mild weather muting demand.

This congestion has caused ships to be tied up in floating storage, removing tankers from the spot market, Flex LNG Chief Executive Officer Oystein Kalleklev said.

Germany is one step closer to providing some relief for the continent. On Tuesday officials said work was complete on the first jetty for a floating terminal near Wilhelmshaven on the North Sea. Firms including Energy giant Uniper SE are now doing additional construction, with the idea of having the terminal operational this winter.

Still, supply could be tight during the coming months, just when Europe needs it most. The continent has relied on the US for much of its imports, and the return of Freeport LNG facility in Texas - following an explosion in June - was set to provide some relief. Now, it looks like the facility will remain offline as repairs continue and it awaits regulatory approvals to restart.

An extended outage at an LNG complex in Malaysia could further tighten the market, increasing spot cargo demand from North Asia. Spot LNG prices in the region surged Wednesday on higher freight costs.

Eoin Treacy's view -

Replacing reliable pipelines supplies with ship borne cargoes is far from ideal but it is a necessity for most of Europe. Even if the war in Ukraine ended tomorrow, politicians have learned their lesson, overreliance on a single suppler is ill advised. That ensures LNG will be a well-supported market in Europe regardless of any other events over the next decade.



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October 27 2022

Commentary by Eoin Treacy

Shell Hasn't Been Paying UK Windfall Tax as Profits Double

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

doubled to $9.45 billion, because it was making big investments in North Sea fields. 

The fact that Shell wasn’t liable for the levy, which was designed to allow companies to reduce their payments if they invest in new production, nevertheless threatens to amplify the controversy about record oil-company earnings at a time when most people are struggling with soaring Energy bills. 

There are growing calls for British Prime Minister Rishi Sunak, who imposed the windfall tax in May when he was Chancellor of the Exchequer, to hit the sector with additional levies as he tries to fill a £35 billion hole in the country’s finances. Even Shell’s boss acknowledged the possibility of further government intervention. 

“They will be looking at companies like us, who benefit of course from the volatility and the prices that we see, to fund the programs that they are rolling out,” Chief Executive Officer Ben van Beurden said on a call with reporters Thursday morning. “We have to accept it and we have to embrace that.”

Eoin Treacy's view -

One of the first measures Rishi Sunak took when he became prime minister was to reimpose the ban on fracking. That’s putting more focus on boosting oil and gas supply from the North Sea. Shell expects to spend £23-27 billion on capital expenditure this year which is at least 20% more than last year and on par with years like 2018 and 2019.



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October 24 2022

Commentary by Eoin Treacy

Texas Natural Gas Prices Drop Toward Zero as Supplies Boom

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

Insufficient pipeline capacity has actually been a long-term problem that has dogged Permian Basin gas producers for years. The choke points worsen when pipeline operators must perform repairs and preventative maintenance work that forces temporary reduction in pressure or halts to shipping. 

Permian pipeline constraints “have never been relieved,” making the region more susceptible to sudden gluts and price volatility, said Campbell Faulkner, chief data analyst at OTC Global Holdings LP.

Eoin Treacy's view -

The world is not running out of natural gas. What we are dealing with at present is a supply bottleneck. These kinds of problem can be solved. It would be a lot worse if there was a genuine shortage of global natural gas supply. However, to bring prices back to acceptable levels significant investment in pipeline, LNG import and export facilities, and shipping will be required.



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October 12 2022

Commentary by Eoin Treacy

Putin Says All Infrastructure at Risk After Nord Stream Hit

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

Russia’s President Vladimir Putin said any Energy infrastructure in the world is at risk after the explosions on the Nord Stream gas pipelines.

The attacks were an act of terror that set “the most dangerous precedent,” the Russian president told a Moscow Energy forum on Wednesday. “It shows that any critically important object of transport, Energy or utilities infrastructure is under threat” irrespective of where it is located or by whom it is managed, he said.

Putin blamed the sabotage on the US, Ukraine and Poland, calling them “beneficiaries” of the blasts that caused major gas leaks in the Baltic Sea. The US and its allies have rejected those allegations and suggest Russia may have been behind the underwater blasts.

The attacks on two strings of Nord Stream and one string of Nord Stream 2 at the end of September have raised concerns over the future of Europe’s gas supplies. Other critical infrastructure in the region has also suffered damage in recent weeks. 

Earlier this month, an act of sabotage halted train services across northern Germany and the government has said it can’t rule out foreign involvement. A pipeline that carries Russian oil through Poland was found to be leaking on Tuesday. Investigations continue, and Poland’s top official in charge of strategic Energy infrastructure said he assumed it was an accident.

Eoin Treacy's view -

This is a none too subtle threat to expect escalation of attacks on Energy infrastructure for as long as the EU is supporting Ukraine’s resistance efforts. The sabotage of Germany’s rail network with specialized interruptions conducted simultaneously at locations 200km apart is a display of Russia’s extraterritorial ability to sow disruption.



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October 08 2022

Commentary by Eoin Treacy

Malaysia LNG declares force majeure on supply to customers -Mitsubishi

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

The possible disruption comes at a time when Japan and many other countries in Europe are scrambling to ensure gas supply for the peak winter demand season as they face the threat of an Energy cut-off from Russia amid the war in Ukraine.

The force majeure was due to a leak on the Sabah-Sarawak Gas Pipeline on Sept. 21, the Mitsubishi spokesperson said, adding it was assessing the impact from the action.

"We have already strongly requested that Malaysia LNG take all possible measures to examine and respond to the impact," he said.

"We will closely monitor the situation and provide full support to Malaysia LNG in order to minimize the impact on the Japanese market," he said, adding there would be limited impact on its earnings.

The spokesperson declined to give details such as the dates of declarations and volume of the supply that may be affected or how long the supply disruption could last.

Eoin Treacy's view -

We are in a tight supply environment so every pipeline or processing facility interruption makes global headlines. Nevertheless, there is still potential that the explosion at the Freeport terminal in Texas, the Nordstream pipeline explosion and the Petronas leak are related events. Regardless of whether these events are the result of malicious intent, the argument for any measure that supports Energy independence is more convincing than ever.



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October 06 2022

Commentary by Eoin Treacy

LNG Market Supply to Remain Tight for Years, Top Producers Say

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

Liquefied natural gas will be in short supply in the coming years as production lags behind surging demand from Europe, according to the world’s top producers of the fuel.

Global LNG demand is unlikely to peak for another 20 to 30 years, Qatar Energy Minister Saad Al-Kaabi said at the Energy Intelligence forum in London. Meanwhile, supply will remain “structurally short” until there’s significant new production capacity, which will be 2026 at earliest, Meg O’Neill, chief executive officer of Australia’s Woodside Energy Group Ltd., said at the event.

Their comments add to a growing chorus warning that Europe’s worst Energy crisis in decades is unlikely to end soon. While the continent looks set to cope this winter, it’s next winter when the supply shortage will really bite as Europe tries to replenish its stockpiles without Russian imports.

“Next winter is going to be the problem,” Al-Kaabi said. “It doesn’t look like it’s getting better.”

Eoin Treacy's view -

The opinion that Europe will cope this season is implied in prevailing prices of natural gas. It is not reflected in media coverage which continues to paint a dire picture of what this winter will feel like for many consumers.



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October 04 2022

Commentary by Eoin Treacy

The Freeport LNG Paradox

This article from Goehring & Rozencwajg may be of interest to subscribers. Here is the conclusion:

With the announcement that Freeport will likely resume exports in October, much sooner than originally planned, combined with low inventories and a gas supply that has shown little in the way of growth, we believe the risk of a Q4 price spike in North American natural gas is once again high.

Natural gas has quickly gone from relative obscurity to geopolitical lynchpin. In the summer of 2020, seaborn LNG reached a low of $1.90 per mmcf while oil prices turned negative. Together, this represented the lowest Energy costs in human history. Two short years later, LNG has risen 30-fold to $58 per mmcf, representing the highest Energy costs in human history. Such is the result of a decade of underinvestment. Given the fragility of the world’s Energy supply, it is no wonder tyrants and despots are moving to weaponize fuel sources. We do not expect this trend to stop and recommend investors position themselves accordingly. We remain extremely bullish on North American natural gas and recommend investors continue holding their natural gas related equities.

Eoin Treacy's view -

Some of information quoted in this report is not accurate. For example, Rhine river levels could approach normal depths this week, and France changed the rules on nuclear power heating of river water in August. European coal prices peaked in March and continue to unwind an overbought condition.
 



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September 21 2022

Commentary by Eoin Treacy

OPEC, SPR May Make $80 the New $60 for Oil

This note from Dow Jones may be of interest.

Tightly managed supplies by the OPEC-plus group and signs Washington will start restocking crude siphoned off from its Strategic Petroleum Reserve if oil falls to $80 suggests oil prices will stay relatively high despite a global economic slowdown, BofA Global Research says. "As spare capacity dwindles and capex lags, we think $80/bbl is now the new $60 for Brent crude oil," it says in a note. "Said differently, the 'OPEC-plus put' on average oil prices is higher today." It adds that a recent signal by OPEC-plus to reduce production even as oil traded above $90 was unprecedented, and a good indication it'll do what it takes to keep a floor on prices.

Eoin Treacy's view -

The USA is now an Energy exporter. It no longer has a vested interest in permanently lower prices. Viewed from that perspective, the Norwegian policy suite comes into sharper focus.

Norway relies on hydro for most of its electricity production. That option is not open to the USA but domestic demand for natural gas will increasingly have to compete with global demand as LNG becomes a globally fungible commodity. That will be doubly true as new exporters become less reliant on fixed term contracts. Afterall, that was the practice more than a decade ago when consumers needed to be convinced of the need to build the necessary infrastructure. Today, the need is self-evident.



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September 09 2022

Commentary by Eoin Treacy

The Coming Global Crisis of Climate Policy

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

Politicians are happy to blame Vladimir Putin and his Ukraine invasion for the current Energy disaster. But what transformed that one-off shift in the relative price for Energy into a global disaster was two decades of green-Energy policy beforehand. In Europe, that includes a fixation on renewables incapable of powering industrial economies absent battery technologies that don't exist, a refusal to tap domestic fossil-fuel reserves such as shale gas, and a deep and irrational hostility to nuclear power in many parts of the Continent.

This has created an Energy system of dangerous rigidity and inefficiency incapable of adapting to a blow such as Russia's partial exit from the European gas market. It's almost inevitable that the imminent result will be a recession in Europe. We can only hope that it won't also trigger a global financial crisis.

Eoin Treacy's view -

The tide has certainly turning against the revisionist green movement. This article is very representative of the growing groundswell of disillusionment with how electricity grids and generation has been managed.



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September 08 2022

Commentary by Eoin Treacy

Heavy China platinum imports spur shortages elsewhere, WPIC says

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

It was difficult to track what happened to some of the Chinese imports, so the platinum market was in surplus on paper but on the ground tightness sent lease rates surging to the highest levels in a decade, the WPIC said in its latest quarterly report.

And

China may be increasing its platinum loadings in catalytic converters of heavy vehicles due to stricter emission standards, he said.

Eoin Treacy's view -

Nothing emphasised the fact platinum is an industrial metal more than its demise during Volkswagen’s diesel cheating scandal. The price collapsed and has not recovered because investment demand has not compensated for the loss of automaker buying.



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August 31 2022

Commentary by Eoin Treacy

Email of the day on European electricity prices

I wonder if it's possible to add the French and German electricity contracts in the chart library? thanks!

Eoin Treacy's view -

Thank you for this suggestion. European Energy has certainly become topical this year. Historically we have only updated prices for Nordpool contracts because so many Danish and Swedish electricity traders have come to The Chart Seminar. I do hope they remember acceleration is a trend ending. 



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August 25 2022

Commentary by Eoin Treacy

War and Industrial Policy

This report from Zoltan Pozsar at Credit Suisse may be of interest. Here is a section:

More broadly, the three “moments” of reckoning we discussed above mean that global supply chains, whether they produce military or civilian goods, are facing a Minsky Moment – a Real Minsky Moment. Paul McCulley’s term referred to the implosion of the long -intermediation chains of the shadow banking system that marked the onset of the Great Financial Crisis. Today, we are witnessing the implosion of the long -intermediation chains of the globalized world order: masks, baby formula, chips, missiles, and artillery shells, for now. The triggers aren’t a lack of liquidity and capital in the banking and shadow banking systems, but a lack of inventory and protection in the globalized production system, in which we design at home and manage from home, but source, produce, and ship everything from abroad, where commodities, factories, and fleets of ships are dominated by states – Russia and China – that are in conflict with the West.

Inventory for supply chains is what liquidity is for banks. In 2007 -08, big banks ran on “just -in -time” liquidity: the dominant form of liquidity was market liquidity, for which you could always sell assets into a deep market without moving prices, so you did not have to have liquidity reserves at the central bank. Similarly, big corporations today run “just -in -time” supply chains for which they assume that they can always source what they need without moving the price. But not really: the U.S. military has to wait a little bit as Raytheon “will take a little while”; Taiwan and Saudi Arabia have to wait as well until the conflict in Ukraine is over; and if your washing machine broke recently, you’ll have to wait a bit too until defense contractors are done buying them up to rip chips out to make missiles.

Eoin Treacy's view -

In propagating the Belt and Road Initiative, China has long complained that the USA’s policy towards it is one of containment. That has become more much overt since 2016. Sanctions on chip manufacturing capacity are an escalation. The rationale for such moves is obvious. The USA and Europe need time to rebuild domestic manufacturing capacity.



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August 23 2022

Commentary by Eoin Treacy

Australia's Pensions Suffer Worst Year Since Financial Crisis

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

Australia’s pensions posted their worst annual performance since the global financial crisis as markets were roiled by central banks’ aggressive rate hikes and the war in Ukraine.

Guardians of the world’s fifth largest pension pot shed A$92.8 billion ($64 billion) on investments in the fiscal year through June 30, the biggest loss for the period since 2009, according to Australian Prudential Regulation Authority data released Tuesday. That saw the pool of savings fall to A$3.3 trillion, wiping out a year’s growth. 

The performance was largely due to a A$140 billion loss in the June quarter as equity markets were roiled by fears of a slowing global economy. The funds had boosted their stocks allocations toward the end of last year, before global equity markets slumped following Russia’s war in Ukraine and central banks’ efforts to stamp out rampant inflation. 

Australia’s pensions are bracing for more volatility in anticipation that the global economy could be heading into recession. They’ve lifted their holdings of fixed income and cash, while their stock allocations are now at the lowest level since December 2020.
 

Eoin Treacy's view -

Australia’s pension system is the envy of anyone who cares to look at such things. However, that does not insulate it from the universal challenge of bonds and equities falling in tandem. That’s something every pension fund has had to contend with this year. The biggest question by far is whether this is an anomaly or something we should be prepared to deal with for much of the next decade?



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August 23 2022

Commentary by Eoin Treacy

Saudi Arabia Makes a Push for $100 Oil

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

For long, Saudi Arabia pretended it didn’t target oil prices. The job of OPEC+ was all about matching supply with demand. Focus on fundamentals, and leave prices to the market, it used to say.

On Monday, in an unusual intervention, Saudi Energy Minister Prince Abdulaziz bin Salman indicated he didn’t like the yo-yo pricing he saw in the oil market. The problem, he said in a written interview with Bloomberg News, is that the physical and financial markets have “become increasingly more disconnected.”

Left unsaid, but clearly implied, is the real concern: oil prices were getting too low – and in the view of Riyadh, for no good reason.

With Brent falling toward a six-month low of $90 a barrel last week, Prince Abdulaziz said “cutting production at any time” was an option for OPEC+. The Saudi royal is a veteran policymaker, who knows very well the impact of those words. If there was any doubt, when the state-run Saudi Press Agency published its own version of the interview, it elevated the “cutting production” remark into the headline.

Eoin Treacy's view -

The release from the USA’s strategic reserve began in March and is due to end in early October; less than six weeks from now. On Monday, the reserve hit its lowest level since 1985. That suggests ability of OPEC+ to influence the market will improve soon and the USA will need to buy a lot of oil when prices are cheaper to rebuild the reserve.



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August 19 2022

Commentary by Eoin Treacy

Gazprom to Halt Nord Stream Gas Link for Three Days for Works

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

“Upon completion of the work and the absence of technical malfunctions of the unit, gas transport will be restored to the level of 33 million cubic meters per day,” Gazprom said.

The gas flow after works is equivalent to 20% of capacity. The pipeline can normally carry about 167 million cubic meters per day.

The Portovaya compressor in Russia, where the pipeline begins, is designed to operate six major and two smaller turbines. While one turbine is stranded in Germany after its maintenance in Canada, others that are still in Russia need repairs either in Canada or at the venue.

Eoin Treacy's view -

Germany’s efforts to refill storage tanks to 80% by October 1st appear to be on track. It comes at an enormous cost and is potentially crowding out Germany’s neighbours from the market. Storage is designed to compensate for outsized demand during winter, not a cessation, or a significant reduction in supply.



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August 16 2022

Commentary by Eoin Treacy

Carbon Capture Could Get $100 Billion in Credit from US Climate Bill

This report from Bloomberg New Energy may be of interest to subscribers. Here is a section:

The new legislation raises the credits for captured CO2 that is used and stored to $60/tCO2 and $85/tCO2 respectively. However, project owners must meet prevailing wage and apprenticeship requirements in order to qualify. If they do not, they will be paid a lower credit than the existing 45Q payment. Projects must be under construction by the end of 2032 to receive the credit

A new, much higher credit is available to direct air capture (DAC) projects. DAC currently costs around $600/tCO2. The credit pays $130/tCO2 for gas that is used, say, for enhanced oil recovery or to make synthetic fuels, and $180/tCO2 for CO2 that is stored permanently.

 

Eoin Treacy's view -

Regulatory arbitrage will ensure that some areas will continue to benefit from having less strict regulations than either North America or Europe. Meanwhile there is little to be gained from arguing about the sense behind carbon credit trading. We can only deal with the reality provided by the market. The regulatory regime continues to support taxes on emissions. 



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August 15 2022

Commentary by Eoin Treacy

Germany Slaps Levy on Households to Spread Pain of Gas Surge

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

“The levy is a consequence of Putin’s illegal war of aggression against Ukraine and the artificial Energy shortage caused by Russia,” Economy Minister Robert Habeck told reporters in Berlin. The government is working on a compensation package for consumers, because the levy presents a “challenge“ to them, Chancellor Olaf Scholz said in Oslo after a meeting with Nordic counterparts. 

The levy comes as Europe shifts its focus to curbing consumption in the face of a worsening Energy crisis. German power prices climbed to a record amid mounting concerns the region may struggle to generate enough electricity this winter. That has pushed up inflation rates and threatened the industry.

Habeck said the levy -- which runs through April 1, 2024 -- would cost an average single household about 97 euros a year, a couple would pay about 194 euros more and a 4-person household would bear extra costs of about 290 euros.

Eoin Treacy's view -

The Netherlands natural gas future was up another €10 today as it extends the acceleration. The measures underway to ensure Europe has enough gas for the winter are totally dependent on Russia continuing to supply the region. It is in their interests to pick the most inconvenient time possible to turn off the tap. With the war in Ukraine finely balanced, Russia will be keen to gain whatever benefit they can from asymmetric tools.



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August 11 2022

Commentary by Eoin Treacy

Email of the day on surging electricity prices

I know you have consistently highlighted the challenges that UK households will experience in relation to their Energy bills, and just today they are saying that "typical" households could be paying nearly £600 in January, money that most just can't find. Already consumers are a collective £1.3 billion in arrears on their bills, with an expected 86% hike in the Energy cap expected on 1 October.

But far less is said of the impact on businesses, and on this I can shed some very specific light. I own a small business, an indoor children's play centre. On 1 December last year I renewed my Energy supply contract, and faced with an increase then from 15p/kwH to 20p/KwH I opted to take just a 1 year renewal, with gas prices fairly stagnant until then as you know.

I have been informed today that when I come to renew once more on 1 December, I am going to staring at a tariff of anywhere between 50p/kwh to as much as 89p/kwh. I was also told in no uncertain terms by the 'sales' person at my current supplier, that they are trying to migrate away from small and medium business in this environment, and are deliberately pricing us away. the daily fixed standing charge will move from £83 per month, to potentially as much as £1,000.

For context, my own Energy bill is going to shift from £20k per year to closer to 60k-£70k. This is going to be catastrophic for U.K. businesses, as many will be left in dire straits, unable to keep the lights on, and customers cool (in summer) or sufficiently warm in the winter. So many businesses in the hospitality sector especially are saddled with the burden of Covid "bounce back loans", delayed VAT repayments, and of course huge inflation on input costs with a consumer at breaking point. Business closures = higher unemployment...it is looking particularly dire here in the U.K.

Eoin Treacy's view -

Thank you for sharing this visceral experience of price increases business owners are experiencing. The challenges are significant and options to raise prices are inhibited so many businesses will close. The strike action in the UK which has been building for months and will escalate further. They are a symptom of how much living standards are being impacted by the rising cost of living.



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August 09 2022

Commentary by Eoin Treacy

Europe Energy Supply Takes Another Hit as Russia Oil Pipe Halts

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

In the first days of August, before the halt, Russia sent just over 24,000 barrels a day to the Czech Republic and the same volume to Slovakia through the Druzhba, according to industry data seen by Bloomberg. Flows toward Hungary zero due to planned maintenance at the country’s processing facilities, the data showed.

Ukrtransnafta JSC, which operates Ukraine’s oil pipeline network and oversees the transit of crude via the southern leg of the Druzhba link, “stopped providing oil-transportation services” through its territory on Aug. 4, Transneft said in a statement on Tuesday. There was no immediate comment from Ukrtransnafta.

The contract between Transneft and Ukrtransnafta requires 100% prepayment for transit flows. While the Russian pipeline operator paid the August transit fee on July 22, it received the money back on July 28, Transneft said. Slovak crude-pipeline operator Transpetrol, in a separate statement, confirmed Transneft’s payment failed to go through and was returned to the company by the bank.

The European banks involved in the transaction are not authorized to make their own decisions on cross-border payments from Russia due to sanctions and need approvals from their national regulators, according to Transneft. 

The Russian oil-pipeline operator said it has appealed “to an authorized bank for further transfer of information to the European regulator in order to obtain permission to conduct settlements under an agreement with Ukrtransnafta.” It is also looking at alternative ways to transfer funds. 

Eoin Treacy's view -

There is a lot of commentary in the media about how successfully the HIMARs artillery have offset Russia’s offensive capability in Ukraine. Time will tell how true that is, but Russia has every reason to exercise its influence over the European Energy sector. Choking off supply of oil and gas to Europe is all part of Russia’s playbook to ensure Europe has a very uncomfortable winter.



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August 01 2022

Commentary by Eoin Treacy

Shale Profits Finally Blossoming After Decade of Steep Losses

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

US shale drillers are expected to post record second-quarter profits in coming days, reversing nearly a decade of debt-fueled losses. 

The top 28 publicly traded US independent oil producers generated $25.5 billion in free cash flow in the three months to June 30, according to estimates compiled by Bloomberg. In that space of time they’ll have made enough cash to erase one-fourth of what they lost over the previous decade. 

Fracking revolutionized global Energy markets by enabling American drillers to harvest shale resources that had previously been untouchable. In the space of just over 10 years, the US went from a declining crude producer to the world’s dominant oil and gas source, but at an astronomical cost: the 28 companies lost about $115 billion in the decade leading up to the Covid-19 pandemic.

Eoin Treacy's view -

Nothing about unconventional supply is cheap but it is a lot more cost effective than it used to be. The continual need for drilling and the quick abundant payback initially led to excessive enthusiasm. The business model has more recently evolved to be more sensitive to the cost of production, oil prices and economies of scale. That has finally translated into profits for the sector.



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July 29 2022

Commentary by Eoin Treacy

New US Climate Deal Could Make EVs, Energy Bills Cheaper

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

“This bill is going to open up a lot of avenues for Americans to contribute to the fight against climate change on an individual level,” said Senator Sheldon Whitehouse, a Democrat from Rhode Island, in an emailed statement. “Through a mix of rebates for electric appliances and efficiency retrofits and tax credits for technologies like heat pumps … it’s going to become a lot more affordable to do your part.” 

Eoin Treacy's view -

The prospect of hundreds of billions in support for renewable Energy solutions is a clear positive for that sector. However, the big near-term challenge is nothing in this bill will incentivize companies to invest in additional new oil and gas supply.



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July 12 2022

Commentary by Eoin Treacy

Anger in Shanghai as Covid Return Spurs Fear of New Lockdown

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

Tension is spreading through Shanghai as residents watch the Covid-19 caseload tick higher, fueling fears they’re headed back into lockdown little more than five weeks after exiting a bruising two-month ordeal.

The city reported 59 new infections for Monday, the fourth day in a row case numbers have held above 50. The sharp rise from single digits about a week ago follows the detection of the more contagious BA.5 sub-strain of the omicron variant, which has triggered two additional rounds of mass testing between Tuesday and Thursday this week across nine of the financial hub’s 16 districts, as well as other areas where cases have been found. 

China’s strict Covid Zero approach is once again being tested as outbreaks flare across the country amid the arrival of a sub-variant that has fueled rising caseloads elsewhere. Already, close to 30 million people nationwide are under some form of movement restrictions to quell transmission, but authorities have so far steered clear of strict lockdowns in key economic regions.

Eoin Treacy's view -

Quarantines work in the initial stages of an outbreak because there is still some hope the rate of infection can be contained. The only reason to sustain a quarantine during a pandemic, where there is no hope of containing the global spread, is to slow the rate of infection. The time bonus gained from slowing the rate of infection can be used to prepare treatments, vaccines and recovery areas, but no one is under any illusion that quarantines can indefinitely turn back a pandemic. Eventually everyone is going be infected.



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June 28 2022

Commentary by Eoin Treacy

Inventory Woes Lead to Another Margin Miss

This article from Bloomberg may be of interest to subscribers. Here it is in full:

Concerns about company margins have been in focus as stock prices have slid this year. Another major US corporation is reporting a miss, which may add to anxiety about the upcoming earnings season.

Nike’s fourth-quarter gross margin trailed estimates, with an 80 basis-point drop from the prior year, due to what the firm said were higher inventory “obsolescence reserves” in China, along with elevated freight and logistics costs. Production issues amid Covid shutdowns have been resolved, but shipping logjams are still an issue, boosting inventory as many items were stuck in transit.

Earlier this month, bellwether national supermarket chain Kroger also reported a profit-margin miss, because of some price cuts and higher supply-chain costs. That was exactly the combination of factors that’s been a source of worry about corporate profitability.

Nike shares initially popped in postmarket trading, but pared some gains. Watch for more from the company on its 5pm conference call. Meantime, big banks, like JPMorgan, BofA and Morgan Stanley, are announcing their shareholder payout plans in the wake of the Fed’s stress tests; shares were mixed with JPM dipping slightly.

Eoin Treacy's view -

Nike is another company dealing with high inventory levels. That’s stranded capital until the excess levels are worked off. Given the seasonal nature of many product lines and the industry practice of bringing out new designs on a regular basis, there is a clear scope that significant discounting will be required to clear stock levels. That’s good news for consumers, less so for Nike.



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June 22 2022

Commentary by Eoin Treacy

Biden to Urge Gasoline Tax Pause as Prices Drag on Democrats

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

President Joe Biden will ask Congress to suspend the federal gasoline tax for three months, after his administration’s previous efforts failed to curb soaring pump prices that weigh heavily on his party’s political fortunes.

Biden will call for a pause in tax collections through September in a speech scheduled for 2 p.m. Wednesday in Washington, senior administration officials said. The national average gasoline price hit a record this month above $5 a gallon, even after Biden ordered a historic release from US reserves earlier this year.

Any pause, however, is fraught with contradiction. Lowering the price of gasoline may spur demand, potentially exacerbating supply imbalances already roiling markets. Biden entered office describing climate change as an existential threat and pledging to scale back US drilling; he’s now calling for measures to make fossil fuels less expensive, while all but begging oil companies to boost production and refining.

And it’s unlikely Congress will heed the president’s request, as many Democrats have concerns about the move and Republicans aren’t inclined to help Biden with his biggest political liability ahead of a critical election in November.

Eoin Treacy's view -

I tuned in to watch Jay Powell’s testimony in front of the Senate today. I was struck by how partisan the questioning was. Democrats are eager to shift blame for high prices and Republicans are eager to the pin the blame for high prices on the current administration. Tomorrow he speaks to Congress where a lot more people are up competing for re-election this year so the tone of the questioning is likely to be more aggressive. The tax holiday on gasoline is a crowd-pleasing measure which is unlikely to implemented. Meanwhile oil prices extended their decline as traders price in falling demand amid slowing growth.



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May 23 2022

Commentary by Eoin Treacy

How an Energy Expert Triggered Vladimir Putin With One Word

This transcript of a podcast with Daniel Yergin may be of interest. Here is a section:

He knew that US shale was a threat to him in two ways. One, because it meant that US natural gas would compete with his natural gas in Europe, and that’s what we’re seeing today. And secondly, this would really augment America’s position in the world and give it a kind of flexibility it didn’t have when it was importing 60% of its oil. 

And

That’s the question that’s really weighing now because in terms of oil, there’s enough crude oil in the world. You have to move it around, but between strategic stocks, between demand being down in China, you can manage that. When you get into products like diesel, it gets harder. And then you’re going to the hardest thing with natural gas, and that is exactly as you go into the winter. So, the big question now is can they fill storage so that they can get through the winter, and, by the way, not only stay warm, but keep industry operating. And I think we can say that Putin made a series of decisions which kind of were irrational -- that his army was really good, that Ukraine wouldn’t be able to resist, that the US had just gone through getting out of Afghanistan and was deeply divided, that Europe was so dependent on his Energy that they would say, ‘OK, this is terrible, but life goes on.’ And none of that happened.

But I think he’s still calculating. And he said that ultimately this Energy disruption -- and we are in a huge disruption of Energy markets -- would be such a big threat to the European economy that the coalition that now exists would fall apart. I think that’s his wager right now. And the Achilles heel is what you pointed to: what happens as Europe goes into the fall and winter. And we’ve had at least one German, very prominent industrialist, who said, ‘This is too dangerous for the European economy. We should negotiate something with Putin.’

Eoin Treacy's view -

We are in a market lull for European natural gas prices as we head into summer and lower heating demand. The price of European gas (Netherlands) is down from a peak of €140 in December to €74 today. The UK price has been much more volatile and is down from a March high of £800 to £138.



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May 17 2022

Commentary by Eoin Treacy

Pound Jumps Most in 17 Months as Traders Eye Tight Labor Market

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

“People don’t need too strong an excuse to buy sterling right now,” said Geoffrey Yu, a strategist at BNY Mellon. “Even a modicum of good data or even data that isn’t as bad as previously expected can see them coming back because of valuations.”

The move accompanies a broader dollar decline, with the greenback underperforming all Group-of-10 currencies bar the Japanese yen as risk sentiment rebounded. The Bloomberg Dollar Spot Index slid 0.5%, a third day of declines and the longest losing streak since March.

Eoin Treacy's view -

The Pound is rebounding from the lower side of a lengthy medium-term range just as the Dollar Index is encountering some resistance at the upper side of its range. As risk appetite returns there is scope for both to unwind their respective overextensions.



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May 06 2022

Commentary by Eoin Treacy

U.K. Plans New Energy Law to Enable Renewable, Nuclear Build Out

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

The U.K. will introduce new laws for Energy to enable a fast build out of renewables and nuclear power stations as set out in the government’s Energy security strategy last month.

An Energy bill will be included in the Queen’s Speech on May 10, according to a person familiar with the matter who asked not to be named because the information isn’t public.

The last significant set of Energy legislation was in 2013 and the government has accelerated its push toward net zero significantly since then. Britain is targeting a tripling of installed nuclear power capacity by 2050 and plans to build 50 gigawatts of offshore wind farms this decade. The nation has also increased its ambition on hydrogen, solar power and measures to spur North Sea oil and gas projects.

“This country now has a raft of ambitious targets in place and the focus must now be on delivering these,” said Dhara Vyas, director of advocacy at EnergyUK. “A new Energy Bill should create a framework for a low carbon future. The Energy industry is ready to deliver.”

Eoin Treacy's view -

North Sea oil allowed successive UK governments the leeway to avoid thinking seriously about Energy policy. In the 15 years since the UK became a net Energy importer, social cohesion has deteriorated, taxes have risen, debt has become problematic and social services have suffered. That’s not all because of Energy imports but it is a factor at the margin.



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May 04 2022

Commentary by Eoin Treacy

EU Squeezes Hard on Russia, Sweeping In Oil, Bank, Business

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

The European Union plans to ban Russian crude oil over the next six months and refined fuels by the end

of the year as part of a sixth round of sanctions to increase pressure on Vladimir Putin over his invasion of Ukraine.

“This will be a complete import ban on all Russian oil, seaborne and pipeline, crude and refined,” European Commission President Ursula von der Leyen said in remarks to the European Parliament. “We will make sure that we phase out Russian oil in an orderly fashion, in a way that allows us and our partners to secure alternative supply routes and minimizes the impact on global markets.”

Hungary and Slovakia, which are heavily reliant on Russian Energy and had opposed a sudden cut-off of oil, will be granted a longer timeframe -- until the end of 2023 -- to enforce the sanctions, according to people familiar with the matter.

Eoin Treacy's view -

A rumbling argument in the oil market is contributing to the evolving wedging characteristic in prices. For the bulls, the dislocation caused by Western Europe’s efforts to stop buying Russian oil, as well as leaning on other countries to do the same, is a clean support for prices. The bears believe the impending global slowdown will kill off demand, and the market will turn to surplus faster than many people expect. 



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April 29 2022

Commentary by Eoin Treacy

Exxon Triples Share Buybacks to $30 Billion as Profits Soar

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

Exxon Mobil Corp. tripled its share-buyback program to as much as $30 billion after profits surged amid Russia’s invasion of Ukraine and a rally in worldwide Energy prices.

The repurchases will be made through the end of next year, Exxon said in a statement on Friday. The oil giant more than doubled first-quarter adjusted net income to $8.8 billion, or $2.07 a share, lagging estimates by 17 cents.

Chief Executive Executive Darren Woods cited a dip in output from oil and natural gas wells stemming from adverse weather and other factors. Exxon rose 0.3% to $87.43 at 9:33 a.m. in New York.

The oil giant took a $3.4 billion writedown due to its planned exit from its Sakhalin-1 operation in Russia, compared with a previously announced estimate of as much as $4 billion. The company declared force majeure at the venture earlier this week and curtailed crude production. 

Exxon follows TotalEnergies SE and Chevron Corp. in posting first-quarter results. The French oil titan pledged to buyback as much as $3 billion in shares before the end of June while Chevron disclosed its biggest profit in almost a decade.   

Eoin Treacy's view -

In an environment where pandemic padding of balances in the tech sector rapidly waring thin, the Energy sector hasn’t had a year this good in decades. In times of uncertainty, when interest rates are rising and geopolitical threats are mounting, the reliability of strong cashflows, rising dividends and a thinning supply of stock will be welcomed by investors.



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April 27 2022

Commentary by Eoin Treacy

GS, Doosan and Samsung to Cooperate in SMR Power Plant Business

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

A signing ceremony was held at GS Energy Headquarters in Gangnam-gu, Seoul, on April 26 with the presence of representatives from the four companies. They included GS Energy president Huh Yong-soo, Doosan Enerbility vice president Na Gi-yong, Samsung C&T vice president Lee Byung-soo, GS Energy vice president Kim Seong-won, and NuScale Power president John Hopkins.

NuScale’s SMR is the only one of its kind to receive design certification from the U.S. Nuclear Regulatory Commission (NRC). It is regarded as the most advanced SMR in the world. It can be used for hydrogen production, seawater desalination, and heat supply to industrial complexes in addition to electricity generation.

The MOU is expected to generate huge synergies by combining NuScale’s SMR technology, GS Group’s power plant operation capabilities, Doosan Enerbility’s expertise in nuclear power plant equipment production, and Samsung C&T’s power plant construction capabilities.

A power plant using NuScale SMRs will be built and put into commercial operation in Idaho of the United States in 2029.

Eoin Treacy's view -

Last month Samsung also signed a memorandum of understanding aimed at building Seaborg’s modular self-contained molten salt reactors for nearshore power production. In addition to taking a minority stake in NuScale last year, this represents a significant bet on small scale nuclear construction. It’s not an exaggeration to think South Korea is aiming to dominate the construction of small modular reactors.



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April 12 2022

Commentary by Eoin Treacy

Stocks Rise as CPI Bolsters Bets on Inflation Peak

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

While the U.S. consumer-price index climbed by the most since late 1981, excluding volatile food and Energy components, the gauge increased 0.3% from a month earlier and 6.5% from a year ago -- due in part to the biggest drop in used vehicle prices since 1969. The March CPI reading represents what many economists expect to be the peak of the current inflationary period, capturing the impact of Russia’s invasion of Ukraine.

Comments:
“There were some green shoots in the data that suggest March could potentially be the peak for inflation,” said Lindsey Bell, chief markets and money strategist for Ally. “When you couple this with the recent retreat in oil prices, improving shipping costs, a potential reduction in demand from higher prices, and the cycling of higher inflation comparisons, it’s possible that inflation could be topping out.”

“While today’s inflation print hit a four-decade high, there was a sigh of relief as some components of core inflation weakened,” said Charlie Ripley, senior investment strategist for Allianz Investment Management. “Regarding peak inflation, we have been at this juncture before where subtle shifts within the data make it appear that the level of inflation has reached its peak for the cycle only to keep marching higher.”

“It’s a red-hot number, but the market’s reaction for now suggests it’s priced in, especially with the month-over-month core read coming in below expectations,” said Mike Loewengart, managing director of investment strategy at E*Trade from Morgan Stanley.

Eoin Treacy's view -

The above headline was a bit premature as early rises were later reversed.

Used car prices have an outsized effect on the USA’s official inflation measure because they don’t look at either food or Energy. The Index rallied 57.3% between June 2020 and January 2022. It is now declining. Used cars cost about the same as new vehicles with the only difference being you can get a used car today but wait for a new one. The wait is increasingly preferrable to consumers as monetary conditions tighten.



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April 06 2022

Commentary by Eoin Treacy

Copper: Supply meets demand concerns

Thanks to a subscriber for this report from UBS 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. 

Ranging prices contribute to analysts hedging their bets of which direction prices are likely to breakout and how much they are likely to move. Nevertheless, by suggesting a strike on put options of $9750, which coincides with the trend mean, they are effectively saying give the benefit of the doubt to the upside provided it continues to hold that level.



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March 21 2022

Commentary by Eoin Treacy

Oil Surges With Growing Supply Fears as EU Considers Russian Ban

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

In weeks prior, the EU sanctioning Russian oil “seemed unrealistic given their reliance on Russian Energy supply,” said Rohan Reddy, a research analyst at Global X Management, a firm that manages $2 billion in Energy-related assets. If sanctions were instilled, “it would basically shave off a full 4-5% of global oil supply,” as “Europe bought up around 40-45% of Russia’s total oil production in 2021.”

The global oil market has been thrown into turmoil by Russia’s invasion of Ukraine, with the U.S. and Europe imposing sanctions on Moscow and crude buyers shunning the country’s cargoes. Brent neared $140 a barrel earlier this month to hit the highest since 2008, before seeing a massive pullback that briefly put the market into bear territory. Prices have seen unprecedented volatility, with frequent intraday swings of about $10 and broader commodity markets seizing up amid a widespread liquidity crunch.

The rally in oil prices has spurred importing nations to pressure other producers to step up supply, including members of the Organization of Petroleum Exporting Countries. During the weekend, Japan urged the United Arab Emirates to increase exports. Meanwhile, oil giant Saudi Aramco plans to raise spending as it seeks to boost output.

Saudi Arabia said it cannot be held responsible for any drop in oil output if it doesn’t get more help to deter attacks from Yemen. Yemen’s Houthi rebels attacked at least six sites across Saudi Arabia late Saturday and early Sunday, including some run by Aramco. Saudi Arabia has been facing calls from oil-consuming nations such as the U.S. to increase supply output.

Eoin Treacy's view -

Cutting demand for oil is not easy. It doesn’t usually happen by choice. Prices rise to a point where it is unaffordable and demand falls. That usually means a recession. Therefore, any effort to manage prices must rely on increasing supply.



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March 15 2022

Commentary by Eoin Treacy

Powering Up

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

For the grid to work, supply must match demand – all the time. “There are already times when we produce so much green electricity, we don’t know what to do with it,” says Hartman. “That can be in the middle of the day when the sun is shining, or in the middle of the night when we are not using so much electricity, but we are producing a lot from wind turbines.” At certain times, Energy goes to waste; producers are paid to take capacity offline.

On the other hand, the vagaries of the weather mean generation can fall short of expectations as well. For instance, on rare occasions both Germany and the UK have experienced ‘not much sun’ and ‘not much wind’, so respective Energy outputs slumped at the same time. Hence the hive of research activity around Energy storage. Behind it is a key idea: if storage can be made cheap enough, dense enough and extensive enough, it becomes viable to operate an Energy mix with a much higher percentage of renewables.

This is driving deployment of grid-scale storage; something companies like Tesla, LG Chem and Samsung are anticipating as they construct battery megafactories around the world15 (see Figure 4). Combining renewables with large, preassembled battery units to store excess power, with Energy fed back into the grid when demand requires it, has taken off.

The relative attractiveness of this has shifted “seismically” recently, according to Energy consultancy Wood MacKenzie.17 Producing Energy using solar and wind power already undercuts natural gas on a levelised cost basis (see Figure 5) and recent discoveries suggest further efficiency gains are possible.

Henry Snaith, professor of physics at the University of Oxford, describes solar “being in 1965 in silicon technology terms,” for example, with “lots of room to improve”. (In Search of Wild Solutions has more details.) Now battery costs have fallen rapidly as well, so ‘solar PV + large-scale battery storage’ are cheaper than ‘solar PV + natural gas’ as back-up to meet peak demand.

Eoin Treacy's view -

Large numbers of battery factories are under construction. When they come on line, it will represent a voracious appetite for everything from copper, nickel, manganese and lithium to steel and aluminium. Between now and then there is still time to argue about the extent of the bull market.



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February 25 2022

Commentary by Eoin Treacy

Solar Stocks Rally as Tariff Expiration Nears With No Decision

This article from Bloomberg may be of interest to subscribers. Here it is in full:

Solar stocks rally Monday, with Enphase Energy and SolarEdge among the 10 best performers on the S&P 500 Index amid a broader rebound in growth stocks.

“The solar industry faces short-term volatility as political pressure mounts around the expiration of U.S. solar duties on Feb. 6,” writes Bloomberg Intelligence analyst Clelia Imperiali

It’s likely that President Joe Biden will renew the tariffs, which would support the domestic upstream solar industry but penalize downstream players that import solar cells and modules, she writes in a note

A key impact of the tariffs has been to ease competition for domestic producers like First Solar (up 4% on Monday)

* The Invesco Solar ETF (TAN) is up 4.3% at 10:33 a.m. in New York, with the top gainers including Shoals Technologies +12%, Canadian Solar +9.3%, Daqo New Energy +7.6%, Array Technologies +7.2%, Beam Global +7.2%, Enphase +7.1%

Eoin Treacy's view -

The solar sector is split between residential and commercial operators and then between those that offer utility scale electricity generation and those providing residential rooftop services. The efficiency of these products is good enough for commercial reality. It can get more efficient and/or durable but the products available today are fit for purpose.



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February 01 2022

Commentary by Eoin Treacy

Exxon to Accelerate Buybacks After Biggest Profit Since 2014

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

Chevron Corp. reported record free cash flow late last week. Shell Plc, BP Plcand TotalEnergies SE are scheduled to post fourth-quarter earnings during the next two weeks.

The boost in cash flow will allow Exxon to increase the pace of a $10 billion share buyback previously announced as taking place over two years. Now, the company expects the buybacks to be “faster than that 12-24 month pace,” Chief Financial Officer Kathy Mikells said during a conference call. 

Exxon also expects to grow oil production in the Permian basin by 25% in 2022 after increasing by the same amount from 2020 to 2021. That dwarfs the 10% increase that rival Chevron Corp. announced last week and is the latest sign that U.S. shale is ramping up again after years of restraint. 

Exxon’s results come a day after the driller disclosed yet another belt-tightening move, this time involving shuttering its corporate headquarters in suburban Dallas and consolidating those offices near Houston. Exxon shares have risen more than 20% this year, capping an almost 50% advance in 2021 for the best annual performance in at least four decades. 

Eoin Treacy's view -

The oil majors are not spending on new supply. That’s boosting profitability and contributing to strong oil prices. Even when Exxon expects to grow production by 25% from the Permian, that comes at a fraction of the cost base the company was prepared to spend before the pandemic. Both Exxon and Chevron now spend more on dividends than capex.



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January 28 2022

Commentary by Eoin Treacy

Email of the day on the green revolution

Thanks for the great service pulling the noise out of market trends for us. We especially enjoy what my wife affectionately calls the “Big Picture Long-Winded” Friday recordings. Regarding the possible rotation into the renewable/green economy do you have any ideas on Industries/companies that could benefit from the build out? Or would the safer play be directly in the commodities needed for the grid, vehicles, batteries, and such? Hoping to get to another Chart Seminar before too long.

Eoin Treacy's view -

Thank you for your kind words. A former delegate at The Chart Seminar once described my sense of humour as “impish” and I can’t argue with that. Your better half’s turn of phrase certainly tickled me. The Friday broadcasts are often a delicate balance between trying to be pithy and attempting to cover the relevant arguments. I’m looking at a late May/early June date for a London seminar and I hope to see you there.

The question of the future of the zero carbon/green revolution/Energy transition is a big one. On one hand we have high minded projections of a utopian future where the air is pristine and no economy is dependent on carbon emissions for growth. Promises of hundreds of trillions being spent to achieve that goal were a major feature of international conferences in 2021.



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January 28 2022

Commentary by Eoin Treacy

January 24 2022

Commentary by Eoin Treacy

French Nuclear Giant's Fall Risks Energy Security for All Europe

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

Nuclear power is dwindling elsewhere in Europe too. EDF has shut down some reactors in the U.K. earlier than planned because of other safety issues, while Germany will permanently close its three remaining reactors by the end of the year, after shutting down three others a few weeks ago. Belgium will also close a reactor in October, and halt its six others by the end of 2025. 

At the same time, those countries are adding large amounts of wind and solar generation, filling the gap left by nuclear but increasing their Energy systems’ dependence on the whims of the weather. Without reliable baseload power exports from EDF, a cold and windless winter day will become a potentially stressful scenario. 

“The dependency on France is likely to increase with Germany getting out of coal and nuclear,” said Johannes Pretel, head origination for Germany at Swiss utility Axpo Holding AG. “This winter we still had all of our capacity, next winter we don’t have it anymore because the last nuclear plants will be out.”

Eoin Treacy's view -

Europe stopped building reactors thirty years ago. Today there is little appetite to invest in the infrastructure required to maintain aging plants or to build new ones. The loss of the primary source of base load electricity is going to be felt across the continent for years to come. Even if they decided to spend the money today, it would still be a decade before new reactors come into service.



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January 18 2022

Commentary by Eoin Treacy

Commodities Boom Sends Industry Titan Glencore to Decade High

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

Commodities giant Glencore Plc hit the highest in almost a decade, driven by rallies in everything from metals to coal and optimism for a years-long supercycle.

The world’s biggest commodity trader surpassed its 2018 intraday peak on Tuesday, valuing the Swiss company at about $74 billion. Like its mining rivals, Glencore has benefited from massive global stimulus measures that have stoked demand for raw materials, and has also been a big winner from an Energy crunch that sent coal prices to a record high. 

A Bloomberg gauge of spot commodities has doubled since early in the pandemic -- reaching an all-time high in October -- as government measures to bolster economies underpinned demand while supply curbs further tightened metals markets. At the same time, a green revolution is boosting long-term prospects for metals including cobalt and nickel for products like batteries.

Glencore is expected to deliver record profits and a bumper dividend when it reports earnings in February. And as the boom draws more investors into commodities, many analysts forecast prices to remain high. Goldman Sachs Group Inc. said that a commodities supercycle has the potential to last for a decade.

Eoin Treacy's view -

The London Metals Index is testing the 2007 and 2011 highs. Those were bumper years for mining profits so this year is likely to be no different. The challenge for investors is those peaks also represented major climaxes ahead of a rapid tightening of monetary conditions and slowing global growth. The question is whether this time is different?



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January 07 2022

Commentary by Eoin Treacy

European Gas Falls After Netherlands Says It May Boost Output

This article from Bloomberg may be of interest to subscribers. Here it is in full:

European natural gas erased earlier gains, after the Netherlands said it may boost production at its biggest field this year.

The announcement halted a rally that’s seen prices jump about 30% this week, topping 100 euros a megawatt-hour earlier Friday. It brings some relief to a market where benchmark contracts are still almost three times higher than they were just six months ago, with Russia continuing to limit flows to Europe.

Output from the Dutch Groningen field may total 7.6 billion cubic meters in the 12 months through September, up from an earlier forecast of 3.9 billion cubic meters, according to data from grid operator Gasunie. The deposit is still due to be shut down later this year, after decades of extraction triggered earthquakes. Separately, booked capacity for Norwegian gas to Europe rose for a second day.

Benchmark European gas futures declined 6.4% to 90.285 euros a megawatt-hour by 3:33 p.m. in Amsterdam, after earlier climbing as much as 6.7%. The equivalent U.K. contract for February was down 6.5% at 220 pence a therm.

Extra supply would be welcome news for the region, where prices had rebounded this week after easing in late December. The recent price surge has been underpinned by a lack of sufficient supply from Russia, whose Yamal-Europe pipeline has been flowing in a reverse direction for more than two weeks -- sending gas east instead of west. Russian flows via a key route through Ukraine also remain low.

Europe is drawing on depleted gas storage, raising concerns of a repeat of the current supply crunch next winter, consultant Inspired Energy said in a research note.

The continent has sought increased shipments of liquefied natural gas to ease the pressure. Regasified LNG entering the grid from European import terminals has jumped during the first week of January, network data show.

Eoin Treacy's view -

Europe is scrabbling for gas supplies and is praying for a mild winter. That has boosted the appeal of the region for LNG shipments. It is also forcing efforts to temporarily boost supply; like the Dutch announcement today. The high price of Energy in central Asia was the catalyst for protests in Kazakhstan and that’s for a country which is a major Energy exporter.



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December 30 2021

Commentary by Eoin Treacy

China's Water Shortage Is Scary for Its Neighbors

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

Yet China’s natural abundance is a thing of the past. As Michael Beckley and I argue in our forthcoming book, “The Danger Zone,” Beijing has blown through many of its resources. A decade ago, China became the world’s largest importer of agricultural goods. Its arable land has been shrinking due to degradation and overuse. Breakneck development has also made China the world’s largest Energy importer: It buys three-quarters of its oil abroad at a time when America has become a net Energy exporter.

China’s water situation is particularly grim. As Gopal Reddy notes, China possesses 20% of the world’s population but only 7% of its fresh water. Entire regions, especially in the north, suffer from water scarcity worse than that found in a parched Middle East.

Thousands of rivers have disappeared, while industrialization and pollution have spoiled much of the water that remains. By some estimates, 80% to 90% of China’s groundwater and half of its river water is too dirty to drink; more than half of its groundwater and one-quarter of its river water cannot even be used for industry or farming.

This is an expensive problem. China is forced to divert water from comparatively wet regions to the drought-plagued north; experts assess that the country loses well over $100 billion annually as a result of water scarcity. Shortages and unsustainable agriculture are causing the desertification of large chunks of land. Water-related Energy shortfalls have become common across the country.

The government has promoted rationing and improvements in water efficiency, but nothing sufficient to arrest the problem. This month, Chinese authorities announced that Guangzhou and Shenzhen — two major cities in the relatively water-rich Pearl River Delta — will face severe drought well into next year.

The economic and political implications are troubling. By making growth cost more, China’s resource problems have joined an array of other challenges — demographic decline, an increasingly stifling political climate, the stalling or reversal of many key economic reforms — to cause a slowdown that was having pronounced effects even before Covid struck. China’s social compact will be tested as dwindling resources intensify distributional fights.
 

Eoin Treacy's view -

China, India and neighbouring countries are some of the most densely populated areas of the world. As living standards improve resource consumption tends to rise. That is particularly true for water as sanitation and agricultural demand increases. It is reasonable to expect that resource competition will increase significantly over coming decades and it could easily become a source of conflict if droughts were to become more commonplace or agricultural yields are affected.



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December 30 2021

Commentary by Eoin Treacy

Once Stellar Green Stocks Fell Even More Than Airlines in 2021

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

After dropping by nearly a third this year, Vestas Wind Systems has warned that more pain lies ahead, amid surging commodity prices and supply-chain bottlenecks that disrupted production. But the cost of raw materials is not the only reason blamed for the lackluster returns. 

In a way, green stocks are paying the price of past success, as a rally in 2019 and 2020 catapulted their valuations into the stratosphere. Now, much of the good news on government pledges to pivot their economies toward a low-carbon model is already priced in. 

Even after this year’s share price plunge, Siemens Gamesa trades at 52 times its expected earnings for next year, and Vestas at 45 times. That compares to 15.7 times for the Stoxx 600. 

While equity strategists from BlackRock Inc. to Goldman Sachs Group Inc. and Societe Generale have said that decarbonization presents unprecedented opportunities to investors, near term headwinds remain. 

Valuations for “green stocks are still elevated,” Bloomberg Intelligence strategists Tim Craighead and Laurent Douillet said in a note. “Lower sales expectations and higher steel prices pressure wind-turbine profits.”

Eoin Treacy's view -

Devon Energy and Marathon Oil are the top two best performing stocks on the S&P500 this year. Sentiment towards the Energy sector has improved considerably among the investment community this year because of this performance.



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December 23 2021

Commentary by Eoin Treacy

European Gas Plunges 20% as Rally Lures Flotilla of U.S. LNG

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

European natural gas prices plunged more than 20% on Thursday as this year’s stellar rally attracted a flotilla of U.S. cargoes.

At least 10 vessels are heading to Europe, according to ship-tracking data compiled by Bloomberg. Another 20 ships appear to be crossing the Atlantic, but are yet to declare their final destinations. U.S. cargoes of liquefied natural gas will help offset lower flows from Russia, Europe’s top supplier.

Gas prices in Europe have surged more than sixfold this year as Russia curbed supplies just as pandemic-hit economies reopened, boosting demand. Delayed maintenance work and power-plant outages also contributed to the rally. Prices in Europe are 13 times higher than in the U.S. and the market is also trading at a rare premium to Asia, making the continent a prime destination for LNG.

 

Eoin Treacy's view -

Today’s move in European gas was exacerbated by forecasts for mild weather. Large numbers of cargoes will need to be delivered to improve the low reserves condition currently present in Europe. The market remains at the mercy of the weather so we can anticipate a great deal of volatility over the coming months. Today’s downward dynamic suggests at least a near-term peak.



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December 20 2021

Commentary by Eoin Treacy

Equinor Wants the World's Last Drop of Oil to Come from Norway

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

Equinor’s Johan Sverdrup oil field is already fully electrified. It started production two years ago and is expected to operate for more than 50 years. The process of extracting the crude emits 0.67 kilograms (1.5 pounds) of carbon dioxide per barrel, compared with the company average of 9 kilograms. The global average is 18 to 19 kilograms.

Yet Norway isn’t the only country with this idea. Saudi Arabia, leader of the Organization of Petroleum Exporting Countries, also says it wants to pump the world’s last barrel. The carbon intensity of the kingdom’s crude matches that of Equinor, at 9 kilograms a barrel, according to Oslo-based consultant Rystad Energy A/S.

There’s also the question of whether it will remain politically possiblefor Norway to remain as a major exporter of carbon-based fuels even as it implements its own emissions reductions, and strives for leadership in areas such as electric cars. Its neighbor the U.K. is already facing stiff opposition to new oil and gas developments on climate grounds, contributing to the shelving of the Cambo field earlier this month. 

Eoin Treacy's view -

Conventional oil wells tend to have lengthy production profiles but even these eventually peak and need to be replaced. For unconventional wells the requirement for fresh drilling is much more urgent because of the steep initial production profile and early peak. The major oil companies are attempting to evolve in an environment where they are going to be judged on their carbon emissions. That’s expensive but ultimately favours the lowest cost producers like Equinor and the GCC.



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December 13 2021

Commentary by Eoin Treacy

Email of the day on carbon sequestration

Montreal company Carbicrete has developed a method for sequestering carbon in concrete, claiming its product captures more carbon than it emits. The technology cuts out the need for calcium-based cement, a key ingredient in traditional concrete that is responsible for around eight per cent of all global CO2 emissions. I thought you might be interested in this.

Eoin Treacy's view -

Thank you for this informative email. There is a clear incentive for innovators to come up with ways to profit from the rising cost of carbon emissions. The COP26 agreement will create a global market for emissions and will broaden the number of companies subject to carbon restrictions. That is all aimed at creating a market for alternatives in much the same way that subsidies fostered the solar and wind sectors.



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November 25 2021

Commentary by Eoin Treacy

Australia Firms Ramp Up Spending Plans Signaling Strong Recovery

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

The result is likely to boost the Reserve Bank of Australia’s confidence in the economy’s prospects as the board prepares to review the A$4 billion weekly pace of its bond-buying program in February. Su-Lin Ong at Royal Bank of Canada put the odds of quantitative easing ending at that meeting at 30%.

The capex data is “likely to see markets continue to price in multiple hikes over the year ahead,” said Ong, head of Australian economic and fixed-income strategy at RBC. Money markets are wagering the RBA will start its policy tightening cycle with a 15 basis point hike to 0.25% by May 2022.

Today’s report showed the Covid lockdowns weighed on outlays, with total capital expenditure slipping 2.2% in the three months through September from the prior quarter. Spending on equipment, plant and machinery fell 4.1%, suggesting it will detract from economic growth in the period. 

Eoin Treacy's view -

Australian firms are looking around the world and see massive monetary and fiscal stimulus. Much of that spending will be focused on infrastructure and they are in line to benefit from outsized demand for resources. This is the time to invest in new supply before everyone else does.



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November 19 2021

Commentary by Eoin Treacy

Solar demands to normalize in 2022, polysilicon price likely to remain high

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

While some factories have already resumed operation after the mandatory power rationing expired, for instance GCL-Poly revealed that their 36,000 tonnes polysilicon factory has already restarted production after making use of the 2-week suspension period to undergo repair and maintenance, most solar materials have also witnessed significant price increase under the adverse effect of supply reduction. One of the clear examples is the sharp price rally of silicon raw material, which is the major material for making polysilicon and on average account for 40% of polysilicon’s production cost. The silicon raw material price rose sharply from USD 2.4/kg in Aug-21 to the peak of USD 10.4/kg in late Sep-21, before gradually normalizing to USD 6/kg in Nov (See Exhibit 3), especially after the Yunnan government decided to restrict the utilization of most Energy-intensive production, including silicon raw material, by 90% starting from Sep in 2021. It is noteworthy that Yunnan accounts for 20% of total silicon raw material production in China, while Xinjiang and Sichuan’s market shares are 40% and 15% respectively. In our view, the cost pressure originated from silicon raw material price rally would gradually pass down the supply chain, implying subsequent solar material price hike would continue to emerge in other segments.

Eoin Treacy's view -

China has historically been willing to do whatever it takes to capture market share in emerging industries. That helped it dominate the entire supply chain for solar panels in the last decade. Deploying excess Energy from coal fired power stations into polysilicon production was a big part of that strategy.



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November 19 2021

Commentary by Eoin Treacy

Bill Gates' nuclear startup picks a Wyoming coal town for its 1st advanced reactor, which will cost $4 billion

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

Warren Buffett's power company, PacifiCorp, is working with Gates' TerraPower on the Natrium reactor project, which is expected to be finished in 2028, per the release.

The US government has agreed to pump $1.9 billion into the project, Reuters reported. This includes $1.5 billion from the infrastructure bill that President Joe Biden signed this week, according to TerraPower's press release.

TerraPower, founded by Gates 15 years ago, will contribute $2 billion for the project, per the release.

The advanced nuclear power plant in Kemmerer would be able to produce a baseload of 345 megawatts, but would also have the capacity to supply 500 megawatts of power, which is enough Energy to power around 400,000 homes, TerraPower said in the release.

 

Eoin Treacy's view -

This project means molten salt reactors will become a more dominant part of the global nuclear sector over the coming couple of decades. The big selling point from a global perspective is the difficulty of using these designs to manufacture fissile material for bombs. That boosts the potential for exports to third party countries once the technology has been proofed up.



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November 15 2021

Commentary by Eoin Treacy

4 Million Tons a Day Show Why China and India Won't Quit Coal

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

Meanwhile, mines across China and India have been ramping up production in recent weeks to ease a supply crunch that’s caused widespread power shortages and curbs on industrial activity. China’s miners have beaten a government target to raise output to 12 million tons a day, while India’s daily production is close to 2 million tons.

“The power cuts since mid-to-late September show that we are still not prepared enough,” Yang Weimin, a member of the economic committee of the Chinese People’s Political Consultative Conference and a government advisor, told a conference in Beijing on Saturday. Additional funding is needed to ensure coal plants can be used to complement a rising share of renewables, he said.

Coal’s share in global electricity generation fell in 2020 to 34%, the smallest in more than two decades, though it remains the single largest power source, according to BloombergNEF.

In China, it accounted for about 62% of electricity generation last year. President Xi Jinping has set a target for the nation to peak its consumption of the fuel in 2025, and aims to have non-fossil fuel Energy sources exceed 80% of its total mix by 2060.

For India, coal is even more important, representing 72% of electricity generation. The fuel will still make up 21% of India’s electricity mix by 2050, BNEF analysts including Atin Jain said in a note last month.

Eoin Treacy's view -

The focus on attention right now is on the willingness and potential of both India and China to eventually limit their use of coal. Much less attention is focused on Africa where the bulk of population growth is occurring. The next couple of billion people will mostly be born in Africa. That means increasing demand for power and higher standards of living as the continent urbanises



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November 03 2021

Commentary by Eoin Treacy

On Target #273

Thanks to Martin Spring for this edition of his letter which may be of interest to subscribers. Here is a section on battery back-ups:

The key inefficiency is intermittency. When winds don’t blow and the sun doesn’t shine, electricity has to be found elsewhere. In July there was so little wind driving the turbines on which Britain depends for a quarter of its power supplies that they operated at less than 5 per cent of their capacity for 314 hours. We’re told that we’ll eventually have battery farms on such a scale storing back-up Energy to overcome the intermittency problem with the renewables that will replace fossil fuels. But the figures don’t add up. A friend who has analyzed them tells me that, using reasonable assumptions, to replace the 1,400 Terawatthours of electricity used in the European Union each year and currently coming mainly from natural gas and coal will require battery storage back-up of some 273 million tonnes of batteries. Assuming battery prices continue to fall, that will nevertheless cost say $8.2 trillion – double that taking into account necessary peripherals -- and need about 25 years’ mining of lithium carbonate. And you’d need to replace the entire stack of batteries every few years as their charge holding capacity erodes. As my friend says: These are “insanely prohibitive costs.” Activists argue that the current Energy crisis must be used to intensify the transition to renewables. That is, more of one of the root causes of the crisis. More inefficiency, more malinvestment and more demand for relatively scarce materials such as copper.

 

Eoin Treacy's view -

The willingness of the environmental lobby to drive investment towards renewables remains unabashed particularly as we look at the verbal commitments being made as part of the COP26 discussions. The viability of these commitments rests squarely on developing new battery chemistries that are more efficient, cheaper and less resource intense. It’s a tall order and, even then, will only form part of the wider Energy mix.



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October 28 2021

Commentary by Eoin Treacy

Nuclear Stocks are Making a Comeback

Thanks to a subscriber for this article by Brendan Coffey for Cabot Wealth which may be of interest. Here is a section:

HALEU is in between, with 5% to 19.75% of the uranium mass that power-source isotope. As an added bonus, HALEU can be made from down-blending the used, military-grade uranium. The U.S. Department of Energy (DOE) is so excited by HALEU that it’s close to approving a new generation of reactor designs it says “will completely change the way we think about the nuclear industry.” Power plants will be smaller, more efficient, produce less waste uranium and they won’t need their cores replaced for 20 years, unlike every 18 to 24 months for current reactors. At the moment, the DOE is in the process of deciding on the next generation reactor from 10 finalists; nine of them are designed to use HALEU.

The first market for HALEU will be micro-reactors for the military. The Pentagon is seeking to remove domestic bases from the wider electrical grid as part of its climate change-related plans to keep bases operational under increased extreme weather events. A Defense Department prototype reactor, Pele, should be available by 2024. Perhaps 130 reactors will be deployed. By mid-decade, utility owned micro-reactors will start rolling out for remote locations like interior Alaska and far-flung islands. They’ll generate perhaps 10 megawatts (MW) of Energy with a one-time upfront fueling to last 20 years. More powerful, advanced utility reactors could come to market by 2030. Even current reactors will be able to use HALEU in place of the low-enriched stuff.

Eoin Treacy's view -

Militaries pioneered small modular reactors for use in aircraft carriers and submarines so they are also likely to be the first to deploy small reactors for use in other applications as well. The US military’s answer to climate change is to double down on nuclear reactor technology by taking bases off the grid and creating options for power in remote locations like Alaska and forward operating bases. 



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October 18 2021

Commentary by Eoin Treacy

Email of the day on UK renewable energy listings

It seems difficult to buy many of the ETFs you mention in the UK. For instance, FAN and TAN. Is there a copper mines ETF that a UK investor can buy?

Eoin Treacy's view -

Thank you for this email which may be of interest to the Collective. The UK equivalent of the Invesco Solar ETF (TAN) is the Invesco Solar UCITS ETF (ISUN). Unfortunately, it is illiquid with only $2.25 million under management.



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October 14 2021

Commentary by Eoin Treacy

Musings from the Oil Patch October 12th

Thanks to a subscriber for this report from Allen Brooks at PPHB which may be of interest. Here is a section on wind patterns:

The authors of the paper drew this key conclusion from their research.
The downward trend observed in the windiness indices for the period 1990 to 2005 is also reflected in the North Atlantic Oscillation, Grosswetterlagen and Jenkinson Lamb data. However, these proxies for wind speed indicate that there was an upward ‘blip’ in wind speeds centered on the early 1990s, which suggests that this recent downward trend in mean annual wind speed may represent a return to the longer-term mean. It is therefore concluded that a continued ramp down of future wind speeds should not be assumed. This is also supported by the increase in annual wind speeds in recent years as displayed in Figure 1 (our Exhibit 18, page 20).

It is important to note that this paper was published at a time when there were concerns about a continuation of the declining wind performance, especially as European governments were pushing utilities to embark on a massive buildout of wind generating capacity. The authors offer the conclusion that the post-2003 wind performance was a return to the long-term average wind speed and an end to the relentless decline of prior years. The conclusion we draw, however, is that even if Europe’s wind speed returns to its long-term average, the continent may experience future periods of wind speed resembling the 1990-2003 span when it was in a broad downward trend. That potential, something we have not heard discussed during the wind generation buildout in recent years, suggests wind Energy dependency may put utilities at greater risk of stillness than considered in their planning.
 
The more that European countries come to depend on wind power for running their economies, the possibility of extended wind speed declines and increases in lulls means utilities will be scrambling more often to find backup power. Will they rely on huge batteries, or more fossil-fuel plants? Does this potential stillness risk increase the pressure on governments to allow utilities to keep their nuclear power plants operating, or even to begin building new ones? These are questions politicians and the public need to consider and answer, so Energy planners can move forward. We have yet to see discussion of stillness as a potential long-term cyclical challenge for wind power, and in turn, Europe’s electricity grid. Maybe it is time for that discussion to begin.

Eoin Treacy's view -

One would think that the question of wind variability would be central to planning for the making significant investments in renewable Energy infrastructure along most of the European and North American coastlines. Regrettably, there is not enough long-term data to make such predictions and the recent experience highlights the difficulty in predicting patterns with partial data at best.



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October 08 2021

Commentary by Eoin Treacy

Global: The one on Tsars, Muftis, Weathermen and Energy Prices

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

How low are inventories? Germany is already under water
German inventories of natural gas are scarily low ahead of the winter. We have taken a deep look at Gazproms major storage sites in Germany (Katharina, Jemgum, Redhen and Etzel), and were almost shocked by the severity of the issue. Current inventories will run frighteningly close to zero by Mid-March 2022, if usual seasonal patterns unfold over winter.

The current 16900 MCM/D inventory in Gazproms German facilities is barely enough to survive the winter, as the inventories usually drops by between 17500-20000 MCM/D between late October and mid-March. This is too much of a knife-edge situation to be truly comfortable with. Remember that natural gas makes up around 25% of the total Energy consumption in Europe still. We are counting on you Vladimir!

The situation is about as bad in China, if we just replace natural gas with coal in the charts, which could prove to be even more problematic as coal makes up around 60% of the Energy consumption in China. Per anecdotal evidence China has now re-allowed Australian coal shipments to reach Chinese land-territory despite the ongoing geopolitical dispute between the two countries.

Eoin Treacy's view -

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

A topic I discussed in yesterday’s audio was the current Energy crisis in Europe and China highlights an important logical inconsistency for environmentalists. If one believes the climate is going to change in an unpredictable fashion, then building an alternative Energy future which depends on weather patterns remaining constant does not make sense.



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October 05 2021

Commentary by Eoin Treacy

Beijing Blinked First in China's Energy Crisis

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

It looks like the government has blinked first. Miners, after months of being ordered to stick closely to capacity limits, are now being ordered to produce as much as they can, people familiar with the matter told Bloomberg News. That should help to take the wind out of surging thermal coal prices and prevent the current crisis from extending into the winter, when sufficient Energy supply can be a life-or-death matter.

There is, to be sure, an attempt to make this retreat look like a withdrawal. The latest advice from Beijing’s economic planners last week focuses on protecting individuals but continuing the crackdown on industry, especially when it’s most Energy-intensive and polluting. Allowing generators to raise prices to end-users, as is happening in Guangdong province, will also help create a more commercial power market. Electricity consumption controls have even been loosened in a way that would permit potentially unlimited volumes of cheaper renewable power into the market.

The risk, as with the rapidly fading fears over Evergrande, is that Beijing has simply deferred a pressing problem again. If China doesn’t reform a system that refuses to face up to its internal contradictions, the problems of an economy fed by credit and carbon will only fester and grow. 

 

Eoin Treacy's view -

Self sufficiency is Chinese government policy. Coal imports do not gel with that ambition so efforts to defray demand are likely to persist in a piecemeal manner subject to necessity. However, the reality is winters north of the Yangtze River are harsh and most communities rely on coal to heat homes, factories and run electricity.



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September 28 2021

Commentary by Eoin Treacy

Email of the day on China's energy challenges

You mentioned the Energy shortages in China. These two articles from the Daily Telegraph spell out the scale and the implications globally. Best wishes to you and family

Eoin Treacy's view -

Thank you for the wishes and both these articles. Here is a section from Ambrose Evans Pritchard’s and here is a link to the other: 

The property squeeze is compounded by a parallel squeeze on carbon. Xi has promised peak CO2 emissions by 2030, a 25pc cut per unit of GDP by 2025, and a 3pc cut in Energy intensity this year.

He knows that China is paying a high credibility price for foot-dragging as Europe and the US launch green deals (nobody can hide behind Trump any longer), and may soon face a carbon border tax in its top markets if it is not careful.

Energy-saving edicts are raining down. Party cadres have been mobilised to pursue CO2 crimes, and are reportedly doing so with the zeal of the Cultural Revolution. The state planner (NDRC) says 20 Chinese provinces have failed to meet this year’s goals on cutting Energy intensity.

Nomura says nine have received “Level 1 warnings”, including Guangdong and Jiangsu, 35pc of China’s economy between them. Woe betide the Party officials responsible.

The steel, cement, and aluminium industries face production caps by the industry ministry (MIIT). They stole part of their allowance over the first half, and must cut back this half to compensate. That means drastic falls in steel output. It has already begun and is hammering iron ore prices, along with miners such as Vale and BHP Billiton.

I wonder does anyone remember the butter mountains and the wine lakes of the late 1980s and early 1990s? They were a political embarrassment, but prices were low. The EU and North America were overproducing because they subsidized farmers and low prices meant third world country farmers were impoverished and could not compete. The result was the abandonment of subsidies, much higher prices, still impoverished global farmers and a migration of market dominance to Brazil. I mention it here to emphasise that no good intention is left unpunished in the commodity markets.



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August 23 2021

Commentary by Eoin Treacy

World's biggest wind turbine shows the disproportionate power of scale

This article from NewAtlas may be of interest to subscribers.

China's MingYang Smart Energy has announced an offshore wind turbine even bigger than GE's monstrous Haliade-X. The MySE 16.0-242 is a 16-megawatt, 242-meter-tall (794-ft) behemoth capable of powering 20,000 homes per unit over a 25-year service life.

The stats on these renewable-Energy colossi are getting pretty crazy. When MingYang's new turbine first spins up in prototype form next year, its three 118-m (387-ft) blades will sweep a 46,000-sq-m (495,140-sq-ft) area bigger than six soccer fields.

Every year, each one expected to generate 80 GWh of electricity. That's 45 percent more than the company's MySE 11.0-203, from just a 19 percent increase in diameter. No wonder these things keep getting bigger; the bigger they get, the better they seem to work, and the fewer expensive installation projects need to be undertaken to develop the same capacity.

The overall result should be a drop in offshore wind Energy production prices – a sorely needed drop, too. Current levelized costs of Energy, as estimated by the US Energy Information Administration for new Energy generation assets going live in 2026, place offshore wind as the most expensive way of generating a megawatt-hour right now, at US$120.52, where ultra-supercritical coal is more like $72.78 and standalone solar is around $32.78 before subsidies.

Obviously, wind fills in gaps that solar can't, and it'll be a crucial part of the Energy mix going forward. Scaling the industry up with these mammoth turbines is the key reason why industry experts are predicting that the cost of offshore wind will drop by between 37 and 49 percent by 2050, as reported by Renew Economy.

MingYang says the MySE 16.0-242 is just the start of its "new 15MW+ offshore product platform," and that it's capable of operating installed to the sea floor or on a floating base. The full prototype will be built in 2022, installed and into operation by 2023. Commercial production is slated to begin in the first half of 2024.

Eoin Treacy's view -

The challenge for the wind sector is that many of the best locations have been taken up by turbines that are not nearly as powerful as the models currently being marketed. In many respects the wind sector is suffering from the same dilemma as the oil sector. How do you introduce new technology to an area where you have already sunk significant resources?



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July 21 2021

Commentary by Eoin Treacy

Enel installs 6.1 MWh vanadium redox flow battery in Spain

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

Canada-based vanadium mining company Largo Resources has announced that its U.S.-based unit Largo Clean Energy has signed its first supply agreement for its VCHARGE ± vanadium redox flow battery system, with Enel Green Power Spain, a unit of Italian renewable Energy company Enel Green Power, which is itself part of the Enel group. Under the terms of the deal, Largo Clean Energy will provide a five-hour, 6.1 MWh system for a project in Spain whose start-up is scheduled for the third quarter of 2022.

The company's VPURE and VPURE + vanadium products come from one of the three largest vanadium mines in the world, the company's Maracás Menchen mine, located in Brazil. These compounds are used to develop's Largo's  VCHARGE ± vanadium redox flow battery technology.

Largo Clean Energy began, last year, the development of its vanadium redox flow battery (VRFB) technology based on 12 patent families previously owned by U.S. storage specialist VionX Energy, whose assets it acquired for $3.8 million.

Eoin Treacy's view -

Vanadium surged in 2018 on expectations that the world would adopt redox flow batteries for utility-scale Energy storage. The uptake was less enthusiastic than many expected and the price of the metal collapsed.



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June 23 2021

Commentary by Eoin Treacy

The monumental challenge of trying to hit climate targets

Thanks to a subscriber for this report from National Bank of Canada. Here is a section:

Eoin Treacy's view -

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

When numbers in excess of $100 trillion are bandied about most people’s eyes glaze over. The global annual GDP in 2020 was $93 trillion. That suggests to achieve the stated aim of containing temperature rises to 1.5% by 2050, we need to made big assumptions. The most important is that if we go ahead and make the sacrifices and spend the money, that it will work.



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June 03 2021

Commentary by Eoin Treacy

Global Food Prices Surge to Near Decade High, UN Says

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

Drought in key Brazilian growing regions is crippling crops from corn to coffee, and vegetable oil production growth has slowed in Southeast Asia. That’s boosting costs for livestock producers and risks further straining global grain stockpiles that have been depleted by soaring Chinese demand. The surge has stirred memories of 2008 and 2011, when price spikes led to food riots in more than 30 nations.

“We have very little room for any production shock. We have very little room for any unexpected surge in demand in any country,” Abdolreza Abbassian, senior economist at the UN’s Food and Agriculture Organization, said by phone. “Any of those things could push prices up further than they are now, and then we could start getting worried.”

The prolonged gains across the staple commodities are trickling through to store shelves, with countries from Kenya to Mexico reporting higher food costs. The pain could be particularly pronounced in some of the poorest import-dependent nations, which have limited purchasing power and social safety nets as they grapple with the pandemic.

The UN’s index is treading at its highest since September 2011, with last month’s gain of 4.8% being the biggest in more than 10 years. All five components of the index rose during the month, with the advance led by pricier vegetable oils, grain and sugar.

Eoin Treacy's view -

Farmers that survive the pandemic disruptions will want to plant as much acreage as possible for their next growing season in every agricultural zone in the world. High prices are all the incentive they need. That’s particularly true for the grains and beans where production is possible in multiple different geographically diverse regions.



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June 02 2021

Commentary by Eoin Treacy

Australia's Economy Powers On, Recouping Pandemic Losses

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

Australia’s rapid rebound has been underpinned by its ability to limit Covid-19 outbreaks, boosting consumer and business confidence. A massive fiscal-monetary injection strengthened the financial position of households and firms during the lockdown, and consumers are spending and companies hiring.

“Australia is in rare company here -- only five other countries can boast an economy that’s larger now than before the pandemic,” said Kristian Kolding, a partner at Deloitte Access Economics. “Maintaining this trajectory is now the task at hand -- the lockdowns in Victoria are a stark reminder that the pandemic is far from over.”

Deloitte noted that on average, economies in the Organisation for Economic Cooperation and Development are 2.7% smaller than they were before the pandemic. The U.K. is almost 9% smaller, the European Union is 5% smaller and the U.S. has shrunk 1%, it said.

Yet a potential risk to the outlook is the sluggish rollout of a Covid vaccine. This has been magnified by a renewed outbreak of the virus in Melbourne that prompted a lockdown in the nation’s second-largest city, and has now been extended for another week.

Eoin Treacy's view -

Victoria is back in lockdown but the number of cases is comparatively low and the rest of the country is reasonably unaffected. Investors are taking the news in their stride. After more than a decade of liquidity infusions the reality remains liquidity beats most other factors most of the time. Central bankers also understand that logic and must feel vindicated in their actions. Every time there is a problem, they boost money supply and act to depress yields and the economy rebounds. They are unlikely to do anything different until that policy stops working.



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May 23 2021

Commentary by Eoin Treacy

Net Zero by 2050 A Roadmap for the Global Energy Sector

The IEA was always a politically motivated organisation but this report highlights just how far they have adopted the renewable consensus. Here is a section:

Eoin Treacy's view -

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

The one thing the market teaches us is the consensus is seldom correct. What happens when we spend until trillions on Energy diversification only to learn that it does nothing to arrest a warming trend? Will we then lament not moving sooner on risk mitigation strategies like building higher seawalls or developing additional food supplies? The one thing I can be sure of is the vilification of opposition is a key symptom of mania.



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May 21 2021

Commentary by Eoin Treacy

Canadian Dollar is pick of commodity currencies

This trading note from Bloomberg may be of interest to subscribers. Here is a section:

The Canadian dollar may fare better than other commodity currencies in the remainder of the year as resurgent growth spurs the nation’s central bank to wean the economy off stimulus.

While already perched near multi-year highs, the loonie still has potential to add to its gains given the surge in commodity prices and an economy that is forecast to grow at the fastest pace in several decades. And with the Bank of Canada having unveiled a scale-back of government debt purchases while accelerating the timetable for a possible interest-rate increase, money markets have lost no time in pricing an aggressive rate trajectory.

Other G-10 commodities, too, have fared well this year. While Norway’s central bank is likely to raise rates sooner than its Canadian counterpart, the differential between 10-year yields in the two nations is a considerable hurdle for the krone to overcome. The Australian and New Zealand dollars, meanwhile, face considerable headwinds to climb from current levels given that they are both overvalued from a fundamental perspective, especially against a backdrop where their central banks are likely to stay accommodative for a long time yet.

The Canadian dollar also stands out in relation to its peer group by its muted volatility, which reduces the overall risk in a portfolio setting. All told, it’s been plain sailing for the loonie so far this year. If the current macroeconomic backdrop prevails, 2021 may well turn out to be annus mirabilis for the currency, not only against its commodities peer group but also the wider G-10 complex.

Eoin Treacy's view -

Canada has a long history of fostering upstart companies that come to dominate their respective niches during the prevailing bull market of the time. Nortel Networks, Blackberry, Canopy Growth Corp, Brookfield Asset Management and Shopify all come to mind. Amid the significant media attention these companies receive, it is worth remembering that the oft-maligned extractive sector forms the basis for the country’s wealth and stability.



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April 22 2021

Commentary by Eoin Treacy

China Blasts Australia's Decision to Cancel Belt and Road Deal

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

The Australian federal government scrapped both the memorandum of understanding and framework agreement signed between Victoria and China’s National Development and Reform Commission, Beijing’s top economic planning body, Foreign Minister Marise Payne said in an emailed statement Wednesday. She described the deals as “inconsistent with Australia’s foreign policy or adverse to our foreign relations.”

The step “is another unreasonable and provocative move taken by the Australian side against China,” the Chinese embassy in Canberra said in an emailed statement. “It further shows that the Australian government has no sincerity in improving China-Australia relations -- it is bound to bring further damage to bilateral relations, and will only end up hurting itself.”

Australia “basically fired the first major shot against China in trade and investment” conflicts, Chen Hong, director of the Australian Studies Center at East China Normal University in Shanghai, told the Communist Party-backed Global Times. “China will surely respond accordingly.”

China has lodged stern representations with Australia over the issue and reserved the right to take more action, Foreign Ministry spokesman Wang Wenbin said at a regular press briefing Thursday in Beijing.

Eoin Treacy's view -

China may successfully be able to cow smaller countries into submission by following a carrot and stick approach to infrastructure and trade development. Australia is a different story.



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April 14 2021

Commentary by Eoin Treacy

Trafigura Sees Green Copper Supercycle Driving Prices to $15,000

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

Trafigura expects the metal to breach $10,000 a ton this year, before entering a range of $12,000 to $15,000 a ton over the coming decade. Other ardent copper bulls including Goldman Sachs Group Inc., Bank of America Corp. and Citigroup Inc. have similarly strong near-term forecasts, but Trafigura has set itself apart with its lofty long-term target.

Goldman expects copper to hit $10,500 a ton within 12 months, while Citi sees it reaching $12,000 next year in its bull-case forecast. In the years to come, that’s likely to become the floor for prices as the industry revalues the metal, according to Trafigura.

“You can’t move to a green economic environment and not have the copper price moving significantly higher,” Bintas said. “How can you have one without the other?”

Eoin Treacy's view -

Every country wants its economy to recover from the ravages of the pandemic. They are all looking at the same playbook. They need to increase growth without raising taxes and need a quick way to get as many people back to work as possible which will hopefully kick start the velocity of money. Infrastructure development has been the preferred strategy to achieve those goals after every other recession and this one is now different. The only question was what kind of infrastructure would be approved.



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April 09 2021

Commentary by Eoin Treacy

Fragile Planet 2021

Thanks to a subscriber for this report from HSBC which may be of interest. Here is a section on renewable Energy materials availability:

Here we look at the 2019 share of global production and at the share of global reserves for countries around the world. We use data from the United States Geological Survey’s Mineral Resources Program, and the World Nuclear Association. While production data are considered relatively accurate, reserves data is imperfect, given lack of exploration is some areas. However, we take a view that if countries have reserves, but have zero production currently, then there are likely to be technical, financial and/or institutional factors to overcome to allow production in the near future. (Note that we were unable to access reserves data for the commodities Indium and Gallium, and only included production numbers). We create a blended metric for production and reserves values for these commodities (weighting them all equally), in order to score and rank countries in this area. South Africa is ranked first here, followed by China and Chile. Australia comes in fourth, making it the highest ranking DM country on this indicator.

Eoin Treacy's view -

Government policy, everywhere, is increasingly skewing towards the assumption that sea level rise, water insecurity, global warming and climate change are inevitable. Renewable Energy assets are increasingly also being priced on the assumption that a migration to carbon-free economies is also inevitable.

Trillions of Dollars are being committed to building out carbon-free infrastructure, whether than is solar, wind, geothermal, nuclear or hydrogen. As that buildout gets under way it will require massive fiscal support, regulatory bypasses for permitting and taxation supports in the form of carbon credits. It will also result in a significant near-term boost in demand for all manner of resources from copper to lithium and from coal to oil.



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March 17 2021

Commentary by Eoin Treacy

Lennar Shares Spike on Plan to Spin Off Startup Investments

This article from Bloomberg may be of interest to subscribers. Here it is in full:

Lennar Corp. soared after the homebuilder said it will create a spinoff with at least $3 billion in assets.

The new company, which will have $3 to $5 billion in assets and no debt, will include Lennar’s technology investments, according to an earnings call Wednesday.

Lennar, which said it made about $470 million on its investment in Opendoor Technologies Inc., jumped as much as 9.5% to $97.09 in New York. The stock had gained 16% this year through Tuesday’s close.

Miami-based Lennar reported orders on Tuesday that beat estimates as it benefited from the pandemic housing market. It got also a boost from Opendoor, which began trading in December.

Lennar said two other “technology-driven” companies it has invested in also have announced agreements to go public through mergers with special purpose acquisition corporations, or SPACs.

Those companies are Doma, formerly known as States Title, and Hippo, the home-insurance startup that’s merging with a blank-check company led by Zynga Inc. founder Mark Pincus and LinkedIn co-founder Reid Hoffman

Eoin Treacy's view -

It is a clear sign of the times that a home builder, which is about as brick and mortar as it gets, has upwards of $5 billion in technology investments. It’s good news that the company has made wise decisions in what are now highly valued digital assets. However, that decision to prioritise risk in non-core businesses is also a symptom of the wider lack of building new homes that has been a feature of the recovery from the 2007-12 housing recession.



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March 04 2021

Commentary by Eoin Treacy

OPEC+ Keeps Tight Squeeze on Output, Sending Prices Soaring

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

restraints. It leaves the world facing a significant supply squeeze, higher Energy costs and the risk of inflation, just as widespread vaccination allows economies to start emerging from the downturn caused by the pandemic.

“OPEC+ definitely risks over-tightening the oil market,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. in London.

Brent has already rallied almost 30% this year to above $67 a barrel as OPEC+ kept production below demand in order to drain the glut that built up during the worst of the Covid-19 lockdowns. Without additional supply, that deficit will widen significantly in April, according to the cartel’s internal estimates.

Eoin Treacy's view -

The oil price has been rebounding in part because of a renewed demand outlook as the global economy reflates and also because supply growth has been both intentionally and unintentionally constrained.

The brief but traumatic trip below zero last year was a catalyst for OPEC members to be more amenable to supply discipline. They want to ensure prices stay at economic levels and that means somewhere in the region of $60 to $80.



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March 01 2021

Commentary by Eoin Treacy

Ignoring Energy Transition Realities

Thanks to a subscriber for this report from the team at Goehring & Rozencwajg which was released a couple of months ago. Here is a section:

Electric vehicles also involve Energy intensive lithium-ion batteries. Few realize how much Energy is embedded in an electric vehicle before it is ever plugged in. Over the life of a typical EV, nearly 40% of the total Energy goes into manufacturing the battery. The IEA expects electric vehicles will represent nearly 15% of total transportation Energy by 2040. We calculate this equates to approximately 850 mm EVs and nearly 65 terawatt hours of batteries. This is a staggering amount considering global lithium-ion manufacturing capacity is currently less than 0.4 terawatt hours per year. These batteries will require an incredible 2 billion tonnes of oil equivalent to build. We will shortly release a detailed podcast that goes into these figures in great depth.

Unfortunately, few people realize how Energy intensive the “green transition” will be. As a result, much (if not all) of the carbon savings will be undone by generating the power in the first place. The IEA’s proposal assumes wind and solar make up nearly 50% of all electricity by 2040 and that some 850 mm electric vehicles will be on the road. These initiatives are expected to reduce CO2 by 55% or 18 bn tonnes per year. While this may sound impressive, simply moving away from coal towards much-cleaner natural gas would itself save nearly 14 bn tonnes of CO2 per year. When analyzed through this perspective, renewables would save an incremental 4 bn tonnes compared with the next cleanest option.

Eoin Treacy's view -

The views expressed in this report elaborates on many of the points made by other analysts. There is no getting around the fact that renewables are dependent on access to metals like copper, lithium, cobalt and nickel. That’s in addition to the significant additional quantities of rare earth metals required. These are all extractive industries. A lot of renewable infrastructure is also placed in very remote, ecologically pristine areas.



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February 16 2021

Commentary by Eoin Treacy

Blackouts Cascade Beyond Texas in Deepening Power Crisis

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

Blackouts triggered by frigid weather have spread to more than four million homes and businesses across the central U.S. and extended into Mexico in a deepening Energy crisis that’s already crippled the Texas power grid.

After millions in Texas lost electricity, the operator of the grid spanning 14 states from North Dakota to Oklahoma ordered utilities to start rotating outages to protect the system from failing amid surging demand for electricity.

“In our history as a grid operator, this is an unprecedented event,” the Southwest Power Pool said in a statement Monday.

The brutal cold striking Texas -- the capital of the U.S. Energy industry and home of some of the world’s largest oil and gas companies -- is emblematic of a world facing more unpredictable weather due to the rising impact of climate change. The outages also underscore the growing vulnerability of the grid as the globe moves away from fossil fuels to an all-electrified system increasingly reliant on renewable Energy.

Eoin Treacy's view -

The big argument about renewables has been always been cost and reliability. The cost argument has been removed from the discussion over the last couple of years. Economies of scale mean that many wind and solar projects are now viable without relying on subsidies. Unfortunately, there hasn’t been any progress how to ensure base load when the turbines stop turning or the sun isn’t shining.

Temperatures significantly below zero (Celsius) freeze the turbines. That’s why there are rolling blackouts across Texas today and yesterday. They rely on wind to produce a significant proportion of electricity and were in no way prepared for the freezing weather to move this far south.

I arrived in Dallas yesterday evening. The car rental place was inundated and understaffed with about four inches of snow on the ground. The restaurants are not getting deliveries so most are closed. The super markets are all also closed. It’s a good thing the weather is expected to improve by the weekend or there will be a lot of hungry people as well as being cold.



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February 12 2021

Commentary by Eoin Treacy

Vestas reveals offshore turbine with world's largest sweep

This article by Paul Ridden for NewAtlas.com may be of interest to subscribers. Here is a section: 

Each turbine is expected to deliver around 80 GWh of Energy per year, depending on site-specific conditions, which is said to work out as being enough to power 20,000 European homes.

The V236-15.0 MW also offers the potential to reduce the number of turbines deployed at offshore windfarm level – with Vestas calculating that the "offshore turbine offers 65 percent higher annual Energy production than the V173-9.5 MW, and for a 900-MW wind park it boosts production by five percent with 34 fewer turbines."

The company expects the first V236-15.0 MW prototype to be built in 2022, with serial production following two years later. It has a design lifetime of 25 years.

“With the V236-15.0 MW, we raise the bar in terms of technological innovation and industrialization in the wind Energy industry, in favor of building scale," says Anders Nielsen, Vestas CTO. "By leveraging Vestas’ extensive proven technology, the new platform combines innovation with certainty to offer industry-leading performance while reaping the benefits of building on the supply chain of our entire product portfolio. The new offshore platform forms a solid foundation for future products and upgrades.”

Eoin Treacy's view -

Boosting production and needing to build fewer towers suggests there should be cost savings in construction. The big change in renewable Energy occurred in late 2019 when economies of scale improved enough that the wind and solar sectors could survive without subsidies. That has led to a complete reappraisal of the rationale for investing in the sector. More recently it has allowed the renewable Energy sector focus on the subsidies provided to fossil fuel companies across the Energy supply chain.



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February 02 2021

Commentary by Eoin Treacy

U.S. nuclear: delayed closures could add 26Mlbs to 2021-30 global uranium demand

Thanks to a subscriber for this report from BoA Securities. Here is a section:

Eoin Treacy's view -

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

The uranium sector has had a number of false dawns over the last decades. The reason for an inability to reach escape trajectory from the lengthy base formations was KazAtom’s policy of flooding the market and driving high-cost producers out of business.



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December 30 2020

Commentary by Eoin Treacy

Email of the day on rising inflationary pressures and Ethereum

I hope you are enjoying the holidays and looking forward to a better year next year.

Here’s another one of Charles Gave's excellent articles-the oil price is on the move thus starting to bear out his fear of a 1970s-type repeat.

Secondly, regarding Ethereum, have you been able to quantify any price target and if so, what technical data/events have you chosen to use?

Eoin Treacy's view -

Thank you for this interesting report which repeats Gave’s earlier call for an inflationary boom with which I agree. However, I’m not sure we are in the same kind of bull market in oil that we had in the first decade of this century. The history of secular bull markets in oil points to rising prices lasting as long as it takes new sources of supply to reach market. That is followed by decades of ranging.



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December 10 2020

Commentary by Eoin Treacy

Email of the day - on the international beauty contest

This article today struck me as being a profound historical perspective on the UK and the EU. It reinforces my view (and yours I think) that the EMs are where the growth will be for the medium-long term. Whether we in the UK will be able to capitalise on this is our question.

Eoin Treacy's view -

Thank you for this emotional article which highlights the frustration many people feel with both the trajectory of European integration and the UK’s membership of the long-term federal project. As David used to say, “the markets are an international beauty contest where we get to be the judges.”



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December 04 2020

Commentary by Eoin Treacy

Secular Bull Market Investment Candidates Review

Eoin Treacy's view -

On November 24th I posted a review of candidates I believe likely to prosper in the emerging post-pandemic market. It was well received by subscribers so I will post an update on my views on the first Friday of the month going forward. That way subscribers can have an expectation that long-term themes will be covered in a systematic manner and will have a point of reference to look back on.

Media hysteria about the 2nd or 3rd waves has not led to new highs in the number of deaths. The success of biotech companies in deploying vaccines means there is going to be a substantial recovery in the economic activity in 2021 and going forward.

The stay-at-home champions saw their sales growth surge in 2020. It will be impossible to sustain that growth rate in 2021. That’s particularly true for mega-caps. One-way bets on the sector are likely to work less well in the FAANGs going forward.



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November 24 2020

Commentary by Eoin Treacy

Email of the day on reflation candidates and whether it is too late

Eoin, the reflation trade seems to be well under way and you have repeatedly viewed commodities (both industrial and soft) to be an attractive investment for a lengthy period of time and at times, you have mentioned a possible investment vehicle. I suggest that you present those ETF/ETC and other funds/shares or a combination which you believe will best cover this area at the present time. I would think that many in the collective will appreciate getting such a list from you.

This also against the background that gold, PMs in general and PM miners seem to have to work off their overbought condition and for the time being, don't seem to be needed as safe havens as worldwide growth is picking up and neither inflation nor systemic risk are perceived as major issues at this time.

Therefore, in my view industrial and soft commodities should be the better investment compared to PMs for some time to come.

And

Dear Eoin, I hope you and the family are well. This "rotation" trade seems to have run quite far and I sense a general frothiness to markets, (apart from gold of course). Would, you go with the crowd here hoping for further gains? Or would you wait for a pull-back, (which today feels like it may never come) and maybe nibble at a few out of favour stocks/themes? Best wishes,

And

Interesting picking up on your views regarding soft commodities.  Some directly investable ideas seem hard to track down related to this theme in the UK market; really appreciate your suggestions as to how to invest in this and am sure others would be interested as well.

In general, the markets seem to be moving very rapidly at present, e.g. Royal Dutch, +5%, Glencore +5% etc, so your guidance about how best to play these trends that you are identifying is hugely helpful in your day to day notes and commentary.  

And

It would be useful to have a list of ETFs to play a number of different themes: 1) COVID recovery candidates like airlines and hospitality, 2) value, 3) small caps, 4) general Asian exposure.

Eoin Treacy's view -

Thank you all for these questions which highlight the emotional difficulty of buying breakouts. When sectors and indices trade out to new highs there is always a temptation to think they may have already gone too far. The big question then is to gauge whether the animating factor behind the breakout has the potential to persist.



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November 11 2020

Commentary by Eoin Treacy

Email of the day on hydrogen investments

Given hydrogen powered Energy is an emerging trend I would be grateful! Mr. Treacy could mention the name of related ETFs or any other tradable security that would provide exposure to this trend.

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. I’ve been anticipating a new use case for natural gas since the price collapsed with the introduction of unconventional supply. It was simply inevitable that with so much supply and low prices for a vital commodity that someone would find something to do with it. The hydrogen market is almost completely dependent on supply from natural gas at present. Efforts to produce green hydrogen are underway but are uncertain and will take years to build.



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October 22 2020

Commentary by Eoin Treacy

The Race to Hydrogen Goes Beyond Brexit With Italy-U.K. Deal

This article by Chiara Albanese and Alberto Brambilla for Bloomberg may be of interest to subscribers. Here is a section:

Italy’s Snam SpA will brush aside Brexit and invest 33 million euros ($39 million) in ITM Power Plc, which produces electrolyzers, a crucial component in the hydrogen technology.

The investment is part of a 150-million pound ($197 million) capital increase by ITM. The accord is part of Snam’s expansion in the technology after the European Union put hydrogen at the heart of its measures to cut greenhouse gases and become climate neutral by 2050. Hydrogen, if made with renewables, could replace coal, oil, and eventually natural gas, and help eliminate about a third of emissions from industries like steel and cement by mid-century, according to BloombergNEF.

“The hydrogen sector is like the internet before the dot com boom,” Marco Alvera, chief executive officer of Snam, said in an interview. “What matters now is to unlock potential technology and to find the right positioning.”

Eoin Treacy's view -

The EU is going to spend €2 trillion on a green new deal. China is at least talking about going carbon neutral within the next thirty years. That’s a lot of money chasing an Energy transition.



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October 13 2020

Commentary by Eoin Treacy

Email of the day on outperformance following the US election:

As per JPM and Nomura   the mkt is pricing a Biden win, caution that a blue wave is necessary, otherwise will get gridlock.

Even if it happens probably get turmoil specially if we do not get clean sweep. Otherwise legal problems will be forthcoming. The groups would be HC, alternative energies, cyclical, education, infrastructure. Also China as frictions will be reduced

Can you identify possible winners, using the charts and share them?

Trust you and your family are well. Stay safe.

Eoin Treacy's view -

The narrative about who will win the US Presidential election has morphed over the last couple of weeks to pricing in a Biden victory. The catalyst for this change was the debate where the two candidates harangued each other and dropped the bar for political decorum another notch lower. Since then, confidence among Democrats has increased substantially. There has been talk of a double-digit margin of victory and a blue wave where they control both legislative branches and the Presidency.



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October 06 2020

Commentary by Eoin Treacy

Compact Nuclear Fusion Reactor Is "Very Likely to Work", Studies Suggest

This article by Henry Fountain for the New York Times may be of interest to subscribers. Here is a section:

Scientists developing a compact version of a nuclear fusion reactor have shown in a series of research papers that it should work, renewing hopes that the long-elusive goal of mimicking the way the sun produces Energy might be achieved and eventually contribute to the fight against climate change.

Construction of a reactor, called Sparc, which is being developed by researchers at the Massachusetts Institute of Technology and a spinoff company, Commonwealth Fusion Systems, is expected to begin next spring and take three or four years, the researchers and company officials said.

Although many significant challenges remain, the company said construction would be followed by testing and, if successful, building of a power plant that could use fusion Energy to generate electricity, beginning in the next decade.

Eoin Treacy's view -

It’s impossible to know whether the SPARC design will work but a couple of points are worth considering. The first is they are holding to their estimate of having a prototype up and running by 2024. That at least is a positive. The second is the team behind the project only set the company up because they lost their funding at the old MIT tokomak project. Academics have no incentive to set or exceed deadlines. Commercial enterprises do.



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September 10 2020

Commentary by Eoin Treacy

Desert Mountain Energy Announces Significant Helium Percentages in Two New Wells In Arizona

This press release may be of interest to subscribers. Here is a section: 

Based on normal accepted industry operation procedures, the company at this time and prior to further engineering and flow testing, would entertain a possible daily flow rate of between 4,100 and 5,600 MCFGPD based on aggregated production from both wells. The Company has compared these wells to the closest established and documented helium production located approximately 35 miles NE in the Pinta Dome Field.  Note: Desert Mountain Energy’s wells have been completed in members of the Pennsylvanian-aged Formations which are lower in depth than the helium productive Permian-aged Coconino Formation found at Pinta Dome (AZOGCC archives).  Production comparisons with a number of wells from the prolific Pinta Dome Field, specifically the Kerr-McGee Barfoot State#1, clearly shows that large artificial formation stimulation was not required to exceed the original projected calculated reserves by over 500%, over a 13-year production life (Olukoga 2016, AZOGCC Barfoot #1 well files).

Eoin Treacy's view -

There have been a number of articles over the last couple of years about the lack of new supply for helium, against a background of continued strong demand growth. Here is a link to an article from Forbes, dated April 2019, making a number of points about supply inelasticity meets rising demand. 



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September 04 2020

Commentary by Eoin Treacy

Tenth Annual Energy Paper

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

We expect some of the “base” decline from existing shale wells to be replaced by new wells; the harder question is by how much. Operating and development costs have declined, well productivity has improved and there are large sunk costs in Appalachia (i.e., lease agreement options) that may compel many producers to keep drilling irrespective of lifecycle economics. Furthermore, if the onshore shale boom fades, we might see a revival of US offshore oil & gas production in the Gulf of Mexico. US oil production is also very sensitive to price: $55-$65 oil prices could add 1-3 mm bpd to US production when compared with JP Morgan’s $40 base case WTI price forecast. Even so, the US may now be close to peak oil and natural gas production and peak Energy independence given financial pressures on the shale industry, and environmental pressures discussed next.

Eoin Treacy's view -

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

This report is laden with interesting graphics and statistics which highlight the challenges of developing renewable as well conventional and unconventional Energy solutions. The correlation between renewable stocks and oil prices broke down late last year. That was a meaningful event and suggested the market has moved on from thinking of renewables solely in terms of cost competition with oil. That implies an alternative set of metrics is now be used to value the sector.



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August 14 2020

Commentary by Eoin Treacy

Platinum Quarterly Presentation Q1 2020

This report carries a great deal of relevant information for the platinum market. Here is a section:

Automotive demand down only 17% (-132 koz) YoY despite a 24% fall in Q1 light global vehicle sales

Tightening global emissions standards, driving higher pgm loadings, partially counters lower auto sales/production

W. Europe diesel share decline slowed on increased diesel sales

Diesel vehicles still key for automakers to avoid or reduce heavy CO2 fines

German diesel car market share continued to recover (Q1’20 average 35%, up 1.3% over 2019 average)

Eoin Treacy's view -

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

It’s easy to think that diesel is a dead fuel but sales still continue. The damage to consumer confidence may, however, be impossible to overcome. That is creating a new market for transportation alternatives. 



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August 05 2020

Commentary by Eoin Treacy

Shale Driller Devon to Pay Biggest Dividend In Its History

This article by Joe Carroll and Rachel Adams-Heard for Bloomberg may be of interest to subscribers. Here is a section:

The debt buybacks will target an amount equivalent to about half of Devon’s outstanding net debt, according to data compiled by Bloomberg. Devon stock was the best performer in the S&P 500 Index, rising 7.8% to $11.95 at 9:33 a.m. in New York after earlier climbing 8.3%.

Devon’s special payout and debt-reduction targets are the most aggressive efforts yet as shale explorers grapple with a virus-induced demand collapse and tumbling Energy prices.

“These shareholder-friendly initiatives demonstrate our commitment to a new E&P business model, which moderates growth, emphasizes capital efficiencies, generates free cash flow and returns increasing amounts of cash directly to our shareholders,” Devon Chief Executive Officer Dave Hager said in the statement.

Eoin Treacy's view -

Instilling financial discipline on rapacious appetite for expansion at any cost is part of the ebb and flow of a commodity bull and bear markets. The gold mining sector went through exactly the same rationalisation process and it created healthier companies.



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July 30 2020

Commentary by Eoin Treacy

Conoco Plunge Shows U.S. Oil Struggling to Exit Crisis Mode

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

On the bright side, Chief Executive Officer Ryan Lance said he’s encouraged by low premiums for shale acquisitions, citing Chevron’s recent agreement to buy Noble Energy.

When asked if Conoco also looked into buying Noble, Lance said “we did look,” but he was worried that Noble’s Israel assets might have been the source of political tension, since Conoco operates in other areas of the Middle East.

“The gem is certainly the Middle Eastern gas position,” he said. “With some of the other things we’re doing in the Middle East, that creates maybe a little bit of an issue and problem for us politically.”

Conoco’s earnings miss followed reports from three shale-focused explorers on Wednesday that signaled a grim rest of 2020 for the broader U.S. oil industry. QEP Resources Inc. cut its production outlook, WPX Energy Inc. further reduced its capital spending budget, while Concho Resources Inc. stuck with plans to keep crude volumes flat from 2019 levels, ending years of growth.

Eoin Treacy's view -

Bankruptcies in the oil patch are likely to continue to trend higher because so many projects have break-evens in the $60 area. That is creating buying opportunities for the majors and the chance to rationalise the onshore domestic US production landscape. That will be necessary in order to survive because global demand will take time to recover from the virus hiatus.



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July 28 2020

Commentary by Eoin Treacy

Once-Unpopular Carbon Credits Emerge as One of the World's Best Investments

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

“It’s attracting hedge-fund speculators,” said Norbert Rücker, head of economics at Swiss private bank Julius Baer. “With this move, carbon has really come back to life this year and it’s attracted a lot of interest—we have clients reaching out to us asking about it.”

The resurgence in carbon-credit prices began in mid-2017 when EU policy makers agreed to sharply reduce the number of available credits. That has pushed up prices and allowed the carbon market to help fulfill its purpose of punishing excess polluters. With the market set up to constrict credit supply, prices should rise further still, analysts say.

Eoin Treacy's view -

The success of Tesla, in gaming the carbon credit system to its advantage, has woken the rest of the globe up to the possibilities government sponsored markets hold.



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July 27 2020

Commentary by Eoin Treacy

Three Gorges Dam deformed but safe, say operators

This article by Frank Chen for AsiaTimes.com may be of interest to subscribers. Here is a section:

The deformation occurred last Saturday when the flood from western provinces including Sichuan and Chongqing along the upper reaches of the Yangtze River peaked at a record-setting 61,000 cubic meters per second, according to China Three Gorges Corporation, a state-owned enterprise that manages the dam and the sprawling power plant underneath it.

The company noted that parts of the dam had “deformed slightly,” displacing some external structures, and seepage into the main outlet walls had also been reported throughout the 18 hours on Saturday and Sunday when water was discharged though its outlets.

But the problem of water seeping out did not last long, as the dam reportedly deployed floodgates to hold as much water as possible in its 39.3 billion-cubic-meter reservoir to shield the cities downstream from the biggest Yangtze deluge so far this year.

And

Meanwhile, Wang Hao, a member of the Chinese Academy of Engineering and an authority on hydraulics who sits on the Ministry of Water Resources’ Yangtze River Administration Commission, has also assured that the dam is sound enough to withstand the impact from floods twice the mass flow rate recorded on Saturday.

Eoin Treacy's view -

It is still raining in southwest China and that means the dam will be letting out more water to control the level behind the wall. Therefore, it is unlikely to be able to curtail the risk of flooding downriver.



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July 20 2020

Commentary by Eoin Treacy

Out to pasture!

This is potentially Edward Ballsdon’s final post for his Grey Fire Horse blog and may be of interest to subscribers. Here is a section:

Recently there has been discussion about yield curve control (YCC), and whether the FED will introduce a new policy on managing interest rates. Do not be fooled - this is a rather large red herring, as the debt is now too large in the US (as it is in most major economies) to raise rates without the increased interest cost having a debilitating effect on annual government budget figures.

There is no longer $ 1trn of outstanding US federal Bills - in June the outstanding amount surpassed $ 5trn. If rates rise from 0.2% to 2%, the ANNUAL interest cost just on that segment of the outstanding $19trn debt would rise from ~$ 8.5bn to ~$ 102bn. Naturally you would also need to also factor in the impact of higher interest rate costs on leveraged households and corporates.

This is the red herring - the size of the debt will force monetary policy. To think that the central bank can raise rates means ignoring the consequence from the debt stock. And this is the root of my lower for longer view, which is obviously influenced from years of studying Japan, and which is now almost completely priced in to rates markets. Remember that the YCC in Japan led to a severe reduction of the BOJ buying of JGBs - it just did not have to.

Eoin Treacy's view -

The Japanification of the developed world represents a massive challenge for investors in search of yield. 90% of all sovereign bonds have yields below 1% and the total of bonds with negative yields is back at $14 trillion and climbing.



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July 10 2020

Commentary by Eoin Treacy

Skai revises targets for its liquid-hydrogen, long-range eVTOL

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

One challenge for anyone who wants to work with liquid hydrogen is that you need to keep it extremely cold to keep it in its liquid state. At atmospheric pressure levels, we're talking just 20.28 kelvins above absolute zero (−252.87 °C, or −423.17 °F).

That temperature can rise a little if you're willing to pressurize as well as cool (using a cryogenic system running between 250 and 700 bar of pressure), but Gunter says that's not part of Skai's plans, as "even a moderately pressurized system has significant weight penalties."

So, super-cooling it'll be, and while that entails extra Energy losses in the liquefaction stage, the cooling equipment, the conversion back into gas for use in the fuel cell and in boil-off in the tank itself, the net result will still be a much longer range aircraft than anyone dealing with gaseous hydrogen – or certainly lithium batteries – will be able to deliver.

It'll be interesting to see how Skai gets the job done, as really you've got to look to NASA and other space programs to find liquid hydrogen being used in serious volumes.

"The good thing in all of this," says Gunter, "is the notable developments that occur in this space on an increasing basis. The efficiencies we’ve seen in fuel cells and the same the industry is seeing regarding H2 production all point to increasing effectiveness of any form of H2 as a future focused solution."

"There's a number of naysayers about what we're doing with hydrogen," says Hanvey, "but we believe we've gone from the question to the possible, and it's now the probable. We know we can fly with hydrogen, and the question is just how quickly we can get it to the market. And based on our experience, we think we can get there a lot quicker than perhaps the market will give us credit for."

Eoin Treacy's view -

Hydrogen’s Energy density is orders of magnitude greater than any other fuel currently used in the global economy. The only reason we don’t already use it is because of the technological difficulty of containing what is a highly combustible material. The whole world knows about the Hindenburg accident 83 year ago, which put an end to transatlantic zeppelin travel. It did to the hydrogen industry what the Fukushima accident did to nuclear.



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June 29 2020

Commentary by Eoin Treacy

Chesapeake's Collapse Is Latest in Long Line of Shale Busts

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

More than 200 North American oil and gas producers, owing over $130 billion in debt, have filed for bankruptcy since the beginning of 2015, according to a May report from law firm Haynes & Boone. This month alone, seven oil and gas companies have gone under, tying December 2015 for the busiest on record after crude prices plunged amid the Covid-19 pandemic, according to data compiled by Bloomberg.

The shale boom spearheaded by the likes of Chesapeake a decade ago was fueled by debt. Profitability and shareholder returns have been consistently disappointing, and investors had already grown wary of throwing more money into shale before this year’s oil crash. The rate of default on high-yield Energy debt stood at 11%, Fitch Ratings said in a June 11 report, the highest level since April 2017.

Eoin Treacy's view -

Unconventional drilling is capital intensive. Arguably, it would not have been a viable development option for new supply without the tailwind of very low interest rates and abundant liquidity. The challenge the sector faces is once a well begins producing, there is a very steep increase in supply, followed by a steep decline. That ensures companies are very exposed to near-term oil prices. The significant volatility in commodity prices has been a headwind for the sector, because most operations are profitable in the region of $60-$80 a barrel.



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June 05 2020

Commentary by Eoin Treacy

OPEC+ Set to Extend Oil Cuts as Meeting Called for Weekend

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

But members of the 23-nation OPEC+ alliance have a lot to gain by preserving their agreement. They have helped engineer a doubling in Brent prices since April, easing pressure on their government budgets of oil-rich nations.

The accord has also revived the fortunes of major Energy companies like Exxon Mobil Corp. and Royal Dutch Shell Plc, and prompted some U.S. producers to consider restarting wells just weeks after they were idled.

The deal in April set out historic cuts of 9.7 million barrels a day, or roughly 10% of global oil supplies, to offset the unprecedented collapse in demand caused by the virus lockdowns. Then a few weeks later, Saudi Arabia and its closest allies in the Persian Gulf promised additional supply restraint of 1.2 million barrels a day in June.

Those reductions were set to ease to 7.7 million barrels a day from July 1. so failure to reach an agreement this month could have brought a flood of oil back onto the market and undermined a tentative recovery as countries start emerging from coronavirus lockdowns.

With American shale production starting to come back online, OPEC’s careful management of the demand recovery is crucial.

Eoin Treacy's view -

The coronavirus spread in a wave around the world and resuming demand for just about everything is also likely to come back sequentially. Chinese demand is recovering, European demand is also recovering and the USA will follow. Latin America’s infection rate is probably close to peaking which suggests demand will begin to recover in the middle of the summer.



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April 08 2020

Commentary by Eoin Treacy

Musings from the Oil Patch April 7th 2020

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

When we look at the company’s costs and expenses per barrel of oil equivalent (BOE), we find they totaled $14.01 for 2019.  Based on the company’s average oil price (which was not adjusted for its gas output given its low price), this translates into a cash profit margin per BOE of $36.88.  If we include the cost of depreciation, depletion and amortization expense (largely a non-cash expense), but indicative of the amount of investment the company needs to make to insure it replaces produced barrels and remains an ongoing enterprise, the cash profit per BOE falls to $19.06, or 37.4% of the average selling price after adjusting for hedging.  That is a pretty attractive return.  

With WTI oil futures prices falling to $20 per barrel, and assuming the location and quality discount remains at $6, Whiting Petroleum was looking at generating no positive cash from the oil it produced.  It also assumes cash operating expenses remain at 2019 levels.  This means Whiting Petroleum would be unable to invest in new exploration and development, which makes the company a self-liquidating entity.  In that condition, the company essentially has no value.  The bankruptcy filing indicates that reality, as current shareholders will only retain 3% of the shares of the reorganized company, as the debt holders will hold 97% in return for agreeing to cancel their bonds.  

Under today’s very depressed oil and gas prices, few producers will be able to fund operations.  If the companies have a significant amount of debt on their balance sheets, they will face serious challenges to sustain their businesses if they do not address their financial leverage.  To understand the precarious health of the producer sector, Energy consultant Rystad has prepared a chart showing the debt maturity schedule and annual interest expense for a group of 29 significant producers.  While this represents only 29 producers, we believe it is indicative of the financial condition of the balance of the producer sector.  

Eoin Treacy's view -

The only way the unconventional oil sector is going to make it through the current crisis is to reduce the cost of production. There is no getting around the fact hydraulic fracturing and horizontal drilling operations are considerably more expensive than conventional drilling. Technological innovation will help improve that spread but it will be impossible to eliminate. Therefore, scale and proximity to end markets are the primary route to reducing costs.



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March 17 2020

Commentary by Eoin Treacy

Email of the day - what will signal a bottom:

I understand the reasoning behind the various precautions being recommended & taken, but what will be the criteria for sounding the all clear? Using the present logic, it seems that as long as there is at least 1 person with the virus the threat remains & the precautions should remain.

Eoin Treacy's view -

Thank you for this question which others may also have an interest in and it is a highly relevant topic as trends accelerate.

Unemployment data is about to get ugly. Jobless figures are reported with a two- week lag so the update on Thursday will be for March 7th. Thousands of people lost their jobs yesterday with shutdowns in cities like New York, Los Angeles and San Francisco, The same will be true in much of Europe where economic activity is grinding to halt. Retailers like TJX have hundreds of thousands of employees and we need to question how long they can sustain payroll without cutting headcount significantly.

Temporary worker numbers peaked more than a year ago but can be expected to fall off a cliff when next reported on April 3rd.



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March 09 2020

Commentary by Eoin Treacy

Rosneft Plans to Increase Output as Russia Digs in for Price War

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

Last week in Vienna, ministers from Russia, Saudi Arabia and other members of the group left a fractious meeting with no deal to continue the cuts beyond April 1. Saudi Arabia heavily discounted its oil over the weekend, triggering a plunge of more than 20% in international crude futures.

Rosneft’s London-listed shares dropped 19.5% on Monday, while markets in Moscow were closed for a public holiday. In a separate statement, Russia’s finance ministry said that the country’s oil-wealth reserves would be sufficient to cover lost revenue “for six to 10 years” at oil prices of $25 to $30 a barrel.

 

Eoin Treacy's view -

Unconventional oil and gas has been one of the biggest gamechangers for the global economy in history. When the world’s biggest consumer, where production peaked decades ago morphs into the world’s biggest producer and a net exporter it changes the fundamentals and interrelationships of the market.



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February 28 2020

Commentary by Eoin Treacy

Lead Indicators of Recession

Eoin Treacy's view -

After a week characterised by selling across the board, a great deal of profit taking has taken place and many overextensions relative to the trend mean have been unwound. The question I believe many people will be concerned with is whether the coronavirus is going to be the catalyst for an economic contraction? I thought it would therefore be worth monitoring the kinds of instruments that offer a lead indicator for that kind of concern.



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February 27 2020

Commentary by Eoin Treacy

Junk Bond Sell-Off Deepens With Energy Hit the Hardest By Virus

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

Energy led the decliners as oil prices fell below $47 a barrel, while bonds of rental car Hertz Global Holdings Inc. slumped as much as six cents on the dollar. Leveraged loans tied to American Airlines Group Inc. and Travelport Worldwide Ltd. also slipped. The high-yield CDX index, which trades on price, was down a full point at one stage.

High-yield bond investors are trying to assess the big unknown: whether the coronavirus will be just a short-term problem if it can be contained, or, far worse, turn into a pandemic that could pose a long-term drag on the economy and spark a recession.

“The sell-off is accelerating,” said William Smith, a portfolio manager at AllianceBernstein. “Initially we were seeing more weakness in liquid securities, but today there are multiple situations where bonds are down more than five points.”

Eoin Treacy's view -

Riskier credits are less well able to ride out earnings volatility than better capitalised companies. That’s generally why they need to discount their bond offerings. Spreads in the sector were priced for near perfection heading into the end of 2019 as the stock market continued to rebound following the provision of $400 billion in stimulus to the repo market. The potential knock-on effect to demand for consumer products resulting from the virus scare is an obvious risk.



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February 26 2020

Commentary by Eoin Treacy

Berkshire Hathaway Inc Shareholder Letter

Thanks to a subcsriber for this letter by Warren Buffett. Here is a section on utilities:

Berkshire Hathaway Energy is now celebrating its 20th year under our ownership. That anniversary suggests that we should be catching up with the company’s accomplishments.

We’ll start with the topic of electricity rates. When Berkshire entered the utility business in 2000, purchasing 76% of BHE, the company’s residential customers in Iowa paid an average of 8.8 cents per kilowatt-hour (kWh). Prices for residential customers have since risen less than 1% a year, and we have promised that there will be no base rate price increases through 2028. In contrast, here’s what is happening at the other large investor-owned Iowa utility: Last year, the rates it charged its residential customers were 61% higher than BHE’s. Recently, that utility received a rate increase that will widen the gap to 70%.

The extraordinary differential between our rates and theirs is largely the result of our huge accomplishments in converting wind into electricity. In 2021, we expect BHE’s operation to generate about 25.2 million megawatt-hours of electricity (MWh) in Iowa from wind turbines that it both owns and operates. That output will totally cover the annual needs of its Iowa customers, which run to about 24.6 million MWh. In other words, our utility will have attained wind self-sufficiency in the state of Iowa.

In still another contrast, that other Iowa utility generates less than 10% of its power from wind. Furthermore, we know of no other investor-owned utility, wherever located, that by 2021 will have achieved a position of wind self-sufficiency. In 2000, BHE was serving an agricultural-based economy; today, three of its five largest customers are high-tech giants. I believe their decisions to site plants in Iowa were in part based upon BHE’s ability to deliver renewable, low-cost Energy.

Of course, wind is intermittent, and our blades in Iowa turn only part of the time. In certain periods, when the air is still, we look to our non-wind generating capacity to secure the electricity we need. At opposite times, we sell the excess power that wind provides us to other utilities, serving them through what’s called “the grid.” The power we sell them supplants their need for a carbon resource – coal, say, or natural gas.

Berkshire Hathaway now owns 91% of BHE in partnership with Walter Scott, Jr. and Greg Abel. BHE has never paid Berkshire Hathaway a dividend since our purchase and has, as the years have passed, retained $28 billion of earnings. That pattern is an outlier in the world of utilities, whose companies customarily pay big dividends – sometimes reaching, or even exceeding, 80% of earnings. Our view: The more we can invest, the more we like it.

Today, BHE has the operating talent and experience to manage truly huge utility projects – requiring investments of $100 billion or more – that could support infrastructure benefitting our country, our communities and our shareholders. We stand ready, willing and able to take on such opportunities.

Eoin Treacy's view -

I found this to be an enlightening discussion of the utilities sector. The long-held perception is that these kinds of businesses can afford to pay out the majority of free cashflow in dividends because they are charging rents on established pieces of infrastructure with easily forecastable maintenance and renewal trajectories. As Berkshire’s experience with wind demonstrates, this ignores the long-term risk of exogenous shocks, technological innovation, changing regulation and infrastructure reaching the end of its useful life.



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February 20 2020

Commentary by Eoin Treacy

Vanishing Spreads Are Ringing Alarms in Risky Debt Markets

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

“What do you do with your cash?” said Luke Hickmore, investment director at Aberdeen Standard Investments in Edinburgh, where he helps run a number of bond funds. “Leaving it standing there makes no sense and the experience over the last 10 years is that there is no pain in buying bonds. Learnt behavior is that it is safe. Inflation is nowhere and central banks start buying every time yields go higher.”

Heavy demand for tax-exempt income drove yields on even the riskiest municipal bonds to 3.58% on Friday, the lowest since Bloomberg’s records began in 2003. The influx has compressed spreads across the country and caused some debt in high-tax states like California and New York to yield less than top-rated benchmark securities. Municipal mutual funds have reported inflows for the 58th straight week on Feb. 13.

Eoin Treacy's view -

With 30-year debt yielding 1.92% in the USA, 1.59% in Australia, 1.42% in Canada, 1.05% in the UK. 0.36% in Japan and 0.04% in Germany bond investors, and particularly pension funds, are at a loss for where to invest to generate the returns necessary to meet their future liabilities.



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February 11 2020

Commentary by Eoin Treacy

Saxo Q1 Outlook: The Great Climate Shift

This press release 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. 

The long running argument against green Energy investing has been that the cost and intermittency of supply do not come close to compensating for the ease of relying on fossil fuels. That meant the sector has long been confined to a high beta position relative to oil prices because it relied on high Energy prices to justify investment. The question that now needs to be addressed is whether this valuation model is still relevant?



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February 03 2020

Commentary by Eoin Treacy

Gas Rout Puts 60% of Output at Risk, Tudor Pickering Says

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

Almost two-thirds of U.S. natural gas production is at risk of being cut as prices tumble, according to Tudor, Pickering, Holt & Co.

About 55 billion cubic feet a day of gas in basins from Texas to Appalachia could be curtailed, analysts at Tudor Pickering wrote Monday in a note to clients. That’s roughly 60% of current dry gas output, based on BloombergNEF estimates.

Mounting debt, a lack of access to capital markets and a drop in hedging will lead to a decline in drilling starting in the second half of this year, Tudor Pickering said. The Energy-focused investment bank says only two or three companies, including Cabot Oil & Gas Corp., can afford to keep output flat with prices below $2.25 per thousand cubic feet, or about $2.17 per million Btu.

“We do expect to see a significant number of bankruptcies if gas prices stay this low,” Matthew Portillo, managing director of upstream research at Tudor Pickering, said by phone. Producers have no gas hedges in place beyond 2021, he said.

Gas has lost about a third of its value since early November, sinking below $2 per million British thermal units for the first time in almost four years as production from shale basins overwhelms demand amid a mild winter.

“What you’re starting to see is the forward curve not only in 2020 but in 2021-plus has moved to such a low price that companies are not able to drill within cash flow to hold drilling steady,” Portillo said.

Drilling in the Haynesville shale in Louisiana is set for a “significant collapse” if prices remain low, he said.

Eoin Treacy's view -

Unconventional supply is prolific but expensive. The vast majority of companies rely on continued high prices to support their drilling activities. That ensures the cyclicality of prices. The higher prices are the more oil and gas can be produced but declines in prices mean drillers can no long source funding and some will inevitably go bankrupt. That will temporarily withdraw supply from the market which will support prices and open the way for new drilling to take place.



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January 09 2020

Commentary by Eoin Treacy

Deloitte-Ballard Joint White Paper Assesses Hydrogen & Fuel Cell Solutions for Transportation

This press release may be of interest to subscribers. Here is a section:

Randy MacEwen, Ballard President and CEO said, "In less than 10 years, it will become cheaper to run a fuel cell electric vehicle (FCEV) than it is to run a battery electric vehicle (BEV) or an internal combustion engine (ICE) vehicle for certain commercial applications."

Although FCEVs are currently more expensive to run per 100 kilometers (km) than BEVs and ICE commercial vehicles, they are set to become much cheaper as manufacturing technology matures, economies of scale improve, hydrogen fuel costs decline and infrastructure develops. Indeed, the white paper conservatively estimates the Total Cost of Ownership (TCO) for commercial hydrogen vehicles will fall by more than 50% in the next 10 years.

Eoin Treacy's view -

Economics 101 dictates that when the price of a vital commodity falls precipitously industrious people find a way to use more of it and particularly as a substitute for higher priced commodities. Natural gas is the primary feedstock for creating hydrogen. The price is back testing the $2 level which is close to the lows of the last decade and approximately levels seen ahead of the commodity bull market.



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November 12 2019

Commentary by Eoin Treacy

CLO Selloff Flashes Warning Sign to Junk Bond Market

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

CLOs resemble the mortgage-backed bonds that imploded in 2008, but very few defaulted in the credit crisis, a key driver of their recent popularity. Prices for their shares and bonds, however, plummeted at the time, and holders who sold out took heavy losses.

Now some CLO bond prices are falling again. That is because the riskier loans the CLOs own are dropping in value as the companies that borrowed them start running out of cash. CLO bonds rated double-B, which are among the riskiest CLO securities, returned about 10% this year through June. But recent declines, especially last month, erased most of the gains, giving holders a roughly 1% return this year through October.

That contrasts sharply with high-yield bonds: Many of the same companies to which CLOs lend issue junk bonds, which returned about 12% this year through October, according to data from S&P Global Market Intelligence.

“If you think that double-B CLOs are giving a warning sign, that says something about high yield,” said David Preston, head of CLO research at Wells Fargo & Co. “It’s hard to see how both markets can be right.”

Eoin Treacy's view -

The Energy sector is where the majority of spread expansion has taken place as higher cost, more leveraged, issuers have come under pressure. The relatively stable oil price at present is not high enough to rescue these issuers and the existential crisis gripping Chesapeake Energy is an example of the stress coming to bear on higher cost producers, particularly in a low natural gas price environment.



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November 11 2019

Commentary by Eoin Treacy

The next 6 months favor Cyclicals: Financials, Energy, Industrials, Tech, Materials

Thanks to a subscriber for this chart illustrated report by Barry Bannister for Stifel which may be of interest.

Eoin Treacy's view -

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

I have some sympathy with the view that when everyone is short, the risk of a short covering rally greatly increases. That’s particularly true if Saudi Arabia succeeds in encouraging OPEC to further reduce supply to bolster the valuation of Saudi Aramco ahead of the IPO.



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November 07 2019

Commentary by Eoin Treacy

Chesapeake's Covenants Could Pinch in 2020

This article by Allison McNeely may be of interest to subscribers. Here is a section:

The company warned there is doubt about its ability to continue operating. Its shares and bonds have plunged since reporting earnings Nov. 5.

*Based on price assumptions of $55 per barrel for oil and $2.50 per million British thermal units for natural gas as well as no debt reduction, Chesapeake is likely to trip its leverage covenant by the third quarter of next year, if not sooner, CreditSights analysts Jake Leiby and Michael Mistras wrote in
the report.

**They predict Chesapeake will have a free cash flow shortfall of about $50 million in 2020 and finish the year with gross leverage of 4.6 times debt to a measure of earnings, above the 4.25 ratio in its covenant.

Eoin Treacy's view -

Chesapeake dropped significantly over the last couple of days and is now dependent on the kindness of strangers to ease debt covenants if it is to survive. The problem for the company is it is not viable at a shale industry average of $55. Its breakeven might be closer to $70. Meanwhile natural gas prices remain volatile, even after the rebound over the last week which took the price back above $2.50.
 



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November 06 2019

Commentary by Eoin Treacy

Brazil's Oil Flop a Warning for Majors and Aramco

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

Offshore oil investment was all the rage among Big Oil during the supercycle, with capital expenditure almost quadrupling in the decade up to 2014. That is the problem. The majors poured money into large, multi-year projects prone to delays and, because of their often bespoke engineering, spiraling budgets. The result: tumbling return on capital and an inability to dial back investment quickly when the oil crash hit in 2014. Roughly 3,000 new offshore projects sanctioned between 2010 and 2014 have either barely generated any value for oil companies or are expected to generate none at all, according to a recent study published by Rystad Energy, a consultancy:

More recent investments score better, mostly because the boom tailed off, with offshore capex falling by more than half between 2014 and 2018. That took the heat out of industry inflation; and, because of the bonfire of returns in the prior decade, oil majors got smarter about such things as standardizing offshore equipment design to cut costs and shorten schedules. The pace of new projects has picked up again after the slump. Exxon, for example, has effectively opened up an entire new offshore zone with its Guyanese fields.

Still, one look at the stock prices of oilfield services firms, especially offshore-focused types such as Transocean Ltd. and Noble Corp. Plc, tells you this investment wave is nothing like the tsunami of yesteryear. Bad memories combined with unease about both near- and long-term oil demand make bold bets on big, multi-year offshore projects a tough sell with investors more interested in payouts. Even Exxon’s success in Guyana gets overshadowed by the fact that the company’s capex bill leaves it borrowing to pay its dividend. And Exxon, like Chevron Corp. and other majors, has swung more of its spending toward shorter-cycle onshore fracking in North America.

Eoin Treacy's view -

Secular bull markets in commodities are defined by a step change in the marginal cost of production. During periods of what can best be described as a status quo the price of oil can range for decades. That reduces investment in new supply and the sector is unable to respond quickly when a new source of demand emerges. The massive investment to bring new supply to market takes time to evolve and that creates a secular bull market as new higher cost sources are brought online. 



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October 14 2019

Commentary by Eoin Treacy

Game Changer

Thanks to a subscriber for this report by Ed Hyman and team at Evercore which makes a bullish case. It’s loaded with interesting graphics and I commend it to subscribers. 

Eoin Treacy's view -

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

There are a couple of big points that stick out to me. The first is you can’t have a recession without unemployment rising. The second is oil price spikes have a causal factor in recessions over the last thirty years but we need to consider when they are a necessary cause. The third is recessions generally occur following a bubble in something. That sector represents the epicentre of risk and is most likely to collapse when the music stops.



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October 11 2019

Commentary by Eoin Treacy

Melting Ice Redraws the World Map and Starts a Power Struggle

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

Shawn Bennett, deputy assistant secretary for oil and natural gas at the Department of Energy, said the U.S. was not concerned about competition. Growth projections for natural gas demand in India and other Asian countries are so high, and the need for supply diversification in Europe so acute that there’s little risk of a glut, he told Bloomberg. “Global demand for LNG is just going to grow,” he said.

The U.S. may be pushing back in more concrete ways. On September 30, the Department of the Treasury imposed sanctions on units of China’s Cosco Shipping Corp., over alleged breaches of U.S. sanctions against Iran. The move immediately hit the Yamal project’s LNG tanker routes because of Cosco’s share in one of the main shipping companies involved.

Still, for those who have been working in the Arctic for a long time, much of the geopolitical discussion sounds a little breathless. Last year, Russia’s Northern Sea Route carried 29 million tons of cargo, with projections rising to 90 million. The Suez Canal carries about 1 billion tons.

Eoin Treacy's view -

David and I predicted more than a decade ago that the USA would become Energy independent that that represented a gamechanger for the Energy sector that was completely underappreciated by markets. This chart suggests that reality, long promised, is now upon us.



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September 11 2019

Commentary by Eoin Treacy

On Target September 9th 2019

Thanks to Martin Spring for this edition of his ever- interesting letter. Here is a section:

America Is Losing Mideast Allies
Mainstream media are strangely reluctant to report the major changes in the Mideast that are strengthening Iran’s negotiating position relative to its enemies.

According to Yossef Bodansky of GIS/Defense & Foreign, both Saudi Arabia and the United Arab Emirates are engulfed in a major crisis in their relations with the US.

Arab leaders urged America to strike Iran hard in retaliation for shooting down the Global Hawk drone. Trump refused to do that. Both the Saudi crown prince, Mohammed bin Salman (“MBS”) and the crown prince of Abu Dhabi, Mohammed bin Zayed (“MBZ”), considered the last-minute cancellation of the retaliatory strike a personal affront and humiliation.

Both have for a long time suspected that the US has been hiding major matters from them. That got confirmed last month when the US ambassador to Iraq, Matthew Tuellier, publicly admitted: “We have direct communication channels with Tehran.” Bodansky says “both Riyadh and Doha were stunned and humiliated, because the Trump White House did not bother to inform them of the Baghdad back-channel… while pressuring them to avoid all contacts and negotiations with Iran.”

However the deterioration in relations between the US and its anti-Iran allies goes far beyond the current tiff.

Eoin Treacy's view -

The USA was the biggest consumer and importer of oil so it made sense to have a strong relationship with the countries where it was buying oil. Perhaps more correctly it was important to have solid relationships with the biggest producers, so the global market for oil had some stability because oil price spikes cause recessions. That created both a ready market for US debt instruments but also clear rationale for a globally present military force to protect sea lanes.



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August 27 2019

Commentary by Eoin Treacy

OPEC+ Expects to Drain Oil Stocks as It Makes Supersized Cut

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

In response, the Saudis have reduced output by far more than pledged under the terms of the deal, and the coalition’s overall implementation rate last month was 59% above target, according to a statement posted on its website on Tuesday. That means the alliance cut supplies by about 1.9 million barrels a day.

OPEC signaled that the deeper-than-anticipated cutbacks had been necessary because of the extreme upheaval in the global economy.

“This high level of overall conformity has offset uncertainty in the market due to ongoing economic-growth worries,” according to the statement from the Joint Ministerial Monitoring Committee, a body set up by OPEC and its allies to oversee implementation of their strategy.

“Along with healthy oil demand,” the supply restraints have “arrested global oil-inventories growth and should lead to significant draws in the second half of the year,” the committee said.

Eoin Treacy's view -

Brent Crude is flirting with $60 and WTI is testing the $55 area. OPEC and Russia need a higher price to meet their domestic obligations. Meanwhile shale producers need a higher price to justify continued drilling and to help meet their debt obligations. That suggests the $50 area for WTI is a big level for the US domestic onshore sector because they cannot justify supply growth below that level. Despite this competition between OPEC and the Permian oil is trading in backwardation out to two-year maturities.



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August 16 2019

Commentary by Eoin Treacy

Musings From the Oil Patch August 13th 2019

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

Today’s Energy world is nothing like what it was prior to OPEC’s move.  It is even moving away from the model that evolved immediately after the price collapse.  Both of those models have been shunned by investors.  A new model is evolving in response to investor demands that Energy companies be profitable and return cash to investors.  This new model is evolving in response to the disconnect between Energy company fundamentals and their share prices.  That disconnect is evident in Exhibit 8, which tracks oil prices and stock indexes reflecting oil and oil service companies since mid-2014 when oil prices began sliding, before OPEC delivered its coup de grâce.  Oil company stocks (XLE) performed better during this period, largely because they pay dividends, offering investors income while waiting for share values to reflect higher oil prices.  Oil service stocks (OSX) fell steadily in this period, because of too much debt and shrinking market activity leading to substantial asset impairment and eroding company values.  

Eoin Treacy's view -

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

If we are indeed now in a period where Energy investors are more demanding of profits than production growth that is not great news for the fragmented nature of the shale oil sector. That suggests there is significant scope for consolidation to provide the profitability demanded by investors.



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August 08 2019

Commentary by Eoin Treacy

As Shale Drillers Stumble, Big Oil Says It Can Do Permian Better

This article by Rachel Adams-Heard for Bloomberg may be of interest to subscribers. Here is a section:

Concho Resources Inc., long considered one of the Permian’s premier operators, was forced to scale back activity after drilling almost two dozen wells too closely together. That move by the Midland, Texas-based producer spooked investors across the industry, with Evercore ISI predicting the “carnage” would have a lasting impact.

Concho’s problem with well spacing highlights the challenges of fracking so-called child wells: Too close to the “parent,” and output is less prolific; too far apart, and companies risk leaving oil in the ground.

Exxon and Chevron say they aren’t as exposed to those problems. Because of their size relative to smaller independent producers, the oil giants are able to lock up acreage, giving them room to be more conservative in their well spacing.

Eoin Treacy's view -

The lower for longer nature of oil pricing over the last few years and probably for the foreseeable future suggests smaller independent oil drillers and producers need to concentrate a lot more on containing costs. That suggests there is scope for consolidation within the Permian where the larger better capitalised companies are likely to have an advantage.



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July 25 2019

Commentary by Eoin Treacy

Evaluating US Nuclear Competitiveness and its Future as a Carbon-Free Clean Energy Source

Thanks to a Keith Rabin for this interview of Dr.Robert F.Ichord. Here is a section:

Both Russia and China are strongly committed to domestic nuclear development, international nuclear power exports, and the development of small modular reactors (SMR) and advanced nuclear reactors. Russia is building seven third–generation VVER–1200 reactors domestically and over twenty internationally. China is building domestically about eleven indigenous units, not including the Russia VVERs, the French EPRs or the recently completed US AP–1000s. They have two reactors of the Hualong One design under construction in Pakistan near Karachi and one planned at Chasma, the site of older, smaller Chinese reactors. They are also pursuing deals in the UK, Romania and Argentina as well as Bulgaria and several other countries. These strong state–financed commitments create the domestic and industrial capabilities needed for future innovation as well as to establish long–term political and economic relationships with countries of strategic interest. US historical influence over international standards and regulatory system development is therefore being challenged as well as US overall foreign policy interests in democracy and open markets. South Korean and Japanese companies are also international competitors but remain long–time US collaborators.

According to the World Nuclear Association about 30 countries are considering, planning or starting nuclear power programs. These range from sophisticated economies to developing nations. Is nuclear a viable option for emerging and frontier economies and how does installation and utilization differ in these locations from developed economies in terms of safety, non–proliferation as well as political stability, environmental and regulatory standards, supporting infrastructure and other factors?

I believe there is a major shift occurring in the global nuclear industry from the industrial countries to the non–OECD countries. Most of future global electricity growth will be in these countries and they want to diversify and develop cleaner Energy systems. Despite the huge upfront costs, countries are deciding to accept attractive Russian and Chinese financing for these large, multi–billion dollar units. There is the national pride involved from joining the “nuclear club' as well as possible corruption in certain cases. Russia also offers military equipment as well as full fuel and operating services in its strategy to expand influence. Although both Russia and China have significant training efforts to develop local capacities, overall governance and transparency in a number of these countries is weak and the commitment to competent Nuclear Regulatory Commission (NRC)–like regulatory institutions is questionable. Although most of the countries have signed the Non–Proliferation Treaty (NPT) and the International Atomic Energy Agency (IAEA) Additional Protocol, the introduction of current nuclear power technologies in countries and regions – in which there are significant tensions and political conflicts, e.g. Middle East – raises serious concerns for US foreign policy.

Eoin Treacy's view -

The mining investment cycle of the early part of this century delivered on additional supply capacity. While the building plans for new reactors are impressive, they have been slowed by the Fukushima disaster and competition from other Energy sources. That has resulted in quite a bit of volatility for uranium miners.



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July 19 2019

Commentary by Eoin Treacy

Email of the day on climate change.

Regarding the Allen Brooks piece on Climate change. I have to say I find the benign conclusions of the report totally unconvincing. Over the years I have read widely on the subject and have been especially impressed by the publications and books of one of the most eminent climate scientists whose work goes back more than 50 years. I refer to Professor James Lovelock. In a recent BBC interview, he suggested that global warming may be entering an acceleration phase. As I write this reply a news story has just announced that a high-pressure dome is due to affect the Eastern states of the US with predicted city temperatures likely to exceed 40 deg C. The simple fact is that you cannot expect hydrocarbons that have been trapped in the Earth’s crust over many millions of years, to be exploited by man over a few decades with the bye products going into the atmosphere, without grave consequences.to follow. Globally we have just experienced the hottest June ever and significantly Siberia has been 7 deg C above normal for the time of year. I mention this in respect of the melting permafrost which is now releasing methane in significant amounts. A gas thirty times more significant than CO2.as a greenhouse gas Of course this topic is an extremely emotional one, simply because the decisions made now on how we collectively proceed could not be more important. On balance I think I would go with the IPCC and James Lovelock. His books on Gaia theory, by the way, are worth reading

Eoin Treacy's view -

Thank you for this email which may be of interest to others. Higher median temperatures and more humid conditions in some areas than we are accustomed to are a fact. Coral bleaching and marine calcification are also facts we cannot dispel. Pollution of our rivers, lakes and oceans, desertification following logging and rapid expansion of cities to accommodate billions more people all represent significant challenges that need to be dealt with.



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July 02 2019

Commentary by Eoin Treacy

Roubini Lives Up to Dr. Doom Alias With Global Recession Call

This article by Gregor Stuart Hunter for Bloomberg may be of interest to subscribers. Here is a section:

On the trade front, deglobalization looms as countries around the world have to choose which country to align with -- the U.S. or China -- once the bilateral negotiations collapse, Roubini said. “This divorce is going to get ugly compared to the divorce between the U.S. and the Soviet Union.”

On top of that, an oil-price shock coming from Iran tensions would raise the prospect of 1970s-style stagflation as a rise in crude prices coincides with slower growth, Roubini said.

Speaking at a blockchain summit in Taipei, Roubini reiterated his skepticism toward cryptocurrencies such as Bitcoin.

“There’s massive, massive amounts of price manipulation” in cryptocurrency trading, he said in remarks at the conference. As for blockchain, “it’s the most overhyped technology ever, it’s nothing better than a glorified spreadsheet,” Roubini said. “Nobody’s using it, and nobody’s ever going to use it.”

Eoin Treacy's view -

The stock market is at a new all-time high, but there is still such an impending sense of doom. That is not what one expects from market tops. Nouriel Roubini has a particular talent for soundbites, not least about cryptocurrencies. However, the challenges he alludes to are worthy of consideration.



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June 13 2019

Commentary by Eoin Treacy

Email of the day - on the USA's oil advantage:

Quick thought, following your comment on America's oil glut, and Morgan Stanley's report you highlighted.

I have been watching the difference in price between the WTI and Brent Crude for a long time now. The difference seems to vary between 10 and almost 20% depending on the day, with WTI obviously being the cheaper. Is it too SIMPLISTIC to say?

1) that US factories, offices, homes etc enjoy an enormous advantage over their global competitors with Energy costs being so much cheaper, not forgetting it already enjoys a significant tax advantage over many as well.

2) when the US does become a significant oil exporter, it can make a lot of profit, even by offering only minor discounts to the Brent price to attract business. Possibly more profit than from its LNG exports.

Eoin Treacy's view -

Thank you for highlighting these points. I’ve always been a fan of Ockham’s Razor. There is no need to get over complicated. The USA has a massive advantage in terms of its oil and gas production capacity. That is reshaping global geopolitics, it will have a meaningful effect on the balance of payments and it has already had a meaningful effect on the chemical industry because of reduced input costs.  one.



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June 12 2019

Commentary by Eoin Treacy

What if the US and China Reach a Trade Deal?

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

February 05 2019

Commentary by Eoin Treacy

Morning Tack February 5th 2019

Eoin Treacy's view -

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

Since the dawn of the first industrial revolution 250 years ago there has been a clear correlation between the Energy intensity of economies and economic growth. That is certainly still true in many emerging markets. However, when we look at highly developed economies like the USA and parts of Europe the Energy intensity of the economy is declining, but data intensity is rising.



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December 13 2018

Commentary by Eoin Treacy

Uranium price: best performer of 2018 set for more gains

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

Struggling French nuclear giant Areva (rebranded as Orano this year) slashed production more than a year ago. In August Paladin put its Langer Heinrich mine in Namibia on care and maintenance, although this week the Sydney-based miner said it's working on a possible restart of operations with vanadium as a byproduct (vanadium is trading at record highs and the only metal outperforming uranium).

In a research note on Kazatomprom, BMO Capital Markets says the production discipline from top miners will break the trend of rising global uranium inventories following the Fukushima nuclear disaster in Japan in 2011 and prompt the first production deficit in more than a decade.

And

China has 42 operating nuclear reactors, 16 reactors under construction and a further 43 planned. At the end of November, the country's national uranium corporation bought control of the Rossing uranium mine in Namibia. China is also behind the only sizeable uranium mine to come into production in the past few years, the Husab mine in Namibia, although ramp there has been slow.

Eoin Treacy's view -

Japan is steadily firing up its shuttered nuclear plants and considering China’s demand for clean Energy it is unlikely to be deterred from continuing its construction program. Meanwhile when the world’s major producers find it more cost effective to buy in the spot market than produce the metal themselves then we know prices are depressed.



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October 09 2018

Commentary by Eoin Treacy

Rocketing vanadium price primed for 'Elon Musk moment'

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

Vanadium pentoxide (V2O5) which makes its way into so-called vanadium redox flow batteries used in Energy storage systems breached $20 a pound for the first time since 2005 this month. That’s a four-fold increase from the start of 2017.

Simon Moores of Benchmark Mineral Intelligence, a battery materials research and price discovery provider based out of London, says the recent success of lithium ion batteries being deployed in increasing larger systems that are exceeding 1GWh has brought to light the huge potential of the market for all types of battery technologies.

Vanadium flow batteries have lifespans of over 20 years without capacity loss, are non-flammable and can operate at any temperature. Another advantage over lithium ion is that this type of battery can be charged and discharged simultaneously making it highly suitable for large-scale storage from renewable sources such as solar and wind when connected to an electricity grid. Main downside is low Energy density which means comparatively large installations needed.

“If a vanadium battery producer steps forward with bold plans to produce vanadium flow at mass scale, giving the industry its Elon Musk or lithium ion moment, the potential for the technology to be the second most deployed ESS battery in the world is there,” says Moores.

“Raw material self-sufficiency is a critical component to this. At least a third of the cost of a vanadium flow battery is vanadium pentoxide which makes up the liquid electrolyte.

“If companies are thinking of creating the Gigafactory of vanadium flow batteries, they will either need to own a mine or implement a new pricing system where the fully recyclable vanadium in the battery is leased."

Eoin Treacy's view -

Battery technology is improving all the time and a race is on to develop models which will be the foundation of an electric vehicle. Concurrently, efforts are underway to develop batteries that can perform at scale for utilities which are increasingly reliant on renewables are inherently intermittent sources of Energy. Those are two completely different growth trajectories and given the different priorities it is quite likely there will be a number of potential solutions that eventually make it to market. 



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September 24 2018

Commentary by Eoin Treacy

Oil Traders Say $100 Coming as OPEC Strains to Fill Iran Gap

This article by Javier Blas, Heesu Lee, Alfred Cang and Dan Murtaugh for Bloomberg may be of interest to subscribers. Here is a section:

Major oil trading houses are predicting the return of $100 crude for the first time since 2014 as OPEC and its allies struggle to compensate for U.S. sanctions on Iran’s exports.

With Brent crude already jumping to an almost four-year high on Monday, that’s exactly the kind of price surge President Donald Trump has been seeking to prevent by pressuring the Organization of Petroleum Exporting Countries to raise production. Yet the cartel and its allies gave mixed signals at a meeting in Algiers on Sunday, ultimately showing little sign they would heed U.S. demands to rapidly push down crude prices.

OPEC’s reticence, combined with signs of accelerating supply losses from Iran, created a bullish mood the annual gathering of the Asian oil industry, traders, refiners and bankers in Singapore on Monday.

“The market does not have the supply response for a potential disappearance of 2 million barrels a day in the fourth quarter,” Mercuria Energy Group Ltd. co-founder Daniel Jaeggi said in a speech at the S&P Global Platts Asia Pacific Petroleum Conference, knows as APPEC. “In my view, that makes it conceivable to see a price spike north of $100 a barrel.”

Eoin Treacy's view -

Saudi Arabian official stated only last week that they are comfortable with the idea of oil trading above $80 so it is not so surprising that OPEC is not racing to increase supply not least since its members all rely on high oil prices to balance their budgets.



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September 13 2018

Commentary by Eoin Treacy

The United States is now the largest global crude oil producer

This article from the EIA by Candice Dunn and Tim Hess may be of interest to subscribers. Here is a section:

The United States likely surpassed Russia and Saudi Arabia to become the world’s largest crude oil producer earlier this year, based on preliminary estimates in EIA’s Short-Term Energy Outlook (STEO). In February, U.S. crude oil production exceeded that of Saudi Arabia for the first time in more than two decades. In June and August, the United States surpassed Russia in crude oil production for the first time since February 1999.

Although EIA does not publish crude oil production forecasts for Russia and Saudi Arabia in STEO, EIA expects that U.S. crude oil production will continue to exceed Russian and Saudi Arabian crude oil production for the remaining months of 2018 and through 2019.

U.S. crude oil production, particularly from light sweet crude oil grades, has rapidly increased since 2011. Much of the recent growth has occurred in areas such as the Permian region in western Texas and eastern New Mexico, the Federal Offshore Gulf of Mexico, and the Bakken region in North Dakota and Montana.

Eoin Treacy's view -

The embedded charts in this article tell an important story of renewal in the US onshore domestic supply market versus the relatively stagnant supply growth in both Russia and Saudi Arabia. 



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August 27 2018

Commentary by Eoin Treacy

2030 Energy Mix: Key Regional Trends Marching Towards A Cleaner Future

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

As can be seen from the table above, the trend of Energy efficiency improvements or declines in Energy intensity is not uniform across time periods for various country groups or for individual countries. For developed or high-income countries, the trend is most secular with improving efficiency in every time period as we move forward in time. However, for middle and low-income countries, periods of high growth may be associated with high Energy intensity, which could slow down the overall improvement rate. This is most apparent for China in the 2000-2010 timeframe, where very high GDP growth rates coincided with lower focus on Energy efficiency. Energy efficiency has now picked up again in the current decade, where Chinese GDP growth has moderated and a focus on environment friendly Energy practices has evolved. Move over to low-income countries like India, and it seems that improvements in Energy efficiency are lower in the current decade owing to higher economic growth. Thus, the Chinese pattern could repeat for emerging countries like India, which will likely moderate the pace of Energy efficiency improvements to an extent as we move toward 2030.

Eoin Treacy's view -

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

It is easy to conclude high income countries are more efficient because they are more technologically sophisticated than developing economies. The secular trend toward greater Energy efficiency in high income countries and the corresponding evolution of technology is supportive of that conclusion.



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August 09 2018

Commentary by Eoin Treacy

U.S. Oil Vanishing From Chinese Tariffs Reveals America's Clout

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

The removal of U.S. crude from goods targeted by Chinese tariffs is a sign that America has become too big to ignore in the oil market.

Less than two months after threatening to impose levies on imports of U.S. crude, the world’s biggest oil buyer has now spared the commodity. Only fuels such as diesel, gasoline, propane will be hit with duties on Aug. 23, according to China’s commerce ministry. That’s after the nation’s buyers, including top refiner Sinopec, began shunning American supplies to avoid the risk of tariffs.

China’s original plan to target U.S. crude came at an inopportune time for the country’s buyers. Sinopec’s trading unit, Unipec, was embroiled in a dispute with Saudi Arabia, saying the producer’s prices were costly and cutting purchases just as it was boosting American imports. Two months on, refiners were faced with the risk of supply disruptions from Iran to Venezuela and paying more to take advantage of booming U.S. output.

“The U.S. has been and will remain the main source of incremental crude production globally,” said Den Syahril, an analyst at industry consultant FGE. “With several new refineries starting up over the next couple of years, China would thus be wary of taking a decision that could end up severely hurting its domestic refining industry.”

Eoin Treacy's view -

We’ve been saying for more than a decade that shale oil and gas were going to be gamechangers for the Energy sector. The reality today is that the USA has gone from being the biggest importer of oil to being the marginal source of additional supply in less than a decade. That has deep repercussions for the US economy, after all that is hundreds of billions that will no longer be flowing overseas.



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June 29 2018

Commentary by Eoin Treacy

"Terminal Velocity?"

Thanks to a subscriber for this note from Jeffrey Saut for Raymond James 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.

Wall Street’s relative performance this year has been driven by the parts of the technology sector which have been largely excluded from competing in China. They might be exhibiting short-term overbought conditions right now but they are largely immune to trade war fears.  



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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 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 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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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 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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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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December 22 2017

Commentary by Eoin Treacy

Email of the day on an update from Sydney

I have had to attend several business meetings with senior executives in Sydney over the last few months.   The meetings cover senior executive remuneration.  

The City is almost uniformly buoyant and confident.   The Bankers are understandably more cautious and almost certainly earning less.   I was surprised by the benefits the innovation and start-up guys can earn - big numbers.    Despite all this the ASX is climbing that wall of worry.   This does feel more late cycle behaviour.   However, what I think confuses the economic outlook is that the Australian economy is definitely going through profound change. 

Thank you for all your good work. 

Eoin Treacy's view -

Thank you for this illuminating insight and composing this service is greatly enabled by the contribution of so many highly informed subscribers. Your email highlights the transition of interest away from the financial sector and towards information technology over the past decade. After every crash the epicentre of risk takes a long time to recovery while capital and investor interest migrate to the “new thing”. 



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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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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 09 2017

Commentary by Eoin Treacy

Britain risks a nuclear dead end by spurning global technology leap

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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November 07 2017

Commentary by Eoin Treacy

Musings From The Oil Patch November 7th 2017

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

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

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

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

Eoin Treacy's view -

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



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



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November 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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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 19 2017

Commentary by Eoin Treacy

Email of the day on wind farms

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

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

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

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

 

Eoin Treacy's view -

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



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June 16 2017

Commentary by Eoin Treacy

Many Rivers to Cross Decarbonization breakthroughs and challenges

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

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

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

Eoin Treacy's view -

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



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May 24 2017

Commentary by Eoin Treacy

The Big Green Bang: how renewable energy became unstoppable

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

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

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

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

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

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

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

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

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

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

Eoin Treacy's view -

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

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

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



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May 19 2017

Commentary by Eoin Treacy

China successfully mines flammable ice from the South Sea

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

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

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

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

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

 

Eoin Treacy's view -

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



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May 08 2017

Commentary by Eoin Treacy

Big Short in Loonie on Concern Over Oil, Trump, Housing

This note by Maciej Onoszko for Bloomberg may be of interest. Here it is in full:

Hedge funds and other speculators increased their short positions in the Canadian dollar to the highest level on record, according to data from the Commodity Futures Trading Commission. The loonie, which is the worst-performing major currency this year, has been under pressure in recent weeks amid concerns over a potential trade war with the U.S., a plunge in crude oil and financial woes of alternative mortgage lender Home Capital Group Inc.

Eoin Treacy's view -

The Canadian Dollar skirted the worst effects of the credit crisis by virtue of having a strongly regulated banking sector when just about everywhere else in the G7 had given into the worst excesses to deregulation. The rebound in oil allowed the Loonie to retest its 2008 peak in 2011 but the subsequent decline in commodity prices has taken its toll.



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April 10 2017

Commentary by David Fuller

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

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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



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February 14 2017

Commentary by Eoin Treacy

Bottom is in for Uranium; Gold & Silver Off to the Races in 2017

Thanks to a subscriber for this report from Cantor Fitzgerald which may be of interest. Here is a section on uranium

Kazatomprom that it plans to cut its annual uranium production by 10%, or by 5.2M lbs U3O8. This amount translates into roughly 3% of 2015 global production and marks an inflection point in the space. Since at least 2001, Kazatomprom has relentlessly increased production into an oversupplied market and is arguably the single biggest cause for the weakness in the commodity aside from the Fukushima disaster. In fact, we had long since given up on expecting Kazatomprom to exercise production restraint as its mines were the lowest cost operators in the world and constant production increases appeared to be a cultural focus in Kazakhstan.

While some skepticism exists on whether Kazatomprom will actually follow through with this cut (as opposed to OPEC style “cuts”), we suspect that at least some of the production reduction will occur among joint venture operations managed by western producers such as Cameco. Moreover, we believe the impact will be more than the announced cut amount because the market was likely factoring in a typical Kazatomprom increase as opposed to a cut. So instead of a 3-5% increase we are expecting a reduction of 10%, or a 13-15 percentage point swing.

Cameco’s announcement of Tokyo Electric Power Holdings’ (“TEPCO”) termination of its supply contract has cast some concern over what will happen with the U3O8 pounds that were earmarked for the Japanese utility. In total, the contract was for 9.3M lbs U3O8 to be delivered from 2017-2028, this works out to 775,000 lbs annually. TEPCO was selling some if not all of the material it was contractually obligated to purchase already. As such, we believe the worst case scenario arising from the cancellation is that Cameco does the exact same thing and sells the material into the spot market. However, we think there is room for potential positivity from this announcement, as Cameco could instead elect to not produce the pounds at all (and further cut costs by doing so) or it could elect to store them in inventory to await higher prices. Either of those two actions would effectively be removing some of the excess supply in the market. 

Eoin Treacy's view -

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

azakhstan stamped its dominance on uranium market by engineering a multi-year decline and succeeded in driving a significant number of small explorers out of business.  Last week’s news Tokyo Electric cancelled a major Cameco contract highlights just how successful their policy of flooding the market with supply has been. Having achieve their goal, the decision to limit supply is an important catalyst for the uranium market. 



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January 11 2017

Commentary by Eoin Treacy

World's top uranium producer Kazakhstan to cut output by 10%

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

State-owned uranium company and global production leader, Kazatomprom, said production for 2017 will be reduced by 2,000 tonnes, which is about 3% of the total global output, according Cantor Fitzgerald Canada Research’s figures.

“These strategic [uranium] assets are far more valuable to our shareholders and stakeholders being left in the ground for the time being, rather than adding to the current oversupply situation,” Kazatomprom Chairman Askar Zhumagaliyev said in the statement.

He added the production would pick up pace once market conditions improve.

Cantor Fitzgerald’s analysts Rob Chang qualified the move as a “game changer,” adding he expected to see across the board strength in the uranium space very soon.

“Kazatomprom’s relentless increases in production over the years was one of the top causes for uranium price weakness,” Chang said in a note to investors.

 

Eoin Treacy's view -

Uranium prices have now unwound their oversold condition relative to the trend mean. It is as yet unclear whether this decision by Kazakhstan was the catalyst for the rally to date and will continue to act as a bullish factor. However what we can conclude is that prices are uneconomic for even the most efficient producers at these levels so marginal supply is under pressure. That is a recipe for higher prices over the medium-term.



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January 06 2017

Commentary by David Fuller

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

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



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January 06 2017

Commentary by Eoin Treacy

World's Worst Commodity Radioactive for Investor Portfolios

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

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

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

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

 

Eoin Treacy's view -

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



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December 30 2016

Commentary by Eoin Treacy

Solar Panels Now So Cheap Manufacturers Probably Selling at Loss

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

“Certainly it would be a challenge for anyone to make money at that price,” Osborne said in an e-mail. “The blended cost for most last quarter was about 36 cents to 38 cents.”

The current price is also lower than cost estimates from Trina. The biggest supplier of 2015 expected to reduce costs to about 40 cents a watt by the end of the year, from 45 cents in the second quarter, Chief Financial Officer Merry Xu said in an August conference call. The Changzhou, China-based company’s shareholders on Dec. 16 agreed to a $1.1 billion deal to take the company private. A spokesman declined to comment Friday.

Some companies’ cost structures remain competitive, even with prices this low. Canadian Solar Inc., the second-biggest supplier, reported costs of 37 cents in the third quarter, down from 39 cents in the second quarter. The company has said its costs are among the lowest in the industry, and it expects to reach 29 cents a watt by the fourth quarter of 2017. Many of its competitors expect costs in the low 30s by then, Osborne said.

 

Eoin Treacy's view -

Producing solar cells in an environment where prices are falling and likely to continue to fall as new technologies are integrated into the manufacturing process is a highly competitive business. Companies unable to compete will go bankrupt and even the most successful face the threat of obsolescence. Consumers are the primary beneficiaries. 



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December 15 2016

Commentary by David Fuller

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

Here is the opening of this interesting article from Bloomberg:

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

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

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

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

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

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

David Fuller's view -

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

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



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December 14 2016

Commentary by Eoin Treacy

Namibia's new uranium mine to boost growth, make it worl's third producer

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

The massive project, said to be the third largest uranium-only mine in the world, will boost domestic production from 2,900 tonnes in 2016 to 5,800 tonnes next year, according to BMI estimates.

Output will be gradually increased to reach the installed capacity of 50-million tonnes of ore a year, Swakop's chief executive Zheng Keping said in September.

Based on data from Namibia’s central bank, production of uranium will increase 63% this year and 90% in 2017.

Currently, the African nation is the world’s sixth biggest uranium miner, behind Kazakhstan, Canada, Australia, Niger and Russia.

 

Eoin Treacy's view -

China has long-term ambitions of cleaning up its toxic air and nuclear represents a big part of the anticipated solution. That is the primary reason the country has been so aggressive in securing uranium deposits wherever it can get a significant stake. 



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December 05 2016

Commentary by David Fuller

Stakes Are High In Showdown for British Future Energy Strategy

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

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

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

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

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

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

David Fuller's view -

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

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

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



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December 01 2016

Commentary by Eoin Treacy

OPEC Meeting Review

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

OPEC has just decided a headline cut of 1.2 million b/d

We calculate that compared with October secondary sources in the OPEC report, the net OPEC cut from the 11 participating countries in the deal is 0.982 million b/d

Angola was allowed to use September output as the base instead of October

The cartel will use secondary sources to monitor output reductions
Indonesia, Libya and Nigeria is not part of the deal

Since the cartel has distributed quotas to the different countries, have organized a monitoring committee and are using secondary sources, the deal is very bullish to the oil price

 

Eoin Treacy's view -

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

Brent crude oil hit a new recovery high today and upside follow through tomorrow would confirm a return to demand dominance beyond what has been an impressive two-day rally. Considering the fact that the price has been rangebound for the last six months the potential for a breakout that is outsized relative to the amplitude of the congestion area cannot be discounted. 



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November 23 2016

Commentary by David Fuller

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

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November 02 2016

Commentary by David Fuller

Energy Giant Shell Says Oil Demand Could Peak in Just Five Years

Royal Dutch Shell Plc, the world’s second-biggest Energy company by market value, thinks demand for oil could peak in as little as five years, a rare statement in an industry that commonly forecasts decades of growth.

“We’ve long been of the opinion that demand will peak before supply,” Chief Financial Officer Simon Henry said on a conference call on Tuesday. “And that peak may be somewhere between 5 and 15 years hence, and it will be driven by efficiency and substitution, more than offsetting the new demand for transport.”

Shell’s view puts it at odds with some of its biggest competitors. Exxon Mobil Corp., the largest publicly traded oil company, said in its annual outlook that “global demand for oil and other liquids is projected to rise by about 20 percent from 2014 to 2040.” Saudi Arabia, the biggest producer, with enough reserves to last it 70 years, has said demand will continue to grow, boosted by consumption in emerging markets.

If renewable Energy and other disruptive technologies such as electric cars continue their rapid advance, petroleum use will reach its maximum level in 2030, the World Energy Council has forecast. Michael Liebreich, founder of Bloomberg New Energy Finance, predicts a peak in 2025 and decline in the 2030s.

“For the first time, oil companies have to think seriously about the future,” Alastair Syme, an oil analyst at Citigroup Inc. in London, said by phone. Drillers that even a couple of years ago believed “every molecule of oil we produce will have a market,” have come to realize they “can afford to bring on only the most competitive assets.”

Gas, Biofuels

Shell will be in business for “many decades to come” because it is focusing more on natural gas and expanding its new-Energy businesses including biofuels and hydrogen, Henry said.

“Even if oil demand declines, its replacements will be in products that we are very well placed to supply one way or the other, so we need to be the Energy major of the 2050s,” Henry said. “That underpins our strategic thinking. It’s part of the switch to gas, it’s part of what we do in biofuels, both now and in the future.”

Shell sees “oil and gas as being part of the Energy mix for many decades to come,” it said in a statement Wednesday.

 

David Fuller's view -

As Yogi Berra said: “It’s tough to make predictions, especially about the future.”

Nevertheless, Shell’s forecast by Chief Financial Officer Simon Henry: “… that peak [for oil demand] may be somewhere between 5 and 15 years hence…” makes sense to me.  It is backed by the continued development of alternative sources of Energy, from renewables to natural gas and nuclear power. 

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November 01 2016

Commentary by David Fuller

Shell Back in the Black as BG Takeover Boosts Production

Royal Dutch Shell has cheered investors with a $1.4bn (£1.1bn) profit for the third quarter, as the takeover of BG Group boosted production and it rebounded from a massive $6.1bn loss caused by writedowns in the same period last year.

Underlying profits at the Anglo-Dutch Energy giant - excluding reduced writedowns of $1.3bn - rose by 18pc to $2.8bn, significantly beating analyst expectations, as the extra production and cost-cutting helped offset the impact of lower oil prices.

Shares rose almost 4pc as chief executive Ben van Beurden credited "strong operational and cost performance".

But he warned that "lower oil prices continue to be a significant challenge across the business, and the outlook remains uncertain". 

Simon Henry, Shell's chief financial officer, said lower oil and gas prices had reduced its earnings by about $1bn year on year. Despite this, the upstream exploration and production division posted a small $4m profit, confounding expectations of a loss.

Production was up 25pc to 3.6m barrels of oil per day, including an extra 800,000 barrels per day from former BG assets.

"Operating expenses were lower, more than offsetting the impact of the consolidation of BG," Shell said.

Mr Henry said the "most impressive performance" in cost reduction had been in the North Sea, a traditionally high-cost basin, where Shell has made 1,000 job cuts. Production costs had come down by as much as 50pc, he said.

While it was clearly "not the most profitable asset in the portfolio", excluding major ongoing investments the rest of the North Sea was "cash positive". 

"The North Sea's performance is beginning to look considerably better than it was. That however does not mean we hold onto all the assets," he said.

Shell is looking to offload some of its ageing North Sea assets as part of its target to divest $30bn by the end of 2018 to help pay off the debts of the BG takeover. "The question is can we get value for that asset?," he said.

Shell said it was currently working on 16 asset sales across its portfolio but that it was a "value-driven not a time-driven divestment programme".

"We are not planning for asset sales at giveaway prices," he said. However, he insisted there was "no reason today to think the $30bn figure will not be achieved".

Shell also indicated that capital expenditure next year would be at the lower-end of the $25-30bn range.

Analysts at Barclays said strong cashflow, combined with the reduced operating and capital expenditure and divestments, "should prove enough to reassure investors that Shell is well on its way to resetting the business post the BG deal".

David Fuller's view -

Royal Dutch Shell B (est p/e 27.99 & gross yield 6.34%, according to Bloomberg) has sustained its dividend for longer than most analysts expected, rewarding shareholders in the process. 

Can it continue to fund this pay out which is in excess of current Cash Dividend Cover of 0.2?

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October 05 2016

Commentary by David Fuller

Alaska Oil Reserves May Have Grown 80% on Giant Discovery

Alaska’s oil reserves may have just gotten 80 percent bigger after Dallas-based Caelus Energy LLC announced the discovery of 6 billion barrels under Arctic waters.

The light-oil reserves were found in the company’s Smith Bay leases between Prudhoe Bay and Barrow along the Arctic shore, according to a statement from Caelus on Tuesday. As much as 40 percent of the find, or 2.4 billion barrels, is estimated as recoverable, the company said. That compares with the state’s proved reserves of 2.86 billion barrels in 2014, almost 8 percent of the U.S. total, Energy Department data show. 

“It’s a really exciting discovery for us, and we think it’s really exciting for the state of Alaska,” Caelus Chief Executive Officer Jim Musselman said in a phone interview. “They need a shot in the arm now.”

Alaska’s oil output has been gradually declining, to 483,000 barrels a day last year from a peak of more than 2 million barrels a day in 1988, Energy Department data show. The last major field brought online was Alpine in 2000, which averaged 62,000 barrels a day in September, Alaska Department of Revenue data show.

Musselman, the man who engineered the $3.2 billion sale of Triton Energy Ltd. to Hess Corp. in 2001, founded Caelus in 2011 to explore and develop petroleum resources on the North Slope. In 2014, the company formed a partnership with affiliates of Apollo Global Management LLC to invest in oil and gas properties in Alaska.

The development will cost between $8 billion and $10 billion over the life of the project, which could be brought into operation by the fall of 2022, Musselman said. Located about 125 miles from any other facilities, the company will need to build pipelines and roads. An oil price of about $65 a barrel and greater certainty on state tax policy and incentives is needed to develop the field, he said.

“A lot of the investment decision is going to revolve around what happens within the state from a regulatory standpoint,” he said.

Caelus said its newly discovered field could produce as much as 200,000 barrels a day.

David Fuller's view -

Light crude oil is highly desirable, being more valuable than the many heavy crudes available because it produces more gasoline and diesel when refined.  Assuming further drilling confirms the size of this discovery, it is an important development for the economies of both Alaska and the USA generally, although Caelus’ oil cannot be developed quickly.  Nevertheless, it also has two important messages for the global crude oil market. 

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August 22 2016

Commentary by David Fuller

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

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

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

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

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

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

David Fuller's view -

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

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

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August 17 2016

Commentary by David Fuller

August 16 2016

Commentary by Eoin Treacy

Gas Glut Upends Global Trade Flows as Buyers Find Leverage

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

Historically, LNG has been sold on long-term contracts that guaranteed buyers supply and helped producers finance liquefaction plants at a time when less of the product was shipped. Now, a gas glut is causing LNG importing countries to support renegotiating existing deals that can run 20 years or more while suppliers offer more flexible terms to lock up customers spoiled for choice.

India already is encouraging importers to rework long-term accords to better align costs with spot market prices. Japan, the world’s largest LNG importer, may soon join them. That country’s Fair Trade Commission is in the process of probing resale restrictions in longer deals in an effort that could mean the renegotiation of more than $600 billion in contracts and boost the number of shorter-term agreements.

“There will be 40 million to 50 million tons of homeless LNG by 2020, which can go anywhere or doesn’t have any fixed customers,” said Hiroki Sato, a senior executive vice president with Jera Co., a fuel buyer that plans to increase spot and short-term LNG deals. “Homeless LNG will provide a great opportunity to improve liquidity in Asian and global markets.”

 

Eoin Treacy's view -

The evolution of a global transportation network for natural gas is creating the impetus to divorce pricing from long-term oil contracts. While Russia floated the idea of creating a natural gas equivalent of OPEC a few years back, as a way of preserving it pricing power, it was unable to reach critical mass. 

The reality today is that a substantial number of new entrants to the market, not least Australia, the USA and developing east Africa, all have a vested interest in capturing market share. Meanwhile major consumers like Japan, India and China would understandably like to avail of lower prices. The expansion of the Panama Canal also boosts the viability of US exports to Asia. 

 



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August 11 2016

Commentary by David Fuller

Holy Grail of Energy Policy in Sight as Battery Technology Smashes the Older Order

Here is the opening and also a latter section of this informative article by Ambrose Evans-Pritchard for The Telegraph:

The world's next Energy revolution is probably no more than five or ten years away. Cutting-edge research into cheap and clean forms of electricity storage is moving so fast that we may never again need to build 20th Century power plants in this country, let alone a nuclear white elephant such as Hinkley Point.

The US Energy Department is funding 75 projects developing electricity storage, mobilizing teams of scientists at Harvard, MIT, Stanford, and the elite Lawrence Livermore and Oak Ridge labs in a bid for what it calls the 'Holy Grail' of Energy policy.

You can track what they are doing at the Advanced Research Projects Agency-Energy (ARPA-E). There are plans for hydrogen bromide, or zinc-air batteries, or storage in molten glass, or next-generation flywheels, many claiming "drastic improvements" that can slash storage costs by 80pc to 90pc and reach the magical figure of $100 per kilowatt hour in relatively short order.

“Storage is a huge deal,” says Ernest Moniz, the US Energy Secretary and himself a nuclear physicist. He is now confident that the US grid and power system will be completely "decarbonised" by the middle of the century.

And more on Hinkley Point:

Perhaps the Hinkley project still made sense in 2013 before the collapse in global Energy prices and before the latest leap forward in renewable technology. It is madness today.

The latest report by the National Audit Office shows that the estimated subsidy for these two reactors has already jumped from £6bn to near £30bn. Hinkley Point locks Britain into a strike price of £92.50 per megawatt hour - adjusted for inflation, already £97 - and that is guaranteed for 35 years.

That is double the current market price of electricity. The NAO's figures show that solar will be nearer £60 per megawatt hour by 2025. Dong Energy has already agreed to an offshore wind contractin Holland at less than £75.

Michael Liebreich from Bloomberg New Energy Finance says the Hinkley Point saga will be taught for generations as a case study in how not to run a procurement process. "The obvious question is why this train-wreck of a project was not killed long ago," he said.

Theresa May has inherited a poisonous dossier, left with the invidious choice of either offending China or persisting with a venture that no longer makes any economic sense. She may have to offend China - as tactfully as possible, let us hope - for the scale of the folly has become crushingly obvious.

Every big decision on Energy strategy by the British government or any other government must henceforth be based on the working premise that cheap Energy storage will soon be a reality.

This country can achieve total self-sufficiency in power at viable cost from our own sun, wind, and waters within a generation. Once we shift to electric vehicles as well, we will no longer need to import much oil either. Rejoice.

David Fuller's view -

Modern Energy industries are among the biggest beneficiaries of the accelerated rate of technological innovation.  The primary incentive is ‘needs must’.  For this reason the US Energy Department is currently, albeit belatedly, funding approximately 75 projects dedicated to improving electricity storage capacity.  Other countries with developed research capabilities are following a similar path.  Electricity storage costs are plummeting and forecast to reach $100 per kilowatt hour before long.  This will largely remove the ‘intermittency’ problem which is currently still the main downside for solar and wind power. 

Against this background, governments should reconsider proposals for 20th century Energy programmes, of which the UK’s Hinkley Point project is a classic example.  It was hastily proposed on the basis that Energy costs could only move higher - a dubious premise as we now know.  In fact, Energy prices will plummet in the years ahead, for countries which develop modern and increasingly efficient Energy policies including solar, modern nuclear and also natural gas which is readily available via fracking in many countries and the least polluting fossil fuel by far.  

The Hinkley Point project, far from providing a helpful source of Energy, would saddle the UK with uncompetitive Energy costs for at least 35 years, damaging economic prospects in the process.

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August 09 2016

Commentary by David Fuller

Britain Faces a Nasty Shock When the Global Energy Cycle Turns

Here is a middle section of this timely and informative article by Ambrose Evans-Pritchard for The Telegraph, which I managed to see while on holiday:

The BGS [British Geological Survey] thinks there are 1,300 trillion cubic feet (TCF) of gas resource in the Bowland, enough in theory to replace the North Sea and profoundly change British fortunes.

"Four or five years ago the recovery rate in the US was 10pc and now they are moving towards 20pc. I don't see why we can't do that in the Bowland," Stephen Bowler, the chief executive of IGas. Anything like that would be enough to meet Britain's entire annual consumption of 2.7 TCF through the 21st Century.

IGas is in partnership with Total, GDF Suez, and INEOS, expects initials flows in the Bowland in early 2017, building up to commercial output within two or three years.

Those on the cutting edge are exasperated by the static critiques of the hydraulic fracturing, typically five years out of date. The gains in technology, seismic imaging, computer data, and smart drills are moving at lightning speed.

New methods allow for three, six, or even ten wells to be drilled from the same pad,  greatly reducing disruption. Walking rigs move on the next spot without the need for the vast fleets of vehicles that bedevilled the early years of shale. Fracking remains 'dirty', but less than a decade ago. The BGS says that most early stories of water contamination have been false alarms.

British geologists are better prepared. They have already pre-collected readings on methane levels that will enable them to detect any leakage from fracking wells. "They never had that data in the US so we will have a much better handle," said Mr Gatliff.

Burning gas emits CO2 of course - albeit half as much as coal - but fracking is still a net plus for global warming if it displaces imports of liquefied natural gas (LNG) from places like Qatar. LNG must first be frozen to minus 160 degrees Centigrade and then shipped across the world. A study by Cambridge Professor David Mackay concluded that LNG's carbon footprint is 20pc higher than shale gas.

David Fuller's view -

The title of the article above would be redundant if Britain moved swiftly and competently to develop its fracking potential.  BGS is cautious to a fault in its forecasts for the UK’s shale gas recovery capability, but we know there is plenty of this important resource underground.  It would be madness not to use it, given the rapid development in fracking technology over the last ten years. 

See also: Britain Must Seize the Benefits of Fracking, an editorial from The Telegraph which I posted yesterday.    

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July 27 2016

Commentary by Eoin Treacy

Musings From the Oil Patch July 26th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB which contains an interesting discussion on the longevity of products but here is a section on the liquefied natural gas market:

In recent months, two LNG cargoes from Cheniere Energy’s (LNG-NYSE) Sabine Pass export terminal in Louisiana have been delivered to Kuwait and Dubai. So far, since it began shipping LNG in February, Cheniere has sent cargos to seven countries, including Argentina, Chile, Brazil, India, Portugal, Dubai and Kuwait. The shipments to the Middle East reflect the soaring demand for Energy in these countries. (As a testament to the nation’s Energy demand issue, Saudi Arabia recently disclosed it has been drawing on its domestic oil inventories to meet the summer Energy demand surge and to avoid having to further boost oil production above the country’s current 10.5 million barrels a day rate.) As all he countries in the Middle East have rapidly growing populations, their domestic demand is growing and tends to soar during the hot summer months. Most of these countries have large natural gas resources, but other than Qatar, which is currently the world’s largest LNG exporter, they are less developed. We expect the rest of the countries in the region will step up the pace of their natural gas resource development.

In order to appreciate the market potential for cheap U.S. natural gas, Kuwait’s LNG imports exploded from one million tons in 2012 to 3.04 million tons last year, according to the Middle East Economic Survey. We know that Saudi Arabia has been ramping up its drilling for natural gas in order to power more of the country’s water desalination plants and electricity generators. By using more domestic natural gas, Saudi Arabia will be able to reduce the volume of crude oil burned to power these facilitates. That will enable Saudi Arabia to have more of its crude oil output available for export and to generate income for the government, rather than burning it under utility boilers. For the meantime, we expect more U.S. LNG cargos will find their way to the Middle East. Those LNG exports will help to tighten the domestic gas market and send natural gas prices higher as we move into 2017, but we are not sure that the Middle East will become a long-term U.S. LNG export market. But the industry will take whatever demand it can find it now.

Eoin Treacy's view -

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

For much of the last century natural gas was in such abundance that it had no economic value and was burned off as a by-product of oil drilling. With increasing demand for less polluting, but Energy dense resources, to provide heating, cooling and cooking natural gas has experienced a renaissance. 



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June 22 2016

Commentary by Eoin Treacy

California's Last Nuclear Plant Is Closing, Edged Out by Renewables

This article by Jim Polson and Jonathan Crawford for Bloomberg may be of interest to subscribers. Here is a section: 

Economics have achieved what environmentalists have sought for years: the shutdown of California’s nuclear power plants.

PG&E Corp. is proposing to close two reactors at Diablo Canyon in a decade that would end up costing more to keep alive as California expands its use of renewable Energy, Chief Executive Officer Tony Earley said Tuesday. They won’t be needed after 2025 as wind and solar costs decline and electricity from the reactors becomes increasingly expensive, he said.

Diablo Canyon became California’s only operating nuclear power plant after Edison International three years ago shut its San Onofre plant north of San Diego after a leak. Tuesday’s announcement follows decisions this month to retire three other U.S. nuclear plants struggling to make money amid historically low power prices and cheap natural gas.

“It’s going to cost less overall as a total package than if you just continued to operate Diablo Canyon,” Earley said. “It’s going to operate less because of the Energy policies that are in place.”

 

Eoin Treacy's view -

Nuclear in North America and Europe suffers from a boy who cried wolf problem. By over promising on cost and production and under delivering, particularly on safety, public ambivalence has grown substantially. That’s an unfortunate development because new nuclear technologies really do hold the potential to fulfil earlier promises, but they are unlikely to be built in either North America or Europe. China is now the primary bastion of support for developing nuclear technology and is already exporting its designs to other countries. 



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June 22 2016

Commentary by Eoin Treacy

Musk's Solar Lifestyle Idea Has One Big Flaw

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

The commercial success of Musk's vertical integration idea hinges -- in terms of turning a profit rather than generating a high market capitalization -- on battery technology that would have mass rather than niche appeal. The assumption upon which Musks' concept -- and Tesla's $32.3 billion market capitalization -- is built is that Tesla is betting on the right battery technology and no one will come up with a much better one. That is the big hole in the donut: The assumption is far from safe.

Cheap and reliable Energy storage is central to the idea of an off-the-grid, solar-powered household. Such a home needs Energy at night, when the sun isn't shining: It has fridges, air conditioners and other appliances running, and a Tesla charging in the garage. So it needs a good battery, and Tesla's Powerwall doesn't necessarily fit the bill -- if only because the cost of the Energy it supplies, including amortization, is higher than grid prices. Because of this, and given the high price of Tesla cars, the lifestyle on offer is an expensive statement. In terms of cost and convenience, it's not competitive with the traditional grid-and-fossil fuel model.

 

Eoin Treacy's view -

Let’s call Tesla Motor’s acquisition of SolarCity what it is; a bailout. The tide of highly attractive subsidies for solar has turned. NV Energy, Warren Buffett’s Nevada utility, successfully argued that it should not have to bear the full cost of the electrical grid when solar producers get to use it for free and get preferential rates on the electricity they supply. That represented a major upset for SolarCity in particular but also highlighted a deeper challenge for the solar leasing business model which has contributed to increased scepticism among investors about the prospects for related companies. The big question is whether other states, particularly in the sun-belt will announce similar charging structures. 



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June 15 2016

Commentary by Eoin Treacy

A Circular Reference: Ushering In A New Era For Natural Gas

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

Previously a commodity with volatile price swings due to a domestic market that was short supply, the outlook for natural gas through 2020 shows a well supplied market capable of delivering to growing demand sources. There will be s-t dislocations (weather / infrastructure constraints) and the introduction of LNG exports will re-couple the U.S. to the global economy, but we see an emerging theme of natural gas entering a range bound period of $3-3.50/mmbtu. The 5 year build up in demand (2013-18) now looks to be meeting up with the 10 year buildup in supply (2005-15), creating a period of price equilibrium with upward and downward pressures on both sides.

Demand – Focus On The Known Drivers
After a 15 year period of stagnant consumption (1995-2009), demand for natural gas has enjoyed consistent growth over the past 5 years (2-3Bcfpd annually), a trend we expect to pick up through 2020. The drivers of growth are visible – power generation, industrial use, and Mexico exports – and will provide a base level of consumption growth. The reemergence of natural gas on the global scene via LNG exports has also long been a theme and will be additive to demand, though the quantifiable impact is tough to point to as capacity utilization will vary based on global prices and supply. We estimate ~6Bcfpd of export demand in 2020 in our base case, which is needed to balance the S/D outlook. In total, we see demand growth approaching ~98Bcfpd by 2020 (ex pipeline imports) up from ~78Bcfpd in 2015.

Supply – Filling Demand Needs…Just Need More Pipeline Capacity
U.S. supply has increased ~50% over the last 10 years to ~75Bcfpd, a rate of growth not witnessed since the 1960-1970s and following a brief pause in 2016/17, we anticipate growth to resume in 2018. We see four key trends from our supply forecast: 1) Supply is ~2Bcfpd below demand (weather normalized) in 2016/17 but ~3Bcfpd oversupplied in 2018, 2) Northeast supply growth increases by ~9Bcfpd in 2018, driven by the pipeline build out, 3) The bull case for supply by 2H18 is based on demand as the Northeast has excess pipeline capacity, and 4) The Northeast isn’t the only source of growth as we anticipate the Haynesville and Associated Gas Basins to return to growth by 2018, and implementing new technology could support growth elsewhere. Our forecast grows to meet demand and fills storage with enough deliverability in 2018, creating a more range bound environment with equal s/d pressures.

 

Eoin Treacy's view -

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

The natural gas market was the original recipient of the innovations that led to the boom in unconventional supply. Since then it has offered an object lesson in the ramifications of how that is likely to play out for other commodities where supply is surging not least oil. The greatest beneficiaries have been consumers who have seen prices for essential Energy commodities decline to levels not preciously imaginable. That has also resulted in demand increasing not least from substitution which has also benefitted consumers in other sectors. 



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June 02 2016

Commentary by Eoin Treacy

A Cautionary Tale from the '80s for Today's Loan Participations

Thanks to a subscriber for this article by Christopher Whalen for the American Banker. Here is a section: 
 

 

Since 2013, the federal regulatory agencies have been warning banks and investors about the potential risks in leveraged lending. These warnings have been both timely and prescient, particularly in view of the ongoing credit debacle in the Energy sector. In addition to the well-documented credit risk posed by leverage loans, we believe that the widespread practice of selling participations in leveraged loans represents a significant additional risk to financial institutions and other investors from this asset class.

While regulators have appropriately focused on the credit risk component of leveraged loans held by banks and nonbanks alike, the use of participations to distribute risk exposures to other banks and nonbank investors also raises significant prudential and systemic risk concerns. The weakness in oil prices, for example, has caused investors to cut exposure to companies in the Energy sector. This shift in asset allocations caused by the decline in oil prices has negatively impacted prices for leveraged loans and high yield bonds. In some cases, holders of these securities are attempting to exit these exposures by securitizing the participations.

The investor exodus away from leveraged loans with exposure to the petroleum sector brings back memories of the 1970s oil bust, an economic shock that led to the failure of Penn Square Bank in 1982, the subsequent failure of Seafirst Bank later in that year, followed by Continental Illinois Bank in 1984. Before its failure, Penn Square technically continued to "own" — and service — loan interests held by other banks with participations. As receiver for the failed bank, the Federal Deposit Insurance Corp. deemed those investors to be nothing more than general creditors of the failed bank's estate. Those participating banks lost their entire investment.

 

Eoin Treacy's view -

Leveraged loans issuance overtook the 2007 peak a couple of years ago. That fact is bemusing to many people who remember claims that bankers would never again engage in such activity. Yet with interest rates so low and the demand for yield so high the rationale for issuing to less than optimal borrowers is hard to resist. 



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June 01 2016

Commentary by Eoin Treacy

OPEC Meeting Preview

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

We agree that the market is fixing itself. The headline on our presentation that we bring to customer meetings has since the start of this year been “Non-OPEC to painfully balance the market by moving from record growth in 2014 to production declines in 2016.” We still believe this is the correct way of looking at this market and we never factored in any production limiting help from OPEC in our supply-demand balance despite being bullish to oil prices since January. In our report from January 13 we forecasted Brent prices of 50 $/b for Q2 this year. This was then way above consensus as Brent then traded at 30 $/b. We argued that one can be bullish to oil prices without production limiting policies from OPEC. We are now seeing the signs that the Saudi strategy is working and it has mainly to do with swings on the supply side rather than changes to demand. We can mention that the growth in global oil supply was 2.3 million b/d in 2014 and 2.7 million b/d in 2015, but moving into Q2-2016 the growth in global oil supply (also including OPEC of course) is gone and will probably turn net negative for the rest of the year. Our own global supply-demand balance is suggesting that global oil supply will not grow in 2016, despite OPEC supply growing 0.7 million b/d. This is the key to the rebalancing. 

May 2016 is the first month since December 2013 that our global supply-demand balance is in a deficit. The market has been helped to reach this deficit quicker than what we thought at the beginning of this year particularly due to large unplanned outages in Nigeria and Canada. Canada has during May lost about 0.9 million b/d in production due to the wild fires while Nigeria has lost about 0.5 million b/d due to force majure on Forcados, Escravos, Bonny Light and Qua Iboe. All but Qua Iboe has been caused by sabotage against oil facilities executed by militant groups where The Niger Delta Avengers is the most famous. Canadian production will likely be back to prior levels by July after ramp up through June, but Nigerian output will be slow to return as militants are set to continue to attack facilities through the rest of this year. 

 

Eoin Treacy's view -

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

The oil market remains in a state of flux because oil producers have been forced to take a hard look at their business models. The response to low prices has been to cut investment to the bone and simply pump what is most expedient. The result is that US production has begun to decline while the Nigerian and Canadian outages have added to the near-term bullish case for oil. 



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May 26 2016

Commentary by David Fuller

Germany and the U.S. Have Different Ideas About Energy

Here is the opening of this topical article from Bloomberg:

The share of Germany's electricity generated from renewable sources has tripled during the past decade, to 30.1 percent. That's impressive, especially when compared with what has happened in the U.S.

On the other hand, the percentage of Germany's electricity generated by burning coal isn't all that much lower than it was a decade ago, and is higher than it was in 2010. In the U.S., coal's share has been falling a lot in recent years.

Both countries are going through major shifts in how they keep the lights on, but they're very different shifts. Germany is in the midst of a large-scale, government-driven Energy transition toward renewables (the "Energiewende"). The U.S. has also favored renewable Energy with tax incentives and other subsidies, but the effort has been modest compared with Germany's. Here, the big news has been rising natural gas production thanks to fracking, plus pressure on utilities from the government and private groups to shut coal-fired power plants.

So which country is doing a better job of shifting its Energy mix? It depends on your priorities. The Germans have long been uncomfortable with nuclear power, and in 1998 made plans to phase out its use by 2022. There was some hemming and hawing in subsequent years, but after the 2011 Fukushima reactor accident in Japan, the government recommitted to the 2022 phase-out. Since 1998, nuclear power has gone from supplying 27.5 percent of German electricity to 18.1 percent.

David Fuller's view -

The article above does not address critical point regarding average costs of electricity in Germany, the USA and a number of other countries. 

However, another article from OVO Energy shows three separate bar graphs for average Energy costs in over a dozen countries, based on: “How much does electricity cost”, and “Electricity prices relative to purchasing power”.  On average, electricity prices are almost 200 percent higher in Germany than in the USA.  That is why heavy manufacturing firms have been moving some of the factories out of Germany and other European countries, and moving them to the USA and other nations which have lower Energy costs. This will continue to be reflected by comparative GDP for countries over the longer term.  



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May 26 2016

Commentary by Eoin Treacy

Oil Erases Gains After Exceeding $50 for First Time This Year

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

Brent for July settlement decreased 12 cents to $49.62 on the London-based ICE Futures Europe after. The contract earlier climbed as much as 1.6 percent to $50.51. The global benchmark crude was at a 15-cent premium to WTI.

"We’re seeing a steady decline in U.S. production, which is going to continue, and outages around the world," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $4.3 billion. "This doesn’t mean we’re going to continue going higher; a lot may be priced in. It was a lot easier being bullish oil with sub-$40 prices than it is near $50."

U.S. crude production dropped for an 11th week to 8.77 million barrels a day, the Energy Information Administration reported Wednesday. Crude inventories slid by 4.23 million barrels last week, exceeding an expected drop of 2 million. Stockpiles at Cushing, Oklahoma, the delivery point for WTI and the nation’s biggest oil-storage hub, fell by 649,000 barrels.

 

Eoin Treacy's view -

Brent Crude Oil has posted an orderly rebound from its January low and has almost doubled in the process. A progression of higher reaction lows is evident with reactions of between $5 and $6 constituting entry opportunities along the way. A reaction of greater than $7 would be required to question the consistency of the advance. Nevertheless the round $50 area represents a psychological level for many investors so it would not be surprising to see prices pause in this area. 



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April 21 2016

Commentary by David Fuller

American Wealth Effect from Rising Home Prices Has Been Cut in Half

Here is the opening of this interesting article from Bloomberg:

The U.S. consumer might be the engine of global growth — just not the roaring V12 it used to be.

From the fourth quarter of 2003 through 2006, amid the real estate bubble, personal consumption expenditures grew at an average annual clip of 3.5 percent. Since the S&P/Case-Shiller Composite 20-City Home Price Index bottomed out in March 2012, however, personal consumption expenditures have increased by just 2.3 percent, on average.

In an economic letter published by the Federal Reserve Bank of Dallas, economists John Duca, Anthony Murphy, and Elizabeth Organ identify one reason why this American muscle car has lost its nitrous oxide.

The researchers found that the wealth effect from real estate — that is, the extent to which home price appreciation juices consumer spending — has been cut in half since the mid-2000s:

David Fuller's view -

Janet Yellen’s Federal Reserve can only be concerned by this data.  Yes, a slower rate of house price appreciation is still positive and far better for consumer spending than a slump.  Nevertheless, despite the very favourable effect of a somewhat weaker US Dollar, the US economic recovery remains modest and far from self-sustaining.  Therefore, a rate hike in June would be far more risky than beneficial.

This item continues in the Subscriber’s Area.



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April 07 2016

Commentary by David Fuller

Time to Stop Dancing With Equities on a Live Volcano

Corporate earnings peaked at $1.845 trillion (£1.3 trillion) in the second quarter of 2015, and recessions typically start five to seven quarters after the peak. "We will not be dancing on the volcano like so many others," said Saint-Georges.

If we are lucky it will be a slow denouement with a choppy sideways market going nowhere for another year as the US labour market tightens, and workers at last start to claw back a greater share of the economic pie. 

The owners of capital have had it their way for much of the post-Lehman era, exorbitant beneficiaries of central bank largesse. Now they may have to give a little back to society. Yet this welcome “rotation” spells financial trouble.

Strategists Mislav Matejka and Emmanuel Cau, from JP Morgan, have told clients to prepare for the end of the seven-year bull run, advising them to trim equities gradually and build up a safety buffer in cash. “This is not the stage of the US cycle when one should be buying stocks with a six to 12-month horizon. We recommend using any strength as a selling opportunity,” they said.

Their recent 165-page report on the subject is a sobering read. The price-to-sales ratio (P/S) of US stocks is higher than any time in the sub-prime boom. Share buy-backs are at an historic high in relation to earnings (EBIT). Net debt-to-equity ratios have blown through their historical range.

This is happening despite two quarters of tighter lending by US banks. Spreads on high-yield debt have doubled since 2014, jumping by 300 basis points even after stripping out the Energy bust. The list goes on; the message is clear. “One should be cutting equity weight before the weakness becomes obvious,” they said.

David Fuller's view -

There are a number of good points in this article, inspired by the bearish 165-page report from JPMorgan mentioned above, which I assume Jamie Dimon would have encouraged given his recent comments.

This item continues in the Subscriber’s Area where some conflicting evidence is illustrated and discussed.  A PDF of AE-P’s article is also available.



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April 05 2016

Commentary by Eoin Treacy

Email of day on the long-term outlook for energy resources

Yer man, while I often feel like I am part of the new old economy. I am not concerned in the near term that electric vehicles will have mass adoption. I am puzzled how the electrical grid will power all these new super cars? Coal which is the worst emitter of GHG's is the primary source of electrical generation in North America and that is being phased out for natural gas as you know. The environmental movement is flawed with hypocrisy and makes no economic sense. In Canada the govt has chosen to demonize the oil and gas industry which funds the majority of our social services and yet we bail out Bombardier and the auto industry. I sound like a grumpy old man.

Eoin Treacy's view -

Thanks for this topical comment to a piece I posted on Friday. It’s been a long time since we shared an apartment in London; when we were both new to London, and I’m glad you’re still in the heat of the action in Calgary. I think everyone finds it hard not to be grumpy when things are not going one’s way at any age. 

This article from the state.com from 2014 estimates that if every car in America was an electric vehicle it would represent only about a 30% increase in electricity demand because electric vehicles are more efficient. 



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February 29 2016

Commentary by Eoin Treacy

Electric car war sends lithium prices sky high

This article by James Stafford for Mineweb may be of interest to subscribers. Here is a section:

That’s why Goldman Sachs calls lithium the “new gasoline”. It’s also why The Economist calls it “the world’s hottest commodity”, and talks about a “global scramble to secure supplies of lithium by the world’s largest battery producers, and by end-users such as carmakers.”

In fact, as the Economist notes, the price of 99%-pure lithium carbonate imported to China more than doubled in the two months to the end of December—putting it at a whopping $13,000 per ton.

But what you might not know is that this playing field is fast becoming a battlefield that has huge names such as Apple, Google and start-up Faraday Future throwing down for electric car market share and even reportedly gaming to see who can steal the best engineers.

Apple has now come out of the closet with plans for its own electric car by 2019, putting it on a direct collision course with Tesla. And Google, too, is pushing fast into this arena with its self-driving car project through its Alphabet holding company.

Then we have the Faraday Future start-up—backed by Chinese billionaire Jia Yueting–which has charged onto this scene with plans for a new $1-billion factory in Las Vegas, and is hoping to produce its first car next year already.

Ensuring the best engineers for all these rival projects opens up a second front line in the war. They’ve all been at each other’s recruitment throats for months, stealing each other’s prized staff.

And when the wave of megafactories starts pumping out batteries—with the first slated to come online as soon as next year–we could need up to 100,000 tons of new lithium carbonate by 2021. It’s an amount of lithium we just don’t have right now.

 

Eoin Treacy's view -

Describing lithium as the “new gasoline” is an interesting take on the projected demand for electric cars. Last week’s Bloomberg article proclaiming batteries would cause the next oil crisis would appear to be in the same vein. These estimates are based on the fact that large battery factories are going to come on line in the next 18 months and not just Tesla’s giga-factory in Nevada. With additional supply, prices can be expected to decline and demand should rise. Home batteries and home charging stations are likely to become much more visible and utilities are already installing industrial scale batteries to tackle intermittency of renewables and to become more efficient with fossil fuel use. 



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February 26 2016

Commentary by David Fuller

Energy Price War Spreads to Gas as US Shale Storms Global Market, Stalks Russia

The US has exported its first shipment of natural gas in a historic move that shifts the balance of power in the global Energy market and kicks off a struggle with Russia for market share. 

Surging US supply over the next five years threatens to break the Kremlin's dominance over Europe's gas market, and is already provoking talk of a "Saudi-style" counter attack by Moscow to drive US shale gas frackers out of business before they gain a footing.

At the very least, it sharpens a global price war as liquefied natural gas (LNG) bursts onto the scene, and closes the chapter on the 20th century system of pipeline monopolies. Gas is starting to resemble the spot market for crude oil, with the same wild swings in prices and boom-bust cycles.

A seven-year, $11.5bn project by Cheniere Energy finally came to fruition this week as the first LNG cargo left Sabine Pass in Louisiana - in a special molybdenum-hulled ship at -160 degrees Centigrade - destined for Petrobras in Brazil. "It is a big day for our natural gas revolution," said Ernest Moniz, the US Energy secretary.

Speaking at the IHS CERAWeek summit in Texas, he said the emergence of the US as a gas superpower is a geopolitical earthquake, though he has always been coy about the exact intention. "It is a change in the Energy security picture," he said.

The US is ramping up LNG exports to almost 130bn cubic metres a day (BCM) by the end of the decade, roughly equal to Russia's gas exports to Europe. This may rise to 200 BCM and possibly beyond as the shale industry keeps finding once unthinkable volumes of gas.

Mr Moniz said the world had been expecting the US to be a huge importer of LNG before the shale shock. The mere fact that this is no longer the case turns the market upside-down, and is a key reason why LNG prices have been in free-fall across the world.

The shift to net exports is something that almost nobody expected. Mr Moniz predicted that the US will match Qatar, and possibly exceed it to become the world's biggest exporter of LNG by 2020. 

The US is still a net importer of natural gas but that is because Canadian pipelines supply New York and Detroit. However, it does not alter the overall picture.

Martin Houston, chairman of Parallax Energy, said the US may account for a quarter of the world's LNG market within a decade, and is so efficient that it can deliver gas to Europe for as little as $5 per million British thermal unit (Btu) despite the high cost of liquefaction and shipping.

David Fuller's view -

This article is well worth reading in full because it is about a monumental development – cheap Energy forever – at a time when investors are agonising over China, the EU and negative interest rates.  That is not a misprint; I did say cheap Energy forever, thanks to technology. 

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



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February 24 2016

Commentary by Eoin Treacy

Musings from the Oil Patch February 23rd 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report which this month highlights the toll low prices are taking on Texas oil companies. Here is a lengthy section: 

For example, the surprise decision by Southwestern Energy (SWN-NYSE) to lay off 40% of its staff, or more than 1,100 employees, and shut down all its drilling rigs after having recently moved into a massive new headquarters building shocked the industry. Likewise, ConocoPhillips (COP-NYSE), after defending its dividend through the first year of this downturn even at the cost of laying off staff, finally caved and cut its quarterly dividend by two-thirds from 74-cents to 25-cents per share. ExxonMobil (XOM-NYSE), after reporting weak earnings results for its fourth quarter, followed up last Friday by announcing it had failed to replace its production last year for the first time in 22 years, announced a 25% cut in its 2016 capital spending plans and the suspension of its share repurchase program. These steps are designed to reduce the drain in the company’s cash balances. Another optimist, Pioneer Natural Resources (PXD-NYSE), after signaling late last year that it might actually increase its 2016 capital spending by 20%-30% as a result of the multiple attractive exploration opportunities it has in its Permian Basin acreage, announced a 10% capex cut this year, which means it will be forced to cut in half the number of drilling rigs it operates, going from 24 at year-end 2015 to 12 by mid-year 2016. The latest industry bombshell was Devon Energy’s (DVN-NYSE) announcement just last week that it was slashing its 2016 capital spending by 75% and laying off 1,000 employees, or about 20% of its staff. The shock from this announcement had barely been digested when Devon announced the sale of up to 69 million shares of stock and raising potentially $1.6 billion in cash to shore up its balance sheet. The cash infusion also helps the company by reducing the pressure to depend partially on selling assets to help fund capital spending. 

The sale of stock by Devon is another example of the continuing ability of Energy companies to tap capital markets, something a growing number of observers believe is prolonging the needed spending reduction that will cause oil output to fall off materially and set the stage for a recovery in prices. According to Bloomberg, the Energy industry has announced plans to raise $4.6 billion in new equity, accounting for nearly 30% of all new equity raised so far this year. The amount of equity being raised is almost evenly split among three deals – Pioneer Natural Resources, Hess Corporation (HES-NYSE) and Devon. Each of these deals was upsized from their original announcement reflecting high levels of demand from investors betting not only the individual companies surviving but that their share prices will soar when the oil price rises and Energy industry fortunes improve. 

The $4.6 billion equity raise so far this year compares with the $7.8 billion raised by exploration and production companies during the first two months of 2015, the fastest pace in raising new equity in over a decade. An interesting question is whether the capital raised in early 2015 has been wasted? If we consider what has been happening to companies within the E&P and oilfield service sectors, the oil price collapse is finally ending the corporate and investor strategy of “pretend and extend.” That strategy means that company executives have been selling lenders and investors on the view that a turnaround is just around the corner, so if they will just give them a little more time (and money?) the companies will be fine. As this strategy evaporates, the battle lines are drawn between managements and their owners. A change in the past is that many of the owners of the companies are investors who specialize in distressed securities. As a result, the struggle over how to redo the capital structure of Energy companies becomes more intense as debt-owners, who have legal claims against the assets of the company, fight to gain the most ownership and thus stand to benefit the most whenever the share price recovers. 

Many of these recapitalization struggles are being fought in the esoteric world of corporate bankruptcy law. The last great boom for the local bankruptcy industry occurred in the period of the 2008 financial crisis and the recession that followed. For Energy, the greatest bankruptcy boom was the demise of the industry in the 1980s bust. A recent article about the state of the bankruptcy business, in response to the collapse in oil prices, was in The Houston Chronicle. The article included a graphic showing the number of Chapter 11 (the section of the bankruptcy law that provides for restructuring of financially distressed companies rather than liquidations of companies that is conducted under Chapter 8 of the code) filed in the Southern District and the State of Texas. In 2015, the number of bankruptcies filed in the Southern District approached close to those filed in 2008, the start of the financial crisis. The article cited a survey of 18 bankruptcy legal experts by The Texas Lawbook calling for a doubling of filings this year. 

The fallout from the low oil prices and the hefty cash outlays producers have been making to play the shale revolution and/or to continue to generate cash flows is showing up in the growing number of exploration and production companies filing for bankruptcy. The Houston Energy practice of the law firm Haynes & Boone is tracking those filings for both E&P and oilfield service companies in the United States and Canada. As of the listings on their web site, as of early February, 48 E&P companies and 44 oilfield service companies have filed since the start of 2015. The total of secured and unsecured debt involved in these bankruptcy filings totals $25.1 billion, split $17.3 billion for E&P companies and $7.8 billion for oilfield service companies.

Eoin Treacy's view -

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

This is the most comprehensive reporting of the measures taken by Texas Energy companies to preserve capital I have seen. I chose to reproduce it because it should serve as a useful record for subscribers look as this transition unfolds. 



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February 23 2016

Commentary by David Fuller

OPEC Has Failed to Stop US Shale Revolution Admits Energy Watchdog

The current crash in oil prices is sowing the seeds of a powerful rebound and a potential supply crunch by the end of the decade, but the prize may go to the US shale industry rather Opec, the world's Energy watchdog has predicted.

America's shale oil producers and Canada's oil sands will come roaring back from late 2017 onwards once the current brutal purge is over, a cycle it described as the "rise, fall and rise again" of the fracking industry.

"Anybody who believes the US revolution has stalled should think again. We have been very surprised at how resilient it is," said Neil Atkinson, head of oil markets at the International Energy Agency.

The IEA forecasts in its "medium-term" outlook for the next five years that US production will fall by 600,000 barrels per day (b/d) this year and 200,000 next year as the so-called "fracklog" of drilled wells is finally cleared and the global market works off a surplus of 1m b/d.

But shale will come back to life within six months - far more quickly than conventional mega-projects and offshore wells - once crude rebounds to $60. Shale output is expected to reach new highs of 5m b/d by 2021.

This will boost total US production of oil and liquids by 1.3m b/d to the once unthinkable level 14.4m b/d, widening the US lead over Saudi Arabia and Russia.

Fatih Birol, the IEA's executive director, said this alone will not be enough to avert the risk of a strategic oil crisis later in the decade, given the exhaustion of existing wells and the dangerously low levels of spare capacity in the world.

David Fuller's view -

Long-term forecasting is more guesswork than analysis, not least as there are too many variable factors.  Additionally, most forecasts are influenced by an element of hopeful self-interest.  Considering these factors, what can we conclude about the International Energy Agency’s forecasts?

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



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February 08 2016

Commentary by Eoin Treacy

Credit Market Risk Surges to Four-Year High Amid Global Selloff

This article by Aleksandra Gjorgievska and Tom Beardsworth for Bloomberg may be of interest to subscribers. Here is a section:

Exchange-traded funds that hold U.S. junk bonds slid to their lowest levels in almost seven years. BlackRock’s iShares iBoxx High Yield Corporate Bond exchange-traded fund and SPDR Barclays High Yield Bond ETF both fell to the lowest levels since 2009.

Financials and Energy were the two investment-grade sectors that added the most risk in the U.S., Markit CDX North American Indexes show. In high yield, Energy, communications and health care fared the worst.

Chesapeake Energy Corp., the U.S. natural gas driller that’s been cutting jobs and investor payouts to conserve dwindling cash flows, lost more than half it stock market value Monday after a report that it hired a restructuring law firm.

The company’s bonds led losses among high-yield debt on Monday. Chesapeake’s notes due March 2016 tumbled to a record to 74.5 cents, from 95 cents last week, while its bonds maturing in 2017 fell to an all-time low at 34 cents.

“Broad oil weakness has now turned into distressed Energy cases, which investors view as possibilities of higher risk of restructuring or debt exchanges," Ben Emons, a money manager at Leader Capital Corporation. “Nothing has been announced of that matter but markets move quicker ahead of such possibility happening."

 

Eoin Treacy's view -

Regardless of the answer, when someone asks whether a default is imminent one has to conclude that the situation is troubling. This is as true of Chesapeake today as it was of Greece, Portugal et al a few years ago. 

Chesapeake’s 2017 6.25% Senior UnSecured bullet bond now yields 150% suggesting very few people think it will make its last coupon payment due in July.   

 



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January 29 2016

Commentary by David Fuller

Decision On Oil Cut Only Possible If All Exporters Agree, Russian Energy Minister Says

Here is the opening from this topical report from Bloomberg:

A decision on cutting oil production is possible only if all crude-exporting nations are in agreement and there’s no timing for talks, Russia’s Energy Minister Alexander Novak said.

“We’re ready to discuss the issue of cutting oil output volumes” but not ready for a decision, Novak said Friday in an interview with Bloomberg Television. “We’re ready to consider the possibility; this should be a consensus. If there’s a consensus, it makes sense.”

Oil pared gains after Novak’s comments. Prices closed at the highest in three weeks on Thursday after Novak said that the Organization of Petroleum Exporting Countries and other producers may meet to discuss output. Traders have looked for signs of cooperation between producing nations after a global glut of crude pushed prices to a 12-year low. The head of OPEC this week called on producers outside the group to assist in reducing the oversupply, signaling once again its members won’t make output cuts alone.

“There’s no set date” for a meeting, Novak said. “As far as I understand they are discussing it with other possible participants.” Russia has taken part in such consultations before and “nothing new happened,” he said.

David Fuller's view -

A carefully hedged statement, for sure.  We also know about all the rivalries, to put it mildly, between oil producers.  However, these considerations pale into insignificance against the background of today’s reality.

This item continues in the Subscriber’s Area.



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January 28 2016

Commentary by Eoin Treacy

Who owns the sun

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

Buffett’s company has also bought renewable Energy through long-term contracts. Last year, NV Energy signed up to purchase power from a giant First Solar installation outside Las Vegas for $38.70 per megawatt-hour. Analysts said at the time that it was one of the cheapest rates on record. Commissioners cited projects like that for why it made no sense to continue encouraging net metering in Nevada. If the goal is to put more solar on the grid, it’d be far cheaper for NV Energy to procure it.

This, of course, is of little consolation for the Nevadans who’ve already blanketed their roofs with solar panels. The public outcry seems to have registered with NV Energy. On Jan. 25 it said it would ask the commission to allow existing net-metering customers to stick with the old system for two decades in some instances. “A fair, stable, and predictable cost environment is important to all our customers,” Paul Caudill, the utility’s president, said in a statement. The commission will soon rehear that portion of the case.

Even if the utility’s proposal is accepted, it may not go far enough for the solar industry. The December decision could be challenged in court—or taken straight to voters. SolarCity and other groups are trying to get the issue on the November ballot.

Caught in limbo are people such as Dale Collier. The day after the commission hearing, he showed off a 56-panel system on his home in the Las Vegas suburb of Henderson. It cost him about $48,000 to install in 2011. SolarCity hadn’t yet set up shop in Nevada, so he paid for it by refinancing his house. The system took his NV Energy bill down to about $80 a month from the $330 it used to average, he says. One year, he got a $1,355 check from NV
Energy because his solar power was helping the utility meet its renewable Energy requirements. “It was the smartest thing I’d ever done,” he says. “Now, it’s the stupidest thing I’ve ever done.”

Collier had planned to retire from his job flying small cargo planes. But he doesn’t want to stop working until he has a better handle on his monthly bills from Buffett’s utility. “If it goes totally haywire, I’m going to look at batteries,” he says. “I’d love to just go off the grid totally, and tell them to f--- off.”

 

Eoin Treacy's view -

The acrimonious battle between legacy utilities and distributed supply represented by solar has come to a head in Nevada. There is a great deal at stake and emotions are running high, not least because people have invested a lot of money and risk a profit turning into a loss.

If we look at the situation with a clear perspective the upkeep of the electrical grid is not free. Both utilities and consumers use it to buy and sell electricity. Therefore it makes sense that both should contribute to its upkeep. That was the central argument proposed by NV Energy and it’s hard to argue with. 



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January 18 2016

Commentary by Eoin Treacy

Brent Trades Near 12-Year Low as Iran Comeback to Swell Glut

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

“The likely increase of Iranian oil production could not have come at a more unfavorable point in time, with the oil market being oversupplied and renewed economic concerns,”

Giovanni Staunovo, an analyst at UBS Group AG in Zurich, said in a report. “It is not worth holding a direct exposure to crude oil at present, before more clarity sets in.”

Brent capped a third annual loss in 2015 as the Organization of Petroleum Exporting Countries effectively abandoned output limits. Iran, which was OPEC’s second-biggest producer before sanctions were intensified in 2012, is trying to regain its lost market share and doesn’t intend to pressure prices, officials from its petroleum ministry and national oil company said this month.

 

Eoin Treacy's view -

Iran has been stockpiling crude ahead of anticipated end of sanctions and this has been a factor in the swift decline of prices over the last month. If we put some numbers on that, it is now January 18th and Brent Crude has fallen 40% from peak to trough so far this year. That’s an accelerating downtrend by any definition one might choose to use. 

Iran’s newfound unrestricted ability to sell oil is a potential bonus for the oil services sector since it is going to have to spend billions on upgrading infrastructure atrophied by sanctions. However let’s not also forget that Iran has been selling oil to China for more than a decade and that aside from what it has in storage for sale, the country’s ability to rapidly increase supply is relatively low.  

 



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January 14 2016

Commentary by David Fuller

U.S. Stocks Rally From 3-Month Lows as Energy, Health-Care Lead

Here are a few highlights from this topical report from Bloomberg:

U.S. stocks surged from three-month lows as Energy and health-care shares paced a rebound, with the Standard & Poor’s 500 Index recovering after the steepest selloff since September.

Equities spiked higher, reversing an early drop that sent the Nasdaq Composite Index toward a 14-month low. Energy companies jumped as crude rallied, with Exxon Mobil Corp. and Chevron Corp. gaining more than 3.4 percent. JPMorgan Chase & Co. added 1.7 percent after its quarterly profit beat estimates amid lower expenses. Merck & Co. and Pfizer Inc. increased at least 2.2 percent to pace health-care’s rise.

“This is the relief rally we’ve been waiting for,” said Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird, which oversees $110 billion. “Pessimism had grown to such a level that enough cash had been raised on the sidelines to sport at least a short-term rally. Better-than-expected earnings could be something for the bulls to grasp and provide this rebound some sustainability.”

“We’ll have to digest all these earnings numbers and then we’ll have a clearer picture, but if you look around the world, there’s not many positive drivers,” said Benno Galliker, a trader at Luzerner Kantonalbank AG. “Play it safe, that’s the message at the moment.”

The recent equity selloff is an “emotional response,” obscuring expansion in both the American economy and corporate profits, Abby Joseph Cohen, president of Goldman Sachs Group Inc.’s Global Markets Institute, said today. The fair value for Standard & Poor’s 500 Index is 2,100, she said.

The main U.S. equity index has declined more than 10 percent from its record set in May, and is 2 percent above the bottom of an August swoon, which was also triggered by anxiety over the impact of China’s weakness on worldwide growth. The gauge has slumped 8.1 percent since the Federal Reserve raised interest rates last month for the first time since 2006.

David Fuller's view -

The comment, “… there’s not many positive drivers”, has certainly been true.  For that to change, I maintain, we need to see China steady and the price of crude oil move higher on short covering and supply reductions.  The same can be said for industrial metals.

This item continues in the Subscriber’s Area.



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January 04 2016

Commentary by Eoin Treacy

8 Tech Breakthroughs of 2015 That Could Help Power the World

Thanks to a subscriber for this article by Wendy Koch for National Geographic which may be of interest. Here is a section: 

7. Better Batteries
Solar and wind power have seemingly limitless potential, but since they're intermittent sources of Energy, they need to be stored. That’s why there’s a race to build a better battery. The lithium-ion standard bearer, introduced by Sony two-plus decades ago for personal electronics, can be pricey—especially for large uses—and flammable. So every few weeks comes an announcement of a new idea.

Harvard researchers unveiled a flow battery made with cheap, non-toxic, high-performance materials that they say won’t catch fire. “It is a huge step forward. It opens this up for anyone to use,” says Michael Aziz, Harvard University engineering professor and co-author of a study in the journal Science. (Find out how this flow battery works.) Also this year, MIT and DOE announced promising advances that could make batteries better and cheaper.

The battery push has gone beyond the lab. In May, Tesla’s Musk unveiled battery products that he plans to mass-produce in his $5 billion Gigafactory in Nevada. The products include the sleek, mountable Powerwall unit that SolarCity, a company he chairs, is putting in homes. This month, in the first such offering from a U.S. utility, Vermont’s Green Mountain Power began selling or leasing the Powerwall to customers. (Here are five reasons this battery is a big deal.)

Other companies are challenging Musk. Pittsburgh-based Aquion Energy, a spinoff from Carnegie Mellon University, began selling its saltwater battery stacks last year. German storage developer Sonnen said this month that it’s ramping up production of its lithium-ion battery at its facility in San Jose, California, for use in U.S. homes.

 

Eoin Treacy's view -

Symbiosis is popular in nature but it is becoming increasingly clear that it also has a role to play in sustaining the pace of technological innovation. Renewable Energy technologies such as wind and solar are progressing rapidly but they will always suffer from intermittency without corresponding innovation in storage for both consumer and industrial uses. This has been painfully slow to follow because it takes time for capital invested in research to deliver results and yet the signs are promising that the next really big enabler with occur among chemical companies. 



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December 30 2015

Commentary by David Fuller

Crude Oil, 1.100-Foot Steel Monsters Rule

Here is the opening of this interesting article from Bloomberg:

The most destructive oil crash in a generation is giving ship owners a billion-dollar windfall.

With the Organization of Petroleum Exporting Countries abandoning output limits in a drive for market share, ships that carry as much as 2 million barrels a trip are in demand to haul crude from the Middle East to Asia and North America. While oil prices fell about 35 percent in 2015, average earnings for these carriers jumped to $67,366 a day, the most since at least 2009, according to Clarkson Plc, the world’s largest shipbroker.

“The stars are aligned for us right now,” Nikolas Tsakos, the chief executive officer of Tsakos Energy Navigation Ltd., said in an interview at Bloomberg’s New York offices, adding that falling oil prices will likely stimulate demand and cargoes next year.

Tanker analysts are predicting the rate boom will persist for many of the same reasons oil forecasters are bearish. OPEC shows no sign of reversing its market strategy, and Iran has outlined plans to ramp up its exports once economic sanctions against the country are lifted. At the same time, the U.S. just repealed a four-decades old limit on its exports.

With on-land inventories already at record levels, this could mean more barrels will eventually be stored on ships, further increasing profit, said Tsakos.

The biggest tanker operators who manage fleets from Europe are Euronav NV, based in Antwerp, Belgium, DHT Holdings Inc., Frontline Management AS, which runs Norway-born billionaire John Fredriksen’s tanker fleet, and Tsakos Energy in Greece. All have seen their shares rise this year while most Energy producers have fallen.

David Fuller's view -

Clearly cheaper Energy costs open the routes of international commerce, while also making business more attractive and competitive for many corporations and middleclass people around the world. 

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December 23 2015

Commentary by Eoin Treacy

Worst performers of 2015

Eoin Treacy's view -

With the exception of a small number of outliers the worst performing shares this year have been in the Energy sector. This is particularly true of the S&P 500 where 11 of the 15 shares down more than 50% are Energy related. Those are pretty scary declines and sentiment is about as bearish as I have seen with news flow compounding that view as one would expect. 



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December 22 2015

Commentary by Eoin Treacy

Soaring Debt Yields Suggest Oil M&A Could Happen in 2016

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

Mergers haven't taken off in the oil patch this year largely because potential targets have been banking on a rebound and potential buyers have been expecting further falls. The spike in yields for borrowers in the Energy sector, along with the growing acceptance that oil and gas prices likely face another year on their back, should mean those opposing views finally converge in 2016, prompting some deals.

What's more, this chart suggests the advantage should lie with large, strategic buyers like the oil majors for two reasons.

First, one way potential targets have been shoring up balance sheets is to sell assets rather than the entire company.

But a thriving asset market requires buyers being able to raise capital at reasonable rates, be they other E&P companies or private equity firms looking to snap up bargains. Asset sales have slowed already this year, with just $29 billion worth in North America, compared with $107 billion in 2014, according to data compiled by Bloomberg.

Second, with the cost of capital rising and cash harder to come by, any deals struck will require at least the promise of synergies and will favor those buyers able to use their own stock as a credible acquisition currency. One reason Anadarko's approach to Apache met with such scorn was that it scattered rather than tightened the company's focus. The majors, diversified anyway, bring the benefit of bigger balance sheets, which both alleviate any credit pressures weighing on the target and provide a clearer path to developing a smaller E&P company's reserves. Paying with shares also means that selling shareholders get to participate to some degree in the eventual recovery in oil and gas prices.

 

Eoin Treacy's view -

Major oil companies have slashed exploration budgets with the result they have more capital to pick up promising assets as prices decline. Private Equity firms have amassed sizable war chests to invest in troubled Energy companies but have so far been slow to make large purchases. Meanwhile sellers are hoping for a rebound so they can get a better price. With everyone appearing to bide their time a catalyst is required to encourage deal making. 



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December 17 2015

Commentary by Eoin Treacy

Shale Drillers Are Now Free to Export U.S. Oil Into Global Glut

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

U.S. shale drillers will soon be able to sell their oil all over the world. Too bad no one needs it right now.

A congressional deal to lift the 1970s-era prohibition on shipping crude overseas has the potential to unleash a flood of oil from Texas and North Dakota shale fields into markets already flush with cheap supplies from the Persian Gulf, Russia and Africa.

The arrival of U.S. barrels in trading hubs from Rotterdam to Singapore will intensify competition for market share between oil-rich nations, publicly traded producers and trading houses, adding pressure to prices that have tumbled 67 percent in the past 18 months. In the longer term, it may also extend a lifeline to shale drillers strapped for cash after amassing huge debt loads during the boom years.

“The winners in all of this are the U.S. oil producers who now have a bigger market for their shale” output, said Gianna Bern, founder of Brookshire Advisory and Research Inc. in Chicago and a former BP Plc oil trader. “Unfortunately, it’s coming at a time when there’s already way too much crude on the global market.”

U.S. oil explorers from Exxon Mobil Corp. to Continental Resources Inc. have been agitating for an end to the export ban for most of this decade as technological advances in drilling and fracking opened up vast, untapped reserves of crude. The so- called shale revolution has lifted U.S. oil output for seven straight years, making the nation the world’s third-biggest producer behind Russia and Saudi Arabia. 

 

Eoin Treacy's view -

2016 is going to be an important year for US Energy producers. One way to look at it is that they are going to be running slimmer operations since they had to cancel so much spending amid a collapse in prices. Another way to look at it is they will have the ability to export both crude oil and natural gas for the first time in decades and that will contribute to increasing fungibility between international contracts. 



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December 17 2015

Commentary by Eoin Treacy

What Just Happened in Solar Is a Bigger Deal Than Oil Exports

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

The extension will add an extra 20 gigawatts of solar power—more than every panel ever installed in the U.S. prior to 2015, according to Bloomberg New Energy Finance (BNEF). The U.S. was already one of the world's biggest clean-Energy investors. This deal is like adding another America of solar power into the mix.

The wind credit will contribute another 19 gigawatts over five years. Combined, the extensions will spur more than $73 billion of investment and supply enough electricity to power 8 million U.S. homes, according to BNEF. 

"This is massive," said Ethan Zindler, head of U.S. policy analysis at BNEF. In the short term, the deal will speed up the shift from fossil fuels more than the global climate deal struck this month in Paris and more than Barack Obama's Clean Power Plan that regulates coal plants, Zindler said.

 

Eoin Treacy's view -

As I mentioned in yesterday’s commentary. The renewable Energy sector is being challenged by the increasingly competitive price structure of fossil fuels but is likely to be supported by regulation for the foreseeable future. With interest rates beginning to rise and capital for infrastructure projects beginning to dry up the announcement tax credits will be extended for an additional 5 years represents a windfall for solar companies. 



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December 14 2015

Commentary by David Fuller

Never Mind $35, Cheapest Oil Globally Is Already Close to $20

Here is the opening of this topical article from Bloomberg:

As oil crashes through $35 a barrel in New York, some producers are already living with the reality of much lower prices.

A mix of Mexican crudes is already valued at less than $28, an 11-year low, according to data compiled by Bloomberg. Iraq is offering its heaviest variety of oil to buyers in Asia for about $25. In western Canada, some producers are selling for less than $22 a barrel.

“More than one-third of the global oil production is not economical at these prices,” Ehsan Ul-Haq, senior consultant at KBC Advanced Technologies Plc, said by e-mail. “Canadian oil producers could have difficulty in covering their operational costs.”

A blend of Mexican crude has plunged 73 percent in 18 months to $27.74 on Dec. 11, its lowest level since 2004, according to data compiled by Bloomberg. Venezuela is experiencing similar lows. Western Canada Select, which is heavy and sulfurous, has slumped 75 percent to $21.37, the least in almost eight years. Other varieties including Ecuador’s Oriente, Saudi Arabia’s Arab Heavy and Iraq’s Basrah Heavy were selling below $30, the data show.

Bitumen -- which technically isn’t crude but a heavy black viscous oil that constitutes the so-called tar sands along with clay, sand and water -- is trading at around $13 a barrel, suffering a drop of more than 80 percent since June 2014.

Crudes of this type trade at a discount to lighter varieties because to process them “refiners have to invest in upgrading facilities such as coking plants, which are very expensive,” KBC’s Ul-Haq said.

David Fuller's view -

Oil is still the world’s most important commodity, even though it is branded as a pariah resource in the eyes of most environmentalists and political greens.  Despite all the politics, pressure to develop renewables and the gradual re-emergence of new nuclear, global demand for crude oil continues to rise.

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December 11 2015

Commentary by Eoin Treacy

High Yield and Energy

Eoin Treacy's view -

When interest rates are low there is an incentive to issue debt over equity. The low interest rate environment also contributes to spreads tightening as yield hungry investors move further out the risk curve to capture the return they require. The unexpectedly long length of time that interest rates have been low has created a situation where business models were framed around the situation continuing and now that the Fed is set to change tack an adjustment is underway. 



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December 07 2015

Commentary by Eoin Treacy

Statoil Is Offered Oil Assets Daily as Slump Hits Rivals

This note by Francois de Beaupuy and Mikael Holter for Bloomberg may be of interest to subscribers. Here is a section: 

Statoil is flooded w/ offers of assets for sale from rivals squeezed by drop in crude prices, CFO Hans Jakob Hegge says in interview in Paris.

Co. not biting yet because valuations still too high; there are “a lot of unrealistic price assumptions from the sellers”

Statoil is cutting capex, opex, but not planning large-scale asset sales

 

Eoin Treacy's view -

Statoil is not the only company cutting capex. However it is one of the first to throw some light on just how many companies are seeking to dispose of assets in order to reduce debt burdens, in realisation they are no longer in a position to develop them and/or because they are in financially unsound condition following the collapse in oil prices. 



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December 01 2015

Commentary by Eoin Treacy

Musings From The Oil Patch December 1st 2015

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

A final batch of questions focused on how important major oil company dividends were to holding up their share prices? We believe it is an important consideration, but the question of dividends and the major oil companies may actually foreshadow a discussion of their future business models. If a company is stuck in a low-growth industry, which oil certainly is, then spending inordinate sums of money to lift the growth rate may not be worth it. For oil companies, the cost for finding and developing new oil production to boost a company’s output growth rate from 2% to 3% to say 5% to 6%, without the company having any control over the price it receives for the product, should raise questions about their long-term business strategy. Maybe it is better to develop a steady, albeit low, production growth profile while using the surplus cash flow to maintain, and potentially increase, the dividend to shareholders. That might be a way to sustain a company’s stock market valuation and secure stable shareholder support. This strategy implies that capital spending would always be at risk in low commodity price environments, but the strategy could lead to stable employment, which is critical for securing and sustaining the technical talent required in the petroleum business. This strategy, however, wouldn’t work for smaller E&P companies needing capital to grow as their ability to tap the capital markets likely requires that they demonstrate rapid production growth. As we are learning, that strategy can be deadly in a period of low commodity prices. So if major oil companies were to adopt slow-growth production goals while defending and increasing their dividends, their share prices might not decline.

Eoin Treacy's view -

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

Capital Expenditure budgets have evaporated as companies deal with the revised economics of oil and gas development. On the plus side they have already taken significant write downs so any production that comes online as a result of previous investment can be considered already funded. Companies like Exxon Mobil, at a rating of AAA, are considered better credits than many sovereigns and the removal of the burden of capital expenditure leaves them in a better position to sustain their businesses into the medium term.



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November 19 2015

Commentary by Eoin Treacy

Time to add wind developers

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

After years of efforts, China achieved breakthroughs in nuclear export this year with two mega-size contracts signed with Britain and Argentina, respectively. In October 2015, China General Nuclear Corporation (CGN) reached an agreement with state-owned EDF Energy to co-invest in a Hinkley Point C nuclear project in England with respective 33.5% and 66.5% stakes in a deal worth GBP18bn. It is also worth mentioning that China will be able to bring its own Generation III nuclear technology of Hualong One to a subsequent project Bradwell B.

In November 2015, China National Nuclear Corporation (CNNC) sealed a USD6bn deal with Argentina to build the country’s fourth nuclear plant. According to media reports, CNNC also reached a framework agreement with Argentina on a fifth plant, which will use Hualong One technology if the deal is finalized. 

China’s first nuclear project based on Hualong One, Fuqing 5, achieved FCD in May. Its construction and operation, together with the recognition of developed countries with advanced nuclear tech and experience such as Britain, will help open doors to more markets for Hualong One. However, all these projects will take at least seven to eight years to complete, which suggests limited near-term upside potential for nuclear equipment exports. 

 

Eoin Treacy's view -

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

The current low price of oil is a benefit to China. However the fact it has to import such large quantities of Energy means building domestic capacity that does not depend on fossil fuel will remain a priority for the foreseeable future regardless of slowing infrastructure investment in other sectors. 

Such concerted investment in nuclear technology has also enhanced China’s ability to compete internationally in what is among the most complex technology fields. This is even more important for the future because so few countries are willing to commit the capital necessary to fund development of new nuclear. 

 



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October 29 2015

Commentary by David Fuller

Paris Climate Deal to Ignite a $90 Trillion Energy Revolution

Here is the opening of this important and somewhat controversial column by Ambrose Evans-Pritchard for The Telegraph:

The fossil fuel industry has taken a very cavalier bet that China, India and the developing world will continue to block any serious effort to curb greenhouse emissions, and that there is, in any case, no viable alternative to oil, gas or coal for decades to come.

Both assumptions were still credible six years ago when the Copenhagen climate summit ended in acrimony, poisoned by a North-South split over CO2 legacy guilt and the allegedly prohibitive costs of green virtue.

At that point the International Energy Agency (IEA) was still predicting that solar power would struggle to reach 20 gigawatts by now. Few could have foretold that it would in fact explode to 180 gigawatts - over three times Britain’s total power output - as costs plummeted, and that almost half of all new electricity installed in the US in 2013 and 2014 would come from solar.

Any suggestion that a quantum leap in the technology of Energy storage might soon conquer the curse of wind and solar intermittency was dismissed as wishful thinking, if not fantasy.

Six years later there can be no such excuses. As The Telegraph reported yesterday, 155 countries have submitted plans so far for the COP21 climate summit to be held by the United Nations in Paris this December. These already cover 88pc of global CO2 emissions and include the submissions of China and India.

Taken together, they commit the world to a reduction in fossil fuel demand by 30pc to 40pc over the next 20 years, and this is just the start of a revolutionary shift to net zero emissions by 2080 or thereabouts. “It is unstoppable. No amount of lobbying at this point is going to change the direction,” said Christiana Figueres, the UN’s top climate official.

Yet the Energy industry is still banking on ever-rising demand for its products as if nothing has changed. BP is projecting a 43pc increase in fossil fuel use by 2035, Exxon expects 35pc by 2040, Shell 43pc and Opec is clinging valiantly to 55pc. These are pure fiction.

The Intergovernmental Panel on Climate Change (IPCC) may or may not be correct in arguing that we cannot safely burn more than 800bn tonnes of carbon (two-thirds has been used already) if we are to stop global temperatures rising two degrees above pre-industrial levels by 2100. I take no view on the science.

David Fuller's view -

This article is controversial, although I certainly feel that it merits our attention. 

Solar Energy is developing even faster than most people envisaged, thanks to ‘needs must’ and the accelerating rate of technological innovation which this service frequently mentions.  China has embraced solar Energy because of its chronic pollution problems.  Less developed India has moved more slowly in this respect but has the same problem.  Additionally, even a small rise in global temperatures presents a huge risk for tropical India. 

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



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October 22 2015

Commentary by Eoin Treacy

Greenlight Partner Letter

Thanks to a subscriber for this interesting report from Greenlight. Here is a section on SunEdison:

In the weeks before the GLBL initial public offering, SUNE was at its highs and we contemplated trimming the position. Since we expected the UOI would trigger a further advance in the shares, we decided against it. Around the same time, oil and gas prices renewed their declines, causing the values of Energy master limited partnerships to justifiably fall. We believed that TERP and GLBL would not be impacted, as neither is subject to commodity risk. We were wrong. Because the SUNE yield vehicles were relatively new to investors, the market did not distinguish them from other Energy dividend flow through structures. In mi-July, TERP began falling along with the rest of the sector taking SUNE with it. GLBL IPO’d at a big discount a week later and traded poorly in the aftermarket. 

As GLBL and TERP continued to fall they effectively lost access to the capital markets, and SUNE collapsed as the market because worried that SUNE would be able to sell its projects and could even run out of money. Ironically, the market judged SUNE’s rapidly growing and massive backlog of attractive projects to be a liability. 

SUNE’s hard-to-decipher financial statements fed the stock collapse. SUNE consolidates both TERP and GLBL on its GAAP statements. The complicating result is two-fold. First when SUNE sells a project to TERP or GLBL it bears the operating costs but doesn’t get to book the revenue from the sale. The result is the appearance of an operating loss. Second TERP and GLBL use non-recourse project finance debt to fund the purchases and the debt appears on SUNE’s balance sheet. The result is that SUNE appears to be heavily levered and losing money. From a GAAP perspective that’s true, but from an economic perspective it is not. Nonetheless, this hasn’t stopped some wise guys from dubbing it “SunEnron”. 

SUNE responded to the deteriorating environment by raising additional equity, finding third parties to buy its products, and slowing it development pipeline. All of these actions have marginally lowered the company’s value, but have stabilized the situation. Taking into account the more conservative business plan, when we look through the complicated financials we believe that SUNE’s development business is poised to have economic earnings in 2016 of about $1.34 per share, assuming that TERP and GLBL do not regain access to the capital markets. 

 

Eoin Treacy's view -

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

In the movable feast of renewable Energy breakeven estimates it’s hard to argue that lower oil and particularly natural gas prices skew the calculation. Solar technology is advancing at a prodigious rate but not so fast that companies can compete with Energy prices which more than halved in a year. This has weighed on the sector in the short term but it is hard to argue with government mandates that utilities have to buy Energy from renewable sources. 



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October 14 2015

Commentary by Eoin Treacy

Email of the day on overextensions and rotation

Thank you again for your excellent commentaries.

In the middle of last week you referred to a number of stocks that had risen more than 30% and were now well above their 200 MA while there were others still trading well below that mark.  Would it be possible to list some of those in the latter category which investors could examine in more detail?

 

Eoin Treacy's view -

Thank you for your kind words. Any corrective phase results in rotation as momentum leaders that may have been frothy before the decline struggle to regain impetus while bargain hunters begin to take fresh looks at the most beaten down of sectors where short sellers will have placed stops to preserve profits. This sets up opportunities provided we are willing to match our behaviour to the reality provided by the market. 



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October 08 2015

Commentary by Eoin Treacy

SolarCity Unveils World's Most Efficient Rooftop Solar Panel, To Be Made in America

This press release from SolarCity may be of interest to subscribers. Here is a section:

SolarCity will begin producing the first modules in small quantities this month at its 100 MW pilot facility, but the majority of the new solar panels will ultimately be produced at SolarCity’s 1 GW facility in Buffalo, New York. SolarCity expects to be producing between 9,000 - 10,000 solar panels each day with similar efficiency when the Buffalo facility reaches full capacity.

SolarCity’s panel was measured with 22.04 percent module-level efficiency by Renewable Energy Test Center, a third-party certification testing provider for photovoltaic and renewable Energy products. SolarCity’s new panel—created via a proprietary process that significantly reduces the manufacturing cost relative to other high-efficiency technologies—is the same size as standard efficiency solar panels, but produces 30-40 percent more power. SolarCity’s panel also performs better than other modules in high temperatures, which allows it to produce even more Energy on an annual basis than other solar panels of comparable size.

SolarCity initially expects to install the new, record-setting solar panel on rooftops and carports for homes, businesses, schools and other organizations, but it will also be excellent for utility-scale solar fields and other large-scale, ground level installations.

 

Eoin Treacy's view -

The low price of oil and other Energy commodities has taken a toll on the moveable feast of solar power breakeven calculations. The sector simply has to continually introduce more efficient products and there is good reason to expect it will. Solarcity’s announcement of a production-ready panel sporting 22% efficiency is great news provided the final announced price is competitive. In the lab efficiency rates of over 40% are achievable but it’s a big leap from a sterile environment to rooftops. This is the primary reason SolarCity’s announcement is important. 



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September 30 2015

Commentary by David Fuller

Turn CO2 Into Cold, Hard Cash

Here is the opening of this interesting article from Bloomberg:

The world's biggest companies cite many reasons for cutting their climate pollution: It's good PR, it's even the law in many places, and not doing so contributes to the risk of global catastrophe. Here's one you don't hear so much. By blowing their carbon dioxide skyward, power plants are venting raw material and, by extension, a ridiculous amount of money. Waste is being wasted. All that carbon and oxygen must be good for something.

That's the premise of the XPrize Foundation's new Carbon Prize, a $20 million competition over five years to identify "high-value products" that can be made from captured power-plant CO2 emissions. The competition formally opened Tuesday with a six-month period for teams to register their projects that might involve biofuels, fabrics, pharmaceuticals, and building materials. Within prescribed limits, it doesn't matter what's made, as long as the CO2 is captured and turned into something people or businesses want to buy.

Competitors must make it through three judging rounds. The two main prizes of $7.5 million each will go to the teams that make the most of CO2 from coal and gas plants. A U.S. coal plant and Canadian gas plant will be named as the XPrize's test sites soon. The prize is sponsored by NRG Energy and Canada's Oil Sands Industry Alliance.

The guidelines rule out technologies that miss the spirit of low-carbon innovation. Trees, for example, have proven adept at catching carbon, but their core technology—photosynthesis—isn't new. "Enhanced oil recovery" is Energy-industry jargon for pumping CO2 into a well to drive up more oil. That's a marketable use of the gas, but in the service of burning more carbon. 

The Carbon Prize may be the most physically challenging competition yet. Not because it necessarily requires great exertion, but because of the actual physical chemistry of CO2 itself. Carbon dioxide is a very low-Energy molecule. It's spent fuel—the molecular equivalent of passing out from exhaustion after a long run. So to make CO2 into anything useful, you need to use lots of Energy. But producing Energy typically emits CO2, which the XPrize wants people to make into useful products, which requires Energy, which produces CO2 ….

David Fuller's view -

This competition is sponsored by the USA’s NRG Energy and Canada’s Oil Sands Industry Alliance.  They deserve any favourable publicity from this effort, and who knows, perhaps it will spark a sensible commercial idea which lowers CO2 emissions.  It is not a new idea – see Herbert Hoover’s sensible comments nearly a hundred years ago, quoted in the concluding paragraph of Bloomberg’s article.      



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September 29 2015

Commentary by David Fuller

The Weekly View: Beginning To Buy Energy Stocks

My thanks to the team at RiverFront for the latest copy of their interesting letter.  Here is a brief sample:

Energy companies have only recently begun to take the necessary steps to bring Energy supply back into balance with Energy demand.  Despite Energy prices being at similar levels 12 months ago, Energy producers were optimistic that prices were likely to bounce back quickly, and thus were discouraged from making the drastic cuts that would have a significant impact on supply.  However, lower lows for oil prices in August prompted management teams to explore more drastic approaches to survive lower for longer pricing, including additional restructuring, rig count reductions, capital expenditures cuts, asset sales and mergers & acquisitions.  Put simply, we believe Energy producers have felt the pain and are now motivated to truly balance the crude market. 

David Fuller's view -

This is an interesting comment but I suggest that the mainly Western oil companies, which I assume they are referring to, are far from the biggest problem in term of the global oversupply of crude oil. 

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



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September 22 2015

Commentary by Eoin Treacy

Musings from the Oil Patch September 22nd 2015

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

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

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

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

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

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

Eoin Treacy's view -

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

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



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September 17 2015

Commentary by Eoin Treacy

Pure Energy Minerals drops the next lithium bombshell As Tesla seeks supply for its Gigafactory

This article by Peter Epstein for Mineweb may be of interest to subscribers. Here is a section: 

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

Eoin Treacy's view -

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



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September 16 2015

Commentary by Eoin Treacy

We are nowhere near peak coal use in India and China

This article by Frank Holmes appeared in Mineweb and may be of interest to subscribers. Here is a section

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

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

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

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

 

Eoin Treacy's view -

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



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August 31 2015

Commentary by Eoin Treacy

Oil Jumps to One-Month High as OPEC Ready to Talk to Producers

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

“The market turned around on two pieces of news,” Phil Flynn, senior market analyst for Price Futures Group Inc. in Chicago, said by phone. "The EIA cut its U.S. output estimates and OPEC says its ready to talk to others about cutting output."

Eoin Treacy's view -

$40 represents an important psychological Rubicon for crude oil prices. Last week’s upside weekly key reversal and upside follow through this week suggest a low of at least near-term significant. A clear downward dynamic would now be required to question current scope for additional mean reversion. 



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August 12 2015

Commentary by Eoin Treacy

Musings From the Oil Patch August 12th 2015

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

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

Eoin Treacy's view -

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

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

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

 



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July 13 2015

Commentary by Eoin Treacy

Email of the day on oil prices and Canadian producers

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

Eoin Treacy's view -

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

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

 



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June 29 2015

Commentary by Eoin Treacy

Coal Shares Jump After Supreme Court Strikes Down Mercury Rule

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

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

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

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

 

Eoin Treacy's view -

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



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June 12 2015

Commentary by Eoin Treacy

S&P 500 and its primary sector ETFs

Eoin Treacy's view -

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

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

 



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May 19 2015

Commentary by David Fuller

Vortex bladeless turbines wobble to generate energy

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

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

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

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

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

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

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

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

David Fuller's view -

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

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

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May 19 2015

Commentary by Eoin Treacy

Musings From the Oil Patch May 19th 2015

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

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

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

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

 

Eoin Treacy's view -

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

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

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

 



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May 12 2015

Commentary by Eoin Treacy

Email of the day on a name change:

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

Eoin Treacy's view -

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

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



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May 11 2015

Commentary by Eoin Treacy

The rise of electricity storage Something for everybody

This article by John P. Banks for the Brookings Institute may be of interest to subscribers. Here is a section: 

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

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

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

 

Eoin Treacy's view -

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



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May 01 2015

Commentary by Eoin Treacy

Elon Musk Challengers Jostle to Solve Riddle of Energy Storage

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

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

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

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

 

Eoin Treacy's view -

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

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

 



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April 22 2015

Commentary by David Fuller

Energy-Hog China Seen Sitting Out Big Global Oil & Gas Deals

Here is the opening of this informative article from Bloomberg:

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

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

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

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

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

David Fuller's view -

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

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March 31 2015

Commentary by Eoin Treacy

Carlyle Dives Into Energy Industry LBOs as Apollo Lies in Wait

This article by Kiel Porter and Devin Banerjee for Bloomberg may be of interest to subscribers. Here is a section: 

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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March 25 2015

Commentary by Eoin Treacy

Beijing to Shut All Major Coal Power Plants to Cut Pollution

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

The facilities will be replaced by four gas-fired stations with capacity to supply 2.6 times more electricity than the coal plants.

The closures are part of a broader trend in China, which is the world’s biggest carbon emitter. Facing pressure at home and abroad, policy makers are racing to address the environmental damage seen as a byproduct of breakneck economic growth. Beijing plans to cut annual coal consumption by 13 million metric tons by 2017 from the 2012 level in a bid to slash the concentration of pollutants.

And

Nationally, China planned to close more than 2,000 smaller coal mines from 2013 to the end of this year, Song Yuanming, vice chief of the State Administration of Coal Mine Safety, said at a news conference in July.

 

Eoin Treacy's view -

I’ll be stopping off in Beijing on my way to Singapore next week and I’m looking forward to seeing first-hand what measures, if any,  have been taken to tackle the pollution problem. Replacing coal fired power stations with natural gas plants is a hugely positive development which is likely to have some far reaching repercussions. 



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March 05 2015

Commentary by David Fuller

The Third Industrial Revolution: Internet, Energy and a New Financial System

Here is the conclusion of this fascinating interview with Dr David Brown by Goncalo de Vasconcelos for Forbes:

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

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

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

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

David Fuller's view -

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

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March 04 2015

Commentary by Eoin Treacy

The Price of Oil Is About to Blow a Hole in Corporate Accounting

This article by Asjylyn Loder may be of interest to subscribers. Here is a section: 

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

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

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

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

Eoin Treacy's view -

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



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February 16 2015

Commentary by Eoin Treacy

Is That All There Is? A Fresh Look At U.S. Gas/LNG Export Potential

Thanks to a subscriber for this article by Housley Carr for RBN Energy. Here is a section:  

Exports of U.S.-sourced natural gas as liquefied natural gas (LNG) will likely begin within a year’s time, and will ramp up through the 2016-19 period. That much seems certain. What’s less clear is whether the capacity of U.S. liquefaction/export projects will plateau at the roughly 6 Bcf/d in the “First Four” projects now under construction or continue rising higher. Yesterday’s decision by the BG Group to delay its commitment to the 2 Bcf/d capacity of the Lake Charles LNG terminal until 2016 certainly casts doubts on those further expansions. Prospects for additional export projects hinge on a few interrelated factors, including the higher capital costs associated with some next-round projects; the costs and challenges of shipping LNG through the expanded Panama Canal; and the possibility of competing LNG export projects being developed elsewhere, including western Canada. Today we consider these factors and handicap the handful of export projects on the cusp of advancing.

Making a final investment decision (FID) on multibillion-dollar liquefaction and export projects is not for the faint of heart. Once that FID trigger is pulled, there’s really no turning back. But the decision to build a project is in many ways easier than the decision by a Japanese utility or global LNG trader to commit to 15 or 20 years of LNG purchases. After all, if (as has been the case with all U.S. liquefaction/export projects so far) the project’s economics are based largely on long-term take-or-pay liquefaction commitments, the developer is basically assured of recovering the costs of its investment (and making at least some profit) once it has the necessary Sales and Purchase Agreements (SPAs), even if the LNG buyer elects not to use all the liquefaction capacity it has lined up.

An LNG buyer, on the other hand, is committing to pay up to $3.50/MMBTU for liquefaction capacity and—if, as is likely, it uses that capacity--115% of the Henry Hub price of natural gas for the gas that is liquefied. As a result, prospective LNG buyers need to be very sure that any SPA they enter into will work to their benefit over a wide range of possible scenarios, including the possibility (and current reality) of low oil prices that make once-onerous oil-indexed LNG contracts look not so bad anymore.  As we said in Episode 1, the first liquefaction “train” at Cheniere Energy’s Sabine Pass facility in southwestern Louisiana by early 2016 will be supercooling natural gas and loading LNG onto ships for export to Asia and other markets. Three more trains at Sabine Pass will start operating later in 2016 and in 2017, and soon thereafter the Cameron LNG, Freeport LNG and Cove Point LNG liquefaction/export facilities (a total of six more trains) will be up and running too. The LNG production capacity of what we call the First Four (four trains at Sabine Pass, three at Cameron, two at Freeport and one at Cove Point) totals 45 million tons per annum (MTPA)—enough to consume just over 6 Bcf/d of U.S.-sourced natural gas, or about one-twelfth of current U.S. gas production.

 

Eoin Treacy's view -

As a result of the fall in oil prices investment in Energy infrastructure is on hold at best. The decline has upended the growth assumptions of major oil and gas companies with the result they will likely need to see evidence of bottoming before they commit to major expenditure once more.  For Asia the fall in Energy prices is good news for some of the world’s largest importers i.e. China, Japan and India while it is a mixed blessing for countries such as Indonesia and Thailand. 
 

 



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February 12 2015

Commentary by David Fuller

Want Conservatives to Save Energy? Stop the Environmentalist Preaching

Indeed, one company in the behavioral space, Simple Energy in Boulder, Colo. – an Opower rival – is examining political beliefs as just one factor out of many that may shape how people perceive Energy messages. CEO and founder Yoav Lurie says his company has found, for instance, that terminology matters. “Liberal respondents tended to resonate well with the term ‘save Energy,’ where conservative households resonated better with the term ‘waste less Energy,’” he notes.

“It turns out that ‘waste less’ works in liberal households as well,” Lurie adds, “so you might just change that message to ‘waste less.’”

He emphasizes that his company is not selectively messaging to different consumers based on ideology, but it could be a potential way to reach people. When it comes to the message, Lurie says, “the thing we care about most is how it’s received.”

In the end, then, perhaps the best way to think about ideology and Energy use is this: Nobody is against efficiency or lower bills. Nobody is for waste. Nobody hates the environment.

But environmental and Energy issues are nevertheless wrapped up in politics, which makes conservation, overall, less of a “safe” space for conservatives, according to Renee Lertzman, who works with Brand Cool as Director of Insight and is a consultant on climate change communications. Conservatives often feel “ambivalent” about the topic, she says, pulled in different directions — and liberal assumptions don’t help.

“A lot of people I interviewed felt very offended that they were often assumed to be not caring, they felt very insulted and patronized, because of their choices, and I really felt for that,” Lertzman says. “I felt, it would be so important to convey to people, we know you really do care. And that itself, as a starting off point, would be very powerful.”

David Fuller's view -

For me, this is all about emotional intelligence, which is incredibly important in so many aspects of life, although it is too often misunderstood and therefore seldom taught.  



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February 03 2015

Commentary by David Fuller

U.S. Stocks Advance as Energy Rally Extends to Broader Market

Here is the opening of this report from Bloomberg:

(Bloomberg) -- U.S. stocks rallied for a second day, rebounding from the biggest monthly drop in a year for the Standard & Poor’s 500 Index, as a four-day rally in Energy stocks spread to the broader market.

Exxon Mobil Corp. and Chevron Corp. climbed more than 2.6 percent as Brent crude entered a bull market. Freeport-McMoRan Inc. rose 9.1 percent as commodities had the biggest three-day advance since 2012. Office Depot Inc. jumped 22 percent after the Wall Street Journal reported the company is in advanced merger talks with Staples Inc.

The S&P 500 added 1.2 percent to 2,045.13 at 3:23 p.m. in New York, climbing above its average level for the past 50 days. The Dow Jones Industrial Average rose 277.24 points, or 1.6 percent, to 17,638.28. That gauge is up 2.8 percent over two days. Trading in S&P 500 companies was 32 percent above the 30-day average.

“The fact that oil is stabilizing takes some edge off the argument that the global economy is really in trouble,” Bruce Bittles, chief investment strategist at Milwaukee-based RW Baird & Co., which oversees $110 billion, said in a phone interview. “The markets are a little oversold after being down in January, which is also part of the strength today.”

David Fuller's view -

Given the US stock market’s size it remains a big influence on equity trends in other parts of the world.  Consequently, few investors can afford to overlook market developments on Wall Street, where the technical action has been nervous since October 2014.  It has also been ranging in a volatile fashion so the next sustained breakout is likely to be important – up or down.   

This item continues in the Subscribers’ Area.



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January 30 2015

Commentary by Eoin Treacy

Musings From the Oil Patch January 30th 2015

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

What is most interesting is the consistency in long-term demand growth since 1989. As shown on the chart, for the decade 1989-1999, demand grew on average by 900,000 barrels a day. For the overlapping decade of 1994-2004, average demand grew 50% faster, or an average rate of increase of 1.45 million barrels a day. That period was marked by 2004’s dramatic increase along with healthy growth during the last half of the 1990’s. When we calculated the average demand growth for 2000-2014, it was at an annual average rate of 950,000 barrels a day. This means that last year’s demand grew by only two-thirds of the historical growth rate. This year’s growth will come close to matching the long-term average, however, that forecast was made before the International Monetary Fund (IMF) cut its global economic growth estimates for 2015 and 2016 by 0.3 percentage points, respectively. The problem is that if industry planners were anticipating growth more like that experienced over the 1994-2004 decade, then demand is falling well short of expectations. What we know about this year’s Energy demand forecast is that it will continue to be buffeted by the cross-currents from the demand stimulus as a result of lower oil prices and reduced economically-driven demand from around the world.

In our view, much of the world’s Energy business for the past decade has been driven by an extrapolation of the demand trends established in 1994-2004. The financial crisis and recessionary period presented a brief interruption in that healthy growth trend. Population growth, rising living standards and cheap capital, curtesy of easy monetary policies around the world, stimulated significant growth in oil drilling and production that contributed to the current supply growth. Lack of demand continues to play a greater role in the weak oil prices of today than many are willing to acknowledge. That imbalance between demand and supply is not particularly large – maybe 1.5 million barrels a day, although supply is growing while demand is lagging. Saudi Arabia knows it needs a healthy global economy to spur long-term oil demand growth and thus lift global oil prices. How long will it take to re-establish this growth? Saudi Arabia said it was prepared to live with low oil price for up to two years. Fundamentals, however, should shorten that time frame.

Eoin Treacy's view -

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

A 60% cut in the price of oil will reignite demand growth. However prices will not rebound in any meaningful way until demand has recovered sufficiently and supply has been pared back so that the market returns to relative equilibrium before reversing. The motives of the Saudi Arabians in holding production steady in a supply dominated environment will be cause of continued debate but until they decide to alter their strategy the market will be susceptible to weakness.  

As with any major decline analysts tend to extrapolate the trend and become progressively more bearish as prices fall.  However where oil finds support will be heavily influenced by the ability of shale oil producers to sustain production at lower prices.



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January 20 2015

Commentary by David Fuller

Tim Guinness: 2015 Outlook for Energy

My thanks to a subscriber for this comprehensive report, published by Guinness Asset Management Ltd.  Here are the first two bullet points for 2015:

We expect the oil price to remain volatile for a number of months, with a recovery to $75+/bbl likely over the next 12 months. A necessary part of this outcome is for US oil shale growth to fall back by the end of 2015. After 2015 the likelihood is that the price will fluctuate quite widely, but move on an upwards trajectory as accelerating emerging country demand growth and flattening US shale oil growth slowly tighten the global oil supply/demand balance.

The oil price at $50-60/bbl is not yet at an economic extreme, leaving a reasonable chance that it continues to decline while the market starts to rebalance. An oil price in the $50-60/bbl range is not high enough to justify new investment in higher cost and more marginal non-OPEC projects. However, it is not low enough to warrant existing high cost producers to shut in reasonable volumes of supply. We believe that oil prices would need to fall to around $35-40/bbl to warrant this.

Saudi and other OPEC members are acting rationally in their response to the falling oil price. OPEC’s decision not to cut production is borne out of a realisation that the falling price is principally a function of non-OPEC over-supply, making ‘emergency’ quota cuts a fools’ errand as they would simply encourage more non-OPEC growth. We sense that Saudi are eyeing US shale oil growth and would prefer a shallower oil price recovery for the time being (i.e. one that doesn’t allow US oil growth to accelerate unabated), rather than a ‘V’ shaped recovery that restores it to $100/bbl. If we are right, it is logical for Saudi & co to tolerate a lower oil price for as long as it takes to achieve this.

David Fuller's view -

I do not see this as an OPEC agreement.  It was a Saudi-led decision for the predominantly Sunni producers – Saudi Arabia, Qatar, Kuwait and the UAE - to keep pumping, weakening the growing and predominantly Shia Iran / Iraq alliance, while also curbing non-OPEC supplies from US shale oil to Russia’s production. 

This item continues in the Subscribers’ Area, where Tim Guinness’ Letter is also posted.   



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January 15 2015

Commentary by David Fuller

Dubai Doubles Power-Plant Size to Make Cheapest Solar Energy

Here is the opening of this interesting report from Bloomberg:

Dubai’s government-owned utility plans to double the size of a solar power project that it expects will produce some of the world’s cheapest electricity.

Dubai Electricity & Water Authority awarded a contract to build the 200-megawatt plant to a group led by Saudi Arabia’s ACWA Power International. The 1.2 billion dirham ($330 million) generating station will be completed in April 2017, DEWA Chief Executive Officer Saeed Mohammed Al Tayer said yesterday at a news conference in the Persian Gulf emirate.

ACWA will sell electricity from the plant to DEWA at 5.85 cents per kilowatt-hour, a price that will be “the lowest by far” for solar power globally and among the cheapest from other sources, Paddy Padmanathan, the Riyadh-based company’s CEO, said in an interview.

Dubai plans to build 1,000 megawatts of solar capacity by 2030, enough to meet 5 percent of its forecast electricity needs that year, as it seeks to reduce reliance on natural gas as its main source of Energy for local use. Saudi Arabia and Abu Dhabi, the U.A.E.’s capital and largest emirate, are also developing renewable Energy as oil producers in the Gulf try to reduce the burning of costlier fossil fuels to produce power.

David Fuller's view -

There will be no stopping solar power, which is by far the most flexible Energy source, coming in units of variable sizes and shapes.  The efficiency of new solar panels improves every year, simultaneously lowering costs.



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December 19 2014

Commentary by David Fuller

Berkshire Energy Fined for Eagle Death at Wyoming Wind Farms

Here is the opening of this distressing report from Bloomberg:

PacifiCorp, one of the utilities owned by Berkshire Hathaway Inc. (BRK/A)’s Energy unit, agreed to pay $2.5 million to settle charges that its wind facilities in Wyoming killed eagles and other birds.

The deaths near the Seven Mile Hill and Glenrock/Rolling Hills wind farms violated the Migratory Bird Treaty Act, according to a statement today from the utility. PacifiCorp said it will pay $400,000 in fines, $200,000 in restitution to the Wyoming Game and Fish Department and $1.9 million to the National Fish and Wildlife Foundation to help protect golden eagles near the facilities.

David Fuller's view -

Good.  I hope they continue fining nice Warren Buffett and other owners of wind farms which remain cuisenaires for birds, and also drive people mad who have the misfortune to live nearby.   



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December 19 2014

Commentary by Eoin Treacy

Year-Ahead Outlook 2015

Thanks to a subscriber for this report from Deutsche Bank focusing on the credit markets. Here is a section:

 

Historically, it has been the case that lower oil provided a net benefit to the US and EU economies, both of which were large net importers of Energy. This remains the case in EU today, however we wonder to what extent this relationship might have changed for the US in recent years. Just looking at Energy companies in our IG and HY indexes, we are seeing their cumulative capital expenditures since Jan 2010 at $4.7 trillion, with $1.15trln coming in the last four quarters alone. The latter figure translates into 6.5% of the total US GDP, not an immaterial figure. We realize that not all of this capex went into US shale plays, however it is just as important to acknowledge that not all US shale players are captured by our IG/HY index data. What part of this capex budget gets cut next year is subject to uncertainty, however even a relatively modest cut of 10% could translate into a noticeable 65bp impact on broader GDP figures.

What makes this issue even more consequential to the US economy, is that the negative impact of lower oil is unlikely to remain confined just to the Energy sector alone. Some of the more obvious casualties will include capital goods and materials sectors, where suppliers of drilling equipment, pipes, storage containers, machinery, cement, water, and chemicals used in shale production are all likely to experience a negative impact. Now, readers should be careful to avoid double-counting the same dollars here, as a dollar of capex by oil producer is 80 cents of inventory sold from its suppliers; only incremental value-added is captured by the GDP. Add to this list railroads, where volumes exploded in recent years as large quantities of oil were ferried by rail cars.

All these are relatively obvious casualties of a pullback in Energy producers’ budgets. Perhaps somewhat less straightforward would be utilities – we wonder how much electricity was used to power all this new shale-related manufacturing, production, transportation, and refining activity? Taking one more step towards less directly impacted sectors, we think about financials, and not even in a sense of direct loan exposures to cash-flow challenged producers. Energy producers have raised $550bn in new debt across USD IG, HY, and leveraged loan markets since early 2010 (Figure 3). Lower capex budgets would imply lower need (and ability!) to borrow, thus squeezing a revenue source for investment banks.

And now to the least obvious, or perhaps even counterintuitive, candidates: think about consumer discretionary sectors, such as retail, autos, real estate, and gaming. States with the strongest employment growth in the US in the last few years were all states heavily involved in shale development – average unemployment rate in Dakotas, Nebraska, Utah, Colorado, Iowa, Montana, Oklahoma, Wyoming, and Texas is 4.1%, compared to a national aggregate of 5.8%. Average unemployment rate in oil-producing states today is lower than the national aggregate was at any point in time in the last twelve years.

While we still believe that lower oil prices would provide a net benefit to consumer discretionary areas, we think that historical parallels between Energy prices and their positive net effects could be challenged in this episode given significant changes to structural characteristics of the US economy. Just as we believe consensus has consistently underestimated positive externalities of the US Energy revolution in the past few years, it is positioning itself to underestimate the other side of this development now. 

Eoin Treacy's view -

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

The stock market appears to be currently focused on the benign economic scenario that has allowed the Fed to signal short-term interest rates may increase in 2015. With unemployment back to trend and early signs of wage increases, along with recovering economic growth, the Fed has good reason to want to use this environment as an opportunity to replenish its arsenal of policy tools. Consumers will find that they have extra money in their pocket every time they fill up at the pump or pay of heating oil and these benefits will pass on to Energy consuming sectors as well. 



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December 11 2014

Commentary by David Fuller

Fed Bubble Bursts in $550 Billion of Energy Debt: Credit Markets

Here is the opening of this informative report from Bloomberg:

The danger of stimulus-induced bubbles is starting to play out in the market for Energy-company debt.

Since early 2010, Energy producers have raised $550 billion of new bonds and loans as the Federal Reserveheld borrowing costs near zero, according to Deutsche Bank AG. Withoil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for Energy junk bonds will double to eight percent next year.

“Anything that becomes a mania -- it ends badly,” said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management. “And this is a mania.”

The Fed’s decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns, raising concern that risks were being overlooked. A report from Moody’s Investors Service this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis.

Borrowing costs for Energy companies have skyrocketed in the past six months as West Texas Intermediate crude, the U.S. benchmark, has dropped 44 percent to $60.46 a barrel since reaching this year’s peak of $107.26 in June.

David Fuller's view -

What are the implications of this situation?

This item continues in the Subscribers’ Area.  



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November 18 2014

Commentary by Eoin Treacy

Musings From the Oil Patch November 18th 2014

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

Temasek, Singapore’s state investment company, has joined with RRJ, a private equity firm founded by Richard Ong, a Malaysian dealmaker, to purchase $1 billion in convertible bonds to be issued by Cheniere Energy (LNG-NYSE) for financing the construction of its liquefied natural gas (LNG) export terminal. The bonds have a 6 ½ year maturity and carry an annual interest rate of 4.87% and will be convertible into Cheniere’s common stock in a year’s time. RRJ already had an equity investment in Cheniere. This move comes at the same time Asian buyers appear less interested in buying U.S. LNG. We don’t know why they are turning down what is supposed to be cheaper LNG, but we wonder whether they have less confidence that U.S. LNG supplies will be available in the volumes projected, and especially at the current low price that is projected to remain so for many years. It is also possible that Asian gas demand will not grow as much as projected due to slow growing economies, increased conservation and efficiency that trim demand growth, and  other alternative gas supplies being available with long-term, fixed price terms that prove cheaper than U.S. gas volumes. We continue wondering whether the U.S. LNG export terminals will become white elephants just as the LNG import terminals did.

Eoin Treacy's view -

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

Natural gas prices are characterised by volatility not least because the demand component of the market is so heavily influenced by weather. This is more important now than in the decade prior to 2012 because in many respects the market has returned to a balance between new gas coming on line, displacement of coal in the power sector and a focus on profitability among drillers. This season’s injection pace is now being put to the test as winter weather arrives early and demand for heating rises. 



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November 07 2014

Commentary by Eoin Treacy

Transocean Takes $2.76 Billion Charge Amid Glut in Drilling Rigs

This article by Will Kennedy and David Wethe for Bloomberg may be of interest to subscribers. Here is a section: 

Transocean Ltd., owner of the biggest fleet of deep-water drilling rigs, is feeling the effect of an oncoming glut in the expensive vessels just as crude prices tumble.

The company will delay posting third-quarter results after saying earnings would be hit by $2.76 billion in charges from a decline in the value of its contracts drilling business and a drop in rig-use fees, the Vernier, Switzerland-based company said in a statement today. Transocean, which had been scheduled to report earnings today, fell 7.9 percent to $27.55 at 8:10 a.m. in New York before regular trading began.

Oil’s decline to a four-year low in recent months has caused companies to consider spending cuts, reducing demand for rigs and the rates it can get for leasing them to explorers. Rig contractors had responded to rising demand during the past few years with the biggest batch of construction orders for rigs since the advent of deep-water drilling in the 1970s. Almost 100 floating vessels are on order for delivery by the end of 2017, according to a June estimate from IHS Energy Inc.

“Ouch,” analysts from Tudor Pickering Holt & Co. wrote in a note to investors. The announcement “reflects the reality of this oversupplied floater rig market globally.”

 

Eoin Treacy's view -

A topic of conversation at The Chart Seminar is “How do the majority of market participants predict how a market is likely to trade?” The short answer is that people predict what they see. When prices have been static for a period of time, expectations go down and people assume that the situation will persist. When oil prices were ranging above $100 oil companies and those that service them made decisions based on the situation persisting. 



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November 07 2014

Commentary by Eoin Treacy

Uranium Miners Jump as Japan Moves to Restart Reactors

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

Kyushu Electric Power Co. today received final local approval to resume power generation at its Sendai nuclear plant in northern Japan, according to a prefecture statement. All reactors in Japan have been shut since a March 2011 earthquake and subsequent tsunami led to a meltdown at Tokyo Electric Power Co.’s Fukushima Dai-Ichi nuclear power plant, the worst nuclear disaster since Chernobyl 

“We have been waiting for this moment for a long time,” David Sadowski, a Vancouver-based analyst at Raymond James Financial Inc., wrote today in a note to clients. “Restarts in Japan will reduce the threat that Japan’s utilities will dump their uranium inventories into the market.”
Sendai’s two reactors are in position to be the first nuclear plants in Japan to resume operations under more stringent safety rules set by the country’s nuclear regulator. 

Officials in Satsumasendai city, the closest community to the reactors, last month voted in favor of allowing restart. Final reviews of construction and safety rules must still be completed.

 

Eoin Treacy's view -

Increased geopolitical tensions with Russia and the prospect of Japan restarting more of its stalled nuclear reactors have both contributed to a firmer tone for uranium prices. The spot index rallied to break a more than three-year progression of lower rally highs by September and spent much of the subsequent month consolidating, before breaking out once more. A sustained move below $35 would now be required to begin to question medium-term recovery potential. 

 



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November 06 2014

Commentary by Eoin Treacy

Confident U.S. Shale Producers Think They Can Outlast OPEC Moves

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

The U.S. companies believe they have a lot more staying power than many of Saudi Arabia’s partners in the Organization of Petroleum Exporting Countries, or OPEC. Several producers plan on increasing production.

“Saudi Arabia is really taking a big gamble here,” Archie Dunham, chairman of shale producer Chesapeake Energy Corp., said during a telephone interview. “If they take the price down to $60 or $70 a barrel, you will see a slowdown in the U.S. But you’re not going to see it stop. The consequences for other OPEC countries are far more dire.” 

 

Eoin Treacy's view -

Hydraulic fracturing and horizontal drilling techniques coupled with advanced geophysics make exploiting shale oil and gas possible but it is not a low cost production method. Despite oil price weakness, the benefits to the US economy of Energy independence suggest the question is more of at what price the balance between profit and loss exists rather than whether these resources are going to be developed. 

A number of companies have spent a great deal of money in securing acreage, leaving them at risk as oil prices decline. This would suggest that larger, better capitalised companies have an advantage in a weak price environment. 

EOG Resources dropped by a third between June and October but has held a progression of higher reaction lows since as it closes the overextension relative to the trend mean.
Conoco Philips and Marathon Oil share similar patterns. 

Chesapeake Energy retested its 2012 lows in October and continues to bounce. It will need to the hold the low near $16 on the next pullback to demonstrate a return to demand dominance beyond the short term. 

 



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November 04 2014

Commentary by Eoin Treacy

Musings from the Oil Patch November 4th 2014

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report. Here is a section on Canadian efforts to export its Alberta production: 

The other factor in play now is TransCanada’s plan to ship Canadian oil sands output east from Alberta to the Irving Company refinery and its oil export port in Saint John, New Brunswick. TransCanada formally submitted its 30,000-page application for the 1.1 million-barrel-a-day project, labeled Energy East, to Canada’s regulator, National Energy Board. Once in place, oil sands output could move from Alberta to the East Coast and then be loaded on ships and transported to the U.S. Gulf Coast refining complex for only a couple of dollars more than the proposed tariff to ship it to Texas on Keystone. In a low oil price environment, that cost might be considered an impediment to oil sands export, but it doesn’t appear to represent a significant economic hurdle. As a result, the environmental movement’s argument that by preventing Keystone from being built would prevent Canada from expanding its oil sands business and stepping up its exports would be severely weakened. Energy East requires no U.S. approvals, although it does need Canadian federal government ok and approvals from various provinces. Our understanding is that TransCanada has worked hard to win over those people with rational objections to the pipeline route by relocating the route and adding spurs to refineries in the provinces and export ports. We anticipate Energy East having an easier time winning approval than Keystone has experienced.

We have learned several things from watching the battle over Keystone. The view that environmental politics overwhelms Energy economics when the country is governed by the left was reinforced. Additionally, while pipelines represent the safest mode of oil transportation, the recent string of oil leaks from old pipelines has battered that safety image. The spills strengthened the hand of the environmentalists battling Keystone and the images of black oil oozing through people’s backyards, neighborhood streets and bubbling streams is a powerful weapon against the Energy business, and the Energy companies have not been proactive in trying to change their image. The environmentalists have demonstrated that they have learned how to fight Energy projects more effectively through the regulatory and legal systems. Lastly, low oil prices, should they continue for any duration, will disrupt the pace of development of the oil sands – just how much and exactly when remain uncertain – and possibly change the impetus for either or both Keystone and Energy East. In the end, oil sands output will reach markets, but where those markets are may be different

 

Eoin Treacy's view -

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

It is in Canada’s national interest to develop an export avenue for its crude oil. Since it has met with such stiff resistance to the Keystone pipeline, exporting via its Eastern border represents the next best thing. With Russian supplies now representing a risk for European refineries there is the possibility that Canadian supply will have more than one market rather than having to depend on demand from the US gulf coast. This may be part of the reason Saudi Arabia has been so keen to preserve its European market share by offering discounts. 



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October 30 2014

Commentary by Eoin Treacy

Email of the day on Norwegian oil services companies

I will revert in more detail on oil services tomorrow, but gut feeling is that a few shares have accelerated to the downside and are now trying to establish support. Several names are claimed by analysts to have overreacted to the downside becoming undervalued. One seismic company, Polarcus, need more equity and that is also raising worries among invstors regarding other companies. Feels a bit like capitulation the last down leg.

On the other side we need to keep in mind e.g. the recent oil price forecast from DNB Markets. I am not sure all investors have adjusted expectations to a much lower oil price environment, which will dampen upside potential for many Energy related stocks.

And 

I looked at the charts in your oil services section in the library (Eoin's favourites). Some stocks look like they have bottomed.  

For perspective I have attached the oil service index of Oslo Stock Exchange. No evidence of an end to the downtrend, apart from a "hope" that the 2011 low will provide support. Looking at individual constituents of the index:

AKSO (Aker Solutions; oil service products/services): consolidating after recent drop, but testing lows FOE (Fred Olsen Energy; drilling): has been accelerating down this fall, but another dramatic drop this week PGS (Petroleum Geo-Services; seismic): still in downtrend PRS (Prosafe; accommodation rigs): consolidating recent drop SDRL (Seadrill; rigs): consolidating after steep decline TGS (seismic): showing relative strength, only stock not to post 12 month lows.

Seems to me there is less signs in the Norwegian oil service sector of an end to the acceleration/downtrend than in your international oil service stocks. I am short SUBC (Subsea 7; short term trading position), long DOLP (Dolphin - seismic; likely quite undervalued today) and long PLCS (Polarcus - seismic; my biggest mistake this year...).

Conclusion: there are some signs of capitulation recently, but not yet evidence that all is over, although some stocks are arguably cheap. But there might be some further thinking among investors that oil price decks will have to be revised down. This could hinder the upside going forward.

What do you think?

 

Eoin Treacy's view -

Thank you for these generous emails. I’m sure other subscribers will be glad of your on the ground perspective in Norway. The oil services sector has taken a beating not least because the forecasts for demand growth they based expansion plans on are not panning out. The recent decline in crude oil prices has thrown this issue into sharper focus. 



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October 24 2014

Commentary by Eoin Treacy

NZ trade deficit widens as lower log and dairy prices weigh on exports

This article from the New Zealand Herald may be of interest to subscribers. Here is a section: 

Imports were bolstered by large capital item purchases with transport equipment jumping 591 per cent from the same month the previous year to $614 million, including an aircraft from the US. Car imports gained 31 per cent to $371 million, with a boost from Japanese car arrivals, Statistics NZ said.

China remained the country's largest trading partner although New Zealand slipped into a trade deficit with Asia's largest economy, from a small surplus in September a year earlier. Chinese imports rose 9.6 per cent in the month from a year earlier to $865 million, while New Zealand's exports to the country declined 30 per cent to $568 million, as the difference in dairy prices weighed on the value of the country's exports.

 

Eoin Treacy's view -

The New Zealand economy has come through the financial crisis and the Christchurch earthquake in robust fashion, bolstered by exports of food and building materials to a growing Asian market. However the doubling of the Kiwi Dollar against the US Dollar from 2001 has been an impediment to the competitiveness of exports. This was less of an issue when the Euro was relatively firm but its recent weakness represents a challenge for New Zealand’s milk operations not least as the Eurozone’s milk quota scheme expires at the end of this year. 



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September 24 2014

Commentary by Eoin Treacy

Musings from the Oil Patch September 24th 2014

Thanks to a subscriber for kindly forwarding this edition of Allen Brooks’ ever informative Energy report for PPHB. Here are two important sections: 

The IEA’s comment about how remarkable the decline is, suggests that it did not have a grasp of the magnitude of the impact on oil demand from China’s ending the filling of its oil storage tanks during the past few months in response to the country’s growing economic weakness and financial stress. It would appear that the additional cost of this storage oil was too expensive for the Chinese economy and banking system to bear. Additionally, we believe the IEA’s model assumed too generous an estimate for economic growth in Western Europe and North America during the second half of 2014.

And

Besides the accelerating demand growth against limited non-OPEC supply increase case, the bulls point to the growing cost to find additional oil supplies. They also point to the new dynamic for OPEC, which is the high fiscal cost of their oil output. By “fiscal cost” they mean the price for a barrel of oil that multiplied by the number of annual barrels produced yields income sufficient to cover the cost of running the country’s government. That cost has risen sharply in a number of Middle Eastern and North African countries due to rapidly growing populations (these countries have some of the highest birth rates in the world) and the cost to mitigate social tensions associated with the ethnic struggles (Arab Spring) ongoing within most of these countries – what some of us might call political insurance. A number of analysts have crunched the budget numbers for these countries and created charts such as that below.

What this chart demonstrates is that only Qatar and Kuwait among the OPEC members have fiscal breakeven prices of around $75 a barrel. A substantial volume of OPEC production needs a price somewhere around $100 a barrel for the country to breakeven, while another substantial amount requires prices in the $125 per barrel neighborhood.

Eoin Treacy's view -

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

There have been a number of headlines pondering the response of oil prices when geopolitical tensions have been so taut. China’s decision that its strategic reserve is large enough represents the withdrawal of a significant source of demand from the market at a time when supplies have been reasonably steady regardless of geopolitical tensions. 



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September 18 2014

Commentary by Eoin Treacy

Uranium officially enters bull market

This article from Bloomberg on the 16th may be of interest to subscribers. Here is a section: 

The U.S. on Sept. 12 expanded sanctions against Russia to include OAO Sberbank, the country’s largest bank, because of the fighting in eastern Ukraine. The EU added 15 companies such as Gazprom Neft and OAO Rosneft, and 24 people to its own list of those affected by its restrictions.

In Canada, voting on Cameco’s new labor agreement will happen once workers are back on the job, the United Steelworkers said Sept. 12. The Saskatoon, Saskatchewan-based producer said Aug. 27 it had started shutting down the mine after receiving a strike notice from the union.

An agreement to end the strike will be negative for the uranium sector, Rob Chang, the head of metals and mining at Cantor Fitzgerald in Toronto, said in a Sept. 12 note. The brief shutdown may affect about 900,000 pounds of supply, he said.

Eoin Treacy's view -

The repercussions of the sanctions on Russia continue to be felt across an increasing number of sectors. Locking Sberbank out of large international capital markets is a major impediment to Russia accessing the working capital necessary to fund normal financial markets operations. By comparison, the ban on salmon exports from Europe and Norway has been a boon for the Faroe Islands but in the wider scale of things a pretty small consideration. Russia’s tactical advantages lie in the Energy sector and potentially in the cyber sector. 



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August 19 2014

Commentary by Eoin Treacy

Tony Abbott expected to sign uranium deal with India on visit next month

This article by Daniel Hurst for the Guardian may be of interest to subscribers. Here is a section:

Tony Abbott is expected to sign a deal to sell uranium to India during a visit to the country next month.

The Australian prime minister’s scheduled visit follows the completion of negotiations surrounding arrangements for the export of uranium, according to multiple news reports.

Indian officials convinced their Australian counterparts that the uranium would not be used for nuclear weapons, the Australian Broadcasting Corporation reported on Monday.

The Times of India reported earlier this month that negotiations between the two countries had concluded and the deal was likely to be signed during Abbott’s visit to India in early September.

The Australian government would not confirm the reports on Monday, but the assistant minister for infrastructure, Jamie Briggs, told the ABC it would be a welcome development if true.

 

Eoin Treacy's view -

Despite the fact Australia has the world’s largest deposits of uranium, it has no nuclear power stations and has often had a difficult relationship with its uranium mining sector; with the result that some states and territories permit mining while others don’t. Signing a deal with India for exports is a welcome development for the sector which has been languishing in the aftermath of the Fukushima disaster.

Uranium prices collapsed from their 2007 peak near $140 and, following a relatively brief rally in 2010, extended the downtrend to fresh lows. The recent three-week rally has closed the overextension relative to the 200-day MA but a sustained move above it will be required to begin to suggest a return to demand dominance beyond the short term. 



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August 18 2014

Commentary by Eoin Treacy

Musings from the Oil Patch August 18th 2014

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

As the EIA analysis pointed out, for the year ending March 31, 2014, 127 major oil and natural gas companies generated $568 billion of cash from operations, but their major uses of cash totaled $677 billion, leaving nearly a $110 billion shortfall. That shortfall was met by $106 billion increase in debt and $73 billion from sales of assets, leading to an overall increase in cash balances.

The oil and gas industry is facing a challenging future. Regardless of whether peace or war breaks out, the industry is likely looking at meaningful changes in its underlying fundamentals – commodity prices and Energy demand. Depending on which way prices go, companies might have more or less cash from operations. On the other hand, whichever way commodity prices go, demand will also change, either positively or negatively. Due to these scenarios, the Energy industry will either need to ramp up its spending to find and develop new supplies or it must cut back spending due to adequate supplies. Thrown into the mix is a more difficult and expensive environment for finding and developing new large oil and gas supplies.

For many in the Energy industry who are unconcerned about the above challenges, we worry that they may be looking over the horizon with a risk of falling into the near-term valley. When confronted with what are perceived as merely short-term interruptions to long-term industry trends, it is often easier to maintain one’s focus on these long-term trends to the exclusion of short-term conditions. If one studies the history of the Energy industry during the first half of the 1980s, the result of continued long-term focus over concern for short-term ills proved devastating. We certainly hope current conditions are not a precursor to a repeat of the early 1980s, but hopefully by raising this issue we are providing a service to the industry.

 

Eoin Treacy's view -

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

Unconventional shale and deep water oil might be abundant but they are not cheap sources of supply. Together with increasingly strident nationalisation trends across a number of jurisdictions, the cost of delivering additional supplies remains a challenge for oil companies. Over the last twenty years the response of companies such as Exxon and Shell has been to focus on natural gas but again new sources of supply are not cheap when compared with conventional supplies. 



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August 08 2014

Commentary by David Fuller

Brussels fears European industrial massacre sparked by energy costs

Here is the opening from this interesting article by Ambrose Evans-Pritchard for The Telegraph: 

Europe's industry is being ravaged by exorbitant Energy costs and an over-valued euro, blighting efforts to reverse years of global manufacturing decline.

"We face a systemic industrial massacre," said Antonio Tajani, the European industry commissioner.

Mr Tajani warned that Europe's quixotic dash for renewables was pushing electricity costs to untenable levels, leaving Europe struggling to compete as America's shale revolution cuts US natural gas prices by 80pc.

"I am in favour of a green agenda, but we can't be religious about this. We need a new Energy policy. We have to stop pretending, because we can't sacrifice Europe's industry for climate goals that are not realistic, and are not being enforced worldwide," he told The Daily Telegraphduring the Ambrosetti forum of global policy-makers at Lake Como.

"The loss of competitiveness is frightening," said Paulo Savona, head of Italy's Fondo Interbancario. "When people choose whether to invest in Europe or the US, what they think about most is the cost of Energy."

A report by the American Chemistry Council said shale gas has given the US a "profound and sustained competitive advantage" in chemicals, plastics, and related industries. Consultants IHS also expect US chemical output to double by 2020, while Europe's output will have fallen by a third. IHS said $250bn (£160bn) in extra US manufacturing will be added by shale in the next six years.

European president Herman Van Rompuy echoed the growing sense of alarm, calling it a top EU priority to slash Energy costs. "Compared to US competitors, European industry pays today twice as much for electricity, and four times as much for gas. Our companies don't get the rewards for being more efficient," he said.

Europe's deepening Energy crisis has for now replaced debt troubles as the region's top worry, with major implications for the Commission's draft paper on shale expected in October. The EU's industry and environment directorates are pitted against each other. The new legislation could in theory stop Britain, Poland, and others going ahead with fracking.

"Personally, I am in favour of shale gas in Europe because we have to do more for industry," said Mr Tajani.

David Fuller's view -

I have harped on about this for years so I certainly share Mr Tajani’s views.  However, on reading the quotes in this article I worry about his job security as European industry commissioner! 

Fortunately for Europe, solutions to the Energy problem are at hand, so this is really a question of will. 

1) Restart viable nuclear plants, of which France has the largest number.  Invest in smaller and somewhat safer ‘new nuclear’ plants.

2) Develop Europe’s considerable shale oil and gas potential.  Yes, people will protest, as we see in the UK, but this is a matter of education and reward, plus responsible management by companies with the fracking skills. 

3) Do not build any more windmills.  Instead, encourage the use of more solar panels on buildings.    



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July 03 2014

Commentary by Eoin Treacy

China Coal to Olefins Industry

Thanks to a subscriber for this fascinating heavyweight report from Deutsche Bank. Here is a section: 

In its most recent 5-Year Plan (2011-15), the Chinese government laid out an aggressive time table for development of its coal-to-olefins (CTO), coal-to syngas (CTG) and methanol-to-olefins (MTO) industries (Appendix 1-3). 

The economics of China coal-to-olefins (ethylene / propylene) is competitive relative to the world’s naphtha-to-olefins industry (Figure 2, Figure 20 & Figure 92-93). The world’s naphtha-to-olefins industry is Asia-based. Ninety percent (90%) of Asia’s olefin (ethylene) capacity uses naphtha as a feedstock (Appendix 6-10). Asia produces 34% of global ethylene. A fast-growing China CTO industry would displace its own naphtha to olefins industry (24% of global ethylene capacity). Somehow, this strategy does not make much sense; although it would produce short-term China GDP growth. 

The economics of China coal-to-olefins however is not competitive relative to a growing North American and Middle Eastern natural gas-to-olefins industry (Figure 2, Figure 20, and Figure 94). From a cost perspective, a fast-growing China CTO industry would displace its own naphtha to olefins industry but then be displaced itself by a lower-cost North American and Middle Eastern natural gas-to-olefins industry. Somehow, this strategy makes even less sense; except for the fact that it creates plenty of China GDP by both building and then dismantling multiple China industry chains. 

China’s coal-to-olefins and / or coal-to-urea do not make economic sense in a world awash in low-cost natural gas. Notwithstanding, China continues to grow its coal-to industries; maybe on the prospect that the world’s growing supplies of cheap natural gas could be short-lived.

The production of olefins from coal requires an abundance of water (Figure 98) and produces an abundance of CO2 emissions (Figure 102). The addition of one 600k tpa CTO facility in Beijing would increase provincial CO2 emissions by 14%. China’s abundant water resource (Figure 95) is located in the South and South West part of the country; its coal resources are located in the North and North West part of the country (Figure 11-12) – bad luck.  

 

Eoin Treacy's view -

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

China has a substantial coal sector which, in common with the global sector, has been under pressure from below trend global growth, increasingly stringent environment regulations and competition from lower cost alternatives (at least in some jurisdictions) such as natural gas. The green light for investment in coal to liquids development appears to be an attempt from some portions of the administration to provide the coal sector with an additional business line in order to preserve its viability.

Quite how viable that is when water and environmental concerns have not been addressed and when the country is also investing heavily in developing its own natural gas reserves raises some important questions about whether this will in fact pan out. 



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June 25 2014

Commentary by Eoin Treacy

Australia lowers 2015 iron ore price forecast to $94.60/t

This article by James Regan for Reuters may be of interest to subscribers. Here is a section

BREE's forecast iron ore price for 2015 is just above the current price of 93.30 .IO62-CNI=SI, following a 30 percent price drop this year. However, exports in fiscal 2014/15 were forecast to rise 13 percent to 720.7 million tonnes, BREE said, just below its previous estimate.

Jefferies has cut its earnings estimates for iron ore miners by 5-9 percent below consensus between 2014 and 2016, owing to expectations ore prices will continue to weaken as supply swells.

"This tsunami of supply is still rolling in, and supply growth is likely to be substantial until 2016," it said in a client note.

BREE also forecast a sharp dip in metallurgical coal prices to $118.90 a tonne in 2015, well down on its March forecast of $134.60. It slightly increased its forecast for exports to 180.5 million tonnes in 2014/15, just up on a year earlier.

Commissioning of new coal mines has more than offset lost production from ones that have closed, BREE said, but many producers were unprofitable at prevailing prices.

"This demonstrates the business of mining bulk commodities like coal and iron ore is almost exclusively the domain of big producers, which can benefit from their large economies of scale," said Minelife analyst Gavin Wendt in Sydney.

Eoin Treacy's view -

Over the last week iron-ore prices have stabilised near the 2012 low at $90. A short-term oversold condition is evident so even in a bearish scenario there is scope for a bounce from these levels. However investors are probably going to require some evidence of steadying before concluding a meaningful floor has been reached.

Coking Coal prices have fallen even further and are currently trading below their 2008 lows. A sustained move back above the 200-day MA would be required to begin to suggest more than a short-term low has been reached.



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June 23 2014

Commentary by Eoin Treacy

China to accelerate nuclear power development

Thanks to a subscriber for this article from Xinhua which may be of interest to subscribers. Here is a section:

By the end of last year, 17 nuclear plants were in operation, with a total capacity of nearly 15,000 megawatts of electricity.

At a meeting of the National Energy Commission on April 18, Premier Li Keqiang announced the introduction of new nuclear power plants along the east coast "at a proper time".

Earlier this month, the Ministry of Environmental Protection released the environmental impact statements for two new nuclear power plants, one in Guangdong Province and another in Shandong, but this is still not enough in the longer term.

"China's nuclear power sector still has a long way to go before reaching the global average," said Ye Qizhen of the Chinese Academy of Engineering.

A proportion of 10 percent of nuclear power is an ideal number for China, Ye said.

 

Eoin Treacy's view -

With a serious pollution problem and Energy consumption on a secular upward trajectory, China has little choice but to explore every avenue for electricity generation. The approval of new nuclear reactors suggests the period of contemplation that followed the Fukushima disaster has ended.  

Among Chinese companies related to the construction of nuclear reactors; Shanghai Electric Group (Est P/E 12.35, DY 3.04%) found support three weeks ago in the region of the 200-day MA. It will need to hold above the HK$2.80 area if potential for additional higher to lateral ranging is to be given the benefit of the doubt. 

 



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June 20 2014

Commentary by Eoin Treacy

Bridging Hong Kong, Shanghai for the future

This article by Zhu Ning for ChinaDaily Asia, dated May 19th may be of interest to subscribers. Here is a section: 

To be fair, allowing Chinese domestic investors to access the Hong Kong stock market may prove to be even more valuable. Given the controls on capital accounts and cross-country listings, Chinese domestic investors are severely underdiversified in their portfolios.

Such underdiversification costs Chinese investors dearly, especially given the exorbitantly high volatility and recent disappointing performance in the Chinese A-share market.

By investing in the Hong Kong market, Chinese investors can not only buy cheaper stocks offered by the same company (for most companies cross-listed between Shanghai and Hong Kong, the H-shares trade at a discount), but also invest in overseas companies that cater to Asian investors and are listed in Hong Kong.

With the direct investment channel between Hong Kong and Shanghai, Chinese investors can use their existing accounts to invest in overseas companies. Such convenience and familiarity will no doubt boost Chinese investors' confidence in investing overseas, which not only helps their portfolio performance but also propels more Chinese capital into the international financial arena.

 

Eoin Treacy's view -

Speculation that the A-H Share spread would disappear due to changes in Chinese regulations sent the Hang Seng to an accelerated peak of 32,000 in 2007. When this speculation came to naught, the Index pulled back sharply before collapsing during the credit crisis. By contrast news that the Chinese are prepared to allow domestic investors relatively unfettered access to the Hong Kong market within the next six months has on this occasion been met with little fanfare. 

Of course the stock market situation is totally different today. In 2007, the A-Share market was surging ahead and investors were speculating that the Hang Seng would participate in a major catch-up move. Today investors need a lot of convincing to consider China particularly when other markets are doing a lot better. The A-H Share premium has fallen to its lowest level since 2006 and may have disappeared altogether by the time the regulatory change comes into being. Whereas in 2007 the Chinese were worried about an overheating stock market, today they are eager to continue to attract investment. Therefore the potential of them following through to allow greater access to their domestic market is probably greater today than it was in 2007. 



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June 13 2014

Commentary by David Fuller

Iraq civil war threatens structure of global energy supply for years

Here is the opening of this topical and insightful column by Ambrose Evans-Pritchard for The Telegraph:

Spectacular advances by Jihadi forces across northern Iraq have raised the spectre of a Sunni-Shia conflagration in the heart of the Middle East, triggering a surge in oil prices and throwing into doubt the structure of global Energy supply for the next decade.

Brent crude jumped above $113 a barrel as the self-described Islamic State of Iraq and the Levant (ISIL) raced down the Tigris Valley towards Baghdad with sophisticated weaponry, seizing on its momentum after the historic capture of Mosul. Oil prices are approaching levels last seen during the Arab Spring.

“Iraq is turning into a nightmare. There are real risks that this movement will spread to other countries. Our economies are too weak to pay for oil at $120, and they can’t stand $140 if it spikes that high,” said Chris Skrebowski, a veteran oil analyst and former editor of Petroleum Review.

Iraq is Opec’s second-biggest producer, though output has slipped 8pc to 3.3m barrels a day (b/d) since February due to sabotage of the Kirkuk-Ceyhan pipeline to Turkey. Ole Hansen, from Saxo Bank, said a fall in Iraqi output to levels seen in the last Gulf war would cause a $20 price spike. “The entire economic recovery could stall, and we could even slip back into recession in some regions,” he said.

The International Energy Agency is counting on Iraq to provide 45pc of the entire increase in global oil supply by the end of the decade, badly needed to meet growing demand in China and India. This requires vast investment – rising to $540bn by 2035 as output tops 8m b/d – but such outlays are implausible as the state slides towards sectarian civil war.

A risk alert put out on Thursday by IHS said the West Tikrit and Ajul oil fields and other Energy assets in the North are at “severe risk of being raided or targeted for sabotage”. The highways linking Baghdad to Basra are also at risk, and cargo travelling almost anywhere in the north is vulnerable to bomb attacks. The government claims to have stopped an assault on the country’s biggest oil refinery at Baij but IHS said the plant is still at “severe risk”.

Iraq’s oil minister, Abdul Kareem Luaibi, said most of country’s crude was pumped from “very, very safe” regions in the Shia South. He insisted that Iraq would meet plans to boost output to 4m b/d by the end of the year, the highest since the late 1970s.

Such assurances count for little as the Iraqi security forces melt away in the face of lightning strikes by the army of Sunni extremists, a group of up to 5,000 warriors that is too radical even for Al-Qaeda and harks back to the 8th century Caliphate.

David Fuller's view -

I do not think that the headline above is correct.  Nevertheless, the last thing a gradually recovering global economy needs is an oil price shock, which has suddenly become a possibility following the advance of a radical group of Sunnis calling themselves the ‘Islamic State of Iraq and al-Sham’ (ISIS).  It has rolled swiftly into Iraq in recent days, encountering little opposition from the infiltrated and demoralised army backed by the Shia-dominated regime of Nouri al-Maliki in Baghdad.  Global stock market sentiment is being tested by this generally unexpected event.

It is the latest in the long history of Sunni-Shia conflicts.  It also has suspicious financial undertones because regional oil producers, unaffected by the conflict, would benefit from somewhat higher oil prices in the short to potentially medium term. 

The full Telegraph Article is posted in the Subscriber's Area.

Despite the technological development of commendable renewable sources of Energy, it will be at least several decades before the global economy can prosper without crude oil.  Most countries now know that technologies are available to develop their own oil and gas reserves from both conventional, and increasingly, unconventional shale sources.  A few are doing so and reducing their carbon emissions by producing and using much more natural gas. 

What are other countries waiting for, especially when they risk being hostages to fortune in terms of even higher Energy prices?

(The current Energy risk is discussed in more detail in Friday’s Big Picture Audio.  See also Thursday’s written comment.)   



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June 10 2014

Commentary by Eoin Treacy

Email of the day on MLPs

I wonder if one of you can be tempted to have a look at some charts of the more successful Master Limited Partnership?  In particular ETE, MMP and TRGP have had rivetingly consistent charts for a number of years, and they have been my main money spinners recently. However they are doing so well that I have now got out of them fearing a pullback, but (as always with a bull market) wondering whether hanging on to a good thing would not have been best.

These three are either General Partners or (MMP) have no General Partner, which partly explains why their growth is so high, as I understand that a GP is in a way a leveraged play on the underlying LP.  But their charts are much more consistent than those of their LPs and indeed than those of most other MLPs.  The whole sector (AMJ) has also had an explosion recently, which does make me think the trend is actually likely to continue.

 

Eoin Treacy's view -

Thank you for this informative email and question of general interest to the Collective. Pipeline MLPs have been among the greatest beneficiaries of the boom in US unconventional oil and gas production, not least because regardless of how profitable the drilling operation is, the product still needs to reach market. As volumes increased, so have the shares of the related MLPs. The companies’ attractive dividend streaming characteristics have been additionally compelling in what has been a low yield environment. 



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June 05 2014

Commentary by Eoin Treacy

Email of the day on some interesting MLPs and coal companies

I read your book last fall and thoroughly enjoyed it, and I intend to read it again soon just to be sure that the information sticks. You and David provide such a wonderful template for viewing markets. Thanks for all your hard work on behalf of the Collective. And on another note, would you be kind enough to add Pacific Coast Oil Trust (ROYT) and Suncoke Energy Partners (SXCP) to the Chart Library. Thanks again.

Eoin Treacy's view -

Thank you for your kind words and I’m delighted you enjoyed Crowd Money. I’ve added both of the above instruments to the Chart Library. 

Pacific Coast Oil Trust (P/E 7.48, DY 11%) manages producing and non-producing properties in California which is one of the most hostile states to additional drilling. Therefore this can be viewed as a yield play rather than a potential growth story. The trust cuts it dividend by 5.89% in the last year but the price fell by 30%. It has stabilised mostly above $12.50 and a sustained move below that level would be required to question potential for continued higher to lateral ranging. 

 



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May 21 2014

Commentary by Eoin Treacy

Encana CEO Surprises With Makeover in One Year

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

Since taking over, the former BP Plc executive announced the sale of $2.3 billion of gas properties, the purchase of $3.1 billion of oil lands, planned a royalty spinoff and paid down debt. Suttles is shifting production toward more valuable oil and gas liquids to buffer Encana from the wave of North American supply unlocked by modern drilling techniques that reduced gas prices about 60 percent in the past six years.

“He’s done a better job than what I was originally anticipating,” Kyle Preston, an analyst at National Bank Financial in Calgary, said in a May 15 phone interview. “My original view, and it was probably shared by much of the market, was that Encana was this beast of a gas-focused company and it was going to be hard to turn that ship around.”

In November, Suttles laid out plans to fire almost 1,000 people, or about 20 percent of Encana’s workforce, and lower its dividend 35 percent to cut costs and boost profits.

“He took the hard medicine up front” and the company is now on a “good path,” Craig Bethune, a vice president and portfolio manager at TD Asset Management Inc. in Toronto who holds Encana shares, said in a May 15 phone interview. “The stock’s done well so that’s probably your biggest evidence.”

 

Eoin Treacy's view -

Natural gas companies have been forced to evolve by the ongoing revolution in unconventional supply. This has been particularly challenging for Canadian producers since the USA represents their only export market of any size and US production has ballooned over the last decade. This has forced a migration to oil rich plays where possible and some drastic cost cutting in other parts of their businesses. 



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May 12 2014

Commentary by David Fuller

Email of the day 3

On the future path of EU Energy policies:

“Dear David, I hope all is well with you and your family. Also, congrats on the successful transformation of the service. It seems to function smoothly now, after some minor initial setbacks. I was hoping to hear your current views on the future path of EU Energy policy. More specifically, the role of Russian imports. In light of recent events, one hears a lot of talk about Europe diversifying further its Energy supply. Is that an emerging trend to be taken seriously or just lip service? If this takes place, what sort of substitutes do you see as most likely? Obviously, the potential impact on the Energy sector is significant. For the record, I'm long Royal Dutch Shell and a small cap share called Exmar, involved in LNG/LPG shipping. So not entirely unbiased here:) Many thanks in advance.”

David Fuller's view -

Thanks for your kind words and interesting questions.  Regarding development of the service, last year Eoin and I concluded that we had to jump from what we saw as a deteriorating environment.  It was not easy and it was very expensive but the alternatives were unconscionable, in my opinion.   Under the circumstances, the initial setbacks were most unfortunate, particularly regarding the Chart Library.  Eoin’s efforts have been instrumental in improving the Library and they continue.  For instance, we will soon have some frequently requested indicators.    

This item continues in the Subscriber’s Area.



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May 08 2014

Commentary by David Fuller

Email of the day

On investing in the now rapidly changing Energy sector:

“I saw this and found it surprising and, if true, a view that should alter my investing ideas for the Energy sector long-term. I would be most interested in your opinion on it.

“Look forward to seeing you tomorrow!”

David Fuller's view -

Thanks for the interesting article and I look forward to seeing you and other subscribers at The Markets Now event tomorrow.

The Energy sector is changing rapidly, thanks to an accelerated rate of technological innovation, plus a powerful needs-must incentive because the world will need more and preferably cheaper Energy to prosper, and we also need cleaner Energy for the well being of ourselves and our planet. 

This item continues in the Subscriber’s Area.



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May 07 2014

Commentary by Eoin Treacy

BlackRock World Mining boosts income

This article from the Investors Chronicle dated February 5th may be of interest to subscribers. Here is a section:

About half the trust's income comes from ordinary dividends, which Mr Hambro says are on the rise, but it has also boosted its income by investing in royalties. This is where in exchange for putting money into a company the trust, for example, receives a percentage of the revenue from the company's mine over its life. The trust holds three royalties, though can invest up to 20 per cent of its portfolio in these and is looking to increase exposure.

It entered into its first royalty agreement in 2012 with London Mining (LOND). For a consideration of $110m, the trust gets a 2 per cent revenue related royalty calculated from iron ore sales over the life of the mine from London Mining's Marampa licence in Sierra Leone. This is paid quarterly.

 

Eoin Treacy's view -

Over the last month we have highlighted a number of Energy and resources companies which have returned to positions of relative outperformance. As part of my search for suitable vehicles likely to benefit from this theme, I took a look at the Blackrock World Mining Trust’s constituents. 

While Rio Tinto and BHP Billiton remain its largest weighting, London Mining is its four largest at 6.7% of the portfolio. The trust may hold a royalty in the company’s production but the share remains in a medium-term downtrend and its market cap has declined to a mere £80 million. This underperformance may be contributing to the trusts inability to sustain a rally. 

 



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April 30 2014

Commentary by Eoin Treacy

Supreme Court upholds EPA rule limiting cross-state pollution

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

EPA Administrator Gina McCarthy called the ruling “a resounding victory for public health and a key component” of the agency’s effort to “make sure all Americans have clean air to breathe.” She said the court’s decision underscored the importance of basing clean air rules “on strong legal foundations and sound science,” declaring it a big win and “a proud day for the agency.”

Richard Lazarus, an environmental law professor at Harvard, called the cross-state pollution rule “one of the most significant rules ever” promulgated by the EPA, and supporters said the cost of carrying it out would be more than offset by health benefits.

 

Eoin Treacy's view -

The last few years have represented a perfect storm for coal companies. Low natural gas prices took over market share among utilities. Stricter environmental standards have also increased the cost of using coal for the same utilities which has further bolstered the allure of natural gas. As a result a number of coal miners have run into financial difficulties. For example, James River Coal defaulted on its debt two weeks ago. 



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April 15 2014

Commentary by David Fuller

It is OK to Support Nuclear Power and Still Enjoy a Movie Now and Then

Here is the opening from this somewhat tongue-in-cheek assessment published by Bloomberg:

The nuclear power industry received a springtime Christmas present this week.

The world’s authoritative climate science group Sunday threw its arms around nuclear Energy, among others, as a future source for powering economies. The industry’s share of global electricity generation has been falling since 1993.

The report, from the Intergovernmental Panel on Climate Change, emboldens proponents of nuclear Energy, who tend to talk it up no matter what the issue is at hand.

David Fuller's view -

We cannot afford to ignore the risks of man-made atmospheric pollution.  Fortunately, production and consumption of natural gas is increasing rapidly, and it is the cleanest of fossil fuels.  Solar Energy is leading the renewables, becoming much more efficient and flexible than wind power, in addition to its compatibility with populated regions. 

New nuclear is the most productive clean source of power, although plants are currently expensive to build.  Understandably, they are unpopular because nuclear accidents, even if rare, are massively destructive.  Additionally, there is no known solution to the problem of nuclear waste. 

Nevertheless, the world needs nuclear Energy and the Intergovernmental Panel on Climate Change has made a sensible contribution to the debate.  Prime Minister Shinzo Abe of Japan will be among the first leaders to take note.  



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March 21 2014

Commentary by Eoin Treacy

Email of the day on oil sector balance sheet optimisation

“interesting article. It's certainly is what I see in my company BG who are in cost cutting mode. Also as it is mentioned we are no longer going for volume but will develop assets that deliver $” 

Eoin Treacy's view -

Thank you for this article by Allen Brooks’ for PPHB which appeared in Rigzone. A link to the full edition of his Musings from the Oil Patch report dated March 18th is posted in the Subscriber's Area but here is a section: 

We were intrigued by the decision by Chevron to boost its oil price outlook from $79 a barrel for Brent crude oil to $110 per barrel. This move is designed to help the financial outlook for the company’s earnings and to offset the reduction in the production target. The oil price assumption is consistent with the average Brent price for the past three years, but it is at odds with the trajectory for prices derived from the futures market, which call for lower levels in the future. We wonder whether this price-target revision will rank with their statement about the future course for natural gas prices a few years ago when the major oil companies jumped on the shale gas bandwagon. Their timing essentially marked the top for gas prices as North American gas prices collapsed due to the surge in gas output. This would not be the first time major oil company planning departments incorrectly projected the course of global oil prices.

Strategy adjustments by major oil companies are seldom quickly reversed even when near-term industry trends suggest an adjustment should be made. If the newly defined financial discipline mantra demanded by investors is followed and industry capital spending is restrained, and possibly falls, there will be ramifications in the Energy market. If Mr. Watson’s declaration, as echoed by other oil company CEOs, is true, then the cost of finding and developing new reserves is too high and the pressure to drive down oilfield service costs will grow more intense. We may now be witnessing the fallout from that discipline in the offshore drilling business where the expansion of the global rig fleet with more sophisticated and expensive rigs, necessitating higher day rates, is leading to near-term “producer indigestion.” Could the offshore drilling industry be on the precipice of a significant wave of older rig retirements in order to sustain demand for its new, expensive drilling rigs currently being delivered without contracts?


This service has long defined the peak oil argument in terms of the rising cost of marginal production. The demand growth story which has been such an important aspect of just about all commodity markets in the last decade has created conditions where producers were forced to invest in exploration, new technologies and other capital intensive projects. 

 



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March 05 2014

Commentary by Eoin Treacy

Australian Growth Beats Estimates as Rebalancing Begins

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

“The Coalition’s plan to reduce regulation and abolish taxes will help smooth the transition in the economy away from resource investment and toward growth in the non-mining sectors,” Treasurer Joe Hockey said in a statement today.

“That will be key to boosting annual growth to more than 3 percent, which is what’s needed to bring unemployment down.”

The nation’s unemployment rate climbed to a 10-year high of 6 percent in January. February jobs data is due on March 13.

“Some indicators of business conditions and confidence have shown improvement and exports are rising,” central bank Governor Glenn Stevens said in a statement accompanying yesterday’s decision to leave rates unchanged. “At the same time, resources sector investment spending is set to decline significantly and, at this stage, signs of improvement in investment intentions in other sectors are only tentative.”

Eoin Treacy's view -

The RBA has made its intentions clear by reducing short-term rates to historic lows and repeatedly earmarking the currency for additional declines. This has had the twin effects of boosting the allure of Australia’s high yielding shares and enhancing the export sector’s competitiveness.

While a great deal of commentary has focused on the slowing pace of investment in the resources sector, the equity markets have already priced in the fact that massive write-downs have already been announced and that miners are now running much more cost-efficient operations. 



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February 27 2014

Commentary by Eoin Treacy

Short Term Oil Market Outlook report from DNB

Thanks to a subscriber for this interesting report from DNB which may be of interest to subscribers. Here is a section

In the US the refining margin based on domestic crudes as feedstock have stayed strong and hence justified refinery throughput at US refineries a massive 830 kbd higher than the prior year on a 4-week moving average basis. In Europe the throughput at refineries in EU was down 366 kbd vs the prior year in January and 836 kbd down in December. This is the flip side of the US shale story and shows how this has a global effect on oil prices. The last half a year the average refinery throughput in EU is down 900 kbd, while for US refiners the average throughput is up more than 600 kbd for the same period. This is the answer to why the lost Libyan barrels have not been able to send the Brent-price higher. We have not only lost a lot of crude supply to Europe, we have lost a lot of crude demand as well. This lost demand for crude in Europe is due to US refiners taking market share from European refiners and this is a direct consequence of the US shale revolution. US refiners have both cheaper feedstock and cheaper operating costs, so how can European refiners compete? One year ago Libya produced 1.4 million b/d but output started to decline in June and fell to almost nothing in November/December. Still the Brent price has continued to trend lower since August last year when it priced as high as 117 $/b at the highest. That is quite remarkable noting that Libyan production the last half a year is down 1.1 million b/d on average vs the year before and knowing that most of the Libyan crude normally feeds European refineries.

The US refineries are entering maintenance season which according to a survey by PIRA Energy should peak in March/April this year. US crude demand should drop by about 800 kbd from January to March, purely based on maintenance schedules. The important Padd 2 region (The Midwest, where Cushing Oklahoma belongs) is scheduled to lose 300 kbd of crude demand from January to March and this may halt the decline in Cushing crude stocks in the coming month as it is should be worth more than 2 million barrels stock build per week, all else being equal.

Refinery maintenance in Europe is set to peak in April at about 1 million b/d which is 0.6 million b/d higher than in February. On a global scale the refinery maintenance is set to increase by 2.5 million b/d from February to April, which looks to be the seasonal peak. What does it mean? It basically means less demand for crude oil in the coming month or two.

Eoin Treacy's view -

The full report is posted in the Subscriber's Area. 

The USA may have a ban on crude oil exports but that does not apply to refined products. As a result of lower input costs and the spread between domestic and international pricing, the USA became a net exporter of refined products in the last few years which has been of substantial benefit to related companies. 



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February 25 2014

Commentary by Eoin Treacy

Natural Gas Heads for Biggest 2-Day Drop in 11 Years on Weather

This article by Naureen S. Malik for Bloomberg may be of interest to subscribers. Here is a section: 

March gas traded 28 cents above the April contract, narrowing from 82.5 cents yesterday. Concern that stockpiles would tumble before the end of the heating season sent the March premium to a record $1.208 on Feb. 20.

The narrowing spread and support for April contracts shows “the fundamentals are still relatively constructive” for gas prices in the coming months, Viswanath said.

Gas consumers in the East can expect “unrelenting cold” in the north-central states over the next five days, said MDA in Gaithersburg, Maryland. The National Weather Service has issued wind-chill advisories from Montana to Minnesota and Indiana. The combination of cold air and wind may make temperatures feel like minus 35 degrees Fahrenheit (minus 37 Celsius).

Below-normal readings will sweep most of the lower 48 states through March 6 before moderating heading into mid-March, while the West Coast will be unusually mild, MDA said.

Eoin Treacy's view -

The surge in demand for natural gas exposed how tight the market had become following years of depressed pricing. An additional consideration anyone with a long position in futures will be aware of is that natural gas trades on monthly contracts. As the expiry approaches traders need to decide whether to roll the position forward or to take profits. 
 

 



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January 23 2014

Commentary by Eoin Treacy

Winter storm Janus: Natural gas prices soar in Northeast

This report from the Christian Science monitor highlights the tight situation currently evident in the USA’s natural gas market. Here is a section:

"While supply is greatly increased because we have plenty of natural-gas production, right now we have a transportation and storage issue," Dennis Weinmann, a principal at Coquest Inc., a Dallas Energy brokerage and consulting firm, told The Wall Street Journal. "We don't have gas where we need it right this second." 

On a typical day, industry watchers say the Northeast's natural gas infrastructure is in need of an upgrade, particularly as natural gas production booms in the US. When extreme winter hits suddenly, and everyone stays home and turns up the heat, the strain on that pipeline system increases. Nearly all natural gas pipelines headed into New York and New England were constrained Wednesday, according to the US Energy Information Administration (EIA). 

Eoin Treacy's view -

Henry Hub is still very much a local market for North America. The boom in shale gas production saw prices plummet and it has taken a few years for the market to restore equilibrium. The fact that a short-term event such as a dramatic winter storm has caused a price spike suggests that the excess supply has been worked through and while prices can be expected to pull back once the weather improves, the $4 area is likely to represent a new floor.

 



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December 27 2013

Commentary by Eoin Treacy

December 23 2013

Commentary by Eoin Treacy

Shenhua Buys $1.5 Billion of Assets From Parent in Expansion

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

Shenhua Energy, which generated 69 percent of its sales from coal and 29 percent from power production in 2012, according to data compiled by Bloomberg, is buying related companies as it seeks to broaden its earnings base.

The company said yesterday it plans to invest $90 million in a venture that will explore for shale gas in Pennsylvania. Last year, the company agreed to buy 3.45 billion yuan of assets from its parent, including stakes in three companies and rail cars.

 

Eoin Treacy's view -

Closer environmental scrutiny of coal fired power stations and competition from natural gas in the USA, and reduced demand for steel, has acted as a significant headwind for the coal sector globally. The result has been that it was among the worst performers this year. Some of the larger companies have attempted to diversify by either investing in value added products such as chemicals and/or producing coal seam gas. With natural gas prices at their highest level in a number of years the competitive disadvantage coal has been at is now being eroded. 
 

 



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December 16 2013

Commentary by David Fuller

Energy and Jobs. The transformation of Americas energy market is starting to have a direct impact on vital British [and European] industries

Here is the opening from this important editorial from The Times, which is relevant not only to Britain but also most countries which have chemicals industries:

“Welcome to Boomtown USA,” says the sign at the entrance to Williston, North Dakota. Its unemployment rate is under 2 per cent. Its gas flares are visible from space, and its pride at helping to reverse America’s long slide towards Energy dependency is palpable.

There are no such signs in Britain because there is still no large-scale British fracking industry. Instead the economy remains yoked to high Energy costs and low growth that compare well only with its sluggish European neighbours.

Britain’s Energy-intensive industries, chief among them chemicals manufacturers, are struggling with gas prices three times higher than in the United States. Electricity costs twice as much as in America and the chemicals sector across Europe is in a “fight to the death”, in the words of one analyst, as investment and jobs go elsewhere. Prompt steps must be taken to begin to bring them back. If the price is that the coalition’s green credentials are further undermined before the next election, it is one that must be paid.

For now, Europe’s largest maker of PVC is the giant chemical works owned by Ineos in Runcorn. It produces 38 varieties of polyvinyl chloride, used in hundreds of products from clingfilm and swimming pool liners to pharmaceuticals and drainpipes. It uses as much electricity, much of it from gas-fired power stations, as Liverpool. Historically it has exported much of its output to North America, but its future is now much less certain.

The Government’s Committee on Climate Change warned yesterday that low American shale gas costs as a result of fracking “could present a direct competitiveness risk to UK gas-intensive firms trading with the US”. The committee said that “in the longer term there is a risk that investment and jobs could relocate to the US”.

Viewed globally, this relocation is already under way. Taiwanese and Saudi chemicals firms are among those planning investments worth more than $90 billion in new US plants to take advantage of low Energy costs. From being a net importer two years ago, America expects to be exporting chemicals worth $30 billion a year by 2018. At the same time it is preparing to boost its gas liquefaction capacity by a third in order to sell its shale gas surpluses abroad.

The impact on British industry will be profound, and the policy imperatives are clear. The Government should, first, avoid the trap of committing itself to high prices for future Energy supplies when there is a clear possibility that wholesale prices will fall rather than rise in the medium to long term. That it has already guaranteed extravagant prices for power from new nuclear plants to woo foreign investors only makes it more important not to follow the same path for renewables. The result would be higher domestic Energy bills and the risk of steep job losses for the sake of self-imposed carbon targets not observed even elsewhere in Europe.

David Fuller's view -

Wake up politicians, and smell the coffee.  You are weakening your economies and increasing unemployment by driving away Energy dependent industries. 

This is not America’s fault.  In fact, the USA’s private sector has shown the way, by using technology, commonsense and commercial initiative to lower its dependency on often hostile Energy cartels.  Thanks to fracking technology, which the USA’s private sector invented, it has lowered its Energy costs and increased the efficiency of its economy.  In the ultimate riposte to militant green lobbyists, who would weaken our economies while darkening our homes and streets, the USA has also lowered its CO2 emissions by using fracking to produce much more natural gas.

 



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December 10 2013

Commentary by Eoin Treacy

Oil Market Outlook 2014

Thanks to a subscriber for this educative report from DNB which is sure to be of interest to subscribers. Here is a section:

Recently Lynn helms, the head of North Dakota's Department of Mineral Resources stated that 86% of the state¡¯s output has break even prices of 45 $/b or lower. This is much lower numbers that we have seen in earlier calculations. The break even price includes 10 % cost of capital and is after tax and royalties according to the Department. The break even prices for the top 4 counties in the Bakken field was said to be 40 $/b for Williams, 37 $/b for Mountrail, 26 $/b for McKenzie and 31 $/b for Dunn. These are low numbers, but note that they would be well-head break evens which means you will have to add maybe 5-15 $/b in transportation costs to reach a refinery. Still if the break even costs to reach the sea is 45 $/b plus 15 $/b, this is lower than the estimates we have operated with so far. We will probably have a test of the North Dakota Break even prices when we get the reported November numbers from the oil industry in North Dakota because in November the price for Bakken crude oil into the Clearbrook pipeline system was about 80 $/b. If this price was not low enough to dent any activity in the Bakken it may indicate that the break even costs are on their way down rather than up in North Dakota. According to Wood Mackenzie the break even price for Bakken is at 62 $/b. Also this is meaningfully lower than the 77 $/b we have been leaning on as the average Bakken break even price calculated by PIRA Energy. PIRA is however telling us that they are about to revise their break even calculations for the Bakken lower these days.

There are many numbers floating around and what we should probably focus on is the development reported by the key players in the shale industry. It is probably not very relevant to put any weight on what small insignificant producers may report of IP-rates, break even costs, drilling time, etc, etc. In the US shale oil industry (note this is not shale gas) there are 25 players that are behind most of the volume produced. We have made a list of these players in the Appendix. The largest shale oil player is by far EOG, but other players are on the rise. Note that this list of 25 players only includes 3 International Oil Companies (NOC¡¯s). This industry is in other words not at all driven by the large international integrated oil companies. Note that Royal Dutch Shell is not at the list at all. The largest of the oil supermajors is ConocoPhilips. Our point is that if you wish to follow the broad development of costs and efficiency in this industry you should focus on the 25 names mentioned in the Appendix. Don't waste effort in looking at the development for the very small players (unless you are evaluating investing directly in them of course.
 

Eoin Treacy's view -

At FTMoney.com we have defined peak oil in terms of the rising cost of production and this is borne out in the fact that much of the new supply now reaching market is at a cost substantially above that of providers such as Saudi Arabia. As a result we can conclude that while the medium-term outlook for oil prices is for lower to lateral ranging, prices are unlikely to fall below the marginal cost of new unconventional production.



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December 03 2013

Commentary by Eoin Treacy

Asia Oil & Gas Positioning for 2014

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

DB Analyst John Hirjee sees no reason for change as his top pick for 2014 Oil Search was our best performer in 2013. John expects significant production and EPS growth (2014-15) due to the commissioning (2H14e) of the PNG-LNG project. DB Analyst Harshad Katkar similarly sees no reason to change as his top pick for 2014 Reliance Industries was also his top pick in 2013. Harshad is looking for an improving upstream gas business on KGD6 and chemical capacity expansions (FY14-16e) to drive ~15% EPS growth over the coming few years. DB Analyst Shawn Park has our call on Asia Chemicals and recently (01 Nov) upgraded the sector to overweight on the back of flat to down naphtha prices, tighter product supplies and higher spreads. Shawn¡¯s top pick for 2014 is LG Chemicals given its material exposure to ABS (25% revenues) and an improving EV battery business. DB Analyst, David Hurd continues to like Sinopec (SNP) as a top pick for 2014. David notes that soft to down oil prices support SNP¡¯s refining business and that there is material operating leverage in the company¡¯s chemical business.

Eoin Treacy's view -

While the revolution in US supply continues to garner investor attention, Asia¡¯s demand growth continues to represent one of the more promising avenues for major oil companies. One of the greatest challenges in the region from the perspective of an investor is represented by regional government policy to cap prices for consumers. As these policies are gradually liberalised, it should be positive for the sector and this is likely to continue to represent a catalyst to ignite interest in related shares. 



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November 29 2013

Commentary by David Fuller

Euro-Area Inflation Holds at Less Than Half ECB Ceiling

Here is the opening of this informative article from Bloomberg:

Euro-area inflation stayed below 1 percent for a second month, less than half the European Central Bank's ceiling, underscoring the weakness in parts of the euro region's economy.

The annual rate rose to 0.9 percent from 0.7 percent in October, the European Union's statistics office in Luxembourg said in a preliminary estimate today. The median forecast in a Bloomberg News survey of 44 economists was for 0.8 percent. Separately, unemployment unexpectedly dropped to 12.1 percent.

The increasing inflation rate "is largely coming through because of base effects in Energy," said Guillaume Menuet, an economist at Citigroup Inc. in London. "Once these start to fall out of the calculation, it's quite likely by the spring of next year we'll have again more evidence of weakening price pressures."

Today's data mark the 10th straight month that the rate has been less than the ECB's 2 percent goal. The central bank unexpectedly cut its key refinancing rate by a quarter point to 0.25 percent on Nov. 7 to prevent slowing inflation from taking hold in a still-fragile euro-area economy. ECB President Mario Draghi said at the time that the region needs record-low borrowing costs to combat a "prolonged" period of weak consumer-price growth and "very high" unemployment.

Euro-area unemployment unexpectedly fell to 12.1 percent in October from 12.2 percent a month earlier. Economists had predicted the rate would stay unchanged, according to the median of 34 estimates.

After this month's surprise rate cut, ECB officials have said they still have options for easing monetary policy. Bloomberg News reported last week that policy makers are considering a smaller-than-normal cut in the deposit rate, currently at zero, to minus 0.1 percent, if stimulus is required.

David Fuller's view -

It is no surprise that the Euro region's economic recovery remains weak. However, this does not detract from the ECB's considerable achievements since 'super' Mario Draghi was appointed president on 1st November 2011.

Unfortunately, there is little that he can do about Europe's high costs for Energy. Fracking would certainly reduce this problem but it is not happening, at least not yet. I expect money supply to remain very stimulative and Draghi may wish to engineer the Euro somewhat lower.



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November 27 2013

Commentary by Eoin Treacy

Email of the day (1)

on "cheap" Energy:

"There was a good article on Fracking in the Economist Magazine (still the best business magazine with no close second choices).  It was the 16-22 November issue. Sorry life has been to busy to bring this to your notice earlier.

"I am not taking sides in the argument of social versus business arguments for fracking. I personally not convinced Fracking is a cheap source of oil although in the short term it is providing the US with cheap gas.

"What I observe is fracking has created a collar in the oil market. If oil prices drop the frackers respond quickly and fracking stops. If oil prices rise frackers drill a lot more to meet the demand. T Boon Pickens commented recently that fracking is not in his experience cheap oil. I think we agree Mr Pickens knows the oil business in particular the economics of fracking.

"As the Economists Magazine article points out the economics of fracking is a combination of gas prices, other liquids and oil prices. I will not go into the boring arguments of the relative merits of different sources of gas. Australia has lots of gas. We always knew about coal seam gas (CSG) however the petroleum engineers used to tell us CSG was very poor quality gas with low heat qualities and of no commercial significance. Not a argument you hear today. 

"I guess the economics of fracking will improve. BHP are hoping they do. But unless they do improve even the dumb money (i.e. BHP) will get the hint and stop funding what has been so far a stupid idea.

"Hopefully see you in February at the Chart seminar."

Eoin Treacy's view -

Thank you for this insightful email which brings us to the question of what exactly the term cheap Energy means. We have described the peak oil argument, for much of the last decade, in terms of the rising cost of production. As you point out, geologists have known about coal seam methane, shale oil and gas, tight gas, methane hydrates etc for almost as long as the fossil fuel industry has existed. The commercial viability of these resources has always been dependent on the application of technology and the marginal cost of production.



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