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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 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 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 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.   

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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 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.

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

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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.

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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 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?

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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.

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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.

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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.

This item continues in the Subscriber’s Area. 

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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.


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.   

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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?

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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.


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.


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.    

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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. 

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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 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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