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June 01 2016

Commentary by Eoin Treacy

Musings from the Oil Patch June 1st 2016

Thanks to a subscriber for this edition of Allen Brooks' Energy report for PPHB. Here is a particularly interesting section on autonomous trucking: 

The new topic being opened by efforts such as Otto and the platooning demonstration in Europe is the impact on fuel and labor costs within the trucking industry. In the United States, trucks drive 5.6% of all vehicle miles and are responsible for 9.5% of highway fatalities, according to Department of Transportation data. Because heavy-duty trucks have a significantly lower fuel-efficiency performance, they account for a larger share of diesel fuel consumption than diesel cars or other types of equipment. Because diesel fuel is included in distillates, we cannot determine the exact weekly volumes. However, we know that for the week ending May 20, distillate volumes of slightly over 4 million barrels a day represented 20% of total fuel supplied in the U.S. By examining the latest inventory data, distillates are broken down by the amount of sulfur in the fuel. Diesel fuel for vehicle use needs to be low sulfur – 15 parts per million or less. That fuel category accounted for 88% of all the distillate in storage, therefore we would think this is a reasonably close approximation of the highway quality diesel fuel being supplied to the U.S. market. If 62% is used by over-the-highway trucks, then the daily consumption is approximately 2.2 million barrels. Improved fuel savings from autonomous technology could eventually account for upwards of 200,000 barrels a day in savings. 

Autonomous vehicle technology is being hailed as a way to reduce the number of accidents. The largest impact of the technology, however, may be on the employment of truck drivers. There are more than three million truck drivers in this country. According to the American Trucking Associations, the truck industry accounts for one of every 15 jobs in the United States. By eliminating the need for second drivers on many trucks due to the ability of the primary driver to fulfill his rest obligations while the truck drives itself, there will be a negative employment impact from autonomous technology. 

Although perceived as a negative, autonomous technology might actually become a positive as the trucking industry deals with an aging workforce and a less-than-attractive employment career as long-haul driving can be tedious and keeps drivers away from home for extended time periods. While younger drivers enjoy the first and last miles of truck driving, they wish to avoid the boring portion, which autonomous technology would eliminate. In the U.S., according to consultant Oliver Wyman, by 2023 it is projected that there will be shortfall of 240,000 drivers, or approximately 8% of the estimated current number of truck drivers. 

Canada has a similar employment outlook for its highway trucking industry. According to the Canadian Trucking Alliance there are about 300,000 long-haul truck drivers. Similarly, the Canadian Trucking Alliance estimates that the Canadian industry will have a shortfall of 48,000 drivers by 2024 — about 15 per cent of the total driving force – due to an aging workforce and a less-attractive employment career. 

Another impact of autonomous technology for trucks is that vehicles can be kept on the highway for more hours per day. That could not only reduce the need for additional drivers, but it could also reduce the cost for transporting goods, further contributing to deflationary forces in the economy. 

All of these considerations influenced our previous article’s conclusion that autonomous trucks were more likely to be on the roads before autonomous cars. That may be why Mr. Levandowski left Google. He said that his decision to leave was motivated by being eager to commercialize a self-driving vehicle as quickly as possible. At Google, he was responsible for drafting legislation to permit self-driving vehicles, which ultimately became law in Nevada. While certain states such as California have motor vehicle regulations that would prohibit the idea of trucks traveling on the freeway with only a sleeping driver in the cab, other states currently do allow it. “Right now, if you want to drive across Texas with nobody at the wheel, you’re 100 percent legal,” said Mr. Levandowski. Stay tuned for self-driving trucks on a freeway near you. 

Eoin Treacy's view -

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

The technology behind autonomous vehicles is progressing towards greater utility and it makes sense that haulage vehicles represent the primary source of demand considering the high cost of fuel, personnel and regulations. It represents an additional example of the deflationary role technology has and the benefits that accrue to consumers as a result. 



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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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May 24 2016

Commentary by David Fuller

Saudi Arabian New Oil Plan Makes OPEC Redundant

Here is the opening of this informative article from Bloomberg:

Saudi Arabia, one of the founders of OPEC, is sounding the group’s death knell.

The world’s biggest crude exporter has already undermined OPEC’s traditional role of managing supply, instead choosing to boost output to snatch market share from higher-cost producers, particularly U.S. shale drillers, and crashing prices in the process.

Now, under the economic plan known as Vision 2030 promoted by the king’s powerful son, Deputy Crown Prince Mohammed bin Salman, the government is signaling it wants to wean the kingdom’s economy off oil revenue, lessening the need to manage prices. Moreover, the planned privatization of Saudi Arabian Oil Co. will make the nation the only member of the Organization of Petroleum Exporting Countries without full ownership of its national oil company.

“The main take-away from Saudi Vision 2030 is that there’s just no role for OPEC,” Seth Kleinman, head of European Energy research at Citigroup Inc. in London, said by phone on May 16. “Or, you can have an OPEC without Saudi Arabia, which just isn’t much of an OPEC.”

The first change of oil ministers in more than 20 years may also recast the country’s relationship with OPEC. The group’s 13 members, which contribute about 40 percent of the world’s supply, gather in Vienna on June 2.

King Salman on May 7 replaced Ali al-Naimi, the most influential voice in OPEC and the architect of current Saudi oil policy. While there’s likely to be considerable continuity, his replacement, Khalid Al-Falih, is an ally of Prince Mohammed, who scuppered a plan al-Naimi had supported for capping production. When producers considered freezing output to curb a global glut in April, the young royal’s view that no deal was possible without Iran prevailed, and talks collapsed.

“We don’t care about oil prices,” Prince Mohammed said in an April 25 interview in Riyadh. “$30 or $70, they are all the same to us. We have our own programs that don’t need high oil prices.” Benchmark Brent crude was trading at $48.11 a barrel on Tuesday at 11:23 a.m. in London.

David Fuller's view -

OPEC will not be missed.  Cartels are power arrangements for maximising profits at everyone else’s expense. 

Oil prices will remain volatile but the current surplus of supply will prevent the strong recovery that some commentators have forecast.  Even as the global economy eventually recovers and the record amounts of crude in storage are gradually reduced by consumption, the advance of technology has enabled more conventional oil to be produced than was imaginable less than a decade ago.  Supplies may be finite but there are also vast quantities of shale oil, largely untouched.   

Meanwhile, technology will continue to hasten declines in costs for renewable forms of Energy, led by solar.  Most countries now have the capacity to lower their Energy costs.  However, Energy prices paid by business and consumers will vary considerably among nations, subject to their willingness to utilise all forms of available Energy, plus their individual taxation policies on these vital resources.    

(See also: OPEC Brings Oil Price War Home in Pursuit of Asia Cash - Oct 20, 2015)



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May 23 2016

Commentary by David Fuller

Why China Is Having So Many Problems Ramping Up Wind Power

China holds the record as the world’s top wind installer, accounting for about a third of the total global installed wind capacity. The United States trails in second place, accounting for just more than 17 percent. But despite its higher total capacity, China still isn’t putting out as much wind-generated electricity as the United States. In other words, it has built the technology, but it just is not able to use it to the max.

New research, published Monday in the journal Nature Energy by researchers from Tsinghua University in Beijing, Harvard University and other U.S. and Chinese universities, examines a handful of factors thought to be responsible for the discrepancy, using a mathematical approach to evaluate the relative importance of each.

Wind turbines can produce only as much Energy as the wind provides — so the researchers were interested in whether differences in wind flow could account for some of China’s problems. But they found that these differences played a relatively small role. Although the United States tends to get superior winds nationwide, the researchers point out that China has approached this issue by promoting more development in the regions with the best wind resources, mostly to its north and northeast.

Instead, the findings suggest that the primary challenges to wind power in China involve lower turbine quality, delayed connections to the grid and grid operators failing to transmit wind power to users in favor of other Energy sources, such as coal — all of which play about equally important roles.

These issues are capable of putting a substantial dent in China’s wind electricity output, it turns out. The researchers noted that in 2012, China’s wind-generated electricity was 39.3 terawatt-hours less than that of the United States.

“This is a large number — larger than the total amount of wind power generated in the United Kingdom in 2015, which can power around 8 million UK homes,” wrote Joanna Lewis, an associate professor and expert on China’s Energy landscape at Georgetown University, in a comment on the new study, also published Monday in Nature Energy.  

To evaluate the quality of turbines in China — which, the authors note, has not been done in previous studies — the researchers used the output from a specific type of wind installation (the GE 2.5 megawatt turbine) as a standard for comparison, concluding that overall turbine quality in the United States is higher than in China. They chalked up the quality issues to a need for “technology catch-up” in domestically produced turbines, which account for most of the installations in the country. The fix in this case is relatively simple: The authors recommend a short-term switch to more international suppliers, while focusing on domestic research and development efforts and technology transfer agreements with other nations in the long term.

David Fuller's view -

Credit to China for being the world’s fastest developing economy, even as it struggles with monumental transformational challenges, which it is also attempting to resolve in record time. 

This item continues in the Subscriber’s Area.



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May 20 2016

Commentary by Eoin Treacy

What you should know about China's new energy vehicle (NEV) market

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

About two-thirds of Chinese cities exceed the air pollution limits specified by the Environmental Air Quality Standards, according to China’s State Information Center. Rapid increase in internal combustion engine (ICE) vehicle ownership and the consequent traffic congestion, especially in large Chinese cities, are perceived to contribute significantly to carbon dioxide and other harmful gas emissions, and the level of inhalable particulate matter (PM). This makes China one of the most polluted countries in the world.

To curb environmental pollution and improve air quality, various countries have implemented or tightened policies to gradually reduce fuel consumption and/or harmful gas emission. China also has tightened requirements for emission and fuel consumption. Since the country had a slower start in emission controls (Figure 6), it should be one of the fastest to tighten emission controls to catch up with developed countries (e.g. the EU and Japan) (Figure 7).
While countries have multiple means to lower auto emission, e.g. diesel adoption and using conventional hybrid engine technologies, China has placed a greater emphasis on using electric vehicle (EV) or plug-in electric vehicle (PHEV) technologies. To this effect, the State Council in 2012 issued a roadmap for China’s NEV industry development, The 2012-2020

Development Plan for Fuel-efficient and New Energy Vehicle Industry. 
According to the plan, the government targets an accumulated NEV (including EVs and PHEVs) sales volume of 500k units by 2015 and 5m units by 2020E, with an annual NEV production capacity of 2m units by 2020E. Despite rapid growth in NEV sales volume in 2012-14, the absolute sales volume was meager in China, making up less than 0.2% of its vehicle sales during the period and falling way short of its 2015 target ownership level. However, NEV sales catapulted in 2015 at a 3.4x YoY growth rate and made up 1.3% of China vehicle sales (Figure 8). Aggregate NEV sales also approached closer the 2015 target NEV fleet size. In our view, soaring demand for NEVs in China is fueled by massive government subsidies and policy support (to be discussed in the next section).

 

Eoin Treacy's view -

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

China has a massive pollution problem and perhaps more importantly it is now a political liability as an increasingly vocal middle class demand a healthier standard of living. Additionally China’s geopolitical considerations are never far from the minds of its leadership. The fact China does not have the domestic Energy resources necessary to fuel its economic growth represents a challenge for policy markets. 



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May 10 2016

Commentary by Eoin Treacy

Oil Rises From Two-Week Low Amid Libya, Nigeria Supply Fears

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

Oil rose from a two-week low on concern that supplies from Nigeria and Libya, holders of Africa’s largest crude reserves, will be disrupted.

Futures advanced 2.8 percent in New York. Royal Dutch Shell Plc and Chevron Corp. are evacuating workers from the Niger Delta because of deteriorating security, a union official said.
In Libya, some fields will be forced to halt output unless a port blockade is lifted, according to the National Oil Corp.

Canada’s oil-sands companies curbed supply as wildfires ripped across Northern Alberta last week. Gains accelerated as global equities rose.

"The market is getting support from the disruption in Canadian oil sands production and increased threats to output in the Niger Delta," said Gene McGillian, a senior analyst and broker at Tradition Energy in Stamford, Connecticut.

"The underlying fundamentals remain weak. If not for supply disruptions and the decline in U.S. production, prices would be lower."

Crude has rebounded from a 12-year low earlier this year on signs the global oversupply will ease as non-OPEC output declines and regional supply faces threats in Africa and Canada.

 

Eoin Treacy's view -

Oil prices have been the subject of a great deal of media coverage over the last few months not least because of Saudi Arabia’s court politics. There are so many moving parts to this market that we can really only be guided by the price action as an arbiter of what people are doing with their money. 



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May 09 2016

Commentary by David Fuller

After 20 Years, OPEC Bids Farewell to Saudi Arabia Oil Chief

Here is the opening of this topical article from Bloomberg:

Saudi Arabian Oil Minister Ali al-Naimi, the architect of the 2014 switch in OPEC policy that’s since roiled the Energy market, companies and entire economies from Mexico to Nigeria, is leaving his post.

An 80-year-old who rose from modest Bedouin roots, al-Naimi headed the ministry for almost 21 years, steering the world’s largest crude exporter through wild price swings, regional wars, technological progress and the rise of climate change as a key policy concern.

“During my seven decades in the industry, I’ve seen oil at under $2 a barrel and $147, and much volatility in between,” al-Naimi told a gathering of the who’s who of the American oil industry in February in Houston. “I’ve witnessed gluts and scarcity. I’ve seen multiple booms and busts.”

The departure of al-Naimi, who for years could move markets just by uttering a few words, is the latest sign of how the country’s young Deputy Crown Prince Mohammed bin Salman is stamping his authority over oil policy. Khalid Al-Falih, chairman of Saudi Arabian Oil Co., the state-owned producer, will replace him as minister of Energy, industry and mineral resources. Al-Falih is known to be close to King Salman and to Prince Mohammed.

“Khalid has been integral to the current oil policy of Saudi Arabia and has worked very closely with the deputy crown prince,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University in New York and a former White House oil official.

While al-Naimi enjoyed a relatively free hand to implement oil policy under King Fahd and King Abdullah, his room for maneuver seemed to have narrowed since last year’s accession to power by King Salman and the growing influence of his 30-something son, Prince Mohammed.

At the April 17 meeting in Doha where producers discussed a possible production freeze to shore up prices, al-Naimi lacked authority to complete a deal, according to his Russian and Venezuelan counterparts. The view of Prince Mohammed, who had insisted that no accord was possible without Iran, eventually prevailed and the talks collapsed.

David Fuller's view -

All change as Deputy Crown Prince Mohammed bin Salman ups the stakes in this war of attrition.  Consumers and oil importing countries will be the long-term beneficiaries.   



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May 09 2016

Commentary by Eoin Treacy

Lithium 101

Thanks to a subscriber for this comprehensive heavyweight 170-page report on lithium. If you have questions on the lithium sector the chances are they will be answered by this report. Here is a section: 

Global lithium S&D analysis highlights opportunity for high-quality assets
The emergence of the Electric Vehicle and Energy Storage markets is being driven by a global desire to reduce carbon emissions and break away from traditional infrastructure networks. This shift in Energy use is supported by the improving economics of lithium-ion batteries. Global battery consumption is set to increase 5x over the next 10 years, placing pressure on the battery supply chain & lithium market. We expect global lithium demand will increase from 181kt Lithium Carbonate Equivalent (LCE) in 2015 to 535kt LCE by 2025. In this Lithium 101 report, we analyse key demand drivers and identify the lithium players best-positioned to capitalise on the emerging battery thematic. 

Global lithium demand to triple over the next 10 years
The dramatic fall in lithium-ion costs over the last five years from US$900/kWh to US$225/kWh has improved the economics of Electric Vehicles and Energy Storage products as well as opening up new demand markets. Global battery consumption has increased 80% in two years to 70GWh in 2015, of which EV accounted for 35%. We expect global battery demand will reach 210GWh in 2018 across Electric Vehicles, Energy Storage & traditional markets. By 2025, global battery consumption should exceed 535GWh. This has major impacts on lithium. Global demand increased to 184kt LCE in 2015 (+18%), leading to a market deficit and rapid price increases. We expect lithium demand will reach 280kt LCE by 2018 (+18% 3-year CAGR) and 535kt LCE by 2025 (+11% CAGR). 

Supply late to respond but wave of projects coming; prices are coming down 
Global lithium production was 171kt LCE in 2015, with 83% of supply from four producers: Albemarle, SQM, FMC and Sichuan Tianqi. Supply has not responded fast enough to demand, and recent price hikes have incentivized new assets to enter the market. Orocobre (17.5ktpa), Mt. Marion (27ktpa), Mt. Cattlin (13ktpa), La Negra (20ktpa), Chinese restarts (17ktpa) and production creep should take supply to 280kt LCE by 2018, in line with demand. While the market will be in deficit in 2016, it should rebalance by mid-2017, which should see pricing normalize. Our lithium price forecasts are on page 9.

 

Eoin Treacy's view -

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

The cost of lithium ion batteries falling rapidly and the fact this is occurring at the same time solar cells costs have been trending lower is a major incentive for installations of both technologies; increasingly in parallel. With costs coming down and technology improving growth in demand is a major consideration as factories achieve scale and miners invest in additional supply. 



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May 05 2016

Commentary by Eoin Treacy

Negative interest rates are the dumbest idea ever

This interview of Jeff Gundlach by Christoph Gisiger for Finanz und Wirtschaft may be of interest to subscribers. Here is a section:

Energy companies are playing an important role in the junk bond sector. What would oil at $ 38 mean for the credit markets?

Just like oil, the high yield market has enjoyed the easy rally. I think it’s basically over. I don’t see how you are supposed to be all fond off high yield bonds, since they are facing enormous fundamental problems. I thought people would learn their lesson but the issuance in the years 2013/14 was vastly worse than the issuance in 2006/07. Also, in the bank loan market covenant lite issuance rose to 40% in 2006/07. In this cycle it climbed to 75%. The leverage in the high yield bond market is enormous and you’re about to have a substantial increase in defaults. I wouldn’t be surprised if the cumulative default rate in the next five years were going to be the highest in the history of the high yield bond market.

What would be the consequences of that?
We are now in a culture of default. There is no stigma about defaulting anymore. During the housing crash, homeowners walked away from their mortgages. That was the beginning of a massive tolerance of default. Today, people talk about Puerto Rico defaulting like it’s nothing. But if Puerto Rico defaults why won’t some clever person in Illinois say: «Let’s default, too! » Constitutionally, Illinois is not allowed to default, but Puerto Rico wasn’t either. For Illinois it just seems impossible to pay their pension obligations. And then, what about Houston, what about Chicago, what about Connecticut? I am surprised that people have lost their focus on the enormity of the debt problem. Remember, in 2010 and 2011 there was such a laser focus on the debt ceiling in the US and we were worried about Greece. Nobody is worried anymore. People are distracted by this negative interest rate experiment. 

 

Eoin Treacy's view -

The first time I visited Boston was about four years ago and there was a sign from Prudential above the Charles which proclaimed “We have $1 trillion under management”. That’s an impressive number but what popped into my head was “What do they own?” The answer of course is that a great deal of that money is invested in bonds. In fact regulators insist conservative portfolios, aimed at the pensions market, have to own bonds in order to ensure some degree of security that future liabilities can be met. The fact bonds have been in a 35-year bull market has only bolstered the sector’s “risk free” credentials. 



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May 04 2016

Commentary by Eoin Treacy

Gasoline Demand Is A Red Herring For The Oil Market

Thanks to a subscriber for this article by Art Berman covering US gasoline demand. Here is a section:

Meanwhile, net gasoline exports are at record high levels. Exports have increased 1,443 kbpd since June 2005.

So, consumption has increased but remains far below pre-2012 levels. Production is again approaching earlier peak levels but most of the increased volume is being exported. The belief that U.S. consumption is approaching record highs is simply not true.

Americans Are Driving More But Using A Lot Less Gasoline

Americans are driving more than ever before. Vehicle miles traveled (VMT) reached an all-time high of 3.15 trillion miles in February 2016 (Figure 2).

VMT have increased 97 billion miles per month (3%) since the beginning of 2015 and gasoline sales have increased 187 kbpd (2%). The rates of increase are not proportional.

For example, VMT was fairly flat from mid-2011 until oil prices collapsed in September 2014 yet gasoline sales fell more than 1 million barrels per day during the same period. Americans traveled the same number of miles but used a lot less gasoline. Even with the VMT increase since 2015, sales are still 539 kbpd less than in January 2009.

 

Eoin Treacy's view -

Generally speaking Energy demand represents a constant long-term growth trajectory because so much of the global economy depends on Energy consumption to fuel growth. However the evolution of electric and CNG vehicles, as well as increasingly stringent emissions regulations reflect an additional consideration that was not so much of a factor previously.



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April 29 2016

Commentary by Eoin Treacy

Commodities Overtake Stocks, Bonds With Best Rally Since 2010

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

The gains come after five straight years of annual losses when slowing Chinese demand and rising output produced a global supply overhang for most commodities. The rout hurt producers including Exxon Mobil Corp., Freeport-McMoRan Inc., Glencore Plc and Anglo American Plc, who boosted production following a decade-long so-called super cycle of rising consumption and higher prices.

“I believe with what we’ve witnessed early in 2016 will be the trough for the commodity markets,” Albanese said on a conference call after Vedanta reported quarterly earnings.

Oil prices in New York are up about 19 percent this month in New York, the largest increase since April 2015. U.S. crude output declined for a seventh week, according to data Wednesday from the Energy Information Administration. Futures traded at $45.60 at 11:45 a.m. on the New York Mercantile Exchange.

 

Eoin Treacy's view -

Crude Oil is by far the largest, most liquid commodity market and represents a significant cost in the production and transportation of other commodities. The falling cost of Energy was a major enabler for marginal producers remaining in business so the subsequent rally has been a catalyst for increased interest right across the commodity spectrum. 



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April 28 2016

Commentary by David Fuller

The Biggest Windmills Now Make Jumbo Jets Look Tiny

Here is the opening of this informative article from Bloomberg:

 Often derided as a blot on rural landscapes, wind turbines got bigger and stronger than ever anyway. The next generation are even larger and designed to withstand an Arctic battering. 

The granddaddy of them all is a machine with rotors that cut a 164 meter (538 foot) swath made by a Vestas Wind Systems venture with Mitsubishi Heavy Industries. A single blade is 80 meters, about the entire wingspan of an Airbus A380 jumbo jet. In the intensely competitive wind turbine business, it’s rare for executives to allow a close-up look of what they’re developing, lest they tip off rivals. Vestas allowed Bloomberg News to visit and photograph the prototype units this month.

As they got bigger, the units became more efficient, boosting global installations 23 percent last year to a record 63.5 gigawatts, which at full tilt would be about as much as what flows from 63 nuclear reactors. Wind is now the most installed form of low-carbon Energy. While few people outside the industry noticed, the trend lifted shares and profit of manufacturers from their crash during the financial crisis. Vestas is due to report its fifth consecutive increase in quarterly profit on Friday, overcoming a slump that forced it to cut 3,000 jobs since 2011.

Even the plunge in crude prices since  2014 has failed to derail industry growth.

“The doubling of turbine size this decade will allow wind farms in 2020 to use half the number of turbines compared to 2010,” said Tom Harries, an industry analyst at Bloomberg New Energy Finance. “This means fewer foundations, less cabling and simpler installation -- all key in slashing costs for the industry.”

The average turbine installed in Europe was 4.1 megawatts last year, 28 percent larger than in 2010, according to the London-based researcher, which expects 6.8 megawatts to be the norm by 2020. Harries said Siemens has hinted it’s working on a 10 megawatt turbine.

Standing in northern Denmark, where fjords cut through flat farmland, MHI Vestas Offshore Wind has erected the world's most powerful turbine. The turbine produces 8 megawatts of power, enough for about 4,000 homes. It could challenge the lead in offshore wind accrued by Siemens, which has almost two-thirds of installed capacity, according to BNEF. MHI Vestas is in second place, with 19 percent.

A Siemens spokesman said a 7-megawatt turbine the company is working on has a “track record of reliability” that will reduce costs for customers. It won its biggest contract for the machine on Wednesday from the Spanish utility Iberdrola, which will buy 102 turbines valued at as much as 825 million pounds ($1.2 billion).

The 80-meter blades of the MHI Vestas V164 make the machine almost as high as the Times Square Tower in New York, and are so large that they were “a nightmare” to transport on narrow country roads, Jens Tommerup, chief executive officer of the venture, said in an interview. This prototype is built for use offshore and has been tested on land since January 2014 at the wind turbine field in Osterlid, managed by the Technical University of Denmark. The goal is to spot faults before they enter service.

David Fuller's view -

As with all technologies, windmills are becoming more efficient, which is obviously very good in terms of the Energy produced.  Aesthetically, I do not like them.  They remind me of the invasion machines from H.G. Wells memorable science fiction novel: The War of The Worlds, first serialised in 1897.  If you live within earshot of a windmill the effects can be very disturbing.  Nevertheless, we will see more of them around the globe because their technology is improving and they are helping us to inch closer to a world in which our Energy is mainly of the renewable variety.   



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April 27 2016

Commentary by Eoin Treacy

Email of the day on inflation expectations and rates

You've drawn attention to the 12 month T-bill rate a couple of times over the past week. Additionally, it is also very instructive to monitor inflation expectations to gauge what is discounted in terms of the future direction of interest rates. The five-year “breakeven” rate, a market measure of inflation expectations derived from comparing the yield of Treasury Inflation protected bonds (Tips) and conventional Treasuries, has climbed from a low of 0.95% in early February, to 1.56% now. It peaked at 2.4% in October 2012 after reaching an unprecedented minus 0.9% in 2008. 

Movements in Tips have tended to reflect investor expectations about future consumer price inflation, and these have been stoked by the recent rise in oil prices and a weaker dollar, which means higher import prices. In fact, the breakeven rate has been rising in tandem with oil prices since February. Interestingly, the “core” US inflation rate, which strips out the impact of volatile components such as Energy and food, has also been rising. The current buying of Tips reflects a view that the cycle of dollar strength and commodity weakness has come to an end. 

Like you and David, I also think that commodities have bottomed. However, there are no signs of strong underlying demand and inflationary pressures from the real economy at the moment. Furthermore, Janet Yellen, the Fed chair, has cast doubts on the durability of the recent pick-up in core inflation and inflation expectations, arguing that the case for moving cautiously on interest rates was still strong. It is not surprising that she would say that given that the Fed has reduced the likely number of rate rises this year. 

My view is that the US breakeven rate will rise with commodity prices which will push conventional yields up and stock markets down but I don't believe that oil prices, for example, will get anywhere near the previous peak for the reasons discussed by this Service. Thus bond yields too will peak at a much lower level. The collapse in commodity prices in the last few years has distorted valuations in various markets and there will be a ripple effect across the other asset classes.

 

 

Eoin Treacy's view -

Thank you for this thoughtful email and for highlighting breakeven rates which I have not looked at in a while. I watch the 12-month yield because if gives us a good indication of how the bond market is pricing the risk of the Fed raising rates. 



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April 26 2016

Commentary by David Fuller

Saudi Prince Vows Thatcherite Revolution and Escape From Oil

The reform blueprint is inspired by a McKinsey study – Beyond Oil – that laid out how the country can double GDP over the next fifteen years and reinvent itself with a $4 trillion of investment across eight industries, from electrical manufacturing, to cars, healthcare, metals, steel , aluminium smelting, solar power, and most surprisingly tourism. McKinsey warned that half-hearted reform risks disaster, and bankruptcy.   

There is some logic to the Vision2030 plan given Saudi Arabia’s access to cheap Energy. Delivery is another matter. “We have seen these sorts of transition plans before and they never come to much,” said Patrick Dennis from Oxford Economics.

“I don’t think they can pull this off. The riyal peg is grossly overvalued and that makes it even harder. We think market pressures will become overwhelming if there is little evidence of real reform by 2018.”  

Under the plan, Riyadh will sell up to 5pc of the state oil giant Aramco to global investors, and convert the secretive behemoth into a modern company with transparent accounts.

He valued the group at $2 trillion but this figure is plucked out of thin air. Investment funds have demanded a steep discount before buying into partial privatisations of this sort in Russia and other petro-states with a weak rule-of-law, fearing that they may be held hostage to politics.

The aim is to transfer the proceeds into the country’s sovereign wealth fund, using the money to diversify into global investments. These will generate a non-Energy income in the future along the lines of the Norwegian petroleum fund.

It is unclear how this Saudi fund can plausibly reach $3 trillion unless oil rises back above $100 a barrel, and stays there for a long time. The country is currently depleting its foreign exchange reserves by $10bn a month to cover a budget deficit still near 15pc of GDP, drawing down its overseas wealth to fund its military build-up, a war in Yemen and life-support for Egypt, as well as paying state salaries.

The Saudis may have left it too late to break oil dependency in time, especially as renewable Energy reaches parity and the COP21 climate accords signal a move to worldwide carbon pricing. India is already examining plans to switch its entire transport system to electric power.

David Fuller's view -

I hope Prince Mohammad bin Salman succeeds, as that would be best for a degree of stability in the Middle East.  However, I agree with all the reservations in this article above and also others which I have published.  Nevertheless, at least the Prince has ambition, Energy and a plan for dragging his country into the 21st century.  Good luck to him.

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



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April 22 2016

Commentary by David Fuller

San Francisco Passes Law Requiring New Buildings to be Topped With Solar Panels

My thanks to a subscriber for this article from Gizmag.  Here is a section:

San Francisco has passed a law requiring all new buildings below 10 stories to have solar panels installed on their rooftops. It becomes the first major US city to mandate solar panel installations on new constructions and forms part of a wider vision to generate 100 percent of its electricity via renewable Energy.

The Better Roofs Ordinance was passed unanimously by the city's Board of Supervisors, and will apply to new constructions both commercial and residential from January next year, according to the San Francisco Examiner.

"Activating underutilized roof space is a smart and efficient way to promote the use of solar Energy and improve our environment," says Supervisor Scott Wiener, who introduced the legislation in February. "We need to continue to pursue aggressive renewable Energy policies to ensure a sustainable future for our city and our region."

Other governments around the world have adopted similar policies, including the states of Maharashtra and Haryana in India. Dubai also plans to make rooftop solar panels mandatory for all buildings starting in 2030, as part of the Dubai Clean Energy Strategy 2050. More locally, the smaller Californian cities of Lancaster and Sebastopol introduced compulsory rooftop solar panels in 2013.

David Fuller's view -

 

Hardly a month goes by without reports of new developments within the solar industry which increase the variety, flexibility and overall efficiency of these installations.  Our ability to capture and generate power from the sun’s rays is limited only by our imagination.   

  (See also: 3D solar towers offer up to 20 times more power output than traditional flat solar panels, and Solar Panels made three times cheaper and four times more efficient.)



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April 22 2016

Commentary by Eoin Treacy

TerraForm Power Believes It Has Sufficient Liquidity to Operate

This note by Will Daley for Bloomberg may be of interest to subscribers. 

Even if some SUNE obligations are not fulfilled, TERP expects to continue operating

Defaults may now exist under many of TERP’s non-recourse project-debt financing pacts (or such defaults may arise in the future) due to SUNE bankruptcy filing, delays in preparation of audited financial statements

Defaults “are generally curable"; TERP will work with its project lenders to obtain waivers and/or forbearance agreements

No assurances can be given that waivers, forbearance agreements will be obtained

 

Eoin Treacy's view -

SunEdison rallied impressively from its 2012 lows following the adoption of a quickstep leveraged strategy aimed at acquiring or building solar Energy power plants while simultaneously divesting of the completed assets into two MLPs. This saddled the parent with the risk of acquisition and building without holding onto the residual cash flows from a working utility once completed. The strategy was predicated on the rapid pace of solar installations persisting indefinitely. They do not appear to have factored in the role a drop in oil prices would have on that business model. 



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April 20 2016

Commentary by Eoin Treacy

Mining the balance sheets

Thanks to a subscriber for this report from Goldman Sachs dated February 29th. Here is a section:

Our commodities analysts believe that China’s demand for commodities will normalise to a level consistent with its GDP/capita, as the economy transitions from investment-led (i.e. where the government pays) to consumption-led (i.e. where the consumer pays). In short, fewer roads, buildings, bridges and airports, and more cars, air conditions, fridges and the like. This part of an economy’s development is less commodity-intensive, and we expect China’s commodity demand evolution to follow a more conventional path. This suggests a significantly lower level of demand than that seen through 2003-2014.

The implication for the supply-demand balances of the major metals is that without a significant change on the supply-side of the equation, oversupply will widen and prices will fall further

Which brings the argument back to liquidity. We would argue that mines don’t close through choice, but because they have to. Typically, this point comes when a company runs out of funds to meet its obligations (liquidity). We have seen African Minerals and London Mining join and leave the London stock market and their mines close - the capital markets were not prepared to continue to fund losses.

Ultimately, if demand does not return, then the industry’s current position could prove to be something of a holding pattern. Keep producing, drive more productivity and cost reduction and wait for the capital markets to pass judgement when the more weakly positioned companies need to refinance.

Eoin Treacy's view -

The role of Energy prices in the total cost of production for mining operations is a topic that does not appear to be covered by this report. Yet, it is a major consideration for miners and declining oil prices were a key factor in the ability of very marginal operations remaining viable. That is one of the primary reasons why the rebound in oil prices has been a positive catalyst for commodities. 



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April 19 2016

Commentary by David Fuller

Saudis Are Going for the Kill But the Oil Market Is Turning Anyway.

The collapse of OPEC talks with Russia over the weekend makes absolutely no difference to the balance of supply and demand in the global oil markets. The putative freeze in crude output was political eyewash.

Hardly any country in the OPEC cartel is capable of producing more oil. Several are failed states, or sliding into political crises. 

Russia is milking a final burst of production before the depleting pre-Soviet wells of Western Siberia go into slow run-off. Sanctions have stymied its efforts to develop new fields or kick-start shale fracking in the Bazhenov basin.  

Saudi Arabia’s hard-nosed decision to break ranks with its Gulf allies at the meeting in Doha - and with every other OPEC country  - punctures any remaining illusion that there is still a regulating structure in global oil industry. It told us that the cartel no longer exists in any meaningful sense. Beyond that it was irrelevant.

Hedge funds were clearly caught off guard by the outcome since net ‘long’ positions on the futures markets were trading at a record high going into the meeting. Brent crude plunged 7pc to $41 a barrel in early Asian trading, but what is more revealing is how quickly prices recovered.

Market dynamics are changing fast. Output is slipping all over the place: in China, Latin America, Kazakhstan, Algeria, the North Sea. The US shale industry has rolled over, though it has taken far longer than the Saudis expected when they first flooded the market in November 2014. The US Energy Department expects total US output to drop to 8.6m barrels per day (b/d) this year from 9.4m last year.

China is filling up the new sites of its strategic petroleum reserves at a record pace. Its oil imports have jumped to 8m b/d this year from 6.7m in 2015, soaking up a large part of the global glut.  Some is rotating back out again as diesel: most is being consumed in China.

Goldman Sachs says the twin effect of rising demand and supply disruptions across the world is bringing the market back into balance, leading  to a “sustainable deficit” as soon as the third quarter. The inflexion point could come sooner than almost anybody expects if a strike this week in Kuwait drags on as oil workers fight pay cuts. The outage is already costing 1.6m b/d.

Kuwait’s woes are the first taste of how difficult it will be for the petro-sheikhdoms to impose austerity measures or threaten the cradle-to-grave social contracts that keep a lid on dissent across the Gulf.

David Fuller's view -

 

While I had seen this article in The Telegraph and was planning to use it, I also received this email from a subscriber today:

I am sure you have read the above. He is saying precisely what you said many moons ago, but the conclusion is I think somewhat different.

Thanks, and yes, he does have a different conclusion which I will comment on below but first here is the article’s headline from the printed edition:

Saudi Arabia’s strategy has killed Opec – the cartel is now irrelevant

OPEC was rapidly losing control, thanks to technology.  However, the Saudis have hastened this process by flooding the market.  This was always going to be a Pyrrhic victory at best and it cut every oil producers’ revenue much more quickly than was necessary.  They could have kept prices at least $30 to $40 higher for the lengthy medium term by making some marginal supply cutbacks, rather than flooding the markets with oil. 

That opportunity was lost, so what happens next?

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



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April 19 2016

Commentary by Eoin Treacy

Australia's Stevens Posits Whether Policy Has Reached Its Limits

This article by Michael Heath for Bloomberg offers a window on the thinking of a major central banker approaching the end of his tenure so with little to lose. Here is a section: 

Australian central bank Governor Glenn Stevens speculated that monetary policy may have reached its limits in spurring economic growth and suggested this could explain why markets are being easily rattled.

“Monetary policy alone hasn’t been, and isn’t, able to generate sustained growth to the extent people desire,” Stevens said in a speech in New York on Tuesday. “Maybe we need to be clearer about what we can’t do. Monetary solutions are for monetary problems. If there are other problems in the underlying working of the economy, central banks won’t be able to solve those.”

The irony here is that Stevens, who has resisted the global movement to further easing and kept his benchmark rate at 2 percent for almost a year, is facing a currency that has reversed course in the past three months and threatened his push to broaden Australia’s growth drivers. He warned in minutes of this month’s policy meeting Tuesday that the Aussie’s appreciation could complicate efforts to rebalance the economy away from mining.

Stevens, who is in the final months of his 10-year stint at the helm of the Reserve Bank of Australia, also questioned in the notes of his speech whether central banks and their unorthodox policies are solely responsible for the decline in long-term interest rates. 

“Monetary policy is not supposed to be able to affect real variables -- like real interest rates -- on a sustained basis,” he said. “Presumably, changes in risk appetite, subdued growth and expectations that growth will continue to be subdued have also played a role in lowering real rates.”

 

Eoin Treacy's view -

The need for Australia to develop additional sources of economic growth outside the resources sector was a major focus of attention while the price of commodities was falling. With the rebound in Energy, industrial resources and soft commodities now underway the urgency of that drive is less pressing. In fact it is likely to act as headwind because the RBA will be less inclined to ease monetary policy when commodities are doing well. 



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April 18 2016

Commentary by David Fuller

Aiming at Iran, Saudi Arabia Mixes Oil Policy With Politics

Here is the opening of this topical article from Bloomberg:

After taking over defense and economic planning, Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman has now stamped his authority over oil policy.

In so doing, the 30-year-old son of King Salman upended the Saudis’ decades-long approach of separating commercial from political considerations. Over the weekend, Saudi officials quashed an agreement among major oil producers in Doha to freeze output due to Iran’s refusal to participate, a sign the regional rivalry is infecting the market.

“Everything at Doha was about politics,” said Yasser Elguindi, an oil analyst at Medley Global Advisors, a consultant that advises large hedge funds.

The change means that everyone exposed to Energy prices, from oil majors such as Exxon Mobil Corp. to traders like Vitol Group BV, will have to heed the opaque politics of the Middle East -- and the House of Saud. With Saudi Arabia and Iran weathering one of their worst diplomatic crises since the Islamic revolution in 1979 installed a Shiite theocracy in Tehran, and both countries taking opposite sides in civil wars in Syria and Yemen, the oil market should brace for a wild ride.

“The fact that Saudi Arabia seems to have blocked the deal is an indicator of how much its oil policy is being driven by the ongoing geopolitical conflict with Iran,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University in New York and a former White House oil official.

David Fuller's view -

This looks like a power play by Deputy Crown Prince Mohammed bin Salman.  Is he just reminding everyone within OPEC that he is in charge?  Does he want them to pressure Iran into line?  It is anyone’s guess and this remains a difficult situation.

The most interesting development concerns what is happening in the markets.

This item continues in the Subscriber’s Area.



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April 12 2016

Commentary by David Fuller

Oil Surge Fuel Stocks to Metals as Demand for Haven Assets Ebbs

Here is the opening of this topical article from Bloomberg:

Oil rallied above $42 a barrel, buoying stocks and commodity prices worldwide amid a revival in optimism over the global economy.

Energy shares in the Standard & Poor’s 500 Index surged the most since February after Russia and Saudi Arabia were said to have forged a deal on freezing oil output. Metals jumped, bolstering the Bloomberg Commodity Index and offsetting the impact of the International Monetary Fund’s warning on global stagnation. The yen fell versus all its major peers, as Treasuries and German bunds slid amid diminished demand for haven investments.

Crude oil is extending its 14 percent climb this year amid prospects a drop in U.S. shale production will help ease a global glut in the commodity. Traders are focused on a meeting in Doha set for April 17, where major producers, including Russia and Saudi Arabia, are due to discuss arresting production. Speculation the oil market could soon find some enduring stability is helping to prop up equities, even as investors brace for what’s projected to be the worst American earnings season since the global financial crisis. The Federal Reserve’s pared timeline for interest-rate increases is also supporting gains.

“There’s continued positive sentiment that is a function of a more dovish Fed as well as continued oil price strength and weakness in the dollar,” said David Spika, the Dallas-based global investment strategist for GuideStone Capital Management. “Oil prices have really been the driver of sentiment, with a high positive correlation.”

David Fuller's view -

While the Doha meeting this Sunday may be only another small step, the reality is that oil producers are still burning through cash reserves at today’s prices.  Oil is no different from any other commodity; less production is the key to higher prices.  Most of this year’s rally to date has come from short covering.  

(For considerably more coverage of industrial commodities and precious metals, please listen to the Audio.)



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April 08 2016

Commentary by Eoin Treacy

Oil Market `Fooled' by Freeze Talks Seen Better Off Gauging U.S.

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

While global producers are “buying time” and waiting for the focus to shift from the oversupply to rising demand, U.S. producers will “absolutely” be the ones driving the potential rebalancing of the oil market, according to Hansen.

“No doubt, because they have the ability to react much quicker to price changes,” he said, referring to U.S. producers. He warned that a price surge to $55 to $60 a barrel may prompt drillers to pump more. Others including Goldman Sachs Group Inc., UBS Group AG and IHS Energy have also said a recovery in crude may sputter once prices go high enough to keep U.S. oil flowing.

After surging to 9.6 million barrels a day last year, the highest level in more than three decades, daily U.S. production has dropped to about 9 million as of early April. Meanwhile, the number of rigs drilling for oil in the U.S. has dropped to the lowest level since 2009.

Still, the market may reach equilibrium in 2017, according to Hansen. The International Energy Agency has warned that investment cuts taking place now because of the Energy downturn increase the possibility of oil-security surprises in the “not-too-distant” future.

 

Eoin Treacy's view -

The USA is an increasingly important swing producer of crude oil which is not a condition many people predicted before last year. Unconventional oil and gas remain gamechangers for the sector and the increasing potency of the US on Energy prices as a supplier rather than just a consumer is a part of that.



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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 06 2016

Commentary by Eoin Treacy

The bin-Salman Interview What Does It Mean?

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

The announcement of this meeting has been very supportive for the oil price as it led to a large short covering by financial players, since a deal to freeze production should limit the potential downside in oil prices. Now with the statements by MBS in the Bloomberg interview last week, the outcome of this freeze deal is much more uncertain. In the interview MBS said that Saudi Arabia will only freeze output if Iran and other major producers do so. If all countries agree to freeze production, we’re ready," MBS said . "If there is anyone that decides to raise their production, then we will not reject any opportunity that knocks on our door.” This stands in contrast to prior statements from the Saudi Oil Ministry and from Russia which had suggested that a freeze deal could happen without any commitment from Iran. The market took this statement very negatively for the oil market because Iran has made no indications that they will join the freeze deal and even if they did, most analysts would probably doubt that production from Iran would be frozen anyway.

If Saudi Arabia indeed see any chance that a freeze deal cannot be accomplished then it is relevant to ask the purpose of even arranging the meeting. If a meeting is held and Saudi does not accept a deal without Iran participating then we believe a deal will not happen and if a meeting is held without a successful deal, then the oil price may drop quite significantly on that kind of news. Would that be in Saudi Arabia’s interest. Would MBS like to see a lower price again to inflict even more pain on the other global oil producers and hence set the stage for higher prices later? It seems odd that MBS is not coordinated with the oil ministry in this issue, but could his statement have been meant for domestic politics? And is it not very strange if MBS in the last minute should undermine the Russian effort to achieve this now famous freeze deal? Is this a negotiating trick to achieve something in return from the Russians vs Iran in Syria or other places?

The problem with this statement from MBS is that he outranks everyone else in Saudi when it comes to economic policy as he heads the newly formed Economic Council. This implies that if he actually means what he is saying here, there will be no production freeze deal in Doha, because we are confident that Iran will not take part in any production freeze deal. Before this statement by MBS we were 90% certain that there would be a production freeze deal coming out of the Doha meeting, because why hold this meeting if a freeze is not already agreed? It would, as described above, send the oil price in tailspin if a meeting was arranged and ended up with no agreement. After the MBS statements we see the chances for a freeze deal meaningfully reduced, maybe down to 50%.

If the meeting to hold the freeze deal in Doha is cancelled or if it is held without a successful outcome we would reduce our short term (3-month) price target for Brent which is currently 45 $/b. We would however not do anything with out 6-month target of 55 $/b and our 12-month target for 65 $/b. Our 24-month target (currently 70 $/b) on the other hand may be adjusted slightly higher due to the extra damage that may be inflicted to the supply side of a potential revisit to 25-35 dollar oil prices.

On Monday this week the Russian Energy Minister Alexander Novak however stated that “Russia can conduct extra talks with Saudi Arabia on oil output freeze before the meeting in Doha on April 17th”. Novak also stated that he is confident that an agreement will take place. This suggests that maybe the statements from MBS in the Bloomberg interview last week may have been meant for his domestic audience. Also the Kuwait OPEC governor Nawal Al-Fuzaia said on April 5 that there are indications that oil producing countries in both OPEC and non-OPEC are poised to agree on a production freeze to January levels. This statement seemed to give the market some restated confidence that there could still be a freeze deal in the Doha meeting on April 17th. But nonetheless the MBS interview last week has added a lot more uncertainty to the April 17th meeting than what the oil market would prefer. 

Eoin Treacy's view -

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

Brent crude prices firmed today on positive inventory data but the result of the April 17th meeting between major OPEC and non-OPEC producers is a major consideration for traders.

Saudi Arabia is fighting wars on three fronts and higher oil prices would certainly help with affording this adventurism as well as its highly accommodative domestic social programs. While Iran remains its greatest competitor for regional hegemony and the administration will not wish to give it any advantage, economic factors will probably take precedence. 



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April 05 2016

Commentary by Eoin Treacy

Email of day on the long-term outlook for energy resources

Yer man, while I often feel like I am part of the new old economy. I am not concerned in the near term that electric vehicles will have mass adoption. I am puzzled how the electrical grid will power all these new super cars? Coal which is the worst emitter of GHG's is the primary source of electrical generation in North America and that is being phased out for natural gas as you know. The environmental movement is flawed with hypocrisy and makes no economic sense. In Canada the govt has chosen to demonize the oil and gas industry which funds the majority of our social services and yet we bail out Bombardier and the auto industry. I sound like a grumpy old man.

Eoin Treacy's view -

Thanks for this topical comment to a piece I posted on Friday. It’s been a long time since we shared an apartment in London; when we were both new to London, and I’m glad you’re still in the heat of the action in Calgary. I think everyone finds it hard not to be grumpy when things are not going one’s way at any age. 

This article from the state.com from 2014 estimates that if every car in America was an electric vehicle it would represent only about a 30% increase in electricity demand because electric vehicles are more efficient. 



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April 04 2016

Commentary by David Fuller

Why Your Utility Bill Is Still Rising Even When Power Is So Cheap

Here is the opening of this topical article from Bloomberg:

Record-low costs for power in the U.S. haven’t translated into lower monthly payments for consumers.

As the price of electricity in the eastern U.S. fell by half over the last decade, utilities raised monthly bills for residential customers by 26 percent, according to government data. Consumer advocates say the power companies are using falling electricity costs as cover to raise other charges. Utilities counter that it’s payback for billions of dollars worth of government-mandated improvements to long-neglected infrastructure.

It’s “a good thing that Energy prices have fallen off and allowed the required capital to be installed and be done without impacting the consumer,” said Exelon Corp. Chief Executive Officer Chris Crane in an interview during a conference organized by Bloomberg New Energy Finance in New York on Monday.

Electricity itself makes up about a third of the average utility bill, down from about half just eight years ago, thanks to a flood of cheap fuel, natural gas extracted with fracking from tight-rock formations. The rest of the retail charges are for delivering supplies, including adding enough capacity to handle demand surges.

David Fuller's view -

The too often postponed infrastructure repairs are clearly necessary and obviously not just in the USA.  Imagine how much worse this situation would have been if technological innovation had not led to lower prices for crude oil and natural gas

In another example, Japan still faces higher Energy costs because it understandably closed all its nuclear reactors following the Fukushima meltdown.  They previously provided almost 30 percent of Japan’s electricity.  Japan is increasing its solar and wind power but this currently produces less than 15 percent of its electricity.  Consequently, Japan has had to import more coal, oil and natural gas.  This situation is only just beginning to improve as Japan is gradually reopening some of its nuclear reactors, in what are regarded as geologically safer regions, following additional safety measures.   

Most countries should benefit from lower Energy costs in years ahead as renewables become more efficient, oil and gas prices stay low and new nuclear is used more widely. 

 

 



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April 04 2016

Commentary by Eoin Treacy

We interrupt this rally to bring you...fundamentals

Thanks to a subscriber for this report from Deutsche Bank focusing on the mining sector which may be of interest to subscribers. Here is a section: 

The rally year to date reflects a rotation into sectors benefiting from a weaker US dollar, Chinese stimulus and the oil price rebound more than it reflects the slowly improving fundamentals - and we think each of these positives is now priced in. The sector has re-rated to a P/NPV of 0.86x, in line with the average trough multiple since 2003. It's the same for earnings multiples, where we now forecast a sector 2017e PE of 30x, well above the average trough PE of 9x, and the 17x of the most recent low in May 2015. We prefer Rio at 0.76x P/NPV compared with BHP at 0.92x. We have downgraded Glencore to Hold (0.8x NPV), but prefer it to Anglo (0.6x) given deleveraging progress.

FCF now healthy across the sector and gearing coming down
The 1Q16 commodity price recovery, with the oil price and producer currency weakness early in the quarter, plus continued ‘self-help’, has boosted free cash flow across the sector. 17 of the 19 companies under our coverage are now producing free cash flow after dividends in 2017. FCF yields average 10% for the big four diversified miners and 8.4% for the whole sector next year. Gearing is also reducing: we forecast a drop from 26% in 2015, to 22% in 2016 and 16% in 2017.

Lots for sale, lots of window shopping, no real buying…yet
A few companies are starting to use their balance sheets in selective M&A, but for rich multiples which are too high for most to justify when downwards pressure on long-term commodity prices prevails: today we have cut our LT copper price by 7% to USc300/lb and our LT iron ore price by 14% to US$57/t. There is a lot of window shopping going on, but valuations have run hard very quickly and we think both buyers and quality “for sale” assets remain scarce. 

 

Eoin Treacy's view -

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

The commodities sector was about as unloved as is possible late last year and an impressive short covering rally has taken place over the first quarter. A similar move in oil prices has been the catalyst for renewed interest in miners because somewhat higher Energy prices will have helped to push marginal supply out of the market. 



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March 30 2016

Commentary by David Fuller

Global Longest Bull Run Endures Tumult as Foreigners Return

Here is the opening of this informative article from Bloomberg:

Malaysia’s Energy exports are tumbling, its prime minister is battling corruption allegations and corporate profits are weakening. With all that, the Southeast Asian nation is also home to the world’s most resilient bull market for stocks.

Overseas funds are piling in at the fastest pace in Southeast Asia. Kuala Lumpur’s benchmark equity gauge has more than doubled from its 2008 lows without succumbing to a 20 percent drop. Tan Ming Han says he knows its secret: the lowest volatility among the region’s markets. It’s an environment where a growing army of investors are willing to miss out on the highest highs if that means they also avoid the biggest crashes.

“Sometimes, too much excitement can cause a panic attack -- especially with volatile markets,” said Tan, senior investment manager at Amundi Malaysia. “Boring is sometimes beautiful.”

Sentiment remains stubbornly buoyant in Malaysia, home to some of the region’s highest dividends, as the country’s $166 billion pension fund underpins demand for equities with share purchases. Even after the FTSE Bursa Malaysia KLCI Index climbed 12 percent from a three-year low in August, it trades near the cheapest relative to global equities in almost a decade.

David Fuller's view -

South East Asia’s so-called ‘Little Tiger’ stock markets had been out of favour for a lengthy period but Malaysia’s KLCI (p/e 18.67 & yield 3.04%) bottomed in August 2015 with a big upside weekly key reversal following a plunge to almost 1500.  Currently, there is no evidence that this recovery is over and the 200-day (40-week) MA has turned upwards, although overhead supply is likely to be a headwind at somewhat higher levels.

This item continues in the Subscriber’s Area.



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March 30 2016

Commentary by David Fuller

Eight Things Chinese Money Is Buying in America Right Now

Here is the opening of this informative article from Bloomberg:

Chinese companies, driven by favorable government policies and a desire to gain overseas assets, are on an unprecedented acquisition spree in the U.S. They've announced a record $40.5 billion of U.S. deals this year, already nearly double the amount for all of 2015. Here's a sample of what Chinese money is buying. 

Strategic Hotels & Resorts Inc.'s portfolio includes Four Seasons properties in Austin and Silicon Valley, as well as the Intercontinental Miami and Chicago. China's Anbang Insurance Group Co. is paying about $6.5 billion to buy the hotel group from Blackstone Group LP—just three months after the New York-based private equity firm acquired it.

Anbang is also currently the lead bidder for Starwood Hotels & Resorts Worldwide Inc., after twice topping Marriott International Inc.'s bid. Starwood owns real estate valued at about $4 billion, including the St. Regis in New York. Anbang's latest offer values Starwood at about $14 billion.

General Electric Co. agreed to sell its appliances business to China's Haier Group Co. for $5.4 billion in January—$2 billion more than Electrolux AB had agreed to pay for the business before the deal collapsed amid opposition from the U.S. Justice Department. Haier will need antitrust approval from authorities in the U.S., Mexico, Canada, and Colombia.

Zoomlion Heavy Industry Science & Technology Co., a Chinese industrial machinery manufacturer, is pursuing Westport, Conn.-based cranemaker Terex Corp. After Terex agreed to a merger with Finnish competitor Konecranes Oyj, Zoomlion made an unsolicited counter-bid in January; last week it upped the offer to $31 a share.

China's richest man agreed in January to buy Legendary Entertainment LLC, producer of Godzilla and the Dark Knight trilogy and co-producer of Jurassic World, for as much as $3.5 billion. Wang Jianlin is set to become the first Chinese person to control a Hollywood film company.

David Fuller's view -

 

This is not a repeat of earlier efforts by China’s government, using companies it controlled, to controversially attempt to acquire strategic US assets, from Energy to important high-tech businesses.  Instead, apparently independent Chinese companies and exceptionally wealthy individuals are moving a record $40.5 billion into the US during the first quarter of 2016 alone, by paying over the odds for mostly consumer-related businesses. This looks like the latest effort in China’s difficult transition from a heavy manufacturing economy to one that is driven primarily by consumer demand.   



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March 24 2016

Commentary by David Fuller

Email of the day 1

More on Brussels:

This assessment [see Wednesday’s lead item] does not surprise me. I travel to Brussels several times a year to EU meetings. Much of the city appears to be slowly degenerating with little sign of refurbishment of buildings or infrastructure. New buildings are mostly EU-related. Traffic is awful. The Eurostar station (Brussels-Sud) is from the 19th century and on return home London St Pancras/Kings Cross looks marvelous, with colour, Energy and modernity totally lacking in Brussels. Though Belgium still surprises with very good food and beer!

David Fuller's view -

Subscriber feedback and other thoughts of general interest are always appreciated.

I suspect the food and wine have been good for centuries, a few wars aside, and I hope they are a favourable omen for Brussels’ future.  As for Parcras/Kings Cross, I can remember when they were very rundown and their revival is further evidence of London’s dynamism.  However, this cannot be taken for granted – we have a very important mayoral election on 5th May.   



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March 23 2016

Commentary by David Fuller

The Big Question for This Election: What Makes America Great?

In two months on the road covering the 2016 presidential primaries, I've seen the U.S. going through something of an identity crisis, after decades of dominance. The candidates are talking about what the voters are thinking about: What does it mean for America to be great? 

To a traveler, America's greatness is revealed in simple, visual ways. Everywhere, even in sparse rural areas, there's a healthy bustle of activity. Americans get up early, and they find it hard to keep still. At a Florida intersection, I watched a man expertly juggle a mattress-store sign to attract customers. He might hold the sign for minimum wage, but that's not why he juggles it.

The whole country is never in repose; an Energy runs through it that you won't find anywhere else, and a sense of constant, habitual competition is ever-present. This is the biggest economy in the world, and it feels like it. It feels like a great nation.

To the presidential candidates, however, the issue of greatness is debatable.

David Fuller's view -

America’s most attractive and inspirational quality of the 20th Century, in my opinion, was that in this nation of immigrants people believed that they had the freedom and opportunity to achieve their realistic ambitions.

I believe that was an important key to America’s greatness.    



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March 22 2016

Commentary by Eoin Treacy

Musings from the Oil Patch March 22nd 2016

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

Mr. Burns, a long-time financial journalist and the creator of the “Couch Potato” investment portfolio, authored a column recently pointing out the dilemma faced by retirees who wished to finance their retirements without assuming any risk, or as he titled it, “How to cope with the great yield famine.”

The column, published about two weeks ago, pointed out that the last time anyone earned 6% on a six-month certificate of deposit (CD) was December 2000. The lowest yield on a six-month CD immediately after the dotcom market crash was 1.01% in June 2003. The highest yield on a six-month CD since June 2003 was 5.22% in July 2006. Today, according to Bankrate.com, the highest yield on a six-month CD nationwide is 1.10%, but the vast majority of banks offer less than 0.15%.

He then went on to figure out the retiree’s needs and how much capital was required to meet those needs risk-free. The monthly premium for Medicare Part B is $121.80, or $1,461.60 a year. To earn that much money from a 0.15% CD you would need to keep $974,400 on deposit. For most Americans that is a large sum, but it is not a problem since Social Security deducts the payment from your monthly check.

The official federal poverty level income for a family of two for 2016 is $15,930. To generate that income from a risk-free CD at 0.15% interest, you need to deposit $10,620,000. To finance a poverty-level retirement with a risk-free investment portfolio means you have to maintain $11,594,400 of your assets on deposit in those low-yielding CDs, which would place you among the top 1% of wealthy Americans. Think about that. If you don’t want to accept financial risk in your retirement, you must be in the top group of Americans in terms of wealth. The rich are poor! In order to keep our world spinning and boost its growth rate, there are no risk-free avenues available for ordinary Americans. Recognition of this condition, coupled with the stock market’s volatility, may be fuelling a portion of the anger we are seeing among the electorate today. This situation will also be an anchor on how fast our Energy needs grow.

 

Eoin Treacy's view -

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

The impact on savers of the near zero and increasingly negative interest rates we are now presented with represents a major challenge for savers. A subscriber left this comment on a piece I posted Friday and I believe it is well worth repeating here:

“I find it very concerning that central bankers, like finance ministers, never discuss the distortions produced in the future savings markets by the NIRPs.

“Pension funds and insurance companies are suffering even more than banks, but no one is discussing this. It seems to me that in the medium term the dysfunction of markets under NIRP will continue to produce counterproductive effects on risk appetite, which will negate the aim to increase risk acceptance by investment in business assets (as opposed to just paper).”

 



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March 15 2016

Commentary by Eoin Treacy

Email of the day on next generation batteries

Have you seen this :- World First: Graphene Battery Plant Gears up for 2016 Commercial Production Spanish company Graphenano has introduced a graphene polymer battery it says could allow electric vehicles to have a maximum range of up to 497 miles. The battery can also be charged in just a few minutes, is not prone to explosions like lithium batteries, and can charge faster than a standard lithium ion battery by a factor of 33. The batteries are expected to be manufactured in Yecla, Spain and will have an Energy density of 1,000 Wh/kg. For perspective, conventional lithium batteries have an average Energy density of just 180 Wh/kg. To top it all off, the battery does not exhibit memory effect, a phenomenon in which charging a battery multiple times lowers its maximum charge

Eoin Treacy's view -

Thank you for this snippet and no I had not previously heard of Graphenano but it captured my attention because it sounds almost too good to be true. 



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March 11 2016

Commentary by Eoin Treacy

MLP Investors Face Tax Hit On Top of Big Losses

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

The issue stems from the fact that Linn is taxed as a master limited partnership, or MLP, rather than a corporation, a popular arrangement among Energy companies when oil prices were soaring.
In good times, that status allowed income to flow straight through to investors without the Internal Revenue Service taking a cut at the corporate level. Linn distributed some billions of dollars of cash to investors as U.S. Energy production boomed.

But the collapse in oil and gas prices has exposed the structure’s double-sided risk: Investors with potentially worthless shares—or units, as they are known—may nonetheless owe taxes on debt that is forgiven in a bankruptcy or an out-of-court restructuring.

That is because MLPs pay no corporate taxes and instead pass certain tax burdens, along with a share of their income, to investors. Debt forgiven in a restructuring counts as noncash income, or “cancellation of debt income,” which creates a tax liability for investors without an associated cash distribution.

The roughly 60% plunge in oil prices since the summer of 2014 already has sent a number of Energy companies into bankruptcy court, and more are expected to follow. Fitch Ratings expects the default rate for U.S. high-yield Energy bonds to rise to 11% by the end of the year, compared with 1.5% for bonds outside the battered Energy and metals-and-mining sectors.

A gusher of bankruptcies and debt restructurings could be especially painful for MLP investors, most of whom are individual investors. Big institutions like BlackRock Inc., as well as many endowments and foreign institutions, can’t legally own partnership units or don’t want to, given their complexity.

 

Eoin Treacy's view -

I’ve given talks and conducted The Chart Seminar all over the world but I was never asked about the tax implication of a decision to sell until I came to the USA. The tax code is complex, rates are high and sometimes tax savings can reside where you might not expect them such as in trusts. The details described above highlight some of the reasons why the MLP sector underperformed so acutely while oil prices were falling but with such a panic to get out, is the bad news already in the price?



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March 09 2016

Commentary by Eoin Treacy

US agency reaches 'holy grail' of battery storage sought by Elon Musk and Gates

Thanks to a subscriber for this article from the guardian which may be of interest. Here is a section: 

But the biggest breakthrough is in the area of Energy storage. “I think that’s one area where we have delivered big time,” Williams told the Guardian.

The battery storage systems developed with Arpa-E’s support are on the verge of transforming America’s electrical grid, a transformation that could unfold within the next five to 10 years, Williams said.

The most promising developments are in the realm of large-scale Energy storage systems, which electricity companies need to put in place to bring more solar and wind power on to the grid.

She said projects funded by Arpa-E had the potential to transform utility-scale storage, and expand the use of micro-grids by the military and for disaster relief. Projects were also developing faster and more efficient super conductors, and relying on new materials beyond current lithium-ion batteries.

The companies incubated at Arpa-E have developed new designs for batteries, and new chemistries, which are rapidly bringing down the costs of Energy storage, she said.
“Our battery teams have developed new approaches to grid-scale batteries and moved them out,” Williams said. Three companies now have batteries on the market, selling grid-scale and back-up batteries. Half a dozen other companies are developing new batteries, she added.

 

Eoin Treacy's view -

Battery technology is the missing link in the supply chain between generating electricity via wind and solar and meeting requirements for base load. Until the last decade investment in batteries was puny compared to what has gone into other sectors. However the high oil price environment created an incentive to develop more efficient ways of generating and storing Energy. Some of that is now coming to fruition and it is likely to have a transformative effect on electricity costs and the potential for electric cars. 



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March 08 2016

Commentary by Eoin Treacy

Musings From The Oil Patch March 8th 2016

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

To demonstrate how dramatically the outlook for petroleum demand growth has changed, we compared common year demand estimates from the 2004 and 2015 AEO forecasts and found the following data points: 2015 – 43.94 vs. 32.76 QBtus; 2020 – 46.97 vs. 33.16 QBtus; and for 2025 – 50.42 vs. 32.64 QBtus. These represent forecast differences between the 2004 and 2015 AEO forecasts of -25.4%, -29.4% and -35.3%, respectively. 

It is our belief that this dramatically altered long-term outlook for petroleum is at the heart of the Saudi Arabian oil strategy. High oil prices have hurt demand growth prospects while at the same time encouraging the development of high-cost, long-lived petroleum resources. These high oil prices have provided an umbrella for expensive alternative Energy sources and, given the global embrace of climate change and anti-fossil fuel policies and mandates, made petroleum’s long-term outlook even less rosy. In the U.S. where producers could sell everything they produced, few gave any thought to the shifting demand outlook globally and the role that domestic production growth would play in altering that outlook. 

Recognizing that the outlook for petroleum demand is lower requires a mindset change for oil company CEOs; something we sense is just now beginning to sink in. While oil CEOs talk about lowered production growth forecasts as a result of low oil prices and the forced reductions in their capital spending plans, recognition that there are substantial low-cost oil reserves in the world held by countries desperate for income is beginning to resonate. Zero production growth in a declining demand business may not be the worst outcome for oil companies. Without production volume growth, maximizing profitability becomes even more important. Determining how to organize and manage a company in this new black-swan-world of shrinking oil demand will be the real challenge. 

Eoin Treacy's view -

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

I have not previously seen historic figures for how expectations of demand growth have inflated over the last decade. We know that China’s booming steel industry encouraged new mines to open and existing iron-ore miners to increase supply. The exact same thing happened in the Energy market and the problem now is that those demand growth forecasts have to be recast in the light of China’s moderating growth rate and the increasingly efficient use of Energy on a global basis. 



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March 07 2016

Commentary by David Fuller

Has This Commodity Rally Got Legs?

The commodity bulls are now roaring after Monday's near 20-per-cent jump in the price of iron ore, which sent shares in miners such as BHP Billiton, Rio Tinto and Fortescue Metals sharply higher.

The euphoric mood continued in trading overnight, helping to push oil prices higher. Brent crude, the global benchmark, climbed 5.5 per cent to a 2016 peak above $US40 a barrel. It is now 50 per cent above the 12-year low it hit in intraday trading in January. US West Texas Intermediate joined in the recovery, surging 5.5 per cent to $US37.90.

Oil prices have climbed on hopes the major oil producers will strike a deal to limit supply after Russia, Saudi Arabia, Venezuela and Qatar agreed last month to freeze output at January levels. These hopes were bolstered overnight, after the United Arab Emirate's Energy minister said that current prices meant it made no sense for any country to increase production.

"This is all good news for balancing the market", Suhail bin Mohammed al-Mazrouei told reporters. "We just need to be patient."

But not everyone is convinced that commodity prices will continue their upward surge. Some analysts argue that price gains in industrial metals, such as iron ore, are largely dependent on hopes that China will introduce more aggressive policies to stimulate growth.

The bulls are hoping that, faced with slowing economic activity, Beijing will abandon its efforts to steer its economy away from heavy industry, and towards services. They're betting that China will boost spending on major infrastructure projects, which will boost demand for steel (China accounted for about half of the world's steel output last year).

But more bearish analysts point out that iron ore prices will quickly drop if Beijing's efforts to boost growth fall short of expectations.

David Fuller's view -

In grappling with this question we will continue to hear a great deal about China, which is the world’s largest consumer of many commodities.  Sure, China is obviously important but with commodities supply is always the most significant variable. 

Will commodity exporters increase production rapidly now that industrial resources are off their lows?  Well, some may but that is the equivalent of sitting on the wrong end of the branch which you are sawing off the tree. 

Meanwhile, the cure for low commodity prices is low prices, which encourage increased consumption at a time when all-important supply is also decreasing. 
 



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March 04 2016

Commentary by David Fuller

Oil Companies Turn to Solar

Here is a latter section of this interesting and informative article by Nick Hodge of Outsider Club:

But perhaps the most convincing evidence that solar is here and it's competitive is that oil companies are now using it to make oil extraction cheaper and cleaner.

Late last year news began coming out that the oil industry was turning to solar to help it pump crude.

Royal Dutch Shell (NYSE: RDS), Total (NYSE: TOT), the Kuwait State Oil Company, and Oman's sovereign wealth fund have teamed up to create a solar company called GlassPoint.

It is building a massive solar installation in the Oman desert to create steam to help pump oil. That one project will save more carbon than all electric cars sold so far by Tesla (NASDAQ: TSLA) and Toyota (NYSE: TM) combined.

What's more, using solar to help power an oilfield makes total economic sense. Up to 60% of the operating expenses at heavy oil fields are for fuel purchases.

So at a time when oil companies are cutting costs — curtailing exploration and laying off tens of thousands of workers — they are still interested in spending for projects that can reduce costs.

And that means solar.

Petroleum Development Oman, which is partly backing GlassPoint, accounts for 70% of the nation's oil production and 100% of its gas supply.

It is highly indicative that it is turning to solar to complement its fossil fuel operations.

This is only going to continue through 2030, as solar continues its march toward becoming the world's dominant source of electricity.

As that happens, the companies that improve solar technology and reduce its costs are going to be the biggest winners for investors.

 

David Fuller's view -

Fuller Treacy Money has long maintained that solar power would dominate not only renewable Energy but also prove to be more successful than any fossil fuel, due to its unique advantages.

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



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March 04 2016

Commentary by Eoin Treacy

Don't panic about high-yield defaults

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

An alternate view is that US high yield, with or without the commodities sector, remains within the trading range we have seen since 2010. The European market is similar. In other words, high yield has been behaving much as it has throughout the post-financial crisis period which has witnessed several episodes of major market stress. These include Greece in 2010, the US rating downgrade in 2011, the eurozone crisis in 2011/12, and the China equity meltdown in August 2015. During these periods, high-yield spreads gapped out as investors feared a re-run of the 2008-09 experience when spreads and defaults soared. 

This time around, things are a bit different in that spreads have widened on account of macro concerns combined with genuinely higher defaults in the Energy and materials sectors (Figure 2). Investors must distinguish these two issues. Sure, macro concerns do keep mounting – prominent on the radar recently are US growth slowdown, China devaluation fears, slumping commodity prices, health of emerging market economies, European banks, the shift to negative interest rates and Brexit. But the view on the broader highyield market should have very little to do with the commodity cycle or the longevity of the recovery. Rather, it should have everything to do with whether one believes policymakers will keep muddling through or if they are about to make an error that plunges the global economy into another 2008-09 crash. 

If one believes policymakers will not make a significant blunder then high-yield is probably not on the verge of a default debacle, even if macro risks are on the rise. Even in the event of a major crisis, it is likely defaults will not reach the levels of recent cycles. Looking closely at past credit cycles provides some useful lessons.

Since 1970 there have been four major default cycles and one minor one in the mid-1980s (Figure 3). Note that while the default rate has averaged about four per cent over these 45 years, it is not a mean-reverting relationship – default rates are either low or high. Some have warned that hitting four per cent is an ominous sign beyond which defaults will likely keep rising much higher. However, the four per cent default level was breached thrice in the 1980s and again in 2012 without significant further increases. There is nothing sacrosanct or cataclysmic about hitting four per cent; every cycle has to be evaluated on its merits.

The business and default cycles of the past 45 years have mostly shared two broad characteristics – the Treasury yield curve has flattened and inverted and there has been explosive growth in corporate debt other than bonds. In the past three cycles a third factor has been asset bubble conditions in one or more sectors which caused these cycles to be particularly vicious. None of these three conditions conclusively exists now. 

Eoin Treacy's view -

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

This is one of the most bullish reports on bonds I’ve seen in quite a while and thought subscribers would benefit from a fresh perspective. One argument I have also seen proposed which makes sense is that while low oil prices have been a harbinger of defaults in the Energy sector, the rebound will remove some of the pressure so the pace of defaults might be lower that currently priced in. 

 



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March 02 2016

Commentary by David Fuller

Shale Oil Is Not the Only Nemesis for Saudi Arabia

Here is the opening for this interesting article from Bloomberg:

Even if Saudi Arabia wins its struggle with U.S. shale producers over market share, it will face a new billion-barrel adversary.

It won’t be regional nemesis Iran, a resurgent Iraq or long-standing competitor Russia. The answer will be more prosaic: Even when overproduction ends, a stockpile surplus of more than 1 billion barrels built up since 2014 will remain, weighing on prices. Inventories will keep accumulating until the end of 2017, the International Energy Agency forecasts, and clearing the glut could take years.

“We may get to the end of the year, and even though supply and demand are in balance, the market shrugs and says ‘So what?’ because it’s waiting for proof of inventory draw-downs,” said Mike Wittner, head of oil markets at Societe Generale SA in New York. “Moving from stock-builds to balance might not be enough.”

Since it was unveiled in late 2014, Saudi Arabia’s strategy to bring the world’s oversupplied oil markets back into balance by squeezing competitors with lower prices has proved grueling, dragging crude down to less than $30 a barrel last month. While a gradual decline in U.S. production signals supply will stop growing, the second act of the process may prove the longest as stockpiles slowly contract.

For a historical precedent, Goldman Sachs Group Inc. points to the oil glut that developed in 1998 to 1999 as demand plunged in the wake of the Asian financial crisis. Crude prices kept falling even as the Organization of Petroleum Exporting Countries made output cuts in March and then June of 1998, slipping below $10 a barrel in London in December of that year. It wasn’t until stockpiles in developed economies started dropping in early 1999 that the recovery took shape.

David Fuller's view -

This is a useful reminder and I think we should always keep an eye on stockpiles, wherever possible, for any commodity of interest. 

I maintain that Saudi Arabia cannot achieve more than a pyrrhic victory from its efforts to curtail global production of crude oil through oversupply.  Moreover, this crude strategy (pun intended) will have made more long-term adversaries than friends.

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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 25 2016

Commentary by David Fuller

Here is How Electric Cars Will Cause the Next Oil Crisis

With all good technologies, there comes a time when buying the alternative no longer makes sense. Think smartphones in the past decade, color TVs in the 1970s, or even gasoline cars in the early 20th century. Predicting the timing of these shifts is difficult, but when it happens, the whole world changes.

It’s looking like the 2020s will be the decade of the electric car.

Battery prices fell 35 percent last year and are on a trajectory to make unsubsidized electric vehicles as affordable as their gasoline counterparts in the next six years, according to a new analysis of the electric-vehicle market by Bloomberg New Energy Finance (BNEF). That will be the start of a real mass-market liftoff for electric cars.

By 2040, long-range electric cars will cost less than $22,000 (in today’s dollars), according to the projections. Thirty-five percent of new cars worldwide will have a plug.

This isn’t something oil markets are planning for, and it’s easy to see why. Plug-in cars make up just one-tenth of 1 percent of the global car market today. They’re a rarity on the streets of most countries and still cost significantly more than similar gasoline burners. OPEC maintains that electric vehicles (EVs) will make up just 1 percent of cars in 2040. Last year ConocoPhillips Chief Executive Officer Ryan Lance told me EVs won’t have a material impact for another 50 years—probably not in his lifetime.

But here’s what we know: In the next few years, Tesla, Chevy, and Nissan plan to start selling long-range electric cars in the $30,000 range. Other carmakers and tech companies are investing billions on dozens of new models. By 2020, some of these will cost less and perform better than their gasoline counterparts. The aim would be to match the success of Tesla’s Model S, which now outsells its competitors in the large luxury class in the U.S. The question then is how much oil demand will these cars displace? And when will the reduced demand be enough to tip the scales and cause the next oil crisis?

David Fuller's view -

Asking OPEC spokesmen and leaders of international oil companies about the impact of electric vehicles (EVs) on oil consumption over the next decade or two is similar to asking the manufacturers of buggy whips about the prospects for automobile manufacturers in 1910.  In other words, they could not hope to be objective about a monumentally important new technological development which threatened their industry. 

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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 23 2016

Commentary by David Fuller

Saudi Arabia to U.S. Oilmen: Cut Costs or Get Out of Business

Here is the opening of this report from Bloomberg on a confrontational meeting in Houston:

The world’s most powerful oilman brought a harsh message to Houston for executives hoping for a rescue from low prices: high-cost producers -- many of them sitting in the room -- need to either “lower costs, borrow cash or liquidate."

For the thousands of executives attending the IHS CERAWeek conference, the message from Saudi Arabia oil minister Ali al-Naimi means deeper spending cuts, laying off more roughnecks and idling drilling rigs.

"It sound harsh, and unfortunately it is, but it is the most efficient way to rebalance markets," Naimi told the audience in Houston on Tuesday.

As many as 74 North American producers face significant difficulties in sustaining debt, according to credit rating firm Moody’s Investors Service. Shale explorers from Texas to North Dakota will be “decimated” in coming months amid a wave of restructurings and bankruptcies, said Mark Papa, the former EOG Resources Inc. chief executive officer who helped create the shale industry more than a decade ago. The survivors will be more conservative, Papa, who is now a partner at private-equity firm Riverstone Holdings LLC, said during a panel discussion on Tuesday.

The message will resonate beyond the American Energy industry as declining spending, rising debts and layoffs are starting to spread to Main Street, with the impact spreading from regional banks in Oklahoma to the economies of cash-strapped Venezuela and Brazil.

For the oil industry itself, the warning is a sign of more months -- and perhaps years -- of financial pain. The S&P 500 Oil and Gas index has fallen roughly 60 percent since mid-2014 to its lowest since 2009. The debt of junk-rated U.S. oil companies is yielding more than 20 percent, the highest in at least 20 years, according to Bank of America Corp.

Naimi told the executives in Houston that Saudi Arabia believed that freezing oil production -- as it just agreed with Russia -- would be enough to eventually balance the market. Over time, high-cost producers will get out of the business, and rising demand will slowly eat up the oversupply, he said. The International Energy Agency believes that means another two years of low prices.

The freeze agreement isn’t "cutting production. That is not going to happen," Naimi said.

David Fuller's view -

Well, Ali al-Naimi has chutzpah and this is certainly a game of attrition.  It may also be a game of high-stakes poker.  Every oil producer is losing, so who will blink first?

That remains to be seen but the economic damage is already considerable and increasing.  The US is both a loser within its oil sector and a big winner in terms of national consumption of oil.  If the US wants to up the ante, it can subsidise its oil sector.    



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February 23 2016

Commentary by Eoin Treacy

The Fed: No longer to the rescue

This article by Russ Koesterich for Blackrock may be of interest to subscribers. Here is a section: 

In the past, soft growth, tightening financial conditions and falling inflation expectations would have at least provoked a response from the Fed. Although we still believe that central banks in Europe, Japan and probably China will continue to ease, the Fed is in a bit of a bind. Economic data, particularly manufacturing, are soft while inflation expectations remain near multi-year lows. That said, most measures of realized inflation are improving. U.S. core inflation is now running at 2.2%, the fastest pace since the fall of 2008. Prices on imported goods, both oil and non-Energy-related products, continue to fall, but housing and medical inflation are accelerating.

The Fed is unlikely to raise interest rates four times this year, as it suggested last December, but will the central bankers wait out all of 2016? Probably not, yet this is exactly what the futures market is suggesting. As such, any hikes would represent a more hawkish stance than the market is currently discounting. If this occurs in the context of a stronger dollar, it will represent a further tightening of already challenging financial market conditions.

For investors, there are several implications. First, the Fed is unlikely to provide the same backstop for asset prices as it has in recent years. Second, in a world in which central bank policy is both less available and less potent, volatility is more likely to remain above its historical average.

Finally, today's inflation expectations are most likely too low. Even in a world of slow growth, weak productivity and diminishing labor market slack, inflation may be higher than today's diminished expectations suggest. Under this scenario, Treasury Inflation Protected Securities (TIPS) may represent a good long-term opportunity.

 

Eoin Treacy's view -

This is a useful summary of some of the background issues that are currently affecting investor confidence. The Fed is now less likely to step in to support prices at the first sign of trouble and that represents a change to the status quo which has prevailed since 2009. That’s a major evolution and helps to explain why the main Wall Street indices have been largely rangebound for more than a year. 



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February 17 2016

Commentary by Eoin Treacy

Berkshire Expands Energy Investments With Kinder Morgan Stake

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

“It strikes me as a business that’s right up his alley,” said Jeff Matthews, an investor and author of Buffett-related books. “It’s a business that’s going to last for a long time,” he said. And the stock has “gotten crushed,” creating an opportunity to buy at an attractive price.

Oil drillers, gold miners and rig operators have sacrificed dividends to conserve cash amid tumbling prices in oversupplied commodity markets. When Kinder Morgan cut its dividend, it pledged not to issue any new shares through the end of 2018.

Shares Jump
Kinder Morgan jumped 7.5 percent to $16.79 at 6:50 p.m. in extended trading in New York. Berkshire’s portfolio is closely watched by investors for clues into how the billionaire chairman and his backup stock pickers are thinking. Newly disclosed holdings often send shares higher.

One of Buffett’s deputy investment managers, Todd Combs or Ted Weschler, could be responsible for the investment. Both have been building portfolios at Berkshire and tend to make smaller bets than their boss.

“Our guess is that it’s Todd or Ted,” said Tony Scherrer, director of research at Smead Capital Management, which oversees about $2.1 billion including Berkshire shares. “It’s not insignificant, but it doesn’t smell like a straight-up Buffett move to us.”

Energy Bets
Other closely watched investment managers added holdings in the Energy industry during the fourth quarter. David Tepper’s Appaloosa Management bought shares of Kinder Morgan and Energy Transfer Partners LP, while Seth Klarman’s Baupost Group increased its positions in Antero Resources Corp., an oil and gas producer, and Cheniere Energy Inc

Eoin Treacy's view -

At the Daily Journal AGM in 2014 Charlie Munger mentioned that Berkshire was set to become the biggest utility in the country. The acrimonious dispute with solar companies in Nevada highlights its participation in that power market but that only gives a small window on the kinds of businesses Berkshire seems to buy. The short answer could be that they tend to buy companies whose products are used every day. That’s as true of Coca Cola as it is of railroads, electricity and now pipelines. 



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February 16 2016

Commentary by David Fuller

Saudi Arabia, Russia to Freeze Oil Output Near Record Levels

Here is the opening of this topical article from Bloomberg:

Saudi Arabia and Russia agreed to freeze oil output at near-record levels, the first coordinated move by the world’s two largest producers to counter a slump that has pummeled economies, markets and companies.

While the deal is preliminary and doesn’t include Iran, it’s the first significant cooperation between OPEC and non-OPEC producers in 15 years and Saudi Arabia said it’s open to further action. Oil pared gains after the accord was announced, signaling traders see no immediate end to the global supply glut.

The deal to fix production at January levels, which includes Qatar and Venezuela, is the “beginning of a process” that could require “other steps to stabilize and improve the market,” Saudi Oil Minister Ali Al-Naimi said in Doha Tuesday after the talks with Russian Energy Minster Alexander Novak. Qatar and Venezuela also agreed to participate, he said.

Saudi Arabia has resisted making any cuts in output to boost prices from a 12-year low, arguing that it would simply be losing market share unless its rivals also agreed to reduce supplies. Naimi’s comments may continue to feed speculation that the world’s biggest oil producers will take action to revive prices.

“The reason we agreed to a potential freeze of production is simply the beginning of a process” over next few months,” Naimi told reporters. “We don’t want significant gyrations in prices. We don’t want a reduction in supply. We want to meet demand. We want a stable oil price.”

David Fuller's view -

Markets were soon disappointed with this surprise announcement because it did not change anything in terms of current oil production. However, it is an important achievement because, as savvy Saudi Oil Minister Ali Al-Naimi said, because it is the “beginning of a process” which could require “other steps to stabilize and improve the market.” 

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February 16 2016

Commentary by Eoin Treacy

Chance discovery puts graphene electronics closer to mass production

This article by Dario Borghino for Gizmag may be of interest to subscribers. Here is a section: 

The scientists had built a solar cell by placing graphene on top of the high-performance semiconductor copper indium gallium diselenide (CIGS), which in turn was stacked on top of soda-lime glass (SLG), the same industrial-grade glass used for windows and bottles. When the researchers measured the baseline performance of the cell before proceeding to dope the graphene, they found to their surprise that the graphene had already been doped to the ideal level.

As they later discovered, this was because the sodium ions in the glass spontaneously transferred to the CIGS semiconductor by surface contact, and from there to the graphene, creating a concentration of impurities that happened to dope the graphene in just the right concentration.

Crucially, this method doesn't require high-temperature, chemical or vacuum processes, and the doping remained strong even when the cell was exposed to air for several weeks. What's more, the same method could also be applied to combinations of semiconductors and substrates other than CIGS and glass, where the concentration of doping impurities that reach graphene can be fine-tuned by inserting an insulating layer of the right thickness.

 

Eoin Treacy's view -

Graphene has been a long time coming and it has not quite reached commercialisation yet. but the number of discoveries relating to it continues to increase and its potential is undiminished. We don’t know when the key mass production breakthrough will be made but it will be particularly transformative for the battery sector which remains in need of a major breakthrough to revolutionise Energy storage. 

 



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February 12 2016

Commentary by David Fuller

Best Bank Rally Since 2012 Lifts Europe Stocks From Two-Year Low

Here is the opening from this Bloomberg report:

Rebounds in lenders, miners and Energy producers pushed European stocks to their biggest gains in three weeks.

Commerzbank AG jumped 18 percent, the most since 2009, after saying it returned to profit. That eased concerns that the region’s lenders will fail to find a way to remain profitable in a low-rate environment, which sent them to their biggest plunge since August 2011 on Thursday. Deutsche Bank AG climbed 12 percent after saying it will buy back about $5.4 billion of bonds. Energy producers posted their biggest surge since 2008 and miners their biggest since 2009 as commodities rallied.

The Stoxx Europe 600 Index rose 2.9 percent, rebounding from its lowest level since 2013. Data showing that the region’s recovery kept its momentum also helped sentiment: Germany led the euro area’s growth to 0.3 percent in the fourth quarter, matching economists’ forecasts.

“Markets have been scrabbling for a story -- we’ve changed our focus on fears about China, oil, financials and central banks in such a short time,” said Ben Kumar, an investment manager at Seven Investment Management in London. His firm oversees about $13 billion. “It’s crazy that the market is priced for recession and a complete failure of the financial system. But you wouldn’t want to call it the end of the rout quite yet. Nobody wants to be the first bull now.”

 

David Fuller's view -

Most stock markets are deeply oversold relative to their 200-day moving averages, but investors remain fearful.   

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February 12 2016

Commentary by Eoin Treacy

China Could Have a Meltdown-Proof Nuclear Reactor Next Year

This article by Richard Martin for the MIT Technology Review may be of interest to subscribers. Here is a section:

Construction of the plant is nearly complete, and the next 18 months will be spent installing the reactor components, running tests, and loading the fuel before the reactors go critical in November 2017, said Zhang Zuoyi, director of the Institute of Nuclear and New Energy Technology, a division of Tsinghua University that has developed the technology over the last decade and a half, in an interview at the institute’s campus 30 miles south of Beijing. If it’s successful, Shandong plant would generate a total of 210 megawatts and will be followed by a 600-megawatt facility in Jiangxi province. Beyond that, China plans to sell these reactors internationally; in January, Chinese president Xi Jinping signed an agreement with King Salman bin Abdulaziz to construct a high-temperature gas-cooled reactor in Saudi Arabia.

“This technology is going to be on the world market within the next five years,” Zhang predicts. “We are developing these reactors to belong to the world.”

Pebble-bed reactors that use helium gas as the heat transfer medium and run at very high temperatures—up to 950 °C—have been in development for decades. The Chinese reactor is based on a design originally developed in Germany, and the German company SGL Group is supplying the billiard-ball-size graphite spheres that encase thousands of tiny “pebbles” of uranium fuel. Seven high-temperature gas-cooled reactors have been built, but only two units remain in operation, both relatively small: an experimental 10-megawatt pebble-bed reactor at the Tsinghua Institute campus, which reached full power in 2003, and a similar reactor in Japan.

Eoin Treacy's view -

Regardless of the cost, China needs to import fossil fuels. From a national security perspective that’s a problem. Despite the fact the pace of growth is moderating the requirement the country is going to have for Energy means they have little choice but to fund any and every potential technology to supply their market. Nuclear is a big part of that and China is now the largest test bed for new reactor designs in the world. They will inevitably seek to capitalise on that investment and China is going to be a major competitor in the construction of nuclear reactors globally. 



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February 10 2016

Commentary by Eoin Treacy

Musings From the Oil Patch February 10th 2016

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

One aspect of the presentation we found interesting as a sign of Saudi Arabia’s thinking about the long-term outlook for the oil business was a discussion of research efforts underway at the company’s newest research center located in Detroit. That facility was opened last November. Its focus is fuel technology and improved engines, but also strategic transport analysis. The latter effort involves scenario analysis of future transportation markets including ultimately issuing white papers on the topic.

With respect to their core technology focus, they are targeting passenger and commercial fuels and engine technologies. From descriptions of some of their research efforts, it seems they are focused on autonomous vehicle development, although that term was never used. Mr. Al-Tahini said that the over-arching research goal is to produce the most fuel-efficient vehicle with the lowest emissions.

Our take-away from that part of the presentation was that at some point in the past, Saudi Arabian officials began considering the forces at work reshaping the transportation business, a market dominated by crude oil. One broad trend impacting that market is demographics, but there is little Saudi Arabia can do to change the impact. Understanding these trends and their impact on the market is critical for long-term planning.

In recent years, the environmental movement has aggressively targeted the fossil fuel industry, which has resulted in a tightening of fuel-efficiency and carbon emission standards, the elimination of fuel subsidies in a growing number of countries around the world, and a strong push to urbanize the population and increase transportation alternatives. All of these forces will impact the growth of the transportation fuels market.
Given those forces, we have concluded that Saudi Arabia believes that oil demand may be closer to a peak than previously thought. This does not mean that the oil industry is going out of business anytime soon, but rather that its growth will slow in the future. Market share growth for Saudi Arabia will need to come from someone else’s share, which means increased price competition. It also means trying to slow the development of alternative Energy sources. Knocking out future oil sands and deepwater oil output as well as marginally shrinking shale oil opportunities will all benefit Saudi Arabia’s long-term market potential. Any negative impact on the oil output of other significant producers such as Russia, Iran and Iraq, coupled with boosting demand would all help Saudi Arabia. Lastly, technological developments that enable Saudi Arabia to reduce the cost and extend the life of its oil fields would also help the kingdom’s future. While none of this is new to our thinking, Mr. Al-Tahini’s presentation provided confirmation of what we think is motivating Saudi Arabia’s actions.

 

Eoin Treacy's view -

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

How Saudi Arabia views the market for its products matters. If they truly believe that the peak in demand growth has been reached that would help to explain the beggar thy neighbour approach that has been adopted over the last year. Major oil companies have responded by shelving expansion plans, Alberta put off its desire for more royalties from its producers and we can expect to hear a lot more about refracking in the unconventional supply sector. 



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February 08 2016

Commentary by David Fuller

What Executives Say About the Possibility of a U.S. Recession

Here is the opening of this topical article from Bloomberg:

Executives across corporate America are being asked for their views on whether a recession is in the offing.

Growth in the U.S. decelerated to a 0.7 percent annualized rate in the fourth quarter as companies contended with a slower global economy. The median probability for a U.S. recession in the next 12 months jumped to 19 percent in last month’s Bloomberg survey of economists, the highest since February 2013.

As stock and oil prices slide, executives are offering their perspectives on the economy in conversations with analysts and investors. These comments were collected by Bloomberg from earnings calls, meetings and conferences the past three weeks.

John Thain, chairman and chief executive officer, CIT Group Inc.: 
“Given the recent performance of the equity market and our stock price, the market seems to indicate a recession is imminent. I don’t see that. Low Energy prices do not cause recessions. While the Energy sector itself is weak, the U.S. economy is still growing." (Feb. 2)

Stephen Schwarzman, chairman and CEO, Blackstone Group LP: 
“While it’s always possible that a market correction becomes something more significant, we, at Blackstone, do not see a recession in the U.S. We do believe that global GDP growth is slowing, and we’ve seen a slowdown within certain sectors and regions in our global portfolio as a result." (Jan. 28)

David Fuller's view -

Stock markets are better indicators of investor sentiment than economic prospects.  Today, investors are frightened by uncertainty; excessively choppy market action due to high-frequency trading; forced sales by sovereign wealth funds, all of which are contributing to what will eventually be a healthy contraction in valuations.  



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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

The Bigger Picture A Global & Australian Economic Perspective

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

There are signs that the strength in household goods expenditure is losing steam, possibly reflecting the recent cooling of the housing market spearheaded by Sydney. That said, the more recent data on retail spending continues to be relatively resilient, underpinned by improving trading conditions, while a lower AUD has encouraged tourism spending. ABS retail turnover growth for November (0.4%) was slightly below October (0.6%) to be 4.1% y/y, around the trend seen since late 2014. Meanwhile, NAB’s Online Retail Sales Index for November showed a 0.7% m/m rise in online spending. Despite soft wages growth, we expect a modest pick-up in consumer spending growth through to 2016, driven by a gradual reduction in households’ saving ratio and strong employment growth.

The Sydney housing market has clearly cooled, having recorded two consecutive months of price declines, while momentum in the Melbourne market has also slowed -but not as much as Sydney. Other capital cities experienced mixed outcomes in December. Recent property market outcomes are consistent with our view that prices growth will increasingly come under pressure as credit restrictions on investor lending bite, in combination with subdued incomes and slowing population growth/rising supply. We have maintained our previous forecast for much slower house price growth in 2016 (2%), although risks to the downside have escalated even more, especially in the apartment market.

Signs of stronger non-mining investment remain hard to find in the official data (especially the expectations data), while inevitable declines in mining capex continue – and could well become more pronounced given further falls in commodity prices. Despite significant signs of improvement in the business landscape, the NAB Business Survey reports that firms are still apparently gun-shy on investment. A fall in capacity utilisation in the December Monthly business survey has probably not helped, nor would recent financial market uncertainties. That said, we remain hopeful that AUD depreciation will eventually assist investment in trade exposed industries. Dwelling investment has been a little softer than expected in recent quarters, yet record high numbers of dwellings in the construction pipeline suggest the positive contribution to growth is likely to continue – although the cooling housing market will likely stem the flow of new projects.

 

Eoin Treacy's view -

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

A firmer tone on Energy markets represents a tailwind for Australia as LNG shipping capacity comes on line. In fact with the rationalisation of China’s steel industry Australia needs Energy to play a significant role in exports to make up for the loss of revenue from coal and iron-ore. If we take that a step further it is reasonable to expect the Australian Dollar to be more heavily influenced by moves in the oil price than was previously the case. 



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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 27 2016

Commentary by David Fuller

The Strategic View: The Correlation Between Oil & Equities Is Not a Sign of Recession: Time To Start Buying

My thanks to Michael Jones for his excellent report published by RiverFront Investment Group.  Here is a brief sample from the opening:

Based on conversations with our partner financial advisors, one of the most troubling and confusing aspects of recent market volatility is the close connection between the oil market and the stock market.  If oil prices fall during the trading day, then equity prices almost inevitably follow oil lower.

Falling oil prices are typically seen as beneficial to global consumers, and equity prices outside the Energy sector historically tend to be largely immune to or even benefit from cheap oil.  The few times in history that oil and stock prices have fallen in tandem were driven by the onset of a global recession.  Thus, despite robust US job gains, improving new home sales, and the positive impact of lower gas prices on their personal finances, investors are increasingly fearful that the close correlation between oil and equities is once again signaling a recession and the potential for a market crash similar to 2008.  We strongly disagree.  

David Fuller's view -

This is a well-argued, sensible report by Michael Jones.  I strongly recommend it to our subscribers.

A PDF of the report is posted in the Subscriber’s Area.



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January 26 2016

Commentary by Eoin Treacy

Mansion Prices Are Falling Across America

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

The stronger dollar is driving South American buyers away from the 23,000 condos in the pipeline for Miami’s downtown area, said Peter Zalewski, owner of South Florida development tracker CraneSpotters.com. Buyers signed about one-fourth fewer pre-construction contracts last year than in 2014, according to Anthony M. Graziano, senior managing director at Integra Realty Resources Inc., which tracks condo data for the Miami Downtown Development Authority.

In nearby Sunny Isles, Florida, faraway currency fluctuations are endangering the sale of a $3.7 million condominium. A Colombian woman who put down a 50 percent deposit is fretting over how she’ll cover the other half over the next year, said her agent, Mauricio Rojas. The Colombian peso, dragged down by the commodity slump, has lost about 30 percent of its value since she signed the contract in December 2014.

In Houston, the plunge in oil prices to a 12-year low is killing the luxury boom. Sales for homes priced at $500,000 or more dropped 17 percent in December from a year earlier, according to the Houston Association of Realtors.

 

Eoin Treacy's view -

The strength of the US Dollar represents a headwind for the luxury real estate market, at a time when many foreign buyers have seen the value of their domestic currencies decline from what were in many cases historic peaks. Rationalisation in the Energy service sector is an additional headwind for places like Texas, Pennsylvania and North Dakota. However that’s not what piqued my attention today. 



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January 26 2016

Commentary by Eoin Treacy

Musings From the Oil Patch January 26th 2016

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

With oil prices dropping and E&P companies cutting their spending, the answer to our question of what is the sound of another shoe dropping is becoming clear. It is the sound of pink slips landing on employees’ desks. Living within one’s cash flow has taken on greater meaning for companies today. Unfortunately, the major operating costs are employees, especially when there isn’t much to do. Reducing costs to stay within cash flow means laying-off employees. Last Thursday afternoon, Houston and the oil patch were shocked by Southwestern Energy’s (SWN-NYSE) announcement that it was terminating 1,100 employees, or 44% of its labor force, as it deals with low oil and gas prices. The third largest natural gas producer indicated it had no drilling rigs operating and was reducing its capital spending plans for the year. 

The next day, leading oilfield service provider Schlumberger Ltd. (SLB-NYSE) announced plans to reduce its workforce by 10,000 in response to low commodity prices and low oilfield activity. Since the third quarter of 2014, Schlumberger has cut 34,000 employees, representing 26% of its workforce. The company also stated in its fourth quarter earnings release that it doesn’t see an increase in oilfield activity until 2017. This view is rapidly being embraced by the industry and shaping all staffing and capital spending decisions. 

Leading forecasting groups – the International Energy Agency, OPEC, IHS, Wood Mackenzie – are embracing the view that the current low oil prices will force the industry to further cut its activity during the first half of 2016 and that natural attrition in production will drop global oil supplies, despite the addition of possibly 300,000-500,000 barrels a day of oil exports from Iran this year. These groups also see demand continuing to grow, although uncertainty about the health of the Chinese economy is becoming a significant wildcard in the forecasts. On balance, these forecasters see the imbalance of global oil supply and demand, which has existed for the past two years, will return to a more balanced condition by the second half of 2016. A balanced market will allow bloated global petroleum inventories to start shrinking, which sets the stage for higher oil prices in the third and fourth quarters of 2016 and still higher prices in 2017. It will be the combination of continued oil demand growth, matched by a stable supply outlook and declining inventories, that drives an upturn in oilfield activity in the first half of 2017. The challenge for the Energy industry will be getting back those employees receiving pink slips now.

Eoin Treacy's view -

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

The same subscriber added the following anecdote: 

Interestingly enough, the massive layoffs of the 1980's have not YET repeated themselves in the Texas Panhandle, where vast numbers of conventional wells continue to pump. One specialist contractor in drilling supervision said (to my brother over the weekend) that he was still as busy as he could handle, and my nephew just hired on to a drilling company as a roustabout. Interesting anecdotal information - not perhaps strongly suggestive of anything in particular, of course.

 



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January 22 2016

Commentary by David Fuller

Why Much Cheaper Oil Is Not All Good News

After a week of turmoil, there was relief in the markets and for everyday investors on Friday. The FTSE 100 finished the week higher, giving a desperately needed fillip to the country’s depleted ISAs and pension pots; and the price of oil recovered a little. In the past, a rebound in the price of crude would have been seen as a blow, at least outside Scotland – but these days, we seem to have started cheering each time it goes up.

Why? Have we lost the plot, or is it right for the UK, paradoxically now a major net oil importer as a result of the demise of the North Sea industry, to hope for a stabilisation of the price of oil? The answer is that oil’s slump remains good news, on balance, for consumers and manufacturers. With oil production contributing far less than before to our GDP, the direct downside on that front is small.

But there are counterbalancing factors, reasons why it makes sense for the financial markets to worry, even if the ultra-pessimists are wrong.

So why is it different this time? There are five main reasons. The most interesting is that many analysts are worried about a looming Energy and commodity debt crisis. Firms borrowed to invest, including for fracking and shale; but it seems that this credit could turn out to be the new subprime mortgages. The worry is that as the Energy and commodities bubble continues to burst, a tidal wave of bad debt could engulf the financial system, in a repeat of the crisis of 2008.

David Fuller's view -

This is a far cry from the crisis of 2008 for the USA, in my opinion.  We are only talking about the US Energy sector, which is certainly not insignificant but the general public benefits from low oil prices.  In 2008 the entire US financial system and housing market was adversely affected by ‘liar loans’ and collateralized mortgage obligations (CMO’s).

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January 21 2016

Commentary by David Fuller

The World Has Discovered a $1 Trillion Ocean

Here is the opening of Bloomberg’s article by Eric Roston on this significant development:

As chairman of investments at Guggenheim Partners, Scott Minerd thought he had a realistic view on how big an economic challenge climate change poses.

Then, at a Hoover Institution conference almost three years ago, he met former U.S. Secretary of State George Shultz. Minerd recalled him saying: “Scott, imagine that you woke up tomorrow morning, and the headline on the newspapers was, 'The World Has Discovered a New Ocean.’” The opening of the Arctic, Shultz told him, may be one of the most important events since the end of the ice age, some 12,000 years ago.

And while Shultz’s spokesman couldn’t confirm the conversation, there’s no doubting the melting of the Arctic ice cap, and the unveiling of resources below, presents mind-boggling opportunities for Energy, shipping, fishing, science, and military exploitation. Russia even planted its flag on the sea floor at the North Pole in 2007.

Energy and shipping have been first up. Norway made its national fortune drilling in northern waters, and Arctic fossil fuel exploration has become a more prominent part of U.S. Energy policy. Melting ice means that in summer months, cargo can travel approximately 5,000 km from Korea to New York, rather than the 12,000 km it takes to pass through the Panama Canal. Warming waters also open up access to commercial fish stocks, making the Arctic a growing source of food.

David Fuller's view -

The headline and text of Eric Roston’s article clearly view the opening of the Arctic for commercial ventures as a huge opportunity.  Well, trade routes through the Arctic will be convenient for some but technological advances already ensure that we have more than enough oil, gas and minerals.  This is confirmed by today’s low prices for these resources.  That may change some day but I think the continued and even accelerating advance of technology will provide the industrial resources, or even better substitutes, that the world will require. 

The melting of Artic ice is also further confirmation of climate change in the form of global warming.  This will have some very negative consequences, most likely starting with an increase in the rate of rising sea levels.  The article mentions fishing but not any of the negative consequences.  The last thing our dwindling fish stocks require is the plundering of their last refuge as factory ships sweep up critical supplies.       



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January 20 2016

Commentary by David Fuller

What Is Behind the Market Plunge?

Another dive in the oil price: new fresh lows in global equity markets. That's been the dominant pattern for 2016, and it shows no sign of abating.

The trend continued last night, with tumbling crude oil prices dragging down global equity markets. The key US market – West Texas Intermediate – fell 7 per cent per cent, hitting its lowest level since 2003, while the global benchmark – Brent crude – fell 5 per cent to $US27.33 a barrel, a 12-year low.

Indeed, this pattern has become so entrenched that so far this year there's been around a 90 per cent correlation between movements in the key US share market index, the S&P 500 and changes in the oil price (a 100 per cent correlation means that the two move in perfect unison). Which is remarkable given that the US share market usually shrugs off moves in the oil price.

So the big question is why, all of a sudden, the two are now moving in virtual lock-step.

Most analyst agree that global equity markets started showing a hyper-sensitivity to the oil market when the price of crude first approached, and then fell through, the $US30 a barrel level.

Investors have started getting seriously worried that the lower the oil price goes – and the longer it stays down – the greater the threat that many debt-laden oil producers won't be able to meet the interest payments on their debts. As a result, we're likely to see a sharp spike in defaults, and even bankruptcies.

Already, with the oil price continuing to edge further below the $US30 a barrel mark, a high proportion of North American Energy companies are losing money. And with every move lower in the oil price, the likelihood of large-scale defaults and bankruptcies rises. What's more, it's only a matter of time before credit-rating agencies start the process of downgrading triple-B, and even A-rated Energy companies.

As a result, the problems in the oil market have been infecting the huge high-yield US debt market (commonly referred to as junk bonds) for some time., even though the Energy sector only accounts for a relatively low share – around 10 to 12 per cent – of high yield indices.

David Fuller's view -

Given investors’ current mind set it is hard to imagine stock markets rallying against the background of new lows for crude oil prices.  However, the lower Brent falls, the more sharply it is likely to rebound.  Moreover, oil is already experiencing a severe bear market. 

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January 19 2016

Commentary by Eoin Treacy

Barron's 2016 Roundtable, Part 1: A World of Opportunities

Thanks to a subscriber for this transcript of a panel discussion between a number of high profile analysts. Here is a section: 

We will see a higher default rate in the junk-bond market. Junk-bond issuance used to represent about 1% of GDP. Then it rose to 2%. It was something of a stimulant to the economy. Also, the stock market has been buyback-driven to an extent, and higher borrowing costs will make that more problematic.

Investment-grade bonds also have been dropping in value. The LQD [ iShares iBoxx $ Investment Grade Corporate Bond ETF] consistently dropped in price through 2015. When interest rates rose, it was challenged by interest-rate risk. When the world looked problematic, it was challenged by credit risk. It seems like there is almost no way to win. When investment-grade credit is downgraded, it falls into junk territory, which makes it un-ownable for a large number of institutional investors. The credit market is sending a message, and the stock market, at least until recently, was whistling through the graveyard. When junk bonds fall 20% in price and the stock market sits at a high, something is wrong with the picture. These markets are moving like alligator jaws. Ultimately, they will move together.

 

Eoin Treacy's view -

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

There are undeniable problems in the Energy sector and this is all the more important because it has been one of the primary sources of new debt over the last five years. With prices where they are today, the prospect of an uptick in the default rate is non-trivial. That’s a problem, particularly for bond ETFs, because they cannot arbitrarily sell and will need to wait for a downgrade or other mandated event to occur before they liquidate. This means they will invariably be late. 



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January 15 2016

Commentary by Eoin Treacy

On the Couch

Thanks to a subscriber for this memo by Howard Marks for Oaktree Clients which I highly recommend reading both for its behavioural insights and level headed perspective on the markets as they stand today. Here is a section: 

There is no immediate connection (other than for companies doing business there) between the slowdown and the price decline in the oil patch, on one hand, and the general creditworthiness and desirability of high-risk debt on the others. And yet, over the last few months, pronounced changes occurred in the market for distressed debt:

After a period of very stable prices – ever for “iffy” debt 0 some securities have “gaped down” in the last few months (i.e. fallen several points at a time rather than correcting gradually). In particular, investors have become highly intolerant of bad corporate news. 

For the first time since 2008-09, the debt of some companies outside of Energy and mining has fallen from 80 to 60 and others from 50 to 20. 

There is a general sense among my colleagues that investors have gone from evaluating securities based on the attractiveness of their yield (with companies fundamentals viewed optimistically (to judging them on the basis of the likely recovery in a restructuring (with fundamentals viewed pessimistically).

The capital markets have begun the swing from generous toward tight, as is their habit. Thus, whereas they used to find it easy to refinance debt I order to extend maturities or secure “rescue financing” now it’s hard for companies – especially those experiencing any degrees of difficulty – to obtain capital. 

On December 7, Oaktree held a dinner in New York for equity analysts who follow out publicly traded units. Bob O’Leary, a co-portfolio manager of our distressed debt funds, planned to be among the hosts. But he called me on December 3 with a question I hadn’t heard in a long time from my distressed colleagues. “Would you mind if I don’t come? There’s too much going on for me to leave the office“. The change in investor attitudes had created investment opportunities where they hadn’t existed just a few months before – in some cases out of proportion to the change in fundamentals. 

Developments like these are indicative of rising pessimism, skepticism and fear. They’re largely what Oaktree hopes for, since – everything else being equal – they make for vastly improved buying opportunities. But note that we may be just in the early stages of a downward spiral in corporate performance and credit market behaviour. Thus, while this may be “a time” to buy, I’m far from suggesting it’s “the time”. 

 

Eoin Treacy's view -

This is balanced piece and it’s really worth taking time over the weekend to read it in full. 

In August I described the price action following the volatility across ETFs as a massive reaction against the prevailing trend and therefore confirmation of Type-2 topping characteristics. Following such an event investors invariably ask if anything has really changed and whether the widespread experience of being stopped out of positions will have a lasting effect. At the time I drew parallels with the flash crash in 2011 because that was the last time investors had experienced a similar event albeit now from a higher level. 

 



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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 14 2016

Commentary by David Fuller

The Real Price of Oil Is Far Lower Than You May Realize

Here is the opening of this informative article from Bloomberg:

While oil prices flashing across traders’ terminals are at the lowest in a decade, in real terms the collapse is even deeper.

West Texas Intermediate futures, the U.S. benchmark, sank below $30 a barrel on Tuesday for the first time since 2003. Actual barrels of Saudi Arabian crude shipped to Asia are even cheaper, at $26 -- the lowest since early 2002 once inflation is factored in and near levels seen before the turn of the millennium.

Slumping prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.

Slowing investment and construction in China, the world’s biggest Energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said in an interview with Bloomberg Television.

David Fuller's view -

This is why oil prices are likely to start moving higher as the year progresses.  There are limits to how far some oil producers can devalue to offset lower benchmark prices in USD, without causing even bigger problems in terms of their import costs of other goods and domestic inflation.

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January 14 2016

Commentary by Eoin Treacy

Inflation will return, and the Fed will speed up rate hikes, top forecaster says

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

“Markets have a deep skepticism that we’ll ever see a pickup in inflation,” Stanley said in an interview. But market participants are implicitly assuming Energy commodity prices will continue to fall as fast as they did in late 2014, when Energy prices dropped more than 20%. “The bulk of the movement took place roughly a year ago,” Stanley said.

The Fed expects headline and core inflation to drift higher in 2016 to about 1.6%, and Stanley believes that forecast is the key to what the Fed will do this year. If inflation doesn’t begin to move higher soon, it’s likely that the Fed won’t raise rates more than one or two times. But if inflation surprises the Fed, as Stanley believes it will, then the Fed would be more aggressive.

“It wouldn’t shock me if inflation is higher than the Fed thinks it will be, and they may go one or two more times than is baked in,” he said.

Although markets are intensely focused on the global economy, Stanley argues that the domestic economy is what matters most. “The U.S. is a relatively closed economy,” with global trade accounting for only about 15% of the economy.

“The global economy won’t be entirely healthy, but it won’t deteriorate, deteriorate, deteriorate,” he said.

As for the U.S. economy, Stanley sees a relatively healthy household sector, with rising incomes and an improving housing market, continuing to do better than the business sector, with its soft investment spending.

 

Eoin Treacy's view -

A point both David and I have made, particularly in the Subscriber’s Audio, is that the sharp declines in commodity prices will have a transitory effect on inflation figures because they cannot continue to fall at the current pace indefinitely. Once prices stabilise the effect on inflation statistics will wash out in a couple of quarters and the rising cost of services and wages will be more apparent. There is also the possibility that rebounds in commodity prices, from very oversold levels, will have an inflationary impact. I believe that is why the Fed continues to believe inflation will be higher later this year. 



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January 13 2016

Commentary by David Fuller

Saudi Debt Risk on Par With Junk-Rated Portugal as Oil Slides

Investors wanting to take out insurance on Saudi Arabia’s debt have to pay as much as they would for Portugal, a nation still saddled with a junk credit-rating five years after an international bailout.

The cost of insuring the kingdom’s debt more than doubled in the past 12 months to a 190 basis points, or $190,000 annually to insure $10 million of the country’s debt for five years, as of 4:14 p.m. in Riyadh, the highest since April 2009, according to CMA prices compiled by Bloomberg. That’s almost identical to contracts linked to debt from Portugal, whose rating is seven levels below Saudi Arabia’s Aa3 investment grade at Moody’s Investors Service.

Saudi Arabia’s finances are under pressure as it fights a war in Yemen at a time when crude prices are languishing at the lowest level in almost 12 years. The country, which counts on Energy exports for 70 percent of government revenue, sold domestic bonds for the first time since 2007 last year to help fund a budget deficit that may have been the widest since 1991. Net foreign assets dropped for 10 straight months through November, the longest streak since at least 2006, to $627 billion.

David Fuller's view -

Saudi Arabia faces a perfect storm of problems, many of their own creation.

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January 13 2016

Commentary by Eoin Treacy

Email of the day on molten salt nuclear reactors

Some encouraging news from the advanced nuclear sector. I am pleased to see that Terrestrial Energy (disclosure: I own shares) has successfully raised the equivalent of USD 7m in equity. Albeit modest, it is an important step forward. The company is making steady progress in its task to finalize its Molten Salt Reactor design, while the next step is to work with Canadian authorities with the aim to license the technology. Commercialization in the first part of the 2020’ies is still some years ahead, but this technology should, as I hope and believe, prove to be an important tool to reduce carbon emissions in the future.

Eoin Treacy's view -

Thank you for this update and the MIT review articles which gives additional insights on the development of new nuclear. Perhaps the greatest challenge facing the nuclear industry is that despite the fact technology continues to improve quickly, regulatory change is moving at a glacial pace. With sufficient government backing there is credible scope for new nuclear to flourish but it is dependent on political will to make it happen.



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January 12 2016

Commentary by Eoin Treacy

Musings From The Oil Patch January 12th 2016

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

The creator of the “lower for longer” scenario, BP plc’s (BP-NYSE) CEO Robert Dudley was interviewed at year-end by a reporter with the BBC during which he began to qualify his view. “A low point could be in the first quarter [of 2016].” Given developments in the global oil market during the first few days of 2016, this looks like a good call. Mr. Dudley went on to say, “But 2016’s third and fourth quarters could witness a more natural balance between supply and demand, after which stock levels could start to wear off.” If that proves to be the case, it implies that oil prices should begin rising during the second half of 2016. However, there remains the overhang of global oil inventories that continue to swell due to the global overproduction. According to the International Energy Agency’s (IEA) latest total (crude oil plus refined products) inventory figures for the OECD countries as of October 2015, there were 2,971 million barrels in storage. Crude oil inventory totaled 1,181 million barrels. As shown in Exhibit 14, the amount of crude oil in storage grew dramatically last year.

A different way of looking at the crude oil inventory situation is to measure it on the basis of days of inventory in storage. Exhibit 15 (next page) shows this data for 2012 through August 2015. While one might think that 30-31 days of forward inventory cover is not meaningful, if we compared the July data when 2015 was at 30 days and the prior three years that were at 27 days, those three additional days represent nearly 300 million extra barrels of oil. To eliminate that additional supply, global oil demand needs to increase by nearly one million barrels a day, or 1% growth in existing oil demand, which just happens to be the long-term average increase in global oil consumption experienced since the 1980s. While consistent with the oil market’s long-term growth rate, reducing the oversupply assumes that supply stops growing, which we know may not happen due to the return of Iranian production plus efforts of other producing countries to boost output to offset lower oil prices.

 

Eoin Treacy's view -

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

With deteriorating geopolitical considerations and no sign yet that supply has peaked, the futures market for Brent Crude is in contango right across the curve. For prices to rise a catalyst will be required. That may take the form of a major bankruptcy in the highly leveraged unconventional oil and gas sector or a marked deterioration on the geopolitical front. Both are possible and this is particularly poignant considering the fact that oil prices are accelerating lower and have already had a large decline. 



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January 08 2016

Commentary by Eoin Treacy

Indonesia surpasses Malaysia in 2015 reserves

This article from the Jakarta Post may be of interest to subscribers. Here is a section:

According to Bank Indonesia (BI) governor Agus Martowardojo, forex reserves shrunk to $105.9 billion after the central bank used some of the funds to intervene in the currency market in an effort to prop up the ailing rupiah. The government also disbursed some of the funds to pay external debts.

"We are grateful that our foreign exchange reserves are now $105 billion, compared to $111 billion last year. It is an ample amount to finance external debt or obligation payments and to pay for imports," he told reporters in Jakarta on Friday.

The rupiah's stability, Agus added, had become a central bank priority and would be maintained in 2016. "We feel that foreign reserves are another instrument that we must manage, in addition to exchange rates and interest rates," he said

Eoin Treacy's view -

Indonesia’s President Widodo has made some legislative and regulatory progress in reforming the economy and clamping down on corruption which has been largely ignored because of the fall in commodity prices and the influence of a weakening Chinese economy. As a major oil producer Indonesia has not been immune to the Energy markets and the Rupiah accelerated to a low near IDR15,000 against the US Dollar last September. Intervention by the central bank to stem the decline saw it jump by 10% in the space of a month and it has been notably steady of late; particularly in an environment where currency volatility has been making headlines. 



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January 05 2016

Commentary by David Fuller

Email of the day

In reply to Allister Heath’s article in The Telegraph: The Collapse in the Price of Oil is a Challenge to the Old World Order, 31st December 2015, which I posted and commented on: 

As a keen amateur historian I was very interested in the piece by Allister Heath on Thomas Malthus. I would like to play the role of Devil’s advocate here and suggest that things might not be quite so rosy regarding our future comfort on the planet. Malthus was plainly wrong in not considering the incredible capacity of humans to innovate and develop technologies regarding supplies of essential commodities. In one respect however he may still be correct in his basic proposition, namely population growth of our species outpacing our resources at some point. In 1800 there were about 1 billion people on the planet. Today 7.3 billion rising to 11 billion in 2050. While it is true rabbits cannot control their birth rates and we can. The fact is we don't. The control that women have over their bodies is reserved for a privileged few in well-educated western style economies. For vast areas of the globe women are, for cultural or religious reasons totally subservient to men, having no control whatsoever over their bodies. I have just been reading the latest statistic concerning teenage pregnancy here in South Africa. Whereas there were 60 thousand teenage pregnancies in 2011, last year this figure was more than double. Many of these girls are under 15. The whole matter of population of course, impacts directly on climate change and our use of fossil fuels. The development of China over the last 30 years has changed everything. All our talk of green Energy is all very well but China still relies on fossil fuels for 85% of its Energy needs. On official statistics it burns 3.5 billion tonnes of coal as compared to the US one billion tonnes Last year extreme weather events made headlines again, the main one being a record breaking El Nino currently wreaking havoc in the UK and here in South Africa causing a year long drought and record high temperatures. I think we have at least to consider the possibility of global warming entering an acceleration phase.

David Fuller's view -

Many thanks for your interesting and thoughtful email, covering many points.  

Regarding the forecast of 11 billion people in 2050, which I have also heard, I am wary of such extrapolations that far into the future.  It could be right, for all I know, but if we consider the possibility of global warming entering an acceleration phase, as you suggest, subject to severity that could easily reduce populations.  More likely, I hope, education and greater prosperity, leading to a larger middleclass in the world’s poorer regions would also reduce or at least slow population growth.

Regarding air pollution, I have long maintained that we need a little luck, mainly in terms of time, to successfully curb this problem before it is seriously out of control.  Thereafter, technology is the key and fortunately the world is increasingly focussed on this challenge. Great strides have been made and China’s government is now engaged in the effort to reduce CO2 emissions. So I am hopeful, but far from complacent.   



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January 04 2016

Commentary by David Fuller

What Lies Ahead for the Global Economy in 2016?

Crystal balls at the ready! This is the time of year when we economists like to give the benefit of our supposed wisdom and you, the readers, indulge us by appearing to believe that we know what is going to happen. Since economists are normally a pretty gloomy bunch, this represents the triumph of fear over experience. By contrast, I find myself fairly optimistic about the year ahead – albeit tempered by the usual dose of worries.

On the global front, the most important influence on our economy will probably continue to be the price of Energy. I reckon that it is likely to stay roughly at the current level, although it may trend up a bit.

Two consequences follow from continued low Energy costs. First, across pretty much all of the developed world the rate of inflation is set to rise from the near-zero rates that have prevailed recently.

Second, whereas last year saw the predominance of the negative effects of low Energy prices over the positive ones, this year that balance should reverse. The losers from low prices will already have done most of their cutting, while the gainers may still increase their spending.

I doubt whether China is again going to provide the main source of anxiety this year. I suspect that the slowdown has pretty much come to an end and there may even be scope for economic growth to pick up a bit. In America, I expect the recovery to continue bowling along at its recent solid though unspectacular pace.

In recent years the euro-zone has been a running sore for the world economy. Although it did a bit better last year, I suspect that its growth rate will fall back in 2016. Certainly no one should suppose that its fundamental economic problems are fixed.

In some ways 2016 is going to be a watershed year. Having flirted with deflation, most developed economies will now experience a return to more familiar territory and policymakers – except in the euro-zone and Japan – will return to the once familiar quandary as to how far and how fast to put up interest rates in order to fend off the danger of inflation.

David Fuller's view -

Readers of the financial press are subjected to a plethora of 12-month financial forecasts at this time of year.  They are not without some merit, including consensus views which can be a warning for contrarian thinkers. 

This service does not release its own annual forecasts because Eoin and I comment on the markets every day, including medium to longer-term forecasts in the Friday ‘big picture’ Audios.  However, I am always interested in Roger Bootle’s forecasts regarding him as a practical economist with a good track record.

Nevertheless, I suspect Roger Bootle and most of the rest of us who are not perennial bears will find today’s market action somewhat unnerving.  Moreover, a weak start to the year can often weight on sentiment for a longer period.  

Subscribers may recall my checklist of four points which concerned me when I responded in both writing and Audio to the optimistic outlook from The Weekly View: 2016 Outlook Highlights: Shifting Gears, which I posted on 22nd December and also discussed in the Audio for that day. This item is updated and reviewed today, including in response to a subscriber’s email citing concerns expressed in today’s FT. 

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January 04 2016

Commentary by Eoin Treacy

Nevada Regulators Eliminate Retail Rate Net Metering for New and Existing Solar Customers

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

The Nevada Public Utility Commission voted unanimously in favor of a new solar tariff structure on Tuesday that industry groups say will destroy the Nevada solar market, one of the fastest-growing markets in the country.

The decision increases the fixed service charge for net-metered solar customers, and gradually lowers compensation for net excess solar generation from the retail rate to the wholesale rate for electricity, over the next four years. The changes will take effect on January 1 and will apply retroactively to all net-metered solar customers.

The broad application of the policy sets a precedent for future net-metering and rate-design debates. To date, no other state considering net-metering reforms has proposed to implement changes on pre-existing customers that would take effect right away. Changes are typically grandfathered in over a decade or more.

 

Eoin Treacy's view -

Renewable Energy and distributed generation are two of the greatest threats to established utilities in the sun-belt. If people can generate their own electricity at home, sell excess onto the grid at a favourable rate and only take from the base load provider when necessary, they are put in a highly advantageous position relative to the utility. On the other hand utilities are accustomed to a highly regulated market but not to competition. 



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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 31 2015

Commentary by David Fuller

The Collapse in the Price of Oil is a Challenge to the Old World Order

It is one of life’s mysteries that being wrong about everything has never been much of a barrier to success. Take Thomas Malthus, the British theologian: his big idea was that the number of human beings would necessarily grow faster than the supply of food, leading to calamity. There was little difference, in his mind, between people and rabbits: both were doomed to over-breed, over-consume and starve.

Yet this theory, expounded in 1798 in An Essay on the Principle of Population, one of the most influential books ever written, and now also routinely applied to oil and other resources, is bogus. Unlike rabbits, who are powerless to control their environment, the more we need, the more we eventually find a way of producing: the availability of food and oil are determined by technology and economics, not by some law of nature. Modern techniques (such as fertilisers, genetic selection or fracking) mean that agriculture and the extraction of commodities have become hugely more efficient.

The average British field yielded just over three tons of cereal per hectare per year in 1961; today, it is twice that. Thanks to the spread of free markets and knowledge, the world has never produced so much food, and the number of hungry people worldwide has dropped by 216m since the early Nineties, according to the United Nations.

Ditto oil production: in 2000, the Energy Information Administrationestimated that the world contained just over one trillion barrels of untapped oil; since then, proved reserves have shot up by 60pc, increasing every single year despite booming consumption from Energy-thirsty emerging markets.

Malthus wasn’t just far too pessimistic about supply: he was also wrong about demand. Rabbits can’t control their birth rates; we can. As more countries embrace markets and globalisation, thus ensuring that their economies develop, global birth rates keep on falling. As to Energy consumption, it is just a matter of time before improved battery technology and ever-cheaper solar power finally lessen our dependence on the internal combustion engine and oil. We will eventually be able to feed and fuel the world’s population using significantly less land and fewer hydrocarbons than we do today.

Jesse H Ausubel, an academic at the Rockefeller University in New York, has calculated that an area the size of the Amazonian forest could be returned to wildlife when the average farmer around the world becomes as productive as their US counterparts. Ausubel calls this the Great Reversal: nature’s chance to restore land and sea to their original use. It is an intriguing and exhilarating prospect, made possible by the wonders of capitalism, innovation and human ingenuity.

The abject failure of Malthusianism was, in fact, one of the defining trends of 2015, especially in the oil market; it will continue to be one of the central forces of 2016, impacting everything from how quickly the Bank of England puts up interest rates, to the stability of the Middle East. The price of Brent crude oil, which briefly reached $147 a barrel in 2008, is now down to around $37. Some analysts even believe it could fall briefly to $20, especially if more Iranian supplies than expected hit the global markets.

David Fuller's view -

People are susceptible to Malthusianism because running out of what we need and want – food, companions, shelter, money – is a primal instinct. Fortunately, it motivates most people on a needs must basis.  However, it can also overwhelm some with feelings of anxiety and loss. 

As investors with a sense of history, we know that most markets have not only survived but also thrived after much more worrying events than we are witnessing today.  We also know that the world improves more often than not, in terms of GDP growth, technological innovation and life expectancy.  This is reflected by stock markets over time, to the benefit of sensible, worldly investors who buy low and sell high.   

A PDF of Allister Heath's article is posted in the Subscriber's Area.



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December 31 2015

Commentary by David Fuller

Key Events in 2016: The Year Ahead

Here is the opening of a helpful calendar from Bloomberg:

Bloomberg News reporters in 128 cities will cover the stories that matter most in 2016. Here's a selected calendar of key events for the year.

January 

Taiwan holds an election and may choose its first female president.

U.S. begins production of liquefied natural gas for export from Cheniere Energy's terminal in Louisiana, the first since 1969. 

World leaders gather for the World Economic Forum in Davos, Switzerland. Follow our special report.

Vietnam's Communist Party Congress convenes to make leadership changes and set policy.

UN monitors may conclude that Iran has implemented all steps required under July nuclear accord, allowing the U.S. and Europe to lift sanctions.

David Fuller's view -

A few of these dates will be important for stock markets.  Inevitably, however, it will be the surprise developments and perhaps a black swan or two which become the events of the year.  Despite all the uncertainties and concerns that people have felt and expressed throughout 2015, I think 2016 will provide a number of opportunities.  Eoin and I aim to identify many of these, helped by our vast Chart Library, plus the interests and experience of our subscribers.

Happy New Year! 



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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 29 2015

Commentary by David Fuller

Saudi Riyal in Danger as Oil War Escalates

Here is a middle section from this highly informative article by Ambrose Evans-Pritchard for the Daily Telegraph:

Dr Alsweilem, now at Harvard University's Belfer Centre, said the Saudi authorities have taken a big gamble by flooding the world with oil to gain market share and drive out rivals. “The thinking that lower oil prices will bring down the US oil industry is just nonsense and will not work.”

The policy is contentious even within the Saudi royal family. Optimists hope that this episode will be a repeat of the mid-1980s when the kingdom pursued the same strategy and succeeded in curbing non-OPEC investment, and preparing the ground for recovery in prices. But the current situation is sui generis.

The shale revolution has turned the US into a mid-cost swing producer, able to keep drilling at $50bn a barrel, according to the latest OPEC report. US shale frackers can switch output on and off relatively quickly, acting as a future headwind against price rises.

The Energy intensity of global GDP is falling rapidly. Renewable technology and Energy efficiency have both made huge strides. The latest climate accords in Paris imply some form of carbon tax that will ratchet upwards over time, slowly changing the cost calculus for oil use.

“There is an overwhelming feeling among many in Saudi Arabia that this crisis is just cyclical and that it will reverse soon, so everything will be OK. But the danger is that what is happening is structural, and that means a country like Saudi Arabia can’t just sit still,” said Dr Alsweilem.

The Saudi government may have unveiled an austerity package of spending cuts and increased taxes, and be looking to slash electricity and water subsidies for the wealthy. But Riyadh has to tread with care. The country’s cradle-to-grave welfare system is what keeps a lid on dissent and binds the country’s fissiparous tribal polity.

Prince Mohammed bin Salman, the 30-year old deputy crown prince now running the country, is trying to push through radical reforms, firing princelings from sinecure positions and bringing in an elite team of technocrats to transform Saudi Arabia’s archaic oil-based economy.

He is drawing on a McKinsey study – ‘Beyond Oil’ - that sketches how the country can break its unhealthy dependence on crude, and double GDP by 2030 with a $4 trillion investment blitz across eight industries, from petrochemicals to metals, steel, aluminium smelting, cars, electrical manufacturing, tourism, and healthcare.

David Fuller's view -

I do not know if Dr Khalid Alsweilem, the former head of asset management at the Saudi central bank, has much influence with King Salman.  However, 30-year old and highly influential Prince Mohammed bin Salman may understand, given the concluding paragraph above. 

However, Saudi governments remain compromised by their Faustian pact with the contemporary Wahhabis who have spread their intolerant faith far beyond the Middle East, in an effort financed by Saudi billions as the price of crude oil mostly rose from the 1970s until mid-2014.  With that stream of funding now inevitably reduced, one might hope that intolerant Wahhabism was now in decline, although the outcome may be less reassuring.  

This item continues in the Subscriber’s Area, where more charts and another article are posted, in addition to a PDF of AE-P’s article.



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December 29 2015

Commentary by Eoin Treacy

Musings From The Oil Patch December 29th 2015

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

California’s proposed rule that a driverless vehicle must contain a steering wheel and a brake pedal for emergencies, goes against the grain of the technology industry that has been leading the development of these vehicles and cannot imagine a situation where the specified equipment would be necessary. It is akin to the continued existence of the emergency brake, a seldom used feature on a car, or directional signals, which many people seem to consider as unnecessary. The mandated equipment will certainly alter a passenger’s experience from that of a 21st Century, space-age vehicle to merely being a passenger riding in a modern automobile.

And   

Stretching out the transition time to a totally driverless vehicle fleet will also delay some of the anticipated economic and Energy benefits envisioned. The world of a complete fleet of autonomous vehicles would allow them to be smaller and lighter, reducing the Energy needed to produce them and power them. The absence of accidents would reduce the economic impact of injuries, physical damage and deaths, along with limiting or even ending the need for personal automobile insurance and the costs of accident litigation. If driverless vehicles could operate without human drivers, many families might also eliminate the need for second or third cars by being able to overlap their use of one vehicle, even though it would mean that vehicle would drive considerably more miles per year than the typical family’s current vehicles do. Net-net there should be an Energy savings. Lastly, fewer vehicles would mean less need for expanded highways and parking spaces, freeing up urban land for alternative uses. California’s stance on driverless vehicles would seem to be slowing down the shift to our transportation nirvana and actually extending the petroleum age.

 

Eoin Treacy's view -

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

California’s laws on what need to be inside an autonomous vehicle, including a driver for example, are likely to represent a brake on the sector’s progress. However as anyone who actually drives a car knows there is a difference between what the law says and what the experience of driving is. 



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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 David Fuller

The Weekly View: 2016 Outlook Highlights: Shifting Gears

My thanks to Rod Smyth for his excellent timing letter.  It is posted in the Subscriber’s Area but here is a brief sample:

US STOCKS: We believe the bull market in US stocks will remain in place, but we only expect single-digit annual returns. We anticipate a prolonged but slow expansion, which is shifting gears as wages start to grow.  This is better for economic growth than for earnings, as higher wages pressure already high margins and the strong dollar remains a headwind for global companies.  We expect mid-single-digit returns from the S&P 500, as we believe current valuations put a restraint on the upside potential. Within our portfolios, we currently like homebuilders and bank stocks; we recently added oil services to increase our Energy holdings, which we underweighted in 2015.  In contrast, we are avoiding utilities and REITS, which are highly sensitive to interest rates.  We are cautious on retailers and healthcare stocks.

David Fuller's view -

So, how does this forecast tally with subscribers’ views and our own outlook?

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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 21 2015

Commentary by David Fuller

Putin 2015 Foreign Policy Score Card

Here is the opening from this interesting appraisal by Leonid Bershidsky for Bloomberg: 

United Nations Security Council Resolution 2254, which laid out the map of a peace process in Syria, crowns a year of risky gambles for Russian President Vladimir Putin. Most of these played out badly for ordinary Russians, but Putin himself appears to have improved his international standing after an ugly 2014, carving out a clear -- though not necessarily enviable -- new role for Russia in world affairs.

In 2014, Putin became a near-pariah. After Russia annexed Crimea from Ukraine, the leaders of what used to be the Group of Eight decided to cancel a meeting in Sochi and agreed to hit Russia with weak but humiliating economic sanctions. The U.N. General Assembly passed a resolution stating the annexation was illegal, and only 10 countries -- including North Korea, Zimbabwe, Venezuela and Sudan -- backed Russia by voting against it. China and India abstained, though, and Putin decided he could pivot toward his partners in Asia, demonstrating that "the West" and "the world" are not synonyms.

Russia also signed some long-term Energy deals with China in 2014, but they fell short of forming a solid anti-Western alliance. The crash of a Malaysian plane in eastern Ukraine, apparently shot down by Moscow-backed rebels, made things worse. A Moscow-approved Ukraine cease-fire didn't work. At a Group of 20 summit in Australia in November, other world leaders shunned or snubbed Putin, who had ordered Russian warships to approach Australian shores ahead of the meeting, and he left early.

Putin wanted his views and interests to be heeded. Instead, he got contempt and a measure of fear, a combination that wasn't much better than disregard. So in 2015, he set out to improve his global standing with a series of bold moves. 

David Fuller's view -

Putin now has a good chance of improving his strained relations with the EU, UK, USA and the UN, by cooperating with international military efforts to defeat Daesh in the Middle East. 

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December 17 2015

Commentary by David Fuller

Beijing Warms to Climate Change

Here is the opening of Ambrose Evans-Pritchard’s column for The Telegraph, using the paper’s headline rather than the online title currently shown:

Chinese scientists have published two alarming reports in a matter of weeks. Both conclude that the Himalayan glaciers and the Tibetan permafrost are succumbing to catastrophic climate change, threatening the water systems of the Yellow River, the Yangtze and the Mekong.

The Tibetan plateau is the world’s "third pole", the biggest reservoir of fresh water outside the Arctic and Antarctica. The area is warming at twice the global pace, making it the epicentre of global climate risk.

One report was by the Chinese Academy of Sciences. The other was a 900-page door-stopper from the science ministry, called the “Third National Assessment Report on Climate Change”.

The latter is the official line of the Communist Party. It states that China has already warmed by 0.9-1.5 degrees over the past century – higher than the global average - and may warm by a further five degrees by 2100, with effects that would overwhelm the coastal cities of Shanghai, Tianjin and Guangzhou. The message is that China faces a civilizational threat.

Whether or not you accept the hypothesis of man-made global warming is irrelevant. The Chinese Academy and the Politburo do accept it. So does President Xi Jinping, who spent his Cultural Revolution carting coal in the mining region of Shaanxi. This political fact is tectonic for the global fossil industry and the economics of Energy.

Until last Saturday, it was an article of faith among Western climate sceptics and some in the fossil industry that China would never sign up to the COP21 accord in Paris or accept the "ratchet" of five-year reviews.

They have since fallen back to a second argument, claiming that the deal is meaningless because China will not sacrifice coal-driven growth to please the West, and without China the accord unravels since it now emits as much CO2 as the US and Europe combined.

This political judgment was perhaps plausible three or four years ago in the dying days of the Hu Jintao era. Today it is clutching at straws.

David Fuller's view -

On a needs must basis, China is belatedly now moving fast to lower its murderous urban air pollution, created by inefficient household uses of coal for cooking and heating, small industries and coal-fired power plants.  The same was true of London in the 1960s and also cities in many other developed countries.  In London, coal was being phased out in the late ‘60s and ‘70s but it was not uncommon to see it in household fireplaces, particularly in more rural regions of the UK.

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December 17 2015

Commentary by Eoin Treacy

The Big Long: Bank Trade Gets Liftoff in Stocks as Fed Tightens

This article by Lu Wang and Anna-Louise Jackson for Bloomberg may be of interest to subscribers. Here is a section: 

The country’s biggest financial stocks have surged more than 5 percent in two days, an early payday for bulls who have piled in on speculation the end of zero-percent rates will stoke a profit revival. Securities tracking the industry have attracted $1.7 billion in the past month, the most among 12 sectors tracked by Bloomberg except Energy.

Bulls are looking for something that has been elusive -- a rally big enough to erase the losses banks suffered in 2008, their worst year since the Great Depression. The group has been a favorite of global money managers for two months even as stress in the junk bond market evokes comparisons to the subprime meltdown.

The Fed hike “does provide the first wave of relief for the financials and so we have moved to an overweight position in the last two quarters in financials in part with this expectation,” said Leo Grohowski, who helps manage more than $184 billion in client assets as chief investment officer of BNY Mellon Wealth Management in New York. “This is welcome news for the financial sector.”

Fund inflows and the options market show the extent of optimism on banks at the end of an unprecedented stimulus campaign by the Fed. Since mid-November, money sent to stock ETFs such as the Financial Select Sector SPDR Fund has accounted for about a third of the total deposited to all sector funds, data compiled by Bloomberg show.

 

Eoin Treacy's view -

This year’s Contrary Opinion Forum was the best one I’ve been to and I learned a lot from Michael Vardas, of Northern Trust Capital Markets, presentation. He made a number of points about how the burden of additional financial sector regulation across jurisdictions represents a headwind to the ability of large banks to increase their dividends meaningfully. The low interest rate environment also represented a headwind because banks were losing money on money market funds since they were not covering management fees. So how has the sector been affected by yesterday’s rate decision?



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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 16 2015

Commentary by David Fuller

Kick OPEC While It Is Down

Here is the opening of this tough editorial from Bloomberg:

The Organization of Petroleum Exporting Countries is in disarray. The price of Brent crude fell to less than $38 a barrel on Friday, the lowest since 2008. If the cartel had been working, it would be cutting output to force prices back up. Its members chose to keep pumping.

Why? Because just as demand from emerging markets is slowing, technology has changed the economics of oil. That's bad news for OPEC, but good news for everybody else -- especially if the U.S. government and others have the wit to kick OPEC while it's down.

The U.S. shale-oil revolution has greatly increased non-OPEC supply. At the same time, efforts to curb oil consumption as part of the fight against climate change are further limiting the cartel's power to set prices. Oil prices are notoriously hard to predict, but these forces aren't going away, and they mean that OPEC's troubles may not be temporary.

Shed no tears. If the cartel collapsed altogether, there'd be no need to reinvent it. Meanwhile, OPEC's weakness presents an opportunity -- and smart policy can make the most of it.

Cheap oil will directly boost growth in most of the world, but with side effects that need to be managed. The fall in oil prices will encourage oil consumption, both in the short term (people will use their cars more) and long term (they'll buy cars that are less fuel-efficient). This works against reducing carbon emissions, and over time could help to restore OPEC's market power. Later, if prices bounce back, the economic hit would be disruptive.

The answer is for governments to smooth prices by adjusting the tax on fuel. When prices are low, like now, a higher gas tax would barely be noticed. Almost painlessly, it would raise revenues to pay for tax cuts elsewhere -- while maintaining the incentive for Energy efficiency and keeping OPEC on its heels. If and when prices go back up, governments can soften the blow to their economies by lowering the tax.

David Fuller's view -

Those are reasonable points but the big variable with crude oil or any other commodity is always supply.  Saudi Arabia is predictably calling the shots and it is hard to see any better outcome for them, or any other oil exporters, than Pyrrhic victories.

This item continues in the Subscriber’s Area. 



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December 15 2015

Commentary by David Fuller

Roger Bootle: US Interest Rates Will Rise and Hit 3.5% By the End of 2017

The case for higher interest rates is clear. The US economic recovery is well established, having begun in 2009. Output is now 10pc above where it was at the beginning of 2008, just before the financial crash unleashed the Great Recession. Unemployment has fallen to 5pc, very nearly as low as the lowest levels that reigned before the financial crisis.

It is true that inflation remains subdued, but this is largely due to the influence of low oil and commodity prices. If you strip these out of the index to reach a measure of “core” inflation, the rate is about 2pc.

Moreover, it needs to be borne in mind that the ultra-low interest rates that have ruled for so long were an emergency measure. Accordingly, with the emergency over, and as the economy gradually gets back to normal, then interest rates should also be returned to something like normal.

Admittedly, the new normal may not be quite the same as the old normal. The Fed has itself made clear that the pace of monetary tightening is likely to be slower than in previous economic cycles. Equally, the peak of interest rates is also likely to be lower than in the past. Indeed, if rates do rise this week, there will surely be an accompanying statement conveying something like this now familiar message. Accordingly, the markets, pretty much to a man, confidently expect interest rates to rise slowly and to reach only about 1.7pc by the end of 2017.

This confidence is all very well but the history of economic forecasting and of economic policy is a history of mistakes. When thinking about the future, we (and they) need to take heed of this experience. In the past, it has been common for central banks to raise interest rates too little and too late. The result is that they have been left to play catch-up while inflation increased. The awkward truth is that inflationary pressures can readily take both markets and policymakers by surprise. This is a particular danger when, as now, inflationary impulses are disguised by the powerful disinflationary forces unleashed by lower Energy prices and the strong dollar.

David Fuller's view -

US rates at 3.5% by the end of 2017 is a bold forecast by Roger Bootle, who has an excellent track record.  So what would need to occur for his prediction to be accurate?

The first point, I maintain, would be a rise in global commodity prices. Today, many commodities are at unsustainably low levels, so supply is likely to contract in 2016, while demand continues to rise.

This item continues in the Subscriber’s Area.



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December 15 2015

Commentary by David Fuller

The Weekly View: Eurozone: Policy and Earnings Are Key

Here is the opening of this influential report, written this time by Chris Konstantinos and Adam Grossman for RiverFront:

Stock prices tend to be dictated by two components over time: (1) the trend of corporate earnings; and (2) the valuation the market is collectively willing to assign to those earnings.  Of those two, we believe corporate earnings trends hold the key to Europe’s stock performance in 2016.  We believe the eurozone is in the early innings of a positive earnings cycle.  For instance, few have noted that 2015 marked the first year in quite a while in which eurozone large-cap companies out-earned their US peers – a trend likely to continue in 2016, in our opinion.  This positive cycle comes after a lengthy and pronounced drought (by our calculations, European earnings are still roughly 30% below their 2007 peak) and should be aided by an accommodative European Central Bank (ECB), a relatively weak euro, and low Energy input costs.  Unfortunately, these tailwinds are largely absent in the UK, where earnings are likely to remain disappointing.

David Fuller's view -

UK earnings have been dragged down, on average, by large crude oil and mining companies listed in the FTSE 100 Index.  European earnings have been improving, following a long period of underperformance, thanks to a competitive euro and the European Central Bank’s Quantitative Easing. 

Note the Chart of the Week in The Weekly View, posted in the Subscriber's Area, which shows earnings trends since 2008 for the US, Eurozone, UK and Japan.  Earnings for one of these countries is significantly outperforming, and it may surprise you.



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December 15 2015

Commentary by Eoin Treacy

Musings from the Oil Patch December 15th 2015

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

What seems evident from the chart is that when the labor force participation rate fell below 66%, the rate of increase in oil consumption slowed and eventually declined. That decline was partially triggered by the fall in labor force participation, but there was also a small event known as the Great Recession, aka the Financial Crisis. While the oil consumption decline bottomed out and has actually shown a small increase since, driven largely by an increase in gasoline use, the participation rate has sunk lower. With the Labor Department’s projection calling for a further meaningful decline in the labor force participation rate over the next ten years, without low oil and gasoline prices, it is hard to see how Energy consumption grows in any meaningful amount. That is the bad news from the Labor Department’s supposedly upbeat job creation forecast. The low U.S. economic growth outlook this forecast calls for unfortunately is being repeated in another major oil consuming region – Europe - where the combination of weak economic activity is combining with unfavorable demographic trends to drag down that region’s future economic growth rate. This is merely one of numerous headwinds for the global oil and gas business, and a factor that will make the industry’s recovery that much more challenging and likely requiring more time. 

Eoin Treacy's view -

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

Demand growth is not nearly as volatile as supply when assessing the prospects for global Energy use. However there is no denying that the evolution of the services sector is less Energy intensive while urbanisation and rapidly rising standards of living are more Energy intensive. Therefore on a global basis the demand growth argument depends more heavily on emerging market growth than developed markets like the USA or Europe. 



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December 14 2015

Commentary by Eoin Treacy

Junk-Bond Fund's Demise Mars Vulture Investor's Storied Career

Thanks to a subscriber for this article by Gregory Zuckerman and Daisy Maxey for the Wall Street Journal which may be of interest. Here is a section: 

Traders said part of the reason the Third Avenue fund ran into deep problems: It allowed daily withdrawals but stuck with investments that have become harder to trade and have been steadily losing value as investors fled Energy and other kinds of riskier debt. It has been harder to find investors willing to buy debt the fund holds, including Energy company Magnum Hunter Resources Corp. and troubled Spanish gambling company Codere SA, traders said.

As the Third Avenue fund’s holdings began to decline, rival traders at hedge funds shorted, or bet against, some of the mutual fund’s holdings, wagering that Third Avenue would experience investor withdrawals and be forced to sell some of its holdings, according to the company and one trader who made this move.

“It all starts with maybe trying to overreach,” Mr. Tjornehoj  said. “Maybe this is the strategy—focused credit—that should only be available to institutions or accredited investors.”

Now, investors are focused on whether other funds may run into similar investor withdrawals and problems as the year-end approaches. Many investors move to exit losing funds and investments late in the year to generate losses to reduce capital gains taxes, traders said.

 

Eoin Treacy's view -

When I started in Bloomberg in 2000 most of my clients on the Belgium and Luxembourg sales route were fixed income oriented so the first thing my manager had me do was read bond math manuals to get up to speed with what clients were looking at. I remember reading about convexity, how much of a move in price and yield duration can be expected from a move in interest rates, and it made sense to me since interest rates tended to move a lot. Little did anyone expect at the time that trading convexity would become a one-way bet, that would last for the better part of a decade.  



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December 14 2015

Commentary by Eoin Treacy

U.S. Gas Slumps to 13-Year Low as Forecasts Keep Getting Warmer

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

Natural gas output is on course to reach a fifth straight annual record this year, even as prices decline, government data show. Production will rise 6.3 percent to 79.58 billion cubic feet a day as output from the Marcellus and Utica shale formations expands, according to the U.S. Energy Information Administration.

Gas inventories totaled 3.88 trillion cubic feet as of Dec. 4, 6.5 percent above the five-year average. Withdrawals from storage will be smaller than average as warm weather curtails demand, Dominick Chirichella, senior partner at the Energy Management Institute in New York, said in a note to clients.

“With mild temperatures still looming through the end of December (and possibly beyond) weekly withdrawals are likely to underperform versus history for several weeks to come,” Chirichella said.

 

Eoin Treacy's view -

Natural gas is a big beneficiary of the climate agreement announced over the weekend not least because coal power is likely to face increasingly stringent environment regulation on top of that already in place. Gas more than any other fuel source will replace coal not least because Energy storage solutions are not yet ready to ensure solar and wind can meet base load requirements. 



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December 11 2015

Commentary by David Fuller

Stocks Tumble in Worst Week Since August as Fed Anxiety Spreads

Here is the opening of the market summary from Bloomberg:

U.S. stocks capped their worst week since the August selloff as optimism over the economy’s strength gave way to anxiety over the Federal Reserve just as commodities and credit markets flashed signs of danger.

The Standard & Poor’s 500 Index fell 3.8 percent in the five days to end at a two-month low. Energy shares plunged as the cheapest crude oil since 2009 rekindled anxiety over deflation before the Fed’s Dec. 16 policy decision. Financial shares, the ostensible beneficiaries of any rate hike, tumbled 5.4 percent, as asset managers were routed after a high-yield mutual fund suspendedredemptions.

Optimism that the U.S. economy is strong enough to withstand higher rates transformed into anxiousness, as a commodity selloff clouded the prospects for a global recovery and rekindled deflation concerns. The benchmark U.S. equity gauge ended at its lowest level since October amid concern that a rout in high-yield credit markets will spread at the same time that money managers must cope with shifting monetary policy.

“We have the continued decline in oil prices related to excess supply, and there’s market anxiety relating to the commodity complex due to the ongoing China unknown,” said Alan Gayle, senior strategist for Atlanta-based Ridgeworth Investments, which has about $42.5 billion in assets. “These factors have more than offset the relative strength of November economic data.”

 

David Fuller's view -

I have discussed all this and more in my Friday Audio, touching on a number of topics, including China’s economy, government debt, the Middle East wars, European tensions aggravated by the out of control migrant crisis and last but not least, commodities.



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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 10 2015

Commentary by Eoin Treacy

The Big Issues 2003-2016

Thanks to a subscriber for this report from ComSec which may be of interest. Here is a section on China and how its evolution affects Australia:

China is Australia’s largest trading partner. Further, recently the number of tourists to Australia from greater China (mainland China and Hong Kong) outnumbered those from New Zealand. China is also providing the biggest contribution to global economic growth of any nation. China may still only be the second largest economy on the planet but with growth rates near 7 per cent rather than 2 per cent in the US, it is expected to contribute 1 percentage point of the expected 3.6 per cent growth of the global economy in 2016.

But China is transforming. Whereas the industrial sector drove growth in past years, in future years it will be services and household spending that is expected to lead the way.

This is hardly a remarkable situation. All major industrialised economies have followed the same path. It has happened more recently in South Korea, Taiwan and even Japan. And the US and Australia have also trekked the same path. Rural and mining sectors initially drive economies, and infrastructure is put in place. But as incomes rise and businesses are priced out of markets, they move on to more elaborately-transformed manufactures and services industries.

Chinese authorities have made no secret of the fact that growth drivers are changing and that growth rates will slow. Chinese authorities refer to it as the “new normal”. Economic growth rates are more likely to be in a range of 6.0-7.0 per cent.

Such transformations are by no means easy. Some businesses will need to close as industries retreat in importance while other businesses will take their place. And the impact is by no means local. Australian resource providers will need to get used to lower prices and will need to adjust supply to the slower pace of expected demand. Commodity prices have trended lower for a century, interspersed with relatively short-lived upturns as new economies industrialise – like Japan and China.

While there will be some pain in Australian mining and Energy sectors, there are other businesses and industries that will benefit from rising Chinese incomes, as well as the rising middle class in Asia. Business such as those in food production, tourism, education, health and financial services.
We expect China to experience a relatively soft landing. But that doesn’t mean that there won’t be bumps along the way as Chinese authorities attempt to transform the nation from a developing economy into a developed economy.

 

Eoin Treacy's view -

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

Australia sidestepped the worst effects of the Global financial Crisis because its resources sector benefitted so much from China’s stimulus program. However Australia is also an advanced economy with world class education, high tech and agricultural resources all of which are well positioned to benefit from Chinese demand for better quality products as standards of living improve. 

The Australian Dollar has been trending lower for more than three years. It most recently encountered resistance in the region of the 200-day MA from May and extended its decline in a consistent manner until September. A reversionary rally is still underway but a sustained move above 75¢ would be required to begin to question medium-term US Dollar dominance. 

 



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December 09 2015

Commentary by Eoin Treacy

Pipeline Giant Kinder Morgan Rebounds After Cutting Dividend

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

The dividend reduction will keep enough of the cash generated from operations in-house to help the company retain its investment-grade credit rating, Kinder Morgan said in the statement. Retaining cash also will forestall any need to issue new shares to raise capital through at least 2018, the company said.

“We applaud the strategy of cutting to the point that prevents the need for capital funding through 2018,” Jefferies LLC analysts said in a note to clients.

The Houston-based company raised its capital budget for growth projects by 20 percent for 2016 to $4.2 billion, Chief Executive Officer Steve Kean said Wednesday during a conference call with analysts. The company’s spending plan for next year assumes an average oil price of $50 a barrel.

Kinder Morgan directors set the new dividend at 50 cents to achieve a yield that would be above the average of the companies in the Standard & Poor’s 500 Index, Kean said.

The company “anticipates enough retained internally generated cash flow to fund all of the required equity contribution projected for 2016 and a significant portion of its debt requirements,” according to the statement.

 

Eoin Treacy's view -

This week has been marked by major commodity related companies cutting or eliminating dividends. This is a necessary step in rehabilitation for the sector following what has been a steep pullback in the price of the products they sell or, in the case of pipelines, transport. 

MLP pipeline companies have the fact that regardless of price Energy companies will still need to get their products to market. The bearish argument rests on the fact that many companies have high debt burdens which are now being picked apart by investors. 

 



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