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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.

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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.

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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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December 08 2015

Commentary by David Fuller

What Paris Talks Have Accomplished So Far

Here is the opening of a thoughtful editorial by Michael Bloomberg, published by Bloomberg:

The two-week United Nations conference on climate change is halfway over, and no matter what else happens, it has already been a clear-cut success in two critical areas.

As important as a global accord is, the most influential actors on climate change have been cities and businesses, and leaders in both groups made it clear that they will not wait for an agreement that, if it comes together, won’t even take full effect until 2020.

Mayors and officials representing more than 500 cities organized and attended their own summit in Paris (which Paris Mayor Anne Hidalgo and I co-hosted). It was the first time local leaders had ever gathered in such numbers during a UN climate-change conference. They came not only to ensure that their voices were heard by heads of state, but also to express their determination to act on their own, and to learn from one another and share best practices.

Cities account for about 70 percent of global greenhouse-gas emissions, and while some heads of state have been arguing over which countries should do more, cities recognize that reducing their emissions is in their own best interest. After all, when cities cut their emissions, they help their residents live longer, healthier lives. When they improve the Energy efficiency of their buildings, they save their taxpayers money. When they invest in modern low-carbon infrastructure, they raise their residents’ standard of living. Taken together, these actions make cities more attractive to businesses and investors. Even if climate change were not a concern, reducing emissions would be smart policy.

David Fuller's view -

We cannot afford to ignore the risk that climate change is actually occurring. 

I commend the rest of this editorial and also the accompanying video to readers.  



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December 08 2015

Commentary by David Fuller

OPEC Provides Economic Stimulus Central Bankers Cannot or Will Not

Here is a middle section of this topical article from Bloomberg:

At Societe Generale, Michala Marcussen, global head of economics, reckons every $10 drop in the price of oil lifts global growth by 0.1 percentage point. She estimates that since 2014, the world has enjoyed a windfall equivalent to 2 percent of gross domestic product it would otherwise have spent on crude.

“Our biggest relief last week was that OPEC decided no output cut, promising consumers inexpensive oil for longer,” said Marcussen.

Even though falling oil may weaken the inflation rates central bankers are struggling to lift, Erik Nielsen, chief economist at UniCredit Bank, said it was important to recognize that it’s “‘good’ disinflation, because it stems from supply rather than demand and so should raise real income, thereby propelling consumption and the recovery.”

“A drop in Energy prices is the equivalent of a tax cut, with no implications for debt,” he said, adding that faster expansions as a result should end up bolstering prices too and so investors should be wary of wagering on a deterioration in inflation.

Some central bankers are seeing the upside of cheaper oil too. Jens Weidmann, president of the Bundesbank, on Dec. 3 objected to the ECB’s additional easing by saying “the significant Energy price declines in fact are supporting the recovery.” Fed Bank of San Francisco President John Williams said last week the effects of falling oil on headline inflation should also soon “peter out.”

David Fuller's view -

I certainly maintain that the big fall in oil prices, created by oversupply and the continued advance of renewable forms of Energy and also nuclear power, is a considerable long-term economic stimulus for global GDP growth.  Many $billions which were previously transferred to oil exporters, of which there are relatively few, are now largely retained by oil importing countries of which there are many more.  These include most developed economies and also the largest Asia-Pacific emerging nations, which have vastly greater populations than oil producing countries.

However, there is also a significant drawback.

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December 08 2015

Commentary by Eoin Treacy

Oaktree's Marks Likens Distressed Conditions to Post-Lehman

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

“Post Lehman there was too much to do and now there is again,” Marks said Tuesday, referring to the financial crisis that followed the collapse of the investment bank in September 2008. “For the credit investor we have our first opportunities in several years. It’s been a long, long time."

After Lehman’s bankruptcy, Oaktree deployed billions of dollars in distressed debt, reaping a handy profit. Its Opportunities Fund VII, which did the bulk of the investing, has so far distributed $22 billion to clients on $13.5 billion of drawn capital, according to its recent third-quarter earnings statement.

Oaktree’s top executives, including Marks and co-Chairman Bruce Karsh, had bemoaned a dearth of distressed-investment opportunities since at least 2013, when the Standard & Poor’s 500 index was still in the middle of a four-year run-up. That changed in August, when investor concern that China’s economic growth was slowing quicker than expected sparked a selloff in stocks and high-yield bonds. Energy companies have been hit particularly hard as oil prices continue to slide.

“What you saw in the third quarter of this year could well be a harbinger of things to come in the next year or two,” Karsh said in October. “We’re in the later stages of this credit cycle. We saw the psychology beginning to really roll over and change and people starting to get fearful. We started to see a lot of cracks.”

 

Eoin Treacy's view -

Private equity firms have had little trouble raising capital for Energy sector acquisitions not least because it represents one of the few sectors trading at depressed valuations. With a dearth of truly high yield opportunities, investors have little choice but to look at Energy and this is exacerbated by the availability of liquidity in an ultra-low interest rate environment. 



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December 07 2015

Commentary by David Fuller

Rout in Crude Sends U.S. Stocks Lower as Dollar Strengthens

Here is the opening of this topical report from Bloomberg:

Oil’s tumble to a six-year low touched off a rout in equity markets, as Energy-related shares tumbled with currencies of commodity-producing nations. The dollar gained and gold fell on rising prospects for higher U.S. interest rates.

American crude extended losses past $38 a barrel to the lowest level since 2009 as OPEC abandoned its strategy of limiting production. The Standard & Poor’s 500 Index dropped as Energy shares sank the most since Aug. 24, while Canada’s resource-heavy benchmark plunged the most in two months. Colombia’s peso weakened to a record, while Norway’s krone and Russia’s ruble slid. The greenback rallied and gold fell as investors shifted their attention to the Dec. 16 Federal Reserve policy decision.

“Weak oil is the story today,” said Stephen Carl, principal and head equity trader at Williams Capital Group LP. “The lack of economic numbers today is compounding the effect of Energy losses. The Fed rate hike is imminent, and people are trying to square up heading into year-end.”

David Fuller's view -

I think we know both sides of the story, regarding the collapse in oil prices. 

This is a huge boon for importers of crude oil (Brent & WTI), businesses in terms of their Energy costs and consumers who can barely believe the drop in US gasoline prices that has occurred since mid-2014.  

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December 07 2015

Commentary by David Fuller

Oil Price War Looks a Pyrrhic Victory for Saudi Arabia as the Costs Climb

I have used the original newspaper title and here is the opening of this informative article by Ambrose Evans-Pritchard for The Telegraph:

Hedge funds have taken their bets. The market is convinced that Saudi Arabia will ignore the revolt within Opec at a potentially explosive meeting on Friday, continuing to flood the global markets with excess oil.

Short positions on US crude and Brent have reached 294m barrels, the sort of clustering effect that can go wildly wrong if events throw a sudden surprise.

The world is undoubtedly awash with oil and the last storage sites are filling relentlessly, but speculators need to be careful.

They are at the mercy of opaque palace politics in Riyadh that few understand. Helima Croft, a former analyst for the US Central Intelligence Agency and now at RBC Capital Markets, says the only man who now matters is the deputy crown prince, Mohammed bin Salman.

The headstrong 30-year-old has amassed all the power as minister of defence, chairman of Aramco and head of the Kingdom's top economic council, much to the annoyance of the old guard. "He is running everything and it comes down to whether he thinks Saudi Arabia can take the pain for another year," she said.

The pretence that all is well in the Kingdom is wearing thin. Austerity is becoming too visible. A leaked order from King Salman - marked "highly urgent" - freezes new hiring and halts public procurement, even down to cars and furniture.

The system of cradle-to-grave welfare that keeps a lid on public protest and holds the Wahhabi state together risks unravelling. Subsidies are draining away. It will no longer cost 10p a litre to fill a petrol tank. VAT is coming. There will be a land tax. Yet these measures hardly make a dent on a budget deficit running near $140bn a year, or 20pc of GDP.

The German intelligence agency BND issued an extraordinary report warning that Prince Mohammed is taking Saudi Arabia into perilous waters. "The thus far cautious diplomatic stance of the elder leaders in the royal family is being replaced by an impulsive interventionist policy," it said.

The war in Yemen - Saudi Arabia's "Vietnam" - grinds on at a cost of $1.5bn month. It is far from clear whether the Kingdom can continue to bankroll Egypt as Isil operations spread from the Sinai to Cairo suburbs.

The war in Yemen - Saudi Arabia's "Vietnam" - grinds on at a cost of $1.5bn month. It is far from clear whether the Kingdom can continue to bankroll Egypt as Isil operations spread from the Sinai to Cairo suburbs.

David Fuller's view -

The rest of this article is very informative and I commend it to all subscribers.

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December 07 2015

Commentary by David Fuller

Email of the day 2

On tech from the Orange River:

Greetings from offshore of the Orange River mouth on this fine Thursday evening. I believe this may be of interest to David; it is a link to an article on MSR (molten salt reactor) technology.

David Fuller's view -

Many thanks for your email and the short article above from Machine Design on MSR technology.  On this subject, I am just an interested observer, who has posted a few articles on molten salt reactors (MSRs) over the last several years.  It sounds very promising, in terms of relative safety and small compact units which would enable power to be both generated and transmitted more efficiently.  However, safety issues will always be a concern with nuclear power and the problem of highly toxic nuclear waste remains.

Alas, the holy grail of nuclear fission still remains beyond our grasp.   

(See also: Molten Salt Reactors from the World Nuclear Association, and Don’t believe the spin on thorium being a greener nuclear option



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December 04 2015

Commentary by Eoin Treacy

U.S. Employers Shaking Off Global Risks With Broad-Based Hiring

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

“We’re not leaning on one or two or three industries to support the job market,” which is “very encouraging,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, whose forecast for payrolls was among the closest in the Bloomberg survey. “We’re creating more than enough jobs to reduce the slack in the broader labor market.”

The figures underscore Fed Chair Janet Yellen’s view that slowdowns in emerging markets or Europe won’t derail the U.S. expansion, clearing the path for officials to raise the benchmark interest rate this month for the first time since 2006. The pace of future rate increases will be contingent on progress toward the central bank’s inflation goal and probably depends on how quickly wage pressures mount as the job market tightens.

 

Eoin Treacy's view -

Considering the fact many US inflation measures exclude both Energy and food, the role wages play in the calculation tends to be exaggerated. Hiring remains on a steady upward trajectory as the economy recovers from the credit crisis recession in about the same amount of time as Rogoff and Reinhart predicted.  

One of the unintended consequences of Obamacare was to disincentivise low income and lower middle income families from working for fear of losing eligibility for attractive health insurance benefits. This means wages have to be higher to entice people back into the workforce. 

Wages are rising and broke out of a four-year base at the October update. Meaningful deterioration would be required to question the medium-term upward bias not least as a growing number of cities seek to implement minimum wages rates in the region of $15. 

 

 

 



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December 02 2015

Commentary by David Fuller

A Smart Climate Strategy for India

To many eyes, India looks like a roadblock to an effective world climate deal. Prime Minister Narendra Modi's demand for “climate justice” -- meaning that rich nations should reduce their carbon emissions even as India and others continue to pollute -- reprises the polarizing rhetoric that has sunk previous international attempts to battle global warming. Yet there’s merit to Modi’s argument, and success in Paris requires that all countries recognize it. 

The first thing to appreciate is that, whatever commitments Modi's government ends up making at the climate talks, India’s fuel mix is growing steadily greener. While coal is still the cheapest and most abundant domestic fuel source, it's getting more expensive and harder to dig from the ground. Many banks already see more potential in funding solar projects than new coal-fired power plants. In fact, the most apt criticism of India’s pledges to reduce carbon intensity and the use of fossil fuels -- rather than cap emissions -- is that the country could probably meet them without really trying. It can and should aim higher. 

That said, Modi’s central argument is sound: India can't accept a hard limit on emissions when it’s still trying to lift hundreds of millions of Indians -- more than 20 percent of whom lack electricity -- out of poverty. Western nations are most responsible for the greenhouse gases now in the atmosphere; the average American accounts for 10 times the annual emissions of the average Indian. Judged by whether countries are doing their “fair share,” based on how much they’ve contributed to the problem and how able they are to pay, the U.S. and European Union’s climate pledges look far weaker than India’s. Among major nations, only China appears to have committed to doing more than its fair share. 

David Fuller's view -

A key point about global warming is that we cannot afford to take the risk that it is not actually occurring. 

Everyone has a view on climate change, and your guess on this frightening topic may be better than some of the Al Gore-style ‘experts’.  Personally, my very unscientific experience tells me that the planet is warming.  I remember how cold the winters were from early childhood in the 1940s up through the 1970s.  Thereafter, winters where I live in London have become gradually warmer, especially the last two.  It is early days for this winter, but so far I have not needed a winter coat, hat or gloves.  However, I know my friends in many parts of the USA thought they were freezing to death during the last two winters.  They deserve some favourable climate change.

Seriously, I do not see how mankind’s growing population, with its cities, industries, household machines, farm animals and travels could be doing anything other than contributing to global warming.  Therefore, I am pleased that so many people are taking the Paris climate summit very seriously, although they may also be creating some hot air. 

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December 02 2015

Commentary by Eoin Treacy

Who's Who in the New Argentina: Macri's Five Key Ministers

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

The creation of a new Energy ministry speaks of the increasing importance of Argentina’s burgeoning oil industry.

Aranguren, former CEO of Shell Argentina, will be in charge of attracting investment to the Vaca Muerta formation, the world’s second-largest shale gas deposit and fourth-largest shale oil reservoir. He’ll also head up attempts to unravel the current government’s system of utility bill subsidies that contributed to an estimated budget deficit of 7.2 percent of gross domestic product this year.

An outspoken critic of the current government who frequently sparred with some of its officials, Aranguren has already made clear his different outlook, saying he would prefer to import Energy while prices are low rather than maintain subsidies on oil. His double role as mining minister suggests Macri’s government may be more proactive in developing that sector after years of stagnation.

 

Eoin Treacy's view -

Argentina is not Iran but they both share the ignominy of having been locked out of the international markets for a long time. Argentina is blessed with abundant natural resources and an educated workforce. A trend of improving standards of governance has been lacking for decades but, with expectations so low, the potential for a positive reaction from investors from even a modest uptick has to be the base case. 



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December 01 2015

Commentary by David Fuller

COP-21 Climate Deal in Paris Spells End of the Fossil Era

Here is the opening of this informative article by Ambrose Evans-Pritchard for The Telegraph:

A far-reaching deal on climate change in Paris over coming days promises to unleash a $30 trillion blitz of investment on new technology and renewable Energy by 2040, creating vast riches for those in the vanguard and potentially lifting the global economy out of its slow-growth trap.

Economists at Barclays estimate that greenhouse gas pledges made by the US, the EU, China, India, and others for the COP-21 climate summit amount to an epic change in the allocation of capital and resources, with financial winners and losers to match.

They said the fossil fuel industry of coal, gas, and oil could forfeit $34 trillion in revenues over the next quarter century – a quarter of their income – if the Paris accord is followed by a series of tougher reviews every five years to force down the trajectory of CO2 emissions, as proposed by the United Nations and French officials hosting the talks.

By then crude consumption would fall to 72m barrels a day - half OPEC projections - and demand would be in precipitous decline. Most fossil companies would face run-off unless they could reinvent themselves as 21st Century post-carbon leaders, as Shell, Total, and Statoil are already doing.

The agreed UN goal is to cap the rise in global temperatures to 2 degrees centigrade above pre-industrial levels by 2100, deemed the safe limit if we are to pass on a world that is more or less recognisable.

Climate negotiators say there will have to be drastic "decarbonisation" to bring this in sight, with negative net emissions by 2070 or soon after. This means that CO2 will have to be plucked from the air and buried, or absorbed by reforestation.

Such a scenario would imply the near extinction of the coal industry unless there is a big push for carbon capture and storage. It also implies a near total switch to electric cars, rendering the internal combustion engine obsolete.

David Fuller's view -

One of life’s lessons in this era is never underestimate the influence of developing technologies and their ability to change the world.  Another is that most technological breakthroughs are achieved within capitalist economic systems.

Moreover, once new technologies become economically competitive, there is no stopping their development, including an ongoing series of previously unimaginable enhancements.  A good example in our era of accelerating technological innovation is the progress of solar power, discussed by Mark Lewis, the chief author of Barclays’ report on Renewables in a latter portion of the article above:

"The average cost of global solar was $400 a megawatt/hour worldwide in 2010. It fell to $130 in 2014, and now it has fallen below $60 in the best locations. Almost nobody could have imagined this six years ago," he said.  

This is immensely encouraging when considering the risks of manmade climate change.  However, we also need luck because no one knows how various climate change risks will play out over time, even if we could theoretically end our carbon emissions overnight. 

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



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December 01 2015

Commentary by David Fuller

The Silicon Valley Idea That Is Driving Solar Use Worldwide

Silicon Valley has something to offer the world in the drive toward a clean Energy economy. And it’s not technology.

It’s a financing formula. In a region that spawned tech giants Apple Inc. and Google and is famous for innovators and entrepreneurs like Steve Jobs, a handful of startups began offering to install solar panels on the homes of middle-class families in return for no-money down and monthly payments cheaper than a utility bill. This third-party leasing method -- which made expensive clean Energy gear affordable -- ignited a rooftop solar revolution with annual U.S. home installations increasing 16-fold since 2008, according to the Solar Energy Industries Association and GTM Research.

The world is taking notice. Businesses in China, the biggest greenhouse-gas polluter, are so keen on replicating California’s success that Trina Solar Ltd.’s Head of Global Marketing Jing Tian said she had to come up with a rough Chinese translation for “third-party leasing.” Similar models are spreading to countries like Mexico and Japan and are being employed to sell other emerging clean Energy technologies such as batteries and onsite waste-water treatment gear.

David Fuller's view -

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December 01 2015

Commentary by Eoin Treacy

The Silicon Valley Idea That's Driving Solar Use Worldwide

This article by Mark Chediak and Chris Martin for Bloomberg may be of interest to subscribers. Here is a section: 

SolarCity took the leasing model that SunEdison Inc. first developed for the solar industry by a graduate student named Jigar Shah. He founded the company and sold its first power purchase agreement with Whole Foods Market Inc. in 2003, according to his book, Creating Climate Wealth.
SolarCity adapted that model for residential consumers in 2008 and many more offered similar arrangements including Sunrun Inc., which developed the first one in September 2007, and Vivint Solar Inc. In August, SolarCity bought a developer in Mexico that was offering the first leases to businesses in that country and plans to expand it to homes there.

And now the idea is spreading to other industries trying to sell expensive capital equipment that reduce pollution and fossil fuel consumption. Cambrian Innovation, a startup out of Massachusetts Institute of Technology, has developed onsite wastewater treatment plants. While the high cost make them difficult to sell, when they combine all the benefits to a consumer like a brewery -- lower disposal fees, water use, Energy use and carbon emissions -- they can finance leases and offer savings at no cost to the consumer.

“SunEdison developed the solar power-as-a-service that helped the industry take off,” Matthew Silver, chief executive officer of Boston-based Cambrian, said in an interview. “Now we’re offering clean water as a service that municipal utilities can or won’t do.”

 

Eoin Treacy's view -

With the COP21 conference beginning in Paris today, there are a large number of articles circulating on the advances already seen in the development of renewable sources of Energy. Lease back agreements that have increased access to these solutions is certainly important, but I am curious how these will be structured when interest rates rise and the cost of funding such largesse rises. 

Renewable intermittency means industrial scale storage solutions need to get substantially cheaper and battery technology needs to improve. Progress has been made on both fronts but we are still a long way from replacing fossil fuels. 

 



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November 20 2015

Commentary by Eoin Treacy

Is there hidden treasure in the mining industry?

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

The principal drivers of cost inflation vary by commodity, so we have identified and projected the most important costs for each commodity. In the 2000 to 2013 period, cash cost inflation for the marginal producer has been close to 20 percent annually for copper, iron ore, and potash (coal has been lower at around 11 percent), primarily due to the geological factors just described.

Inflation is influenced by external factors (for example, local consumer prices, increase in wages and diesel prices, and local-currency appreciation versus the US dollar) and internal ones (for example, productivity, metal grade, and geological mine conditions). Assuming a scenario of lower oil and diesel prices and a strengthening US dollar versus the local currencies of mining producers, our analysis suggests that external cost factors will be flat, or even negative, for most commodities.

Inflation due to internal factors, however, is here to stay. Even with productivity gains, mines will increasingly suffer from declining ore grades and deteriorating mine conditions, such as deeper shafts, worsening stripping ratios, and longer hauling distances. We expect the level of geological cost inflation will continue to be the main determinant of cost increases, and that total inflation will average 4 to 7 percent per year going forward.

 

Eoin Treacy's view -

In the extractive sector supply and demand data are endlessly picked over for clues to how prices might respond. However it is important to consider that demand growth is much less volatile than supply. The global population continues to expand, not least because people are living longer. Additionally, living standards, on aggregate, are improving. Higher standards of living require greater use of resources such as Energy, steel, copper, zinc, tin, soy etc. so demand tends to trend higher over time. 

The re-entry of China onto the global market as a major consumer of commodities resulted in an acceleration in the pace of demand growth which is now being unwound. Demand growth is not negative but the pace of that growth has moderated. 

The problem for the mining and oil sectors is that they invested fortunes in developing new supply to cater to demand growth numbers that are no longer relevant. This is why the sector continues to underperform and it will continue to do so until supply contracts enough to cater to the reality provided by the market today. 

 



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November 19 2015

Commentary by Eoin Treacy

Time to add wind developers

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

After years of efforts, China achieved breakthroughs in nuclear export this year with two mega-size contracts signed with Britain and Argentina, respectively. In October 2015, China General Nuclear Corporation (CGN) reached an agreement with state-owned EDF Energy to co-invest in a Hinkley Point C nuclear project in England with respective 33.5% and 66.5% stakes in a deal worth GBP18bn. It is also worth mentioning that China will be able to bring its own Generation III nuclear technology of Hualong One to a subsequent project Bradwell B.

In November 2015, China National Nuclear Corporation (CNNC) sealed a USD6bn deal with Argentina to build the country’s fourth nuclear plant. According to media reports, CNNC also reached a framework agreement with Argentina on a fifth plant, which will use Hualong One technology if the deal is finalized. 

China’s first nuclear project based on Hualong One, Fuqing 5, achieved FCD in May. Its construction and operation, together with the recognition of developed countries with advanced nuclear tech and experience such as Britain, will help open doors to more markets for Hualong One. However, all these projects will take at least seven to eight years to complete, which suggests limited near-term upside potential for nuclear equipment exports. 

 

Eoin Treacy's view -

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

The current low price of oil is a benefit to China. However the fact it has to import such large quantities of Energy means building domestic capacity that does not depend on fossil fuel will remain a priority for the foreseeable future regardless of slowing infrastructure investment in other sectors. 

Such concerted investment in nuclear technology has also enhanced China’s ability to compete internationally in what is among the most complex technology fields. This is even more important for the future because so few countries are willing to commit the capital necessary to fund development of new nuclear. 

 



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November 17 2015

Commentary by Eoin Treacy

Copper Tumbles to Six-Year Low as Industrial Metals Extend Slump

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

“There is a sense that this move is a little bit China-related,” Ric Spooner, a chief market strategist at CMC Markets Asia Pacific Pty, said from Sydney. “There has been a trend towards destocking of inventory in recent times and that appears to be creating downward momentum, particularly in copper.”

Metals are being battered by a stronger dollar. The greenback is buoyed by expectations for the first U.S. interest-rate increase since 2006 in December and by heightened geopolitical risk after the terror attacks in Paris. The Bloomberg Dollar Spot Index rose 0.2 percent on Tuesday, making assets denominated in the currency more expensive.

Eoin Treacy's view -

We saw a lot of evidence of businesses under pressure when in China earlier this month. The low oil price is a benefit for China’s Energy consumers but for its exporters the loss of Russian and Middle Eastern customers is a headache and is contributing to the economic slowdown. The domestic market continues to transition from an infrastructure investment led model to consumerism. This means the while demand is likely to continue to trend higher it will do so at a considerably slower pace. This is weighing on resources companies. 



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November 16 2015

Commentary by David Fuller

Oil Producers Hungry for Deals Droll Over West Texas Tiramisu

Here is the opening and a portion from the middle of this informative article from Bloomberg.

The worst oil market in decades would be hard to spot in West Texas, where two-lane county roads are still jammed with trucks and Energy companies are on the prowl for deals.

The Permian Basin, the biggest of the shale-oil regions that ignited the U.S. Energy boom, is also the only one where production is increasing even as drillers idle more than half the rigs in the country during the longest price slump since the 1980s.

And:

The Permian’s multiple layers of oil- and gas-soaked rocks, in some places stacked 5,000 feet thick, contain plenty of places to drill that will yield 30 percent to 40 percent rates of return with crude prices as low as $40 a barrel, Laird Dyer, a Royal Dutch Shell Plc Energy analyst, said at a conference in Toronto Nov. 10.

A single layer in the Permian, the Spraberry, probably holds 75 billion barrels of recoverable oil, Dyer said. That’s enough to supply the entire world for more than two years.

A single layer in the Permian, the Spraberry, probably holds 75 billion barrels of recoverable oil, Dyer said. That’s enough to supply the entire world for more than two years.

“Somebody described it to me once as a tiramisu, it’s just lots of layers of beauty over there,” Drilling Info’s Gilmer said. “Everyone recognizes that the Permian Basin is by far the richest land on earth. The only thing holding it back from more and more is the engineering, and I think this is an industry that’s really proven that the engineering gets better every year.”

David Fuller's view -

The Permian Basin, plus US engineering skills developed entirely by private industry, are currently the single biggest factors holding back the Saudi’s misinformed attempt to close the fracking industry. 

Saudi Arabia’s new government led by King Salman inherited this Energy war, launched ostensibly to retain the country’s most important clients such as China.  However, its primary effort, I maintain, has been to force other producers, starting with the US and Russia, to cut supplies. 

That has not worked, at least not yet.  Therefore, oil exporters face growing deficits.  The current battle of overproduction, while it continues, would be less of a Pyrrhic victory if the Saudis declared that the policy had ‘succeeded’, and persuaded other OPEC suppliers to join them in reducing production.  That would probably lift Brent Crude Oil to the $70 to $80 region.  



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November 16 2015

Commentary by Eoin Treacy

ndian Stocks Rebound From Two-Month Low as Industrials Advance

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

“The market rebounded from an oversold territory as investors used the panic to add to their portfolios,” Jitendra Panda, chief executive officer at Peerless Securities Ltd., said by phone from Kolkata. “There’s speculation that moderating inflation will enable the Reserve Bank of India to lower rates next quarter.”

India’s wholesale prices fell for a 12th straight month even while the pace of deflation eased. Consumer prices -- the central bank’s benchmark -- rose 5 percent last month from a year earlier after a 4.41 percent climb in September. RBI Governor Raghuram Rajan has said he can reach his 5 percent CPI target for March 2017 with the current monetary stance. He reviews rates again on Dec. 1, having cut four times this year.

“We expect more than 200 basis points of rate cuts in 2015-2016,” Christopher Wood, chief equity strategist at CLSA Asia Pacific Markets, told reporters in Gurgaon, near New Delhi on Monday. “While earnings growth continues to be downgraded, the offsetting positive is the significant rate cuts.” The brokerage remains “overweight” on Indian equities because the country benefits more than its regional peers from lower oil and commodity prices, he said.

 

Eoin Treacy's view -

Few countries benefit more from low Energy prices than India because it has very little in the way of domestic supply. While other countries are worried about deflationary forces India continues to benefit from disinflation as import prices decline. The current low oil price environment also benefits the government by allowing it leeway to reform the subsidy system without an immediate deleterious effect on the economy.



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November 16 2015

Commentary by Eoin Treacy

Experimental drug targeting Alzheimer's disease shows anti-aging effects

This press release from the Salk Institute may be of interest to subscribers. Here is a section: 

In this latest work, the researchers used a comprehensive set of assays to measure the expression of all genes in the brain, as well as over 500 small molecules involved with metabolism in the brains and blood of three groups of the rapidly aging mice. The three groups of rapidly aging mice included one set that was young, one set that was old and one set that was old but fed J147 as they aged.

The old mice that received J147 performed better on memory and other tests for cognition and also displayed more robust motor movements. The mice treated with J147 also had fewer pathological signs of Alzheimer's in their brains. Importantly, because of the large amount of data collected on the three groups of mice, it was possible to demonstrate that many aspects of gene expression and metabolism in the old mice fed J147 were very similar to those of young animals. These included markers for increased Energy metabolism, reduced brain inflammation and reduced levels of oxidized fatty acids in the brain.

Another notable effect was that J147 prevented the leakage of blood from the microvessels in the brains of old mice. “Damaged blood vessels are a common feature of aging in general, and in Alzheimer's, it is frequently much worse,” says Currais.

Currais and Schubert note that while these studies represent a new and exciting approach to Alzheimer’s drug discovery and animal testing in the context of aging, the only way to demonstrate the clinical relevance of the work is to move J147 into human clinical trials for Alzheimer’s disease.
“If proven safe and effective for Alzheimer’s, the apparent anti-aging effect of J147 would be a welcome benefit,” adds Schubert. The team aims to begin human trials next year.

 

Eoin Treacy's view -

Health systems in most Western countries are under increasing stress not because of drug use or alcoholism but because people are living longer with chronic conditions. Diseases like diabetes and conditions exacerbated by obesity are expensive to treat and incredibly time consuming. People living longer but with deteriorating mental and physical function, often with complications, represent major cost centres for health systems. 



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November 13 2015

Commentary by David Fuller

IEA Says Record 3 Billion-Barrel Oil Stocks May Deepen Rout

Here is the opening of Bloomberg’s report on what is still by far the world’s most important commodity in terms of consumption. 

Oil stockpiles have swollen to a record of almost 3 billion barrels because of strong production in OPEC and elsewhere, potentially deepening the rout in prices, according to the International Energy Agency.

This “massive cushion has inflated” on record supplies from Iraq, Russia and Saudi Arabia, even as world fuel demand grows at the fastest pace in five years, the agency said. Still, the IEA predicts that supplies outside the Organization of Petroleum Exporting Countries will decline next year by the most since 1992 as low crude prices take their toll on the U.S. shale oil industry.

“Brimming crude oil stocks” offer “an unprecedented buffer against geopolitical shocks or unexpected supply disruptions,” the Paris-based agency said in its monthly market report. With supplies of winter fuels also plentiful, “oil-market bears may choose not to hibernate.”

Crude has dropped about 40 percent in the past year as OPEC defends its market share against rivals such as the U.S. shale industry, which is faltering only gradually despite the price collapse. Oil inventories are growing because supply growth still outpaces demand, the 12-member exporters group said in its monthly report Thursday.

David Fuller's view -

We can conclude several things from this informed report of what is currently happening in terms of global supply and demand for crude oil.  

1) Most producers of crude oil around the world are pumping all they can in an effort to offset the revenue losses from lower prices.  This production currently includes 31.76 million barrels a day from OPEC alone. 

2) Now that sanctions on Iran have been removed, their renewed production will increase next year, potentially significantly. 

3) Oil stockpiles have risen every quarter since 1Q 2014 and now total a record 3 billion barrels (see graph in the article above).  This is a significant cushion against any supply disruptions, due to cutbacks, accidents, sabotage or wars in OPEC or other producer regions.  

4) Global oil demand, helped by cheap prices, will climb by 1.8 million barrels a day this year.  This is the fastest pace in five years and is currently at 94.6 million barrels a day.  

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November 13 2015

Commentary by Eoin Treacy

Autodesk's CEO of today on the machines that will be making things tomorrow

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

"Back to the point of how things are made is changing, here's a small group of people who were able to use the most advanced manufacturing to do things," Bass says. "And I think that's really upsetting the apple cart, in terms of small companies and small groups of people, who are empowered in ways to do things that used to require huge amounts of capital."

The thought that these Darwinian machines can crunch through countless possibilities, mutating designs until they produces something resembling the perfect solution, is a fascinating idea. Bass does acknowledge that the technology won't provide a one-size fits all approach, however, that there will be problems where generative design is an appropriate solution and problems that are better solved by human minds.

And as for the fabrication of future designs, both our own and those conjured up by computers? While 3D printing technology is advancing all the time, Bass is of the view that it will only ever complement existing techniques like subtractive manufacturing, rather than completely snuff them out.

"Does 3D printing replace all manufacturing? It's another tool in the toolbox," he says. "There will be times when 3D printing is awesome, there will be times when manufacturing is awesome. What I think the future of making things is, is this combination of having powerful design tools in order to make them, and the powerful fabrication techniques to realize those designs."

 

Eoin Treacy's view -

3D printing or additive manufacturing is a revolutionary development but perhaps more important is the fact that the above article highlights how innovative solutions can be combined to accelerate the pace of development. Tools now being developed will enable infrastructure development at a lower cost, lower Energy intensity and lower resource requirement which has the potential to greatly enhance the quality of life for many more people. As costs decline demand will rise to create a long-term growth trajectory.  



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November 12 2015

Commentary by David Fuller

Saudi Arabia Risks Destroying OPEC and Feeding the Isil Monster

The rumblings of revolt against Saudi Arabia and the Opec Gulf states are growing louder as half a trillion dollars goes up in smoke, and each month that goes by fails to bring about the long-awaited killer blow against the US shale industry.

"Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff"

Helima Croft, RBC Capital Markets

Algeria's former Energy minister, Nordine Aït-Laoussine, says the time has come to consider suspending his country's Opec membership if the cartel is unwilling to defend oil prices and merely serves as the tool of a Saudi regime pursuing its own self-interest. "Why remain in an organisation that no longer serves any purpose?" he asked.

Saudi Arabia can, of course, do whatever it wants at the Opec summit in Vienna on December 4. As the cartel hegemon, it can continue to flood the global market with crude oil and hold prices below $50.

It can ignore desperate pleas from Venezuela, Ecuador and Algeria, among others, for concerted cuts in output in order to soak the world glut of 2m barrels a day, and lift prices to around $75. But to do so is to violate the Opec charter safeguarding the welfare of all member states.

"Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff. There could be a total blow-out in Vienna," said Helima Croft, a former oil analyst at the US Central Intelligence Agency and now at RBC Capital Markets.

The Saudis need Opec. It is the instrument through which they leverage their global power and influence, much as Germany attains world rank through the amplification effect of the EU.

The 29-year-old deputy crown prince now running Saudi Arabia, Mohammad bin Salman, has to tread with care. He may have inherited the steel will and vaulting ambitions of his grandfather, the terrifying Ibn Saud, but he has ruffled many feathers and cannot lightly detonate a crisis within Opec just months after entangling his country in a calamitous war in Yemen. "It would fuel discontent in the Kingdom and play to the sense that they don't know what they are doing," she said.

David Fuller's view -

For decades commencing in the 1070s we have lived through an era where OPEC controlled global Energy prices, due to their enormous reserves of easily accessible crude oil.  In this dominant role, OPEC rulers in the Middle East and North Africa grew very rich, presiding over superficially stable countries, controlled by subjective interpretations of Islamic law, enforced by their authoritarian national regimes, and enormous government handouts to their citizens in an effort to buy loyalty.   

For over two thousand years there have been many similar regimes, albeit with different state religions.  Some of these ruled for centuries before mostly decaying from within.  Others became complacent and could not react to change with the pace of their rivals. 

OPEC countries of the Middle East and North Africa were more often religious rivals rather than allies, but maintained associations of mutual convenience due to their dominant role as the leading suppliers of crude oil.  However, in the last several years the long-held myth of dwindling oil supplies trading at ever-rising prices has been shattered by the march of technology, undermining OPEC’s grip on the oil market from both ends of the spectrum.  

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



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November 11 2015

Commentary by Eoin Treacy

2016 Oil Market Outlook

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

In addition to a still over supplied global liquids balance it is of course bearish that OPEC does not look set to change their output policy in the December 4 meeting. The change in Saudi policy was one of the key reasons why we held the most bearish view to oil prices in the surveys one year ago. We were early to identify 1986 as the relevant comparison since this downturn is a supply led downturn and not a demand led downturn. Hence it made no sense to us that Saudi would defend oil prices this time, since the kingdom always has seen the 1980-86 cut period as a mistake. We do not foresee a change in the Saudi tactics in the December 4 OPEC meeting since there are very visible signs that the policy is working, first and foremost through the large global CAPEX cuts hitting shale, deepwater and Canadian oil sands.

It is also important to emphasize that we are still in a situation where there will be no contributions to a potential OPEC production cut from other than Saudi/UAE/Kuwait. Iran, Iraq and Libya is of course totally out of the picture to contribute, and how can Venezuela, Nigeria and the other OPEC countries cut back output voluntarily when their domestic economies needs the exports revenues? Since there is no sanctions on any OPEC country that does not follow the potential new quota, how can Venezuela trust that Nigeria is cutting any output?? The risk would be that Venezuela cuts and it is too small to affect the price and then revenues are falling as the exports volume is reduced. OPEC behaviour is still a lot of game theory… To us this means that the only way we could see an OPEC cut in the December meeting would be that Russia contributes to cutting production. We do not see this as very likely, noting the statements from for example the Russian Deputy Energy Minister in October where he said that Russian oil wells are mostly located in harsh climate in Siberia which means the wells will not be easy to restart after having been shut down and there is no storage capacity for the crude Russia would otherwise have exported.

On October 21 OPEC and some non-OPEC countries held a meeting with technical experts to discuss the oil market but the meeting gathered no interest from non-OPEC countries to contribute to any production cuts. Venezuela has proposed to reapply a new price band for OPEC where production should be reduced when the price is below a 70 $/b threshold but has seen little traction so far on this idea. The response from the Saudi “pump-king” Al-Naimi was that “only the market can decide on prices, no one else”, so it does not look promising for Venezuela which will just have to tighten their belts.

For OPEC it just makes it even more difficult that Iran is set to return to the market in 2016. IAEA must verify that Iran has implemented the nuclear agreement before sanctions can be removed. Iran must reduce the number of centrifuges from 9.500 to 5.060, move installed non-operating centrifuges into storage, dilute stock pile of low-enriched uranium from 10.000 kg to 300 kg, remove the core Arak heavy water reactor and establish verification systems across the supply chain. Iran’s supreme leader has stated that the process at Arak will not begin until the IAEA completes its investigation on past nuclear weapons work and that report is not due until December 15. We have hence factored in that the sanctions are not removed until the second quarter of 2016 in our global supply/demand balance.

 

Eoin Treacy's view -

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

There are large number of moving parts in the global Energy sector and the number of potential wild cards that could have a major influence on prices has increased. At this stage it is a philosophical question whether the low price environment has led to increased risk but there is no denying that wars on the periphery of some of the world’s biggest oil producing areas is a risk. The piece in the above report focusing on the palace politics of Saudi Arabia is also worth keeping an eye on because of the influence regime change could have on Energy policy. 



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November 10 2015

Commentary by Eoin Treacy

Musings from the Oil Patch November 3rd 2015

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

Self-driving vehicles may be the answer. Researchers at the University of Texas have conducted a realistic simulation of vehicle use in cities that took into account traffic congestion and rush-hour use. They found that if our vehicle fleet was fully autonomous, every shared autonomous vehicle could replace 11 conventional vehicles. As their study showed, the world would only need 800 million vehicles to supply transportation services for nine billion people, or 200 million fewer cars than what already exists in the global vehicle fleet. That doesn’t sound like a bright future for either the automobile or petroleum industries.

The UT simulations showed that riders would wait for an average of 18 seconds for an autonomous vehicle to show up. Each vehicle would serve 31-41 travelers a day. Importantly, less than 0.5% of travelers waited for more than five minutes for an autonomous vehicle to arrive. Equally important, shared autonomous vehicles reduce the average cost of an individual’s travel by as much as 75% versus a conventional driver-owned vehicle.

A global vehicle fleet of autonomous vehicles could easily be electrified since they would be able to go off to be recharged and cleaned during periods of low demand without sacrificing service quality for travelers. We know that one of the key objectives of autonomous vehicles is for them to be able to travel faster, in tighter spacing and in smaller-sized units. This means that we will need less material for constructing these vehicles with a favorable impact on overall Energy and material needs besides less fuel. Here is another example of savings from fewer vehicles due to an autonomous vehicle fleet. We would also have fewer vehicles needing to be parked, which means that upwards of 20% of urban land currently devoted to parking could be transformed into close-in housing and businesses. Increased urban density could further reduce overall Energy demand by boosting the use of mass transit.

While Dr. Smil is concerned about the increasing cost of extracting Energy and materials due to their capital intensity, which could doom our economy by subjecting it to increasingly more expensive fossil fuels for decades into the future, what would happen if our Energy future follows a deployment path similar to that of information technologies? Several decades ago, prognosticators did not foresee how the world would skip over the building of landline telephone infrastructure and go directly to cellular phones. In 2014, there were only 1.1 billion fixed telephone landlines worldwide compared to more than seven billion cellular phones. Equally as impressive is how much the cost to make these phones has declined during the transition.  

 

Eoin Treacy's view -

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

Let’s consider how supply and demand impact the market for a new technology. I can own any number of cars I wish but I can only drive one at a time. Autonomous vehicles remove that limitation so I could send the car out to collect dinner while I go to the bank personally. Of course if Uber remains a viable business in a decade then I could simply have a roaming vehicle pick up my dry cleaning, have another pick up my lunch and another pick up my groceries. The car I choose to drive will be for comfort, style and cache while other vehicles will be the proverbial work horses. 



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November 04 2015

Commentary by David Fuller

Exxon Predicted the Present Cheap Solar Boom Back in the 1980s

Here is the opening and also a latter section of this interesting article from Bloomberg:

For more than a generation, solar power was a environmentalist fantasy, an expensive and impractical artifact from the Jimmy Carter era. That was true right up until the moment it wasn't. Solar silicon prices dropped 94 percent from early 2008 to the end of 2011. Crystalline silicon has since fallen an additional 47 percent, to $15.20 a kilogram. 

Many were caught off guard by the emergence of solar as a competitive power source. The scientist who led Exxon's research arm back in the 1980s wasn't one of them. 

Peter Eisenberger, now an environmental science professor at Columbia's Earth Institute, co-authored an internal report for Exxon projecting that solar wouldn't become viable until 2012 or 2013. The report, written before he left the company in 1989, suggested that Exxon would do best to sell its solar assets; not surprisingly, the company did just that. What is surprising is that Exxon's 25-year-old solar projections nailed the timing for the arrival of affordable solar power. 

And:

Eisenberger left for academia and in 2010 co-founded a alternative-Energy company, Global Thermostat, at which he now serves as chief technology officer. The company works to reduce the cost of capturing atmospheric carbon dioxide and rendering it useful for synthetic fuels and materials. "Almost all the people that are involved in founding this company—and in helping me get going—were from Exxon," Eisenberger said. "Every one of them. They're the only people who didn't think I was nuts."

David Fuller's view -

Exxon and the other large international oil companies are also working on the commercial capturing of atmospheric carbon dioxide, and understandably so.  Unless it can be effectively and cheaply removed and used profitably for something else, oil and other fossil fuels will increasingly be regarded as pariahs. 



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November 04 2015

Commentary by David Fuller

Saudi Wells Running Dry of Water Spell End of Desert Wheat

Here is the opening of this informative article from Bloomberg:

For decades, only a few features punctuated the vastness of the Saudi desert: oil wells, oases -- and wheat fields.

Despite torrid weather and virtually no rain, the world’s largest oil producer once grew so much of the grain that its exports could feed Kuwait, United Arab Emirates, Qatar, Bahrain, Oman and Yemen. The circular wheat farms, half a mile across with a central sprinkler system, spread across the desert in the 1980s and 1990s, visible in spring to anyone overflying the Arabian peninsula as green spots amid a dun sea of sand.

The shift toward imports, which started eight years ago, is reverberating beyond the kingdom, providing business opportunities for grain traders such as Cargill Inc and Glencore Plc as well as for farmers in countries such as Germany and Canada. 

"The Saudis are the largest new wheat buyer to emerge," said Swithun Still, director of grain trader Solaris Commodities SA in Morges, Switzerland.

Ahmed bin Abdulaziz Al-Fares, managing director of the Grain Silos and Flour Mills Organization, the state agency in charge of cereal imports, told an industry conference in Riyadh last month that Saudi Arabia will import 3.5 million metric tons in 2016. That’s a 10-fold increase from about 300,000 tons in 2008, the first year local crops were curtailed.  An agency presentation says the kingdom will rely on imports for "100 percent" of its wheat in 2016 for the first time.

By 2025, demand is forecast to rise to 4.5 million tons as population growth drives demand for flour, positioning Saudi Arabia as one of the 10 biggest wheat buyers worldwide.

The shift is propitious as the wheat market weathers the largestglut in nearly 30 years, with bumper harvests filling up silos from Russia to Argentina. Prices for high-quality wheat, which reached an all-time high in Kansas City of more than $13 per bushel in 2008, have fallen to less than $5 this year.

David Fuller's view -

Too low aquifers for irrigation of desert wheat; too low oil prices to balance the Saudi budget.  For many Saudi citizens used to the comfortable but rigidly controlled life this must feel like a plague. 

The Saudis were behind the slump in oil prices, by increasing production to lower prices deliberately in a desperate attempt to knock out the US shale industry.  However, in fairness to the Saudis, they were defeated by the advance of technology.  Moreover, they inadvertently encouraged not only oil discovery and drilling technologies, from shale to deep water projects, but also the renewable Energy industries by keeping oil prices high for as long as they could.

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November 03 2015

Commentary by David Fuller

Big Science Faces Big Problems in China

As in so many other things, China's seeking to play a leading role in 21st century science. And it's using a familiar weapon: money.

Last week, Chinese physicists announced that they’d completed the initial design for a massive high-Energy particle collider, which could become operational around 2025. The project -- which may cost $3 billion and stretch for more than 60 miles -- is just the latest in a string of Chinese “big science” initiatives designed to boost national prestige and produce lucrative spinoff technologies. At a time when money for basic research is increasingly difficult to obtain in the U.S. and Europe, China sees an opportunity to seize the global scientific vanguard.

The regime isn't wrong to try, and the cause of human knowledge will benefit from any breakthroughs that result. But if China's truly going to reap a return on its eye-popping investments, the government needs to do something harder than build a giant particle smasher: It needs to rethink its central role in Chinese research.

State sponsorship of science has its pluses, of course, including speedy decisionmaking on complex, expensive projects. But the costs often outweigh the benefits. Under the regime's heavy hand, the Chinese scientific establishment has long suffered from cronyism,corruption, and pervasive fraud. These blemishes damage the country’s research reputation. More importantly, they help drive anongoing brain drain that no amount of government largesse has been able to stem.

While the relationship between science and the state is politicized and complex in every country (including the U.S.), China’s top-down system exacerbates the worst problems. With scientists expected to serve the state, those who show their loyalty to the regime have typically progressed as fast if not faster than those who make new discoveries. This less-than-meritocratic culture has become ingrained in the influential Chinese Academy of Sciences -- a 60,000-employeebureaucratic behemoth that controls 104 of China’s top research institutions and most of its non-military research spending.

David Fuller's view -

This is one of the more informed articles about China which I have seen.  Whether or not one invests in China, we need to pay attention to this country as it grows in importance.  



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November 02 2015

Commentary by David Fuller

On Target by Martin Spring: Thinking about Financing Your Retirement

My thanks to the author for his interesting romp around global markets, plus some pithy asides.  This issue contains some highlights from Eoin Treacy’s timely presentation at the Contrary Opinion Forum, but I could not resist producing this topical and also acerbic item: Bureaucrats at War over PollutionPollution, posted without further comment::

Here’s what my friend and brilliant commentator Robin Mitchinson has to say about the Volkswagen affair

At the heart of the VW fiasco are the conflicting aims of two groups of busybodies.

In the Red corner we have – surprise, surprise – the Brussels nomenklatura . They are leaders in the climate change-global warming racket that generates enormous profits for „green power‟ companies and manufacturers of wind turbines, subsidized by the taxpayers of Europe, and damaging Europe‟s competitiveness through Energy prices treble those of competitors.

Twenty or more years ago they exhorted us to switch to diesel power in our vehicles because its CO2 emissions were lower than petrol power. Of course, LPG [liquefied petroleum gas] would have been more effective, but the UK government ratcheted up the excise duty on that, so it became uneconomical.

The European Union motivation for throwing all this grit into the economic machine was to meet the ludicrous emission targets in international agreements which the major polluters – the US, China, et al, refused to sign up to (the fact that this made the whole exercise pointless and worthless was not, and never has been, a deterrent to the men in suits in the Berlaymont).

In the Blue corner we have various US enforcers (motto: „go forth and multiply‟) which have little interest in carbon emissions, but plenty in nitrous oxide -- which does not contribute to climate change, but does create public health problems.

Now the scheissen hits the airconditioning.

The Yanks discovered that VW had been gaming the emission tests all along (and the fuel consumption monitoring).

It‟s tempting to say: „So what?‟ Although over 50 per cent of vehicles in Europe are diesel-powered, only about 1 per cent of US cars are oilers.

In any case, most nitrous oxide pollution must come from the heaviest users -- heavy trucks, locomotives, construction machinery, ships, oil-fired central heating. Will all these now be subject to emissions regulation? Don‟t be silly!

What we are left with is a contest between two utterly conflicting targets. In the Red corner we have climate change; in the Blue we have public health concerns.

It is a reasonable certainty that there is not a single diesel engine in the world that meets the US emission limits. If the VW TDI puffs out 40 times the limit, this only proves one thing -- the limits are fiction; they are clearly unobtainable. And we don‟t know who fixed them, or on what criteria or scientific proof of health concern.

The last time VW got so much publicity was over their way of keeping the union bosses happy with lavish parties, prostitutes and Viagra.

Much more fun than „defeat devices‟!

David Fuller's view -

A PDF of Martin Spring's On Target is posted in the Subscriber's Area.



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October 29 2015

Commentary by David Fuller

Paris Climate Deal to Ignite a $90 Trillion Energy Revolution

Here is the opening of this important and somewhat controversial column by Ambrose Evans-Pritchard for The Telegraph:

The fossil fuel industry has taken a very cavalier bet that China, India and the developing world will continue to block any serious effort to curb greenhouse emissions, and that there is, in any case, no viable alternative to oil, gas or coal for decades to come.

Both assumptions were still credible six years ago when the Copenhagen climate summit ended in acrimony, poisoned by a North-South split over CO2 legacy guilt and the allegedly prohibitive costs of green virtue.

At that point the International Energy Agency (IEA) was still predicting that solar power would struggle to reach 20 gigawatts by now. Few could have foretold that it would in fact explode to 180 gigawatts - over three times Britain’s total power output - as costs plummeted, and that almost half of all new electricity installed in the US in 2013 and 2014 would come from solar.

Any suggestion that a quantum leap in the technology of Energy storage might soon conquer the curse of wind and solar intermittency was dismissed as wishful thinking, if not fantasy.

Six years later there can be no such excuses. As The Telegraph reported yesterday, 155 countries have submitted plans so far for the COP21 climate summit to be held by the United Nations in Paris this December. These already cover 88pc of global CO2 emissions and include the submissions of China and India.

Taken together, they commit the world to a reduction in fossil fuel demand by 30pc to 40pc over the next 20 years, and this is just the start of a revolutionary shift to net zero emissions by 2080 or thereabouts. “It is unstoppable. No amount of lobbying at this point is going to change the direction,” said Christiana Figueres, the UN’s top climate official.

Yet the Energy industry is still banking on ever-rising demand for its products as if nothing has changed. BP is projecting a 43pc increase in fossil fuel use by 2035, Exxon expects 35pc by 2040, Shell 43pc and Opec is clinging valiantly to 55pc. These are pure fiction.

The Intergovernmental Panel on Climate Change (IPCC) may or may not be correct in arguing that we cannot safely burn more than 800bn tonnes of carbon (two-thirds has been used already) if we are to stop global temperatures rising two degrees above pre-industrial levels by 2100. I take no view on the science.

David Fuller's view -

This article is controversial, although I certainly feel that it merits our attention. 

Solar Energy is developing even faster than most people envisaged, thanks to ‘needs must’ and the accelerating rate of technological innovation which this service frequently mentions.  China has embraced solar Energy because of its chronic pollution problems.  Less developed India has moved more slowly in this respect but has the same problem.  Additionally, even a small rise in global temperatures presents a huge risk for tropical India. 

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October 27 2015

Commentary by David Fuller

China Calls U.S. Challenge Over Island Threat to Regional Peace

Here is the opening of this informative article from Bloomberg:

China said it will take “all necessary measures” to defend its territory after the U.S. sailed a warship through waters claimed by China in the disputed South China Sea, a move the government in Beijing called a threat to peace and stability in Asia.

“The behavior of the U.S. warship threatened China’s sovereignty and national interest, endangered the safety of the island’s staff and facilities, and harmed the regional peace and stability,” Foreign Ministry spokesman Lu Kang said in a statement today. “The Chinese side expressed its strong discontent and firm opposition.”

The comments came hours after the USS Lassen passed within 12-nautical miles of Subi Reef, an island built by China as a platform to assert its claim to almost 80 percent of one of the world’s busiest waterways. By passing so close to the man-made island, the U.S. is showing it doesn’t recognize that the feature qualifies for a 12-nautical mile territorial zone under international law.

The patrol marks the most direct attempt by the U.S. to challenge China’s territorial claims and comes weeks after President Barack Obama told President Xi Jinping at a Washington summit that the U.S. would enforce freedom of navigation and that China should refrain from militarizing the waterway. The spat threatens to fuel U.S.-China tensions ahead of multilateral meetings to be attended by Xi and Obama, including the Asia-Pacific Economic Cooperation forum in the Philippine capital next month.

In a strongly-worded statement, Lu said the USS Lassen had “illegally” entered Chinese waters and that “relevant Chinese departments monitored, shadowed and warned the U.S. ship.” China has “indisputable” sovereignty over the Spratly Islands and surrounding waters, Lu said.

China bases its claims to most of the sea, a conduit for trade and Energy supplies between Europe and Asia, on a so-called nine-dash line for which it won’t give precise coordinates. China has stepped up its island building in the past year and is installing runways capable of handling military aircraft to extend its control over the waterway, parts of which are also claimed by the Philippines, Brunei, Malaysia, Vietnam and Taiwan.

David Fuller's view -

This problem and potentially significant flashpoint has been building for a long time, and it is no secret that other countries in the region, mentioned above, have encouraged the US to support their maritime claims.  Subscribers may wish to keep a close eye on developments in the South China Sea, which are likely to affect investor sentiment adversely at some point.

See also: Beijing summons US Ambassador over warship in South China Sea, and: If US relations with China turn sour, there will probably be war, both from The Guardian)



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October 26 2015

Commentary by Eoin Treacy

Africa: The next frontier

Thanks to a subscriber for this report from Deutsche Bank focusing on Africa’s potential as a commodity exporter and consumer. Here is a section focusing on copper:

The world will need an estimated 5mt of additional mined copper by 2025

Copper demand has grown 3.2% each year since the end of WWII. However, we estimate that this growth rate will drop over the next 15 years to be below trend at 3%. This takes into account our GDP expectations, ongoing industrialisation of the emerging market economies and further substitution.

Despite the strong growth in copper demand in China over the past decade (2000-2010, near 15% CAGR), global copper demand was a more muted 2.4% The high price environment of 2005-2008 led to demand destruction of around 2.2mtpa, with widespread substitution.

Taking into account increased secondary supply (+3% pa), mine depletion from falling grades (see Figure 29) and supply additions already underway, we estimate the world will need an additional 5Mtpa of mined copper by 2025, or around 500kt each year. This is more than a Collahuasi-sized mine each year (445kt in 2014) or two Andina-sized mines (232kt in 2014).

Time to first production is now at least 12 years
As shown here, for a typical Greenfield copper mine, the time to first production is at least 12 years. For diamond mines, the time frame has extended to an average of 22 years. For gold mines, the average time frame for the mines currently producing in Cote d’Ivoire was 15 years to get to first production (see Figure 32).

And 

Most major known deposits are currently exploited across Chile, Australia, North American, Russia and China. As shown earlier (in Figure 1 on page 4), Africa has a wealth of mineral resources, hosting 95% of the world’s known platinum, 65% of its manganese, 50% of its diamonds and cobalt, 40% of its gold, 30% of the world’s bauxite, and approximately 10% of the world’s known copper sits in the Central African Copperbelt. Yet today, Africa supplies only 11% and 12% of the world’s copper and gold respectively, plus just 9% of its thermal coal.

 

Eoin Treacy's view -

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

This report carries a very interesting graphic illustrating the number of conflicts that occurred in the 1990s compared with the last decade. Relative peace has broken out across the continent despite some high profile trouble spots grabbing attention. The question then is to what extent higher commodity prices contributed to this easing of tensions? 

In an environment characterised by a dearth of capital, the potential for armed conflict increases as access to basic resources such as food, Energy and shelter is inhibited. The commodity bull market meant revenues increased and reduced the incentive for conflict. The question now is how many of the gains achieved in the last decade can be held onto and improved upon. Standards of governance are integral to this question because without improvement the potential for a number of major African countries to miss out on development over the next decade increases. 

 



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October 23 2015

Commentary by Eoin Treacy

Musings from the Oil Patch October 20th 2015

Thanks to a subscriber for this edition of Allen Brooks’ every interesting report. Here is a section on the developing El Nino:

Considering the weather patterns that will dominate the 2015-2016 winter, Ms. Garriss writes,” Strong El Niños normally bring warm, dry winters to the northern tier of states and Southern Canada. Meanwhile the Southern US has cool, wet winters. Large Icelandic eruptions typically bring warm winters to the Midwest, Northeast and Canada from the Great Lakes to the Atlantic Provinces. If history repeats itself, expect lower heating demands.” That is not good news for the domestic Energy business, but certainly good news for homeowners. It may also be good news for underlying economic growth as the combination of lower heating bills and reduced gasoline pump prices may result in more money being spent on other products and services. 

During the past four weeks of the natural gas storage injection season, weekly volumes have averaged 100 billion cubic feet (Bcf). As of the week ending October 9, there was 3,733 Bcf of gas in storage, which puts current storage up at the top of the five-year average weekly storage volume peak. Forecasters have been anticipating that total gas storage will end the injection season somewhere close to, or possibly slightly in excess of 4,000 Bcf. If we do exceed 4,000 Bcf, it would mark the first time in history that the industry began the heating season with that much natural gas in storage. During 2009-2013, with the exception of 2012, the industry ended the injection seasons with slightly over 3,800 Bcf of gas in storage. In 2012, the industry was able to slightly exceed 3,900 Bcf of gas in storage. Last year, the industry began the heating season with only 3,571 Bcf of gas in storage, which was due to the injection season beginning with the second lowest storage volume since 1994 - only 822 Bcf.

Eoin Treacy's view -

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

The record hurricane currently moving towards Mexico’s Pacific coast near Puerto Vallarta and the speed with which it formed may have been influenced by the strength of El Nino in warming the normally cool Pacific. It is going to dump a lot of rain on Mexico and is expected to move into the Caribbean and potentially strengthen again to become a tropical storm that hits parts of Texas.  



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October 22 2015

Commentary by Eoin Treacy

Greenlight Partner Letter

Thanks to a subscriber for this interesting report from Greenlight. Here is a section on SunEdison:

In the weeks before the GLBL initial public offering, SUNE was at its highs and we contemplated trimming the position. Since we expected the UOI would trigger a further advance in the shares, we decided against it. Around the same time, oil and gas prices renewed their declines, causing the values of Energy master limited partnerships to justifiably fall. We believed that TERP and GLBL would not be impacted, as neither is subject to commodity risk. We were wrong. Because the SUNE yield vehicles were relatively new to investors, the market did not distinguish them from other Energy dividend flow through structures. In mi-July, TERP began falling along with the rest of the sector taking SUNE with it. GLBL IPO’d at a big discount a week later and traded poorly in the aftermarket. 

As GLBL and TERP continued to fall they effectively lost access to the capital markets, and SUNE collapsed as the market because worried that SUNE would be able to sell its projects and could even run out of money. Ironically, the market judged SUNE’s rapidly growing and massive backlog of attractive projects to be a liability. 

SUNE’s hard-to-decipher financial statements fed the stock collapse. SUNE consolidates both TERP and GLBL on its GAAP statements. The complicating result is two-fold. First when SUNE sells a project to TERP or GLBL it bears the operating costs but doesn’t get to book the revenue from the sale. The result is the appearance of an operating loss. Second TERP and GLBL use non-recourse project finance debt to fund the purchases and the debt appears on SUNE’s balance sheet. The result is that SUNE appears to be heavily levered and losing money. From a GAAP perspective that’s true, but from an economic perspective it is not. Nonetheless, this hasn’t stopped some wise guys from dubbing it “SunEnron”. 

SUNE responded to the deteriorating environment by raising additional equity, finding third parties to buy its products, and slowing it development pipeline. All of these actions have marginally lowered the company’s value, but have stabilized the situation. Taking into account the more conservative business plan, when we look through the complicated financials we believe that SUNE’s development business is poised to have economic earnings in 2016 of about $1.34 per share, assuming that TERP and GLBL do not regain access to the capital markets. 

 

Eoin Treacy's view -

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

In the movable feast of renewable Energy breakeven estimates it’s hard to argue that lower oil and particularly natural gas prices skew the calculation. Solar technology is advancing at a prodigious rate but not so fast that companies can compete with Energy prices which more than halved in a year. This has weighed on the sector in the short term but it is hard to argue with government mandates that utilities have to buy Energy from renewable sources. 



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October 21 2015

Commentary by David Fuller

OPEC Is About to Crush the U.S. Oil Boom

Here is the opening of this topical article from Bloomberg:

After a year suffering the economic consequences of the oil price slump, OPEC is finally on the cusp of choking off growth in U.S. crude output.

The nation’s production is almost back down to the level pumped in November 2014, when the Organization of Petroleum Exporting Countries switched its strategy to focus on battering competitors and reclaiming market share. As the U.S. wilts, demand for OPEC’s crude will grow in 2015, ending two years of retreat, the International Energy Agency estimates.

While cratering prices and historic cutbacks in drilling have taken their toll on the U.S., OPEC members have also paid a heavy price. A year of plunging government revenues, growing budget deficits and slumping currencies has left several members grappling withsevere economic problems. The fact that the U.S. oil boom kept going for about six months after the group’s November decision also means OPEC has so far succeeded only in bringing the market back to where it started.

“It’s taken a hell of a long time and it will continue to take a long time -- U.S. oil production has been more resilient than people thought,” said Mike Wittner, head of oil markets research at Societe Generale SA in London. “The bottom line is the re-balancing has begun.”

OPEC abandoned its traditional role of paring production to prevent oversupply last November as a tide of new oil from the U.S. eroded its share of world markets. The group chose instead to keep pumping, allowing the subsequent price slump to squeeze competitors with higher costs. The group didn’t discuss capping output when its representatives met in Vienna Wednesday with non-member countries including Russia.

David Fuller's view -

I think the headline above is unnecessarily alarmist, to the point of sounding more like an OPEC dream, rather than reality.  A glance at stock market performances of predominantly oil producing countries, relative to Wall Street, provides a dose of reality.

The key point is that all countries which are heavily dependent on oil production, including all OPEC members, are running significant deficits.  To date, their economic policy has been to produce more oil, which pushes the price of crude lower, rather than reduce expenditure sufficiently to their loss of revenue.

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October 20 2015

Commentary by David Fuller

OPEC Brings Oil Price War Home in Pursuit of Asia Cash

When it comes to deciding how much to charge Asian oil buyers,OPEC members are showing little regard for tradition.

Suppliers from the Organization of Petroleum Exporting Countries have long moved in lockstep, raising or lowering prices in tandem. Now, Kuwait is undercutting Saudi Arabia by the most on record and Iraq is also selling its oil more cheaply than the group’s biggest member. Qatar is pricing cargoes at the biggest discount in 27 months to competing crude from the U.A.E.’s Abu Dhabi.

While the group that accounts for about 40 percent of global oil supplies maintains a collective strategy of flooding the market with crude, the semblance of unity has vanished when setting monthly selling prices. With Asia forecast to account for most of the growth in global oil demand this year, competition for the region’s buyers is trumping historical allegiances.

“It’s a full-on fight for market share within OPEC,” said Virendra Chauhan, a Singapore-based analyst at industry consultant Energy Aspects Ltd. “That’s even as the group tries to fend off a rise in non-OPEC production from countries such as Russia, Brazil and the U.S.”

David Fuller's view -

‘All is fair in love and war.’  Members of OPEC do not share friendships – just mutual interests.  The same can be said for the EU or any other alliance of self-interest.  When times are tough it is every nation for itself.  It is not edifying but it is how the world works at the international commercial level.

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October 20 2015

Commentary by David Fuller

Cheap, Simple Technique Turns Seawater Into Drinking Water

Here is a promising article from Gizmag on what has been an increasingly worrying problem for many regions:

Researchers from the University of Alexandria have developed a cheaper, simpler and potentially cleaner way to turn seawater into drinking water than conventional methods.

This could have a huge impact on rural areas of the Middle East and North Africa, where access to clean water is a pressing issue if social stability and economic development is to improve.

Right now, desalinating seawater is the only viable way to provide water to growing populations, and large desalination plants are now a fact of life in Egypt and other Middle Eastern countries.

Most of these plants rely on a multi-step process based on reverse osmosis, which requires expensive infrastructure and large amounts of electricity. These plants release large quantities of highly concentrated salt water and other pollutants back into the seas and oceans as part of the desalination process, creating problems for marine environments.

That’s why the race is on to find a cheaper, cleaner and more Energy-efficient way of desalinating sea water.

In a paper published last month in the journal, Water Science & Technology, researchers Mona Naim, Mahmoud Elewa, Ahmed El-Shafei and Abeer Moneer announced that they have developed a new way to purify sea water using materials that can be manufactured easily and cheaply in most countries, and a method that does not rely on electricity.

The technology uses a method of separating liquids and solids called pervaporation. Pervaporation is a simple, two-step process – the first step involves filtering the liquid through a ceramic or polymeric membrane, while the second step requires vaporizing and collecting the condensed water. Pervaporation is faster, cleaner and more Energy efficient than conventional methods, not least because the heat required for the vaporization stage does not necessarily have to be electrically generated.

Pervaporation is not new – it has been in use for many years. But the membrane used in step one has been expensive and complicated to manufacture.

The breakthrough in this research is the invention of a new salt-attracting membrane embedded with cellulose acetate powder for use in step one of the pervaporation process. Cellulose acetate powder is a fiber derived from wood pulp and is, according to the researchers, cheap and easy to make in any laboratory.

According to the paper, the membrane can quickly desalinate highly concentrated seawater and purify even badly contaminated seawater. It can also be used to capture pollutants and salt crystals to minimize pollution of the environment. The membrane can be used in very remote situations using fire to vaporize the water.

The researchers have yet to prove the commercial viability of the product, but if they can, it could be a promising alternative for developing countries where water and electricity is a scarce resource.

David Fuller's view -

I find it encouraging that pervaporation was developed at the University of Alexandria.  Needs must remains a powerful motivation for development.  Many regions of the globe would benefit from this technology, which sounds as if it has real commercial potential. 

It is at least a partial solution to California’s biggest problem of drought, having used up much of its groundwater.  In addition to the Middle East and North Africa mentioned in the article above, both China and India should be very interested in pervaporation.    



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October 20 2015

Commentary by Eoin Treacy

Engineered viruses provide quantum-based enhancement of energy transport

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

While this initial result is essentially a proof of concept rather than a practical system, it points the way toward an approach that could lead to inexpensive and efficient solar cells or light-driven catalysis, the team says. So far, the engineered viruses collect and transport Energy from incoming light, but do not yet harness it to produce power (as in solar cells) or molecules (as in photosynthesis). But this could be done by adding a reaction center, where such processing takes place, to the end of the virus where the excitons end up.

“This is exciting and high-quality research,” says Alán Aspuru-Guzik, a professor of chemistry and chemical biology at Harvard University who was not involved in this work. The research, he says, “combines the work of a leader in theory (Lloyd) and a leader in experiment (Belcher) in a truly multidisciplinary and exciting combination that spans biology to physics to potentially, future technology.”

“Access to controllable excitonic systems is a goal shared by many researchers in the field,” Aspuru-Guzik adds. “This work provides fundamental understanding that can allow for the development of devices with an increased control of exciton flow.”

The research was supported by the Italian Energy company Eni through the MIT Energy Initiative. The team included researchers at the University of Florence, the University of Perugia, and Eni.

 

Eoin Treacy's view -

Proof of concept is a big step and this is an enormously exciting field not least because of the enormous potential for artificial photosynthesis. However it could be a decade before we see commercial applications of this technology. 



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October 19 2015

Commentary by David Fuller

Russia Retreats to Autarky as Poverty Looms

Here is the opening of an excellent, detailed article by Ambrose Evans-Pritchard for The Telegraph:

Russia is running out of money. President Vladimir Putin is taking a strategic gamble, depleting the Kremlin's last reserve funds to cover the budget and to pay for an escalating war in Syria at the same time.

The three big rating agencies have all issued alerts over recent days, warning that the country's public finances are deteriorating fast and furiously. There is no prospect of an oil revival as long as Saudi Arabia continues to flood the market. Russia cannot borrow abroad at a viable cost.

Standard & Poor's says the budget deficit will balloon to 4.4pc of GDP this year, including short-falls in local government spending and social security. The government has committed a further $40bn to bailing out the banking system.

Deficits on this scale are manageable for rich economies with deep capital markets. It is another story for Russia in the midst of a commodity slump and a geopolitical showdown with the West. Oil and gas revenues cover half the budget.

"They can't afford to run deficits at all. By the end of next year there won’t be any money left in the oil reserve fund," said Lubomir Mitov from Unicredit. The finance ministry admits that the funds will be exhausted within sixteen months on current policies.

Alexei Kudrin, the former finance minister, said the Kremlin has no means of raising large loans to ride out the oil bust. The pool of internal savings is pitifully small.

Any attempt to raise funds from the banking system would aggravate the credit crunch. He described the latest efforts to squeeze more money out of Russia's Energy companies as the "end of the road".

Mr Kudrin resigned in 2011 in protest over Russia's military build-up, fearing that it would test public finances to breaking point. Events are unfolding much as he suggested.

Russia is pressing ahead with massive rearmament, pushing defence spending towards 5pc of GDP and risking the sort of military overstretch that bankrupted the Soviet Union.

The Stockholm International Peace Research Institute said the military budget for 2014 rose 8.1pc in real terms to $84bn as the Kremlin took delivery of new Su-34 long-range combat aircraft and S-400 surface-to-air missile systems.

It is to rise by another 15pc this year, led by a 60pc surge in arms procurement. This is an astonishing ambition at a time when the economy is in deep crisis, contracting by 4.6pc over the last twelve months.

David Fuller's view -

Vladimir Putin has a penchant for reckless aggression.  His massive increase in military spending is reminiscent of the old Soviet Union under the eventually fossilized Leonid Brezhnev, briefly followed by the prematurely geriatric Yuri Andropov and then Konstantin Chernenko.  The USSR was in a state of economic collapse when Mikhail Gorbachev took over in 1985, eventually as President before resigning on 25th December 1991.  The Soviet Union was formally dissolved the following day.   

This item continues in the Subscriber’s Area and contains two additional articles, plus a PDF of AE-P's column..



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October 16 2015

Commentary by David Fuller

BMW Braves Stench to Power South African Plant With Manure

Here is the opening of this informative article from Bloomberg:

BMW AG’s car-assembly plant in South Africa is doing its bit to help the German carmaker edge toward a global target to supply all its production with renewable Energy: It’s getting some of its power from cow manure.

The company has agreed to a 10-year deal to buy as much as 4.4 megawatts of electricity from a biogas plant about 80 kilometers (50 miles) from its factory north-west of Pretoria, the South African capital. Surrounded by land where about 30,000 cattle graze, the operation runs off gas emitted by a fetid mixture of dung and organic waste ranging from sour yogurt to discarded dog food.

The deal with Bio2Watt (Pty) Ltd., the closely held company that operates the power plant, was struck to bring Munich-based BMW a step closer to its renewable target, according to the carmaker’s South Africa spokesman Diederik Reitsma. The biogas facility, when ramped up to full capacity, will represent 25 percent to 30 percent of the electricity consumption at BMW’s factory, he said in an interview at the car plant.

“We are a big consumer, so that’s a lot,” Reitsma said. “It’s waste no longer wasted.”

BMW already purchases about 51 percent of its Energy from renewable Energy sources, according to the company. In South Africa, the carmaker may consider other clean-Energy sources including solar for the Rosslyn factory, which was BMW’s first foreign plant when it was established in 1973. The facility produces more than 60,000 3-Series sedans a year for local and export markets and produced its one-millionth vehicle in February.

David Fuller's view -

Well, the Germany automobile industry has been deep in it, as they say, under suspicion following the VW scandal.  Consequently, it is a welcome relief to see some positive news.

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October 13 2015

Commentary by Eoin Treacy

British Inflation Rate Unexpectedly Drops Back Below Zero

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

The figures will reinforce the view that the BOE is at least months away from raising its benchmark interest rate from a record-low 0.5 percent. The BOE said last week that its near-term outlook for inflation had weakened since August and that price growth will probably stay below 1 percent until spring 2016, well below its 2 percent target.

“Though prices have fallen slightly over the past year, the risk of persistent deflation is remote,” said Andrew Sentance, an economist at PricewaterhouseCoopers and a former BOE policy maker who is in favor of a rate increase. “As lower food and Energy prices start dropping out of the annual inflation rate, we should expect inflation to move back toward 2 percent next year.”

Just one BOE policy maker, Ian McCafferty, voted to raise rates last month. Testifying to lawmakers on Tuesday, he said the low reading is “largely due to those transitory impacts of oil and commodity prices” and they will disappear from the calculation early next year.

Bank of England officials have been weighing domestic strength against international risks in recent months. While the labor market is tightening, policy makers are still assessing the impact of the global slowdown on the U.K. economy.

Eoin Treacy's view -

The Bank of England has helped foster a recovery in UK economic activity and is unlikely to endanger it by being the first major economy to raise interest rates. Imported deflationary forces in the Energy, food and clothing sectors give the central bank ample room to wait and see what other countries decide to do. 



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October 12 2015

Commentary by Eoin Treacy

Myanmar's Quest to (Em)Power its Citizens

Thanks to the authors for this article penned for Foreign Affairs magazine which may be of interest. Here is a section: 

Myanmar has ambitious growth plans [12]. Officials in Naypyidaw have forecast a national growth rate of 9.3 percent for the 2015–16 fiscal year through a combination of job creation and activity in tourism, telecommunications, agriculture, and other sectors. Inadequate power proves particularly troublesome for the manufacturing sector. In Mandalay, one foundry prices its production of pumps differently depending on whether they are produced during rainy season, when hydroelectric and grid power is available at lower prices, or during the dry season, when the company must supplement supply through diesel-powered backup generators. Making matters worse, the nation’s use of subsidized tariffs means that the government provides power to citizens at a loss. Several years ago, it was estimated these subsidies created an annual deficit of over $275 million. Under past regimes [13], when economic development and domestic Energy use were less of a priority, revenue gained from oil, gas, and other resource exports was used to finance the country’s survival in the face of a harsh sanctions regime. These programs largely benefited a small group of elites and select institutions and are now unpopular, even though the capital and expertise that is derived could potentially fund power sector development.

According to the World Bank, universal electrification should be both “achievable and affordable” in Myanmar by the year 2030 [14]. To this end, the organization has committed $1 billion in financial support [15] to expand electricity generation, transmission, and distribution for the national grid as well as off-grid development. The funds will be utilized to support a National Electrification Plan [16], which the government has developed in cooperation with the World Bank over the past few years. An initial $400 million loan was recently approved by Myanmar’s National Assembly as well as by the World Bank Board of Directors. Coordination meetings between donors, interested private firms, and other parties are now under way, with an anticipated program launch for the first phase before the end of the year.

Eoin Treacy's view -

South East Asia has a wonderful record of previously underdeveloped countries emerging as vibrant manufacturing and consumer economies. With that kind of record there was considerable enthusiasm expressed at the potential for Myanmar to following in the footsteps of many of its neighbours as the political climate evolves. Despite the fact this frontier market has vast upside potential it still suffers from the issue that the number of investment vehicles one might choose from is very limited. 



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October 09 2015

Commentary by David Fuller

Charting the Markets: Watch Out for the Spikes

Here is the opening of this market report from Bloomberg, complete with their charts:

Global stocks keep on rising. The MSCI All Country World Index gained for an eighth day, the longest stretch of increases since February, as minutes from the Federal Reserve's September meeting bolstered the view interest rates won't budge until 2016. The Fed's healthy view of the domestic economy is tempered by external threats, like China's slowdown. The eight-day 8 percent rally is the biggest since December 2011. $3.2 Trillion of value has been added to global stocks in that period after the worst quarter in four years. European stocks gained for a sixth day, the longest winning streak since July 20.

Asian stocks are heading for the biggest weekly rise in almost four years as investors push back expectations for when the Fed will raise interest rates. The MSCI Asia Pacific Index has jumped 6 percent to the highest level since Aug.20. The move comes after the gauge sank 15 percent in the third quarter, the biggest drop in four years, after China devalued its currency. Now investors believe Chinese authorities will be forced to implement more measures to prop up its faltering economy. The region's best-performing equity index this week is Indonesia's Jakarta Composite Index, which has soared 20 percent.

A Bloomberg index tracking 20 emerging market currencies is on track for its best week in more than six years, rising 3.3 percent. It's been some turnaround from the third quarter when the gauge registered its biggest quarterly loss since 2011. Last quarter's biggest laggards - the Indonesian rupiah, the Russian ruble and the Malaysian ringgit - are this week's biggest gainers. Those three currencies have jumped 9 percent, 8 percent and 7 percent respectively as U.S. rate hike expectations get pushed back and oil rebounds. Any gains may prove fleeting. According to the latest analysts' forecasts, all 23 emerging market currencies tracked by Bloomberg are projected to weaken against the dollar by the first quarter because of the worsening global economic outlook.

David Fuller's view -

Investors benefitting from this sudden rally can be forgiven for rubbing their eyes and pinching themselves, fearing that they have just awakened from a nice dream, and now face more of the scary meltdown that had wiped many billions off stock market valuations. 

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October 08 2015

Commentary by David Fuller

Wealth Funds From Oslo to Riyadh Raid Coffers to Offset Oil Drop

Here is the opening of this informative article from Bloomberg:

From Oslo to Doha, Riyadh to Moscow, governments that rode crude’s historic rise to unprecedented wealth are now being forced to start repatriating their rainy-day funds just to make ends meet.

The halving of oil to less than $50 a barrel has the potential to alter one of the most powerful economic and political forces of the past half century: the rise of the petrostate. These countries led a surge in state investments in the U.S. and Europe that now totals about $7.3 trillion globally, according to the Sovereign Wealth Fund Institute.

During the last boom, the oil countries flaunted their wealth abroad by buying stakes in iconic companies such as Barclays Plc as well as trophy assets including Manhattan hotels, European soccer clubs and London luxury homes, often in the face of opposition from the local public. 

Such swagger is fading.

The biggest fund, Norway’s, this week said it expects to tap its $820 billion stockpile for the first time next year to balance its budget, following similar moves across the Persian Gulf and in Russia. If sustained, the withdrawals may be felt by investors the world over, according to Michael Maduell, president of the Las Vegas-based Sovereign Wealth Fund Institute.

David Fuller's view -

This may cause some minor turbulence in developed country bond, property and stock markets but the long-term net result is positive for countries which will benefit especially from lower Energy prices. 

However, the Middle East and not least Saudi Arabia has long had a large undereducated (except for religious studies) and untrained population, which has previously had little cause or encouragement to develop work ethics.  This is a recipe for unrest as the free benefits are reduced.  



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October 08 2015

Commentary by Eoin Treacy

SolarCity Unveils World's Most Efficient Rooftop Solar Panel, To Be Made in America

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

SolarCity will begin producing the first modules in small quantities this month at its 100 MW pilot facility, but the majority of the new solar panels will ultimately be produced at SolarCity’s 1 GW facility in Buffalo, New York. SolarCity expects to be producing between 9,000 - 10,000 solar panels each day with similar efficiency when the Buffalo facility reaches full capacity.

SolarCity’s panel was measured with 22.04 percent module-level efficiency by Renewable Energy Test Center, a third-party certification testing provider for photovoltaic and renewable Energy products. SolarCity’s new panel—created via a proprietary process that significantly reduces the manufacturing cost relative to other high-efficiency technologies—is the same size as standard efficiency solar panels, but produces 30-40 percent more power. SolarCity’s panel also performs better than other modules in high temperatures, which allows it to produce even more Energy on an annual basis than other solar panels of comparable size.

SolarCity initially expects to install the new, record-setting solar panel on rooftops and carports for homes, businesses, schools and other organizations, but it will also be excellent for utility-scale solar fields and other large-scale, ground level installations.

 

Eoin Treacy's view -

The low price of oil and other Energy commodities has taken a toll on the moveable feast of solar power breakeven calculations. The sector simply has to continually introduce more efficient products and there is good reason to expect it will. Solarcity’s announcement of a production-ready panel sporting 22% efficiency is great news provided the final announced price is competitive. In the lab efficiency rates of over 40% are achievable but it’s a big leap from a sterile environment to rooftops. This is the primary reason SolarCity’s announcement is important. 



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October 07 2015

Commentary by Eoin Treacy

DuPont Breaking In Two After CEO Exit Seen Raising Value 31%

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

DuPont shares surged Tuesday by the most in six years in anticipation that more value will be unlocked. The Wilmington, Delaware-based company said Kullman will be replaced later this month as both CEO and chairman on an interim basis by board member Edward Breen, who oversaw the dismantlement of Tyco International Plc.

Earlier on Monday, Trian Fund Management, the activist investor that argues DuPont would be worth more as two companies, announced it had added to its stake in the company.

In May, Trian co-founder Nelson Peltz led the firm in its proxy fight in a doomed attempt to get three board seats.

"It’s kind of bittersweet, because Trian is vindicated in some respects," said Hank Smith, who helps manage $6.5 billion as chief investment officer at Haverford Financial Services Inc.

in Radnor, Pennsylvania. "If DuPont had embraced Trian earlier on and welcomed Peltz on the board, Ellen Kullman would still be CEO."

 

Eoin Treacy's view -

Speciality chemicals is an amorphous terms used to describe businesses leveraged to everything from agriculture, Energy, healthcare, home improvement and anything in between. The drawdown in commodity prices affected at least two of those segments and the difficulties experienced by Latin American countries has been an additional headwind particularly for DuPont. 

One of the original reports on the potential of unconventional gas was written by analysts at Citigroup and titled “Shale Gas: a gamechanger for the chemical sector”. The boom in unconventional oil and gas drilling was a major benefit for chemical companies supplying the “mud” that lubricated the drill bit and keeps the fractures open so oil and gas can flow. The reduction in drilling activity has been an additional headwind and contributed to the relative underperformance of chemical companies. 

 



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October 06 2015

Commentary by Eoin Treacy

Musings From the Oil Patch October 6th 2015

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

The new Imperial Oil technology involves adding a solvent to improve the flow of oil to the surface as well as generators that burn less natural gas to supply the steam. What we understand about Imperial Oil’s new technology is that currently proposed oil sands projects could produce 55,000 to 75,000 barrels a day in oil output compared to their presently planned output of 30,000-40,000 barrels a day according to Mr. Krüger. As he was quoted during the presentation,

“This is bigger on a per phase basis than we’ve talked about in the past.” From Mr. Krüger’s viewpoint, this technology represents “a very large, long-term growth opportunity.” Even though the company seems satisfied with the new technology, it is not ready to move forward with some of these planned oil sands projects while management assesses their cost, possible changes to Alberta’s regulatory policies and the outlook for global oil prices.

Citi Research has prepared a chart showing its assessment of the impact of technological and economic cost reductions of various oil outputs between 2014 and 2015, based on assumed 2020 output contribution, due to the industry downturn. Most of the decline since 2014 is about $5 per barrel, although Gulf of Mexico costs may have declined by $7 a barrel and the shale formations by $10 a barrel. If Mr. Krüger’s assessment of the impact on output from Imperial Oil’s new technology is correct, then there would likely be a significant reduction in the cost of new oil sands output. According to the Citi Research chart, they estimate that oil sands currently cost between $80 and $100 a barrel. However, if the Imperial Oil claims are correct and can be implemented commercially, then a 30% output improvement might translate into $25-$30 per barrel cost reductions.

Obviously there are a number of assumptions that must be made in reaching this conclusion, including that the solvent-added SAGD process is not more costly than what is being done now and that additional output volumes require extensively larger facilities in order to handle them.
If you are Saudi Arabia and you have targeted new, large and long-term output sources such as oil sands and deep water oil in your price war, the prospect of their costs declining materially has to be unnerving. It has been our contention that Saudi Arabia’s target was these deposits, including Arctic output, and less about the domestic shale business. Why? The shale revolution is a “real-time” output, meaning that if producers are forced by economics to stop drilling, eventually oil prices will rise, drilling will resume, as will shale output, and the price cycle will start all over again.

 

Eoin Treacy's view -

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

Technological innovation continues apace and lower Energy prices only increase the incentive to develop solutions in order to ensure survival. North America represents an exciting Energy geography and the relatively low price of oil does not change that. On the other hand the continued development of new extraction methods may keep a lid on prices but will increase volumes. 



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October 01 2015

Commentary by David Fuller

Email of the day 1

On global stock markets (picked up from the website in response to Wednesday’s copy):

 

I don't get it. Oil prices are low. Interest rates remain low. When did those factors become negatives? We should be excited (I am).

The markets rose for four years unabated from a previous resting ledge. We are due for a rest (ranging). All of the demographic and technological factors David and Eoin cite remain in place. Demand for securities continues to rise globally, its only a matter of when, not if the markets resume a general upward slope.

Emerging market and Energy sectors are offering a once in a generation value proposition. 

All of this noise by the bears clearly rhymes with past exhortations that went unfulfilled. 

My two cents, not worried.

David Fuller's view -

Thanks for your interesting comments. 

I certainly have no vendetta against bears but when people miss a big move to the upside, they understandably have a vested interest in a significant downturn, so I particularly like your penultimate sentence above.  Markets are often very emotional, with people interpreting the crowd’s panic or euphoria as an economic indicator.  Accordingly, markets discount approximately eight out of the last one significant bear markets.



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September 30 2015

Commentary by David Fuller

Turn CO2 Into Cold, Hard Cash

Here is the opening of this interesting article from Bloomberg:

The world's biggest companies cite many reasons for cutting their climate pollution: It's good PR, it's even the law in many places, and not doing so contributes to the risk of global catastrophe. Here's one you don't hear so much. By blowing their carbon dioxide skyward, power plants are venting raw material and, by extension, a ridiculous amount of money. Waste is being wasted. All that carbon and oxygen must be good for something.

That's the premise of the XPrize Foundation's new Carbon Prize, a $20 million competition over five years to identify "high-value products" that can be made from captured power-plant CO2 emissions. The competition formally opened Tuesday with a six-month period for teams to register their projects that might involve biofuels, fabrics, pharmaceuticals, and building materials. Within prescribed limits, it doesn't matter what's made, as long as the CO2 is captured and turned into something people or businesses want to buy.

Competitors must make it through three judging rounds. The two main prizes of $7.5 million each will go to the teams that make the most of CO2 from coal and gas plants. A U.S. coal plant and Canadian gas plant will be named as the XPrize's test sites soon. The prize is sponsored by NRG Energy and Canada's Oil Sands Industry Alliance.

The guidelines rule out technologies that miss the spirit of low-carbon innovation. Trees, for example, have proven adept at catching carbon, but their core technology—photosynthesis—isn't new. "Enhanced oil recovery" is Energy-industry jargon for pumping CO2 into a well to drive up more oil. That's a marketable use of the gas, but in the service of burning more carbon. 

The Carbon Prize may be the most physically challenging competition yet. Not because it necessarily requires great exertion, but because of the actual physical chemistry of CO2 itself. Carbon dioxide is a very low-Energy molecule. It's spent fuel—the molecular equivalent of passing out from exhaustion after a long run. So to make CO2 into anything useful, you need to use lots of Energy. But producing Energy typically emits CO2, which the XPrize wants people to make into useful products, which requires Energy, which produces CO2 ….

David Fuller's view -

This competition is sponsored by the USA’s NRG Energy and Canada’s Oil Sands Industry Alliance.  They deserve any favourable publicity from this effort, and who knows, perhaps it will spark a sensible commercial idea which lowers CO2 emissions.  It is not a new idea – see Herbert Hoover’s sensible comments nearly a hundred years ago, quoted in the concluding paragraph of Bloomberg’s article.      



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September 30 2015

Commentary by David Fuller

Email of the day 2

BoE Governor Carney’s comments on Climate Risks:

David, Whatever one thinks of the evidence for climate change, warnings like this from Carney cannot help the case for holding oil and gas assets. And even if the climate change data proves illusory, the rapid advance in renewables (which grew in the UK to 25% of Energy production in the 2nd quarter) will inevitably hit oil and gas companies. What are your thoughts and suggested actions for investors?

David Fuller's view -

Thanks for the article on Carney’s views and also for your email.

No pun intended but this is quite a hot potato that you have lobbed in my direction.  What are my thoughts?  Regarding Carney, I am surprised by his comments which are certainly off piste for a central banker.  I could say the same for Pope Francis who frequently warns about climate change.

Do these gentlemen know more about climate change than the rest of us?  One might suspect or hope so, whether based on science or divine intervention, but they certainly have a bigger platform.  A sceptic might assume that they seek a larger topic beyond heaven and earth or monetary policy.  Meanwhile, investors will have noted that turbulent markets encourage apocalyptic forecasts.     

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