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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.

This item continues in the Subscriber’s Area.



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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. 

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



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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.

This item continues in the Subscriber’s Area. 



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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.   

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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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September 29 2015

Commentary by David Fuller

The Weekly View: Beginning To Buy Energy Stocks

My thanks to the team at RiverFront for the latest copy of their interesting letter.  Here is a brief sample:

Energy companies have only recently begun to take the necessary steps to bring Energy supply back into balance with Energy demand.  Despite Energy prices being at similar levels 12 months ago, Energy producers were optimistic that prices were likely to bounce back quickly, and thus were discouraged from making the drastic cuts that would have a significant impact on supply.  However, lower lows for oil prices in August prompted management teams to explore more drastic approaches to survive lower for longer pricing, including additional restructuring, rig count reductions, capital expenditures cuts, asset sales and mergers & acquisitions.  Put simply, we believe Energy producers have felt the pain and are now motivated to truly balance the crude market. 

David Fuller's view -

This is an interesting comment but I suggest that the mainly Western oil companies, which I assume they are referring to, are far from the biggest problem in term of the global oversupply of crude oil. 

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September 29 2015

Commentary by Eoin Treacy

How to Fix the Offshore Drilling Industry

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

The overwhelming consensus view is that “deepwater is dead” or structurally impaired. We strongly disagree. The tried and true path to long-term success in Energy investing is to “go where the oil is” and that is in deepwater where reserve additions have outpaced shallow water by 3.2x and onshore by 45% (1.3x excluding oil sands). Our field by field analysis suggests long-term (10 year) demand for 320 floating rigs (vs. 225 currently active and a total fleet – including expected newbuild deliveries - of about 385 today). The bad news is that near-term demand remains weak with a rig-by-rig analysis suggesting demand will bottom at 194 rigs in 2H ‘16. A similar analysis of the jackup market implies trough demand of 328 by YE ‘16 (vs. a fleet of about 570 rigs).

Reality bites: Industry to tackle structural supply issues
Rig attrition has begun to take hold with 43 floaters retired in the current cycle to date and an additional 28 floating units cold-stacked with most of those unlikely to return to the market. Although a significant increase relative to the last several years, these actions have only removed 14% of deepwater capacity (23% including stacked units) even as roughly 75 newbuilds remain on order so the fleet will still see net growth absent more aggressive action. The news is worse on the shallow water front, where only 52 units have been retired and 57 stacked (10% and 20% of the global fleet, respectively). With the oil price testing new lows again recently, backlog dwindling and hopes for a near-term demand recovery fading rapidly, the industry now seems more realistic about the need to take more decisive action on capacity reduction. We see scope for as many as 70 floaters and 110 additional jackups to exit the fleet over the next 12-18 months, although we believe the floater market will come into balance sooner given its better secular demand outlook, higher degree of consolidation and greater differentiation between newbuild and older units.

 

Eoin Treacy's view -

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

The decline in oil prices continues to take a toll on the drilling and services sector with a large number of consistent downtrends in evidence. Inevitably this is putting the most strain on the most highly leveraged operations and rationalisation is a virtual certainty the longer prices remains close to current levels. 



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September 22 2015

Commentary by Eoin Treacy

Musings from the Oil Patch September 22nd 2015

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

Other than public debt and equity, the E&P industry has also been seeking other sources of capital. Drawing down bank credit lines has been one avenue, but lower oil prices will mean reduced asset values, especially as some of the assets will be redlined because they have been in the undeveloped category for too long so will be considered uneconomic. With the upcoming bank loan redeterminations, we expect to see increased E&P sector financial stress. In March, the last time loan redeterminations were conducted, oil averaged $71 per barrel. Now, the average is $57 a barrel; helped by the spring run-up in oil prices. By the fourth quarter, it is possible the average oil price will be in the $40s. A 40% haircut in the borrowing base will impact 2016 E&P spending.

The E&P industry has also lived off its earlier production hedges. As a result, some companies were being paid in the $90s a barrel for their output, but most of those high-priced hedges are running out. An analysis by investment banker Simmons & Company International and quoted by The Wall Street Journal, cited 36 U.S. oil producers with hedges covering 33% of their 2015 output at an average of $80 a barrel. Next year, those companies only have 18% of their output hedged, and at an average price of only $67 per barrel. Those high-valued hedges during the first half of this year was a reason why layoffs and G&A cuts were not severe, if at all. Management teams’ days of living in a world of unreality is rapidly coming to an end, and the pain will be severe.

Another source of capital for the Energy business has been private equity - pools of capital that can be used to start new companies, buy companies on which to build much larger companies, and to provide capital for companies to grow. Data for the past three years (Exhibit 10) shows that private equity invested $43 billion in 2012, $36 billion in 2013, but only $11 billion in 2014. Private equity deals this year have been sparse as fund managers struggle to find attractive deals in an environment in which it is difficult to assess what companies are worth. That also explains why deal-making in 2014 was down sharply from the prior two years. 

As a result of the 2010-2014 period of high oil prices and expectations that these prices would only go higher in the future, private equity targeted the Energy business due to its large capital needs. Virtually every major private equity firm raised one or more Energy-focused funds. Those private equity firms who have ploughed the oil patch for years were easily able to raise large new funds off their successful track records. With billions of dollars sitting in these Energy-focused private equity funds, finding and executing deals has become a high-pressure effort. 

Increasingly, private equity managers are recognizing that this potential avalanche of capital seeking Energy deals is their biggest problem. It has, and is, leading to overvalued deals. As long as this money has to be put to work due to the mandates of the funds, the pain in the industry is likely to continue. The Energy business truly needs to have the capital flow turned off, not merely turned down. Only then can the industry washout occur and the healing begin. 

Eoin Treacy's view -

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

The Energy sector remains in a state of flux and the stress some of the more overleveraged companies are coming under has seen yields almost double in the last two years. BBB Energy 5-year yields are not at high absolute levels relative to history but the trend remains clear. 



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September 17 2015

Commentary by Eoin Treacy

Pure Energy Minerals drops the next lithium bombshell As Tesla seeks supply for its Gigafactory

This article by Peter Epstein for Mineweb may be of interest to subscribers. Here is a section: 

Stepping back for a moment, on September 3rd, Tesla’s Founder Elon Musk reiterated his commitment to source materials from Nevada. However, that pledge did not necessarily mean another sourcing deal, announced so soon, or that it would be for lithium. Other materials besides lithium will be required. Cobalt and graphite, (among others), will also be needed to feed Tesla’s massive giga-factory in Nevada. I find this agreement to be highly noteworthy in the sense that Tesla’s growing need for lithium, perhaps more so than that for cobalt and graphite, represents the single most important raw material need. I imagine that other lithium agreements will be signed in coming months. Without question, Nevada wants further lithium deals to come from Nevada.

Eoin Treacy's view -

The fall in oil prices has had a knock-on effect on most Energy related sectors as the relative economics of various alternatives have changed. Lithium miners have been no exception and this has been despite the fact lithium prices have not fallen. Demand for lithium-ion batteries in everything from consumer goods to cars and planes has helped fuel major investment and a large number of explorers are now listed. However securing an agreement to supply Tesla’s factory is a major coup for Pure Energy.



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September 16 2015

Commentary by Eoin Treacy

We are nowhere near peak coal use in India and China

This article by Frank Holmes appeared in Mineweb and may be of interest to subscribers. Here is a section

It’s possible that if China’s coal consumption dramatically declines, India will be there to fill the hole. Macquarie estimates that by 2025, India’s Energy demand will rise 71 percent, with coal taking the lead among oil, gas, hydro, nuclear and others. The south Asian country is already the second-largest importer of thermal coal, and it might very well surpass China in the coming years. Macquarie writes:

Although all Energy use will rise [in India], coal is the major theme as consumption and local production are both set to almost double by 2025 on the back of large-scale coal power plant construction plans.

The group adds that, unlike China, India has no present interest in reigning in its use of coal. Most emerging markets, India included, recognize that coal is an extremely affordable and reliable source of Energy, necessary to drive economic growth.

Even if these predictions don’t come to fruition, the consensus is that we haven’t yet seen peak coal use in Asia. Estimates vary depending on the agency, but everyone seems to agree that demand in the medium-term will rise before it retreats. A 2014 MIT study even suggests that Chinese coal consumption could rise more than 70 percent between 2012 and 2040.

 

Eoin Treacy's view -

North America and Europe engage in a great deal of navel gazing when it comes to climate change and yet US emissions have been falling because of natural gas boom and the EU has seen aggregate emissions decline not least because of its sluggish economic recovery. The main future contributors to carbon emissions are the up and coming developing economies. If governments are truly interested in tackling the issue, doing everything possible to help China and India migrate from coal is in everyone’s interest. This is no small task because above all else coal is cheaper now than it has been in a decade. 



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September 14 2015

Commentary by Eoin Treacy

Email of the day on the US rig count

The press has been touting the "sharp drop in rig counts" as evidence of an imminent slowdown in oil production, headlining off the drop of 18 rigs in the week ending 9/11. Now if we look at the facts, we are at 652 oil rigs versus 635 2 months ago. Last I checked, 652 is more than 635. Oil rigs dropped 10 in the past week. Gas rigs have been in a pretty clear, slow downtrend for most of this year.

Now of course a drop of 10 oil rigs in a week may sound like a lot to the untrained ear (which most journalists appear to have), but 10/662 = 1.51%, which is not exactly a blow-off-the-socks change. In fact, it is within the normal ebb and flow of wells being taken down to move to the next location, rigs offline for maintenance, etc.

I think the IEA's prediction of "slamming the brakes" on the production of shale oil (see http://www.ft.com/intl/cms/s/0/15e4dc9a-585e-11e5-9846-de406ccb37f2.html ) needs to be taken with a somewhat wait-and-see attitude. Low prices will ultimately bring down high-cost production, but economists' predictions about oil production costs just might have included too much sunk cost and not factored in enough efficiency gains in the oil patch. This just could further reinforce the notion that oil prices will stay lower for longer than most in the financial media expect.

Eoin Treacy's view -

Thank you for this informative email and chart contributed in the spirit of Empowerment Through Knowledge. Technological innovation is enhancing just about every area of our lives but its’ influence on the Energy sector is particularly poignant. 



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September 14 2015

Commentary by Eoin Treacy

Email of the day on LNG exports

As you know, Australian exports are based on building capacity to fulfil 'firm' long term 'take or pay' contracts. I anticipate some of the capacity will have to be mothballed rather than go to spot markets if the 'takers' default on the contracts. You do not mention Canada, where there are logistical problems and governmental changes threatening production for export.

Eoin Treacy's view -

Thank you for these relevant points in response to my piece on LNG on Friday. Considering the stress the Canadian Energy sector is currently under it is debatable whether West Coast export facilities will be built. This site from the British Columbia government highlights the fact that ground has not yet been broken on any of the proposed projects. 



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August 27 2015

Commentary by Eoin Treacy

Email of the day on oil and oil shares

Hope isn’t a strategy – but what can you tell me about this chart?   It’s the Canadian Energy index.  What signs should I be looking for?

Eoin Treacy's view -

This has been a very active week in just about all markets but the only emails from subscribers I received in the last two days were focused on the Energy market. I chose to publish this one because it’s from a normally very calm person but the stress he is feeling is evident in the wording. 



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August 26 2015

Commentary by Eoin Treacy

Email of the day on Royal Dutch Shell

Hi Eoin, I love my daily read of your great service.

What is your opinion on Royal Dutch Shell, I am under water by about 30% not counting dividends.

Eoin Treacy's view -

Thank you for this question which is sure to be of interest to other subscribers and I’m delighted you’re enjoying the service. The steep decline in a large number of sectors, particularly Energy has left a lot of people in a similar dilemma. My first thought is that with a share yielding 7.71% today it would be rash to ignore the dividend even if the yield was lower when you purchased it. 



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August 25 2015

Commentary by Eoin Treacy

Musings from the Oil Patch August 25th 2015

Thanks to a subscriber for this report by Allen Brooks for PPHB. Here is a section:

This analyst made a couple of other interesting observations. He said he questioned E&P management teams about their view of the level for oil prices that would generate returns similar to those earned when crude oil was at $90 a barrel and finding and development costs were much higher than today’s. In his view, the consensus was that $60-$70 a barrel is the “new $90 a barrel” oil given lower well costs and improved corporate efficiencies. He also said that producers acknowledged that returns were “skinny” with crude oil in the low $40s a barrel. We aren’t sure what “skinny” equates to, but we suspect not much profit, if any at all.

We were interested in his other observation, which dealt with how producers are coping with the current environment. He said that producers seemed to be reverting to the “1980’s playbook.” What does that mean? How about drilling within cash flow and attempting to hold production flat. What novel concepts! What someone who didn’t live through the ‘80’s and ‘90’s might not understand is that the playbook resulted from there not being cheap capital and private equity money available then. In fact, following the demise of Continental Illinois Bank in Chicago and Penn Square Bank in Oklahoma City, commercial banks almost outlawed Energy lending in the 1980’s as it was considered too speculative, so there was virtually no new capital available. Today, we live in a world driven by easy money policies globally, meaning zero interest rates, which contributed to the high oil prices of 2009-2014 and the surge in capital flowing into private equity funds. A recent quote from economist and money manager Gary Shilling highlights this phenomenon and its damage to the Energy industry. He said:

“The oil optimists noted that earlier high oil prices, aided by low financing costs, had pushed up production, especially among U.S. frackers. Low prices, they reasoned, would curb production, especially since fracked wells tend to be short-lived and the cost of drilling new ones exceeded the depressed prices. But a funny thing happened on the way to $80 oil: The rally stopped dead in its tracks at about $60 in May and June, then slid to the current $42, a new low. “Me? I'm sticking with my forecast of $10 to $20 a barrel.”      

 

Eoin Treacy's view -

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

This Service is not bullish of oil prices over the medium-term and we have been vocally proclaiming how much of gamechanger shale oil and gas are for years. However $10 - $20 is an aggressive forecast even in an environment where major producers such as Saudi Arabia and Iran are competing for market share and prices are working on a ninth consecutive week to the downside. 



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August 19 2015

Commentary by David Fuller

Global Companies Hurt by Slowing China

Here is the opening of this topical article by Nicole Bullock and Eric Platt of the Financial Times:

surprise devaluation of the renminbi has raised the stakes of an economic slowdown in China for global companies that have relied on the country as the engine of growth around the world.

All of that comes at a time when companies already have been buffeted by falling oil prices and a rising US dollar. Valuations, in the US at least, look stretched at 17 times for the S&P 500.

“We all knew that China’s economy was under pressure but the devaluation was an indication that it is worse than expected and that is a problem for corporate earnings,” says Nicholas Colas, chief market strategist at Convergex.

Blue-chip UK, US and eurozone companies in sectors long dependent on China, including carmakers, miners and luxury goods retailers, have endured the brunt of selling by investors this week. This comes when companies in the Energy, materials and industrials sectors have been lagging badly for much of this year, with falling commodity prices suggesting demand from China has slipped into a much lower gear.

“Companies with sales of 20 per cent or more to China have been penalised in the market, but so have those that are tied to commodity prices where demand from developing regions has been key to the former super cycle thesis,” says Tobias Levkovich, head of US equity strategy at Citi.

“First and foremost has been the idea that Chinese demand wanes and the world is left with a glut of production and inventory that causes price discounting for everything from drugs to electronics to cars (and well beyond just oil and iron ore), which compresses corporate profits worldwide,” he adds.

Now the question facing equity investors is whether China’s devaluation can help bolster overall growth and demand for the products and services sold by global companies from the US and Europe. While share prices were stabilising in Europe and the US on Thursday, many believe the pressure is not likely to let up soon.

“In Europe, they’ve been banking on their exports looking cheaper — 40 per cent of European gross domestic product is exports — and the problem is again the Chinese are jumping on board to drive growth through an increase in exports,” says David Lebovitz, global market strategist at JPMorgan Asset Management.

David Fuller's view -

Many investors are panicking over China’s economic slowdown and stock market volatility.  That said, the Shanghai A-Shares Composite Index is still higher on the year by 13.82% in US Dollar terms.   

This item continues in the Subscriber’s Area.



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August 13 2015

Commentary by Eoin Treacy

Retail Sales Show Broad Gain as U.S. Consumers Spur Growth

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

Amazon.com Inc. held a Prime Day on July 15 to mark its 20th anniversary, featuring reduced prices on television sets, lawnmowers and other goods. The company said the promotion helped to drive orders surpassing Black Friday, an annual U.S. sales event following the Thanksgiving Day holiday that kicks off the year-end shopping season.

The job market is giving consumers the wherewithal to keep spending. Payrolls grew in July by 215,000 workers following a 231,000 gain in the prior month, and the jobless rate held at a seven-year low of 5.3 percent.

Eoin Treacy's view -

Low Energy prices and cheaper imports have acted as an enabler for consumers which has helped Consumer Staples shares retain a position of relative strength. However, that does not negate the fact the retail sector remains intensively competitive particularly between bricks and mortar stores and online platforms. This has forced the former to open e-commerce sites while some youth oriented brands now maintain physical locations so potential customers can try on items but then buy them online. 



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August 12 2015

Commentary by Eoin Treacy

Musings From the Oil Patch August 12th 2015

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

We are not convinced that the stock market needs higher commodity and oil prices in order to continue to rise. In our view, the shift in the direction of commodity prices since 2010 reflects a transfer of the benefits of higher commodity production from producers to consumers. That means basic industries and consumers should be the beneficiaries of falling commodity prices. Long-term, commodity prices should climb in response to increased consumption, which will drive up corporate earnings that are necessary to support higher share prices. A higher stock market can come without oil prices reaching new all-time highs, but they need to be higher than current levels for Energy company earnings to rebound, that is unless substantial operating costs can be removed from the Energy business. The Energy business may get both, and investors will benefit from increased share prices. Unfortunately, this isn’t likely until sometime in 2016.

Eoin Treacy's view -

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

It strikes me as odd that anyone thinks you need a high oil price to support a bull market in equities outside the Energy sector. The stock market does not need high oil prices to rally but it does need the perception that the future will be better than the past to justify progressively higher prices. Admittedly this is often associated with higher Energy demand.

The concentration of revenues in the Energy sector that occurred as a result of the high Energy price environment is over. This has acted as an incentive for mergers. Consumers will be medium-term beneficiaries as Energy savings accrue and spending power improves. But what about the short term?

 



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August 12 2015

Commentary by Eoin Treacy

MIT designs small, modular, efficient fusion power plant

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

The new reactor is designed for basic research on fusion and also as a potential prototype power plant that could produce 270MW of electrical power. The basic reactor concept and its associated elements are based on well-tested and proven principles developed over decades of research at MIT and around the world, the team says. An experimental tokamak was built at Princeton Plasma Physics Laboratory circa 1980.

The hard part has been confining the superhot plasma — an electrically charged gas — while heating it to temperatures hotter than the cores of stars. This is where the magnetic fields are so important — they effectively trap the heat and particles in the hot center of the device.

While most characteristics of a system tend to vary in proportion to changes in dimensions, the effect of changes in the magnetic field on fusion reactions is much more extreme: The achievable fusion power increases according to the fourth power of the increase in the magnetic field.
Tenfold boost in power

The new superconductors are strong enough to increase fusion power by about a factor of 10 compared to standard superconducting technology, Sorbom says. This dramatic improvement leads to a cascade of potential improvements in reactor design. 

 

Eoin Treacy's view -

This is a difficult time in markets and some caution is warranted however short-term volatility has no effect on the rate of technological innovation that remains perhaps the most bullish medium-term consideration for investors. Economic development is predicated on access to abundant, reasonably priced Energy and fusion technology represents a powerful potential enabler which is why it is so exciting. We will always need more Energy and the challenge is how to generate it as cleanly as possible. 



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August 11 2015

Commentary by David Fuller

The Weekly View: Oil Sector: Give It Time

My thanks to Rod Smyth for his excellent timing letter, published by RiverFront Investment Group.  Here is a brief sample:

When we look at their price patterns, there is some technical support at current levels for both [crude oil and oil shares] (see horizontal lines above).  Sentiment in the short term is getting close to a pessimistic extreme (see Weekly Chart below), but the primary trends (not shown) are still firmly down.  Interestingly, our chart above shows the Energy sector’s relative performance has clearly broken below its March low, whereas oil prices have not.  This observation suggests to us that Energy investors are now coming to terms with the idea of lower oil prices for a longer period of time.  We think they are right, and the risk for oil prices is that they ultimately break down to a lower low, potentially even re-testing the 2008 lows in the mid-to low-$30s price range.  Should that occur, the fundamental case for a longer term bottom would be more compelling as it would likely solicit both a supply and a demand response.  Our current fundamental view on oil prices is that a trading range is forming with an upside cap somewhere between $60 and $70, which is where the short-term supply from US producers will increase.  As yet, we do not have a strong fundamental view regarding the bottom of the range.  In the meantime, we suggest patience.  

David Fuller's view -

The key variable with any commodity is usually supply.  Currently, the world is awash with oil.  Traditional producers did not anticipate the technological developments, including fracking, which have produced additional supplies of crude oil.  Shocked by their significant loss of revenue, they have responded by increasing production.  The Saudi’s, in particular, are waiting, expecting, hoping… that higher-cost production slumps. 

This item continues in the Subscriber’s Area, where The Weekly View is also posted.



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August 07 2015

Commentary by David Fuller

Saudi Arabia May Go Broke Before the US Oil Industry Buckles

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

If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.

The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states.

The Saudis took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn.

Bank of America says OPEC is now "effectively dissolved". The cartel might as well shut down its offices in Vienna to save money.

If the aim was to choke the US shale industry, the Saudis have misjudged badly, just as they misjudged the growing shale threat at every stage for eight years. "It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run," said the Saudi central bank in its latest stability report.

"The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience," it said.

One Saudi expert was blunter. "The policy hasn't worked and it will never work," he said.

By causing the oil price to crash, the Saudis and their Gulf allies have certainly killed off prospects for a raft of high-cost ventures in the Russian Arctic, the Gulf of Mexico, the deep waters of the mid-Atlantic, and the Canadian tar sands.

Consultants Wood Mackenzie say the major oil and gas companies have shelved 46 large projects, deferring $200bn of investments.

The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek Energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year - and not only by switching tactically to high-yielding wells.

Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. "We've driven down drilling costs by 50pc, and we can see another 30pc ahead," said John Hess, head of the Hess Corporation.

It was the same story from Scott Sheffield, head of Pioneer Natural Resources. "We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days," he said.

The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. "The freight train of North American tight oil has kept on coming," said Rex Tillerson, head of Exxon Mobil.

David Fuller's view -

The Saudi’s have or had larger reserves from the sale of conventionally produced oil and gas than other Energy exporters but they are all in trouble. 

The first remarkable fact about US shale oil and gas production that we are hearing about more frequently is the speed and efficiency with which this technology has developed, significantly lowering costs in the process. 

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



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August 07 2015

Commentary by Eoin Treacy

Randgold riding gold price fall well as it bucks the peer trend

This article by Lawrie Williams for Mineweb may be of interest to subscribers. Here is a section: 

Bristow was preceded at the presentation by Randgold Chairman, Chris Coleman, who reminded those present that Randgold was formed almost exactly 20 years ago when the gold price was at a virtual all-time low. The point here being that the current low gold price is not as bad as it was back then, and Randgold has thrived since its very beginnings, in both lower and higher gold price environments.

Bristow continued on the same theme, saying that in terms of the gold price in real terms, Randgold was nearly back where it started! He re-iterated the company has always followed a basic strategy that allowed it to be able to continue to build, while many of its peers were still trying to figure out how to survive in the current gold price environment. “I’ve always tried to do the opposite to the industry and grow in the troughs,” Bristow said to Richard Quest of CNN. Randgold has not wavered from its strategy of only developing good-sized projects offering strong returns at $1000 gold and this policy has held it in good stead.

As far as the Q2 figures were concerned, not surprisingly, Bristow tended to dwell more on the positive aspects of the results. These included a solid all-round performance from its operations, with improvements in grade, throughput and recovery, leading to a new gold production record and a higher profit compared with Q1 in the face of a declining gold price. 

 

Eoin Treacy's view -

Gold miners are now trading at around the same levels relative to the gold price as they did before the commodity bull market. This highlights just how unsuccessful the sector on aggregate has been in controlling cost inflation. However as Energy prices pull back and wage inflation moderates, or even contracts, the ability of miners with reasonable debt loads to prosper should improve. This means we can expect some wide variation in returns between miners. 



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August 06 2015

Commentary by Eoin Treacy

California Drivers Get No Joy From Oil Rout as Pump Prices Rise

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

The premium that Southern California drivers are paying over the national average is at its highest ever, Jamie Court, president of the nonprofit Consumer Watchdog, said at a news conference in Los Angeles Wednesday. He was joined by billionaire environmentalist Tom Steyer.

“The Golden State is getting gouged,” Court said. “The money that’s being made from the pockets of California gas consumers is lining the pockets of the oil refiners.”

California-blend gasoline is produced by refineries within the state and in a few other parts of the U.S. and the world.

Output of the blend by in-state refineries dropped to 6.5 million barrels in the week ended July 24, California Energy Commission data show.

While the refinery fire has contributed to high California pump prices, there are other factors such as the second-highest gasoline taxes in the country and environmental rules that boost costs, Braden Reddall, a spokesman at Chevron Corp., said in an e-mail.

“While it is easy for groups like Consumer Watchdog and individuals like Tom Steyer to take one factor in our earnings out of context, what can’t be taken out of context is the fact that many policies backed by Steyer are already increasing fuel prices for California consumers,” Reddall said.
Gasoline Cargoes

The high pump prices are temporary and should decline as gasoline cargoes arrive in greater numbers from abroad, Allison Mac, West Coast petroleum analyst at Gasbuddy, said in a phone interview Wednesday.

“Prices should be dropping at a higher rate than we have been seeing and that’s because of the imports,” she said. “The last couple of days, massive cargo ships arrived alleviating what was causing the prices to spike.”

 

Eoin Treacy's view -

At Costco, which is about the cheapest sellers of gasoline, prices have fallen 40¢ per gallon in the last five days which is about 10%. This suggests the supply shortage which has kept prices high is easing. While competition from imports may represent a challenge for refiners the continued weakness in oil prices is probably a more important factor.  



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August 03 2015

Commentary by David Fuller

California Has a Plan to End the Auto Industry as We know It

Here is the opening of this informative article from Bloomberg:

Sergio Marchionne had a funny thing to say about the $32,500 battery-powered Fiat 500e that his company markets in California as “eco-chic.” “I hope you don’t buy it,” he told his audience at a think tank in Washington in May 2014. He said he loses $14,000 on every 500e he sells and only produces the cars because state rules re­quire it. Marchionne, who took over the bailed-out Chrysler in 2009 to form Fiat Chrysler Automobiles, warned that if all he could sell were electric vehicles, he would be right back looking for another govern­ment rescue.

So who’s forcing Marchionne and all the other major automakers to sell mostly money-losing electric vehicles? More than any other person, it’s Mary Nichols. She’s run the California Air Resources Board since 2007, championing the state’s zero-emission-vehicle quotas and backing Pres­ident Barack Obama’s national mandate to double average fuel economy to 55 miles per gallon by 2025. She was chairman of the state air regulator once before, a generation ago, and cleaning up the famously smoggy Los Angeles skies is just one accomplish­ment in a four-decade career.

Nichols really does intend to force au­tomakers to eventually sell nothing but electrics. In an interview in June at her agency’s heavy-duty-truck laboratory in downtown Los Angeles, it becomes clear that Nichols, at age 70, is pushing regula­tions today that could by midcentury all but banish the internal combustion engine from California’s famous highways. “If we’re going to get our transportation system off petroleum,” she says, “we’ve got to get people used to a zero-emissions world, not just a little-bit-better version of the world they have now.”

David Fuller's view -

This is tough love for automobile companies.  They will struggle to adapt and the costs will be high, at least initially, as we know from Sergio Marchionne’s remarks above.  However, cleaning up our planet has to be one of our most important policies.  It is not only a measure of our civilization, but also a key to our species’ long-term survival.

Mary Nichols is smart, successful and growing influence internationally.

Here policy on fuels is another long-term blow for the crude oil industry.     



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August 03 2015

Commentary by Eoin Treacy

Blue Chip Yielding 5% Beckons Daredevils to Catch Falling Knife

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

After reporting its lowest profit since 2009 and cutting in half its plans for buybacks this quarter, Exxon Mobil’s vice president of investor relations Jeffrey J. Woodbury told analysts on a conference call: ‘‘Fundamentally, we’re committed to our shareholders to continue to provide a reliable and growing dividend.”

Said Chevron Corp. chief financial officer Patricia E. Yarrington on her company’s earnings call: “We said we would cover the dividend from free cash flow in 2017. We stand by that commitment.”

Chevron is paying almost 5 percent of its share price in dividends, the most since 1992 and near the highest above 10- year Treasury yields in data going back to 1991. It’s one of 19 Energy companies in the S&P 500 with dividend yields above 10- year notes, and in recent weeks it exceeded Verizon Communications Inc. as the highest yielding blue chip in the Dow Jones Industrial Average.

Can’t you almost taste the salt-water taffy, kids? Like others who have addressed the “are we there yet” question in recent months, Martin Adams at Wells Fargo offers a less-than-satisfying answer: not quite yet, kids.

 

Eoin Treacy's view -

The Energy sector offers an interesting perspective on the motivations of investors in purchasing shares over the last number of years. Often the size of the buyback program has been a more alluring factor than the dividend. The low interest rate environment has played a role in this preference and helps to throw light on why the security of Energy companies’ dividends are receiving less attention than the fact that they will be buying less of their shares. 



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July 30 2015

Commentary by David Fuller

How Cheap Oil Is Fueling a Surge In New Factories

Here is the opening of this topical article from Bloomberg

America's Energy rebirth is the gift that keeps on giving for the economy. But this year, it's more about construction than drilling holes in the ground.

While the collapse in oil and gas prices since the middle of last year caused Energy companies to slash investment in oil wells, Thursday's report on second-quarter GDP showed an interesting dynamic taking shape — investment in factories has been running full bore.

It may be surprising on the surface, given that manufacturing has simmered down this year on the heels of a weaker global economy, but spending on all types of production facilities increased at a 65 percent annualized pace in the second quarter. That was almost enough to offset a 68 percent plunge in investment in wells and mines that marked the biggest drop in 29 years.

Outlays for factory-related structures jumped even more from January through March -- surging at a 95 percent pace. Over the last four quarters, investment in plants increased an average 64 percent, the strongest since records began in 1958.

David Fuller's view -

We have heard far more about slowdowns in the oil and gas industries, and obviously not just in the USA.  However, is this surge in factories evidence that the benefits of cheaper Energy are now beginning to be realised? 

This item continues in the Subscriber’s Area.



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July 30 2015

Commentary by Eoin Treacy

Thync review: Where we just say yes to a drug-like, brain-zapping wearable

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

The key is the locations of the pads: Thync believes it's found the right target areas to tweak your brain's natural stress responses in one direction or the other. One strip is designed to produce a calming effect ("calm vibe") while the other strip makes you feel more alert ("Energy vibe"). And each "vibe" also has three sub-categories within it, varying in intensity and length of time.

It's like choosing a workout program, only instead of doing squats or lunges, the technology does the work for you. You just sit there and enjoy the results.

If this all sounds pretty far-out, like something a burned-out space junkie would be using in an 80's-era sci-fi novel, we completely understand. But for me, it works exactly as advertised, either relaxing or energizing me (or both) – not only while I'm using it, but for several hours afterwards.

Skeptics will also be quick to question whether Thync is just an expensive placebo effect. And while this is only one person's experience and opinion – take it as you will – I don't see how there's any way that's the case with me. If this is a placebo, then all the pot, caffeine and meditation I've ever tried must be as well.

Eoin Treacy's view -

This product would appear to claim many of the same benefits as electroshock treatment but with more nuanced application and without the amnesia associated with the more violent treatment. Thync is still a privately held company but if the product does as it says and represents a non-chemical treatment for stress and lack of motivation then an IPO will be a potentially attractive proposition. 



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July 28 2015

Commentary by Eoin Treacy

Musings from the Oil Patch July 28th 2015

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

The scenario Mr. Faber outlines reflects one of our underlying beliefs, which is that the commodity boom of the first decade of the new century has spurred a significant commodity output expansion, fueled by the easy money policies of the United States, and now followed Europe, Japan and China. The capacity expansion is leading to a long-term decline in commodity prices that will benefit consumers rather than producers. This trend is long-term, and at times may appear not to be working because of near-term news and economic events. However, over 5- and 10-year periods, macro trends will drive investment returns. 

In a presentation we gave at a 2010 Decision Strategies Oilfield Breakfast meeting, we offered this view on the macro trend for Energy. We suggested that the past trend that benefitted Energy producers would shift to benefitting Energy consumers. For example, petrochemical companies benefit from lower-priced and readily-available natural gas and natural gas liquids supplies while producers struggle with extremely low natural gas prices. In that presentation, we attempted to crystalize our view by suggesting an investment trade for the next decade even though we were no longer in the business of researching and recommending stocks at that time. Our suggested trade was to buy Honeywell (HON-NYSE) and sell ExxonMobil (XOM-NYSE). THIS SHOULD NOT BE CONSIDERED AN INVESTMENT RECOMMENDATION.] We decided to see how this trade has developed. The chart in Exhibit 9 shows the stock prices for the past five years, in which Honeywell has outperformed ExxonMobil. 

Our point in bringing up this trade is to highlight that what often appears evident in the near-term about industries and companies often changes as time enables new fundamentals to play out. In this case, remember that in 2010 the Energy industry had just emerged from the 2008 financial crisis and 2009 recession that cut Energy demand and caused oil and gas prices to collapse. In 2010, oil prices had rebounded and were on their way to multiple years of oil prices of $100 a barrel. Remember when the head of Chevron (CVX-NYSE) described $100-a-barrel oil as “the new $20-a-barrel oil”? Presently, that assumption appears questionable, but it is quite possible the statement may still prove accurate. If not, then the future for oil and gas will not be like the past. The challenge is to determine what the future might look like and how best to capitalize on changing Energy industry and investment trends. 

Eoin Treacy's view -

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

The Supply Inelasticity Meets Rising Demand bull market that began in 2002/2003 succeeded in delivering additional supply and perhaps more importantly the capacity to increase supply. More than any other factor this has contributed to the decline in prices evident in the industrial metal complex as well as Energy futures. 

For nearly a decade David and I have been banging the drum that unconventional oil and gas would be game changers for the Energy sector and that consumers would be the greatest beneficiaries. Nothing has happened to change that view.  

 



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July 27 2015

Commentary by David Fuller

Martin Spring: On Target: A European Success Story

My thanks to this knowledgeable and highly experienced author for his perspective on the global financial scene.  This issue opens with a good look at Denmark, an outstanding performer among European stock markets.  Here is the beginning of a topical section: Why Global Economic Growth Is Sluggish

There’s bullish talk about a coming pick-up in global economic growth, but for the moment, the signals are negative. Trends in the global economy look increasingly ominous.

Global trade is sluggish. In the first four months of the year, it rose only 2 per cent in volume terms, fell 12 per cent in dollar terms, year-on-year. Exports of Asian countries that are particularly sensitive indicators are looking awful.

Investment in expanding productive capacity is weak. The gap between new orders and stocks held by manufacturers is the poorest in three years.

Inflation is trending downwards in the US, Europe, China and Japan, with the rise in consumer prices in purchasing-power terms down over the past two years from 3 per cent to 1.2 per cent.

The OECD – the think-tank of mature economies – has cut its forecast for growth this year from 3.7 per cent to 3.1. The US is only expected to grow 1.1 per cent according to the Atlanta Fed’s latest GDP Now model. Europe and Japan are forecast to deliver minimal growth, while the most dynamic constituent of the world economy, China, is losing momentum.

Of course, there are some positive factors to counter the gloom. The fall in oil prices, by improving users‟ spending power, is adding 0.25 percentage points to economic growth. Central banks show no sign of retreating from their extreme money and credit creation policies to stimulate growth. In the US unemployment continues to fall, wage gains have started to gain traction, the housing market is looking better.

David Fuller's view -

This is an interesting section and Martin Spring gives plenty of reasons why he still thinks global GDP growth will remain weak for many more years.  He could be right and obviously no one knows for sure.  I have repeatedly said in recent months that if may take two or three more years before we see a clear improvement in global growth.  Fortunately, the more enlightened governments and central bankers understand the challenge.  They are also addressing it, from the USA to India and obviously many more countries. 

They are also doing so in an environment of globalisation and accelerating technological innovation.  These changes are not without significant challenges, but the long-term benefits are likely to be far greater.  We already see this in so many areas, from the development of increasingly influential corporate Autonomies, to lower Energy costs, and previously unimaginable developments in biotechnology.  This is not just a limited or theoretical net gain for mankind.  Look at the increasing growth in the world’s middle classes over the last decade and counting.         

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



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July 27 2015

Commentary by Eoin Treacy

Could Next-Gen Reactors Spark Revival In Nuclear Power?

Thanks to a subscriber for this informative article from National Geographic focusing on next generation nuclear. Here is a section: 

“We’ve been talking with the national labs about it,” she says, noting the Department of Energy has a new loan guarantee program for advanced nuclear reactors. “There’s really good buy-in from DOE for developing a wide range of technologies.”

Even if all goes well, Dewan says, it will take at least a decade to develop a commercial molten salt reactor. She’s optimistic it will happen and welcomes the work of other nuclear startups.

“It’s so cool how much new development is occurring,” says Dewan, the grown-up version of the sixth grader who managed to produce light by connecting a water wheel to a generator. “It makes me excited for the industry.”

 

Eoin Treacy's view -

I posted a similar article from the Brookings Institute in February  which also talked about the potential of new reactor designs to change the nuclear industry beyond recognition. These are big ideas and will require big money to help realise them but the potential for a truly ground breaking innovation is worth the investment. The problem right now is that there is not a great deal of appetite for Energy investment in any shape as oil prices trend lower and budgets are slashed.  



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July 24 2015

Commentary by Eoin Treacy

India and the Iran deal

This article by Tanvi Madan for Brookings Institute may be of interest to subscribers. Here is a section:

In some ways, India has been preparing for a deal for several months, re-engaging Iran at the highest levels. Since February, the Indian national security advisor, transport minister and foreign secretary have traveled to Iran, and the foreign minister intended to do the same until her meeting was postponed. Most recently, Prime Minister Narendra Modi met with President Hassan Rouhani on the sidelines of the Shanghai Cooperation Organisation summit in Ufa, Russia last week. He reiterated an invitation for Rouhani to visit India and said he looked forward to visiting Iran as well.

India never stopped engaging with Iran and some of the recent trips may have taken place even in the absence of the deal. There are certain imperatives for the relationship that make it important for India regardless (mentioned below). Furthermore, after spending its first year focused on India’s immediate neighborhood, the Asia-Pacific and the G-7, the Modi government has made clear its intention to “look west” over its second year, including with high-level trips to Central Asia (completed), Israel, Palestine, Jordan, and Turkey (for the G20 summit). This engagement becomes easier and more crucial for Delhi with the Vienna deal, which has implications for India in the Energy, economic and geopolitical spheres.

And 

Indian oil and gas companies have been active in Iran in the past – albeit not without problems – and they will likely consider returning. State-owned oil and gas company ONGC has been trying to win the rights to develop a block in the Persian Gulf that it had discovered years ago. A delegation of petroleum ministry and state-owned Energy company officials visited Iran in the spring to explore other opportunities. In the private sector, Reliance Industries, which had investments in and exported refined products to Iran, might also take another look at upstream projects and the possibility of resuming exports of petroleum products. At its peak in 2008-09, India was exporting over $1 billion worth of petroleum products to Iran; after Reliance stopped exporting, there was a sharp decline in that figure to less than $50 million in recent years.

 

Eoin Treacy's view -

As a major consumer of Energy products and with very little in the way of domestic resources India has had little choice but to engage with Iran throughout its period of isolation. Iran will be keen to develop its export markets in order to boost income and potentially displace some of its regional competitors. Both China and India represent obvious growth markets. 



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July 23 2015

Commentary by David Fuller

Oil Rigs Left Idling Turn Caribbean Into Expensive Parking Lot

Here is the opening of this interesting article from Bloomberg.

Imagine parking your $300 million boat for months out in the open sea, with well-paid mechanics hovering around it and the engine running.

The Gulf of Mexico and the Caribbean Sea have become a garage for deepwater drillships -- at a cost of about $70,000 a day each. It’s either that or send your precious rig to a scrapyard.

The dilemma underscores how an offshore industry that geared upfor an oil boom is grappling with a bust. Rig owners are putting equipment aside at unprecedented numbers as customers including ConocoPhillips pull back from higher-cost deepwater exploration. That’s helped make Transocean Ltd. and Ensco Plc two of the three worst performers in the Standard & Poor’s 500 Index over the past year.

“Most contractors have never seen an environment like this, where demand is falling as quickly as it is,” David Smith, an analyst at Heikkinen Energy Advisors in Houston, said in a phone interview. “It’s been a big headache, and the problem is that we’re not halfway through.”

A growing glut of newly built exploration vessels looked worrisome enough before the oil rout. Now it’s beginning to look disastrous.

Shipyards continue to roll out new units to meet orders made during the boom, but the rig providers may not need them anymore. As contracts expire, many producers may not renew them, and some are being canceled.

David Fuller's view -

A big problem for all crude oil producers is the speed with which the oil price slumped.  Of course it has happened before and the plunge was even more dramatic in 2008.  However, prices recovered relatively quickly because OPEC producers reduced supplies and others followed this lead. Speculators also bought crude oil.

This item continues in the Subscriber’s Area.



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July 23 2015

Commentary by Eoin Treacy

Financial Insight: MLPs and the M&A Marketplace

This is an informative article by Jeff Kramer and may be of interest to subscribers. Here is a section: 

All that being said, it is somewhat surprising that the wholesale-related MLP stock prices are soft, despite decent margins and overall stable fuel demand and strong profitability.  For example, CrossAmerica Partners LP (linked with CST) is down 29% from last year's high, strong Global Partners LP is down 26%, and Sunoco LP is down 38%.

Granted, equity supply continues, as indicated by the initial public offerings of GPM Investments and Empire Petroleum Partners. However, these are relatively small equity offerings of $100 million apiece, not normally enough to kill the overall equity side, unless the demand for these equities has tapered off considerably. What might be wrong with this seemingly good picture for downstream MLPs? Let me offer some possibilities:

Oil prices. Should oil prices drop much further than now assumed by the marketplace, all downstream petroleum margins could suffer over time. Most vulnerable might be U.S. refiner margins, which are currently “to the moon,” because of the wide WTI-Brent crude-oil spread and the lunacy that U.S. producers cannot export their crude oil, yet U.S. refiners can export products at world-market prices--ah, heaven! Lower oil prices could impact margins in general as working capital requirements decline, and, more importantly, the 1% discount for prompt pay offered by branded refiners becomes worth less to middleman distributors. Perhaps Wall Street simply feels the “bloom is off the rose” for anything oil related for now.

Are purchase multiples too high? There has been spirited competition for M&A deals from MLPs, but equally from refiner-marketers such as Marathon/Speedway and Shell, as well as from many solid retail oriented players who want to use their strong cash flows and credit lines to expand, yet find organic growth too slow. Thus, there is a huge urge to merge by many players, as on Wall Street in general these days. MLPs have the absolute need to grow their dividends but, depending on their complicated structures, have quantifiable EBITDA multiple limits as to what they can pay and still have the acquisitions be accretive to earnings. And, as we all know, not all acquisitions work as planned, so the need can increase to acquire more to stay ahead of earnings. Many are fortunate because the interesting web of MLPs, general partners, sponsors, long-term financing vs. short-term financing, and lines of credit give them a smorgasbord of financing options while most interest rates are at historic lows. It’s a chief financial officer's best dream--or nightmare.

Interest rates. For whatever reason, unforeseen right now, might interest rates go higher than anticipated?

 

Eoin Treacy's view -

Selling pressure in the Energy sector has been indiscriminate with major producers, service companies and pipelines deteriorating. A great deal of bad news is being priced in, not least since oil prices have so far failed to recover. An additional question on many minds will be whether Saudi Arabia will be more or less likely to continue to pump record volumes with the removal of sanctions on Iran. 



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July 22 2015

Commentary by David Fuller

Speculators Smash Gold as Dollar Squeeze Tightens

Here is the opening of this interesting column by Ambrose Evans-Pritchard for the Daily Telegraph:

Powerful speculators have launched an unprecedented attack on the world gold market, driving prices to a five-year low as commodities wilt and the US Federal Reserve prepares to tighten monetary policy.

Spot prices slumped by more than 4pc to $1,086 an ounce in overnight trading after anonymous funds sold 57 tonnes of gold in Shanghai and New York, choosing the moment of minimum market liquidity in what appears to have been a synchronized strike intended to smash confidence.

Spot prices slumped by more than 4pc to $1,086 an ounce in overnight trading after anonymous funds sold 57 tonnes of gold in Shanghai and New York, choosing the moment of minimum market liquidity in what appears to have been a synchronized strike intended to smash confidence.

Ross Norman, a veteran gold analyst at brokers Sharps Pixley, said sellers dumped 7,600 contracts covering 24 tonnes on the Globex exchange in New York in a two-minute span after it opened late on Sunday night.

A further 33 tonnes were sold at almost exactly the same time in Shanghai. The combined hit of 57 tonnes in such a short period is an extraordinary event in the world’s relatively small gold market.

“They choose the optimal moment in the early morning and when Japan was closed for a holiday to get the biggest bang for the buck. It was clearly ‘short’ traders using leverage to trigger (technical) stops,” he said.

The price later regained some of its ground, allegedly as the profiteers cashed in jackpot gains on options that they also had. “It was a trade within a trade,” said Mr Norman.

The slide came as the Bloomberg commodity index hit a 13-year low, dragged down by the slump in base metals and Energy. Gold has fared better than other commodities over recent months - trading on its safe-haven status during the Greek crisis and China’s equity crash - but it now risks being sucked into the vortex as well.

Michael Lewis, commodities chief at Deutsche Bank, said the “fair value” for gold is around $750. This is based on an index of eight indicators, such as oil, copper, income per capita and equity prices, that dates back to the early 1970s. Gold tends to “mean revert” over time.

David Fuller's view -

This is one of the best articles on gold that I have seen for a very long time.  I commend it to all subscribers and have also posted a PDF version in the Subscriber’s Area for your convenience. 

The latest bear raid for gold described above is fascinating.  The simultaneous selling of 57 tonnes, of which 24 tonnes were on the Globex exchange in New York, and 33 tonnes in Shanghai, was a massively well organised raid. 

Moreover, in China’s command economy, I assume that the Shanghai sale could not have occurred without government knowledge and probable participation.  This is very likely because the sale came shortly after China’s central bank issued the suspect and bearish figure of 1,658 tonnes in bullion reserves. 

This detailed and chart-illustrated analysis continues in the Subscriber’s Area, where a PDF of The Telegraph article is also posted.  



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July 21 2015

Commentary by David Fuller

Commodity Rout Worsens as Prices Tumble to Lowest Since 2002

Here is the opening of this report from Bloomberg:

The rout in commodities deepened with prices touching the lowest since 2002 as the prospect of higher U.S. interest rates sent gold tumbling.

Raw materials are losing favor with investors as the dollar gains amid signals from Federal Reserve Chair Janet Yellen that the central bank may raise rates this year on the back of an improving U.S. economy. Higher borrowing costs curb the attractiveness of commodities such as gold, which doesn’t pay interest or give returns like assets including bonds and equities.

The Bloomberg Commodity Index dropped as much as 1.4 percent, falling for a fifth day in the longest stretch of declines since March. Gold futures sank to the weakest in more than five years while industrial metals, grains, Brent crude and U.S. natural gas also slid as a measure of the dollar climbed to the highest since April 13.

David Fuller's view -

Expectations for global GDP growth are cautious for the second half of 2015, not least because of slumping commodity prices.  However, growth could also improve given stimulative monetary policies and cheaper Energy prices at least six-and-a-quarter years after the worst credit crisis recession since the 1930s.  It usually takes at least this long for economies to recover from a cycle of extensive corporate and private deleveraging, leading to falling tax revenues, as we have been seeing.  



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July 21 2015

Commentary by David Fuller

Wall Street Lenders Growing Impatient With U.S. Shale Revolution

Here is the opening of this article from Bloomberg:

Halcon Resources Corp. almost ran into trouble with its banks in June 2013. And again in March 2014. And in February 2015.

Each time, the shale driller came close to violating debt limits set by its lenders, endangering a credit line that provided as much as $1.05 billion in much-needed cash. Each time, Halcon’s banks, led by JPMorgan Chase & Co. and Wells Fargo & Co., loosened their restrictions, allowing Halcon to keep borrowing.

That kind of patience may be coming to an end. Bank regulators have issued warnings on the risks involved in lending to U.S. drillers, threatening a cash crunch in an industry that’s more dependent than ever on other people’s money. Wall Street has been one of the biggest allies of the shale revolution, bankrolling thousands of wells from Texas to North Dakota. The question is how that will change with oil prices down by half since last year to $50.36 a barrel.

“Lenders in general are increasing pressure on oil companies either to raise more equity or do some sort of transaction to pay down their credit lines and free up extra cash,” said Jimmy Vallee, a partner in the Energy mergers and acquisitions practice at law firm Paul Hastings LLP in Houston.

David Fuller's view -

The benefits of lower oil prices, while significant, are spread thinly throughout economies.  In contrast, the problems for producers of oil and gas at lower prices are considerable and therefore highly visible.  This can have a knock-on negative effect, affecting banks with loans to the Energy sector, the number of people employed in the oil and gas industries, tax revenues from these sectors, and economic slumps in previously booming oil towns.  

This item continues in the Subscriber’s Area.



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July 20 2015

Commentary by Eoin Treacy

Make way for the Sun

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

India has made an exceptional commitment to solar Energy by raising its 2022 target five-fold to 100GW and its Renewable Energy target to 175GW. The government has announced an unprecedented policy push and states are providing the necessary infrastructure. Annual investments in solar could surpass investment in coal by 2019-20, with USD 35bn committed by global players. For local IPPs, solar has to be an inherent part of their expansion strategy, as RE obligations become strictly enforceable and cost of coal power increases. NTPC, Adani and RPWR are ahead in this development cycle which  adds 10-15% to our current valuations. NTPC is our top pick.

We raise our solar power forecast by 240%
Global majors have committed USD 35bn+ to the Indian solar sector. By 2020, annual solar power capacity additions and investments could surpass those in coal power projects. We are raising our solar power forecasts by 240% to 34GW by 2020. This is on the back of strong commissioning (4.5GW), even stronger pipeline - under construction (~5.1GW), and new projects (~15GW). By then, renewables could account for a significant 20% of power capacities in India, per our forecast. Private sector interest is decisively moving towards solar from coal power, and we foresee numerous opportunities of fund-raising, yield co-structuring and M&A activity.

RE can reach 20% of capacity but we see challenges to higher penetration
(1) Transmission constraints and integration of diurnal power into the grid are risks, without peak-load management capability. Solar absorption in Rajasthan could see challenges like wind in Tamil Nadu, given policy target of 25GW solar vs. peak-demand of 11GW. (2) A further risk is the enforcement of RE purchase obligations (RPOs) given weak finances of state distribution cos, and hence large-scale absorption of solar could be a concern (INR 170bn additional burden by 2020E). (3) Other issues include financing, land acquisition, limited domestic manufacturing, and returns/reliability of baseline data. 

Impact on the thermal power producers 
Solar could have a significant impact on day power rates, given that generation peaks between 9am and 6pm. In turn, this could reduce the coal requirement by ~8% or 70mnt by 2020E, largely impacting the highest cost of power, i.e., imported coal – leading to large savings (~USD 17bn/pa).

Eoin Treacy's view -

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

India has highly favourably demographics but if that dividend is to be realised the country needs to embark on a long-term policy of industrialisation. Narendra Modi’s government understands what has to be done and is gradually making the changes needed to unlock India’s considerable development potential. 

On its path to industrialisation China built huge numbers of coal fired power stations which facilitated growth but poisoned the air. It is now faced with an environment challenge that is proving expensive to correct. India has the potential to  partially circumvent at least these challenges by taking advantage of improvements in technology that were not available to China when it began to industrialise. 

 



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July 14 2015

Commentary by Eoin Treacy

Musings from the Oil Patch July 14th 2015

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

While there really was nothing unique in the observations they shared about the investment process or the desirable criteria, the scary fact was (is) the volume of private equity money seeking a home in the Energy industry. According to Mr. Ryder, Energy private equity investing as a percentage of total Energy sector merger and acquisition activity had climbed from under 2% in 2000 to over 20% in 2014. During the first quarter of 2015, the Energy private equity funds were investing at that slightly greater than 20% rate until the announcement of the $70 billion BG Group (BG-NYSE) and Royal Dutch Shell (RDS.A-NYSE) deal. We have not yet seen updated figures so we don’t know how the current state of the industry may have changed in the second quarter.

As the First Reserve article pointed out, the increased size of the investment pools forced the group to abandon its proven strategy of making smaller investments in smaller enterprises. First Reserve was forced to increase the size of its investments, meaning it needed to invest in larger deals. This investment shift is an economy of scale issue. To hold to its original investment philosophy, First Reserve would have had to make many more investments in each fund stretching the human resources of its investment team. It would have also potentially diluted the potential investment returns anticipated when putting the fund together, although given the performance of those funds a broader pool of investments might have provided them with better results. At the same time it was being forced to alter its investment strategy, First Reserve may also have been a victim of the “feeding frenzy” among Energy private equity funds and non-Energy new entrant private equity funds that could have inflated deal valuations. That feeding frenzy may have been the biggest problem if one believes that since the financial crisis in 2008-2009, the Energy industry has been in a long-term downturn, just as happened during the 1980’s. We remain concerned about the magnitude of private equity money seeking investment opportunities in the Energy business. We concluded our prior article on Energy private equity funds with the following observations, which we still believe are correct.

“The uniformity of thinking among private equity players is a bit scary. Group-thought is usually not a successful strategy. The volume of public capital is not only surprising, but discouraging if one believes the industry needs to experience pain before a true recovery can begin. Lastly, in looking at the presenters and the audience, there were very few present that experienced the 1980’s forced re-structuring of the Energy business following the bullish experience of the 1970’s. In our discussions that day, we encountered another old-timer who referenced the 1980’s downturn starting in 1982, three years before when most who look at the industry’s history think it began. We were there then, and this guy had it exactly right. This industry is headed for significant change.” In our view, the industry’s changes are just now beginning to emerge. 

 

Eoin Treacy's view -

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

The Energy sector has gone through a decade long investment cycle predicated on developing previously uneconomic resources that were justifiable at a price structure above $40 and more often above $60. It is reasonable to expect that more than a little of that investment capital was used to bring resources into production with a considerably higher price point. As a result the natural progression for a sector going through a consolidation is rationalisation. 



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July 14 2015

Commentary by Eoin Treacy

Mexico Battles Bad Timing in 1st Sale of Oil Fields Since 1930s

This article by Adam Williams and Juan Pablo Spinetto for Bloomberg may be of interest to subscribers. Here is a section: 

Mexico waited 77 years to invite foreign oil producers back into its borders. That was one year too many.

The move to lure tens of billions of dollars from the likes of Exxon Mobil Corp. will be put to the test for the first time at an oilfield auction on Wednesday. With oil prices down by about half since last year, five of 38 potential bidders including Glencore Plc, Noble Energy Inc. and even Mexico’s state-owned oil producer have pulled out.

President Enrique Pena Nieto moved to end the state monopoly after poor drilling infrastructure and technology failed to reverse a decade-long production decline that reduced government revenue. To lure investments now, Mexico will probably get a much smaller share of profits than it would have a year ago.

“They shaped expectations at a $100-per-barrel market and we are way off that now,” Wilbur Matthews, chief executive officer of San Antonio-based Vaquero Global Investment, which oversees more than $100 million of assets including oil-producer bonds, said by phone July 10.

 

Eoin Treacy's view -

Favourable geology doesn’t just stop at the border between Texas and Mexico. Officials must have been looking on with envy as the shale boom took off in the US south west. Mexico’s state owned oil company dealt with declining output. Today’s news of Iran reaching an agreement to end sanctions and increase oil exports is another reason for Mexico to ramp production. The country will not get the same price they were hoping for from producing unconventional supplies and boosting offshore but it has little choice but to develop these reserves if the hole in its budget is to be repaired. 



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July 13 2015

Commentary by Eoin Treacy

Email of the day on oil prices and Canadian producers

I'm looking for your view again on the Canadian Energy sector.  I obviously am aware of the effect technology has had on the shale boom etc...I do disagree with most assertions that there is a flood of supply in oil at these price levels.  Anyway, aside from that- how do we go into this massive global GDP growth phase and not require an abundance of resources of all kinds?  Technology has brought on supply but they require much higher prices to break even.  Help me reconcile how we have this huge growth backdrop and yet the market is pricing in disaster levels in Canada?  Is the Energy sector forever dead or is this a tremendous buying opportunity?   Thanks as always. Hope you and your family are well.

Eoin Treacy's view -

Thank you for a question sure to be of interest to the Collective. My family are all in rude health thank you. The oil sector has a lot of moving parts so let’s try to pick it apart. 

Saudi Arabia is pumping oil like it is going out of fashion and in a sense it is. The evolution of solar in particular, but also other renewables, batteries, electric cars, hydrogen fuel cells and the migration of work onto the cloud mean that oil now has challengers both as a transport fuel and for heating. 

 



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July 02 2015

Commentary by Eoin Treacy

German Wind-to-Hydrogen Plant Takes Car-Fuel Battle to Tesla

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

Still, hydrogen-fuelled cars have two main advantages over their battery-powered rivals, said Salim Morsy, a New-York based analyst for Bloomberg New Energy Finance.

“They are faster to refuel and have much longer ranges than electric ones,” the analyst said. “It can take just five minutes to refuel a hydrogen car for a range of 400 miles, compared to up to a seven hour charge for an electric vehicle to travel just 200 miles.”

Linde says Energiepark Mainz could help put an end to the criticism that hydrogen fuel cells are only marginally more environmentally friendly than traditional combustion vehicles, and allow the gas to be extracted anywhere there’s wind and water. BMW AG is also starting tests of a vehicle powered by hydrogen this month.

 

Eoin Treacy's view -

In 1874 Jules Verne hypothesised in the Mysterious Island “water will one day be employed as fuel, that hydrogen and oxygen of which it is constituted will be used”. It’s been a long time coming and we are not there yet but producing hydrogen cheaply and cleanly represents a major breakthrough in the potential for it to be reused as a transport fuel. Toyota putting the Mirai into production represents a major bet that the technology has reached commercial utility.   



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June 30 2015

Commentary by Eoin Treacy

Musings from the Oil Patch June 30th 2015

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

The significance of the oil sands on global oil supply cannot be ignored. Over the past five years, oil sands output has grown by 1.1 mmb/d, fully one-fifth of the total oil production growth for North America. The impact of lower oil prices on the oil sands cannot be missed. Early in 2014, Western Canada Select, a heavy oil price market, was selling at $86 a barrel. By the end of March, that marker was trading below $30 a barrel. This is when, according to oil industry consultant Rystad Energy, new oil sands projects require a price of $100 a barrel in order to breakeven. What’s been the impact of the price decline on the Canadian oil industry?

In February, Royal Dutch Shell (RDS.A-NYSE) withdrew its application to build a new 200,000 barrels per day (b/d) mine at Pierre River, north of Fort McMurray. In May, the company announced it would delay for several years a new 80,000 b/d in situ oil sands project at Carmon Creek near Peace River. The significance of these projects is highlighted when one realizes that Shell currently operates 225,000 b/d of oil sands production. Other projects are being delayed as companies plan to bring much smaller in situ projects into production at a delayed pace in order to manage their cash flow and capital investment requirements.

A June 16th report from Ernst & Young LLP projects a 30% decline in Canadian oil sands spending, bringing this year’s investment to $23 billion, down from an expected $33 billion. The result of this spending decline and the announcements by several producers to stop or delay new oil sands mines and in situ projects means total oil production will be 17% lower by 2030 compared to the target output in the 2014 forecast provided by the Canadian Association of Petroleum Producers (CAPP).

In addition to cutting new investment, oil sands producers are looking at ways to cut their operating costs to help improve their breakeven prices. Suncor Energy (SU-NYSE), a significant oil sands producer, has said it plans to replace 800 dump truck drivers with automated trucks at its oil sands mines. That move, which is a huge boost for autonomous vehicle technology, is projected to save the company C$200,000 per driver.

 

Eoin Treacy's view -

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

Decisions to postpone or cancel spending on new projects has long-term consequences for oil supply growth forecasts not least when this situation is not limited to Alberta. Oil and gas companies are cutting expenditure wherever they can in order to remain profitable in what could be a persistently low price environment, at least relative to the levels that prevailed until a year ago. 



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June 29 2015

Commentary by Eoin Treacy

Coal Shares Jump After Supreme Court Strikes Down Mercury Rule

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

U.S. coal shares jumped after the Supreme Court struck down the Obama administration’s mercury and acid gases power plant rule, saying it hadn’t considered the billions of dollars in costs before issuing the rule.

Arch Coal Inc. jumped as much as 19 percent, Peabody Energy Corp. climbed 15 percent and Alpha Natural Resources Inc. was up 14 percent in intraday trading after the ruling was announced Monday.

The court’s decision calls into question an Environmental Protection Agency rule that targets mercury and acid gases. The rule has led to the closing of dozens of coal-fired power plants over the last two years.

 

Eoin Treacy's view -

It’s been a long time since coal caught a break and a great deal of bad news is already in the price. Coal is dirty, antiquarian, low tech and contributes to pollution but is cheap and abundant.  Over the last few years investors and regulators have concentrated on the former points and forgot the latter ones. Coal is the feed stock for a substantial portion of electricity production and today’s decision will mean that fewer power stations in the USA will need to be closed as a result of stringent regulations. 



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June 24 2015

Commentary by Eoin Treacy

Water splitter produces clean-burning hydrogen fuel 24/7

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

In conventional water splitters, the hydrogen and oxygen catalysts often require different electrolytes with different pH — one acidic, one alkaline — to remain stable and active. “For practical water splitting, an expensive barrier is needed to separate the two electrolytes, adding to the cost of the device,” Wang explained.

“Our water splitter is unique because we only use one catalyst, nickel-iron oxide, for both electrodes,” said graduate student Haotian Wang, lead author of the study. “This bi-functional catalyst can split water continuously for more than a week with a steady input of just 1.5 volts of electricity. That’s an unprecedented water-splitting efficiency of 82 percent at room temperature.”

Wang and his colleagues discovered that nickel-iron oxide, which is cheap and easy to produce, is actually more stable than some commercial catalysts made of expensive precious metals.

The key to making a single catalyst possible was to use lithium ions to chemically break the metal oxide catalyst into smaller and smaller pieces. That “increases its surface area and exposes lots of ultra-small, interconnected grain boundaries that become active sites for the water-splitting catalytic reaction,” Cui said. “This process creates tiny particles that are strongly connected, so the catalyst has very good electrical conductivity and stability.” 

Eoin Treacy's view -

The challenge for a hydrogen fuelled economy has always been in delivering the gas at an acceptable price. More recently the fact the majority of hydrogen is produced from natural gas has acted against it as a potential solution because of environmental concerns. Technological innovation has the potential to change that scenario if a scalable, low Energy solution can be delivered.

Toyota is making a big bet on hydrogen fuel cells with its Mirai vehicle due for release this summer. Removing a reliance on natural gas from the fuel cycle would represent a major selling point for the vehicles. 



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June 23 2015

Commentary by Eoin Treacy

Richard's Bay coal market faces changes after complaints to globalCOAL

This article by Sarah McFarlane for Reuters dated June 2nd may be of interest to subscribers. Here is a section: 

One trader told Reuters that by entering bids on screen that no seller is in a position meet, a bidder could artificially push up prices.

"The way you do that is by the timing and size of those parcels," the trader said.

As the market is not particularly liquid, bids and offers help inform pricing on the API 4 index, which is calculated using data gathered by Argus and IHS McCloskey.

Traders said that the concerns over artificially high bids pushing up coal prices on the API 4 index had cut the volumes traded.

API 4 trade volumes between January and May fell by almost a third from a year earlier, data published by the CME and ICE exchanges showed.

The index is the world's third largest behind the API 2 benchmark for northern European coal markets and globalCOAL's Newcastle benchmark index for thermal coal in the Asia-Pacific.

 

Eoin Treacy's view -

Coal has been a benighted sector as Energy prices have declined and regulations tightened in an effort to reduce emissions. The possibility that HFT type trading practices have extended to the illiquid commodity markets is not a welcome development and suggests short-term volatility may increase. 

US Coal prices remain in an accelerating downtrend and a clear upward dynamic will be required to pressure shorts. The activism of the Environmental Protection Agency (EPA) and low cost of natural gas are at least partly responsible for the underperformance of US prices relative to global benchmarks.

 



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June 17 2015

Commentary by David Fuller

India Courts Solar Investors With Dollar Contracts

My thanks to a subscriber for this informative article from ft.com.  Here is a brief sample:

Solar developers say the introduction of such contracts, which would protect investors from the expected depreciation of the rupee over the next 25 years, would overcome one of the last remaining obstacles to new investments and cement India’s position as the next big destination for renewable Energy groups.

“The scale-up will happen extremely rapidly,” says Tejpreet Chopra, chief executive of Bharat Light & Power, which plans to quintuple its wind and solar output in India to 1,000 megawatts (1GW) in the next few years. “The good news is that at least the government is showing intent. In order to do this scale of projects, we’re going to need foreign capital.”

Piyush Goyal, the minister responsible for power and renewable Energy, launched bold plans a year ago to provide electricity 24 hours a day for all Indians by 2019, partly from ever cheaper green power: the plan for the solar sector is to spend $100bn to raise capacity from just under 4GW today to 100GW by 2022. An estimated 400m Indians lack basic access to electricity. Coal remains India’s most important Energy source, supplying more than half of all power stations.

David Fuller's view -

According to a graph in the article above, only China, Japan, the USA, and UK will be adding more solar capacity in 2015.  Moreover, with Narendra Modi leading India, this rapid development will continue for many more years.

To grow rapidly, India needs vastly more Energy.  This is certainly possible and, preferably, India will be able to phase out most of its reliance on coal within the next 20 years.  In today’s world, good leadership can modernise a third-world economy in a little over a generation.  



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June 12 2015

Commentary by Eoin Treacy

S&P 500 and its primary sector ETFs

Eoin Treacy's view -

The market is at an interesting juncture. The S&P is up less than 2% this year and been largely rangebound since late last year. A somewhat lengthier range after a particularly consistent advance suggests supply and demand have come back into equilibrium. Among the arguments propounded by the cautious camp are that valuations, not least the CAPE have increased and earnings have deteriorated. There is fear that the Greek issue will spill over into a bigger problem and that the Fed may raise interest rates in September. 

Among the more optimistic arguments are that banks are outperforming, technological innovation is delivering new products which have the potential to improve productivity and Energy prices are less of a headwind. Global central banks are also flooding the market with liquidity but the Fed has stopped adding new money.

 



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June 11 2015

Commentary by David Fuller

Jobless Claims in U.S. Hold Below 300,000 for a 14th Week

Applications for U.S. unemployment benefits remained below 300,000 for a 14th straight week, a sign of labor market strength that will help fuel U.S. growth.

Jobless claims rose by 2,000 to 279,000 in the week ended June 6, a Labor Department report showed Thursday in Washington. The median forecast of 48 economists surveyed by Bloomberg called for 275,000. The four-week average of initial applications also crept up.

The data indicate employers are retaining workers in anticipation of a pickup in demand this quarter after a slow start to the year. Combined with a spring spurt in payrolls, the employment picture bodes well for household spending, the biggest part of the economy.

“There’s not much going on in the way of layoffs, they remain low,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, who projected claims of 280,000. “The labor market is reasonably good. Consumer spending is getting support from the labor market clearly and from some income growth.”

Another report Thursday showed a pickup in May retail sales. The Commerce Department said purchases last month jumped 1.2 percent, reflecting broad-based gains from auto dealers to clothing retailers to department stores, after a 0.2 percent April gain.

Since the first week of March, applications for unemployment benefits have been below the 300,000 level that economists say is consistent with an improving job market.

David Fuller's view -

This is encouraging since I have read that at least 40,000 people have been laid off in the US Energy industry over the last several months, mainly from the shale oil sector. 

Better economic figures since weak Q1 are certainly welcome although they have been pushing US 10-Yr Treasury yields higher, at least until today as we have just seen a downside key day reversal.  This suggests a temporary pause and consolidation before Treasury yields resume their recovery. 

This item continues in the Subscriber’s Area.



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June 08 2015

Commentary by Eoin Treacy

From cars to power grids: battery technology from Daimler is accelerating the transition to renewable energy generation

This article from Daimler highlights its entry into the domestic and commercial Energy storage sectors. Here is a section:

Daimler is entering into business in the field of stationary Energy storage plants with its one hundred percent subsidiary Deutsche ACCUmotive. The first industrial-scale lithium-ion unit is already on the grid and is being operated by the partner companies The Mobility House AG and GETEC Energie AG. For business with private customers in the area of Energy storage in Germany, Daimler AG is planning to collaborate with EnBW AG. Daimler is also aiming to enter into cooperation with other sales and distribution partners both in Germany and at international level. "Mercedes-Benz Energy storages provide the best confirmation that lithium-ion batteries Made in Germany have a viable future," says Harald Kröger, Head of Development Electrics/Electronics & E-Drive Mercedes-Benz Cars. "With our comprehensive battery expertise at Deutsche ACCUmotive we are accelerating the transition to sustainable Energy generation both on the road and in the field of power supply for companies and private households. The technology that has proven its worth over millions of kilometres covered in the most adverse conditions, such as extreme heat and cold, also offers the best credentials for stationary use. We have been gathering initial experience in this field since 2012."

Eoin Treacy's view -

Daimler was in the news last month for its introduction of driverless haulage vehicles to Nevada following the state’s legislation on autonomous vehicles. The company’s entry into the domestic and commercial Energy storage sectors is equally ground breaking and suggests it has ambitions of being a pioneer in the future of transportation and Energy storage. 



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June 02 2015

Commentary by Eoin Treacy

Musings from the Oil Patch June 2nd 2015

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

More importantly, when we look at total natural gas import volumes and the percentage originating from Canada, we can see (Exhibit 13) how important imports and Canada’s share were until total imports peaked in the winter of 2007-2008 and began to slide. As gas import volumes peaked, the Canadian share declined and other supply sources expanded, in particular LNG volumes from the Caribbean. In recent months, LNG and other gas supply sources declined, leaving Canadian pipeline gas as our sole import volumes.

The dilemma for Canada is that without either more rapid growth in U.S. natural gas consumption or a decline in U.S. gas output, Canada’s ability to ship more of its gas production to the U.S. will be capped, or possibly worse shrink. This is a reason why Canadian politicians need to work harder to open other export opportunities for its natural gas and oil output. Without them, Canada’s petroleum industry will face an extended period of depressed activity as it is highly likely that Canadian natural gas prices will remain depressed and volumes shipped out will show no growth, not a good outlook for either Canada’s economy or its petroleum industry.

Eoin Treacy's view -

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

The USA’s unconventional oil and gas revolution has done Canada no favours. A failure to develop additional export markets has left the country at the mercy of an explosion in supply from shale oil and gas wells in the USA and it will still be a number of years before even the most optimistic plans for additional export options are realised. This should be a national priority for such a resource dependent country but handwringing about the environmental consequences and continued dependence on a fickle US judiciary has delayed export projects. 



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June 01 2015

Commentary by Eoin Treacy

Defiant Tsipras threatens to detonate European crisis rather than yield to creditor "monstrosity"

This article by Ambrose Evans Pritchard for The Telegraph may be of interest to subscribers. Here is a section: 

Mr Tsipras's article is a thinly-disguised warning that Greece may choose to default on roughly €330bn of debt in the biggest sovereign default ever, and pull out of the euro, rather than breech its key red lines.

The debts are mostly to European official creditors and the European Central Bank. The situation has become critical after depositors withdrew €800m from Greek banks in two days at the end of last week, heightening fears that capital controls may be imminent.

Mr Tsipras's choice of words also implies that Greece may turn its back on the Western security system, presumably by shifting into the orbit of Russia and China.

The article comes as Panagiotis Lafanzanis, the Energy minister and head of Syriza's powerful Left Platform, returns from Moscow after securing a provisional deal with Gazprom to build part of the "Turkish Stream" gas pipeline through Greece.

Eoin Treacy's view -

The EU is both an economic and political union. Much of the commentary has focused on the ramifications of Greece leaving the Euro, defaulting on its debts and refusing to engage with its creditors. On the political front, tighter relations with Europe’s geopolitical rivals represent an additional consideration since Greece is also a member of NATO. 

This article from GlobalSecurity.org highlights how Turkey controls the Bosporus, Sea of Marmara and the Dardanelles but ships exiting the strait from the Black Sea transit through both Turkish and Greek territory in the Aegean. Increasingly friendly relations between a tactically important NATO member and Russia will be a cause for concern. It is therefore open to question whether Europe’s geopolitical interests will trump economic considerations during continued tense negotiations with Greece. 



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May 27 2015

Commentary by Eoin Treacy

Email of the day on how to make best use of the Service

I am trialing your service. You speak in the daily service about your and David's favourite views. Could you tell me where I can find these and also could you recommend how I can get the best understanding of value from your site. Many thanks.

Eoin Treacy's view -

Thank you for taking the time to trial our service. FullerTreacyMoney is content rich so we understand that it may be overwhelming for new subscribers to figure out how best to use what we offer.

Every day we post a number of articles in Comment of the Day which we believe are of interest either in themselves or because they related to major issues or investment themes. We record a daily audio commentary to put what happened that day in context and to point our short-term movements in the market. As someone just getting acquainted with the Service I would suggest listening to one of the Friday Audios. This is when we put forward our longer-term outlook for the various different asset classes and would be the most accessible way of figuring out where we stand on various topics.   

I would also suggest playing around with the Chart Library. Add instruments you are interested in to your Favourites so you can monitor your portfolio and watch list. Our comprehensive globally oriented Chart Library is updated daily with close to 15000 stocks, bonds, indices, funds, currencies and commodities.

We also tell you exactly what we are doing with our own money both from a trading and investment perspective as it happens.

We spend a great deal of time identifying investment themes and have a strong record of being early. If you click on the Investment themes tab in the main menu (located in the middle of the black bar) you will be presented with two different category searches. Every article we write is categorised by whether it falls into one of our major themes (Energy, Technology, Precious Metals/Commodities, Autonomies, China, India, Japan etc.) as well as into individual “Tags”.

For example if you are interested in the broad China sector. The vast majority of the articles we write relating to the topic can be found under the China tab. If you are interested in an individual subject or company such as Citic Securities you can search the Tags for the name of the company or subject. You can also browse the Tags by clicking on one of the letters on the Investment Themes page.  

 



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May 26 2015

Commentary by Eoin Treacy

Audi claims first synthetic gasoline made from plants

This article by Eric Mack for GizMag may be of interest to subscribers. Here is a section:

In late 2014, Global Bioenergies started up the fermentation unit for a pilot program to produce gaseous isobutane from renewable biomass sugars such as corn-derived glucose. Gaseous isobutane is a sort of raw material for the petrochemical industry that can then be refined into a variety of plastics, fuels and other applications.

The next step in the process was to run the material through a conditioning and purification process, allowing it to be collected and stored in liquid form under pressure. Some of it was then sent to Germany to be converted into isooctane fuel, creating a pure, 100 octane gasoline.
"To me this is a historic moment," says Global Bioenergies CEO Marc Delcourt. "It is the first time that we have produced real gasoline from plants."

Isooctane is currently used as an additive to improve fuel quality, but could also be used a stand-alone fuel. Audi calls the final, refined form of the fuel "e-benzin" and claims that it burns clean due to its lack of sulfur and benzene. Also, its high grade enables it to power engines using high compression ratios for more efficiency.

Audi will test the fuel composition and conduct engine tests to see how it performs before eventually trying it out in vehicle fleets. Delcourt says he could see it being used in consumer cars on a large scale "very soon."

"We thinking we're bringing green-ness to a field that desperately needs green-ness," says Rick Bockrath, vice president for chemical engineering at Global Bioenergies. "It's basically how we're moving away from an oil-based economy towards something that has a renewable, sustainable future to it."

 

Eoin Treacy's view -

This follows a story from a month ago talking about how Audi produced a diesel fuel from air and water through a chemical process. Today’s story is a further iteration of this concept.

In the last month we have also learned that artificial photosynthesis has been achieved. Here is a section from an article by Lynn Yarris for Lawrence Berkeley National Lab: 

Scientists with the U.S. Department of Energy (DOE)’s Lawrence Berkeley National Laboratory (Berkeley Lab) and the University of California (UC) Berkeley have created a hybrid system of semiconducting nanowires and bacteria that mimics the natural photosynthetic process by which plants use the Energy in sunlight to synthesize carbohydrates from carbon dioxide and water. However, this new artificial photosynthetic system synthesizes the combination of carbon dioxide and water into acetate, the most common building block today for biosynthesis.

“We believe our system is a revolutionary leap forward in the field of artificial photosynthesis,” says Peidong Yang, a chemist with Berkeley Lab’s Materials Sciences Division and one of the leaders of this study. “Our system has the potential to fundamentally change the chemical and oil industry in that we can produce chemicals and fuels in a totally renewable way, rather than extracting them from deep below the ground.”



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May 20 2015

Commentary by David Fuller

Good News America: Saudi Vies for Great Satan Status in Iran

My thanks to a subscriber for this informative article by Roula Khalaf for The Financial Times.  Here is the opening:

It’s not quite the Great Satan — at least, not yet. But it’s an enemy that the Iranian regime and the people can unite against

Now that Iran’s Islamic government is close to a nuclear deal with the US and other world powers, the traditional “death to America” slogan is losing its lustre but the loathing of Saudi Arabia is gaining appeal.

Though this is happening by accident more than design, driven by a stand-off in Yemen between Iranian and Saudi proxies, it is blissfully convenient for Iran’s rulers.

Iranians never learnt to hate America despite their leaders’ best efforts to whip up resentment. It certainly won’t grow easier to convince them of devious American plots if a nuclear accord is signed.

When it comes to Saudi Arabia, however, Shia Iranians are happy to bash their Sunni neighbour. Persian-Arab enmity goes back centuries; Iranian-American hostility is only a few decades old. “People in Iran love Americans, and Saudi Arabia is the one country that everyone hates,” one political analyst tells me. “If it’s not the Great Satan it’s only because it’s not that important.”

Indeed, in my own meetings in Iran, there are sometimes awkward moments: someone casually drops a disparaging remark about Arabs then realises I come from Lebanon and reassures me Iranians love the Lebanese but less so Gulf countries. In Lebanon, of course, Iran has Hizbollah, its most prized proxy.

I heard Saudi leaders denounced as “immature children” who bomb fellow Muslims in Yemen and join hands with jihadi terrorists in Syria and Iraq. It’s impossible to convince anyone that the Islamic State of Iraq and the Levant (Isis), which threatens the Saudi regime possibly even more than it threatens Iran, is not a Saudi creation. The notion that Saudi Arabia should reject an Iranian role in the affairs of other Arab states also meets with incredulity. A common language (Arabic) doesn’t give one country the right to claim authority over another, say Iranian officials.

David Fuller's view -

Thanks to technology, the USA no longer has the same vital interests in the Middle East, although it would understandably like to prevent the region’s wars and terrorism from spreading westward.  If ongoing Sunni-Shia conflicts threaten the Middle East’s oil production, the USA can quickly ramp up its shale oil output, avoiding a repeat of recessions caused by earlier Energy crises.  

Many other countries could do the same.  If they follow the USA’s Energy policies, from shale oil and gas to solar-led renewables, in 20 to 30 years time the Middle will have the luxury of consuming all of its own oil and gas.

The FT article is posted in the Subscribers' Area.    



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May 19 2015

Commentary by David Fuller

Vortex bladeless turbines wobble to generate energy

My thanks to a subscriber for this fascinating article from Gizmag.  Here is the opening:

Looking somewhat like a giant reed gently swaying in the wind, the new Vortex bladeless wind-driven generator prototype produces electricity with very few moving parts, on a very small footprint, and in almost complete silence. Designed to reduce the visual and aural impact of traditional spinning-blade turbines, this new device takes advantage of the power contained in swirling vortices of air.

Many opponents of spinning wind turbines point to their supposed danger to birds and other flying animals, as well as their rather noisy operation and – particularly in commercial installations – their enormous size. Though these may well be excuses by those who prefer to stay with older electricity generating technologies that they know and trust, standard wind-driven turbines do have these issues and this tends to hold back their universal acceptance and use.

This is where the creators of the Vortex bladeless believe that their device has the advantage. A relatively compact unit, it relies on the oscillation of its reed-like mast in reaction to air vortices to move a series of magnets located in the joint near its base to generate electricity.

Though obviously not as efficient as a high-speed, directly wind-driven turbine, this is offset by the fact that the Vortex has fewer moving parts and is, according to the creators, up to 80 percent more cost effective to maintain. Coupled to the notion that it supposedly has a greater than 50 percent manufacturing cost advantage and a 40 percent reduction in its carbon footprint compared to standard wind turbines, the system also seems to offer direct economic advantages.

We've explored a number of bladeless wind-turbines before – the Solar Aero turbine being one (though, by definition, not really bladeless as it merely covered the spinning blades with a housing) and the Saphonianbeing another. The latter being more of a true bladeless "turbine," it still required hydraulic actuation of pistons to generate electricity, so its efficiency was probably not all that great (and, to be perfectly frank, it was not strictly a turbine either as it had no spinning parts).

The Vortex, on the other hand, is purported to take advantage of the swirling motion of wind and not direct force like the aforementioned units. This means that it can generate Energy from the repeating pattern of vortices (known as the Kármán vortex street), which are generated as the air separates to pass by a blunt body, such as the Vortex structure itself.

This also means that groups of Vortex units can be huddled closer together as the disruption of air movement in the wind stream is nowhere near as critical as it is when positioning standard, blade-driven wind turbines. This will also help ameliorate the inherent efficiencies in each unit as they can be grouped much closer together than their standard turbine counterparts and, therefore, potentially generate more power per square meter.

David Fuller's view -

For years I have ranted about contemporary windmills and wind farms, because of their expense, maintenance costs, inefficiencies, noise, ecological damage to birds and other wildlife, and visual blight on the landscape.  In contrast, the vortex bladeless turbines are a vast improvement. 

What never ceases to amaze me, although I comment on it all the time, is the incredible inventiveness of people all over the world, in response to a needs-must requirement to protect ourselves and our planet from potential calamities such as manmade global warming and ‘peak oil’.  In fact, only a decade ago it was still fashionable to assume that the cost of crude oil would continue to rise remorselessly, ruining our economies in the process.  Today, thanks to technology, ever higher oil prices are only an OPEC pipedream. 

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May 19 2015

Commentary by David Fuller

How Is India Doing?

My thanks to a subscriber for these bullet points from Goldman Sachs.  Here is the opening:

The long-term positive macro story is still largely intact

● We met with a number of technocrats in place in key ministries who seem

well in command of their brief. We heard no complacency as yet on the need

for reforms.

● Quiet progress on longer-term structural reforms in some areas (National

Infra Fund, reducing Energy subsidies, direct transfer of subsidies).

● Significant progress on increasing coal production and dealing with

transport/environment clearance bottlenecks.

● Recognition that the MAT was an 'own goal' and committed to defusing the

problem.

● Feeling that corruption levels are diminishing and ease of doing business is

improving.

● Strong conviction that some big-ticket reforms will in fact occur, especially

GST, where we heard widespread agreement that if passed, this would have

significant positive impact.

Near-term progress has been slower than expected

● Passing reform legislation through Parliament is proving an obstacle (the

opposition is focusing on polarizing issues like land reform, and retain control

of the Upper House)

● Lack of progress in addressing balance sheet problems for PSU banks and

corporates, limiting appetite for private investments

● General sense that onshore monetary conditions are tight and, in our view,

over-optimism about near term RBI easing

● Rural incomes/spending under stress due to weak commodity prices and

lower government spending, with no obvious near term relief

David Fuller's view -

These and the other points mentioned sound reasonable to me.  India (weekly & daily) from the time Narendra Modi threw his hat into the electoral ring in September 2013, before peaking at 30000 in early March of this year.  I have maintained that it would experience a well deserved consolidation before eventually moving higher. 

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May 19 2015

Commentary by Eoin Treacy

Musings From the Oil Patch May 19th 2015

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

It is possible that what is happening in China with respect to EVs and hybrid vehicles is a precursor of how America’s vehicle sales and distribution models will work. In response to air pollution and vehicle congestion in major cities, China has begun a strategic initiative to build EVs and is encouraging foreign manufacturers and their partners to join the effort. China expects as many as 40 new EV models go on sale in the country this year, triple the number of new EV models available two years ago. As described in an article in Business Week, Toyota Motors (TM-NYSE) will only market an EV in China as it is committed to hydrogen-powered vehicles as a better alternative to EVs elsewhere. In fact, its dedication to hydrogen-powered vehicles is why Toyota ended its all-electric Rav4 EV crossover partnership with Tesla Motors, Inc. (TSLA-Nasdaq).

China has new emission guidelines that call for a 28% improvement in average per vehicle fuel consumption by 2020, something that likely requires manufacturers to embrace plug-in EVs. Since China controls the permitting of new manufacturing facilities, automakers are almost forced to embrace EVs if they want to have plants capable of manufacturing new vehicles. According to an analyst with A.T. Kearney in Shanghai, China, all the new EV models coming to market may enable the industry to get 1-2 million EVs and other new Energy vehicles on the country’s roads by 2020. That achievement, however, will still fall well short of the government’s target of five million EVs being on the road.

While China may be the model, the technology still is short of delivering a reasonably-priced EV with a traveling range similar to that of an ICE vehicle, or roughly 200 miles on a single charge. There is also the issue with fast charging of EVs, as drivers will measure charging times against the length of time they must spend at the gas pump filling up their ICE vehicle. Environmental concerns are an important consideration for EVs, but they were largely bought by people more interested in impressing their neighbors with their statement about environmental concern than their economics. The fact these clean-fuel vehicles are now being traded in for conventionally-fueled vehicles at an accelerating rate suggests that economics are clearly trumping environmental considerations. Whether this is a good thing or not remains to be seen, but the fact it is happening tells us how powerful the pocketbook is for consumer purchasing decisions. It also tells us that auto manufacturers need to address the shortcomings of EVs and hybrids if they want them to become a competitive auto market segment. Then again, those manufacturers may just elect to let the draconian U.S. fuel-efficiency standards force consumers to buy these less desirable vehicles.

 

Eoin Treacy's view -

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

As the world’s largest car market, China’s regulatory structure will make waves around the world. If China is insisting on electric vehicles in order to contain pollution then car manufacturers will have little choice but to build them. 

An additional thought with regard to range anxiety: A large number of people, at least in Southern California lease they vehicles. In order to get the best price for the vehicle at the end of the lease, mileage has to be kept low. This means that many people rent a car for long trips and use their own car for commuting. I wonder if it is conceivable that the same model will expand beyond SoCal with the advent of electric vehicles which may or may not have overcome their range issues within the next decade. 

 



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May 13 2015

Commentary by Eoin Treacy

Pareto Securities on Pretium Resources

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

We expect Brucejack to have sizeable production and free cash flow
Based on Pretium Resources' June 2014 feasibility study and starting from 2018, we believe the Brucejack deposit has the ability to produce average annual life-of-mine (LOM) gold production of 404.1koz at an all-in sustaining cost (AISC) of CAD 500/oz for 18 years, post an initial capital cost of CAD 811.9m.

We initiate with a BUY rating and a target price of CAD 10.88/share.
Our target price is based on a sum-of-the-parts valuation composed of the following: 1.0x NPV9% of our LOM assumptions for the Brucejack project, balance sheet items, the after-tax PV9% of general and administration and exploration costs, PV7% of the after-tax interest costs, financing assumptions and in-the-money (ITM) instruments.

Eoin Treacy's view -

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

The post credit crisis environment has been difficult for explorers as Energy prices surged, access to credit was restricted and gold prices fell from their 2011 peak. More recently the outlook has improved not least because Energy prices no longer represent so much of a headwind and gold prices have stabilised. The rationalisation that has purged the sector of wildcat investors has resulted in leaner, more disciplined and cheaper operations. This is reflected in the valuation of the Gold BUGS Index relative to the bullion price. 



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May 12 2015

Commentary by Eoin Treacy

Continuous Commodity Index and related shares

Eoin Treacy's view -

The CCI which is the unweighted Old CRB, fell from 700 in 2011 to a recent low above 400. It has at least steadied, not least because Energy markets have stabilised and industrial metals have been exhibiting relative strength. The consistency of the fall from above 550 has now been broken, but a sustained move above the 200-day MA will be required to confirm more than temporary steadying. 



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May 12 2015

Commentary by Eoin Treacy

Email of the day on a name change:

New Energy Technologies Inc (WNDW US Equity) 2.0240  has recently changed their name  to SOLAR WINDOW TECHNOLOGIES.(WNDW US Equity) 2.0240   They are closer to production than  Ubiquitous Energy

Eoin Treacy's view -

Thank you for pointing out this name change which has a more marketable ring to it than New Energy Technologies. I've been watching the company for a number of years. If I recall correctly T.Boone Pickens was an early investor and I learned of the company following an interview he gave on CNBC 

I've been watching the share since in the hope they would come through with a marketable product. 



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May 11 2015

Commentary by David Fuller

Silver No Longer Poor Man Gold as Solar Demand Surges

Silver has been mined for thousands of years. But for most of the 20th century it was the poor man’s precious metal, its value eclipsed by the enduring lure of gold.

The first big revolution in silver came in 1492 with the discovery of the New World, which opened up mining of the metal on a scale not previously seen. In the centuries that followed Hernán Cortés and the conquistadors’ destruction of the Aztecs, Peru, Bolivia and Mexico accounted for three-quarters of all world production and trade in the metal.

Today, more than 877m ounces of silver are mined annually and the metal is increasingly being employed in new industrial processes. A major catalyst for demand over the next decade will be in the production of solar Energy.

Silver is a key component in crystalline silicon photovoltaic (PV) cells. According to IHS, demand for solar power is set to increase by 30pc to 57 gigawatts of electricity in 2015. China alone is expected to install something in the region of 17 gigawatts of solar capacity by the end of the year, creating huge potential demand for silver.

David Fuller's view -

This is the first bullish news that I have heard about silver since it peaked near $50 just over four years ago.

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May 11 2015

Commentary by Eoin Treacy

The rise of electricity storage Something for everybody

This article by John P. Banks for the Brookings Institute may be of interest to subscribers. Here is a section: 

In sum, there is great potential for storage both in front of the meter and on the customer side of the meter. Costs need to come down, but the longer-term trajectory indicates that this will happen, and policies and regulations to incentivize storage need to continue to be implemented to spur the creation of markets. The DOE's QER is a step in the right direction, calling for the establishment of a framework and strategy for storage and flexibility. 

In the near-term, it is likely that most of the market development and storage capacity deployed will be at the grid-scale in competitive markets such as PJM, but the SCE procurement certainly highlights the impact of supporting policy and regulation in spurring competitively procured PPA-type arrangements. In addition, California's investor owned utilities have initiated the first round of storage auctions in response to the state's mandate, with final project selection and submission to the California Public Utilities Commission for approval this coming fall.  

In the longer-term, solar-plus-storage could become increasingly economic on the customer side. Indeed, as Hamilton of the Electricity Storage Association described, the three biggest storage markets in the residential sector are California, Arizona, and Hawaii and what they all have in common is lots of solar. But beyond selected markets, residential-scale storage systems such as Tesla's PowerPack won't likely lead to mass defection from the grid in the next five to 10 years. The important point, however, is that Tesla's announcements and all the other recent news is exciting because it shows the progress and potential of a technology with multiple applications and benefits across the grid, providing something for everybody.

 

Eoin Treacy's view -

In my review of utility grade Energy storage companies last week, I highlighted that the sector has been in existence for a number of years but it is Tesla's high profile into the sector that has ignited media interest. We are still in the very early stages of this evolution and it is likely to persist into the lengthy medium term. 



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May 08 2015

Commentary by Eoin Treacy

Musings from the Oil Patch May 8th 2015

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report. Here are two sections on Saudi Arabia and oil market dynamics respectively:

Besides Prince Mohammad bin Salman’s role as minister of defense, which to date has not been a monumental success as the battle with the Iranian-backed Houthi rebels in Yemen has produced little other than destruction of that country and a humanitarian disaster, he also has been handed responsibility for the council dealing with economic reform. King Salman appointed Labor Minister Adel Fakeih, a former chairman of Savola Group, a food company, as minister of economy and planning. In January, King Salman appointed Azzam bin Mohammed Al-Dakhil, a board member on several private companies, as minister of education. He also named Mohammed Al Jadaan, an advisor to Morgan Stanley and Clifford Chase in Saudi Arabia, to head the capital markets authority. This is quite important as on June 15th the country’s stock exchange will open to direct foreign investment. Saudi Arabia will become one of the largest emerging market indexes available to investors.

And

Two trends in the crude oil trading market will help shape the future of oil prices. One is the action of commodity traders who seem to have thrown in the towel in late March on their bets that oil prices would continue to fall. (See Exhibit 17 above.) The traders have since added to their long trades, meaning they expect prices to continue rising. But the ETFs for oil have suddenly witnessed huge outflows of money that will put downward pressure on crude oil prices as futures contracts, which the funds hold, are sold to meet the redemptions. The Wall Street Journal reported that one ETF, the United States Oil Fund LP, experienced a $2.7 billion cash outflow in April. That fund was holding about 11% of the June crude oil futures contracts’ total open interest. Will the commodity traders tossing in their towels be the buyers of the contracts the ETFs are selling? If yes, then oil prices will not retreat. If the answer is no, then look for near-term downward pressure on oil futures prices.

 

Eoin Treacy's view -

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

Saudi Arabia remains in a state of transformation both politically and economically as it responds to the elevation of a new generation to power, continued strife along just about all of its borders, Energy price volatility and a massive young population. Opening up the country to direct foreign investment raises the question of what foreigners might be allowed to buy? The stock market is a natural destination for investment flows. 



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May 06 2015

Commentary by David Fuller

Cameron Might Just Win After All, Bookmakers Say on Eve of Vote

Here is the opening of this topical report by Bloomberg:

Ed Miliband might want to hold off measuring for curtains in No. 10 Downing Street just yet as Conservative incumbent David Cameron stages a comeback in the betting market on the eve of the election.

William Hill Plc, the biggest U.K. bookmaker, gives Labour leader Miliband and Cameron the same chance to be prime minister, with the odds on both at 10-11, meaning a successful 11 pound ($16.70) bet wins 10 pounds. Last month, William Hill had Miliband as favorite, as did Betfair, which now gives both an even shot.

Opinion polls indicate neither Cameron nor Miliband will win enough seats tomorrow to govern the U.K. without the support of smaller parties. Odds show the most likely next government is a Labour minority, given the Scottish National Party has offered to support Miliband. Yet the Conservatives will win the most seats and votes, odds show.

David Fuller's view -

I think Cameron needs at least 15 more seats than Miliband, taking him over 300, to be sure of forming the next government.  Polls are not reflecting this but they can be inaccurate.  Betting shops are a fraction closer, as are the UK’s financial markets which have remained stable.

Conservatives underestimated Miliband’s Energy for the campaign and this could be costly.  Also, Conservatives lost the word game.  All leftwing types now describe the most socialist policies as ‘progressive’.   Conservatives were branded as the ‘austerity’ party and until the last few days only George Osborne seemed to talk about responsible governance. 

I found it a depressing campaign, woefully short of leadership, not to mention humour with the exception of Boris Johnson who will surely be the next leader of the Conservative Party.      



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May 01 2015

Commentary by Eoin Treacy

Elon Musk Challengers Jostle to Solve Riddle of Energy Storage

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

If the storage breakthrough is coming, it seems obvious it would happen in California, which has long led the U.S. in supporting alternative Energy. The state has the most demanding fuel-efficiency standards for cars, as well as incentives that have made it the biggest market for solar power in the U.S.

California “is often a lab” for the rest of the country, said Brian Warshay, an analyst at Bloomberg New Energy Finance. It will “continue to be so on the storage front.”

Older methods of trying to store power have existed for decades, including pumped hydropower facilities in which water is sent to higher elevation reservoirs and released through lower turbines to produce electricity when demand is high.

 

Eoin Treacy's view -

Here is a link to Tesla’s website where they highlight some of the key features of the Powerwall battery. Perhaps the most important consideration today is that almost no one has a battery in their home and that in a decade it could be commonplace. I reviewed the residential battery sector on April 23rd

As much as smoothing out supply and demand curves for electricity use in the home are interesting, the industrial and utility sectors are just as exciting. 

 



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April 29 2015

Commentary by Eoin Treacy

Email of the day on solar cell manufacturers

This was a useful update on the solar industry and Canadian Solar in particular. CSIQ's chart pattern seems to show 1 year range between $20 and $40. Maybe time for a breakout?

Eoin Treacy's view -

Thank you for this topical article. . Here is a section: 

Along with government incentives to combat global warming, a more natural economic process in the marketplace is driving quick growth in demand for solar power. Cheaper panels and cheaper batteries mean that not too long from now consumers will simply put solar panels on their roofs because that is cheaper than buying electricity off the grid.

The U.S.-based Rocky Mountain Institute warned earlier this month that utilities in the U.S. Northeast stand to lose as much as half of residential sales by 2030 as customers install solar and battery-storage systems and generate their own power.

To keep up with this increase in demand, Canadian Solar plans to almost double its own panel capacity from 2013 levels, Qu said. Along with supply from original equipment manufacturing, total capacity will reach more than 4 gigawatts, he said.

 



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April 28 2015

Commentary by Eoin Treacy

Tensions building

Thanks to a subscriber for this report from Deutsche Bank focusing on the European region. Here is a section: 

Resolution of the Greek crisis did not take a definitive step forward with the finance ministers meeting in Riga. The controversial move to secure cash reserves from local governments buys Greece several weeks, but the ECB appears increasingly uncomfortable with its rising ELA exposure to Greece. At the same time, Alexis Tsipras’ popularity is starting to wane. The clock is ticking. Our baseline remains unchanged but the risks are high and rising. 

Keep an eye on Italy over the next two weeks – the country faces a relatively low risk of a high impact event. The final vote on the new electoral law in the Lower House is a key fork in the road for PM Renzi’s institutional reform process and probably for the future of his government. We think that the balance of probability is largely in favour of PM Renzi and that the electoral law should pass. The risks are not negligible, however.

Finland’s Centre Party will lead the formation of the new government. A coalition of three parties is probably required to facilitate a coherent reform agenda, which could include the EU-skeptical Finns party. We would downplay the risks to Greece as the Finns party has toned down its rhetoric and is keen to join the government. At worst, Finland could be a source of delay.

The April Flash PMIs disappointed with the euro area composite falling 0.5 points to 53.5 (market expectation: 54.4). Both France and Germany missed expectations by a non-negligible margin. However, the euro composite remained above Q1 levels and is consistent with GDP growth slowing only marginally from 0.5% qoq in Q1 to 0.4% in Q2, in line with our expectations. Other euro area data surprised to the downside too and SIREN-Surprise fell into negative territory for the first time in four months. Nevertheless, SIRENMomentum appears to confirm upside risk relative to our (1.4% yoy) and Bloomberg consensus projections (1.4% yoy) for 2015.

Next week sees the first April CPI prints in the euro area. The risks are to the downside of consensus. We see scope for inflation to rise in H2. There is evidence of the weaker currency in imported inflation, but we don’t expect the impact on producer and consumer prices to be evident until H2.

 

Eoin Treacy's view -

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

The ECB has taken on a great deal of additional responsibility in the last decade but its one core mandate is to target an inflation rate of close to but below 2%. Inflation figures can’t but surprise to the downside considering the decline in Energy prices and the knock-on effects this has for prices of other goods. However we also know that these factors will wash out of the statistics within six months. At that point the likelihood of deflationary pressures easing, not least because the ECB has reversed monetary policy, will improve. 

There is not a great deal of evidence to suggest QE supports economic growth. On the other hand we have ample evidence to support the view that it inflates asset prices and puts downward pressure on the respective currency. 

 



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April 28 2015

Commentary by Eoin Treacy

African revival shifts east

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

Among the oil producers, support for reforms that proved elusive when revenues were booming may now be forthcoming. Last month’s election of Muhammadu Buhari in Nigeria on a strong anti-corruption platform could prove to be an opportunity in this regard. Lower oil revenues are intensifying the momentum to diversify the oil economies, particularly in Angola and Nigeria.

Most countries in Africa are Energy importers and will benefit from lower oil prices. Many are also largely producers of soft commodities, which should be less sensitive to the slowdown in capital spending in China.

On balance, we think that the region’s centre of economic gravity will shift towards the less resource-intensive countries of east Africa, including Ethiopia, Kenya, Mozambique, Tanzania, and Uganda. They are economically more diverse and beginning to form a relatively large and well-integrated regional market. Investment flows, including from China, have already begun to shift in this direction.

These countries likely stand a better chance of delivering the structural transformation that will be needed to create jobs. This will be critical as half of the one billion new workers set to join the global labour force over the next twenty-five years will do so in frontier Africa.

Eoin Treacy's view -

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

There is no doubt that the run up in commodity prices has been of benefit to African countries not least farmers since agriculture continues to account for the majority of employment. As the above report highlights falling oil prices represent an opportunity for Energy importers particularly in East Africa. In many respects, this is a story from the last decade. Africa’s demographics are what is likely to animate investor interest over the next few decades. 



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April 27 2015

Commentary by Eoin Treacy

Audi just created diesel fuel from air and water

This article by Eric Mack for Gizmag highlights the benefits improving solar cell efficiency could potentially have for the wider economy. Here is a section: 

Sunfire claims that analysis shows the properties of the synthetic diesel are superior to fossil fuel, and that its lack of sulphur and fossil-based oil makes it more environmentally friendly. The overall Energy efficiency of the fuel creation process using renewable power is around 70 percent, according to Audi.

"The engine runs quieter and fewer pollutants are being created," says Sunfire CTO Christian von Olshausen.

The fuel can be combined with conventional diesel fuel, as is often done with biodiesel fuels already.

The Dresden pilot plant is set to produce about 42 gallons (160 l) of synthetic diesel per day in the coming months, and the two companies say the next step is to build a bigger plant.

"If we get the first sales order, we will be ready to commercialize our technology," von Olshausen says.

Sunfire anticipates that the market price for the synthetic diesel could be between 1 and 1.5 Euros per liter, which would be nearly competitive or a little more expensive than current diesel prices in Europe, but the actual figure will be largely dependent on the price of electricity.

 

Eoin Treacy's view -

One of the issues hydrogen fuel cell and similar technologies face is that they are dependent on the availability of cheap electricity to drive the process of separation or combination. The commercial utility of a water-to-diesel project as outlined above will be contingent on the cost of electricity coming down. As such the improving efficiency of solar cells and improvements in battery technology represent a major step forward for such technologies as the cost of electricity would be free from volatility and could conceivably trend lower in real terms over time. 



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April 24 2015

Commentary by David Fuller

Oil at $65 Could Free 500,000 Barrels From Shale Fracking

Oil needs to recover to $65 a barrel for U.S. drillers to tap a pent-up supply locked in shale wells and unleash more crude on markets than is produced by Libya.

Dipping into this “fracklog” would add an extra 500,000 barrels a day of oil into the market by the end of next year, Bloomberg Intelligence said in an analysis on Thursday. Producers in oil and gas fields from Texas to Pennsylvania have 4,731 idled wells at their disposal.

Prices are rebounding from a six-year low after drillers idled half the nation’s oil rigs, slowing the shale boom that boosted production to the highest in four decades. The number of wells waiting to be hydraulically fractured, known as the fracklog, has ballooned as companies wait for costs to drop. That could slow the recovery as firms quickly finish wells at the first sign of higher prices.

“Once service costs come down and drillers begin to work through their higher-than-normal backlog, the market should start to price in that supply coming online,” Andrew Cosgrove, an Energy analyst for Bloomberg Intelligence in Princeton, New Jersey, said by phone. “It may act as a cap on prices.”

U.S. oil futures tumbled by more than $50 a barrel in the second half of last year amid a worldwide glut of crude. West Texas Intermediate for June delivery fell $1.16 to $56.58 a barrel at 11 a.m. on the New York Mercantile Exchange.

Oil production in the lower 48 states would rise to 7.67 million barrels a day in the fourth quarter of 2016 if drillers start shrinking their fracklogs by 125 wells a month in October and put some rigs back to work, Bloomberg Intelligence models show. The U.S. fracklog has more than tripled in the past year, with oil wells making up more than 80 percent of the total.

David Fuller's view -

‘Service costs’ are at least partially a euphemism for oil workers, who were very highly paid at the height of the fracking boom in early 2014, and have subsequently been laid off by the industry since the price for crude oil plunged.  Oil sector employment will pick up, albeit at lower salaries, when WTI crude is in the high $60s.  Above that region employment and fracking production will accelerate until it caps prices once again. 

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April 23 2015

Commentary by David Fuller

Oil Slump May Deepen as US Shale Fights OPEC to a Standstill

The US shale industry has failed to crack as expected. North Sea oil drillers and high-cost producers off the coast of Africa are in dire straits, but America's "flexi-frackers" remain largely unruffled.

One starts to glimpse the extraordinary possibility that the US oil industry could be the last one standing in a long and bitter price war for global market share, or may at least emerge as an Energy superpower with greater political staying-power than Opec.

It is 10 months since the global crude market buckled, turning into a full-blown rout in November when Saudi Arabia abandoned its role as the oil world's "Federal Reserve" and opted instead to drive out competitors.

If the purpose was to choke the US "tight oil" industry before it becomes an existential threat - and to choke solar power in the process - it risks going badly awry, though perhaps they had no choice. "There was a strong expectation that the US system would crash. It hasn't," said Atul Arya, from IHS.

"The freight train of North American tight oil has just kept on coming. This is a classic price discovery exercise," said Rex Tillerson, head of Exxon Mobil, the big brother of the Western oil industry.

Mr Tillerson said shale producers are more agile than critics expected, which means that the price war will go on. "This is going to last for a while," he said, warning that any rallies are likely to prove false dawns.

The US "rig count" - suddenly the most-watched indicator in global Energy - has fallen from 1,608 in October to 747 last week. Yet output has to continued to rise, stabilizing only over the past five weeks.

David Fuller's view -

There is no doubt that US fracking is a very adaptable business and the combination of technology and experience is making the industry much more efficient.  Nevertheless, today’s higher production will wane at current prices, as the yield from shale formations inevitably declines rapidly, necessitating additional drilling slightly further along the shale formation.  Companies will be less willing to continue drilling with WTI crude in the $50s region, especially as their hedged prices at higher levels begin to expire in 2016.  Additionally, plenty of oil industry workers have been laid off this year and it will take a little longer to get them back if the price of oil does rise.

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April 23 2015

Commentary by Eoin Treacy

Tesla Wants to Power Wal-Mart

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

Jackson Family Wines, based in Santa Rosa, has a new partnership with Tesla involving battery storage and several vehicle charging stations, according to the February issue of Wine Business Monthly. The winery declined to comment.

Mack Wycoff, Wal-Mart’s senior manager for renewable Energy and emissions, said the company is intrigued by Energy storage. “Instead of pulling electricity from the grid, you discharge it from the battery,” he said. “Ideally you know when your period of peak demand is, and you discharge it then.”

Mike Martin, Cargill’s director of communications, declined to provide details about how the company plans to use Tesla batteries at the Fresno plant. The 200,000-square-foot facility, one of the largest of its type in California, produces nearly 400 million pounds of beef each year.

Janet Dixon is director of facilities at the Temecula Valley Unified School District in southern California, which plans to install solar panels at 20 of its 28 schools this summer. Dixon said that SolarCity is the solar provider, and five of the facilities will have Tesla batteries.

“We spend roughly $3 million a year on electricity, and most of that is lighting and air conditioning,” said Dixon. “We are going solar to reduce our overall costs and the battery storage should help us manage our peak demand.”

Eoin Treacy's view -

Tesla trades on aggressive multiples. Since its car sales are a fraction of even the smallest auto manufacturer, it will be quite some time before the company will compete on that front even if one assumes that large numbers of people will be driving electric vehicles 10 years from now. Batteries are a much bigger story for Tesla which is why they are investing so much capital in building a “gigafactory” which they anticipate will deliver the economies of scale necessary to drive down the cost of their products.

At the present moment almost no one has a battery in their home. As solar technology improves and the prospect of containing volatility on Energy spending becomes a realistic possibility demand is likely to increase. At the present moment the solar cells companies like SolarCity are installing in homes are not particularly efficient. However, as the efficiency rates of laboratory tested products reach commercialisation the Energy generation capacity of one’s home will rapidly improve. Therefore the efficiency of solar and the potential demand landscape for home batteries are linked. 



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April 22 2015

Commentary by David Fuller

Energy-Hog China Seen Sitting Out Big Global Oil & Gas Deals

Here is the opening of this informative article from Bloomberg:

There are many reasons why China’s biggest oil companies should be dusting off their files on acquisition targets: cheap oil, the beginnings of global consolidation, and the nation’s rising crude consumption among them.

If it's not at the top of the priority list, it’s because state-owned giants such as PetroChina Co. and Sinopec have their hands full. Weathering government corruption probes and its plans to remake the public sector are bigger considerations for the year ahead.

Amid speculation that Royal Dutch Shell Plc’s purchase of BG Group Plc will spur a round of mega deals, China could find itself on the margins, swapping assets or buying smaller companies rather than bidding for the majors. That could prove a lost opportunity for the world’s most Energy-hungry nation, as its reserves decline and import needs are forecast to rise to two-thirds of consumption by the end of the decade.

PetroChina’s president, Wang Dongjin, said in March that the company is looking at many businesses overseas, although its ambition could be limited to asset swaps to reduce transaction costs.

That thinking hasn’t changed after the Shell-BG announcement earlier this month. Buying large global rivals would be politically difficult and suck up too many resources, according to a company official who asked not to be named as the information isn’t public. Instead, China’s biggest oil and gas producer is seeking individual assets that can give immediate returns, the person said.

David Fuller's view -

In addition to the corruption probes mentioned above, I think China’s big, state-owned oil companies are wary because with Brent Crude at $62 today, we now know that they paid over the odds for oil resources during the three previous years. 

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April 21 2015

Commentary by Eoin Treacy

Musings From the Oil Patch April 20th 2015

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. This edition has more of interest than usual and I commend it to subscribers. Here is a section on the surge in private equity interest in the oil sector:  

We came away with several impressions from the two presentations and our discussions with fellow attendees. First, as we mentioned earlier, the vultures who circle over every disastrous industry are circling over Energy with high expectations that road-kill victims will soon be available. Second, there are a lot of smart investors looking for the right opportunity to “buy into the Energy industry at the bottom.” To us, that means there is too much money chasing a limited number of quality investments. That also likely means pricing on deals initially will be too high. The private equity investors believe these early investors may have to wait longer for the returns they are traditionally expecting. Fortunately, or unfortunately, the availability of public money is delaying the typical industry cycle pattern for private equity returns.

The uniformity of thinking among private equity players is a bit scary. Group-thought is usually not a successful strategy. The volume of public capital is not only surprising, but discouraging if one believes the industry needs to experience pain before a true recovery can begin. Lastly, in looking at the presenters and the audience, there were very few present that experienced the 1980’s forced re-structuring of the Energy business following the bullish experience of the 1970’s. In our discussions that day, we encountered another old-timer who referenced the 1980’s downturn starting in 1982, three years before when most who look at the industry’s history think it began. We were there then, and this guy had it exactly right. This industry is headed for significant change.

 

Eoin Treacy's view -

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

One of the problems faced by fundamental or value investors at a time when interest rates are low, liquidity abundant and valuations elevated is that there is a dearth of opportunities. When a decline such as we have seen in the Energy sector occurs, they have little choice but to deploy capital because there are so few other low prices opportunities. This at least partially explains the ease with which private equity firms have been able to raise capital. The problem is that with so much money chasing opportunities prices will rise for troubled assets and the eventual rationalisation of the sector will be delayed. 



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April 15 2015

Commentary by David Fuller

The Major Paradox at the Heart of the Chinese Economy

Here is a brief section from this interesting article from Bloomberg Business.

Xi and Premier Li Keqiang are trying to defuse that debt bomb, rein in banks and local governments and promote the nation’s stock markets as a primary way for innovative and smaller companies to raise capital.

Both leaders say they’ve mapped out more than 300 reforms that over time will reduce state intervention in the economy. Among the initiatives is scaling back Energy-price controls that favor manufacturers. The changes are also designed to improve the social safety net and encourage market-driven deposit rates to get Chinese families saving less and spending more.

Few countries with the scale of China’s credit boom have escaped unscathed without experiencing some sort of banking crisis. Research by Michael Pettis, a finance professor at the Guanghua School of Management at Peking University, shows that “every investment-led growth miracle in the last 100 years has broken down.”

Avoiding that fate requires a high-wire balancing act for the government. It needs to wind down the torrent of investment -- 49 percent of China’s GDP from 2010 to 2014 -- without cratering the economy and worsening the situation for indebted local governments or the bad-debt burden of Chinese banks.

“Our goal is to keep China’s economic operation within the proper range,” Premier Li said in a March 31 interview with the Financial Times that was published Wednesday. Achieving the 7 percent target this year “won’t be easy” and requires “vision, perseverance and courage,” Li said, as cited by the newspaper.

Selling slower growth now for greater prosperity later isn’t an easy political sell, even in a one-party state. Xi faces entrenched interests that favor the status quo, such as state-owned nonfinancial enterprises that have $16 trillion in assets and local governments that have benefited from big public works projects and thriving real-estate markets.

There’s also the risk of a disorderly de-leveraging in the banking sector and the jobs-intensive property market. Any crisis there could take growth rates well below the government’s target of about 7 percent. China is already home to income-inequality levels on par with Nigeria and Mexico.

Throw higher unemployment into the mix and the risk of social unrest rises.

David Fuller's view -

I have sometimes described China’s economy and stock market as interesting enigmas.  For this reason I have also learned to be wary of highly opinionated forecasts for China from Western commentators. 

However, I have developed some helpful guidelines for monitoring and China’s stock markets.

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April 15 2015

Commentary by David Fuller

Modi Hails Indian Uranium-Supply Accord With Cameco

Here is the opening of this informative article from Bloomberg:

India agreed to buy C$350 million ($285 million) of uranium through 2020 from Canadian producer Cameco Corp. to fuel its expanding fleet of nuclear reactors.

The accord was announced Wednesday as Indian Prime Minister Narendra Modi visited Ottawa, the first such trip by a PM from that nation in a generation. Cameco stock rose the most in five months in Toronto.

India is the fastest growing market for nuclear power after China. The nation is extending electricity supplies to serve more of its 1.24 billion population. It operates 21 reactors; another six are being built and due to come online by 2017.

While nuclear power isn’t the cheapest option, it’s preferable from an environmental perspective, Modi said. “This is an effort to save the world from global warming and climate change,” Modi told reporters.

India’s Department of Atomic Energy will acquire 7.1 million pounds of uranium concentrate, Saskatoon, Saskatchewan-based Cameco said in a statement.

“This is a new port of entry, if you will, for Cameco’s uranium and we’re glad to have it open,” Chief Executive Officer Tim Gitzel said in a phone interview.

Cameco rose 5.7 percent to C$20.07 in Toronto, the highest close since Dec. 3.

David Fuller's view -

Since India has a pollution problem to rival China’s, this is a sensible move and Modi has gained another Western ally.  I assume that nuclear is replacing more of India’s coal-powered utilities, which are certainly cheaper but also the biggest polluters.  



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April 15 2015

Commentary by David Fuller

Cheap Oil Winners and Losers in One Giant Map

The world's most innovative regions just got a $900 billion-a-year stimulus package.

With oil prices still down about 50 percent since June, the global economy is benefitting. The IMF estimated in December that the price crash could boost GDP worldwide by 0.7 percent. But those benefits aren't shared equally.

Bloomberg New Energy Finance (BNEF) estimated some of the biggest winners and losers in the map above. Net oil importers like the U.S., Europe, and Asia are getting a nearly $900 billion economic stimulus from cheaper oil prices. The Middle East and Russia are getting stuck with the bill.

"I believe we are in an era of lower oil prices in the medium term and also in the longer term," Michael Liebreich, founder of BNEF, said in a presentation at the group's annual summit on Tuesday. "We have cheap oil, cheap gas, cheap renewables. We are definitely in an age where supply is not constrained."

Note: The calculations for the map are based on a $5 drop in natural gas price and $50 drop in oil price. The estimates use import/export volumes from 2011 to 2013, which would exclude the expansion in U.S. oil since then.  

David Fuller's view -

Developing Asia Pacific has the biggest winners, led by China and India.  Europe is next, Norway excepted.  The US does benefit but probably not by the $180bn shown, because America’s shale industry is now at least temporarily in retreat.   



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April 14 2015

Commentary by David Fuller

The $5 Billion Race to Build a Better Battery

My thanks to a subscriber for this informative article from Bloomberg Business.  Here is the opening:

Professor Donald Sadoway remembers chuckling at an e-mail in August 2009 from a woman claiming to representBill Gates. The world’s richest man had taken Sadoway’s Introduction to Solid State Chemistry online, the message explained. Gates wondered if he could meet the guy teaching the popular MIT course the next time the billionaire was in the Boston area, Bloomberg Markets magazine will report in its May issue.  “I thought it was a student prank,” says Sadoway, who’s spent more than a decade melting metals in search of a cheap, long-life battery that might wean the world off dirty Energy. He’d almost forgotten the note when Gates’s assistant wrote again to plead for a response.

A month later, Gates and Sadoway were swapping ideas on curbing climate change in the chemist’s second-story office on the Massachusetts Institute of Technology campus. They discussed progress on batteries to help solar and wind compete with fossil fuels. Gates said to call when Sadoway was ready to start a company. “He agreed to be an angel investor,” Sadoway says. “It would have been tough without that support.”

Sadoway is ready. He and a handful of scientists with young companies and big backers say they have a shot at solving a vexing problem: how to store and deliver power around the clock so sustainable energies can become viable alternatives to fossil fuels.  How these storage projects are allowing utility power customers to defect from the grid is one of the topics for debate this week at the Bloomberg New Energy Finance conference in New York. Today’s nickel-cadmium and lithium-ion offerings aren’t up to the task. They can’t run a home for more than a few hours or most cars for more than 100 miles (160 kilometers). At about $400 per kilowatt-hour, they’re double the price analysts say will unleash widespread green power. “Developing a storage system beyond lithium-ion is critical to unlocking the value of electric vehicles and renewable Energy,” says Andrew Chung, a partner at Menlo Park, California–based venture capital firm Khosla Ventures.

The timing for inventors—and investors—may finally be right. Wind turbines accounted for 45 percent of new U.S. power production last year, while solar made up 34 percent of fresh capacity worldwide. Storing this Energy when the sun isn’t shining or a breeze isn’t blowing has remained an expensive hurdle. Battery believers say that’s changing. They’ve invested more than $5 billion in the past decade, racing to get technologies to market. They’re betting new batteries can hold enough clean Energy to run a car, home, or campus; store power from wind or solar farms; and make dirty electricity grids greener by replacing generators and reducing the need for more fossil fuel plants. This market for storage capacity will increase almost 10-fold in three years to 2,400 megawatts, equal to six natural gas turbines, Navigant Consulting says.

David Fuller's view -

Energy storage is the missing link for renewables such as solar, so these developments are encouraging and will be a welcome boost for the sector.

Just think – up until about a decade ago numerous gloomy forecasters told us that we faced a frightening, dark and interminable period of economic decline because of Energy shortages.  Today, Energy prices are lower due to an abundance of supply from not only fossil fuels but more importantly, increasingly viable renewables led by solar.  We can thank technology for this favourable situation.  



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