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November 19 2014

Commentary by Eoin Treacy

Wages Poised to Rise as Signs Emerge of Improved U.S. Job Market

This article by Richard Clough, Victoria Stilwell and Jennifer Kaplan for Bloomberg may be of interest to subscribers. Here is a section: 

Jockeying for Houston workers goes beyond Energy, according to Ray Perryman, president of Waco, Texas-based economic consultant Perryman Group. Construction and even restaurant employees have received signing bonuses, he said by e-mail.

The dearth of pay raises since the recovery began has puzzled economists and surfaced as an issue in the midterm elections. Even as unemployment fell and the economy created jobs, inflation-adjusted compensation per hour rose by only 0.7 percent over the last five years, the weakest growth for any expansion of comparable length since World War II, according to Bureau of Labor Statistics data compiled by Bloomberg.

The most likely culprit, many economists said, was the continuing drag of millions of long-term unemployed people as well as those toiling part-time. That has allowed companies to staff without having to offer fatter paychecks.

Now, the strengthening economy is starting to tighten the labor market, putting pressure on some companies to offer more raises to retain and recruit workers.

 

Eoin Treacy's view -

Since the Fed doesn’t look at Energy or food prices in its measure of inflation, wages are an important arbiter of consumer health. The knock-on effect of lower labour force participation in an economy boosted by years of easy money, and more recently by lower Energy prices, is that wages need to rise to encourage people back into the system. This now appears to be taking place. 



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November 18 2014

Commentary by David Fuller

Coal Rush in India Could Tip Balance on Climate Change

My thanks to a subscriber for this controversial article from The New York Times.  The subscriber’s comments are immediately below, followed by the opening of the NYT’s article:

“I think this is an excellent article which discusses many of the contentious issues and dilemmas that countries face.  The comments are even better than the article – note the earlier comments that were made by people living in the East rather than the American comments made later in the day.”

 

DHANBAD, India — Decades of strip mining have left this town in the heart of India’s coal fields a fiery moonscape, with mountains of black slag, sulfurous air and sickened residents.

But rather than reclaim these hills or rethink their exploitation, the government is digging deeper in a coal rush that could push the world into irreversible climate change and make India’s cities, already among the world’s most polluted, even more unlivable, scientists say.

“If India goes deeper and deeper into coal, we’re all doomed,” said Veerabhadran Ramanathan, director of the Center for Atmospheric Sciences at the Scripps Institution of Oceanography and one of the world’s top climate scientists. “And no place will suffer more than India.”

India’s coal mining plans may represent the biggest obstacle to a global climate pact to be negotiated at a conference in Paris next year. While the United States and China announced a landmark agreement that includes new targets for carbon emissions, and Europe has pledged to reduce greenhouse gas emissions by 40 percent, India, the world’s third-largest emitter, has shown no appetite for such a pledge.

“India’s development imperatives cannot be sacrificed at the altar of potential climate changes many years in the future,” India’s power minister, Piyush Goyal, said at a recent conference in New Delhi in response to a question. “The West will have to recognize we have the needs of the poor.”

Mr. Goyal has promised to double India’s use of domestic coal from 565 million tons last year to more than a billion tons by 2019, and he is trying to sell coal-mining licenses as swiftly as possible after years of delay. The government has signaled that it may denationalize commercial coal mining to accelerate extraction.

“India is the biggest challenge in global climate negotiations, not China,” saidDurwood Zaelke, president of the Institute for Governance & Sustainable Development.

Prime Minister Narendra Modi has also vowed to build a vast array of solar power stations, and projects are already springing up in India’s sun-scorched west.

But India’s coal rush could push the world past the brink of irreversible climate change, with India among the worst affected, scientists say.

And:

“India is going to use coal because that’s what it has,” said Chandra Bhushan, deputy director of the Delhi-based Center for Science and Environment, a prominent environmental group. “Its strategy is ‘all of the above,’ just like in the U.S.”

Each Indian consumes on average 7 percent of the Energy used by an American, and Indian officials dismiss critics from wealthy countries.

“I don’t want to use the word ‘pontificate’ when talking about these people, but it would be reasonable to expect more fairness in the discussion and a recognition of India’s need to reach the development of the West,” Mr. Goyal said with a tight smile.

David Fuller's view -

The debate on this contentious subject is unlikely to change and one important reason for this is contained in the penultimate paragraph immediately above: “Each Indian consumes on average 7 percent of the Energy used by an American”. 

While I am wary of long-term alarmist forecasts from commentators on climate change, I have often said that we can all agree that atmospheric pollution should be sensibly and scientifically reduced.  

I feel there is a self-righteous tone to the article above, including from some of the people who are quoted.  Perhaps the author, Gardiner Harris, and the NYT could produce an article on how wealthy countries could provide economical pollution-lowering technologies for developing economies.  If they feel strongly about climate change, do they not also have a responsibility to help poorer nations that are striving to develop?  If they did, India could look after its poor and more readily improve the quality of its air.   



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November 18 2014

Commentary by Eoin Treacy

Musings From the Oil Patch November 18th 2014

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

Temasek, Singapore’s state investment company, has joined with RRJ, a private equity firm founded by Richard Ong, a Malaysian dealmaker, to purchase $1 billion in convertible bonds to be issued by Cheniere Energy (LNG-NYSE) for financing the construction of its liquefied natural gas (LNG) export terminal. The bonds have a 6 ½ year maturity and carry an annual interest rate of 4.87% and will be convertible into Cheniere’s common stock in a year’s time. RRJ already had an equity investment in Cheniere. This move comes at the same time Asian buyers appear less interested in buying U.S. LNG. We don’t know why they are turning down what is supposed to be cheaper LNG, but we wonder whether they have less confidence that U.S. LNG supplies will be available in the volumes projected, and especially at the current low price that is projected to remain so for many years. It is also possible that Asian gas demand will not grow as much as projected due to slow growing economies, increased conservation and efficiency that trim demand growth, and  other alternative gas supplies being available with long-term, fixed price terms that prove cheaper than U.S. gas volumes. We continue wondering whether the U.S. LNG export terminals will become white elephants just as the LNG import terminals did.

Eoin Treacy's view -

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

Natural gas prices are characterised by volatility not least because the demand component of the market is so heavily influenced by weather. This is more important now than in the decade prior to 2012 because in many respects the market has returned to a balance between new gas coming on line, displacement of coal in the power sector and a focus on profitability among drillers. This season’s injection pace is now being put to the test as winter weather arrives early and demand for heating rises. 



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November 18 2014

Commentary by Eoin Treacy

Uranium Climbs to Highest Since January 2013 Amid Utility Demand

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

Demand from utilities is driving prices higher after uranium entered a bull market in September amid a labor strike at Cameco Corp.’s McArthur River operation in Canada, the world’s biggest mine for the fuel. Kyushu Electric Power Co. this month received local approval for reactors at its Sendai power station to resume operations, clearing the way for the first nuclear plants in Japan to restart as soon as early 2015.

While uranium for immediate delivery is in demand through January, there’s also been a rise in buying interest for distribution of supplies later in 2015, Ux said. It has recorded 22 transactions for 3.8 million pounds this month.

Uranium and nuclear Energy is on a “more positive trajectory with a lot of upside to come,” John Borshoff, the chief executive officer of Paladin Energy Ltd., said on a conference call Nov. 13. Global production cuts of 6 million to 8 million pounds are starting to take effect, he said.

 

Eoin Treacy's view -

Increasing tensions with Russia have reduced supplies from that country while the restarting of at least some of Japan’s reactors represents some good news from the demand side of the equation. 

Uranium prices rallied in August to break the almost four-year progression of lower rally highs and continue to extend the rebound. Until recently the majority of related shares have been slow to respond but as metal prices extend the breakout investor interest in the sector is increasing once more. 

The following charts are in log scale in order to highlight the base formation characteristics without focusing on the depth of the prior declines. 

 



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November 17 2014

Commentary by David Fuller

Russia Seen as Biggest Threat in Poll Even as Oil Erodes Putin Power

Here is the opening from this assessment of the poll by Bloomberg:

Russia poses the biggest security risk to world markets and will be the biggest loser from the drop in oil prices, according to a Bloomberg Global Poll of international investors.

Asked which of five possibilities posed the greatest risk to global financial markets, 52 percent of participants chose the Russia-Ukraine conflict. Twenty-six percent cited Islamic State, while Ebola barely registered with 5 percent. The U.S. was seen as the most likely beneficiary from lower crude prices.

Russia is being buffeted by the twin blows of sanctions and an oil-market selloff that threatens to hollow out its economy. While the country is menacing Ukraine with tanks and sending its jets into foreign airspace, President Vladimir Putin said Nov. 14 that the drop in crude is potentially “catastrophic” for the world’s largest Energy exporter.

“The Russia-Ukraine situation is more dangerous as we have a sovereign state, which is trying to increase its power by creating chaos both through threatening actions of war,” Mikael Simonsen, chief sales manager for cross asset sales at Nordea Bank in Helsinki and a poll respondent, said by e-mail. “This might impact the common thinking of how developed we are today, and impact the risk premium.”

David Fuller's view -

Russia’s economy is in meltdown, due to bad management from Putin, international sanctions against his regime and the slump in oil prices.  This is reflected by Russia’s RTSI$ Index and the Ruble, shown inversely against the USD.  However, Russia’s military remains the third strongest in the world, and Putin wants to intimidate us with this power.  It is a war of attrition which the democratic West can win, if it holds its nerve. 

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November 17 2014

Commentary by David Fuller

Email of the day

On Friday Audios, etc.: 

“hi David always enjoy listening to your friday audio. by the way for me it is never too long. Following, i was wondering what could have been the trigger for oil/ gold /silver etc to reverse and go up this Friday? the first warning sign you mentioned was the reversal on nov 7 but today was an impressive reversal. So my question is: Could it be that the lower yield on the US 10yr Treasury Bond Yield which started to go lower on thursday and again yesterday caused the usd to weaken and therefore caused commodities to go up? i know the interest rate change looks minor but if i look at your charts the commodities were at their lows in the beginning of the trading day and went up when the interest rate went lower. would appreciate your expert opinion . On European autonomies, despite the fact valuations might be low for companies. The high Energy costs for companies and consumers hardly decreased because of the stronger usd and the high percentage of taxes. That destroyed the advantage of lower Brent prices almost completely ironically the lower Energy costs give US companies and consumers a huge and even greater advantage over European companies and consumers. i rather buy shares of Dow Chemical than Basf and probably also enjoy an additional advantage of an appreciating usd versus the euro. In this beauty contest it is hard to favor European shares over US shares or Asian shares. best regards”

David Fuller's view -

Thanks for your comments and perspective.  Living in the Eurozone, I can certainly understand why you prefer Dollar-denominated investments. 

Re commodities, many of them have been technically oversold and I agree that when the USD weakened from an intraday new recovery high, that led to some short covering of depressed resources on Friday.

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November 14 2014

Commentary by David Fuller

The Browning Newsletter, Covering Climate, Behavior and Commodities

My thanks to Alex Seagle of Browning Newsletter for the latest issue of this impressive letter, by Evelyn Browning Garriss.  Here is a brief sample:

The Wild Card

There is one major wild card in this scenario – the giant eruption in Iceland’s Holuhraun lava field.

Not all volcanic eruptions are explosive. In Hawaii, for example, volcano eruptions are usually relatively quiet lava flows. (There is currently one that is threatening the Pahoa subdivision. Ironically the greatest damage the community is enduring is from looters, not lava.) Similarly, the Holuhraun eruption is a low-lying eruption, with relatively small explosions (about the size of the Statue of Liberty) and lots of oozing lava and gas.

The volcano has been erupting since Au­gust and emitted between 20,000 -- 60,000 tons of SO2 per day (compared to all of Europe which emits 14,000 tons per day). Scientists are reporting that this is not high enough to affect climate, but this much low-lying acidic fog is affecting the daily weather. No one has died, but the Icelandic air is blue with an eye-stinging haze.

Scientists report that, given the amount of debris this volcano has emitted, it is the largest Icelandic eruption in centuries. His­torically, eruptions like this add to cooling and acid rain as far south as Great Britain and Central Europe. This is one more sign that Europe has a very high probability of a cold winter this year. If the cold affects the jet stream, then the ripple would allow colder air to penetrate downstream as well, in Siberia and portions of Northern China.

Of course, if the explosion grows more violent, penetrating the stratosphere, then it would affect the Icelandic Low semi-per­manent air pressure region and the impact would be huge. No one expects this to hap­pen.

However, stay tuned. There is a wild card in Iceland.

David Fuller's view -

Last winter was unusually mild in the UK, and I did not experience freezing temperatures in London.  A cold winter in Europe and the UK would increase the risk of Energy shortages, largely due to the inadequate Energy policies of most governments. 

The Browning Newsletter forecasts warm winter conditions for the US Pacific Coast, which would reduce drought problems from California to Texas.  In contrast, she says the Southern and East Coast regions are likely to be colder.  

The Browning Newsletter is posted in the Subscribers' Area.



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November 14 2014

Commentary by David Fuller

Gold Futures Post Biggest Two-Day Rally Since June

Here is the opening of this article from Bloomberg:

Gold futures jumped, capping the biggest two-day gain since June, as an oil rally damped concern that inflation will remain low and revived demand for the metal as a store of wealth. Silver surged the most in nine months.

Aggregate gold trading more than doubled compared with the 100-day average for this time, according to data compiled by Bloomberg. Today, an option wager on a price rebound to $1,200 an ounce surged as much as fivefold, while Brent crude jumped as much as 2.9 percent.

Oil tumbled into a bear market last month, and Federal Reserve officials warned that lower Energy costs may hold down consumer costs in the near term. Crude’s slump is increasing the likelihood that producers will curb output, helping to stabilize prices. Fed Bank of St. Louis President James Bullard said today that inflation expectations have rebounded since October.

“The spike in oil prices acted as a catalyst,” David Meger, the director of metals trading at Vision Financial Markets in Chicago, said in a telephone interview. “There was a lot of fund buying.”

Gold futures for December delivery rose 2.1 percent to settle at $1,185.60 at 1:38 p.m. on the Comex in New York. Earlier, the price reached $1,192.90, the highest for a most-active contract since Oct. 31. In two days, the price climbed 2.3 percent, the most since June 20.

Total volume rose to an estimated 315,276 contracts, the seventh time this year trading topped 300,000. Yesterday, aggregate open interest climbed to the highest since May 22, 2013.

More than 10,000 contracts for December delivery traded around 10:06 a.m., with prices jumping about 1.5 percent within six minutes and erasing earlier declines. Today’s session low was $1,146 at 8:35 a.m.

“A lot of buy stops were triggered at $1,167.40, and that brought in the upward momentum,” Phil Streible, a senior commodity broker at R.J. O’Brien & Associates in Chicago, said in a telephone interview. “Today’s run-up was largely technical, and a few investors bought gold after oil prices showed some strength.”

OPEC ministers have stepped up their diplomatic visits before the group’s Nov. 27 meeting, potentially seeking a consensus on how to react to oil prices that have plunged to a four-year low. Gold reached a five-year low of $1,130.40 on Nov. 7 as Energy prices tumbled and U.S. equities climbed to a record.

David Fuller's view -

Data in the article above is interesting and the price charts even more so.  

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November 13 2014

Commentary by David Fuller

The Weekly View: Job Gains Good For Sales

My thanks to Rod Smyth, Bill Ryder and Ken Liu for their excellent strategy letter published by RiverFront.  Here is a brief sample:

Last week’s elections produced a wave of Republican victories, with the US senate reverting to GOP control.  Although not enough to enact a full-scale conservative agenda with secure veto/filibuster-proof votes, we think the results increase the likelihood of more business-friendly legislation being sent to the president on immigration, trade, Energy, and taxes.  The Republican domination of state legislatures and gubernatorial wins are potentially more consequential.  Democratic control of state governments has been reduced to 7 from 14, the lowest since the 1860s.  We expect GOP-controlled state legislatures to enact pro-growth policies, which would likely be received favourably by financial markets, in our view.  

David Fuller's view -

I certainly agree that most investors interested in the USA will favour the Republican victories and expect more pro-growth economic policies. 

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November 07 2014

Commentary by David Fuller

Putin Jets Blast Through European Dream 25 Years After Berlin Wall Fell

Here is the opening and some latter paragraphs of this sobering article from Bloomberg

Europe’s post-Cold War order is fraying and there’s no consensus over how to stitch it back together.

Some blame the European debt crisis for exposing the folly of the drive for economic unification. Some point to Vladimir Putin for redrawing the map by force and sending his warplanes to buzz NATO borders. For others, the vision of a peaceful, post-national Europe died off with the World War II generation.

The makers of European memory will ponder those questions this weekend, marking on Sunday the anniversary of the fall of the Berlin Wall in 1989 and the ensuing euro-euphoria. The lessons of the intervening quarter-century are more sobering.

“The easy assumption was that the international liberal order was prevailing,” said Nick Witney, a former head of the European Defence Agency, who is now with the European Council on Foreign Relations in London. “The fact is that those who don’t share those values are coming back. We’re not somehow riding the wheel of history any more than communism was.”

And:

Juncker’s mission as the EU’s top civil servant is primarily defensive. The turn-of-the-century notion that Europe could export its economic model to places like China, India and Latin America has given way to renewed global power politics with Europe’s heft much diminished.

“Europe has a number of forces that are fragmenting it right now,” said Christopher Chivvis, a European security analyst at the Rand Corp. in Washington. “To a certain degree, Putin increases the fragmentation. But I think that on the whole, especially as people in Europe absorb the reality of what’s happened in Ukraine, it’s going to tend to create a more unified European response.”

For now, however, Putinism isn’t without its apologists. Some architects of the new Europe have turned against their creation. The most notable is Viktor Orban, a leader of the anti-Soviet student movement in 1989 who, as prime minister of Hungary, now preaches the downfall of the liberal model he helped usher in.

Building what he calls an “illiberal state,” Orban has spoken admiringly of Putin and cut Energy-supply deals with Russia in defiance of the EU. Orban’s party has rammed through a new constitution, curtailed the powers of the judiciary, clamped down on media and academic freedoms, and won another term this year in an election criticized by international observers.

In any case, there’s more than enough nationalism to go around in the European heartland. Parties with grievances against immigration, the euro, the EU and a sense of lost identity have made electoral inroads in Britain, France, Greece, Denmark, the Netherlands, Finland, Austria -- and even Germany, long seen as immune to bouts of populism.

“This is the worst possible time for geopolitical risk to be hitting the European continent,” Ian Bremmer, head of Eurasia Group, a New York-based risk consultancy, said this week on “Bloomberg Surveillance.” “On the one hand, you have an external environment that is much worse for the Europeans than anyone else. On the other hand, you have internal populism that’s going to make the Europeans grow farther apart.”

David Fuller's view -

Europe’s initial post WW2 goal, long before it became the European Union, was noble – bring a permanent halt to European warfare.  The first achievement was an alliance of friendly nations, offering free trade and open borders for each others’ citizens.  However, this was not enough for politicians who went on to create the European Union and the Euro, as the first stage of building a Super State. 

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November 07 2014

Commentary by Eoin Treacy

Transocean Takes $2.76 Billion Charge Amid Glut in Drilling Rigs

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

Transocean Ltd., owner of the biggest fleet of deep-water drilling rigs, is feeling the effect of an oncoming glut in the expensive vessels just as crude prices tumble.

The company will delay posting third-quarter results after saying earnings would be hit by $2.76 billion in charges from a decline in the value of its contracts drilling business and a drop in rig-use fees, the Vernier, Switzerland-based company said in a statement today. Transocean, which had been scheduled to report earnings today, fell 7.9 percent to $27.55 at 8:10 a.m. in New York before regular trading began.

Oil’s decline to a four-year low in recent months has caused companies to consider spending cuts, reducing demand for rigs and the rates it can get for leasing them to explorers. Rig contractors had responded to rising demand during the past few years with the biggest batch of construction orders for rigs since the advent of deep-water drilling in the 1970s. Almost 100 floating vessels are on order for delivery by the end of 2017, according to a June estimate from IHS Energy Inc.

“Ouch,” analysts from Tudor Pickering Holt & Co. wrote in a note to investors. The announcement “reflects the reality of this oversupplied floater rig market globally.”

 

Eoin Treacy's view -

A topic of conversation at The Chart Seminar is “How do the majority of market participants predict how a market is likely to trade?” The short answer is that people predict what they see. When prices have been static for a period of time, expectations go down and people assume that the situation will persist. When oil prices were ranging above $100 oil companies and those that service them made decisions based on the situation persisting. 



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November 06 2014

Commentary by Eoin Treacy

Confident U.S. Shale Producers Think They Can Outlast OPEC Moves

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

The U.S. companies believe they have a lot more staying power than many of Saudi Arabia’s partners in the Organization of Petroleum Exporting Countries, or OPEC. Several producers plan on increasing production.

“Saudi Arabia is really taking a big gamble here,” Archie Dunham, chairman of shale producer Chesapeake Energy Corp., said during a telephone interview. “If they take the price down to $60 or $70 a barrel, you will see a slowdown in the U.S. But you’re not going to see it stop. The consequences for other OPEC countries are far more dire.” 

 

Eoin Treacy's view -

Hydraulic fracturing and horizontal drilling techniques coupled with advanced geophysics make exploiting shale oil and gas possible but it is not a low cost production method. Despite oil price weakness, the benefits to the US economy of Energy independence suggest the question is more of at what price the balance between profit and loss exists rather than whether these resources are going to be developed. 

A number of companies have spent a great deal of money in securing acreage, leaving them at risk as oil prices decline. This would suggest that larger, better capitalised companies have an advantage in a weak price environment. 

EOG Resources dropped by a third between June and October but has held a progression of higher reaction lows since as it closes the overextension relative to the trend mean.
Conoco Philips and Marathon Oil share similar patterns. 

Chesapeake Energy retested its 2012 lows in October and continues to bounce. It will need to the hold the low near $16 on the next pullback to demonstrate a return to demand dominance beyond the short term. 

 



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November 04 2014

Commentary by Eoin Treacy

Musings from the Oil Patch November 4th 2014

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report. Here is a section on Canadian efforts to export its Alberta production: 

The other factor in play now is TransCanada’s plan to ship Canadian oil sands output east from Alberta to the Irving Company refinery and its oil export port in Saint John, New Brunswick. TransCanada formally submitted its 30,000-page application for the 1.1 million-barrel-a-day project, labeled Energy East, to Canada’s regulator, National Energy Board. Once in place, oil sands output could move from Alberta to the East Coast and then be loaded on ships and transported to the U.S. Gulf Coast refining complex for only a couple of dollars more than the proposed tariff to ship it to Texas on Keystone. In a low oil price environment, that cost might be considered an impediment to oil sands export, but it doesn’t appear to represent a significant economic hurdle. As a result, the environmental movement’s argument that by preventing Keystone from being built would prevent Canada from expanding its oil sands business and stepping up its exports would be severely weakened. Energy East requires no U.S. approvals, although it does need Canadian federal government ok and approvals from various provinces. Our understanding is that TransCanada has worked hard to win over those people with rational objections to the pipeline route by relocating the route and adding spurs to refineries in the provinces and export ports. We anticipate Energy East having an easier time winning approval than Keystone has experienced.

We have learned several things from watching the battle over Keystone. The view that environmental politics overwhelms Energy economics when the country is governed by the left was reinforced. Additionally, while pipelines represent the safest mode of oil transportation, the recent string of oil leaks from old pipelines has battered that safety image. The spills strengthened the hand of the environmentalists battling Keystone and the images of black oil oozing through people’s backyards, neighborhood streets and bubbling streams is a powerful weapon against the Energy business, and the Energy companies have not been proactive in trying to change their image. The environmentalists have demonstrated that they have learned how to fight Energy projects more effectively through the regulatory and legal systems. Lastly, low oil prices, should they continue for any duration, will disrupt the pace of development of the oil sands – just how much and exactly when remain uncertain – and possibly change the impetus for either or both Keystone and Energy East. In the end, oil sands output will reach markets, but where those markets are may be different

 

Eoin Treacy's view -

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

It is in Canada’s national interest to develop an export avenue for its crude oil. Since it has met with such stiff resistance to the Keystone pipeline, exporting via its Eastern border represents the next best thing. With Russian supplies now representing a risk for European refineries there is the possibility that Canadian supply will have more than one market rather than having to depend on demand from the US gulf coast. This may be part of the reason Saudi Arabia has been so keen to preserve its European market share by offering discounts. 



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November 03 2014

Commentary by David Fuller

CSEM White Solar Panels Are Made to Blend into Buildings

Here is the opening of this informative article from Gizmag:

Solar panels are seen as a way of making buildings greener and more sustainable, as well as making them less dependent on the grid for power. The problem is that the blue/black panels stick out like sore thumbs and end up exiled to rooftops. With the goal of making solar panels aesthetically invisible, the Swiss private, nonprofit technology company CSEM has developed what it bills as the world's first white solar modules – designed to blend into buildings instead of sitting on the roof.

The reason why most solar panels look like something off of a beetle’s back is because of the need to absorb visible light. Since nothing absorbs like something colored black, the photovoltaic cells that make up the panel are as dark as possible. That may do the job, but it also means that any solar panel installation looks like exactly what it is, which doesn’t leave architects with much latitude.

CSEM reasoned that what designers wanted was a panel that would come in different colors and has no visible connections, with white being the most desirable because of its versatility. The way in which the company managed this is with a plastic layer that goes over the panel. This layer acts as a scattering filter that reflects all visible light, yet lets in infrared rays, which allows the panel to generate electricity. CSEM claims that this layer works with any crystalline silicon cell and can be applied to any existing panel whether it’s flat or curved.

The company says that the technology has a number of advantages beside the cosmetic. Being white, the layer keeps the solar panels at a lower temperature, making them more efficient, as well as reducing air conditioning costs.

CSEM sees the technology as having not only applications in architecture, but in consumer goods such as laptops, phones, and vehicles such as cars and buses, as the layer is adapted to cover a range of colors.

The video below introduces the white solar panel technology.

David Fuller's view -

Hardly a week goes by without another new, creative breakthrough for solar power, which is by far the most versatile form of renewable Energy.  Yes, they do not work at night and they do not have the capacity to be a standalone solution to our power needs.  However, these solar panels are likely to be ubiquitous within a few years, available in all shapes, sizes and colours for our buildings, and even our laptops and mobile phones.  Mass production of these panels will lower costs helping to reduce our dependence on the grid for power.

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October 30 2014

Commentary by David Fuller

Why Oil Prices Went Down So Far So Fast

The reasons oil prices started sliding in June were hiding in plain sight: growth in U.S. production, sputtering demand from Europe and China, Mideast violence that threatened to disrupt supplies and never did.

After three-and-a-half months of slow decline, the tipping point for a steeper drop came on Oct. 1, said Ray Carbone, president of broker Paramount Options Inc. That’s when Saudi Arabia cut prices for its biggest customers. The move signaled that the world’s largest exporter would rather defend its market share than prop up prices.

“That, for me, was the giveaway,” Carbone said in an Oct. 28 phone interview from his New York office. “Once it started going, it was relentless.”

The 29 percent drop since June of the international price caught traders and forecasters by surprise. After a steady buildup of supply and weakening demand, the outbreak of an OPEC price war is casting doubt on investments in new oil resources while helping the global economy, keeping inflation in check and giving motorists a break at the pump.

Brent crude, the global benchmark, declined to $82.60 a barrel on Oct. 16, the lowest in almost four years, from $115.71 on June 19. In the U.S., West Texas Intermediate touched $79.44 on Oct. 27, the lowest since June 2012. U.S. regular unleaded gasoline is averaging close to a four-year low of $3.01 a gallon nationwide, according to AAA.

David Fuller's view -

The drop in WTI and particularly Brent crude oil are good for the global economy, oil producers excepted.  They know that their days of controlling the oil market and ensuring that prices are rising faster than inflation are largely over, thanks to the plethora of new Energy sources, current and planned. 

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October 30 2014

Commentary by David Fuller

Norway $860 Billion Wealth Fund Bets Big on Modi and India

Here is the opening of this interesting article from Bloomberg:

Norway’s sovereign wealth fund, the world’s largest, will increase its holdings “significantly” in India as Prime Minister Narendra Modi opens Asia’s third-largest economy to investments and competition.

The fund today revealed that it raised its holdings of Indian bonds and stocks to 0.9 percent of its fixed-income and equities portfolios, as part of a broader plan to increase its presence in emerging markets and generate bigger returns.

“India is one of those markets where you should expect that we will continue to increase our investments over time, significantly,” Yngve Slyngstad, chief executive officer of the Oslo-based fund, said in an interview after a press conference today. “Relative to the size of the economy our investments are smaller than you would expect.”

Foreign investors are increasing investments in India at a faster pace than in any of the seven other Asian markets tracked by Bloomberg. The Sensex index has jumped 28 percent this year, rallying after Modi in May won elections by the biggest margin in three decades on promises to create more jobs and lift growth. Since taking power, Modi has shifted toward more market-based Energy pricing, allowed more foreign investment in the defense industry and pushed to revive the manufacturing sector.

“The changes that we have seen have given us more confidence that we will have good investment potential in the coming years,” Slyngstad said. “We will continue to increase our investments there, both on the fixed-income side and in regards to our company investments.”

David Fuller's view -

Interest in India among foreign investors is growing by the day, and it started from a very low floor before Narendra Modi was swept to power with an overall majority. 

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October 30 2014

Commentary by Eoin Treacy

Email of the day on Norwegian oil services companies

I will revert in more detail on oil services tomorrow, but gut feeling is that a few shares have accelerated to the downside and are now trying to establish support. Several names are claimed by analysts to have overreacted to the downside becoming undervalued. One seismic company, Polarcus, need more equity and that is also raising worries among invstors regarding other companies. Feels a bit like capitulation the last down leg.

On the other side we need to keep in mind e.g. the recent oil price forecast from DNB Markets. I am not sure all investors have adjusted expectations to a much lower oil price environment, which will dampen upside potential for many Energy related stocks.

And 

I looked at the charts in your oil services section in the library (Eoin's favourites). Some stocks look like they have bottomed.  

For perspective I have attached the oil service index of Oslo Stock Exchange. No evidence of an end to the downtrend, apart from a "hope" that the 2011 low will provide support. Looking at individual constituents of the index:

AKSO (Aker Solutions; oil service products/services): consolidating after recent drop, but testing lows FOE (Fred Olsen Energy; drilling): has been accelerating down this fall, but another dramatic drop this week PGS (Petroleum Geo-Services; seismic): still in downtrend PRS (Prosafe; accommodation rigs): consolidating recent drop SDRL (Seadrill; rigs): consolidating after steep decline TGS (seismic): showing relative strength, only stock not to post 12 month lows.

Seems to me there is less signs in the Norwegian oil service sector of an end to the acceleration/downtrend than in your international oil service stocks. I am short SUBC (Subsea 7; short term trading position), long DOLP (Dolphin - seismic; likely quite undervalued today) and long PLCS (Polarcus - seismic; my biggest mistake this year...).

Conclusion: there are some signs of capitulation recently, but not yet evidence that all is over, although some stocks are arguably cheap. But there might be some further thinking among investors that oil price decks will have to be revised down. This could hinder the upside going forward.

What do you think?

 

Eoin Treacy's view -

Thank you for these generous emails. I’m sure other subscribers will be glad of your on the ground perspective in Norway. The oil services sector has taken a beating not least because the forecasts for demand growth they based expansion plans on are not panning out. The recent decline in crude oil prices has thrown this issue into sharper focus. 



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October 29 2014

Commentary by David Fuller

Fed Cites Improved Labor Market While Ending QE as Planned

Here is the opening of Bloomberg’s report on the Fed’s policies now that it has ended QE3

The Federal Reserve said it sees further improvement in the labor market while confirming it will end an asset-purchase program that has added $1.66 trillion to its balance sheet.

“Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate,” theFederal Open Market Committeesaid today in a statement inWashington. “A range of labor market indicators suggests that underutilization of labor resources is gradually diminishing,” the panel said, modifying earlier language that referred to “significant underutilization” of labor resources.

Policy makers maintained a pledge to keep interest rates low for a “considerable time.”

While saying inflation in the near term will probably be held down by lower Energy prices, they repeated language from their September statement that “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”

Stocks extended losses after the Fed announcement. The Standard & Poor’s 500 Index fell 0.8 percent to 1,969.29 as of 2:17 p.m. in New York. The benchmark 10-year Treasury note yielded 2.35 percent, up 5 basis points from yesterday.

Chair Janet Yellen is completing two years of bond purchases that started under her predecessor, Ben S. Bernanke, as the Fed nears its goal for full employment. She must now chart a course toward the first interest-rate increase since 2006 while confronting risks from a slowing global economy and declining inflation. The FOMC repeated it will consider a wide range of information in deciding when to raise the federal funds rate, which has been held near zero since December 2008. Most Fed officials expect to raise the rate next year, according to projections released last month.

The Fed said it will continue reinvesting proceeds from a balance sheet that swelled to a record $4.48 trillion in the course of three rounds of so-called quantitative easing that started in November 2008 during the longest and deepest recession since the 1930s.

David Fuller's view -

To the Fed’s credit, it has been totally transparent in its assessments of economic data, and carefully signalled every step in its policy of gradually phasing out QE3, to ensure that their have been no sudden surprises for consumers, businesses or the financial markets.

Sensibly, it has left its options open by not providing a detailed assessment of developments that would either hasten or delay the eventual increases in short-term interest rates which we can expect as the economy gradually recovers.  However, the Fed has reaffirmed its policy of keeping rates low for a “considerable time.”  It has also indicated that it will not end the reinvest of maturing instruments in its balance sheet until it has raised the benchmark interest rate.

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October 29 2014

Commentary by Eoin Treacy

Oil Market Outlook

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

We have been tracking IEA´s monthly oil reports for the past 38 months to see how they have forecasted the growth in US oil production. The graph above to the left represents 38 monthly oil market reports from the IEA. When these lines are rising it means upward revisions to production growth. During the past 38 months we have seen 35 upwards revisions. This means that in almost every monthly oil market report issued by the IEA during the past three years the agency has revised its estimated growth in US oil production higher. That is quite remarkable. Something like that has probably never happened before. The forecasted growth for 2014, which was issued last summer (in other words several years into the shale revolution) started at 700 kbd. Now the last IEA estimate is that US oil production will grow 1.4 million b/d in 2014. This is in other words a forecasting error of 100% and at the time of the initial forecast, the agency had already witnessed growth of oil production of about 1 million b/d for both 2012 and 2013. This is not to criticise the IEA. They have not been alone in being too conservative to the US shale oil industry.

The large growth in US oil production has meant that non-OPEC production has been growing faster than 1.5 million b/d for more than a year now. The key growth is as mentioned coming from the US, but also Canada and Brazil are growing their output quickly. In Canada the growth is coming from oil sands production, mainly in-situ projects, but we also see growth in shale oil output from Canada. According to PIRA Energy, Canadian shale oil production has reached about 0.5 million b/d. We expect continued start-up of new projects in Canada in 2015. These will be projects that are not sensitive to today’s oil prices, as the investments have been taken several years ago. Going forward however, the investments in Canadian oil sands are set to suffer on a lower oil price but that will only lead to lower production growth as we approach 2020. Also in Brazil there will be no negative impact on production in the next couple of years due to lower prices. The country continues to ramp up its production from the pre-salt fields in the Santos and Campos basin. Pre-salt production reached a record 532 kbd in September which is 62% higher than the year before. We do however expect larger production growth from Brazil in 2016 than in 2015 as 900 kbd of platform capacity is then set to come on line. This could of course slip into 2017 but it will be coming to the market no matter what happens to oil prices in the coming two years.

 

Eoin Treacy's view -

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

Veteran subscribers will be familiar with our view that oil prices are likely to trend lower in real terms over the next decade. The DNB team have been among a small number of analysts to share this view. Unconventional oil and gas remain game changers for the Energy sector and this is likely to remain a significant factor for the foreseeable future. 



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October 29 2014

Commentary by Eoin Treacy

The Outlook for Energy: A View to 2040 2014

This report from Exxon Mobil may be of interest to subscribers. Here is a section: 

In 2010, coal was the world’s No. 1 fuel for power generation, accounting for about 45 percent of fuel demand. Though coal use will likely increase by about 55 percent in developing countries by 2040, it continues to lose ground in developed countries – primarily to natural gas and renewables such as wind and solar.

By 2040, demand for natural gas in the power generation sector is expected to rise by close to 80 percent. At that time, natural gas will be approaching coal as the world’s largest Energy source for power generation, and coal’s share will have dropped to about 30 percent. Natural gas will actually produce more electricity than coal, reflecting efficiency advantages of gas-fired versus coal-fired power plants.

Increased local natural gas production in North America and elsewhere, along with expanded international trade, is expected to supply the gas for power generation.

By 2040, we expect that the use of nuclear power will approximately double and renewables will increase by about 150 percent, led by wind and hydroelectric power.

 

Eoin Treacy's view -

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

It’s hard to think of a more benighted sector than coal. Beset on all sides by obstacles such as tougher environmental standards, slower growth in major markets like China, excess supply, too much debt and low natural gas prices in the USA,  steaming coal has fallen back to test the 2013 lows. 



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October 28 2014

Commentary by David Fuller

Stocks Rise on Corporate Earnings Ahead of Fed Meeting

Here is a section of this informative report from Bloomberg:

Almost 79 percent of S&P 500 companies that have reported so far have beatenearnings estimates, while 62 percent have surpassed revenue projections, according to data compiled by Bloomberg. Profit for S&P 500 companies rose 6.3 percent in the third quarter and sales increased 4.1 percent, analysts predicted.

“The corporate sector seems to be alive and kicking,” said Christian Gattiker, head of research at Julius Baer Group Ltd. in Zurich. “This is good news especially after the breakdown of confidence we had earlier this month. The question is whether the market has to rely on central bank policy alone to drive asset prices higher. Certainly the earnings season so far shows there is some support from the corporate sector too.”

Data today indicated orders for durable goods unexpectedly dropped in September for a second month as demand for machinery and computers slumped. Bookings for goods meant to last at least three years decreased 1.3 percent after falling 18.3 percent in August. The median forecast of 83 economists surveyed by Bloomberg called for a 0.5 percent gain.

Consumer confidence advanced in October as Americans enjoyed further price drops at the gas pump and the job market continued to improve. The Conference Board’s index climbed to 94.5 this month, the highest since October 2007, from a September reading of 89 that was stronger than initially estimated.

“The consumer confidence index was really big as everybody’s been concerned about what the pullback in the stock market means for holiday spending,” John De Clue, the Minneapolis-based chief investment officer for the Private Client Reserve of US Bank, said in a phone interview. “When you approach this time of year you’re looking at a wall of money to be spent or not spent, and it looks like now the fall in gasoline prices is going to offset that.”

All 10 of the main groups in the S&P 500 advanced, with Energy stocks rising 2.3 percent to lead gains. Transocean Ltd. and Newfield Exploration Co. added at least 4.3 percent.

David Fuller's view -

Corporate earnings are mostly encouraging, yet the lower durable goods figures for the second consecutive month confirm that the US economy is far from overheating.  Lower gasoline prices are a big boost for consumer confidence ahead of the important Christmas season.  This year’s three black swans – tit for tat sanctions against Russia, Isil’s advance in Iraq, and Ebola - are mostly off the front pages. Importantly, monetary policy remains extremely accommodative despite the imminent end of QE. 

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October 23 2014

Commentary by Eoin Treacy

From mobility to connectivity

Thanks to a subscriber for this interesting report from Deutsche Bank focusing on the Internet of Everything theme which is likely to continue to gain attention over the coming decade. Here is a section: 

IoT-driven demand for servers to all benefit the Asian technology supply chain in 2015-20. In this report we focus on devices which have yet to become connected and will be new growth drivers in 2015-20. We expect the upstream semiconductor sector to see incremental sales contribution from IoT and wearable ICs in 2015-20. We anticipate server demand to benefit the downstream hardware sector more than the upstream semiconductor sector.

Internet of Things – the connectivity theme After the mobility theme drove the proliferation of smartphones and tablet PCs since 2005, we expect the connectivity theme to trigger IoT demand in 2015-20. We expect 1) low-power application processors and microcontrollers with connectivity and embedded memory, and 2) MEMS (micro-electro-mechanical systems) sensors to be the major growth drivers for the upstream semiconductor sector. The key IoT applications for the downstream hardware sector include smart cities, home automation, eHealth, retail, smart cars, logistics, industrial control, smart metering, and smart agriculture and farming. In our view, IoT will provide benefits such as life quality improvement, productivity improvement, Energy saving, and security enhancement.

Wearable devices to be key products in an IoT world
Wearable devices can be connected to mobile devices and belong to the concept of IoT. Major applications for wearable devices will be entertainment, healthcare monitoring, mobile communication (connection with mobile devices), and mobile payment, in our view. We expect wearable device units to grow at a 25% CAGR in 2015-20.

IoT infrastructure should drive continuous server demand growth
We believe IoT infrastructure will be based on the current cloud architecture. Once IoT connects more objects, machines, and networks for global cloudbased services, data will be routed through servers for applications and data analysis. The uptake of IoT should therefore result in growing demand for data analysis and storage in servers and continue to drive demand for servers in 2014-18 with 4.3% unit CAGR 

 

Eoin Treacy's view -

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

Connectivity is an increasingly utility-like commodity which is essential to modern living. As 4G networks continue to evolve and speed up, the practicality of having access to the internet wherever you go, at an acceptable cost and for an increasingly wide array of uses is swiftly becoming a reality. Set aside for one moment the angst of what we are to do to ensure full employment and think of the productivity that can be gained from supplying an educated, astute worker with tools that make their jobs easier. The roll out of technology to the global workforce and the development of entirely new industries that benefit from big data, tech distribution and connectivity represents the type of development on which secular bull markets are based. 



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October 22 2014

Commentary by Eoin Treacy

Musings from the Oil Patch October 22nd 2014

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. This edition contains an enlightening post on climate change but here is a section on the oil price:

What gives us greater confidence in this scenario is the fact that the Saudi officials have suggested that they are prepared to accept these lower oil prices for up to two years. That time period is longer than the near-term impacts suggested by some of the other scenarios. More importantly, the time frame is too short to derail the U.S. shale effort, especially since the marginal cost of that effort is $70-$77, or below the low end of the Saudi target oil price range. Two years may be how long it will take for lower Energy costs to help Europe to recover. The last point about this scenario that seems quite interesting is the timing of the Saudi disclosure, even though it has been offering small price reductions to Asian and U.S. buyers in recent weeks. The Saudis appeared to disclose their price strategy almost immediately following the European Union’s decision to not label Canada’s oil sands as “dirty” oil. That ruling opens up this market to Canadian oil sands producers, just at a time when they are struggling with rapidly escalating development costs that has even caused some projects to be delayed. From our chart of marginal oil costs, oil sands is just at or above the top end of the Saudi target price range, suggesting that the Kingdom wants to make sure that by continuing to hold an umbrella above oil sands’ costs it would concede the European market to Canada. Essentially, the Saudi oil pricing strategy is all about attempting to restart economic growth that the world desperately needs for its political health and the Saudis and its fellow OPEC members need for their oil exports. The unknown unknowns (tip to Donald Rumsfeld) of this strategy are what we should be worrying about.

Eoin Treacy's view -

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

Regardless of the motivation behind the offering of discounts to Asian and European buyers, the fact remains that Saudi Arabia’s decision has had an impact on pricing and puts pressure on the more expensive sources of new production. 



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October 21 2014

Commentary by David Fuller

Oil at $80 a Barrel Muffles Forecasts for U.S. Shale Boom

Here is the opening of this topical article from Bloomberg:

The bear market in oil has analysts reassessing the U.S. shale boom after five years of historic growth.

The U.S. benchmark price dropped to $79.78 a barrel on Oct. 16, the lowest since June 2012. At that level, one-third of U.S. shale oil production would be uneconomic, analysts for New York-based Sanford C. Bernstein & Co. led by Bob Brackett said in a report yesterday. Drillers would add fewer barrels to domestic output than the previous year for the first time since 2010, according to Macquarie Group Ltd., ITG Investment Research and PKVerleger LLC.

Horizontal drilling through shale accounts for as much as 55 percent of U.S. production and just about all the growth, according to Bloomberg Intelligence. The Paris-based International Energy Agency predicted in November that the U.S. would pass Russia and Saudi Arabia to become the biggest producer in the world by 2015. Though some forecasts show oil rebounding or stabilizing, any slower increase in U.S. output would shake perceptions for the global market, said Vikas Dwivedi, an oil and gas economist in Houston for Sydney-based Macquarie.

David Fuller's view -

Oil prices slightly above $80 for WTI and $85 for Brent are bullish for the global economy, if not oil exporters who increased their budgets in line with their projections for higher export earnings.  Oil prices are oversold and have steadied, as I also mentioned yesterday in reply to Email of the day 2.

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October 20 2014

Commentary by David Fuller

Modi State Election Wins Pave Way for India Overhaul

Here is the opening of this informative article from Bloomberg:

It’s been a good weekend for India’s Prime Minister Narendra Modi.

Two days ago he took his biggest step yet toward boosting the economy with a shift to more market-based Energy pricing. Then yesterday his Bharatiya Janata Party came first in two state elections, building on his landslide victory in May.

Modi now has a stronger hand to push ahead with tougher steps to overhaul Asia’s third-biggest economy. Those include passing a goods-and-services tax, further opening up to foreign investment and making subsidies for fertilizer, cooking gas and food more targeted toward the poor.

“The decision to scrap fuel subsidies and raise gas prices is a potential game-changer in the realm of investor perceptions of Mr. Modi’s commitment to undertake major fiscal and structural reforms,” Nicholas Spiro, managing director of London-based Spiro Sovereign Strategy, said by e-mail. “The stronger the BJP is at the state level, the more scope there is for Mr. Modi to undertake meaningful reforms. Now the stars seem to be aligning for Mr. Modi.”

Thus the victories could make it easier to push through a six-year-old bill proposing to allow foreign investors ownership of as much as 49 percent of a local insurance company and also reach agreements to replace more than a dozen types of tax that increase incentives for corruption. Passing the tax law would require votes in both houses of parliament, plus the support of 15 of the 29 states to amend the constitution.

Formation of a single internal market offers the $1.9 trillion economy a significant boost, according to the National Council of Applied Economic Research in New Delhi.

“The prospects are very good of Modi being able to carry out other tough reforms,”Akshay Mathur, head of research at Mumbai-based Gateway House, said by phone. “GST requires a certain consensus and given his leadership and the kind of euphoria over his victory, chances are that he will push the GST through.”

The optimism follows on the heels of Modi’s Oct. 18 move to scrap controls on diesel prices and increase natural gas tariffs. These were his biggest steps toward curbing subsidies that have contributed to one of Asia’s widest budget deficits.

David Fuller's view -

For a country previously considered to be ungovernable, two elections have created one of the world’s strongest democracies, led by an economically savvy Prime Minister who inspires confidence, not least among ex-pat Indians living all over the world.

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October 17 2014

Commentary by Eoin Treacy

Deflation fears are overdone

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

Overview:  Over the last three months, inflation has fallen significantly, rekindling fears of deflation. Moreover, the fact that Energy prices have collapsed—in part because of a stronger dollar—has caused the breakeven inflation rate to roll over. In turn, financial markets have pushed out the timing of Fed tightening and substantially reduced expectations for the terminal fed funds rate. Our analysis shows that core inflation is likely to trend higher over time, led by higher services prices. Goods prices have been soft, but there is little evidence to suggest they are likely to turn sharply lower. Finally, the dollar needs to appreciate significantly further to have any noticeable impact on core inflation. 

Lower Energy prices will not sink capex:  Financial market participants are fretting the impact of falling Energy prices on capital expenditures within the Energy sector. In our view, these fears are overblown as oil- and gas-related investment is only about 10% of total nonresidential investment in equipment and structures, which is where business spending is captured in the GDP accounts. In total, business investment accounts for roughly 9% of real GDP. Hence, while Energy-related capital spending could slow if oil prices remain depressed for a significant period of time, this may be worth only a tenth or two on inflation-adjusted output growth, which is not very much. In fact, as we recently highlighted, the positive effects from a boost to consumer spending should more than outweigh any negative impact from lower capital expenditures.

 

Eoin Treacy's view -

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

There is the world of difference between deflationary and disinflationary action. In many respects the fall in oil prices is a major benefit for economies not least in terms of transport, heating/cooling and industry. If this translates into lower headline inflation it can be viewed as a positive for anyone with a medium to longer-term perspective. However for a central bank dedicated to fostering inflation in order to incrementally debase the value of outstanding debt it is not seen in such rosy terms. 



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October 14 2014

Commentary by Eoin Treacy

Giant Battery Unit Aims at Wind Storage Holy Grail

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

Electric-car battery prices already have fallen by 50 percent since 2010 to about $500 per kilowatt hour, and “by drawing on auto-battery technology, battery makers may also be able to supply storage batteries at a lower price,” Citigroup said in a Sept. 25 report. Tesla Chairman Elon Musk said in July that battery packs for electric cars will drop to $100 in the next 10 years. The Tehachapi batteries are supplied by LG Chem Ltd. and are the same type used in General Motors’ Volt.

The Southern California Edison project is part of a push for more wind and solar power in the state, among the sunniest in the U.S. A third of California’s electricity must come from renewable sources by 2020, and mandates also require that the three biggest investor-owned utilities store 1,325 megawatts by 2024. California already has more than 12,000 wind turbines, the most of any state, according to the American Wind Energy Association.

Eoin Treacy's view -

Many of the efficiencies claimed by battery manufacturers have been achieved via scale in manufacturing rather than technological leaps. Tesla’s gigafactory takes this process further by introducing additional economies of scale to further reduce the price of lithium batteries. So far ground breaking innovation has been more difficult to achieve than previously envisaged by companies but one benefit of building utility sized batteries is that power to weight ratios which are so important for car batteries are no longer a consideration.  

 



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October 13 2014

Commentary by David Fuller

U.S. Stocks Sink as Oil Slumps to 4-Year Low; Gold Gains

Here is the opening of this market summary from Bloomberg:

The Standard & Poor’s 500 Index capped its worst three-day loss since 2011 as airlines sank on Ebola concerns and Energy shares plunged as Brent dropped to the lowest in almost four years. The dollar slid and gold climbed.

The S&P 500 (SPX) fell 1.6 percent to 1,874.82 at 4 p.m. in New York, the lowest since May and closing below its 200-day moving average for the first time since 2012. The Dow Jones Industrial Average lost 1.4 percent to a six-month low. The Bloomberg U.S. Airlines Index plunged 6.2 percent, the most in two years. Brent crude tumbled 1.5 percent after sliding into a bear market last week. The dollar weakened against most of its 16 major counterparts. Gold gained 0.7 percent.

Today’s selloff extended a rout that wiped $1.5 trillion from global equities last week amid concern about weakening economic growth. Federal Reserve Vice Chairman Stanley Fischer said during the weekend that U.S. rate increases could be delayed by slowing growth elsewhere. Confirmation that a Dallas health-care worker is infected after treating an Ebola patient who died has put a new focus on risks the virus will spread.

“There has been weakness all day and there’s no leadership so when you get this exogenous thing, whether it’s caused by Ebola or not, and airlines are getting decimated, it’s hurting everything else,” Michael Block, chief equity strategist at Rhino Trading Partners LLC, said by phone.

David Fuller's view -

What is causing this selloff on Wall Street?  Well, subscribers who have monitored this service’s Comments of the Day and listened to the Audios over at least the last two to three weeks are not surprised.  The first, early warning came from deteriorating market breadth, revealed by the Russell 2000 Index of smaller companies – the canary in the coalmine - which had been developing a large top formation all year, before breaking downwards last week.  The second warning came from overextended rallies which reached psychological reassessment points, notably 2000 for the S&P 500 Index.

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October 13 2014

Commentary by David Fuller

Putin Deals China Winning Hand as Sanctions Power Rival

Here is the opening of this informative article from Bloomberg:

Defying his former enemies in the U.S. and Europe may force Vladimir Putin to aid the ascent of his biggest rival in the east.

Isolated over UkraineRussia is relying on China for the investment it needs to avert a recession, three people involved in policy planning said, asking not to be identified discussing internal matters. This means caving in to pressure to grant China privileged access to the two things it wants most: raw materials and advanced weapons, two of the people said.

Russia’s growing dependence on China, with which it spent decades battling for control over global communism, may end up strengthening its neighbor’s position in the Pacific while hastening its own economic decline. With the ruble near a record low and foreign investment disappearing, luring Chinese cash may deepen Russia’s reliance on natural resources and derail government efforts to diversify the economy.

“Now that Putin has turned away from the west and toward the east, China is drawing maximum profit from Russian necessity,” said Masha Lipman, an independent political analyst in Moscow who co-authored a study on Putin with former U.S. Ambassador Michael McFaul.

China is wasting no time filling the void created by the closing of U.S. and European debt markets to Russia’s largest borrowers. A Chinese delegation led by Premier Li Keqiang signed a package of deals today in Moscow in areas including Energy and finance. Among the accords was a three-year 150 billion yuan local-currency swap deal, a double-tax treaty, satellite-navigation and high-speed rail cooperation and an agreement on implementing a May natural gas contract.

David Fuller's view -

This is a good deal for China which wants Russia’s oil, gas and sophisticated weapons.  Terms for agreement will be set mainly by China because Russia is a forced seller and very much in need. 

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October 10 2014

Commentary by Eoin Treacy

Autonomies

Eoin Treacy's view -

We created the Autonomies designation because it was evident from late 2009 that some very important secular themes were coalescing around a group of companies that benefit from lower Energy prices, the expansion of the global middle class and the accelerating pace of technological innovation. These types of companies have global reach, the freedom to take maximum benefit from the global economy, dominate their respective niches, have established businesses that foster brand loyalty and often pay solid yields.  

Such qualities represent important reasons why they should be considered for entry in investment portfolios with a relatively long time horizon. More than a few subscribers have told me that they use the universe of Autonomies as a pool from which they pick emerging trends to participate in for as long as they remain consistent and we anticipate they the group will continue to provide investment opportunities for the foreseeable future.  

As the Fed’s third QE program draws to a close, the liquidity fuelled rally which has had such an effect on both markets and investor psychology is coming into question. I thought it would be an opportune time to review the Autonomies considering the spike in volatility posted this week. 

I suspect a big question for many investors will be whether the current pullback will represent something akin to that posted in 2011. It might, but in a good many cases this reaction is already larger and occurring from a higher point. 

 



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October 09 2014

Commentary by David Fuller

Stealth Bear Markets in U.S. Stocks Are Hiding in Bushes

Here is the opening of this topical report from Bloomberg:

While the Standard & Poor’s 500 Index is still less than 4 percent below its September record, other gauges of U.S. stocks are revealing where risk has been taken off the most in front of an eventual “normalization” of monetary policy.

Most conspicuous are the 88 Energy companies represented in the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), a $1.1 billion fund. The ETF managed to rebound yesterday after falling 24 percent from its June record, though today it’s reversing those gains and setting a new 13-month low. Crude oil is down 22 percent from its high in September 2013 as the rallying U.S. currency lowers prices of dollar-denominated commodities.

While lower oil prices are good for many parts of the economy, keep in mind that crude and the S&P 500 are usually positively correlated, meaning they tend to move in the same direction. The correlation diminished in recent years, and even went negative for a short time in late July and early August. The last time it went negative for any significant period was around the bankruptcy of Lehman Brothers Holdings Inc. in 2008.

David Fuller's view -

Churning price action, as we are now seeing on Wall Street, is an important technical signal.  However, the implications depend entirely on where it is occurring in the market cycle.

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October 09 2014

Commentary by Eoin Treacy

Long Run Crop Price Outlook: $6 Corn and $13 Soybeans

I met Michael Devlin from Cere Partners at last week’s Contrary Opinion Forum and had a long chat about the merits of farmland in a diversified portfolio. Here was kind enough to send me their outlook for corn and soybeans which they farm in Indiana. Here is a section: 

Brazil has been expanding its soybean acreage for 20 years, but $16.00 soybeans made the economics attractive on even marginal ground, which may not yet be fully conditioned to neutralize the naturally high acidity. Consequently, we witnessed the second biggest expansion of Brazilian soybean acreage ever. (See Exhibit 3) Furthermore, $7.50 corn made not only 1st-crop corn attractive in Southern Brazil, but also 2nd-crop or safrinha corn. In some parts of the world, including major parts of Brazil, farmers are often able to get 2 crops by planting a soybean variety with a shorter growing season, and then immediately planting the second crop (often corn, cotton, or sorghum). "is acreage is able to rotate annually to whichever crop offers the best economics. But second-crop corn is risky. Farmers are gambling that the rainy season will continue until the corn is mature. However, at $7.50 or even $6.00 the economics have been compelling and in Brazil there was a major expansion of second crop corn in 2012 and 2013. For the first time ever, second crop corn (safrinha means “little crop” in Portuguese) was bigger than first crop corn, comprising 56% of the total production. 

Where $7.50 corn (and $16.50 soybeans) signals an expansion of acreage, Ceres believes $4.50 corn (more precisely $10 soybeans) signals a reduction of acreage. Mato Grosso State in West Central Brazil grows approximately 10% of the global soybean crop. But Mato Grosso soybeans must be hauled more than 1,000 miles by truck over poor roads to get to market. Net of transportation costs, the price farmers receive for soybeans is significantly below the price quoted in Chicago.

Currently the “basis” on bids for 2014 soybeans is reportedly ~$3.00 under Chicago. So $10 soybeans in Chicago (the ~price equivalent to $4.50 corn) translates into $7 soybeans in Mato Grosso. But $7 is the breakeven price for the average producer in the state (See Exhibit 4) according to IMEA, the Mato Grosso Institute for Agricultural Economics. Put another way, half of the soybean producers in Mato Grosso, comprising ~5% of worldwide soybean production, would be below breakeven in a $4.50 corn/$10 soybean environment. $10 soybeans might not have an immediate elect on soybean acreage because Brazilian farmers typically buy inputs and market their crops in advance. So it could take $4.50 corn/$10 soybeans lasting a full year for soybean acreage to drop significantly.

Additionally, at $4.50 corn, we would anticipate much less corn acreage in the second crop. Based on crop budgets from IMEA it will cost ~$2.50 to grow a bushel of second crop corn in 2014. "is breakeven at ~$5.00 corn given that IMEA estimates it costs another $2.50 a bushel to truck corn from the interior to the major grain exporting ports. Second crop corn would at best be a breakeven proposition at $4.50-$5.00. We would see some acreage planted as farmers need a cover crop, but it will be significantly less than we saw in 2013.

 

Eoin Treacy's view -

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

Farmers respond to higher prices by planting more in an effort to capture as much benefit as possible. Inevitably supply increases. In the period from 2006 relatively high historical prices have been sustained for lengthy periods of time. The weak Dollar, high cost of Energy, inclement weather, expensive nutrients and rising labour costs all contributed to this situation but the effect has been that supply increased nonetheless. 



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October 08 2014

Commentary by Eoin Treacy

International schemes hatch to tap nuclear for industrial heat

Thanks to a subscriber for this informative article from the Energy2blog which may be of interest: Here is a section: 

The HTR-PM is not to be confused with another ambitious high temperature project underway in China, in which the Chinese Academy of Sciences in Shanghai is developing small prototypes of a salt-cooled, solid fueled pebble bed reactors (Li Fu’s HTR-PM design uses gas cooling) and of a salt-cooled, liquid fueled molten salt reactor. It is targeting a 2019 completion date.

The two projects reflect a drive in China to develop nuclear power as part of an environmental and Energy security push. China even has other advanced reactor projects under way. For example, it hopes to operate a “super critical water-cooled reactor” by 2025, NucNet reported. And its current commitment conventional reactors has become legendary. As I wrote recently, whereas China currently operates only 20 nuclear reactors , it has another 28 under construction, an additional 58 planned, and a staggering 150 or so proposed.

It is also stepping up as an exporter of nuclear reactors and technologies to countries including Saudi Arabia and possibly the UK. Its penchant for selling abroad applies not only to conventional reactors, but to advanced reactors as well. In one of his Vienna slides, Tshinghua’s Li noted that the HTR-PM is “suitable for international market” and that its small size makes it “more flexible for developing countries.”

 

Eoin Treacy's view -

The development of Generation IV nuclear reactors represents a bold step forward for the prospects of a future with abundant Energy. However, the fact that China is the only country presently willing to commit to experimenting with a variety of potential solutions ensures that not only has it a better chance of solving its Energy dilemma but that it will gain a technological lead in what is a highly strategic sector. The deterioration in the price of oil and gas together with political ignorance of and ambivalence to new nuclear suggest that North American and European appetites are likely to remain tepid for developing these technologies. 



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October 07 2014

Commentary by David Fuller

Roger Bootle: Global imbalances succumb to the dwindling price of oil

Here is the latter section from this informative article by the author for Bloomberg:

Over the last few years, this picture has changed. America’s deficit has just about halved, and there has been a major reduction in the corresponding large current account surpluses around the world. Japan’s surplus has fallen dramatically so that it is now not much above zero. China’s surplus and the combined surpluses of the oil producers have just about halved.

What’s more, these trends may be set to continue. The oil price has been dribbling down and is now just over $90. At Capital Economics, we think that the price of Brent crude could be about $70 a barrel by 2020, compared to the 2008 peak of $143. This price weakness is being driven by a combination of increased supply coming onto world markets and increased Energy efficiency. If we are right about the prognosis, then some significant surpluses are going to evaporate. Russia’s is almost completely gone already.

But there is a new element to this story. While most of the global imbalances have been on a course towards reduction, in the eurozone, what wasn’t an imbalance ten years ago has recently become one. Of course, from the beginning of the single currency there were significant imbalances within the eurozone, with large surpluses for Germany and the Netherlands offset by large deficits in Spain and several of the other smaller economies.

What has happened over the last few years, however, is that the surpluses run by Germany and the Netherlands have remained constant, but the group of weaker peripheral countries – Portugal, Italy, Ireland, Greece and Spain – has moved from small deficits to a surplus. The primary driver behind this change has been Spain. As recently as 2007, it was running a deficit of 10pc of GDP. The balance is now nearly zero.

The upshot is that the eurozone’s combined current account surplus is now about double the size of China’s, and roughly equal to the combined surpluses of all the oil-producing countries in OPEC. The effort to keep the euro together has involved a massive deflation of demand in the European periphery that has depressed aggregate demand for the world as a whole. The surplus run by the eurozone as a whole represents an implicit attempt to Germanise the union and to export its way out of economic weakness, in the process exporting recessionary forces around the world. One of the prime sufferers from this development has been the UK, since we are the eurozone’s single biggest export market and it is ours.

Let me put this more provocatively. Some of the forces responsible for the fundamental weakness of aggregate demand which lay behind the financial crisis have been attenuated and/or are on the way to petering out. If oil prices continue to fall this will be a massive boon to the world economy. Just as this improvement has occurred, however, the gathering failure of the eurozone has replaced it.

Some notable American economists are banging on about the idea of “secular stagnation”, that is to say, the notion that demand is going to be weak for an extended period for deep-seated, systematic reasons, and that accordingly economic performance will be weak – for years, if not decades, into the future. They are barking up the wrong tree. The formation of the euro and the way that it has been managed in a deflationary manner is now the single biggest cause of weak aggregate demand and poor economic performance. Cure the euro problem, and the whole world economy would be much stronger. I surely don’t need to remind you of how the euro problem can be cured.

David Fuller's view -

Financial difficulties, not to mention crises, are well known catalysts for political change.  All of Europe remains in a political hot seat.  Scotland’s referendum vote nearly broke up the United Kingdom.  Putin’s mendacity in Ukraine, leading to sanctions, followed by a sharp drop in the price of Brent crude oil since June, make regime change a real possibility in Russia.     



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September 26 2014

Commentary by David Fuller

Nuclear Plants Across Emerging Nations Defy Japan Concern

Here is the opening of this interesting article from Bloomberg:

Three years after Japan closed all of its nuclear plants in the wake of the Fukushima meltdown and Germanydecided to shut its industry, developing countries are leading the biggest construction boom in more than two decades.

Almost two-thirds of the 70 reactors currently under construction worldwide, the most since 1989, are located inChinaIndia, and the rest of the Asia-Pacific region. Countries includingEgyptBangladesh, Jordan and Vietnam are considering plans to build their first nuclear plants, according to Bloomberg New Energy Finance in London. Developed countries are building nine plants, 13 percent of the total.

Power is needed as the economies of China and India grow more than twice as fast as the U.S. Electricity output from reactors amounted to 2,461 terawatt-hours last year, or 11 percent of all global power generation, according to data from the Organization for Economic Cooperation and Development and the International Energy Agency. That’s the lowest share since 1982, the data show.

“We see most of the constructions in the growing economies, in the parts of the world where you see strong economic growth,” Agneta Rising, the head of the World Nuclear Association in London, said Sept. 24 by e-mail. “In many developed countries there is a large degree of policy uncertainty concerning nuclear.”

China’s electricity consumption is forecast to jump 63 percent by 2020 to 7,295 terawatt-hours from 4,476 terawatt-hours in 2011, while India’s demand is predicted to grow by 45 percent from 2010 through 2020, according to the U.S. Energy Information Administration. Over the same period, demand growth in 22 European members of the OECD is forecast to be 3.6 percent.

David Fuller's view -

The world will need all of the Energy sources that it can develop and a significant increase in new nuclear plants would be a big factor in reducing CO2 emissions.  We are currently in the foothills of nuclear power’s recovery as it remains controversial, albeit less so in faster growing emerging countries. 

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September 24 2014

Commentary by David Fuller

Technology Revolution In Nuclear Power Could Slash Costs Below Coal

Here is a section from this interesting article by Ambrose Evans-Pritchard for The Telegraph: 

The Alvin Weinberg Foundation in London is tracking seven proposals across the world for molten salt reactors (MSRs) rather than relying on solid uranium fuel. Unlike conventional reactors, these operate at atmospheric pressure. They do not need vast reinforced domes. There is no risk of blowing off the top.

The reactors are more efficient. They burn up 30 times as much of the nuclear fuel and can run off spent fuel. The molten salt is inert so that even if there is a leak, it cools and solidifies. The fission process stops automatically in an accident. There can be no chain-reaction, and therefore no possible disaster along the lines of Chernobyl or Fukushima. That at least is the claim.

The most revolutionary design is by British scientists at Moltex. "I started this three years ago because I was so shocked that EDF was being paid 9.25p per kWh for electricity," said Ian Scott, the chief inventor. "We believe we can achieve parity with gas (in the UK) at 5.5p, and our real goal is to reach 3.5p and drive coal of out of business," he said.

The Moltex project can feed off low-grade spent uranium, cleaning up toxic waste in the process. "There are 120 tonnes of purified plutonium from nuclear weapons in Britain. We could burn that up in 10 to 15 years," he said. What remained would be greatly purified, with a shorter half-life, and could be left safely in salt mines. It does not have to be buried in steel tanks deep underground for 240,000 years. Thereafter the plant could be redesigned to use thorium, a cleaner fuel.

The reactor can be built in factories at low cost. It uses tubes that rest in molten salt, working through a convection process rather than by pumping the material around the reactor. This cuts corrosion. There is minimal risk of leaking deadly cesium or iodine for hundreds of miles around.

Transatomic Power, in Boston, says it can build a "waste-burning reactor" using molten salts in three years, after regulatory approval. The design is based on models built by US physicist Alvin Weinberg at Oak Ridge National Laboratory in the 1960s, but never pursued - some say because the Pentagon wanted the plutonium residue for nuclear warheads.

It would cost $2bn (overnight cost) for a 550-megawatt plant, less than half the Hinkley Point project on a pro-rata basis. Transatomic says it can generate 75 times as much electricity per tonne of uranium as a conventional light-water reactor. The waste would be cut by 95pc, and the worst would be eliminated. It operates in a sub-critical state. If the system overheats, a plug melts at the bottom and salts drain into a cooling basin. Again, these are the claims.

The most advanced project is another Oak Ridge variant designed by Terrestrial's David LeBlanc, who worked on the original models with Weinberg. It aims to produce power by the early 2020s from small molten salt reactors of up to 300MW, for remote regions and industrial plants. "We think we can take on fossil fuel power on a pure commercial basis. This is a revolution for global Energy," said Simon Irish, the company's chief executive.

David Fuller's view -

Here is a PDF version if you had any difficulty in opening the article above.

Molten salt reactors that provide cheap Energy, consume most of our nuclear waste, are vastly safer than nuclear plants in use today, and much cheaper to build, sounds too good to be true.  That is the reality today, but theoretically, the potential of future technologies is virtually unlimited. 

The prospect of commercially competitive molten salt reactors is presumably at least a decade away, assuming this fledgling industry receives the development capital required.  That will prove to be more of a political than economic challenge, I fear.  Backers of today’s various Energy sources will be opposed, as will most militant greens, and governments are too often looking for short-term solutions.  

Nevertheless, there is a clear ‘needs must’ incentive for reliable, economic, 24-hour a day Energy at a consistent rate, which does not pollute the atmosphere.  Molten salt reactor projects are certainly worth developing.

Looking ahead, I would welcome any informative articles and reports on this subject that readers are able to share with our Collective of Subscribers. 



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September 24 2014

Commentary by Eoin Treacy

Musings from the Oil Patch September 24th 2014

Thanks to a subscriber for kindly forwarding this edition of Allen Brooks’ ever informative Energy report for PPHB. Here are two important sections: 

The IEA’s comment about how remarkable the decline is, suggests that it did not have a grasp of the magnitude of the impact on oil demand from China’s ending the filling of its oil storage tanks during the past few months in response to the country’s growing economic weakness and financial stress. It would appear that the additional cost of this storage oil was too expensive for the Chinese economy and banking system to bear. Additionally, we believe the IEA’s model assumed too generous an estimate for economic growth in Western Europe and North America during the second half of 2014.

And

Besides the accelerating demand growth against limited non-OPEC supply increase case, the bulls point to the growing cost to find additional oil supplies. They also point to the new dynamic for OPEC, which is the high fiscal cost of their oil output. By “fiscal cost” they mean the price for a barrel of oil that multiplied by the number of annual barrels produced yields income sufficient to cover the cost of running the country’s government. That cost has risen sharply in a number of Middle Eastern and North African countries due to rapidly growing populations (these countries have some of the highest birth rates in the world) and the cost to mitigate social tensions associated with the ethnic struggles (Arab Spring) ongoing within most of these countries – what some of us might call political insurance. A number of analysts have crunched the budget numbers for these countries and created charts such as that below.

What this chart demonstrates is that only Qatar and Kuwait among the OPEC members have fiscal breakeven prices of around $75 a barrel. A substantial volume of OPEC production needs a price somewhere around $100 a barrel for the country to breakeven, while another substantial amount requires prices in the $125 per barrel neighborhood.

Eoin Treacy's view -

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

There have been a number of headlines pondering the response of oil prices when geopolitical tensions have been so taut. China’s decision that its strategic reserve is large enough represents the withdrawal of a significant source of demand from the market at a time when supplies have been reasonably steady regardless of geopolitical tensions. 



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September 23 2014

Commentary by David Fuller

Martin Spring: On Target

My thanks to the author for the latest issue of his informative monthly letter.  Here is a brief sample:

Making a Mess of Power Supply

Britain’s National Grid has announced that emergency measures are going to be introduced to prevent the “lights going out” this winter.

Energy investment banker Allen Brooks says this is “an unintended consequence of the UK’s green Energy plan that has forced the closure of fossil fuel and nuclear plants,” pushing the nation’s surplus power availability “to a razor-thin margin that might disappear this winter” as a result of power-plant outages.” It may also be caused by “lack of renewable Energy at times when the wind doesn’t blow and the sun doesn’t shine.”

Emergency measures include compensation for offices and factories that agree to shut down for up to four hours a day to provide capacity for households, and asking owners of old fossil-fuel generating plants that we shut down to reopen before the start of winter.

Those such as former US vice-president Al Gore who argue that renewables increasingly make “good economic sense” because they’re heading towards commercial viability -- the cost of solar panels has halved over three years – ignore “the costs associated with the intermittency of the power output,” Brooks says.

“Wind farms do not generate power when the wind isn’t blowing, and solar power isn’t produced during the night. Electricity demand also varies… in ways that the output from wind and solar may not match.”

A recent cost-benefit analysis by Charles Frank of the Brookings Institute that takes into account all the costs of building and running power plants, including the costs of dealing with intermittency through providing standby power, shows that wind and solar are much more expensive using the standard measure of “levelized” cost.

“Solar power is the most expensive way to reduce carbon emissions. Wind turns out to be the next most expensive, with hydro-power providing a modest net benefit. The most cost-effective zero-emission technology is nuclear power.”

David Fuller's view -

I only question the last paragraph’s contention that solar power is a more expensive way to reduce carbon emissions than windmills.  I do not know how they measured this but solar panels are becoming increasingly efficient and I expect to see them on many industrial / commercial buildings and an increasing number of private homes over the next two decades.

This issue of On Target has an excellent lead section on Planning Your Portfolio, extensively quoting William Bernstein’s new book.

On Target is posted in the Subscriber's Area.



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September 19 2014

Commentary by David Fuller

The Weekly View: Keeping The Fed At Bay

My thanks to Rod Smyth, Bill Ryder and Ken Liu of RiverFront for their excellent timing letter.  Here is a brief sample:

Even with a strengthening economic environment, we don’t see any inflation trouble ahead.  This is partly because of falling Energy prices, which makes up about 10% of the consumer price index.  Other major global commodities, such as iron ore, corn, and rubber, have had big price declines and continue to trend lower.  We also credit US dollar strength in recent weeks for putting the lid on commodity prices in general.  A stronger dollar also helps lower import costs, which is another way to keep inflation under control.  Thus, one of the beneficial side effects of stronger economic growth and rising expectations of monetary tightening is to boost the currency (and its purchasing power) while actually lowering inflation expectations.

David Fuller's view -

The USA’s virtual Energy self-sufficiency puts it in a much stronger position to cope with a firming currency, in a competitive global environment, as the economy gradually recovers. 

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September 18 2014

Commentary by David Fuller

Fracking, Drinking Water and Reality

As it turns out, fracking doesn't necessarily pollute the water supply. But the wells used for fracking might.

The distinction matters because drilling companies know how to make wells more reliable, even if all the effects of the fracking process are not yet well understood. One of the biggest worries, for example, has been that the hydraulic fracturing of deep underground rock to release the natural gas within it could somehow cause that gas to leak upward and contaminate drinking water supplies many thousands of feet closer to the surface.

But a new study finds that this danger is oversold. In places where the water near fracking sites has been contaminated, the culprit has been faulty steel tubing inside the vertical wells that lead down to the shale, or weak cement in the casing around it.

Making sure the wells are built soundly is something that drilling companies, and state regulators, can do. In about 5 percent of wells, the cement is imperfect enough to carry the risk of internal leaks.Poor cementing was partly to blame for the BP oil spill in the Gulf of Mexico four years ago.

So states need strong standards for well construction -- to ensure, for example, that the cementing is done effectively, that there are plenty of layers of casing, that the well runs straight and has smooth sides, and so on. And states need enough trained inspectors to see that the rules are carefully followed.

The good news is that many states have been putting such rules in place. Pennsylvania, Wyoming and Texas have all strengthened their regulations since 2010. In just the past year and a half, eight other states have updated their well-integrity rules, and six more have changes in the works.

Knowing that water pollution isn't inevitable with fracking should help both critics and defenders of the technology come together to agree on well standards. It wouldn't make fracking problem-free -- there's still a need for the safe handling of wastewater, as well as the noise, light and other distractions that many well neighbors hate. But it allays worries about a possibly dangerous side effect of a business that increasingly provides the U.S. with a relatively clean and inexpensive fuel.

David Fuller's view -

The technology continues to improve; effective regulation is in everyone’s interests; the world gets the Energy it needs.

If Europe embraced responsible fracking, its economies would be more competitive and Putin would be brought to heel more quickly.  



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September 18 2014

Commentary by Eoin Treacy

Uranium officially enters bull market

This article from Bloomberg on the 16th may be of interest to subscribers. Here is a section: 

The U.S. on Sept. 12 expanded sanctions against Russia to include OAO Sberbank, the country’s largest bank, because of the fighting in eastern Ukraine. The EU added 15 companies such as Gazprom Neft and OAO Rosneft, and 24 people to its own list of those affected by its restrictions.

In Canada, voting on Cameco’s new labor agreement will happen once workers are back on the job, the United Steelworkers said Sept. 12. The Saskatoon, Saskatchewan-based producer said Aug. 27 it had started shutting down the mine after receiving a strike notice from the union.

An agreement to end the strike will be negative for the uranium sector, Rob Chang, the head of metals and mining at Cantor Fitzgerald in Toronto, said in a Sept. 12 note. The brief shutdown may affect about 900,000 pounds of supply, he said.

Eoin Treacy's view -

The repercussions of the sanctions on Russia continue to be felt across an increasing number of sectors. Locking Sberbank out of large international capital markets is a major impediment to Russia accessing the working capital necessary to fund normal financial markets operations. By comparison, the ban on salmon exports from Europe and Norway has been a boon for the Faroe Islands but in the wider scale of things a pretty small consideration. Russia’s tactical advantages lie in the Energy sector and potentially in the cyber sector. 



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September 18 2014

Commentary by Eoin Treacy

Towards an Asian century of prosperity

This article from The Hindu newspaper by China’s Premier Xi Jinping may be of interest to subscribers. Here is a section: 

Both China and India are now in a crucial stage of reform and development. The Chinese people are committed to realising the Chinese dream of great national renewal. We are deepening reform in all sectors. The goal has been set to improve and develop the socialist system with Chinese characteristics and advance the modernisation of national governance system and capability. A total of over 330 major reform measures covering 15 areas have been announced and their implementation is well underway.

Under Prime Minister Narendra Modi’s leadership, the new Indian government has identified ten priority areas including providing a clean and efficient administration and improving infrastructure. It is committed to building a united, strong and modern India — Shreshtha Bharat. The Indian people are endeavouring to achieve their development targets for the new era. China and India are both faced with historic opportunities, and our respective dreams of national renewal are very much aligned with each other. We need to connect our development strategies more closely and jointly pursue our common dream of national strength and prosperity.

As emerging markets, each with its own strengths, we need to become closer development partners who draw upon each other’s strengths and work together for common development. With rich experience in infrastructure building and manufacturing, China is ready to contribute to India’s development in these areas. India is advanced in IT and pharmaceutical industries, and Indian companies are welcome to seek business opportunities in the Chinese market. The combination of the “world’s factory” and the “world’s back office” will produce the most competitive production base and the most attractive consumer market.

As the two engines of the Asian economy, we need to become cooperation partners spearheading growth. I believe that the combination of China’s Energy plus India’s wisdom will release massive potential. We need to jointly develop the BCIM Economic Corridor, discuss the initiatives of the Silk Road Economic Belt and the 21st Century Maritime Silk Road, and lead the sustainable growth of the Asian economy.

Eoin Treacy's view -

Ahead of Xi’s visit Chinese troops built a rudimentary road on the contested part of the India/China border and Indian troops destroyed it a day later. India boosted support for Vietnam, agreeing to export arms, the day before his visit. The above text is part of a charm offensive where both countries could benefit from greater bilateral trade, but no one is under any illusion about how much room there still is for relations to improve.   

 



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September 16 2014

Commentary by Eoin Treacy

Crude Rises as OPEC Secretary General Says Group May Cut Target

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

“I am not really concerned about the prices declining at this short term,” OPEC’s El-Badri said. “I think the price will rebound by the end of the year. When we’re coming to the fall, things will look better.”

Saudi Arabia cut its crude production by 408,000 barrels a day to 9.6 million in August, the biggest reduction since the end of 2012, the kingdom said in a submission to OPEC.

OPEC officials, including Saudi Arabian Oil Minister Ali Al-Naimi, have said they see no urgent need to respond to oil’s drop. Prices “always fluctuate and this is normal,” Al-Naimi told reporters in Kuwait on Sept. 11. Oil will recover as demand for winter fuels climbs, Kuwaiti Oil Minister Ali Al-Omair said the same day. The group is next due to meet on Nov. 27.

‘Huge Decline’
“The huge decline in prices since June has been a major concern to all oil producers,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on Energy, said by phone. “The Saudis have already started to cut output and now we’re getting evidence of further action. The market appears to have found a bottom and the statements are a sign for the buyers to return.”

Russian and OPEC analysts will meet in the spring, Russian Energy Ministry spokeswoman Olga Golant said by text message. “High-level” talks are scheduled for the second half of 2015, according to a joint statement from OPEC and Russia today “I wouldn’t be surprised if the Russians and OPEC cooperated to support the market,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $2.6 billion, said by phone. “It’s in the interests of both parties to keep prices from falling further.”

Eoin Treacy's view -

Oil remains both the most important and most political of all commodities. The actions of OPEC, in supporting prices in the $100 region over the last three-years, have helped sustain the range evident in Brent crude prices. As a result traders have been waiting for a statement from the cartel on what their actions are likely to be with prices testing the lower side. They appear to have their answer. 



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September 12 2014

Commentary by David Fuller

U.S., EU Tighten Russia Sanctions in Ukraine Conflict

Here is the opening for this article on the latest developments regarding sanctions, reported by Bloomberg:

The U.S. expanded sanctions againstRussia to include the country’s largest bank, OAO Sberbank, Energy companies as well as five state-owned defense and technology companies, joining the European Union in tightening restrictions.

President Vladimir Putin, talking to reporters in the Tajik capital of Dushanbe, said Russia will hold off on retaliation for now and has no plans to “close itself off.”

Russia is locked in a standoff with its former Cold War adversaries over the fighting in eastern Ukraine that has claimed more than 3,000 lives. Putin has denied supporting pro-Russian rebels in the battle-torn region.

“Russia’s economic and diplomatic isolation will continue to grow as long as its actions do not live up to its words,” U.S. Treasury Secretary Jacob J. Lew said in a statement today. “Russia’s economy is already paying a heavy price for its unlawful behavior.”

The Treasury Department imposed sanctions that prohibit transactions in, provision of financing for, or other dealings in new debt of greater than 90 days maturity issued by OAO Gazprom (OGZD) Neft and OAO Transneft. For banks, the debt financing restriction now covers maturities greater than 30 days, instead of 90 days previously.

David Fuller's view -

Russia’s economy is weak and problems are compounded by the recent decline in oil prices.  Therefore, Putin may have decided on a quieter strategy over the next few months, knowing that European countries were already talking about lifting the latest sanctions as they reluctantly imposed them, if there were no further obvious invasions of Ukraine.  A rally in the price of Brent crude oil and / or the approach of winter will strengthen Putin’s hand and could embolden him, provided there is no real resistance to his policies within Russia.

This item continues in the Subscriber’s Area, and contains an informative interview.



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September 11 2014

Commentary by David Fuller

Obama Says U.S. to Join EU in Tightening Russia Sanctions

Here is the opening of this recently released article from Bloomberg:

The U.S. joined the European Union in stiffening sanctions on Russia over Ukraine, as the 28-member bloc offered to ease the restrictions once the Kremlin makes a good-faith effort to end the conflict.

The U.S. will “deepen and broaden” measures against Russia’s financial, Energy, and defense industries, President Barack Obama said in a statement today, adding that the sanctions will take effect tomorrow and details will be released then. The EU said it would also enact its latest round of economic restrictions tomorrow. Europeis acting against a peaceful solution in Ukraine, the Russian Foreign Ministry said.

The moves raise the level of confrontation and follow reprisals last month by Russian President Vladimir Putin with a ban on a range of food imports after an earlier round of U.S. and European penalties. Facing the most significant action against his country since the fall of the Berlin Wall, Putin denies any involvement in the fighting that broke out after he annexed Crimea in March and says Russia’s Cold War adversaries are to blame for the standoff.

“We have always stressed the reversibility and scalability of our restrictive measures,” EU President Herman Van Rompuy said in a statement from Brussels. A review of the cease-fire in eastern Ukraine by the end of September may lead to EU “proposals to amend, suspend or repeal the set of sanctions in force, in all or in part.”

Ending days of wrangling, representatives of the EU governments agreed to impose curbs on European assistance for Russian oil exploration and production and on the financing of Russian defense and Energy companies. The EU also slapped travel bans and asset freezes on 24 more people accused of destabilizing Ukraine, bringing the total to 119.

David Fuller's view -

Sanctions and the inevitable counter moves that we have seen from Russia are understandably inconvenient and painful for all parties, but preferable to military war.  They are also a medium to longer-term strategy so it is premature to say that they are not working. 

However, reading the article above, EU President Herman Van Rompuy’s comments sound like the novice, underfunded gambler making his last ante while simultaneously announcing that he will fold in the next round.  Instead, he should indicate that sanctions will continue to be tightened until Russia backs down. Unfortunately, his comments are more likely to encourage Putin. 

Putin’s policies ensure that Russia’s economic position is vulnerable, but so is Europe’s.  However, Russia is in a position of isolation relative to the European Union.   



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September 10 2014

Commentary by Eoin Treacy

Rand Conspiring With Deficit to Upend Doves: South Africa Credit

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

The Reserve Bank’s monetary policy committee meets next week and again in two months after raising the benchmark lending rate by 75 basis points this year to 5.75 percent. While inflation eased to 6.3 percent in July, remaining above policy makers’ target, the gauge stripping out food, Energy and gasoline costs climbed to the highest level since January 2010.

“We could see another interest-rate increase,” Ronel Oberholzer, an economist at Pretoria-based IHS Global Insight Southern Africa, said by phone yesterday. “The bank will probably use the rand’s movement as a reason, but then it would pause and see what happens with growth, which will be bad this year.”

 

Eoin Treacy's view -

The US Dollar remains in a consistent uptrend against the Rand and rallied this week from the region of the 200-day MA. A sustained move below ZAR10.50 would be required to question medium-term potential for additional strength. 

 



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September 09 2014

Commentary by Eoin Treacy

Email of the day on uranium mining investment vehicles

Your comment on the Uranium price is of interest to me. Prior to Fukishima , Geiger Counter was very much in vogue. Then came the collapse. I wondered what the view was now concerning the above and perhaps suggest other companies listed in London that have positive chart patterns .    

Eoin Treacy's view -

Thank you for this question which others may have an interest in. Geiger Counter generally runs a concentrated portfolio of high potential explorers and developers although its current holdings are peppered by some larger uranium names.  

I highlighted it as a potentially interesting fund offering exposure to the uranium market on August 22nd

 



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September 08 2014

Commentary by Eoin Treacy

Brent Crude Declines Below $100 for First Time Since June 2013

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

WTI for October delivery fell 98 cents, or 1.1 percent, to $92.31 a barrel on the New York Mercantile Exchange. Futures touched $91.80, the lowest level since Jan. 14. Volumes were 8.6 percent higher than the 100-day average. The U.S. benchmark grade traded at a $7.52 discount to Brent, compared with $7.53 at the close on Sept. 5.

“The fundamentals have been bearish and eventually the fundamentals win out,” Sarah Emerson, managing principal of ESAI Energy Inc. in Wakefield, Massachusetts, said by phone. “We’re looking at a weak global market.”

In China, imports fell for a second month as a property slump hurt domestic demand. The trade surplus climbed to a record of $49.8 billion in August as exports rose on the back of increased shipments to the U.S. and Europe.

The 2.4 percent drop in imports compares with the median estimate for a 3 percent increase. Exports increased 9.4 percent from a year earlier, the Beijing-based customs administration said today, compared with the 9 percent median estimate in a Bloomberg survey.

Eoin Treacy's view -

Brent Crude closed out the day close to $100 which has represented an area of support on successive occasions since 2011. Demand growth might be moderating but supply constraints are what helped prices maintain elevated prices over the last few years. This situation is easing as US production displaces imports and as some of the missing Middle Eastern barrels begin to come back to market. 



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September 08 2014

Commentary by Eoin Treacy

Tesla choice of Nevada for gigafactory boon to NV mining

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

The plant is expected to begin production of 500,000 lithium battery packs by 2017 for use in Tesla’s Model 3 cars.

John Boyd, a principal of the site selection firm The Boyd Company, told the Wall Street Journal, “I think the single most important factor is the [site’s] low-cost green power, including solar, wind and geothermal Energy for the plant. He also cited Nevada’s lack of corporate and personal income taxes as positive factors.

Elon Musk, Tesla CEO, said the company has a commitment from Panasonic Corp, which already supplies batteries for Tesla’s Model S, to help run the battery cell-making operations and underwrite some of the costs.

Located near the former Sleeper Gold Mine in Humboldt County, Nevada, the Western Lithium’s King Valley project is often promoted thusly: “Nevada is uniquely positioned to support the world-wide increase in renewable Energy production and demand for electric vehicles through lithium mining—the key ingredients to the high-performance batteries, which will power electric vehicles and be used in utility-scale Energy storage projects.”

Eoin Treacy's view -

When the lithium battery gigafactory reaches full production it will represent a significant supply increase for the global sector which will put higher cost battery producers under pressure. Economies of scale should also help to ensure that the market for lithium batteries will also continue to grow. 



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September 05 2014

Commentary by David Fuller

September 05 2014

Commentary by Eoin Treacy

Back to school, miners league table

Thanks to a subscriber for this interesting report from Deutsche Bank assessing the outlook for European listed diversified miners. Here is a section:

Vedanta's planned group restructuring was completed in 2H13 calendar, with the court clearance of Sterlite's merger into Sesa Goa. This was an important step in simplifying the group's structure, reducing the scope for future conflict between majority and minority shareholders. Post the merger of Sterlite and Sesa, we see the group's buyout of the Indian government's stakes in HZL and Balco as critical for maximising cash fungibility across all group entities and expect progress on this in the next 12 months. Beyond this, management has set three near-term priorities for improvement for the group: an iron ore mining re-start, bauxite sourcing in India, and Copper Zambia development. We expect all of these areas to show improvement in 2015. Buy. 

Valuation 
Our price target is set at a 5% discount to our DCF valuation, to reflect some of  the inherent delivery risks within Vedanta's growth plan. Our DCF valuation (10.9% WACC - cost of equity 13%, post-tax cost of debt 6.1% and target gearing 30%: RFR 4.0%, ERP 6%)is calculated using life of mine cash flow analysis. 

Risks 
Key downside risks include lower metal prices than we expect, sustained strength in the Indian rupee, higher import duties, slower execution of projects and the slow or noreceipt of government permits for the alternative bauxite mines in Orissa and the Lanjigarh refinery expansion programme. The company has a large capex program which may require further debt funding or capital raising, either at the Sterlite or Vedanta level.

Eoin Treacy's view -

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

The new Indian administration under Narendra Modi has lofty ambitions. Urbanisation, export oriented manufacturing and chipping away at the country’s infrastructure deficit are all goals the new government is working towards. Greater per capita consumption of just about all industrial and Energy commodities goes hand in hand with these objectives and India needs a concerted strategy for sourcing the resources it needs to fuel growth. 



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September 01 2014

Commentary by David Fuller

Merkel Says Europe Will Not Allow Russia "Attack" on Ukraine

Here is a section of this Bloomberg report:

German Chancellor Angela Merkelsaid the European Union will press ahead with tougher sanctions against Russia as evidence mounts that President Vladimir Putin is behind “attacks” on Ukraine.

“It’s become ever clearer that, from the beginning, this hasn’t been about a conflict within Ukraine, but a conflict between Russia and Ukraine,” Merkel told German lawmakers today in the lower house of parliament in Berlin.

The remarks underscore the German leader’s growing exasperation with the escalating conflict and her government’s more assertive role in seeking to resolve it as Russian soldiers continue an incursion into Ukrainian territory.

Merkel was among EU leaders over the weekend who said further measures against Russia are necessary, and gave the European Commission a week to deliver proposals for sanctions that may target Russia’s Energy and finance industries.

Addressing the risks involved for Europe’s largest economy should measures against Russia harden, Merkel said Germany is prepared for any economic fallout from the actions.

“Being able to change borders in Europe without consequences, and attacking other countries with troops, is in my view a far greater danger than having to accept certain disadvantages for the economy,” she said earlier at a press conference in the German capital.

David Fuller's view -

The headline above overstates Merkel’s position but she appears determined to up Russia’s costs for Putin’s murderous and cynical intervention in Ukraine.  What few Westerners are pointing out, however, is that Putin is violating the terms and spirit of the Budapest Memorandums on Security Assurances, 1994, when Ukraine agreed to give up its nuclear weapons.  This was initially signed by Putin’s predecessor, Boris Yeltsin, in 1994 but later reaffirmed by Putin on December 4, 2009.  Here is a sample:

1. The Russian Federation, the United Kingdom of Great Britain and Northern Ireland and the United States of America reaffirm their commitment to Ukraine, in accordance with the principles of the Final Act of the Conference on Security and Cooperation in Europe, to respect the independence and sovereignty and the existing borders of Ukraine;

2. The Russian Federation, the United Kingdom of Great Britain and Northern Ireland and the United States of America reaffirm their obligation to refrain from the threat or use of force against the territorial integrity or

political independence of Ukraine, and that none of their weapons will ever be used against Ukraine except in self-defence or otherwise in accordance with the Charter of the United Nations;

3. The Russian Federation, the United Kingdom of Great Britain and Northern Ireland and the United States of America reaffirm their commitment to Ukraine, in accordance with the principles of the Final Act of the Conference on Security and Cooperation in Europe, to refrain from economic coercion designed to subordinate to their own interest the exercise by Ukraine of the rights inherent in its sovereignty and thus to secure advantages of any kind;



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August 26 2014

Commentary by Eoin Treacy

Best Oil Bet Seen Supported by Political Shift

This article by Peter Millard and Julia Leite for Bloomberg may be of interest to subscribers. Here is a section: 

Silva’s entry into the contest as a replacement for Eduardo Campos, who died in an Aug. 13 plane crash, has upended the race, with polls showing her attracting previously undecided voters.

Her pledges to slow inflation, grant central bank autonomy and check rising spending that led the country’s debt rating to be cut appeal to the mainly affluent supporters of rival Neves, while her personal story as a former maid appeals to poorer voters, said Rafael Cortez, a political analyst at research company Tendencias Consultoria Integrada.

Silva criticized Rousseff’s management of the economy in an Aug. 20 news conference. Her economic adviser, Eduardo Giannetti, said the previous day that policies to contain Energy prices are “extremely harmful” in the short term.

Biggest Return
Silva would win in a run-off against Rousseff with 47 percent of the vote, compared with 43 percent for the incumbent, according to a Datafolha poll published Aug. 18. Rousseff’s 36 percent lead in the poll for the first round of balloting, compared with 21 percent for Silva and 20 percent for Neves, wouldn’t be enough to ensure a victory. To win in the first round a candidate needs more votes than the other competitors combined.

Petrobras returned 62 percent in dollar terms in the past six months, the biggest gain among the 20 most valuable oil producers. The average gain over the same span was about 15 percent.

Investors betting Petrobras will surge if Rousseff is voted out of office in October elections have a large chance of losing their money even if the she is defeated, said Robbert van Batenburg, director of market strategy at broker-dealer Newedge USA LLC.

They had better wait for evidence a challenger would swiftly phase out Rousseff’s expensive fuel subsidies to improve profitability at the most-indebted publicly traded oil company, Batenburg said in a phone interview from New York.

Eoin Treacy's view -

The Brazilian market was in need of a catalyst to reignite investor interest following the collapse of mining company OGX, the disappointing performance of iron-ore, the massive capital raising of Petrobras and what many see as inept political leadership amid failure to promote growth and control inflation.

The failure of the Brazilian football team at this summer’s World Cup might appear trivial but many Brazilians appear to have seen it is as symptomatic of the issues facing the country and are increasingly likely to vote for change. Whether a new administration decides to remove the fuel subsidy is an uncertainty but they would be more likely to do so than Rousseff. 



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August 22 2014

Commentary by Eoin Treacy

Smart Grid in China

Thanks to a subscriber for this interesting report from Oriental Patron in Hong Kong. Here is a section:  

1. First of all, we believe Energy savings investment will shift from industrial to public facilities, driven by urbanization in China which is the focus of China's smart grid development. As one of the central government's key aims, we expect the Energy Management (EM)'s market size to achieve 22% CAGR in 2012-2015E.

2. In light of this, leading Energy management contract (EMC) companies will enjoy fastest growth as subset of EM industry, at 39% CAGR in 2013-2015E, thanks to supporting government policies for EMC companies such as exemption on corporate tax, subsidies on building retrofit, etc.

3. We also expect the penetration of smart meters to increase rapidly from the current 60% in China to approaching 100%. Besides, we also see replacement demand kick in to drive 4.8% CAGR in 2013-2020E, starting in 2015E.

4. As smart meter penetration is likely to reach full coverage from 2014E onwards, we believe that smart meter suppliers with tailor-made power distribution and Energy efficient solutions are able to leverage on the well-established smart meter network to offer value-added service, hence new revenue flow to support its robust earnings growth in the coming five years, we expect the earnings CAGR of Wasion Group (3393 HK) is 20% in 2013-2016E.

5. Ultra High Voltage (UHV) power cables demand CAGR 62% in 2015E-2020E, is much higher than CAGR 18% in 2010-2015E, thanks to National Energy Administration(NEA)’s plan for long distance power grid construction,

6. High entry barrier enable market consolidation. Nationwide UHV grid construction drives demand in EHV power cables construction in regional power distribution, only 12 manufacturers are qualified as suppliers to SGCC. 

 

Eoin Treacy's view -

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

China has been aggressive in securing resources overseas in order to provide for increasing Energy consumption. Ensuring it makes the most efficient use of that Energy is a logical next step not least because there is demand for efficient device management on the international market and China’s lower cost of production may lend it a competitive advantage. 



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August 22 2014

Commentary by Eoin Treacy

Email of the day on uranium funds

I found your observations on uranium on the 19th very interesting. What vehicles for investing in this sector do you think might best suit private investors? There doesn't seem to be any ETC or the like - the closest I've come across is the Uranium Participation Corporation. This is a pure play on the Uranium price, but is currently trading at a hefty premium to NAV of about 26%. Many thanks! 

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers. There were a considerable number of uranium funds listed when uranium prices were surging higher in 2005 and 2006. Many have since been delisted but there are still a small number that are reasonably liquid. 



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August 20 2014

Commentary by Eoin Treacy

The activity of the Sun shown to influence natural climate change

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

"Reduced solar activity could lead to colder winters in Northern Europe. This is because the sun’s UV radiation affects the atmospheric circulation. Interestingly, the same processes lead to warmer winters in Greenland, with greater snowfall and more storms." said Dr said Raimund Muscheler, Lecturer in Quaternary Geology at Lund University. "The study also shows that the various solar processes need to be included in climate models in order to better predict future global and regional climate change."

Further to their theory, the researchers believe that changes in wind patterns resulted from alterations in received temperatures, suggesting that a top-down solar influence increased oceanic feedback and may have acted as an additional amplification mechanism. In other words, variations in solar radiation affected the atmosphere, altering the barometric pressure which, in turn, changed the prevailing wind patterns in the upper atmosphere.

In atmospheric physics parlance, these winds are known as eddy-driven jets and a high-pressure increase over the North Atlantic (as evidenced in today's climate) is often accompanied by a displacement to the south of these winds. This results in a negative effect on the North Atlantic Oscillation (the atmospheric pressure difference at sea level between the Icelandic low and the Azores high), which can produce colder winds and higher levels of snowfall.

As a result, the alteration of these winds changes the way in which heat is exchanged between the oceans and the atmosphere. In the Lund University reconstruction and modeling, evidence is shown that this particular effect was being exacerbated by the amount of solar Energy striking the Earth's atmosphere in direct relationship to the activity of the sun.

"The study shows an unexpected link between solar activity and climate change. It shows both that changes in solar activity are nothing new and that solar activity influences the climate, especially on a regional level," said Dr Muscheler. "Understanding these processes helps us to better forecast the climate in certain regions."

Eoin Treacy's view -

It seems rational, at least to me, that the sun has a significant impact on the climate and its activity should be included in climate models.  



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August 19 2014

Commentary by Eoin Treacy

BHP Billiton unveils $14 billion spin-off

Thanks to a subscriber for this article by Sonali Paul for Reuters which may be of interest. Here is a section: 

Chief Executive Andrew Mackenzie, in the top job for just over a year, said the widely expected move to simplify BHP around the "four pillars" of iron ore, copper, coal and petroleum would spur cashflow growth and boost returns.

"By concentrating on what we do best, the development and operation of major basins, we can improve our productivity further, faster and with greater certainty," Mackenzie said in a statement.
The spin-off company, dubbed NewCo for now, will bundle BHP's aluminium, manganese, Cerro Matoso nickel in Colombia, South African Energy coal and some Australian metallurgical coal assets and the Cannington silver, lead and zinc mine.

"It's probably a better asset mix than we thought it would be beforehand. BHP has added Cerro Matoso, which is a better nickel asset than its Nickel West division, and Illawara Coal," said David Radclyffe, an analyst with CLSA in Sydney.

BHP confirmed the spin-off as it reported an 8 percent rise in second-half underlying attributable profit to $5.69 billion, just below a consensus analyst forecast of $5.94 billion, according to Thomson Reuters Starmine's SmartEstimate.

Analysts and investors said the fall in BHP shares on Tuesday was an over-reaction.
"Some people may be disappointed because nothing was announced on a special dividend or buyback," said Albert Minassian, an analyst with Investec in London.

 

Eoin Treacy's view -

Rationalisation and cost cutting have been a focus for miners over the last few years not least because the previous decade’s overly optimistic demand growth forecasts resulted in companies allowing costs to get out of control. The announcement of BHP Billiton’s demerger is a reflection of this trend. The choice of which assets to dispose of highlights the company’s wish to concentrate efforts in geopolitically secure regions. 



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August 18 2014

Commentary by Eoin Treacy

Musings from the Oil Patch August 18th 2014

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

As the EIA analysis pointed out, for the year ending March 31, 2014, 127 major oil and natural gas companies generated $568 billion of cash from operations, but their major uses of cash totaled $677 billion, leaving nearly a $110 billion shortfall. That shortfall was met by $106 billion increase in debt and $73 billion from sales of assets, leading to an overall increase in cash balances.

The oil and gas industry is facing a challenging future. Regardless of whether peace or war breaks out, the industry is likely looking at meaningful changes in its underlying fundamentals – commodity prices and Energy demand. Depending on which way prices go, companies might have more or less cash from operations. On the other hand, whichever way commodity prices go, demand will also change, either positively or negatively. Due to these scenarios, the Energy industry will either need to ramp up its spending to find and develop new supplies or it must cut back spending due to adequate supplies. Thrown into the mix is a more difficult and expensive environment for finding and developing new large oil and gas supplies.

For many in the Energy industry who are unconcerned about the above challenges, we worry that they may be looking over the horizon with a risk of falling into the near-term valley. When confronted with what are perceived as merely short-term interruptions to long-term industry trends, it is often easier to maintain one’s focus on these long-term trends to the exclusion of short-term conditions. If one studies the history of the Energy industry during the first half of the 1980s, the result of continued long-term focus over concern for short-term ills proved devastating. We certainly hope current conditions are not a precursor to a repeat of the early 1980s, but hopefully by raising this issue we are providing a service to the industry.

 

Eoin Treacy's view -

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

Unconventional shale and deep water oil might be abundant but they are not cheap sources of supply. Together with increasingly strident nationalisation trends across a number of jurisdictions, the cost of delivering additional supplies remains a challenge for oil companies. Over the last twenty years the response of companies such as Exxon and Shell has been to focus on natural gas but again new sources of supply are not cheap when compared with conventional supplies. 



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August 13 2014

Commentary by David Fuller

Russian Military Drills in Asia Spark Japan Anger

Russia started military exercises in the remote far east of the country, prompting protests from neighboring Japan at a time when its troops are also active in eastern Europe and on the Ukrainian border.

The drills in the Kuril islands started yesterday with more than 1,000 troops, five helicopters and about 100 pieces of equipment, state-run new service RIA Novosti reported, citing Alexander Gordeyev, a regional spokesman for Russia’s Defense Ministry. Japan, which also claims the islands as its Northern Territories, called the drills “absolutely unacceptable,” according to a statement from the Foreign Ministry.

The dispute risks worsening Russia’s relations with another trading partner and are the latest setback for Japanese Prime Minister Shinzo Abe’s efforts to resolve the island dispute. Trade between the two countries, which haven’t signed a peace treaty after World War II, rose more than sixfold in a decade to $37 billion last year, propelling Japan to sixth place among Russia’s partners from 12th in 2003, according to International Monetary Fund data.

The government in Moscow, angered by Japan’s support for sanctions over the unrest in Ukraine, less than two weeks ago canceled talks between the two countries’ deputy foreign ministers. The war games will practice “elements of defending the coastline” and feature a deployment of airborne troops, Gordeyev said, according to RIA.

With the start of the maneuvers on the Pacific, Russia has military exercises under way that span the world’s biggest country by area. The nation of 143 million people with a $2 trillion economy this decade has embarked on its biggest overhaul of the armed forces since the Cold War.

Two days ago, the Itar-Tass news service reported that week-long drills involving about 3,000 paratroopers, warplanes and helicopters began in the Pskov region of western Russia, which borders Belarus as well as Estonia and Latvia, both members of the European Union and NATO.

The U.S. and its allies have accused Russia of using military exercises during the recent standoff with Ukraine to keep pressure on its western neighbor.

The government in Kiev estimates Russia has deployed 45,000 soldiers, 160 tanks and 192 warplanes among other equipment along its border, including soldiers stationed in Crimea. That makes it the biggest military buildup since troops were withdrawn from the area in May.

David Fuller's view -

Russia has only two trump cards – its regionally powerful military and its Energy resources of oil and gas.  So far, Russia has not extended its Energy restrictions beyond Ukraine, as that would be an own goal for Putin’s economy.  However, Russia is flexing its military muscles.  This presumably makes Putin feel stronger and it is intimidating Eastern European countries.  This does not seem very clever because far from making friends and allies, it only reminds countries such as Estonia and Latvia why they joined the European Union and NATO. 

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August 08 2014

Commentary by David Fuller

U.S. Stocks Rise, Bonds Pare Gains on Easing in Ukraine

Here is a sample of the latest update onUkraine, Russia and more importantly for markets, sanctions:

The Standard & Poor’s 500 Index rose, while Treasuries and the yen pared gains as signs that Russia is de-escalating tension in Ukraineoutweighed concern about crises in the Middle East.

Equity futures jumped earlier today after RIA Novosti reported that Russia seeks a de-escalation of the conflict in Ukraine. Stocks extended gains in the afternoon as Interfax said military exercises near the Ukraine border are over, citing Russia’s defense ministry.

Russia’s Defense Ministry said warplanes had ended drills in the region near Ukraine. RIA Novosti earlier reported that Russia offered to mediate between the government in Ukraine and the separatists that it’s battling. President Barack Obama approved airstrikes in Iraq, and rocket attacks marked the end of a cease-fire between Israel and Hamas. More than $1.8 trillion has been erased from the value of equities worldwide in the past two weeks.

“The market is looking abroad today--at Russia and Iraq, and with Russia it’s going to be a little bit of relief for the market rather than anything else,” John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a phone interview.

David Fuller's view -

These statements suggest that Russia is not about to go surging over the Ukraine border with a massive military force in the next few hours or days, as some have feared.  The Russian Defense Ministry’s comment is a sufficient hint for some short covering and opportunistic buying following the recent setback from overbought and overextended conditions on Wall Street.  European stock markets, which remain particularly sensitive to Russian aggression and the increased sanctions that we have seen, paired today’s further losses before the close. 

Russia’s offer to mediate between Ukraine’s government and the separatists or instigators of this conflict could only have been authorised by Putin.  Playing the conciliator’s peace card shows Putin’s chutzpah.  It would also require a blank memory or extreme gullibility to be fooled by this.  However, it is Putin’s least costly strategy and he is obviously hoping to weaken Europe’s resolve over sanctions. 

“To jaw-jaw is always better than to war-war”, as Winston Churchill memorably said.  Putin knows that the US and Europe will not go to war over Ukraine.  However, they can assist Ukraine, with food, Energy and weapons.  War would be expensive for Putin, not least as Western sanctions would also be increased.  Tough sanctions would eventually break Putin but at an economic cost, as we are already seeing.  Currently, one man’s ego, Soviet-style callousness and big military force, stands for further Eastern European oppression rather than peaceful economic development.   

 



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August 08 2014

Commentary by David Fuller

Brussels fears European industrial massacre sparked by energy costs

Here is the opening from this interesting article by Ambrose Evans-Pritchard for The Telegraph: 

Europe's industry is being ravaged by exorbitant Energy costs and an over-valued euro, blighting efforts to reverse years of global manufacturing decline.

"We face a systemic industrial massacre," said Antonio Tajani, the European industry commissioner.

Mr Tajani warned that Europe's quixotic dash for renewables was pushing electricity costs to untenable levels, leaving Europe struggling to compete as America's shale revolution cuts US natural gas prices by 80pc.

"I am in favour of a green agenda, but we can't be religious about this. We need a new Energy policy. We have to stop pretending, because we can't sacrifice Europe's industry for climate goals that are not realistic, and are not being enforced worldwide," he told The Daily Telegraphduring the Ambrosetti forum of global policy-makers at Lake Como.

"The loss of competitiveness is frightening," said Paulo Savona, head of Italy's Fondo Interbancario. "When people choose whether to invest in Europe or the US, what they think about most is the cost of Energy."

A report by the American Chemistry Council said shale gas has given the US a "profound and sustained competitive advantage" in chemicals, plastics, and related industries. Consultants IHS also expect US chemical output to double by 2020, while Europe's output will have fallen by a third. IHS said $250bn (£160bn) in extra US manufacturing will be added by shale in the next six years.

European president Herman Van Rompuy echoed the growing sense of alarm, calling it a top EU priority to slash Energy costs. "Compared to US competitors, European industry pays today twice as much for electricity, and four times as much for gas. Our companies don't get the rewards for being more efficient," he said.

Europe's deepening Energy crisis has for now replaced debt troubles as the region's top worry, with major implications for the Commission's draft paper on shale expected in October. The EU's industry and environment directorates are pitted against each other. The new legislation could in theory stop Britain, Poland, and others going ahead with fracking.

"Personally, I am in favour of shale gas in Europe because we have to do more for industry," said Mr Tajani.

David Fuller's view -

I have harped on about this for years so I certainly share Mr Tajani’s views.  However, on reading the quotes in this article I worry about his job security as European industry commissioner! 

Fortunately for Europe, solutions to the Energy problem are at hand, so this is really a question of will. 

1) Restart viable nuclear plants, of which France has the largest number.  Invest in smaller and somewhat safer ‘new nuclear’ plants.

2) Develop Europe’s considerable shale oil and gas potential.  Yes, people will protest, as we see in the UK, but this is a matter of education and reward, plus responsible management by companies with the fracking skills. 

3) Do not build any more windmills.  Instead, encourage the use of more solar panels on buildings.    



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August 07 2014

Commentary by Eoin Treacy

Inviting Foreigners to Boost Drilling Hits Nerve

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

Supporters of opening the oil, gas and electricity monopolies to competition say it will attract $20 billion a year in foreign investment and increase economic growth by at least 1 percent every year. Opponents, led by former presidential candidate Andres Manuel Lopez Obrador, argue that letting foreigners bid and drill for oil is a violation of national sovereignty and will lead to corruption and a loss of control over the oil revenue that could be used to develop a more modern national economy. Mexico would be better served, they say, by reducing Pemex’s tax burden, increasing transparency and attacking persistent corruption –- Pemex is missing over 32 million barrels of oil this year, worth about $3 billion. The opposition points to Saudi Aramco as an example of a successful state monopoly. Pena Nieto’s team disagrees, saying that Mexico’s days of easy-to-access oil are over, and that the nation’s future as an oil producer depends on technology and know-how that private companies are best positioned to bring. To cushion the change, however, he assured Pemex workers that none of them would lose their job.

Eoin Treacy's view -

If it is to reverse declining production Mexico has little choice but to attract both investment and expertise to its Energy sector. One of the reasons Saudi Arabia’s state controlled Energy company has been able to maintain high standards of efficiency is because they have aggressively invested in enhancing production and hired the brightest minds from the around the world to help achieve their goals. The problem for many state owned oil companies is that they are treated as utilities by politicians who tend to use them as piggy banks. Introducing competition may help Mexico’s Pemex to adopt a more professional attitude and private companies have a profit incentive to maximise production. 



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August 01 2014

Commentary by David Fuller

G-7 Nations Said to Oppose New World Bank Russia Projects

Here is the opening of this topical article from Bloomberg:

Group of Seven countries will vote against new World Bank projects in Russia to punish Vladimir Putin’s regime, according to three government officials with knowledge of the agreement.

The action, which puts at least $1.5 billion of contemplated World Bank projects in Russia at risk, was decided by deputy finance ministers from the G-7 during a conference call last week, according to two of the officials, who spoke on the condition of anonymity because the call wasn’t public.

The move dovetails with new rounds of sanctions targeting Russia’s banking, Energy and defense industries as the U.S. and European Union this week stepped up economic pressure on Russia over its actions in Ukraine. Russia’s finance ministry received no official information, according to its press office.

The World Bank will have trouble getting approval for projects in the face of opposition from the G-7, which has more than 40 percent of votes on the bank’s board, said Scott Morris, a former deputy assistant secretary for development finance and debt at the U.S. Treasury Department.

David Fuller's view -

The World Bank will not become engaged in political discussions surrounding Russia and the European Union.  However, Putin has turned Russia into a pariah state, in the eyes of most European leaders.  Sanctions are not a short-term solution but they will hurt over time.  Reprisals by Putin, which have been mentioned by some of his spokesmen, would most likely only harden US and European resolve.  Even if Putin survives the USSR-style series of reprehensible events which led to sanctions, he is finished in terms of ever again being accepted as a credible, trustworthy political leader by the civilised world. 

(See also this week’s earlier comments, including Thursday’s chart review.)



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August 01 2014

Commentary by David Fuller

Shell beats forecasts despite more US shale disappointment

Here is the opening of this report from The Telegraph:

Royal Dutch Shell has posted a 33pc jump in earnings, despite weathering a $1.9bn (£1.2bn) write-down due to disappointing performances from parts of the company's shale investments in North America.

The Anglo-Dutch giant has struggled to take advantage of the booming US shale sector as smaller, more agile competitors outmanoeuvre the oil majors. Earlier this year itannounced it would cut spending on shale by a fifth and exit several ventures. It said its remaining 48 so-called dry gas investments "remain under review" as it turns its focus to liquids-rich shale in Western Canada and the Permian basin that spans western Texas and New Mexico.

Shell nonetheless smashed analysts' expectations by unveiling earnings of $6.1bn for the second quarter of the year, up a third from the same period a year ago. Analysts had expected earnings of $5.46bn.

The strong results were largely due to a stronger than expected quarter for Shell's exploration, or upstream, business, which posted earnings of $4.7bn, compared with forecasts for $4.3bn.

Downstream earnings also exceeded expectations, with profits of $960m, well above analysts' expectations of $796m.

It also raised its quarterly dividend and said the value of its share buybacks and dividends for 2014 and 2015 would exceed $30bn.

However its 4pc increase to the second quarter dividend to $0.47 per ordinary share disappointed some analysts, with Justin Cooper of Capita Asset Services saying it would "underwhelm" investors, "especially given the big jump in profits".

Ben van Beurden said the results showed his strategy to refocus the business after years of profligate spending was starting to pay off, but added that the plan had longer to run.

David Fuller's view -

Royal Dutch Shell ‘B’ remains one of the three largest holdings in my personal portfolio, and I post this article knowing that a number of subscribers also own this conservative, high-yielding share which is listed in several currencies.  It tested our patience for a few years but has been steadily improving since Ben van Beurden took over as Chief Executive Officer last year.  Shell currently has an estimated p/e of 11.31 and yields 4.36%, according to Bloomberg.  I have occasionally added to this position on pullbacks and the chart looks promising in terms of its medium-term outlook.  



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August 01 2014

Commentary by Eoin Treacy

Early Bakken Bets Position Rail Shippers for Export Rush

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

Shipments of U.S. oil by rail have since doubled to more than 1 million barrels a day, sparking a national debate over safety, and volumes may mount if the government allows more exports of crude, easing a four-decade ban. Global and other midstream carriers are preparing themselves for a chance to serve that market.

“The East Coast was left on a figurative island when everyone in the middle of the country got access to low-priced crude coming out of the Bakken, and oil by rail was its lifeline,” Bradley Olsen, managing director at Energy investment bank Tudor, Pickering, Holt & Co., said by phone from Houston. “The next challenge is exports.”

 

Eoin Treacy's view -

The entry of US oil onto the world stage would represent a powerful force that would help eliminate the arbitrage between WTI and Brent crudes and would be a net positive for Europe. As a geopolitical tool it would also exert leverage over regimes seeking to further their objectives with the threat of supply disruptions. Considering the escalation of geopolitical tensions currently underway the export of oil to the United States’ allies would add considerably to the goodwill between nations and bolster floundering relationships in some quarters. 



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July 31 2014

Commentary by David Fuller

Eastern Europe Punished in Markets After Opposing Putin

Here is the opening of this topical article from Bloomberg:

Investors are punishing many former Soviet bloc nations for their ties to Russia even as these countries, now European Union members, support sanctions on President Vladimir Putinfor his actions in Ukraine.

After the ruble, currencies from eastern Europe accounted for five of the six worst-performing emerging-market exchange rates in July, led byHungary’s forint and Romania’s leu. Stock indexes in Bulgaria, the Czech Republic and Hungary joined Russia’s among the 10 biggest declining markets in the world this month. Gedeon Richter Nyrt., Hungary’s biggest drugmaker, plunged to a three-month low today after revising down its sales outlook because of the escalating crisis over Ukraine.

All but one of the 11 former Communist countries now part of the EU condemned Putin’s land grab of the Crimea earlier this year. They walk a tightrope by aligning themselves politically with western Europe while maintaining economic links to Russia. More than half the Energy supplies consumed by east European countries comes from Russia, according to Deutsche Bank AG. The 28 EU nations voted unanimously to extend sanctions on Russia this week as a penalty for what they see as Putin’s destabilizing role in Ukraine, even as the trade restrictions also harm them.

“There’s a sense by global investors of why mess around with central and eastern Europe and the geopolitical risks if there are other opportunities out there,” said Ilan Solot, a foreign-exchange strategist at Brown Brothers Harriman in London.

David Fuller's view -

Markets are unsentimental.  Many global investors will avoid placing more capital in eastern and central Europe until either the situation with Russia improves or valuations are sufficiently low that it is worth overlooking the current risks and uncertainties.   



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July 31 2014

Commentary by Eoin Treacy

EU gets tougher with sanctions on Russia - but there is a twist

This article by Suzanne Lynch for the Irish Times may be of interest to subscribers. Here is a section: 

EU gets tougher with sanctions on Russia - but there is a twist – This article by Suzanne Lynch for the Irish Times may be of interest to subscribers. Here is a section:

All three sectors affected by the sanctions are protected in some way. The restrictions on Energy, such as the banning of the sale of equipment that can be used in the Energy industry, do not apply to gas, Russia’s main export into Europe.

The arms embargo prohibiting the sale of weapons to Russia only applies to future sales, allowing France to proceed with the sale of two warships to Russia.

The fact that Russia produces most of its own military equipment and arms also means that its arms industry is unlikely to be severely affected by the sanctions. Similarly, the move to prohibit Russian banks from issuing debt and stock on EU capital markets contains potential loopholes.

One possibility is that Russian banks’ EU subsidiaries may be able to circumvent the rules and channel funds back to their parent company.

This was rejected by EU officials yesterday who said that, because the EU subsidiaries do not regularly engage in these kinds of bond issuances, any move to raise debt for the parent company would be easy to monitor.

However, with subsidiaries still permitted to transfer other funds to their parent companies, and Russian banks dependent on EU and US debt for less than 10 per cent of their funding, the impact of the restrictions on Russian state-owned banks is likely to be limited.

The country’s largest bank Sberbank, is not included in the US sanctions, though it is understood to be included in the EU’s list, which will be published later this week.

Eoin Treacy's view -

Europe is getting tougher with Russia but the above article highlights how intertwined the Eurozone’s economic interests are with its Eastern neighbour. The severity of sanctions has increased but important business interests continue to be preserved, not least for Energy companies seeking to exploit shale gas resources.

Nevertheless, the trend of these sanctions is clear and there is no evidence yet that tensions in the region are about to ease. Sberbank is an important barometer for the Russian market.   



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July 30 2014

Commentary by David Fuller

Russia ordered to pay $51bn over Yukos destruction

Here is the opening from this informative article by Ambrose Evans-Pritchard of The Telegraph, published two days ago:

Russia has been ordered to pay $51.5bn to Yukos shareholders by the world’s top commercial court in the biggest such award of all time, ruling that the Kremlin fabricated evidence to destroy the oil company and eliminate its founder, Mikhail Khodorkovsky.

The judgment marks the culmination of a 10-year drama and amounts to a damning verdict on the legal abuses of President Vladimir Putin. It raises awkward questions about the conduct of BP and other Western companies that bid for Yukos fields or have teamed up with Rosneft and Gazprom, ignoring warnings that they were acquiring “stolen assets” without legal protection.

It also ratchets up the pressure on the Kremlin a day before EU ministers meet to debate sanctions aimed at shutting Russia’s banks out of global finance. “Today is a great day for the rule of law. A superpower has been unanimously held accountable for its violation of international law by an independent tribunal of the highest repute,” said Emmanuel Gaillard, a lawyer for GML, one of the three plaintiffs.

The award by the Permanent Court of Arbitration in The Hague is 20 times larger than any previous ruling. It was backed by all three judges, a Canadian, a Swiss and an American picked by the Russians themselves. They appeared irked that the Kremlin did not furnish fact witnesses from the finance ministry.

The award raises the external debt of the Russian state, banks and companies to $770bn at a stroke. The foreign currency debt will rise to $610bn. Russia must start making payments by mid-January. After that the damages will accrue at interest rates fixed to the US 10-year bond yield.

There is no appeals procedure, though Russia could try to quash the case on a technicality. The Kremlin said the verdict was “one-sided and politically motivated”. Russia’s foreign minister, Sergei Lavrov, said his country will use “all available legal possibilities to defend its position”.

David Fuller's view -

Russia is in a difficult economic position of Putin’s creation, and it is likely to remain there until he is replaced.

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July 25 2014

Commentary by David Fuller

Netherlands Despairs of Justice for Dead as Russia Trade Takes Precedence

Here is part of the conclusion from this informative article by Bloomberg:

The commercial ties that bind the Netherlands and Russia go back to the days of Tsar Peter the Great, who spent part of 1697 learning shipbuilding while living in Zaandam. Two years later, the Russians set up a diplomatic mission in The Hague.

Today, Russia is the Netherlands’ seventh-biggest trading partner and a critical investment destination for Anglo-Dutch multinationals such as Shell and Unilever. In 2013, both countries celebrated their bilateral ties in a yearlong series of promotional events. At the Sochi Winter Olympics, Putin shared a beer with King Willem-Alexander of the Netherlands at the Holland Heineken House.

Russia’s biggest oil, gas, mining and retail companies -- including some run by billionaires close to Putin -- have moved tens of billions in corporate assets to the Netherlands or have used financial institutions in Amsterdam to route profits to low-tax, offshore financial centers like Bermuda and the British Virgin Islands.

The Netherlands, along with Cyprus and the British Virgin Islands, is a major transit point for the “round-tripping” of Russian investment money, according to a report last year by a UN agency. Under that technique, Russian money comes into the Netherlands, is moved out to low-tax offshore financial centers and then sent back to Russia, offering legal protection against expropriation or arbitrary acts by government.

“The Netherlands as a country will be juggling the fact that on the one hand it may want to hurt Russia in some way,” said Gerard Meussen, a tax law professor atRadboud University in Nijmegen. “On the other hand, we value our position as a country with an attractive tax climate. We are still merchants.”

Winding back Russian commercial ties would be particularly painful now. The Dutch economy has experienced three recessions since the 2007 financial crisis. In 2012, it earned about one-third of its income from trade, according to the Netherlands Enterprise Agency. The Dutch port of Rotterdam is an important transport point for Russian Energy exports to the rest of the world.

The Netherlands also has to pay heed to the EU’s broader policy response. That means taking into account Germany and France, which have different economic interests at stake. Instructing Dutch banks to withhold financing from Russian companies would have little meaning if other regional banks stepped into the gap.

“In practical terms, it’s almost impossible to do something outside of the EU,” said Louise van Schaik, a senior research fellow at the Clingendael Institute, a Dutch diplomatic think tank. “There is a lot of anger and calls for revenge, but that may not be a sound long-term strategy.”

Nor is ignoring Russia’s assertiveness and instability in the Ukraine, said Jaap de Hoop Scheffer, a retired Dutch politician and former secretary general of NATO. In an interview with Het Financieele Dagblad, he called on Europe to stop slashing its defense budgets. The current international situation is “without a doubt the most serious crisis since the Cold War and I don’t dare to predict how this will end,” he said.

David Fuller's view -

We can call this realpolitik.  There is an unscrupulous, dangerous and militarily powerful leader within the larger European family.  The Dutch, along with citizens of other EU countries will have to put up with him.  So will East European states which have more to worry about, especially if they are overly dependent on Russia for Energy.  Much of the EU will remain largely underarmed, for better or worse.

President Obama is unlikely to undertake the EU’s briefly discussed tough sanctions on Europe’s behalf.  Why should he?  Russia poses little military threat to the USA, a country which is considerably stronger and also once more virtually Energy independent.  However, it may still implement some moderate sanctions against Russia, if only to remind Putin that he is vulnerable.    



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July 24 2014

Commentary by David Fuller

Mobius Says Not Too Late to Buy China With 20% Upside

Here is the opening of this topical article from Bloomberg:

Mark Mobius says it’s not too late to buy into the rally in Chinese stocks.

The executive chairman of Templeton Emerging Markets Group predicts the nation’s equity market will climb another 20 percent, following a 19 percent surge in the Hang Seng China Enterprises Index (HSCEI) since March 20. Mobius, whose $12 billion Templeton Asian Growth Fund has outperformed 94 percent of peers this year, favors state-owned banks and Energy companies because of their cheap valuations and the government’s plans to open up state-dominated industries.

An extension of the rally would give investors another chance to profit after they pulled almost $700 million from U.S. exchange-traded funds tracking China stocks since the advance started, the biggest outflows among emerging marketstracked by Bloomberg. Chinese shares are rebounding as policy makers accelerate spending and loosen some banks’ reserve requirements to keep economic growth from slipping below their 7.5 percent annual target.

“Usually when you enter a phase like this, you’re looking at at least 20 percent upside” from current levels, Mobius, 77, who oversees more than $40 billion in emerging markets, said in an interview yesterday in Hong Kong. “If you look at the valuations of SOEs, you’ll see that they are very cheap.”

The Hang Seng China index rose 1.1 percent yesterday to the highest level since Dec. 18 after a private gauge of manufacturing in the world’s second-largest economy increased to an 18-month high. Policy makers have accelerated infrastructure spending, cut reserve-requirement ratios for some lenders and allowed some local governments to loosen property curbs as a slumping real-estate market threatens to derail economic growth.

David Fuller's view -

There are plenty of people who disagree with this view, also quoted in the article above, so who is right?

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July 24 2014

Commentary by David Fuller

Once again, tough talk followed by soft action against Vladimir Putin

Here is a realistic editorial from The Telegraph, posted without further comment: 

At the emergency summit in Brussels, there were demands for Russia to face international isolation due to its interference in the affairs of a sovereign state. The British prime minister took a tough position, while in Washington the president denounced Moscow’s actions as unacceptable. But these events did not happen yesterday, but seven years ago, after Russia invaded Georgia. The prime minister was Gordon Brown, the president was George W Bush and the man in the Kremlin was Vladimir Putin, then pulling the strings as premier.

We have, in other words, been here before. In 2007, Russia objected to Nato’s attempts to woo Georgia, just as Ukraine’s dalliance with EU membership so irked Mr Putin this time. Then, there were fiery threats to get tough, but nothing happened. One of the few proposals that might have hurt – to take the Winter Olympics away from Sochi – fell by the wayside.

Something similar happened in the case of Alexander Litvinenko, the fugitive intelligence officer poisoned in London in 2006 by radioactive polonium, almost certainly provided by the Russian state and administered by one of its agents. Britain cooled diplomatic relations and demanded the extradition of Andrei Lugovoi, the former KGB man thought to be responsible, but the Kremlin refused to hand him over. Within the year, Mr Putin was sitting down with EU leaders at a summit in Lisbon. True, there is now to be a judge-led public inquiry into the circumstances of Mr Litvinenko’s murder; but this owes everything to the determination of his widow, Marina, to obtain justice through the British courts, and little to any official desire to find the truth.

In our reaction to the shooting down of Malaysia Airlines flight MH17, we in the West are in danger of writing another chapter in this sorry tale of appeasement, by once more talking tough while acting soft. In the Commons on Monday, David Cameron allied himself with Barack Obama in demanding punitive sanctions, and voiced his frustration with the rest of the EU for its unwillingness to act. Yesterday, foreign ministers in Brussels agreed to extend the list of Russians subject to restrictions on their finances and movements – but another summit will be needed to impose tougher sanctions.

Settling on any common policy within the EU over Russia is almost impossible, given the disparate interests of its members – not least the dependence of Germany and Italy on Russian Energy, France’s profits from the sale of military equipment, and the UK’s own financial ties to the country’s oligarchs. In this instance, in view of what has gone before, Mr Putin will not be unduly alarmed by the response so far.

David Fuller's view -

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July 23 2014

Commentary by David Fuller

Europe Sleeps as Putin Waits

Here is the latter portion of a good editorial from Bloomberg:

There is a legitimate reason for all this reluctance: No one knows how effective tougher sanctions would be. The mere threat of them has done nothing to stop the fighting in eastern Ukraine, which continues unabated -- as does the rise in Putin's personal approval rating (it hit asix-year high of 83 percent last week). With Russians in the grip of a nationalist fervor, why would Putin back down? And if he won’t, why put Europe’s businesses at risk?

These are the wrong questions to ask. It's true that sanctions alone may not persuade Putin to end his support of separatists in Ukraine. But there's a chance they might -- and even if they don't, they're still worthwhile.

One thing sanctions can do -- and there is some evidence they are hurting Russia’s economy already -- is deter future behavior. If Putin has unleashed a nationalist hunger to restore Russian dominance that he has lost either the will or the ability to control, all the more reason to cut off the arms and money that fuel further adventures, in Ukraine or elsewhere.

There are other reasons for sanctions, large and small: Cooperation and agreement on sanctions would help keep the EU united on other equally important issues, such as economic aid to Ukraine and ways to help the young presidency of Petro Poroshenko. Sanctions would show Europe is willing to stand up for the principles of sovereignty and democracy, which it claims to revere. And they would deprive Putin of the ability to play the U.S. and the EU off each other.

Finally, it is worth pointing out that sanctions are in Europe's long-term economic interest. The goal is not merely to deter Russia; it is to ensure the stability and vitality of the European economy. If Russia insists on using Europe's dependence on its Energy to endanger the continent's security, then Europe needs to take steps to protect itself.

David Fuller's view -

If Europe will not introduce shared sanctions of consequence, why would Putin stop with Ukraine rather than increase Russia’s dominance in other regions? It has happened before and Putin has made no secret of his regret that the Soviet Union no longer exists.     



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July 22 2014

Commentary by Eoin Treacy

Global Ripple Effects Of American Energy Independence

Thanks to a subscriber for this highly informative report which ties a number of Energy themes together. Here is a section: 

It’s rare for more than one disruptive change to occur, but the unfolding of seven disruptive changes at once is unique to Energy market today.

Much attention is rightfully being placed on the shale revolution in the US, which is impacting both sweet and sour crude flows starting in North America, but soon after that, the world.

Not far behind is the deep water revolution, also focused substantially on N. America, but also the Atlantic and Pacific Basins.

Refinery capacity build-out in the Middle East and East Asia are turning global flows on their head.

Russia’s move from a lumpy European supplier of oil and gas to a global supplier is having significant repercussions on the balance between pipeline and seaborne transportation.

China’s preference for pipeline sourcing, is impacting not just Central Asian supply lines, but is reinforcing Russia’s move toward tied pipeline transportation.

New sources of LNG in the US, Canada and Australia are about to have dramatic impacts on the pricing and flows of natural gas globally.

The dramatic drop in solar pricing, combined with ongoing drive to boost renewable generation, is already impacting coal and natural gas markets, but is posing questions of economic viability for various high-cost LNG projects. 

Eoin Treacy's view -

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

We are living through an incredibly interesting period in the Energy markets. The high price environment that has prevailed for much of the last decade has translated into a supply response where new supplies and adoption of alternatives will change the complexion of the market for years to come. 



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July 18 2014

Commentary by Eoin Treacy

The next industrial revolution: Moving from B-R-I-C-K-S to B-I-T-S

Thanks to a subscriber for this report from Goldman Sachs exploring the industrial applications of the Internet of Things (IoT). Here is a section: 

While IoT spans a variety of industrial sectors, the focus of this report is on Home Automation. Previous reports in this series addressed the applications of IoT to CommTech, Semiconductors and Software. In this report, we address the impact of the IoT on the industrials space, with a deeper dive into Home Automation within the Building Automation opportunity below. We expect a series of follow-up reports touching the following topics.

Building Automation focuses on improving Energy efficiency and occupant comfort/utility within the home or commercial building. Key advantages include improved security, remote monitoring of devices, and Energy management.

Manufacturing applications of IoT could help facilities to reduce downtime through predictive maintenance, have better visibility into inventory and Energy management, and improve operational efficiencies overall.

Resources could benefit from real-time equipment monitoring, Energy efficiency (smart meters), and fuel reduction (O&G).

 

Eoin Treacy's view -

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

The frivolity of much of the social media space has led some to believe that future productivity gains will be limited. However, the increasing application of new technologies to the industrial sector almost certainly insures that this assumption will prove false. Rapid prototyping, embedded sensors, processors and transmitters are driving efficiencies that are transforming the industrial sector. This is important because productivity growth is a necessary component in the evolution of a secular bull market. It is for this reason that veteran subscribers will be familiar with our continued emphasis, particularly in the Friday audio, that we are in a technological golden age more commonly referred to as the Third Industrial Revolution. 



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July 18 2014

Commentary by Eoin Treacy

Foreigners Cannot Get Enough Bonds in Oil-Law Boon

This article by Ben Bain and Isabella Cota for Bloomberg may be of interest to subscribers. Here is a section: 

International investors are boosting their holdings of Mexico’s peso-denominated government debt to a record as lawmakers near a vote on rules to end the nation’s seven-decade-old oil monopoly.

Foreigners now hold 2 trillion pesos ($154 billion) of the securities, or 37.5 percent of the total, the most recent data released by the central bank showed. Yields on Mexico’s fixed- rate bonds have fallen 0.7 percentage point this year, more than twice the average for emerging markets, according to Bank of America Corp.

Draft rules for how companies from Exxon Mobil Corp. to Royal Dutch Shell Plc can pump crude from the nation’s oil fields for the first time since 1938 were approved by Senate committees this week. Bank of America estimates ending the oil monopoly may attract $20 billion in annual foreign-direct investment.

“Foreign investors see the long-term story,” Alejandro Urbina, a money manager at Silva Capital Management LLC, which oversees $800 million including Mexico’s fixed-rate debt, said in a telephone interview from Chicago. “The process is moving forward. It didn’t stop. As long as it doesn’t get stuck anywhere, it’s positive.”

 

Eoin Treacy's view -

Most of the news about Mexico focuses on the power of the drug cartels and the trafficking of people across the border. However this represents only a small portion of this large country’s story. The opening up of the Energy sector to inward investment and the potential reversal of production declines is a more important story. 



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July 17 2014

Commentary by David Fuller

Russia Sanctions Could Reach Tipping Point

Here is the opening from this ominous article by Mohamed A Erian for Bloomberg:

The market reaction to repeated sanctions against Russia has tended to follow a pattern, with investors shrugging off the news after an initial sell-off. Still, the cumulative impact of sanctions is getting harder to ignore, and -- particularly given the reports of the downing of a passenger plane in Ukrainian airspace -- it could yet get much worse.

Citing the Kremlin’s continued interference in Ukraine, President Barack Obama announced yesterday that the U.S. would intensify its sanctions in the areas of defense, Energy and finance, including placing restrictions on the financing of state-owned companies such as oil giant Rosneft. European leaders followed suit, restricting new funding from the European Investment Bank and seeking to do the same for the European Bank for Reconstruction and Development. The moves represent another step along a well-specified path toward targeting first individuals, then companies and ultimately whole sectors where the Russian economy is particularly vulnerable.

The market's immediate negative reaction is well justified. The Russian economy will suffer from the reduced availability of financing and supplies, and from an increasingly uncertain operating environment. An impaired Russian economy will have spillover effects on major trading partners such as Europe, which will in turn weigh to some extent on the global economy.

David Fuller's view -

For stock markets, the shock waves from an escalating conflict occurring in a specific region such as the Russia-Ukraine border are understandably felt most strongly in proportion to their proximity.  This latest incident is bad news for Europe, highlighting its Energy vulnerability in addition to ongoing economic problems.  The USA is also affected somewhat because of its participation in the sanctions.

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July 17 2014

Commentary by David Fuller

Wind turbine fires "ten times more common than thought", expert warns

Here is the opening of this informative article from The Telegraph

Study backed by Imperial College finds wind turbines prone to "catastrophic" fires but the true scale of the problem is unknown

Wind turbines may catch on fire ten times more often than is publicly reported, putting nearby properties at risk and casting doubt on their green credentials, researchers have warned.

The renewable Energy industry keeps no record of the number of turbine fires, meaning the true extent of the problem is unknown, a study backed by Imperial College London finds on Thursday.

An average of 11.7 such fires are reported globally each year, by media, campaign groups and other publicly-available sources, but this is likely to represent just the “tip of the iceberg”.

There could in fact be 117 turbine fires each year, it argues, based on analysis showing just 10pc of all wind farm accidents are typically reported.

Fires tend to be “catastrophic”, leading to turbines worth more than £2 million each being written off, because the blazes occur so high up that they are almost impossible to put out, it warns.

Turbines are prone to catching on fire because their design puts highly flammable materials such as hydraulic oil and plastic in close proximity to machinery and electrical wires, which can ignite a fire if they overheat or are faulty.

“Lots of oxygen, in the form of high winds, can quickly fan a fire inside a turbine,” it says. “Once ignited, the chances of fighting the blaze are slim due to the height of the wind turbine and the remote locations they are often in.”

It warns: “Under high wind conditions, burning debris from the turbine may fall on nearby vegetation and start forest fires or cause serious damage to property.”

The main causes of fires are lightning strikes, electrical malfunction, mechanical failure, and errors with maintenance, it finds.

David Fuller's view -

This is possibly the most damning of the many articles on wind farms that I have seen and posted in recent years, and it is informative rather than a diatribe. 

The developing fashion in this heavily subsidised industry has been to build ever higher and larger in terms of blade circumference, on the basis that these Jules Verne-style monsters would be more efficient.  Yes, at an enormous cost, both initial and ongoing, not least as they are much more likely to be struck by lightening.   

(Please use the Search facility above if you wish to see any of the 26 articles found under ‘wind farms’ or 22 articles under ‘wind power.)



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July 16 2014

Commentary by Eoin Treacy

Even in Canada, booming U.S. petroleum elbowing out Alberta producers

Thanks to a subscriber for this article by Jeff Lewis for Financial Post which may be of interest. Here is a section: 

Even in Canada, booming U.S. petroleum elbowing out Alberta producers – Thanks to a subscriber for this article by Jeff Lewis for Financial Post which may be of interest. Here is a section: 

So much low-cost gas is expected to flow from the Marcellus in the northeast part of the U.S. , for example, that Nova is in “serious” talks to develop a second pipeline into the region, Mr. Thomson said. Access to U.S. feedstock is “going to be key” in deciding whether to build a second production unit for making high-end polyethylene products at its Sarnia plant, he said.

In the Quebec town of Bécancour, IFFCO Canada Enterprise Ltd. aims to start construction on a $1.6-billion fertilizer plant by spring next year. But the company, majority owned by a unit of India’s largest fertilizer manufacturer and distributor, has warned the project’s future hinges on timely access to low-cost gas, including through the Dawn trading hub in southwestern Ontario, one of the entry points for U.S. gas into Canada.

“At the moment Dawn is the cheaper alternative than Western Canada. I don’t think this is a surprise,” said Simon Pillarella, vice-president, corporate affairs with IFFCO Canada.

“It’s not only us who’s looking for this sort of option,” he added. “Most clients in Eastern Canada are looking for the cheapest way to supply their gas.”

 

Eoin Treacy's view -

The boom in the USA’s production of crude oil, natural gas and various by-products can’t but displace more distant suppliers. The evolution of North American unconventional extraction methods continues to represent a game changer for the Energy sector which is having a significant effect on capital investment decisions across the chemical, fertiliser, industrial, refining, pipeline and transportation sectors which in no small part has contributed to the USA’s recovery. . 



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July 11 2014

Commentary by Eoin Treacy

Crop Forecast Sends Corn Prices to Near Taxpayer Subsidy Trigger

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

The $956.4 billion farm bill was touted as changing the subsidies that watchdog groups called excessive government support for farmers who last year had record profits. A $5 billion annual program to pay farmers regardless of crop price was eliminated, replaced by aid for insurance programs and a so- called Price Loss Coverage program, a vestige of the old subsidies approach that would still be an option for producers.

Booming prices for corn, soybeans, wheat and other commodities has led to less spending on traditional forms of payouts in recent years. Corn growers received $2.7 billion in 2012, down from a peak of $10.1 billion in 2005, according to Environmental Working Group, which tracks farm payments.

Assuming continued high prices, the farm bill was estimated to save $23 billion over 10 years, according to congressional estimates. That isn’t happening.

As surpluses push down prices, annual farm profits are forecast to drop 27 percent to $95.8 billion this year from last year’s record, the government said in February. Revenues from major crops will be $189.4 billion, down 12 percent.

Eoin Treacy's view -

Soft commodities and Energy contracts have led declines on the Continuous Commodity Index this week sending it back below the 200-day MA despite the fact that industrial metals have been reasonably steady and precious metals advanced. 



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July 10 2014

Commentary by Eoin Treacy

Comments posted on central bank balance sheet charts

Terrific chart. Can you put it in the library please?

The BoJ appear to be keeping things afloat and rumours abound that they will have to go all in soon or the great experiment in Abemonics will get derailed. The economic stats recently have been less than encouraging...

And

I read that China is printing more money than the US - they have created Renminbi equivalent to 50 bn $ per month over the last six months. What is the graph like if this is added!

Eoin Treacy's view -

Thank you both for these additional comments on yesterday’s composite chart of major central bank balance sheet sizes.

The Bank of Japan has little choice but to proceed with QE, in its efforts to reignite growth and inflation, now that it has embarked on the extraordinary monetary policy route. While QE has had mixed results in achieving economic growth it has been much more successful in inflating asset prices. Loose monetary policy is important for Japan, but Abenomics is likely to succeed or fail based on their success in imposing regulatory and process reform and in controlling Energy price inflation.

I have now also added the PBOC Balance Sheet Chart to the Chart Library and updated the total assets chart for the Fed, ECB, BOJ and PBOC. Unfortunately, it is not possible to add this chart to the Chart Library. 



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July 10 2014

Commentary by Eoin Treacy

OPEC Sees Lowest Demand for Its Crude Since 2009 Amid U.S. Boom

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

OPEC predicted that demand for its crude will decline in 2015 to the lowest in six years as supplies from other producers, led by the U.S., are more than enough to cover the increase in global consumption.

The need for crude from the Organization of Petroleum Exporting Countries will slide to 29.4 million barrels a day next year even as growth in world oil consumption accelerates, the group said in its first assessment of 2015. That’s 300,000 a day less than OPEC’s 12 members pumped in June. It would be the third consecutive annual drop in demand for OPEC crude and the lowest since 2009. The U.S. will provide about two-thirds of next year’s supply growth, OPEC said, amid a shale-oil surge that has made the U.S. the world’s biggest producer.

“Even if next year’s world economic growth turns out to be better than expected and crude oil demand outperforms expectations, OPEC will have sufficient supply to provide to the market,” the group’s Vienna-based secretariat said in the report.

The U.S. has overtaken Saudi Arabia and Russia as the world’s biggest oil producer as it taps shale formations in Texas and North Dakota by splitting apart rocks with high- pressure liquid, a process known as known as hydraulic fracturing, or fracking. Oil prices have remained supported by threats to supplies in OPEC members such as Iraq and Libya, with the Brent benchmark’s loss this year limited to 2.3 percent.

Eoin Treacy's view -

We have referred to the evolution of unconventional oil and gas as a game changer for the Energy sector since at least 2008 and the fact that OPEC’s dominance of the Energy sector is decreasing is testament to that transformation.

There are two ways to look at this development. On the one hand, new US and Russian production might be at a higher marginal cost than that of many OPEC members but at today’s prices it is helping to contain the risk of price spikes since there is ample supply. 



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July 08 2014

Commentary by Eoin Treacy

Minerals & Energy Commodities Update

Thanks to a subscriber for this report from National Australia Bank. Here is a section on iron-ore: 

Spot prices exhibited less volatility in June than they did in May –trading in a narrow range across the month –in contrast to a persistent downward trend since late 2013. In late June, prices for 62% fines edged back above US$95 a tonne (having fallen as low as US$89 a tonne)

Unlike other bulk commodities, imports of iron ore into China have remained strong –increasing by almost 19% in the first five months of the year to 383 million tonnes.
The strong level of exports have seen stockpiles at Chinese ports rise to record levels –at almost 114 million tonnes –albeit the level has remained fairly stable in June.

MySteelResearch had previously estimated that around 40% of stocks were connected to shadow banking-related financing deals, however a more recent estimate by Bank of America-Merrill Lynch suggests steel mills control 70% of current stocks.

Reuters report that some Chinese steel mills are selling future iron ore cargoes (delivered under long term contracts) and purchasing material currently at ports –for which the prices are lower. This trend may have supported the recent (albeit modest) recovery in spot prices.
Lower prices are likely impacting the viability of Chinese ore producers –with estimates that around 80% of Chinese iron ore mines have cash costs at between US$80 and US$90 a tonne (MySteel).

Our forecasts for iron ore prices are unchanged –our hybrid price consists of a weighted combination of spot and contract prices –however the recent weakness in spot prices highlights downside risk. We expect ironore at around US$100 at the end of 2014 and down to US$95 a tonne at the end of 2015.  

 

Eoin Treacy's view -

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

We can assume that Chinese production of iron-ore represents the marginal cost for the global sector. Below $80 and part of China’s mining sector would need to be shuttered. Above $90 and they are still profitable. Quite apart from the fact that major foreign suppliers have better quality ore and long-term contracts, prices are unlikely to fall much below the $80 to $90 area. 



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July 07 2014

Commentary by Eoin Treacy

BP Statistical Review of World Energy (June 2014)

Thanks to a subscriber for this in depth report which may be of interest. Here is a section on coal: 

Coal consumption grew by 3% in 2013, well below the 10-year average of 3.9% but it is still the fastest-growing fossil fuel. Coal’s share of global primary Energy consumption reached 30.1%, the highest since 1970. Consumption outside the OECD rose by a below-average 3.7%, but still accounted for 89% of global growth. China recorded the weakest absolute growth since 2008 but the country still accounted for 67% of global growth. India experienced its second largest volumetric increase on record and accounted for 21% of global growth. OECD consumption increased by 1.4%, with increases in the US and Japan offsetting declines in the EU. Global coal production grew by 0.8%, the weakest growth since 2002. Indonesia (+9.4%) and Australia (+7.3%) offset a decline in the US (-3.1%), while China (+1.2%) recorded the weakest volumetric growth in production since 2000.   

Eoin Treacy's view -

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

Coal faces stiff opposition in North America from low natural gas prices and increasingly stringent EPA regulations. However, the fact remains that coal is cheap, abundant and technologically simple to derive Energy from. Coal prices are depressed and investors are fearful that the sector is in terminal decline. That has certainly been the case for a number of miners but their demise also means that the oversupply situation which has been reflected by prices should ease. 



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July 04 2014

Commentary by Eoin Treacy

Rare earths industry teeters as Lynas heads to full ramp-up

This article by Sonali Paul for Reuters appeared in Mineweb. Here is a section: 

"The pressure is on Lynas and Molycorp to demonstrate that rare earths is a viable business," said Dudley Kingsnorth, a rare earths expert at Curtin University in Western Australia, whose forecasts are widely used in the industry.

Lynas now expects to reach its initial output rate target by December at the latest, which should shore up its shaky cash position, its new CEO said in her first interview.

Lynas mines rare earths at Mount Weld in Western Australia and then ships concentrated material in 2.5-tonne bags to Kuantan in Malaysia, where it has built the world's biggest rare earths plant on a 100-hectare site surrounded by other chemical plants and peat swamp forest.

It had hoped to be producing rare earth oxides of lanthanum, cerium, neodymium and praseodymium, used in super magnets for wind turbines, car brakes, batteries for hybrid and electric vehicles, and Energy efficient light bulbs by early 2012. 

But more than two years later it has yet to hit a stage one capacity of 11,000 tonnes a year, stalled by opposition to the project on environmental grounds and technical problems. Once it reaches that rate, Lynas will be cash flow positive, CEO Amanda Lacaze, who took the role in June, said on Wednesday.

"We have an opportunity here to take something and be significant in a worldwide sense," Lacaze said. "On the other side, there are a few hurdles or mountains to be climbed or pushed over to get to there."

Lynas is being shored up by the Japanese, who have looked for an alternative supply ever since China held back supplies amid a territorial dispute over the Senkaku Islands in 2010.
Trading house Sojitz Corp and state-run Japan Oil, Gas and Metals National Corp (JOGMEC) provided $225 million in debt for the second stage of its Malaysian plant, which included Sojitz taking 8,500 tonnes of product.

 

Eoin Treacy's view -

Rare earth elements represent strategic resources for a number of companies so developing multiple sources of supply makes sense. However China is jealous of its dominant position. Following the ill-calculated attempt to force high-end manufacturing to relocate and to influence geopolitics, China has flooded the market once more with supply in order to maintain market share. The result has been that nascent rare earth miners racing to get production underway saw their share prices plummet as access to credit became a lot more difficult. I’ve recreated the rare earth miners section from my Favourites in the Chart Library. 



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July 02 2014

Commentary by David Fuller

Indian Bonds Advance as Monsoon Pickup Adds to Budget Optimism

Here is a sample from this informative Bloomberg report:

Indian bonds due 2023 rose, pushing the yield to the lowest in two weeks, on indications the monsoon is strengthening and optimism the government will unveil steps in next week’s budget to curb the fiscal deficit.

Seasonal showers covered northern Indian states including Uttarakhand and Himachal Pradesh, the weather bureau said yesterday, adding that conditions are favorable for an advance into other areas. State-run refiners raised fuel prices this week following an increase in rail fares last month, spurring expectations the government will seek to improve its finances by boosting revenue and reducing Energy subsidies.

“Any sign of a revival in rains will buoy the bond market as it would calm inflation expectations,” Debendra Kumar Dash, a fixed-income trader at DCB Bank Ltd. in Mumbai, said by phone. “The government has been making all the right noises, leading to hopes that the budget will focus on fiscal consolidation.”

India’s new administration led by Prime Minister Narendra Modi will present its firstfederal budget on July 10, the finance ministry said in a statement today. India can’t afford populist policies and needs fiscal discipline for sustainable economic growth, Finance Minister Arun Jaitley said yesterday.

David Fuller's view -

India (weekly & daily) remains one of the world’s best performing stock markets this year, moving steadily higher ever since Narendra Modi threw his hat in the political ring and won a landslide majority victory.  Given Modi’s success in running the state of Gujarat, global investors saw his victory as a vote for modernity.   

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June 30 2014

Commentary by Eoin Treacy

Corn Heads for Biggest Decline in Year on Climbing Inventories

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

“Inventories were larger than expected and signal no shortfall in supplies ahead of the harvest this year,” Dale Durchholz, the senior market analyst for AgriVisor LLC in Bloomington, Illinois, said in a telephone interview. “Corn supplies are comfortable.”

Corn futures for December delivery fell 4.5 percent to $4.2725 a bushel at 11:39 a.m. on the Chicago Board of Trade, heading for the biggest decline since June 28, 2013.

Global grain stockpiles, excluding rice, are forecast to climb to a 15-year high by the end of the 2014-2015 season, the London-based International Grains Council said on June 26.
Soybeans Tumble

Soybeans fell to the lowest since January 2012 as the USDA said farmers will plant more than analysts expected.

Seedings will reach an all-time high of 84.839 million acres. Analysts expected 82.213 million acres, according to a Bloomberg survey. The USDA said in March that growers intended to plant 81.493 million.

“Certainly, we were all fearing for a record number, but this was way out of the range of expectations,” Bill Nelson, senior economist at Doane Advisory Services in St. Louis, said in a telephone interview. “We had the wet start to the corn planting season. In the end, that might have encouraged some farmers to switch from earlier intentions into soybeans.”

 

Eoin Treacy's view -

Due to a confluence of factors the commodity complex has experienced a rotation where the metal and Energy sectors have returned to outperformance while volatility within softs and agriculture has resulted in a great deal of variability in terms of performance. Grains and beans have come under particular pressure.



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June 25 2014

Commentary by David Fuller

Abe Declares Deflation End as Growth Plan Confronts Skeptics

Here is the opening from this interesting article from Bloomberg:

Prime Minister Shinzo Abe said the deflation that wiped out much ofJapan’s growth the past 15 years and so stunted the economy that it slipped to No. 3 behind China, has ended and will be thwarted by new government policies designed to encourage business expansion.

“Through bold monetary policy, flexible fiscal policy and the growth strategy we have reached a stage where there is no deflation,” Abe, 59, said in an interview yesterday at the prime minister’s official residence in Tokyo. With the first sales tax rise since 1997 that took effect in April, “this was an extremely difficult time for management of the economy, but I believe we were somehow able to overcome it.”

Abe was speaking before his cabinet endorsed the most specific measures yet to deliver on his growth strategy -- the third part of a campaign to end declines in consumer prices and stoke investment. The government plans corporate-tax cuts, trade liberalization, reduced barriers for agricultural land consolidation, special zones of lighter regulation and the study of casinos as a way of spurring record numbers of tourists.

The steps are part of Abe’s strategy to restore Japan’s influence in a region where China is the dominant power. A strengthened economy would boost Japan’s appeal to nations from the Philippines to India as a counterweight to China, which caused concern among neighbors pressing its claims on disputed territories.

And:

Abe said that among his policy initiatives he will aim to lower the corporate tax rateto 20 percent to 29 percent over a few years, from about 35 percent now. The rate is currently the second-highest in the Group of Seven, after the U.S., and compares with 23 percent in the U.K. South Korea’s rate is 24 percent.

David Fuller's view -

Is this the oldest rule in the markets?  Don’t bet against an aggressive central bank.  If not the oldest, it is certainly one of the best.  Abe’s regime has gone all out to end deflation.  The only thing that could bring it back anytime soon, in my opinion, would be a significant spike in the price of crude oil.  Japan needs to lower its Energy costs and safer ‘new nuclear’ would be one important route. 

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June 25 2014

Commentary by Eoin Treacy

Capex about to turn up: The missing link in the US recovery

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

Spending on non-residential structures fell to unusually depressed levels following the financial crisis and has remained weak during this recovery. Similar to residential investment, much of this weakness can be attributed to a need to work through the overbuilding that occurred during the run up to the financial crisis, as structures share of GDP rose rapidly from 2004 through 2008. There are some indications that this excess supply has diminished materially and that pent up demand for non-residential structures should lead to stronger spending going forward. For example, the vacancy rate for office space nationally has declined steadily over the past four years toward historically more normal levels (Chart 18). In addition, in response to the shale Energy boom in the US, investment in Energy-related structures has been notably strong. This supports the outlook for a pickup in investment in commercial structures.

IPP: Uptrend should continue
Spending on IPP – composed of spending on software, R&D, and entertainment, literary and artistic originals – has displayed a steady uptrend as a share of GDP over the past several decades, which has been relatively impervious to cyclical factors. Recent strength in IPP spending has been driven primarily by the R&D component. IPP spending may also benefit from a shift away from investment in information processing (IP) equipment.

Equipment: IP equipment has been notably weak
Equipment spending as a share of GDP remains well below historical averages for this point of the recovery. In this section we take a more granular look at equipment’s components to analyze the underlying causes of this weakness. We have already determined that transportation equipment is near longer-term averages. We also find that recent contributions to BFI from industrial equipment and the “other” equipment category appear to be in line with longer-term averages. Conversely, IP equipment appears to be the component driving much of the softness in total equipment spending. Spending on IP equipment has been consistently below its longer-term average contribution to overall fixed investment during this recovery (Chart 19). 

Eoin Treacy's view -

The majority of established technology companies rely on corporate spending to boost earnings. The outperformance of the Nasdaq-100 highlights the fact the corporations have been spending on software and other services. The return to outperformance of the industrial sector in 2012 reflects increased spending on machinery and embedded processors. Generally speaking there is a perception that the US recovery is weaker than one might expect but the fact that companies are embarking on increased spending is a sign of confidence. 



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June 23 2014

Commentary by Eoin Treacy

China to accelerate nuclear power development

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

By the end of last year, 17 nuclear plants were in operation, with a total capacity of nearly 15,000 megawatts of electricity.

At a meeting of the National Energy Commission on April 18, Premier Li Keqiang announced the introduction of new nuclear power plants along the east coast "at a proper time".

Earlier this month, the Ministry of Environmental Protection released the environmental impact statements for two new nuclear power plants, one in Guangdong Province and another in Shandong, but this is still not enough in the longer term.

"China's nuclear power sector still has a long way to go before reaching the global average," said Ye Qizhen of the Chinese Academy of Engineering.

A proportion of 10 percent of nuclear power is an ideal number for China, Ye said.

 

Eoin Treacy's view -

With a serious pollution problem and Energy consumption on a secular upward trajectory, China has little choice but to explore every avenue for electricity generation. The approval of new nuclear reactors suggests the period of contemplation that followed the Fukushima disaster has ended.  

Among Chinese companies related to the construction of nuclear reactors; Shanghai Electric Group (Est P/E 12.35, DY 3.04%) found support three weeks ago in the region of the 200-day MA. It will need to hold above the HK$2.80 area if potential for additional higher to lateral ranging is to be given the benefit of the doubt. 

 



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June 23 2014

Commentary by Eoin Treacy

Waste Management

Eoin Treacy's view -

In compiling the lists of uranium related instruments for the above item, USEC posed something of a quandary. It is not a miner and the company’s ambition of owning a nuclear reactor contributed to its bankruptcy. As an enricher of uranium and manager of the subsequent waste the share fits more accurately into the waste management sector. This led me look at other waste management companies. 

A number of solid waste companies are benefitting from increased quantities of waste as the US economic recovery gains pace. Additionally, they are benefitting from a greater focus on recycling and a desire to turn waste into Energy.  

 



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June 19 2014

Commentary by Eoin Treacy

Exxon, BP Evacuate Oil Workers From Iraq as Violence Escalates

This article by Nayla Razzouk, Bradley Olson and Kadhim Ajrash for Bloomberg may be of interest to subscribers. Here is a section: 

Exxon evacuated some workers from the West Qurna oil field, according to a person familiar with the company’s Iraq operations. BP Plc removed non-essential workers, Chief Executive Officer Bob Dudley said June 17. Malaysia’s Petroliam Nasional Bhd. moved 28 of its 166 Iraq employees to Dubai, the company said by e-mail yesterday. Royal Dutch Shell Plc isn’t evacuating staff yet and is ready to do so, Andy Brown, head of Shell Upstream International, said in an interview in Moscow.

The companies all said they’re continuing to pump oil and there are few signs Iraq’s production has been curbed after Islamic State in Iraq and the Levant fighters took northern cities including Mosul. Police near the Baiji refinery, the nation’s largest, said government forces are now in control after a battle with ISIL. Crude shipments from the south, where most production is located, may accelerate next month and Kurds are defending the Kirkuk oilfield in the north.

“The only infrastructure that is currently producing and supplying international markets is in the south and will remain untouched,” said Kyle Stelma, managing director of Dubai-based Dunia Frontier Consultants, which researches Iraq for clients.

 

Eoin Treacy's view -

The spread between Brent Crude and WTI is widening once more which further emphasises the USA’s position as a secure and growing source of supply. While the USA does not export meaningful quantities of crude oil, the market for products such as gasoline and heating oil is globally fungible so prices are increasing. 

Higher oil prices represent an additional bullish catalyst for the Energy majors which have been exhibiting relative strength for much of the last couple of months. I recreated the Oil Majors section from my Favourites in the International Equity Library which should make it easier for subscribers to return to in future. Some of the more interesting charts include: 



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June 16 2014

Commentary by Eoin Treacy

Email of the day on European solar ETFs

Hello, I was wondering if you could analyse the solar power sector, in Europe there are no funds or ETFs to invest in this sector. In the US I found the Guggenheim Solar ETF. I notice that this ETF is very correlated with the heaviest weighted stock, First solar, so I will probably buy this as being in Europe we are fiscally punished if we buy us ETFs which are not compliant with UCITS regulations. Anyway First Solar seems to have a very interesting chart could you please comment thanks

Eoin Treacy's view -

Thank you for this question and following a search on Bloomberg I did not find a dedicated solar fund listed in Europe. I’ve reviewed solar companies on a number of occasions over the last year not least because they were rallying from deeply depressed levels and because the technological advances seen in the sector hold out the potential for a truly game changing innovation in the Energy sector globally. Here is a link to the Tag for solar comments. 



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June 13 2014

Commentary by David Fuller

Iraq civil war threatens structure of global energy supply for years

Here is the opening of this topical and insightful column by Ambrose Evans-Pritchard for The Telegraph:

Spectacular advances by Jihadi forces across northern Iraq have raised the spectre of a Sunni-Shia conflagration in the heart of the Middle East, triggering a surge in oil prices and throwing into doubt the structure of global Energy supply for the next decade.

Brent crude jumped above $113 a barrel as the self-described Islamic State of Iraq and the Levant (ISIL) raced down the Tigris Valley towards Baghdad with sophisticated weaponry, seizing on its momentum after the historic capture of Mosul. Oil prices are approaching levels last seen during the Arab Spring.

“Iraq is turning into a nightmare. There are real risks that this movement will spread to other countries. Our economies are too weak to pay for oil at $120, and they can’t stand $140 if it spikes that high,” said Chris Skrebowski, a veteran oil analyst and former editor of Petroleum Review.

Iraq is Opec’s second-biggest producer, though output has slipped 8pc to 3.3m barrels a day (b/d) since February due to sabotage of the Kirkuk-Ceyhan pipeline to Turkey. Ole Hansen, from Saxo Bank, said a fall in Iraqi output to levels seen in the last Gulf war would cause a $20 price spike. “The entire economic recovery could stall, and we could even slip back into recession in some regions,” he said.

The International Energy Agency is counting on Iraq to provide 45pc of the entire increase in global oil supply by the end of the decade, badly needed to meet growing demand in China and India. This requires vast investment – rising to $540bn by 2035 as output tops 8m b/d – but such outlays are implausible as the state slides towards sectarian civil war.

A risk alert put out on Thursday by IHS said the West Tikrit and Ajul oil fields and other Energy assets in the North are at “severe risk of being raided or targeted for sabotage”. The highways linking Baghdad to Basra are also at risk, and cargo travelling almost anywhere in the north is vulnerable to bomb attacks. The government claims to have stopped an assault on the country’s biggest oil refinery at Baij but IHS said the plant is still at “severe risk”.

Iraq’s oil minister, Abdul Kareem Luaibi, said most of country’s crude was pumped from “very, very safe” regions in the Shia South. He insisted that Iraq would meet plans to boost output to 4m b/d by the end of the year, the highest since the late 1970s.

Such assurances count for little as the Iraqi security forces melt away in the face of lightning strikes by the army of Sunni extremists, a group of up to 5,000 warriors that is too radical even for Al-Qaeda and harks back to the 8th century Caliphate.

David Fuller's view -

I do not think that the headline above is correct.  Nevertheless, the last thing a gradually recovering global economy needs is an oil price shock, which has suddenly become a possibility following the advance of a radical group of Sunnis calling themselves the ‘Islamic State of Iraq and al-Sham’ (ISIS).  It has rolled swiftly into Iraq in recent days, encountering little opposition from the infiltrated and demoralised army backed by the Shia-dominated regime of Nouri al-Maliki in Baghdad.  Global stock market sentiment is being tested by this generally unexpected event.

It is the latest in the long history of Sunni-Shia conflicts.  It also has suspicious financial undertones because regional oil producers, unaffected by the conflict, would benefit from somewhat higher oil prices in the short to potentially medium term. 

The full Telegraph Article is posted in the Subscriber's Area.

Despite the technological development of commendable renewable sources of Energy, it will be at least several decades before the global economy can prosper without crude oil.  Most countries now know that technologies are available to develop their own oil and gas reserves from both conventional, and increasingly, unconventional shale sources.  A few are doing so and reducing their carbon emissions by producing and using much more natural gas. 

What are other countries waiting for, especially when they risk being hostages to fortune in terms of even higher Energy prices?

(The current Energy risk is discussed in more detail in Friday’s Big Picture Audio.  See also Thursday’s written comment.)   



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June 13 2014

Commentary by Eoin Treacy

Review of the Autonomies

Eoin Treacy's view -

This week I have spent each day reviewing a different Dividend Aristocrats index, as defined by S&P, and adding the respective constituents and former constituents to the Dividend Aristocrats section of the International Equity Library. Today I will focus on the Autonomies, a term we coinded a number of years ago, which is a list I compiled to reflect the types of companies that should benefit from the confluence of themes represented by the Greatest Urbanisation in History, the Golden Age of Technological Innovation and the game changing nature of innovation in Energy production

Our original aim in creating the list was to recognise the fact that companies have grown so much in terms of influence and dominance of their respective niches that they are now akin to mobile principalities.  The globalisation of economies means that corporations can make the best use of their platforms to optimise sourcing of raw materials, manufacturing, R&D, marketing and sales. They also have the ability to choose where they eventually pay taxes and how to limit their exposure to regulation.

Capitalism trends towards concentration as the strongest eventually consume the weakest. It is therefore no surprise that the Autonomies include a range of sectors dominated by oligarchies whether iron-ore, industrial gases, social media, marketing, convenience foods, snack foods etc.

In an exchange between Iain Little, Pascal Morin and I this week Pascal suggested the following as a definition for autonomies:

An autonomy is a company which displays leadership characteristics in its sector and operates on a global scale; it is relatively “autonomous” from any given country, including where its head office is located, with respect to tax, governmental interference, regulation, labour inputs and end-markets, and can freely choose where to allocate its resources to best fulfil its objectives.   

This encapsulates the most important factors we seek to highlight with the list. In this regard it is a somewhat qualitative definition and differs from the Dividend Aristocrats which is a purely quantitative designation. I devoted the final section of my book, Crowd Money, to the Autonomies because they represent a fertile pool from which uptrends continues to evolve. 



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June 11 2014

Commentary by Eoin Treacy

Musings from the Oil Patch June 10th 2014

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

The translated Nikkei article described the transmutation experiment in the following manner: “The researchers put the source material that they want to convert on top of the multi-layer film, which consists of alternately laminated thin films of calcium oxide and palladium. The thin metal layers have a thickness of several tens of nanometers. Elements are changed in atomic number in increments of 2, 4 and 6 over a hundred hours while deuterium gas is allowed to pass through the film.

“The transmutations of cesium into praseodymium, strontium into molybdenum, calcium into titanium, tungsten into platinum have been confirmed.”

Mitsubishi’s patent was originally issued in Japan but it was extended in 2013 into a European patent, and protects the company’s proprietary thin-film transmutation technology. The Japanese newspaper also reported that a research and development company of the Toyota Group (TM-NYSE), Toyota Central Research and Development Labs, has also replicated the elemental conversion research with results similar to Mitsubishi’s experiment.

While the Mitsubishi and Toyota research efforts have focused on material transformation rather than the generation of Energy, the process is similar. High profile work on LENR as an Energy source has been conducted by Andrea Rossi, an Italian engineer, inventor and entrepreneur. He has invented the Energy Catalyzer (E-Cat) and completed two tests, one of which produced 900o C (1,650o F) of heat that could be used to generate steam to power a generator to produce electricity. In early 2013, a group of independent scientists ran tests on two versions of the “Hot Cat,” a one megawatt LENR unit. Their coefficient of performance (COP) was measured, determining the ratio of Energy out versus Energy in. The COPs in the two tests were 5.6 and 2.2, respectively. Another group that is not affiliated with nor has it worked with Mr. Rossi, has been using an E-Cat and conducting longer term tests, the results of which may be released soon. This could be a monumental development, although it will not end skepticism of the technology.

Eoin Treacy's view -

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

In the aftermath of the Fukushima disaster Japan has a vested interest in figuring out how to deal with the problems associated with nuclear power. In the near term that has meant building tsunami walls around nuclear plants and reinforcing structures to protect them from earthquakes. The challenges represented by nuclear waste have been intractable for a long time but the transmutation methods detailed above hold out hope that these will eventually be solved. 



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June 05 2014

Commentary by Eoin Treacy

China Nuclear coming online

Thanks to a subscriber for this report focusing on China’s utilities as newly constructed nuclear power stations come on line. Here is a section: 

According to China Electric Power Promotion Council (CEPPC) report, Fuqing Nuclear unit 1 completed its last round of security checks in mid-April before loading fuel and is currently on schedule to be commissioned from August 2014. However, after Datang’s Ningde nuclear recorded c.Rmb100m loss in 1Q14 due to a 90-day overhaul, investors become a bit concerned whether Fuqing’s profit contribution is likely to be compromised by the undertaking of regular maintenance. While we understand that a new nuclear unit would need to perform a major overhaul for fuel re-load in its second year of operation, the time period is normally shorter. Hence, we do not think the longer-than expected maintenance period for Ningde is a common situation to be assumed for other nuclear projects.

Average utilization still over 7,300 hours despite maintenance In Figure 1, we summarize the utilization hour record of China’s operating nuclear units with GII or GII+ technology. Result shows that, excluding Tianwan unit 1, which incurred some technical issues during the first three years, average utilization in the second year is still above 7,300 hours, quickly climbing to above 7,700 hours in the third year.

 

Eoin Treacy's view -

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

Over the last decade China has aggressively invested in procuring the Energy resources required to fuel economic expansion. Building nuclear power capacity has been a major component of that strategy and these new reactors are now being commissioned. Considering how extensive the pipeline is for additional reactors, this represents a growth story from the perspective of utilities. 



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June 05 2014

Commentary by Eoin Treacy

Email of the day on some interesting MLPs and coal companies

I read your book last fall and thoroughly enjoyed it, and I intend to read it again soon just to be sure that the information sticks. You and David provide such a wonderful template for viewing markets. Thanks for all your hard work on behalf of the Collective. And on another note, would you be kind enough to add Pacific Coast Oil Trust (ROYT) and Suncoke Energy Partners (SXCP) to the Chart Library. Thanks again.

Eoin Treacy's view -

Thank you for your kind words and I’m delighted you enjoyed Crowd Money. I’ve added both of the above instruments to the Chart Library. 

Pacific Coast Oil Trust (P/E 7.48, DY 11%) manages producing and non-producing properties in California which is one of the most hostile states to additional drilling. Therefore this can be viewed as a yield play rather than a potential growth story. The trust cuts it dividend by 5.89% in the last year but the price fell by 30%. It has stabilised mostly above $12.50 and a sustained move below that level would be required to question potential for continued higher to lateral ranging. 

 



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June 04 2014

Commentary by Eoin Treacy

Musings from the Oil Patch May 27th 2014

This report by Allen Brooks for PPHB may be of interest to subscribers. Here is a section on German electricity prices: 

Revising the EEG is not the only power industry debate ongoing in Germany. The electric power companies are dealing with the government’s decision to shut down its nuclear power industry. Estimates are that small plants may cost €500 million ($684 million) to €1 billion ($1.368 billion) for larger plants. While cost is one aspect of dismantling nuclear power plants, there are many unanswered questions about what to do with the nuclear fuel and components from the plant that are radioactive. Moreover, these dismantling projects may take 10-20 years to complete, subjecting them to potential cost over-runs. Because of these technical and cost challenges, the heads of the three utilities responsible for eliminating Germany’s nuclear power plants have developed a plan to get the government to establish a “bad bank” structure for the plants. The utilities would contribute the roughly €30 billion ($41 billion) in reserves they were forced by the government to accrue for clean-up costs to the bank with the government (taxpayers) assuming all the technological and cost over-run exposures.  

The decision by Ms. Merkel’s government’s decision to shut down its nuclear power plants cost the Germany utilities substantially. They were forced to absorb the balance sheet hit from the write-down of the plants’ value, plus the additional costs of mothballing the plants while dealing with the costs of the dysfunctional power market due to the implementation of the EEG and Energiewende. They were forced to cut their dividends while suffering significant earnings hits, both of which hurt share prices. It is fascinating to watch the Germany Energy industry deal with its mandate to completely shut down its nuclear power industry by 2022 while trying to meet the country’s 2025 and 2035 goals of 45% and 60%, respectively, of renewable power generation. The cost of these policy changes has levied a financial toll on both Germany’s manufacturing sector, which is heavily dependent on export competitiveness, and its citizens. Do the recent Ifo institute index results reflect ongoing fallout from these policies and if so, what might the proposed Energy sector reforms mean for Germany’s economic future?

 

Eoin Treacy's view -

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

Germany is engaged in an expensive experiment in Energy politics which has so far resulted in the country’s carbon emissions hitting new highs. This is despite the fact that renewable Energy is contributing progressively more to the country’s Energy mix. Since Germany continues to subsidise renewables, is closing nuclear plants and has to import oil and gas, they are relying on coal to ensure base load requirements are met. Reuters today reported that Vattenfall has had its brown coal (lignite) mining licence renewed beyond 2026. The irony of this politically driven Energy policy is that it has failed in both containing costs and moderating carbon emissions. 



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June 03 2014

Commentary by Eoin Treacy

Are We Underestimating America's Fracking Boom?

Thanks to a subscriber for this article by Dennis Berman for the Wall Street Journal which may be of interest to other subscribers. Here is a section:

In that way, Sasol is a metaphor for what we don't yet understand about America's gas boom. Most know what fracking has meant for oil and gas prices. But because much of the work hasn't started yet, few appreciate the true extent of the industrialization that's about to begin.

So let's put it this way: We are building a Qatar on the Bayou. From whole cloth, companies are laying new cities of fertilizer plants, boron manufacturers, methanol terminals, polymer plants, ammonia factories and paper-finishing facilities. In computer renderings, the Sasol site looks like a fearsome, steel-fitted Angkor Wat.

In all, some 66 industrial projects—worth some $90 billion—will be breaking ground over the next five years in Louisiana, according to the Greater Baton Rouge Industry Alliance. Tens of billions of other new investments could be coming, says Louisiana's economic development secretary, Stephen Moret. How many projects will actually get built remains to be seen.

Assuming that most will, you realize we are still probably underestimating the positive impact of the gas boom on both local and national economies. The entire GDP of the state of Louisiana is about $250 billion annually.

"As an economist, I can only say, 'Wow. Holy Cow,'" said Loren Scott, a Louisiana economist who has studied the state for 40 years. "We typically measured expansion in terms of hundreds of millions of dollars. Something like that makes your eyes bug out." He expects, for instance, that once 10-year tax-abatement deals expire, schools boards will "find themselves with a bonanza."

Eoin Treacy's view -

Veteran subscribers will be familiar with our belief, since at least 2009, that unconventional oil and gas represent game changers for the Energy sector. The USA’s competitive advantage both in terms of Energy production and costs represent powerfully attractive qualities for Energy intensive industries. 

 



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June 03 2014

Commentary by Eoin Treacy

Pemex Reducing Repsol Stake as Mexico Prepares Oil Opening

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

The Mexican company is reducing its shareholding as lawmakers prepare regulations to open up the oil industry to foreign investment for the first time since 1938. Pemex was “very disappointed” in Repsol’s performance, Chief Executive officer Emilio Lozoya said in an Oct. 31 interview. The stake “has returned zero” under the current administration, he told a congressional Energy committee on Nov. 20.

Eoin Treacy's view -

The US Mexican Border is a political rather than geological boundary so it is reasonable to expect that the Mexican government has been looking on with envy at the surge in oil and gas production that has occurred in west Texas. This has been made possible through the innovation of wildcatters and private enterprise. By contrast national oil companies have been left scrambling to upgrade their knowhow. In tandem with a desire to reverse the country’s the production decline Mexico has strong reason to court private investment in its Energy sector. 



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