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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?

This item continues in the Subscriber’s Area.



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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.

This item continues in the Subscriber’s Area where the article is also posted. 



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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.   

This item continues in the Subscriber’s Area.



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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. 

This item continues in the Subscriber’s Area.



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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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May 30 2014

Commentary by Eoin Treacy

Blackstone Unit Foreshadows Google Path to Power Company

This article by Ehren Goossens, Mark Chediak and Jim Polson for Bloomberg may be of interest to subscribers. Here is a section: 

Meanwhile, Comcast, the cable giant, is in a pilot project with NRG in Pennsylvania that adds electricity to its cable, phone and Internet packages. AT&T last year entered the home automation and security business in 15 markets; while not yet planning power sales, it has introduced a smart thermostat that puts it solidly in the home Energy-management business. It could do what Comcast and Vivint are doing.

Google’s $3.2 billion acquisition of smart-home startup Nest in February “ought to give utility officials a sinking feeling in the pit of their stomachs” since it makes clear the Technarians have begun to seriously eye at least the periphery of utility business if not its core, said Adrian Tuck, CEO of Tendril Networks Inc. a Boulder, Colorado-based Energy-services management company.

Google Energy
While coy about its ultimate Energy ambitions, Google is already a power generator through more than $1.4 billion in clean Energy investments and holds a wholesale power license.

Last month it contributed $100 million to a program to promote rooftop solar power with SunPower Corp.

Nest, maker of the Learning Thermostat that memorizes and adjusts to users’ preferences, gives Google a leap-ahead presence in the burgeoning smart-home market at the precise time that power in the U.S. has begun to flow both ways with the rise of rooftop solar and other forms of decentralized, home-grown Energy, collectively called distributed generation.

Though Tuck said he has no special insight into Google’s thinking, he believes that its Nest acquisition may well be a “Trojan horse” that gives Google a back door into the utility industry with the ability to leverage its smart thermostats into massive quantities of salable demand response even as it begins to compete directly with utilities with its own green-power projects.

Google spokesman Tim Drinan declined to comment on Tuck’s speculation.
Tuck’s company Tendril is also doing a brisk business in advising regional cable, home-security and home-automation companies how to exploit this opening. He said the utilities he talks to feel constrained by tradition, phobia or regulatory uncertainties from wading in -- a mistake he likens to Eastman Kodak Co. being slow to join the digital camera revolution.

 

Eoin Treacy's view -

As a society we need cheap abundant Energy if we are to generate the type of productivity growth that can fuel a secular bull market. We don’t have it yet but the advent of unconventional oil and gas coupled with technological innovation across a whole host of sectors increases the likelihood that Energy price inflation will be much less of a factor in the next decades than it was in the last one. 



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May 28 2014

Commentary by Eoin Treacy

Fueling the Next Industrial Expansion

Thanks to a subscriber for this interesting report from Deutsche Bank focusing on natural gas demand growth. Here is a section: 

Our bottom up analysis suggests US industrial demand is likely to assume a higher growth trajectory as new projects take hold beyond 2015. While we are wary of simply adding both our top down and bottom up approach to forecasting, the announced project backlog and the implied intensity of incremental natural gas demand is significantly ahead of consensus expectations. Our view is that some portion of the industrial projects is additive – not a substitute - to the baseload of US industrial natural gas use implied by a top down survey. 

The EIA and Wood Mackenzie forecast US industrial demand growth for natural gas based on trend. The EIA annual Energy outlook assumes 22.2 Bcf/d of 2018 demand (up 2.5 Bcf/d from 2012). Wood Mackenzie looks to add both a baseline of GDP driven growth (1.9 Bcf/d) and a similar project build-up adding 2.0 Bcf/d. We would also note Wood Mackenzie recently revised its total industrial demand estimates, with total 2018 industrial demand increasing from 22.7 Bcf/d (Fall 2013) to 23.6 Bcf/d, directionally in line with our work. 

Our utilities equity research colleagues highlight the potential impact from the pending EPA ruling on carbon regulations for existing coal plants. Aggressive carbon reduction targets are expected, but mandating specific levels may prove difficult in light of the Clean Air Act limitations. We expect the result will be more demand side reductions and more natural gas burn in the power stack. While a potential positive for deferred natural gas, compliance is likely in the 2019-2030 timeframe. 

Our top down macro approach forecast based on a multi-variable regression model compares favorably with a 22.5 Bcf/d implied forecast by 2018, implying ~0.5 Bcf/d annual growth. At risk of double counting, we remain confident that little of the project based inflection in demand is included in the EIA estimates. We see the potential for 2.3 Bcf/d of incremental natural gas demand through 2018 based on our bottom up forecast. This demand is identifiable, risked, and promises to reach an inflection point by 2016. We believe that industrial demand is likely to find a balancing point between these our top down and bottom up approach, but above levels implied by major forecasting agencies such as the EIA.

 

Eoin Treacy's view -

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

It has been our belief at FullerTreacyMoney since at least 2008 that unconventional oil and gas represent game-changers for the Energy sector. The imposition of stringent environment standards on the coal burning sector represent an additional compelling demand driver. There is every reason to believe that the use of natural gas as a feedstock for utilities, industry, homes and transport is on a secular uptrend.   



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May 23 2014

Commentary by Eoin Treacy

Noble Returns to London LNG Trading as U.S. Adds Volume

This article by Anna Shiryaevskaya and Isis Almeida for Bloomberg may be of interest to subscribers. Here is a section: 

U.S. gas traded at $4.391 per million British thermal units on Louisiana’s Henry Hub by 5:21 p.m. London time. Northeast Asian LNG for delivery in four to eight weeks cost $13.50 a million Btu in the week to May 19, according to assessments by World Gas Intelligence. U.K. front-month gas, a regional benchmark, was at 44.51 pence a therm ($7.48 a million Btu) on ICE Futures Europe.

Sanchez Gestido is returning to Noble after leaving “about a year ago when a decision was made that the business wasn’t ready for this initiative,” Griffiths said.
Cheniere Energy Inc. will start exporting LNG in the first quarter of 2016, Jean Abiteboul, president of Cheniere Supply & Marketing Inc., said on May 19 in Amsterdam. The Houston-based company’s Sabine Pass terminal is the first to win full approval for U.S. exports from the Federal Energy Regulatory Commission since ConocoPhillips’s Alaskan Kenai plant in 1967. There were 14 more U.S. export terminals proposed to FERC as of May 21.

Cheniere will charge 115 percent of Henry Hub prices plus $3.50 a million Btu in liquefaction fees, and estimates shipping costs of $1 per million Btu for Europe to $3 for Asia, according to an April presentation on the company’s website.

 

Eoin Treacy's view -

The global market for LNG remains on a growth trajectory as ambivalence towards coal is unlikely to moderate anytime soon. A great deal of additional supply from the USA, Australia and Africa is set to come online in the next decade which will help allay the liquidity fears potential consumers may have towards the market. 

Based on the above figures, US exports will probably be more competitive in Asia supplies than Europe. Meanwhile China will be a less attractive market than other countries following its agreement with Russia. As gas markets become more fungible there is potential for US prices to appreciate somewhat while Asian prices should contract somewhat. 

 



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May 22 2014

Commentary by David Fuller

In the Russia-China Gas Deal, Did Putin Win?

Here is the opening from this interesting editorial from Bloomberg:

So in striking a big new deal to supply natural gas to China, has Vladimir Putin outmaneuvered the U.S. and its European friends yet again? Much as Russia's president would like you to think so, not really.

Putin called today's accord an "epochal event." The governments'joint statement contained thinly veiled criticism of U.S. and European Union actions over Ukraine, inviting the world to view the deal in the context of that dispute. The timing is certainly no accident, and a closer relationship between Russia and China is hardly a matter of indifference to the rest of the world.

At the same time, this agreement to supply China with gas has been in the works for 10 years, and a deal had been widely expected this year. The two countries had been haggling mainly over price. The terms announced this week don't make the true price of the gas (including how much each will spend on the necessary pipeline infrastructure) explicit, but it appears that China will pay a bit less than Europe pays for Russian gas. If so, both sides have moved from their earlier positions in closing the deal.

If there's a winner, it's China. It used Russia's desire to send the U.S. and Europe a message as a lever to get both a better price and its preferred pipeline route for the gas. For his part, Putin has a big new customer for Russian exports, and can tell the U.S. and Europe that Russia is fine without the European market, thank you. China diversifies its Energy supply -- among other things, it's keen to rely less on coal -- and does so on favorable terms. Expressions of solidarity about the drawbacks of democratic capitalism and the merits of other value systems are a bonus for both sides.

What the deal doesn't signify -- not yet, at least -- is a global realignment that puts the U.S. and Europe at a grave disadvantage. The tortuous history of Russia-China relations shows that their long-term interests are not complementary. Putin won't want Russia to depend on China any more than he wants it to depend on Europe. Anyway, the gas exports in the new pact, once onstream in 2018, will be about a quarter of what Russia sells to Europe. Even if the deal is enlarged later, the idea that Russia can now get along fine without the European market is nonsense.

David Fuller's view -

China got the better deal, not least as Russia had no other major buyer.  The world also benefited because China will hopefully burn less coal which has almost twice the CO2 emissions of natural gas.  Despite this wake-up call, Europe’s Energy policies, sadly, remain uncompetitive and they are not as green as promised.  For instance, Germany burns more coal today because its forest of windmills is less reliable and far more expensive than the nuclear power stations it closed.

(See also Wednesday 21st May’s lead item.)



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May 21 2014

Commentary by David Fuller

Russia, China Sign $400 Billion Gas Deal After Decade of Talks

Here is the opening of this latest report from Bloomberg:

Russia reached a $400 billion deal to supply natural gas to China through a new pipeline over 30 years, a milestone in relations between the world’s largest Energy producer and the biggest consumer.

President Vladimir Putin is turning to China to bolster Russia’s economy as relations sour with the U.S. and European Union because of the crisis in Ukraine. Today’s accord, signed after more than a decade of talks, will allow state-run gas producer OAO Gazprom (GAZP) to invest $55 billion developing giant gas fields in eastern Siberia and building the pipeline, Putin said.

It’s an “epochal event,” Putin said in Shanghai after the contract was signed. Both countries are satisfied with the price, he said.

Gazprom Chief Executive Officer Alexey Miller signed the deal with Zhou Jiping, chairman of China National Petroleum Corp. The agreement is for 38 billion cubic meters of gas annually over 30 years, Miller said. While he declined to give a price, he said the total value would be about $400 billion.

“This is the largest ever contract for Gazprom,” Miller said, adding the deal was clinched at 4 a.m. Supplies will start in four to six years, he said.

Gazprom shares rose as much as 2.2 percent, to 148.55 rubles in Moscow today and traded at 147.04 rubles at 4:04 p.m. local time.

David Fuller's view -

I do not think that Putin would have gone to China, with some fanfare, if he did not know that a deal was imminent.  Nevertheless, the last minute agreement, particularly after financial news services were initially saying this morning that discussions had failed, suggests to me that Putin had to give ground to the Chinese. 

Russia has gas, oil and weaponry but that is a narrow economic base for a country aspiring to be a global leader.  More importantly, the Energy cartels are gradually losing power, not least because many countries now have the capacity, if not quite the will and know how, to produce their own natural gas by fracking.  Additionally, solar power and most other forms of renewable Energy can only grow in importance as the advance of technology improves their output and efficiency. 

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May 20 2014

Commentary by David Fuller

China and Russia Fail to Reach Agreement on Gas Plan

Here is the opening for this interesting report from the International New York Times:

BEIJING — President Xi Jinping of China and the Russian leader, Vladimir V. Putin, were unable to announce an agreement on a natural gas deal on Tuesday, despite high expectations that mutual political interests would help finally push through the project.

Instead, commercial concerns continued to dominate — specifically, the price of the gas, which China and Russia have been haggling over for nearly a decade. After the meeting between the two leaders, Mr. Putin’s spokesman, Dmitri S. Peskov, said that talks were continuing.

According to Xinhua, the Chinese state news agency, after meeting Mr. Xi in Shanghai, Mr. Putin said, “I’m glad to be informed that the two sides have made significant progress in the price negotiation of the east route of the natural gas project.”

A joint statement said that Russian natural gas supplies would start flowing “as soon as possible,” a phrase used after many previous negotiations between Gazprom and the China National Petroleum Corporation, and an indication that the two sides could not close the gap on price in time for the two leaders to announce the deal at their meeting.

Energy analysts had predicted that there would finally be an agreement, partly because Russia might have been willing to accept China’s hard bargaining in order to diversify Gazprom’s natural gas sales into Asia and away from a stagnant market in Europe.

Some analysts believed that the countries’ political imperatives were also aligned. By this reasoning, China was willing to help Russia at a time of American and European sanctions over Ukraine, and China was interested in siding with Russia during a tense period in relations between Washington and Beijing.

“Given the political and commercial catalysts, this is a surprising result for everyone and for Gazprom,” said James Henderson, a senior research fellow at the Oxford Institute for Energy Studies in Britain. “There was an expectation that with Putin arriving in China and with the political issues with Europe — that would be the trigger to get it over the line.”

Mr. Putin had also been expected to agree to China’s demands on price in part because of the weak Russian economy. The International Monetary Fund projects Russia’s economic growth in 2014 will be 0.2 percent.

But China was in no hurry to sign a deal, said Shoichi Itoh, a senior analyst at the Institute of Energy Economics in Tokyo. “China already has enough gas from Central Asia, and now Myanmar, until the mid-2020s,” he said. “Unless Russia made a compromise on price, China has no reason to sign it.”

David Fuller's view -

Putin’s position could be vulnerable and it will be interesting to see if China helps him to save face by agreeing terms that Russia can accept.

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May 20 2014

Commentary by Eoin Treacy

Can crowdfunding give us safe fusion power by 2020?

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

According to LPP Fusion chief scientist Eric Lerner, the vast majority of the financial resources have been allocated to ITER's approach to fusion power, while other avenues, such as the one being pursued by his team, have been largely neglected, despite being much cheaper. Using an approach he calls "focus fusion," Lerner says his team can obtain a crucial electrode for $200,000, demonstrate net power gain with $1 million, and solve the final engineering problems, leading to a functioning fusion reactor with just $50 million in funding.

Eoin Treacy's view -

Fusion has been described as the holy grail of the Energy sector for decades and always seems to be about thirty years away. Part of the reason for this is because the government sector which originally funded nuclear research was more interested in weapons development than cheap, clean Energy. The ITER project has been plagued by lack of funding, political struggles and a need to make one bet on a developing technology which has not yet been proven.

This project has clear parallels with Craig Venter’s success in sequencing the human genome. His company achieved the feat faster and more cost effectively than the government funded Human Genome Project. It remains to be seen whether the above privately funded initiative will be fruitful, but it seldom pays to bet against humanity’s capacity for innovation.



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May 19 2014

Commentary by David Fuller

China steps up speed of oil stockpiling as tensions mount in Asia

Here is the opening from this interesting column by Ambrose Evans-Pritchard of the Daily Telegraph.

China is stockpiling oil for its strategic petroleum reserve at a record pace, intervening on a scale large enough to send a powerful pulse through the world crude market.

The move comes as tensions mount in the South China Sea, and the West prepares possible oil sanctions against Russia over the crisis in Eastern Ukraine. Analysts believe China is quietly building up buffers against a possible spike in oil prices or disruptions in supply.

The International Energy Agency (IEA) said in its latest monthly report that China imported 6.81m barrels a day in April, an all-time high. This is raising eyebrows since China’s economy has been slowing for months, with slump conditions in the steel industry and a sharp downturn in new construction.

The agency estimates that 1.4m b/d was funnelled into China’s fast-expanding network of storage facilities, deeming it “an unprecedented build”. Shipments were heavily concentrated at Chinese ports nearest the new reserve basins at Tianjin and Huangdao. “We think this is a big deal,” said one official.

China accounts for 40pc of all growth in world oil demand, so any serious boost to its strategic reserves tightens the global supply almost instantly and pushes up the spot price.

Michael Lewis, head of commodities at Deutsche Bank, said Chinese officials at Beijing's Strategic Reserve Bureau are playing the oil market tactically, or “buying the dips” in trader parlance. They add to stocks whenever Brent crude prices fall to key support lines, as occurred earlier this Spring. This is currently around $105.

“It's is very similar to what they have been doing with copper. Whenever it drops below $7,000 (a tonne), they see it as a buying opportunity. They do the same with agricultural commodities,” he said.

China is putting a floor of sorts underneath the global oil market, calling into question predictions by the big oil trading banks that prices will deflate this year as more crude comes on stream from Libya, Iraq, and Iran, and as the US keeps adding supply shale.

The strategic buying could go on for a long time since China is rapidly expanding its reserve capacity from 160m barrels to 500m by 2020, with sites scattered across the country.

David Fuller's view -

At the moment, Brent crude is trading quietly in an increasingly narrow range and WTI crude has a similar pattern.  These sorts of patterns in any instrument, let along the world’s most important commodity, can lull one into a false sense of security.  However, they are usually resolved by sudden, sharp breakouts. 

This item continues in the Subscriber’s Area where Ambrose Evans-Pritchard’s article is also posted along with a second article from CNN.



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May 16 2014

Commentary by Eoin Treacy

Graphene and carbon nanotubes combined to create flexible, wearable supercapacitor

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

"The fiber supercapacitor continues to work without performance loss, even after ending hundreds of times," said researcher Dingshan Yu. So, when this supercapacitor material does become commercially viable, its ability to be bent continuously out of shape while maintaining its charge and structural integrity could lead to it being woven into clothing, backpacks, shoes, and other items to produce a wearable power system.

In turn, these could then power devices such as medical monitors, GPS devices or any of the other myriad accoutrements to our technological life that would allow us even more mobile freedom. It could also be woven into textiles for use by the military to power soldiers’ equipment, incorporated into other materials to form the case of a device that is also its power supply, or even double as the cover and the battery for an eReader.

But more than this, the low mass, high volumetric density of a graphene and carbon nanotube supercapacitor is so great that it may well provide a solution to a more pressing problem for electric vehicles: weight. At a mere fraction of the bulk of storage batteries, and capable of being charged and discharged for more than 10,000 cycles (less than 1,000 is the norm for rechargeable batteries), this type of superlight power storage could prove to be the answer to the electrical motor industry's prayers.

 

Eoin Treacy's view -

With rumours that endowment funds are beginning to treat investments in fossil fuel companies in the same manner as tobacco companies, demand for renewable Energy technologies is likely to increase. One of the most persistent issues people have with renewable Energy is how to ensure they can meet the base load requirements of utilities. 
 

 



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May 14 2014

Commentary by David Fuller

May 13 2014

Commentary by David Fuller

Indian Stocks Rise to Record as Polls Show Modi Win

Here is the opening from Bloomberg’s latest report on this important event:

Indian stocks advanced to all-time highs and the rupee strengthened after exit polls showed the main opposition alliance led by Narendra Modi probably won the most seats in national parliamentary elections.

Modi’s Bharatiya Janata Party and its allies probably won 249 to 340 seats, according to six exit polls, with 272 needed for a majority. The Sensex has outperformed stock indexes in BrazilRussia and China in 2014 as investors bet a Modi-led government will revive an economy growing at near the weakest pace in a decade. Results will be announced May 16.

“A result north of 240 seats for Modi would likely deliver him the Prime Minister’s office and a host of willing coalition partners,” Jonathan Schiessl, an Asian equities specialist at Ashburton Investments, which manages $10 billion, said by e-mail today from Jersey in the Channel Islands. The exit-poll numbers are “staggering,” he said.

Energy companies, including Oil & Natural Gas Corp. (ONGC), and power-equipment maker Bharat Heavy Electricals Ltd. (BHEL) were among the top gainers on the Sensex amid speculation that a Modi-led government will ease control over state companies. The S&P BSE India PSU Index climbed to a 15-month high.

The Sensex index has risen 21 percent since Sept. 13, when the BJP named Modi as its candidate for prime minister, while the rupee has gained 6.2 percent. The rally may extend if the BJP and its allies secure more than 266 seats, according to a Bloomberg survey of 19 brokers and investment advisory firms published May 9.

Global investors have plowed $10.7 billion into Indian stocks and bonds this year. They bought a net $341 million of shares today, according to provisional data from the exchanges, the most since March 28. Inflows may continue on expectations of a stable government, Goldman Sachs Group Inc. said in a report today. JPMorgan Chase & Co. said it expects “market revelry” to continue as exit polls show a Modi-led alliance may be less reliant on the support of regional parties.

David Fuller's view -

India is now open for business

This is a big story for the world’s largest democracy which has just completed the biggest election in history.  The question for international investors today: Can India reverse its sad economic decline of recent years and regain the status of a successful developing economy?

Of course it can and that is what India’s electorate of approximately 800 million people have voted for.

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May 12 2014

Commentary by David Fuller

Email of the day 3

On the future path of EU Energy policies:

“Dear David, I hope all is well with you and your family. Also, congrats on the successful transformation of the service. It seems to function smoothly now, after some minor initial setbacks. I was hoping to hear your current views on the future path of EU Energy policy. More specifically, the role of Russian imports. In light of recent events, one hears a lot of talk about Europe diversifying further its Energy supply. Is that an emerging trend to be taken seriously or just lip service? If this takes place, what sort of substitutes do you see as most likely? Obviously, the potential impact on the Energy sector is significant. For the record, I'm long Royal Dutch Shell and a small cap share called Exmar, involved in LNG/LPG shipping. So not entirely unbiased here:) Many thanks in advance.”

David Fuller's view -

Thanks for your kind words and interesting questions.  Regarding development of the service, last year Eoin and I concluded that we had to jump from what we saw as a deteriorating environment.  It was not easy and it was very expensive but the alternatives were unconscionable, in my opinion.   Under the circumstances, the initial setbacks were most unfortunate, particularly regarding the Chart Library.  Eoin’s efforts have been instrumental in improving the Library and they continue.  For instance, we will soon have some frequently requested indicators.    

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May 08 2014

Commentary by David Fuller

Boris Johnson: The economic sunshine has left Miligoblin groping in the dark

This is an entertaining column from The Telegraph in which London’s Mayor uses satire to make some very important points:  Here is a brief sample:

This is what we might call Miliband’s toadstool strategy – to shelter beneath some umbrageous and poisonous fungus and croak whatever Lefty nonsense comes into his head and that he thinks will be popular. He wants us to focus on the miserable old toadstools and forget about the ambient sunshine.

First, he noticed that people were fuming about their Energy bills. So Labour offered to freeze them. We’ll cut your bills! Free money for everyone! said Labour. Really? said everyone, turning to look. You bet, said the voice beneath the toadstool. And for a while, it worked – until people started thinking about it.

They realised it would mean the Energy companies wouldn’t be able to invest in the new kit that would allow them to hold down costs in the long run: new nuclear power stations, new substations and distribution networks. They started to wonder whether it made sense to allow politicians to set market prices in this way. Hadn’t the Emperor Diocletian tried that? Didn’t Edward Heath? It looked as though the Energy price freeze might end up having the opposite effect – driving the price higher later on.

David Fuller's view -

If David Cameron loses the UK general election in 2015, London Mayor Boris Johnson or Chancellor of the Exchequer George Osborne would most likely become the next leader of the Conservative Party.  Either one would make a good prime minister, in my opinion.  However, if the Conservative Party does not win next year, it is unlikely that either could win a general election before May 2020.   



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May 08 2014

Commentary by David Fuller

Email of the day

On investing in the now rapidly changing Energy sector:

“I saw this and found it surprising and, if true, a view that should alter my investing ideas for the Energy sector long-term. I would be most interested in your opinion on it.

“Look forward to seeing you tomorrow!”

David Fuller's view -

Thanks for the interesting article and I look forward to seeing you and other subscribers at The Markets Now event tomorrow.

The Energy sector is changing rapidly, thanks to an accelerated rate of technological innovation, plus a powerful needs-must incentive because the world will need more and preferably cheaper Energy to prosper, and we also need cleaner Energy for the well being of ourselves and our planet. 

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May 07 2014

Commentary by Eoin Treacy

BlackRock World Mining boosts income

This article from the Investors Chronicle dated February 5th may be of interest to subscribers. Here is a section:

About half the trust's income comes from ordinary dividends, which Mr Hambro says are on the rise, but it has also boosted its income by investing in royalties. This is where in exchange for putting money into a company the trust, for example, receives a percentage of the revenue from the company's mine over its life. The trust holds three royalties, though can invest up to 20 per cent of its portfolio in these and is looking to increase exposure.

It entered into its first royalty agreement in 2012 with London Mining (LOND). For a consideration of $110m, the trust gets a 2 per cent revenue related royalty calculated from iron ore sales over the life of the mine from London Mining's Marampa licence in Sierra Leone. This is paid quarterly.

 

Eoin Treacy's view -

Over the last month we have highlighted a number of Energy and resources companies which have returned to positions of relative outperformance. As part of my search for suitable vehicles likely to benefit from this theme, I took a look at the Blackrock World Mining Trust’s constituents. 

While Rio Tinto and BHP Billiton remain its largest weighting, London Mining is its four largest at 6.7% of the portfolio. The trust may hold a royalty in the company’s production but the share remains in a medium-term downtrend and its market cap has declined to a mere £80 million. This underperformance may be contributing to the trusts inability to sustain a rally. 

 



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May 02 2014

Commentary by Eoin Treacy

Email of the day on Energy, Bank Capital & Cars

Have you noticed US oil producers are having trouble capitalising on these higher global Oil prices.  We both agree the world needs a cheap Energy.  I think it is unlikely that cheap Energy source will be conventional or unconventional Oil and Gas.  My concern is that cheap Energy solution may take another 10 years to materialise.

I still think European banking looks like Zombie banking.  We know European banks have capital deficiencies.  I think these banks are holding back a broad recovery in the European economy.  My sources continue to tell me European banks are still trying to shrink balance sheets.  I believe the ECB needs to be more proactive in solving this problem.  I see ECB is talking of QE - I am not sure this idea is the solution more likely the problem.   However the bank capital dilemma needs to be addressed quickly otherwise Europe faces a possible Japanese situation of low growth for decades.

Like you I am a strong believer in the big European global business brands and product solutions.  However the availability of credit is stifling growth in Europe's smaller companies and businesses.   From what I observe VW increasingly looks like it is going to dominate the global car industry.  Unless Toyota can catch up in this technology race they will lose their cherished Crown of the dominate global car producer.  As for old world car companies Ford , GM etc. sadly they look like a great short to me.  Every time I hire rental car in the US I come away with the thought how do US car companies do it so badly and remain in business.  I don't expect US cars to handle like my Porsche but US cars are just plain scary to drive.

Please keep up the good service.

Eoin Treacy's view -

Thank you for sharing your perspective on a range of topics. The revolution in unconventional supply of oil and gas can be viewed in terms of a supply response to high prices. At the beginning of the last decade $40 was considered the highest price possible for oil with the result that a great deal of additional supply was simply uneconomic.

Canadian bitumen becomes economic in the region of $40. Generally speaking more established offshore oil fields, such as the North Sea, have a breakeven in the region of $20-$25 while newer offshore such as Brazil’s pre salt ultra-deep water fields comes in closer to $45. A number of the unconventional plays have breakevens closer to the $50-60 area. As a result, we can conclude that price is the determining factor in which sources of potential supply are ultimately moved into production. 



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April 30 2014

Commentary by Eoin Treacy

Japan approves energy plan reinstating nuclear power

This article by Osamu Tsukimori and Mari Saito for Reuters, dated April 11th, may be of interest to subscribers. Here is an important section: 

But the plan may be too little too late for Japan's moribund atomic industry, which is floundering under the weight of estimated losses of almost $50 billion, forcing two utilities to ask the government for capital last week.

Plant operators have had to pay out almost $90 billion on replacement fossil fuels, with domestic media saying they have also spent an estimated 1.6 trillion yen ($16 billion) on nuclear plant upgrades to meet new safety guidelines.

A recent Reuters analysis shows as many as two-thirds of the country's 48 idled nuclear reactors may have to be left closed because of the high cost of further upgrades, local opposition or seismic risks.

 

Eoin Treacy's view -

Japan faces a daunting Energy challenge as the weakness of the currency and collapse of the domestic electricity generation sector push Energy prices up. The decision to reactivate stalled nuclear plants is to be welcomed but as the above article highlights many of these plants are badly in need of expensive remediation work which is unlikely to be done. This suggests that while restarting some plants at least partially ameliorates the situation, Japan needs to do a lot more to fix its Energy policy. 

 

 



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April 29 2014

Commentary by David Fuller

Senate Democrats Weigh Vote Backing Keystone XL

Here is the opening for this Bloomberg article on an important project, long delayed by the White House:

U.S. Senate Democratic leaders are considering scheduling a vote on a non-binding resolution urging approval ofTransCanada Corp. (TRP)’s Keystone XL pipeline, according to two Senate Democratic aides.

The option is being discussed as a way to ease passage of separate legislation the Senate may consider as soon as next week that aims to promote Energy efficiency, according to the aides, who requested anonymity.

The idea behind the approach is that promising a vote on backing approval of the pipeline would allow Democratic leaders to make the case that Keystone shouldn’t be debated as part of the Energy-efficiency bill. It also would give some Democrats a chance to publicly state their support for the project.

“This is Energy, which relates to many controversial issues so there’s the possibility of lots of issues coming up,” said Ohio Senator Rob Portman, the chief Republican sponsor of the Energy efficiency measure. “But that’s what we’re paid to do -- debate and vote on tough issues. So I hope we’ll be able to do that.”

The Senate voted 62-37 in March 2013 in favor of a non-binding resolution endorsing construction of the pipeline. Sixteen Democrats voted for the measure, including Mary Landrieu of Louisiana, Mark Pryor of Arkansas, Kay Hagan of North Carolina and Mark Begich of Alaska. The four are seeking re-election this year in states that Republican presidential nominee Mitt Romney won in 2012.

Senate Minority Leader Mitch McConnell, a Kentucky Republican, said today that Democrats could pay a political price for failing to force approval of the project.

“You’d think Washington Democrats would join the majorities of Americans who say that Keystone is a good deal for our country,” McConnell said.

After the State Department announced earlier this month that it was again delaying a recommendation on the pipeline, Democratic backers said the Senate should go further and circumvent the administration by forcing the project’s approval.

David Fuller's view -

The US may face a Cold War with Russia over Putin’s territorial aggression in Eastern Europe but it would be careless of Obama to further chill relations with Canada over the Keystone pipeline.

Energy remains the most crucial strategic asset, with global demand certain to surge as economies recover from the 2008 credit crisis slump.  The world needs all forms of Energy from fossil fuels to nuclear power and increasingly renewables as the best long-term solution once their efficiency and reliability has been improved.

Without fossil fuels, especially crude oil and natural gas as some environmentalists advocate, the global economy would soon slide into depression.  This would cause appalling hardship and sharply reduce funding for the technologically led development of renewable Energy.

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April 29 2014

Commentary by David Fuller

Putin Says Sanctions Jeopardise U.S., EU Energy Deals

Here is the opening from this topical report from Bloomberg:

Russian President Vladimir Putin warned that further economic sanctions over the Ukraine crisis may lead Russia to reconsider participation by U.S. and European Union companies in Energy and other key industries.

While his government has prepared measures to retaliate for penalties imposed by the U.S. and its allies, Putin told reporters in Minsk, Belarus, yesterday that he doesn’t consider them necessary for now, though that may change.

If sanctions continue, “then of course we will have to consider who’s working and how in the Russian Federation, in the key sectors of the Russian economy, including Energy,” he said. “We really don’t want to take these reciprocal steps.”

Putin’s remarks added uncertainty for companies that have stakes in Russia’s Energy industry, including Royal Dutch Shell Plc and Exxon Mobil Corp. (XOM), which is planning Arctic drilling in an alliance with Russian state-controlled OAO Rosneft. (ROSN)

The Russian leader spoke hours after the EU expanded penalties against people close to Putin and companies tied to them, following similar steps a day earlier by the U.S., which yesterday called separatist violence in Ukraine’s east “terrorism, pure and simple.”

David Fuller's view -

Sanctions between powerful countries are high-stakes poker with a considerable element of bluff.  Both sides hope that the adversary will fold rather than increase the ante. 

The investment crowd, keen to run with stock market bull trends, concluded today that EU governments were too timid, weak and dependent on Russian Energy to engage in more than token sanctions.  The US is in a stronger position but investors appear to be hoping that the White House has no stomach for much more than bluster.

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April 25 2014

Commentary by David Fuller

America has conquered its debt crisis with incredible speed

Here is the opening for this interesting and controversial article by Ambrose Evans-Pritchard for the Daily Telegraph:

Americans are purging their excesses one by one. Spending by the US Federal government has seen the steepest drop as share of national income since demobilisation after the Second World War.

Claims that President Barack Obama is bankrupting America with a lurch towards hard-Left statism are for tabloid consumption only. Outlays have fallen from 24.4pc to 20.6pc of GDP in five years. Spending is roughly in line with its 40-year average. This fiscal squeeze has been achieved without driving the economy into recession or a Lost Decade, a remarkable feat.

The US Congressional Budget Office expects the budget deficit to drop to 2.8pc of GDP this year, and 2.6pc next year. This is about the same as the eurozone but with a huge difference. The US economy is expanding fast enough to outgrow its debts.

The US Energy revolution is of course half the story. It has stoked booms across the Dakotas, Wyoming, Nebraska, Washington, Oregon, Utah and Texas.

Francisco Blanch, from Bank of America, estimates that shale gas and oil have given the US economy an extra tailwind worth 1.9pc of GDP - what he calls the "Energy carry" - with effects rippling through the chemical and plastics industries. New investments in ammonia plants are rising at an exponential rate, thanks to natural gas prices that are $4.40 (per BTU) in the US and $15 on Asia's spot market.

The US transferred more than $3 trillion to oil exporters from 2001 to 2008. That chapter is closed. The US is back to where it was in 2000 with an Energy deficit well below 2pc of GDP and improving every month, while the eurozone is at -4.4pc and getting worse, and Japan is at -6.3pc.

The US has added 2.5m barrels a day of crude output over the last three years, almost as much as the next three countries combined. America covered a quarter of its oil needs in 2007. It covers well over half today. It has overtaken Russia to become the world's biggest exporter of refined petroleum products, and will soon be an exporter of liquefied natural gas as well.

David Fuller's view -

I preferred the newspaper title for this article: Writing off America was foolish… now it’s on the brink of a golden age.

I do maintain that the US economy is enjoying a process of revitalisation.  However, success is impermanent, often to the point of being ephemeral, especially when governance fails. 

I credit one man for enabling the US economy to outperform most others, as we are currently seeing.  Fittingly, he was not a politician but a gritty, hardworking Texas oil man named George Mitchell, the father of fracking.  I have mentioned him previously including in this item on 7th November 2011, and I am very pleased to see that fracking has enabled the US economy to become virtually Energy dependent far faster than I predicted.

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April 25 2014

Commentary by David Fuller

How Obama Shocked Harper as Keystone Frustrator-in-Chief

Here is the opening of a revealing report from Bloomberg:

On Thursday, Nov. 10, 2011, Canadian Prime MinisterStephen Harper, seated in his Ottawa office across from Parliament Hill, took an urgent call from U.S. President Barack Obama. Harper’s advisers were listening intently around a muted speakerphone in an adjoining room.

The State Department, Obama said, would be making an announcement later that day putting the Keystone XL pipeline project on hold. There was no choice, according to the president. Nebraska wanted the route changed to protect a key aquifer under millions of acres of prime farmland. This would necessitate a new environmental assessment. He assured Harper the call wasn’t a game changer; neither a yes nor a no, just a delay.

Harper was far from assured -- he was irritated. The project had already undergone three years of study and was, so the Canadians believed, on the cusp of approval. Delay, he told Obama, served no one’s interest.

By the time Harper hung up, according to people with knowledge of the episode, he had sized up the potential economic calamity for Canada and its oil ambitions. Western Canada’s land-locked Alberta oil sands hold roughly 168 billion recoverable barrels of heavy crude known as bitumen. America gobbles up almost all of Canada’s oil exports. An Energy research group in Calgary had run the math: If Keystone died, it could cost Canada C$632 billion ($573 billion) in foregone growth over 25 years -- 94 percent of it from the economy of Alberta, the province Harper calls home.

So here was Obama, in Harper’s view, jeopardizing Canada’s welfare by throwing a sop to his anti-Keystone environmental supporters. He had blinked and might well blink again. A year or two could be three or four. Or never.

That the U.S. couldn’t be counted on to take Canada’s oil came as a shocking epiphany, said a former senior government adviser with knowledge of the call who asked not to be identified because the person isn’t authorized to speak publicly.

The president’s call that day jolted the Canadians awake. It convinced Harper that Obama was treating a long-presumed “special relationship” between Canada and the U.S., enshrined in the 1989 Free Trade Agreement, as a political football. It would set a brittle tone on both sides of the border as the Keystone battle became a contest of contrasting political wills and sensibilities as much as a fight over oil development.

David Fuller's view -

It is a clear choice.  Everyone who reads this article all the way through (don’t worry it gets even better) and some of the many comments it generated, will find plenty of evidence to decide whether you sympathise with Obama or Harper.



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April 24 2014

Commentary by David Fuller

Poland Pushes Coal on Europe as Putin Wields Gas Weapon

Here is the opening of this informative article from Bloomberg:

Polish Prime Minister Donald Tusk says the country’s giant coal fields should become a cornerstone in Europe’s defense against a newly aggressive Russia.

Because the fossil fuel supplies 90 percent of Poland’s power it has less need of Russian natural gas than other Eastern European nations, burning half as much per capita as the neighboring Czech Republic, for example. As politicians wrestle with how to respond to the crisis in Ukraine, Tusk argues Europe needs to “rehabilitate” coal’s dirty image and use it to break Russia’s grip on Energy supply.

“In the context of the Russian-Ukrainian conflict, the overriding objective is to lessen the dependence on Russia,” said Mujtaba Rahman, an analyst at Eurasia Group in London. “Climate objectives will be absolutely secondary to that.”

At Belchatow in central Poland, where Europe’s largest mine produces more than twice as much coal as the whole of the U.K., visitors stand on an observation platform looking into a 310 meter-deep pit that supplies the giant power station visible on the horizon. On a recent April afternoon, the entire junior Polish national soccer team arrived for a look.

Poland burns over 50 million tons of coal a year, more than any European nation other than Germany, while having the lowest reliance on natural gas among the EU’s 10 largest economies, according to International Energy Agency data. That’s a popular position in a nation where Soviet troops were stationed for four decades until the early 1990s.

David Fuller's view -

Climate change alarmists will be horrified but hopefully their long-term forecasts are no better than the poor track record that most people can recall for such predictions.  Of course we want to reduce pollution and the accelerating rate of technological innovation will be the key to these future developments.

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April 23 2014

Commentary by David Fuller

April 16 2014

Commentary by Eoin Treacy

How resource scarcity is driving the third Industrial Revolution

If you believe as we do that we are in the early stages of a third industrial revolution then this video from McKinsey is well worth spending 11 minutes to watch. Here is a section from the transcript:

What’s important to realize is that the technologies we’re talking about changing in this way are really basic infrastructure technologies. And because of that, they have this spillover benefit for the productivity of the economy as a whole.

When we change the cost of a structure—in housing or an office—that has a knock-on effect on all these industries that use or take advantage of buildings. When we change the economics of the resources required for transportation and for movement of goods, every industry that ships anything anywhere in the world benefits from that.

When we virtualize a process to, instead of physically moving a good, turn it into a service delivered over your phone or over the Internet remotely, that, again, spreads to many, many industries, from elevators to automobiles to mining companies. They’re all now taking advantage of the fact that I can do things remotely. That’s why it’s very exciting. We’re just at the beginning, the inception point, of these new materials and new IT technologies beginning to affect many, many other industrial domains.

 

Eoin Treacy's view -

The above video helps bring together a number of themes that are likely to help drive productivity growth over the coming decades. This is worth keeping in mind following the sharp pullbacks experienced by a number of technology companies over the last six weeks. 

 

 



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April 15 2014

Commentary by David Fuller

It is OK to Support Nuclear Power and Still Enjoy a Movie Now and Then

Here is the opening from this somewhat tongue-in-cheek assessment published by Bloomberg:

The nuclear power industry received a springtime Christmas present this week.

The world’s authoritative climate science group Sunday threw its arms around nuclear Energy, among others, as a future source for powering economies. The industry’s share of global electricity generation has been falling since 1993.

The report, from the Intergovernmental Panel on Climate Change, emboldens proponents of nuclear Energy, who tend to talk it up no matter what the issue is at hand.

David Fuller's view -

We cannot afford to ignore the risks of man-made atmospheric pollution.  Fortunately, production and consumption of natural gas is increasing rapidly, and it is the cleanest of fossil fuels.  Solar Energy is leading the renewables, becoming much more efficient and flexible than wind power, in addition to its compatibility with populated regions. 

New nuclear is the most productive clean source of power, although plants are currently expensive to build.  Understandably, they are unpopular because nuclear accidents, even if rare, are massively destructive.  Additionally, there is no known solution to the problem of nuclear waste. 

Nevertheless, the world needs nuclear Energy and the Intergovernmental Panel on Climate Change has made a sensible contribution to the debate.  Prime Minister Shinzo Abe of Japan will be among the first leaders to take note.  



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April 11 2014

Commentary by David Fuller

Putin Could Stop Selling Gas to Ukraine. Here is Why He Will Not

Here is the opening of this interesting article from Bloomberg Businessweek:

For a time this week, Vladimir Putin looked ready to turn off the gas. In an April 10 letter to 18 European heads of state, he warned that Russia could “completely or partially cease gas deliveries” to Ukraine, in turn threatening Western Europe, which gets about 15 percent of its natural gas from Russia via Ukrainian pipelines.

But on April 11, the Kremlin appeared to soften its stance, saying that Russia didn’t plan to cut off Ukraine’s supply and promising it would honor its contracts with European customers.

Russia has played hardball with Ukraine before, most recently in 2009 when it shut off gas flows for two weeks in the middle of winter, causing supply disruptions across southeastern Europe. So why is Putin hesitating now?

Partly, it’s a question of timing. Because of reserves accumulated during an unusually warm winter, Europe doesn’t urgently need fresh gas supplies right now. More important, though, is Russia’s economy, which is “more vulnerable than has been perceived,” says emerging-markets economist Neil Shearing of Capital Economics in London.

All told, oil and gas sales to Europe account for 10 percent of Russia’s gross domestic product, according to Capital Economics.

Plagued by sagging growth, a weakening currency, and rising capital flight, “Russia needs money from its Energy exports more than ever,” Shearing says. And there’s no practical way for Moscow to cut off Ukraine’s supply without hurting European customers that get their deliveries through Ukrainian pipelines.

David Fuller's view -

This is a logical argument.  The trouble is, a dictator under pressure will not necessarily follow a logical course.  Putin is a loose cannon and remains a potential source of uncertainty for investors. 



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April 09 2014

Commentary by David Fuller

Email of the day

On solar power:

“You probably saw this already, being (like me) a fan of the tremendous progress and potential in solar power. A new cheap Energy source is one of the key requirements to drive the expanding Third Industrial Revolution - and it is right on track to power the next secular bull market.”

David Fuller's view -

Many thanks for this informed email and an exceptionally good article.  Actually, while Eoin and I read as much as we can, we see only a fraction of what is potentially informative for the Collective.  Therefore we really appreciate these contributions from subscribers, contributed in the spirit or Empowerment Through Knowledge.

The report is posted in the Subscriber’s Area.



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April 07 2014

Commentary by David Fuller

U.S. Wind Power Blows New Records. Again. And Again

I am no fan of wind power but was impressed by this report from Bloomberg.  Here is the conclusion:

Even without the subsidy, wind prices are getting cheaper as the technology improves. The cost of wind Energy has declined by 43 percent over the last four years. There’s a backlog of projects that already qualified for the tax credit that will ensure a steady pace of turbine growth for the next few years, according to BNEF wind analyst Amy Grace.

The future of the wind tax credit is contentious and uncertain, but so is America’s cheap gas prices. As expensive coal plants are retired, utilities are switching to cheaper natural gas, driving up the price, says Grace. Also, the U.S. Energy Department is opening up domestic gas for exports for the first time. By 2020, U.S. shale gas may account for 20 percent of the global market, according to a Citigroup estimate.

If Americans have to buy gas anywhere near international market prices, wind wins. Gas may be booming, but you can expect many more wind records to come.

David Fuller's view -

I suspect that at least part of that 43% drop in the cost of wind Energy is due to temporary overproduction of windmills.  Nevertheless, improving technology is also a major factor.  Even so, these HG Wells monsters are appalling, noisy eyesores which blot landscapes and kill millions of birds. 

At least the USA has more undeveloped, remote land where windmills can be placed.  However, this considerably increases the costs and challenges of delivering their electricity to population centres where it is required.  In contrast, solar power need not have any of these drawbacks, while also being far more efficient and adaptable in terms of size or location.  



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April 02 2014

Commentary by David Fuller

Britain Confronts Gas Mother Lode With Fracking Pushed by Browne

Here is the opening from this detailed and interesting article about fracking in the UK, led by Lord Browne of Madingley, former chief executive of BP Plc: 

Apr. 3 (Bloomberg) -- An icy rain is pelting about 30 protesters who’ve converged at the gate of a natural gas drilling site near Manchester, England. On the other side of a fence topped with razor wire, a 10-story-high rig is boring into shale to determine if it’s suitable for hydraulic fracturing, or fracking. The demonstrators unfurl a banner: “Fracking will poison our children.”

As a phalanx of police officers pushes the protesters back, a convoy of supply trucks inches out of the gate and past an encampment of tents and trailers sporting placards decrying the drilling practice, Bloomberg Markets magazine will report in its May issue. “Fracking will not lower gas prices, Lord Browne,” one reads on this January morning.

The following week, the man the protesters call “the fracking czar” is seated in a solarium-like conference room overlooking the rooftops of Mayfair in central London. John Browne, a former chief executive officer of oil giant BP Plc, is clad in a crisp, white dress shirt, enameled cuff links, a royal-blue necktie and dark trousers.

Browne, an independent member of the House of Lords and a nonexecutive director in the U.K. government’s Cabinet Office, is lamenting how the protests may slow his efforts to bring America’s shale boom to Britain.

Browne says fracking would secure a new domestic Energy source, create thousands of jobs, generate billions of pounds in tax revenue and be a far cheaper alternative than constructing nuclear plants.

David Fuller's view -

Posted in the Subscriber's Area, this is one of the best and most balanced articles on fracking that I have seen.  It is a long article so if you are pressed for time, I suggest that you just read the concluding paragraphs.  



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March 28 2014

Commentary by Eoin Treacy

Mexican Peso Climbs to Two-Month High on Surprise Trade Surplus

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

Mexico posted a preliminary trade surplus of $976 million in February, compared with a $200 million deficit forecast by economists surveyed by Bloomberg. The economy will grow 3.25 percent in 2014, compared with a 1.1 percent expansion last year, according to the median forecast in a survey by Bloomberg.

“The trade balance figure is a positive as it signals the possibility that external demand could be a more supportive factor for growth,” Juan Carlos Alderete, a strategist at Grupo Financiero Banorte SAB in Mexico City, said in an e-mailed response to questions.

 

Eoin Treacy's view -

Mexico’s trend of improving standards of governance turned meaningfully upwards following the ambitious legislative agenda of the new administration aimed at fostering growth and opening up the Energy sector to foreign investment. As a result the Mexican Peso fell less than other commodity influenced currencies in January and has since retraced the entire decline. 

 

 



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March 26 2014

Commentary by Eoin Treacy

Obama Deplores Russian Brute Force in Ukraine

This article by Michael D. Shear and Peter Baker may be of interest to subscribers. Here is a section: 

The speech came as Mr. Obama moved to deploy additional military forces to Eastern Europe to guard against Russian aggression. The president met with Anders Fogh Rasmussen, the secretary general of NATO, to discuss ways of reassuring Poland and the Baltic states, fellow alliance members that remain acutely nervous about Russia’s actions in the region. The United States has already sent additional planes to patrol the Baltic region and an aviation detachment to Poland.

Mr. Obama vowed to live up to NATO obligations to defend alliance members. “We have to make sure that we have put together very real contingency plans for every one of these members, including those who came in out of Central and Eastern Europe,” he said at a news conference before his speech. “And over the last several years we have worked up a number of these contingency plans.” He said alliance ministers next month would discuss doing more to ensure a “regular NATO presence among some of these states that feel vulnerable.”

 

Eoin Treacy's view -

40,000 troops amassed on the eastern border of Ukraine and pro-Russian statements coming from sections of the Moldovan polity suggest EU and US leaders have little choice but to take the potential for an additional land grab seriously.

The impetus for greater economic, political and military cooperation between the USA and Europe has not been so compelling since the 1980s. Sanctions that can be racketed up in the event of additional transgressions are a start. Encouraging European leaders to abandon ideology and get serious about Energy independence from Russia is a potentially more important development. 



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March 21 2014

Commentary by Eoin Treacy

Email of the day on oil sector balance sheet optimisation

“interesting article. It's certainly is what I see in my company BG who are in cost cutting mode. Also as it is mentioned we are no longer going for volume but will develop assets that deliver $” 

Eoin Treacy's view -

Thank you for this article by Allen Brooks’ for PPHB which appeared in Rigzone. A link to the full edition of his Musings from the Oil Patch report dated March 18th is posted in the Subscriber's Area but here is a section: 

We were intrigued by the decision by Chevron to boost its oil price outlook from $79 a barrel for Brent crude oil to $110 per barrel. This move is designed to help the financial outlook for the company’s earnings and to offset the reduction in the production target. The oil price assumption is consistent with the average Brent price for the past three years, but it is at odds with the trajectory for prices derived from the futures market, which call for lower levels in the future. We wonder whether this price-target revision will rank with their statement about the future course for natural gas prices a few years ago when the major oil companies jumped on the shale gas bandwagon. Their timing essentially marked the top for gas prices as North American gas prices collapsed due to the surge in gas output. This would not be the first time major oil company planning departments incorrectly projected the course of global oil prices.

Strategy adjustments by major oil companies are seldom quickly reversed even when near-term industry trends suggest an adjustment should be made. If the newly defined financial discipline mantra demanded by investors is followed and industry capital spending is restrained, and possibly falls, there will be ramifications in the Energy market. If Mr. Watson’s declaration, as echoed by other oil company CEOs, is true, then the cost of finding and developing new reserves is too high and the pressure to drive down oilfield service costs will grow more intense. We may now be witnessing the fallout from that discipline in the offshore drilling business where the expansion of the global rig fleet with more sophisticated and expensive rigs, necessitating higher day rates, is leading to near-term “producer indigestion.” Could the offshore drilling industry be on the precipice of a significant wave of older rig retirements in order to sustain demand for its new, expensive drilling rigs currently being delivered without contracts?


This service has long defined the peak oil argument in terms of the rising cost of marginal production. The demand growth story which has been such an important aspect of just about all commodity markets in the last decade has created conditions where producers were forced to invest in exploration, new technologies and other capital intensive projects. 

 



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March 20 2014

Commentary by David Fuller

Former Ambassador: Putin May Be Just Getting Started

Here are a few segments from this interesting column by Albert R Hunt for Bloomberg:

Michael McFaul, who recently stepped down as U.S. ambassador to Russia, says President Vladimir Putin is riding "an ugly nationalistic fervor that's off the charts," and is likely to escalate tensions with the U.S. and Europe over Ukraine.

McFaul, who left his post as ambassador last month to teach at Stanford University, expects tougher sanctions to be imposed on Russia and anticipates Putin will respond "tit for tat." The Russian leader, he believes, has little interest in negotiations.

And:

"These critics miss an important historical point," McFaul said. "When the Soviet Union or Russia decides to use coercive force against one of its neighbors, no American president has been able to prevent that. This goes back to President Eisenhower -- General Eisenhower -- who when the Soviet tanks rolled into Hungary in 1956 couldn't stop it."

He added that this also was the case under former President Jimmy Carter when the Soviets invaded Afghanistan; under Ronald Reagan when Moscow imposed martial law in Poland; and during the George W. Bush administration when, in 2008, Russia invaded Georgia.

And:

Noting the "really ugly anti-American" atmosphere in Russia fueled by Putin, McFaul said Russia's reaction to stiffer sanctions, which he strongly supports, could range from symbolic retaliation to further military action in eastern Ukraine. According to McFaul, Russia's nationalistic fervor gives Putin more leeway to act.

McFaul thinks economic sanctions may hurt Russia's weakening economy in the long run but won't have much immediate impact. "Putin is highly motivated to prevail and he's willing to incur big economic costs," he said. "And, by the way, he doesn't answer to any real electorate or shareholders."

The crisis has ominous implications , the former envoy to Moscow believes. "This is the critical turn at the end of the post-Cold War period; the idea of integrating and engaging Russia is done."

David Fuller's view -

This is a sobering but realistic appraisal, in my opinion.  Of course Putin cannot be easily or safely stopped by Western forces from invading and annexing Crimea or any other region on its borders.  The USA and the European Union are not going to risk serious military conflict, let alone WW3, to contain Russian aggression in the 21st century, nor should they. 

The West can not talk Putin out of his macho destiny fantasy.  However, it can increase economic pressure, as I discussed again yesterday, particularly if Europe creates some sensible self-sufficiency in terms of Energy.  This will be controversial and inevitably also take time, but Europe does have the resources and means to generate its own Energy.  This would also lower unemployment and help Europe’s economic recovery by eventually lowering unnecessarily punitive Energy costs.

I have been asked by several people if they should invest in Russia’s beaten up stock market.   

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March 18 2014

Commentary by David Fuller

Putin Says Russia Does Not Want Ukraine Split After Crimea

Here is the conclusion to this report from Bloomberg on Vladimir Putin’s showcase speech (note the second photo):

Putin today gave no indication that a resolution between Russia and the West is near, and Russia could take over more of its neighbor, Fredrik Erixon, director of the European Centre for International Political Economy in Brussels, said.

“Putin has a long record of violating international boundaries, so I wouldn’t believe anything he says about not seeking to grab more of Ukraine,” Erixon said. “The Kremlin is interested not just in eastern Ukraine but also Kiev and western Ukraine, which is all seen as part of Mother Russia.”

Defending his policy, Putin lashed out at the U.S. and NATO area countries for infringing on territory close to Russia’s interests and engaging “Russian containment.”

“Everything has its limits,” Putin said. “And in the case of Ukraine, our Western partners have crossed the line and behaved rudely, irresponsibly and unprofessionally.”

Western nations criticized both Putin’s push to take over Crimea and his reasoning that NATO’s 1999 intervention to force Serbian troops out of Kosovo and the expansion of western alliances into the area of the ex-Soviet Union justified it.

“It was regrettable to hear President Putin today choosing the route of isolation,” U.K. Foreign Secretary William Hague said in the House of Commons. “No amount of sham and perverse democratic process or skewed historical references can make up for the fact that this is an incursion into a sovereign state and a land grab of part of its territory.”

David Fuller's view -

No, in answer to the headline above; Putin wants all of Ukraine.

Russia’s autocratic ruler has a weak economy but a strong military with which he will use coercion to expand his Eurasian Customs Union, until he is stopped, preferably by Russians. 

This is the last thing Western governments wanted, particularly following the severe credit crisis recession.  However, Europeans know their history so they will hopefully respond to this latest wake-up call and attempt to isolate Putin economically.  This is a gradual process and the most effective way to start is by ending their Energy dependence on Russia.  They could do this by fracking for natural gas and oil; so could Ukraine, if unimpeded, because it has some of the most promising shale resources in Eastern Europe.  The next stage is for Europe to speed up its development of solar Energy, as rapidly as possible, because this is already vastly superior in every respect to windmills. 

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March 18 2014

Commentary by David Fuller

Market rally on Russian annexation of Crimea leaves experts shaking their heads

Here is a latter section of this informative article by Ambrose Pritchard-Evans of the Daily Telegraph:

Mr Putin has vowed to retaliate against any sanctions “aggression” with equally damaging measures. Analysts doubt that he would risk cutting off gas to Germany or Italy but he might try to divide the EU Council by menacing minnows in Eastern Europe. Finland, Estonia, Latvia and Lithuania rely on Russia for 100pc of their gas.

Western strategists are looking at the use of “regasification ships” that can supply liquefied natural gas quickly to smaller countries that do not yet have their own LNG terminals.

Europe is less vulnerable to a gas boycott in the spring, and its gas stocks are higher than normal after a mild winter. Germany has 90 to 100 days supply. Eastern states could survive for several months. Poland’s new terminal will open this year, eventually meeting half its gas needs. Analyst expect a surge of global LNG supply this year.

The aim is to stiffen the resolve of small frontline states, making it easier to ratchet up the sanctions pressure one notch at a time.

Open Europe said full sanctions would have a “catastrophic impact on the Russian economy”, though the screw can be tightened in all kinds of ways short of an outright oil, gas and trade embargo. Europe’s exports to Russia are just 1pc of total GDP, while exports to Europe are 15pc. There is ultimately no symmetry.

Mr Riley said Mr Putin’s actions have already shattered Russia’s credibility as a reliable source of Energy, and have guaranteed a rush to build up LNG, shale and other sources. “A lot of things are going to happen. We may even see the German nuclear ban lifted. It is a matter of national security now,” he said.

David Fuller's view -

Ambrose Pritchard-Evans full article is posted in the Subscriber's Area.



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March 17 2014

Commentary by David Fuller

Email of the day 2

On Angus Roxburgh’s article on Russia, which I posted on 14th March:

“A few years ago I taught Angus Roxburgh's son and met Angus. He is a very calm and measured person. He has decades of experience of Russia, having lived there and being able to speak the language. If Angus is concerned about the level of hysteria in Russia, we should take this very seriously.  Throughout this crisis I have been haunted by the similarities with the situation 100 years ago - 1914 - in the run up to the First World War. I hope that we will not come to an armed conflict this time but neither do I believe that diplomacy will solve the problem. This is beginning to look like a "Black Swan" moment.  It is clear that sanctions will be applied to Russia next week. There is great danger of a "loss of face" situation developing on both sides. This situation could deteriorate seriously if trouble breaks out in eastern Ukraine, beyond the confines of Crimea. If that occurs, I think that Putin will now feel that he has to intervene there as well.

“I do not like the way that this is developing. Europe needs Russian Energy and Russia needs European revenues. In spite of that fact, a serious economic conflict could still deteriorate into some form of armed conflict, via third parties. That could be the West arming Ukrainian military forces.

“All the "experts" were predicting two weeks ago that Putin would not resort to force. They were all wrong.

“In investment terms I wonder whether gold is not a short term gamble??”

David Fuller's view -

Thanks for an interesting email.  Anyone with a reasonable sense of history would be concerned by the current situation.  I think Angus Roxburgh is right in describing Putin as a paranoid and therefore also insecure person.  Moreover, obsessed with building his fledgling and strangely named Eurasian Customs Union - an effort to re-establish a version of the Soviet Union - suggests to me that he is living in the past.  If so, he will not necessarily think the way that either we or most of the business/market oriented Russians do.  This makes him less predictable and we know he can be dangerous. 

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March 17 2014

Commentary by Eoin Treacy

Eastern European stock market indices

Eoin Treacy's view -

The majority of Eastern European stock market indices bounced from short-term oversold conditions today as investors responded to the relatively muted political response of the USA and EU countries to Russia’s annexing of Crimea. However, does anybody really think that Russia will be satisfied to stop at Crimea?

Russia continues to mass troops on Ukraine’s eastern border and may be reasoning that a play for more territory is worth the risk of increasingly stringent sanctions from Europe and the USA. Considering how reliant Europe remains on Russian Energy, it remains questionable how effective sanctions are likely to be. I thought it might be worth reviewing Eastern European markets in light of this unfolding situation.

 



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March 14 2014

Commentary by Eoin Treacy

Draghi Takes Aim at Euro Seen Too Strong for Comfort

This article by Lukanyo Mnyanda may be of interest to subscribers. Here is a section:

“The ECB is reacting in part to the trend in the euro,” Sebastien Galy, a senior currency strategist at Societe Generale SA in New York, said yesterday. While “$1.40 means little to an economist, it does to a lot of corporates complaining to their central banks.”

Morgan Stanley and UBS AG say the euro’s gains aren’t compatible with the ECB’s goal of repairing an economy that shrank 0.5 percent last year and boosting inflation. Consumer prices rose 0.8 percent in February from a year earlier, half the ECB’s 2 percent target, while core inflation, which is stripped of volatile components such as Energy and food, was 1 percent.

More than six years ago, Draghi’s predecessor as ECB president, Jean-Claude Trichet, described the euro’s advance as brutal in November 2007, a day after it climbed to a record $1.4731. 

 

Eoin Treacy's view -

Mario Draghi’s successful efforts to restore confidence in the cohesion of the Euro have seen the currency appreciate by more than 16% against the US Dollar since mid-2012. However, wishing to dispel fears of its imminent demise and a willingness to tolerate the currency being among the strongest in the world are not the same thing. 

The Euro has rallied for six consecutive weeks and has developed a short-term overbought condition as its tests the $1.40 level. This area has represented an area of resistance in the past so some consolidation of recent gains is likely. However, the $1.50 area has been a more important psychological level over the last five years and probably represents an area where we could see more substantive measures from the ECB than attempts to talk the currency down. 

The weakness of the US Dollar over the last six weeks has been a tailwind for commodities not least in the agriculture sector where weather issues have acted as a bullish catalyst. Some steadying of the Dollar could see some consolidation of gains among the more overbought commodity contracts.

 



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March 13 2014

Commentary by David Fuller

RiverFront: The Weekly View: S&P 500 On Track to 2000 By Year End

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

We are encouraged, not intimidated, by US stocks at record highs, and we remain overweight stocks and underweight investment grade bonds.  As we pointed out a year ago, new stock market highs do not necessarily foreshadow a bull market’s demise (The Weekly View, 3/11/13).  February’s employment report suggests that the private sector is strong enough to sustain economic growth as the Federal Reserve continues to taper.  This is consistent with RiverFront’s baseline scenario for the US economy to grow by 2.6% this year; a moderate growth rate relative to post-war history, which we think can be sustained for several years.

David Fuller's view -

The US economy has more long-term advantages than those of any other country, starting with competitive Energy prices and an increasing lead in most technologies.

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March 12 2014

Commentary by David Fuller

Russia Said to Get Ready for Iran-Style Sanctions in Worst Case

Here is the opening from this topical article from Bloomberg:

Russian government officials and businessmen are readying for sanctions resembling those applied to Iran after what they see as the inevitable annexation of Ukraine’s Crimea region, according to four people with knowledge of the preparations.

Iran-style retaliation from the West, which would include freezing Russia’s foreign reserves, banking assets and halting lending to companies, is being treated as an unlikely worst-case scenario, according to the people who asked not to be identified as the talks are under way. Officials are calculating the cost to the economy, the people said.

Some political leaders are hoping that President Vladimir Putin will moderate his response to the crisis, the people said. A sanctions war, with Russia retaliating against the West, could wipe out 10 years of achievements in financial and monetary policy, one of them said. Such escalation could erase as much as a third of the ruble’s value, another said.

Dmitry Peskov, Putin’s spokesman, declined to comment.

The Ukraine crisis triggered the worst standoff between Russia and the West since the end of the Cold War after Russian forces seized the Crimean peninsula. German Chancellor Angela Merkel yesterday said a round of European Union sanctions is “unavoidable” if Putin’s government fails to take steps to ease tensions.

In Washington, U.S. Secretary of State John Kerry yesterday said at a congressional hearing that sanctions on Russia could “get ugly fast” if events justified them. Group of Seven countries called on Putin to “immediately halt” efforts to pry Crimea away from Ukraine, to reduce Russian forces to pre-crisis numbers and to allow international monitors and mediation.

David Fuller's view -

Vladimir Putin’s gamble has been that he could seize Crimea and bundle it into Russia following this Sunday’s vote in the region, without any fear of military opposition from Western European countries or the USA.  Putin has calculated correctly in this respect and he knows that he can easily brush aside any Ukraine military opposition to the annexation of Crimea, not least as a majority of the region’s residents are Russian.   

Recalling Soviet Union era tensions, Putin may have also assumed that he could fund his current aggression with higher oil prices.  That option may be less reliable.  Yes, Europe has so far spurned its opportunity to develop its own shale oil and gas reserves, while also closing nuclear power plants.  The European Union’s dependence on Russian oil and gas has reduced its opposition to gentle rebukes and perhaps temporary travel restrictions on Russian citizens.  

Nevertheless, increased tensions in Crimea and Eastern Ukraine could lead to a temporary freeze of Russian assets in Europe.  The UK could effectively do this, albeit at some temporary cost, because an increasing number of wealthy Russians now have assets in the UK, including financial reserves and property. 

Meanwhile, the 21st Century financial markets continue to pull money out of Russia’s stock market (weekly & daily), weakening the Ruble in the process, following Putin’s 18th & early 19th Century military takeover tactic.  Additionally, the USA has just announced its first sale of crude oil from its strategic reserves since 1990, as this article from Reuters explains: US surprises oil market with a sale from strategic reserve.  

An interesting and previously unmentioned side effect of Russia’s strongman aggression is that Putin is now susceptible to a coup d’état.  Currently, polls suggest that the authoritarian Putin is favoured more than he is feared in Russia.  However, this would change if a takeover of Crimea results in a further withdrawal of capital from Russia, plus travel and financial sanctions in European and possibly other countries.  Russia’s oligarchs and even its military may decide that he has become a too expensive liability for their 21st Century multinational opportunities.

(See also, “punished by the 21st century financial markets”, in my assessment on March 4th.)

 

 

Nevertheless, increased tensions in Crimea and Eastern Ukraine could lead to a temporary freeze of Russian assets in Europe.  The UK could effectively do this, albeit at some temporary cost, because an increasing number of wealthy Russians now have assets in the UK, including financial reserves and property. 

Meanwhile, the 21st Century financial markets continue to pull money out of Russia’s stock market (weekly & daily), weakening the Ruble in the process, following Putin’s 18th & early 19th Century military takeover tactic.  Additionally, the USA has just announced its first sale of crude oil from its strategic reserves since 1990, as this article from Reuters explains: US surprises oil market with a sale from strategic reserve.  

 



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March 12 2014

Commentary by Eoin Treacy

Next Opportunity: Position for Theme-based Investment

Thanks to a subscriber for a link to this report from Citi focusing on China. Here is a section: 

In the annual session of the National People’s Congress (NPC), Chinese leaders appear to have opted for Chinese medicine, not western ones or a drastic surgery, to cure past problems. They called for stabilizing growth in 2014 while the economy is climbing hills and crossing ridges. This does not rule out the possibility of sub-7.5% growth this year, but the resource-rich government will try to avoid a systemic risk.

Defaults in the financial markets are possible but significant ones would be avoided. In other words, our concern is not the defaults in the near-term but in the long-term.

The economy may moderate further but a hard landing is unlikely in the near term. The bottom line is to cap any sharp rise in the unemployment rate.

This reconfirms our base case: growth first, reform second. Reforms are likely to take place only when the CPI is below 3.5% but GDP growth above 7.0-7.5% (or, below 4.6% urban registered unemployment).

However, the market is likely to remain cautious in the near-term regardless of the government policy and growth target. Some investors worry about no reform as a high growth target limits any room for reform, and others are more concerned over the near-term defaults and thus further economic downturn. Neither scenario is positive to the equity market.

Our more constructive view is that the next investment opportunity will likely be a mixture of growth stabilization and reform. The government may first buy time by avoiding significant defaults and then roll out reform to boost domestic demand and engage in a gradual pace of de-leveraging. An even better but difficult result is when near-term defaults are avoided and the economy stabilizes; reforms are able to ease default risks in the long-term.

Eoin Treacy's view -

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

The above report represents a measured medium-term outlook for China’s economy and is probably in line with how the administration sees the situation. However, the short-term outlook is more focused on the fact that an increasing number of troubled trust products are missing coupon payments and investor hopes of receiving their principal are deteriorating. Here is a section from a Bloomberg article with some additional detail: 

Jilin Province Trust Co., which missed five interest payments on a trust product it issued to finance mining projects, declined to comment on a sixth payment due yesterday. China had its first onshore bond default last week when Shanghai Chaori Solar Energy Science & Technology Co. failed to make an interest payment and Baoding Tianwei Baobian Electric Co.’s notes were suspended from trading yesterday after it lost money for a second year.

“China’s economic outlook has deteriorated and more bond defaults could be coming, so it’s weighing on the yuan,” said Bruce Yam, a currency strategist at Sun Hung Kai Forex in Hong Kong. “A weaker yuan could help some exporters, especially the small- to medium-sized ones. It will also facilitate meeting China’s growth target this year.”




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March 11 2014

Commentary by David Fuller

ETF Outflows Biggest in World on Economy: China Overnight

Here is the opening of this informative article from Bloomberg:

Exchange-traded funds focused on China are posting the world’s biggest outflows amid concern economic growth is slowing.

Withdrawals from U.S.-based Chinese ETFs totaled $87.5 million March 10, the most among 46 nations, bringing this year’s redemption to $380.7 million, according to data compiled by Bloomberg. The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., fell 1.6 percent to $33.90. The Bloomberg China-US Equity Index of the most-traded stocks in the U.S. dropped 2 percent to 99.60, led by Vipshop Holdings Ltd. (VIPS)

Official data over the weekend showed the steepest slide in exports since 2009 and the slowest inflation in 13 months, highlighting the challenges for Premier Li Keqiang in achieving this year’s economic-growth target of 7.5 percent. China had its first onshore bond default after Shanghai Chaori Solar Energy Science & Technology Co., a solar-panel maker, said last week it would fail to pay interest on notes due March 2017.

“Investors are pulling out of financial markets where there’s an economic slowdown and a lot of uncertainties,” Dave Lutz, the head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore, said yesterday. “The outflow of capital from China will not end until investors stop seeing all the headlines about China indicating the country’s growth is faltering.”

David Fuller's view -

This is certainly understandable because the world’s second biggest economy is obviously going through a difficult transformation stage.  Moreover, China looks like a conundrum to many observers because the timing of its next recovery or even the next policy decision of importance remains difficult to predict.  As China’s Shanghai A-Shares Index (weekly & daily) has sagged, no one really thinks the 7.5% GDP growth target is achievable. 

Against this background, are the ETF outflows from China’s stock market a smart move or a contrary indicator?

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March 10 2014

Commentary by David Fuller

Japan Giant Tsunami Wall Fails to Stop Fears About Atomic Power

Here is the opening section of this informative article from Bloomberg:

March 11 (Bloomberg) -- The cost to restart Japan’s nuclear power plants: $12.3 billion and counting.

     That’s the amount power companies have committed so far on thousands of tons of reinforced concrete and steel, armies of workers, tsunami walls and seismic tests.

     All to meet tougher safety standards for the remaining 48 reactors on coastlines throughout earthquake-prone Japan. And to convince regulators the defenses will withstand a quake and tsunami on a scale of what struck the Fukushima area three years ago today, causing one of history’s worst civil nuclear disasters and shutting down the nation’s atomic fleet.

     As Prime Minister Shinzo Abe backs plans to restart nuclear plants, the country has to weigh the economic damage as fossil fuel imports drive record trade deficits, against risks to safety and the environment. At stake is Japan’s nuclear fleet that is designed to produce a further 5 trillion kilowatts of Energy worth 40 trillion yen ($389 billion), according to Penn Bowers, an Energy analyst with CLSA Asia-Pacific Markets in Tokyo.

     “In the short-term, economically it’s a no-brainer to restart” the idled fleet, Bowers said in an interview this month.

     Shikoku Electric Power Co.’s plant on Shikoku island and Kyushu Electric Power Co.’s Sendai station in the south among the top contenders to win first approval to restart, he said.

 

David Fuller's view -

Following Fukushima, nuclear power is an understandably emotive issue in Japan.  The country’s economy needs nuclear power because with few natural resources its Energy costs are high and the import of fossil fuels is extremely expensive.  However, the Japanese public is understandably wary of future nuclear accidents. 

 Fukushima was a serious tragedy made worse by lax standards at the region’s nuclear plants.  Nevertheless, the statistics this article also provides have a cold economic reality which enables one to view the situation in perspective.  

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March 07 2014

Commentary by Eoin Treacy

Zombies Spreading Shows Chaori Default Just Start: China Credit

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

Total debt of publicly traded non-financial companies in China and Hong Kong has surged to $1.98 trillion from $607 billion at the end of 2007. Some 63 companies have a debt-to- equity ratio exceeding 400 percent, compared to the average of 73 percent. In latest filings, 351 have negative ratios of earnings before interest, taxes, depreciation and amortization to interest expenses, while 409 have coverage of less than 1.

Renewable Energy, materials, household appliances and software companies dominate the rankings.

Premier Li Keqiang is trying to balance efforts to avoid sharper slowdowns in economic growth with steps to rein in debt.

Expansion in gross domestic product is set to cool to a more than two-decade low of 7.5 percent this year from 7.7 percent in 2013, according to the median estimate in a Bloomberg survey.

 

Eoin Treacy's view -

$630 billion in Chinese corporate debt will need to be paid off or refinanced this year and we have just seen the first onshore default. It is a reasonable expectation that more will follow. Until now, investment vehicles have been supported by government largesse and investors have been made whole in the event of trouble. That is simply unsustainable, not least because the debt market is now so large that to continue on that trajectory would eventually bankrupt the country. 



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March 07 2014

Commentary by Eoin Treacy

Weekend Reading

Thanks to a subscriber for this list of mostly academic reports which it is reasonable to assume constitute the reading material of policy makers globally. This week we have an additional entry in the form of a new offering from Deutsche Bank who has just hired the former editor of the Financial Times’ Lex column.  “Insights in 140 Words” is posted below.

Macro
Eurozone inflation - The debate divides like Marmite yet is complex like a fine Bordeaux. Amidst warnings about Japan-style deflation headline prices have held steady for the last five months and excluding Energy inflation is up. Regional differences add to the confusion. In Greece and Cyprus prices are actually falling. Meanwhile overall inflation in the periphery (0.3 per cent) is lower than the core (1.1 per cent). Indeed this is the first sustained period of lower relative inflation in peripheral countries since 1999. Yes this helps their competitiveness. Trouble is lower inflation versus, say, a year ago means real interest rates are down less than headlines suggest - a problem for an indebted periphery. For example 5-year Italian bond yields are 100 basis points lower since January 2013 but reduced inflation expectations account for 80 basis points of that. Tricky times for the ECB. 

Strategy
Russian stocks - Pity the emerging markets investor reeling from the relentless march of a foreign power with designs on overseas expansion. Yes, being underweight Tencent must be a nightmare these days. China’s internet juggernaut has advanced another 30 per cent this year and is now the third largest company in the MSCI emerging markets index - bigger than China Mobile and ICBC. Indeed for managers running funds against this commonly used benchmark the Ukraine crisis is almost a sideshow in comparison. Russia only has four stocks in the top 50 names and 22 in the index overall - half as many as Malaysia. That explains why the index has not fallen since Crimea was overrun last week. Hence too why fund managers worry less about whether, say, Sberbank is cheap ($50bn market value, 5 times price/earnings) than whether Tencent is expensive ($150bn, 60 times). 
Stocks

Politics matters - Thanks mostly to German Energy policy shares in power producer RWE have collapsed 70 per cent since 2007. Thanks mostly to Russian Energy policy shares in gas producer Gazprom are also down 70 per cent over the same period. Yet the latter is a monopoly while the former has been thrown to the competitive wolves by its government - indeed this week RWE reported its first loss in 60 years as Germany’s rush into renewables weighs on prices. How can such different situations result in identical underperformance? It helps that neither company generates a return above its cost of capital. Gazprom’s problem (Ukraine aside) is sloth: revenues per unit of capital invested have almost halved since 2007. RWE’s is simple pain: cashflow margins have fallen versus investment. But the common factor is unfavourable politics against which most companies are defenseless. 

Finance
Bank earnings - Few industries post record earnings after five years of stagnant revenues and rising costs. But American banks managed to do just that in 2013. Their operating revenue of $670bn was unchanged versus the year before and broadly flat over the previous five years. And a record $190bn wage bill helped push non-interest expenses close to peak levels and 15 per cent higher than 2007. Luckily, however, US banks squirreled away too much money in the bad times and since then loan loss provisions have dropped to 13-year lows. Hence the highest net income ever. In contrast, profits at European banks have dropped by a quarter over three years as revenues fell and bad debt expenses at 1 per cent of loans are twice the level of US lenders. Europe’s banks will be hoping for some help from their pasts too. 

Digestif
Skin in the game - European legislators want portfolio managers to receive half their bonuses in units of their own funds. Meanwhile employee money makes up at least a tenth of assets under management at 70 per cent of all hedge funds. Clearly, this skin-in-the-game idea is popular. But it is also often misguided. Take a Japanese equity manager. For most of the last two decades his stocks traded lower, but clients probably had an allocation to Japan for risk purposes. It would be wrong to force an 80 per cent loss on the manager without regard to his overall investment position. Sure it is comforting to know that passengers interests are aligned with an airline pilot’s. But chefs love fast food and fashion designers wear scruffy clothes. Such incongruities are why money remains the best way of rewarding people for a hard day’s work.

Fed: “Banks as Patient Fixed Income Investors” 

IMF: “Tracking Global Demand for Emerging Market Sovereign Debt” 

Fed: “A Model of Slow Recoveries from Financial Crises” 

ECB: “Has US Household Deleveraging Ended?” 

Fed: “Using an Improved Taylor Rule to Predict When Policy Changes Will Occur” 

Eoin Treacy's view -

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March 05 2014

Commentary by Eoin Treacy

Cummins Westport Recalls 25,000 Nat-Gas Engines

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

The recall covers 16,746 ISL G 8.9-liter engines that had their engine control modules recalibrated between September 2007 and January 2013, as well as 5,713 ISL G engines produced in 2013 and 2014. It also includes 2,554 ISX12 G 12-liter engines produced in 2013 and 2014, Cummins and Cummins Westport told the National Highway Traffic Safety Administration, which publicized the recalls Feb. 28.

Cummins and Cummins Westport told NHTSA that in cold weather, the temperature and pressure sensor may ice over, causing the engine to take in too much fuel. This could overheat the exhaust and cause fires in the exhaust pipe, as was reported in two cases.

Eoin Treacy's view -

Subscribers will be familiar with our long held view that unconventional oil and gas production is a game changer for the Energy sector. As demand for natural gas as an alternative to expensive oil and polluting coal continues to trend higher, the range of vehicles that use natural gas as a fuel also remains on an upward trajectory.

 



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March 04 2014

Commentary by David Fuller

Ukrainian Gambit by Putin Stings Economy as Allies Lose Billions

Here are two brief sections from this interesting and informative article from Bloomberg: 

March 5 (Bloomberg) -- President Vladimir Putin’s brinkmanship in Ukraine has already cost some of his closest comrades billions of dollars. The other 144 million Russians may also pay a price.

Putin’s troop buildup in Crimea triggered the biggest stock selloff in five years March 3 and pulled the ruble to a record low, prompting the central bank to raise interest rates the most since 1998, when a cash-strapped government stumbled toward default. Longtime Putin ally Gennady Timchenko and his partner Leonid Mikhelson lost a combined $3.2 billion of their wealth after their gas producer OAO Novatek tumbled 18 percent.

“Russia will be the big loser of the crisis in Ukraine,” said Timothy Ash, chief emerging-market economist at Standard Bank Group Ltd. in London. “There’ll be a big hit to domestic and foreign confidence, less investment and likely increased outflows, likely losses for Russian banks with exposure in Ukraine, a weaker ruble and weaker growth and recovery.”

The tensest standoff with the West since the end of the Cold War is exposing the weakness of an economy rebuilt on the back of the Energy industry. With oil and gas accounting for more than half of all exports and Energy prices stagnant, the growth potential is all but exhausted, prompting officials in Moscow to sound the recession alarm even as the country’s main trading partners recover.

Vital Pipelines

Russian companies also have investments in Ukraine’s Energy, defense and agricultural industries. The country is Russia’s fifth-largest trading partner, with turnover of $39.6 billion last year, according to data from the Federal Customs Service in Moscow. Exports to Ukraine were $23.8 billion, while imports totaled $15.8 billion.

More vital to Putin is Ukraine’s network of pipelines, through which state-run OAO Gazprom sends more than half of its exports to Europe, where it has a quarter of the market.

Even so, Putin is prepared to do whatever it takes to stop Ukraine from aligning with the West, said Michael Ganske, head of emerging markets at Rogge Global Partners Plc in London.

Putin considers Ukraine and its 45 million people key to his goal of building a trading bloc to rival the EU, according to Ganske. His customs union, which Yanukovych planned closer ties with, is currently comprised of Russia, Belarus and Kazakhstan, though Armenia has also agreed to join.

“Putin cares for the economy, but he cares more for the greatness of Russia and regional influence,” Ganske said. “As a former spy, Putin has this grand-Russia idea in his head and he just doesn’t accept that Russia’s importance in the geopolitical context has decreased. Putin doesn’t like the idea of Ukraine moving further away from Russia and becoming part of the EU at some stage, let alone NATO.”

David Fuller's view -

This article is informative and supplies both names and numbers, fleshing out my comments in the lead article above.  It also provides some reasons for why both institutional and private investors will leave a country where risks appear to be increasing.

We are living in an era in which corporate Autonomies, including some of the biggest multinational investment institutions have emerged, as I have often discussed in recent years.  These Autonomies are infinitely larger, more prosperous and therefore more powerful and influential than ever before.  They are already wealthier than some frontier economies.  Their growth rates are stronger than most economies because they are often better managed and have far fewer liabilities.

Is this good for investors?

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March 04 2014

Commentary by Eoin Treacy

Xi Jinping Inner Circle (Part 1: The Shaanxi Gang)

Thanks to a subscriber for this informative report by Cheng Li, Director of Research at John L. Thornton China Center, detailing the rise the Xi Jinping and those who have ascended to power with him. Here is a section:

As for the “tigers,” since about a year ago 19 ministerial and provincial-level senior leaders have been arrested, including four members (two full members and two alternate members) of the newly formed 18th Central Committee.51 Many of the arrested leaders have had ties to the country’s most formidable special interest groups like the oil industry, including Jiang Jiemin, the minister who oversaw all major state-owned enterprises (SOEs) under the State-owned Assets Supervision and Administration Commission (SASAC). In addition, 30 executives of SOEs—including 20 CEOs—were arrested in 2013, representing various industries such as Energy, transportation, telecommunications, finance, steel, and mining.

Some critics may be cynical about the methods employed in the anti-corruption campaign, which relies more on the CCP’s traditional campaign mechanisms rather than the legal system. Zi Zhongyun, a distinguished scholar and former English interpreter for Mao Zedong and Zhou Enlai, recently wrote that the current anti-corruption campaign could not effectively prevent corruption—not only because there are far too many corrupt officials in the country, but also because such a campaign might lead to power abuse and undermine the role of the legal system and emerging civil society.53 While Zi and likeminded critics have valid concerns, one may reasonably argue that this criticism is unfair on the grounds that one simply cannot expect to establish a legal system in China in a short period of time. The fact is that, as Zi herself recognizes in her article, the campaign has already transformed the behavior of Chinese officials. Also, in the defense of Wang Qishan, Wang himself stated explicitly that the anti-corruption campaign should mainly deal with symptoms (....) now in order to gain the necessary time to find a way to cure the disease (....) in the future.

It should be noted that the Third Plenum resolution did hold out promise for legal reforms, especially greater judicial independence. Under the current system local judges and secretaries of local discipline inspection commissions answer to local party chiefs, who exert political pressure on their decisions. Under the rule of Bo Xilai, for example, Chongqing city’s high court almost completely followed Bo’s orders. Abuse of power and police brutality became rampant in the city. The proposed vertical control of local courts by the national judiciary (and also the vertical control of local discipline commissions by the CCDI) should be seen as an encouraging policy move to prevent power abuse and strengthen the rule of law.

 

Eoin Treacy's view -

The Party Congress currently underway is taking place amid the aftermath of terror attacks and high expectations for reform. This report is a useful primer for how the political establishment is structured and who is in charge of what. 
 

 



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March 04 2014

Commentary by Eoin Treacy

Musings from the Oil Patch

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

In the Middle East, civil unrest in Iraq has resulted in its oil output falling by nearly 5% between December and January. The continued unrest prevents a recovery in output further straining the volume of oil reaching global markets. It has become clear that these oil production disruptions are supporting high oil prices. The Energy Information Administration (EIA) produces two charts that track the volume of unplanned crude oil outages. One chart tracks the outages from OPEC member countries while the other tracks those outages of non-OPEC member countries. We present the most recent versions of those charts in Exhibit 3 on the previous page and Exhibit 4 below.

What we see from the charts is that after a steady reduction in outages from non-OPEC countries during most of the second half of 2013, there has been a steady increase over the past three months. In particular, the change in trend has been largely due to increased outages in Sudan, Syria and the North Sea. In the near term, there will likely be little improvement in output from the first two countries, but the North Sea could see some improvement as we move into spring. The OPEC outage situation became worse during the second half of 2013 after being at a low volume of outages during the first half of the year. As of January 2014, OPEC’s production outage had climbed by nearly one million barrels a day since the summer of 2013 and now stands at about 2.25 million b/d. Coupled with non-OPEC outages of about 600,000 b/d, the total global crude oil outage is close to three million b/d, or about 3% of total global oil production, and that is before this latest production outage in Libya. If we examine the trend in Brent oil prices over the past 365 days, one can see how the price rose in response to the late summer OPEC production outage increases. The improvement in non-OPEC outages during the fall, coupled with little change in OPEC outages, contributed to a decline in Brent oil prices.

 

Eoin Treacy's view -

The focus of media attention remains on how likely Russia is to escalate its incursion into Ukraine, despite the calming of tensions today. What is perhaps more relevant from a market perspective is the background this situation is unfolding in. Civil unrest in a number of OPEC nations is contributing to losses of production which has resulted in a relatively tight environment for global oil markets. 



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February 27 2014

Commentary by David Fuller

Dream of U.S. Oil Independence Slams Against Shale Costs

Here is the opening to this somewhat pessimistic article from Bloomberg:

Feb. 27 (Bloomberg) -- The path toward U.S. Energy independence, made possible by a boom in shale oil, will be much harder than it seems.

Just a few of the roadblocks: Independent producers will spend $1.50 drilling this year for every dollar they get back.

Shale output drops faster than production from conventional methods. It will take 2,500 new wells a year just to sustain output of 1 million barrels a day in North Dakota’s Bakken shale, according to the Paris-based International Energy Agency.

Iraq could do the same with 60.

Consider Sanchez Energy Corp. The Houston-based company plans to spend as much as $600 million this year, almost double its estimated 2013 revenue, on the Eagle Ford shale formation in south Texas, which along with North Dakota is one of the hotbeds of a drilling frenzy that’s pushed U.S. crude output to the highest in almost 26 years. Its Sante North 1H oil well pumped five times more water than crude, Sanchez Energy said in a Feb.

17 regulatory filing. Shares sank 7 percent.

 “We are beginning to live in a different world where getting more oil takes more Energy, more effort and will be more expensive,” said Tad Patzek, chairman of the Department of Petroleum and Geosystems Engineering at the University of Texas at Austin.

Drillers are pushing to maintain the pace of the unprecedented 39 percent gain in U.S. oil production since the end of 2011. Yet achieving U.S. Energy self-sufficiency depends on easy credit and oil prices high enough to cover well costs.

Even with crude above $100 a barrel, shale producers are spending money faster than they make it.

David Fuller's view -

Veteran subscribers will be familiar with most aspects of the technical challenges of fracking.  It is a comparatively young, technologically advanced industry, and the fast depletion rate for each well occurs because the oil and gas is in variable shale rock structures rather than pools. 

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February 27 2014

Commentary by Eoin Treacy

Short Term Oil Market Outlook report from DNB

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

In the US the refining margin based on domestic crudes as feedstock have stayed strong and hence justified refinery throughput at US refineries a massive 830 kbd higher than the prior year on a 4-week moving average basis. In Europe the throughput at refineries in EU was down 366 kbd vs the prior year in January and 836 kbd down in December. This is the flip side of the US shale story and shows how this has a global effect on oil prices. The last half a year the average refinery throughput in EU is down 900 kbd, while for US refiners the average throughput is up more than 600 kbd for the same period. This is the answer to why the lost Libyan barrels have not been able to send the Brent-price higher. We have not only lost a lot of crude supply to Europe, we have lost a lot of crude demand as well. This lost demand for crude in Europe is due to US refiners taking market share from European refiners and this is a direct consequence of the US shale revolution. US refiners have both cheaper feedstock and cheaper operating costs, so how can European refiners compete? One year ago Libya produced 1.4 million b/d but output started to decline in June and fell to almost nothing in November/December. Still the Brent price has continued to trend lower since August last year when it priced as high as 117 $/b at the highest. That is quite remarkable noting that Libyan production the last half a year is down 1.1 million b/d on average vs the year before and knowing that most of the Libyan crude normally feeds European refineries.

The US refineries are entering maintenance season which according to a survey by PIRA Energy should peak in March/April this year. US crude demand should drop by about 800 kbd from January to March, purely based on maintenance schedules. The important Padd 2 region (The Midwest, where Cushing Oklahoma belongs) is scheduled to lose 300 kbd of crude demand from January to March and this may halt the decline in Cushing crude stocks in the coming month as it is should be worth more than 2 million barrels stock build per week, all else being equal.

Refinery maintenance in Europe is set to peak in April at about 1 million b/d which is 0.6 million b/d higher than in February. On a global scale the refinery maintenance is set to increase by 2.5 million b/d from February to April, which looks to be the seasonal peak. What does it mean? It basically means less demand for crude oil in the coming month or two.

Eoin Treacy's view -

The full report is posted in the Subscriber's Area. 

The USA may have a ban on crude oil exports but that does not apply to refined products. As a result of lower input costs and the spread between domestic and international pricing, the USA became a net exporter of refined products in the last few years which has been of substantial benefit to related companies. 



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February 26 2014

Commentary by David Fuller

Boris Johnson: We are not the bad boys of Europe: just ask our ski instructors

Here is the latter portion of what I thought was a very relevant, sensible and witty column by London’s Mayor, published by The Daily Telegraph:  

I hope we give Angela Merkel a red-carpet welcome this week, when she addresses both Houses of Parliament. The German leader is a remarkable politician – she is proof that centre-Right parties can win elections, and arguably the most powerful voice in Europe. If we are going to get anywhere in our plans to reform the EU, in advance of a referendum, then we need her on our side.

So she is, in many ways, or should be – given Germany’s interest in free markets and sound budgets. But we will get absolutely nowhere in these talks if we persist in the view – peddled by the EU Commission, and picked up by certain UK newspapers and broadcasters – that Britain is somehow the problem child of the European family.

I don’t want to hear anyone bleating on about how we are always the “awkward squad” or the “backmarker” or a “bad European”. Any such assertion is demonstrable tripe. We are in a fantastic moral position to call for a better EU, to insist on a better EU, and indeed to bang our shoe on the table until they all shut up and listen – because we are the Good European. In fact, we are just about the politest, the most enthusiastic and the most law-abiding Europeans of all – and it is about time we pointed it out.

It is not just that we have coughed up for the whole malarkey – one of only two countries to be net contributors for the entire period of our membership. There is no other country that has tried so faithfully to follow the logic of the Common Market – the principles to which we signed up in 1972. We have opened up our Energy markets and our water market and our transport market with a Hayekian rigour that has been imitated nowhere else.

Look at the signs on the side of those London buses: there’s Abellio from Holland, and there’s something called RATP. Do you know what that stands for? Régie Autonome des Transports Parisiens. Now screw up your eyes and imagine the French agreeing to something like that – British buses on the streets of Paris! Can you see it? I thought not.

And then there was the final and most extraordinary way in which we demonstrated our European credentials – when most countries insisted on quotas and delays, the Labour government opened our borders in 2005 to millions of Eastern Europeans; which was groovy for corporate Britain, but less easy for the low-paid who happened to be here already. Germany didn’t do it. France didn’t do it. Whatever the rights and wrongs of that policy, you have to admit that it put this country in the absolute vanguard of “European integration”. Even the Belgians have just kicked out 2,700 EU nationals for failing to find work. Can you imagine our courts doing the same?

It is therefore as the best and most committed Europeans that we can now demand reform: axe the crazed Common Agricultural Policy, scrap the appalling social chapter, get rid of the EU Court’s jurisdiction on borders, police, home affairs and human rights – and above all tell the EU Commission to wake up and do what it is damn well supposed to do: make it easier for people to live, work and enjoy themselves in other EU countries.

What kind of a system is it that allows French buses on the streets of London, but forbids English ski instructors on the slopes of the French alps? I will tell you: a system that is morally bankrupt. We want reform; and if we don’t get it, and we have to leave – well, it won’t be because we couldn’t obey the club rules. On the contrary – we complied, and they didn’t.

David Fuller's view -

Fuller Treacy Money is not a political service.   Nevertheless, there are three very important political decisions to be made within our region during the next two years.  

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February 25 2014

Commentary by David Fuller

Japan Pushes to Revive Moribund Nuclear Energy Sector

Here is the latter section from this interesting article from the International New York Times (also in PDF format):

…there has been strong backing for a return to nuclear Energy from Japan’s most influential business lobbies, which say the nation’s reactors must be brought back online to ease a crippling Energy crunch. Before the 2011 accident, Japan was one of the world’s largest generators of nuclear power, relying on atomic Energy for about 30 percent of its electricity needs. Since then, Japan has made up for the shortfall by increasing imports of oil and gas, which has caused Energy prices to rise in Japan and weighed on its trade balance.

And nationally, organized opposition to nuclear power — which erupted in the months following the Fukushima accident into mass street rallies — has failed to materialize. In a closely watched gubernatorial race in Tokyo this month, a fractured field of antinuclear candidates appeared to split the opposition vote, helping to return a pro-nuclear, governing party candidate to office. That victory has given momentum to Mr. Abe’s push for a return to nuclear power.

Mr. Kan, the former prime minister who led the country’s response to the Fukushima crisis, blasted the government’s nuclear turn.

“This government has not learned the lessons of Fukushima,” he said by telephone. “Japan was on the brink. But now, we want to go back to nuclear for economic reasons. But what happens to the economy if another disaster hits?”

Japan’s new Energy plan calls nuclear power an important “baseload” electricity source — one that can produce Energy at a constant rate and lower cost than alternatives like solar or wind power. Renewable Energy proponents have argued that safety risks and the costs of handling nuclear waste ultimately make nuclear power less reliable and more expensive than other clean Energy options.

The plan also says that Japan will ultimately decide on the appropriate size of its nuclear program after taking into account its future Energy needs, as well as the country’s commitments to reducing greenhouse gas emissions, which have surged with the decline of nuclear power. The wording, Japanese news outlets noted, left the door open for Japan to add to its current nuclear system.

 
David Fuller's view -

Energy remains Japan’s biggest problem and it is unlikely to be resolved in the near term.  Nevertheless, post-deflationary funk Japan has the ability to run safely its nuclear power stations which are not positioned near obvious tectonic plate fault lines, as was the case with Fukushima.  

Shinzo Abe is obviously having to tread cautiously but he has a ‘needs must’ case to make; Japan’s manufacturing sector is on his side, and Japan’s environmentalists will not be happy that their country’s CO2 emissions have soared following the shutdown of all their nuclear reactors.  

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February 25 2014

Commentary by David Fuller

Email of the day 2

On developments in solar power:

“Hello David, it's me again. The article below on solar power appeared in today's City A.M. paper (London). The author draws a graphic analogy of panels installed to date with the Ford Model-T which was produced from 1908-1927. Look at the sophistication, reliability and affordability of modern cars by comparison and we get some idea of how amazing solar power is likely to become in coming decades. It will transform the world, in my humble opinion.”

Ed: Here is a section:

First, grid parity – when electricity generation is competitive with grid-electricity rates without subsidies – is edging closer. In 2012, Bloomberg reported that Germany, Denmark, Italy, Spain, Portugal, Australia, and Brazil could already expect to achieve at least a 6 per cent return on PV investments. Many of these countries still offer indirect subsidies, so the market isn’t competitive quite yet. But the direction is clear. The average US PV market will likely reach proper grid parity around 2020, and states like California should reach that point sooner. Within a few years, arguments about feed-in tariffs will become irrelevant in many countries, because the solar industry won’t need subsidies.

Second, large companies are flocking to solar. Thanks in part to cheap PV modules, non-Energy businesses are becoming mini power generators. The retail giant Walmart already has a solar-Energy capacity of almost 90 megawatts (MW) in the US. If the retailer installed panels on every US store, it could generate 1.5 to 2 gigawatts – or about twice the output of my local nuclear power station. If other big-box retailers follow – and many are already doing so – we could see collective generation capacity skyrocket, making solar increasingly viable as part of the Energy mix.

Its potential goes beyond retail. Solar is well-suited to industrial and processing applications: in Saudi Arabia, the Al-Khafji solar-powered seawater desalination plant is set to produce 30,000 cubic metres of salt-free water per day. And entrepreneurs are honing new applications. The US startup WaterFX, for example, is developing solar “troughs” that remove salt from water by distillation to deal with drought.

But these innovations are only possible because solar technology is developing rapidly. Today’s domestic PV modules are the Ford Model-Ts of solar: cheap, mass-produced, commercial pioneers. But they are poor at converting sunlight into electricity (efficiencies of around 10 to 15 per cent are common). These figures, however, could easily double.

Scientists from the California Institute of Technology and partners are developing a new multi-junction cell with a target efficiency of over 50 per cent. Building-integrated PV – glazing that generates power – could further popularise solar power. And PV is not the only form of solar Energy. Improvements in other approaches, such as concentrated solar power (CSP), are possible. CSP uses mirrors to concentrate a large amount of sunlight onto a small area, driving a turbine. Just look at Spain’s 50MW Solnova Solar power station.

David Fuller's view -

Many thanks for the article, as informative emails are most welcome, not least in the field of technology.  Solar farms can be understandably contentious if they are anywhere near recreational areas and sights of natural beauty, although they are considerably less menacing than noisy windmills. 

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February 20 2014

Commentary by David Fuller

Financial crisis threatens Russia as Ukraine spins out of control

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

The dramatic escalation of Ukraine’s civil conflict and fears of Russian military intervention have sent financial tremors across Eastern Europe, turning the region into the new fulcrum of the emerging market crisis.

“This has suddenly gone from a domestic Ukrainian story into a geopolitical clash,” said Lars Christensen, from Danske Bank.

The Russian ruble has fallen to a record low against the euro, with contagion reaching Poland, Hungary and Romania in recent days. “The moves in Russia are very like the events during the war in Georgia in 2008. Markets are pricing in the risk of Russian intervention,” he said.

Any deployment of Russian troops to stiffen the Ukrainian governmment - even if invited by President Viktor Yanukovich - could spiral out of control, leading to an East-West stand-off not seen since the Cold War. It might even be seen as replay of Russian intervention in Hungary in 1956 to prevent the country slipping out of the Soviet sphere.

German foreign minister Frank-Walter Steinmeier called Ukraine a “powder keg” as the death toll rose to 70, while Poland’s premier Donald Tusk warned of civil war.

Russian foreign minister Sergei Lavrov called the demonstrators fascists bent on a 1930-style “Brown Revolution”. Moscow has accused the EU of instigating a coup d’etat by mob violence.

Regis Chatellier, from Societe Generale, said there is a “high risk” that Ukraine will be pushed into default on its €60bn sovereign debt, triggering a credit shock for Russian banks. Sberbank and VTB are both large holders of Ukrainian bonds. Global emerging market bond funds hold 3pc of their portfolio in Ukrainian debt. “The spillover effect of a Ukrainian default would be significant, but not systemic,” he said.

The decision by the Ukrainian nationalist stronghold of Lvov this week to declare “independence” from Kiev has upped the ante, creating a volatile climate in which the Ukrainian army may be forced to intervene to head off civil war.

“Ukraine is on the verge of splitting into two countries. We’re looking at events that we have not seen in Europe since the break-up of Yugoslavia,” said one City economist with links to Lvov. “When you have this level of hatred and mistrust, anything can happen.”

David Fuller's view -

The seeds for these problems were sown during the Soviet era, when millions of Russians were encouraged to move into the industrialised Eastern sector of Ukraine.  This created resentment and a long-term dilemma for which there is no easy solution. 

Russia clearly has the regional power and may use it shortly after Vladimir Putin returns from the Sochi Olympics next week.  He supplies the oil and gas upon which Ukraine is currently dependent.  He can also provide more loans.  Most significantly, he has unrivalled military power at his disposal. 

The Ukrainian nationals, not the Russians living in Ukraine, would like to join the European Union, which can only offer free trade at this time.  The USA will side with the EU, verbally, but it is not about to become involved in Russia’s back yard. 

The irony is that Ukraine has considerable shale oil and gas resources, as I reported over a year ago.  However, it lacks the technical knowledge and finances which could actually make Ukraine Energy independent within a few years.  No US or other Western drilling companies would become involved without government support and guarantees which will not be forthcoming.  Russia will not help because it wants a supplicant Ukraine, not an Energy rival which could eventually lower regional Energy prices.  Russia’s Gazprom also sends over half of its European Energy exports via a pipeline running through Ukraine.  

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