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August 09 2018

Commentary by Eoin Treacy

U.S. Oil Vanishing From Chinese Tariffs Reveals America's Clout

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

The removal of U.S. crude from goods targeted by Chinese tariffs is a sign that America has become too big to ignore in the oil market.

Less than two months after threatening to impose levies on imports of U.S. crude, the world’s biggest oil buyer has now spared the commodity. Only fuels such as diesel, gasoline, propane will be hit with duties on Aug. 23, according to China’s commerce ministry. That’s after the nation’s buyers, including top refiner Sinopec, began shunning American supplies to avoid the risk of tariffs.

China’s original plan to target U.S. crude came at an inopportune time for the country’s buyers. Sinopec’s trading unit, Unipec, was embroiled in a dispute with Saudi Arabia, saying the producer’s prices were costly and cutting purchases just as it was boosting American imports. Two months on, refiners were faced with the risk of supply disruptions from Iran to Venezuela and paying more to take advantage of booming U.S. output.

“The U.S. has been and will remain the main source of incremental crude production globally,” said Den Syahril, an analyst at industry consultant FGE. “With several new refineries starting up over the next couple of years, China would thus be wary of taking a decision that could end up severely hurting its domestic refining industry.”

Eoin Treacy's view -

We’ve been saying for more than a decade that shale oil and gas were going to be gamechangers for the Energy sector. The reality today is that the USA has gone from being the biggest importer of oil to being the marginal source of additional supply in less than a decade. That has deep repercussions for the US economy, after all that is hundreds of billions that will no longer be flowing overseas.



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July 26 2018

Commentary by Eoin Treacy

Musings from the Oil Patch July 24th 2018

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. This week it contains some interesting commentary on natural gas. Here is an excerpt:

Natural Gas: The Forgotten Fuel’s Future Needs LNG Exports 

One can be forgiven if he/she believes only crude oil news is important to the Energy sector.  The volatility of crude oil prices, coupled with the OPEC meeting drama and President Donald J. Trump’s twitter campaign against high oil prices, provides opportunities for shocking headlines and non-stop commentary by the media.  On the other hand, if your business is tied to natural gas, you can be excused for believing it’s pretty boring since no one is talking about gas.   

Eoin Treacy's view -

                    



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July 25 2018

Commentary by Eoin Treacy

Monopolies have killed the marine diamond industry

Many thanks to Gavin Craythorne for this story about his unique and isolated industry which he wrote recently for the Daily Maverick. Gavin is a campaigner for the rights of small-scale marine diamond miners. 

 

The marine diamond industry is a unique sector of the global diamond mining industry and is indigenous to South Africa and Namibia. There are no other places on our planet where diamonds are mined from the seabed. These diamonds are among the most sought-after gems in the world, having survived the process of natural selection during the epic journey from their source to the sea, a journey which destroys all but the highest quality diamonds.

One would think that the seaside towns and villages where these diamonds are found would be thriving with successful diamond divers, cutters and polishers, jewellery craftsman and tourism entrepreneurs. But they are not.

The towns and villages along the Northern Cape littoral are among the poorest in South Africa with unemployment at unbearable levels. The South African marine diamond mining industry is a shadow of its former self and what remains of it today is so structurally imbalanced that 93 percent of the industry’s capacity is concentrated on only 27 percent of the concessions. More than two thirds of the concessions are effectively dormant with no job creation, skills development or any other form of mining benefits for the community, while almost three quarters of the industry has contracted.

For the exceptional economic potential in the industry to be unlocked, there must be enforcement of compliance to the Mining Charter (any of them will do as far as we are concerned) and theMineral and Petroleum Resources Development Act (MPRDA). It is clear to all reasonable people that the objects of the Act are appropriate for combating poverty, inequality and unemployment in South Africa.

Why then, in an industry wherein the Charter and the Act could make such a dramatic improvement in the socio-economic conditions of so many people, is there such an obvious lack of compliance?

It is due to our South African corporate culture of monopolistic greed coupled to political insiderism. Why else would a unique, highly specialised industry be handed over, lock stock and barrel, to people who know nothing about its workings and could not care less if it thrives or dies?

It is irrational to presume that individuals with no experience, no qualifications, no technical expertise, no mining vessels and no aptitude will be able to comply with the conditionalities of marine diamond concession ownership,ie perform the optimal exploitation of the resource and deliver sustainable economic development. And yet, here we are, in a death spiral.

Then there is the matter of moral hazard. What incentive is there for a concession owner to invest significant sums of capital, at considerable risk, in an extremely challenging industry they do not understand and which they can milk anyway at someone else’s risk, effort and expense?

This dynamic has led to the collapse of the industry and the hoarding of its minerals, a situation which the Equitable Access Campaign (EAC) very cogently warned the Department of Mineral Resources would happen if it continued to allow further concentration in the hands of Trans Hex. Unfortunately, the Minister was too busy fighting the Gupta’s Imperial Crown Trading battle all the way to the Constitutional Court to listen. At great cost to taxpayers for sure.

Well before the announcement of the Namaqualand Mines transaction, the EAC made every effort to engage with the owners of dormant and underutilised concessions in the Northern Cape to address the collapse of the diamond diving industry brought about by the effects of climate change, resource depletion, high operating costs and lack of equitable access. Our efforts were simply ignored and have continued to be ignored.

The formation of the EAC was a response by people from within the industry with many years of dedication to it and a deep understanding of its unique inner workings to the unfolding collapse of Namaqualand’s marine diamond mining industry.

The depletion of the low-hanging fruit coinciding with the arrival of climate change effects has brought about a harsh new reality in which a steep decline in seadays coupled with extreme weather events make diving for diamonds a very challenging and high-risk enterprise.

The haughty indifference on the part of Trans Hex, Alexkor and the Department of Mineral Resources, who continue to ignore the impact of climate change on small-scale marine miners in the face of alarming evidence-based information flowing from the EAC, is highly antagonistic of the MPRDA’s objects, not to mention contradictory of the Ramaphosa New Era.

Did we host COP17 just to impress the rest of the world?

The only intervention which can mitigate the negative impacts of climate change and resource depletion is the meaningful establishment of equitable access for small-scale marine diamond miners to the marine diamond deposits alongside our towns and villages.

The Mining Charter and the MPRDA are emphatic on transformation and sustainability in the mining sector through equitable access to mineral resources. The National Development Plan echoes these same imperatives, so too the King III code of conduct, quoted here as follows:

“Sustainability is the primary moral and economic imperative of the 21st century. It is one of the most important sources of both opportunities and risks for business. Sustainability considerations are rooted in the South African Constitution which is the basic social contract that South Africans have entered into.”

We think so too.

The EAC came into existence on April 28, 2010 at a meeting of concerned members of the Northern Cape small-scale marine mining community with the purpose of rebuilding the industry to take full advantage of its economic development potential.

This took the form of an undertaking to bring about the establishment of equitable access in our remote sector of the mining industry by taking our government at its word and using, to the full extent possible, the powers we naively believed were available to us through the BEE Mining Charter and the Minerals and Petroleum Resources Development Act.

At a series of special town hall meetings held in Port Nolloth shortly thereafter, the EAC introduced itself to the rest of the shallow water mining community and presented the Muisvlak Manifesto, our founding principles, which was duly endorsed in full by all the BEE small-scale marine mining companies of the Northern Cape.

During one of those meetings, Archie Ovies, a coloured small-scale marine mining contractor who, disillusioned by years of struggle and financial losses in our industry, made the following observation:

“Julle beteken absoluut niks nie en die charter beteken ook niks nie want julle het geen politike mag nie.” (You mean absolutely nothing and the charter also means nothing because you have no political power.)

So far, his words have proved to be prophetic.

In response, the EAC gave all present at the meeting a commitment to strive for the transformation and sustainability of our industry while giving our best efforts, going the distance and never backing down.

Our resolve is based on the fact that we are a unique seafaring mine community with highly specialised expertise, impeccable BEE credentials, an impressive track record, living next to a diamond resource which only we are capable of mining, yet which resource is rendered largely dormant by outsiders who hold the mining rights.

The presence or absence of equitable access will determine the success or failure of the entire mining industry in South Africa. Without it there can be no transformation and therefore no sustainability. The insiders would be wrong to think that their monopolies are unassailable. One way or another they will fall and surely, they realise this by now.

In 2004 President Thabo Mbeki was outraged at the comments made by Tony Trahar (then chairman of Anglo American) on the political risks in South Africa because the ANC government had given monopoly capital their entire wish-list only to get bad-mouthed over in The City.

The irony is that much of the political instability in South Africa today is due to a lack of shared growth, for which those who wield monopoly power must accept their share of responsibility. One only need consider the heavy case load of the Competition Commissioner to know this is true.

The entire shallow water mining industry is structured in two tiers. Up in the top tier are the concession owners, Trans Hex and Alexkor, who now jointly own all the concessions from the Orange River mouth to the Groenrivier mouth. One is controlled by Llewellyn Delport and the other by Mervyn Carstens, a good friend and former colleague at Trans Hex.

Down in the bottom tier are all the small-scale marine miners who do the mining. The small-scale miners would have no quarrel with this if the top tier were complying with the Mining Charter and the Act by providing equitable access. They do not and in fact fall very far short of their commitments as concession owners.

By allowing a more equitable, efficient, fair and developmental model to emerge, the concession owners could open the way for a dramatic improvement of the socio-economic conditions in the Namaqualand littoral. No question – a profound improvement.

Our industry can no longer support an unproductive and oppressive layer seeking to benefit on our behalf by clinging to a redundant rent-seeking culture – precisely what the MPRDA and NDP seek to eliminate.

The two-tier marine mining model has broken down under the weight of years of rental extraction that has impoverished the miners, killed innovation and blocked technical progress. The only solution for rebooting into a sustainable marine diamond mining industry is to ensure equitable access, thereby reigniting the entrepreneurial spirit of Texan oilman Sammy Collins and creating an appetite for innovation and risk. Precisely what the MPRDA and NDP prescribe and what the Fourth Industrial Revolution ruthlessly demands. It is also Industry 4.0 that holds the key to exhuming that ancient black swan buried beneath the delta.

The focus for the past four decades has been on the low-hanging fruit, the easy diamonds located in shallow water with little or no overburden. A long term sustainable future for the industry lies in deeper water, under many metres of sand and mud.

The inshore industry has mainly operated two types of vessels, ski-boats and under-25-ton deck-boats. These vessels have been effective for pursuing the low-hanging fruit where the water is shallow, the volumes of gravel are low, and the operational emphasis has been on agility to prospect.

Technically speaking, there has never been any mining conducted in shallow water because the diamond grades and gravel volumes are extremely erratic due to the hydro-dynamics of the surf-zone and the rugosity of the bedrock. Operators are in a perpetual mode of prospecting: no sooner does one find an area that has gravel, and which carries diamonds than it runs out and the hunt starts over again.

The Orange River delta alluvial fan which overlays the rich diamond megaplacer orebody is mostly absent from the surf-zone as the wave Energy prevents it from settling in any significant layer. The depth of the alluvial fan sediment correlates positively with distance from the shore and reaches depths up to 30m deep in the eye of the delta, the zone which is likely to regularly produce diamonds over a hundred carats in the future when the technology to mine there is ready.

Due to depletion of the surf-zone portion of the orebody, the operational emphasis must shift urgently towards earthmoving capacity to strip the sand and mud overburden, much like the terrestrial alluvial mining operations along the beaches of Namibia where Namdeb have deployed their beach accretion mining method for the past few decades.

However, it is one thing to chase an ore body with known grades into the ocean by holding back the sea using off-the-shelf capital equipment, it is an entirely different matter to design, build and operate your own capital equipment to do the same in an underwater environment that is literally as unpredictable as the weather and without a geological model.

Furthermore, when there are individuals in positions of power who can weaponise their monopoly control of the entire industry against active citizens who are merely using democratic means to pursue constitutional rights for an entire community, the business case is not very appealing, to say the least.

The need to pivot away from the surf-zone to deeper water where the orebody is covered by many metres of fine/heavy and sticky overburden, therefore poses not only a substantial technical challenge to the industry but also a substantial mindset challenge to the concession owners.

The first is a challenge for which neither Trans Hex nor Alexkor have been willing to risk one single cent towards developing a solution, and the second is a challenge that neither have been willing to engage upon in the slightest. Kragdaadigheid is their way as far as we can tell.

We have no problem with self-interest, our problem is with unenlightened self-interest.

Remember what Oom Anton (Rupert) said: “He who covets all, loses all.”

Eoin Treacy's view -

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July 13 2018

Commentary by Eoin Treacy

Global Crude Oil Supply-demand

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

The IEA forecasts that US crude oil production will increase 1,720,000bbl/day in 2018 and 1,190,000bbl/day in 2019. In the Permian region, which has been driving growth in output, the lack of pipeline capacity is likely to persist until 2019. Because of this, Midland oil prices are some USD14/bbl lower than the WTI price. With issues including rising production costs and a lack of engineers, too, we think US shale oil output is unlikely to substantially exceed current forecasts even if tightening supply-demand causes oil prices to rise. See our 11 July 2018 Global research report US crude oil output - Sharp slowdown in pace of increase in 2019.  We estimate that US production forecasts are predicated on WTI price assumptions of USD55-60/bbl for 2018 and USD60-65/bbl for 2019. We estimate WTI of around USD70-75/bbl were the aforementioned short supply to be made up with increased output in the US.

Eoin Treacy's view -

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

The USA’s onshore production of oil and gas continues to surge, fuelled by access to cheap credit. If we cast our minds back to 2015, private equity firms had amassed massive sums to invest in Energy and that has helped to fuel the surge in US supply over the intervening period.



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July 11 2018

Commentary by Eoin Treacy

Crude Crumbles Under Trade War That Imperils Economic Growth

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

“There’s no doubt that that uncertainty continues to weigh, not only on the crude oil markets, but really all markets,” said Brian Kessens, who helps manage $16 billion in Energy assets at Tortoise. As for the storage report, “there was a little bit of noise in the data. It just depends when the ships actually hit the docks.”

Oil topped $75 a barrel last week amid actual and anticipated supply disruptions from Canada to the Persian Gulf.

Saudi Arabia has promised to ramp up output to help cover shortfalls from other major suppliers, though some observers questioned the kingdom’s capacity to do so.

In the U.S. Gulf Coast region that includes refining centers in Texas and Louisiana, oil imports plunged by 1.13 million barrels last week, the steepest decline since September 2012, according to the EIA.

“There’s a sense that Saudi Arabia’s going to increase their exports to the U.S.,” Kessens said. “There’s a lingering sense in the back of people’s minds that we’ll see that a little bit later this summer.”

Eoin Treacy's view -

Oil prices have been firm because economic growth has been robust, OPEC had been reducing supply and major suppliers like Libya and Venezuela have dropped out of the market. News today that pro-government forces have retaken four of Libya’s export ports suggests supply will start flowing once more. Meanwhile the threat to China’s economy from a ratcheting up of tariffs is a simmering issue. 



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June 27 2018

Commentary by Eoin Treacy

Musings from the Oil Patch June 26th 2018

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

To appreciate how the Energy world is changing, two charts presented by Mr. Dale set the stage.  Global Energy growth last year was 2.2%, up from 1.2% in 2016, and above the 10-year average of 1.7%.  That robust growth came as a result of strong global economic growth, but also due to a decline in Energy productivity.  While the International Monetary Fund is warning of potential dark clouds on the horizon for global economic growth, its forecast remains robust, meaning Energy growth is likely to remain high.  

Also important is the difference in where Energy growth originated.  The driver for the above-average growth was the strength of the developed economies of the OECD, but also some deterioration in Energy productivity.  However, nearly 80% of the total Energy growth came from the non-OECD or developing economies of the world.  That is not surprising as they benefit from the global economic recovery, especially China.  China saw Energy demand grow by 3%, nearly three times its growth rate of the past several years.  That higher growth was driven by recoveries in numerous high-Energy sectors such as iron, crude steel and non-ferrous minerals.  Still, the high growth rate was well below China’s 10-year average rate, even though it was helped by a decline in Energy intensity that was more than twice that of the global economy.  

The picture of primary Energy fuel mix highlighted the title of Mr. Dale’s remarks – Two Steps Forward and One Step Back.  He pointed to the dramatic growth in natural gas and renewables as the two steps forward.  Combined, those two fuels accounted for 60% of the total growth in Energy fuels.  

The backward step was the growth in coal usage.  In 2017, global coal use rose by 1.0%, or 25 million tons of oil-equivalent, marking the first annual increase since 2012.  The increase was driven by India, although China’s consumption also rose after declines in the three prior years.  

Eoin Treacy's view -

Batteries might eventually remove the need for quite so much back up conventional power generating capacity as renewable penetration of the Energy market continues, but that is still some ways off. At present natural gas represents the happy medium between reliance on coal and the fact that renewables are not yet ready to stand on their own.



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June 22 2018

Commentary by Eoin Treacy

OPEC+ to Boost Oil Output After Saudis Secure Deal With Iran

This article by Wael Mahdi, Grant Smith and Nayla Razzouk for Bloomberg may be of interest to subscribers. Here is a section:

The final communique made no mention of whether the kingdom, or any other member, could compensate for losses elsewhere. Yet it said the group as a whole should strive for “overall conformity” of 100 percent, which in practice will only be achievable if those nations with spare production capacity step in to fill the gap left by others.

"The lack of specificity is bullish for prices,” said Joe McMonigle, senior Energy analyst at Hedgeye Risk Management LLC. “It’s a mystery oil production increase because we don’t really know the final numbers."

Eoin Treacy's view -

OPEC is going to raise production by maybe 1 million barrels a day which is less than it could have. That probably represents the difficulty that exists in getting Saudi Arabia and Iran to agree on anything and suggests the market will be tighter than might otherwise have been the case.



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June 19 2018

Commentary by Eoin Treacy

US Oil Firms Use Shale Know-How To Revitalize Old Oilfields

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

Wildcatters first pumped oil from the Austin Chalk nearly a century ago, but output reached its peak in the early 1990s even though the formation still contains about a billion barrels of crude, according to U.S. government's Geological Survey.

That is not unusual. Oil producers have historically extracted less than half the oil from any particular field because the rest has not been accessible at a profit.

That is changing in fields like the Austin Chalk.

Based on test wells and modeling techniques, Conoco believes long, horizontal wells with multiple fracks - a technique used often in shale fields - will deliver strong results from its acreage in the Austin Chalk.

"What we were seeing with some of the newer technologies work really well in the Austin Chalk," Conoco Chief Executive Ryan Lance told Reuters.

Some wells they have fracked in the Austin Chalk have produced more prolifically than shale wells. Wildhorse's newer Austin Chalk wells produced more than three times the initial output of wells at the Eagle Ford shale field, the company said this month.

EOG also said an Austin Chalk well it drilled this year in Texas produced nearly 3,000 bpd in its first month, more than twice the first month rate of a shale well it had completed in the Permian during the same period.

Eoin Treacy's view -

One of the oldest adages in the Energy business is “you find oil where your found oil” The benefit of employing new technology in proven grounds is that there is no risk the oil is not in fact there. That reduces the cost of drilling substantially if the technology can get to less accessible reservoirs.



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June 19 2018

Commentary by Eoin Treacy

On Target June 19th 2018

Thanks to Martin Spring for this edition of his ever-interesting letter which may be of interest to subscribers. Here is a section:

 

I think it very doubtful that Italy will either choose to leave the Eurozone or be forced out. Britain’s tortuous Brexit negotiations have made everyone in Europe aware of the horrendous complexities of such disengagements. And the Brussels elite will go to great lengths to avoid another country exiting European membership.

They may need to do so. The new government in Rome is determined to introduce cash handouts for less-wealthy citizens, big tax cuts, and state aid for troubled banks. If investors take fright at the prospect of a spending spree in Rome, which would be a serious breach of the European Union’s fiscal rules and produce major conflict with it and the European Central Bank, that could trigger a flight out of Italian assets by both foreigners and Italians.

There would be significant risk of that ballooning into financial disaster. Italy has the biggest debt-crisis potential in Europe, with public debt of €2.3 trillion. The available lending capacity of the EU crisis rescue fund for the whole of Europe is less than €380 billion -- a panic would overwhelm the euro currency system.

Clashes over money won’t be the only source of Rome’s warfare with Brussels, Berlin and Frankfurt. Stir in a big row over forced repatriation of illegal immigrants. And possibly trouble over the union’s anti-Russian policies (which the populists oppose). It all adds up to what seems certain to be an avalanche of conflict, with the European Union seriously distracted from addressing its other major issues.

Many of those stem from the lamentable failure of European leaders to convert people to the idea of sacrificing national sovereignty to bring about strong central institutions. That’s why Europe, despite being in aggregate the world’s largest economy, has no closely co-ordinated economic policies, depends on one superpower for its defence, and depends on the other for most of its Energy imports.

Eoin Treacy's view -

The European Union now appears likely to reform the immigration policy that has allowed millions of economic migrants into the region over the course of the last few years. It has taken the rise of populism in Italy and the accession of the far right leaning Alternative Fur Deutschland to the Bundestag to send a wake-up call to the status quo that the citizenry are unhappy with the course of policy.



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June 18 2018

Commentary by Eoin Treacy

Le Divorce Investment themes for the post-Transatlantic world

This report by Vincent Deluard for INTL FCStone may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

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

There is a realistic possibility that the USA could become Energy independent and is in fact already an exporter of oil and natural gas. The widening of the Panama Canal and receding ice around the North Pole have created new shipping lanes that did not exist a decade ago. Meanwhile if the USA is an exporter it has a reduced need to secure supply channels from the Middle East and we are already seeing greater ambivalence towards active engagement in that region.



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June 12 2018

Commentary by Eoin Treacy

Musings From The Oil Patch June 12th 2018

Thanks to a subscriber for this report edition of Allen Brooks’ ever interesting report for PPHB. Here is a fascinating section on Energy efficiency statistics over the last 50 years:

Eoin Treacy's view -

A link to the full report and a section from it are posted in the Subscriber's Area.

There is no doubt that battery efficiency is improving and new solar innovation is being revealed on almost a weekly basis. There are laudable reasons for seeking to reduce carbon and nitrogen oxide emissions in our cities all of us can support. However, the question many people are worried about is whether this is merely transferring a problem from cities to less populated areas.



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June 11 2018

Commentary by Eoin Treacy

Biggest Electric-Vehicle Battery Maker Soars 44% on Debut

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

Shares of the world’s biggest maker of electric-vehicle batteries jumped on their trading debut as investors bet on rising demand for new-Energy cars worldwide.

Contemporary Amperex Technology Ltd. rose by the maximum 44 percent to 36.20 yuan at 10:17 a.m. in Shenzhen, China, valuing the company at about $12.3 billion. The manufacturer sold a 10 percent stake at 25.14 yuan a share in its initial public offering on May 30.

Investors are confident that CATL, as the company is known, can fend off rivals including Panasonic Corp. and continue to win orders as automakers move toward electric vehicles. CATL, whose customers include Volkswagen AG, had reduced the size of its IPO by more than half compared with its original ambitions because of declining margins and a cap imposed by Chinese authorities on price-earnings ratios in IPOs.

 

Eoin Treacy's view -

CATL produces more batteries than Tesla and is likely to continue to do so well into the future considering the pace of factory building it has planned. China has every intention of dominating the battery sector both because it is the largest auto market but also because it has a clear aim to become globally competitive in auto exporting. Additionally, as an Energy importer it has a clear reason to reduce imports of oil if at all possible. That suggests China will be investing heavily in batteries for the foreseeable future.



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June 08 2018

Commentary by Eoin Treacy

Milestone claimed as experimental nuclear reactor reaches temperature of the Sun

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

The pursuit of nuclear fusion is inspired by the collision of atomic nuclei in stars, which fuse together to form helium atoms and release huge amounts of Energy in the process. If we can recreate this process we could have an inexhaustible supply of Energy on our hands that brings no harmful by-products, such as carbon dioxide emissions or the radioactive waste generated at nuclear fission-based power plants like Fukushima and Chernobyl.

But to do that we need to create Sun-like conditions here on Earth, which calls to mind one requirement first and foremost – incredible amounts of heat. Tokamak Energy hopes to achieve this through what's known as merging compression, where running high currents through two symmetrical magnet coils generates two rings of plasma, or electrically charged gas, around them.

Eoin Treacy's view -

The ITER tokomak being constructed in the south of France is based on technology from the 1970s. It is coming at the problem of containing plasma by building a big containment unit which is costing upwards of $30 billion. Today, much stronger magnetic fields can be attained through the use of superconductors. That means experiments can be much smaller and cost a fraction of the ITER model.



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June 01 2018

Commentary by Eoin Treacy

Multiyear Plan for Energy Sector Cybersecurity

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

Anticipating and reacting to the latest cyber threat is a ceaseless endeavor that requires ever more resources and manpower. This approach to cybersecurity is not efficient, effective, nor sustainable in light of escalating cyber threat capabilities. We must recognize today’s realities: resources are limited, and cyber threats continue to outpace our best defenses. To gain the upper hand, we need to pursue disruptive changes in cyber risk management practices.

DOE’s cyber strategy is two-fold: strengthen today’s Energy delivery systems by working with our partners to address growing threats and promote continuous improvement, and develop game-changing solutions that will create inherently secure, resilient, and self-defending Energy systems for tomorrow. 

Meaningful public-private partnership is foundational to DOE’s strategy. Facing an ever-evolving threat landscape requires a coordinated approach to improving risk management capabilities, information sharing, and incident response. The federal government has also historically funded innovative research, development, and demonstration (RD&D) that cannot be economically justified in private-sector markets. Today, this includes game-changing RD&D that will build cyber resilience into Energy systems for tomorrow.

Eoin Treacy's view -

The increasingly connected nature of the global economy, together with the modernisation of IT structures in key pieces of industrial and utility infrastructure has introduced risk premia that never existed before. A decade ago no one would have given credence to the view that a hospital could be shut down remotely or that police departments could be held hostage, yet that is exactly what has happened in the last 18 months. Securing Energy infrastructure is even more important now that the US is an exporter of oil and gas and because of rising geopolitical tensions.



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May 30 2018

Commentary by Eoin Treacy

They're Whispering the D-Word in Asia's Junk Market

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

Actually, it’s China’s fault: Non-investment-grade issuers from the mainland have already raised more than $30 billion, following a record $77 billion last year. China Inc. now has half the weighting of the Bloomberg Barclays Asia USD High-Yield Bond Index.

So if China sneezes, the rest of Asia gets sick. Global fund managers hesitate to deviate substantially from their benchmarks; the most likely action is fleeing the asset class altogether. Already, in the last month, global funds pulled more than $5 billion from emerging-market bonds, data provided by Jefferies Group show. 

And it looks like China may be catching something worse than a little cold: The feared D-word is being whispered. Beijing has already allowed China Energy Reserve & Chemicals Group Co. (which counts state oil behemoth China National Petroleum Corp. as a major stakeholder) to default, as well as a financing vehicle in Inner Mongolia. Will the authorities blink if private-sector enterprises miss their obligations? 

China is now on track to achieve an unhappy annual record. There have already been 19 bond defaults this year, totaling $3.1 billion.

Eoin Treacy's view -

China needs to allow defaults. The environment that existed previously where the government back stopped just about every form of egregious lending created an unsustainable level of risk in the shadow banking sector. Allowing defaults is a big part of trying to institute discipline in investors minds.



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May 25 2018

Commentary by Eoin Treacy

Saudis Signal Oil Output Boost, Offering Relief to Consumers

This article by Jack Farchy, Dina Khrennikova and Elena Mazneva for Bloomberg may be of interest to subscribers. Here is a section:

“Given current developments, with supply worries driving the price to $80, it would make perfect sense to remove the over-compliance by compensating for the shortfall from Venezuela,” said Ole Sloth Hansen, an analyst at Saxo Bank A/S in Copenhagen.

Excess cuts amounted to about 740,000 barrels a day in April, according to estimates from the International Energy Agency. Without compensating supply from other members, this number looks likely to expand as the U.S. re-imposes sanctions on Iran and the collapse of Venezuela’s oil industry worsens.

Whether the size of the supply increase is ultimately "a million, more, or less, we’ll have to wait until June," when OPEC and its partners will meet, Al-Falih said. Novak echoed that, saying “it’s too early now to talk about some specific figure, we need to calculate it thoroughly.”

Typically, OPEC operates by consensus, meaning members that have little prospect of boosting production -- Venezuela, Iran and Angola -- would have to agree to the proposal.

Saudi Arabia has recently shown willingness to push prices higher to bankroll domestic economic reforms and underpin the valuation of its state oil company in a planned initial public offering. That appears to be changing, with the Aramco listing delayed until 2019 and Brent crude flirting with the kingdom’s desired price of about $80 for most of this month.

Eoin Treacy's view -

The USA has re-imposed sanctions on Iran and no one is likely happier about that than Saudi Arabia. That is also likely to have a played a role in the decision to help rebalance the oil market. Brent crude is no longer in backwardation between the first and second months suggesting some of the near-term pressure on supply is easing.



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May 25 2018

Commentary by Eoin Treacy

Renewable energy: A green light to Copper Demand

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

Eoin Treacy's view -

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

There is always a new demand led story in any bull market and renewables do represent such an opportunity. However, the success of that new idea is dependent on the conventional sources of demand remaining on a steady trajectory and it is in that regard that doubts tend to be raised about copper.



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May 21 2018

Commentary by Eoin Treacy

Email of the day another email on the CAPE and the merits of cash

In your 30th April response to my email, you say as follows "The only problem I have with comparing the current environment to that which prevailed from the early 1960s is that the market spent 13 years ranging from 2000 to 2013 so it would be unusual to begin another similar range so soon after the last one ended"

My response:  Yes, it is true that it would be unusual to "commence a similar such range so soon after the last one ended."  However, in this circumstance, there are a range of other very unusual related circumstances.

In the last 10 years, we have had a unique period of historically extreme money printing with very little consumer prices inflation as measured by the official CPI number, but this extreme period of money printing has caused very high asset price inflation - pushing many sectors back up into fairly extreme valuations as measured by historical norms.

We can also look at this phenomena from another. If we look at Professor Robert Shiller’s cyclically adjusted price/earnings ratio series commencing 1880, we can see that secular bear markets have typically ended with a single digit CAPE - at the end of a secular bear market, the cyclically adjusted P/E has been in the range of 5-7 in 1982 and 1921.

By contrast, the January 2018 peak in the US cyclically adjusted P/E of 33 was the second highest instance since 1880 - only being surpassed by the dot com peak in 2000 but surpassing the 1929 peak by a small margin.

So, by this (Shiller CAPE) normally fairly reliable valuation measure, the US share market on broad averages is at a fairly extreme level. I think it is fair to say that if you buy expensive assets, you should expect poor to bad average real returns over the following 10 years or so.

One last point to you 30th April comments, to the section where you say "The stock market is a better hedge against inflation than bonds because companies have the ability to raise prices and therefore dividends while bond coupons are fixed."  In a period of rapidly rising inflation like the 1970s, all listed securities including shares and bonds tend to do poorly because of the rapidly rising discount that needs to be applied when valuing such assets. By contrast, in Australia at least, during the 1970s, cash and hard assets like gold and commercial property were better investments. 

Eoin Treacy's view -

Thank you for this riposte to my answer to your original question posted in Comment of the Day on April 30th.



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May 21 2018

Commentary by Eoin Treacy

Beyond the Dollar Everything's Just Noise for Emerging Markets

This article by Netty Ismail, Ben Bartenstein, Lilian Karunungan and Alex Nicholson for Bloomberg may be of interest to subscribers. Here is a section: 

The combination of higher debt levels and share of debt denominated in foreign currency means many emerging markets are now more exposed to dollar appreciation than in 2009, amid signs the robust growth in developing economies may be slowing, the Institute of International Finance said in a May 17 note.

While the U.S. Treasury will sell some of its largest offerings since 2010 this week, a slew of Fed speakers may reiterate plans for gradual rate increases.

The selloff in developing nation currencies is hurting other assets.

Emerging-market local-currency government bonds declined for a sixth week, the worst run since 2016. Developing-nation stocks retreated 2.3 percent last week.

Eoin Treacy's view -

The last time there was angst expressed at the impact a resurgent Dollar would have on emerging markets was in 2015. The same arguments are being made today and it appears that the figures for US Dollar denominated debt are even higher.



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May 17 2018

Commentary by Eoin Treacy

Global surge in air-conditioning set to stoke electricity demand

Thanks to a subscriber for this article by Ed Crooks for the Financial Times which may be of interest. Here is a section:

Over the next 30 years, air-conditioning could increase global demand for electricity by the entire capacity of the US, the EU and Japan combined, unless there are significant improvements in the efficiency of the equipment, the IEA warned.

In a report released on Tuesday, the agency urged governments to use regulations and incentives to improve the efficiency of air-conditioning units, to avoid a surge in demand that could put strains on Energy supplies and increase greenhouse gas emissions.

Fatih Birol, the IEA's executive director, said: “This is one of the most critical blind spots in international Energy policy.”

Air-conditioning has had an enormous effect on the quality of life in hot regions, but its use is unevenly distributed around the world. About 90 per cent of homes in the US and Japan have air-conditioning, compared with about 7 per cent in Indonesia and 5 per cent in India.

Electricity used for cooling in the US is almost as great as the entire demand for power in Africa.

Eoin Treacy's view -

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

There was a story a few years ago where world leaders were asked what the greatest invention of the 20th century was. Some said the electrical grid but the Prime Minister of Singapore said air conditioning. He opined that without it most people in the country would still be seeking shelter from the heat under the nearest tree.



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May 04 2018

Commentary by Eoin Treacy

War on coal making the world's top mine owners a lot richer

This article appeared in Mining.com and may be of interest. Here is a section:

Some of the more significant declines are occurring in China, the top mine operator, and financing for new supplies is drying up. That’s creating a windfall for the producers who remain.

“It’s a perverse consequence” of policies intended to combat climate change, said Julian Treger, co-founder of activist investor Audley Capital Advisors LLP. “It’s going to be very difficult for funders to provide capital to bring new coal assets online. We have a very interesting supply and demand picture being set up.”

Anglo American, which not long ago wanted to unload its coal assets, has seen income from the business triple since 2015 to become the mining company’s most profitable commodity. Last year, Glencore reported earnings from the fuel more than doubled, while BHP Billiton said it surged sixfold.

While global coal use and mine output has been dropping, production failed to keep pace with demand in 2016 for the first time in seven years, data compiled by BP Plc show. As supplies continue to drop, the amount available for export is shrinking. BMO Capital Markets says the 1 billion-metric-ton seaborne market will have a small deficit by 2021 and expand to 15 million tons in 2022.

Eoin Treacy's view -

Coal is about as unfashionable as one might imagine and it must be very difficult for companies to raise capital to increase supply considering how negative sentiment is. At the same time, coal is one of the world’s most popular sources of Energy and is indispensable in the production of steel. A good many coal companies when bust before prices started to recover in 2016 and supply is still constrained.



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May 04 2018

Commentary by Eoin Treacy

NASA built and tested a 'truly astounding' nuclear reactor that may help astronauts travel longer, farther, and faster in space

This article by Dave Mosher for Business Insider may be of interest to subscribers. Here is a section:

"This is the first new reactor not just for space and not just for NASA, but of any kind in the US in 40 years," David Poston, the project's chief designer at Los Alamos National Laboratory, said during a press conference Wednesday. "We demonstrated a concept that NASA can use right now. It's ready for a flight program."

And

In March, NASA tested that process in an experiment called Kilopower Reactor Using Stirling Technology, or KRUSTY. The test run generated about 100 watts of electrical power, or enough to run a bright incandescent lightbulb.

But Poston said Kilopower could easily scale up to 10 kilowatts — 100 times more, or enough to power a typical US home — and even megawatts.

He called the experiment "incredibly successful" and said it cost NASA relatively little.

"People thought it would cost billions of dollars to do these reactors," Poston said. "We showed we can design, build, and test a reactor for less than $20 million."

Eoin Treacy's view -

It says a lot about how negative sentiment is about nuclear Energy that in order to get a design built you have to promise to deploy the reactor in space. If that isn’t the starkest example of Not In My Backyard (NIMBY) then I don’t know what is.



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May 03 2018

Commentary by Eoin Treacy

Tesla Supercharging Its Model 3 Means Less Cobalt, More Nickel

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

Tesla Inc. may have some bad news for those betting on cobalt to continue its record-breaking rally, and good news for nickel bulls.

While the weight of its Model 3 is on par with gasoline- powered counterparts, its battery cells are of the highest Energy density used in any electric vehicle, the Palo Alto, California-based company said Wednesday in a letter to shareholders.

“We have achieved this by significantly reducing cobalt content per battery pack while increasing nickel content and still maintaining superior thermal stability,” Tesla said.

Cobalt prices have more than tripled in the past couple of years as companies like Tesla strive to bring electric vehicles into the mainstream car market, and with supply largely dependent on a few mines in the politically volatile Democratic Republic of Congo. Nickel, which has gained about 50 percent in the same span, is far more widely available.

Tesla says the cobalt content in its nickel-cobalt-aluminum cathode chemistry is already lower than next-generation cathodes that will be made by other cell producers with a nickel- manganese-cobalt ratio of 8:1:1.

Eoin Treacy's view -

In the last six months I have seen estimates for when the 8:1:1 ratios of nickel : manganese : cobalt would be achieved in commercial batteries that ranged from 5 to 10 years from now. Tesla has these batteries in the limited number of Model 3 cars it is putting out today. That is a testament to exponential pace of technological innovation because it represents another powerful enhancement to Energy density.



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May 03 2018

Commentary by Eoin Treacy

Think innovation will save the economy? That's probably an illusion.

Thanks to a subscriber for a link to this Washington Post article which may be of interest. Here is a section:

Not so fast, say critics. The negative trends affecting the economy reflect deep social problems that resist change. “Rising educational attainment during the 20th century was an important source of productivity growth,” writes Gordon, “but the pace of that increase slowed markedly after 1980.” The truth is that we’ve been trying to improve schools for decades with, at best, modest success.

Or take the drain of prime-age men from the job market. The main problem, argues Gordon, “reflects in large part the loss of stable middle-income employment opportunities.” The result has been fewer marriages, more drug use and more suicides, writes Gordon. None of this is easily altered. Among 20 advanced countries, the United States has the second-lowest labor-force participation rate of prime-age men. Only Italy is lower.

We seem to have entered a new economic era — one defined more by the limits on our economic power than by its promises. The explosion of new technologies seems to have fooled us into thinking that a burst of innovation will magically restore our economic vitality. On the evidence, this is a mirage.

Eoin Treacy's view -

I use YouTube when I want a refresher on how to wire a plug or replace a bulb in my car’s headlight. Unfortunately, my children live on YouTube, it’s a substitute for TV but they also post videos of their own. However, it is hard to justify endless videos of cats or people falling over as being beneficial to the economy beyond being a distraction. If that is your measure of technological innovation then you really should get out more.

Cancer costs the global economy about $1 trillion a year. Even today that is still a lot of money. By comparison the global economy spends about $6 trillion on Energy a year.



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April 27 2018

Commentary by Eoin Treacy

World's lithium king is ready to unleash a flood of new supply

This article from Bloomberg appeared in Mining.com and may be of interest. Here is a section:

“There is a legitimate concern on the side of battery manufacturers about long-term availability of supply,” said Daniel Jimenez, an SQM vice president who recently estimated that the industry will require a capital investment of $10 billion to $12 billion in the next decade to meet demand.

The green light to mine vastly more lithium, combined with pending changes in its ownership structure, has suddenly put SQM in the sights of several global mining companies, including London-based giant Rio Tinto Group. Among the most aggressive bidders is China’s Tianqi Lithium Corp., which has offered to buy SQM shares at a 20 percent premium, Eduardo Bitran, the former head of government development agency Corfo, said earlier this year.

“Tianqi owning the stake would be another step towards overall Chinese consolidation of the lithium industry,” Chris Berry, a New York-based Energy-metals analyst and founder of House Mountain Partners LLC., said in an email.

Eoin Treacy's view -

SQM’s growth projections have been among the chief catalysts in the decline of lithium miners over the last few months. The big question is how quickly demand picks up over the next decade to absorb additional supply. Lithium was a supply inelasticity meets rising demand market from 2013 but really only garnered interest in the last couple of years as the shares turned to outperformance. Supply is now increasing so we are likely to see more volatility in the respective shares. This story further highlights China's intention to be the dominant force in the electric car sector. 

 

 



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April 26 2018

Commentary by Eoin Treacy

Musings from the Oil Patch April 16th 2018

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

Eoin Treacy's view -

A link to the full report and a section from its are posted in the Subscriber's Area.

Major companies, like Exxon Mobil and Royal Dutch Shell, transitioned from being majority oil producers’ years ago. While they still report in Energy equivalent barrels the reality is that the majority of their production is natural gas. As a comparatively clean fuel, which tends to see demand increase as living standards improve, the long-term outlook for gas demand appears to be relatively secure.



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April 10 2018

Commentary by Eoin Treacy

Saudi Arabia Is Said to Signal Ambition for $80 Oil Price

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

Saudi Oil Minister Khalid Al-Falih has also sounded increasingly hawkish in public, suggesting that OPEC should keep tightening the oil market even through the cartel is close to meeting its goal of cutting crude inventories in industrialized countries back to their five-year average.

In an interview in New York last month, he said today’s price near $70 a barrel hadn’t been sufficient to stimulate investment in the industry, which remains significantly below levels seen before 2014’s price crash.

"That tells me that the pricing signals that have come out of the recovery haven’t been sufficient," he said, without giving a target for prices.

The Saudi Ministry of Energy didn’t immediately respond to a request for comment.

Domestic Policy
Riyadh’s desire for higher prices is driven by domestic policy imperatives. Although Saudi Arabia’s budget deficit has narrowed sharply as oil has recovered, Prince Mohammed has set out an ambitious and expensive economic and social reform program. He also needs to pay for the kingdom’s increasingly drawn-out military entanglement in Yemen.

While there’s little indication the Saudis are prepared to deepen their oil cuts to achieve $80, at the very least the aspiration suggests they’ll keep with the current measures until the price goal is closer. Riyadh is counting on declining Venezuelan oil production, the likely imposition of new U.S. sanctions on Iran, and continued demand growth to absorb U.S. shale production.

Eoin Treacy's view -

In addition to sanctions on Iran, the deteriorating relationship Europe and the US have with Russia is exerting an influence on oil prices which closed above $70 today and in dynamic fashion. That is going to act as an incentive to increase supply among various higher cost producers such as shale properties, tar sands and deep water, though that supply is going to take time to come to market.

 



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March 27 2018

Commentary by Eoin Treacy

Electric Cars May Be Cheaper Than Gas Guzzlers in Seven Years

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

Electric cars may be cheaper than their petroleum counterparts by 2025 if the cost of lithium-ion batteries continues to fall.

Some models will cost the same as combustion engines as soon as 2024 and become cheaper the following year, according to a report by Bloomberg New Energy Finance. For that to happen, battery pack prices need to fall even as demand for the metals that go into the units continues to rise, the London-based researcher said on Thursday.

The clamor to roll out electric vehicles has grown louder as countries and companies race to clean up smog in their cities and hit ambitious climate goals set by the Paris Agreement. U.K. lawmakers started an inquiry into the market in September, probing the necessary infrastructure and trying to determine whether to bring forward the 2040 deadline to end the sale of gasoline and diesel cars.

Eoin Treacy's view -

Tesla has one major undeniable achievement to its name. It made electric cars sexy. Before Elon Musk delivered his roadster, electric vehicles were a hard sell, plagued by perceptions of inconvenience. However, in little more than a decade, they have become so desirable that just about every car company is planning on investing billions in manufacturing capacity.



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March 26 2018

Commentary by Eoin Treacy

As Trump Takes On China, Another Trade Challenge Looms in Asia

This article by Connor Cislo and Jiyeun Lee for Bloomberg may be of interest to subscribers. Here is a section:

But at the same time, there’s been a spike in sales to China of precision metal working machines and equipment for making chips from firms like Japan’s Yaskawa Electric Corp. With a Chinese state-backed fund gearing up to pour as much as $31.5 billion into homegrown semiconductor manufacturing, there’s potential for trade flows to start to shift.

China’s ambitions, set out in its sweeping Made in China 2025 plan, go much further than semiconductors and would see its technical prowess advance in a host of areas, ranging from bio- medicine and artificial intelligence to new-Energy vehicles and aircraft. The challenge to Japan, Korea and Taiwan also applies to European exporters like Germany, and comes on top of the risks to global trade from the Trump administration’s embrace of tariffs.

"The bits of the global supply chain that are currently the preserve of Korea, Japan, Taiwan, the U.S., and Germany, are the bits of the supply chain that China has a decade-long industrial strategy to move into," said Tom Orlik, Bloomberg’s chief Asia economist. He said it’s only a matter of time before many components for electronic products are made domestically and the country is on track to become a car exporter. Eventually, it will be selling airplanes, said Orlik.

Eoin Treacy's view -

China is moving up the value chain in just about all industries. It’s policies in achieving that goal are openly mercantilist. It has unabashedly supported domestic industry by whatever means necessary, closed off the mainland market to global competitors, engaged in industrial espionage on a grand scale and none of these actions are without precedent.



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March 21 2018

Commentary by Eoin Treacy

Fed Lifts Rates, Steepens Path Through 2020 For More Hikes

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

In another change to the statement, the Fed said inflation on an annual basis is “expected to move up in coming months,” after saying “move up this year” in the January statement. Price gains are still expected to stabilize around the Fed’s 2 percent target over the medium term, the FOMC said.

The central bank’s preferred price gauge rose 1.7 percent in the 12 months through January and officials projected it to rise to 2 percent in 2019 and hit 2.1 percent the following year, the latest estimates showed. The estimates for inflation excluding food and Energy, which officials see as a better way to gauge underlying price trends, rose to 2.1 percent in 2019 and 2020 from 2 percent seen in December.

“Job gains have been strong in recent months, and the unemployment rate has stayed low,” the FOMC said. The statement said that household spending and business investment “have moderated” from strong fourth-quarter readings.

Eoin Treacy's view -

A dovish rate hike is what the market was hoping for and that’s what it got which eases concerns that the new Fed chair is anything other than market friendly. There had been some concern that the Fed might raise rates four times this year but that is now looking less likely. However, the upshot of the statement is that four rates hikes in 2019 is a realistic possibility and a significant negative impact would be required to stop the run-off of the balance sheet. Therefore, the outlook is not quite as liquidity friendly as might have appeared on first blush.



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March 16 2018

Commentary by Eoin Treacy

Precious Metals Review

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

Capital allocation: We are nearing 5 years since the significant gold price (~$1,600/oz down to $1,360/oz) correction in early April 2013. The period since has largely been characterized by cost cutting, capex reduction and de-leveraging of Balance Sheets. With an average ND/2018E EBITDA ratio of 0.5x for Precious stocks under coverage, companies are largely finished with debt reduction and must now decide on the right mix of project capex (brownfield and greenfield) /exploration /dividends/buybacks/further debt reduction/M&A opportunities. Management decisions to define companies will likely diverge over the coming years and we believe this is a key consideration for investors, particularly for a sector that does not have a good record of deploying capital. In terms of dividends, companies will need to define policies that are both sustainable but also representative of variation in cash flow through the cycle, e.g., a base dividend with a supplementary dividend is most likely.

Cost pressure starting to come back: A number of companies on recent conference calls mentioned cost pressure that is entering the industry either through macro factors or through mining sector specific areas.

Examples include the increase in Energy costs (mainly due to higher diesel/gas prices), some currency moves, consumables, equipment and contracting. It does not appear to be significant at this stage but the opportunities for cost-cutting initiatives seem to have largely ended (with the potential exception of technology impacts, e.g., Barrick's initiatives medium- to long-term). As an example of cost pressure, Barrick's nearterm All-In Sustaining Costs (AISC) are expected to be ~$765-815/oz for 2018, ~$50/oz higher than previous guidance of $740-760/oz. Longer term, Barrick has alluded to the fact that its target of $700/oz is going to be more difficult to achieve.

Eoin Treacy's view -

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

The Gold/NYSE Arca Gold BUGS Index ratio hit an important peak near 10 in late 2015 which presaged the recovery rally in the metal price which broke the five-year downtrend. That undervaluation of the miners relative to the gold price represented a period of deep stress for the sector as companies scrambled to pay down debt and to keep their operations afloat. However, as the gold price rallied the miners exhibited high beta characteristics which saw them double relative to the gold price.



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March 08 2018

Commentary by Eoin Treacy

Saudi Oil Minister Says Aramco IPO Could Be Delayed to 2019

This article by Annmarie Hordern, Glen Carey and Grant Smith for Bloomberg may be of interest to subscribers. Here is a section:

Saudi Arabia’s Energy minister hinted the initial public offering of the state oil company Aramco could be delayed until 2019, pushing back a central plank of Crown Prince Mohammed bin Salman’s plan to modernize the economy.

Khalid Al-Falih also said the IPO, potentially the largest ever, would be “anchored” by a listing on Saudi Arabia’s local exchange and any international listing would be announced in due course, if at all.

“Between December 31st and January 1st there is no value lost for the kingdom,” Al-Falih said in an interview in London.

“So, I don’t see this artificial deadline that you refer to as being significant.”

Until recently, Saudi officials insisted the IPO was “on track, on time” for 2018, but two months into the year that deadline is looking harder to meet. Still, Al-Falih, who also serves as Aramco’s chairman, insisted the company had made all the necessary preparations for a share sale of the world’s largest oil producer.

"The only certain thing about the Saudi Aramco IPO is that a) it will happen, b) the anchor market will be the Tadawul exchange in Saudi Arabia,” Al-Falih said. “We have created the framework -- fiscal and otherwise regulatory -- for Saudi Aramco to be listed this year. The actual timing will be announced when we feel that the conditions for the success of that listing are in place.”

Eoin Treacy's view -

Managing even a partial sale of one of the world’s most significant assets is not an undertaking that can be completed in a short period of time and there is an obvious incentive to get the best possible price. One of the primary supporting arguments for the oil price over the last year has been that Saudi motivation to get the best possible price for its asset.



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March 06 2018

Commentary by Eoin Treacy

Musings from the Oil Patch March 6th 2018

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

Eoin Treacy's view -

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

Unconventional oil and gas have been game changers for the US Energy sector and with increasing export capacity that moniker will increasingly be true for the global market.

Together with the fact that US tight oil supply is also of the sweet light variety makes it an attractive option for refiners, particularly since a great deal of the additional supply coming from Saudi Arabia is of the heavier variety.



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February 22 2018

Commentary by Eoin Treacy

The lithium ion battery and the eV Market

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

Eoin Treacy's view -

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

Battery chemistry is complicated and the rate at which Energy density doubles is about every five years. That’s quite a bit slower than the 18-month pace of doubling of efficiency seen in the semiconductors sector on which Moore’s Law is based. 



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February 21 2018

Commentary by Eoin Treacy

Musings from the Oil Patch February 20th 2018

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

The attacks on the oil and gas industry in the U.S. for its methane emissions have been based on reports and estimates of the volume of leaks from its drilling and transportation activities.  Fighting these leaks is in the companies’ best interests because it will help the bottom lines as less natural gas will be lost to the atmosphere and income will be enhanced.  Fixing the leaks on their own is also a way the oil and gas industry can hope to stave off further debilitating regulations.  Now, however, the industry is hopeful of an easing of the methane containment rules for companies drilling and producing natural gas from federal lands by the Trump administration.  

 

While the discussion about methane leak control for the oil and gas industry is dominating the headlines, there remains a huge untapped source of natural gas in the form of methane hydrates under the ocean that some governments are working to exploit.  These hydrates are where molecules of methane gas are entrapped within an ice lattice.  They form under very low temperatures or high pressures, or a combination of the two.  They are usually found on the outer continental shelves around the world.  (They have been found in the pink areas of the global map in Exhibit 18.)  The challenge is that they have been difficult (risky) to mine, as well as costly.  They have the potential to blow up any vessel attempting to extract the hydrates from the sea floor.  The U.S. Bureau of Ocean Energy Management (BOEM) estimates that the U.S. has 51,338 trillion cubic feet of methane hydrate gas resources.  If only half of BOEM’s estimate is realized, there are 1,000 years of supply based on the current consumption rate of natural gas in the United States.

 

Last year, China, a country with significant needs for more natural gas but lacking success in finding and developing meaningful reserves, has been experimenting with tapping methane hydrates.  The country’s focus is on hydrates situated in the South China Sea, which helps explain China’s attempt to claim territorial rights to that area of the Pacific Ocean.  At the same time, Japan, another nation lacking adequate Energy resources, has successfully extracted methane hydrates from an area offshore the Shima Peninsula.  The implications of successful development of methane hydrate mining by either or both countries would be significant for the future of the global liquefied natural gas (LNG) business.

Eoin Treacy's view -

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

If one were looking for a single reason China is so interested in claiming the South China Sea, then methane hydrates are probably the answer. The existence of such vast resources is no secret. Just like shale oil and gas, geologists have known about methane hydrates for years. However, they have been largely irrelevant to the Energy sector because of the cost of production. 



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February 16 2018

Commentary by Eoin Treacy

Worldwide Threat Assessment of the US Intelligence Community

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

Continued global space industry expansion will further extend space-enabled capabilities and space situational awareness to nation-state, nonstate, and commercial space actors in the coming years, enabled by the increased availability of technology, private-sector investment, and growing international partnerships for shared production and operation. All actors will increasingly have access to space-derived information services, such as imagery, weather, communications, and positioning, navigation, and timing for intelligence, military, scientific, or business purposes. Foreign countries—particularly China and Russia—will continue to expand their space-based reconnaissance, communications, and navigation systems in terms of the numbers of satellites, the breadth of their capability, and the applications for use.

Both Russia and China continue to pursue antisatellite (ASAT) weapons as a means to reduce US and allied military effectiveness. Russia and China aim to have nondestructive and destructive counterspace weapons available for use during a potential future conflict. We assess that, if a future conflict were to occur involving Russia or China, either country would justify attacks against US and allied satellites as necessary to offset any perceived US military advantage derived from military, civil, or commercial space systems. Military reforms in both countries in the past few years indicate an increased focus on establishing operational forces designed to integrate attacks against space systems and services with military operations in other domains.

Russian and Chinese destructive ASAT weapons probably will reach initial operational capability in the next few years. China’s PLA has formed military units and begun initial operational training with counterspace capabilities that it has been developing, such as ground-launched ASAT missiles. Russia probably has a similar class of system in development. Both countries are also advancing directed-Energy weapons technologies for the purpose of fielding ASAT weapons that could blind or damage sensitive space-based optical sensors, such as those used for remote sensing or missile defense.

Of particular concern, Russia and China continue to launch “experimental” satellites that conduct sophisticated on-orbit activities, at least some of which are intended to advance counterspace capabilities. Some technologies with peaceful applications—such as satellite inspection, refueling, and repair—can also be used against adversary spacecraft.

Eoin Treacy's view -

Satellites represent key pieces of military infrastructure without which many advanced pieces of modern military equipment do not work.  Therefore, it is inevitable that space become a theatre in any future conflagration. 



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February 07 2018

Commentary by Eoin Treacy

Musings from the Oil Patch February 6th 2018

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

Eoin Treacy's view -

If Asia and indeed Africa follow the trend of Energy usage in the OECD then it is logical to expect more gas fired power generation and more gas used for cooking. At the same time the evolution of the electric vehicle represents a growing challenge for gasoline demand over the medium-term. At the same time electricity demand is likely to trend higher and gas will play a part in the Energy mix along with renewables, batteries, nuclear and coal. These are medium to long-term considerations which Energy executives will need to come to terms with but what about right now?



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January 31 2018

Commentary by Eoin Treacy

Interview with Nobuo Tanaka, Chairman, Sasakawa Peace Foundation

Thanks to a subscriber for this interview with a former executive director at the IEA. Here is a section:

Some countries are saying they can depend 100% on renewables. That may be possible in small countries - but for sake of security we need alternatives and backup supply. This is true even with advances in battery technology and the fact that today more than 50% of capacity growth is now coming from renewables - so this is clearly the future. Costs are declining and they are able to provide a decentralized source of electricity, and even in Japan nuclear is becoming much more costly than renewables and power companies need to do a much better job integrating decentralized renewable generation into their system and their role can be much larger than before. Before the problem was costs were very high for renewables, not only in terms of production but also in terms of management and integration - so dealing with the large-scale generation that comes from nuclear and other major facilities was preferred. Today, however, advances in digitalization and information technology makes it more feasible to manage decentralized and more numerous facilities. Electric vehicles are also coming and all of these changes make renewables far more probable.

This is exactly what China is aiming at and they are moving to become major providers of clean power for electric vehicles, digitalization and other purposes. Bottom line - the price of electricity is key for national competitiveness. China today has one of the cheapest sources of electricity in the world and Japan one of the highest. How can we compete? It is impossible. We import gas at twice the price of US so we need to use cheaper renewables with integrated decentralized system to bring costs down. That is unavoidable and we must act as soon as possible.

Eoin Treacy's view -

National security and global competitiveness are two sides of the same coin for many countries but this is most especially the case in terms of Energy security. For nations heavily dependent on imported oil and gas, nuclear was, previously, an attractive answer to the question of how their economy might survive commodity price volatility. However, with the increasing efficiency of renewables the outlook is changing because with solar, wind and geothermal more countries than ever have a real chance to become Energy independent. 



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January 31 2018

Commentary by Eoin Treacy

Shale Sends U.S. Output Past Historic 10 Million-Barrel Mark

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

 

U.S. oil production surged above 10 million barrels a day for the first time in four decades, another marker of a profound shift in global crude markets.

The milestone comes weeks after the International Energy Agency said the U.S. is poised for "explosive" growth in oil output that would push it past Saudi Arabia and Russia this year. New drilling and production techniques have opened up billions of barrels of recoverable U.S. oil in shale rock formations in the past 10 years, reversing decades of declining output and turning the nation into an exporter.

The news also comes after the Organization of Petroleum Exporting Countries decided last year to extend an agreement with several non-OPEC members to curb output in response to a global supply glut fed in part by shale. That agreement was finally showing signs of working, with prices emerging from a three-year downturn. After falling near $26 a barrel in 2016, the global benchmark oil price climbed above $70 a barrel in January, and the U.S. price is following suit. Yet, increasing output from the U.S. may threaten rising price.

“You are starting to see a little bit of a shift in market sentiment on oil given the fact that production is really starting to ramp up,” Joseph Bozoyan, a portfolio manager at Manulife Asset Management LLC in Boston, said by telephone.

“These U.S. production numbers are starting to take the wind out of the sails of the crude oil market.”

Eoin Treacy's view -

The USA is the world’s most important swing producer because its production figures are market driven rather than being forced to fund government vanity projects or social programs. The fact it is now the world’s largest producer and exporting both oil and gas is further evidence of its increasing influence on the global market and also helps to explain why the USA is no longer as concerned with ensuring the status quo in the Middle East. 



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January 19 2018

Commentary by Eoin Treacy

Speculation Grows That OPEC Will End Cuts Early as Prices Rise

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

"I don’t think the deal per se will end" as inventories near the five-year average, said Bjarne Schieldrop, chief commodity analyst at SEB AB. The Declaration of Cooperation -- the 2016 accord that first established the group of 24 oil producers-- will still stand, but be modified to allow for production cuts to gradually unwind from mid-2018, he said.

Giovanni Staunovo, commodity analyst at UBS Group AG, expects a similar outcome. Citigroup Inc., whose data show that global oil stockpiles are already back in line with the five- year average, predicts a summer agreement to ramp up production.

The oil producers themselves say they’re sticking to the plan. While Russia’s Energy Minister Alexander Novak told reporters on Jan. 12 that the meeting in Oman could include discussion of mechanisms for gradually exiting the cuts, four days later he affirmed that the pact should continue. Ministers from the United Arab Emirates, Iraq and Kuwait also insisted there’s no need to change tack.

Eoin Treacy's view -

Sometimes it is imperative to keep an eye on the price action. Over the course of the last few days I’ve seen one headline after another reporting the ‘collapse’ in oil prices or the major reversal seen from the intraday peak. I’m reminded of Mark Twain’s quip “the report my death was an exaggeration.” 



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January 18 2018

Commentary by Eoin Treacy

Fed Is Targeting the Wrong Inflation

This article by Danielle DiMartino Booth rhymes with my view that inflation is understated in the official statistics. Here is a section: 

Consumers are increasingly asking: Is this a need or a want? A discernible gap between the rate of price increases for necessities and the one for discretionary purchases is putting the Federal Reserve’s tightening path at risk of veering off course.

Making matters more difficult, the Fed’s preferred inflation gauge does a pitiful job of capturing the quandary facing many households that live paycheck to paycheck. The so- called core PCE is the central bank's go-to inflation metric. It is derived by netting out the necessities of food and Energy from personal consumption expenditures. But the core PCE also minimizes the weight of rent and over-emphasizes health care due to Medicaid and Medicare’s inputs.

Classify the following items within the core PCE as necessities and then track them as an aggregate using what we can call the Household Budget Inflation Gauge. Included are food and nonalcoholic beverages, fuels, clothing, housing, utilities, health care, health insurance, homeowners’ insurance, auto insurance, higher education and the phone, utility and internet bills. As of the latest reading, these costs are rising at a 2 percent rate compared with last year.

Now throw all of the rest of the discretionary items into what we can call the Household Wish List Inflation Gauge and you will see that these items’ prices have been rising at a pace of 1.5 percent.

Yet if you insist on comingling these baskets and then throwing out food and Energy, you will by flying as blindly as the most dovish members of the Federal Open Market Committee.

Eoin Treacy's view -

The triumph of the subscription model means that there is an increasing number of calls on income that did not exist a decade ago. Only today my iPhone told me I needed to upgrade my iCloud storage. Netflix is now a staple for many households, Amazon Prime has hundreds of millions of subscribers. Microsoft has also successfully transitioned to a subscription model with Office 365. 



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January 08 2018

Commentary by Eoin Treacy

$900M Australian rare earths mine given state approval

This article by Andrew Topf for Mining.com may be of interest to subscribers. Here is a section:

The company is also looking at a joint venture with OCI Company Ltd. to build a separation plant in South Korea.

According to Arafura the Nolans Bore rare earths-phosphate deposit is "one of the largest and most intensively explored deposits of its kind in the world." The deposit contains a JORC-compliant mineral resource of 56 million tonnes at an average grade of 2.6% TREO that extends to 215 metres below the surface. Two-thirds of the contained rare earths are in the measured and indicated category.

Arafura estimates the project would create an investment of about $900 million in Central Australia, as well as 250 to 300 permanent jobs.

An environmental approval from the Australian government and a final approval from the state government still need to be obtained.

The mine could supply up to 10% of world demand for neodymium and praseodymium, used in the manufacture of magnets for wind turbines, and electric vehicles.

Eoin Treacy's view -

Rare earth metals represent vital parts of the evolving technology sector and not least for renewable Energy, batteries, defence and computing. Since China dominates the sector and has already demonstrated it is willing to use its position as both a geopolitical and economic tool, there are solid arguments for developing more varied sources of supply. 



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January 03 2018

Commentary by Eoin Treacy

Commodities Roiled as Arctic Blast Takes Hold

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

Prices for the heating fuel rose to the highest in a month as the U.S. burned the most natural gas ever on Monday, breaking a record set during the so-called polar vortex that blanketed the nation’s eastern half with arctic air in 2014, Bloomberg News reports. America consumed 143 billion cubic feet of gas as temperatures dipped to all-time lows on New Year’s Day, topping the previous high of 142 billion from four years ago, data from PointLogic Energy show. Ice in the Hudson River delayed fuel-barge deliveries, as the government warned of a home heating-fuel shortage from the East Coast to Texas. Natural gas prices have jumped 19 percent from a 10-month low on Dec. 21. U.S. retail diesel prices averaged $2.87 a gallon on New Year’s Day, the most since June 2015, according to AAA.
 

Eoin Treacy's view -

I drove up to Big Bear Lake Tuesday afternoon and there is no sign of the cold wracking other parts of the USA. Talk around town is much more about global warming and the shortening season because of the lack of snow. We took ski lessons this morning which is responsible for the late posting of Comment of the Day and the Subscriber’s audio for which I apologise.  



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December 21 2017

Commentary by Eoin Treacy

Financial Markets in 2018: The Times They Are A Changing

Thanks to a subscriber for this article by Pamela Rosenau for Forbes which may be of interest. Here is a section: 

As correlations among stocks and other assets classes break down, there will be a significant divergence in the performance of “quality” assets versus “junk” assets.  A prudent money manager should be prepared for this market shift by focusing on shorter duration assets, which goes for both credit and equities.  I expect longer duration equities, such as growth stocks with lower near-term earnings to underperform more value oriented stocks such as consumer staples, telecom, and Energy sectors, on which I have focused.  Today’s market appears to be the inverse image to the early 1980s.  Back then, investors were misled into hiding out in cash as stocks were perceived as too expensive in a high interest rate environment.  Today, very few hold cash as stocks appear cheap relative to low bond yields.  This is a backward looking strategy derived from a relative value argument that is no longer operable.  I suggest more than a little risk aversion, as I have maintained, would be prudent in times like this.  As I have often said -- preserving capital is paramount, not winning friends. 

Eoin Treacy's view -

Money has been pouring into ETFs over the last couple of years which is a testament to the success of the low fee argument, against a background where the success of momentum strategies has reduced the allure of stock picking. The success of the ETF business has contributed to the consistency of the trends evident on the primary Wall Street indices and the low volatility condition that has prevailed over the last six months in particular. 



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December 19 2017

Commentary by Eoin Treacy

Musings From the Oil Patch December 18th 2017

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

A section from this report is posted in the Subscriber's Area. 

Eoin Treacy's view -

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

Autonomous vehicles represent as much of a gamechanger for the Energy sector as unconventional oil and gas did a decade ago. No one knows whether it will be 2030 or 2040 when they become ubiquitous but the important point about artificial intelligence is that it only needs to learn a lesson once. It might take millions of lines of code and an equal number of pictures to teach a computer a lesson but the work only needs to be done once. By contrast, every human needs to learn to drive on an individual basis and the Pareto Principle dictates that most of us are not particularly good at it. 



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December 19 2017

Commentary by Eoin Treacy

Sugar industry likely to see record global production of 192m tonnes

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

According to Informa's Agribusiness Intelligence, an industry research and analysis firm, the biggest driver behind the record output this year will be the European Union, India and Thailand.

Despite this, sugar cane diversion to ethanol production in Brazil means global prices will remain high as the country will produce less sugar in 2018-19.

Agribusiness Intelligence said that in October, for the first time in more than a year, there was a year-on-year increase in local sales of ethanol of 11% in Brazil. This accelerated to a plus of 16% in the first half of November.

"The most important reasons for the attractiveness of ethanol versus sugar are: the relatively high price of gasoline at the pump, an advantageous tax structure, recovering fuel demand as the Brazilian economy is moving out of recession and the low sugar price."

Meanwhile, within the EU, the market is still responding to the scrapping of production quotas for sugar refined from sugar beet, which is creating a huge jump in production. In the EU, 20 million tonnes of sugar will be produced by the end of 2017-18 which is an increase of 3 million tonnes compared to the previous year.

"This growing trend has not been supported by domestic consumption which has been declining in the EU steadily over the last few years. This will have a direct impact on the trade balance of EU countries, with imports declining and exports could double to as much as 4 million tonnes by the end of 2017-18," the analysis firm added.

Eoin Treacy's view -

Synchronised global growth helps to boost demand for all commodities but Energy is particularly affected since OPEC is attempting to curtail supply. That is helping Brent Crude prices hold above the $60 area. Meanwhile it improves the allure of producing ethanol for Brazil because of the arbitrage consumers benefit from as long as sugar prices are low. 



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December 11 2017

Commentary by Eoin Treacy

Brent Reaches Highest Since 2015 After Forties Pipeline Shutdown

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

Brent crude in London reached its highest since 2015 as a key North Sea pipeline shut down.

The Forties Pipeline System, one of the most important oil conduits in the world, is to be fully halted after a crack was discovered, the link’s operator Ineos said. The announcement boosted pricing that had been largely muted over the last week following an OPEC-led agreement by major producers to extend output curbs through the end of 2018. The Brent rally pulled New York futures up near $58 a barrel.

At the same time, the U.A.E.’s Energy minister said Monday the group may draft a strategy in June to end the curbs if the market is no longer oversupplied. Brent, the global benchmark, rose as high as $64.71 a barrel while West Texas Intermediate climbed to as high as $57.86 a barrel.

“Brent is ripping,” said Bob Yawger, director of futures at Mizuho Securities USA Inc. in New York. “You really don’t have a lot of spare barrels before the supply situation becomes a problem.”

In addition, the WTI-Brent spread will “widen and encourage U.S. exports,” he said.

The pipeline system feeds crude to the Hound Point export terminal near Edinburgh in Scotland. At over 400,000 barrels a day, the supplies that flow through the link are the single largest constituent part of the Dated Brent grade that helps to settle more than half the world’s physical oil prices.

 

Eoin Treacy's view -

The Forties pipeline has more of an effect on pricing than its size merits because Brent is such an important benchmark for the global oil industry. The big question is how long it will take the leak to be sourced, fixed and whether they will then use this opportunity to run other maintenance. 



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December 04 2017

Commentary by Eoin Treacy

Russian Ships Near Data Cables Are Too Close for U.S. Comfort

Thanks to a subscriber for this article by David E.Sanger and Eric Schmitt for the New York Times. Here is a section: 

The issue goes beyond old worries during the Cold War that the Russians would tap into the cables — a task American intelligence agencies also mastered decades ago. The alarm today is deeper: The ultimate Russian hack on the United States could involve severing the fiber-optic cables at some of their hardest-to-access locations to halt the instant communications on which the West’s governments, economies and citizens have grown dependent.

While there is no evidence yet of any cable cutting, the concern is part of a growing wariness among senior American and allied military and intelligence officials over the accelerated activity by Russian armed forces around the globe. At the same time, the internal debate in Washington illustrates how the United States is increasingly viewing every Russian move through a lens of deep distrust, reminiscent of relations during the Cold War.

 

Eoin Treacy's view -

The USA is now the world’s largest oil producer, and its economy is not as dependent on Energy as other major producers. At the other end of the spectrum Russia and Saudi Arabia are also major producers but their economies are close to totally dependent on Energy. Just how much of a gamechanger unconventional oil and gas supply is cannot be underestimated as the geopolitical implications continue to unfold. 



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December 04 2017

Commentary by Eoin Treacy

Mars and beyond: Modular nuclear reactors set to power next wave of deep space exploration

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

Rated at 10 kilowatts, the Kilopower reactor puts out enough power to support two average American homes and can run continuously for ten years without refueling. Instead of plutonium, it uses a solid, cast uranium 235 reactor core 6 inches (15 cm) in diameter. This is surrounded by a beryllium oxide reflector with a mechanism at one end for removing and inserting a single rod of boron carbide. This rod starts and stops the reactor while the reflector catches escaping neutrons and bounces them back into the core, improving the efficiency of the self-regulating fission reaction. Until activated, the core is only mildly radioactive.

And

The design is modular, so the self-contained reactor units can be hooked together to provide as much power as and where it's needed, whether it's a deep space probe or a Martian outpost. According to Lee Mason, STMD's principal technologist for Power and Energy Storage at NASA Headquarters, the technology is "agnostic" to its environment, allowing it a wide range of applications.

 

Eoin Treacy's view -

Small, modular and safe reactors, that can be produced in factories and transported to their destination via regular roads represent perhaps the only feasible future for the nuclear industry. The fact NASA is moving ahead with such designs, for its own purposes, increases the potential similar programs will find utility in the wider economy. 



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November 21 2017

Commentary by Eoin Treacy

Musings From The Oil Patch November 21st 2017

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

Between 2010 and 2016, coal’s share of U.S. Energy fell from 23% to 15.8%, while renewables’ share climbed from 1.7% to 3.7%.  In the EU, coal’s share fell from 16% to 14.5%, and renewables more than doubled its share, going from 3.9% to 8.3%.  This emissions and economic progress by the EU is in jeopardy following the election of President Trump who is determined to boost U.S. oil, natural gas and coal industries, and push back on green mandates and subsidies.  The EU’s response has been to isolate the United States for its climate position.  Their strategy for overcoming high Energy costs and exposure to Energy disruptions is to make people choose expensive renewable Energy in the guise of it being the only logical choice when confronted with the alternative of a disastrous environmental outcome if we continue burning fossil fuels.  

As the EU’s strategy seems not to be working as well as planned, it has become more radical with governments seeking to ban internal combustion engine cars.  This, its leaders believe, will force American auto companies to compete in the marketplace of zero-emission vehicles.  Little is mentioned about the fact that the carbon emissions legacy associated with building electric cars requires years of driving them before it is neutralized.  Electric car promoters also never mention the environmental and social costs of mining the rare earth minerals required in rechargeable batteries.  If fairly presented, people might question whether there are other alternative solutions that are less-costly and do more to mitigate the environmental hazards of electric batteries and renewable Energy sources.  

While the goal to level the economic playing field with respect to Energy’s cost in manufacturing remains an EU objective, the path to achieving that goal has changed.  The choice presented is impending environmental disaster with continued use of fossil fuels versus feeling good about saving the planet with high cost renewables and zero-emission electric vehicles.  Expect more of rhetoric as we move forward.  Maybe President Trump understands that the climate change movement is really an economic war in the guise of climate change.

Eoin Treacy's view -

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

The simple fact is the EU imports a lot of its Energy and the USA is close to being Energy independent. Quite whether the EU is so cynical in its attempts to pioneer high cost power is questionable, but if everyone were to adopt the same cost base for Energy production it would certainly create a more level playing field for a lot of important industries and help European competitiveness.  



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November 21 2017

Commentary by Eoin Treacy

ASEAN: The infrastructure push

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

Infrastructure plays a crucial role in the region’s economic, social and environmental development, including boosting regional connectivity. Greater connectivity of the transport infrastructure enhances logistical efficiency and supports the growth of investment, trade and commerce while reducing business costs. While countries have invested in infrastructure to varying extents over the years, development has been gaining momentum, with more than US$275bn key pipeline projects across ASEAN, as we detail in this report.

Singapore: To fulfil Singapore’s 6.9mn population target (+25% from the current size) by 2030, the government is steering infrastructure development towards greater public network connectivity, usage of personal mobility devices, as well as usage of digitalisation to transform the city state into a Smart Nation. These infra developments, amounting to US$44bn will help Singapore cope with population increase and prevent traffic congestion.

Malaysia: In the 10th Malaysia Plan (2011-2015), the government highlighted its commitment to infrastructure development. One focus is on building railways (MRT 2, MRT 3, LRT 3) to alleviate traffic congestion. Another focus is on connecting rural areas to urban clusters to ensure equitable development through the Pan Borneo Highway. Infrastructure growth is driven by China, having committed US$34bn (RM144bn) to infrastructure projects such as the East Coast Rail Link, Kuantan Industrial Park and Melaka Gateway. 

Indonesia: In the post-Suharto era, infrastructure development stalled and has not been able to keep up with economic growth amid the commodities boom. The inefficient transport network has resulted in acute distribution bottlenecks, driving up logistics cost. When President Jokowi took office, he diverted a portion of the Energy subsidies to infrastructure development. Through priority infrastructure projects totalling US$41bn, the government seeks to boost connectivity in the archipelago to increase business competitiveness.   

Eoin Treacy's view -

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

In a period of synchronised economic expansion it is natural for emerging markets to engage in infrastructure development since credit is generally still accommodative and the need remains compelling. That will also help to lay the foundation for future growth as the region evolves economically amid a trend of generally improving standards of governance. 



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November 16 2017

Commentary by Eoin Treacy

World's Biggest Wealth Fund Wants Out of Oil and Gas

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

 

Norway, which relies on oil and gas for about a fifth of economic output, would be less vulnerable to declining crude prices without its fund investing in the industry, the central bank said Thursday. The divestment would mark the second major step in scrubbing the world’s biggest wealth fund of climate risk, after it sold most of its coal stocks.

“Our perspective here is to spread the risks for the state’s wealth,” Egil Matsen, the deputy central bank governor overseeing the fund, said in an interview in Oslo. “We can do that better by not adding oil-price risk.”

The plan would entail the fund, which controls about 1.5 percent of global stocks, dumping as much as $40 billion of shares in international giants such as Exxon Mobil Corp. and Royal Dutch Shell Plc. The Finance Ministry said it will study the proposal and decide what to do in “fall of 2018” at the earliest.

Eoin Treacy's view -

Norway’s proposal to diversify its exposure to the oil sector makes sense but the timing of the decision, ahead of the proposed Saudi Aramco IPO and after the successful sale of Abu Dhabi’s Adnoc retail gasoline stations’ business says more about the trauma of the crash lower from above $100 than the state of the sector at present. 



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November 09 2017

Commentary by Eoin Treacy

Rio Tinto joins race for stake in world's largest lithium miner

Rio Tinto joins race for stake in world’s largest lithium miner – This article by Cecilia Jamasmie for Mining.com may be of interest to subscribers. Here is a section: 

 

El Mostrador suggested Tinto Rio had already made a bid, potentially trumping Chinese companies Sinochem, Tianqi and GSR Capital, all of which had also expressed interest in SQM.

The news came on the heels of PotashCorp and Agrium announcing Tuesday that China’s ministry of commerce had approved the merger, but required the sale of PotashCorp’s minority holdings in Arab Potash Company and SQM within 18 months of closing, and Israel Chemicals Ltd. within nine months.

SQM, which has a market value at just over $15 billion, produced roughly 44 million tonnes of lithium carbonate last year and is developing new projects in Chile and Australia.

Rio's current incursion in the lithium market is mostly limited to its 100%-owned lithium and borates mineral project in Jadar, Serbia, which is still in the early stages of development.

Eoin Treacy's view -

Rio Tinto generates 68% of its revenue from iron-ore and aluminium. Diamonds and minerals, copper and Energy make up the balance of its operations in that order. Despite enthusiasm about lithium SQM generate about 26.5% of its revenue from the metal, with plant nutrition (32.2%) and potassium (20.8%) also representing major businesses for the company. 



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November 09 2017

Commentary by Eoin Treacy

Britain risks a nuclear dead end by spurning global technology leap

Thanks to a David for this article from Ambrose Evans-Pritchard in the Telegraph. Here is a section: 

A few million will be put aside for ‘blue sky’ research but the real money will go to a consortium led by Rolls-Royce to develop a series of 440 megawatt SMRs for £2.5bn each, drawing on Rolls’ experience building PWR3 reactors for nuclear submarines. The company bills it as part of a “national endeavour’ that will create 40,000 skilled jobs. It requires matching start-up funds of £500m from the state. 

I find myself torn since these ambitions are commendable. They revive a homegrown British sector, akin to the success in aerospace. It is exactly what Theresa May’s industrial strategy should be. Rolls-Royce is a superb company with layers of depth and a global brand. It could genuinely hope to capture an export bonanza.  

Yet the venture looks all too like a scaled-down version of Sizewell, plagued by the same defects as the old reactors, less flexible than advertised, and likely to spew yet more plutonium waste.  

Rolls Royce insists that the design is novel and can slash costs by relying on components small enough to be manufactured in factories. “Everything can be cut down to size and put on a lorry,” said a spokesman.  

Rolls-Royce has said the design can slash costs by relying on components small enough to be manufactured in factories It aims for £65 MWh by the fifth plant, dropping to £60 once the scale is ramped up to seven gigawatts (GW), with exports targeting a putative £400bn global market.  

 

Eoin Treacy's view -

A decade ago the UK went from being an oil and gas exporter to an importer, as the North Sea oil fields hit peak production, and the cost of production began to rise. That represents a considerable headwind to growth from a sector which had been a tailwind for decades previously. When people bemoan declining living standards and the rising cost of living, one of the first places to look has to be the Energy sector and absence of a clear strategy to promote Energy independence. 



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November 07 2017

Commentary by Eoin Treacy

Musings From The Oil Patch November 7th 2017

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

The euphoria that greeted the production cut agreement announcement lifted oil prices above $50 a barrel, a critical threshold for market confidence.  As global oil inventories failed to drop as the market expected, investors turned on the commodity as well as Energy stocks, sending their prices lower.  Since the oil price drop in early 2007, prices have largely traded between the low $40s a barrel to now above $54, with a brief excursion as low as $26.  The narrow price range reflected global oil inventories remaining relatively flat, until recently.  As oil inventories started falling a few weeks ago, we are now in a period favorable for higher prices.  

Today, we are firmly planted in an oil market reflecting positive price momentum.  Better projected oil demand growth seemed to be the initial factor that helped lift the oil market.  The International Energy Agency (IEA) upped its demand growth estimates for the second half of 2017.  About the same time, U.S. shale producers began shedding oil drilling rigs in response to weakening oil prices and as they sensed a need to rebuild investor confidence in their financial health.  Producers had to dispel the image of exploration and production (E&P) companies as destroyers of capital, a label the industry’s record seemed to warrant.  Disciplined capital spending, meaning living within a company’s cash flow in order to not have to borrow money or sell more equity to fund the overspending, appears to be the new mantra for E&P companies.  The latest survey of E&P company spending plans versus cash flow demonstrates that overspending remains high.  This may signal that it will take time for companies to generate positive cash flow.  

In recent weeks, as Brent oil prices have risen at a faster rate than WTI oil, the forward oil price curve moved into backwardation, meaning that barrels of oil able to be delivered immediately are worth more than if they are stored and delivered in the future.  This price disparity is further impacted by the cost of storing the oil.  Backwardation encourages holders of oil in storage to begin selling those barrels, which has accelerated the shrinking of global oil inventories.   

Eoin Treacy's view -

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



Comparing these two futures curves for Brent Crude oil and West Texas Intermediate we see that the backwardation is most acute in Brent while West Texas Intermediate is in contango over the first four contracts. That highlights the continued incentive domestic US suppliers have, to pump and export into the global market; picking up a more than $5 spread in the process. 



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November 06 2017

Commentary by Eoin Treacy

A resignation, detentions and missiles: 24 hours that shook the Middle East

This article by Tamara Qiblawi for CNN may be of interest to subscribers. Here is a section:

Saudi Arabia was still putting out the fires caused by the missile attack when state TV announced the onset of an anti-corruption crackdown led by the crown prince. Over 17 princes and top officials were arrested on graft charges, according to a list obtained by CNN and cited by a senior royal court official.

The list includes billionaire business magnate Prince Alwaleed bin Talal, who owns 95% of Kingdom Holding, which holds stakes in global companies such as Citigroup, Twitter, Apple and News Corp.

The list also includes formal head of the royal court Khaled Al-Tuwaijri, Saudi media mogul Waleed Al-Ibrahim and Prince Turki Bin Nasser.

"Some of the wealthiest figures in the Arab world are in apprehension today," said military analyst Riad Kahwaji.
"This is unprecedented. We're seeing it for the first time and it's definitely causing shockwaves across the region."

 

Eoin Treacy's view -

On October 19th 2015 I wrote this: 

To think of Saudi Arabia as having to go to the market for money is a misrepresentation of just how much capital the kingdom has. Let’s think of the country more as a feudal kingdom than the democracies we are accustomed to. It is not beyond the realm of possibility that the various princes who have accumulated impressive wealth based on the largesse of the crown could be called upon to supply the state with arms, capital or soldiers in just the same way that dukes and earls would have done in feudal Europe.

 



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November 03 2017

Commentary by Eoin Treacy

Fossil-Fuel Friendly Tax Plan Spares Oil, Not Solar or Tesla

This article by Alex Nussbaum, Brian Eckhouse and Emma Ockerman for Bloomberg may be of interest to subscribers. Here is a section:

The House proposal protects three provisions that save explorers billions of dollars annually, while chopping a few others.

The legislation preserves the use of last-in-first-out accounting rules, also known as LIFO. The rules let companies value crude stockpiles at the price they’re selling for, rather than the original purchase cost. The bill also allows continued deductions of so-called intangible drilling costs and preserves a measure that lets explorers reduce taxable income to reflect the depreciation of reserves.

All three were thought to be in jeopardy as Republicans searched for offsets to pay for lowering taxes elsewhere.
Eliminating the drilling and depletion provisions alone would force Energy companies to pay about $25 billion in additional taxes between 2016 and 2026, Congress’s Joint Committee on Taxation estimated last year.

The House bill would also end two smaller breaks for “marginal" oil wells and enhanced oil recovery projects, which involve older oil and gas fields. That would cost drillers about $371 million over ten years, the committee estimated.
The plan spares “the Holy Grail of E&P tax breaks" by maintaining the intangible drilling costs provision, analysts at Houston investment bank Tudor Pickering Holt & Co. said in a research note Friday. Between that and a plan to cut the corporate rate from 35 percent to 20 percent, the legislation would be “a net positive for oil and gas," they wrote.

 

Eoin Treacy's view -

The US oil and gas business represents a major opportunity for the economy to reduce its trade deficit with oil producers or even to become a net Energy exporter. Renewables represent an equally important part of that goal since every barrel of oil not consumed at home is available for export. It therefore makes sense from a strategic perspective to support both from a regulatory and tax perspective. However, Energy is about the most politically charged of all sectors, not to mention being competitive between source and others. Therefore one tends to be favoured over the other depending on the tone of the administration in power. 



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October 26 2017

Commentary by Eoin Treacy

FAAMG: A Bubble In The Making?

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

FAAMG: The music continues to play We continue to be bullish on the global Information Technology (IT) sector, mainly due to our positive view on the semiconductor and software sub-segments. Global IT is benefiting from a macro environment, which is characterised by accelerating growth and rising rates that support IT companies due to their low financial leverage and high operating leverage. Global IT stocks are trading at a forward P/E of around 18x, broadly in line with the sector’s long-term historical valuation multiple average. As a result, we believe that the good growth perspectives of the sector are not yet fully reflected at current levels.

However, within the IT segment, we would like to take a closer look at the FAAMG group (Facebook, Amazon, Apple, Microsoft, Google). Those five stocks have been the main performance drivers of the underlying IT and consumer indices and now represent around 13% of the S&P 500, roughly the same weighting as the US Energy sector.
 
A recession would be needed to trigger a bubble burst. 
While we agree that the share price performance of the FAAMG group may look like a bubble in the making, we would stress the fact that bubbles only tend to burst when the underlying market moves into a recession. According to our economists, global growth should accelerate towards the end of the year and stabilise at current levels in 2018. Leading indicators in all major regions around the globe support this forecast and thus a recession looks highly unlikely in the foreseeable future.

 

Eoin Treacy's view -

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

The US technology sector continues to represent some of the clearest beneficiaries of the evolution of the digital economy where data is a valuable asset. While companies like Microsoft and Facebook look quite different on the surface they both see their growth deriving from gathering, parsing, interpreting and selling data. The evolution of the home speaker/digital assistant market being simultaneously pushed by Apple, Amazon and Google are all symptomatic of their desire to secure consumer cashflows by being the conduit for data. 



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October 24 2017

Commentary by Eoin Treacy

Musings from the Oil Patch Ocotber 24th 2017

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

If you are Saudi Arabia, a one-product (oil) economy, and you are watching the aggressive adoption of government policies around the world to stop the sale of internal combustion engine cars, you have to be concerned.  Given that France and the UK have announced bans on the sale of ICE vehicles by 2040, auto industry executives are assuming China will adopt a similar date.  The Netherlands just adopted a 2025 ban on the sale of new ICE cars, with a 2030 date for all ICE cars to be off Dutch roads.   

For China, the world’s largest car market, having sold over 28 million cars last year (nearly a 14% year-over-year increase), the banning of ICE vehicles will shrink the need for, and eventually eliminate motor fuels, which will have a material impact on Saudi Arabia’s long-term oil export opportunities.  When considering that Saudi Arabia has been fighting Russia and Iran to gain an increased share of the Asian, and especially Chinese, oil markets, anything threatening the long-term success of that fight is of concern, even if it is a future event.
   
 Is the industrial policy to ban ICE vehicles a signal of the impending end of the Petroleum Age, much like Sheik Yamani predicted?  Is that prospect part of the motivation behind Crown Prince Salman’s plan to sell off a portion of Saudi Aramco, either in an initial public offering or through a direct sale to sovereign wealth funds to raise money now for diversification investments?  In a way, current industry developments and future prospects are similar to the forces that drove OPEC’s formation in 1960.  A brief review of history may help put into perspective why OPEC is struggling to remain relevant now, and will likely continue to struggle in the future. 

 

Eoin Treacy's view -

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

The argument about the exact timeline for when renewables will represent a dominant position in the Energy mix and in the transportation sector continues to receive a great deal of attention. However, the bigger picture is that Energy providers, who have little choice but to adopt very long-term perspectives, have already concluded that the heyday of the oil market has passed. That should help to inform our view of what the medium-term perspective on the Energy markets is. 



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October 23 2017

Commentary by Eoin Treacy

Venezuela's Behind on Its Debt and Facing Two Huge Bond Payments

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

Venezuela could still also make the payments on time. While $10 billion in foreign reserves isn’t much for a country that now owes some $140 billion to foreign creditors, it’s still enough to pay the bills for a while.

And the Maduro government has surprised the bond market before, making payments the past couple years that many traders had anticipated would be missed. Some of those now betting that these next two payments will also be made actually point to the $350 million currently overdue on the other notes as an encouraging sign. Those arrears indicate, they contend, that officials are prioritizing the payment of bonds with no grace period at the expense of those they can put off without penalty.

Even if Venezuela can make the payments due this year, investors say that, unless oil prices stage some sort of miraculous comeback, they still see default as an inevitable outcome. Credit-default swaps show they’re pricing in a 75 percent chance of a PDVSA default in the next 12 months and 99 percent in the next five years.

 

Eoin Treacy's view -

Venezuela represents a problem for bond investors because it could either be a one-off default or be the thin end of the wedge for distressed Energy producers. The fact PDVSA sinkable bonds are now trading at a spread of 526 basis points, versus 200 last week, suggests investors are increasingly skeptical the government is going to be able to make principal payments when they mature on November 2nd. 



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October 11 2017

Commentary by Eoin Treacy

Email of the day on Mexico

I'm forwarding to you the most recent free, weekly commentary of Michael Drury, in house economic analyst for McVean Traders, a Memphis (Tennessee) based commodities broker-dealer. I find the commentary, an evaluation of the current status of the Mexican economy, to be quite lucid and educative. Perhaps others of your readers would find it so, too?

Warm regards and with great appreciation for the service you render.

 

Eoin Treacy's view -

Thank you for your kind words and this report which may also be of interest to subscribers. Here is a section:

At the Bank of Mexico, much of the conversation centered on Mexico’s current very high rate of inflation – which is largely due to surging Energy costs after deregulation of the electricity sector a year ago.  As with Japanese VAT tax increases, these reforms caused a pig in the python effect as they work their way through reported annual CPI increases.  Mexico’s CPI should plunge lower toward 4% early  next year as the Energy hikes pass out of the data.  This is still high compared to the 3% target, but should drift within the 1% acceptable band around the target.  The Bank sees more recent data as confirming that new inflationary pressures (which were mostly from the pass through effect of higher Energy cost) are small.  As a result, recent hikes in the central banks reference rate are expected to end – though they will not be quickly reversed.  The combination of sticky rates and plunging inflation suggest a threat to Mexican growth from sharply higher real interest rates.  However, real economic growth has surprised to the upside recently, while high inflation has reduced the burden of earlier debt accumulation.  Long term interest rate appear already to have peaked as Bank rate hikes are ending. 

One perennial problem for Mexico is a low domestic savings rate and underdeveloped financial markets.  Combined with the earlier commitment to the view that all Mexican oil is a resource for the people and so no foreign ownership should be allowed, this meant that Mexican oil resources were underutilized and inefficiently operated.  However, as the deregulation of the telecom industry has shown, competition increases consumer options and lowers prices.  Private firms (from Italy and Houston) have recently found 3.4 million barrels of oil – out of an estimated 9 billion in Mexican reserves.  Perhaps those figures will have to be revised higher.  However, issues concerning crossownership and the upcoming election – where Obrador is campaigning for a roll back of Energy reforms -- are clouding the speed with which these huge finds will be developed.  

 



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October 10 2017

Commentary by Eoin Treacy

Not Business as Usual

Thanks to a subscriber for this heavyweight 329-page report from Deutsche Bank which may be of interest. Here is a section:

Not business as usual for the oilfield services industry 
This is an industry that is still in transition, and these are companies that still need to navigate this transition. The commercial development of tight oil reserves in the US was disruptive and it derailed the normalization of the cycle. The business models that worked last cycle will not necessarily work again this cycle. We believe in the long term, the oilfield service franchises that will be the winners will be those that evolve with innovative business models, and those that acquire or invest in niche technology leaders. 

Pressure pumping demand poised to recover to 2014 highs 
The biggest common denominator among our top picks is exposure to pressure pumping. As US producers tailor their drilling programs to focus increasingly on their core acreage and best wells, there will be a disproportionate mix of leading edge, longer lateral wells with tighter stage spacing and higher sand loadings. This will drive the average completion intensity per well even higher, which should restore the demand for horsepower to the 2014 highs despite a lower rig count.

 

Eoin Treacy's view -

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

Oil service companies have been among the primary targets for cost cutting by major oil producers. As wave after of wave of rationalization gripped the sector during the oil price collapse the major oil producers cancelled green field sites, abandoned deep-water drilling and committed to a lower for longer price forecast which dramatically altered their spending plans. The result was that the oil service sector is now a fraction of the size it attained at the oil peaks in 2008. That is before one considers the current optimism for electric vehicles, renewable Energy and domestic batteries. 



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October 09 2017

Commentary by Eoin Treacy

During Irma's Power Outages, Some Houses Kept The Lights On With Solar And Batteries

This article by Adele Peters for fastcompany.com may be of interest to subscribers. Here is a section: 

Of course, if a storm is strong enough to tear solar panels off a roof and the battery can’t recharge, this type of system wouldn’t work for long. It’s also expensive: A single Powerwall unit, which can store 14 kilowatt-hours of Energy, costs $5,500 plus supporting hardware and installation that can cost up to $2,000. A similar battery from Mercedes-Benz ranges from $5,000 to $13,000 for a 20 kilowatt-hour system including installation. In the U.K., where Ikea now sells both solar panels and batteries, its batteries are also nearly $4,000 at current exchange rates. Beyond cost, if someone rents an apartment or house and can’t install solar panels, it’s not an option.

But the cost is likely to drop, and battery storage and solar power could also be used in community solar projects, where customers don’t have solar panels at their own homes, but invest in or buy power from a nearby microgrid. In Orlando, customers can buy solar Energy from a 12-megawatt solar farm built on top of a landfill; while the power is currently sent back to the grid, in the future, it’s possible that it and other community solar farms could use batteries to provide local backup power from multiple locations in emergencies.

 

Eoin Treacy's view -

Microgrids, batteries and solar cells have the potential to grow exponentially as costs come down and business models evolve. There are two additional points that are likely to prove attractive to consumers as well as government. The first is that the utility network is likely to be a target in any future war and foreign governments have already demonstrated both the intent and ability to tamper with it. 



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October 09 2017

Commentary by Eoin Treacy

Spain Warns Catalonia Independence Bid Risks Economic Meltdown

This article by Maria Tadeo, Esteban Duarte, and Angeline Benoit for Bloomberg may be of interest to subscribers. Here is a section:

Spanish 10-year bonds rose, with the spread over German bunds narrowing by six basis points at 11:38 a.m. in Madrid to 119 basis points. Spain’s benchmark stock index has lost about 1.2 percent since Catalans voted in defiance of the Constitutional Court, while Catalan companies including lender CaixaBank SA are moving their legal bases out of the region.

Nadal, the Energy minister, suggested Catalonia would be jeopardizing electricity supplies and communications networks. Catalonia has little control over Energy supplies and is reliant on the big Spanish companies that, in theory, could suspend service and turn the lights off.

“It so terrible a scenario the idea of independence, that everything won’t work from the single moment from which independence is declared," Nadal said in a Bloomberg Television interview. "There will be a problem in the Energy sector, there will be a problem in the telecom sector, in the financial sector of course.”

 

Eoin Treacy's view -

The only way an independent Catalonia can function would be to introduce capital controls. There is already evidence of capital flight with Caixa Bank, for example, moving its headquarters to Madrid. If the Catalan administration does in fact wish to declare independence they have no time to waste. 



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October 04 2017

Commentary by Eoin Treacy

Micro-grids at the threshold

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

Batteries allow micro-grids to tap multiple revenue streams: Storage is helping micro-grid to transition beyond suppliers of just back-up power. Aggregation of storage and generation assets within a micro-grid creates a VPP and is capable of providing much-needed resiliency services to the central grid. Demand for these services is more than doubling every five years due to rising renewables in the generation mix. In Europe, this trend will likely continue considering targets to increase renewables by 20% by 2020. 

Block-chain and batteries make electricity trading possible: Utilities in the US and Europe are trialling block-chain technology, which, coupled with storage, can enable electricity trading within and also between micro-grids. Unhindered electricity trading is necessary if we are to overcome the intermittent, geographical and seasonal limitations of renewables. Batteries only offer a limited solution as overcoming these issues in the absence of fossil fuel generation would need uneconomic oversizing of storage capacity. 

Smart grid will be based on storage, micro-grids and electricity trading: We forecast the grid-connected micro-grid market globally to grow to $10bn by 2021 from under $0.5bn in 2016. Battery storage (residential and large) is estimated to play a major role and we expect 30GWh of micro-grid, which translates into a $5bn market opportunity by 2021. Fuel cells could be important for micro-grids as they are the most efficient generation technology – 15% adoption of fuel cells in microgrids will translate into 7.5Gw of demand and a market worth more than $2bn.       

Eoin Treacy's view -

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

Electricity traders have represented one of the largest demographics at The Chart Seminar over the last few years. At least part of the reason for that interest in Behavioural Technical Analysis is because it is a market with a bewildering array of fundamental inputs; coming with a slew of local considerations which contribute to volatility. That is before one considers the innate volatility of the Energy markets. Therefore, an understanding of crowd psychology, the rhythm of markets and how one market can affect another are valuable tools which are going to be all the more important as the Energy markets fracture with the growth of microgrids. 



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October 03 2017

Commentary by Eoin Treacy

Chinese EV market nearing 2% penetration

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

In 2016 Chinese electrical vehicle makers represented 43% of the global EV market, or 873,000 units, overtaking the United States for the first time, according to a July report by McKinsey & Company. The report notes that not only did China up its share of the EV market by 3% compared to 2015, it also made gains on the supply side of EVs including components such as lithium-ion batteries and electric motors. "One important factor is that the Chinese government provides subsidies to the sector in an effort to reduce fuel imports, improve air quality, and foster local champions," McKinsey explained.

The Chinese government has announced that "new Energy vehicles" (NEVs, which includes hybrids) should account for 8% of the passenger vehicle market by 2018, 10% by 2019 and 12% by 2020, according to EV Volumes.com.

Eoin Treacy's view -

Anyone who has spent any time in Beijing over the winter knows how badly the entire north east of the country needs to combat air pollution. On my first strip in 2005 I developed a cough as if I have been smoking my entire life that only let up once I got back on the plane home. If anything, the air is worse today than it was then. 



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October 02 2017

Commentary by Eoin Treacy

China sees new world order with oil benchmark backed by gold

This article by Damon Evans for the Nikkei news agency may be of interest to subscribers. Here is a section: 

China's move will allow exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan. To further entice trade, China says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong.
"The rules of the global oil game may begin to change enormously," said Luke Gromen, founder of U.S.-based macroeconomic research company FFTT.

The Shanghai International Energy Exchange has started to train potential users and is carrying out systems tests following substantial preparations in June and July. This will be China's first commodities futures contract open to foreign companies such as investment funds, trading houses and petroleum companies.

And 

The existence of yuan-backed oil and gold futures means that users will have the option of being paid in physical gold, said Alasdair Macleod, head of research at Goldmoney, a gold-based financial services company based in Toronto. "It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either," Macleod said.

 

Eoin Treacy's view -

This is an interesting gambit from China because while it is the biggest importer of oil it is the largest producer of gold. The futures contract is not yet active but for oil producers who are not happy to transact in Dollars, physical gold has definite attractions. It also raises the stakes in China’s attempts to establish the Renminbi as a viable reserve country. 



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September 28 2017

Commentary by Eoin Treacy

Gleanings: "When Smart People Talk, We Listen"

Thanks to a subscriber for this report from Jeffrey Saut for Raymond James which may be of interest. Here is a section: 

1. Invest in something when people say they never want to invest in it again, when they are throwing it out the window. Think about that.  We know people that liquidated their portfolios around the March 2009 lows vowing to never buy a stock again.  The same can be said about tech stocks as they were bottoming between November 2002 and May 2003.  Currently, the same thing is being said now about Energy stocks, especially the midstream MLPs.

2. Investing is both qualitative and quantitative. There is room for both disciplines (qualitative and quantitative) in one’s portfolio just like there is room for both passive and active investment management, although currently we favor active. 

3. The more people ridicule and question you, the more likely you are probably onto a good thing no matter what it is. This was like us buying oil sands stocks in the late 1990s when everyone was buying tech.  Or like when we bought tech stocks near the end of 2002; and, what we are doing now in buying the out of favor Energy stocks. 

4. Don’t invest in an area just because it is depressed, find and wait for the change and invest just before it happens while still unrecognized by the market. My father use to tell me, “Good things happen to cheap stocks,” but stocks can stay cheap for a really long time if other investors do not recognize their cheap valuations.  The charts will tell you when other investors will recognize them too.

 

Eoin Treacy's view -

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

Many investors seeking to follow the buy-low-sell-high maxims laid out in this report are hunting for sectors that look cheap by historical standards. The most obvious candidate is the Energy sector which is still struggling with the profound changes unconventional supply have wreaked, not to mention the anticipated surge in demand for electric vehicles. 



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September 20 2017

Commentary by Eoin Treacy

Proterra Catalyst E2 MAX Sets World Record And Drives 1,101.2 Miles On A Single Charge

This press release contains some impressive statistics and may be of interest to subscribers. Here is a section: 

Today Proterra, the leading innovator in heavy-duty electric transportation, announced it has set a world record for driving the longest distance ever traveled by an electric vehicle on a single charge at the Navistar Proving Grounds in New Carlisle, Indiana. Proterra’s 40-foot Catalyst E2 max traveled 1,101.2 miles this month with 660 kWh of Energy storage capacity. For the last three consecutive years, Proterra has demonstrated improved range and battery performance. Last September, Proterra drove 603 miles with 440kWh of Energy storage, and in 2015, Proterra drove 258 miles with 257kWh of Energy storage on a single charge. This year’s world record range marks exceptional performance improvements over prior years, and underscores Proterra’s commitment to innovation and accelerating the mass adoption of heavy-duty electric vehicles.

“For our heavy-duty electric bus to break the previous world record of 1,013.76 miles — which was set by a light-duty passenger EV 46 times lighter than the Catalyst E2 max — is a major feat,” said Matt Horton, Proterra’s chief commercial officer. “This record achievement is a testament to Proterra’s purpose-built electric bus design, Energy-dense batteries and efficient drivetrain.”

Beyond meeting transit agencies’ range requirements, the Catalyst E2 max is poised to make a significant impact on the transit market because of its low operational cost per mile compared to conventional fossil fuel powered buses. According to Bloomberg New Energy Finance, lithium-ion battery prices have dropped by roughly 72 percent since 2010, and the economics for batteries continue to improve. Between li-ion battery cost savings and improving vehicle efficiency, electric vehicles represent the most disruptive mode of transport today.

“Driven by the best cost savings-per-mile, we believe the business case for heavy-duty electric buses is superior to all other applications, and that the transit market will be the first to transition completely to battery-electric powered vehicles,” said Ryan Popple, Proterra CEO. “Early electric bus adopters like our first customer, Foothill Transit, have paved the way for future heavy-duty applications, like motor coaches and commercial trucks. As we see incumbents and more companies enter the heavy-duty EV market, it has become very apparent that the future is all-electric, and the sun is setting on combustion engine technology.”

 

Eoin Treacy's view -

One of the primary arguments often trotted out to combat ambitious forecasts about the future of long haul and large passenger vehicles is the battery would have to be so large and heavy as to make the endeavor untenable. 



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September 20 2017

Commentary by Eoin Treacy

Oil Traders Empty Key Crude Storage Hub as Demand Booms

This article by Rupert Rowling and Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:

Oil traders are emptying one of the world’s largest crude storage facilities, located near the southernmost tip of Africa, as the physical market tightens amid booming demand and OPEC production cuts.

Total SA, Vitol Group and Mercuria Energy Group Ltd. are selling crude they hoarded in Saldanha Bay, South Africa, during the 2015-2016 glut when the market effectively paid traders to store oil, according to people familiar with the matter, who asked not to be named discussing private operations. 

Crude demand is now seasonally outstripping supply, tightening the physical market for some crude varieties to levels not seen in the last two years and encouraging traders to sell their stored oil.

“The market is selling inventories from everywhere,” Mercuria Chief Executive Officer Marco Dunand said in an interview in Geneva.

Although largely unknown outside the oil trading industry, Saldanha Bay is one of the world’s largest crude storage facilities, with the capacity to hold 45 million barrels in just six gigantic, partially-buried concrete tanks. By comparison, Cushing, the better-known U.S. oil storage center in Oklahoma that serves as the pricing point for the West Texas Intermediate oil benchmark, can hold about 75 million barrels in more than 125 tanks.

 

Eoin Treacy's view -

We are in a period of synchronized global economic expansion so that should be generally positive for commodity demand, all other factors being equal. The hurricanes which hit the US and meant that the strategic reserve was tapped means it will need to be refilled while refineries will be running at capacity once they get back on line to make up for lost time.



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September 19 2017

Commentary by Eoin Treacy

Email of the day on wind farms

In my trip last week across the Texas Panhandle, I observed a continuing explosion in the number of power-generating windmills (picture is from last year's trip). Last year, vast numbers of these were not operating - this year, most are, suggesting that the power lines to major cities (e.g. Dallas-Ft. Worth) are now working and that purchase contracts are now in place. I spoke at length with a friend who farms a dozen or so square miles there about this subject, which he is very knowledgeable about.

Ah, but all is not well. The company that built hundreds of windmills in around 2002 up in the (windy) OK Panhandle has gone bankrupt, and the windmills are being torn down for scrap. Alas, the cost of these reclamation efforts are not fully covered by the original reclamation bonds bought by the now-bankrupt company, meaning either the farmers who own the land or the government (taxpayers) will have to cover the cost. Meanwhile, the productive farmland that was used for these remains unusable and unproductive until they are torn out, including their huge concrete bases. A 15-year life is not what anyone was promised...

When a farmer agrees to allowing windmills to be built on his land, he is effectively giving up on irrigating that land using modern, efficient center-pivot irrigation systems. Dryland wheat yields 1/4 that of irrigated wheat in the best rain years (which are few and far between), and 10% or less in dry years (lots of years). Most now grow at least some corn, and corn is not a dryland crop in these parts. Yes, he could go back to the horribly inefficient and water-wasting row irrigation method, but that has serious long-term aquifer depletion issues, as well as cost of pumping and labor cost increases. The windmills themselves, the power lines, and the access roads all reduce the crop acreage. Annual payments to the farmers make up for some of this, and some farmers do make money on the windmill contracts, but many smart farmers are turning down the offers. 

Despite all this, the building boom continues, and like all booms, will ultimately lead to substantial overcapacity, bankruptcies, finger pointing, and pain. With over 50% of the power generated being consumed by power line losses, it is not clear that such projects will ever create significant profits before government (taxpayer) subsidies are counted.

 

Eoin Treacy's view -

Even in the windiest locales onshore wind has a hard time being economic and the turbines installed 15 years ago bear little resemblance to those being erected today. European manufacturers have been promoting offshore turbines the size of skyscrapers. They are betting on scale to achieve efficiency gains and Denmark’s Dong Energy made headlines a few months ago by winning contracts to install offshore turbines with no subsidies from the German government. Of course, it remains to be seen if it can in fact deliver on its promise. 



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September 18 2017

Commentary by Eoin Treacy

Gold in correction mode

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

Precious metals: Gold has dropped to a 2½-week low of $1,315 per troy ounce this morning amid increased risk appetite among market participants. Gold in euro terms is trading at only around €1,100 per troy ounce. The Dow Jones Industrial Average and S&P 500 indices in the US had both climbed to new record highs on Friday. The rise in stock markets is continuing in the Asian region today. What is more, bond yields in the US have increased significantly of late, which makes gold less attractive as an alternative investment.

Presumably this is also why Friday saw the second consecutive daily outflow from gold ETFs. Portugal’s credit rating was upgraded on Friday evening by the ratings agency S&P, achieving an investment grade rating again for the first time since January 2012. Ireland was also upgraded, this time by the ratings agency Moody’s. Wednesday could see further volatility on the gold market, as this is when the US Federal Reserve meeting will take place.

If the market’s currently low rate hike expectations increase as a result of the meeting, this is likely to weigh on the gold price. According to the CFTC’s statistics, speculative financial investors further expanded their net long positions in gold in the week to 12 September, putting them at 253,500 contracts now. This was already the ninth weekly increase in a row.
The price rise to a 13-month high of just shy of $1,360 was thus driven largely by speculation. Given that the gold price is now trading considerably lower, positions have presumably been squared in the meantime

 

Eoin Treacy's view -

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

We are in a period of synchronised global economic expansion where central banks are only just beginning to turn the corner towards tightening; with the USA’s Federal Reserve in the lead. Commodities no longer share the trending commonality evident at the dawn of the commodity boom in the early 2000s. Industrial resources including palladium are recovering while Energy and agricultural prices have been subject to a great deal of volatility. 



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September 15 2017

Commentary by Eoin Treacy

Electric Vehicle Boom: ICE-ing The Combustion Engine

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

Many manufacturers undertaking all-solid-state battery R&D Manufacturers that aim to make all-solid-state batteries commercially available in 20202025 include Toyota, Sekisui Chemical, Hitachi Zosen, and Ohara. There have been announcements also from Panasonic, Samsung Electronics, Daimler, Sony, and Hyundai Motor about R&D efforts, but it is not clear when these companies aim to start mass production. BYD says it has set up a research team that is focused on all-solid-state batteries. Bosch, which is the largest auto parts maker, has acquired the all-solid-state battery startup Seeo, while household appliance maker Dyson entered the battery industry with its acquisition of Sakti3. This suggests there are growing expectations for the potential use of all-solid-state batteries not only in automobiles, but also in household appliances. 

Advantages of all-solid-state batteries 
An all-solid-state battery has the potential to offer not only greater Energy density, but also greater safety as well as flexibility in terms of operating temperatures. The advantage of these batteries is that they do not contain electrolyte solution, which is flammable and can react to temperature changes. The batteries also do not require separators, which eliminates the risk of damaged separators causing the battery to short-circuit. Moreover, sulfur-based solid electrolytes have the potential to substantially reduce recharging times as they demonstrate greater ion conductivity than electrolyte solution. 

Disadvantages of all-solid-state batteries 
We think the technological hurdles hampering mass production are the main drawback for all-solid-state batteries. Manufacturing all-solid-state batteries will require new production processes including pressing (in the case of sulfur-based batteries) and sintering (oxide-based batteries). In the case of sulfur-based batteries, which appear to be a strong candidate for automobiles, there is a risk that the sulfur-based solid electrolyte will react with moisture to create hydrogen sulfide. Companies are considering ways around this issue, which include housing the battery in a solid case to reduce the risk of it being damaged, or incorporating a hydrogen sulfide gas detector that would raise the alarm early. On the production side, it has been suggested that all-solid-state battery factories should have a super-dry room with a dew point of -100 degrees. There are also concerns that when all-solid-state batteries are used in automobiles, the vehicle’s vibration may reduce interface stability. It would appear that Toyota therefore faces a number of hurdles to overcome if it is to be ready to commercialize such batteries in 2022.   

 

Eoin Treacy's view -

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

Innovations in the Energy sector have profound effects on all financial markets by reducing the cost of production and transportation of just about everything. That is why batteries represent the lynchpin for the dawn of a new Energy future where electricity becomes a local industry and transportation is no longer dependent on extraction of resources from politically unpalatable regions. 



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September 14 2017

Commentary by Eoin Treacy

Oil Breaches $50 as Worldwide Energy Demand Outlook Brightens

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

Oil topped $50 a barrel for the first time in more than a month amid heightened optimism that a demand resurgence is in the offing.

Futures rose as much as 2.4 percent in New York, extending the longest upswing since July. Two of the most influential organizations in world oil markets -- the International Energy Agency and OPEC -- nudged their demand forecasts higher, signaling continued erosion of a global glut that has weighed on prices.

Oil demand for 2017 will expand by the most in two years, the Paris-based IEA said on Wednesday. That followed OPEC’s increase of its estimate for how much crude buyers will seek from the cartel next year, driven by rising consumption in Europe and China. In the U.S., hurricane-driven refinery outages spurred fuel distributors to pull a record amount of gasoline from storage tanks to cope with shortages last week, government data showed.

“The market is continuing to digest that information and realizing that the rebalancing process is working,” Mark Watkins, a Park City, Utah-based regional investment manager at U.S. Bank Wealth Management, which oversees $142 billion in assets, said by telephone.

 

Eoin Treacy's view -

Saudi Arabia’s decision to sell a part of Aramco with the aim of setting a valuation so they could borrow against the balance led investors to conclude it believes oil prices are in terminal decline. Anecdotal evidence it is planning to delay the IPO has had the opposite effect on sentiment and is contributing to recent strength. 



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September 08 2017

Commentary by Eoin Treacy

Hurricane Irma set to squeeze a lot more than just Florida's oranges

This article by Myra Saefong may be of interest to subscribers. Here is a section:

Frozen concentrated orange juice for November delivery OJX7, +2.98% rose 5.3 cents, or 3.8%, to $1.461 a pound in Thursday dealings on the ICE Futures U.S. exchange. It’s up more than 9% so far this week and is poised for the highest settlement since mid-May.

“The damage to the orange crop is twofold: both short term disruption but also, to the extent crops are completely destroyed, it could have a longer term effect since it takes a few years to grow an orange tree to production, thus limiting supply for a longer period,” said Alan Konn, partner and managing director of Price Asset Management.

Cotton prices have also rallied. December cotton CTZ7, +0.23%  settled at nearly 75 cents a pound Tuesday, the highest since mid-June, though prices pulled back Wednesday and Thursday.

Cotton markets are also nervous because Harvey did an as yet uncalculated amount of damage in Texas,” which is the country’s top grower of cotton, said Gilbertie. “And if Irma affects Georgia, the country’s number three producer of cotton, the U.S. cotton industry will be dealt an immensely damaging blow.”

Eoin Treacy's view -

Energy companies will be working day and night to overcome the challenges Hurricane Harvey represented and refining capacity will likely be back online in the relatively near future. If orchards are damaged by a hurricane, debris can be cleared away the trees cared for but one still has to wait lost fruit to grow again. 



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September 07 2017

Commentary by Eoin Treacy

How a Bird Charity's Battle Against a Wind Farm Backfired

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

When plans for Neart na Gaoithe started being developed in 2008, Siemens AG’s 3.6 megawatt turbine was the most popular among developers. Now manufacturers are working on machines that could be four times bigger, helping companies like Dong Energy A/S build projects cheaply enough to make money at market prices. The collapse in oil prices has also helped lower offshore wind costs, by making the sea vessels needed to install projects cheaper to hire.

Eoin Treacy's view -

I’ve haven’t seen a satisfactory solution for the problem of wind turbines impact on migratory bird populations regardless of the fact offshore turbines help create artificial reefs for sea life. However, the economies of scale that can be gained from going offshore has altered the wind turbine sector beyond recognition. 



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September 06 2017

Commentary by Eoin Treacy

Investment Gurus Counsel Catching Reform Tailwinds in Latin America

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

“The broad outperformance in Latin America -- particularly Argentina, Mexico, and Brazil -- speaks to the broad reform programs we have seen in each of these countries and the stable backdrop these reforms have provided,” said Kofi Bentsi, a money manager focused on emerging-market corporate bonds at Pimco, the second-largest U.S. fixed-income management firm. He says Argentina and Brazil are likely to continue to outperform. 

Jim Barrineau, the co-head of emerging-markets debt at Schroders in New York, said the region has benefited from a combination of the highest yields among emerging markets and improving economies, especially in Argentina and Brazil, which overcame deep recessions. This backdrop, he says, tends to favor corporate bonds over government securities.

“They are more responsive to changes in economic growth,” said Barrineau, who helps oversee Schroders’ $520 billion in assets. His emerging-market bond fund has outperformed 81 percent of peers this year.

Eoin Treacy's view -

The LME Metals Index has been on a recovery trajectory since January 2016 and has rallied to break a lengthy medium-term downtrend.
The CRB Index, which is skewed by Energy prices, has been ranging below 200 since late 2015 but is currently bouncing, having found support in June. 



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August 25 2017

Commentary by Eoin Treacy

Thorium salt reactor experiments resume after 40 years

This article by David Szondy for Newatlas.com may be of interest to subscribers. Here is a section:

 

Working in cooperation with the European Commission Laboratory Joint Research Center, NRG's SALt Irradiation ExperimeNT (SALIENT) is a multi-stage experiment aimed at turning Thorium Molten Salt Reactors (TMSR) into an industrial scale Energy source with commercial possibilities.

According to advocacy group Thorium Energy World, the first phase of the experiment is focusing on removing the noble metals produced by the thorium fuel cycle. That is, the metals created in the steps in the nuclear fission process where the thorium transmutes into uranium before splitting to give off Energy.

Once this has been achieved, the next step will be to determine how well commonplace materials used in the construction of TSRMs stand up to the corrosive high-temperature salt mixture or to find alternatives to keep down maintenance and operation costs. These might include an alloy of nickel called hastelloy, or Titanium-Zirconium-Molybdenum (TZM alloy

The ultimate goal is to create TMSRs that are modular and scalable to meet local Energy demand, yet provides 24-hour power that is available year round. In addition, using molten salts mean that refueling can take place while the reactor is still in operation, drastically reducing downtimes.

Eoin Treacy's view -

Molten Salt reactors never got the go ahead in the early days of nuclear development because of the difficulty of producing weaponised materials from them. In the current age that is one of the primary points in their favour since what we need is a non-proliferation friendly design that is less susceptible to meltdowns. Nevertheless, it will be years before we have a working prototype.  



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August 17 2017

Commentary by Eoin Treacy

Musings from the Oil Patch August 15th 2017

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

In total, between 2010 and 2040, the EIA expects Energy demand to grow by 54.4%.  Liquids fuels are projected to grow over this period by 37.7%, while natural gas growth will soar 78.7%.  In physical terms, natural gas (93 QBtus increase) consumption will grow by nearly a third more than oil’s use (68 QBtus), while coal consumption (34 QBtus) will increase by barely over half of the growth in liquids’ consumption.  Nuclear power increases the least of all the fuels (19 QBtus), but posted one of the largest percentage gains (+67.9%) due to its small base in 2010.  Most interestingly, the Other category, which includes renewables, is predicted to increase consumption by 74 QBtus, or an impressive 128.5% gain.   

A consideration that should not be overlooked is where this growth is happening.  Exhibit 3 (next page) shows Energy consumption divided between the developed countries of the world (OECD) and the developing ones (non-OPEC).  The difference in Energy demand growth between these two groups is astounding.  The OECD economies will increase their Energy use by 15.8% compared to the 87.5% growth projected for non-OECD economies.  For a domestic exploration and production company, this may seem to be a worthless consideration, but now that the United States has become an oil exporter, the health of the global oil market should be of increased interest to the executives of these E&P companies.   
What the EIA forecast demonstrates is that the portfolio shifts underway at several major integrated oil companies – BP, Royal Dutch Shell (RDS.A-NYSE) and TOTAL S.A. (TOTF.PA) – from crude oil to natural gas resource exploitation, are founded on the expectation that the world’s Energy market has entered a new era that will be dominated by natural gas.

The quest for cleaner fossil fuels, in response to global pressure to reduce carbon emissions, has focused on increased use of natural gas, which has considerably fewer carbon emissions than either crude oil or coal.  That explains why natural gas was initially embraced by environmentalists as the “bridge fuel” to a cleaner Energy mix until renewable fuels could mature sufficiently to become the “carbonless fuel” for the future.  The double-digit price at that time may explain why the environmentalists loved natural gas as it provided a price umbrella over expensive renewables.   

 

Eoin Treacy's view -

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

The major oil companies have been reporting reserves on an Energy equivalent basis for more than a decade which tends to paper over the transition that has been made from oil to gas production. It’s no exaggeration to state that companies like Royal Dutch Shell, Total and Exxon Mobil might better be described as major gas companies rather than major oil companies. 



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August 09 2017

Commentary by Eoin Treacy

Elon Musk Inspires World's Top Miner to Target Electric Vehicle Boom

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

“As we delved in to understand more about the lithium-ion battery market, it became clear that demand from EVs was accelerating,” Haegel said Wednesday in an interview. “It also became clear that we had competitive advantages.”

As a result, BHP approved a $43 million project to begin production at its refinery from April 2019 of nickel sulfate, a product needed for lithium-ion batteries. The move will make BHP the top exporter of the material, Haegel said in Kalgoorlie, Western Australia.

Global nickel demand could more than double by 2050, fueled in part by rising electric-vehicle sales, Bloomberg Intelligence analyst Eily Ong wrote in a June report. Demand for nickel from lithium-ion batteries may rise to more than 190,000 metric tons a year by 2030 from about 5,200 tons in 2016, Bloomberg New Energy Finance analyst Julia Attwood forecast in April.

Eoin Treacy's view -

Lithium, nickel and cobalt are the primary metals used in the manufacture of lithium batteries. With demand for large batteries from the transportation and utility sectors growing the mining and refining sectors are scrambling to keep up.

 



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August 08 2017

Commentary by Eoin Treacy

Email of the day on batteries

Welcome back from China, I would also reciprocate the glowing comments
on Saturdays missive.

FYI attached please find some headlines from the Asian Nikkei, unfortunately I am not a subscriber, but for all the battery fanatics following you and I agree with the view that battery technology is a game changer. I thought you would be interested in the following :

Eoin Treacy's view -

Battery technology was a fringe industry for a long time because there was no compelling commercial reason to invest the money required to develop it. That changed when oil prices surged higher and consumers were forced to begin to think about economizing to reduce how much they were spending on Energy

The dynamics that have unfolded in the Energy sector are a perfect example of how high prices influence spending decisions by producers and economizing by consumers while low prices have the opposite effect. These long-term dynamics contribute to the long-term cyclical nature of markets. 



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August 04 2017

Commentary by Eoin Treacy

Germany Giving Gigafactory a Home in Latest Challenge to Tesla

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

German executives are preparing to announce a new home for a lithium-ion battery plant designed to rival the output at Tesla Inc.’s Gigafactory.

Terra E Holding GmbH will choose one of five candidate sites in Germany or a neighboring country next month to build its 34 gigawatt-hour battery factory, Frankfurt-based Chief Executive Officer Holger Gritzka said in an interview. The former ThyssenKrupp AG manager has helped to assemble a consortium of 17 German companies and won government support for the project, which will break ground in the fourth quarter of 2019 and reach full capacity in 2028, he said.

"The battery factory is the latest sign that German industry, the motor behind the world’s fourth-biggest economy, is gearing up for a new stage in the Energy revolution. Lithium- ion batteries can help stabilize intermittent flows of wind and solar power on electricity networks. They’re also projected to power millions of plug-in cars expected to roll off German production lines beginning early next decade.

“We have to be better in process technology than competitors, a constant step ahead,” said Gritzka, who emphasized that Terra E will be counting on Germany’s competitive edge in manufacturing robotics and automated production to make money.

Global battery-making capacity is set to more than double by 2021, reaching 278 gigawatt-hours, up from about 103 gigawatt-hours in the second quarter, according to Bloomberg New Energy Finance. Asia electronics makers including South Korea’s LG Ltd. and Samsung SDI Co. currently control the market. Tesla will become the world’s No. 2 battery maker once it finishes building its $5 billion, 35 gigawatt-hour Gigafactory in Nevada, according to the London-based researcher.

Merkel’s Endorsement

Some of Terra E’s consortium members also may become its clients, according to Gritzka, who declined to name companies participating. The project, which won 5.2 million euros ($6.2

million) in subsidies from Germany’s Ministry of Education and Research, expects to need upwards of a billion euros before completion, the CEO said.

Terra E will be seeking strategic investors that are attracted by the government-paid research embedded in Terra’s technology and Chancellor Angela Merkel’s endorsement of the company, said Gritzka. In May, Merkel broke ground at another 500 million-euro plant to assemble lithium-ion Energy-storage units for Daimler AG, which produces Mercedes-Benz and Maybach luxury cars.

Terra E will focus its batteries on stationary units, Gritzka said. The project aims to tap an emerging market for mobile and non-automotive power and storage, said Gritzka. The bet rests on projected faster demand for lithium storage in the next decade.

Eoin Treacy's view -

Germany’s dominant automotive sector is under pressure following the diesel cheating scandal which continues to remain an open sore, as various cases make their way through the US courts system. 



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August 01 2017

Commentary by Eoin Treacy

Musings from the Oil Patch August 1st 2017

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

Since these solid-state batteries can be packed more tightly, more power can be put into the same space occupied by a current lithium-ion battery, significantly boosting a vehicle’s range.  Another advantage of these solid-state batteries is that they can handle higher charging currents safely.  That allows for faster charging times, assuming the remote charging stations are equipped with more powerful charging current equipment.   

According to the patent applications, solid-state batteries are less susceptible to temperature variations than liquid electrolyte batteries, which is a hidden issue for many EVs who suffer lost power and range due to extreme heat and cold.  Additionally, solid-state batteries eliminate the need for many of the safety features of current lithium-ion batteries, which will help boost their relative cost advantage, thereby improving the economics for EVs.   

 

Eoin Treacy's view -

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

The prize for innovation in the battery sector cannot be overstated. Energy storage represents the lynchpin for the evolution of the renewable Energy, transportation and utility sectors. The company that can get a better battery with high Energy density and faster charging capabilities to market first will quickly gain market share because the cost advantage it will derive will be so acute. 



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July 31 2017

Commentary by Eoin Treacy

Tesla's Model 3 Arrives With a Surprise 310-Mile Range

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


Three hundred ten. 

That’s the electric range of a $44,000 version of Tesla’s Model 3, unveiled in its final form Friday night. It’s a jaw-dropping new benchmark for cheap range in an electric car, and it’s just one of several surprises Tesla had in store as it handed over the keys to its first 30 customers. 

Tesla has taken in more than 500,000 deposits at $1,000 a piece, Chief Executive Officer Elon Musk told reporters ahead of the event. This has created a daunting backlog that could take more than a year to fulfil—and that was before Musk took the stage in front of thousands of employees, owners, and reservation-holders to lift the curtain on the
company’s most monumental achievement yet.

“We finally have a great, affordable, electric car—that’s what this day means,” Musk said. “I’m really confident this will be the best car in this price range, hands down. Judge for yourself.”

Eoin Treacy's view -

This graphic from the above article is perhaps the most relevant part of the story. The cost per mile of range continues to trend lower while range is trending higher. The range of 310 miles is making headlines but the cost of $160 per mile for the battery is also a record and more important from the wider spectrum perspective of the growth of the Energy storage sector. 



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July 21 2017

Commentary by Eoin Treacy

Letter to the Editor of the New York Times from Sunrun's CEO

I thought this letter by Lynn Jurich may be of interest to subscribers. Here it is in full:

“After Rapid Growth, Rooftop Solar Programs Dim Under Pressure From Utility Lobbyists” (news article, July 9) got it right that traditional utilities are fighting to undercut competition and customer choice by targeting state solar policies, “particularly net metering, which credits solar customers for the electricity they generate but do not use and send back to the grid.”

Rooftop solar growth, however, is inevitable. More than one million consumers across the country are already powering their homes with rooftop solar. By 2022, residential solar capacity will more than triple, according to GTM Research estimates.

The utility lobby is intentionally distracting regulators from focusing on the real threat to affordable Energy: billions of dollars of grid expansion proposals with virtually guaranteed profits and requests to subsidize nuclear plants. Rooftop solar competition forces utilities to control their costs.

Policy leaders who dig into the facts know that rooftop solar, plus home batteries for solar storage, will modernize our grid, provide more affordable clean power to everyone and create more American jobs.

 

Eoin Treacy's view -

The combative tone of this letter to the editors highlights the fact that the battle between utilities and solar companies is far from over. If we distil the arguments down to their core. Utilities have a vested interest in preserving their near monopoly on supply of electricity and the grid on which it travels. Solar companies want to create as large a market for their products as possible and rooftops are an important part of their growth strategy. To that end they have developed innovative pricing models and relied on sharing the grid so electricity can be sold. 



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July 19 2017

Commentary by Eoin Treacy

Musings from the Oil Patch July 19th 2017

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

The latest topic of interest in the oil and gas business is the lack of new discoveries given the cutback in capital investment in keeping with Mr. Dudley’s “capital diet.”  What does this mean for the industry’s future?  The International Energy Agency (IEA) has sounded the alarm over sharply higher oil prices in the 2020-2022 time frame due to a lack of industry capital spending.  With capital spending cut by 25% in 2015 and by another 26% in 2016, prospects are increasing for a growing gap in the future output trajectory for oil.  Current expectations call for a modest increase in capital spending during 2017, but that increase could prove overly optimistic should oil prices fail to recover in the second half.   

The IEA warned in its Oil 2017 report of a possible imbalance between demand and supply growth, leading to the smallest global spare production capacity surplus in 14 years by 2022.  That conclusion is based on demand growth for 2016-2022 of 7.3 million barrels per day (mmb/d), which exceeds the projected supply growth of under 6 mmb/d.  A possible relief valve might be the growth in U.S. shale output.  As Dr. Fatih Birol, the IEA’s executive director put it: “We are witnessing the start of a second wave of U.S. supply growth, and its size will depend on where prices go.”  He went on to say, “But this is no time for complacency.  We don’t see a peak in oil demand any time soon.  And unless investments globally rebound sharply, a new period of price volatility looms on the horizon.”

The supply shortage view seems to be gaining traction among oil and gas industry professionals.  Halliburton Company’s (HAL-NYSE) Mark Richard, senior vice president of global business development and marketing, told the World Petroleum Congress that “You’ll see some kind of spike in the price of oil, maybe somewhere around 2020, 2021."  This fits with Bernstein Research’s latest oil price downgrade.  The firm now sees oil prices exhibiting a U-shape cyclical pattern: after having declined from over $80 a barrel in 2014, they traded in the $40s for 2015-2016, and will now be flat at $50 for 2017-2018 before slowly climbing back to $70 by 2021.   

 

Eoin Treacy's view -

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

Synchronised global economic expansion is generally positive for Energy consumption and most particularly in emerging markets where the bulk of Energy demand growth is expected to originate. How quickly battery technology advances to quell range and charging time questions is likely to represent a significant a key arbiter for whether bullish forecasts come to fruition over the next five years. 



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July 18 2017

Commentary by Eoin Treacy

What If Big Oil's Bet on Gas Is Wrong?

This article by Jack Farchy and Kelly Gilblom for Bloomberg may be of interest to subscribers. Here is a section:

Driving the shift has been a sharp decline in the cost of building new renewable power –- which, unlike generating electricity from coal or gas, is almost free to run after the initial capital investment has been made.

“Wind and solar are just getting too cheap, too fast" for gas to play a transitional role, said Seb Henbest, lead author of the BNEF report.

The consultant estimates that onshore wind and solar power are already competitive with coal and gas in Germany, and that within five years they will be cheaper to build than new coal and gas plants in China, the U.S. and India. By the late 2020s, it will start to even be cheaper to build new onshore wind and solar power than run existing coal and gas plants.

The trends that are undercutting optimism about the global gas outlook are already playing out in Europe. Natural gas demand remains well below a 2010 peak, as greater Energy efficiency, rapid adoption of renewables and resilient coal consumption cut into its market share.

The IEA does not see European gas demand returning to its 2010 high. In its base case scenario, European gas demand would be at the same level in 2040 as in 2020.

 

Eoin Treacy's view -

Since the majority of globally traded natural gas is tied to long-term contracts producers have some security in the investments they made. However, a decade of high oil prices created the perception of long-term outsized profits and the reality is likely to be more modest. The extent to which coal will survive as a fuel stock against increasingly high regulatory barriers as well as innovation in storage solutions are likely to be key determinants in the success of what have been massive investments in natural gas which has contributed significantly to global supply. 



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July 14 2017

Commentary by Eoin Treacy

An email from David

Health: My thanks to subscribers for your thoughtful emails of support and best wishes for a speedy recovery.  I wish I had better news to share with you but here is a brief description of the reality.

My operation on 7th July was considerably more debilitating than I had expected.  Unfortunately my atrial fibrillation returned after a few days and I still have some fluid in my lungs. Consequently my mobility remains extremely limited. Therefore I do not have either the Energy or concentration to resume my career at this time. I will focus on rest, recovery and a more holistic treatment of my condition, mainly from a healthier environment in North Devon.

Stock markets: In my opinion stock markets are even more fascinating than ever. A period of uncertainty and fear persists but that is far less dangerous than euphoria. As always there are many medium-term hurdles to be cleared, not least the eventual normalisation of interest rates. The longer-term outlook remains extremely promising, not least for successful technology companies.

Your Fuller, Treacy Money Global Strategy Service: We are very fortunate to have Eoin Treacy with his calm, experienced and forensic study of global stock markets, best observed on price charts. These seldom move in isolation so Eoin also monitors global bonds, currencies and commodities on a similar basis, knowing that sharp moves in these instruments can affect sentiment. Consequently he can see potentially significant changes in relative strength or weakness more quickly than most other observers. This perspective is invaluable, ensuring that Eoin is less distracted by market noise.

Kind regards,

David

Eoin Treacy's view -

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July 07 2017

Commentary by Eoin Treacy

Musings from The Oil Patch July 6th 2017

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

While U.S. production grew slightly in 1978, and then remained stable until 1983 before once again growing. The emergence of the North Sea as a significant new oil supply basin (UK and Norway) as well as Mexico’s offshore oil success demonstrated the power the sustained higher oil prices had on creating new supplies. The impact of new supplies contributed to OPEC’s collapse.

At the same time oil supply outside of OPEC started growing, oil consumption in the developed world (OECD) fell, which is demonstrated by the United States and Europe consumption curves in Exhibit 13. Those two regions are the key part of the OECD. Non-OECD consumption continued growing. As the chart shows, the demand reduction was significant, and was key to crippling OPEC’s pricing power as was the growth in new oil supplies.

As we look at the factors helping to reshape today’s oil market, environmental pressures, especially the potential impact of electric vehicles, coupled with the impact on oil demand growth that will come in response to efforts by countries to decarbonize their economies, can be considered the equivalent of the 1970s oil price shock to global oil demand. Demand will continue to grow for the foreseeable future, but the annual rate of growth is likely to continue to slow until it eventually goes negative. Lower demand is coming at the same time oil companies are reducing well breakeven prices insuring more supplies in the future. These improved E&P economics is broadly similar in impact to the opening of new oil supply basins that occurred in the 1970s and 1980s. Just as the opening of new supply basins had a long-term impact, the reduced well breakeven prices will also have a long lasting impact. We can argue about how long the impact will last, but it is likely to last much longer than we expect.

History does not repeat, but it does rhyme, as suggested in the famous quote. In our view, the current oil industry downturn is rhyming more with the 1982-1986 cycle than with the 2008-2011 one. If that is true, then the industry may be looking at an extended period of low oil prices just as the industry experienced following the 1981 oil price peak. That span extended for 18 years as oil prices averaged below $45 a barrel, or the very long-term average of inflation adjusted oil prices, with the brief exceptions of the First Gulf War and 9/11. BP plc CEO (BP-NYSE) Robert Dudley’s comments in early 2015 that the industry needed to learn to live in a “lower for longer” environment seem to be proving accurate. That means the oil industry must continue adjusting its cost structure. The oil companies will need to keep their staffing lean, employ the best drilling and completion technologies available, and manage their balance sheets appropriately to succeed in the future. This environment doesn’t mean that there is no future for the oil industry. It means that corporate strategies must constantly be reassessed within a broader Energy industry panorama subject to external pressures that will only grow in the future.

 

Eoin Treacy's view -

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

“The cure for high prices is high prices” has been an adage in the commodity prices for decades and is no less true of oil prices. After almost a decade of high prices a great deal of additional supply has been brought to market. However, the advent of new technology which has allowed previously inaccessible reserves to be accessed, namely shale oil and gas, and the subsequent success in reducing the cost of extraction continue to represent gamechangers for the sector. That is before we begin to talk about the emerging trend of refracking; where wells that are past their peak output can be revitalized at a substantially lower cost.  



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July 04 2017

Commentary by Eoin Treacy

Energy Stat: Is "Fake News" Driving Down Oil Prices?...

Thanks to a subscriber for this report from Raymond James which takes a bullish opinion on oil prices. Here is a section:

Myth #2: U.S. shale production growth is going to flood the market at $35/bbl.
The fear of massive U.S. oil supply growth at oil “breakeven” prices of $35-40 per bbl is the other panic button that most investors (and many sell-siders) have been happy to push over the past few months. Yes, there are many U.S. horizontal (especially Permian) operators that can make solid incremental well returns at $35-40 per barrel if and only if they do not include any costs other than the drilling and completion costs of that next well. The problem with this type of analysis is twofold: 1) It is definitely not capturing the fullcycle returns where companies must include lifting, overhead, interest expenses, and other sunk costs. On a full cycle basis, very few U.S. E&P companies are actually generating positive returns at oil prices below $50/bbl, and 2) There is simply not enough cash being generated by U.S. E&P companies at oil prices below $50 to justify current drilling and completion activity and some of the U.S. supply growth forecasts that are now starting to appear. In fact, at current oil prices (of around $45/bbl) we estimate that the U.S. E&P industry as a whole will outspend cash flow generated by a whopping 50% this year! That amount of outspend is simply unsustainable and means the unfettered U.S. oil supply growth assumptions in a sub-$50 oil world are highly, highly unlikely.

We would also point out two other important points on this emerging U.S. supply growth panic. First, we have historically had one of the most aggressive (and accurate) U.S. oil supply growth models on the Street. Despite this, our global oil supply demand equation still suggests a meaningfully undersupplied oil market for the remainder of this year. In fact, if we go back to the beginning of this year (six months ago), our 2018 U.S. oil supply growth estimate of 1.3 million bpd was high on the Street and at least 500,000 bpd above consensus estimates at the time. Note that our current U.S. supply estimate is actually down about 500,000 bpd from our estimate a year and a half ago (early 2016) because of downward revisions in U.S. industry cash flows and emerging oil service equipment bottlenecks. In our opinion, forecasts of 2018 U.S. supply growth of 2.5 million bpd at oil prices below $50/bbl are simply not doing the math. Secondly, the longer-term fear of too much U.S. supply growth at $50/bbl ignores the fact that there is another~30 million bpd of OPEC and ~50 million bpd of non-OPEC supply (across a variety of geographies, both short-cycle and long-lead-time) that will likely be declining in a few years. Solely considering U.S. supply growth would be a “one hand clapping” approach: that is to say, it gives an exaggerated impression of how much global supply is actually growing. In 2017, for example, at least three significant nonOPEC producers – China, Mexico, Colombia – are posting sizable declines. Several others – Russia, Norway, Argentina – are flattish. Longer term, 2018 is shaping up to be the cyclical trough year for global long-lead-time project startups (down close to 50% versus 2016 levels) meaning non-U.S. oil supply growth will likely come under significant pressure in 2019 and beyond.

 

 

Eoin Treacy's view -

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

I think it’s fair to say that a lot of unconventional supply becomes uneconomic around $45 but starts making money anywhere above $55 so the big question is the extent to which producers hedged their exposure when prices were north of $55 at the beginning of the year. That is likely to be key variable in whether they are making money in the current environment. 



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June 30 2017

Commentary by Eoin Treacy

China Is About to Bury Elon Musk in Batteries

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

Roughly 55 percent of global lithium-ion battery production is already based in China, compared with 10 percent in the U.S. By 2021, China’s share is forecast to grow to 65 percent, according to Bloomberg New Energy Finance.

“This is about industrial policy. The Chinese government sees lithium-ion batteries as a hugely important industry in the 2020s and beyond,” Bloomberg New Energy Finance analyst Colin McKerracher said.

In all, global battery-making capacity is forecast to more than double by 2021 to 273 gigawatt-hours, up from about 103 gigawatt-hours today. That’s a huge opportunity, and China doesn’t want to miss it.

“The Gigafactory announced three years ago sparked a global battery arms race,” said Simon Moores, a managing director at Benchmark Mineral Intelligence. “China is making a big push.” 
But don’t count Tesla out. The company, based in Palo Alto, California, plans to announce locations for up to four new factories by the end of 2017. (It’s exploring at least one site in Shanghai.) And there are few, if any, individual Chinese battery companies that can match the scale of Tesla’s production toe to toe.   

 

Eoin Treacy's view -

China went from pretty much nowhere to become the dominant force in solar cell manufacturing in a relatively short time because of unwavering government support and could easily achieve the same feat in batteries. That is quite apart from similar objectives being pursued in South Korea and Japan. 



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June 21 2017

Commentary by Eoin Treacy

Why Britain Has to Be Really Nice to Norway and Russia

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

Already buffeted by political chaos at home and abroad, the U.K. gas market must now operate without its biggest stabilizing force: the giant Rough gas storage facility under the North Sea.
     
The planned permanent shutdown of the Centrica Plc site, able to meet 10 percent of peak demand in winter, means Britain is becoming even more reliant on imports of liquefied natural gas or pipeline fuel from Russia and Norway. That sets up the possibility that traders would have to outbid Japan, the world’s biggest LNG buyer, and others to keep millions of homes warm.

Political uncertainty is making the supply game even riskier, with rules for international gas pipelines clouded in mystery as the U.K. negotiates an exit from the European Union.

And the diplomatic crisis this month involving Qatar, the nation’s largest LNG supplier, caused gas prices in Britain to jump the most since January as two tankers were diverted.
     
“It takes two weeks for a cargo of LNG to arrive from Qatar, which is not a politically stable place right now,” Graham Freedman, principal analyst for European gas and power at Wood Mackenzie Ltd. in London, said by phone.“That does raise the political implications quite a lot, along with Brexit. So it’s a perfect storm in terms of security of supply for the U.K.”
     
Last winter as much as 94 percent of the country’s gas came from sources other than storage. More than half of that was imports, mainly through pipelines from Norway. Statoil ASA, Norway’s state-owned producer, has repeatedly said it doesn’t plan to significantly boost exports, but can divert more fuel to Britain if needed.

Eoin Treacy's view -

The graphic contained in this article highlighting the UK’s transition from being an Energy exporter to importer represents a major inflection point for the economy which was exacerbated by the repercussions of the global financial crisis. 



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June 21 2017

Commentary by Eoin Treacy

June 20 2017

Commentary by Eoin Treacy

Musings From the Oil Patch June 20th 2017

Thanks to a subscriber for this report by Allen Brooks’ for PPHB. Here is a section on the rig count:

At the same time, U.S. oil output continues growing in response to the increase in the number of working drilling rigs. As a result, the International Energy Agency (IEA) is projecting that U.S. oil output will grow by almost 5% on average this year, and by nearly 8% in 2018, overwhelming projected demand growth and re-establishing the glut environment. This forecast is creating concern about the success of OPEC’s strategy of cutting its output. The pessimistic view of crude oil prices rests on the belief that the slow pace in reducing oil inventories will create an environment where cheating on production cuts occurs, making it impossible for demand growth alone to drive oil prices higher. The optimists, including OPEC, believe that its strategy is working, it will merely need more time – hence the nine-month extension rather than a six-month one.

What we know is that the lift in oil prices sparked a drilling rig recovery in 2016, which has continued into 2017, and has become the fastest industry recovery in history. Although the recovery has been the fastest, it has yet to reach the levels of the recoveries of 1979 and 2009. The current weakening of crude oil prices is likely to cut short this rig recovery below the levels reached in those earlier recoveries, unless something else is at work in the oil patch.

 

Eoin Treacy's view -

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

Something interesting has occurred in the oil market as prices have declined almost $10 over the last month. When the front month price was close to the $60 in January the spread between it and the two-year future was about $1. Now it’s closer to $4. 



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June 16 2017

Commentary by Eoin Treacy

Many Rivers to Cross Decarbonization breakthroughs and challenges

Thanks to a subscriber for this report from J.P. Morgan Private Bank which may be or interest. Here is a section: 

New York. This is more of a theoretical exercise, since in NY, wind/solar comprise only 3% of electricity generation. But in principle, NY could also reduce CO2 emissions to 90 MT per GWh in exchange for a ~15% increase in system costs. One difference vs California is that NY’s build-out would start from a much lower base. The other difference is that storage is less optimal given lower NY solar capacity factors. Instead, a more cost-effective approach to reaching the deeper 60% emissions reduction target would be to build more wind/solar and discard (“curtail”) the unused amount, and not build any storage.

Conclusions. Scale and innovation are creating cost-benefit tradeoffs for decarbonizing the grid that are more favorable than they were just a few years ago, even when including backup thermal power costs. However, this is likely to be a gradual process rather than an immediate one. Bottlenecks of the past were primarily related to the high capital cost of wind, solar and storage equipment. The next phase of the renewable electricity journey involves bottlenecks of the future: public policy and the construction/cost of transmission are two of the larger ones7. As is usually the case with renewables, there’s a lot of hyperbole out there. The likely trajectory: renewables meet around one third of US electricity demand in 2040, with fossil fuels still providing almost twice that amount

Eoin Treacy's view -

Energy storage solutions have been evolving for a long time but the advances in battery technology has potential to revolutionise the sector. However he cost of those batteries still needs to come down a lot for them to truly have a transformational impact on the cost of generating and storing Energy. What is clear from the above report is that the continued build out of renewable Energy solutions, with or without storage, represents an additional cost for consumers over the lengthy medium term without a major advancement in battery technology.  



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June 14 2017

Commentary by Eoin Treacy

Copper demand from electric vehicles to be nine times higher by 2027

This piece from the International Copper Association may be of interest to subscribers. Here is a section:

Electric vehicles use a substantial amount of copper in their batteries, and in the windings and copper rotors used in electric motors. A single car can have up to six kilometers of copper wiring. The metal is also required for busbars, used to connect modules and cells in battery packs, and in charging infrastructure.

Whilst most cars use internal combustion engines that require up to 23 kg of copper, the IDTechEX research found that a hybrid electric vehicle uses 40 kg of copper, a plug-in hybrid electric vehicle uses 60 kg, a battery electric vehicle 83 kg, and a hybrid electric bus 89 kg. A battery-powered electric bus can use 224–369 kg of copper, depending on the size of battery used.

“Copper has the highest conductivity of any non-precious metal, and plays an important role in all Energy production, but it is particularly important for future sustainable technology applications such as electric vehicles,” said Colin Bennett, Market Analysis and Outreach, ICA. “Copper increases the efficiency and reliability of these vehicles and is itself a sustainable material, as it is 100% recyclable without loss of properties.”

 

Eoin Treacy's view -

The automotive sector is betting big on electric vehicles while also attempting to figure out how autonomy will function and what that means for ownership and miles driven assumptions. With battery technology improving all the time and with considerable investment flowing into the sector the potential for the electric vehicle market to grow from its current relatively modest footprint is considerable. 



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June 09 2017

Commentary by Eoin Treacy

Renault plans foray into energy market with mega battery

This article by Christoph Steitz and Edward Taylor for Reuters may be of interest to subscribers. Here is a section:

Large batteries can help stabilize the primary reserve electricity market, which is responsible for ensuring the grid has at least 50 Hertz. Carmakers can also earn money competing with conventional power stations to guarantee the provision of electricity during periods of high demand or volatility.

"We forecast the combined market for electric passenger vehicles, electric buses and battery storage to increase eight-fold to over $200 billion by 2020, a five-year compound annual growth rate of more than 50 percent," Berenberg analysts said.

With about 4 million electric cars expected to be on the roads by 2020, vehicle manufacturers looking at ways to recycle batteries, including Tesla, which already sells everything from solar panels to batteries and electric cars.

Daimler, BMW, Volkswagen and China's BYD Co Ltd are also exploring so-called second-life storage projects with batteries.

That includes partnerships such as the recent collaboration between BMW and Vattenfall, in which the luxury automaker will deliver up to 1,000 lithium-ion batteries to the Swedish utility for storage projects this year.

"What will end up happening is that BMW and Daimler will ... become utilities themselves," said Gerard Reid, founder of Alexa Capital LLP, a corporate advisor in the Energy, power infrastructure and technology sectors.

"They use Vattenfall now because they need to learn but I think the amount of batteries coming back will be so big that I think they'll end up engaging directly with the end customer themselves. And they've got the brand name to do that."  

 

Eoin Treacy's view -

The diesel scandal took a heavy toll on the growth ambitions of a number of auto manufacturers. There are now scrambling to come up with a way of ensuring their next clean Energy gambit is successful. Since the batteries going into electric vehicles are a lot like bigger versions of those in phones we know that they lose capacity after a few hundred recharges. That means finding new uses for old batteries is a major field of endeavour if the price is to be kept under control. 



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June 07 2017

Commentary by Eoin Treacy

Concerned about the Paris Agreement? There's still hope through girls' education

This article by Rebecca Winthrop and Christina Kwauk for the Brookings Institute may be of interest to subscribers. Here is a section:

The good news is that the most effective intervention is not even in the Paris Agreement. Empowering girls and women through a combination of education and family planning is the number one thing the world can do to address climate change, ahead of switching to solar Energy, wind Energy, or a plant-rich diet. Investing in both girls’ education around the globe and enabling women access to contraception and reproductive healthcare would result in 120 gigatons of carbon reduced by 2050, a staggering amount compared to the 90 gigatons that could be reduced by better management of harmful chemical refrigerants like chlorofluorocarbons (CFCs).

Demographers, global development specialists, and education advocates have long known about the connection between girls’ and women’s empowerment and smaller, more sustainable families. Research suggests that the difference in family size for a woman with 0 years of schooling compared to a woman with 12 years of schooling is about four to five children. And several studies have projected slower population growth if all girls around the world receive a secondary school education—as much as two billion fewer people on the planet for 2050 than if current fertility rates persist, and over five billion fewer people by 2100. Indeed, reaching a sustainable population growth rate could be realized even more quickly if the 225 million women around the world who want to avoid pregnancy but do not have access to contraception or control over their reproductive lives were given access to safe and voluntary family planning. The majority of these women live in the world’s 69 poorest countries, and it’s no coincidence that many of these countries are where girls have the hardest time going to school.

 

Eoin Treacy's view -

It boggles the mind that there is still debate on the issue of female education. Not only is there a strong body of research on the social and developmental benefits of giving girls equal access to education but there are also clear environmental and conservation benefits as well. At its most basic it just makes sense for any country to give itself a leg up by investing in the brain of every citizen to ensure the most productive people actually achieve their economic capacity. It really is that simple. 



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June 06 2017

Commentary by David Fuller

Email of the day 1

On Theresa May’s disappointing campaign:

Bullying, yes, and the British always tend to support underdogs. But the Tory campaign has allowed the debate to swing away from Brexit onto domestic, where Labour is generous and Tories realistic. Generosity is more attractive than reality. Her U Turn on Social Care -why introduce a radical domestic change mid-term when you are already incumbent and don't need to? - had many good points but she allowed Labour to characterize it as austerity. Overall, the Tory campaign has lacked bite and Energy, allowing opponents to pitch it as arrogant and unnecessarily austere. A Trump factor - disenchantment with the political class - also works against the Tories and in favour of outsider Corbyn and the innumerate amateurism of his acolytes.

David Fuller's view -

Many thanks for your astute summary. 

We can be sure the Brussels bureaucrats will be enjoying Theresa May’s comeuppance.  It will be a painful but also valuable lesson, assuming she survives this election.

(See also: Matthew Lynn’s apt column for The Telegraph: 2017 is the Worst Possible Year for Britain to Experiment with Corbyn-omics, posted on Monday)  



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June 02 2017

Commentary by Eoin Treacy

U.S. Won't Change Efforts to Cut Emissions Post-Paris: Tillerson

This note by Katia Dmitrieva for Bloomberg may be of interest to subscribers. Here it is in full:

Secretary of State Rex Tillerson says the U.S. won’t change “ongoing efforts" to reduce greenhouse gas emissions in the future, despite pulling out of the Paris climate accord.

U.S. “has a terrific record on reducing our own greenhouse gas emissions It’s something I think we can be proud of and that was done in the absence of a Paris agreement," he tells reporters before meeting at State Dept with Brazilian Foreign Minister Aloysio Nunes Ferreira

 

Eoin Treacy's view -

The revolution in unconventional supply has contributed more to the USA’s ability to combat emissions than any form of renewable Energy because it has made coal uncompetitive. The evolving argument for the development of fracking techniques to develop geothermal Energy sources is another reason why the USA is likely to meet its emissions targets without being party to an international agreement. The Energy intensity of the countries like China and India is still in its major growth phase and the question of global emissions rests on their ability to innovate. 



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