David Fuller and Eoin Treacy's Comment of the Day
Category - Energy

    Meltdown But oil prices have fallen enough

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

    We are convinced that the moment the oil market starts to shift the focus towards 2017 and stops worrying about brimming inventories in 2016; that is the moment the oil price starts to increase. We have seen time and time again that the change in the oil price happens before changes in the supply demand balance. It has to do with interpretations of the future more than current fundamentals. The oil market has become similar to the equity market where the players try to “see around the corner” in order to get a head start vs the rest of the market. Investors would want to be early movers in order not to “miss the train”. 

    We believe that the moment for higher oil prices will be the moment the investors starts to rebuild their long positions and buy back the short positions they have put on during 2015.

    And 

    Other potential catalysts are already on the list (known, unknowns), like for example the write-downs of shale oil resources from shale oil producers which we believe will start to materialize by end February. There are also other factors to watch like potential unrest in Venezuela after the parliamentary elections, falling US oil production which will likely lead to crude oil stock draws from March and onwards, increased focus on lower production from non-OPEC as a result of spending cuts, etc, etc.

    We believe that one of the key drivers for higher oil prices through the second quarter will be a strong gasoline market, similar to what happened in 2015. The NYMEX gasoline crack spread increased significantly from late February last year and this was one of the key drivers behind the increase in oil prices during the second quarter last year. WTI increased from about 44 USD/b in March to 61 USD/b in June. Brent increased even more and reached almost 70 USD/b in May before it started to drift lower again. It was demand for gasoline which was the key driver on the demand side for refined products in 2015 and we believe the gasoline market will be strong also in 2016. This is due to the fact that gasoline is a consumer product and not an industrial product like diesel.

     

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    Email of the day on molten salt nuclear reactors

    Some encouraging news from the advanced nuclear sector. I am pleased to see that Terrestrial Energy (disclosure: I own shares) has successfully raised the equivalent of USD 7m in equity. Albeit modest, it is an important step forward. The company is making steady progress in its task to finalize its Molten Salt Reactor design, while the next step is to work with Canadian authorities with the aim to license the technology. Commercialization in the first part of the 2020’ies is still some years ahead, but this technology should, as I hope and believe, prove to be an important tool to reduce carbon emissions in the future.

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    Musings From The Oil Patch January 12th 2016

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

    The creator of the “lower for longer” scenario, BP plc’s (BP-NYSE) CEO Robert Dudley was interviewed at year-end by a reporter with the BBC during which he began to qualify his view. “A low point could be in the first quarter [of 2016].” Given developments in the global oil market during the first few days of 2016, this looks like a good call. Mr. Dudley went on to say, “But 2016’s third and fourth quarters could witness a more natural balance between supply and demand, after which stock levels could start to wear off.” If that proves to be the case, it implies that oil prices should begin rising during the second half of 2016. However, there remains the overhang of global oil inventories that continue to swell due to the global overproduction. According to the International Energy Agency’s (IEA) latest total (crude oil plus refined products) inventory figures for the OECD countries as of October 2015, there were 2,971 million barrels in storage. Crude oil inventory totaled 1,181 million barrels. As shown in Exhibit 14, the amount of crude oil in storage grew dramatically last year.

    A different way of looking at the crude oil inventory situation is to measure it on the basis of days of inventory in storage. Exhibit 15 (next page) shows this data for 2012 through August 2015. While one might think that 30-31 days of forward inventory cover is not meaningful, if we compared the July data when 2015 was at 30 days and the prior three years that were at 27 days, those three additional days represent nearly 300 million extra barrels of oil. To eliminate that additional supply, global oil demand needs to increase by nearly one million barrels a day, or 1% growth in existing oil demand, which just happens to be the long-term average increase in global oil consumption experienced since the 1980s. While consistent with the oil market’s long-term growth rate, reducing the oversupply assumes that supply stops growing, which we know may not happen due to the return of Iranian production plus efforts of other producing countries to boost output to offset lower oil prices.

     

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    Nevada Regulators Eliminate Retail Rate Net Metering for New and Existing Solar Customers

    This article by Julia Pyper for GreenTechMedia may be of interest to subscribers. Here is a section:

    The Nevada Public Utility Commission voted unanimously in favor of a new solar tariff structure on Tuesday that industry groups say will destroy the Nevada solar market, one of the fastest-growing markets in the country.

    The decision increases the fixed service charge for net-metered solar customers, and gradually lowers compensation for net excess solar generation from the retail rate to the wholesale rate for electricity, over the next four years. The changes will take effect on January 1 and will apply retroactively to all net-metered solar customers.

    The broad application of the policy sets a precedent for future net-metering and rate-design debates. To date, no other state considering net-metering reforms has proposed to implement changes on pre-existing customers that would take effect right away. Changes are typically grandfathered in over a decade or more.

     

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    U.S. Natural Gas Futures Extend Record Year-End Rally on Cold

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

    “A quick shot of cold air will lead to the first widespread ice and snow event of the season across the northeast into Tuesday night,” AccuWeather forecaster Kristina Pydynowski said.

    “As quick as the fresh cold and winter storm arrives, milder air will return to close out 2015. However, seasonably colder air should usher back in for the start of the new year.”

    Futures for January delivery, which expire Tuesday, rose to $2.266 per million British thermal units, the highest price since Nov. 27, before trading at $2.263 by 6:57 a.m. New York time. The more active February contract gained 1.5 percent to $2.29 per million Btu.

    Temperatures will likely drop below normal levels across most of the U.S. from Jan. 3 through Jan. 7, according to the National Weather Service. Temperatures in New York are forecast to fall as low as 22 degrees Fahrenheit (minus 6 Celsius), 5 below average, on Jan. 12, AccuWeather’s website showed.

     

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    Hon Hai proposes deal to buy Sharp

    This article from Taipei Times may be of interest to subscribers. Here is a section

    According to the report, while Hon Hai — known as Foxconn Technology Group (???) outside Taiwan — has proposed acquiring Sharp at a high premium, it also wants Sharp’s current management team, including president and chief executive officer Kozo Takahashi, to step down.
    Hon Hai would send a team to Sharp to manage the firm, the report said.

    Hon Hai also plans to take over the debt shouldered by Sharp to help the firm address its financial problems, the report said.

    However, the report also said that Hon Hai has yet to talk with Sharp’s bank creditors.

    The report said that Sharp was shouldering about ?760 billion in debt as of the end of September.
    Hon Hai is not the only potential suitor seeking to buy Sharp, the report said, adding that the Innovation Network Corp of Japan (INCJ), which is sponsored by the Japanese government, is studying a buyout of Sharp.

    The report said that the INCJ still needs some time to map out a concrete acquisition deal, and the proposal is unlikely to come out until next year, so Hon Hai is taking advantage of the vacuum created to make a deal.

     

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    Soaring Debt Yields Suggest Oil M&A Could Happen in 2016

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

    Mergers haven't taken off in the oil patch this year largely because potential targets have been banking on a rebound and potential buyers have been expecting further falls. The spike in yields for borrowers in the energy sector, along with the growing acceptance that oil and gas prices likely face another year on their back, should mean those opposing views finally converge in 2016, prompting some deals.

    What's more, this chart suggests the advantage should lie with large, strategic buyers like the oil majors for two reasons.

    First, one way potential targets have been shoring up balance sheets is to sell assets rather than the entire company.

    But a thriving asset market requires buyers being able to raise capital at reasonable rates, be they other E&P companies or private equity firms looking to snap up bargains. Asset sales have slowed already this year, with just $29 billion worth in North America, compared with $107 billion in 2014, according to data compiled by Bloomberg.

    Second, with the cost of capital rising and cash harder to come by, any deals struck will require at least the promise of synergies and will favor those buyers able to use their own stock as a credible acquisition currency. One reason Anadarko's approach to Apache met with such scorn was that it scattered rather than tightened the company's focus. The majors, diversified anyway, bring the benefit of bigger balance sheets, which both alleviate any credit pressures weighing on the target and provide a clearer path to developing a smaller E&P company's reserves. Paying with shares also means that selling shareholders get to participate to some degree in the eventual recovery in oil and gas prices.

     

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