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

    Email of the day on Energy, Bank Capital & Cars

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

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

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

    Please keep up the good service.

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    Japan approves energy plan reinstating nuclear power

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

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

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

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

     

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    Supreme Court upholds EPA rule limiting cross-state pollution

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

    EPA Administrator Gina McCarthy called the ruling “a resounding victory for public health and a key component” of the agency’s effort to “make sure all Americans have clean air to breathe.” She said the court’s decision underscored the importance of basing clean air rules “on strong legal foundations and sound science,” declaring it a big win and “a proud day for the agency.”

    Richard Lazarus, an environmental law professor at Harvard, called the cross-state pollution rule “one of the most significant rules ever” promulgated by the EPA, and supporters said the cost of carrying it out would be more than offset by health benefits.

     

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    Review of European oil majors

    Short Term Oil Market Outlook - Thanks to a subscriber for this informative report from DNB which may be of interest to subscribers. Here is a section: 

    The geopolitical price premium started to blow out as the market started fearing shut out oil from Russia related to the Ukraine crisis. What if Russian troops really enter the eastern parts of Ukraine and the western powers are forced to impose much stricter sanctions towards Russia. Will oil be part of any sanctions from the western powers? Will Russia be able/willing to use oil as a weapon to retaliate stricter western sanctions?

    These mentioned worries have led to financial players adding to their net long oil holdings in the Brent market since the start of April. The buying pressure has come both from adding new long positions but also from squaring short positions as can be seen in the graph below. Money Managers have rarely held fewer short positions in Brent futures and also rarely held more long positions. This close to record net length in Brent futures held by financial players always represent a downside risk for oil prices in the short term. During the last 15 months we have had two major sell-offs of net long positions by these kinds of players. We had one last year from mid-February that lasted into April which chopped 18 $/b off the Brent price and we had one in September-November last year that shaved 10 $/b off the Brent price. As we are again close to record net length held by these players this is a large bearish mark in our score card for the short term (reverse indicator). The longer the net length held by Money Managers the larger the short term downside risk.

     

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    Obama Deplores Russian Brute Force in Ukraine

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

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

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

     

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    Zombies Spreading Shows Chaori Default Just Start: China Credit

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

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

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

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

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

     

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    Short Term Oil Market Outlook report from DNB

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

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

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

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

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    Natural Gas Heads for Biggest 2-Day Drop in 11 Years on Weather

    This article by Naureen S. Malik for Bloomberg may be of interest to subscribers. Here is a section: 

    March gas traded 28 cents above the April contract, narrowing from 82.5 cents yesterday. Concern that stockpiles would tumble before the end of the heating season sent the March premium to a record $1.208 on Feb. 20.

    The narrowing spread and support for April contracts shows “the fundamentals are still relatively constructive” for gas prices in the coming months, Viswanath said.

    Gas consumers in the East can expect “unrelenting cold” in the north-central states over the next five days, said MDA in Gaithersburg, Maryland. The National Weather Service has issued wind-chill advisories from Montana to Minnesota and Indiana. The combination of cold air and wind may make temperatures feel like minus 35 degrees Fahrenheit (minus 37 Celsius).

    Below-normal readings will sweep most of the lower 48 states through March 6 before moderating heading into mid-March, while the West Coast will be unusually mild, MDA said.

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    WTI Crude Rises to Four-Month High as Cushing Supply Seen Lower

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

    “The bulls can take it to around $105 before running into resistance,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “The bulls are in control of the market. A lot of the strength we’re seeing is predicated on the narrowing of the WTI-Brent spread.”

    Brent crude is becoming a “broken benchmark” for the global oil market because of declining supplies from the North Sea, Citigroup Inc. analysts said in a report dated yesterday.

    Cushing stockpiles dropped 4.23 million barrels in the two weeks ended Feb. 8 as the southern leg of TransCanada Corp.’s Keystone XL pipeline moved oil to the Gulf Coast of Texas from the hub.

    Supplies at the hub probably tumbled 1 million to 1.5 million barrels last week, Jim Ritterbusch, president of Ritterbusch & Associates, a Galena, Illinois-based consulting company, said in a note to clients. Phil Flynn, senior market analyst at Price Futures Group in Chicago, forecast a 1 million- barrel decrease. Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC., predicted Cushing supplies slid 1.9 million. Baruch also forecast a drop.

     

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