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.

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

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

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.

 

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

 

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.

 

The last few years have represented a perfect storm for coal companies. Low natural gas prices took over market share among utilities. Stricter environmental standards have also increased the cost of using coal for the same utilities which has further bolstered the allure of natural gas. As a result a number of coal miners have run into financial difficulties. For example, James River Coal defaulted on its debt two weeks ago. 

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.

 

A great deal of attention is currently centred on political tensions between Russia and Europe/USA. However, despite the leveraging up of long positions Brent Crude Oil prices have been reasonably static; ranging between $105 and $112 since at least November. 

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.”

 

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

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

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.

 

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

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.

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

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

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.

The surge in demand for natural gas exposed how tight the market had become following years of depressed pricing. An additional consideration anyone with a long position in futures will be aware of is that natural gas trades on monthly contracts. As the expiry approaches traders need to decide whether to roll the position forward or to take profits. 
 

A number of subscribers have written in asking about the uranium market over the last month, not least because of increasing interest in the resources sector generally. The outlook for the sector has improved somewhat of late with Japan drawing closer to restarting some of its reactors. (Also see David’s post yesterday). 

In the Chart Library many subscribers have uranium in their Favourites. The most common ticker is the Metal Buttletin price (MBURNXRE) but they no longer supply Bloomberg with this data. Therefore we would suggest replacing it with the uranium future which has the code UXA3. 

I thought it may be instructive to take a look at some of the more notable shares. 

“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.

 

While there is still a ban on crude oil exports within the USA there is no such ban on distillate products. Since WTI still trades at a discount to other global benchmarks, US refiners can probably produce higher value products at more competitive prices than their European competitors. The opening of the southern portion of the Keystone pipeline is probably helping to facilitate refiner demand for crude which could be helping reduce the discount of WTI to Brent.

The Dutch government earns about €12 ($16.3) billion annually from the sale of Groningen production. The decision to cut output means state income will fall by €600 ($813.2) million in 2014, €700 ($948.7) million in 2015 and €1 ($1.4) billion in 2016, given the projected production and gas prices. The lost income will be in addition to the €1.2 ($1.6) billion to be spent over the next five years to strengthen buildings, houses and infrastructure in the region. These investments hope to reverse the decline in house prices due to the actual and potential earthquake damage.

Making up for the potential €3.5 ($4.8) billion drain on the Dutch treasury over the next 3-5 years is the first order of business for the government. Expectations are that some of the lost income will be recouped by increased imports and exports that will find their way through the Dutch energy hub. The expectation that Groningen’s gas volumes would be cut has already boosted local gas prices, which should not be a surprise, but also a pain for citizens and businesses. The biggest beneficiary of the Dutch cut will be Gazprom (GAZ.BE), which sees being able to sell an additional 175 Bcf of gas to Europe, thus earning an additional $1-2 billion in revenues, and further strengthening Europe’s dependency on Russian gas. Oil-price-linked gas imports will keep energy prices in Europe high providing an environment in which slightly cheaper Russian pipeline gas can capture a greater market share.

 

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

The Netherlands has benefitted enormously from its energy resources not least in cementing Rotterdam as a globally significant port. However, as one of Europe’s most densely populated countries, the prospect of the emotional wellbeing of the population being put before gas production has resulted in a potential headache for its neighbours. 

The global supply-demand balance is weakening in coming months. It will not help neither Brent-prices nor WTI prices that the spring refinery maintenance season is just in front of us. Watch the Dubai time spread which has violently moved into contango recently. This could be an early bearish warning signal for Brent prices just like we have seen before.

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

Traditional sage haven assets such as Treasuries and the Yen have rallied this week as investors sought sanctuary from increased volatility in emerging market currencies in particularly as well as from stock markets. Both gold and oil tend to offer similar safe haven characteristics in times of market stress. On this occasion West Texas Intermediate has benefitted more than Brent Crude.

"While supply is greatly increased because we have plenty of natural-gas production, right now we have a transportation and storage issue," Dennis Weinmann, a principal at Coquest Inc., a Dallas energy brokerage and consulting firm, told The Wall Street Journal. "We don't have gas where we need it right this second." 

On a typical day, industry watchers say the Northeast's natural gas infrastructure is in need of an upgrade, particularly as natural gas production booms in the US. When extreme winter hits suddenly, and everyone stays home and turns up the heat, the strain on that pipeline system increases. Nearly all natural gas pipelines headed into New York and New England were constrained Wednesday, according to the US Energy Information Administration (EIA). 

Henry Hub is still very much a local market for North America. The boom in shale gas production saw prices plummet and it has taken a few years for the market to restore equilibrium. The fact that a short-term event such as a dramatic winter storm has caused a price spike suggests that the excess supply has been worked through and while prices can be expected to pull back once the weather improves, the $4 area is likely to represent a new floor.

At this time last year, we thought 2014 U.S. natural gas prices would average $3.75/MMBtu. We still think prices will average $3.75 in 2014. Yes, we know the 2014 gas futures strip has surged well above $4.00 as cold weather has drawn inventories sharply lower. In fact, the recent surge in the year-over-year gas storage deficit to more than 500 Bcf has driven gas prices so high that we are increasing our 1Q14 forecast to $4.15/MMBtu. But we cannot assume that colder-than-normal weather will continue through the remainder of winter. Therefore, we remain of the view that strong U.S. gas supply growth will outpace slowly improving gas demand over the next two years. Specifically, we are looking for Henry Hub to average $3.75/MMBtu for both 2014 and 2015. Obviously, weather will continue to drive volatility, but the fundamentals suggest U.S. gas should trade mostly between $3.25 and $4.25. Beyond 2015, faster expansion of natural gas-consuming infrastructure in the U.S. should allow gas prices to slowly drift higher. Our long-term U.S. gas price deck remains $4.25/MMBtu.

The report quoted above is posted in the Subscriber's Area.

The natural gas market has been subject to quite considerable volatility over the last few weeks as cold weather has resulted in a surge in demand. However, while one would normally expect to see prices rise in such circumstances, the extent of volatility suggests that the market is quite a bit tighter than many might previously have expected. 

Engineering services, equipment and pipes suppliers, and offshore/onshore drillers should be among the first to reap the benefits of the sector’s opening. Their dependence on congress enforcing operating rules is limited; thus, they are already starting to provide services to companies exposed to the sector. Deep-water crude oil exploration and extraction and complex downstream projects should be target businesses for global integrated oil companies. Returns for these should be evident in the long term.

Globally listed vehicles with potential long-term positive spillover It is still early to assess the impact on listed companies but we have made a first attempt to identify our preferred names to play Mexico’s Energy Reform.

And

Look out for better entry points to play this secular story Hefty expectations behind Mexico’s current rich valuation should soon undergo a reality check. In the short-term, consensus’ potentially lower estimates on the elimination of the fiscal consolidation regime could push the IPC to a 2014 P/E above 20x, 50% higher than 10-year average multiples and 100% over the MSCI EM index. Such large premium is difficult to prevail as the full impact of the Energy Reform is likely to materialize post 2015.

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

Whatever the motivations for finally choosing to reform the country’s energy sector, the long-term benefits for the economy are likely to be considerable provided the trajectory of improvements in governance remains positive. Here is a link to two earlier posts focusing on this development. 

The Mexbol Index, where the foreign affiliates of global Autonomies have a  significant weighting, has an historic P/E of 19.55 and yields 1.81%. It has been ranging with a mild upward bias in the region of the 200-day MA since June and a sustained move below 39,000 would be required to question medium-term scope for additional upside. The iShares Mexico ETF (EWW) has a similar pattern.   

Solar and wind shares were among the big winners in 2013 as they recovered from what amounted to brushes with bankruptcy for a number of the weaker companies. The rationalisation of global capacity, lower prices for solar cells on a per unit of electricity basis and recovering demand all helped to fuel investor interest. 

 

"Last year I forwarded some information about nuclear molten salt reactors. I thought I would provide a brief update and have attached an article from Reuters on China's push for future nuclear technologies, in particular thorium and the molten salt reactor design. The article, in my opinion, places too much emphasis on thorium, as I believe the reactor design is the crucial factor. The article highlights considerable efforts being made by China, while one wonders what goes around in the heads of US Government that seems to be taking a back seat in the push for our nuclear future! I find that amazing when one thinks about the technological capacity of the US, and one may speculate about the incumbent nuclear industry's lobbying efforts to protect the status quo.¡±

"Best regards for 2014"

Here is a section from the article: 

"Beijing's long-term goal: commercialize the technology by 2040, after building a series of increasingly bigger reactors. The Shanghai Institute of Applied Physics is recruiting nuclear physicists, engineers, project managers and support staff, according to a regular stream of job advertisements it publishes online. Its team is expected to expand to 750 by 2015 and eventually include 1,000 researchers.

"A director at the Shanghai Institute, Li Qingnuan, and other senior researchers are wooing top young talent across China to join the project. After lecturing on molten-salt reactor technology at Sichuan University in April, Li invited students from the audience to apply for positions at the institute, according to a report on the university's website.

"China's sprawling network of nuclear-research and industrial companies are gearing up to assist. In early June, the China National Nuclear Corporation, the body overseeing all Chinese civilian and military nuclear programs, announced that state-owned China North Nuclear Fuel Company had signed an agreement with the Shanghai Institute to research and supply thorium and molten salts for the experimental reactors.

"The push into thorium is part of a broader national energy strategy. The government wants to reduce its dependence on coal-fired power plants, which account for about 80 percent of the nation's electricity but have darkened its skies. Nuclear energy is a big part of the plan: China aims to have 58 gigawatts of nuclear power on the grid by 2020, an almost five-fold increase from 12.57 gigawatts today.

"Thorium is a hedge on that nuclear bet. China has 15 conventional nuclear reactors online and 30 under construction. But energy authorities are also investing in a range of different technologies for the future, including advanced pressurized water reactors, fast-breeder reactors and pebble-bed reactors. China has little uranium but massive reserves of thorium. So, the prospect of cheaper nuclear power with secure supplies of fuel is a powerful attraction.

"At last year's Shanghai thorium conference, Jiang described how clean nuclear power would allow China to make a "revolutionary" move towards a greener economy.

"The bet on unconventional nukes, he said, explains "why China is the first one to eat a crab" - citing an old Chinese proverb about the individual who dares to make a discovery important to civilization."

 

 

 

The USA is an energy superpower. China is not. This simple fact helps to explain the emphasis China has put on securing energy assets overseas, purchasing the technology required to begin exploiting its unconventional oil and gas resources and developing a multi-strand nuclear policy. China aspires to provide a first world standard of living for its citizens and this will require energy production to expand by multiples over the next few decades. It has no choice but to explore every possible avenue if it is to achieve that goal not least if air quality is to improve. 

“Thanks for a great service. Here’s to a hugely successful and healthy 2014. 

 “I was just wondering what your thoughts were regarding the oil complex given your thoughts on industrial metals and soft commodities. Where will the oil complex be headed or will it remain range bound? Welcome your thoughts.”

Thanks for your thoughtful comments and good wishes.

 I discuss oil prices in every ‘big picture’ Friday Audio but here is a brief summary.

 This item continues in the Subscriber’s Area.

No fresh legislation seems required to lift the ban. With US crude and condensates output expected to hit record levels within the next two years, it is hard to argue that they are still in short supply or that the US faces an excessive drain of scarce materials or serious inflationary impact. It is no longer clear the Export Administration Act is applicable to crude. The ban ensures domestic crude oil prices remain below world levels because producers cannot arbitrage the difference. But no such restrictions apply to refined products, so the price paid by US consumers for oil products are linked to world levels. Domestic US refineries pocket the difference, buying cheap domestic crude below global prices while selling their output at international levels. New Jersey Senator Menendez is in our opinion wrong to argue that ending the export ban would result in higher prices for US consumers at the pump. It will not increase prices at all, it is in fact much more likely that the prices of refined products will drop if the US allows crude oil exports in our opinion. The coming year we are likely to see oil producers lobbying intensely to allow exports of crude while refiners will lobby intensely to maintain the ban on crude exports. It will be interesting to see what happens. If we have to bet on this we would put our money on a lifting of the ban during the coming two-three years and it could happen already during 2014 if the Reuters interpretation is correct.

It is often easier to remain with the status quo than risk offending someone by making a decision. Considering that many of President Obama's supporters often express antipathy towards the fossil fuel sector, any policy that might lend refiners or producers a benefit is likely to be objected to. 
 

THE founder of the controversial shale-gas explorer Cuadrilla Resources wants to hand towns and villages billions of pounds from fracking what he calls “the people’s gas”.

In his first interview in Britain, Allan Campbell, the Australian behind Cuadrilla, claimed his company has discovered “another North Sea”, but bemoaned the lack of political will to develop it.

“I’ve got a great admiration and fondness for this country from whence my ancestors came, but the regulatory and planning system here is just bullshit,” he said.

“There is no leadership, there is no oomph.”

The company claims to have discovered 200 trillion cubic feet of gas thousands of feet underground in Lancashire — sufficient to meet typical British demand for more than 50 years — but has been hamstrung by mounting opposition to fracking.

For all the warnings and scare stories, how many fracking disasters from water table pollution to earthquakes and widespread desecration of the land are we hearing about in the USA today?  Very few and the benefits of fracking considerably outweigh the risks. 

The UK has extensive resources of shale gas and oil, extending from Cornwall to Scotland.  The development of this valuable resource would transform the UK economy, and obviously not just in the south. 

There is a political problem for the Conservative led government because it dare not offend anyone during the countdown to the next election which has to occur by 7 May 2015.  On current evidence the delays in fracking mean that it is unlikely to be lowering the UK’s energy costs by that date.  What a pity. 

U.S. crude production rose to the highest level in a quarter-century as a shale drilling boom in states such as Texas and North Dakota cut the need for foreign oil and pushed the country closer to energy independence.

The U.S. pumped 8.075 million barrels a day in the week ended Dec. 6, a gain of 0.8 percent, or 64,000 barrels a day, the Energy Information Administration said today. It’s the most since October 1988.

“You can’t swing a cat without hitting a barrel of oil in North America,” saidStephen Schork, president of the Schork Group Inc., an energy consulting firm in Villanova, Pennsylvania. “It’s amazing how quickly things can change.”

U.S. oil output grew 18 percent in the past 12 months, the fastest pace on record, boosting fuel exports and reducing reliance on imports, according to the EIA. The boom will make the country the world’s largest producer by 2015, five years sooner than last year’s forecast, the International Energy Agency in Paris said last month.

 

Remember growing up with all those stories about how we were going to run out of oil, to the point of being impoverished and sitting in the dark?  They persisted right into the 21st Century.  People are still inventing reasons to avoid tapping their natural resources, and paying much higher prices for their energy.  Who benefits from that?

 Technology is everything.  It improves our livelihoods, as most of us know.  We have only begun to see how it can reduce pollution, because that challenge was not sufficiently prioritised previously.     

Global LNG capacity will reach 468 million tons in 2018, from 295 million this year, according to Energy Aspects. That includes the expansion of output from Russia and excludes projects in East Africa and Cyprus that will probably be delayed into the next decade, said Trevor Sikorski, the consultant’s head of natural gas, coal and carbon.

There will be “enough room for everyone” in the LNG market and those with more competitive costs will benefit, Denis Solovev, a Novatek spokesman based in Moscow, said today by e-mail, citing earlier remarks by Mikhelson.

Putin pushed for the gas export law to increase the clout of Russia in global LNG markets. The nation is the world’s biggest gas exporter. It accounts for about 5 percent of LNG supply and 30 percent of pipeline deliveries, according to data
from BP Plc.

The creation of an increasingly large global LNG market necessitates not only that supply increases but that export terminals are built and that this valuable commodity is transported across long distances.

While the USA’s natural gas revolution has created bull markets in pipeline and rail shares, the global market represents an opportunity for tankers to transport LNG across oceans. While we can expect more ships to be built to service this market, at present there is a comparatively small number of pure plays.

Royal Dutch Shell Plc (RDSA), General Electric Co. (GE) and a company co-founded by T. Boone Pickens are planning investments in natural-gas-powered shipping as record U.S. output spurs the merchant fleet to use a new fuel. 

Clean Energy Fuels Corp., which Pickens helped start, will begin construction next year on the country¡¯s first fuel station for cargo ships running on liquefied natural gas in Jacksonville, Florida. Shell said in March it¡¯s planning LNG plants for the Great Lakes and Gulf Coast. GE, evaluating five locations, says the U.S. will need 50 to 100 small-scale plants for ships, trains, mining and trucks by 2025, each costing $50 million to $150 million.

And:

Ship owners started switching to lower-sulfur diesel from bunker in northwest Europe and North America because of national and international anti-pollution rules phased in since 2005. LNG cuts sulfur emissions by 90 percent to 95 percent and also releases less carbon dioxide and nitrogen oxide, according to DNV GL. Alternatives include burning low-sulfur diesel or installing equipment called scrubbers that clean exhaust.

Rising demand could drive fuel costs higher. While U.S. natural gas futures plunged 74 percent to $3.960 per million British thermal units from the record reached in 2005, prices will average $4 in 2015 and $4.25 in the longer term, Morgan Stanley estimates.

LNG ship fuel would cost about $800 a ton in the U.S., $1,000 a ton in Europe and $1,200 in Asia, according to estimates by New York-based shipbroker Poten & Partners Inc. That compares with global prices of $1,300 for an equivalent amount of diesel and $950 for fuel oil with scrubbers.

Natural gas is certainly well on its way to becoming the world¡¯s most important fuel, because of its availability, price, and considerably lower contribution to pollution.  

DB Analyst John Hirjee sees no reason for change as his top pick for 2014 Oil Search was our best performer in 2013. John expects significant production and EPS growth (2014-15) due to the commissioning (2H14e) of the PNG-LNG project. DB Analyst Harshad Katkar similarly sees no reason to change as his top pick for 2014 Reliance Industries was also his top pick in 2013. Harshad is looking for an improving upstream gas business on KGD6 and chemical capacity expansions (FY14-16e) to drive ~15% EPS growth over the coming few years. DB Analyst Shawn Park has our call on Asia Chemicals and recently (01 Nov) upgraded the sector to overweight on the back of flat to down naphtha prices, tighter product supplies and higher spreads. Shawn¡¯s top pick for 2014 is LG Chemicals given its material exposure to ABS (25% revenues) and an improving EV battery business. DB Analyst, David Hurd continues to like Sinopec (SNP) as a top pick for 2014. David notes that soft to down oil prices support SNP¡¯s refining business and that there is material operating leverage in the company¡¯s chemical business.

While the revolution in US supply continues to garner investor attention, Asia¡¯s demand growth continues to represent one of the more promising avenues for major oil companies. One of the greatest challenges in the region from the perspective of an investor is represented by regional government policy to cap prices for consumers. As these policies are gradually liberalised, it should be positive for the sector and this is likely to continue to represent a catalyst to ignite interest in related shares. 

Wall Street is changing what it wants from producers active in the shale revolution. Until commodity prices, especially natural gas, move higher, the profitability of developing shale resources will be challenged. For some producers, depending upon the quality of their shale assets and the cost of their operations, there is still likely financial pain ahead. Service companies are struggling to ascertain the level of activity for the industry over the next few years and the types of equipment and services that will be in demand. This will help them decide where to invest. Service companies are also considering where to place their capital bets - North American shale plays, offshore or select international land and shale plays. Additionally, the service companies need to better understand which of their product and service business lines will be of long-term value and which ones they should dispose of. These considerations suggest the service industry is on the cusp of a restructuring. The recent announcement by Weatherford International (WFT-NYSE) that it plans to shed four business lines is a manifestation of that trend. We have also had National Oilwell Varco (NOV-NYSE) decide to split off its oilfield distribution business into a new company. Other corporate moves have involved offshore drilling companies announcing plans to establish MLPs and/or separate companies to hold segments of their current rig fleets. Some of these restructuring moves are designed to help boost capital returns to investors, especially those seeking yield. On the other hand, restructuring of the industry may be due to too many companies chasing the same business and the fact that many of these companies are owned by private equity firms needing to cash in on their investments.

To say that the surge in US unconventional oil and gas supply has been disruptive is an understatement. A measure of just how much of a change this has caused can be seen in how complicated it has been to identify clear winners within the energy complex. A number of large companies paid too much for drilling rights and have been forced to accept write downs, others are now attempting to claw back costs by squeezing service companies. Concurrently rail is competing with pipelines to attract investment capital. Some of the greatest beneficiaries have been consumers such as utilities, chemical and industrial companies rather than the producers of natural gas.

Euro-area inflation stayed below 1 percent for a second month, less than half the European Central Bank's ceiling, underscoring the weakness in parts of the euro region's economy.

The annual rate rose to 0.9 percent from 0.7 percent in October, the European Union's statistics office in Luxembourg said in a preliminary estimate today. The median forecast in a Bloomberg News survey of 44 economists was for 0.8 percent. Separately, unemployment unexpectedly dropped to 12.1 percent.

The increasing inflation rate "is largely coming through because of base effects in energy," said Guillaume Menuet, an economist at Citigroup Inc. in London. "Once these start to fall out of the calculation, it's quite likely by the spring of next year we'll have again more evidence of weakening price pressures."

Today's data mark the 10th straight month that the rate has been less than the ECB's 2 percent goal. The central bank unexpectedly cut its key refinancing rate by a quarter point to 0.25 percent on Nov. 7 to prevent slowing inflation from taking hold in a still-fragile euro-area economy. ECB President Mario Draghi said at the time that the region needs record-low borrowing costs to combat a "prolonged" period of weak consumer-price growth and "very high" unemployment.

Euro-area unemployment unexpectedly fell to 12.1 percent in October from 12.2 percent a month earlier. Economists had predicted the rate would stay unchanged, according to the median of 34 estimates.

After this month's surprise rate cut, ECB officials have said they still have options for easing monetary policy. Bloomberg News reported last week that policy makers are considering a smaller-than-normal cut in the deposit rate, currently at zero, to minus 0.1 percent, if stimulus is required.

It is no surprise that the Euro region's economic recovery remains weak. However, this does not detract from the ECB's considerable achievements since 'super' Mario Draghi was appointed president on 1st November 2011.

Unfortunately, there is little that he can do about Europe's high costs for energy. Fracking would certainly reduce this problem but it is not happening, at least not yet. I expect money supply to remain very stimulative and Draghi may wish to engineer the Euro somewhat lower.

So far in 2013 we have issued 8 short term oil market reports. 5 of them have been bearish and 3 have been bullish. Directionally we have been correct in 5 out of the 8 reports. This is about spot on our long-term average performance which is 35 correct out of 55 published reports (64% correct). Our target is to have a hit ratio above 51% on the direction because the oil market is a flip of the coin market and the average participant should hence be at 50%. We conclude bearish in this 9th short term report of 2013. It is a little bit too early for the new year rally in oil prices that we have often seen and we see a fairly high risk in the short term for players taking profit on the currently very high Brent-WTI spread which is this time mainly caused by an unsustainably large Brent-LLS spread instead of mainly consisting of a large LLS-WTI spread.

This has been an eventful month in the energy markets with the prospect of easing tensions with Iran dominating headlines. However, the prospect of increased tensions in Iraq remains a tailwind for Brent oil prices. Meanwhile, the continued revolution in domestic US supply has changed the historical relationship between the world's major oil contracts.

"There was a good article on Fracking in the Economist Magazine (still the best business magazine with no close second choices).  It was the 16-22 November issue. Sorry life has been to busy to bring this to your notice earlier.

"I am not taking sides in the argument of social versus business arguments for fracking. I personally not convinced Fracking is a cheap source of oil although in the short term it is providing the US with cheap gas.

"What I observe is fracking has created a collar in the oil market. If oil prices drop the frackers respond quickly and fracking stops. If oil prices rise frackers drill a lot more to meet the demand. T Boon Pickens commented recently that fracking is not in his experience cheap oil. I think we agree Mr Pickens knows the oil business in particular the economics of fracking.

"As the Economists Magazine article points out the economics of fracking is a combination of gas prices, other liquids and oil prices. I will not go into the boring arguments of the relative merits of different sources of gas. Australia has lots of gas. We always knew about coal seam gas (CSG) however the petroleum engineers used to tell us CSG was very poor quality gas with low heat qualities and of no commercial significance. Not a argument you hear today. 

"I guess the economics of fracking will improve. BHP are hoping they do. But unless they do improve even the dumb money (i.e. BHP) will get the hint and stop funding what has been so far a stupid idea.

"Hopefully see you in February at the Chart seminar."

Thank you for this insightful email which brings us to the question of what exactly the term cheap energy means. We have described the peak oil argument, for much of the last decade, in terms of the rising cost of production. As you point out, geologists have known about coal seam methane, shale oil and gas, tight gas, methane hydrates etc for almost as long as the fossil fuel industry has existed. The commercial viability of these resources has always been dependent on the application of technology and the marginal cost of production.

"Have you heard of the carbon bubble or done any research on it?http://www.carbontracker.org/carbonbubble Big banks (HSBC) and big investors (WHEB) consider the risk real. I'm curious how you and the collective perceive this."

Thank you for this question which is sure to be of interest to others. At FT Money we apply ourselves to problems in the market and I attempt to limit my comments to topics which can be related back to practical applications of our macro behavioural technical analysis. Occasionally politics encroaches on the market in the form of regulation which we are forced as investors to consider the implications of. 

I clicked through to the link you supplied. This organisation appears to seek to supplant the dividend discount model of equity valuations with its own carbon based model. As such it falls into the carbon fanaticism camp, in my opinion, since this represents not only a massive departure from the norm but an ideological shift. As an aside it is worth remembering that even Karl Marx realised that all ideology is false, because an ideal can never be attained outside the field of mathematical a- priori truths. 

"Re the email posted on Wednesday in section Email of the day - On what causes the big cycles:

"As always David you have summarised a comprehensive reply which in a matter of a few paragraphs simplifies what is most certainly a huge question.

"I am currently enjoying a winter break in the Caribbean and have just finished reading Eoin's latest book 'Crowd Money - A Practical Guide to Macro Behavioural Technical Analysis'. I have to say that Eoin has covered this and so many other issues as well as offering easy to understand observations and answers in terms of the overall topic.

"I have previously enjoyed the 2 day Chart Seminar but Eoin's book is an invaluable reference for all of us who have come to rely on David and Eoin to guide us through the ever changing world of financial markets.

"After completing my reading and applying many of the techniques to a range of charts in The Chart Library, I now feel far more confident to read the charts and to draw meaningful conclusions.

"I heartily recommend that subscribers make a small but invaluable investment in purchasing a copy!"

Thank you for this thoughtful email which Eoin and I very much appreciate.

Enjoy that winter break.

(See also: On what causes the big cycles)

India's Sensex Index (weekly & daily) falls back as the rupee (weekly & daily) weakens again, risking higher inflation and interest rates. Historic resistance above 21000 has turned back the stock market rally and underlying trading will be tested unless the Reserve Bank of India Governor Raghuram Rajan can once again turn back the rupee's slide, shown inversely above against the US dollar.

Turnaround season in US refining has caused a major oversupply of US crude, but international markets have been roiled by a surprise re-outage in Libya. In this note we focus on the Libya issue. We also address the countervailing improvement in US-Iranian relations and the upcoming decision on Chinese-Iranian oil imports sanctions exemption. We very briefly show Iraqi, other OPEC, and Saudi production. Notably, the 550kb/d fall in Iraqi production from 2012 highs to September 2013 lows was under-appreciated by the market, obscured as it was by Syria, Egypt, Libya, and Iran. Note: IEA non-OPEC supply forecasts of 1.8mb/d marginal growth for 2014 are for an all-time high.

Things can’t get worse in Libya
The 1mb/d+ outages that have characterized oil markets since the 2008 peak price have been due to Libya and Iran. To be clear, these are enormous outages that have clearly driven global (Brent) oil prices higher. For thirty years Libya, for all its international controversy, steadily supplied world oil markets with around 1.3mb/d of light sweet oil. Consensus was that the relatively small population of Libya, at around 6m, made it politically stable. Until it wasn’t. Now the country is in disarray, with factions independently taking control and interrupting oil exports. There is no single movement here, as we show in this note. However we do take the view that the situation in Libya cannot now get materially worse, with possibly less than 90kb/d of exports of light sweet crude, there is little left to lose, and plenty to gain. The country is working on a new constitution, and we think there is reason to believe that it is this process that is causing the upsurge in disruption by local interests.

A huge shift in Iran
’s newly-elected President Hassan Rouhani has ushered in a seismic shift in global geopolitics that has reverberated across the oil world, notably to the consternation of the Saudis and other Sunni Gulf oil states. With the all-important blessing of Iran’s Supreme Leader Ayatollah Ali Khamenei, as well as the country’s Parliament, Rouhani quickly reached out to US President Obama directly, and subsequently has moved Iran into nuclear talks over enrichment that had all but died under the leadership of previous President Ahmadinejad. Although nuclear talks in Geneva have ended, there is agreement to meet again as soon as November 20. Rouhani openly hopes for a deal to sanctions that have been the primary cause for the precipitous drop in Iranian oil production and exports. Intelligence suggests that the Obama regime is pushing Congress to soften its stance on sanctions while negotiations are underway, with a notable upcoming decision on the potential for an exemption for China to import Iranian oil, that needs a decision by December 2.

The Brent Crude – West Texas Intermediate spread remains a useful illustration of just how much the global oil market has changed. For decades Brent traded at a discount to WTI, this situation began to change from the early 2000s when the relationship became much more volatile. On the chart we can see that the last three years are distinctly different. As with any spread it is worth considering influences on both constituents.