We don’t know the details behind the Morgan Stanley electric vehicle forecast, but we know there are both more and less aggressive forecasts.  We wonder if those forecasters have considered the potential constraints from lithium carbonate supply.  There is a greater issue with cobalt, which accounts for 58% of a battery by weight, more than the lithium in a battery, and consumes 42% of all cobalt output.  The problem is that cobalt supplies are smaller and about 60% comes from the Democratic Republic of Congo, which is controlled by war lords and relies on child labor for mining the ore.  The governments we will have to deal with to meet the demand for rare minerals to meet electric vehicle forecasts present many moral and financial question marks.  In fact, when we were in Tibet earlier this summer, we followed Chinese trucks hauling bags of lithium carbonate from mines to shipping depots.  That supply is likely committed to the Chinese electric vehicle industry, which needs it to meet its anticipated growth outlook.   

As a result of the growing demand for lithium and other rare minerals, their prices are climbing, and in some cases at alarming rates.  Since 2015, lithium prices have quadrupled, while cobalt prices have doubled.  What will rising prices and limited availability mean for the forecasts of ever cheaper batteries?   

 

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Forecasts for where lithium and cobalt demand is going to be in 2025 are being used to drive investment in new supply today, but it takes years to bring new supply to market. In that window between when demand increases and supply responds there is room for prices to increase meaningfully; in a rerun of the Supply Inelasticity Meets Rising Demand dynamic that animated the commodity bull market from the early 2000s. 

Gasoline futures in New York extended gains a sixth session Tuesday as more than a million barrels of fuel-making capacity was knocked offline; and natural-gas fields and offshore-drilling rigs shut down. The motor fuel advanced 0.4 percent to $1.7183 a gallon at 5:09 a.m. New York time.

Ports along a 250-mile stretch of Texas coast were closed to tankers. Twenty-two vessels laden with a combined 15.3 million barrels of crude from as far afield as Brazil and Colombia were drifting off the coastline, waiting for the all clear.

Ten of the state’s 25 refineries are shut down, accounting for about half the 6 million barrels per day of capacity, said Christi Craddick, chairman of the three-member Texas Railroad Commission, which regulates the industry. Companies will have to wait for floods to recede before they can evaluate damage, she said.

“Hopefully within the next week to two weeks, we’ll see refineries back online,” Craddick said.  

 

Hurricane Katrina resulted in a surge in natural gas prices because so much supply depended on Gulf of Mexico platforms. The rise of onshore shale supplies has reduced reliance on offshore gas so hurricane Harvey has had little impact on gas prices. On the other hand, gasoline refining is heavily concentrated on the Gulf coast and not least around Houston. Therefore, it is the commodity most likely to be affected by hurricane induced damage. 

“It could intensify right up to landfall on Friday,” said Jeff Masters, co-founder of Weather Underground in Ann Arbor, Michigan. “I expect a Category 1 hurricane at landfall, but I cannot rule out a Category 2.”

Harvey is expected to bring multiple hazards including heavy rainfall, storm surge and possible hurricane conditions to parts of the Texas coast on Friday. Heavy rainfall is expected to spread across portions of south, central and eastern Texas and the lower Mississippi Valley from Friday through early next week and could cause life-threatening flooding, according to the advisory.

The Gulf Coast from Corpus Christi, Texas, to Lake Charles, Louisiana, is home to nearly 30 refineries -- making up about 7 million barrels a day of refining capacity, or one-third of the U.S. total. It’s in the path of expected heavy rainfall. Flooding poses risks to operations and may cause power failures.

 

The last few years have been particularly quiet hurricane seasons and even though Harvey will struggle to exceed category one its location ensures there will be plenty of precipitation falling in the Corpus Christ through Louisiana areas which will disrupt businesses. 

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.   

 

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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. 

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 :

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. 

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.   

 

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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. 

“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.

 

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. 

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.   

 

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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. 

As Tesla Motors begins to build the world’s largest lithium-ion battery in Australia and other vehicle makers such as Volvo get on board the electric vehicles train, concerns are rising over the environmental footprint of mining that and other materials used in car batteries, as well as their eventual disposal.

According to analysts at UBS, by 2025 the market will need 12 times the battery capacity currently available. At the same time, only 5% of lithium-ion batteries get recycled, versus more than 90% of those used in conventional vehicles, reports Financial Times:

“One of the challenges of making battery recycling economically viable is the quantity of battery material that is needed to keep utilisation rates of recycling facilities sufficiently high,” say analysts at Morgan Stanley. “The risk, therefore, is there may not be the necessary infrastructure in place in time for the first significant wave of EV batteries to reach end of life.”

Demand for the commodity has been rising as of late, which in turn has caused prices to more than double in the past 18 months.

The need for the metal is expected to triple by 2025, but not all the countries rich in lithium are taking advantage of the boom. At the same time, new actors are emerging worldwide.

 

This article carries a number of interesting graphics on which countries have the largest lithium reserves and which are the largest producers. With demand for the metal expected to multiply over the next decade a supply inelasticity meets rising demand growth model is in place at least until the necessary infrastructure to produce and recycle the metal has been built which could take another few years. 

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.

 

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“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.  

Russia "pretty much threw cold water" on rumors of additional cuts, said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. The American Petroleum Institute is due to issue weekly U.S. inventory numbers Wednesday afternoon.

Oil and gas companies’ shares were down across the board. Bloomberg Intelligence’s index of independent exploration and production companies fell as much as 4.4 percent. Baker Hughes plunged 34 percent on its first day of trading as a unit of General Electric Co.

While crude prices surged last week, futures are down 15 percent for the year amid concerns that rising global supply will offset the output cuts from the Organization of Petroleum Exporting Countries and its partners. Libya and Nigeria, which are exempt from the agreement, accounted for half of the group’s production boost last month, according to data compiled by Bloomberg.

"Now we’ll see if this rally was based on loose expectations that there could’ve been some agreement or additional cuts, or if it was a rally on short-covering," Mizuho’s Yawger said.

 

Oil prices have been confined to a volatile range over the last 12 months with a distinct downward bias since January. The price might have rallied for eight consecutive sessions but there has been a distinct absence of clear upward dynamics similar to those posted in August and November while the large tail on the candle that marked the May low was also a clearly bullish development. 

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.

 

 

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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. 

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.   

 

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. 

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.

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. 

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.

 

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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. 

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

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.  

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."  

 

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. 

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

 

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. 

When the pace of adoption of technologies is examined, there are a number of interesting questions that bear on the projections of how quickly EVs and AEVs, as well as on-demand ride services, will be accepted. Are they going to be adopted as consumer technology items or truly revolutionary technologies and labor-saving devices? As shown in Exhibit 10, proponents of rapid technology adoption point to the cellphone, which took about a decade to go from zero to 60% penetration. That was about the same time span as the internet, but maybe only slightly longer than the VCR. On the other hand, the telephone needed nearly 50 years, while electricity needed only about 25 years, to reach the 60% penetration level. However, maybe we should look at these vehicle technologies as akin to those that brought significant lifestyle changes such as the stove, the clothes washer and the dishwasher, which needed between 35 and 50 years to reach 60% of American homes.

Our best guess is that the adoption rate will be somewhere between the cellphone and electricity, 10 to 25 years, but with a bias toward the longer timeframe. Why do we say that? It is important to understand that vehicles play an important role in family evolutions, something that hasn’t changed over generations. The hyped concern about millennials not getting married, starting families and buying homes, which was very popular during the years immediately following the global financial crisis of 2008, is disappearing. We now see millennials coming out of their parents’ basements, getting married, starting families and buying homes – although maybe not of the same size or in the same locations as their parents. These millennials are, however, continuing the generational pattern of societal evolution, although they are taking longer than previous generations to take some of the steps down that road. Given the pace of this phenomenon’s development, it is important to remember that automobiles remain the second largest purchase after homes for families. These purchases are not made frequently, they usually require significant research and time to reach a decision, and the decisions are often based on economic considerations involving all aspects of families’ lives and not just social concerns, such as climate change.

Given the factors involved in new car purchases, those forecasting the demise of petroleum must explain how those with limited incomes and wealth will voluntarily give up their perfectly functioning fossil fuel vehicle for an expensive EV, which because of battery technology may not get anywhere close to the advertised performance due to the climate where they reside. Their lives will become more complex until electric charging stations are as ubiquitous as gasoline stations, since they may not be able to afford the wait for battery recharges nor the cost of an installed charger in their home, if that option even exists for them.

There is also the question of what happens to the economics of EVs versus ICE cars when the values of used ICE cars go essentially to zero? In that case, unless gasoline and diesel fuels are banned, which may be the next target of environmental activists, it will be much cheaper to own and operate ICE cars than EVs.

There is also the question of how quickly the fleet of American vehicles can be converted to EVs or AEVs. For the past several years, Americans have purchased 17 million or slightly more new vehicles each year. At that pace, it will take 15 1/3 years to completely replace the approximately 260 million vehicles currently on America’s roads. To reach the magic 60% penetration rate, Americans must buy 17 million new EVs every year for more than nine years. Despite the high number of EVs in the fleet, it still leaves 104 million ICE vehicles on the roads burning fossil fuels.

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Something that has always been at the back of my mind when reading comparisons about the pace of adoption of technologies is whether it is appropriate to compare adoption rates over more than a century. The pace of life has accelerated considerably in only the last decade so that we find it hard to imagine how anyone lived without the benefit of wifi or indeed indoor plumbing more than a century ago. My kids for example can’t imagine a world without iPhones, iPads and YouTube.

The falling costs make it more likely that investors will approve pumping crude from such large deep-water projects, the process for which is more complex and risky than drilling traditional fields on land. That may compete with OPEC’s oil to meet future supply gaps that the group sees forming as demand increases and output from existing wells naturally declines.

Saudi Arabia’s Al-Naimi left his post shortly after his speech targeting high-cost producers, and his successor Khalid Al-Falih organized production cuts by OPEC and some other nations that are set to run through March 2018. In a speech in Malaysia this month, Al-Falih bemoaned the lack of investment in higher-cost projects and said he fears the lack of them could cause demand to spike above supply in the future.

Warnings from OPEC of a looming shortage are “overstated and misleading,” Citigroup Inc. said in a report earlier this month. The revolution in unconventional supplies like shale is “unstoppable” unless prices fall below $40 a barrel, and deep- water output could grow by more than 1 million barrels a day by 2022, according to the bank.

Royal Dutch Shell Plc in February approved its Kaikias deep-water project in the U.S. Gulf of Mexico, saying it would break even with prices below $40 a barrel. That followed BP Plc’s decision in December to move forward with its Mad Dog Phase 2 project in the Gulf, with costs estimated at $9 billion compared to $20 billion as originally planned.

Over the next three years, eight offshore projects may be approved with break-even prices below $50, according to a Transocean Ltd. presentation at the Scotia Howard Weil Energy Conference in New Orleans in March. Eni SpA could reach a final investment decision on a $10 billion Nigeria deep-water project by October.

Oil producers spent a decade investing in additional supply and while they went right on investing until prices declined, the reality is that a lot of that investment was in new technology which is now being used to drive prices down while exploration has been abandoned. 

But making those rules public does have a downside: It means companies know precisely how to cheat. Here’s how the Jacobs School describes the situation:

During emissions standards tests, cars are placed on a chassis equipped with a dynamometer, which measures the power output of the engine. The vehicle follows a precisely defined speed profile that tries to mimic real driving on an urban route with frequent stops. The conditions of the test are both standardized and public. This essentially makes it possible for manufacturers to intentionally alter the behavior of their vehicles during the test cycle. The code found in Volkswagen vehicles checks for a number of conditions associated with a driving test, such as distance, speed and even the position of the wheel. If the conditions are met, the code directs the onboard computer to activate emissions curbing mechanism when those conditions were met.

But VW didn’t stop there. The researchers who examined Volkswagen’s work pulled 964 separate versions of the Engine Control Unit (ECU)’s code from various makes and models of Volkswagens. In 400 of those cases, the ECU was programmed with defeat devices.

Now, you might be thinking that a single code model couldn’t possibly compare all the variables in play between various test facilities, and that some cars should have shown a fault simply due to random chance. But VW was aware of that possibility and took steps to prevent it. Their defeat device had ten separate profiles to allow it to detect various permutations in test scenarios.

Not all the defeat devices were sophisticated. The Fiat 500X (not manufactured by VW) has a much simpler defeat device. The vehicle’s emission control system runs for 26 minutes and 40 seconds after you first start the car, period. That’s long enough to pass most emission tests, and it doesn’t try to detect if the vehicle is being tested. But VW’s work was extremely sophisticated, it evolved over time, and the company’s claims that this was all instituted by a few rogue engineers are more farcical than ever.

The fact that it has taken this long to figure out just how the diesel defeat mechanisms function highlights the fact that Volkswagen and Bosch have not been entirely forthcoming with investigators. The emerging reality is that defeating emissions testing was a long-term highly orchestrated endeavour that must have required the efforts of teams of engineers and years of work to achieve such impressive results. 

"The market seems to be a bit disappointed as there is no ‘something extra,’” said Jan Edelmann, a commodity analyst at HSH Nordbank AG. “It seems as though OPEC fears letting the stock-draw run too hot.”

The Organization of Petroleum Exporting Countries agreed in November to cut output by about 1.2 million barrels a day.

Eleven non-members joined the deal in December, bringing the total supply reduction to about 1.8 million. The curbs were intended to last six months from January, but confidence in the deal, which boosted prices as much as 20 percent, waned as inventories remained stubbornly high and U.S. output surged.

OPEC agreed earlier Thursday to prolong their own output cuts by nine months. Nigeria and Libya will remain exempt from making cuts and Iran, which was allowed to increase production under the original accord, retains the same output target, Kuwait’s Oil Minister Issam Almarzooq said after the meeting.

That deal gave the Islamic Republic room to increase output to a maximum of 3.797 million barrels a day.

 

The oil markets rallied ahead of today’s OPEC announcement on the expectation that the production cuts would be extended. The fact the announcement came in line with expectations has resulted in a clear “buy the rumour sell the news” response. Oil prices pulled back sharply today to confirm the progression of lower rally highs with a downside key day reversal. 

“I have been early twice in financing the low carbon energy transition,” says Bruce Huber, cofounder of the Alexa Capital advisory group. “But we feel it’s third time lucky.”

One reason for his optimism is what he calls the “tectonic plateshifting” in the car industry that is driving down the cost of energy storage. Storing clean power has long been a holy green grail but prohibitive costs have put it out of reach. This has begun to change as battery production has ramped up to meet an expected boom in electric cars.

Lithium ion battery prices have halved since 2014, and many analysts think prices will fall further as a slew of large battery factories are built.

The best known is Tesla and Panasonic’s huge Nevada “gigafactory”. Tesla claims that once it reaches full capacity next year, it will produce more lithium ion batteries annually than were made worldwide in 2013.

It is only one of at least 14 megafactories being built or planned, says Benchmark Minerals, a research group. Nine are in China, where the government is backing electric cars with the zeal it has directed at the solar industry.

Could this lead to a China-led glut like the one that helped drive solar industry writeoffs and crashing prices after the global financial crisis?

“It’s something to watch,” says Francesco Starace, chief executive of Italy’s Enel, Europe’s largest power company.

The thirst for electric cars, not least in China, means “the dynamics of demand are completely different” for batteries than for solar panels, he adds.

Still, Enel’s internal forecasts show battery costs falling by about 30 per cent between 2018 and 2021 and it is among the companies already pairing batteries with solar panels to produce electricity after dark in sunny places where power is expensive, such as the Chilean desert.

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The main objections to renewable energy are focused on intermittency and their reliance on subsidies. However economies of scale and the application of technology represent reasons for why we should be optimistic these can be overcome over the medium term. That represents a significant challenge for both the established energy and utility sectors. 

Right now we are talking about a time when solar and wind will be able to compete without subsidies on an increasing number of projects. However if we continue on that path there is potential for the sector to be a victim of its own success because the lower prices go and the more fixed prices are abandoned the greater the potential for volatility in energy pricing. 

During the mining trial done at a depth of 4,153 feet, engineers extracted each day around 16,000 cubic metres of gas, with methane content of up to 99.5%, Minister of Land and Resources Jiang Daming said.

The new energy source, while revolutionary, is not exempt of risks. The release of methane into the atmosphere as permafrost melts is regarded for those who believe in climate change as one of the worst potential accelerator mechanisms for it. Methane hydrate is also hard to extract, which makes the cost of producing it high.

Test drillings have also taken place in the US, Canada and Japan, with the latter announcing earlier this month that it was successful at producing the natural gas on the pacific coast and will continue mining it for around three to four weeks.

Sources of methane hydrate are so large that the US Department of Energy has estimated the world's total amount could exceed the combined energy content of all other fossil fuels.

 

Methane hydrate is uneconomical using today’s methods of extraction and current prices However, its existence highlights the important fact that any argument referring to peak oil must be prefaced with details of costs of production and timeframes. There is no shortage of natural gas or fossil fuels for that matter. Their supply is limited only by a combination of technological innovation and price. Technology is improving all the time so it is inevitable that major important countries like China and japan will continue to work on how to bring down the cost of methane hydrate.

The analysts’ takeaways were that the Saudi Arabian economy was healthier than many thought, thus pressure for the country to lead the OPEC charge to substantially higher oil prices was soon dissipated. The headlines also helped explain King Salman’s willingness earlier to reverse the salary and benefit cuts for ministers and to grant salary bumps for the military and air force pilots. With the shrinking budget deficit and the ability of the kingdom to tap global debt markets twice in the last six months, the government felt comfortable it could increase spending without necessarily needing higher oil prices. Further comfort in its spending decision was provided by the point about non-oil revenue in the first quarter exceeding the government’s expectation. That latter point is important and helps explain why MBS says that Saudi Arabia’s debt will not exceed 30% of GDP. This is in contrast to many countries where total government debt equals or exceeds the country’s GDP. The shifting economic condition in Saudi Arabia is a long-term dynamic at work within the global oil market, and requires that analysts reassess their view of the kingdom’s strategy toward higher oil prices in the future. The last pillar supporting the significantly higher oil price forecast is the requirement for a favorable oil price backdrop in order to launch the initial public offering of Saudi Aramco, the state oil company. 

Crude oil prices are likely to remain highly volatile in the near-term as the shoulder months for oil demand and the restarting of refineries from the heating oil to gasoline turnarounds is creating inventory fluctuations. Many of these inventory fluctuations are not being accurately captured in the average analysts’ weekly inventory change forecasts, setting the oil market up for weekly surprises between the data and estimates. A key driver over the next few weeks will be people trying to guess the outcome from the May 25th OPEC meeting, but the outcome seems preordained. A negative surprise will be if the OPEC members fail to extend the production cut agreement as assumed by conventional wisdom. A positive surprise might be an increase in the production cut volumes, or an extension of the production cut agreement into 2018. Either or both of those actions will likely be viewed skeptically as greater volumes and longer time horizons create an environment that encourages increased cheating by OPEC members. If there has been a surprise from the current production cut it is the high compliance by the OPEC member countries. Is that a reflection of desperation or a true commitment to greater output discipline? 

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

The Saudi Aramco IPO will be a major event and the price of oil is an obvious consideration in the valuation that will be achieved. However the broader question for Saudi Arabia, in a market which is concerned both with equilibrium and increasing geopolitical tensions, is to ensure it affects an aura of stability and a lack of overt unilateral price manipulation strategies. That suggests they have no choice but to negotiate for concerted efforts to support prices, however successful those might be. 

According to Colin Hickman, a spokesman for Boise Public Works, “We’re getting to a place where the amount of space downtown that we’re heating we felt it was the right time to bring on the third well to ensure that we have redundancy, in case something happens during the winter months, during our peak season so we have some back up for the customers on geothermal heating,”

Interestingly, a third well was dug in 1982, however, it has been not in use. Hickman says this third well is needed. These particular wells in Boise have geothermal water that is approximately 177 F (80 C) degrees when it comes out of the ground and is then pumped in insulated pipes to the downtown locations where the water heats the buildings.

“The buildings will basically take the heat out of that water, use it for their heating purposes in their building, and then that water goes back to Julia Davis Park, and there’s an injection well there that puts that water back into the earth,” Hickman said.

Hickman adds that Boise should be proud of its geothermal system as it eliminates the use of fossil fuels, it’s renewable and it’s an economic driver that will bring businesses in that are interested in this type of renewable energies to the Boise area.

Geothermal energy use in Boise dates back to the 1890s.

Geothermal energy has been around for a long time but has been totally reliant on the confluence of shallow heat vents and abundant water. However, it occurs to me that with the advances in hydraulic fracturing and horizontal drilling there is potential for cross pollination between the oil services and renewable energy sectors. 

Large FX buffers buy time despite high fiscal breakeven KSA also has a high fiscal breakeven, expected to reach USD84 in 2017 according to the IMF and somewhat lower according to our estimates at USD72. As such fiscal reform is a priority, but over USD500 billion of SAMA reserves and the potential for part-sale of oil assets give flexibility of timing. However, arguably, the size and conservative nature of the Kingdom makes early reform a necessity.

Saudi Arabia’s approach to breaking its hydrocarbon habit has been to undertake something akin to a revolution in the country, as outlined in the Vision 2030 document and the shorter-term National Transformation Program 2020. The challenges are significant, given the elevated fiscal breakevens, delivering 11% budget deficit in 2017. Ambitions for achieving a balanced budget by 2020 (“Fiscal Balance Program 2020”), suggests the bulk of the social and economic overhaul should be front-loaded. 

The National Project Management Office (NPMO), announced in September 2015 and tasked with moving projects forward in a coordinated fashion, has stalled. Furthermore, headline projects such as the Makkah Metro or the North-South rail line have been pushed out. Of the USD1 trillion pipeline, the only actual new project awards have been limited to Aramco investments. Until the NPMO is fully in place, any major project awards will be exceptions.

By contrast the establishment of the Bureau of Capital and Operational Spending Rationalization – an entity aimed at reviewing the feasibility of projects less than 25 per cent complete has moved forward with a review of some of the SAR1.4 trillion of projects in development. On the first round, approximately SAR100 billion of costs have been cut. Some projects will be cancelled, others retendered or converted to self-financing PPP-style contracts, but the certainty is that these cannot continue to be financed substantially from the public purse. There has also been additional controls on current spending with cuts in civil service allowances. The switch from an Islamic contract year to a slightly longer Gregorian one amounts to a 3% pay cut.

 

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With significant reserves Saudi Arabia has time to deal with a relatively low oil price environment and the effect that is having on its fiscal condition. Rolling back spending commitments would leave the country in a much healthier position to compete considering its abundant resources and low cost of production. The new administration has embraced the need for change both in terms of domestic reform and investing in sectors outside of energy. The soon to launch $100 billion Softbank Technology Fund is a case in point. 

As automobiles transition from being completely under the control of a human driver to being totally controlled by machines and computers, several things can happen. If cars can operate without having accidents, highway speeds can be increased, which could reduce vehicle fuel-efficiency, boosting fuel consumption. Fully-autonomous driving will also enable classes of the population currently unable to utilize vehicles, adding more vehicle miles traveled to the nation’s transportation system and increasing fuel consumption. Those classes of people include non-drivers, along with the elderly, disabled and young people. A study by Carnegie Mellon University estimates that this expansion of the driving population could increase vehicle miles traveled by 14%, or adding 295 billion miles of driving annually. That will mean more fuel consumed, regardless of how fuel-efficient the vehicles are that these classes of people utilize. A rough calculation based on vehicles with 30 miles per gallon ratings, means about 675,000 barrels a day of additional gasoline, or approximately a 7% increase on today’s gasoline consumption. Fully-autonomous driving suggests more vehicle use, more miles driven and more fuel consumed. The offset is if fully-autonomous vehicles dominate the growing car/ride-sharing segment of the transportation sector, which could act to reduce fuel consumption. 

Whether the vehicles of the future are ICE-powered or derive their power from some other fuel source will be influenced by the outcomes of the other two broad trends. For example, if we become a nation of car-sharers, there will be fewer vehicles needed, vehicle miles traveled might decline, although they just as easily could increase. A fully-autonomous vehicle provides the possibility of having a greater impact on fuel consumption than human-driven vehicles. First, cars that don’t have accidents can be made from lighter materials that facilitates more EVs since greater battery weight will be offset by lighter vehicle bodies and frames. That could help EVs overcome some of the range-anxiety challenges for many potential buyers. It could help accelerate the electrification of the automobile fleet, which would have a significant negative impact on vehicle fuel consumption. On the other hand, if ICE powered vehicles remain the popular option, fuel consumption might not be as impacted as in an EV-favored scenario. With fully-autonomous vehicles offering the potential for increased vehicle use, fuel consumption is likely to increase. 

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The Jevons Paradox suggests that if the price of a vital commodity falls use will increase so that the greater efficiency achieved through advancing technology is absorbed by demand growth. In fact the only commodity I can think of that has been completely obviated from popular use is whale oil. In every other case uses might have changed and costs might collapse but we end up using more of it. 

The worst downturn in the history of the oil industry has been followed by the fastest drilling rig recovery in history. From massive layoffs and corporate restructurings, oil and gas and along with oilfield service companies have had to switch gears and figure out how quickly and profitably they can grow along with the current recovery. As someone mentioned, the industry has crammed a year’s worth of rig activity growth into a few months – something that is creating a challenge for the oilfield industry. 

As the energy companies are about to start reporting financial results for the January - March 2017 period, numerous oilfield service company managements have already signaled that the numbers will likely not reflect the levels of profitability Wall Street analysts had expected due to the costs of responding to the explosion in activity, especially following OPEC’s surprise output cut to help drive a recovery in oil prices. From the rapid climb in the rig count, it is clear that not only had investors and analysts bought into the recovery scenario, but so too had exploration and production (E&P) company managements. 

There is an expression in English literature that “all things come to those who wait,” but that isn’t the case in the oil patch – especially if one wants to make money. In reality, the expression “the early bird gets the worm” is more appropriate to describe how people in the E&P business operate, but it is taking a toll on the pace of the recovery in oilfield service company profits. Service company managers have had to spend money to reactivate equipment and re-crew them before they can actually earn revenue. The more aggressive a company has been, or is, in ramping up its idle equipment, the greater are the costs incurred. At the present time, everyone is comfortable in the belief that the delay in gratification – increased profits – will be worth the effort, and the wait. Whether that proves a correct assumption or not will depend on how the recovery continues unfolding and what happens to well costs, which is what is driving the increased activity. Everyone has to make money going forward for the recovery to be sustained. That doesn’t mean, however, that everyone will enjoy the levels of profitability experienced during the era of $100+ a barrel oil prices. But, unless people make money, the industry will not be able to support additional activity, or possibly even support the current level of work. So where are we in this recovery?

 

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Unconventional oil and gas wells are more expensive to drill and have prolific early supply surges which peak quickly. That means operators are uniquely positioned to respond to lower prices by cutting back on drilling and to higher prices by stepping up drilling. It might not be great news for worker job security but it means the USA is increasingly the swing producer in the global oil market. 

Little more than 2 1/2 years from now, the global fleet of merchant ships will have to reduce drastically how much sulfur their engines belch into the atmosphere. While that will do good things -- like diminishing the threat of acid rain and helping asthma sufferers -- there’s a $60 billion sting in the tail.

That’s how much more seaborne vessels may be forced to spend each year on higher-quality fuel to comply with new emission rules that start in 2020, consultant Wood Mackenzie Ltd. estimates. For an industry that hauls everything from oil to steel to coal, higher operating costs will compound the financial strain on cash-strapped ship owners, whose vessels earn an average of 70 percent less than they did just before the 2008-09 recession.

The consequences may reach beyond the 90,000-ship merchant fleet, which handles about 90 percent of global trade. Possible confusion over which carriers comply with the new rules could lead to some vessels being barred from making deliveries, which would disrupt shipments, according to BIMCO, a group representing ship owners and operators in about 130 countries. Oil refiners still don’t have enough capacity to supply all the fuel that would be needed, and few vessels have embarked on costly retrofits.

“There will be an absolute chaos,” said Lars Robert Pedersen, the deputy secretary general of Denmark-based BIMCO. “We are talking about 2.5 million to 4 million barrels a day of fuel oil to basically shift into a different product.”

 

Until ship owners have visibility on whether refiners will be changing the delivery conditions on futures contracts for fuel oil/gas oil, they will be unwilling to commit to multi-million dollar retrofits of existing ships. This news comes on top of last year’s decision by the Ballast Water Management Convention which requires all ships sailing in international waters to install a Ballast Water Management System by September 2017 which also necessitates a significant additional cost for maintaining existing shipping inventory. 

As we contemplate the next cycle, we cast our view back on the industry’s history. The last great cycle came out of the explosion in oil prices in the latter half of the 1970s due to geopolitical events, but realistically it resulted from the peaking of U.S. oil output and the transferring of pricing power to the OPEC cartel. What broke the back of that price explosion was new, large sources of oil – offshore basins in the North Sea and West Africa, in particular, along with Alaska. Those were the resources that drove the industry over the subsequent 30 years. Shale is what is driving the industry now, and likely will drive it for the foreseeable future. What could that mean for oil prices? Look at Exhibit 1 where we show the inflation-adjusted oil prices from the late 1960s to 2016. After the bust of the early 1980s, the oil price traded for 18 years without ever going above $45 a barrel in current dollar prices except in response to one-off geopolitical events. 

The recent oil price bust followed a much longer period of super-high oil prices than in the 1970s. To our way of thinking, we are likely to experience another extended period of lower, but stable, oil prices. Will it be 18 years? We don’t know. Will oil prices stabilize around $45 a barrel? We don’t know. Might the price range be $55-$60 a barrel? It could be. Will it be $70 a barrel or more? We doubt it, except for brief periods. This isn’t because we think history always repeats itself, but rather because the oil industry is fighting maturing economies around the world, meaning slower demand growth. Developing economies are where oil demand is growing the fastest, but those countries have the benefit of employing the most recent equipment designs and technologies, suggesting their economies will be much more energy-efficient than earlier developing economies at the same point in time. Think about how no country now would consider string telephone wires to allow communication – cell towers are the answer. The oil industry is also fighting a global push to de-carbonize economies in order to fight the damage of climate change, which has the potential to significantly lower global oil consumption growth.

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This piece rhymes very strongly with our long-held view that shale oil and gas represent game changers for the energy complex. This has resulted in US onshore shale now representing an important swing producer for the global market. 

I hope you are well. I was wondering what you thought of this article (Japan gambles on Toyota’s hydrogen powered car) about Toyota’s lack of faith in electric vehicles because 'a battery breakthrough is not in prospect'

Thank you for this email raising an important issue regarding energy density. Here is a section from the article:

Fuel cell vehicles, by contrast, need all the manufacturing skills of a car company. “From the industrial strategy point of view, fuel cell technology is extremely difficult, it’s in the world of chemistry not machinery,” says Hiroshi Katayama at the advanced energy systems and structure division of the ministry of economy, trade and industry (METI). If auto technology goes down the hydrogen path, Japan will be well placed. But if it doesn’t, Tokyo will have made a major miscalculation.

Toyota’s faith in hydrogen is best understood by looking at a car it never made: a pure electric vehicle. For the 20 years since it invented the Prius hybrid, Toyota has been the carmaker best-placed to launch a fully electric vehicle. It had the batteries, the motors and the power electronics but chose not to deploy them because of concerns about range limits, refuelling time and the risk of batteries degrading as they age.

It has announced plans for its own electric vehicle to exploit the demand from the premium segment opened up by Tesla and to meet emissions standards in the US and China. Yet Toyota’s fundamental doubts about battery-powered vehicles have not gone away.

The long dreamt-of Sakichi battery would store energy at the same density as the chemical bonds in petrol: roughly 10,000 watt-hours per litre — enough to power a family car for hundreds of kilometres on a single tank. The low energy density of the best batteries, about one-twentieth that of petrol, is why today’s electric cars have limited range.

Investors should be particularly sensitive to indicators that are associated with being in a misaligned world. This analysis can be applied both to sunk capital and new investment. For companies with low growth capex, margins on existing production will clearly be more important than incremental value creation or destruction on new investment. For high growth companies, returns relative to the cost of capital on new investment will be more critical. 

Investors should be wary of high-carbon companies where decarbonisation is likely to be demand driven (for example coal generators facing lower production as subsidised renewable production is built). However there may be value opportunities where decarbonisation is supply driven (for example restrictions on coal production, or forced coal closures could increase margins on remaining capacity even while overall volumes drop). 

Investors should look for low carbon companies in sectors where supply constraints are likely to be more significant than demand constraints as volumes grow. They should be wary of sectors where the mechanisms for growth are likely to drive down returns (for example long asset lives with technological progress and short-term market pricing). 

By understanding the positioning of companies in the matrix of volume and value, investors can make an informed judgment. Market valuations can be set against current opportunities and future expectations. Shareholder engagement can help ensure the right corporate strategy

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

Governments need revenue so regardless of what one’s feelings are with regard to climate there is a strong potential for higher taxes, particularly in Europe which is a major fossil fuel importer. The impetus for similar taxes in energy producing nations, not least the USA, is less compelling.  

There is no law of nature that dictates that global oil demand must eventually reach a peak and then begin an irreversible decline. The well-known “law” of Hubbert’s Peak applies to supply, not demand, and the advent of modern technology (fracking, horizontal drilling, enhanced recovery, etc.) has led to a fundamental rethink of whether oil supply will peak after all. In this context, we see comments such as the one from Shell, suggesting that peak demand will come first, rendering peak supply a moot point.

There is no direct historical precedent for worldwide demand for a major energy commodity to peak on a sustained basis. (Sorry, whale oil doesn’t count.) Despite all of the regulatory and other headwinds, for example, global consumption of coal is still growing. But it is true that there is precedent for national and even regional demand to peak. Coal demand in Europe peaked in the 1960s, and has since fallen to substantially lower levels. Oil demand in Japan peaked in the 1990s. Oil demand in Europe peaked more recently, in 2006, one year after the U.S. By definition, a peak is something that can only be known in retrospect, but with a decade having passed, it seems abundantly clear that European oil demand will never get back to its pre-2006 levels. With regard to the U.S., the situation is less clear-cut because of the demand recovery in recent years, but 2005 may well be the all-time peak. The theory of peak global oil demand holds that when enough parts of the world reach a peak, a global peak will result, because the few places still growing will not be enough to offset the decliners. In this sense, the theory is conceptually valid. Thus, we would not argue with the notion that peak oil demand is a matter of time. The real question is: how much time?

 

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I had not previously seen the statistics about peak demand for Europe and Japan so I found this report enlightening and commend it to subscribers. Peak demand is an important theme and explains why Saudi Arabia guards its Asian markets so jealously; offering discounts again as recently as two weeks ago. Asia and Africa represent the two big growth markets for international oil products just as they represent the major growth areas for coal consumption. 

“Liberals frequently care more about feelings than facts, and your smug Tesla-owning frenemy will never admit it, but in day to day usage, the big BMW is actually 18% more efficient, and 18% kinder to the planet. (Don’t get too cocky, Mr. 7 Series: at a US average 12 cents per KwH, the electricity cost to the Tesla owner for 1000 miles works out in total to about $81, as opposed to $98 for the gasoline. The reason the Tesla is less efficient, but still cheaper to run, is that the power company pays a lot less for fuel than the automobile driver does. But when the issue is green impact, not greenbacks, the BMW wins handily.)

And

“Of course, no self-respecting Green Weenie would settle for powering his car by the sun, but his house by Con Edison. And with the average efficient house using 1 KwH per hour, i.e., 24 KwH per day, the house needs 4.8 KwH capacity, and considering efficiency losses and reserve requirements, that means 6.9 KwH for the house. So to power both the Tesla and the house, Green Man needs at least 1,443 square feet of power production, at a cost of $115,000. But even using a Tesla-only setup, $60k would buy 25,641 gallons of gasoline (at the current US average price of $2.34 per gallon). The Big BMW could travel, on that much fuel, 24,000 x 24 MPG = 615,384 miles. Game, set and match – Munich and Detroit. Sad!” 

While we didn’t do the analysis, all of Mr. Karo’s numbers were sourced, which was not a surprise, given that he is a Philadelphia lawyer, and the math works. Although Mr. Karo expresses disdain for braggadocios Tesla owners, presumably because of his experiences with some owners he has encountered, the economics in this analysis suggest that gasoline-powered vehicles will have a longer future than EV-proponents suggest, or would like to see happen. Tesla owners will not be swayed by Mr. Karo’s analysis. Instead, they will declare that with falling battery and solar panel costs coupled with their improving efficiencies, the cost advantage will soon swing in favor of EVs. However, the inability of EVs to be swapped for gasoline-powered vehicles in a one-to-one exchange for all applications means there is an extensive convincing period ahead before the public fully embraces them. Just how long that convincing period will be is anyone’s guess. 

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There are four major themes in transportation at the present time. These are electric vehicles, automation, connectivity and sharing. Let’s for a moment take the environmental question out of the argument for electric vehicles. Many people buy them because they are cheaper to run and have fewer moving parts so they tend to be reasonably reliable. 

The best way to send the right economic signals that reflect constraints is through locational marginal pricing – having different power prices in different parts of the grid.

This is a politically unpopular mechanism, as it would see prices go up in zones of large demand – potentially industrial areas.

The alternative is grid investment. But the costs are huge, as is the case for the bottleneck between Scottish wind farms and English demand centers. The 2.2 gigawatt HVDC cable currently being built there has an estimated cost of 1 billion pounds. Yet National Grid estimates as much as 8GW of additional transmission capacity could be required by 2030, on that particular border alone.

Less human involvement might be part of the solution. Google’s DeepMind recently announced they are exploring opportunities to collaborate with National Grid. It has been successful elsewhere -- DeepMind demonstrated its immense potential by reducing cooling costs in an already human- optimized datacenter by 40 percent.

Setting it loose on the extremely complex and quite probably over-engineered National Grid, with its many overlapping services and mechanisms, its rules of thumb and its safety margins, could provide novel ways to ensure system reliability cheaply and efficiently. DeepMind’s CEO conservatively hinted that it might be able to save up to 10 percent of the U.K.’s energy usage without any new infrastructure. Step aside, humans.

 

Artificial Intelligence (AI) is rapidly finding its way into systems which had previously always been managed by humans. You might have heard of the Google Deep Mind team’s victory against the Go world champion. It represented a landmark not so much because it overcame a human; we’ve seen that in chess before. It was the manner in which the victory was achieved that is so important. 

Although there is understandable scepticism given the government’s track record, our confidence on the implementation of free pricing for petroleum products stems from the following measures that the government has already taken: 

The extinguishing of the diesel subsidy in October 2014 and the revision of prices in line with changes in international prices without any government intervention; 

The increase in LPG and kerosene prices each month since June 2016; 

Increases in the auto fuel price even during elections and in times of sharp price increases for crude; 

The aggressive implementation of Direct Benefit Transfer (DBT) to LPG and kerosene to contain subsidies. 

FCF yield improves by up to 280 bps over FY17-20 
Operating cash flow for OMCs will likely be driven by improvement in marketing margins, rising refining margins and higher volumes. Over FY17-20, the FCF yield of state-owned OMCs should improve dramatically, by more than 280bps for IOC and BPCL. HPCL, with capex starting from FY18, will likely see its FCF yield decline by 130 bps. We expect the OMCs to generate robust free cash flows of about USD10bn over FY18-22E. We also estimate net debt/equity of OMCs to decrease further over FY16-22E – HPCL from 1.6x in FY16 to 0.6x in FY22, IOC from 0.6x in FY16 to 0.2x in FY22, and BPCL from 0.7x in FY16 to 0.1x in FY22.

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India is a quickly growing economy that needs to take the greatest possible advantage of its democratic dividend before that massive young population ages. Smoothening out what has often been a distinctly anti-business regulatory regime with a reputation for fickle decisions has been one of Modi’s ambitions in taking on the bureaucracy. Therefore there is reason for some optimism that policy continuity can be achieved in more sectors. 

A pioneer of the U.S. shale revolution wants to take fracking to America’s final frontier. Success could help revive Alaska’s flagging oil fortunes.

Paul Basinski, the geologist who helped discover the Eagle Ford basin in Texas, is part of a fledgling effort on Alaska’s North Slope to emulate the shale boom that reinvigorated production in the rest of the U.S. His venture, Project Icewine, has gained rights to 700,000 acres inside the Arctic Circle and says they could hold 3.6 billion barrels of oil, rivaling the legendary Eagle Ford.

While the potential is huge, the difficulty of shipping millions of gallons of water, sand and chemicals -- the ingredients used in fracking -- to one of the most remote areas on earth is nothing short of monumental. At stake is an Alaskan industry that’s seen output tumble from 2.1 million barrels a day in 1988 to 520,000 in 2016 as reserves dwindled and explorers sought cheaper supplies in shale fields to the south.

“The oil is there,” said Basinski, founder and chief executive officer at Houston-based Burgundy Xploration LLC, in an interview. “Now it’s a question of how quickly we can get it to flow and whether we can get the economics to work." One exploratory well has been drilled, he said, and a second is planned by mid year.

 

OPEC is riddled with problems. The first is that members with large populations like Saudi Arabia might have control over some of the world’s cheapest to exploit reserves but they have allowed domestic financial commitments to essentially turn them into high cost producers. They no longer have the flexibility to curtail supply like they did in the 1970s. 

The second is that they have a lot more competition. OPEC was founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Today it has 13 members and all are competing for market share. That is quite apart from the fact that Russia needs exports to fund its domestic economy and adventurism, the USA is now exporting after a 40-year hiatus and Canada is actively exploring export options. 

Oil has fluctuated above $50 a barrel since the Organization of Petroleum Exporting Countries and other nations started trimming supply on Jan. 1 to reduce a glut. Saudi Arabia and Russia, the architects of the deal, presented a united front on complying with the cuts at the CERAWeek conference Tuesday in Houston. Alongside officials from Iraq and Mexico, they insisted the curbs are working. Managed money boosted wagers that U.S. oil futures would rise to a record last month.

"There’s a huge amount of speculative length in the market and they’re starting to bail," Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by telephone. "OPEC didn’t do a good job at CERA convincing the market that it would roll over the cuts into the second half of the year."

 

Any arbitrage in the futures curve has been squeezed out by hedging activity over the last couple of months as unconventional producers locked in what are economic prices for their activities. That has effectively kept a lid on prices despite OPEC’s quite disciplined cut to supply. The fact the USA is now both a major new source of supply and exporting is a challenge for the cartel. 

A more recent analysis by the Lawrence Berkeley National Laboratory covering 1998 to 2015 shows a different measure of PV cost. (See Exhibit 15 on next page.) The pattern of that decline is interesting. It took 11 years for the price per watt to drop from $12 to $8. Notice how the cost per watt dropped between 1998 and 2000, but then remained flat until 2002, after which it declined for the next three years. Starting in 2005, the cost slowly increased for two years before beginning a slow decline that lasted for two years. In 2009, the pace of decline accelerated until it reached about $4 per watt, or half the 2009 value. The recent decline coincides with China’s entrance into the solar panel manufacturing business and its prompt dumping of surplus output into the U.S. market, driving down panel prices and driving U.S. manufacturers out of business.

It is difficult to separate how much of the historical price decline came from technological improvements versus that from a misguided investment strategy by China. More importantly, will these price reduction trends continue as in the past and how dependent on technological breakthroughs in material science are lower prices in the future?

 

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The cost of producing solar cells collapsed as China introduced economics of scale to the market. That has been perhaps the greatest influence on the price of cells and has contributed to the collapse of the investable sector because so many companies are now running at a loss. There have already been a significant number of bankruptcies and remaining companies are still in a highly competitive environment. 

Even within the Saudi government, doubts are emerging. A person familiar with the flotation, who asked not to be named, said last week Aramco in its current form would probably be worth about $500 billion because a lot of its cash goes toward taxes and future investors won’t have a say on investments in non-core areas. Another person familiar with IPO talks put the figure at a little less than $1 trillion if investors base the valuation on Aramco’s ability to generate cash.

Selling a 5 percent stake would therefore raise at least $25 billion, still enough to match Alibaba Group Holding Ltd.’s unparalleled 2014 offering and dole out millions of dollars of fees to the advisers hired to manage the sale, namely JPMorgan Chase & Co., Moelis & Co. and independent consultant Michael Klein.

The $2 trillion estimate was initially put forward by Deputy Crown Prince Mohammed bin Salman last March. There are two key issues, according to interviews with a dozen industry analysts, investors and executives, who asked not to be named because of the sensitivity of the matter.

The first is that it’s premised on a simple calculation: Take the 261 billion barrels of reserves Saudi Arabia says lie under oil fields like the onshore Ghawar and offshore Safaniya, and multiply by $8 (a benchmark used to value reserves). An independent auditor is assessing Saudi reserves, the second- biggest worldwide, before the IPO.

When is the best time to IPO your company? When you can get more for it than you think it is worth. Saudi Arabia is one of the only participants in the oil business which has to have a really long-term perspective. Exxon Mobil and BP put out long-term forecasts for the energy market stretching into the 2030s but Saudi Arabia tends to think in 50-year timeframes. 

All of the forecasts for domestic oil production appear feasible. The U.S. is home to some of the best oil and gas geology in the world with the largest number of independent explorers testing new theories about where to find and how to produce more hydrocarbons cheaper. These hundreds of independent operators are supported by the largest, most technically sophisticated oilfield service industry. Combine these elements with the deep capital markets existing in the United States that ensures that the petroleum industry has access to adequate capital for creating value for investors, and you have the makings of a vibrant and healthy industry. Depending on events around the world, the risk for the domestic oil industry is that its success could undercut the global oil industry’s recovery and knock down the prospect for a slow steady rise in oil prices and future domestic oil output. We don’t know what the odds of that happening are, but it is a scenario that everyone should keep in the back of their minds as they cheer on the nascent oil industry and oil production recoveries. However, too much U.S. oil success could actually be a bad thing for the industry, but probably a good thing for consumers.

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The US oil sector remains highly competitive at today’s levels and the quantity of oil and gas available for export continues to increase. With a tight spread between near and far contracts, the futures curve is flat suggests a great deal of hedging has already taken place; supporting the view producers are profitable at today’s levels. 

Kazatomprom that it plans to cut its annual uranium production by 10%, or by 5.2M lbs U3O8. This amount translates into roughly 3% of 2015 global production and marks an inflection point in the space. Since at least 2001, Kazatomprom has relentlessly increased production into an oversupplied market and is arguably the single biggest cause for the weakness in the commodity aside from the Fukushima disaster. In fact, we had long since given up on expecting Kazatomprom to exercise production restraint as its mines were the lowest cost operators in the world and constant production increases appeared to be a cultural focus in Kazakhstan.

While some skepticism exists on whether Kazatomprom will actually follow through with this cut (as opposed to OPEC style “cuts”), we suspect that at least some of the production reduction will occur among joint venture operations managed by western producers such as Cameco. Moreover, we believe the impact will be more than the announced cut amount because the market was likely factoring in a typical Kazatomprom increase as opposed to a cut. So instead of a 3-5% increase we are expecting a reduction of 10%, or a 13-15 percentage point swing.

Cameco’s announcement of Tokyo Electric Power Holdings’ (“TEPCO”) termination of its supply contract has cast some concern over what will happen with the U3O8 pounds that were earmarked for the Japanese utility. In total, the contract was for 9.3M lbs U3O8 to be delivered from 2017-2028, this works out to 775,000 lbs annually. TEPCO was selling some if not all of the material it was contractually obligated to purchase already. As such, we believe the worst case scenario arising from the cancellation is that Cameco does the exact same thing and sells the material into the spot market. However, we think there is room for potential positivity from this announcement, as Cameco could instead elect to not produce the pounds at all (and further cut costs by doing so) or it could elect to store them in inventory to await higher prices. Either of those two actions would effectively be removing some of the excess supply in the market. 

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azakhstan stamped its dominance on uranium market by engineering a multi-year decline and succeeded in driving a significant number of small explorers out of business.  Last week’s news Tokyo Electric cancelled a major Cameco contract highlights just how successful their policy of flooding the market with supply has been. Having achieve their goal, the decision to limit supply is an important catalyst for the uranium market. 

Chairman Kevin Moriarty says 1414 Degrees' process can store 500 kilowatt hours of energy in a 70-centimetre cube of molten silicon – about 36 times as much energy as Tesla's 14KWh Powerwall 2 lithium ion home storage battery in about the same space.

Put another way, he says the company can build a 10MWh storage device for about $700,000. The 714 Tesla Powerwall 2s that would be needed to store the same amount of energy would cost $7 million before volume discounts.

 

A race is underway to develop new types of batteries and, for the foreseeable future, there is room for a number of competing technologies. The reason for this is the pace of innovation is slower than in other sectors but also because energy storage is required for widely differing sectors. Batteries need to be small and light for handheld devices, big and have almost infinite recharging capabilities for utilities and need highly efficient power to weight ratios for transportation. That suggests there is ample potential for a number of different technologies to play roles in all of these sectors. 
 

Prior to OPEC’s Vienna Agreement last November, putting oil in storage because of its higher future value was a strong motivation for growing storage volumes. Now the curve is much flatter, and for oil priced three years in the future, that price is lower than the current one, providing a strong disincentive for putting oil in storage. Backwardation plays a significant role in oil producers’ decisions to hedge their production since they risk the potential of the price moving higher if the more traditional contango environment returns. As Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors LLC put it, "What happens to the curve does depend on how the OPEC cuts will be carried out. The oil futures curve is indicating that the current OPEC cuts are here to stay for a while." U.S. oil producers will be very happy if that proves to be the case. While history would suggest otherwise, the pending (early 2018) initial public offering for Saudi Arabia’s state oil company, Saudi Aramco, an important component of its domestic economic restructuring effort, might force the country to hold its output down much longer than it has indicated. The reality may be that hundreds of small U.S. oil producers may screw up Saudi Arabia’s grand plan while hurting speculating oil traders with their record bullish oil price bet. A lower future oil price after a record bullish oil futures bet would be consistent with our recent history.

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BP and Exxon Mobil spend a great deal of time and effort producing annual reports on energy use and issue predictions on how it will evolve over the time. That helps keep investors informed on how the companies plan to mobilise capital to take best advantage of how they see events unfolding. Saudi Arabia, as the world’s largest low cost producer, does not issue public annual reports. However its plans to IPO the company tell us more than any report ever could about the conclusions the Saudi Arabian administration has reached about the future of the oil market.

There seems to be an error with the chart of uranium which you referenced last month, would it be possible to please update it (see the enclosed chart)?

Thank you for this email which may be of interest to subscribers. Uranium is not a freely traded commodity so there is only one daily price. Therefore it is best to view it as a line chart. I am not sure why we receive open, high, low, close data but I have now switched the chart to default to line in the Chart Library.

More pipelines from Canada would also “generate greater competition for crudes of comparable quality such as those imported from Mexico or Venezuela,” Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London, said in an instant message.

The administration moved to expedite approval and construction of the Keystone XL pipeline as well as the Dakota Access line through North Dakota. Trump said he wanted to renegotiate terms to get a better deal for the U.S., including more U.S.-made materials in the lines.

The 830,000-barrel-a-day Keystone XL has been blocked since it was first proposed in 2008. TransCanada said in a statement it will reapply for the project.

 

Canada represents a problem for OPEC. It has vast reserves which are largely economic at today’s prices and it borders the world’s largest consumer. Despite that proximity its tar sands have been stranded, inhibited by lack of access to key global markets, which has made Canada something of a bit player in the global market. With the development of pipelines West, East and South that could all change in the coming decade. 

At the top of Mr. Trump’s energy and environmental agenda will be unraveling Obama administration policies that touch on everything from carbon emissions to water.

Much of the action out of the gate will focus on rolling back regulations. Mr. Trump has said he would withdraw Mr. Obama’s signature policy to address climate change, a rule that cuts power-plant carbon emissions. The rule already has faced legal challenges and has been temporarily blocked by the Supreme Court.

The Trump administration, with the help of the Republican-controlled Congress, also will work toward repealing an Environmental Protection Agency rule bringing more bodies of water under federal jurisdiction. Also targeted for repeal: Interior Department rules that require tougher standards for coal mining near streams and that set new standards for emissions of methane, a potent greenhouse gas, from oil and natural-gas wells on federal lands.

While the Trump administration can’t unilaterally repeal most rules right away, it has several options. The EPA and other agencies can immediately start the process to withdraw regulations, and they can relax compliance requirements over time. Meanwhile, Congress can pass measures nullifying rules that have been completed most recently.

Immediately confronting Mr. Trump is a decision regarding the Dakota Access oil pipeline, which extends from North Dakota to Illinois and is nearly built except for a crossing of a Missouri River reservoir.

Mr. Trump may also have a decision to make on the Keystone XL oil pipeline if its developer, TransCanada Corp., reapplies for a State Department cross-border permit the Obama Administration denied in 2015.

On the campaign trail, Mr. Trump said he would withdraw the U.S. from the global climate agreement signed in Paris in late 2015. He couldn’t immediately pull out of the agreement, but he could begin the process of withdrawing.

 

I watched the end of the inauguration speech at my club following my Friday morning HIIT class and the facial expressions of the desk staff were a picture of just how much work needs to be done to reunite the country. High energy costs, high healthcare costs, high education costs and no wage growth combined to create the conditions that got Trump elected. He is going to need to deliver on solutions to some of those problems if he is going to receive the second term he wishes. 

The UK’s largest cap index is in the process of completing a 16-year range by breaking on the upside. The Index has rallied for six consecutive weeks, hit new all-time highs last week and improved on that performance this week. Prior to this breakout it had spent three years ranging below, but in the region of, its previous peaks. While a short-term overbought condition is evident that is consistent with what is to be expected from a major breakout. 

As for a new Ice Age, the Russian Academy of Science’s Pulkovo Observatory in St. Petersburg, considered one of the world’s most prestigious scientific institutions, recently issued a new study titled, “The New Little Ice Age Has Started.” According to the study, the average temperature around the globe will fall by about 1.5o C (2.7o F) when the planet enters the deep cooling phase of this new Little Ice Age, expected in the year 2060. The study goes on to predict that after 2060 the Earth will experience four-to-six 11-year solar cycles of cool temperatures before beginning the next quasi-bicentennial warming cycle around the turn of the 22nd century.

Habibullo Abdussamatov is the head of space research at Pulkovo and the author of the study. He has been predicting the arrival of another ice age since 2003, based on his study of the behavior of the sun’s different cycles and the solar activity that then results. His model is based on data from the Earth’s 18 earlier little ice ages over the past 7,500 years, six of them experienced during the last thousand years. Based on his model, he began predicting over a decade ago that the next little ice age would start between 2012 and 2015. Abdussamatov’s models have been affirmed by actual data, including the rise of the oceans and the measurable irradiance sent earthward by the sun. Given the accuracy of his predictions, which have been demonstrated in numerous studies since 2003, he now predicts that we entered the 19th Little Ice Age in 2014-2015. This forecast would appear to fly in the face of climate change scientists pointing to 2015 and 2016 as being the warmest years on record – and forecasts that we will experience more record warmth in coming years.

Mr. Abdussamatov’s views stand in opposition to the conclusions of climate models, as he has tied his forecast of a prolonged cooling spell to solar, not man-made, factors. The recent disappearance of sunspots from the face of the sun, which also occurred during the Little Ice Age in the late 1600s, has made Mr. Abdussamatov’s contention no longer an isolated view. In fact, organizations such as the National Astronomical Observatory of Japan and the Riken research foundation have reached similar conclusions. The battle over whether man-made or natural forces are the primary driving force behind global warming and climate change will likely become more contentious in the next few years. The key point is that the world’s population is at greater risk of serious harm from colder temperatures rather than warm temperatures, which seems to be ignored by government officials and the media. We guess, cold and ice doesn’t lend themselves to as spectacular disaster scenes as heat-related weather events.

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I am more than willing to accept that humans have an impact on our environment. After all there are a lot of us and we engage in a great many industrial activities. However the sun is a major contributor to weather patterns and its cycles cannot simply be ignored. I predicted back in 2009 the most recent solar activity peak would represent a lower low and that has now come to pass. As we head into another solar minimum we can anticipate colder winters in the years ahead. However to go from there to a prediction of an impending mini-Ice Age is quite a leap. 

“It’s the world’s best asset in the world’s worst market,” said Leigh Curyer, chief executive officer of NexGen Energy Ltd., a Vancouver-based uranium producer. “I don’t think there’s a mine profitable at current spot prices. This short-term spot price isn’t reflective of the cost of producing a pound globally.”

The outlook isn’t entirely bleak. Losses are forcing uranium mines to cut production or close, which may eventually create a supply crunch, while accelerated building of nuclear plants in China and India could help revive demand. But it may take a while for those developments to take hold, according to a report last month from Morgan Stanley, which said it can’t identify any medium- or long-term driver for prices.

Uranium extended its fade last year even as most other raw materials recovered. The Bloomberg Commodity Index of 22 items posted its first annual gain since 2010, advancing 11 percent.

 

When Tata Motors bought Land Rover it held onto the name for obvious reasons. It knew it didn’t stand a chance of selling a luxury vehicle under the moniker Tata Motors. If nuclear energy could do the same it would be in a much better position. Reactors being built today bear little resemblance to those which have garnered such a bad reputation over the last number of decades. However that is not the point. Public opinion is not yet in favour of uranium fuelled energy and there is little evidence that is about to change not least because it simply does not have a high profile credible spokesperson to champion it. 

“Certainly it would be a challenge for anyone to make money at that price,” Osborne said in an e-mail. “The blended cost for most last quarter was about 36 cents to 38 cents.”

The current price is also lower than cost estimates from Trina. The biggest supplier of 2015 expected to reduce costs to about 40 cents a watt by the end of the year, from 45 cents in the second quarter, Chief Financial Officer Merry Xu said in an August conference call. The Changzhou, China-based company’s shareholders on Dec. 16 agreed to a $1.1 billion deal to take the company private. A spokesman declined to comment Friday.

Some companies’ cost structures remain competitive, even with prices this low. Canadian Solar Inc., the second-biggest supplier, reported costs of 37 cents in the third quarter, down from 39 cents in the second quarter. The company has said its costs are among the lowest in the industry, and it expects to reach 29 cents a watt by the fourth quarter of 2017. Many of its competitors expect costs in the low 30s by then, Osborne said.

 

Producing solar cells in an environment where prices are falling and likely to continue to fall as new technologies are integrated into the manufacturing process is a highly competitive business. Companies unable to compete will go bankrupt and even the most successful face the threat of obsolescence. Consumers are the primary beneficiaries. 

With the election of Donald Trump as the nation’s 45th president, there are signs environmental restrictions on fossil fuels will be loosened and more room will be made for fossil fuels. That will be a significant shift in the recent trends for environmental and energy regulation. Whether it significantly alters the current trajectory for the dirtiest of our fossil fuels – coal – remains to be seen. Clearly, short of an outright ban on renewable energy plants, the current backlog of new, cleaner power plants will not change, so our near-term energy mix will continue to shift toward more renewable fuels. The issue for the energy industry is whether the economic trends in place boosting renewable fuels are altered and slow down the pace of additions of new renewable fuel plants. That will partially depend on whether current renewable fuel mandates and subsidies are renewed once they reach their expiration dates, or even if they are outright cancelled early.

At the present time, businessmen, energy executives and consumers are struggling to understand the true economics of electricity. Analysts have strived to produce cost estimates for electricity produced by different fuels in such a way that they can be analyzed on the same basis. Standardized cost estimates provide a means to assess the impact on different fuel sources of various environmental policies. The process is called levelized cost of electricity. This tool enables direct comparison of electricity costs from power plants fueled by either fossil fuels or renewables. One drawback from this tool is that it assumes every kilowatt of power generated has the same value to consumers regardless of when during the day it is produced. It ignores the reality that during summer days in the southern regions of the United States, electricity to power air conditioners in the afternoon when temperature reach their highest levels is of greater value to consumers than during the middle of the night when temperatures drop.

 

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Electricity pricing is a moving target for both energy companies and environmentalists alike. The challenge is to deliver energy when it is most required rather than when it is easiest to produce and the only way of solving that issue for renewables is with storage or back-up conventional capacity. 

Oil prices are probably already high enough to spark a rebound in shale production.

The IEA says that in the third quarter of 2016, the U.S. shale industry became cash flow neutral for the first time ever. That isn’t a typo. For years, the drilling boom was done with a lot of debt, and the revenues earned from steadily higher levels of output were not enough to cover the cost of drilling, even when oil prices traded above $100 per barrel in the go-go drilling days between 2011 and 2014. Even when U.S. oil production hit a peak at 9.7 million barrels per day in the second quarter of 2015, the industry did not break even. Indeed, shale companies were coming off of one of their worst quarters in terms of cash flow in recent history.

That all changed around the middle of 2015 when the most indebted and high-cost producers went out of business and consolidation began to take hold. E&P companies began cutting costs, laying off workers, squeezing their suppliers and deferring projects that no longer made sense.

By 2016, oil companies large and small had shed a lot of that extra fat, running leaner than at any point in the last few years. By the third quarter, oil prices had climbed back to above $40 and traded at around $50 per barrel for some time, replenishing some lost revenue. That was enough to make the industry cash flow neutral for the first time in its history.

 

The price of anything is heavily influenced by the marginal cost of production. If US onshore domestic unconventional oil plays are cash flow neutral at $50 it is reasonable to expect they will invest any free cash flow in expanding production at prices above that level. 

Another theme we think is surfacing is inflation driven by Trump's potential fiscal stimulus program. Hence, a return to "real assets," or stuff stocks, should have an increased weighting in portfolios. Verily, the price of real assets, relative to financial assets, is at historic lows. Consequently, investors' mindsets should be focused towards higher inflation, higher interest rates, and reduced disinflation. As an example, China's PPI hooked up in September for the first time since 2012. We believe the same thing is happening here in the U.S. 

Accordingly, REITs, timber, agriculture, collectibles (wine, art, diamonds, precious metal coins, farmland, etc.), and MLPs should have an increased weighting in portfolios, in our view. To this MLP point, we recently met with one of the savviest MLP-centric portfolio managers on Wall Street, who believes the midstream and downstream MLPs are ripe for a number of good years going forward. He suggests the bad news is in the rearview mirror: the capital markets are wide open for the MLPs; we are consuming an extra 1 million barrels of crude oil per day, and the MLPs traded at around a 30% discount relative to par.

 

The MLP sector is highly leveraged as a rule so it collapsed when oil prices fell. By the same token it is also benefiting from the rise in oil prices and with the high yields evident, particularly in the pipelines sector, it now offers upside leverage. 

The Alerian MLP Total Return Index hit a new recovery high this week and a clear downward dynamic would be required to question medium-term potential for additional upside. 

The massive project, said to be the third largest uranium-only mine in the world, will boost domestic production from 2,900 tonnes in 2016 to 5,800 tonnes next year, according to BMI estimates.

Output will be gradually increased to reach the installed capacity of 50-million tonnes of ore a year, Swakop's chief executive Zheng Keping said in September.

Based on data from Namibia’s central bank, production of uranium will increase 63% this year and 90% in 2017.

Currently, the African nation is the world’s sixth biggest uranium miner, behind Kazakhstan, Canada, Australia, Niger and Russia.

 

China has long-term ambitions of cleaning up its toxic air and nuclear represents a big part of the anticipated solution. That is the primary reason the country has been so aggressive in securing uranium deposits wherever it can get a significant stake. 

While BP's operations are currently the most sophisticated, others have also begun developing U.S./Asia trade.

China's Unipec, the trading arm of Asia's largest refiner Sinopec (600028.SS), is shipping about 2 million barrels of WTI to China this month, while trading house Trafigura is also exporting some 2 million barrels of U.S. oil to Asia.

Incentives to bring U.S. crude into Asia have risen after the Middle East-led producer club of the Organization of the Petroleum Exporting Countries (OPEC) and Russia agreed to cut output, encouraging refiners across the region to seek alternatives to offset potential supply shortfalls.

"OPEC is putting U.S. shale oil to the test... (and) we will truly see what it can deliver," said Bjarne Schieldrop, chief commodity analyst at SEB. He predicted 2017 would be a "shale oil party" with a surge in U.S. exports after the OPEC production cuts.

The operation to send the oil, worth around $150 million, to Asia-Pacific buyers lasted four months and involved BP traders in the United States and Singapore, while colleagues from London were responsible for ship chartering, the sources said and data showed.

BP took advantage of arbitrage between cheaper U.S. West Texas Intermediate (WTI) CLc1 crude and the global benchmark Brent LCOc1.

The deal was aided by cheap tanker rates and a price/time curve, where future oil deliveries are more expensive than those for immediate discharge, making sourcing oil from as far away as North America profitable.

The US has just started exporting crude oil for the first time in decades and if the Keystone pipeline is finally permitted in 2017 if would give Canadian heavy crude an outlet to Texas’s refining and shipping infrastructure that would allow even greater volumes to be exported.

The expanded Panama Canal raises the prospect of a short-cut to Asia from Texas. That is of course once ships have been retrofitted to be tugged through the new canals which is taking somewhat longer than originally anticipated. 

Lithium, frequently referred to as "white petroleum," drives much of the modern world, as it has become an irreplaceable component of rechargeable batteries used in high tech devices.

The market, while still relatively small — worth about $1bn a year — is expected to triple in size by 2015, according to analysts at Goldman Sachs

That should be great news for Chile, as the country contains half of the world’s most “economically extractable” reserves of the metal, according to the US Geographical Survey (USGS). It is also the world’s lowest-cost producer, thanks to an efficient process that makes the most of the country’s climate.

Chile is essentially “the Saudi Arabia of lithium,” according to Marcelo A. Awad, executive director of the Chilean brand of Wealth Minerals, Canadian company that also has interests in Mexico and Peru.

The country, he noted in a recent interview, is perfectly positioned, with ports across the Pacific from the world’s largest car market, China, which is expected to increase electric vehicles production in years to come. There, lithium is also used to manufacture rechargeable ­batteries that power hundreds of millions of smartphones, digital cameras and laptops.

The challenge for foreign investors, particularly the Asian conglomerate, is to persuade Chilean authorities of making the leap from exporting the white metal to producing lithium batteries at the point of extraction.

Estimates from the group’s advisors believe opening the proposed plant would make the value of the product 35 times higher than what it could be obtained by just selling it as lithium carbonate

Elon Musk might be one of the world’s great promotors but there is no denying that he has upended the automotive sector with just about every major auto manufacturer planning to release a range of electric vehicles within the next few years. 

"Perovskites came out of nowhere in 2009, with an efficiency rating of 3.8 percent, and have since grown in leaps and bounds," said Anita Ho-Baillie, a Senior Research Fellow at the UNSW's Australian Centre for Advanced Photovoltaics. "I think we can get to 24 percent within a year or so."

The solar cells are made from crystals grown into a particular structure called perovskite. Smooth layers of perovskite with large crystal grain sizes allow the cells to absorb more light. The technology has been advancing fast and attracting plenty of attention thanks to its ease of production and low cost compared to silicon cells.

"The diversity of chemical compositions also allows cells be transparent, or made of different colors," said Ho-Baillie. "Imagine being able to cover every surface of buildings, devices and cars with solar cells."

Perovskite cells do have downsides like much less durability, something Ho-Baillie and her team say they're confident they can improve, while also shooting for higher levels of efficiency.

Perovskite is a development stage technology that is likely to play an important role in the future of solar cells but it could be a decade before it reaches commercial utility. The primary argument supporting perovskite is the relative cost of producing the crystals versus the panels used today. That enhances the technology’s competitiveness so that cells do not need to be as efficient because they are so much cheaper. However what do need to be overcome are the issues described above regarding durability which are non-trivial.

OPEC has just decided a headline cut of 1.2 million b/d

We calculate that compared with October secondary sources in the OPEC report, the net OPEC cut from the 11 participating countries in the deal is 0.982 million b/d

Angola was allowed to use September output as the base instead of October

The cartel will use secondary sources to monitor output reductions
Indonesia, Libya and Nigeria is not part of the deal

Since the cartel has distributed quotas to the different countries, have organized a monitoring committee and are using secondary sources, the deal is very bullish to the oil price

 

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Brent crude oil hit a new recovery high today and upside follow through tomorrow would confirm a return to demand dominance beyond what has been an impressive two-day rally. Considering the fact that the price has been rangebound for the last six months the potential for a breakout that is outsized relative to the amplitude of the congestion area cannot be discounted. 

While energy market watchers have highlighted President-Elect Trump’s nod towards drilling and fracking, we believe that a Trump administration will have a larger impact on the US demand side of the ledger. The two key regulations which, if repealed, could drive US gasoline demand materially higher are the Corporate Average Fuel Efficiency Standards (CAFE) and the Renewable Fuel Standard (RFS). The potential impact of a Trump presidency on US gasoline demand is not one that should be underestimated. After all, US gasoline demand comprises of nearly 10% of total global oil demand and has been the sole bright spot in the OECD region, which has otherwise been trending lower on a structural basis since the recession. The potential repeal of aforementioned regulations is unlikely to make a difference in his first 90 days in office, but it is a rather bullish potential catalyst in the quarters and years to come.

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An additional bullish potential outcome for gasoline prices is that the millennial generation is increasingly turning towards car ownership after a delayed start which should at least put a partial floor under demand. 

Another issue that has yet to be addressed is a proposed ban on oil tankers operating off British Columbia’s coastline that would effectively shut down the development of an oil export terminal at Kitimat and thus kill the proposed Enbridge (ENB-NYSE) Northern Gateway oil export pipeline. If the tanker ban is put in place, it will force the development of the Trans Mountain pipeline as the primary West Coast oil export pipeline. That would leave the Trudeau government to deal with TransCanada Corp.’s (TRP-NYSE) Energy East oil pipeline project to move Western Canadian oil to the East Coast where it could be exported to the U.S. East Coast or Europe. Despite being the “environmental” prime minister, Mr. Trudeau is recognizing that without more oil and gas export opportunities, his nation’s economy, which depends on a healthy energy economy, will suffer with many social and financial repercussions.

The Canadian federal government’s decision about Trans Mountain on December 19th will be an important milestone for the nation’s energy business. There are still numerous other policy decisions that must be addressed before Canada develops a full-scale oil and gas export expansion regime, but the first steps appear to have been taken last week.

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Anyone who has ever been to Vancouver will understand how important pristine maritime conditions are when they sit down to taste some of the city’s delectable seafood. Whether it is salmon, sushi or Cantonese style seafood all are on par with what is on offer anywhere else in the world. However despite a deep interest in preserving the province’s wonderful maritime resources there are bigger questions that need to be addressed. 

One important breakthrough will be increasing the energy density of the battery through being able to cram more cells into the same volume of battery packs. The battery density doubled between 2009 and 2016, and this is definitely not the end. Just like with the technological development of the personal computer, there is something similar to a 'Moore's Law' in the battery development: currently, we recognize an annual improvement rate of 14 percent, which is quite immense."

Although 14 percent is significant, it's only just a start when it comes to battery technology. At the moment, electric cars make use of lithium-ion batteries, the type pioneered by the Tesla Roadster back in the mid-2000s. Schenk says there's plenty of improvement to come in lithium-ion tech, but greater leaps forward are in the pipe.

"New technologies, and especially those aimed at material-related improvements, plus ever-increasing production volumes leading to further price decreases, will determine the development stages of the next few years," Schenk says. "Within the next decade a major technological leap is expected with lithium-sulphur systems, and these are set to revolutionize costs and operating range as extraordinarily relevant buying criteria for electric vehicles."

Already, improvements to battery chemistry are starting to pay off, and people are starting to buy electric vehicles in greater numbers. Renault, one of the largest players in the European electric game, sold 23,087 electric cars in 2015 - a 49 percent increase on its 2014 numbers.

 

Advances in battery technology have been slower to manifest than in microprocessors because of limitations in chemistry but perhaps more importantly because there has just not been enough incentive for companies to spend money on innovation. 

It appears to us that everyone in the energy industry is fixated on whether the OPEC oil ministers meeting in Vienna, Austria on November 30th will produce an agreement to limit the group’s output, and how that production volume will be shared among the group’s 12 members. Also, it will be important to see who among the 12 OPEC members will be exempted from a monthly production quota and what those countries near-term output goals are. Lastly, we need to see some support from Russia for OPEC’s production cap to have much strength. While all these details are important to the outcome of the OPEC meeting and how the energy world reacts to whatever is agreed to, the lack of executive thinking about what happens to energy demand if the U.S. enters a recession could be the pothole everyone steps in. The duration and depth on any recession will determine how much oil demand might be lost due to weaker economic activity. We suggest you should pay attention to this hidden elephant in the OPEC meeting room. 

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While Allen Brooks is not predicting a recession more than a few analysts have floated the idea. It’s an important consideration that would of course have a significant impact on the energy markets but also on just about every other asset class. Perhaps it would be timely to review some of the leading indicators for recessions to see where we are in the cycle. 

If OPEC reduces output to 32.5 million barrels a day -- a cut of 900,000 a day from September levels -- it would be pumping slightly less than the amount needed to meet demand in 2017, the group’s monthly report from Oct. 12 shows. Inventories would contract as a result, but only by 36.5 million barrels over the course of the year, a negligible impact on a stockpile surplus the group estimated at 322 million barrels above the five-year average in August.

If OPEC doesn’t act to reduce stockpiles next year, Societe Generale’s price forecasts would probably have to be revised lower, Mike Wittner, head of oil-market research, said in an e-mailed note. Over the first three quarters of 2017, the bank currently sees Brent averaging $55 a barrel and West Texas Intermediate at $53.50.

 

If oil prices are to be massaged higher Saudi Arabia and Russia will have to come to an agreement to curtail supply and by more than has already been agreed. Such an agreement would require major sacrifices on both their counts since Saudi Arabia is engaged in a rationalisation of generous handouts its citizens have been accustomed to for decades. Meanwhile Russia is actively engaged militarily in both Ukraine and Syria as well as having expensive plans to revitalise its nuclear arsenal. These decisions would also have to be taken in the knowledge that any additional rally in oil prices will encourage even more US unconventional supply back into the market. 

Marky Mark-ing to market cost and efficiency gains: More competitive than you think
Contrary to popular belief, the US onshore isn’t the only sector seeing meaningful cost deflation and/or efficiency gains. While the ~60% reduction in DW rig rates has grabbed headlines, broad improvements, including drill-days (-30%-40%), steel costs (-30%), and various SURF/topsides costs (-10%-30%) have reduced total project costs by 30%-40%, in our view. And given the lag in response time, excess capacity and a moderate pick-up in activity, we expect cost and efficiency gains to be more durable than in the US onshore.

But not all barrels are created equal. Only high quality resource can compete While all deepwater tends to get lumped together, the range of economics across projects is diverse (sub $30/bbl-$80+/bbl breakevens), with only high quality resource set to compete. We examine various drivers of project economics, many poorly understood, including fiscal terms, resource size, resource density, and proximity to infrastructure, and potential impact. We see high quality, pre-FID deepwater projects breaking even at roughly $40-$50/bbl.

Meaningful challenges remain
Though more competitive than the market believes, meaningful challenges will continue to drive an increasing share of discretionary capital to US shale, including: geologic risk, project execution risk, geopolitical risk, and capital inflexibility. Adjustments to development strategies and scope can mitigate some risk, and large, diverse IOC budgets will invest across the spectrum, but failure to revolve would demand a higher rate of return, with an increase to 15% required IRR (vs. 10%) increasing average breakevens by $7.5/bbl.

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

Drilling for oil offshore is quite a bit more expensive and carries with more risk that drilling onshore. Nevertheless, before the evolution of unconventional onshore oil and gas wells in the USA, oil companies had little choice but to explore the world’s oceans. The question is not whether the oil is in place offshore but rather what is the cost of extraction and transportation to shore?

Speaking at the Senate Economic Committee on Tuesday, BCB President Ilan Goldfajn. Goldfajn repeated several statements that had already been published in the central bank’s Inflation Report last week, reaffirming the intention of making inflation converge to the 4.5% target in 2017. Goldfajn also repeated the remarks published in the Inflation Report about the three conditions for the authorities to initiate an easing cycle (namely limited persistence of food price shock, disinflation of IPCA components, and lower uncertainty about the fiscal adjustment implementation). The Goldfajn, however, added that the BCB “does not have a pre-established timetable for monetary easing,” as the COPOM decision will depend on several factors, including inflation expectations and forecasts. This comment suggests that the BCB has not yet made a final decision to cut rates, perhaps because market inflation expectations for 2017 have not converged to the 4.1% target yet. Despite Goldfajn’s cautious remarks, we still expect the COPOM to cut the SELIC rate by 25bps at the next meeting later this month.

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Brazil has a number of challenges facing the economy not least corruption and the low standards of governance in its state institutions which have contributed to low approval ratings for the government regardless of who is in power. Controlling inflation will be one of the key tests from an international perspective because of the impact that would have on the currency. 

Third-quarter revenue rose 26% year over year to $1.46 billion, driven by 51% growth in the firm’s subscription revenue base. Creative Cloud continues to serve as the company’s key revenue driver, as both greenfield customers and cloud migrators are providing a consistent lift in the annual recurring revenue base. We believe ample growth opportunities remain across both Creative Cloud and Digital Marketing, particularly as consumer users migrate and enterprise customers consolidate digital content creation and marketing spend around suites of applications versus point solutions.

The company is beginning to show the two main benefits of renewal billings in its subscriber base, which are higher prices and substantially lower customer acquisition costs. As a result, GAAP operating margin exceeded our forecast by more than 300 basis points at 25%, the firm’s best quarterly mark since the fourth quarter of fiscal 2012. While we suspect the firm will need to maintain aggressive investment in sales and marketing, particularly as competition for digital marketing wins remains intense, we think the increasing renewal mix of Creative Cloud billings will smooth this effect, yielding mid-30s operating margins in the long run.

 

I’m reminded of an old adage that “you can sheer a sheep every year, but only send him for slaughter once” when looking at the success of Adobe’s subscription pricing model. A significant number of companies are now adopting the same policy, opting for the relative security of payments over the long-term versus relying on “lumpy” sales of new software. 
 

Harry Tchilinguirian, head of commodity research at BNP Paribas SA in London, said on Friday that OPEC had thrown a “lifeline” to U.S. shale firms, prompting them to hedge “in droves.” The bank has “seen many queries coming through” from producers, he said.

The West Texas Intermediate 2017 calendar strip -- an average of future prices next year that’s often used as a reference for hedging activity -- rose above $50 a barrel to its highest since August on Monday. “When calendar 2017 pricing rises into the low-to-mid $50s, as it is doing now, producer hedging rises materially,” Longson said.

U.S. shale producers used a similar rally to hedge their prices in May, when the WTI 2017 calendar strip also rose above $50 a barrel. The current activity comes after industry executives told investors in July and August they planned to use any window of higher prices to lock-in cash flows for next year.

"We would like to be a little bit further hedged than we are today," Pioneer Natural Resources Co. Chief Executive Officer Tim Dove said back in July, noting his company has locked in prices for up to 55 percent of its 2017 exposure. “I’d like to see us get that number up as we go towards at the end of this year.”

 

US unconventional onshore supply represents an important marginal producer that functions independently of the OPEC/Russia cartel. The level at which US producers are willing to hedge supply into next year tells us more about at what level they deem to be economic for their operations than probably any other factor. It is now possible to hedge December 2017 supply at over $53 so we can reasonably conclude that level represents where the incentive to drill and produce even more really becomes inviting. 

Nonetheless, our 4Q16 oil supply-demand balance is weaker than previously expected given upside surprises to 3Q production and greater clarity on new project delivery into year-end. This leaves us expecting a global surplus of 400 kb/d in 4Q16 vs. a 300 kb/d draw previously. Importantly, this forecast only assumes a limited additional increase in Libya/Nigeria production of 90 kb/d vs. current estimated output. As a result, we are lowering our 4Q16 forecast to $43/bbl from $50/bbl previously. While a potential deal could support prices in the short term, we find that the potential for less disruptions and still relatively high net long speculative positioning leave risks skewed to the downside into year-end. Importantly, given the uncertainty on forward supply-demand balances, we reiterate our view that oil prices need to reflect near-term fundamentals – which are weaker – with a lower emphasis on the more uncertain longer-term fundamentals.

Despite a weaker 4Q16, our 2017 outlook is unchanged with demand and supply projected to remain in balance. We expect demand growth to remain resilient while greater than previously expected production declines in US/Mexico/Venezuela/ Brazil/China are offset by greater visibility in the large 2017 new project ramp up in Canada/Russia/Kazakhstan/North Sea. While our price forecast remains unchanged at $52/bbl on average for next year with a 1H17 expected trading range of $45- $50/bbl, we continue to view low cost and disrupted supply as determining the path of an eventual price recovery with our forecasts conservative on both. As we wait for headlines from Algiers, it is worth pointing out that Iran, Iraq and Venezuela have each guided over the past month to a 250 kb/d rise in production next year.

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

Saudi Arabia’s commitment to support a production cut by OPEC of 750.000 barrels made headlines and has influenced the oil market by disrupting the perception, described above, of a balanced market overall. What appears to have made fewer headlines is that Iran will be omitted from the agreement and is therefore free to continue to increase supply in order to regain the market share it lost due to sanctions. Therefore the most likely result is a limited supply cut overall while any boost to prices will encourage unconventional drilling suggesting a cut may be short lived. 

Tesla Motors Inc. will supply 20 megawatts (80 megawatt-hours) of energy storage to Southern California Edison as part of a wider effort to prevent blackouts by replacing fossil-fuel electricity generation with lithium-ion batteries. Tesla's contribution is enough to power about 2,500 homes for a full day, the company said in a blog post on Thursday. But the real significance of the deal is the speed with which lithium-ion battery packs are being deployed. 

"The storage is being procured in a record time frame," months instead of years, said Yayoi Sekine, a battery analyst at Bloomberg New Energy Finance. "It highlights the maturity of advanced technologies like energy storage to be contracted as a reliable resource in an emergency situation."

 

Tesla is essentially a battery company which also happens to produce electric cars. It has been my argument for quite some time that the only way solar can achieve grid parity is if it is used in conjunction with batteries. As long as solar power is subject to intermittency which forces utilities to maintain excess capacity it will not be taken seriously as a viable alternative to fossil fuels. 

Multiple companies have expressed interest in TerraForm Power. Golden Concord Holdings Ltd., a Chinese clean-energy group, is planning to bid for SunEdison’s controlling stake in the company, people familiar with the plans said in August. That would challenge a joint offer from Canada’s biggest alternative- asset manager, Brookfield Asset Management Inc., and billionaire David Tepper’s Appaloosa Management LP hedge fund.

TerraForm Power said in August that it was considering plans to set up an auction to sell itself, according to people familiar with the matter. SunEdison, which has been selling off assets in Chapter 11, said earlier this month that it had reached an agreement with the two non-bankrupt yieldcos over when and how they would bring claims as part of the bankruptcy.

The process may not lead to a deal, according to Swami Venkataraman, an analyst at Moody’s Investors Service.

If the bids “highly undervalue” TerraForm Power and its assets, “they may choose to operate as an independent company for some time,” Venkataraman said in an e-mail Monday.

The case is SunEdison Inc., 16-10992, U.S. Bankruptcy Court, Southern District of New York (Manhattan)  

 

SunEdison’s financial engineering resulted in the company’s bankruptcy with the yieldcos into which it poured all of its productive assets are now the subject of investor interest. For companies seeking to pick up clean energy assets at a discount in order to benefit from the cash flows they throw off and/or to bolster their green credentials Terraform Power and Terraform Global represent potentially attractive targets. 

With Enbridge Inc. planning a $28 billion takeover of Spectra Energy Corp., some investors say the industry’s in store for more deals as pressure mounts on the likes of Enterprise Products Partners LP and Kinder Morgan Inc. to follow suit. The biggest pipeline deal of the year foreshadows a feeding frenzy as those companies that survived the collapse in oil and natural gas prices step up the hunt for bargains. TransCanada Corp. got the ball rolling with the $10.2 billion purchase of Columbia Pipeline Group Inc. earlier in the year.

“We’ve just come through a very tumultuous period,” said Libby Toudouze, a partner and portfolio manager at Cushing Asset Management in Dallas. “Being able to survive the trough in the energy cycle, especially one like this last one that was so long, means you have to be bigger, faster, stronger.”

Enbridge’s deal would vault the Calgary-based company into North America’s largest energy pipeline and storage player. It could also mark the beginning of the "supermajor" era for the industry, according to Rebecca Followill, head of research at U.S. Capital Advisors, since it might “light a fire in the bellies” of the larger pipeline players, setting off a wave of consolidation that could accelerate through the end of 2016.

“Enterprise Products Partners is the other big 800-pound gorilla out there,” Toudouze said. “This puts a little more pressure on them to try to do something in the space.”

 

The MLP sector, which is heavily weighted by pipelines, crashed lower with oil prices. The high leverage employed in the business models of pipeline companies was a major contributing factor in this underperformance. However with increased evidence that oil prices have hit medium-term lows, the relative resilience of North American economic growth and continued low interest rates, it is a natural time for companies to think about acquisitions. 

"The failure of Russia and Saudi Arabia to take any steps to support the market is sending us lower," said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. "The Saudi oil minister actually talked the market lower, which is going to cost his country billions." 

Brent rose the most in three weeks on Friday after President Vladimir Putin said he’d like OPEC and Russia to agree to an output freeze, speaking before he traveled to China to meet Saudi Deputy Crown Prince Mohammed bin Salman. Oil had rallied in August on speculation that members of the Organization of Petroleum Exporting Countries and other producers would agree to cap output when they meet informally in Algiers later this month. A similar proposal was derailed in April over Saudi Arabia’s insistence that Iran participate. 

 

Russia, more than most countries, must want to see oil trading at higher prices. It’s by far their most important export and is responsible for funding not only public services but the country’s adventurism in Eastern Europe and The Levant. Saudi Arabia on the other hand has deliberately used oil as a policy tool in its attempt to deprive Iran, against whom it is engaged in open conflict in Syria, Yemen and Iraq, from deriving any advantage from the loosening of sanctions. If Saudi Arabia were to agree to Russia’s terms without a commensurate move from Iran it would be an admittance of failure which would be hard to countenance at this stage. 

The Obama administration’s Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) released their Phase II fuel efficiency and greenhouse gas emissions regulations for heavy-duty trucks. This group includes the largest pickup trucks sold as well as the traditional 18-wheelers on the highways. The standards are to be phased in between the 2021 and 2027 model years. The existing standards, which were designed for the 2014 through 2018 model years, will remain in place until the new standards take effect.

The heavy-duty truck standards come as the government has just begun negotiations with auto manufacturers over the final fuel efficiency ratings for light-duty vehicles where the industry is lagging behind the targets in the standards. Heavy-duty trucks are the second largest and fastest growing segment of the U.S. transportation system measured by their emissions and energy use. They currently account for about 20% of carbon emissions, yet only account for about 5% of the vehicle population. 

Carbon emissions from transportation is now the largest contributor to overall greenhouse gas emissions. Three charts showing annualized sector shares of total emissions confirm this conclusion. It should be noted that the country’s total carbon emissions peaked in January 2008 and have declined steadily since. On an absolute basis, over the past 8 1/3 years there are 1,410.1 million metric tons of less carbon emissions, or a decline of 16.2%. The transportation sector contributed about 9.1% of that decline. The significance is that transportation’s emissions dropped 6.4% over that time span while overall emissions declined 16.2%. The overall figure reflects the sharp decline from coal’s use due to the shale revolution and low natural gas prices along with static electricity consumption. At the same time, the decline and then flat trend in vehicle miles driven coupled with more fuel-efficient autos also helped reduce the transportation sector’s emissions. One can see these trends at work by looking at the sector shares in 1973, 2008 and 2016.

The United States has done well in reducing its carbon emissions by 16.2% since the start of 2008. The weak economy and energy revolution have been primarily responsible. Going forward, the energy policies targeting the transportation sector, coupled with technological improvements in overall energy use, will become more important in driving down carbon emissions. Thus, the reason for the heavy-duty truck standards. They have support from the industry and truck manufacturers who see economic opportunities from more efficient engines. The Independent Truck Owners Association estimates the new standards will add $12,000-$14,000 to the cost of new tractors, which often cost upwards of a quarter of a million dollars, but they hope to recover those higher costs through improved fuel efficiency.

 

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The surge in supply of natural gas coupled with the fact it is both cleaner than other fossil fuels and domestically available is supporting a revolution in developing new sources of demand. Toyota is now marketing is hydrogen fuelled Mirai automobile in the USA where the hydrogen will be sourced from natural gas. Improving the efficiency of the heavy vehicle fleet is a laudable goal and will also improve the environment so it can be viewed as a win win which is dependent on natural gas prices staying competitive. 

Historically, LNG has been sold on long-term contracts that guaranteed buyers supply and helped producers finance liquefaction plants at a time when less of the product was shipped. Now, a gas glut is causing LNG importing countries to support renegotiating existing deals that can run 20 years or more while suppliers offer more flexible terms to lock up customers spoiled for choice.

India already is encouraging importers to rework long-term accords to better align costs with spot market prices. Japan, the world’s largest LNG importer, may soon join them. That country’s Fair Trade Commission is in the process of probing resale restrictions in longer deals in an effort that could mean the renegotiation of more than $600 billion in contracts and boost the number of shorter-term agreements.

“There will be 40 million to 50 million tons of homeless LNG by 2020, which can go anywhere or doesn’t have any fixed customers,” said Hiroki Sato, a senior executive vice president with Jera Co., a fuel buyer that plans to increase spot and short-term LNG deals. “Homeless LNG will provide a great opportunity to improve liquidity in Asian and global markets.”

 

The evolution of a global transportation network for natural gas is creating the impetus to divorce pricing from long-term oil contracts. While Russia floated the idea of creating a natural gas equivalent of OPEC a few years back, as a way of preserving it pricing power, it was unable to reach critical mass. 

The reality today is that a substantial number of new entrants to the market, not least Australia, the USA and developing east Africa, all have a vested interest in capturing market share. Meanwhile major consumers like Japan, India and China would understandably like to avail of lower prices. The expansion of the Panama Canal also boosts the viability of US exports to Asia. 

Under May’s approach, shale gas royalties that would ordinarily go to governments and quasi-governmental agencies will instead be directed to the residents in the communities hosting the developments. The BBC estimates individual households will be receiving as much as £10,000 ($16,800) under May’s plan; other estimates arrive at higher sums – as much as £65,000 per household lucky enough to be near large shale gas deposits. May’s plan is now expected to wash away local opposition to fracking and unleash the development of Britain’s massive shale gas resources, estimated by the British Geological Survey at 1,300 trillion cubic feet of shale gas, equivalent to a 500-year supply at current gas consumption levels.

This torrent of energy will benefit more than the local residents who until now saw only drawbacks to shale gas development in their community. The abundant supply of gas will lower energy costs throughout the country, relieving residential and business consumers alike and convincing British industries – which have been leaving Britain due to its high energy costs – to not only stay but also to expand their operations in the U.K.

The May approach isn’t limited to shale –  it will apply to developments of all kinds, whether other resource developments, industrial complexes or airport expansions. Through what she calls her blueprint for development projects, May will be converting the development delayer known worldwide as NIMBY (Not In My Back Yard) into PIMBY (Please In My Back Yard), a development accelerator. Residents will effectively become pro-development lobbyists whenever they determine a development personally benefits more than discomforts them.

 

By voting for change the UK has an unparalleled chance to literally throw out the rule book and adopt policies that would have been anathema to the Brussels bureaucracy. Royalties for landowners close to extractive industries has been a major enabler for the growth of the US energy sector and could have a transformative effect on the UK economy, not least because a great deal of its shale is in the north of the country which was particularly hard hit by the closing of collieries. 

Many of the nuclear power plants that were built in the 1960s and 1970s are now approaching the end of their commercial lives. The challenge is that nuclear power plants have the potential for very long operating lives, often on the order of 80 years, meaning that those older plants might have an additional 20 or 30 years of operating life remaining. The issue is that over their very long lives, these nuclear plants require extensive and costly periodic upgrades and repairs. In order to finance these modifications, the plants must generate significant profits during their operating lives. Low coal and now low natural gas prices have undercut the price of nuclear power, often making these plants the highest cost fossil fuel plants in utility company portfolios. These economic challenges ignore the fact that nuclear power plants have the highest operating ratios of all power plants, meaning that they produce power when people need it and that the power output is carbon-free. 

And

Low natural gas prices have seriously undercut the power prices for the nuclear power plants upstate, to the point that the owners – Exelon (EXC-NYSE) and Entergy – have threatened to shut down the plants. If that were to happen, New York State’s plan to have half its power coming from clean energy sources by 2030 would be doomed. In fact, the state has determined that if the nuclear power plants were shut, local utilities would have to rely on power from power plants fueled by dirty gas and coal. That would detract from the governor’s clean energy goal. That goal is why Gov. Cuomo has fought the use of hydraulic fracturing in the state to tap greater supplies of locally produced natural gas. Natural gas, although cheaper than the governor’s favored three sources of clean energy, would have released more greenhouse gases, but it is likely that the cost to consumers would have been less than what will happen in the future. Gov. Cuomo has championed a plan that was embraced by New York’s Public Service Commission and will force utility customers in the state to pay nearly $500 million a year in subsidies designed to keep the three upstate nuclear power plants operating. The Indian Point plant will not receive any subsidy funds because downstate power prices are sufficiently high that the plant can earn a profit.

According to the Public Service Commission, starting in 2017, the subsidies will cost utility ratepayers in New York State $962 million over two years. However, the overall cost of the clean energy program to utility customers would be less than $2 a month, according to the Public Service Commission. The chairman of the commission said that state officials had calculated the social and economic benefits of the program, including the reduction of carbon emissions, lower prices for electricity and more jobs in the electricity generation business, and that these benefits would be greater than the cost of the subsidies. Environmental groups are fighting back, claiming that while they supported the governor’s plan to mandate the purchase of renewable energy by utilities, they viewed the magnitude of the subsidies that could amount to several billion dollars over the 12 years to 2030 as a mistake. Exelon, the owner of two of the three up-state nuclear power plants applauded the Public Service Commission announcement and pledged to invest $200 million in the plants next year if the plan is approved.

Environmentalists who are serious about clean energy should pay attention to the comments of Michael Shellenberger, the president of nonprofit research and policy organization Environmental Progress. He said that nuclear power plants produce so much more energy than other forms that they can be more environmentally friendly than even renewables when all the mining, development and land disturbances are taken into account. As Mr. Shellenberger put it, “from the whole life-cycle analysis, it’s just better.” Of course, on the other side of the issue is someone such as Abraham Scarr, director of the Illinois Public Interest Research Group, a consumer advocate group, who said, “We should be building the 21st century energy system and not continuing to subsidize the energy system of the past.”

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The above paragraphs highlight just how much of an influence low natural gas prices have had on the utility sector and the broader energy mix. Closing down nuclear plants because the cost of upgrades and repairs cannot be justified when competition with natural gas is so intense suggests demand for the commodity is going to intensify in coming years if nuclear is not subsidized. 

Iran has boosted crude production 25 percent this year and aims to reach an eight-year high for daily output of 4 million barrels by the end of the year. Customers in Asia account for the largest share of Iran’s new sales, according to shipping data. The nation dropped to fourth-biggest OPEC producer after international sanctions that restricted its supplies in 2012. It has since returned to third place after the sanctions were eased in January. Saudi Arabia has responded by boosting its crude and refined products exports.

“The market share battle between them and Iran is back on in a big way,” John Kilduff, partner at Again Capital LLC in New York, said by phone on Sunday. “This is a throwdown challenge that I’m sure the Iranians will match.”

Asian demand for crude is stalling as refineries from Singapore to China and South Korea are cutting operating rates amid a slump in margins and rising supply from state-owned giants, which can draw on large crude inventories that have built up over the past two years of low prices.

 

With most Western headlines focusing on the ramifications of the refugee crisis on EU, it might be easy to forget that the war in Syria is a venue for Saudi Arabia and its allies to fight Iran and its allies. Napoleon said an army marches on its stomach, but funding is just as important as supply lines and the protagonists in this conflagration are heavily dependent on oil. By engaging in a price war Saudi Arabia is taking direct aim at Iran and other producers might be considered collateral, or perhaps convenient, damage.  

The US government has announced "an unprecedented set of actions" to pump up the country's plug-in electric vehicle market, including US$4.5 billion in loan guarantees to create a nationwide network of commercial scale and fast charging stations. The initiative to push for greater electric car adoption calls for a collaboration between federal and state agencies, utilities, major automakers and other groups.

The initiative will identify zero emission and alternative fuel corridors across the country, to determine the best locations to put in fast charging stations, as part of the Fixing America's Surface Transportation (FAST) Act.

As part of a partnership between the US departments of energy and transportation, a 2020 vision for a national fast charging network will be developed, with potential longer-term innovations that include up to 350 kW of direct current fast charging. According to the administration, a 350 kW DC system could charge a 200-mile-range battery in less than 10 minutes. For comparison, Tesla just boosted some of its Superchargers' power capacity to 145 kW, which is claimed the fastest currently available.

Governments are getting behind the need for a jump in the efficiency of batteries. If electric vehicle range anxiety is truly to be overcome batteries that can power a car all day, with the air conditioning on, while charging my phone and iPad as I listen to the radio are required. Many people feel they need a workhorse that can fulfil just about any task rather than just commuting. Continued high demand for light trucks is testament to that which is probably why Elon Musk gave a nod to heavier vehicles when announcing his latest growth plan last week. 

Crude in the $40- to $50-a-barrel range may wipe out most of the fracklog in Texas’s Permian Basin and as much as 70 percent of the inventory in its Eagle Ford play by the end of 2017, according to Bloomberg Intelligence analyst Andrew Cosgrove. While bringing them online is the cheapest way of taking advantage of higher prices, the wave of new supply also threatens to kill the fragile recovery that oil and gas markets have seen so far this year.

“We think that by the end of the third quarter, beginning of the fourth quarter, the bullish catalyst of falling U.S. production will be all but gone,” Cosgrove said in an interview Thursday. “You’ll start to see U.S. production flat lining.”

Drillers that expanded operations in U.S. shale fields found that sidelining wells was the easiest way to cut costs when oil and gas prices plunged. Since then, these wells have been “just sitting around, basically waiting for a better price to come along,” said Het Shah, an analyst at Bloomberg New Energy Finance.

U.S. oil producers extended the biggest shale drilling revival since last summer as rigs targeting oil and gas in the U.S. rose by 7 to 447 last week, according to Baker Hughes Inc. Dave Lesar, chief executive officer of Halliburton Co., the world’s largest provider of hydraulic-fracturing work, said Wednesday that the market in North America has turned and that he expects a “modest uptick” in drilling in the second half of the year.

 

Unconventional wells are much more expensive than conventional wells but come with some interesting advantages that protect producers from volatility. They have very prolific early production rates which helps to quickly pay off the multi-million dollar cost of setting them up. They then enter a period of time when production falls precipitously. If prices are not high enough to invest in boosting production through fresh drilling then it drillers have the luxury of time as they wait for prices to recover, after all the oil isn’t going anywhere. 

POSITIONING FOR BETTER PRICES: We are of the opinion that we have seen the worst of both the crude oil and natural gas markets and that prices should further improve as we enter 2017. We are currently forecasting ~US$50/bbl WTI for H2/16, which is a level where most producers fail to grow on a per share basis. In our updated growth tracker, we now expect average production per share to decline by 8% (-12% growth on a median basis); this compares to our estimates of -3% (median -8%) and 5% (median -3%) during Q2/16 and Q1/16, respectively. The decline in per share growth has been a result of dispositions to reduce debt, equity financings without concurrent M&A, or some combination thereof. Ultimately, only a few select companies are able to generate consistent per share growth. Most are natural gas operators but some oil-weighted names, chiefly RRX and SPE, continue to grow on a per share basis. 

IMPLIED OIL PRICES: Despite the ~US$5/bbl pullback in WTI prices, there has not been panic selling of the equities. This benign response is attributed to the belief that the worst is behind us and that any weakness in oil prices will be short lived. However, with equities not pulling back, it is important to estimate the implied oil price by name. We looked at each company’s historical multiple relative to its current trading level in order to back out the oil price needed. Based on our analysis, very few names are pricing in US$50/bbl oil, with most between US$55/bbl and US$65/bbl. Companies with cheaper implied pricing generally possessed higher than average debt, which weighed on valuation. 

IMPLIED GAS PRICES: Using the same methodology with the gas weighted names results in implied prices mostly ranging between $2.25/mcf to $3.50/mcf. The valuation for the gas names is generally a bit more difficult to assess because some producers are promising very high rates of growth which may be difficult to achieve (versus oil producers, where growth profiles are much lower and more manageable). Regardless, we see some opportunities for investors who are bullish on natural gas going into H2/16.

 

Optimism about a recovery in oil prices has improved following an almost 100% rally since January. This is despite the fact higher prices ensure a great deal of marginal production is now approaching economic viability. At the lows it was difficult to impress upon anyone that a rally was possible. Now that marginal supply can once more be produced economically many analysts anticipate additional upside. 

TerraForm Global and SunEdison are in talks regarding “a jointly managed sales process and accompanying protocol for managing the marketing process,” according to a presentation posted on TerraForm Global’s website Tuesday. SunEdison is currently involved in the biggest ever sale of clean energy assets after filing for bankruptcy protection in April with $16.1 billion in liabilities. It has not announced a process for selling its controlling stake in TerraForm Global or its sister yieldco TerraForm Power Inc.

TerraForm Global, a yield company formed by SunEdison to buy clean power plants built by SunEdison outside of the U.S., owns 917 megawatts of solar and wind energy plants, mostly in southeast Asia and South America. The company had revenue of as much as $52 million in the first quarter, according to the presentation.

It also reported preliminary losses of as much as $350 million for the second half of last year, and a preliminary loss of as much as $8 million for the first quarter of this year.

TerraForm Global has not filed results since the third quarter because it relies on SunEdison for some accounting systems, and the parent company’s results are also delinquent.

Financial engineering contributed to SunEdison’s demise because it divested itself of income producing assets while holding onto liabilities. That worked fine while oil prices were high, demand for solar plants was surging and credit was easy to come by. The decline in oil, natural gas and particularly coal prices questioned the profitability of solar plants and the share collapsed. 

US shale regions that two years ago were in the middle of the cost curve for future oil supplies are now down towards the lower end.

Investments in the Eagle Ford shale of south Texas on average need a Brent crude price of $48 a barrel to break even, on Wood Mackenzie’s calculations, while projects in the Wolfcamp formation in the Permian Basin in west Texas need $39.

“There are more opportunities to invest in the US, and that’s where the investment will take place,” said Mr Flowers.

“If your investment options are in deep water, you’ve got quite a task on your hands. You might be asking: ‘Should we be getting into tight [shale] oil?’”

Brent was trading at $47.59 per barrel on Wednesday.

US companies that have shale oil reserves, including Chevron and ExxonMobil, have stressed the flexibility of those assets, which are developed with many wells costing a few million dollars each, rather than the multibillion dollar projects often required for offshore production.

On Wood Mackenzie’s calculations, Brazil’s deepwater oilfields are so large that some will be commercially viable, but higher cost regions could struggle to attract investment.

The number of large projects being given the go ahead by oil and gas companies averaged 40 a year between 2007 and 2013 but dropped to just eight last year, according to Angus Rodger, also of Wood Mackenzie. 

 

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Anyone who has ever bought a boat knows how expensive it is to run any operation on the sea versus on land. The USA has a major advantage in the fact that shale and tight oil is domestic and land based rather than in the deep water off of Africa and Latin America. The ease with which these resources can be brought on line, and potentially even refracked, means it is only a matter of time before prices get to a level which justifies the cost of renewed activity.   

BYD said Samsung has been actively pushing forward talks about buying its shares in a private placement. Talks are still underway, the Chinese company said, denying a report by the Korea Economic Daily that an agreement was reached to acquire a 4 percent stake.

Samsung is pursuing the investment after its affiliate was among foreign battery makers left off a list of suppliers approved by China, where sales of electric vehicles are surging and the government has sped up construction of charging points.

The talks with BYD also add to the global trend of technology companies and automakers collaborating as car buyers increasingly demand more advanced powertrains and features that improve connectivity and safety.

“It puts Samsung into the electric-vehicle subsystem supply chain for a key Chinese electric vehicle and battery manufacturer,” said Bill Russo, a Shanghai-based managing director at Gao Feng Advisory Co. “BYD gets a technology innovation pipeline partner with a reputable brand.”

 

China is the world’s largest car market. With a concerted government backed push into electric vehicles any company seeking to ride the wave to emerging automotive technology cannot afford to lose access to the market. Therefore BYD represents an attractive avenue for foreign investors. While in the USA Tesla sets the pace for what other companies are expected to provide, China’s state mandated vision for zero emissions represents an even more important influence on the market. Car companies have to try and build products for a global audience in order to keep costs under control. Therefore any company seeking to compete globally needs to have a foothold in China. 

U.S. gasoline demand dropped 0.9 percent to 9.67 million barrels a day last week as refiners produced 10.2 million barrels a day of gasoline a day.

"The gasoline data is very bearish," said Thomas Finlon, director of Energy Analytics Group LLC in Wellington, Florida.

"Gasoline production is outstripping demand by more than 500,000 barrels a day." Stockpiles of distillate fuel, a category that includes diesel and heating oil, surged 4.06 million barrels, the most since January.

Gasoline futures for August delivery dropped 4.2 percent to $1.37 a gallon. August diesel tumbled 5.2 percent to $1.3865 after earlier touching $1.3782, a two-month low.
Seasonal Highs

U.S. crude supplies fell 2.55 million barrels to 521.8 million last week, EIA data show. Inventories remain at the highest seasonal level in at least a decade. Analysts surveyed by Bloomberg had forecast a 3 million barrel decline. The industry-funded American Petroleum Institute said stockpiles climbed 2.2 million barrels last week.

"Crude supplies are down a little, but it doesn’t change the overall picture," Finlon said. "They remain at historic highs for this time of the year."

 

Efforts led by Saudi Arabia to knock higher cost competitors out of the market have been partially successful with the result US production has decreased while the fire in Alberta has been an additional headwind for Canadian supply. However economic growth has yet to be spurred by this development with the result stockpiles are higher than might otherwise have been expected. 

“NATO could not have militarily prevented a determined Soviet effort to overrun West Berlin, nor can it militarily prevent a determined Russian effort to overrun the Baltic states. But if the Soviets had overrun West Berlin, that would have meant war with NATO,” said Thomas Graham, a senior White House aide at the time the three countries joined the alliance more than a decade ago. “In theory, the same thing should hold true if the Russians made an effort to overrun any Baltic state.”

To help dispel doubts about its commitment, NATO this week will approve plans to deploy four battalions to rotate through the region. But though bigger than what the military bloc has ever placed there before, the units will still be dwarfed by Russia’s forces on the other side of the border.

The Kremlin, which is spending 20 trillion rubles (about $313 billion) on an ambitious defense upgrade through 2020, argues that it’s just responding to NATO’s encroachment toward Russian borders. In May, Russia announced plans to put two new divisions in the Western region and another in the south. That could be about 30,000 troops, compared to 4,000 in NATO’s plan.

 

There is a Chinese proverb to the effect that when the snipe and the clam fight the fisherman wins. With the UK’s decision to leave the EU, Western European political elites are scrambling to put together a response. At the very minimum it says to the rest of the world that the EU is vulnerable due to a lack of internal cohesion suggesting outside parties have an advantage. As a military strategist Putin may well view this is as an opportunity. 

Silver supply drivers
While overall silver stocks are high globally, over the last few years silver has experienced what is known as a “supply deficit,” as annual production has been less than the demand for the metal, gradually eating away at current stocks. What many investors may not realize is that only 25% of silver production is derived from silver mines; the rest—roughly 75%—is a byproduct of mining for other metals, most notably lead, zinc, copper, and gold. As of year-end 2015, as mining capital expenditures for these other metals has been scaled back in response to relatively low prices, silver production has correspondingly fallen.

Silver demand drivers
Although it may not be the first thing that comes to investors’ minds when they think of silver, industrial applications are a significant demand driver, accounting for more than half of the precious metal’s usage worldwide. Silver’s unique characteristics include its outstanding thermal and electrical conductivity, along with its ductility, malleability, optical reflectivity, and antibacterial properties. These features make the precious metal invaluable as an input in myriad industrial applications including electrical components, batteries, photovoltaics (solar panels), auto parts, pollution abatement technology, ethylene oxide (an important chemical precursor), as well as brazing alloys and solders. 

Of the white metals, silver also tracks gold most closely, boasting a correlation of 0.8 over the past five years. Since gold is seen as a defensive asset in times of expanded bank balance sheets or quantitative easing programs by central banks, monetary policy tends to have a “shadow impact” on silver—far less so than gold, but still noticeable. Lastly, albeit accounting for just 20% of silver use worldwide, it’s worth noting that jewelry demand has held more or less stable over the past decade. 

Looking forward 
Deep capital expenditures cuts in the industrial metals space is likely to have a significant effect on silver supplies, as the majority of silver is mined as a byproduct of zinc and copper. In the context of weakening global demand, especially from China, low commodity prices have reduced production incentives. Looking forward, as the global growth outlook improves, demand for commodities, including silver, is likely to rise.

 

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

If “the cure for high prices is high prices” is one of the oldest adages in the commodity markets then it also works in reverse. Industrial metal prices trended lower for four years and the LME Metals Index more than halved in the process. That forced miners to cut back on spending, cancel expansion plans, hold off on acquisitions, fire workers, especially administrative staff, and become much more conservative with their expectations for growth. 

Economics have achieved what environmentalists have sought for years: the shutdown of California’s nuclear power plants.

PG&E Corp. is proposing to close two reactors at Diablo Canyon in a decade that would end up costing more to keep alive as California expands its use of renewable energy, Chief Executive Officer Tony Earley said Tuesday. They won’t be needed after 2025 as wind and solar costs decline and electricity from the reactors becomes increasingly expensive, he said.

Diablo Canyon became California’s only operating nuclear power plant after Edison International three years ago shut its San Onofre plant north of San Diego after a leak. Tuesday’s announcement follows decisions this month to retire three other U.S. nuclear plants struggling to make money amid historically low power prices and cheap natural gas.

“It’s going to cost less overall as a total package than if you just continued to operate Diablo Canyon,” Earley said. “It’s going to operate less because of the energy policies that are in place.”

 

Nuclear in North America and Europe suffers from a boy who cried wolf problem. By over promising on cost and production and under delivering, particularly on safety, public ambivalence has grown substantially. That’s an unfortunate development because new nuclear technologies really do hold the potential to fulfil earlier promises, but they are unlikely to be built in either North America or Europe. China is now the primary bastion of support for developing nuclear technology and is already exporting its designs to other countries. 

The commercial success of Musk's vertical integration idea hinges -- in terms of turning a profit rather than generating a high market capitalization -- on battery technology that would have mass rather than niche appeal. The assumption upon which Musks' concept -- and Tesla's $32.3 billion market capitalization -- is built is that Tesla is betting on the right battery technology and no one will come up with a much better one. That is the big hole in the donut: The assumption is far from safe.

Cheap and reliable energy storage is central to the idea of an off-the-grid, solar-powered household. Such a home needs energy at night, when the sun isn't shining: It has fridges, air conditioners and other appliances running, and a Tesla charging in the garage. So it needs a good battery, and Tesla's Powerwall doesn't necessarily fit the bill -- if only because the cost of the energy it supplies, including amortization, is higher than grid prices. Because of this, and given the high price of Tesla cars, the lifestyle on offer is an expensive statement. In terms of cost and convenience, it's not competitive with the traditional grid-and-fossil fuel model.

 

Let’s call Tesla Motor’s acquisition of SolarCity what it is; a bailout. The tide of highly attractive subsidies for solar has turned. NV Energy, Warren Buffett’s Nevada utility, successfully argued that it should not have to bear the full cost of the electrical grid when solar producers get to use it for free and get preferential rates on the electricity they supply. That represented a major upset for SolarCity in particular but also highlighted a deeper challenge for the solar leasing business model which has contributed to increased scepticism among investors about the prospects for related companies. The big question is whether other states, particularly in the sun-belt will announce similar charging structures. 

“There is some rebalancing, and I believe the oil price will be in the region of $50, maybe $55 for the rest of the year,” Paolo Scaroni, deputy chairman at NM Rothschild & Sons and former chief executive officer of Eni SpA, said in a Bloomberg television interview. “I personally believe there is a cap. If prices go beyond $60, shale oil producers will start all over again.”

Rigs targeting crude in the U.S. rose by 9 to 337 this week, capping the first three-week gain since August, Baker Hughes Inc. said Friday. Explorers have dropped more than 1,000 oil rigs since the start of last year.

 

Crude oil accelerated to its January low and has since staged in an impressively consistent rally which has seen prices almost double. This has resulted in energy companies being a major contributor in the ability of the wider market to rally from the January lows. For example the majority of the top 10 best performers on the S&P500 year-to-date are energy/resources related. 

For Albemarle, the deal is a means to pay down debt from its acquisition of Rockwood Holdings Inc. for $6 billion in 2015. It bought Rockwood’s lithium business to take advantage of demand for the lightweight metal used in rechargeable batteries in smartphones and electric cars.

"The sale of Chemetall reflects Albemarle’s continued commitment to maximizing shareholder value by investing in the future growth of our high priority businesses, reducing leverage and returning capital to shareholders,” Albemarle CEO Luke Kissam said in the statement.

The transaction value may be reduced for underfunded and unfunded pension obligations and other reasons, Albemarle said. Bank of America Merrill Lynch is advising Albemarle while Shearman & Sterling LLP is legal adviser. BASF worked with Citigroup, with legal help from Morgan, Lewis & Bockius.

 

BASF will gain an important foothold in North America through this acquisition but the price it is paying would appear to be rather expensive and is a further testament to the asset price inflation ultra-low interest rates have contributed to. 

Previously a commodity with volatile price swings due to a domestic market that was short supply, the outlook for natural gas through 2020 shows a well supplied market capable of delivering to growing demand sources. There will be s-t dislocations (weather / infrastructure constraints) and the introduction of LNG exports will re-couple the U.S. to the global economy, but we see an emerging theme of natural gas entering a range bound period of $3-3.50/mmbtu. The 5 year build up in demand (2013-18) now looks to be meeting up with the 10 year buildup in supply (2005-15), creating a period of price equilibrium with upward and downward pressures on both sides.

Demand – Focus On The Known Drivers
After a 15 year period of stagnant consumption (1995-2009), demand for natural gas has enjoyed consistent growth over the past 5 years (2-3Bcfpd annually), a trend we expect to pick up through 2020. The drivers of growth are visible – power generation, industrial use, and Mexico exports – and will provide a base level of consumption growth. The reemergence of natural gas on the global scene via LNG exports has also long been a theme and will be additive to demand, though the quantifiable impact is tough to point to as capacity utilization will vary based on global prices and supply. We estimate ~6Bcfpd of export demand in 2020 in our base case, which is needed to balance the S/D outlook. In total, we see demand growth approaching ~98Bcfpd by 2020 (ex pipeline imports) up from ~78Bcfpd in 2015.

Supply – Filling Demand Needs…Just Need More Pipeline Capacity
U.S. supply has increased ~50% over the last 10 years to ~75Bcfpd, a rate of growth not witnessed since the 1960-1970s and following a brief pause in 2016/17, we anticipate growth to resume in 2018. We see four key trends from our supply forecast: 1) Supply is ~2Bcfpd below demand (weather normalized) in 2016/17 but ~3Bcfpd oversupplied in 2018, 2) Northeast supply growth increases by ~9Bcfpd in 2018, driven by the pipeline build out, 3) The bull case for supply by 2H18 is based on demand as the Northeast has excess pipeline capacity, and 4) The Northeast isn’t the only source of growth as we anticipate the Haynesville and Associated Gas Basins to return to growth by 2018, and implementing new technology could support growth elsewhere. Our forecast grows to meet demand and fills storage with enough deliverability in 2018, creating a more range bound environment with equal s/d pressures.

 

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The natural gas market was the original recipient of the innovations that led to the boom in unconventional supply. Since then it has offered an object lesson in the ramifications of how that is likely to play out for other commodities where supply is surging not least oil. The greatest beneficiaries have been consumers who have seen prices for essential energy commodities decline to levels not preciously imaginable. That has also resulted in demand increasing not least from substitution which has also benefitted consumers in other sectors. 

The spread of electric cars is driving up demand for lithium-ion batteries, the main technology for storage devices that are attached to utility grids and rooftop solar units.

That’s allowing manufactures to scale up production and slash costs. BNEF expects the technology to cost $120 a kilowatt-hour by 2030 compared with more than $300 now and $1,000 in 2010.
That would help grid managers solve the intermittency problem that comes with renewables -- wind and solar plants don’t work in calm weather or at night, creating a need for baseload supplies to fill the gaps. Today, that’s done by natural gas and coal plants, but the role could eventually be passed
to power-storage units.

The researcher estimates 35 percent of all light vehicles sold will be electric in 2040, equivalent to 41 million cars.

That’s about 90 times the figure in 2015. Investment in renewables is expected to rise to $7.8 trillion by then, compared with $2.1 trillion going into fossil-fuel generation.

“The battery industry today is driven by consumer products like computers and mobile phones,” said Claire Curry, an analyst at Bloomberg New Energy Finance in New York. “Electric vehicles will be the driver of battery technology change, and that will drive down costs significantly.”

The industry still has a long way to go. About 95 percent of the world’s grid-connected energy storage today is still pumped hydro, according to the U.S. Energy Department. That’s when surplus energy is used to shift large amounts of water uphill to a reservoir so it can be used to produce electricity later at a hydropower plant. The technology only works in areas with specific topographies.

There are several larger-scale battery projects in the works, according to S&P Global. They include a 90-megawatt system in Germany being built by Essen-based STEAG Energy Services GmbH and Edison International’s 100-megawatt facility in Long Beach, California.

“Utility-scale storage is the new emerging market for batteries, kind of where electric vehicles were five years ago,” said Simon Moores, managing director at Benchmark Mineral Intelligence, a battery researcher based in London. “EVs are now coming of age.”

 

Innovation in the chemistry that supports batteries has been a lot more difficult to achieve than the Moore’s law related enhancements that have been commonplace in chip manufacturing and increasingly in solar technologies. Nevertheless as the requirement for storage grows increasingly urgent, the capital expended on R&D is expanding and innovations are being achieved. In the meantime economies of scale through larger manufacturing plants are helping to drive efficiencies. 

The increasing importance of renewable energy continued to be led by wind power (17.4%, 125 TWh). But solar power is catching up fast, expanding by almost a third in 2015 (32.6%, 62 TWh), with China overtaking Germany and the US as the largest generator of solar power.

The older stalwarts of non-fossil fuels – hydro and nuclear energy – grew more modestly. Global hydro power increased by just 1.0% (38 TWh), held back by drought conditions in parts of the Americas and Central Europe. Nuclear energy increased by 1.3% (34 TWh), as rapid expansion in China offset secular declines within mainland Europe. This gradual shift of nuclear energy away from the traditional centres of North America and Europe towards Asia, particularly China, looks set to continue over the next 10-20 years.

And

The key lesson from history is that it takes considerable time for new types of energy to penetrate the global market. Starting the clock at the point at which new fuels reached 1% share of primary energy, it took more than 40 years for oil to expand to 10% of primary energy; and even after 50 years, natural gas had reached a share of only 8%.

Some of that slow rate of penetration reflects the time it takes for resources and funding to be devoted in scale to new energy sources. But equally important, the highly capital intensive nature of the energy eco-system, with many long-lived assets, provides a natural brake on the pace at which new energies can gain ground.

The growth rates achieved by renewable energy over the past 8 or 9 years have been broadly comparable to those recorded by other energies at the same early stage of development. Indeed, thus far, renewable energy has followed a similar path to nuclear energy.

The penetration of nuclear energy plateaued relatively quickly, however, as the pace of learning slowed and unit costs stopped falling. In contrast, in BP’s Energy Outlook, we assume that the costs of both wind and solar power will continue to fall as they move down their learning curve, underpinning continued robust growth in renewable energy.

Indeed, the path of renewable energy in the base case of the Energy Outlook implies a quicker pace of penetration than any other fuel source in modern history. But even in that case, renewable power within primary energy barely reaches 8% in 20 years’ time.

The simple message from history is that it takes a long time – numbering several decades – for new energies to gain a substantial foothold within global energy.

 

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The evolution of renewable energy technology represents a major paradigm shift for the energy sector not least because the cost of production continues to decrease independently of the oil price and environmental concerns result in a compelling case for adoption. In tandem with wind and solar, the rollout of electric vehicles is a related but separate development which is likely to represent a continued headwind for demand growth.

Oil producers in Nigeria are facing a renewed wave of violence in the delta region that accounts for most of the country’s crude. Nigeria’s output dropped to the lowest in almost three decades as armed groups intensified attacks to rupture pipelines in recent months. Total volume of crude shut due to the attacks range from 700,000 to 800,000 barrels per day, according to the state-owned Nigerian National Petroleum Corp.

The weakness of the Dollar against commodity producing currencies and continued supply disruptions in both Nigeria and Canada are helping to boost demand among traders for the most important commodity and are at least partially offsetting the boost in supply from Iran since sanctions were lifted. 

The new topic being opened by efforts such as Otto and the platooning demonstration in Europe is the impact on fuel and labor costs within the trucking industry. In the United States, trucks drive 5.6% of all vehicle miles and are responsible for 9.5% of highway fatalities, according to Department of Transportation data. Because heavy-duty trucks have a significantly lower fuel-efficiency performance, they account for a larger share of diesel fuel consumption than diesel cars or other types of equipment. Because diesel fuel is included in distillates, we cannot determine the exact weekly volumes. However, we know that for the week ending May 20, distillate volumes of slightly over 4 million barrels a day represented 20% of total fuel supplied in the U.S. By examining the latest inventory data, distillates are broken down by the amount of sulfur in the fuel. Diesel fuel for vehicle use needs to be low sulfur – 15 parts per million or less. That fuel category accounted for 88% of all the distillate in storage, therefore we would think this is a reasonably close approximation of the highway quality diesel fuel being supplied to the U.S. market. If 62% is used by over-the-highway trucks, then the daily consumption is approximately 2.2 million barrels. Improved fuel savings from autonomous technology could eventually account for upwards of 200,000 barrels a day in savings. 

Autonomous vehicle technology is being hailed as a way to reduce the number of accidents. The largest impact of the technology, however, may be on the employment of truck drivers. There are more than three million truck drivers in this country. According to the American Trucking Associations, the truck industry accounts for one of every 15 jobs in the United States. By eliminating the need for second drivers on many trucks due to the ability of the primary driver to fulfill his rest obligations while the truck drives itself, there will be a negative employment impact from autonomous technology. 

Although perceived as a negative, autonomous technology might actually become a positive as the trucking industry deals with an aging workforce and a less-than-attractive employment career as long-haul driving can be tedious and keeps drivers away from home for extended time periods. While younger drivers enjoy the first and last miles of truck driving, they wish to avoid the boring portion, which autonomous technology would eliminate. In the U.S., according to consultant Oliver Wyman, by 2023 it is projected that there will be shortfall of 240,000 drivers, or approximately 8% of the estimated current number of truck drivers. 

Canada has a similar employment outlook for its highway trucking industry. According to the Canadian Trucking Alliance there are about 300,000 long-haul truck drivers. Similarly, the Canadian Trucking Alliance estimates that the Canadian industry will have a shortfall of 48,000 drivers by 2024 — about 15 per cent of the total driving force – due to an aging workforce and a less-attractive employment career. 

Another impact of autonomous technology for trucks is that vehicles can be kept on the highway for more hours per day. That could not only reduce the need for additional drivers, but it could also reduce the cost for transporting goods, further contributing to deflationary forces in the economy. 

All of these considerations influenced our previous article’s conclusion that autonomous trucks were more likely to be on the roads before autonomous cars. That may be why Mr. Levandowski left Google. He said that his decision to leave was motivated by being eager to commercialize a self-driving vehicle as quickly as possible. At Google, he was responsible for drafting legislation to permit self-driving vehicles, which ultimately became law in Nevada. While certain states such as California have motor vehicle regulations that would prohibit the idea of trucks traveling on the freeway with only a sleeping driver in the cab, other states currently do allow it. “Right now, if you want to drive across Texas with nobody at the wheel, you’re 100 percent legal,” said Mr. Levandowski. Stay tuned for self-driving trucks on a freeway near you. 

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The technology behind autonomous vehicles is progressing towards greater utility and it makes sense that haulage vehicles represent the primary source of demand considering the high cost of fuel, personnel and regulations. It represents an additional example of the deflationary role technology has and the benefits that accrue to consumers as a result. 

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

Mr. Gundlach’s opinion, and I agree, is that negative interest rates are inherently deflationary. How could they not be, you deposit money and get less back. He was quick to point out however that central banks don’t appear to have realised that yet and are likely to push the policy further before abandoning it and trying something else. He believes it is only a matter of time before some form of helicopter money policy is employed somewhere. That helps explain his medium-term bullish view on gold. 
 

Brent for July settlement decreased 12 cents to $49.62 on the London-based ICE Futures Europe after. The contract earlier climbed as much as 1.6 percent to $50.51. The global benchmark crude was at a 15-cent premium to WTI.

"We’re seeing a steady decline in U.S. production, which is going to continue, and outages around the world," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $4.3 billion. "This doesn’t mean we’re going to continue going higher; a lot may be priced in. It was a lot easier being bullish oil with sub-$40 prices than it is near $50."

U.S. crude production dropped for an 11th week to 8.77 million barrels a day, the Energy Information Administration reported Wednesday. Crude inventories slid by 4.23 million barrels last week, exceeding an expected drop of 2 million. Stockpiles at Cushing, Oklahoma, the delivery point for WTI and the nation’s biggest oil-storage hub, fell by 649,000 barrels.

 

Brent Crude Oil has posted an orderly rebound from its January low and has almost doubled in the process. A progression of higher reaction lows is evident with reactions of between $5 and $6 constituting entry opportunities along the way. A reaction of greater than $7 would be required to question the consistency of the advance. Nevertheless the round $50 area represents a psychological level for many investors so it would not be surprising to see prices pause in this area. 

The first-quarter slowdown was mostly executives responding to the economic and credit stress earlier in the year, according to Joseph Amato, chief investment officer of equities at Neuberger Berman LLC in New York, where the firm oversees $243 billion. As the fear subsides, buybacks are likely to stay elevated, he said.

“The scare in the first quarter was overblown,” Amato said. “The economy is growing on the global basis at a reasonable level. That, in our mind, would suggest that companies will come back and have a typical buyback program consistent with levels of the last few years.”

And 

Their role in keeping the bull market afloat is more pronounced this year. According to Bank of America Corp., the firm’s trading clients from hedge funds to wealthy individuals were net seller of stocks for 15 straight weeks through May 6, a record streak. The only buyer was corporations scooping up their own shares.

“Companies have been a fairly consistent buyer that has supported the late stage of this bull market,” Channing Smith, a managing director at Capital Advisors Inc. in Tulsa, Oklahoma, said by phone. The firm oversees about $1.6 billion. Their potential retreat means “there is less firepower to counter any type of bout of selling,” he said.

 

I devoted a lengthy discussion in the Subscriber’s Audio on Friday to the role of buybacks in both supporting the market and manipulating valuations by decreasing EPS. Anything that impinges on companies buying back their shares represents a challenge for the market. Corporations have been the primary driver of demand for shares and buybacks have been an important artery for the transmission of central bank liquidity.