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08 August 2015

Press review 08-08-2015 - Contango deceivance

The Brent index closed a sixth consecutive week of losses under 50 $/b and just an hair off the bottom set last January. The main difference this time is a considerably flatter futures curve; now only in 2017 the future contract fetches a price above 60 $/b. The mainstream media tries to sell the mindless idea that a flatter curve means lower prices for a longer period. In practice this means traders have less of an incentive to store petroleum to sell at a later date, i.e., the supply glut if far less severe this time. But well, these days only the unwary trust the mainstream media at face value.

Various analysts had been for months advertising against what it seemed a growing disconnect between petroleum extraction rates reported by the US government's EIA and the real market. The EIA kept reporting increasing extracted volumes against a backdrop of collapsing prices, declining drilling rigs and asset fire-sales. Cornucopian pundits used this disconnect to foolishly claim the "shale" industry had become efficient enough to be profitable at low prices. But there is no magic here, just a cover up of sorts. And once again we see how the US government is anyything but innocent in this story.

EIA Capitulates Under Cover Of Darkness
Leonard Brecken, 03-08-2015

Many investors know that when a company wants to mitigate media coverage of bad news, they typically release data on a Friday after the close.

Well last Friday, that is exactly what the EIA did, admitting the very thing I and Cornerstone Analytics have been arguing all year: EIA was and still is overstating U.S. production. The amount that they admitted to so far, as of Friday afternoon, was 254,000 barrels per day (b/d) or 1,778,000 barrels per week, 7,112,000 per month or 14,224,000 for June and July alone.

This is the most incredible cover up I have ever witnessed in my decade-long investment career and I have not seen one major media outlet even mention it so far. Instead China demand & Iran output are front and center as per prior posts in an attempt to divert attention (I call it moving the goal posts) away from the fact that both U.S. production and inventories were about to fall. The chart below speaks for itself on what is occurring:

Is the money finally drying up for the US energy industry? The article bellows seems to indicate so, with the gap widening between low and high rated corporate bonds. It is in these low tier bonds that are found the petroleum and gas companies operating on source rocks and other low permeability resources (popularly known as "shales"). For companies operating in the red for over one year, this might well be the end to their life line.
Debt Traders Flee Junkyard’s Dogs as Yield Gap Widens on Oil
Carolina Millan and Sridhar Natarajan, 02-08-2015

Debt investors are abandoning the bottom rungs of the speculative-grade market as commodity prices at their lowest level in more than a decade pummel borrowers in the energy and mining industries.

The yield gap between higher- and lower-rated junk bonds expanded to the widest in more than three years, with the large number of energy and mining companies ranked CCC and lower -- the riskiest bets -- driving the dichotomy, said Martin Fridson, a money manager at Lehmann Livian Fridson Advisors LLC. When removing those companies, the yield on CCC bonds barely changed in July, creating “an industry effect in disguise,” he said.

“When you see the index, you think you’re buying all the CCCs cheaper,” New York-based Fridson said. “But outside of energy and metals, which look too scary to buy, the others are trading where they were.”

The yield gap between BB-rated bonds -- the top of the junk pile -- and those ranked CCC and lower expanded to 8.1 percentage points, the most since October 2011, according to Bank of America Merrill Lynch index data. The yield premium for energy companies rated junk versus all high-yielders expanded to as much as 3.66 percentage points last week, the most on record.
The Wall Street Journal puts forward a different perspective on this same problem. It also explains why the collapse of the mid-sized petroleum and gas industry has took so long to materialise. Some of these companies are now even cancelling bond issuances, usually a sign of impending bankruptcy.
Wall Street Journal
Oil-and-Gas Debt Deals Sting Investors
Matt Jarzemsky and Matt Wirz, 03-08-2015

[...] Many fund managers are feeling pressure to keep oil-and-gas companies afloat because they account for a much larger part of their portfolios than in years past, analysts said. Energy companies accounted for 15% of all junk bonds sold since 2009, up from 8% in the previous decade, according to Dealogic, reflecting a boom in natural-gas exploration that is now flagging.

The latest price decline has made it harder for would-be borrowers. Swift Energy Co.pulled a $640 million loan offering last month, citing poor market conditions, The Wall Street Journal reported. The company later said it had hired investment bank Lazard Ltd. to explore options to fix its capital structure.

Stressed exploration-and-production companies “won’t be able to get some of the deals that were done in May done in today’s market,” said Shaia Hosseinzadeh, head of energy and natural resources at investment firm WL Ross & Co., which has been buying the debt of oil-and-gas firms. “The terms have changed, the prices have changed, and there will be some issuers for which there will be no bid.”
Coal is one of the hardest hit commodities by the present economic slowdown. This is another side of the story to the reduction of coal consumption in China, with the foundering of the steel industry there. More bankruptcies are sure to follow.
Three Years Ago This Coal Mine Was Worth $624 Million. Now It Sold for $1
Jesse Riseborough and Juan Pablo Spinetto, 31-07-2015

The destructive force of a collapse in world coal prices has been underscored by the sale of a mine valued at A$860 million ($631 million) three years ago for just a dollar.

Brazilian miner Vale SA and Japan’s Sumitomo Corp. sold the Isaac Plains coking-coal mine in Australia to Stanmore Coal Ltd., the Brisbane-based company said Thursday in a statement. Sumitomo bought a half stake for A$430 million in 2012.

A slump in the price of coking coal, used to make steel, to a decade low is forcing mines to close across the world and bankrupting some producers. Alpha Natural Resources Inc., the biggest U.S. producer, plans to file for bankruptcy protection in Virginia as soon as Monday, said three people with direct knowledge of the matter. It was valued at $7.3 billion in 2008.
Some realism turning up on Libya. International petroleum companies now formally accept the new status of wasteland for this territory. Exploring new resources there is not even in the realm of fantasy.
BP, Total writing off oil assets in Libya
Javier Blas, 28-07-2015

Libya has become a major headache for European oil companies as a four-year conflict forced BP to join Total in writing off millions of dollars in investments in the North African country.

BP on Tuesday said it had taken an impairment of almost $600 million in the second quarter as fighting forced it to suspend an oil exploration campaign. The unexpected charge was the main reason BP’s earnings fell short of analysts’ estimates.

“There is significant uncertainty on when drilling operations might be able to proceed,” London-based BP said in a statement.

The charge comes three months after Total became the first European oil major to take an impairment in Libya, writing off $755 million from onshore assets. That’s an ominous sign for firms including Eni SpA and Repsol SA, which have yet to mark down the value of their assets in the country.
After foregoing gas supplies from Russia, the Ukrainian nationalists face ramping problems with electricity generation. Both gas and coal - Ukraine's traditional energy staples - are becoming increasingly hard to source, even when they seems plentiful to the rest of the world.
Ukraine faces mounting coal shortage problems — Energy Ministry

Ukraine’s thermal power plants face mounting problems with coal shortages while energy companies’ coal stocks are declining, Ukrainian Deputy Energy and Coal Minister Alexander Svetelik said on Friday, as cited by TASS. The deputy minister who spoke at a roundtable discussion on preparations for the upcoming heating season said the energy companies were required to have 2.7 million tons of coal at their warehouses while the available stocks stood at 1.5 million tons.

"We have contracts but coal, anthracite coal is not supplied," Svetelik said. According to the deputy energy and coal minister, Kiev is no longer receiving anthracite coal supplies from the uncontrolled east Ukrainian Donbas region, and also from Russia and some other suppliers.

The problems with fuel supplies have forced Ukraine to halt all contracts for electricity exports while two units of the Burshtynskaya thermal power plant have had to switch from work for European consumers to the Ukrainian domestic market, the deputy energy minister said.
Low gas prices represent a great relief to Europe, ever more reliant on imports of this commodity. Even though consumption is in decline, so is internal gas extraction, with the terminal decline of the North Sea resource.
Russian gas exports jump as Europe stockpiles cheap fuel
Denis Pinchuk, 03-08-2015

Russian gas sales to Europe jumped to an all-time high in July, gas export monopoly Gazprom said on Monday, as European customers capitalised on a steep fall in prices.

Gazprom's gas prices are pegged to oil with a six-month lag, which means its customers are currently paying the equivalent of $45-$50 per barrel seen in January 2015 when oil prices crashed following a decision by OPEC not to reduce output.

The jump in exports will help Gazprom to endure one of the worst years in its history. The Kremlin-controlled company lost its position as western Europe's top gas supplier to Norway earlier this year and its production risks collapsing to an all-time low due to sluggish demand and a decline in upstream investments.
Silver is asingular commodity in the modern economy, of which I have written much in the past. In the first half of 2015 the volumes mined of this metal have collapsed in many traditional exporting countries. While silver is far from being a crucial metal (even though rather hard to replace) it provides an important fore look on what may be about with many other resources extracted from the Earth's crust.
SRSrocco Report
Big Production Declines From The World Largest Silver Producers
Steve StAngelo, 06-08-2015

In a stunning development, the world’s largest silver producing countries reported big declines in recent months. This was surprising because the top two producers, Mexico and Peru, stated positive growth in the first two months of the year. However, silver production from these two countries reversed this trend by declining in April and May.

While this was a significant drop in silver mine supply from the leading producers, what took place in Australia (world’s fourth largest silver producer), was quite a shocker. Not only did Australian silver production fall precipitously, it was down a stunning 31% during the first quarter of 2015 compared to the same period last year:

Closing a reference to an emerging technology that might have a relevant impact on energy consumption. Self driving cars are pretty much ready to hit the roads, with various companies in the US and Europe well advanced in this whole new business. However, the lack of a legal framework has so far prevented their introduction. The article below explores one of many advances this technology can unleash.
The Atlantic
How Driverless Cars Could Turn Parking Lots into City Parks
Peter Wayner, 05-08-2015

Traffic jams aren’t exactly Zen. People are anxious about getting somewhere else instead of being happy about where they are.

To make matters more frustrating: In many cases, the cars clogging roadways are often already at their destination—and just circling the blocks looking for parking. There’s plenty of research showing that a surprisingly large number of people are driving, trying to find a place to leave their car. A group called Transportation Alternatives studied the flow of cars around one Brooklyn neighborhood, Park Slope, and found that 64 percent of the local cars were searching for a place to park. It’s not just the inner core of cities either. Many cars in suburban downtowns and shopping-mall parking lots do the same thing.

Robot cars could change all that. The unsticking of the urban roads is one of the side effects of autonomous cars that will, in turn, change the landscape of cities— essentially eliminating one of the enduring symbols of urban life, the traffic jam full of honking cars and fuming passengers. It will also redefine how we use land in the city, unleashing trillions of dollars of real estate to be used for more than storing cars. Autonomous cars are poised to save us uncountable hours of time, not just by letting us sleep as the car drives, but by unblocking the roads so they flow faster.
Have a great weekend.

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