Tag Archives: Commodities

Iran Agreement. Wrong and Dangerous

“All war aims for impunity”, Michael Ignatieff

The agreement between Iran and the world’s great powers is a big political mistake paved with good intentions. It assumes that a government that has the explicit objective of the “total destruction of Israel” and that has not changed a whit its nuclear aspirations, will change. In fact, the agreement was celebrated by the Iranian news agency, since it is not a real change in its program.

“All nuclear power stations will continue their activity, Iran will continue to enrich uranium and the R&D on advanced centrifuges continues.”
Iran will keep 6,104 IR-1 centrifuges for 10 years. I am concerned that the Minister for Foreign Affairs, Javad Zarif, has confirmed that Tehran will begin to use their (IR-8) next-generation centrifuges, which enrich uranium up to 20 times faster than the current IR-1s.
The former Director of the CIA Michael Morell and a whole battery of geopolitical analysts have warned of the error of basing the agreement on the number of centrifuges and “verification”. “5,000 centrifugues is more than enough to build nuclear weapons, but not for an energy programme”.
According to the International Atomic Energy Agency, a nuclear bomb only needs 25 kilograms of enriched uranium U-235. And although it is more difficult to produce uranium 90% enriched, it is not much more complex than the 4-5% uranium required to generate electricity.
Limiting the number of centrifuges is not avoiding any risk. But it’s funny to put the nuclear program as an excuse to “diversify energy sources”. As if Iran could not diversify through natural gas, solar or wind power.
The support of Iran in the battle against the Islamic State has weighed more than the risk to Israel or the stability of the area. But the claim of the Obama Administration that verification alone will work -when only 25kg of enriched uranium can be enough to make a bomb- and leaving the region to solve its own problems are huge miatakes. And it puts Israel in danger.

The risk for stability and peace in the Middle East is huge… in exchange for a promise that “within eight years,” everything will change. It cannot be more naive.
Impact on the oil market… the only positive.
The agreement with Iran means an estimated increased investment in the country of $ 170 billion, primarily in oil and gas. The immediate impact will be to increase production in the short term between 500,000 barrels per day and a million in the medium term, being conservative. This means much more excess supply, as we mentioned many times in this column.

With the end of the embargo, the spare capacity of OPEC also doubles. In addition, investments in new oil infrastructure will help Iran to increase production above 4 million barrels per day and longer term probably to 6.5 million barrels per day.

Iran will have more than 20.8 billion dollars in annual added revenue in the short term, added to the aforementioned investments. Meanwhile, Saudi Arabia has already increased production to the historical record of 10.33 million barrels per day in May. Iraq, although not subject to quotas, also reached record levels.
The strategy of OPEC is still standing. Prove to the world that they are more competitive, flexible and reliable suppliers. Gain market share in an environment of excess of supply that they know is structural. And prove that they can win a price war against the US, Russia and renewables in an environment of low prices.
John Kerry and the negotiators know well that potential new geopolitical conflicts do not impact the “oil weapon” and with the US close to energy independence, they think that it is easy to leave the region to solve its problems without US support. Seems they have forgotten that there are more important things than cheap oil and reducing military presence in the region.
Obama says that the agreement is not based on trust but on verification. This reminds me of the scene in which Hans Blix told Kim Jong Il in the satirical film Team America that “if you don’t let us inspect your palaces we will send you a letter showing how angry we are”, seconds before being thrown into a pool of sharks by the North Korean dictator.
We may have cheap oil for a long time. But the risk to Israel, and by extension, Europe, is very high, and it is irresponsible for the world to appeal to the good will of those who want your destruction.

Video. Debate About Perspectives of the Energy Sector

Watch here

A debate with BlackRock about the energy sector.

Why oil and gas prices are likely to stay lower for longer. Efficiency and oversupply added to disruptive technologies.

Risks and opportunities in a sector that has overspent for a decade.

Careful with value traps.

Relevance of understanding the capex cycle and the multiples paid for low returns.

Comments from my book The Energy World Is Flat.

Oil prices below OPEC budget needs

brent august 2014


Oil prices are today below most OPEC producers’ budget needs

Oil prices needed to meet expenditure
OPEC Country 2012 – 2013
Algeria 121 – 119
Angola 81 – 94
Ecuador 112 – 122
Iran 123 – 136
Iraq 100 – 116
Kuwait 61 – 59
Libya 94 – 111
Nigeria 118 – 124
Qatar 59 – 58
Saudi Arabia 87 – 92
UAE 82 – 90
Venezuela 102 – 117

Brent is down at $102.55/bbl driven by Libya has making progress in increasing production, rising to 535k b/d on increased output at the El Feel & El Shahara fields. On the geopolitical side, there are reports Kurdish forces, backed by US airstrikes, have reclaimed territory around the Mosul dam from Islamic State fighters. In Ukraine the situation remains tense with Ukrainian forces apparently reclaiming control of the police station in Luhansk that has been under rebel control for several months.

The shale gas and oil revolution in the US has shifted the geopolitical premium and has also dramatically reduced the anxiety about short term supply or needs to call on Saudi Arabia for incremental supply. The US is now the largest oil producer. U.S. production of crude oil, along with liquids separated from natural gas, surpassed all other countries this year with daily output exceeding 11 million barrels.

This shows how well supplied the market is. Despite Iraq, Ukraine, the Ebola threats to Nigeria production and geopolitical issues globally, demand cover is at five year highs in the middle of a global GDP that continues to grow.

oil disruptions

In the US, at 366mb crude stocks are in the upper half of the average range for the time of year. Gasoline inventories are in middle of the average range. OECD inventories are at the upper level of the average range.

The IEA shows demand growth is under pressure from higher levels of efficiency and modest macroeconomic recovery.  While front-month Brent is in contango the back of the curve is about $10/bbl higher than last August showing this weakness is seasonal. The IEA and EIA both lowered their global oil demand growth forecasts for 2015 by 0.1 mb/d to 1.3 mb/d and 1.4 mb/d, respectively. The IEA also reduced its 2014 demand growth projections by 0.2 mb/d to just 1 mb/d on weak 2Q14 demand growth (0.7 mb/d YoY). The IMF’s recent downgrade of its global GDP forecast by 0.3pp to 3.4% also emphasised weak economic recovery. OPEC expects global demand growth of 1.1 mb/d and 1.2 mb/d in 2014 and 2015, respectively.

In ‘The Energy World Is Flat’ (Daniel Lacalle & Diego Parrilla, Wiley 2014), our forthcoming book, we highlight the end of peak oil from the combination of efficiency and ample supply. IEA’s World Energy Outlook shows that by 2035, the world can achieve energy savings equivalent to nearly a fifth of current global demand.

Yellen & Co. are literally grasping at straws to explain the ‘phenomena’ associated with (now) normalized employment and capacity slack/low inflation.

She might want to get out and visit some of the efficiency engines across the country, starting with online commerce. Silicon Valley/SF looks, smells and tastes what you would expect (bouyant labour and wage growth and sharper inflation), at the expense of much of rest of country.

Thisn has been regularly happening over the last 300 years. Productivity/technology led disinflation can be incredibly powerful.

Coming to your industry via substitution real soon.


Important Disclaimer: All of Daniel Lacalle’s views expressed in this blog are strictly personal and should not be taken as buy or sell recommendations.

Sitting in a weak energy commodity environment

As I predicted, Brent lost all the geopolitical premium of the Iraq crisis to trade at $110.46/bbl as Libya exports rise to new highs offsetting the Iraq concerns, and showing how well supplied the market is. WTI moves to $103.77/bbl driven by increased US production, now at 11.7 mbpd.

Fighting between the Iraqi army & ISIS continues but with few developments over the weekend – the conflict remains well away from the main Iraqi oilfields in the south of the country. At the same time, Saudi Arabia is believed to have deployed 30,000 troops to its borders with Iraq. Furthermore, Jihadists of the Islamic State took control on Thursday 3 July of the Al Omar oil field in the east of Syria.Libyan production is currently 325,000 b/d.

Libya’s NOC officials said that they were considering lifting the force majeure on the Es Sider and Ras Lanuf terminals, which has been in place since August 2013. The Es Sider terminal holds between 3.5-5.5Mbbls of oil in storage, meaning new production is not needed to resume oil loadings. Es Sider and Ras Lanuf terminals accounts for 50% of Libya’s export capacity (or 500kbpd).

Coal loses ground at $77.70/mt and is below the key support of $78/mt. Highly unlikely to see it strengthen as summer sees more exports from Australia and South Africa.  Coal weakness shows the oversupply in the market, close to 20%.

Chinese thermal coal imports fell sharply in May, down -19% month-on-month seasonally adjusted and -20% y-o-y. The fall has been driven by declining thermal power generation due to broadly flat overall demand and improved hydro and renewables generation.

CO2 at €5.55/mt… The moment that backloading buying is reduced, it collapses…. Down 6% MTD.

US gas at $4.27/mmbtu as milder weather affects slightly the supply-demand balance. However, inventories are at 666 Bcf below last year’s 2,595 Bcf and 790 Bcf below the 5-year average. Still supportive.

The EIA reported an injection of 100 Bcf, matching forecasts of a 100 Bcf. U.S. working gas in storage is now at 1,929 Bcf, 29% below the five-year average of 2,719 Bcf and 26% below last year’s level of 2,595 Bcf. Weather forecasts for the U.S. over the next six to 10 days call for above-average temperatures on the West Coast and East Coast.

UK gas lost all the premium from the Ukraine crisis and more, down at 35.40p/th (-46% YTD) as inventories rise above 4,250mcm and demand weakens…. The contango is at 26p/th.

The EU levels of gas storage are truly high at this point. UK is at 83.28%, Germany at 76.80%, Netherlands at 98.7%, Spain at 94.5%, Italy at 76.80%… Only France remains oddly low at 54.75%.  These high levels of storage explain the weak gas prices despite Ukraine and the lack of concern from countries about security of supply.

Power prices continue to fall in Europe. German power is down at€34.20/mwh (-7.1% YTD), French power at €41.55/mwh (-6.4% YTD) and Nordpool at €31.20/mwh (-2.7% YTD)

Dr. Fatih Birol, IEA’s Chief Economist just gave some of the key conclusions from IEA’s World Energy Investment Outlook which was published last week.

Main conclusions:

1)            Over $22 trillion forecasted oil and gas capex over the next 20 years. Need for investment in Middle East oil production: Dr. Birol expressed concern over the current lack of appetite to invest in new oil and gas projects across the Middle East, despite oil prices at $110/bbl. If oil prices were to fall, the level of investment from both Middle East NOCs and global IOCs would be even lower. Over the next 20 years, the IEA estimates the Middle East will account for almost a third of global new oil production.

2)            LNG prices likely to remain high: There is now more than $700bn invested in LNG infrastructure, but the cost of shipping LNG around the world remains high. Dr. Birol highlighted that the cost of transporting gas via LNG is 10x that of crude. Despite low US gas prices, the additional liquefaction and transportation costs mean gas price differentials between the US and Europe/Asia are likely to persist for some time.

3)            In Europe, wholesale electricity prices are at least 20% too low: Over the next two decades, Europe needs $2.2 trillion to replace ageing electricity infrastructure and meet carbon targets. However, these investments will not happen under current market conditions, according to Dr. Birol. He highlighted that power prices are about 20% too low to recover costs on new investments. Weak power prices are the result of lacklustre demand and heavily subsidised renewables along with cheap coal imports from the US. Dr. Birol pointed out that total investments in European renewables so far have been three times the size of total investment in US shale gas production. With some overcapacity in the European system, there is some breathing space, but 100GW of thermal capacity is needed over the next decade to safeguard reliability.


Important Disclaimer: All of Daniel Lacalle’s views expressed in this blog are strictly personal and should not be taken as buy or sell recommendations.