Wednesday, July 26, 2017

The Market And Energy Page, T+187 -- July 26, 2017

Bust? Even before it's announced, another reason for concern about Saudi Aramco's IPO. From The Wall Street Journal today:
US shale -- yup, US shale, again -- threatens chemical element of Saudi Aramco's IPO. Aramco will be fighting a war against the US on two fronts: oil and petrochemicals.

The shale revolution means the U.S. is already much less reliant on Saudi Arabia for its oil needs. Less appreciated is the threat it also poses to Saudi Aramco’s plan to diversify downstream into chemicals and plastics production, likely a central pillar of the energy giant’s pitch to investors ahead of its probable initial public offering next year.

Having ruptured the oil-and-gas industry’s economics, the U.S.’s shale bounty is now triggering a domestic investment boom as companies that use hydrocarbons as an input take advantage of low prices. Half of all capital investment in U.S. manufacturing in 2016 went to chemical plants, while nearly $200 billion of new projects are being planned or under construction. Net U.S. petrochemical exports could grow nearly 10-fold to $110 billion over the next decade, according to consultancy IHS Markit .

With U.S. producers set to dominate the petrochemicals sector in the Western hemisphere in the next 10 years, Aramco will need to pin its hopes on the Asian market, specifically China. But Asian refining capacity, much of it with new petrochemical plants attached, is rising fast—led by China itself, which is already flooding Asian markets with diesel.

China’s oil-refining capacity has risen sharply in recent years. In 2016, it was nearly 15% higher than the nation’s actual petroleum consumption. Chinese refiners have in turn been exporting their surplus, dragging down regional oil-product prices. The prospect of poor investment returns given this overcapacity is one reason why Aramco has been wavering over a planned $20 billion refining and petrochemical joint venture with Malaysia’s Petronas.
Boom. Scrolling through Yahoo!Finance In Play company after company reports earnings beating forecasts.

Market indices, futures: up, for all three indices. Wow, Dow futures are up another 60 points.

Ten-year bonds: 2.319%. Breaking below 2.30% is Rick Santelli's "concern."

Spratly Islands? China urges halt to oil drilling in disputed South China Sea. Personal note: it was back in 1993 - 1994, I first heard of the Spratly Islands. At Air War College, the Spratly Islands were  studied in depth over just this issue.

Divergence: crude oil wells -- DUCs increasing; natural gas wells -- the fracklog in the Marcellus is shrinking as drillers take advantage of higher prices.

Turning point: Bloomberg suggests that Anadarko's announcement to cut CAPEX may be a turning point for the global oil market. I agree. I think the Anadarko story is a bigger story than most think. But for reasons other than generally reported.

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