Commentary: Oil price, Independent Oil & Gas, Newco?

14/09/2018

WTI $68.59 -$1.78, Brent $78.18 -$1.56, Diff -$9.59 +22c, NG $2.82 -1c

Oil price

The wild gyrations in the oil price have been clearly manifested this week as the monthly reports are published and inventory figures show that stocks are still around 3% below five year averages. With crude up again this morning it looks like it will end better on the week, albeit modestly.

The IEA added its two pennyworth yesterday and left global demand increases unchanged at 1.4m b/d for 2018 and 1.5m b/d for 2019, not far off the others. It is catching up with my forecast of early this year that global demand will exceed 100m b/d by the end of the year. What is happening now is a classic case of a really tight end to the year which is a combination of highest demand time and serious shortages of supply led primarily by Venezuela and Iran. Iran may only be 500/- b/d off right now but expect that number to be 1m b/d come November time, this is what all the agencies call a tight second half to the year, cue Opec to fill the gap.

Now, they all also agree that it won’t last and that next year is looking distinctly soggy, so to speak. This is through a combination of factors but most are blaming emerging markets/ developing markets where they expect demand to fall, partly due to having to buy expensive dollars to pay for their oil. Most suggest a ‘challenging’ market where call on Opec oil falls to 32m b/d or below.

Your view on oil prices comes down to two things but really almost entirely down to Opec or Opec+. If you assume that Opec will fill the gap in the 4th quarter of this year then +/- $70 is about right, maybe nearer $80 if it gets cold, not entirely joking! As for next year if demand does fall then Opec+ will have to do the reverse and take oil off the market especially in the weaker first half of the year. They may not have to go back to the November ’16 levels but some discipline would be needed to keep the $70 level, I am assuming they will but bears are hoping they will stay greedy for as long as possible. You pays your money and takes your choice…

Independent Oil & Gas

IOG has announced this morning that they have completed the Harvey funding, a £15m non convertible loan facility with London Oil & Gas over five years at LIBOR +9% and 20m of warrants exercisable at 32.18p. The raise is to fund the Harvey appraisal well and other corporate and project costs and the Skipper liabilities.

The PSDM seismic reinterpretation work has yielded a number of mainly positive changes to estimates. Geological chance of success is now 63% (Nov 17 CPR 50%) with low/mid/high resources number of 85/129/199 BCF (44/114/286 BCF). The unrisked mid-case NPV (10) number has risen from £159m to £232m.  Whilst the top end has clearly drifted in a bit the almost doubling of the lower end along with greater definition of the mid end number and well location more than makes up for it. As for the rise in COS this is really important, Harvey will be a ‘game changer’ for IOG according to CEO Andrew Hockey and they expect to spud in January 2019.

Newco?

I can’t say much at the moment but I am hearing some very interesting and potentially very exciting news about a new and unique investment opportunity heading to the market. If it is accurate it could be a serious bucket list candidate and have significant investor appeal. More details as I see them…

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