Author Topic: Oil price and Sasol  (Read 4292 times)

yozzi

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Oil price and Sasol
« on: January 08, 2015, 09:13:55 am »
Read an interesting piece on Sasol shares on my Money Morning newsletter today and don't know why I didn't think of it before with the oil price dropping like a stone!

Sasol was R637 in Sept 2014 but is now around the R400 mark a drop of about 37% in 4 mths with the potential to drop another 23% in the next 2 mths! If it opens below R390 the charts are saying it goes down to under R300 from R637 not so long ago!

What the opinion on this? Is it hogwash or is it a viable proposition and it would obviously pay to wait to see where the share goes before climbing in and will the oil price recover later in the year or will it be a very long recovery period?

Any views on it?   

The Trader

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Re: Oil price and Sasol
« Reply #1 on: January 08, 2015, 10:26:10 am »
I posted this on BDLive this morning......

Oil prices are notoriously speculative at the best of times. The cost of producing the marginal barrel (the one that creates either excess demand or supply) is generally where the price should settle in an efficient market. If we assume the oil from shale condensate is the marginal barrel then around US$65 is probably reasonable. This also happens to be the price you reach when you extrapolate a long term trend line from around 2005. Anything above or below this price is typically down to speculators.

Commodity prices trade in lumpy jumps and we should quite quickly see the price going back to around 60 to 70. Hopefully the Rand will strengthen in this time which will still leave us with a fairly low BFP price to which the government adds their taxes and levies, giving us the pump price. Remember that with low oil prices, the SA oil import refiners such as Shell, BP, Engen, Total are probably making more money on their refining side than on their marketing side. This is because refining margins are probably growing as crude oil prices (their purchases) are dropping faster than refined product prices (their sales). Sasol benefits when oil prices are high as they sell at the BFP price for refined products but their cost inputs are mostly cheaper gas and coal and less crude oil.

Either way we are in for an interesting year. Expect equities and commodities to remain weak this year as interest rates in the US rise and the USD remains strong. Hopefully the Rand will be able to hold its own as our SA economy (finally) starts to improve.

NakedPeanut

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Re: Oil price and Sasol
« Reply #2 on: January 08, 2015, 11:30:02 am »
As part of the challenge this year i'm betting on sasol to recover. It's going to make or break my strategy :whistle:

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Re: Oil price and Sasol
« Reply #3 on: January 08, 2015, 02:17:00 pm »
I wouldn't be too big. Yes, Sasol should recover somewhat as oil prices recover. However, Sasol only started looking at crude hedges when oil prices were around US$58. So, assuming they are hedged now, they will miss any upside above that hedge level. You always know that commodity prices are about to turn when miners, oil producers etc. finally decide to hedge in a panic. Also, Sasol has spent expensive Rands (now worth a lot less) on developing the Louisiana Project and can't turn back now. Gas prices are starting to take a knock in the US as well now and Louisiana could be under water for Sasol which would mean horrible write downs for them. But equity traders will of course use the Brent oil price as a proxy for Sasol and so expect Sasol to rally when oil rallies and vice versa. Until the write downs of course.....

jaDEB

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Re: Oil price and Sasol
« Reply #4 on: January 08, 2015, 02:53:28 pm »
Article from Bloomberg, wonder if they did?

Sasol: Hedge plan to protect against oil price

November 25 2014 at 08:00am

By Bloomberg  Comment on this story

SASOL is considering hedges to protect against lower oil prices even as the decline to the weakest in four years poses no threat to debt of the world’s biggest producer of motor fuel from coal. Acting chief financial officer Paul Victor said yesterday: “We have not hedged during the past few years as shareholders want exposure to oil-price movements, our gearing is negligible and we have substantial surplus cash.” The company is “considering an oil hedge for downside risk protection”. A global glut has contributed to a 22 percent decline in the price since September. Borrowing costs for Sasol, whose revenue is linked to the dollar price of crude, have increased, with yields on its dollar debt due November 2022 rising 26 basis points to 4.39 percent. Sasol expects the Impumelelo and Shondoni coal mines, part of a R14 billion mine-replacement programme, to become operational next year. It had arranged a loan with FirstRand’s Rand Merchant Bank at market-related terms, he said. Shares fell 2 percent to close at R524.51 yesterday. – Bloomberg
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Re: Oil price and Sasol
« Reply #5 on: January 13, 2015, 02:04:55 pm »
I get a daily report from my OTC oil broker in London every day. From time to time I might post it here....

Oil bears firmly in control
Equity indices suffered a volatile start to the week as yet another big slump in oil prices weighed on investor appetite for risk and dragged energy shares lower. Risk assets did appear to be rebounding in early trading on hopes that the Federal Reserve would extend its time frame for the eventual normalisation of interest rates following last week’s mixed US jobs report. However, fears of a global economic slowdown compounded by further oil price weakness along with concerns that the latest US corporate earnings will fall short of expectations ensured that caution dominated market sentiment. Risk aversion looks set to continue this morning as oil resumes its downward path whilst investors shrug-off stronger-than-expected Chinese trade data.

Global oil supply shows no signs of let-up, so far
This week will see the release of the latest set of monthly reports on supply/demand. We will find out whether there is any recognition that global demand has been stimulated by falling oil prices over the last month and whether OPEC believes that it has started to reclaim market share at the expense of non-OPEC suppliers. The EIA will release its report this afternoon, OPEC on Thursday and the IEA on Friday. Below we take a look at the latest available supply data, recent changes in Official Selling Prices from Middle Eastern oil producers and how slumping oil prices have altered price forecasts for this year.

Energy Intelligence published their December global output figures at the end of last week and it did nothing to encourage oil bulls. They put global oil supply at 96.717 mbpd last month, up 982,000 bpd on November. Non-OPEC supply grew by less than 300,000 bpd (+0.51%) with the US producing 87,000 bpd more in December than the month before. OPEC output jumped 612,000 bpd (+2.04%). OPEC crude oil market share increased from 31.30% in November to 31.61% in December whilst the cartel's share including NGL/condensates and other oil rose from 38.23% to 38.55% during the same period.

Looking at the latest OSPs for February from Iraq, Kuwait and Saudi Arabia, the message is that there is relatively good demand emerging from Asia whilst Europe and the US are over supplied. The above-mentioned Persian Gulf producers all increased their differentials to the Far East for next month whilst cutting them for the rest of the world. Asian buyers will have to pay around 50-60 cents/bbl more for their crude purchases in February than this month whilst the cut to Europe and the US varies between $2.10/bbl (Arab Extra Light and Light Mediterranean Ras Tanura) and 10 cents/bbl (Arab Extra Light US Gulf). We have learnt overnight that Iran also raised its OSP to Asian customers. They will sell their light crude 60 cents/bbl and their heavy crude 65 cents/bbl more expensive than in January.

With global supply staying high in December and Persian Gulf OPEC producers clearly determined to stick to their strategy, oil price forecasters have had no option but to revise down their latest estimates for this year. The latest revision came from Goldman Sachs who published their updated report yesterday. The investment bank cut its 2015 WTI forecast from $73.75/bbl to $47.15/bbl and Brent from $83.75/bbl to $50.40/bbl. The price pressure is expected to be most pronounced in the first quarter with the three-month forecast for Brent standing at $42 against a price curve for this period of currently around $49/bbl. SocGen and Citi have also cut their 2015 price forecast this year.

Money managers are resilient
Whilst there are no fundamental signs emerging that oil prices are close to their bottom, money managers are taking a different view. Financial investors in both WTI and Brent increased their net length last week by 3,000 and 15,000 contracts respectively, despite a price drop of more than $6/bbl during the latest reporting period.

In fact, Brent net length has increased in 11 out of the last 14 weeks even though prices have fallen from $94 /bbl to $51/bbl. Although net speculative length has been rising, its composition has undergone significant changes. When speculators were least exposed in Brent at the end of September last year, they were net long 36,704 lots composed of gross length of 194,099 contracts and a gross short position of 157,395 contracts. Last week net length stood at 140,169 contracts consisting of 254,232 lots of long positions and 114,063 lots of short positions.

This was the first week that saw not only a significant reduction in short positions but also a more than 26,000 lots increase in long positions. In other words, net length grew not only because of short-covering but also due to fresh long positions entering the market. Whilst this seems bullish further price weakness could easily force these longs abandon their positions in the near future. Yesterday’s price fall did nothing to make them feel better as WTI lost $2.29/bbl, Brent $2.68/bbl, Heating Oil 489 points and RBOB 487 points. In a sign of demand revival China’s crude oil imports hit a record high of 7.15 mbpd in December. This, however, seems to have failed to change the prevailing sentiment as Brent has lost another $2/bbl this morning. At the moment the bottom is not in sight

The Trader

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Re: Oil price and Sasol
« Reply #6 on: January 13, 2015, 02:15:59 pm »
The whole world and his dog is currently trying to go long crude oil futures at the moment. That is pure heaven for the shorters who are actively fishing for stops and pushing it lower. However, when you see massive short covering coming in then you know the speculation is coming to an end. I think we are pretty much there now.

But make no mistake, this is not a chance to go long over the longer term. I always reckoned that around $45 - $48 on Brent futures would be the floor. I reckon we are now going to see some serious volatility and bouncing around over the next month. Anyone not trading with 100% pure discipline and tight stops is going to get wiped out on the whipsaws. By end February I expect we will get back to around $60 but it is going to be a wild ride getting there. Only those (like the banks and professional commodity traders) with deep enough pockets and VaR limits will be able to stay in the trade long enough to take profits. Everyone else will likely get whipsawed out.

15 Day historical vol on Brent is pushing about 30% but implied vol is pricing in closer to 40%. Calls are seeing massive vol skew which makes buying anything close to the money almost a worthless punt, due to the cost of the premium i.e. higher vol = higher premium. When equity traders talk about the VIX hitting 20% vol I'm sure commodity traders must chuckle a little. They can only dream of such low vol and cheaper options.
« Last Edit: January 13, 2015, 02:20:26 pm by The Trader »

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Re: Oil price and Sasol
« Reply #7 on: January 13, 2015, 02:48:05 pm »
I expect to see massive see-sawing between $45 and $65 oil for some time to come. The reason is that at $45 the frackers don't make money and cut rigs and new drilling completely which reduces supply quite quickly. At $65 the frackers are just making enough money to remain above the variable cost of production, and thus pay off some of their debt and capital etc. which means that all the excess supply is in the system. Which is when the Saudis will again try to drive them out of business by increasing their production and hanging onto market share. It's going to be an interesting game of cat and mouse between the US frackers and the Saudi Sheiks. If only the ZAR would strengthen so we can get some real benefits from the oil price drop.

Moonraker

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Re: Oil price and Sasol
« Reply #8 on: January 13, 2015, 03:51:02 pm »
I posted this on BDLive this morning......

Oil prices are notoriously speculative at the best of times. The cost of producing the marginal barrel (the one that creates either excess demand or supply) is generally where the price should settle in an efficient market. If we assume the oil from shale condensate is the marginal barrel then around US$65 is probably reasonable. This also happens to be the price you reach when you extrapolate a long term trend line from around 2005. Anything above or below this price is typically down to speculators.

Commodity prices trade in lumpy jumps and we should quite quickly see the price going back to around 60 to 70. Hopefully the Rand will strengthen in this time which will still leave us with a fairly low BFP price to which the government adds their taxes and levies, giving us the pump price. Remember that with low oil prices, the SA oil import refiners such as Shell, BP, Engen, Total are probably making more money on their refining side than on their marketing side. This is because refining margins are probably growing as crude oil prices (their purchases) are dropping faster than refined product prices (their sales). Sasol benefits when oil prices are high as they sell at the BFP price for refined products but their cost inputs are mostly cheaper gas and coal and less crude oil.

Either way we are in for an interesting year. Expect equities and commodities to remain weak this year as interest rates in the US rise and the USD remains strong. Hopefully the Rand will be able to hold its own as our SA economy (finally) starts to improve.

Once costs are sunk, some can produce at $0,99 per barrel.
 
In the U.S., Exxon spent an average of $12.72 to extract a barrel of oil last year, its cheapest operating region aside from Asia and Europe, company figures showed. Some operators have even lower costs: Continental Resources Inc. (CLR) spends about 99 cents to pump each barrel from its 1.8 billion-barrel discovery known as the South Central Oklahoma Oil Province, or SCOOP. Continental, controlled by Oklahoma billionaire wildcatter Harold Hamm, discovered the SCOOP in 2012.
 
Once oil companies sink cash into drilling wells, lining them with steel pipes and concrete, blasting the surrounding rocks into rubble with hydraulic fracturing, and linking them to pipeline systems, they have no incentive to scale back production, said Andrew Cosgrove, an analyst at Bloomberg Intelligence in Princeton, New Jersey.

Exxon Mobil Shows Why U.S. Oil Output Rises as Prices Plunge

The Trader

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Re: Oil price and Sasol
« Reply #9 on: January 13, 2015, 04:56:57 pm »

Once costs are sunk, some can produce at $0,99 per barrel.
 .......
Once oil companies sink cash into drilling wells, lining them with steel pipes and concrete, blasting the surrounding rocks into rubble with hydraulic fracturing, and linking them to pipeline systems, they have no incentive to scale back production, said Andrew Cosgrove, an analyst at Bloomberg Intelligence in Princeton, New Jersey.

That's mostly true but realise that Exxon and others are talking their book, trying desperately to remove the Saudi argument in the immediate term. In terms of conventional oil, these wells last for around 20 years so the marginal cost of production can be as low as $0.99 i.e. they have paid off all capital and are massively profitable. But with fracking, these wells generally only last for 3 to 4 years which is why frackers continually need to drill new wells, with associated capital costs etc. The proof of the pudding is already out there.... 1) Rig utilisation in the US is dropping massively, even though production is currently staying constant. Also, gas prices, which fracking is 80% about, is already starting to respond to potentially lower production. The production cuts will come in a year or so and the oil price will react to that forward view in a few months or so.
« Last Edit: January 13, 2015, 05:02:30 pm by The Trader »

Moonraker

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Re: Oil price and Sasol
« Reply #10 on: January 13, 2015, 05:31:25 pm »
I tend to agree that the per barrel price will fluctuate somewhere between 40$-65$, without much upside to that as the frackers will toggle production on or off depending on the price. Sure the more marginal producers are shutting down as we speak and further capex is also being postponed. However one must bear in mind that fracking technology has improved to a great extent, so that for most of the established frackers, 20$ per barrel is sustainable, but you are right, and a lot depends on an economic recovery in the EU and also in China.
The 40$-65$ range could be with us for quite some time.

Edit: Quite frankly I have absolutely no idea whatsoever where the price of oil is going. Anyone having the answer to that is a charlatan !
All I wish for is to have electricity and no national grid collapse which would take us back to Victorian Times. Check out the BBC production "Victorian Farm" on DVD to see how they used to cope.  :'(
« Last Edit: January 13, 2015, 06:00:02 pm by Moonraker »

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Re: Oil price and Sasol
« Reply #11 on: January 19, 2015, 07:20:43 am »
Brent rallied last week and now looks overbought on short term momentum. Looking for another downside move this week to test the $40 level.

jaDEB

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Re: Oil price and Sasol
« Reply #12 on: November 26, 2015, 07:46:41 am »
Johannesburg - Petrochemicals giant Sasol is anticipating that the volatility of the Brent crude oil price, coupled with the weakening of the exchange rate, will have a severe impact on its performance.

The Brent oil price was under pressure and had fallen dramatically. At 5pm yesterday it was quoted at $45.71 (R641.07) a barrel.
Over the past year, Sasol’s share price has fallen by 21 percent.

Sasol’s share price yesterday rose 0.16 percent to R416.44, which valued the company at R271 billion.

Yesterday Cavan Hill, Sasol’s senior vice-president of investor relations, told journalists that a $1 barrel change in the oil price was expected to change profits by R810 million a year.


Impact

Similarly, a 10 cent change in the rand/dollar exchange rate would have a R650m impact on the profits, Hill added.

“We are exposed to the crude oil prices. A year ago Opec decided to defend its market share, resulting in the drop in crude oil prices. In response, we have a business plan to conserve cash,” Hill said.
As part of the plan, Sasol put in place a cost savings programme, called a business performance enhancement programme, with a target of between R4bn and R4.3bn by the end of the 2016 financial year.
Over and above this programme, it has implemented a low oil price response plan that will see it save an additional R1bn a year by the end of the 2018 financial year.
Hill was speaking as the company unpacked its gas strategy in Johannesburg yesterday, and shifted its focus from coal to natural gas.
“Gas is an important part of diversifying the energy mix, our goal is that it will play an integral part of the mix,” Hill said.
Sasol is also developing an $8.9bn ethane cracker complex in Louisiana in the US, which is scheduled to begin operations in 2018 and expects the demand for natural gas to increase over the next five years.
Together with cash-strapped state-owned PetroSA, Sasol was awarded an exploration right permit in the offshore Orange Basin on the west coast in July.
The initial three-year exploration work programme comprises a firm airborne gravity and magnetic survey, and based on these results a 2D seismic survey.
John Sichinga, the senior vice-president of Sasol exploration and production international, said the permit was a “work in progress”.
“There has been a change of leadership; we have not met with the new leadership yet,” Sichinga said.
Sasol expected that the Mozambican gas industry would play a bigger role in energy production after the company submitted its field development plan for the Pande and Temane production sharing agreement to the Mozambican authorities.
The company was now waiting for approval from the government.
Power plant
Sasol also commissioned a 175 megawatt gas-fired power plant in Ressano Garcia, Mozambique, with its partner, the state-owned power utility EDM.
At full capacity the plant will provide power to 2 million Mozambique citizens.
It is also exploring for gas in Mozambique, South Africa, Canada and Australia.
Sasol was the developer of stranded gas fields in Mozambique and had contributed around $600m to the country through royalties and taxes since 2004.
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