Ahead of this CNBC Africa interview Vestact director Sasha Naryshkine told me how much he enjoyed his holiday reading The Frackers by Gregory Zuckerman. It tells the fascinating story of how the US’s abundant but previously useless shale gas resources were brought to account, transforming the global energy equation. Sasha uses those insights to good effect in our discussion about the oil price, Sasol and other game changing developments to which investors should be paying attention. – AH
ALEC HOGG: Sasha Naryshkine is with us in the studio. Let’s get a more in depth view of how the markets are trading today. He’s a Director at Vestact. $55 for Brent Crude…..
SASHA NARYSHKINE: Who would have thought? It’s down about 50 percent over the past year because it was I think, $103 for WTI and now we’re looking somewhere in the region of $52.00 per barrel. This is fabulous news for consumers globally, but not as good news obviously, for producers. I think the price has been reflected in certain commodity stocks because it’s not only the oil price that’s fallen precipitously, but also natural gas, which is also great for consumers in Western Europe and North America. Iron ore was another big story last year. Obviously, the price falling precipitously, too. I don’t think the Chinese demand is going to fall off a cliff, but it has to normalise because the Chinese consume about half of the world’s commodities, but yet they’re only responsible for around 15 percent of global GDP. At some point, it has to normalise, and I think that was the major concern in the second half of last year.
The one year Sasol share price graph - not a pretty picture
The one year Sasol share price graph – not a pretty picture
ALEC HOGG: It was the big story in the second half of 2014, as you say. With the oil price coming down as it is, it has an impact for many South Africans who own Sasol shares. At the current level around R420 from R650… Do you think it has the potential to rebound or are you scared of catching a falling knife?
The one year Sasol share price graph – not a pretty picture
SASHA NARYSHKINE: I think the game changer obviously, is the new ethane cracker in Louisiana because all that supply of on-shore gas, which is now in abundance in North America, to be able to sell into the chemicals market in the US. That could be a big game changer for Sasol. It’s obviously much bigger than the Qatar plant, which at the time, everyone got very excited about. They got excited about the Mafutha Project here, which never happened, and of course, Indian and Chinese coal to liquids, which was seen as dirtier energy. Everyone is comfortable with the fact that gas is a much cleaner energy and there’s an abundance of it in North America…
ALEC HOGG: That’s going to take time, though….
SASHA NARYSHKINE: It is. It’s going to take a long time. So in between now and then, who knows? But I think they’ve committed to the plans. Obviously, raising the necessary capital to build the plant in dollar terms, at a weaker Rand price, is going to be tricky for them, so there might be opportunities to pick up the shares. It’s a fabulous business and we’ve seen them in this transition phase before, although this seems to be a bigger – and if I could use the word ‘more ballsy’ – move.
ALEC HOGG: It’s a fight between the frackers in North America and the oil producers in OPEC, and the OPEC guys are determined to get rid of the frackers. At the very least, it might mean for the rest of us, that supply and demand finally comes back into the equation as far as the oil price is concerned.
SASHA NARYSHKINE: For a 20-year period, there was a fall-off in North American (or specifically, US) production. Now that’s kind of come back and we’re sitting at levels we haven’t seen for 30 years. That’s been completely responsible for the drawdown in oil prices, which is strange because you see more geopolitical risks added to the equation. For example, Russia and Ukraine, heightened sanctions, all those gas pipes that run through that area, plus also a move away from nuclear for the time being towards cleaner alternatives. That should mean that the consumption of fossil fuels will continue. And the ongoing crisis in Syria and the surrounds and ISIS…you would have expected all of that to have had more of an impact. Imagine if that area were politically stable. What would have happened to the price? It’s probably another reminder that the Americans are the ones who ultimately set the energy prices, and the fact that now (I think) close to 87 percent of their needs are being produced in North America, whereas ten years ago, it was less than 17 percent.
ALEC HOGG: The Americans are talking about allowing oil producers export again, which is very interesting. Just to close off with, there are two big geopolitical developments this morning. The one – Rouhani in Iran – saying we have to normalise. We have to have our relationships with the rest of the world. We have to allow economics to drive politics, rather than politics driving economics as it has, for years. I’d love to get your view on that, particularly on the oil price. Secondly, Der Spiegel is telling us that Angela Merkel, the German Chancellor, doesn’t care if the Greeks leave the EU – if they vote the wrong way (in her opinion). They’ve had to retract that. There’s something going on in both of those. Your views.
SASHA NARYSHKINE: Firstly, I think it would be really, positive development for MTN specifically, in being able to unlock that area and being able to extract some of the cash as well as maybe expand there. Secondly, whilst it might seem like a bright idea for the Greeks to get kicked out. It’s like getting kicked out of the Premier League with no prospect of every coming back…getting booted to the fourth position.
ALEC HOGG: Like Rangers FC?
SASHA NARYSHKINE: Possibly, yes. I don’t think it’s going to happen, but there probably will be more stumbling and mumbling along. I think people make too much of a meal of it. Greece, as a percentage of the overall European economy, is less than two percent.
ALEC HOGG: Well, that was Der Spiegel’s argument, wasn’t it that both Merkel and Wolfgang Schäuble (the Finance Minister) have said it’s really not that big a deal any more.
SASHA NARYSHKINE: No.