David Fuller and Eoin Treacy's Comment of the Day
Category - Energy

    Musings from the Oil Patch May 15th 2018

    Thanks to a subscriber for this edition of Allen Brooks ever interesting report for PPHB. Here is a section:

    Elysis: A New Era for the Aluminum Industry

    This press release today announcing a joint venture between Rio Tinto and Alcoa, with technical input from Apple, may be of interest to subscribers. Here is the key point apart from being carbon free:

    A NEW ERA FOR THE ALUMINUM INDUSTRY

    There’s a new, revolutionary way to make aluminum. It eliminates all direct greenhouse gases. And it produces pure oxygen.

     The technology can create more aluminum in the same size smelting cell as the traditional process. And it can be installed in new facilities or retrofitted for existing ones.

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    War on coal making the world's top mine owners a lot richer

    This article appeared in Mining.com and may be of interest. Here is a section:

    Some of the more significant declines are occurring in China, the top mine operator, and financing for new supplies is drying up. That’s creating a windfall for the producers who remain.

    “It’s a perverse consequence” of policies intended to combat climate change, said Julian Treger, co-founder of activist investor Audley Capital Advisors LLP. “It’s going to be very difficult for funders to provide capital to bring new coal assets online. We have a very interesting supply and demand picture being set up.”

    Anglo American, which not long ago wanted to unload its coal assets, has seen income from the business triple since 2015 to become the mining company’s most profitable commodity. Last year, Glencore reported earnings from the fuel more than doubled, while BHP Billiton said it surged sixfold.

    While global coal use and mine output has been dropping, production failed to keep pace with demand in 2016 for the first time in seven years, data compiled by BP Plc show. As supplies continue to drop, the amount available for export is shrinking. BMO Capital Markets says the 1 billion-metric-ton seaborne market will have a small deficit by 2021 and expand to 15 million tons in 2022.

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    Musings From the Oil Patch May 1st 2018

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section:

    The Bloomberg article highlighted the plight of Big Oil.  Its weighting in global equity indices is at a 50-year low.  Of the MSCI World Index’s 100 biggest stocks, only six are oil producers.  Within the Standard & Poor’s 500 Index, Exxon Mobil Corp. (XOM-NYSE), which a decade ago was the largest company, has fallen to ninth place, and investors are requiring higher dividend yields to sustain the share price.  So, what’s the problem for Big Oil?  Simple.  There is a perception that the world is awash in oil at the same time its long-term demand may be falling due to the public’s embrace of climate change policies promoting renewable energies and electric vehicles.  

    Institutional money manager Kevin Holt of Invesco Ltd. was quoted in the Bloomberg article saying, “Earnings have started to come through but no one believes it’s sustainable.  That’s why the stocks haven’t worked even though the commodity has gone up.  Everyone’s saying they don’t believe it.”  

    Stock market valuations are the collective view of investors as to the future earnings and dividend prospects for companies.  Current low valuations are a manifestation of the industry’s negative perception.  Mr. Holt is certainly correct about oil prices.  Since the start of this year, Brent/WTI prices have climbed 12.2%/13.3% through April 23rd.  If we go back to the oil price low of 10 months ago, prices have soared by 66.7%/61.4%.  In the past, an increase in oil prices of those magnitudes would have sparked a meaningful recovery in oil company and oil-related company share prices.  

    A report by the oilfield service research team at Barclays delivered a similar message about their universe of stocks as cited by Bloomberg about Big Oil.  The most telling chart shows a nearly complete correlation (0.96) between the movement in oil prices and the value of the Philadelphia Oilfield Service Stock Index (OSX) between January 2012 and January 2016.  However, from June 2017 to April 2018, the correlation has fallen to only 0.06.  And, June 2017 marked the low price for crude oil!  

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    Email of the day on the long-term outlook and potential for inflation

    In your 10/April long-term themes review, you said: "So, the big question many people have is if we accept the bullish hypothesis how do we justify the second half of this bull market based on valuations where they are today? ..... However, the answer is also going to have to include inflation. "

    My thoughts, not in any particular order:

    If we look at Robert Shiller's research ~1870-now, on the US share market, his studies show that historically, extreme valuations in the US share market (as assessed by cyclically adjusted P/E ratio) have always been followed by poor average real return over the following 10-20 years."
    You point to inflation as to how a secular bull market (in nominal terms implied) can now occur for the US share market (by implications I think you are reflecting on the US share market) over say the next 10-15 years (say).  You use the experience of Argentina and Venezuela as justification for your argument - where from memory, there was hyperinflation in the periods to which you refer.

    First, I do not think you are suggesting hyperinflation for the USA .... mismatch 1.
    For Argentina and Venezuela, I think their currencies also crashed. I do not think you are suggesting the US dollar is going to crash. Possible mismatch 2.
    Rather than a comparison with Venezuela and Argentina, perhaps a better analogy is to the period in the USA following the late 1960s, when US share markets where at quite high valuations (though not nearly as expensive as now on a CAPE basis). Following the peak valuations of the late 1960s, the US share market went sideways (with some large dips) over the next 16 years or so.

    In summary, I am not sure that your argument is particularly robust.  Yes, the technological revolution is a critically important new phase which will have a huge impact over the next 10 and 20 years..... and there may well be a secular bull market in that sector ... but does that really mean that the technology sector by itself will take the whole S&P500 with it in a secular bull market for the next 10 or 20 years?

    Your thoughts?

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    World's lithium king is ready to unleash a flood of new supply

    This article from Bloomberg appeared in Mining.com and may be of interest. Here is a section:

    “There is a legitimate concern on the side of battery manufacturers about long-term availability of supply,” said Daniel Jimenez, an SQM vice president who recently estimated that the industry will require a capital investment of $10 billion to $12 billion in the next decade to meet demand.

    The green light to mine vastly more lithium, combined with pending changes in its ownership structure, has suddenly put SQM in the sights of several global mining companies, including London-based giant Rio Tinto Group. Among the most aggressive bidders is China’s Tianqi Lithium Corp., which has offered to buy SQM shares at a 20 percent premium, Eduardo Bitran, the former head of government development agency Corfo, said earlier this year.

    “Tianqi owning the stake would be another step towards overall Chinese consolidation of the lithium industry,” Chris Berry, a New York-based energy-metals analyst and founder of House Mountain Partners LLC., said in an email.

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    Musings from the Oil Patch April 16th 2018

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on Shell:

    The de-dollarization in China

    This article by Giancarlo Elia Valori for ModernDiplomacy.eu may be of interest to subscribers. Here is a section:

    As further sanction, the United States has removed Iran from the SWIFT network, the well-known world interbank transfer system, which is also a private company.

    Iran, however, has immediately joined the Chinese CIPS, a recent network, similar to SWIFT, with which it is already fully connected.

    Basically China’s idea is to create an international currency based on the IMF’s Special Drawing Rights and freely expendable on world markets, in lieu of the US dollar, so as to avoid “the dangerous fluctuations stemming from the US currency and the uncertainties on its real value “- just to quote the Governor of the Chinese central bank, Zhou Xiaochuan, who will soon be replaced by Yi Gang.

    In the meantime, Russia and China are acquiring significant amounts of gold.

    In recent years China has bought gold to the tune of at least 1842.6 tons, but the international index could be distorted, as many transactions on the Shanghai Gold Exchange are Over the Counter (OTC) and hence are not reported.

    Again according to official data, so far Russia is supposed to have reached 1857.7 tons.

    Both countries have so far bought 10% of the gold available in the world.

    Meanwhile, Saudi Arabia has already accepted payments in yuan for the oil sold to China, which is its largest customer. This is a turning point. If Saudi Arabia gives in, sooner or later all OPEC countries will follow suit.

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    Saudi Arabia Is Said to Signal Ambition for $80 Oil Price

    This article by Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:

    Saudi Oil Minister Khalid Al-Falih has also sounded increasingly hawkish in public, suggesting that OPEC should keep tightening the oil market even through the cartel is close to meeting its goal of cutting crude inventories in industrialized countries back to their five-year average.

    In an interview in New York last month, he said today’s price near $70 a barrel hadn’t been sufficient to stimulate investment in the industry, which remains significantly below levels seen before 2014’s price crash.

    "That tells me that the pricing signals that have come out of the recovery haven’t been sufficient," he said, without giving a target for prices.

    The Saudi Ministry of Energy didn’t immediately respond to a request for comment.

    Domestic Policy
    Riyadh’s desire for higher prices is driven by domestic policy imperatives. Although Saudi Arabia’s budget deficit has narrowed sharply as oil has recovered, Prince Mohammed has set out an ambitious and expensive economic and social reform program. He also needs to pay for the kingdom’s increasingly drawn-out military entanglement in Yemen.

    While there’s little indication the Saudis are prepared to deepen their oil cuts to achieve $80, at the very least the aspiration suggests they’ll keep with the current measures until the price goal is closer. Riyadh is counting on declining Venezuelan oil production, the likely imposition of new U.S. sanctions on Iran, and continued demand growth to absorb U.S. shale production.

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