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August 10 2020

Commentary by Eoin Treacy

Navy's solar power satellite hardware to be tested in orbit

This article by Sandra Erwin for Spacenews.com may be of interest to subscribers. Here is a section:

The 12-inch square tile module will test whether power can be harvested from its solar panel and transform the Energy to a radio frequency microwave. The experiment has been in the works for more than a decade.

The module converts sunlight for microwave power transmission. Depuma said engineers decided to not use optical power transmission because a lot of Energy would be lost through clouds and atmosphere.

The Naval Research Laboratory said the results of the experiment could drive the design of a dedicated spacecraft to test the transmission of Energy back to Earth. The Pentagon is interested in this technology to provide Energy to remote installations like forward operating bases and disaster response areas.

Researchers believe that a space solar system traveling above the atmosphere would catch far more Energy than it would be possible on the ground due to the abundant and unimpeded sunlight in space.

One of the concerns is the thermal performance of the hardware. “It’s kind of a tricky problem to have something that’s in direct sunlight all the time and maintain the temperature of the electronics,” said Jaffe.

Solar power satellites could provide Energy anywhere in the world, he said. “So a really important component of these kind of satellites would be a device that can convert the sunlight into microwaves or some other form of electromagnetic Energy that’s suitable for sending to Earth. Now is the time to test it in space and see how it performs.”

Eoin Treacy's view -

Development of SpaceX’s BFR is progressing much quicker than most people gave the company credit for. The delivery of the vehicle to active commercial service will greatly reduce the cost of lifting major payloads to space.



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August 05 2020

Commentary by Eoin Treacy

Video commentary for August 5th 2020

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber;'s Area. 

Some of the topics discussed include: bonds ease but TIPS remains firm, gold and silver extend breakouts, Energy and industrial resources firm, Dollar eases but is oversold, Wall Street extends breakout on stimulus and vaccine bets. 



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August 05 2020

Commentary by Eoin Treacy

Shale Driller Devon to Pay Biggest Dividend In Its History

This article by Joe Carroll and Rachel Adams-Heard for Bloomberg may be of interest to subscribers. Here is a section:

The debt buybacks will target an amount equivalent to about half of Devon’s outstanding net debt, according to data compiled by Bloomberg. Devon stock was the best performer in the S&P 500 Index, rising 7.8% to $11.95 at 9:33 a.m. in New York after earlier climbing 8.3%.

Devon’s special payout and debt-reduction targets are the most aggressive efforts yet as shale explorers grapple with a virus-induced demand collapse and tumbling Energy prices.

“These shareholder-friendly initiatives demonstrate our commitment to a new E&P business model, which moderates growth, emphasizes capital efficiencies, generates free cash flow and returns increasing amounts of cash directly to our shareholders,” Devon Chief Executive Officer Dave Hager said in the statement.

Eoin Treacy's view -

Instilling financial discipline on rapacious appetite for expansion at any cost is part of the ebb and flow of a commodity bull and bear markets. The gold mining sector went through exactly the same rationalisation process and it created healthier companies.



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August 03 2020

Commentary by Eoin Treacy

NZ to trial world-first commercial long range, wireless power transmission

This article by Loz Blain for newatlas.com may be of interest to subscribers. Here is a section:

Emrod currently has a working prototype of its device, but will build another for Powerco, with plans to deliver by October, then spend several months in lab testing before moving to a field trial. The prototype device will be capable of delivering "only a few kilowatts" of power, but can easily be scaled up. "We can use the exact same technology to transmit 100 times more power over much longer distances," said Emrod founder and serial entrepreneur Greg Kushnir. "Wireless systems using Emrod technology can transmit any amount of power current wired solutions transmit."

The system uses a transmitting antenna, a series of relays and a receiving rectenna (a rectifying antenna capable of converting microwave Energy into electricity). Each of these components appear in these images to simply look like big ol' squares on poles. Its beams use the non-ionizing Industrial, Scientific and Medical band of the radio spectrum, including frequencies commonly used in Wi-Fi and Bluetooth.

Unlike Tesla's globally-accessible free power dream, the power here is beamed directly between specific points, with no radiation around the beam, and a "low power laser safety curtain" immediately shuts down power transmission before any object, like a bird, drone, power thief or helicopter, can touch the main beam. There will be no difficulties this time working out where to place the meter.

Eoin Treacy's view -

The potential for wireless power transmission is a significant potential gamechanger for the Energy sector because it represents an elegant solution to the question of how to connect very remote generating locations to points of consumption. While still in its infancy this is exactly the kind of technology that would benefit from venture funding and could succeed in boosting productivity.



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July 30 2020

Commentary by Eoin Treacy

Conoco Plunge Shows U.S. Oil Struggling to Exit Crisis Mode

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

On the bright side, Chief Executive Officer Ryan Lance said he’s encouraged by low premiums for shale acquisitions, citing Chevron’s recent agreement to buy Noble Energy.

When asked if Conoco also looked into buying Noble, Lance said “we did look,” but he was worried that Noble’s Israel assets might have been the source of political tension, since Conoco operates in other areas of the Middle East.

“The gem is certainly the Middle Eastern gas position,” he said. “With some of the other things we’re doing in the Middle East, that creates maybe a little bit of an issue and problem for us politically.”

Conoco’s earnings miss followed reports from three shale-focused explorers on Wednesday that signaled a grim rest of 2020 for the broader U.S. oil industry. QEP Resources Inc. cut its production outlook, WPX Energy Inc. further reduced its capital spending budget, while Concho Resources Inc. stuck with plans to keep crude volumes flat from 2019 levels, ending years of growth.

Eoin Treacy's view -

Bankruptcies in the oil patch are likely to continue to trend higher because so many projects have break-evens in the $60 area. That is creating buying opportunities for the majors and the chance to rationalise the onshore domestic US production landscape. That will be necessary in order to survive because global demand will take time to recover from the virus hiatus.



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July 28 2020

Commentary by Eoin Treacy

Video commentary for July 28th 2020

July 24 2020

Commentary by Eoin Treacy

Intel Plunges as It Weighs Exit From Manufacturing Chips

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

Outsourcing is the norm in the $400 billion industry nowadays, but for 50 years Intel has combined chip design with in-house production. And until recently, Intel was even planning to churn out processors for others.

“To the extent that we need to use somebody else’s process technology and we call those contingency plans, we will be prepared to do that,” Swan told analysts on a conference call, after the company warned of another delayed production process.

“That gives us much more optionality and flexibility. So in the event there is a process slip, we can try something rather than make it all ourselves.”

Pursuing this option would represent a huge shift in the industry and the end of Intel’s biggest differentiator, Cowen & Co. analyst Matt Ramsay said.

Design can only do so much for semiconductor performance. The manufacturing step is crucial to ensuring these components can store more data, process information faster and use less
Energy. Combining the two helped Intel improve both sides of its operation for decades.

Eoin Treacy's view -

Intel has lagged in its ability to deliver 10nm chips at scale and is also having difficulty in getting its 7nm manufacturing up and running. The reality is as the width of a single silicon atom is approached the difficulty in manufacturing chips increases exponentially. That means the cost and focus required to succeed is progressively more difficult to maintain. Intel’s willingness to entertain the idea of subcontracting represents a significant defeat. 



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July 21 2020

Commentary by Eoin Treacy

Hydrogen - breathing new life into the platinum market

This article from Heraeus may be of interest to subscribers. Here is a section:

The hydrogen industry is gaining momentum from unprecedented political and economic support. Shares in some electrolyser, hydrogen and fuel cell companies are up more than 50% this year. Investors have become more bullish over the past year as several large companies have announced investments or joint ventures with hydrogen players. There are now major opportunities for players throughout the PGM sector to capitalise on the strong legislative backing of the hydrogen economy, providing a long-term positive demand signal for platinum.

Eoin Treacy's view -

The EU has just announced a new €500 billion green Energy stimulus package which is the biggest effort yet to wean the continent off of imported Energy. The intermittency of renewables, coupled with their short lives compared to conventional fossil fuel power plants suggests clear efforts need to be made to tackle efficiency, longevity and costs if the sector is to have a long-term future beyond outright government support. Meanwhile, the considerable support from subsidies and regulations is a sufficient catalyst to fuel a significant bull market.



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July 21 2020

Commentary by Eoin Treacy

Frackers Are in Crisis, Endangering America's Energy Renaissance

This article by Bryan Gruley, Kevin Crowley, Rachel Adams-Heard and David Wethe for Bloomberg. Here is a section:

Texas oil people who’ve lived through past busts remain resolute. This spring the Railroad Commission of Texas, which regulates the oil industry, considered limiting crude production in the hope of bolstering prices amid the Saudi-Russia price war. Some Texans reacted with disdain. “Texas, out of all states, represents a humble, steadfast resolve that refuses to sacrifice its principles due to foreign influence,” David Dale, a Houston-area land manager for oil and gas producer Ovintiv Inc., wrote to the commission. Troy Eckard of Eckard Enterprises LLC in Allen, Texas, told regulators that Russia and Saudi Arabia are “terrorists” whose “game of supply hostage is not the time to bow down and sell out. Let the weak go broke. Let the overpaid, poorly run private equity-back[ed] companies fall by the wayside. Leave us to our own free-market solutions.” The commission stood pat.

As oil historian Daniel Yergin has observed, companies go bankrupt, rocks don’t. Assuming prices slowly recover, producers will begin to turn wells back on—a process that’s never been tried at this large a scale—and maybe drill some new ones. Whether they start paying pumpers better remains to be seen. Opportune LLP, a Houston Energy advisory firm, says pumpers and other service companies face “a test of survivability, not profitability.” Consolidation seems likely, with producers themselves possibly acquiring the smaller service companies on the cheap.

Eoin Treacy's view -

The initial surge in production from shale oil reserves was driven by wildcatters and the viability of the business model was predicated on high prices persisting. The reality that much of the USA’s shale production is higher cost is now leading to many of these companies going bankrupt or experiencing significant problems.



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July 20 2020

Commentary by Eoin Treacy

Silver Futures Step Out of Gold's Shadow in Surge to 3-Year High

This article by Justina Vasquez, Krystal Chia and Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:

“Silver is currently trading at close to a record discount to gold, which should attract demand,” Goldman Sachs Group Inc. said in a note this month. “Silver often tends to lag gold at the beginning of a precious rally, and catch up to it as the rally continues and investors look for ways to diversify.”

During the week through Tuesday, hedge funds and other money managers added to their bullish bets on silver, boosting net-long positions to the highest since late February, according to government data Friday. That amounted to “a larger-than-usual” US$638 million bullish flow spurred by the trifecta of rising haven demand, recovering industrial activity, particularly in China, and South American supply disruptions, according to Societe Generale SA analysts including Michael Haigh.

Green Stimulus
Unlike gold, silver’s price is largely driven by a host of manufacturing applications. Morgan Stanley estimated that industrial demand makes up 85 per cent of silver demand. The metal may be poised to benefit from a push toward less-polluting Energy technologies such as solar power, according to BMO Capital Markets.

With eyes on recovering industrial demand in countries including China, the world’s largest consumer of industrial commodities, some investors may be buying silver as a bet on new technology. U.S. Democratic presidential nominee Joe Biden outlined a goal last week of “a carbon pollution-free power sector by 2035” -- a move that would require rapid acceleration in the deployment of renewable wind and solar power as well as electricity storage, while continuing to rely on emission-free nuclear power.

“Silver-intensive areas such as 5G and solar technology could well benefit from any fiscal impulse,” BMO analysts including Colin Hamilton said in a research note. “More than US$50 billion of green stimulus has been approved by governments thus far this year, over which roughly three-quarters has been in Europe. But perhaps more impactful has been the recent Biden campaign Clean Energy plan, most notably a zero-carbon power grid by 2035 which would see new wind and solar capacity built to displace thermal generation.”

Eoin Treacy's view -

The price of any asset is influenced by the actions of marginal buyers. Therefore, new sources of demand and limitations on supply tend to have an outsized influence on the prevailing trend. Silver is used in solar panels, electronics and communications equipment. It also has healthcare applications as an antibacterial.



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July 15 2020

Commentary by Eoin Treacy

Musings From the Oil Patch July 15th 2020

Thanks to a subscriber for this report by Allen Brooks for PPHB. This issue includes a comprehensive discussion on the viability of a hydrogen economy. Here is a section:

The conclusion that comes from our examination of hydrogen is that without some major technological breakthrough that reduces the cost of producing it substantially, the economic hurdle will not be overcome.  That means the only way hydrogen could become an important Energy source is with government intervention in the Energy market and assigning a price to carbon, or subsidizing the hydrogen fuel.  At this point in time, as governments around the world struggle to reopen their economies and repair the financial damage done to their citizens and businesses by the response to the pandemic, it is difficult to see them embracing carbon prices, which raises Energy costs for their people and companies.  This is why the strong push, especially in Europe, for tying net-zero carbon emission policies in government stimulus efforts to rebuild their economies following Covid-19.  We suggest Energy executives, analysts and investors worry more about the debates over the economic rebuilding efforts than the short-term moves in oil prices, demand and supply.  The long-term future of the oil market will be impacted by the success of governments instituting carbon prices.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

Natural gas and coal prices are low in both nominal and relative terms. Economics 101 dictates that when the price of a vital commodity falls, consumers will naturally migrate towards it and find new uses for the resource.



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July 10 2020

Commentary by Eoin Treacy

Skai revises targets for its liquid-hydrogen, long-range eVTOL

This article by Loz Blain for NewAtlas may be of interest to subscribers. Here is a section:

One challenge for anyone who wants to work with liquid hydrogen is that you need to keep it extremely cold to keep it in its liquid state. At atmospheric pressure levels, we're talking just 20.28 kelvins above absolute zero (−252.87 °C, or −423.17 °F).

That temperature can rise a little if you're willing to pressurize as well as cool (using a cryogenic system running between 250 and 700 bar of pressure), but Gunter says that's not part of Skai's plans, as "even a moderately pressurized system has significant weight penalties."

So, super-cooling it'll be, and while that entails extra Energy losses in the liquefaction stage, the cooling equipment, the conversion back into gas for use in the fuel cell and in boil-off in the tank itself, the net result will still be a much longer range aircraft than anyone dealing with gaseous hydrogen – or certainly lithium batteries – will be able to deliver.

It'll be interesting to see how Skai gets the job done, as really you've got to look to NASA and other space programs to find liquid hydrogen being used in serious volumes.

"The good thing in all of this," says Gunter, "is the notable developments that occur in this space on an increasing basis. The efficiencies we’ve seen in fuel cells and the same the industry is seeing regarding H2 production all point to increasing effectiveness of any form of H2 as a future focused solution."

"There's a number of naysayers about what we're doing with hydrogen," says Hanvey, "but we believe we've gone from the question to the possible, and it's now the probable. We know we can fly with hydrogen, and the question is just how quickly we can get it to the market. And based on our experience, we think we can get there a lot quicker than perhaps the market will give us credit for."

Eoin Treacy's view -

Hydrogen’s Energy density is orders of magnitude greater than any other fuel currently used in the global economy. The only reason we don’t already use it is because of the technological difficulty of containing what is a highly combustible material. The whole world knows about the Hindenburg accident 83 year ago, which put an end to transatlantic zeppelin travel. It did to the hydrogen industry what the Fukushima accident did to nuclear.



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July 09 2020

Commentary by Eoin Treacy

Video commentary for July 9th 2020

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: megacap tech extends uptrend, China extends breakouts, industrials resources firm but Energy eases, agricultural commodities steadying at previous support, Dollar steadies, Europe eases. US regional banks weak.



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July 02 2020

Commentary by Eoin Treacy

Email of the day on hydrogen

I loved your article but why don't you mention the rise of hydrogen and the use of green hydrogen as being a valuable alternative as an Energy storage tool for the future (we are talking about 2040!)? It's also more logical as Energy source for trucks as batteries alone are far too heavy...

Eoin Treacy's view -

Thank you for your kind words and this email which raises some important points. I have been of the opinion for years that the low price of natural gas would seed a hydrogen economy. That now appears to be coming to fruition. Ultimately, the production of hydrogen will be replaced with less reliance on fossil fuels, but we are reliant on gas for at least the next decade to deliver supply.



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July 01 2020

Commentary by Eoin Treacy

Tesla China Plant Might Have Come to the Rescue Last Quarter

This article by Dana Hull for Bloomberg may be of interest. Here is a section:

“The lesson learned by now is that TSLA shares tend to ‘work’ when something new has launched,” Jeffrey Osborne, a Cowen Inc. analyst with the equivalent of a sell rating on the stock, said in a report Tuesday. “At this point both the Model Y and China built cars are ramping up.”

Musk, 49, suggested to Tesla employees early this week that the company could manage to avoid a quarterly loss.

“Breaking even is looking super tight,” the CEO wrote to staff in an email seen by Bloomberg. “Really makes a difference for every car you build and deliver. Please go all out to ensure victory!”

Eoin Treacy's view -

Tesla has done an admirable job of keeping production on line globally even as sporadic shutdowns at home impaired manufacturing. The decision by California to mandate emission free trucking by 2040 is an additional tailwind for the battery producer. 



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July 01 2020

Commentary by Eoin Treacy

Musings from the Oil Patch June 30th 2020

Thanks to a subscriber for this report by Allen Brooks for PPHB. Here is a section on Chinese and Indian coal demand:

India has auctioned 41 coal mines with 17 billion tons of geological coal reserves to enable private companies to commence commercial extraction. All of these mines are largely fully-explored, enabling them to come into production quickly. Four of the mines will be dedicating their coal for use by steel-making plants. The 41 mines represent both large and small mines with peak-rated capacities (PRC) of 0.5 to 40.0 million tons annually (mmt/y). These mines will provide a total PRC of 225 mmt/y when in operation. Given the sizes and locational challenges of some of the mines, we can expect to see more pictures of women hauling baskets of lump coal from the mine to shipment points. This is one way to help the nation’s employment situation.

The increased use of coal is designed to help India deal with its economic challenges, of which employment is one aspect. However, lowering, or at least keeping stable, the cost of Energy is also crucial for political peace. The impact on India’s climate goals remains an open question. The long-term outlook for India’s Energy mix suggests that fossil fuels will remain the dominant supplier. Even if coal, which accounted for 56% of India’s Energy in 2017, were to fall below 50%, and all of that decline went to renewables, it would only triple its contribution – rising from 3% to 9%. Making further gains in reducing carbon emissions will become a huge challenge for government policymakers.

The China story has become more interesting, given that it has become the largest emitter of carbon dioxide and other pollutants, while still paying lip-service to its environmental commitments to the 2015 Paris Climate Accord. China still consumes more than half the world’s coal, and that seems likely to remain the condition for a while, despite the large push for renewable power.

China recently approved two new coal mines with a combined output of 3.6 mmt/y, at a cost of $566 million (4 billion yuan). Those two new mines will have nearly as much output as China’s current coal production, which in 2019 was 3.75 mmt/y. Behind approving the new mines is the government’s plan for shutting down small and outdated mines in favor of larger ones located in coal-rich provinces.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Energy security is a major consideration for every consuming nation. Neither India not China have any hope of achieving Energy independence any time soon. The virtue signalling China, in particular, engages in at climate conferences contrasts starkly with the reality on the ground. China is building more coal fired power stations all over the world than ever.



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June 29 2020

Commentary by Eoin Treacy

Chesapeake's Collapse Is Latest in Long Line of Shale Busts

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

More than 200 North American oil and gas producers, owing over $130 billion in debt, have filed for bankruptcy since the beginning of 2015, according to a May report from law firm Haynes & Boone. This month alone, seven oil and gas companies have gone under, tying December 2015 for the busiest on record after crude prices plunged amid the Covid-19 pandemic, according to data compiled by Bloomberg.

The shale boom spearheaded by the likes of Chesapeake a decade ago was fueled by debt. Profitability and shareholder returns have been consistently disappointing, and investors had already grown wary of throwing more money into shale before this year’s oil crash. The rate of default on high-yield Energy debt stood at 11%, Fitch Ratings said in a June 11 report, the highest level since April 2017.

Eoin Treacy's view -

Unconventional drilling is capital intensive. Arguably, it would not have been a viable development option for new supply without the tailwind of very low interest rates and abundant liquidity. The challenge the sector faces is once a well begins producing, there is a very steep increase in supply, followed by a steep decline. That ensures companies are very exposed to near-term oil prices. The significant volatility in commodity prices has been a headwind for the sector, because most operations are profitable in the region of $60-$80 a barrel.



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June 15 2020

Commentary by Eoin Treacy

BP Writes Off Billions as Covid Redraws Rules of Oil Demand

This article by Laura Hurst and Amanda Jordan for Bloomberg may be of interest to subscribers. Here is a section:

BP Plc will make the biggest writedown on the value of its business since the Deepwater Horizon disaster a decade ago, as the coronavirus pandemic hurts long-term oil demand and accelerates the shift to cleaner Energy.

In a dramatic revision that prompted questions about the affordability of its dividend, the British giant cut its estimates for oil and gas prices in the coming decades between 20% and 30%. It also expects the cost of carbon emissions to be more than twice as high as before.

Under its new Chief Executive Officer Bernard Looney, BP has been quicker than many of its peers to plan for a low-carbon world. Yet moves toward a more sustainable future are bringing financial pain today, and investors are asking fundamental questions about the value of oil majors.

Eoin Treacy's view -

It’s a good time to take write downs for any major corporation. With the negative economic backdrop, global pandemic and collapse in oil prices, more than a few companies are likely to use this as an opportunity to clean their balance sheets.



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June 10 2020

Commentary by Eoin Treacy

New King of Copper Trading Sees Demand Coming Back Stronger

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

By March this year, he was stuck holding video calls with clients and colleagues from his home in Geneva. With the world on lockdown, the outlook for most industrial metals looked bleak. Yet even then, Bintas says there were early signs copper could emerge from the crisis even stronger.

If anything, he’s even more bullish today. Demand is bouncing back in China and stimulus packages being unleashed across the developed world promise to transform the long-term outlook -- particularly with spending on copper-intensive green Energy infrastructure. The coronavirus has also disrupted mines and delayed new builds, throttling current and future supply.

“Copper is coming out of this crisis differently,” Bintas said by phone from Geneva. “When lockdowns were eased and people started to return to work, we were surprised to see our customers not only taking deliveries of volumes they’d already bought, but requesting more to cover themselves in case there were any further disruptions to supply.”

Eoin Treacy's view -

With the Federal Reserve talking about leaving rates on hold for more than two years, amid considerable economic uncertainty, the demand for stimulative measures is likely to increase. Infrastructure development provides jobs during the construction phase but also creates a lasting group of assets that foster economic growth in future. Of course, that latter point depends on what stimulus money is spent on but the commodity demand during construction is likely to be the same.



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June 09 2020

Commentary by Eoin Treacy

Shell's CEO Worries About a Disorderly Energy Transition: Q&A

This interview of Shell CEO Ben van Beurden for Bloomberg may be of interest. Here is a section:

Assuming you don’t get government support to advance research in hydrogen production and carbon capture and storage, what will you have to do to make those viable?

Stay with the program a little bit longer. That’s exactly what we’re doing. You could take a negative view and say we knew that hydrogen was a good thing and we knew that CCS [carbon capture and storage] was needed, but it hasn’t happened. I’m not signing up for that approach. We need a lot of hydrogen in the mix. We need significant CCS. My prediction is that in the next few years you will see CCS projects come off the ground. You will see very large-scale hydrogen projects come off the ground as well. And I hope we will be associated and involved in each and every one of them.

Eoin Treacy's view -

Hydrogen is where traditional oil companies see their future. It does not produce emissions. That ticks a lot of boxes for companies long associated with being among the world’s biggest polluters in their own right while also facilitating emissions growth wherever there are internal combustion engines.



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June 05 2020

Commentary by Eoin Treacy

OPEC+ Set to Extend Oil Cuts as Meeting Called for Weekend

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

But members of the 23-nation OPEC+ alliance have a lot to gain by preserving their agreement. They have helped engineer a doubling in Brent prices since April, easing pressure on their government budgets of oil-rich nations.

The accord has also revived the fortunes of major Energy companies like Exxon Mobil Corp. and Royal Dutch Shell Plc, and prompted some U.S. producers to consider restarting wells just weeks after they were idled.

The deal in April set out historic cuts of 9.7 million barrels a day, or roughly 10% of global oil supplies, to offset the unprecedented collapse in demand caused by the virus lockdowns. Then a few weeks later, Saudi Arabia and its closest allies in the Persian Gulf promised additional supply restraint of 1.2 million barrels a day in June.

Those reductions were set to ease to 7.7 million barrels a day from July 1. so failure to reach an agreement this month could have brought a flood of oil back onto the market and undermined a tentative recovery as countries start emerging from coronavirus lockdowns.

With American shale production starting to come back online, OPEC’s careful management of the demand recovery is crucial.

Eoin Treacy's view -

The coronavirus spread in a wave around the world and resuming demand for just about everything is also likely to come back sequentially. Chinese demand is recovering, European demand is also recovering and the USA will follow. Latin America’s infection rate is probably close to peaking which suggests demand will begin to recover in the middle of the summer.



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May 22 2020

Commentary by Eoin Treacy

Where Should Metals For The Green Transition Come From

This whitepaper may be of interest to subscribers. Here is a section:   

Novel techniques, efficiency innovations, or alternate raw-material sources can create step-function changes in industry outcomes. Seafloor nodules may present such an opportunity; a very large supply of EV battery metals lies in a relatively small area of the ocean floor.

Ocean minerals come in several forms: seafloor massive sulfides (SMSs—similar to land sulfides), cobalt crusts, and polymetallic nodules. In this report, we focus only on polymetallic nodules sitting unattached on the ocean floor in an area of the South Pacific Ocean known as the Clarion-Clipperton Zone (CCZ) (see Figure 13). The metal composition of this ocean resource is uniquely aligned with the base metal needs of the EV industry; polymetallic nodules contain nickel, cobalt, and manganese required for EV batteries, and copper required for battery-current collectors and electric harnesses. The ratio of nickel to cobalt closely matches the ratio of NMC 811 battery chemistry (see Table 2). The size of the resource is substantial, with CCZ nodules containing enough metal to electrify the global EV fleet four times over.

Unlike land-based ore bodies that fall under the jurisdiction of sovereign nation-states, the CCZ polymetallic nodules are located in international waters and are deemed to be part of the “common heritage of mankind.” According to international law, the development of this resource needs to be undertaken in a manner that benefits both developed and developing nations. The use of this resource is regulated by the International Seabed Authority (ISA), an intergovernmental body established in 1994 by the United Nations Convention on the Law of the Sea. The ISA has so far issued 16 exploration contracts, with the stated goal of having regulations in place by 2020 to allow prompt commencement of commercial production.

The development of the polymetallic nodule resource has been greeted with opposition from several ocean conservation-focused NGOs, including Greenpeace and DOSI.71 The main objection is centered around impacts on deep-sea wildlife: removing nodules will mean removing a feature of the habitat that is critical for several life functions of nodule-dwelling marine animals.

Eoin Treacy's view -

There is no getting around the fact the mining is damaging to the environment or that renewable Energy solutions are very metal intensive. Everyone wants a cleaner environment but there is a lot of resistance to siting the infrastructure to deliver the raw materials or generating capacity anywhere near civilisation. That is the main point being made by Michael Moore’s new movie



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May 18 2020

Commentary by Eoin Treacy

Email of the day on what we can deduce from Warren Buffett's actions

I would like to ask Mr Treacy the following question:

Warren Buffet is currently holding relatively high proportion of Berkshire Hathaway holdings in cash. At the last shareholder meeting he cited the reason for not investing at this level as “The range of possibilities on the economic side are still extraordinarily wide,”

Would you consider his comments (and more importantly actions - high cash position) confirming the fact that overall market is still very far off lows that it will eventually reach? Or he holds high proportion of cash in large part due his business model - funding investments with funds generated through insurance (which potentially have high payouts coming due to downturn)? Or perhaps that he plays mainly in private equity hence the investment objectives are not very closely related to indices such as S&P 500 and Nasdaq?

I would very much appreciate your thoughts on this topic. 

Eoin Treacy's view -

Thank you for this question which others may also be asking. The facts are Buffett has sold positions in airlines and greatly reduced positions in banks like Goldman Sachs and JPMorgan, insurance companies like Travelers and Energy stocks like Philips 66. He boosted his position in PNC Financial Services Group. 



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May 05 2020

Commentary by Eoin Treacy

Musings From The Oil Patch May 5th 2020

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

These large stock buybacks, coupled with increased debt, despite low interest rates, have contributed to a remarkable decline in corporate cash balances.  Cash balances for S&P 500 Index companies have fallen to the lowest level since 1980, while debt has soared.  Based on how volatile these two measures have become, we wonder whether, following the recession we certainly are in, cash on company balance sheets becomes a prized asset.  Likewise, will debt become toxic?  Given very low interest rates, something not likely to change anytime soon, will corporate executives adjust how they manage their balance sheets?  

Traditionally, dividends account for about 2% and share buybacks about 3% of the historical annual average stock market return of 5%.  The cessation of share buybacks would cut investor return expectations more than in half, and returns will be further reduced to the extent that dividends are eliminated and/or restricted.  That will be a huge blow to investors who sought out stock market returns to replace those lost from bonds due to low interest rates.  The neighboring chart shows that about 6% of buyback programs, representing 14% of the expected value of buybacks for Energy, have been suspended so far this year.  We certainly expect these numbers to rise as the year unfolds, regardless of legal restrictions imposed by government relief payments, due to cash-preservation steps by managements following the oil price collapse.  

As Exhibit 17 shows, Energy in the S&P 500 Index was the fourth lowest sector, ranked by dollars committed to share buybacks.  Not a surprise, given the oil price crash of 2014, was the sharp decline in dollars spent on share buybacks over the last five years compared to the last 10 years.  The amount of money spent on Energy share buybacks for 2015-2019 was only 31% of the 10-year expenditures.  We will not be surprised to see the next 5-year period having even less money spent on stock buybacks, unless there is a miracle recovery in oil prices.  

If we consider what investor returns by sector of the S&P 500 were in the fourth quarter of 2019, Energy topped the list with nearly a 10.5% yield.  That was nearly 80% greater than the yield of the S&P 500 Index.  That will change in 2020, and likely in 2021, as we expect that is how long it will take for the oil market to balance.  The unanswered question is how the risk profile for investing in Energy stocks may change, as well as investing in the stock market overall?

Eoin Treacy's view -

A link to the full report is posted in the Suibscriber's Area.

Royal Dutch Shell cuts its dividend last week which was a significant departure from its long-held policy of reliable payouts. However, the move was anticipated by the significant decline in the share over the last few months and the decision did have had a measure effect on the price. The primary reason investors look at the Energy sector now is because of the attractive valuations. Meanwhile, the uncertain outlook for the oil price is the reason valuations have improved.



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May 01 2020

Commentary by Eoin Treacy

Central Bank "EVERGREENING"

This educative article by Edward Ballsdon for his Grey Fire Horse blog may be of interest. Here is a section:

It is becoming clear that support for the time being is at best debt (or debt substitution from the market to the Fed, backstopped by the US Treasury), and not non-repayable grants. Debt dynamics on ever leveraging balance sheets suggest that CBs will have to always do more to support corporate debt, on top of the support that they will have to provide governments.

When there is a return to normality, corporate America will find itself in an even more leveraged position than the already highly leveraged position it was pre Covid19, which means that the rebound in equity and tightening of credit spreads will make these assets even more highly “valued”.

The misallocation of capital during the Japanese evergreening years had some very important consequences on growth and inflation, which are very well documented in various research papers (see BIS, NBER etc). The potential transfer of credit risk from the private to public sector through the government backstopping of bank loans, as well as the risk of good money being lent to bad, opens up Central Banks to the accusation that they will be carrying out an equivalent Evergreening of corporate debt as well as a not stemming the misallocation of capital that has allowed the rise of zombification, not only of negative but positive cashflow companies. I cannot think of anything more opposed to the doctrine of “Creative Destruction” laid out by Joseph Schumpter.

MARKET IMPLICATIONS
My core views remain that interest rates will remain “lower for longer”, supported by QE that will suppress real rates. For the time being, recent CB policy and statements don’t threaten that view, nor does the economic data being released. If anything, potential private and public sector debt increases cement that view.

The same goes for Gold – more CB intervention and support, necessitating a further increase of money supply above and beyond what the market expects, should support the value of precious metals. The significant decline in oil prices should finally allow the relative cheap miners to start outperforming gold – Energy is a significant cost to gold extraction. The ratio of gold miners to gold is currently very depressed - chart below – finally there seems to be some miner outperformer (the ratio momentum has resumed its uptrend).

Eoin Treacy's view -

The moral hazard arising from bailing out badly managed companies only perpetuates the practice of running on razor thin margins and high leverage. Striving for market share and retaining zero capital on the balance sheet is an almost sure recipe for bankruptcy. However, that same practice has ensured companies are bailed out whenever the inevitable crisis strikes. Zombification is a significant risk which is only likely to be exacerbated with the current suite of policies.



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April 21 2020

Commentary by Eoin Treacy

Musings From the Oil Patch April 21st 2020

Thanks to a subscriber for this report from Allen Brooks at PPHB which may be of interest. Here is a section:

As George Friedman discussed in his The Storm Before The Calm, the U.S. operates on two long cycles – the socioeconomic cycle and the institutional cycle.  The first works on a 50-year time frame, while the other is about 80-years long.  The socioeconomic cycle’s last shift “happened around 1980, when the economic and social dysfunction that began in the late 1960s culminated with a fundamental shift in how the economic and social systems functioned.”  This is referred to as the Reagan Revolution, which brought lower tax rates that addressed a crucial issue facing the U.S., which was a lack of capital.  Today, we suffer from too much capital and a lack of investment opportunities, which Mr. Friedman attributes to a decline in productivity growth as we experience a falloff in innovation.  There have been a number of studies and books written about why the nation’s productivity has declined.  

The institutional cycle deals with how the federal government’s operation and relationship to society changes.  It’s first 80-year cycle began with the Revolutionary War and the drafting of the Constitution and ended with the Civil War in 1865.  The second cycle extended to World War II.  The current cycle will end around 2025, about the same time the current socioeconomic cycle will end, leading, in Mr. Friedman’s view, to extreme chaos that will force changes on the nation that will bring social calm and economic prosperity in the 2030s, and thereafter.   

Mr. Friedman makes a compelling case in studying how our economy, government, society and geopolitical role in the world have evolved and changed since the arrival of the first colonists in the late 1500s and early 1600s.  Without expounding on his discussion, the nature of cycles, something we pay attention to in the business, investment and Energy worlds, has driven us to think about how the future may evolve.  

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

There is a lot of talk in financial blogs about the prospect of a debt jubilee where governments get together and decide that the liabilities have become so large that the totals will be reduced in an abrupt manner and a new money will be created. 



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April 20 2020

Commentary by Eoin Treacy

Oil Plunges Below Zero for First Time in Unprecedented Wipeout

This article from Bloomberg may be of interest to subscribers. Here is a section:

The price on the futures contract for West Texas crude that is due to expire Tuesday fell into negative territory -- minus $37.63 a barrel. That’s right, sellers were actually paying buyers to take the stuff off their hands. The reason: with the pandemic bringing the economy to a standstill, there is so much unused oil sloshing around that American Energy companies have run out of room to store it. And if there’s no place to put the oil, no one wants a crude contract that is about to come due.

Underscoring just how acute the concern over the lack of storage is, the price on the futures contract due a month later settled at $20.43 per barrel. That gap between the two contracts is by far the biggest ever.

“The May crude oil contract is going out not with a whimper, but a primal scream,” said Daniel Yergin, a Pulitzer Prize-winning oil historian and vice chairman of IHS Markit Ltd.

Eoin Treacy's view -

The May contract expires tomorrow and as of today was still trading 108,593 contracts that will need to roll or be delivered. That’s going to result in massive trading losses for anyone looking to roll and the incredible decline today suggests a surge for the exits among traders.



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April 20 2020

Commentary by Eoin Treacy

Email of the day on uranium

Thanks for the insightful video, as always, Eoin. Have you had a look at the uranium sector lately? The spot price has jumped along with the miners, including Cameco and Denison which jumped 26% yesterday. Is the long-awaited supply crunch coming into play and how long will the uptrend last? Your thoughts on this will be appreciated.

Eoin Treacy's view -

Thanks for this question which may be of interest to subscribers. The shutting down of both transportation and some mining operations has created a short-term supply shortage which is supporting the outperformance of uranium. It’s the number one best performing commodity this year but the supply shortage is unlikely to last beyond the lockdown phase of the virus-induced recession.



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April 09 2020

Commentary by Eoin Treacy

Saudis, Russians End Oil-Price War With Deep Output Cut

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

Saudi Arabia and Russia ended a devastating oil price war on Thursday, agreeing to slash output together with other members of the OPEC+ alliance in an effort to lift the market from a pandemic-driven collapse.

The tentative deal came after strong pressure from U.S. President Donald Trump and American lawmakers, who fear thousands of job losses in the U.S. shale patch, not to mention Wall Street chaos. The price crash has also threatened the stability of oil-dependent nations and forced companies from Exxon Mobil Corp. to small independents to rein in spending.

OPEC and its allies, meeting by video conference, agreed to cut production by about 10 million barrels a day in May and June, delegates said, asking not to be identified ahead of an official statement. Saudi Arabia and Russia, the biggest producers in the group, will each take output down to about 8.5 million a day, with all members agreeing to cut supply by 23%, one delegate said.

“Both Saudi and Russia were going to have to cut anyway, and these cuts allow them to win political points too,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd.

While the headline cut equates to a historic reduction of about 10% of global supply, it makes up just a fraction of the demand loss, which some traders estimate at as much as 35 million barrels a day.

Eoin Treacy's view -

The oil price turf war is over, for now, but unfortunately the cuts announced are not near enough to rebalance the market in the near term. The very fact the Federal Reserve supplemented its stimulus with an additional $2 trillion in spending today, only a week after the last announcement is a testament to how weak economic activity is, even if it turns out to be short-term in nature.



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April 09 2020

Commentary by Eoin Treacy

Email of the day on vitamin C and tips on recovery regimes

Trust you are keeping safe in your home. Here is a bit more on Vitamin C worth reading. I have been taking 5000mg( sodium ascorbate) for years and I can’t remember getting the common cold or flu going back years. I have never had a flu jab. I am definitely a convert. I won’t bother checking the subject matter with doctors because these guys whilst they are good in their respective disciplines are not trained in the area of nutrition. 

And

IMPORTANT From a Respiratory Therapist Friend

They are calling on Respiratory therapists to help fight the Corona virus. I am a retired one, now too old to work in a hospital setting. I'm going to share some common sense wisdom for those with the virus, and trying to stay home. If my advice is followed as given, you will improve your chances of not ending up in the hospital on a ventilator.

This applies to the otherwise healthy population, so use discretion,

(1) Only high temperatures kill a virus, so let your fever run high. Tylenol, Advil, Motrin, Ibuprofen etc. will bring your fever down allowing the virus to live longer. They are saying that ibuprofen, Advil etc. will actually exacerbate the virus. Use common sense and don't let fever go over 103. If it gets higher than that, take your Tylenol, not ibuprofen or Advil to keep it regulated. It helps to keep house warm, and cover up with blankets so body does not have to work so hard to generate the heat. It usually takes about 3 days of this to break the fever.

(2) The body is going to dehydrate with the elevated temperature, so you must rehydrate yourself regularly, whether you like it or not. Gatorade with real sugar, or Pedialyte with real sugar for kids, works well. Why the sugar? Sugar will give your body back the Energy it is using up to create the fever. The electrolytes and fluid you are losing will also be replenished by the Gatorade. If you don't do this, and you end up in the hospital, they will start an IV and give you D5W (sugar water) and Normal Saline to replenish electrolytes. Gatorade is much cheaper, pain free, and comes in an assortment of flavors.

(3) You must keep your lungs moist. Best done by taking long steamy showers on a regular basis, if your wheezing or congested use a real minty toothpaste, and brush your teeth while taking the steamy shower, and deep breath through your mouth. This will provide some bronchial dilation and help loosen the phlegm. Force yourself to cough into a wet wash cloth pressed firmly over your mouth and nose, which will cause greater pressure in your lungs forcing them to expand more and break loose more of the congestion.

(4) Eat healthy and regularly. Gotta keep your strength up.

(5)  Once the fever breaks, start moving around to get the body back in shape and blood circulating.

(6) Deep breathe on a regular basis, even when it hurts. If you don't, it becomes easy to develop pneumonia. Pursed lip breathing really helps. That's breathing in deep and slow; then exhaling through tight lips as if your blowing out a candle. Blow until you have completely emptied your lungs, and you will be able to breath in an even deeper breath. This helps keep lungs expanded as well as increase your oxygen level.  

(7) Remember that every medication you take is merely relieving the symptoms, not making you well.

(8) If you have difficulty breathing, chest pain or pressure go to ER. Please wear a mask.

I've been doing these things for myself and my family for over 40 years, and I've kept them out of the hospital. All are healthy and still living today.

Thank you all for sharing this with family & friends. We gotta help one another.

Eoin Treacy's view -

Thank you for this first hand account and we are all well. My girls are looking forward to getting off of online school for their Easter holiday. They are both in agreement online classes are the closest thing to make believe one might imagine. Either that or what they spend most of their time at school doing is a complete waste of time. After lockdowns end, I suspect the number of people opting for home schooling, at least in the early years, will surge.



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April 08 2020

Commentary by Eoin Treacy

Musings from the Oil Patch April 7th 2020

Thanks to a subscriber for this report by Allen Brooks for PPHB which may be of interest. Here is a section:

When we look at the company’s costs and expenses per barrel of oil equivalent (BOE), we find they totaled $14.01 for 2019.  Based on the company’s average oil price (which was not adjusted for its gas output given its low price), this translates into a cash profit margin per BOE of $36.88.  If we include the cost of depreciation, depletion and amortization expense (largely a non-cash expense), but indicative of the amount of investment the company needs to make to insure it replaces produced barrels and remains an ongoing enterprise, the cash profit per BOE falls to $19.06, or 37.4% of the average selling price after adjusting for hedging.  That is a pretty attractive return.  

With WTI oil futures prices falling to $20 per barrel, and assuming the location and quality discount remains at $6, Whiting Petroleum was looking at generating no positive cash from the oil it produced.  It also assumes cash operating expenses remain at 2019 levels.  This means Whiting Petroleum would be unable to invest in new exploration and development, which makes the company a self-liquidating entity.  In that condition, the company essentially has no value.  The bankruptcy filing indicates that reality, as current shareholders will only retain 3% of the shares of the reorganized company, as the debt holders will hold 97% in return for agreeing to cancel their bonds.  

Under today’s very depressed oil and gas prices, few producers will be able to fund operations.  If the companies have a significant amount of debt on their balance sheets, they will face serious challenges to sustain their businesses if they do not address their financial leverage.  To understand the precarious health of the producer sector, Energy consultant Rystad has prepared a chart showing the debt maturity schedule and annual interest expense for a group of 29 significant producers.  While this represents only 29 producers, we believe it is indicative of the financial condition of the balance of the producer sector.  

Eoin Treacy's view -

The only way the unconventional oil sector is going to make it through the current crisis is to reduce the cost of production. There is no getting around the fact hydraulic fracturing and horizontal drilling operations are considerably more expensive than conventional drilling. Technological innovation will help improve that spread but it will be impossible to eliminate. Therefore, scale and proximity to end markets are the primary route to reducing costs.



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April 08 2020

Commentary by Eoin Treacy

Email of the day on vitamin C and supporting the immune system

On Coronavirus In 1970, the late eminent medical research scientist and Nobel prize winner Linus Pauling made quite a startling finding, albeit based on a fairly small sample of school children on vacation in the swiss alps. He found that there was a statistically significant group that were taking daily high doses of vitamin C which had a much lower infection rate with the common cold virus. Vitamin C has subsequently been found to help the cellular production of Interferon. Common cold viruses are also in the family of coronaviruses. Just a thought

Eoin Treacy's view -

Thank you for this insightful comment. There have been stories from hospitals that vitamin-C is effective. I have also talked to rheumatologists who dismiss the claim it is possible to affect the immune system. That definitely seems to fly in the face of the fact that people have taken everything from oranges to lemons as home remedies for colds for centuries.

For example, my mother never treated a cold or flu with anything more than a hot drink made from fresh lemon juice, honey and sugar as well as the strong belief it was going to improve her symptoms. She maybe took one ibuprofen a year.

This interview, kindly forwarded by a subscriber, with Dr. Shiva Ayyadurai, who is running for the US Senate, is on the fringe of systems biology but he is making a number of compelling arguments about the lack of systems based biology in the medical field.

I was on a conference call today with someone who has recovered from the coronavirus. He was on a ski trip in Colorado with ten families in total. Eight people contracted the virus and none passed it the other members of their families. Testing was hard to get and no one has had an antibody test yet.

Eventually, we are going to get a vaccine for the coronavirus and that will be useful for people with compromised immune systems. There is no argument to counter the advice we should be looking after our personal wellbeing through sound nutrition. The vast majority of people are going to work through an infection with little need for hospital assistance.



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April 03 2020

Commentary by Eoin Treacy

Email of the day - on renewables

ETFs TAN and FAN: what is your opinion on the quality of the constituents in both products? I do believe going forward this be a huge trend. but how many companies will make it to the other end? thanks very much for educating us in these turbulent times!

Eoin Treacy's view -

Thank you for your kind words and this question which may be of interest to other subscribers. The renewables or alternative Energy sector was a clear outperformer into the beginning of March but quickly played catch up with the wider market during a panicky period two weeks ago. I believe it is certainly worthwhile to ask whether the factors which contributed to earlier outperformance are still relevant following what are in some cases declines in the order of 50%.



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April 02 2020

Commentary by Eoin Treacy

Saudi Will Only Cut Oil Output if Others Do, EA's Sen Says

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

“It’s very clear that Saudi Arabia is maintaining its position - it will cut only if everyone else cuts,” Energy Aspect’s Amrita Sen says in a Bloomberg TV interview.

Russia does not see benefit in cutting production given the 20m b/d drop in demand “No way” Saudi Arabia can cut enough to compensate for such a decline

NOTE: Sen speaks following U.S. President Donald Trump’s tweet saying he expects Saudi Arabia and Russia to cut production by 10m bbl

There could be a deal later in the year, but it’s too early as it is unclear how low demand will go; “There’s a lot of hope and expectation rather than anything concrete”

Market will correct through market mechanisms; Energy Aspects believes world will run out of storage in May, producers will then have no choice but to shut production, but prices will remain low

It’s unlikely that the U.S. would ever join Russia and Saudi Arabia in coordinated cuts

“How do you get the U.S. to join something that it would call a cartel?”; there are thousands of producers in the U.S., so it would be impossible for the country to cut

Eoin Treacy's view -

The shock from the coronavirus lock down is still rippling through the Energy markets but that is not why Saudi Arabia chose now to launch a price war with Russia. They are much more concerned with the fact oil demand growth is slowing down, if not contracting, on a secular basis. That presents singular problems for countries who entire existence is predicated on oil exports.



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March 27 2020

Commentary by Eoin Treacy

Enevate's silicon-anode batteries promise ultra-fast EV charging

This article by Loz Blain for New Atlas may be of interest to subscribers. Here is a section:

With some US$111 million in investment from major companies, including LG, Samsung, Mitsubishi, Renault and Nissan, Enevate now says its cells are ready for the big time. In an interview with Charged EVs, Park said Enevate is designing packs for the 2024 and 2025 model years to get its cells into consumer products with major manufacturers. There are no announcements around who or what exactly they're making packs for, but the list of companies above may be instructive.

As far as we're aware, though, the infrastructure to support blast-charging at the kinds of rates we're talking about here simply doesn't yet exist. Tesla's V3 superchargers are currently capable of blast-charging a Model 3 at 250 kilowatts, which would give you around 133 km (83 mi) of range in five minutes.

These batteries would charge three times faster, at around 0.75 megawatts, which is a huge power draw. An alternative method might involve trickle-charging massive supercapacitors all day at slower rates so they've got enough Energy to supply the cars super-quickly when they need it, but we're yet to see anything like that in action, and the size of those supercapacitors might end up being prohibitive.

Eoin Treacy's view -

It is almost as if I see a new story about advancements in battery technology every day. They all come with caveats but the one thing we can be sure of is the quantity of capital now devoted to solving the issue of Energy density and range anxiety is growing persistently. Producing a doubling of Energy density with a low charging time is the hold grail of the sector today and it is reasonable there will be a solution in the market within five years. 



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March 12 2020

Commentary by Eoin Treacy

Blackstone, Carlyle Urge Portfolio Companies to Tap Credit

This article by Sridhar Natarajan and Heather Perlberg for Bloomberg may be of interest to subscribers. Here is a section:

The moves -- along with similar plans by Hilton Worldwide Holdings Inc., Wynn Resorts Ltd. and Boeing Co.-- are signs of the uncertainty coursing through corporate America as a global pandemic, a price war in oil markets and other problems threaten to tip the U.S. economy into a recession. A sudden and sustained increase in companies tapping credit lines could eventually strain banks if conditions become so dire that borrowers won’t be able to meet their obligations.

Lenders offer revolving credit lines to strengthen relationships with companies and don’t typically intend for them to be drawn upon en masse. In normal times, revolvers serve as the corporate equivalent of credit cards, giving companies room to borrow as needed and repay when shortfalls ease. Under normal
circumstances, the lines are seldom maxed out. Extensive use can be seen as a harbinger of distress.

Oil and natural gas companies can come under particular funding stress when prices fall. That’s because their credit lines are periodically updated based on market prices, potentially motivating companies to tap them early.

Blackstone’s private equity operation is the firm’s largest business by assets, at $183 billion. Energy accounts for almost 10% of the total portfolio, the New York-based company said in October. Rival private equity firms also are weighing similar actions, according to executives at two of them.

“From an economic perspective, the virus has created dislocation in the market and fear among the people,” Blackstone co-founder Stephen Schwarzman said in an interview in Mumbai last week. “Once that starts, one has to find the impact of negative consequences.”

Eoin Treacy's view -

Sequoia kicked off efforts to lock down funding last week with its memo to partner companies and other private equity companies are following suit this week. Additionally, large companies with potential cashflow issues are also drawing down on credit lines. That is putting strain on banking balance sheets as they attempt to deal with the cut to interest margins and the potential clients will have solvency issues.



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March 10 2020

Commentary by Eoin Treacy

Shale's Profitability Problem Just Became Much Worse

This article by Rachel Adams-Heard and Kevin Crowley for Bloomberg may be of interest to subscribers. Here it is in full:

With West Texas Intermediate crude trading just above $30 a barrel, America’s shale producers’
profitability problem just became much worse. Only a handful of companies in two areas of the country have breakeven costs lower than the current oil price. Wells drilled by Exxon Mobil Corp., Occidental Petroleum Corp. Chevron Corp. and Crownquest Operating LLC in the Permian Basin, which stretches across West Texas and southeastern New Mexico, can turn profits at $31 a barrel, data compiled by Rystad Energy show, while Occidental’s wells in the DJ Basin of Colorado are also in the money at that price, which is where oil settled Monday. For everyone else, drilling new wells will almost certainly mean going into the red.

Eoin Treacy's view -

The most expensive segments of the oil sector focusing on higher cost production are at risk of being shut in. Even in the best of times a lot of offshore supply has a $40 cost of production but deepwater and Brazil’s pre-salt can stretch to $70. Canada’s tar sands can be among the highest cost production areas but legacy operations have lower costs. Meanwhile the low-price environment is likely to represent an acceleration in the pace of consolidation in the unconventional sector.



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February 27 2020

Commentary by Eoin Treacy

Junk Bond Sell-Off Deepens With Energy Hit the Hardest By Virus

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

Energy led the decliners as oil prices fell below $47 a barrel, while bonds of rental car Hertz Global Holdings Inc. slumped as much as six cents on the dollar. Leveraged loans tied to American Airlines Group Inc. and Travelport Worldwide Ltd. also slipped. The high-yield CDX index, which trades on price, was down a full point at one stage.

High-yield bond investors are trying to assess the big unknown: whether the coronavirus will be just a short-term problem if it can be contained, or, far worse, turn into a pandemic that could pose a long-term drag on the economy and spark a recession.

“The sell-off is accelerating,” said William Smith, a portfolio manager at AllianceBernstein. “Initially we were seeing more weakness in liquid securities, but today there are multiple situations where bonds are down more than five points.”

Eoin Treacy's view -

Riskier credits are less well able to ride out earnings volatility than better capitalised companies. That’s generally why they need to discount their bond offerings. Spreads in the sector were priced for near perfection heading into the end of 2019 as the stock market continued to rebound following the provision of $400 billion in stimulus to the repo market. The potential knock-on effect to demand for consumer products resulting from the virus scare is an obvious risk.



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February 26 2020

Commentary by Eoin Treacy

Berkshire Hathaway Inc Shareholder Letter

Thanks to a subcsriber for this letter by Warren Buffett. Here is a section on utilities:

Berkshire Hathaway Energy is now celebrating its 20th year under our ownership. That anniversary suggests that we should be catching up with the company’s accomplishments.

We’ll start with the topic of electricity rates. When Berkshire entered the utility business in 2000, purchasing 76% of BHE, the company’s residential customers in Iowa paid an average of 8.8 cents per kilowatt-hour (kWh). Prices for residential customers have since risen less than 1% a year, and we have promised that there will be no base rate price increases through 2028. In contrast, here’s what is happening at the other large investor-owned Iowa utility: Last year, the rates it charged its residential customers were 61% higher than BHE’s. Recently, that utility received a rate increase that will widen the gap to 70%.

The extraordinary differential between our rates and theirs is largely the result of our huge accomplishments in converting wind into electricity. In 2021, we expect BHE’s operation to generate about 25.2 million megawatt-hours of electricity (MWh) in Iowa from wind turbines that it both owns and operates. That output will totally cover the annual needs of its Iowa customers, which run to about 24.6 million MWh. In other words, our utility will have attained wind self-sufficiency in the state of Iowa.

In still another contrast, that other Iowa utility generates less than 10% of its power from wind. Furthermore, we know of no other investor-owned utility, wherever located, that by 2021 will have achieved a position of wind self-sufficiency. In 2000, BHE was serving an agricultural-based economy; today, three of its five largest customers are high-tech giants. I believe their decisions to site plants in Iowa were in part based upon BHE’s ability to deliver renewable, low-cost Energy.

Of course, wind is intermittent, and our blades in Iowa turn only part of the time. In certain periods, when the air is still, we look to our non-wind generating capacity to secure the electricity we need. At opposite times, we sell the excess power that wind provides us to other utilities, serving them through what’s called “the grid.” The power we sell them supplants their need for a carbon resource – coal, say, or natural gas.

Berkshire Hathaway now owns 91% of BHE in partnership with Walter Scott, Jr. and Greg Abel. BHE has never paid Berkshire Hathaway a dividend since our purchase and has, as the years have passed, retained $28 billion of earnings. That pattern is an outlier in the world of utilities, whose companies customarily pay big dividends – sometimes reaching, or even exceeding, 80% of earnings. Our view: The more we can invest, the more we like it.

Today, BHE has the operating talent and experience to manage truly huge utility projects – requiring investments of $100 billion or more – that could support infrastructure benefitting our country, our communities and our shareholders. We stand ready, willing and able to take on such opportunities.

Eoin Treacy's view -

I found this to be an enlightening discussion of the utilities sector. The long-held perception is that these kinds of businesses can afford to pay out the majority of free cashflow in dividends because they are charging rents on established pieces of infrastructure with easily forecastable maintenance and renewal trajectories. As Berkshire’s experience with wind demonstrates, this ignores the long-term risk of exogenous shocks, technological innovation, changing regulation and infrastructure reaching the end of its useful life.



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February 25 2020

Commentary by Eoin Treacy

Exxon Drops to 15-Year Low Ahead of Annual Strategy Presentation

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

 

Exxon Mobil Corp. fell to a 15-year low on Monday amid a broad selloff in equity and commodity markets and just over a week before Chief Executive Officer Darren Woods is scheduled to present the oil explorer’s long-term strategic plan to investors and analysts.

The shares have been under pressure since Exxon disclosed disappointing fourth-quarter results in late January and prospects for a near-term recovery were dimmed by the spreading coronavirus. Excess supplies of natural gas, chemicals and motor fuels also weighed on the oil supermajor.

Exxon fell 4.7% to close at $56.36 on Monday in New York as Brent crude tumbled to about $56 a barrel. The last time the Texas-based driller’s stock traded at this level was the end of 2005, when crude fetched $59.

Eoin Treacy's view -

Exxon Mobil is one of the original cast of S&P500 Dividend Aristocrats. It has been decades since it cut its dividend so investors are looking on eagerly to hear how the company plans to retain a strong position in the global Energy market that will allow it to sustain pay outs.



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February 12 2020

Commentary by Eoin Treacy

BP Sets Bold Agenda for Big Oil With Plan to Eliminate CO2

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

For BP to survive the Energy transition in a world that’s gradually falling out of love with oil, it will need to make big investments in new sources of clean Energy, ensure cash keeps flowing from its fossil fuel assets, while also funneling generous returns to investors. It’s a tricky balancing act that its closest peer Shell is already struggling to master.

BP’s commitment to do all this while still boosting free cash flow and shareholder returns is “really the key challenge,” said RBC Capital Markets analyst Biraj Borkhataria.

The company announced structural changes alongside its emissions target. Looney will dismantle its upstream and downstream businesses and reorganize them into an entity made up of 11 new teams that will be more integrated and focused.

“For us the statement represents a step change in terms of vision for the company and one that moves the group toward the biggest reorganization and modernization in at least two decades, if not a century,” analysts at Barclays said in a note. “The magnitude and radical nature of this shift should not be underestimated.”

Eoin Treacy's view -

The trend of public opinion relating to climate change has put most conventional Energy companies in a bind. They have been the subject of vitriol from the green lobby for as long as I can remember but that was manageable when the environment was not an election issue. Today, the situation could not be more different. Wild fires, everywhere, droughts, floods, extinction angst and teenagers lecturing world leaders all point to a very hostile backdrop for oil, gas and coal companies.



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February 11 2020

Commentary by Eoin Treacy

Video commentary for February 11th 2020

February 11 2020

Commentary by Eoin Treacy

Saxo Q1 Outlook: The Great Climate Shift

This press release may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

The long running argument against green Energy investing has been that the cost and intermittency of supply do not come close to compensating for the ease of relying on fossil fuels. That meant the sector has long been confined to a high beta position relative to oil prices because it relied on high Energy prices to justify investment. The question that now needs to be addressed is whether this valuation model is still relevant?



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February 03 2020

Commentary by Eoin Treacy

Gas Rout Puts 60% of Output at Risk, Tudor Pickering Says

This article by Sayer Devlin for Bloomberg may be of interest to subscribers. Here it is in full:

Almost two-thirds of U.S. natural gas production is at risk of being cut as prices tumble, according to Tudor, Pickering, Holt & Co.

About 55 billion cubic feet a day of gas in basins from Texas to Appalachia could be curtailed, analysts at Tudor Pickering wrote Monday in a note to clients. That’s roughly 60% of current dry gas output, based on BloombergNEF estimates.

Mounting debt, a lack of access to capital markets and a drop in hedging will lead to a decline in drilling starting in the second half of this year, Tudor Pickering said. The Energy-focused investment bank says only two or three companies, including Cabot Oil & Gas Corp., can afford to keep output flat with prices below $2.25 per thousand cubic feet, or about $2.17 per million Btu.

“We do expect to see a significant number of bankruptcies if gas prices stay this low,” Matthew Portillo, managing director of upstream research at Tudor Pickering, said by phone. Producers have no gas hedges in place beyond 2021, he said.

Gas has lost about a third of its value since early November, sinking below $2 per million British thermal units for the first time in almost four years as production from shale basins overwhelms demand amid a mild winter.

“What you’re starting to see is the forward curve not only in 2020 but in 2021-plus has moved to such a low price that companies are not able to drill within cash flow to hold drilling steady,” Portillo said.

Drilling in the Haynesville shale in Louisiana is set for a “significant collapse” if prices remain low, he said.

Eoin Treacy's view -

Unconventional supply is prolific but expensive. The vast majority of companies rely on continued high prices to support their drilling activities. That ensures the cyclicality of prices. The higher prices are the more oil and gas can be produced but declines in prices mean drillers can no long source funding and some will inevitably go bankrupt. That will temporarily withdraw supply from the market which will support prices and open the way for new drilling to take place.



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January 31 2020

Commentary by Eoin Treacy

Seven Market Gurus Answer the Seven Big Post-Brexit Questions

This article from Bloomberg News may be of interest to subscribers. Here is a section:

What will the U.K. look like after Brexit? Stephen Jen, CEO of Eurizon Slj Capital:

Britain will probably face a “J Curve” effect after Brexit, with challenges ahead before taking off.

The world is experiencing disruptive shocks that require countries to re-invent themselves and stay competitive. There is a big scope for the U.K. to achieve that outside the EU given that it will have a greater degree of freedom. It’s already number three next to the U.S. and China in terms of technology innovations such as AI, biomedicine and robotics. There is a good opportunity that it could leap-frog its competitors. I don’t think it’s a stretch of the imagination that it’s a very exciting future that the U.K. is facing.

As an investor, I would not focus on the negotiation status of various parties or quarter-by-quarter developments, but on the long-term vision of the U.K. government. We are now talking about a different set of considerations -- structural, strategic, forward-looking, institutional. Think Abenomics. Think Singapore-type vision. The government will have to put the country on a very different path than before.

Eoin Treacy's view -

I believe David would have been chuffed to see the UK leave the EU and today marks a momentous occasion for all Britons. Regardless of how one feels about the exit from the EU the real work is only about to get started. The UK needs a clear growth strategy and is going to require visionary thinking on Energy, regulation, taxation, immigration and trade.



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January 24 2020

Commentary by Eoin Treacy

The Last Straw? China Tries to Trash Single-Use Plastic

This article by Stephanie Yang for the Wall Street Journal may be of interest to subscribers. Here is a section

China will introduce new measures to aggressively cut back on its use of plastic, its first such move in more than a decade as booming e-commerce and food deliveries dramatically increase the country’s production of plastic waste.

In recent years, Beijing has stepped up efforts to reduce waste and pollution, introducing measures such as trash sorting and halting imports of recycling.

“China has used too much plastic,” said William Liu, senior consultant at Energy consulting firm Wood Mackenzie. “Everyone is calling for more environment-friendly development.”

By the end of this year, nonbiodegradable plastic bags will be largely banned from major cities, and single-use straws will be prohibited in restaurants across the country, Beijing’s top economic-planning office and its Environment Ministry said on Sunday. The ban will extend to all cities and towns by 2022 and to markets selling fresh produce by 2025.

Eoin Treacy's view -

The spectacle of business titans fawning over Greta Thunberg and feigning concern at the issues she champions while simultaneously giving a warm welcome to President Trump is yet another example of the virtue signalling designed to impress electorates all over the world.



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January 16 2020

Commentary by Eoin Treacy

Hydrogen May Start Replacing Natural Gas Before 2050, Snam Says

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

 

“There is already a transition going from coal to gas, which is very beneficial for the environment,” Alvera said. “The next step of the transition is getting away from oil and replacing to gas. After we do that phase one, we can ramp up electrolyzers and have green gas.”

The executive’s view about hydrogen reflects concern within the gas industry that governments are moving to limit fossil-fuel emissions and will hit gas soon. That raises the risk that the investments they’ve made in pipelines, compressors and storage tanks could become stranded assets.

In Italy, Snam decided to double the amount of hydrogen it blends into the grid to 10%. Alvera believes hydrogen could supply a quarter of Italy’s Energy demand by 2050 and announced in November a new round of investments to boost transition toward clean Energy.

Eoin Treacy's view -

Hydrogen stocks are having a moment. In any bull market there needs to be a demand narrative which encourages a supply response. The element’s Energy density and clean burning characteristics are burnishing the argument for using more hydrogen as the desire to promote a zero carbon Energy sector gains ground. The future of air travel is probably going to include cryogenic hydrogen but that is still a ways off. Meanwhile the low price of natural gas encourages experimentation because the cost of producing hydrogen is compressing.



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January 09 2020

Commentary by Eoin Treacy

China's Steadying Inflation Leaves Door Open for Monetary Easing

This article from Bloomberg News may be of interest to subscribers. Here is a section:

“The PBOC is likely to continue to use interest rate and liquidity tools to loosen monetary conditions in 2020, though the easing will probably be less pronounced than last year,” David Qu, a China economist at Bloomberg Economics in Hong Kong, wrote in a note. “We expect the PBOC to stick to a stance of measured easing to counter the economic slowdown.”

For the year, consumer inflation for 2019 stood at 2.9%, in line with the government-set target of 3%, while producer prices declined 0.3%. Core inflation, which removes the more volatile food and Energy prices, stabilized at 1.4% in December, signaling ongoing weakness in the broader economy.

China’s economy has shown signs of recovery in recent months as global demand steadies and trade tensions ease. As commodity prices rise and factories start restocking, PPI deflation is set to continue to moderate and some see it turning positive as soon as January.

Eoin Treacy's view -

The outlook for the Chinese economy represents the lynchpin for the global reflation trade and the prospects of steadying growth and continued stimulus are helping aid in the positivity surrounding the hiatus in the trade war.



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December 18 2019

Commentary by Eoin Treacy

Can I Interest You in a 100-Year Boris Bond?

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

The U.K. has the luxury of a deep investor base that hoovers up long-dated, fixed-income assets to make sure it can meet its future pension and insurance liabilities. So much so that the yield on 50-year Gilts is lower than that of their 30-year counterparts, meaning there’s a so-called inversion at the long end of the U.K. yield curve:

The average duration of British government debt is much longer than that of its main counterparts; it’s about 14 years, compared to nearly nine years for German bunds and less than seven years for U.S. Treasuries. There is evidently investor demand in the U.K. for longer stuff, but it requires a genuine commitment from the government to stay the course and not leave any ultra-long issue stranded at the end of the yield curve.

Doing a 100-year deal in concert with more 30- to 50-year issuance would make sure there was plenty of interest at various maturities at the long end of Gilts. A century bond could rapidly build scale into the tens of billions of pounds with quarterly auctions, perhaps with a coupon of about 1.5% (by comparison, Austria’s 100-year issue went for 1.17% back in June). This would be a super-cheap way to really commit to some of the biggest infrastructure projects, such as connecting rail links properly in the north of England.

Eoin Treacy's view -

Borrowing vast sums at record low rates makes sense if the proceeds are invested in growth promoting endeavours like education, critical infrastructure and primary research. If invested in glamour projects and growth hindering strategies like high cost Energy or military hardware then the benefits which accrue will be less impressive. One way or another, fiscal austerity is over and that means the government will have a growing and ongoing funding requirement.



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December 11 2019

Commentary by Eoin Treacy

Value Stocks Are in Position to Swamp Growth: Markets Live 2020

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

* If you’re upbeat about value companies, which are cyclical in nature, then you’re probably optimistic about the global economy. The good news is central bankers are doing everything they can to help the economy get back on track

* Fidelity’s sector strategist Denise Chisholm favors cyclical stocks now that the Fed and ECB are cutting rates at the same time. “That has happened only about 10% of the time since the ECB’s inception in 1998, and when it has, the U.S. market has surged in the subsequent 12 months. Cyclical stocks have fared especially well under these conditions, outperforming the market 71% of the time.”

* Even a limited resolution to the U.S.-China trade conflict should help a global economic revival by reducing uncertainty. That should release animal spirits by boosting new orders for
machinery, industrial supplies and Energy. All that would make the case for value stronger than it’s been in years

Eoin Treacy's view -

Sometimes there is a difference between cheap stocks and value stocks. For over a decade a torrent of liquidity hitting the market has rewarded risk taking and favoured growth at any cost. By comparison the slow and steady business models pursued by many classic value companies has appeared staid. The additional complication of technological obsolescence has resulted in companies with low P/Es and high dividends languishing because investors fear for their survival.



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December 06 2019

Commentary by Eoin Treacy

Oil Surges After Saudis Surprise Market With Additional

This article by Sheela Tobben and Alex Longley for Bloomberg may be of interest to subscribers. Here is a section:

The additional supply reduction would take the kingdom’s production down to levels not seen on a sustained basis since 2014, according to data compiled by Bloomberg.

After the announcement, Prince Abdulaziz predicted that Saudi Aramco, which just completed an IPO at a valuation of $1.7 trillion, would soon soar above the $2 trillion. The kingdom plans to pump 9.7 million barrels a day, he said. That’s a reduction of about 300,000 barrels a day from its output in November and 100,000 below the year-to-date average, according to data compiled by Bloomberg.

Eoin Treacy's view -

There was always a risk that Saudi Arabia would attempt to massage Energy prices in order to get the valuation for Saudi Aramco they desired. The IPO priced yesterday at $1.7 trillion which will represent a $25 billion windfall for the kingdom. If the price pops on the upside following the IPO that will give a windfall to the large numbers of domestic investors, many connected to the ruling class, who invested in the IPO. That is obviously a desirable outcome from a domestic perspective for Saudi Arabia.



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December 03 2019

Commentary by Eoin Treacy

Europe Set to Overhaul Its Entire Economy in Green Deal Push

This article by Ewa Krukowska and Nikos Chrysoloras for Bloomberg may be of interest to subscribers. Here is a section:

The EU plan, set to be approved as the high-profile United Nations summit in Madrid winds up, would put the bloc ahead of other major emitters. Countries including China, India and Japan have yet to translate voluntary pledges under the 2015 Paris climate accord into binding national measures. U.S. President Donald Trump has said he’ll pull the U.S. out of the Paris agreement.

In a pitch of her Green Deal to member states and the European Parliament on Dec. 11, von der Leyen is set to promise a set of measures to reach the net-zero emissions target, affecting sectors from agriculture to Energy production. It will include a thorough analysis on how to toughen the current 40% goal to reduce emissions by 2030 to 50% or even 55%, according to an EU document obtained by Bloomberg News.

Make It Irreversible
In the next step, the commission will propose an EU law in March that would “make the transition to climate neutrality irreversible,” von der Leyen told the UN meeting. She said the measure will include “a farm-to-fork strategy and a biodiversity strategy” and will extend the scope of emissions trading.

Eoin Treacy's view -

The EU’s political elite view the climate argument as a voter winner, a source of revenue for their constrained social services and an additional control on the economy that would be impossible under normal circumstances. It is also a response to the fact the region is a major Energy consumer and has long had to deal with regimes it is politically at odds with because of its dependence on imports of Energy commodities.



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November 12 2019

Commentary by Eoin Treacy

Video commentary for November 12th 2019

November 12 2019

Commentary by Eoin Treacy

CLO Selloff Flashes Warning Sign to Junk Bond Market

This article from the Wall Street Journal may be of interest to subscribers. Here is a section:

CLOs resemble the mortgage-backed bonds that imploded in 2008, but very few defaulted in the credit crisis, a key driver of their recent popularity. Prices for their shares and bonds, however, plummeted at the time, and holders who sold out took heavy losses.

Now some CLO bond prices are falling again. That is because the riskier loans the CLOs own are dropping in value as the companies that borrowed them start running out of cash. CLO bonds rated double-B, which are among the riskiest CLO securities, returned about 10% this year through June. But recent declines, especially last month, erased most of the gains, giving holders a roughly 1% return this year through October.

That contrasts sharply with high-yield bonds: Many of the same companies to which CLOs lend issue junk bonds, which returned about 12% this year through October, according to data from S&P Global Market Intelligence.

“If you think that double-B CLOs are giving a warning sign, that says something about high yield,” said David Preston, head of CLO research at Wells Fargo & Co. “It’s hard to see how both markets can be right.”

Eoin Treacy's view -

The Energy sector is where the majority of spread expansion has taken place as higher cost, more leveraged, issuers have come under pressure. The relatively stable oil price at present is not high enough to rescue these issuers and the existential crisis gripping Chesapeake Energy is an example of the stress coming to bear on higher cost producers, particularly in a low natural gas price environment.



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November 11 2019

Commentary by Eoin Treacy

The next 6 months favor Cyclicals: Financials, Energy, Industrials, Tech, Materials

Thanks to a subscriber for this chart illustrated report by Barry Bannister for Stifel which may be of interest.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

I have some sympathy with the view that when everyone is short, the risk of a short covering rally greatly increases. That’s particularly true if Saudi Arabia succeeds in encouraging OPEC to further reduce supply to bolster the valuation of Saudi Aramco ahead of the IPO.



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November 06 2019

Commentary by Eoin Treacy

Brazil's Oil Flop a Warning for Majors and Aramco

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

Offshore oil investment was all the rage among Big Oil during the supercycle, with capital expenditure almost quadrupling in the decade up to 2014. That is the problem. The majors poured money into large, multi-year projects prone to delays and, because of their often bespoke engineering, spiraling budgets. The result: tumbling return on capital and an inability to dial back investment quickly when the oil crash hit in 2014. Roughly 3,000 new offshore projects sanctioned between 2010 and 2014 have either barely generated any value for oil companies or are expected to generate none at all, according to a recent study published by Rystad Energy, a consultancy:

More recent investments score better, mostly because the boom tailed off, with offshore capex falling by more than half between 2014 and 2018. That took the heat out of industry inflation; and, because of the bonfire of returns in the prior decade, oil majors got smarter about such things as standardizing offshore equipment design to cut costs and shorten schedules. The pace of new projects has picked up again after the slump. Exxon, for example, has effectively opened up an entire new offshore zone with its Guyanese fields.

Still, one look at the stock prices of oilfield services firms, especially offshore-focused types such as Transocean Ltd. and Noble Corp. Plc, tells you this investment wave is nothing like the tsunami of yesteryear. Bad memories combined with unease about both near- and long-term oil demand make bold bets on big, multi-year offshore projects a tough sell with investors more interested in payouts. Even Exxon’s success in Guyana gets overshadowed by the fact that the company’s capex bill leaves it borrowing to pay its dividend. And Exxon, like Chevron Corp. and other majors, has swung more of its spending toward shorter-cycle onshore fracking in North America.

Eoin Treacy's view -

Secular bull markets in commodities are defined by a step change in the marginal cost of production. During periods of what can best be described as a status quo the price of oil can range for decades. That reduces investment in new supply and the sector is unable to respond quickly when a new source of demand emerges. The massive investment to bring new supply to market takes time to evolve and that creates a secular bull market as new higher cost sources are brought online. 



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October 24 2019

Commentary by Eoin Treacy

Tesla's Surprise Looks Strangely Familiar

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

Tesla’s free cash flow, meanwhile, was positive for the second quarter in a row, at $371 million. Again, that is positive. Again, the number was flattered by Tesla underspending on its capex budget. Guidance for the year was $1.5 billion to $2 billion. Based on the low spending in the first half, the mid-point of Tesla’s range implied it spending an average of $610 million in the third and fourth quarters. Capex came in $225 million below that level, equivalent to 61% of the free cash flow. Tesla’s capex continues to come in lower than its depreciation expense, which is striking for a company with such expansive ambitions. The company puts this down to rising efficiency.

There is something ludicrous about the stock of a company already priced at $46 billion, or 422 times the 2020 GAAP earnings forecast, surging because it reported a small net profit rather than a small net loss (the consensus estimate was a negative $234 million). Ditto for a few hundred million of free cash flow largely explained by below-guidance capex. Tesla’s own forecast points to positive profits and free cash flow continuing, but which may suffer “temporary exceptions, particularly around the launch and ramp of new products.”

Eoin Treacy's view -

There is no doubt that Tesla is an expensive share but it’s ability to occasionally turn a profit confounds the highly vocal bearish community who point to the company as representing nothing more than a house of cards. At its most basic the company is producing vehicles many people aspire to own which is a positive. The very big question is whether it can continue to do so and make money at the same time.



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October 22 2019

Commentary by Eoin Treacy

Chile Unrest Has a Worrisome Message for the World

This article by John Authers may be of interest to subscribers. Here is a section:

The first is inequality. The Chicago Boys’ agenda delivered reasonably strong and stable aggregate growth, but Chile remains one of the most unequal countries on earth. It ranks as one of the leaders in inequality among members of the Organization for Economic Cooperation and Development, and, according to the World Bank, remains more unequal than either of its very different neighbors, Argentina and Peru. People are far angrier about a rising cost of living if it comes with a sense of injustice. 

Second, the catalyst was a proposal to raise public transport fares and Energy bills. There is ample evidence from across the world that these will incite rebellion like nothing else — a point that those who hope to reduce greenhouse-gas emissions via a carbon tax should bear in mind. The violent protests of the Gilets Jaunes in France were over higher gasoline taxes, which were seen as penalizing car-dependent people in the provinces while favoring metropolitan elites. Mexico in 2017 saw riots and protests against what was known as the “gasolinazo,” a 20% rise in fuel prices that was a part of the government’s partial privatization of Pemex, the  monopoly state oil company. Last year, Brazil was rocked by protests and a strike by truck drivers in response to fuel shortages and a sharp increase in the price of diesel.

Third, Chile lacks a populist movement, or a canny populist caudillo politician. Such a figure might have been able to use public anger for their own purposes, but would also have had a better chance to control it. For example, Mexico’s left-wing populist president Andres Manuel Lopez Obrador frequently led public protests, but successfully persuaded his followers not to resort to violence. In Chile, where conventional politics lacks a party or a personality to channel their grievances, protesters have resorted to self-destructive vandalism. Which is to say, while charismatic Latin American populists understandably tend to make western leaders nervous, Chile shows that they can perform a vital function. 

Eoin Treacy's view -

The Arab Spring originated in Tunisia in a protest over the price of bread. The unrest in Lebanon last week was a response to the proposed tax on WhatsApp users. The Hong Kong unrest probably has its roots in the rising cost of living. Chile’s protests are equally about the cost of living. Does that suggest, within a decade the world has gone from worrying about bread to bigger ticket purchases? The surge in asset price inflation against a background of largely stagnant wages is at least partly to blame for this deterioration in the political status quo.



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October 21 2019

Commentary by Eoin Treacy

Leveraged loans: how much do credit ratings understate the risks?

Thanks to a subscriber for this report from UBS which may be of interest. Here is a section: 

Two of the main arguments against higher loan defaults are lower rates and lack of covenants. On lower rates, we believe the transmission mechanism of lower rates to leveraged loans is comparatively weak. Our recent work has shown that LL yields are little changed year-over-year, in part because wider spreads have offset modest declines in LIBOR rates. Looking ahead, 4 rate cuts in 2020 could help loan issuers but there are likely offsetting factors. One is that this assumes loan spreads do not widen, which we think is unlikely, particularly heading into 1H20 with US GDP growth slowing to 0.3-0.5% in 1H20. Two is if rating agency downgrades persist (as we expect) the future cost of new funding for issuers increases substantially with each rating notch; our analysis shows the current spread differential between a B- and a CCC+ loan is c300bp. Three is that the Fed has less room to stimulate: only 38-52% of the rate relief provided in the last two cycles. 

On lack of covenants, the key driver of defaults historically is not covenant violations but insolvency and illiquidity. One of the more holistic papers compares these factors in triggering defaults and argues that low market asset value to debt is the key driver while, on average, covenants add limited additional information4. We believe lack of covenants will change the event of default, with more distressed exchanges likely. But it is not clear this is a good outcome. Covenants had weakened leading up to the '15-16 Energy default cycle, yet default rates were elevated (peak 22%) and many distressed exchanges failed with roughly half of firms re-defaulting. While loan downgrades to CCCs have been lagging those to B-, we are starting to see more evidence of downgrades to CCC. These decisions are primarily driven by weak operating performance, negative cash flow and capital structure unsustainability (even as issuers do not have maturities until 202022). Once a firm is downgraded to CCC, we believe the re-pricing in loan yields makes distressed exchanges likely, particularly in more stressed markets.

Eoin Treacy's view -

The race to secure a competitive yield has resulted in large quantities of debt being issued and the quality of issuers declining relative to the yield on offer. If a rising tide lifts all boats then the potential for shipwrecks to be revealed when the tide goes out is also a risk. Warren Buffett’s swimming naked remark comes to mind.

 



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October 14 2019

Commentary by Eoin Treacy

Oil Shipping Costs Soar to Highest Levels in 11 Years

This article by Costas Paris for the Wall Street Journal may be of interest to subscribers. Here is a section:

“There is a lot of confusion and uncertainty out there,” said Paolo d’Amico, head of Intertanko, a trade body representing tanker owners. “Everyone is afraid of being hit by the U.S., sanctions, rendering about 50 VLCCs untouchable.”

U.S. oil exports to Europe, which usually move in smaller tankers, hit a record 1.8 million barrels a day for the week ending Oct. 7, according to Kpler, an Energy market intelligence company. The figure is double the 924,000 barrels in the previous week. But shipments to Asia, which are typically done on VLCCs, were reduced almost in half to 508,000 barrels.

A Singapore broker said rates for some VLCC cargoes on sailings from the U.S. Gulf Coast to the Far East were more than $120,000 on Thursday. Average earnings for supertankers picking up cargoes from around the world hit $94,124 a day, up from $18,284 on Sept. 25, when Washington blacklisted the Cosco fleet.

“VLCCs to Asia are a rare commodity, the market is red hot and will stay that way while the U.S. sanctions on Cosco ships are in place,” said the broker, who asked not to be named because he isn’t authorized to talk to the media.

Eoin Treacy's view -

The Baltic Dirty Tanker Index broke out on the upside last week, to trade above 1500 for the first time since 2008. That follows the breakout in the Baltic Dry Index in August. The latter’s move has not been as pronounced but does highlight the additional pressure on the shipping sector from the impending implementation of the IMO2020 rules on ship emissions.



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October 11 2019

Commentary by Eoin Treacy

Melting Ice Redraws the World Map and Starts a Power Struggle

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

Shawn Bennett, deputy assistant secretary for oil and natural gas at the Department of Energy, said the U.S. was not concerned about competition. Growth projections for natural gas demand in India and other Asian countries are so high, and the need for supply diversification in Europe so acute that there’s little risk of a glut, he told Bloomberg. “Global demand for LNG is just going to grow,” he said.

The U.S. may be pushing back in more concrete ways. On September 30, the Department of the Treasury imposed sanctions on units of China’s Cosco Shipping Corp., over alleged breaches of U.S. sanctions against Iran. The move immediately hit the Yamal project’s LNG tanker routes because of Cosco’s share in one of the main shipping companies involved.

Still, for those who have been working in the Arctic for a long time, much of the geopolitical discussion sounds a little breathless. Last year, Russia’s Northern Sea Route carried 29 million tons of cargo, with projections rising to 90 million. The Suez Canal carries about 1 billion tons.

Eoin Treacy's view -

David and I predicted more than a decade ago that the USA would become Energy independent that that represented a gamechanger for the Energy sector that was completely underappreciated by markets. This chart suggests that reality, long promised, is now upon us.



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September 24 2019

Commentary by Eoin Treacy

How We Should Bust an Investing Myth

This article by Jason Zweig for the Wall Street Journal may be of interest to subscribers. Here is a section:

According to PitchBook Data, 66 companies valued at $1 billion or more have done initial public offerings from 2011 through mid-September 2019. A third of those IPOs came at prices below the value set in the companies’ last round of private funding. Bloom Energy Corp. , Cloudera Inc., Domo Inc., Reata Pharmaceuticals Inc., and Zynga Inc. all launched IPOs priced at least 40% lower than the valuation in their final private-funding round, according to PitchBook.

Perhaps that’s because conventional valuation methods may overstate what private funds’ venture holdings are worth. Often, several share classes are valued equally even though they aren’t all entitled to the same payoffs.

Or perhaps the brilliance of the private market is overstated. Consider a recent survey of nearly 900 venture capitalists.

Asked whether they “often make a gut decision to invest” in a fledgling company rather than relying on analysis, 44% of venture-fund executives said yes.

Which financial metrics do they use to analyze investments? “None,” admitted 9% of respondents. Only 11% quantitatively analyze past investment performance. A similar survey of private-equity executives found that they “do not frequently use” the methods that are standard among public investors for discounting the future cash their holdings might generate.

Eoin Treacy's view -

The “vision thing” as Bill Clinton was wont to say is not a topic that submits readily to discounted cashflows. That is particularly true of angel investing where one is taking bets on companies with no earnings not to mind profits. However, an investor that is investing in a company with billions in earnings and still running billion-dollar losses has to know they are not in the same game as an angel investor. After the first or second round of funding, the only rationale for investing is the wish to sell to a bigger fool later unless one is luck enough to latch onto a lottery scale winner.



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September 13 2019

Commentary by Eoin Treacy

It's A Fish-Eat-Fish World Scientists Want To Change That

This article by Jon Emont for the Wall Street Journal may be of interest to subscribers. Here is a section:

“If we take any more fish out of the ocean—what we call wild-caught—then literally the ecosystem could collapse,” said Alan Shaw, the chief executive of Calysta, a Menlo Park, Calif.-based startup that is among the first companies to use bacteria to convert natural gas into protein that can be used as an alternative fish feed. Calysta operates a factory in northeast England where its bacteria feed on methane producing single-cell proteins that are dried and packaged into pellets it calls FeedKind.

The company announced a $30 million investment from BP in June, which gave the British Energy giant the right of first refusal to supply natural gas to Calysta’s future factories. It already had a partnership with Thai Union, an Asian seafood giant, which says trial shrimp grown on Calysta’s bacterial protein taste the same as those fed traditional diets that include fish.

Eoin Treacy's view -

Fish farming remains a growth business with leverage to both the growth of the global consumer and the need to substitute global fish stocks with additional supply in order to feed all those people. Additionally, the desire to consume more protein and more “heart healthy” fats is on a growth trajectory.



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September 09 2019

Commentary by Eoin Treacy

A Wide Range of Testing Results on an Excellent Lithium-Ion Cell Chemistry to be used as Benchmarks for New Battery Technologies

Thanks to a subscriber for this report which may be of interest to subscribers. Here is a section from the introduction:

We present a wide range of testing results on an excellent moderate-Energy-density lithium-ion pouch cell chemistry to serve as benchmarks for academics and companies developing advanced lithium-ion and other “beyond lithium-ion” cell chemistries to (hopefully)exceed. These results are far superior to those that have been used by researchers modelling cell failure mechanisms and as such, these results are more representative of modern Li-ion cells and should be adopted by modellers. Up to three years of testing has been completed for some of the tests. Tests include long-term charge-discharge cycling at 20,40 and 55°C, long-term storage at 20,40 and 55°C, and high precision coulometry at 40°C.Several different electrolytes are considered in this LiNi0.5Mn0.3Co0.2O2/graphite chemistry, including those that can promote fast charging. The reasons for cell performance degradation and impedance growth are examined using several methods. We conclude that cells of this type should be able to power an electric vehicle for over 1.6 million kilometers (1 million miles) and last at least two decades in grid Energy storage. The authors acknowledge that other cell format-dependent loss, if any, (e.g. cylindrical vs. pouch) may not be captured in these experiments.

Eoin Treacy's view -

The potential electric vehicles with modern battery chemistries to run for upwards of 1,000,000 miles range is a serious gamechanger. That is particularly true for the haulage sector where diesel’s longevity and fuel efficiency have been unchallenged for decades.  



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September 02 2019

Commentary by Eoin Treacy

Indonesia Set to Halt Nickel Ore Exports From End December

This article by Wahyudi Soeriaatmadja  for the Straits Times may be of interest to subscribers. Here is a section:

Energy and Mineral Resources Minister Ignasius Jonan said on Friday that the nickel export curbs are "in line with President Joko Widodo's directives".

Indonesia's current account deficit reached US$31.1 billion (S$43.2 billion) in 2018. The widening deficits were an issue Mr Joko's political opponents frequently played up during his presidential campaign ahead of the April election. Mr Joko will be sworn in on Oct 20 to begin his second and final five-year term.

A senior government official had earlier argued that Indonesia could have recorded even higher deficits had the country not boosted efforts to climb up the value chain in the iron and steel sector, encouraging investors to build plants at home to process raw nickel into intermediate products such as stainless steel slabs.

Eoin Treacy's view -

Indonesia has long sought to gain more economic benefit from its commodity exports. That was particularly true of the tin market when exports were limited to refined products in 2013. The aim was to try and build up the domestic refining business but the collapse in prices in 2014 and 2015 killed off that idea. It now appears Indonesia is attempting to do something similar with nickel exports.



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August 30 2019

Commentary by Eoin Treacy

RBA Says Household Debt Could Complicate Future Rate Decisions

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

Reserve Bank of Australia comments in 2019/20 corporate plan released on website Friday.

“Over 2019/20 to 2022/23, the structure of the Australian economy will continue to evolve and economic shocks -- which, by definition, are not forecastable -- will occur. Movements in asset values and leverage may be more important for economic developments than in the past given the already high levels of debt on household balance sheets”

“Especially in the context of weak growth in household income, high debt levels could complicate future monetary policy decisions by making the economy less resilient to shocks”

“The flexible medium-term inflation target is the centerpiece of the monetary policy framework in Australia and has been well established for more than two decades. Since the early 1990s, it has provided the foundation for the bank to achieve its monetary policy objectives by providing an anchor for inflation expectations. The bank will remain alert to new developments that may have a bearing on the framework for monetary policy”

Eoin Treacy's view -

The Australian Dollar remains in a medium-term downtrend, moving to a new closing low today. With Energy and iron-ore prices declining and the domestic housing market in a parlous condition the RBA may be required to embark on the same counter deflationary measures other developed markets have endured over the last decade.



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August 29 2019

Commentary by Eoin Treacy

U.S. Glut in Natural-Gas Supply Goes Global

This article by Ryan Dezember for the Wall Street Journal may be of interest to subscribers. Here is a section:

Earlier this month Freeport LNG Development LP’s export terminal in a beach town south of Houston began buying and liquefying gas with the expectation of sending out its maiden cargo in September. The Freeport facility, the fifth to begin operating in the lower 48 states since the first opened in early 2016, should help push gas consumption from LNG exporters to a new high. Last week, a record nine LNG vessels left the U.S. carrying cargoes, according to Jefferies Financial Group Inc.

In July, LNG exporters consumed an average of about 6 billion cubic feet of gas per day, according to the U.S. Energy Information Administration. That is the most yet and is equal to roughly 7% of total U.S. gas production. Analysts expect demand from LNG facilities to absorb about 12% of total production by next summer as additional facilities start up and existing terminals boost their capacity.

But if those projects are delayed because of low prices overseas or if existing LNG plants slow down or take advantage of the lull to perform extended maintenance, then the domestic gas market could be swamped, sending prices even lower.

“If that demand goes away even for a couple months, it becomes a real problem for the balance of the market,” said Welles Fitzpatrick, an analyst with SunTrust Robinson Humphrey.

Eoin Treacy's view -

Natural gas is a commodity widely associated with the rise of the global middle class. As living standards improve, and infrastructure is laid down, demand for cleaner burning fuels trends higher. The big change in the market over the last few years has been the creation of the global market for natural gas. Prior to this it was primarily a regional market because of a lack of transportation options. Significant investment in LNG terminals all over the world is turning the USA, Australia and potentially Canada into natural gas exporting giants to compete with Russia and Qatar. That represents a significant change to the status quo.



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August 22 2019

Commentary by Eoin Treacy

Video commentary for August 22nd 2019

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: Baltic Dry Index rallying, Transportation Index weighed down by Energy, banks steady, Renminbi hits new low, the markets continue to signal a requirement for additional stimulus, gold steady, oil eases.
 



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August 16 2019

Commentary by Eoin Treacy

Musings From the Oil Patch August 13th 2019

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

Today’s Energy world is nothing like what it was prior to OPEC’s move.  It is even moving away from the model that evolved immediately after the price collapse.  Both of those models have been shunned by investors.  A new model is evolving in response to investor demands that Energy companies be profitable and return cash to investors.  This new model is evolving in response to the disconnect between Energy company fundamentals and their share prices.  That disconnect is evident in Exhibit 8, which tracks oil prices and stock indexes reflecting oil and oil service companies since mid-2014 when oil prices began sliding, before OPEC delivered its coup de grâce.  Oil company stocks (XLE) performed better during this period, largely because they pay dividends, offering investors income while waiting for share values to reflect higher oil prices.  Oil service stocks (OSX) fell steadily in this period, because of too much debt and shrinking market activity leading to substantial asset impairment and eroding company values.  

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

If we are indeed now in a period where Energy investors are more demanding of profits than production growth that is not great news for the fragmented nature of the shale oil sector. That suggests there is significant scope for consolidation to provide the profitability demanded by investors.



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August 13 2019

Commentary by Eoin Treacy

Email of the day on the ramifications of negative yields

See yield chart middle page 1.  How low (negative) can govt credit yields (-1%) go till the financial system freezes over?  Serious Q……………this negative yield stuff wasn’t taught in Economics 101.

There must be an absolute level of negative rates that destroys money velocity (V) as it means no one puts money in the bank anymore and lending gets restricted.  At -10% I wouldn’t lend to UBS.  What happens at say -5%?  Assuming a real rate of 3%, bank lending -after a margin of say 2%- would essentially be FREE (0%).  But what does that do to banking system integrity (banks make money but less of it as their margins collapse; their deposit base shrinks as they struggle to increase/ attract deposits………….not only do depositors go on strike but existing depos are decreased annually by negative yields!)….and what about regulatory oversight?….would CBs and regulators afraid of imprudent lending caused by needy borrowers at 0% step in to restrict the very process that they are trying to encourage via making money so cheap?  i.e. will they try to stop “BAD” lending.  How will they judge/enforce?

And where does inflation fit into this calculus?...without any inflation the interest rate structure/ yield curve that might restore banking margins is hard to normalize/ become positive again.

Or should governments everywhere borrow vast sums at negative rates for 50 years to finance a massive infrastructure spend (highways, 5G, clean Energy, railways etc.) i.e. “GOOD” lending?  Wouldn’t this raise rates and restore normality?  Then what debt / GDP levels are prudent (see Italy)?  I recall Argentina’s 100-year bond issue in 2017 at 7.9%, 3x over-subscribed by famished yield scavengers.

Investment implications

  • Negative bond yields unattractive versus investment in high quality equities paying well covered dividends, though it is certainly not a good world for poor quality companies who don’t
  • How is any of this bad for gold, whose carry cost is collapsing?

 

Just sharing some thoughts, largely written out of confusion

Eoin Treacy's view -

I think we are all in a state of disbelief at the willingness of investors to pour trillions into bonds with a negative yield. I have long wondered at the absence of any discussion of bond market convexity over the last decade. After all, shouldn’t we all have an interest in the sensitivity of bonds to changes in interest rates?



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August 09 2019

Commentary by Eoin Treacy

Email of the day - on European energy prices

This is by Benny Peiser who is the director of the GWPF. Some bold warnings about Europe's decline fuelled by its high Energy prices.

 

Eoin Treacy's view -

Outsized economic growth and the higher standards of living it delivers is the single best way of creating concern for lower emissions, a cleaner environment and creating greater efficiencies. We have plenty of empirical evidence that this is the case and yet it is still a hard sell for many politicians. The concentration of the argument on climate change is probably at the root of this problem. Instead we should be thinking about improving the human condition not as the problem but as the solution.



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August 07 2019

Commentary by Eoin Treacy

Central Bank Hunger for Gold Lifts Demand to Three-Year Hig

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

Nations added 374.1 tons in the first six months as Russia and China kept building reserves and Poland made a massive purchase. The trend is expected to continue, with a recent survey of central banks showing 54% of respondents expect global holdings to climb in the next 12 months.

Central banks around the world have added to reserves as economic growth slows, trade and geopolitical tensions rise, and authorities seek to diversify away from the dollar. Gold rallied to a six-year high in July, as expectations for lower U.S. interest rates and concerns about the economy boosted bullion’s appeal.

Spot gold edged lower Thursday, falling for a second day after the Federal Reserve signaled it probably won’t embark on a lengthy easing cycle. The metal declined 0.5% to $1,407.04 an ounce, paring this year’s gains to 9.7%.

Eoin Treacy's view -

Energy independence has afforded the USA the ability to be much more assertive on the geopolitical scene. The deployment of trade weapons, tariffs and sanctions etc is all the easier when you are no longer beholden to other countries for supply of a vital commodity. That necessarily results in a corresponding action from other countries which is to try and free themselves from their attachment to the Dollar. Building up gold reserves make sense from that perspective.



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August 07 2019

Commentary by Eoin Treacy

Tesla's big battery in South Australia is a "complete waste of resources," claims Nissan

This article by Simon Alvarez for Teslarati.com may be of interest to subscribers. Here is a section:

Thomas’ statement comes as he was discussing the new Leaf’s vehicle-to-grid/vehicle-to-home (V2G/V2H) system, which will allow the all-electric car to serve as a home battery unit. With the system in place, the Leaf will not only store Energy by plugging into a home or business; the vehicle could also serve the Energy back when needed. V2H is already in use in countries such as Japan, and a release in Australia is expected within six months. 

The Nissan executive noted that the Leaf’s V2G system has the potential to help homeowners save money, especially if the vehicle charges through a rooftop solar system during the day, and uses its stored Energy to power appliances and lights at night. 

“The way we distribute and consume Energy is fundamentally inefficient … what we need is flexibility in the system. It’s great that we’ve invested all this money in renewable Energy, but fundamentally we’re wasting most of that Energy because it’s all being generated in the middle of the day when we don’t really need it,” he said. 

Tim Washington, CEO of charging solutions provider Jetcharge, noted that Nissan V2H technology has a lot of potential, considering that vehicles spend much of their time just parked, or in the case of electric cars, plugged in. 

Eoin Treacy's view -

Tesla has battery manufacturing capacity so it produces batteries. Nissan produces cars so it is pushing a use case for cars to provide base load during periods of peak consumption.



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July 25 2019

Commentary by Eoin Treacy

Evaluating US Nuclear Competitiveness and its Future as a Carbon-Free Clean Energy Source

Thanks to a Keith Rabin for this interview of Dr.Robert F.Ichord. Here is a section:

Both Russia and China are strongly committed to domestic nuclear development, international nuclear power exports, and the development of small modular reactors (SMR) and advanced nuclear reactors. Russia is building seven third–generation VVER–1200 reactors domestically and over twenty internationally. China is building domestically about eleven indigenous units, not including the Russia VVERs, the French EPRs or the recently completed US AP–1000s. They have two reactors of the Hualong One design under construction in Pakistan near Karachi and one planned at Chasma, the site of older, smaller Chinese reactors. They are also pursuing deals in the UK, Romania and Argentina as well as Bulgaria and several other countries. These strong state–financed commitments create the domestic and industrial capabilities needed for future innovation as well as to establish long–term political and economic relationships with countries of strategic interest. US historical influence over international standards and regulatory system development is therefore being challenged as well as US overall foreign policy interests in democracy and open markets. South Korean and Japanese companies are also international competitors but remain long–time US collaborators.

According to the World Nuclear Association about 30 countries are considering, planning or starting nuclear power programs. These range from sophisticated economies to developing nations. Is nuclear a viable option for emerging and frontier economies and how does installation and utilization differ in these locations from developed economies in terms of safety, non–proliferation as well as political stability, environmental and regulatory standards, supporting infrastructure and other factors?

I believe there is a major shift occurring in the global nuclear industry from the industrial countries to the non–OECD countries. Most of future global electricity growth will be in these countries and they want to diversify and develop cleaner Energy systems. Despite the huge upfront costs, countries are deciding to accept attractive Russian and Chinese financing for these large, multi–billion dollar units. There is the national pride involved from joining the “nuclear club' as well as possible corruption in certain cases. Russia also offers military equipment as well as full fuel and operating services in its strategy to expand influence. Although both Russia and China have significant training efforts to develop local capacities, overall governance and transparency in a number of these countries is weak and the commitment to competent Nuclear Regulatory Commission (NRC)–like regulatory institutions is questionable. Although most of the countries have signed the Non–Proliferation Treaty (NPT) and the International Atomic Energy Agency (IAEA) Additional Protocol, the introduction of current nuclear power technologies in countries and regions – in which there are significant tensions and political conflicts, e.g. Middle East – raises serious concerns for US foreign policy.

Eoin Treacy's view -

The mining investment cycle of the early part of this century delivered on additional supply capacity. While the building plans for new reactors are impressive, they have been slowed by the Fukushima disaster and competition from other Energy sources. That has resulted in quite a bit of volatility for uranium miners.



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July 18 2019

Commentary by Eoin Treacy

Oil Dips as Russian Pipe Flow Is Restored, Earnings Are Mixed

This article by Alex Longley and Alex Nussbaum for Bloomberg may be of interest to subscribers. Here is a section:

Russian pipeline operator Transneft PJSC, meanwhile, said it resumed full flows from the country’s largest crude producer, Rosneft PJSC, after imposing restrictions amid concerns about contamination.

Oil has fallen all week as the specter of a renewed U.S.-China conflict dented the demand outlook, while American fuel stockpiles jumped. That’s overshadowed worries that Iran may shut down the Strait of Hormuz, a key chokepoint for much of the world’s oil shipments.

Eoin Treacy's view -

This week we have been treated to two examples of how much the Energy sector has changed. First a hurricane shut down most gas supply in the Gulf of Mexico and hit the New Orleans area which is where a lot of processing infrastructure is situated. The price of gas fell instead of rising because so the market no longer relies on the Gulf of Mexico as a swing producer.



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July 12 2019

Commentary by Eoin Treacy

Email of the day - on predicting in which direction a breakout will take

Hoping for a quick refresher, please. The Chart Seminar reinforces that stocks are either trending or ranging. What I am interested in are the indicators which may suggest a stock could breakout of its range (to the upside or downside) in the near term. Thanks for a wonderful service.

Eoin Treacy's view -

Thank you for this question which others may have an interest in. Markets either trend or range so every range is following by a breakout and vice versa. Ranges are explosions waiting to happen because ranges and boring relative to the trending phases. That means expectations for future potential deteriorate at just the same time that Energy is being stored up for the next breakout.



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July 08 2019

Commentary by Eoin Treacy

China Is Forcing Tourists to Install Text-Stealing Malware at its Border

This article from vice.com maybe of interest to subscribers. Here is a section:

Together with the Guardian and the New York Times, the reporting team commissioned several technical analyses of the app. Penetration testing firm Cure53 on behalf of the Open Technology Fund, researchers at Citizen Lab from the University of Toronto, and researchers from the Ruhr University Bochum as well as the Guardian itself all provided insights about BXAQ. The app's code also includes names such as "CellHunter" and "MobileHunter."

Once installed on an Android phone, by "side-loading" its installation and requesting certain permissions rather than downloading it from the Google Play Store, BXAQ collects all of the phone's calendar entries, phone contacts, call logs, and text messages and uploads them to a server, according to expert analysis. The malware also scans the phone to see which apps are installed, and extracts the subject’s usernames for some installed apps. (Update: after the publication of this piece, multiple antivirus firms updated their products to flag the app as malware).

Eoin Treacy's view -

Xinjiang is one of China’s buffer states which separates the heartland from its neighbours. It is also an Energy producer and bread basket so China has additional reasons to quell even a whiff of separatist sentiment. The extend of surveillance and re-education programs (incarceration) is unparalleled in modern history and is a testament to just how overtly authoritarian the administration is.



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July 04 2019

Commentary by Eoin Treacy

Email of the day on our investment philosophy.

New subscriber here and enjoying the site/audio. Anything on the site or audio that explains your philosophy on markets and approach? I've purchased your book as well so maybe that is the simple answer!

Eoin Treacy's view -

Welcome to the Service and thank you for this email which others may also have an interest in. Crowd Money was my best attempt at creating a companion guide to The Chart Seminar back in 2013 and the principles of crowd psychology and trend consistency covered in it are the basis for the analysis performed in this Service.

FullerTreacyMoney is a top down macro behavioural global strategy service. The best place to be in any market is in a consistent trend. In order to find the most consistent trends we scour the world. Having an appreciation of what a consistent trend is, how they evolve and how they end allows us to form trend running strategies.

There are really only two big factors in the market; crowds of people and monetary policy. Central banks kill off bull markets so we need to pay attention to what they do. Likewise, when oil is surging or when banks can’t make money that impairs liquidity creation so we need to monitor those markets. Of course, the opposite is also true. Central banks help create the liquidity conditions for bull markets to prosper and falling Energy prices improve industrial profitability. That also leads to an awareness of long-term cycles in the behaviour of crowds.

Liquidity is not enough. You also need a fundamental story or theme to animate investor interest over the span of secular bull markets. Big themes, supported by abundant liquidity are what drives long-term bull markets. That is why we focus on the rise of the global consumer, the accelerating pace of technological innovation and secular bear market in Energy

The evolving path of extraordinary monetary policy, rise of populism and geopolitical rivalry can all be viewed in the historical framework of liquidity and crowd psychology.  



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July 03 2019

Commentary by Eoin Treacy

India's Water Crisis Is Man-Made

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

Climate change activists have long argued that water will be the political flashpoint of the 21st century. Water-stressed India will likely be one of the first places to test that theory. The state of Tamil Nadu complains that it doesn’t receive its fair share of the waters of the Cauvery River; recently, the authority that nominally manages the river accused the government of neighboring Karnataka of holding onto water that it should have allowed to flow down to the Cauvery delta.


Things might get even testier up north, where more than a billion people depend upon rivers that rise in the Himalayas. Bangladesh and Pakistan feel that India is being stingy with river water.  Indian strategists constantly worry that China will divert water from the Himalayan rivers that rise in Tibet to feed the thirst cities in its own north.

The floods in Chennai are a warning. As the world warms, the rains on which India depends have become erratic: They frequently fail to arrive on time, and they fall in a more disparate and unpredictable pattern. The country can no longer afford to waste its dwindling resources.

A rapidly urbanizing and developing India needs to drought- proof its cities and rationalize its farming. Water-harvesting must be a priority, alongside mechanisms for groundwater replenishment. As it is, every summer is hotter and less bearable. If Indians run short of water as well, one of the world’s most populous nations could well become unlivable

Eoin Treacy's view -

India’s population is likely to exceed China’s sometime in the middle of the 2020s and peak around 1.6 billion sometime in the middle of the century. That’s a lot of people in a country that already seems crowded.

Generally speaking, water shortages are usually more about mismanagement of resources than an absolute lack of the precious commodity. There are exceptions of course but when rains fall every year the question is less about quantity and more about the quality of governance. In just the same way countries need clear national Energy, commercial, military and political action plans, national water managements plans are also necessary for the long-term welfare of populations.



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June 24 2019

Commentary by Eoin Treacy

The Future of Hydrogen

This report from EIA may be of interest to subscribers. Here is a section

The time is right to tap into hydrogen’s potential to play a key role in a clean, secure and affordable Energy future. At the request of the government of Japan under its G20 presidency, the International Energy Agency (IEA) has produced this landmark report to analyse the current state of play for hydrogen and to offer guidance on its future development. The report finds that clean hydrogen is currently enjoying unprecedented political and business momentum, with the number of policies and projects around the world expanding rapidly. It concludes that now is the time to scale up technologies and bring down costs to allow hydrogen to become widely used. The pragmatic and actionable recommendations to governments and industry that are provided will make it possible to take full advantage of this increasing momentum.

Hydrogen can help tackle various critical Energy challenges. It offers ways to decarbonise a range of sectors – including long-haul transport, chemicals, and iron and steel – where it is proving difficult to meaningfully reduce emissions. It can also help improve air quality and strengthen Energy security. Despite very ambitious international climate goals, global Energy-related CO2 emissions reached an all-time high in 2018. Outdoor air pollution also remains a pressing problem, with around 3 million people dying prematurely each year.

Hydrogen is versatile. Technologies already available today enable hydrogen to produce, store, move and use Energy in different ways. A wide variety of fuels are able to produce hydrogen, including renewables, nuclear, natural gas, coal and oil. It can be transported as a gas by pipelines or in liquid form by ships, much like liquefied natural gas (LNG). It can be transformed into electricity and methane to power homes and feed industry, and into fuels for cars, trucks, ships and planes.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The dramatic decline in natural gas prices and the abundant quantities being produced and in reserve mean that it is inevitable that new sources of demand will appear to take advantage. Since natural gas is one of the primary sources of hydrogen, it makes sense to promote fuel cell vehicles or range extenders for electric vehicles. How long it will take for this evolution to have an effect on the market is questionable, but it will probably be the catalytic event necessary to boost prices out of the long-term base. 



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June 21 2019

Commentary by Eoin Treacy

Maldives Holidays and SUVs Are Badges of Shame Now: Chris Bryant

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

The windshields of large cars parked in my Berlin neighborhood were plastered this week with angry
messages on lurid orange stickers. The owners were told that: “Driving an SUV causes serious climate damage,” “SUVs harm your unborn child,” and “Driving an SUV causes impotence.” That last one may have been a joke.

Sports utility vehicles have long been hated by the more civic-minded among us. They tend to consume more fuel, spew out more pollution and take up more parking space. It’s been suggested that their size and weight are also partly to blame for the rising number of pedestrian road deaths.

Eoin Treacy's view -

Angela Merkel has been Germany’s Chancellor for longer than anyone before her and her chosen successor has been deemed no longer fit for purpose. That leaves the competition to replace her wide open and it is increasingly likely that the next government will be heavily dominated by the Green Party. This will represent the latest iteration of the populist wave which in this case will see leftwing populists gain sway over a major economy.



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June 19 2019

Commentary by Eoin Treacy

Musings from the Oil Patch June 18th 2019

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here Is a section on the commodity/S&P500 ratio:

When we contemplate the market’s assessment of commodities versus stocks, we find the former, which includes oil and gas, to be at the lowest valuation point in at least 50 years.  Does this mean that the commodity market it being disrupted?  Peak valuation points occurred in 1973-74, 1990 and 2008.  Each peak was associated with spikes in oil prices caused by geopolitical events such as the Arab Oil Embargo, the First Gulf War and the Global Financial Crisis, which happened as oil prices traded in excess of $100 per barrel.  Likewise, each low has been associated with low oil prices – either absolute lows, or lows below more recent oil price ranges.  

With respect to the low points in the valuation of commodities versus stocks, the prior two lows were marked by excess stock market speculation about super-growth stock future earnings.  The 1998-99  Dot.com Bubble, which saw companies brought public with barely any revenues and no earnings, but lots of “eyeballs” on web sites or clicks on shopping sites, happened to also be associated with oil prices falling to $11 per barrel as the Asian currency crisis unfolded and a brief global recession occurred.  The 1970-73 low was marked by the market bubble created by the Nifty-Fifty growth stocks, as price-to-earnings ratios for these 50 super-growth companies soared to ratios in excess of 50 times next year estimates for earnings per share.  Of course, two Energy service companies – Schlumberger Ltd. (SLB-NYSE) and Halliburton Companies, Inc. (HAL-NYSE) – were part of this Nifty-Fifty stock group.  Crude oil prices at that point were in the $3 per barrel range, and there was a battle brewing between the seven largest global oil companies that ruled the international oil business and the Organization of Petroleum Exporting Countries over the value of a barrel of oil for tax and royalty calculations.  That tax battle lit the fuse that exploded after the Yom Kippur War involving Israel and Egypt in 1973, leading to the Arab Oil Embargo and the explosion in global oil prices.  

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

This ratio has been doing the rounds of pundit commentary for the last couple of years because commodities are trading at a such a record low level relative to stocks. Jeff Gundlach in particular has been predicting a resurgence in commodity prices because of their relative discount to stocks and one of the reasons private equity has been so interested in the Energy space is because of the relative discount to equities on offer, coupled with the prolific production profiles (and early payback) of unconventional wells.



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June 19 2019

Commentary by Eoin Treacy

Email of the day on gold in other currencies and stock market/commodity ratios:

I am enjoying the commentary as usual. 

I had two questions for which I would be grateful for your opinion:

I don't understand why gold should be priced differently in different currencies. One would have thought that the market would arbitrage out the differences. 

The second one is more general and applies to looking at long term trends such as that for oil versus the stock market. Could it not be argued that technology changes such as the advent of green Energy or electric cars or indeed new modes of producing oil (fracking, oil sands etc) render these charts ineffective as predictors of future price action?

I thank you and look forward to hearing from you in due course. 

Eoin Treacy's view -

Thank you for these questions which I’m sure will be of interest to other subscribers. Gold is a commodity and subject to supply and demand fundamentals just like everything else but it is also a monetary metal. That means it tends to trade more like a currency than a commodity.



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June 13 2019

Commentary by Eoin Treacy

Email of the day - on the USA's oil advantage:

Quick thought, following your comment on America's oil glut, and Morgan Stanley's report you highlighted.

I have been watching the difference in price between the WTI and Brent Crude for a long time now. The difference seems to vary between 10 and almost 20% depending on the day, with WTI obviously being the cheaper. Is it too SIMPLISTIC to say?

1) that US factories, offices, homes etc enjoy an enormous advantage over their global competitors with Energy costs being so much cheaper, not forgetting it already enjoys a significant tax advantage over many as well.

2) when the US does become a significant oil exporter, it can make a lot of profit, even by offering only minor discounts to the Brent price to attract business. Possibly more profit than from its LNG exports.

Eoin Treacy's view -

Thank you for highlighting these points. I’ve always been a fan of Ockham’s Razor. There is no need to get over complicated. The USA has a massive advantage in terms of its oil and gas production capacity. That is reshaping global geopolitics, it will have a meaningful effect on the balance of payments and it has already had a meaningful effect on the chemical industry because of reduced input costs.  one.



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June 12 2019

Commentary by Eoin Treacy

What if the US and China Reach a Trade Deal?

Thanks to subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

May 31 2019

Commentary by Eoin Treacy

Energy Prices Crash in Europe as Old and New Fuels Vie for Share

This article by Mathew Carr, Jeremy Hodges and Eddie van der Walt for Bloomberg may be of interest to subscribers. Here is a section:

“LNG is now so cheap it’s competing with coal almost,” said Caroline Bain, chief commodities economist at Capital Economics Ltd., who sees slowing demand for coal. “It’s not actually falling off a cliff. We think it’s going to be a long slow death rather than tomorrow.”

The price slump is one sign of Europe’s determination to phase out coal as it seeks to slash climate warming emissions without holding back the economy. Renewables are also in the fight for market share, with onshore wind and solar power “fast becoming cheaper than average power prices in Europe’s largest markets,” according to a research by BloombergNEF.

Front-month Dutch gas prices, a benchmark for Europe, plunged 50% this year as record volumes of LNG landed in northwest Europe. Coal for next year has dropped 30% after a mild winter left inventories at European ports unusually high.

“There’s too much coal,” said Hans Gunnar Navik, a senior analyst at StormGeo AS. As “natural gas out-competes coal,” renewable generation is replacing both of them, he said.

Eoin Treacy's view -

In the pricing of commodities supply is much more volatile than demand. Generally, bull markets don’t end because the market runs out of buyers but because new sources of supply appear to satiate demand. That is why we define secular bull markets in commodities in terms of a step up in the marginal cost of production.



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May 21 2019

Commentary by Eoin Treacy

Email of the day - on battery powered flight:

I loved Lex’s tongue-in-cheek view of lithium-on batteries. A useful Energy density chart that shows where lithium-ion batteries are - roughly in between lead batteries and liquid hydrogen.

Eoin Treacy's view -

Thank you for this story and I also enjoyed the tongue and cheek nature of the Energy density comparisons. I suppose it is no longer politically correct to point out that whale blubber has about 87% the specific density of kerosene which is better than lithium ion batteries. If that could be artificially replicated, we really could see whales fly.



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May 09 2019

Commentary by Eoin Treacy

Credit Market Shows Signs of Indigestion as Junk Tumbles

This note by Sebastian Boyd for Bloomberg may be of interest to subscribers. Here is a section:

It looks like this week's jumbo bond issues have provoked some indigestion after all. Older IBM bonds are widening as much as 25 bps, according to BVAL prices. Bristol-Myers Squibb is also underperforming other similarly rated debt. In both cases, it's the longer-dated debt and the 10-year area that seems to be suffering most. Meanwhile, the rest of investment grade is wider by a couple of basis points, but junk bonds are tumbling. Tuesday was the worst day since March, but it looks like today will be even worse. Week-to-date, the weakest sectors are materials and Energy, but today it's health care.

Not all of this is related to the macro headlines. CommScope bonds are 43 bps wider on average today after results missed the lowest estimate. Chaparral Energy's bonds are falling after sales missed. But the impressive breadth suggests its more than just some disappointing quarterly numbers: 92% of the 413 movers in the index are wider today.

Eoin Treacy's view -

High yield bonds tend to trade like equity and they have shared the impressive rally that began in December. With a pause underway in the stock market, a similar condition is affecting high yield bonds. One look at the chart will tell us this is an exaggerated headline.



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April 29 2019

Commentary by Eoin Treacy

Perspectives for the Clean Energy Transition

This report from the International Energy Agency may be of interest to subscribers. Here is a section:

In contrast to current trends, the Faster Transition Scenario sets out a vision for an extremely ambitious transformation of the Energy sector. Energy-related emissions peak around 2020 and drop 75% to around 10 gigatonnes of CO2 (GtCO2) per year by 2050. The carbon intensity of the power sector falls by more than 90% and the end-use sectors see a 65% drop, thanks to Energy efficiency, uptake of renewable Energy technologies and shifts to low-carbon electricity.

Electrification plays a major role in the transition, combined with clean power generation. Electricity’s share in final Energy reaches about 35% by 2050, compared to less than 20% today. That growth is mainly due to adoption of heat pumps in buildings and industry, as well as a swift evolution in transport. Efficiency improvements keep electricity demand for other end uses, such as lighting and cooling, relatively stable, while access to electricity improves worldwide.

Eoin Treacy's view -

One of the biggest challenges facing the environment is the emotionality of the debate. It is almost impossible to discuss objective facts versus subjective opinion. Until this century there was no record of a hurricane in the South Atlantic, but now there have been three. Baobab trees that stood for thousands of years in Africa are dying and coral bleaching is taking over an increasingly large percentage of the world’s reefs. These are facts that point toward a changing climate.



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April 18 2019

Commentary by Eoin Treacy

On Target

Thanks to Martin Spring for this edition of his ever-interesting letter. Here is a section on the coal market which I found particularly illuminating: 

While climate-change activists make a lot of fuss about the US, where emission of greenhouse gases has been in decline, they aren’t demonstrating loudly about China -- which attacks developed countries for not doing enough, while itself doing most to worsen it,

The New York Times reports that China, the world’s leading emitter of greenhouse gases from coal, now admits it’s burning up to 17 per cent more coal than its government previously claimed when it signed up for the Paris accord.

And it’s making things worse. Across China the government is building a fleet of new coal-fired stations with 259 gigawatts of capacity, while outside the country it’s financing even more new coal plants, providing $36 billion for 399 gigawatts.

“Chinese bankers and project planners like coal-backed projects because they are cheap,” says the Energy consultancy IEEFA. “While they are restricted by Chinese pollution and emissions targets at home, they are free to fund coal-backed projects abroad.”

Eoin Treacy's view -

The standard of living attained by China’s middle class has resulted in a clear call for cleaner air and the government is intent on showing progress. However, there is no getting around the fact that coal fired power stations are cheap to build and run and are very reliable. Moreover, China has plenty of experience building them and there is a ready market for coal in emerging markets, not least in India and increasingly Africa.



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April 18 2019

Commentary by Eoin Treacy

The World's Biggest Electric Vehicle Company Looks Nothing Like Tesla

This article by Matthew Campbell and Ying Tian for Bloomberg may be of interest to subscribers. Here is a section:

In automotive circles, Wang’s predictions of the combustion engine’s imminent demise often meet profound skepticism. Chinese sales of new-Energy vehicles, a category comprising plug-in hybrids, pure EVs, and fuel-cell cars, more than tripled from 2015 to 2018, but they still account for only 4.5 percent of the total. The doubters, he argues, underestimate the country’s capacity for reinvention. “The Chinese way is to replace everything at once,” Wang says. “When we switched from black-and-white to color TVs, it took three years. In the West it was 10. Going from feature phones to smartphones took about one year. In Europe it was three. Cars will be the same. It will go very fast.”

Eoin Treacy's view -

China is a massive oil and gas importer but has abundant coal reserves. It therefore has a clear incentive to use less gasoline and natural gas and more coal. Electric vehicles fit squarely into that equation. Since coal is massively polluting nuclear Energy is another growth industry in China.




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April 12 2019

Commentary by Eoin Treacy

Chevron Buys Anadarko in $33 Billion Bet on Shale Oil, LNG

This article by By Kimberly Yuen, Javier Blas and Kelly Gilblom for Bloomberg may be of interest to subscribers. Here is a section:

"Chevron’s deal for Anadarko escalates the race with Exxon Mobil for the Permian and delivery of synergies and efficiencies will be critical in narrowing or overtaking its peer’s returns." --Fernando Valle, industry analyst, and Jonathan Mardini, associate analyst

The deal may put pressure on Shell to seek assets in the Permian, where the Anglo-Dutch company has said it wants to grow. Oil executives and bankers had in the past speculated that Shell may buy Anadarko because they have adjacent acreage. Shell has in the past several months held talks with Endeavor Energy Resources LP, the largest privately-owned company in the Permian that bankers say might be valued at $10 billion to $15 billion.

Eoin Treacy's view -

Unconventional oil and gas production is more expensive than conventional supply but there is a lot more of it. The challenge for producers is to compress the cost of production as much as possible so that they can be competitive when prices occasionally decline. That is what is driving the desire to get economies of scale through acquisitions.

 



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April 04 2019

Commentary by Eoin Treacy

Musings from the Oil Patch April 3rd 2019

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on coal to gas power plant conversions:

With an investment of roughly 50% of the value of an operating coalfired power plant, the benefits of converting to natural gas for fuel can make economic sense, based on our estimates.  However, as every technical article we read discussing fuel conversions pointed out, each project is different and requires an extensive analysis before reaching a conclusion.  We will not bore you with the extended lists of issues to be considered.  Natural gas makes for a cleaner environment and operating facility, and also requires less ongoing maintenance.  Gas plants are also less labor intensive, which may become a greater consideration in the future with a tighter labor market and an aging labor force.  

Given the amount of natural gas resources in the world, it would be nice to say that this conversion option is a panacea for the expensive decarbonization efforts currently being proposed.  A global coal-to-gas conversion effort is not likely, even though we suspect many more switches could (may) be justified.  As the economics of the Joliet conversion highlights, the plant moved from a baseload to peaking status, which could be justified by current Energy economics.  We doubt all regions have similar economics that facilitate such a move.  The world will continue to remain dependent on an “all of the above” Energy slate for ensuring everyone has access to cost-effective electricity.  

Eoin Treacy's view -

Natural gas prices went negative in Texas over the last couple of days, as a result of a surge in supply from the Permian. A couple of years ago there were negative electricity prices in the same region as a result of all the wind power. These market anomalies help to highlight just how prolific production can be. Meanwhile US oil production is in excess of 12 million barrels a day.



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March 27 2019

Commentary by Eoin Treacy

Aramco to Buy $69 Billion Sabic Stake in Record Mideast Deal

This article by Matthew Martin, Dinesh Nair, and Archana Narayanan for Bloomberg may be of interest to subscribers. Here it is in full:

Saudi Aramco, the world’s biggest oil producer, will buy a majority stake in local chemical giant Sabic from the kingdom’s sovereign wealth fund for $69.1 billion.

The Middle East’s biggest deal will transfer a big slug of cash into the Public Investment Fund, helping Crown Prince Mohammed bin Salman finance his economic agenda. It also weights Aramco away from its core oil production business, pumping 10 percent of the world’s crude, and more toward the production of fuels and chemicals.

“This transaction is a major step in accelerating Saudi Aramco’s transformative downstream growth strategy of integrated refining and petrochemicals," Amin Nasser, chief executive officer of Aramco, said in the statement.

The deal, first mooted last year, values the Public Investment Fund’s 70 percent stake at 123.4 riyals per share according to a statement. The remaining shares, traded on the Saudi stock market, aren’t part of the transaction.

Eoin Treacy's view -

This merger is a clear signal of Saudi Arabia’s long-term intentions. They know as well as any of us that the USA is going to become a competitor for established Energy markets which means they have to produce more value-added products in order to compete with higher cost producers. That is particularly bad news for Canada and Brazil where supply bottlenecks, grades and deep water all represent challenges that are only likely to be overcome by higher prices.



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March 20 2019

Commentary by Eoin Treacy

Video commentary for March 20th 2019

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: Fed confirms dovish tilt. Dollar pulls back which boosts the outlook for Europe, commodity producers, commodities, Energy and gold. US Treasury yields compress, taking the conclusion that the next move in interest rates will be downwards. 



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March 12 2019

Commentary by Eoin Treacy

Oil 2019: Analysis and forecast to 2024

This summary report from IEA may be of interest to subscribers. Here is a section:

The United States leads global supply growth The United States continues to dominate supply growth in the medium term. Following the unprecedented expansion seen in 2018, when total liquids production increased by a record 2.2 million barrels per day (mb/d), the United States will account for 70% of the increase in global production capacity until 2024, adding a total of 4 mb/d.

 

Important contributions will also come from other non-OPEC countries, including Brazil, Canada, a resurgent Norway, and newcomer Guyana, which together add another 2.6 mb/d in the next five years. In total, non-OPEC production is set to increase by 6.1 mb/d through to 2024.

 

Among OPEC countries, only Iraq and the United Arab Emirates have significant plans to increase capacity. These gains have to offset steep losses from Iran and Venezuela, which are subject to sanctions and political or economic turmoil. As a result, OPEC’s effective production capacity falls by 0.4 mb/d by 2024.

The United States is also turning into a major player in the global oil trade
As a result of its strong oil production growth, the United States will become a net oil exporter in 2021, as its crude and products exports exceed its imports. Towards the end of forecast, US gross exports will reach 9 mb/d, overtaking Russia and catching up on Saudi Arabia. The transformation of the United States into a major exporter is another consequence of its shale revolution.

Greater US exports to global markets strengthen oil security around the world. Buyers of crude oil, particularly in Asia, where demand is growing fastest, have a wider choice of suppliers. This gives them more operational and trading flexibility, reducing their reliance on traditional, long term supply contracts.

Global trade is not simply a story for the United States. The second-largest increase in crude exports comes from Brazil, which ships an extra 0.8 mb/d of oil by 2024. Following Brazil, Norway is enjoying a renaissance and will overtake Kazakhstan and Kuwait in the next five years a remarkable achievement.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

“Unconventional oil and gas are gamechangers for the Energy sector” has been a refrain at this service for more than a decade and the full extent of that change is now becoming clear. When we first talked about the USA becoming Energy independent it sounded to many like a fanciful view but the country is already an exporter and will reverse decades of imports in the coming couple of years.



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March 07 2019

Commentary by Eoin Treacy

The Next Industrial Revolution: Computational Biology & Bioplatforms

Thanks to a subscriber for this article by James Currier at NFX, a private equity company focusing on biotech. Here is a section:

It bears mentioning that computational biology is objectively important. We’re talking about life itself: human DNA; the food we eat; infectious diseases; the evolution of species, and so on. "Biology is the only technology that can directly address fundamental problems facing the world like planetary and human health," says Arvind Gupta, Managing director & Founder of IndieBio and partner at SOSV. "These are world scale problems looking for technological solutions that will be developed in the next 20 years and those that do stand to create trillions of dollars of value". Rather than manufacturing tools for us to use, like cars or software, we’re now beginning to manufacture life itself.

Jennifer Doudna, co-inventor of CRISPR and co-Founder of Mammoth Biosciences(an NFX portfolio company) told us, "Scientists have spent centuries carefully studying how living things work. We have now entered into a new era of biology where it is possible to move beyond observation and towards rewriting the underlying code of living things, creating countless opportunities to improve the world we live in, from diagnosing and treating human disease to restoring the environment around us."

Further, something that has become clearer to us at NFX in the last three years: computational biology touches every industry. There are at least 90 companies worth over $20BN that are eyeing the CompBio space: agriculture; industrial; pharma; Energy companies; plus all the big tech companies, like AWS, Google, and Microsoft. (Microsoft, for example, DNA that it hopes can replace cumbersome tape drives).

All of these industries are looking deeper at computational biology, trying to see how it is going to impact them.

Eoin Treacy's view -

Healthcare represents virgin territory for big data because it throws off so much data. The human brain has yet to be mapped, and one of the primary reasons is because the quantity of data required to be processed is in the order of petaflops. Colloquially, that is the computing capacity of all of Google’s programming power.



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February 22 2019

Commentary by Eoin Treacy

U.S. Bets on China's Special Envoy in Trade Talks

This article by Lingling Wei and Bob Davis for the Wall Street journal may be of interest to subscribers. Here is a section:

While Chinese negotiators offered to stop providing government subsidies that distort prices and put Western rivals at a disadvantage, they haven’t so far produced a list of subsidies they would be willing to eliminate, the people said.

Instead, the Chinese side so far has focused its offer on greater purchases of U.S. agricultural and Energy products such as soybeans, crude oil and liquefied natural gas, they said.

Whatever deal is struck, the U.S. is also seeking guarantees it will be enforced and a means to resolve disputes.

“It’s one thing to write something on a piece of paper,” said Secretary of State Mike Pompeo on Fox Business Network on Thursday. “It’s another thing to have enforcement mechanisms. And I know our trade team is hard at work, making sure that the American people get that.”

Eoin Treacy's view -

How likely is it that the USA and China will reach a trade agreement? I think it comes down to two factors. What is it that the USA wants from a deal and what is China willing to give up?



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February 21 2019

Commentary by Eoin Treacy

Sustainability - Energy & Power Technologies

Thanks to a subscriber for this report from Canaccord Genuity which may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

There is plenty of evidence of renewed interest in the commodity sector this year and most particularly because of the perception that China is on the cusp of renewing stimulative measures following at least two years of combating leverage in the shadow banking sector.

The significant dip in the Baltic Dry Index over the last few months is a testament to the slowdown in global economic activity and is further evidence of the need for stimulative measures lest China experience a recession.



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February 12 2019

Commentary by Eoin Treacy

The Weak Spot in the Oil Market That Traders Are Missing

This article by Stephanie Ying for the Wall Street Journal may be of interest to subscribers. Here is a section:

Faltering demand in Germany has preceded weak industrial data, which raised fears of a continued slowdown in Europe’s largest economy. Industrial production dropped for the fourth straight month in December, and Germany’s economy contracted in the third quarter of 2018 for the first time since 2015.

Standard Chartered analysts warn that the weakness could spread to other parts of Europe, further undermining demand for oil.

German demand makes up a minor fraction of the world’s oil consumption; the country was the 10th largest oil consumer in 2016, accounting for 2% of the global total, according to the U.S. Energy Information Administration. Since China made up 13% of oil consumption as of 2016, a drop in Chinese demand growth would likely have a comparatively larger impact.

Additionally, signs of slowing demand in other parts of Europe haven’t materialized, Mr. Horsnell noted.

Eoin Treacy's view -

Saudi Arabia continues to cut back on supply which buoyed the market today. However, the reasons for this move are not only to support prices but also in response to the slowdown in the global economy which is being led by Europe and China.



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