In an economy that produces somewhere in the region of $80 trillion of gross domestic product a year, oil and gas drilling make up somewhere between 2% and 3% of the global economy.
Technologies thought unthinkable only a few years ago have revolutionised the way business go about finding their resources and the attitudes to the future of the oil business.
Here, we look at some of the trends and challenges currently circulating in the industry.
The Trends
The ‘Smart-Oilfield’
The oil industry is currently enjoying significant investment to create digitalised oilfields that offer integrated data communication across wellheads, pipelines and mechanical systems.
This collective data produces real-time analytics for data centres that can regulate oil-flows to optimise production.
Experts believe this extra intelligence has the potential to increase the net value of oil and gas assets by an eye-watering 25%.
Technology Striking Rich
Within the last decade, worry around the quantity of oil left remaining dominated the industry. Thanks to the technological advances of the last five or so years, oil companies have discovered resources so significant that these once very real concerns are now a distant memory.
4D seismic technology has created huge benefits in reservoir monitoring and is now used universally to maximise return on investment.
The development of the Subsea oilfields has reduced both infrastructure and production costs, with deeper exploration providing greater profits and risks in equal measure.
While controversial in its application, fracking of shale basins has taken US crude oil output to its highest peak since 1989, and overseas developments are in process and set to have a significant impact on the industry.
Finally, advances in oil recovery technology offer the potential to make enormous efficiency improvements. As it stands, only around one third of oil is recovered in drilling processes, meaning there are huge financial gains to be had through improving the infrastructure.
Even with some of these processes still in their infancy, the tech-revolution is offering the potential for unfathomable gains.
The Challenges
The Competition for Talent
As with any industry, the competition for top talent is fierce, but with an aging and shrinking talent pool, the oil industry’s big guns are having to invest more than ever into attracting the best people to their business.
Adding to the above trends, this means the oil industry is a good one to be in, with notable increases in base salaries alongside additional incentives and perks in recent years.
However, with specialised experience lying predominantly with the older age groups, oil companies face a key challenge in recruiting and training the next generation, not to mention matching the staffing demands of a starved sector.
The Obituary of Oil?
Despite new found and untapped resources, there are several challenges facing the oil industry that collectively pose the question: is the end of the industry nigh?
With an ever-growing market in sustainable energy, continuing price volatility and inflationary costs on wages and raw materials, oil companies face serious challenges in remaining competitively priced and diversifying their services to keep going in fluctuating market.
Even with the rise of green technologies like the electric car market, fossil fuels still have a major part to play in the next few decades of global industry. It is, however, simply a case of proving that to investors who have an eye on the future.
In light of Donald Trump’s dramatic withdrawal from the Iran Nuclear Deal, Katina Hristova examines how the pullout can affect the global economy.
As with anything that he isn’t fond of, US President Donald Trump hasn’t been hiding his feelings towards the Joint Comprehensive Plan of Action between Iran and the five permanent members of The United Nations Security Council plus Germany. Pulling the US out of the agreement on the nuclear programme of Iran, which was signed during Obama's time in office, is something that Trump has been threatening to do since his 2016 election campaign. And he’s only gone and done it. Earlier this month, he announced America’s immediate withdrawal, saying that the US will reimpose sweeping sanctions on Iran’s oil sector and that “Any nation that helps Iran in its quest for nuclear weapons could also be strongly sanctioned by the United States”. And as if this isn’t alarming enough, President Trump has also said that the US will require companies to ‘wind down’ existing contracts with Iran, which currently ranks second in the world in natural gas reserves and fourth in proven crude oil reserve, in either 90 days or 180 days. This would hinder new contracts with Iran, as well as any business operations in the country.
Since Washington’s announcement, signatories of the Iran Nuclear Deal, still committed to the agreement, have embarked on a diplomatic marathon to keep the deal alive. On 25 May, Iran, France, Britain, Germany, China and Russia met in Vienna in a bid to save the agreement.
So how will this hurt the global economy?
Deals worth billions of dollars signed by international companies with Iran are currently hanging by a thread. The main concern on a global scale is that the US’ decision threatens to cut off a proportion of the world’s crude oil supply, which has already resulted in an increase in oil prices, with crude topping $70 a barrel for the first time in four years.
Additionally, European companies like Airbus, Total, Renault and Siemens could face fines if they continue doing business with Iran. Royal Dutch Shell, who is investing in the Iranian energy sector, is potentially one of the biggest companies to be affected by Trump’s withdrawal which could put billions of dollars’ worth of trade in jeopardy. As The Guardian points out: “In December 2016, Royal Dutch Shell signed a provisional agreement to develop the Iranian oil and gas fields in South Azadegan, Yadavaran and Kish. While drilling is still a long way off, sanctions are likely to put any preparations already being made on ice.”
French company Total, who’s involved in developing the South Pars field, the world’s largest gas field in Iran, is in a similar situation.
Airbus and Boeing, two of the key players in the international aviation industry, have signed contracts worth $39 billion to sell aircraft to Iran. As The Guardian reports, the most significant deal is an agreement by IranAir to buy 100 aircraft from Airbus.
A spokesman from Airbus said that jobs would not be affected. “Our [order] backlog stands at more than 7,100 aircraft, this translates into some nine years of production at current rates. We’re carefully analysing the announcement and will be evaluating next steps consistent with our internal policies and in full compliance with sanctions and export control regulations. This will take some time”. Rolls Royce is also expected to be indirectly affected if Airbus loses its IranAir order, as the company is the key engines provider to many of those aircraft models.
Another European company that will be hurt by the sanctions announcement is French Renault and PSA, who owns Peugeot, Citroën and Vauxhall. When sanctions were lifted back in 2016, Renault signed a joint venture agreement with the Industrial Development & Renovation Organization of Iran (IDRO) and local vehicle importer Parto Negin Naseh, worth $778 million, to make up to 150,000 cars in Iran every year. This is one of the largest non-oil deals in Iran since sanctions on the country were lifted. Last year, local firm Iran Khodro also signed a deal with the trucks division of Mercedes-Benz, with car production scheduled for this year.
Iranian firm HiWEB has been working alongside Vodafone to modernise the country’s internet infrastructure, but it looks like the partnership will have to be reconsidered.
The consequences
The White House and President Trump appear aware of the danger that a rise in oil prices on an international level pose to the economic growth of the Trump era, however, they also seem ready to embrace the economic and geopolitical challenges that are to follow. Although the consequences of US’ Iran Deal pullout are not perfectly clear in the short term, they will undoubtedly become more visible as sanctions take effect. The deal has its flaws, however, completely withdrawing from it and threatening the US’ closest allies can only compound those issues and create new ones. It is hard to predict what will unfold from here and where Trump’s strategy will take us. The one thing that is certain though is that the world doesn’t need more hostility.
Investors around the world choose commodities as a means of either advancing their trading strategies or hedging against investments in stocks, forex or cryptocurrencies. But which commodities are they choosing?
In this article Finance Monthly discusses five of the best, looking at the current market conditions and how things might change in the near future. But first we’ll discuss why you might want to trade commodities.
Why Choose Commodities?
Commodities usually reflect trends in the world at large, and so are a good vehicle for those with their finger on the pulse of international markets and political conditions. They are also generally inversely correlated to the stocks and shares market, making them a useful means of protection from risk in your other investments.
You could even use them to hedge against forex trades, provided you use a trading platform that gives you fast and reliable access to as many markets as possible.
And when it comes to choosing commodities to trade, these are the five that we believe you should know about in 2018:
-
Brent Crude
With tension continuing across the oil-producing world and growth predicated in emerging markets, this commodity is a good choice for the rest of this year. In fact, the Goldman Sachs Group Inc. has given Brent Crude an ‘overweight’ recommendation for the current period, meaning that they believe this is a commodity worth adding to a trading portfolio.
-
Natural Gas
High output in countries such as the US and Russia has continued to keep prices lower than they should be for natural gas, but this could change – especially towards the tail end of the year when the Northern Hemisphere moves into winter and demand increases. In fact, demand for natural gas is already outstripping supply in China, and this will surely have repercussions on the price of this commodity worldwide.
-
Copper
Disruptions in mining output, coupled with urgent demand from the electric car industry, have caused the prices of copper to soar recently. This trend may not continue with such force, but over the course of 2018 prices are expected to rise 9.7% from 2017 levels. In other words, copper is still a commodity you should definitely know about.
-
Palladium
This commodity is used in vehicle catalytic converters, and so enjoys demand from the automotive industry. As the trend of converting from diesel to unleaded petrol and hybrid electric continues, so too should the price of palladium rise. Palladium has even started to reach the price levels of platinum, giving just some indication of how in demand this commodity is.
-
Zinc
A top performer in 2016 and 2017, this base metal is beset with supply problems which could see it to another strong year in terms of price growth. Another factor is demand from the Chinese market, which looks set to continue its increase for Zinc and similar commodities.
Of course, there are other commodities to watch in 2018, but these five commodities should provide a good starting point for building a strong investment portfolio.
In 2018, we are witnessing the emergence of a new kind of atmosphere in the recovering oil markets. With an impending trade war between two of the world’s biggest economies on the cards, the impact of geopolitical uneasiness has never been greater. Prices have been volatile thanks to swings in oil supply and now geopolitics has created a scenario of uneasiness in one of the economy’s best performing assets.
Even though a sharp 5% rebound last month pacified stakeholders, worry looms that the US’s protectionist trade policies are only pushing China to impose further reciprocative tariffs, fueling a trade war. In addition to this, the US’s role in the Iran nuclear deal and an ever increasing American crude production (over 10 million barrels a day) gives the current market all the characteristics of an imbalance. Then there is the case of OPEC, Russia and other non-OPEC producers that began to cut back production in early 2017 to ease the global glut accumulating since 2014. Where weak compliance in the past marred any significant impact on price, stronger compliance between the cartel this year appears to be bearing fruit with production at its lowest in months, however, growing tensions in the Middle East and a potential global supply-demand deficit could see the price-check contract dissolve earlier than expected.
In the highly volatile oil market, it is difficult to allocate any single catalyst to oil price movements; more often it is many catalysts working together. That said, a weak dollar, followed by geopolitical pressures in Syria, North Korea, Iran, China and an economic crisis in Venezuela, are all surprisingly giving oil the much awaited upward push, with prices peaking to a 3-year high and Brent crude finally breaking the $70 psychological mark. Interestingly, the recent Twitter feud where President Donald Trump warned Russia to prepare for a possible US missile attack on Syria has brought forth the impending reality of potential supply disruptions in the Middle-East, driving the prices to all-time highs. All this happened despite US Government data reports pointing out an unexpected rise in crude stockpiles.
Oil prices have now almost tripled the harrowing 13-year low of $26 in January 2016. Five months before that, prices were around $60. In July 2014, they had been $100, in 2011 they were $113 per barrel for Brent crude. The market dynamics have since evolved enough to cause larger fluctuations in price in the short-term, however, the long term picture is still obscure and it is hard to say if prices will go back over $100 in the coming years, though many analysts hold quite a positive outlook.
With the US oil production set to rise further in the coming months, the current market’s long-term outlook appears well supplied, a fact likely to hinder any further significant price growth of the current rally, however more short-term price spikes are quite possible considering the high probability of military action in Syria.
The key indicators for any commodity market begin at the supply-demand ratio, keeping this in mind, a number of analysts have pointed out that the increase in oil supply from US shale producers has not pushed the global supply-demand balance into surplus as previously expected, hinting at a deficit similar to the one we saw in 2011. As demand has continued to grow steadily and with production cuts undertaken by the largest oil producers in the world, we have slipped into a deficit which could potentially widen.
Even as prices recovered and US shale producers accelerated their production output, in the current
market scenario, it is quite unlikely that this alone will be enough to bring balance to the global market. While some analysts assert that OPEC will likely intervene and increase production to correct the deficit, others have claimed that given the enormous economic growth and increasing demand from large Asian countries like China and India, even OPEC will not be able to satiate demand as their output capacity is simply not enough. This also reflects the intricate position that OPEC is currently in, it could decide to cut outputs or shift towards a higher output position, both of these options carry significant risks. But we already know how important higher oil prices are for OPEC, that despite proxy wars between Saudi-Arabia and Iran in Yemen and Syria - we have strong compliance from OPEC members so far. At the same time, the unrest in the Middle-East is likely to help prices flare up, as evident in the recent spike during unsuccessful missile attacks by Iran-aligned Houthis aimed at Saudi Arabia's oil facilities. The OPEC deal runs until the end of the year and the cartel will meet again in Vienna in June to decide its next course of action.
In the longer term, there are many possibilities and sides to the story, though some stark characteristics can be set aside due to their paramount importance. Geopolitical factors and sudden financial shifts, in my view, play a major disturbance in predicting a linear development of the oil industry. Given the capital-intensive nature of the oil business, any investments in new production capacity or any change in production can take a long time. There are also a certain numbers of inelastic factors, for example capital intensity and the high ratio of fixed to variable costs in all parts of the supply chain. The price inelasticity along with advancements in technology have long been cited as the leading factors for the oil industry’s inability to conjure self-adjustment mechanism.
Keeping this in mind, we can observe that while OPEC anticipates global reserves to drop further with more output from rivals while expecting even higher global demand. The International Energy Agency (IEA) claimed that by 2023 the US will become self-sufficient due to scaled up shale production, potentially becoming one of the world’s top oil producers. They also claim that demand for crude oil from OPEC will drop below current production levels within a year or two.
Which one of them is right remains to be seen but it is quite certain that the next few semesters will be crucial for the oil market which currently appears to have all the symptoms of steady turbulence.
About Guild Capital Partners Ltd.
Guild Capital Partners Ltd., is a boutique financial services firm headquartered in Mayfair, London specialising in debt restructuring and privatisation solutions.
Founded in 2014 by financial expert and entrepreneur Marco Quaranta, the firm is led by an experienced team of senior professionals noted for their investment acumen, financial services expertise, and ability to execute complex transactions in the dynamic and highly regulated financial services sector.
Operating through decades of experience, the team specialises in evaluating solutions for Mergers & Acquisition deals, navigating regulatory scenarios and partnering with banks and other financial institutions to help build stronger and more valuable enterprises for their clients.
From the current situation in the US to oil and gambling stocks, Rebecca O’Keeffe, Head of Investment at interactive investor, shares some thoughts on this week’s news.
The huge importance of politics to equity markets might have led one to conclude that the US shutdown would be a negative factor for markets, but the bullet-proof nature of current markets, combined with limited economic impact on stocks that a shutdown delivers, has seen global markets shrug off any major concerns. The last US government shutdown in 2013 lasted sixteen days, during which the S&P 500 rallied 3.1% and the two prior shutdowns to that in 1996 and 1995 also resulted in gains for equity markets, so there is certainly precedent for investors to ignore these events. It is only if a protracted shutdown starts to impact consumer confidence and spending that investors are likely to sit up and take notice.
Gambling stocks have tumbled in early trade, after the weekend press suggested that the current government consultation might cut the fixed odds betting limit to just £2. Gambling companies have made hundreds of millions of pounds a year from fixed odds betting terminals and were hoping that the minimum stake would be towards the middle of the £2 and £50 consultation range. Although the consultation does not end until tomorrow, the suggestion that the response to the survey has been overwhelmingly in support of a cut to the minimum £2 means that this is indeed a significant threat to bookmakers.
In Germany, it looks like the stalemate that has afflicted German politics since September may finally be reaching a resolution, after the SPD voted to engage in coalition talks with Angela Merkel and her party. This vote will hopefully ensure that a repeat election can be avoided and should allow Chancellor Merkel to retain her place as a key lynchpin of the European Union and a major player in any Brexit talks.
Oil prices are on the rise this morning, as Opec and Russia have signalled their intent to co-operate on supply beyond the current deal terms. However, OPEC and Russia are just one half of the supply story, as producers in the US, Canada and Brazil are all expected to ramp up output in response to higher oil prices. With these new dynamics in the oil market, the possibility of higher supply is a major downside risk for the oil price.
Below Kathleen Brook, Research Director at City Index, talks Finance Monthly through the current markets environment, referencing US stock, bonds, tech, crypto and oil.
As we reach the middle of the week, there are a few signs that stocks could have a harder climb from here. After reaching record highs earlier on Tuesday, the S&P 500 closed the day lower. Advancers vs. decliners were pretty even on the day, with 243 advancers compared with 255 declining stocks, the biggest loser was Tripadvisor, which sunk on the back of growth concerns. The most striking thing about the US stock market today is not the individual movers, but instead the lead indicators and the bond market.
Lead indicators head lower
The two classic lead indicators for US stocks include the Dow Jones Transport Average and the small cap Russell 2000. The Dow Jones Transport index peaked on 13th October and has been falling since then, it fell through its 50-day moving average on Tuesday, which is a bearish sign and could signal further losses ahead. The decline in the Russell 2000 hasn’t been as steep, but it peaked on October 5th and sold off sharply on Tuesday as investors seemed to rush to ditch small cap stocks after yet another record high was reached.
These two lead indicators have not been able to muster enough strength to recoup recent losses, which could be a sign of investor fatigue further down the pipeline. If the selloff in these two indices continues then it is hard to see how the blue chip indices can sustain momentum as we move through November.
The bond market: a health check for stocks
The other warning sign could be coming from the 10-year bond yield. It has fallen more than 15 basis points since peaking towards the end of October. This is in contrast with the 2-year yield, which has been climbing over the same period and is up some 5 basis ponts so far this month. This has pushed the 2-10-year yield curve up to its highest level since 2007, which is typical in a market where the Fed has embarked on a rate hiking cycle, even this mild one that Janet Yellen started in 2015. Rising yields tends to mean woe for stocks, hence investors may now try to book profit instead of instigating fresh long positions as we move to the end of the year.
However, we believe that it is not as simple as rising yields spooking the market. The decline in the 10-year yield could also be relevant for stock investors, especially if it is a sign that the bond market has lowered its expectations for Trump’s tax plan and thus reduced long term growth expectations. If 10-year yields keep falling – and they are testing key support at 2.31% which is the 200-day sma – then it is hard to see how the stock market won’t follow suit and sell off on the back of tax reform stalemate in Congress. Thus, the Trump tax premium could come and bite markets on the proverbial.
Is tech the canary in the coalmine?
Tech is worth watching at this junction after massive gains so far this year. Already bond prices have started to fall for some of the major tech players including Apple, as more supply has weighed on bond yields. Is this a sign that the market could, finally, be falling out of love with tech?
What can the Vix and Bitcoin tell us about markets?
Before predicting market Armageddon, the Vix still remains below 10. Although it doesn’t usually stay low indefinitely, we want to see it move higher before confirming our fears about global risk appetite. Bitcoin is also worth watching. Before anyone can call it a safe haven we need to see how it performs in a sharp market sell off. So far this week it is down nearly $550, so if you are looking for volatility, bitcoin is the place to find it. It is hard to pinpoint the reason for the decline, maybe the market is getting nervous ahead of the upcoming fork later this month? Or maybe the market sees Bitcoin becoming mass market, both the CME and the CBOE are readying themselves for the arrival of Bitcoin futures, as a threat to its price gains? Who knows, but if traditional stock markets sell off, I will be watching to see how Bitcoin reacts and if it has any traits of a safe haven (recent price performance suggests not.)
What next for the oil price?
This week appears to be oil’s chance to steal the limelight. After surging to a high of $64.65 at one point on Tuesday, Brent crude lost $1 by session close as the market re-assessed the geopolitical risks that have propelled the oil price higher, while the fundamental picture remains unchanged. While we acknowledge that the price of oil cannot simply rise on the back of the Saudi anti-corruption crackdown, we still think that there could be some gas in the tank that could send Brent towards $70 – a key technical level - after all, the sharp increase in the price of Brent crude actually began in early October, well before talk of Opec production cut extensions and Saudi corruption purges.
Ahead today, economic data is thin on the ground, so we expect price action to take centre stage. On Thursday Brexit talks resume, this could lend some volatility to GBP, which has been one of the top performers in the G10 FX space so far this week.
Following this week’s news on a two year high for the Brent crude oil, Richard King, Trading Manager for Inprova Energy, discusses the current impact of oil price volatility on company energy bills worldwide.
Brent crude oil prices hit a two-year high of more than $58 a barrel on Monday 25 September. Although prices have since reduced slightly, analysts don't expect prices to fall back.
Outlook for oil prices
Oil price increases have been largely driven by cutbacks in supply from the oil exporting cartel OPEC. Market experts predict that OPEC will continue its deal to cut production beyond March 2018 as part of its strategy to rebalance oversupply in the global oil market. Market analysts expect the oil price to be within the range of $55 to $60 a barrel for the remainder of the year, with potential for higher levels in 2018.
In a further boost to recovering oil prices, US producers are struggling to fill the supply gap, and the independence referendum in Kurdistan has the potential to disrupt Middle East oil supplies due to the Iraqi government's call to boycott Kurdish supplies. Mounting political tensions between North Korea and the USA could also be a bullish force.
Impact on energy prices
This is having a knock-on effect on UK business energy market prices. Both gas and electricity contracts for delivery in the next few months have posted significant gains of 2-3%. This has reversed recent decreases in energy prices, linked to the currency improvements for Sterling against both the US dollar and the Euro.
Energy market volatility
Oil prices are firmly linked to wholesale energy prices, which will, undoubtedly, increase energy market volatility in future months. In addition, as we head into winter and uncertain weather conditions, and continue to face energy supply reliability problems from continental Europe, further price swings are inevitable.
Such volatility is becoming the new norm. During the past 12 months there was a 45% price swing in the wholesale power market, which was more than twice as volatile as the average movement of the five years prior.
Smarter energy purchasing
While overall electricity and gas commodity prices remain well below the levels reached in 2014, the sizeable commodity price movements underline the imperative of getting timing right when purchasing energy.
Flexible procurement strategies can be less risky than fixed purchasing because there is the facility to buy energy little and often when wholesale prices are favourable, rather than gambling that the prices are best on the day that you fix your purchase. There is also the facility to take advantage of forward prices, which are currently very attractive beyond 2018.
Above all, it is imperative for energy buyers to manage their energy purchasing within a robust risk management strategy, which will set price limits and guard against buying at the top of the market - helping to counter market uncertainty.
Between hurricane Harvey and Irma, states in the US have been truly ravaged by disaster. The effects of destruction have now left long lasting marks on local economies and the performance of markets, among many other things.
OPEC, for example, was severely impacted by the hurricanes, as we saw demand pitfall despite continued production and refining. Goldman Sachs stated that both Harvey and Irma will leave a huge dent in the oil market, leading to a global reduction in consumption of oil by 600,000 bpd in September.
We asked Finance Monthly’s expert contacts what they made of the situation, and have heard Your Thoughts on the overall impact of hurricanes on oil markets and beyond.
Nathan Sage, Market Analyst, PhillipCapital UK:
Hurricane Harvey was one of the biggest storms to hit the gulf coast in a decade with the total damages now estimated at upwards of $180 billion. The category four storm made landfall in Texas as it peaked in intensity and now holds the record for the wettest tropical cyclone to hit mainland US states. The significance of its landing is important as Texas and States along the gulf coast are a major refining point of crude oil and are responsible for around 12% of the country’s refining capacity.
Before Harvey hit, traders were already nervous, and crude, both Brent and West Texas Intermediate, ground lower until dropping as Harvey made landfall. The major moves were in the markets for distillates especially in the gasoline market which gained over 16% as fears of a fuel shortage spread across the state and surrounding areas.
The low of oil was a good buying opportunity for traders as the drop in refining would ultimately lead to higher inventories but the lasting effect of the rise would only be temporary for traders with a moderate outlook. Brent and WTI have both added 3.74% this week and 7.5% since its low last week. The short term effects of Harvey have already been seen in the data with initial jobless claims rising 62,000 in the week to September 2nd totalling 298,000 way above the expected 245,000.
The lasting effects of Harvey from the oil industry’s point of view has now largely worn off with pipelines and refineries coming back online earlier this week and business is mostly back to normal. In the same breath, traders will now be focussing on Hurricane Irma which has already devastated most of the Caribbean and is expected to make landfall this Sunday. Florida has less of a significate for oil markets but insurance companies will weigh on US stock markets as the costs from both Harvey and Irma start to mount. The full extent of the losses are yet to be seen but some are expecting the most Harvey-exposed insurers to take an earnings hit of around 25-30%. It’s no surprise that heading into the weekend risk appetite has waned and we can see US markets edging lower on the open.
Longer term and away from the storms, the overarching themes in oil markets remain focused on the global supply glut. Russian finance minister Anton Siluanov has said that Russia would benefit from extending its agreement with OPEC to limit global supply and said the benefits would extend to “everyone involved”. Without an extension of the agreement and if the world’s largest oil producers were to have full autonomy on their own output it would likely lead to a huge correction lower in prices. This would be especially true, as the recent higher oil price has allowed shale producers to become more efficient and are now able to operate at a lower breakeven point than before.
Fiona Cincotta, Senior Market Analyst, City Index:
The markets are breathing a sigh of relief as the trail of devastation left by Hurricane Irma was not quite as bad as was initially feared. Whilst Florida is still receiving a pounding from the now Category one storm, notably Miami managed to dodge the most dangerous part of the storm. So far news of catastrophic damage hasn’t come through, which is a promising sign that the markets are focusing on.
As a result of the severe but not catastrophic Hurricane Irma the dollar index enjoyed its biggest 1 day jump in 10 days, gaining 0.5% versus a basket of currencies. Meanwhile the Dow Jones futures surged over 100 points, whilst the S&P 500 futures were also pointing to a positive start for the index.
The markets were on edge in the days leading up to the hurricane given the difficulty in assessing the financial impact of natural disasters. However, although the initial assessment is that the impact of the storm is not as bad as first feared, we still expect some evidence of economic damage from this hurricane and hurricane Harvey to feed through to the economy in the form of weaker economic data such as labour market numbers, economic growth and retail sales. Therefore, investors will be paying particular attention to Thursday’s retail sales numbers. Significantly weaker than expected data could weigh heavily on sentiment.
The other point to keep in mind is that the economic impact of hurricanes tends to be short lived and often the rebuilding effort offsets the damage the hurricane caused to the economy. Therefore, if economic data is slightly weaker, this should only be a blip rather than the start of a new trend. Federal Reserve Official Dudley confirmed this last week by saying that he didn’t expect the outcome of Hurricane Irma to impact on the monetary policy outlook.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
Trump administration recently announced plans to expand offshore oil drilling in US waters, threatening recreation, tourism, fishing and other coastal industries, which provide more than 1.4 million jobs and $95 billion GDP along the Atlantic coast alone. The executive order directs the Interior Department to develop a new five-year oil and gas leasing program to consider new areas for offshore drilling. The order also blocks the creation of new national marine sanctuaries and orders a review of all existing sanctuaries and marine monuments designated or expanded in the past ten years.
"Our ocean, waves and beaches are vital recreational, economic and ecological treasures that would be polluted by an increase in offshore oil drilling, regardless of whether or not there is a spill," said Dr. Chad Nelsen, CEO of the Surfrider Foundation. "With today's action, the Trump administration is putting the interests of the oil and gas lobby over the hundreds of communities, thousands of businesses, and millions of citizens who rely on the ocean and coasts for their jobs and livelihoods."
New offshore drilling would threaten thousands of miles of coastline and billions in GDP, for a relatively small amount of oil. Ocean tourism and recreation, worth an estimated $100 billion annually nationwide, provides 12 times the amount of jobs to the US economy, compared to offshore oil production. Even under the best-case scenario, America's offshore oil reserves would provide only about 920 days, or 18 months supply of oil at our current rate of consumption, according to federal agency estimates.
"Tourism drives our local economy, and the approval of offshore drilling poses a huge threat to the livelihood and quality of life in our beach community," said Nicole D.C. Kienlen, Tourism Director of Bradley Beach, New Jersey. "The effects would be devastating on multiple levels."
Even when there are no accidents, offshore oil drilling seriously pollutes our water and food supply at every stage. The ground penetration, the drilling, the rigs, and the transportation tankers all release toxic chemicals and leaked oil. The standard process of drilling releases thousands of gallons of polluted water into the ocean. High concentrations of metals have been found around drilling platforms in the Gulf of Mexico and have been shown to accumulate in fish, mussels and other seafood.
"The Trump administration wants to pour money in to a sinking ship with relatively small return, instead of supporting growth industries like coastal tourism and renewable energy that are adding jobs to our economy," said Pete Stauffer, Environmental Director for the Surfrider Foundation. "We will stand up for what's best for the nation, and our oceans, by fighting new offshore drilling off our coasts."
(Source: Surfrider Foundation)
A few weeks back headlines were ripe with news that oil prices have been settling even lower, reaching a three-month low mid-March. Finance Monthly reached out to Jordan Hiscott, Chief Trader at ayondo markets, to give us a rundown of the current situation, and delves into the global economy’s dependence on the fluctuations of oil prices.
With West Texas Intermediate (WTI) Crude falling to $48, we’re now only $3 higher than the level at which OPEC agreed output would be cut. So how high did we get and does the current level pose value on a mean reversion perspective – i.e. if we agree with the theory that suggests prices eventually return to the mean or average over a two-year period? After the output cut was announced, oil prices rose as high at $54, the highest point in over a year, and until the beginning of March we sustained a clear range between $52 and $54. However, pressure on prices began to materialise around the 8th March, finally falling to $48 in disorderly fashion two days later. In my opinion, this fall is only the beginning of the downward price pressure of WTI, which is likely to be caused by three key catalysts.
Firstly, the lack of adherence to an output cut by OPEC members. The dominance of OPEC and the effect of its actions on international oil markets has waned drastically in recent years. And what was once an extremely united group with a clear objective has become more fragmented, with internal strife and economic difficulties causing individual nations to put their own interests before the group. Should these conditions become more prevalent, especially from a local economic perspective, I suspect it will create a domino effect - when one country breaches output levels, then others follow suit - and prices fall as a result.
Secondly, there is the impact of shale fracking. In a single generation, the US has become completely self-sufficient when it comes to oil and this is largely down to the rise of shale fracking. Remember as recently as 1980, after the Iranian Revolution, the US armed forces realised they had only 30 days’ worth of fuel to power all military vehicles. This led to creation of the Strategic Oil Reserve, located in the New Mexico caves, naturally pressurised, with enough fuel to power the American military for one year. With this dependence on oil from exports no longer significant, it’s certainly arguable that the US might not have engaged in various Middle Eastern conflicts had the supply of oil not been such an issue.
Lastly, and, in my view, most significantly, is the increasing importance of renewable energy. In a world that is drastically changing its dependence on fossil fuels, the advancement of technology to capture renewable energy is nothing short of remarkable. As international government adopts clean energy sources, it’s expected by 2025-2030 that we will reach ‘peak oil’, the hypothetical point in time when the global production of oil reaches its maximum rate, after which production will enter terminal decline.
Almost entirely due to technology, certain governments now achieve the majority of their energy needs from renewable sources. Albania, Iceland and Paraguay obtain essentially all of their electricity from renewable sources (Albania and Paraguay 100% from hydroelectricity, Iceland 72% hydro and 28% geothermal). Norway obtains nearly all of its electricity from renewable sources (97 percent from hydropower). In addition, petrol and diesel demand for vehicles is likely to fall in similar patterns. From a consumer perspective, the concept of electric power cars has never been more popular. For example, Tesla, the US electric car company, now has a market capitalisation that has almost eclipsed GM and Ford. The recent jump higher in stock price catapulted Tesla’s market cap to nearly $45 billion. That compares with nearly $48 billion for Ford and, farther off, about $53 billion for GM. Tesla’s technology means its S battery can now power a car for a range of 265 miles, and what is also remarkable is that Telsa also makes the world quickest production car, accelerating from 0-60mpn in 2.5 seconds. Currently 95% of all motor vehicles use fossil fuels: however the demand for electric cars is soaring having risen by 42% in 2016 alone. I can only see this trend continuing.
The culmination of these factors is abundantly clear to me: the dependence of the global economy on the fluctuations of the value of Oil will be over in 10-15 years.
This week Shell announced that it has been chosen by Rolls-Royce Motor Cars Ltd as the exclusive manufacturer and supplier of Rolls-Royce Motor Cars Genuine Engine Oil. From October 2016, this oil has started to become available to Rolls-Royce Motor Cars Dealers around the world.
The new passenger vehicle engine oil has been developed and rigorously tested to meet the latest Rolls-Royce Motor Cars Ltd. passenger vehicle engine specifications and to work perfectly with their V12 engines. Shell PurePlus Technology, present in Rolls-Royce Motor Cars Genuine Engine Oil, helps protect the engine from power-robbing deposits and sludge. In addition, its properties enable the oil to reach peak operating efficiency sooner in challenging conditions with low oil consumption and long engine service life.
"We are delighted to have been chosen to develop and supply the new passenger vehicle engine oil for Rolls-Royce Motor Cars Ltd., using our most recent innovation – Shell PurePlus Technology," said Richard Jory, Shell's Global Vice President for Lubricants Key Accounts.
Shell PurePlus Technology is a breakthrough in how passenger vehicle engine oils are formulated. It is a patented gas-to-liquid (GTL) process, developed over 40 years of research, which converts natural gas into crystal clear base oil. Base oil, usually made from crude oil, is the main component of finished oils and plays a vital role in the quality of the finished passenger vehicle engine oil. The base oil is produced at the Pearl GTL plant in Qatar, a partnership between Shell and Qatar Petroleum.
(Source: Shell)
Global M&A value in the power and renewables sector has reached the highest level seen in the current decade – up 70% year-on-year - and any further upward movement would begin to move sector deal value back towards the heady levels last seen before the credit crunch, according to PwC and Strategy’s latest annual Power and Renewables Deals report.
The report states there is plenty of potential in the global power and renewables M&A pipeline but the latest surge may not be indicative of the long-term trend. A more globally-balanced spread of deals is expected in 2015 with fewer of the US mega-deals that buoyed 2014 totals. But the flow of divestment- and privatisation-driven deals looks strong and so there are plenty of reasons to think any dip in US deal value will be taken up, in part at least, by activity elsewhere.
The report found total worldwide power and renewables deal value rose from $143.3 billion (€126 billion) in 2013 to $243.1 billion (€215 billion) in 2014. It’s the first time the total has broken out of the $100-200 billion (€88-176 billion) range established since the pre-credit crisis year of 2007.
A series of big but one-off restructuring deals in the US gas sector, involving Kinder Morgan and Williams, contributed $92.2 billion (€81.4 billion) to the worldwide M&A total.
