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Brazil's Oil Flop a Warning for Majors and Aramco

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.

Shopify - Brazil's Oil Flop a Warning for Majors and Aramco

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Comments of the Day

07 November 2019

 

 

Video commentary for November 6th 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: Dollar remains firm but Renminbi very steady, stock markets steady and continue to hold breakouts, oil eases but oil shares pull back more, soft commodities steady, Wall Street steady,

 

 

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. 

 

 

Commerce: a force for good

This admittedly self-serving report from Shopify may be of interest to subscribers. Here is a section:

The success of millions of independent business owners is critical to our world’s economic prosperity. Every new business adds more value to the world. It’s not a zero-sum game, and commerce benefits from more voices rather than fewer. But entrepreneurship is challenging. That’s why we remove barriers and friction for independent business owners. We create tools for anyone, anywhere, to start and grow a business and impact the global community.

 

Eoin Treacy's view

A recent article quoted Shopify’s CEO as saying. “Amazon wants to be an empire,” he said. “At Shopify, we are arming the rebels.”  I couldn’t help but smile at that statement. There is no doubt that the software companies like Shopify and Wix.com sell, which allows anyone to create an ecommerce site in a couple of hours, is a major innovation. However, the job of marketing that website so it can find clients is an altogether more involved process.

 

 

On Target November 6th 2019

Thank to Martin Spring for this edition of his letter which may be of interest. Here is a section on the Dollar:

Are we about to see a “currency pact” between the US and China? Investment bank Jefferies’ Hong Kong-based Christopher Wood sees it as a possible significant development in the difficult ongoing trade negotiations between the two countries.

It could give Donald Trump “a face-saving ‘out’ in terms of declaring victory in negotiations, where he has clearly over-estimated his leverage, for the simple reason that the Chinese leader has more tolerance to take pain than does America’s.”

A currency agreement based on a Chinese commitment not to engage in a competitive devaluation of its renminbi makes sense as both Washington and Beijing want the same thing. Neither wants a stronger dollar and a weaker yuan.
Beijing may see such an agreement as a way at least to end an escalation of the trade war or even to end it. It has no desire to see a major devaluation against the dollar. That would encourage accelerating capital outflow – “the Achilles heel of China’s command economy” -- at a time when such pressures are rising because wealthy citizens are keen to achieve international diversification. The outflow reached about $240 billion in the 12 months to the second quarter.

Devaluation would also make Chinese consumers poorer in dollar terms, undermining the policy of seeking to make the economy more driven by domestic consumption. And it would undermine the current successful policy of attracting foreigners to invest in China’s stock and bond markets.

“The last thing China needs right now is a further sharp appreciation of the US dollar – and that also seems the last thing Trump wants.”  

 

Eoin Treacy's view

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

China has to manage capital flight risk. The drop below the psychological CNY 7 area earlier this year was a catalyst both for a breakout by the gold price for Chinese investors and the desire to become globally diversified.

 

 

Eoin's personal portfolio: precious metals long initiated

 

Eoin Treacy's view

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change. I'll change the title to the date of publication of new details so you will know when the information was provided.

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