Comment of the Day
Video commentary for February 1st 2022
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: total return on Treasuries testing the secular trend, Wall Street continues to unwind short-term oversold, oil and gold steady, copper rebounds, Europe and Japan continues to benefit from lower valuations than Wall Street with stronger rebounds and smaller reactions.
Email of the day on Saudi Arabia
Your rather surprisingly positive reportage from Saudi Arabia awakened my interest in their stock market. I found to my surprise that it is nearly perfectly correlated with a broad commodities index. This is not because it is just the oil price, as that takes up only a small part of the commodities index, and oil companies take up only a small part of the Saudi stock market. The two markets I am comparing are IKSA and COMF, both in London. Do you have any ideas about why this correlation is so tight?
It would be nice if you would revisit the market from time to time and give us your opinions on it.
My view - Thank you for this email which highlights an important aspect of the Saudi market. The SASE Index is predominately weighted by banks. This being Saudi Arabia they are run on Islamic principles so loans are less leveraged relative to deposits than one might see elsewhere. Additionally, companies are not allowed to list until they have posted profits for three consecutive years.
Exxon to Accelerate Buybacks After Biggest Profit Since 2014
This article from Bloomberg may be of interest to subscribers. Here is a section:
Chevron Corp. reported record free cash flow late last week. Shell PLC (LSE:SHEL, NYSE:SHEL, EURONEXT:SHELL), BP PLC (LSE:BP.) and TotalEnergies SE are scheduled to post fourth-quarter earnings during the next two weeks.
The boost in cash flow will allow Exxon to increase the pace of a $10 billion share buyback previously announced as taking place over two years. Now, the company expects the buybacks to be “faster than that 12-24 month pace,” Chief Financial Officer Kathy Mikells said during a conference call.
Exxon also expects to grow oil production in the Permian basin by 25% in 2022 after increasing by the same amount from 2020 to 2021. That dwarfs the 10% increase that rival Chevron Corp. announced last week and is the latest sign that U.S. shale is ramping up again after years of restraint.
Exxon’s results come a day after the driller disclosed yet another belt-tightening move, this time involving shuttering its corporate headquarters in suburban Dallas and consolidating those offices near Houston. Exxon shares have risen more than 20% this year, capping an almost 50% advance in 2021 for the best annual performance in at least four decades.
My view - The oil majors are not spending on new supply. That’s boosting profitability and contributing to strong oil prices. Even when Exxon expects to grow production by 25% from the Permian, that comes at a fraction of the cost base the company was prepared to spend before the pandemic. Both Exxon and Chevron now spend more on dividends than capex.
Nickel Is Gripped by a Supply Squeeze That Keeps Getting Worse
This article from Bloomberg may be of interest to subscribers. Here is a section:
The nickel market is showing more signs of stress. Stockpiles held by the London Metal Exchange extended their decline on Tuesday, with the last increase coming in October. Buyers are paying a massive premium for immediately deliverable futures.
The key cash three-month spread, which briefly eased on news of additional shipments from Tsingshan Holdings Group Co., notched new highs on Monday. Contracts for immediate delivery are trading at a $508-a-ton premium to those in three months, the highest such premium since a historic squeeze in 2007.
While the squeeze last month was focused on near-dated contracts, in recent days it has spread through the curve. That shows the market is now pricing in tighter nickel supplies for longer, amid strong demand from stainless steel producers and battery manufacturers.
My view - Demand for batteries is likely to ramp higher over the coming years as more automotive manufacturers release new models. What kind of batteries will go into those cars is less discussed. Nickel is primarily used as a range extender. The downside is it is much more expensive and chemically volatile. Tesla is switching to lithium iron phosphate batteries for all its mid-range vehicles. That is going to cut into demand for nickel in the medium-term.
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