• Harsh Patel, CFA

Liquid Gold 🛢🛢🛢



Sooo…Oil prices have had a crazy few days.


Drone attacks on the world’s largest crude oil processing facility in Saudi Arabia at the start of this week instantly cut off roughly 5% in global oil supply (5.7 million barrels per day of the “black gold”, to be precise) or half of all Saudi oil production.


The Economics:

  • With less oil to go around, investors promptly went ahead and bid oil prices higher. Oil prices shot nearly 20% higher over the course of Monday - the largest intraday oil price spike in history.

  • This affected companies all over the global economy, from the obvious (BP, Shell, Chevron and other major oil producers saw their share prices increase), to the more subtle (the global airline industry had a Monday to forget).

  • Overall, the economic fall-out seems relatively limited, mainly due to:

  • Good old President Trump coming to the rescue by tweeting(!) his intention to stabilise the oil supply shock by opening up US oil reserves if needed. 

  • The rest of the world also being able to access more oil if needed - gone are the days when we were over-reliant on oil from the Middle East and all the political instability that comes with it (more on this below).

  • The reassuring fact that the world is increasingly less reliant on oil than it was in previous decades.

  • Thanks to the above, crude oil prices have settled at a halfway-house of around $65 per barrel for Brent crude - well below the $70-71 levels they reached on Monday, but still 8% above where they started the week ($60). Why not back to $60? Let’s look at the broader situation…

The Politics:

  • The attack was claimed by Yemen’s Iran-backed Houthi rebels - who have been entrenched in a war with Saudi Arabia and its allies since 2015.

  • America and President Trump wasted little time in responding to the attack, with fresh economic sanctions imminent for Iran.

  • Saudi Arabian officials did their best to shrug off the attack, stating that the oil supply is already coming back online - they expect to be fully up-and-running again by the end of the month.

  • That said, tensions in the Gulf are clearly reaching boiling point as we speak - an increased likelihood of war between the US/Saudi Arabia and Iran means an increased likelihood of further disruptions to global oil supply. Even if Saudi Arabia recovers from this week’s attack by the end of this month. 

  • As a result, investors remain on edge, which explains the fact that oil prices remain elevated at the $65/barrel mark.

An interesting side story:

  • The Saudi oil field which found itself under attack is owned and operated by Saudi Aramco - Saudi Arabia’s national oil producing company and the jewel in its middle eastern crown.

  • A Saudi Aramco IPO (part of the Vision 2030 plan) remains imminent, with banks currently working hard to persuade investors that the company is worth somewhere around $2 trillion (yes, we've spelt it right - that's $2 with 12 zero's or $2,000 billion if you prefer).

  • That would make it almost twice the size of the world’s most valuable publicly traded company today (Microsoft, which currently has a $1.08 trillion market cap).

  • Time will tell as to how the above oil market issues will affect what is expected to be the biggest IPO in history, of the most valuable company that has ever existed:

  • On one hand, higher oil prices should mean a higher valuation for Saudi Aramco given the company's revenues are directly related to oil prices.

  • On the other hand, the increased risk of attacks or even all out war in the Middle East might mean investors are in fact willing to pay less for the company as a result.

  • However this IPO situation plays out, we've got our popcorn ready and can't wait to see it all unfold! 🍿🥤

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What Else is Going On?


US Federal Reserve

Rates cut, Cash Injected 💉

US interest rates cut by 0.25%, as expected given the ongoing US/China trade war. The Fed has also been busy injecting billions of dollars into the crucial Repo market - worth keeping an eye on - the last time this happened, we were in the middle of a global financial crisis...



Bank of England

Rates Unchanged ⚖️

UK interest rates unchanged at 0.75%, with the Bank of England signalling an extended period of low interest rates may be in store.



WeWork

IPO Postponed ⛔️

The We Company, owners of WeWork, have decided to shelve their IPO. A recent SoftBank investment valued the group at $47bn, but they were struggling to find investor demand for an IPO even at a $15-20bn valuation. Ouch, although something tells us they'll be back.



Rocket Internet

Sitting on Cash 💰

The German company - which incubates other (mostly eCommerce) companies - is sitting pretty with €3bn of cash following IPOs of Delivery Hero, HelloFresh, Home24, Westwing, Global Fashion Group and Jumia in recent years. Winning.



Next plc

Ready for Brexit...

...but apparently not quite ready for warm September weather. The UK retailer is reassuring investors it'll be fine in the event of a No Deal Brexit. Sounds optimistic, but CEO Simon Wolfson is a staunch Brexit supporter...which explains a lot.



TransferWise

Profits + Growth = 😍

Estonian fintech unicorn TransferWise posted its 3rd straight year of profits. Just when we were starting to believe tech unicorns aren't profitable anymore! TransferWise - backed by Richard Branson and Peter Thiel's VC fund - was recently valued at $3.5bn following a $292m secondary share sale. 


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