Oil Markets Unmoved By Impeachment

The House's impeachment of Trump has been the center of attention in the news this week. So far, Wall Street couldn't care less, largely banking on a Senate acquittal. Oil prices have trended higher over the week on their two favorite indicators: the economy via the trade war, and lower US crude inventory data just in time for Christmas. But impeachment isn't on anyone's agenda when it comes to oil. The sentiment seems to be that nothing big is going to happen and they're not even pricing anything in.  

Aramco: The 'Inclusion' Euphoria Is Already Over

By Thursday, Saudi Aramco had already seen its newly listed stock decline for three straight days, now trading down 6% from its high on Monday. At 3.3%, it's now officially underperforming the Tadawul index. That's because investors are already taking profits from it. So much for the euphoria surrounding the world's biggest IPO ever. But if you've been tracking this newsletter, we have warned of such plenty of times. 

Foreign investors have largely been clued in. They still think the valuation is too expensive, and they still shy away from government control and geopolitical vulnerabilities. For domestic investors, there have been a fair number of sticks and carrots. 

The 'sticks' have been indirect (everyone remembers MBS' purge of Saudi business elite, which in part was about securing future investments for the Aramco IPO). That's the biggest stick - the need for the Saudi business elite to demonstrate their 'patriotism'. The carrot is that they'll be given bonus shares if they refrain from profit-taking (i.e., selling their shares) for 180 days. 

Sticks and carrots aside, though, plenty of investors are convinced that this is too much smoke and mirrors and they've been ditching shares ahead of that. Major foreign investors aren't likely to jump on board until the valuation is much lower. 

How Big Finance Could Make Some Oil and Coal 'Unbankable'

Any true victory for the environment can only be won by winning over those who finance it, not by attacking oil and gas producers, or coal miners, for instance. And the first step towards that has just happened, with Goldman Sachs announcing it would no longer finance two areas of business: Arctic oil drilling or exploration and new thermal coal mines anywhere in the world. Goldman will also be selling weather-related catastrophe bonds to help clients manage the impact from climate change.  

With regard to the Arctic oil decision, Goldman Sachs has now become the first bank to ever establish a ban on investment for a specific area related to climate change. 

Goldman isn't altruistic. We already knew they weren't keen on the tricky Arctic anyway, and thermal coal doesn't look as attractive in the existing atmosphere. But that doesn't matter. This is the market catching up to the rhetoric, and that's the only way it works. 

Investors should be interested, though, because this raises the reputational stakes for other big banks. What one does, the others generally must follow with some sort of response that makes them look just as good. What happens, for instance, if JP Morgan (the biggest oil and gas banker) feels it needs to respond in kind? That's not likely to happen in the foreseeable future, but when it does, investors should be watching closely. The biggest indicator for the future of fossil fuels will come from the finance industry: Either it's bankable, or it's not.