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The Oil Bears Are Back

Oil is turning bearish, despite all the speculative excitement of taking more Iranian crude off the market. The end of Iran sanctions waivers was officially on Thursday, but while oil importers were scrambling to find alternative supplies at comparable prices, oil prices crashed on record US production and a Russian pipeline coming back online to balance out the market.

And while the mid-week mass uprising called by the opposition leader in Venezuela temporarily boosted oil prices, the failure of Guaido to secure full military allegiance and oust Maduro immediately led to a shortened attention span among speculators. The other oil flow under threat is Libya, but the more likely short-term scenario is that General Haftar will start importing unilaterally. It’s not about upsetting the flow; it’s about controlling it, and the revenues.

Oil Story of The Week: What Exactly Is Buffett Betting On?

Buffett is throwing his weight behind Occidental in its unusual bidding war with Chevron for Anadarko’s prized Permian Basin assets. He’s offered Occidental $10 billion as it tries to derail Chevron’s $33-billion bid that everyone thought was a done deal until Occidental rocked the boat and came in with a $38-billion offer.

While analysts have crawled out of the woodwork to criticize Occidental and opine that Chevron will do more with these assets, Buffett’s $10 billion clearly disagrees. And Buffett may well be right on this one. The investing legend is looking at the track records of the country’s biggest oil players in comparison to the smaller independents in the shale patch.

Big investors have been down this shale revolution road before, and the Big Boys in the oil patch disappointed. This isn’t just a bet on Occidental versus Chevron - it’s a bet on the majors versus the not-so-majors. It’s a bet on real growth from the shale patch, versus growth that failed to bring in profits and failed to repay investors the first time around. Just follow the stock market: the S&P 500 has soared 60% over the past five years, but energy has lost over 30%.

Still, Buffett doesn’t throw his money around lightly: Occidental will have to work for it. They only get the $10 billion if Anadarko goes for the deal. And they also will have to pay Buffett’s Berkshire Hathaway $800 million every year for a decade, not to mention a future share deal that gives Buffett access to 80 million shares close to Occidental’s current market price. It’s a great deal for Buffett, even if OXY shareholders will not benefit right away. They’ll have to be patient, though, because if OXY makes the most of the Anadarko assets as Buffett thinks they will, shareholders will benefit in the end.

Renewables Story of The Week: The OPEC of Lithium

One of the biggest forces in lithium today is the ‘Lithium Triangle’ of Argentina, Brazil and Chile. Together they cover more than 50% of the global lithium supply, and now they are making moves to turn this into an OPEC-style cartel. Talks are now in motion between two of the triangle’s members - Argentina and Bolivia - and the endgame here could have a major impact on prices of the most sought-after of the energy metals. It will be collusion on the level of OPEC for oil, both in terms of price and supply. It also means an end to the free market for lithium if such a cartel actually gets off the ground. But there’s no cartel without China.

Right now the lithium oligopoly - the basis of a potential ‘cartel’ - includes Albemarle (ALB), Sociedad Quimica y Minera (SQM), Tianqi (China) and Ganfeng Lithium, along with FMC corporation.

Lithium

(Click to enlarge)

From a lithium investor’s perspective, the cartel is a rather mouth-watering prospect because it will support and control higher lithium prices. There are a lot of lithium opportunities through junior miners on this scene, and that will serve those miners well in terms of high prices supported by a cartel. Basically, junior miners could offer exposure to a massive cartel in this way, even when they don’t have production online yet. That’s a pretty sizable boost in their standing. It would also open up more possibilities for the ‘cartel’ to start scooping up juniors to solidify their power base.

The key to monitoring whether a lithium cartel will become a reality is watching what happens with China. Last October, Tianqi Lithium Corp was trying to acquire a state in Chile’s SQM, which would have been the biggest piece of the cartel puzzle. The deal met with some legal hurdles when a Chilean billionaire and one of the biggest shareholders in SQM brought a lawsuit against Tianqi precisely because he believed it would lead to a cartel and would result in leaks of SQM trade secrets to the Chinese giant. But in late October, a Chilean anti-trust court gave the deal the green light anyway. In December, Tianqi successfully bought a stake in SQM for $4.1 billion. This makes Tianqi the second-largest shareholder in SQM, which in turn is the second-largest lithium producer in the world. That means that Tianqi, SQM and Albermarle will control two-thirds of the world’s lithium production. This is where the cartel comes into play.

While talk of a lithium cartel has been floating around for a couple of years now, the reality is creeping up on us quickly. The Tianqi deal was the first key, and that has spurred April talks between Argentina and Bolivia.

In the meantime, we’ve got Tesla warning the world of underinvestment in the energy mining sector that will lead to global shortages of nickel, copper and other EV battery minerals. Tesla is particularly worried about copper because EVs use twice as much as internal combustion engines, and without the development of new mines and new supply, they’re expecting a very tight equation. This is where FMC, the smallest of the majors in terms of lithium market share, will benefit as it works towards new copper resources in multiple venues.


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