Bloomberg writes that GX pricing data further strengthens {BOIL<GO>} so that Bloomberg Terminal users can access a comprehensive view of spot oil and refined product price assessments that span from the spot market to OTC curves. 

“The refreshed and expanded dataset aggregates over 400 energy prices, including 160 new benchmarks provided by GX, so that customers can see a full view of market activity for key crudes and refined products across geographies. The benchmarks are calculated by GX using trade information from over 150 data providers and are externally audited to IOSCO standards. GX is also authorized by the UK’s FCA as a benchmark administrator.”

Emilie Gallagher, Global Head of Commodities, FX and Macroeconomics at Bloomberg, says: “In the current era of the macro investor, corporations and institutions will need access to global commodities market information and analytics to navigate economic uncertainty, upcoming geo-political events and an energy sector that’s in transition. Our strategic collaboration with General Index will provide Bloomberg Terminal customers with a transparent view of spot oil and refined product benchmarks and build on the foundational aspects of their investment strategy across critical asset classes.”

The GX-powered {BOIL<GO>} prices reflect both evolving trading patterns and well-established commodity pricing points that can be used in contracts and for trading. The 160 new benchmarks utilise market-relevant pricing and span key crudes in the Middle East, Europe and Canada, as well as other oil products in Europe, the Middle East and various Asian markets like Singapore, South Korea, and Japan.

Tickers align with specific regional market closures and follow a tech-based methodology backed by expert oversight. This offers market participants a transparent data solution for their commodities exposure. In addition to the price assessments on the Bloomberg Terminal, customers can access GX data for enterprise use via Bloomberg Data License and Bloomberg’s real-time market data feed, B-PIPE. 

Neil Bradford, Founder and CEO of General Index, says: “We are delighted to continue our strategic partnership with Bloomberg by bringing GX powered energy benchmarks to all Bloomberg Terminal customers through the refreshed and expanded BOIL function. The GX ethos is fair and affordable access to commodity price data, and having Bloomberg share in this vision further strengthens the market’s ability to better utilise the world’s resources.”

Muller argues that shunning fossil fuel producers only cuts off the finance necessary to help them shift from being the biggest emitters of greenhouse gasses today, to major suppliers of clean energy in the future.

In a CIO Special Report, Energy Transition: the quest for emissions-free energy, DB finds that renewables power-generation capacity is growing faster than non-renewables. with capacity increasing by 130 per cent over the last ten year; much faster than non-renewables growth of 24 per cent.

But globally, wind and solar generation still only accounts for 10 per cent of total electricity production. One forecast suggests they will need to grow to around 40 per cent of electricity generation by 2030 and over 75 per cent by 2050, with parallel deployment of other zero-carbon generation, flexibility, storage and networks, to deliver zero-carbon energy systems at scale.

According to Muller this means “huge investments in wind, solar, energy storage and transmission lines amongst others, will be needed to decarbonise the energy supply”. 

He says: “Consequently, we expect these industries to experience substantial growth over the next few years, partially at the expense of industries like Oil & Gas as we gradually phase out fossil fuels. We believe the energy sector and certain utilities like those based on gas will undergo several challenges in the future as burning fossil fuels for electricity accounts for most of the world’s carbon dioxide gas emissions and will have to be reduced.”

Muller says many energy firms’ financial performance will be affected over the long term, with substantial downside risks resulting from their reliance on fossil fuels.

Stranded assets

However, he argues that simply divesting from fossil fuel companies will result in stranded assets and preclude these organisations from helping to get renewable energy over the requisite production line.

“Financial markets may be overlooking the potential of these companies to earn competitive returns on their decarbonisation investments, providing opportunities for valuation-focused investors with multi-year investment time horizons. The global energy transition may therefore benefit some companies that financial markets are currently neglecting, based on possibly excessive discounting of specific sectors, perhaps including energy and gas utilities,” Muller says.

The DB report also makes the case that major Oil & Gas companies are preparing to change their business models to become energy companies providing a range of fuels, electricity and other energy services. 

This means entering sectors, most notably electricity, where there are already a variety of actors with specialised knowledge, and where the majority of low-carbon investment differ significantly from conventional oil and petrol projects in terms of scale and financial characteristics. 

Oil & Gas companies’ expenditure outside traditional fossil fuel resources has reached 5 per cent of total spending in 2022, reflecting their interest in supporting renewable electricity, and Muller says this figure can only “increase further over the upcoming years”. 

Finally, Muller notes that existing utilities have multi-decade development track records and established pipelines for future projects, and he says these companies are skilled managers of large and complex energy projects, which means “their expertise should benefit them as the energy transition progresses, for example, with offshore wind projects”.

He concludes: “Energy transition investment will need to be seen within a bigger picture. There will be transition risks in this process: established energy companies will have to work hard to adapt to the changing business environment if they want to avoid becoming stranded assets. 

“Within transition industries such as Oil & Gas, those companies that are better at managing the transition may deliver better financial performance than their industry peers over the medium term as well as making a long-term contribution to our future wellbeing.”

The cash-settled contract, based on the West Texas Intermediate (WTI) crude oil benchmark, will represent the most cost-effective way for the retail market to trade the price of crude oil.

FairX CEO Neal Brady says: “We’re excited to broaden our product line with Micro Crude Oil Futures as we continue on our mission to provide the retail sector with around-the-clock, low-cost opportunities to access liquid futures markets. Our partnership with Nodal Clear provides critical risk management to our business model as we expand into this new asset class.”

Nodal Clear, a subsidiary of Nodal Exchange, provides clearing for all FairX contracts.

“Nodal Clear is excited to provide the clearing services to support the launch of FairX Micro Crude Oil Futures, enabling retail access to this significant commodity,” says Paul Cusenza, Chairman & CEO of Nodal Clear.

Boris Ilyevsky, Chief Product and Strategy Officer of FairX, adds: “We’re breaking down the barriers that have kept many individual investors from participating in the futures market and in key sectors like oil by designing our products specifically for them – making them straightforward and easy to understand with low fees and free market data. We’ve listened closely to what retail investors need and believe our products appeal not only to experienced futures traders but to those individuals who have long desired to take positions in markets that have been cost-prohibitive, too large or unnecessarily complex.”

By employing social media analytics in both Arabic and English, alongside QuantCube’s proprietary Natural Language Processing algorithms and a specific dictionary tailored for the crude oil market, the QuantCube Crude Oil Risk Sentiment Indicator is able to accurately capture short-term risks in the market. It processes multiple factors impacting crude oil prices in real time, including OPEC meetings, production and stocks. As a result, the indicator can provide insights several hours in advance of traditional news outlets, giving commodity traders and hedge funds an edge in the market.  
 
“Our Crude Oil Risk Sentiment Indicator is a must-have for clients interested in commodities such as crude oil and is used to derive short term investment signals,” says Thanh-Long Huynh, CEO of QuantCube. “By capturing social media sentiment in Arabic, as well as English, we are analysing more than five times as much data as our nearest competitor and delivering much greater accuracy. The result is derived investment signals that are performing well and generating consistent Alpha.”  
 
Alongside QuantCube’s international and commodity trade indices, powered by AIS Shipping data, the QuantCube Crude Oil Risk Sentiment Indicator provides real-time insights on the supply side for commodity and energy futures traders. When the indicator is also used in combination with QuantCube’s Macroeconomic Intelligence Platform – incorporating real-time macro variable indices for GDP, Consumption, Inflation and Employment – it enables users to assess overall demand trends, and to anticipate economic and trade trends.  
 
The QuantCube Crude Oil Risk Sentiment Indicator is computed over a 24-hour period and refreshed every day. The indicator varies from 0 to 100 and provides information on current social media risk perception for the crude oil market. Investment signals can be derived from the absolute level, as well as from the short-term acceleration, looking at the data over a period of 2-6 days. Readings above 65 are considered very high, and below 35 very low. If the risk is high, the indication is that prices are expected to fall. 
 
“QuantCube carried out a successful pilot of the indicator before launching it to market this month,” says Huynh. “QuantCube has proven success in accurately processing large data sets in different languages using NLP models. We have used NLP techniques to analyse sentiment data to predict the outcome of elections more accurately than the polls.” 

Javier Sáenz de Cenzano heads up Spanish boutique Azvalor Asset Management’s Managers fund. This fund puts its money behind managers, such as Mittleman Brothers and Moerus Capital Management, who share Azvalor’s contrarian outlook on investment. 

Sáenz de Cenzano focuses on the long-term value investing strategy, looking for businesses with strong fundamentals but low market valuations. Despite a decade’s underperformance, he says this strategy always pays off for those investors that can stick with it. Institutional Asset Manager spoke to Sáenz de Cenzano to find out more.

Why has the value investing strategy underperformed in recent years?

The first quarter of 2020 was the worst quarter for value stocks ever, looking at historical data from AQR since 1926. This came on top of a decade of value stocks underperforming the market, making the difference in valuation between expensive and cheap companies reach historical extremes. We were close to the 100th percentile on all valuation spread metrics like price/sales, price/earnings or price/book. The last time we had a similarly bad quarter for value stocks was in the late 1990s, around the end of the tech bubble, and we all know how that ended for super-popular stocks trading at extremely high valuations.

There is an eternal temptation among many investors to justify high prices with narratives about paradigm shifts, something that has cost them dearly several times throughout history. 

In the 1970s, many (fabulous!) companies (the popular nifty-fifty companies) lost 75 per cent of their value, even though many continued to be fabulous 50 years later. The same thing happened with the Japanese miracle, which seemed infallible after the extraordinary returns of the 1980s, and which culminated with the Japanese Nikkei index hitting a record high of almost 40.000 points in 1989. Today, 30 years down the line, the index is still at half of that pinnacle.

In the late 1990s, technology companies seemed unassailable after generating returns similar to those of their current cousins. Cisco was perhaps the best example of that bubble when, after multiplying by 50 times in 10 years, it peaked at over USD 70/share only to tumble and lose 90 per cent of its value in the next year and a half. Cisco continues to be a great company today. 

In our view, what is happening now is not very different from what has happened before. There was always an argument to overvalue the “popular” asset classes, and it always ended in total disaster for the shareholders of these assets. Perhaps it is different this time. We strongly believe it isn’t.

What types of stocks are particularly undervalued today? 

We tend to avoid the most crowded and popular areas of the market, to focus on those segments that have little following and where valuation dislocations abound. We are long-term contrarian investors, and we conduct deep research in companies with a mindset of being minority owners of a particular business.

Through this approach, we have been investing for instance in gold-related stocks for a number of years now. We identified a huge opportunity in this space, where the world’s best-in-class companies were trading at ridiculously low prices, which provided us with a good margin of safety and very interesting upside potential. The opportunity was in line with our approach of “heads we win, tails we don’t lose much”. The market by and large ignored this opportunity for a number of years, but all of a sudden investors started paying attention, including the likes of David Einhorn or Warren Buffett entering the space recently. 

Other areas where we see significant value are in specific companies in the oil, copper and uranium sectors, where the market dynamics are very favourable for long-term investors, and where some companies are trading at very interesting levels. All these areas have been totally ignored by the market in recent years, which has created a great opportunity from a return potential angle, while protecting our investors from very real risks such as inflation or technological disruption, amongst others. 

In our search for portfolio managers on our Azvalor Managers fund, we follow hundreds of professional portfolio managers across the world, and we noticed that many that were in the past very conscious about valuations have now capitulated and have become less valuation-aware and more focused on future growth. 

The underperformance of the value factor has been more extreme and more long-lasting than ever, and it has been very challenging for many managers to stick to their valuation process – it has required a distinctive temperament and long-term perspective that very few have been able to maintain. 

Historically, changing an investment process in the middle of the game has been a recipe for disaster, while sticking to a proven and robust process tends to reward long-term patient investors.

When do you see this valuation gap between growth and value stocks closing? 

We think no one can determine when the gap will close, but we do know we are now at an extreme moment. Valuation divergence between expensive and cheap stocks has never been greater.

History has taught us that extremes don’t last forever and always end up reverting to the mean. We believe that value investing will make a comeback, which may be violent, like in 1929, the 1970s or the late 1990s. This will mean a very favourable tailwind for value portfolios, and there are reasons to think that a trend is beginning in this direction. 

However, it is more relevant for our investments to get the “what” right than the “when”. And everything seems to suggest that the investment alternatives in bonds, liquidity or the most popular stocks carry an unbearable risk for us today due to their high starting price. Our portfolio, with its level of undervaluation, and the long-term earnings prospects of the companies that comprise it, seems to us like an excellent long-term buying opportunity.

How long is too long to wait for a return on an investment?  

From a valuation perspective, cheap stocks have never been cheaper, and historically when you invested in the right companies at these prices, the long-term rewards were material. We firmly believe this time will not be different in the stocks we own. Being a contrarian investor requires a long-time horizon, since under the radar stocks sometimes do nothing for a very long time, but then suddenly realise their potential in an abrupt manner.

Moreover, as the companies in our portfolios generate by and large very strong and recurring cashflows, the passage of time goes in our favour as one gets the benefit of a high free cashflow yield via dividends, share buybacks, debt reduction, or other accretive capital allocation decisions made by top-quality company management. In other words, in a low-yield global environment, we can benefit from a recurring and strong free cashflow stream while we wait for the market to recognise a given company’s intrinsic value.

By Joe Mares, manager of the Trium ESG Emissions Impact Fund
While the recent turmoil in the oil markets might seem extraordinary, history shows the present situation is a return to the past, argues Joe Mares, manager of the Trium ESG Emissions Impact Fund.

In the below insight, he discusses how pressure on upstream oil returns were once a perennial feature of the market, and how improving environmental regulation means we will not see owners setting fire to their oilfields to avoid swallowing a negative price.

“Our strategy is focused on finding companies in high-emitting sectors that have the best potential emissions reductions plans, and providing advice and encouragement to management teams to deliver these plans. We are market neutral, and focus on shorting companies which we believe are ESG under-performers in similar sectors. I have had several conversations with investors in recent weeks, and many have asked my opinion on oil prices going negative, and how very low oil prices impact environmental investors. I try to take a long-term view measured in decades, not years. Most people just look at data you can get on your Bloomberg screen – which only goes into the early 1980s, when the first oil futures contract started trading on NYMEX.”

Lessons from history

“I think to understand the current situation, we need to look much further back to the 1920s, 1930s or 1950s. Indeed, for most of the oil industry’s history, returns in the upstream were low. The original oil billionaire was John D. Rockfeller. He controlled 80 per cent of the US oil industry a century ago. To gain this position, he first took control of the railroads, then the refineries. Oil is worthless if it cannot be transported to a refinery and turned into gasoline or diesel.

“If you control the infrastructure around an oilfield, you control the price. The ‘Seven Sisters’ did the same thing to Middle Eastern countries in the 1950s and 1960s, keeping upstream prices low to producers, while keeping the economic rent in the midstream and downstream. It was only with the Yom Kippor war in 1973, the OPEC embargo, and then the Iranian revolution in 1979, that returns in the upstream really took off. 

“Pre-1973, unless you had an absolutely enormous oilfield, you had little economic rent and were, therefore, usually pushed around by bigger companies with downstream access. If you have time on your hands during lockdown and want to watch a good movie, check out There will be Blood with Daniel Day Lewis. This is the central question of this movie. Daniel Day Lewis finds an oilfield but Standard Oil will not pay him for his oil as he does not use their pipeline.” 

Energy is going green

“The point is this: we are returning to the normal state of the oil industry over the last 150 years; if you do not have infrastructure and downstream access – you cannot guarantee a fair price for your oil, and whenever the market is over-supplied, your marginal price is zero. Obviously demand will recover, and I think the infrastructure problems will get easier, but it is important to recognise what happened at expiry for the May contract has happened before in the 1920s and 1930s – you just cannot see it on Bloomberg. 

“The only difference between now and then – thank goodness – is that environmental regulation has improved. Prices in 1920s never went to zero as the producer would just literally set the oil on fire rather than take a negative price, with terrible environmental consequences. This is demonstrated during an evocative scene in There will be Blood. Fortunately, this is no longer allowed. If you have more time and would rather read a book rather than watching a movie, Daniel Yergin’s The Prize is an industry classic, or Bob Mcnally’s Oil Volatility, or Bryan Burrough’s The Big Rich, or Ron Chernow’s biography Titan about John D. Rockefeller, all discuss the oil industry in the 1920s and 30s.”

Further headwinds

“The key point is that we need to examine the complete span of history, not just what we can easily pull up on a Bloomberg chart. The other point I want to mention is that the ECB, Federal Reserve and of Bank of Japan are buying fixed income, and even equities sometimes, but they will not buy commodities, in our view. The only commodity European governments have the ability to reduce supply of is carbon emissions – through the tradeable emissions markets. Buying EU emissions at roughly EUR20 a tonne may be more attractive than buying oil at EUR20 in the long run.”

Consequences:

• Very negative for shale oil producers in the US; we estimate their breakeven price to be between $45 and $50. The December 2020 future is currently trading at $37, meaning that most producers will not be able to survive should the price remain close to those levels. Consequently, this is also very negative for US high Yield with US High Yield Energy companies representing around 12% of the segment.

• Very negative for break-even inflation expectations obviously.

• Very positive for G7 bonds: This is one of the main reasons of the sudden drop is G7 rates today.

Over the medium-term, we can also see some positive effects, especially for European countries importing most of their oil consumption.
 

OPEC’s power does not rest in the oil it produces, but rather in the oil it does not produce. Without spare capacity, OPEC is relatively impotent in relation to preventing rising prices.

Following four years of collapsing international capital spend, Trump’s removal of the world’s fifth largest oil producer, Iran, from the market – with sanctions to be fully implemented in November – was never going to end well.

Iran is now likely to focus on influencing oil prices in the only way left available, by disrupting supply from others and elevating the risk premium – hence the military exercises performed over the Strait of Hormuz over the weekend.

An early sign Trump was not going to get his way could be found in Saudi Arabia’s recent production and export data. In July, Saudi Arabia responded to one of Trump’s tweets calling for more oil by promising to push production to 11m bbld. But talk is cheap and the exercise of ramping up supply is never simple, so Saudi Arabia cut supply to 10.3m bbld.

Following Trump’s call for support from OPEC, the only country able to increase production significantly since July has been Libya. It increased production by 270k bbld, compared to Saudi Arabia’s decline of 140k bbld – and this could disappear in a heartbeat.

We believe the combination of tight supply, healthy demand, falling global inventories – down from already under-stored levels – and anaemic spare capacity helps support an oil price which could end the year above USD90.

In the event of a large supply disruption, both OPEC and the US – due to a lack of takeaway capacity in 2019 – will find it increasingly difficult to meet shortfalls next year. The world could then be faced with oil prices spiking back up to all-time highs circa USD120.