One of my most prolific pieces was the late-2021 piece on Valaris, the offshore driller. Valaris is up significantly since then.
A year ago I came out very negative on Transocean, an even bigger offshore driller — but with a massive fan base across the world and especially on FinTwit! Transocean is down significantly since then.
The problem offshore drilling now faces is that with an oversupplied market for rigs, the market for oil is weak. For oil majors to charter drillers, usually the price of oil should be higher.
But now, the world seems to be flush with oil — WTI is currently selling for under 70$. It touched $130 in early 2022, not exactly time for big projects and capex, is it?
Oil Price Competition
OPEC started cutting production in October of 2022, and that’s when the big fight between the Biden Administration and Saudi Arabia started. Remember that? 👇
Since then, OPEC extended their oil production cuts again and again.
The Pivot
But it seems falling prices into these cuts doesn’t benefit Saudi and OPEC.
This just means less revenues per barrel and less total revenues because of lower barrels! What an epiphany, right?
The answer is simple: REVERSE production cuts!
The FT seems to have information that OPEC is ready to throw in the towel of production cuts. The leak is that they will start increasing production by 86,000bpd starting this November, and take that to 1mln bpd by December 2025 — “according to people familiar with the country’s thinking”.
Actually, Saudi and 7 other OPEC+ members were due to start unwinding their production cuts this October but news that hit the wires early September signalled that they were still trying to control the price of oil (2-month extension).
—> It seems it is now clear that this policy will be abandoned, and the production cuts will start unwinding.
MBS LEGACY
KSA Crown Prince MBS seems to be all in on transitioning away from oil revenues and into sustainable energy, tourism and other sectors.
But this cost money, the NEOM mega project is expected to cost $1.5 trillion — with the Saudi SWF only worth just shy of $1 trillion.
The risks I see here is that by trying to diversify from an over-concentration in oil, the Kingdom is once again concentrating in a few projects. This means business risk and very high requirements until they build these projects.
Listen to the podcast attached for my final thoughts..
Sincerely,
Philo 🦉
MBS Ambition = Crude Awakening