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The Financial Ironmonger Blog No 38/2019

The Financial Ironmonger Blog No 38/2019

Every week our guest blogger, David Oakes of Mosaic Money Management (aka The Financial Ironmonger), shares with us his take on some of the major UK and overseas macro and political events that shaped the previous week.

Please be reminded the value of investments, and the income from them, may fall or rise. The views expressed in this article are those of the author at the date of publication and not necessarily those of Chelverton Asset Management Limited or Mosaic Money Management. The contents of this article are not intended as investment or tax advice and will not be updated after publication unless otherwise stated.

–THE FINANCIAL IRONMONGER BLOG NO 38/2019–

Last weekend, a co-ordinated strike hit two of Saudi Arabia’s oil processing plants, reducing processing capacity from five million barrels a day, to just two million, wiping 5% off global capacity at a stroke. In recent months, similar attempts have been made by Iraq-backed Houthi rebels, who the Saudis are fighting in Yemen, further to the south. This strike, by drones and Scud missiles, was far more sophisticated than anything they could bring to the party, and nothing was showing on the radar systems, all pointing in that direction.

The Americans, who maintain vast resources both on land and at sea in this geopolitical hotspot, saw nothing either, but the Iranians took out one of their drones as recently as June, again undetected. So, the first lesson is that there needs to be a complete rethink about how these sensitive sites are protected, and the second is that the manufacturers and users of drones are way ahead of those that would seek to deter them.

The predictable reaction was that the oil price went up 20% when markets opened on Sunday night, only to fall away again. Apart from the fact that the world is awash with the stuff, there are two other reasons at play. America is all but self-sufficient in energy, and so it is not particularly bothered what the oil price is. Secondly, the oil producers have come to the realisation, at least in private, that the higher the oil price, the more encouragement it gives to promoters of alternative sources of power.

Right on cue, the UK announced the latest auction prices for offshore wind generated power, circa £40 per MWh, down 30 % from the 2017 price, and well below the wholesale price of £50 per MWh, therefore requiring no subsidy.

You might think it pretty reckless for the Iranians to attack Saudi directly, but the tables have turned since they signed a twenty-five-year deal to supply oil, gas and petrochemicals to China, albeit at a discount of some 12%, payable in yuan. In return, the Chinese are going to invest £224bn in to the oil industry and £120bn in to transport infrastructure, both bought to their knees by American sanctions. They are also going to send 5,000 Chinese security personnel to protect these assets, and guard oil shipments.

The message to the Saudis is clear; don’t mess with us. The silence from Washington probably reflects the fact that their other key ally in the region, Israel, is in electoral turmoil, and therefore unable to respond. It might even suit them to have a much stronger party in Iran to temper the more impulsive views.

Perhaps the biggest looser from this is Saudi Arabia, where the Kingdom has been planning to float 5% of Aramco, the owner of the oil resources, and the largest company in the world. The desired valuation of $2trn implies an oil price of $100 per barrel, and they have also found it difficult to find exchanges that will bend their listing rules, New York and Tokyo the most likely. This week has shown the obvious vulnerability of their infrastructure, and the acknowledgement that their only product is in long term decline, neither conducive to getting an IPO over the line.

There is not a lot to report on Brexit this week, where both sides have been locked in the Supreme Court, with an answer expected on Tuesday. Optimists insist that a deal will be done, whilst seasoned observers in Brussels reckon that it is a forerunner of a blame allocation strategy, when one doesn’t.

–MORE ABOUT OUR GUEST BLOGGER, DAVID OAKES–

David joined Manchester stockbroker Henry Cooke, Lumsden in 1977 and after becoming a member of the London Stock Exchange in 1984 held a number of senior positions within the firm including Managing Director of the in-house fund management company and member of the Executive Committee.

After senior appointments at Cazenove Fund Management and latterly Mercater Capital Management, David joined Mosaic Money Management in 2013. He has successfully managed private client and fund portfolios for over thirty years and has particular expertise in providing a multi manager service to his loyal client base.

The Financial Ironmonger is a hat-tip to Ironmonger Lane, the location of Chelverton’s London office.