Five Forces to Affect Wagers on the Re-opening of the West Sea Oil Exploration Projects

 

Speculating, more than anything else, is capitalizing on politically caused distortions in the market—Doug Casey 

Five Forces to Affect Wagers on the Re-opening of the West Sea Oil Exploration Projects 

 

From the Inquirer(October 16): President Rodrigo Duterte’s go-signal to resume oil and gas exploration in West Philippine Sea has perked up investor appetite on mining/oil stocks with stake in service contracts disrupted by the territorial dispute between the Philippines and China in the last six years. The biggest beneficiaries of the renewed oil exploration play were PXP Energy Corp. (PXP) and Atok Big Wedge, whose shares surged by nearly 50 percent on Friday. Apex Mining gained 34.84 percent and was the day’s most actively traded company. Shares of PXP’s parent firm, Philex Mining, also rose by 20.76 percent. As other mining/oil stocks also mostly gained, the mining/oil counter advanced by 10.79 percent…Energy Secretary Alfonso Cusi has given the “resume to work” notice to contractors doing petroleum exploration in the service contracts (SC) 59, 72 and 75. Atok Big Wedge’s subsidiary Tidemark Holdings Ltd. has a 20 percent in UK-based Forum Energy Ltd., which in turn has 70 percent economic interest in SC72, which is situated offshore west of Palawan Island and is host to the Sampaguita offshore gas discovery. Drilling in the area had been placed on hold by the Philippine government in 2014, under the term of then President Benigno Aquino, pending the resolution of territorial sovereign disputes. PXP, for its part, holds a 79.13 percent in Forum Energy. Apex Mining’s subsidiary, Monte Oro Resources & Energy, has 30 percent participating interest in SC72. 

 

Returns (weekly, year-to-date): PXP (+45.39%, -10.65%), APX (+31.45%, +111.11%), PX (+21.28%, 101.41%), FPI (+27.43%,+9.9%), AB (+49.87%, +5.3%), APO (+9.09%,-13.04%), OPM (+13.1%, -13.64%), OV (+13.75%, -17.27%), PERC (+12.9%, -14.63%) and ACEX (+11.57%,-7.8%). [as of October 16] 

 

Nota Bene: Past performance does not guarantee future results. 

 

Five forces are likely to affect speculations on the West Philippine Sea oil and gas projects. 

 

Here they are. 

 

1.Politics. 

 

Politics determine the existence and the operating parameters of domestic local oil and gas exploration projects. Yet, what the government gives or permits, it can take away again.  

 

In an attempt to downplay the immediate euphoria… 

 

From the CNN (October 16): Insisting that the lifting of the suspension of oil exploration activities in the West Philippine Sea was a unilateral move, Energy Secretary Alfonso Cusi now expects China to ask for an explanation. “I’m sure that they will not just take it without raising a word. I’m sure they are going to write us and we will address that as it comes – na bakit natin nilift (on why did we lift it), and we will be answering that,” Cusi said in an online media briefing on Friday. 

 

However, later… 

 

From the ABS-CBN (October 16): China hopes it can work together with the Philippines in jointly developing energy projects in the South China Sea, foreign ministry spokesman Zhao Lijian told a daily briefing on Friday. Philippines President Rodrigo Duterte has lifted a moratorium on petroleum exploration in the South China Sea, paving the way for three projects to resume, including a possible joint venture with China. 

 

For instance, the real estate boom, we’ve been told, would find its elixir in POGOs. What happened to them? 

 

2.Prices of oil and gas determine the viability of these projects.  

 

Falling prices of oil and gas will diminish margins, thereby reducing the incentives for these firms to pursue engagements in the project/s. On the other hand, rising oil prices, ergo, increasing margins, encourage investment commitments. 

 

Ever since its zenith two years ago, international oil prices have been southbound. However, the pandemic accelerated its cascade; oil prices crashed from March to April, but, in response to the collective actions of global central banks, subsequently rebounded. 

 

Nevertheless, global oil rig counts, which resonated oil prices, plummeted to multi-year lows and continues to fathom at the same levels as of September. That is, while oil drilling activities collapsed along with oil prices, the latter’s bounce has barely induced operators to increase exploration. 

 

Needless to say, a decreed re-opening of oil and gas exploration projects won’t necessarily translate to its reactivation (unless these are state-owned projects). 

 

3.Price trends of the underlying issues, before the news announcements, matter.  

 

 

Sure, the news spurred price spikes on shares of many project related issues, such as AB, FPI, OPM, OV, APO, and ACEX. But even before the announcements, inertia has governed the undercurrent of their respective trends. Friday’s speculative orgy, a possible sign of climaxing euphoria, will exhaust itself. 

 

On the other hand, the news only accelerated, confirmed, and reinforced the uptrends for several issues such as APX and PX, as well as PERC. Though these issues have reached overbought conditions and may see substantial retracements, the underlying trends have been more resilient and likely sustainable over a longer time frame. 

 

The outperformance of gold prices relative to oil underpins the strength of the price trends of gold miners (with oil exploration exposures). 

 

4.Volatile properties of exploration shall influence share prices too. 

 

Oil and gas projects, like its mining contemporaries, shares a similar lifecycle: drilling, speculation, discovery, development, and production phases. 

 

And the exploratory phase tends to be most volatile in the context of price movements. 

 

5.Market liquidity and breadth. 

 

The current easy money regime has been enabling and facilitating wagers supported by several themes, including mining and oil issues. Market breadth has shown signs of improvement. 

 

Have cash-rich banks been using such surpluses to pump up select sectors in the PSE? 

 

While it may be true that liquidity in the PSE, expressed in peso trading volume, remains wanting, mines have led the marginal improvement in market breadth. 

 

Of course, there are other stories besides the mining sector, namely infrastructure (cement, project managers, and builders), alternative energy, and eCommerce (telcos, logistics, transports and real estate), as well as listed firms of a political favorite. 

 

As a side note, raging prices of alternative energy appear to be a gung-ho bet on the triumph of the “blue wave” in the nearing US elections. 

 

Again, politics, prices of oil, underlying price trends, the oil and gas lifecycle, as well as market liquidity and breadth, will likely influence the speculative appetite of the oil sector. 

 

Disclosure: The author has minor exposures to some of the aforementioned issues. 

 

 

The Long-Term Price Trend and Investment Perspective of Gold

Instead of trying to interpret each move, it would seem prudent to see Gold prices from the prism of long-term trends. 

Gold prices etched a new milestone this week.  

After bottoming in January 2016, gold’s uptrend began to trek upwards in August 2018. This upside momentum picked up speed in the middle of 2019 when the issues on the US financial system’s repo holdings surfaced.  

The US government’s response to COVID-19 further accelerated this upside, which has turned almost vertical last week to break past September 2011 acme. 

While the eyes of the public have fixated on the USD quotes, the record run in gold prices has signified a global phenomenon.

Or, surging gold prices have reached milestone highs against ALL fiat currencies, including the Philippine Peso, for the FIRST time since the end of the gold exchange standards, otherwise known as the Bretton Woods standards through the Nixon shock on August 15, 1971.  

This unprecedented moment also suggests that while the actions of the US Federal Reserve and the Federal Government plays a significant role in the recent uptrend, global factors have likewise contributed materially.   

 

Like all assets, gold prices operate in long-term cycles.  

The last two gold bull-market had a 9- to 10-year cycle.  

Since August 1971, gold’s run-up from $35 to $760 occurred in about 9-years. Of course, nothing goes in a straight line; there were countercyclical moves within the general trend.  

After two decades of inertia, Gold prices bottomed in 2001-2002, which set the stage for the next ten-year uptrend, rising from about $260 to $1,794. 

If history rhymes, gold’s recent breakout in USD, peso and other currencies will translate to a multi-year upside. 

Or, if this uptrend of gold prices (in USD and peso) will at least resonate with the past, we should expect gold mining issues (here and abroad) to echo the ascent of its product.  

 

The gold indices of the US HUI (NYSE Gold Bugs), XAU (Philadelphia Gold and Silver), and Barron’s Gold Mining recently surged to reflect the breakout of gold prices.  

 

The chart of Philex shows how its prices behaved during the previous 10-year gold market. PX rose from about Php .15 per share to Php 26.55.  

And for the first time, in recent years, prices of domestic gold mines appear to have diverged or decoupled from the mainstream issues to the upside.   

So regardless of whether gold prices are about resurgent inflation or systemic credit deflation or escalating collateral issues of the offshore dollar system, a resumption of the gold’s uptrend will provide a safe-haven to your portfolio and or generate promising returns, without requiring substantial risk exposure.  

And political obstacles have also diminished.  Back in 2016, I predicted that the war on mines will end*. 

Once the bubble economy begins to corrode and where prices of metals soar, such industry bullying will come to an end. Ban on mining will transform to welcome back mining! 

Why the War on Mining Will Fail!  June 26, 2016 

From GMA (July 23, 2020): Allowing some mining companies earlier suspended or closed by the late former Environment Secretary Regina Lopez could help generate much-needed revenues for the government to respond to the COVID-19 crisis, a top official of the Department of Environment and Natural Resources (DENR) said….Environment Secretary Roy Cimatu, on Thursday, confirmed that some mining firms closed or suspended by Lopez in her controversial industry-wide environment audit would be allowed to resume operations after onsite inspections and reviews found that the miners have rectified their violations and complied with corrective measures.  

Gold prices are presently overbought. Since no trend goes in a straight line, then profit-taking should be expected.  

And this pause would present a timely window for entry points.  

Has the Phoenix Risen? Gold Prices Barrels Through $1,400, a Six-Year High; Be Bullish on Gold Mines!

Has the Phoenix Risen? Gold Prices Barrels Through $1,400, a Six-Year High; Be Bullish on Gold Mines!

No international agreements, no diplomats, and no supernational bureaucracies are needed in order to restore sound monetary conditions. If a country adopts a noninflationary policy and clings to it, then the condition required for the return to gold is already present. The return to gold does not depend on the fulfillment of some material condition. It is an ideological problem. It presupposes only one thing: the abandonment of the illusion that increasing the quantity of money creates prosperity—Ludwig von Mises, Economic Freedom and Interventionism

Gold Prices Soar to 2013 Highs: Expectations of Fed’s Easy Money Policies?

From the CNN: Gold bugs are finally having a moment. The price of gold topped $1,400 an ounce Friday. That's the highest level since September 2013. The price of gold is now up nearly 10% this year. Gold has gained momentum thanks to expectations of a rate cut by the Federal Reserve as soon as next month. Rate cut hopes have helped push the dollar lower -- and gold tends to rally when the dollar gets weaker because that makes it more attractive to foreign buyers.

From AFP/Philstar: The Federal Reserve opened the door to an interest rate cut on Wednesday, vowing to act to keep the economy growing as uncertainties about trade and other issues mount. US Federal Reserve chief Jerome Powell said trade friction and slowing growth worldwide have led many central bankers to feel the case for an interest rate cut has "strengthened" but most still want to see more data before making a move. But one policymaker dissented in the vote, advocating for an immediate cut -- something President Donald Trump has been calling for loudly and which many economists say is necessary given the damage done by the escalating trade frictions. Hasn’t the decade long growth of US economy been the longest. (bold added)

The US is poised to register the longest economic expansion on record next month, but by far has been the weakest.  Powell’s Fed just raised policy rates last December, and now they’re contemplating cuts, why?  Because US Federal Reserve chair Jerome Powell accommodated on the wishes of US President Donald Trump who threatened to him with demotion?

And why a turnaround from ECB’s Mario Draghi who proposed to "cut interest rates again or provide further asset purchases if inflation doesn’t reach its target"?

Didn’t US President Trump throw the gauntlet of the risk of a currency war by accusing ECB’s Draghi of “currency manipulation” for announcing the likelihood of ECB’s monetary easing?

Wouldn’t these imply an escalation of policy uncertainty for the global economy, aside from trade friction?

The Panic Bid on Global Treasury Markets!

And why the panic bid over global bonds?

Figure 1

The global stock of negative yielding bond exploded to $13 trillion by the end of the week, backed by a one-day record flow of $700 billion! (figure 1, top window)

It’s been a race to the lowest yield for global bonds. (figure 1, middle window) Why?

The global money supply is at a record high but in the context of the US, money supply expansion has led to lower monetary velocity, depressing statistical inflation, and the estimated economic output.  (figure 1, lower window)

Has the global money supply expansion been reflecting the escalation of financial repression; inflating asset prices and debt stock coming at the expense of the real economy?

Has the panic buying of global bonds been symptomatic of an escalation of deflationary expectations?

And or, have the global fixed income community been front-running global central banks in expectations of a coming financial bailout through the revival of large scale asset purchases (LSAP) or quantitative easing (QE) via massive bond buying?

Has moral hazard become deeply entrenched to have plagued the global fixed income markets?

And if the fixed income markets expect global central banks to respond aggressively to a sharp deterioration of economic conditions, why has the stock market diverged from this perspective?

Have financial markets become utterly dysfunctional from frequent backstops, manipulations and interventions?

Have financial markets been so enamored or mesmerized by the perceived power of the central banks to stabilize financial and economic conditions? (the Halo effect)

And have financial markets been kept blissfully blind from the escalating entropy of the real conditions?

As Doug Noland of the Credit Bubble Bulletin aptly puts: “Today’s prescription for unstable markets and finance: more monetary stimulus. For unstable economies: more monetary stimulus. For inequality, trade wars and geopolitical uncertainties: much more monetary stimulus.”

Soaring Gold and Treasury Prices: The Liquidity And Fear Trade

Have the Fed-led global central banks been truly in control of the markets?

Figure 2

Yield curve inversions have afflicted not just the US treasury markets such as the 10-year 3-month and the 10-year Fed Fund Rate, but also the US Libor curve, and the Eurodollar futures.

Haven’t these been indicative of TIGHT monetary conditions?

And hasn’t the collapse of the spread of 10-year Fed Fund been a dynamic even before Trump’s “trade wars”?

Figure 3

And what just happened to the Fed’s floor system? The Effective Fed Fund rate has been drifting ABOVE the Interest on Excess Reserve (IOER) since April, the latter which is supposed to serve as a ceiling. (figure 3, top window)

And why have primary dealers have been massively hoarding US treasuries? Have collateral issues been intensifying? Have surging gold prices been a manifestation of an ongoing rapid depletion of liquidity, through a growing scarcity of collateral (rising repo fails), to inspire “fear trades” in both gold and government treasuries? (figure 3, middle and lower windows)

Has the volte-face of the FED been from these liquidity risk factors?

Why have these occurred if the Fed and central banks have been in control?

If so, has gold been pricing in magnified risks of a global economic and financial shock?

To add, geopolitical risks have been mounting.

For instance, though US President Trump had second thoughts to bomb Iran, in retaliation to Iran’s downing of US drones, he ordered a cyber assault on Iran’s military facilities instead. Bombs struck two oil tankers from unknown sources in the Strait of Hormuz, but the US government lays the blame for this on Iran. And this may be another reason for Trump's aborted bombing. The Indian government sent warships to protect its shipping interests.

Hong Kong’s mass protest against the extradition bill had blamed by the Chinese government on Western interference.

The Italian government desires to control its central bank by asking for legal powers to make the appointments of the members of the Bank of Italy.

Which will be proven right in a not so distant future (perhaps 2H of 2019?), the Gold-Treasury Fear Trade or the Risk-ON Equities?

Gold Price Ramp in Other Currencies, Philippine Peso Based Gold Prices Approach Record High

Figure 4

Gold prices in USD crossed the 1,400-threshold for the first time since September 2013.

Surging gold prices have become apparent everywhere.

Gold prices in the Philippine peso (upper window) soared to 2012 highs and may be testing the all-time 2011 peak soon.

Meanwhile, gold prices in the Malaysian ringgit (lower left) and the Indonesian rupiah (lower right), among the many others, raced to new records.

Though the USD will remain the benchmark against gold, individual currencies will perform distinctly relative to gold.

An uptrend in gold prices should manifest in most currencies.

Mining Investments: Be Fearful When Everybody Is Greedy And Greedy When Everybody Is Fearful!

From an investment/market point of view, global gold mining stocks were on fire this week.

Figure 5

The FTSE Gold mines surged 7.6% this week and posted a 21.58% return for the year. (Figure 5, upper window, from US Global Investors)

Meanwhile, the NYSE Gold Bug Index (HUI) soared 9.35% over the week, constituting almost half of its 18.31% 2019 return.

The Philippine mining index was higher 2.12% (-10.93% y-t-d) this week primarily from gains of gold mines. For the week, Philex Mining bested the field up 10.65%. Apex Mining’s +7.44% came in second, then United Paragon’s +4.62%, Lepanto +3.6% and Manila Mining +2.7%.

With the passage of the BSP’s Gold Bill, the war on gold has ended, which should reduce political uncertainty and risk of the sector. [See Bullseye! NG-BSP Admits that the War on Mining Has Failed, the BSP’s Gold Bill is Now a Law! May 26, 2019]

Therefore, a sustained uptrend in gold prices should benefit the underappreciated and highly unpopular industry.  

As Warren Buffett advised, Be fearful when everybody is greedy and greedy when everybody is fearful.

It is time to apply the same formula to the mining sector.

Fear will remain the dominant sentiment over an extended period. As such, returns should outperform as risk diminishes.

In the fullness of time, mines will become a mainstream bubble similar to its previous cycle (2004-2012) which climaxed in 2012.

Let me share a truncated refined excerpt (from my MDR report) for a potential exposure to Apex Mining [PSE: APX]:

APX provides three buying windows which are all dependent on the success of the seed, or the recent breakout.

The first window is at the present levels (1.25 to the early 1.30s), representing an eight-month downtrend.

The second is the three-year (2016) resistance (1.40-1.50).

The third is on the psychological threshold the two-year high of Php 2.

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Nota Bene: A sustained upside of the international prices of gold ultimately determine the feasibility of the gold trade.

Be greedy when everybody is fearful.