Summary

• Many industry players operating in the Lower 48 have a large amount of cash on their balance sheets in 2019 due to accommodative tax policy and cheap debt
• Longer-term strategic capital deployment will help firms lay a foundation for continued business growth, hedging against weakening macroeconomic fundamentals
• These economic conditions are expected to drive more funds towards M&A activity
• However, to capture M&A value by realizing merger synergies, operators should evaluate whether they have the right data insights on enterprise spend, costs, and market trends to build a savings roadmap
  

Summary

• The US raised tariffs on $200 billion of imports from China from 10% to 25% in early May. China responded with retaliatory tariffs on $60 billion of imports from the US, effective June 1.
• This is the third round of US tariffs on imports from China, which now affect $250 billion of imports. The US has threatened a fourth round of tariffs on $300 billion of imports, or nearly all remaining trade with China.
• The new tariffs cover 1,200 chemical and 500 metal products. They are also the first to include consumer products, which raises the prospect of accelerating price increases for US consumers. Neither List 3 nor List 4 includes rare earth minerals.
• Trade negotiations between Beijing and Washington remain underway. Slowing economic growth in either country would add pressure to advance the negotiations, but supply chain teams must prepare for potential price risks.

We’re thrilled to share that over sixty industry executives across more than forty firms attended the 4^th Annual Oil & Gas Executive Forum on May 22nd at the Petroleum Club of Downtown Houston for our best event yet.

As the new year begins and E&Ps continue to face pressure to focus on returns, operators remain on the lookout for incisive market data and forecasts that provide greater visibility into potential risks and opportunities. 

With cost volatility and a need to continue adapting to an evolving industry, Oil & Gas firms have increasingly turned to innovations such as "digitalizaton" as solutions, with many industry leaders citing it as a top of mind focus in 2018 and beyond. But what is digitalization, and how can firms think about leveraging it effectively to drive greater cost competitiveness and overall higher EBITDA?

To help answer these questions, PowerAdvocate's sister company Wood Mackenzie recently published a report outlining the digitalization landscape in Oil & Gas, including a case study of how one operator drove >$1B in savings and a 25% reduction in third party costs through digitalization and big data from PowerAdvocate.

Platinum, a key input to critical refining catalysts, has already faced steep multi-year price declines and has recently hit a long-term low. However, recent hints at a price rebound point to substantial possible cost risks for downstream firms.

Summary: What Happened?

In late March China launched its first oil futures contract that may fully appeal to non-Chinese risk managers. Since oil field service (OFS) providers and other companies often peg contract pricing to oil benchmarks such as WTI and Brent, this introduces a new option for contracts. However, O&G supply chain teams should beware the new option: rather than entertaining the new Chinese oil futures, teams should consider less risky and more established alternatives to mitigate risk and avoid unnecessary costs.

Why Have I Not Heard of Chinese Futures Before Now?

Despite surging activity on China’s three main commodity exchanges (the Dalian Commodity Exchange, the Shanghai Futures Exchange, and the Zhengzhou Commodity Exchange), until recently, several factors have precluded Chinese commodity futures markets from emerging as commonly referenced international price benchmarks:

• Lack of cross border access: Foreigners have seldom been permitted to access and utilize Chinese commodity futures. Only a limited number of Chinese state-controlled enterprises have been granted licenses by the Chinese government to transact in commodity derivatives outside China.
• Non-convertibility of the RMB: The Chinese government limits the convertibility of its currency, the RMB. This can make exchange rate transactions costlier to execute than those with other currencies. Market participants have expressed concerns that profits earned on Chinese commodity futures contracts may potentially be difficult to move out of China.

Both factors have contributed to large divergences between Chinese and foreign benchmark pricing across many commodities. These divergences make Chinese contracts unsuitable to hedge commodity exposure incurred outside of China and arguably make Chinese commodity derivative prices less reflective of global market conditions than their foreign equivalents. Traders and supply chain managers have thus been reluctant to use them. 

UPDATE: In a surprising move, President Trump announced on March 1 that he intends to impose sweeping 25% tariffs on steel imports and 10% tariffs on aluminum -- the most severe of the potential trade remedies recommended by the Department of Commerce. Details of the plan are still unknown, but the announcement has already driven dramatic steel and aluminum price increases and spooked equipment manufacturers. Register for our March 13 webinar for the latest updates on Section 232.  

Read on for our initial analysis of the Department of Commerce's recommendations.

As the Texas and Louisiana Gulf Coast recovers from Hurricane Harvey, Supply Chain organizations face the challenge of navigating its effects, from chemicals to logistics to labor.

Key Takeaways

• Since last fall, a surge in drilling and completions activity in the Permian Basin has led to a dramatic increase in sand demand and, in turn, substantial sand price inflation.
• In response, sand mining companies have begun investing in a slew of new mines in the area.
• While new sand mines will deepen the market’s oversupply, prevailing logistical bottlenecks will likely prevent significant sand price deflation from occurring.

Sand Demand and Sand Price Inflation Since Last Fall

Demand for sand used in oil field operations plummeted after the oil-price crash in mid-2014 and the subsequent sharp drop-off in well completions activity. This trend, however, has recently reversed. Since late 2016, a surge in drilling activity in the Permian, coupled with the activation of drilled-but-uncompleted wells (DUCs), has led to a massive increase in sand demand in the basin (Figure 1). During the first half of 2017, total US sand proppant demand was 63 million tons per year, a 75% increase over 2016 levels.

Figure 1: Permian Basin Sand Demand

Sources: United States Energy Information Administration, Baker Hughes, PowerAdvocate