There are two commodity stories today worthy of an investor's interest: the collapse of shares at Glencore (GLNCY) and the abandonment of Arctic drilling by Shell (RDS.A).
Both are interesting as they point to a continuing collapse in the commodity space, and an even more serious worry about what that collapse means for global economies going forward.
Shell has invested almost $7 billion to date to gain permission and develop the first leases for deepwater drilling in the Arctic. This story of Shell's second big foray north (after its first ignominious defeat with the Kulluk in 2012) gained wide media attention last month as President Obama visited Alaska -- making his case for a global initiative on climate change while approving Shell's leases. Environmentalists made further news in attempting to block the drill ship Noble Discoverer from leaving port in Seattle in July using kayaks -- a ripe media image that received wide exposure.
But the economics of Shell's activity in the Arctic was always suspect. Even with the potential of 15 billion barrels of oil in Arctic waters, the technical challenges of Arctic drilling continue to make offshore extraction of Arctic crude some of the most expensive oil in the world. With oil prices expected to stay low for a long time, according to most oil analysts, the relatively weak results of Shell's first Arctic drilling provided a neat excuse to throw in the towel on the Arctic -- at least for now.
And perhaps that is the point of today's story -- more than the environmental pressures or technical challenges in further exploring the Arctic. Shell seems to be ready to consider the possibility that oil could stay well below the break-even price for Arctic crude -- estimated to be above $80 a barrel -- for a very long time. Another long-term source for crude supply is going to be put on a back burner until prices can again justify the costs and risks.
And that seems to be the theme that is starting to get through to the oil companies, whether they are drilling in Texas or North Dakota, or offshore in Brazil or the Arctic.
Further woes in this long-haul commodity bust have all but destroyed the share price of Glencore, one of the largest physical players in copper as well as oil and gas. Glencore, you may remember, generated a lot of interest for me in 2010. I saw it as the successor to commodity trading power after the investment banks and the NYMEX and CME commodity trading floors' influences had disintegrated. But Glencore CEO Ivan Glasenberg did not chart a course to fill that vacuum and merely run a trading house. Taking Glencore public in 2011 was one of several huge capital raises to buy up physical commodity assets. A successful merger with Xstrata in May 2013 and an unsuccessful bid for Rio Tinto (RIO) showed not merely Glencore's appetite for mining assets, it represented an attempt to take monopolistic control of copper production and global pricing.
But the commodity recession has gotten in the way of Glasenberg's plan.
Now he is forced to find some way to again restructure the mega-miner's finances, reeling under the strain of copper prices that are at six-year lows and perhaps remaining there for longer than anyone thought possible.
While both Glasenberg and Shell CEO Ben Van Beurden are being forced to see a longer bust cycle for both oil and copper and react to them in the boardroom, we are able to sit on the sidelines and view the much more important macro investment point to both stories. Both companies, taking big capital write-offs for missed projects and mergers, will ultimately be forgoing future production potential that will have a large effect on global supply. Alaskan oil barrels won't come out of the ground from Shell in 2017, nor will copper production increase for Xstrata. This will add to the growing palette of future supply in both copper and oil that won't exist even as demand for both continues to inexorably grow.
No one is immune: We are watching the remaining throes of a commodity bust cycle debilitating some of the smartest and best capitalized players. Executives might be convinced that low oil and copper prices are temporary, but bondholders won't listen to hopes and promises: They demand to be paid.