Big Oil Is Buying Up Renewable Energy

1. Coal shifts to seasonal load

- Coal continues to decline in competitiveness, with over 95 GW of capacity having shut down in the past decade. Coal used to make up more than half of U.S. generation; that figure is down below 25 percent now.

- While 200 GW remain, those plants are now utilized less and less. During the "shoulder months" of spring and fall, when electricity demand is down, coal plants have utilization rates of under 50 percent. During summer and winter, they are used at more than 60 percent capacity.

- In April and May 2020, coal plants had a capacity factor of less than 30 percent. "As a result, coal plants sometimes assert that they are unable to operate for enough hours to produce enough annual revenue to cover costs," the EIA said in a report.

- Coal plants are now "evaluating plans to run plants on a seasonal basis," the agency said. In other words, they would only operate in summer and winter, and not spring and fall.

- "The expectation is that completely shutting down plants when electricity demand is low will limit financial losses," the EIA said.

2. Positive manufacturing data boosts oil

- U.S. manufacturing data in August expanded to 56.0, according to the Institute for Supply Management. Anything above 50.0 indicates expansion; below that level indicates contraction.

- That was the highest reading since November 2018, although it's coming off of a steep contraction.

- August was also the fourth consecutive month of economic growth.

- Still, employment remains a sore spot. The ISI Employment Index had a reading of 46.4, which was up 2 points, but is still in negative territory.

- Put more succinctly, Wall Street had a banner month in August, with the stock market breaking new records. At the same time, millions of people are unemployed, which will ultimately hold back a recovery for a long period of time.

3. U.S. politics and the oil boom

- Since World War II, U.S oil production has increased 2.6 percent per year under Democratic presidents and stayed almost flat (0.1 percent growth) under Republican presidents, according to Rystad Energy.

- The Obama era, in particular, saw an extraordinary oil boom, one that carried through in the Trump era.

- The Obama administration oversaw a 7.2 percent CAGR for oil production, even including the 2014-2016 downturn. That is the highest growth rate in U.S. history. Trump's growth rate trailed slightly at 7.1 percent.

- Going forward, there are new threats to oil and gas from an increased focus on environmental policy under a potential Biden administration. Rystad says that oil and gas companies in New Mexico are fast-tracking permitting this year, as they hedge against restrictions on federal lands.

- But Biden also presents an upside to oil investments, according to Rystad: A reduced trade war with China, an improved Covid-19 response, and also, drilling restrictions on federal lands would boost crude oil prices, helping drillers on private lands.

4. Oil's downside risk

- The U.S. saw a sharp rebound in oil demand after April, but demand has stagnated in the past two months. The same pattern is largely true globally.

- "Risks to the downside are becoming increasingly more prevalent, and we have been beginning to outline a potential scenario in which a combination of a slower completion and rollout of a potential vaccine/treatment for the coronavirus and a more sustained global recession results in a weaker 2021 than our current base case, which itself sees returns to growth vs 2019 levels on a global basis from September 2021 onwards," JBC Energy wrote in a note.

- In short, risks to oil demand on the downside can be chalked up to a slower aviation recovery, greater economic slowdown, and more persistent telecommuting.

- In this scenario, oil demand averages 4 mb/d less in 2021 than JBC's base case scenario.

5. Oil majors could take 10% share of renewables

- "Capital markets are driving the transformation of the energy industry, with climate-related shareholder resolutions having almost doubled since 2011 and the percentage vote in favor having tripled," Goldman Sachs wrote in a new report.

- That has cost of capital for long-term oil projects topping 20 percent, while renewables have a cost of capital at only 3-5 percent.

- The bank estimates that the European oil majors - led by BP (NYSE: BP), Total (NYSE: TOT), and Royal Dutch Shell (NYSE: RDS.A) - will spend a combined $170 billion in renewable power by 2030.

- That will increase their market share in renewable power to 10 percent, up from 1 percent in 2019.

6. Brent futures back in contango

- The oil market took on a more bearish tone this week, with Brent five-week futures falling deeper into contango at 64 cents per barrel, the largest discount since June 1, according to Reuters.

- The larger contango suggests market weakness and upward pressure on inventories.

- Part of the concern comes from Iraq, which is seeking a two-month extension on implementing its compensatory production cuts.

- As Bloomberg pointed out, diesel margins in Europe have also fallen sharply.

- Brent broke below its 50-day moving average for the first time since May. "Oil has reversed the trend from August," Jens Pedersen, senior analyst at Danske Bank A/S, told Bloomberg.

7. Surging copper amid boom and shortage

- China's copper demand is skyrocketing and copper inventories are hitting decade lows.

- Copper shot up to a two-year high at $6,800 per ton. Analysts at Red Kite Capital Management LLP compared the current market to that of the early 2000s when a rapidly growing China sparked a copper boom.

- "This time it's been different because China has been sucking everything up," George Daniel of Red Kite told Bloomberg. "It feels like we're getting into a period where there's just no copper around." He added that copper prices could surge to $7,500.

- Citigroup analysts agreed, adding that prices could hit $8,000.