China And India Drive Oil Demand Recovery

1. Shell reports small profit

- Royal Dutch Shell (NYSE: RDS.A) reported a small $177 million profit in the third quarter, rebounding from a $6 billion loss (plus a massive write-down) in the second quarter. But headwinds remain – low refining margins, low LNG margins and low crude oil prices.

- Shell also raised its dividend slightly, signaling a plan to progressively hike dividends going forward. The dividend rose 4 percent to 16.65 cents per share.

- Shell said that once it cuts its massive debt pile from $73.5 billion down to $65 billion, it would begin handing off 20% to 30% of cash flow to shareholders.

- Meanwhile, Shell continues its energy transformation, allocating 25% of its capex to “the future of energy businesses,” including hydrogen, biofuels and renewables.

2. China and India drive oil demand

- China’s gasoline demand could hit a peak around 2027, according to a new report from Goldman Sachs. Demand could fall by around 6 percent from that peak by 2030.

- In this scenario, China’s crude oil demand peaks around 2026, falling 11 percent by 2030.

- However, Goldman Sachs does not see crude oil demand hitting a peak this decade, “due to sustained non-OECD economic growth.”

- In the next five years, China and India still exhibit strong demand growth, averaging 2 and 3 percent CAGR, respectively.

3. Crude futures sink

- Oil prices plunged this week on renewed lockdowns in Europe and a rapid spread of the coronavirus in both Europe and the United States. Libya bringing supply back online poses another bearish factor.

- Longer-dated oil futures are also under pressure. The five-year Brent crude price hit a 15-year low of $46.27 per barrel on March 20, before rebounding to $53.85 in August. But prices are back down below $48, closing in on the 15-year low.

- The slide in futures “appears symptomatic of a market beginning to worry about the potential for peak demand and the effect of energy transitions, as well as becoming concerned that significant economic and oil demand implications of the coronavirus pandemic will extend several years into the future,” Standard Chartered wrote in a note.

- Lower prices five years out indicates weakening confidence in the market, and it also sends a price signal to reduce investment in new supply, the bank added.

4. China becomes an aluminum importer

- China was a net importer of aluminum for two straight months, upending a long-term trend.

- China was exporting 400,000 tons of aluminum in the spring on a net basis, but that vanished in recent months as imports surged.

- The imports are a symptom of arbitrage, with Shanghai futures prices rising above prices on the London Metal Exchange, according to Commerzbank.

- That arbitrage window is now closed, and China will resume net exports. The problem is that the global market is “amply supplied at present.”

- But the downside risk could be limited as analysts expect global demand to begin picking up.

5. Metals prices trending up

- Gold prices are trading close to $1,900 per ounce, having surged this year on the back of monetary easing and the prospect of further stimulus.

- Scotiabank revised up its gold prices through 2023. “Of particular import to the new forecast is the Federal Reserve’s stated tolerance for stronger inflation, which, though it will be subject to implementation challenges, has the potential to weigh on US real rates and support bullion values throughout the medium-term,” Scotiabank wrote in a note. The bank sees gold prices at $1,850 per ounce for the next two years.

- Copper prices have also climbed in recent months, rising to $3.20 per pound last week. “Also lifting copper prices are rumours that the Chinese government will soon step up purchases and stockpile a range of commodities to support its ongoing stimulus plans,” Scotiabank said.

- Nickel and aluminum prices are also trending up on positive Chinese industrial activity. Both are up 25% from earlier this year.

6. Natural gas prices soaring

- Natural gas prices continue to soar, rising above $3.30/MMBtu this week. Prices have more than doubled since June.

- The EIA reported a smaller-than-expected inventory injection, just ahead of winter demand season. Also, colder temperatures swept across the middle of the U.S.

- At the same time, LNG exports have been ramping up, after seeing widespread cancellations a few months ago amid a global supply glut. With more gas diverted overseas, the market has tightened.

- “If the pattern holds and LNG demand rises, gains may lie in store for the December contract,” EBW Analytics Group said, according to NGI.

7. Job cuts continue to mount

- ExxonMobil (NYSE: XOM) said it would cut 1,900 jobs after its latest strategic review, mostly affecting employees in Houston.

- Compared to the end of 2019, Exxon’s job cuts will total 14,000. Exxon is not alone. BP (NYSE: BP) plans to cut 10,000 jobs, Royal Dutch Shell (NYSE: RDS.A) will cut 9,000 and Chevron (NYSE: CVX) announced cuts of 6,000.

- At the same time, Exxon said it would maintain its dividend, keeping it flat. This year will be the first year since 1982 that the oil major did not increase its dividend.

- However, with a yield of around 10%, Exxon may struggle to maintain a steady dividend. “We have doubts about the sanctity of the dividend longer-term,” said Jennifer Rowland, analyst with Edward Jones. “There is greater potential for a dividend reduction in 2021 if demand doesn't fully recover.”