1. China bouncing back
- China imposed the strictest lockdown at the start of the pandemic, and "has so far reaped the biggest rewards," Bank of America Merrill Lynch wrote in a report.
- China's GDP contracted by 6.8 percent year-on-year in the first quarter, and rebounded by 3.2 percent year-on-year in the second. For the full year, China's economy is on track to expand by 2 percent, while the Eurozone will see an 8.2-percent contraction and the U.S. will see an 8-percent contraction.
- In June, when Beijing reported a sudden uptick in cases - 330 total - the government responded swiftly. Mass transit ridership contracted by 50 percent and air traffic plunged by 80 percent for three weeks.
- There are many risk factors for the spread of Covid-19 - age, health, urbanization, globalization - but Bank of America says mobility is one of the most important risk factors, and that governments will likely continue to restrict it. The bank forecasts global mobility will need to decline by another 15 to 25 percent if the R factor is to fall below 1.0.
- "In turn, oil demand could fall by at least an additional 3mn b/d beyond our current base case of a 2.7 mn b/d YoY contraction," the bank said.
2. Refining margins out of negative territory, but still low
- Refiners cut back processing severely when margins plunged into negative territory earlier this year.
- That has refiners on track for a horrific quarter. Valero (NYSE:…
1. China bouncing back
- China imposed the strictest lockdown at the start of the pandemic, and "has so far reaped the biggest rewards," Bank of America Merrill Lynch wrote in a report.
- China's GDP contracted by 6.8 percent year-on-year in the first quarter, and rebounded by 3.2 percent year-on-year in the second. For the full year, China's economy is on track to expand by 2 percent, while the Eurozone will see an 8.2-percent contraction and the U.S. will see an 8-percent contraction.
- In June, when Beijing reported a sudden uptick in cases - 330 total - the government responded swiftly. Mass transit ridership contracted by 50 percent and air traffic plunged by 80 percent for three weeks.
- There are many risk factors for the spread of Covid-19 - age, health, urbanization, globalization - but Bank of America says mobility is one of the most important risk factors, and that governments will likely continue to restrict it. The bank forecasts global mobility will need to decline by another 15 to 25 percent if the R factor is to fall below 1.0.
- "In turn, oil demand could fall by at least an additional 3mn b/d beyond our current base case of a 2.7 mn b/d YoY contraction," the bank said.
2. Refining margins out of negative territory, but still low
- Refiners cut back processing severely when margins plunged into negative territory earlier this year.
- That has refiners on track for a horrific quarter. Valero (NYSE: VLO) posted an adjusted net loss of $504 million in the quarter, for example, after reporting a net loss of $1.9 billion in the first quarter.
- Negative margins are also expected to hit the profits of the oil majors, which have typically found solace in their integrated model - refining typically offset losses from upstream units during previous downturns. Not this time.
- U.S. refinery runs hit a low in April at 12.6 mb/d, down more than 20 percent from the same period a year earlier.
- However, processing has been inching back up from record lows, as demand climbs back. Refining runs rose to 14.595 mb/d in the week ending on July 24. But that is are still down more than 14 percent from year-ago levels.
3. Traffic down, but gasoline demand rebounding
- There are conflicting views on what oil prices might do next. On the one hand, traffic remains a fraction of its former self, hovering at between 30 and 60 percent of year-ago levels in major U.S. cities.
- But U.S. gasoline demand posted a surprisingly strong week on July 24. Demand rose to 8.8 mb/d in the U.S., the highest weekly total since March. It also came after several weeks of contraction, stemming from the latest coronavirus wave in California, Texas, and Florida.
- The weekly rebound in gasoline demand came when crude inventories also fell by a whopping 10.6 million barrels. The data lifted crude prices on Wednesday.
- However, talk of a V-shaped recovery is long gone. The latest worrying sign comes from Europe, where coronavirus cases are back on the rise and traffic is falling again.
- A few weeks ago, Berlin saw traffic actually rise above year-ago levels. The latest data shows it back down below 90 percent of year-ago levels.
4. Gold outperforms other commodities
- Gold prices have surged as of late, reaching new all-time highs. Gold has surpassed other commodities, as well as real interest rates and major currencies, including dollar alternatives like the Euro, Yen, and Swiss Franc.
- "We believe this disconnect is being driven by a potential shift in the US Fed towards an inflationary bias against a backdrop of rising geopolitical tensions, elevated US domestic political and social uncertainty, and a growing second wave of COVID-19 related infections," Goldman Sachs wrote in a report.
- Record levels of debt and concerns about the longevity of the dollar as the world's reserve currency have also boosted flows into gold.
- "With more downside expected in US real interest rates, we are once again reiterating our long gold recommendation from March and are raising our 12-month gold and silver price forecasts to $2300/toz and $30/toz respectively from$2000/toz and $22/toz," Goldman said.
- The bank says gold is the best hedge against currency debasement, while further out, oil and equities are a better hedge against expected inflation.
5. Shale E&Ps to post big losses, but helped by hedges
- The second quarter earnings reports for U.S. independent shale companies are expected to be pretty dismal.
- Standard Chartered estimates that quarter-on-quarter revenue falls could total $26.2 billion. Roughly 81 percent is due to falling prices, while the remaining 19 percent is due to curtailed production.
- But out of a sample of 66 companies, hedging "recouped an average of 56 percent of their Q2 revenue loss," Standard Chartered said.
- In fact, there could be a wide variation in performance depending on hedging. The bank said, "hedging is likely to be a major discriminator across results."
- The problem is that WTI futures for 2021 are at around $43, so the ability to hedge going forward begins to narrow.
6. Copper prices surge
- The simultaneous surge in both gold and copper prices is a "peculiar feature of the commodities landscape this year," Scotiabank wrote in a note. They typically trade inversely - gold does better during uncertain times while copper tracks economic growth.
- Copper is close to $3 per ton, up more than 35 percent since March. A better-than-expected rebound in China has lifted copper prices, and "a sizable stimulus package bolstered" copper's rise, Scotiabank said.
- At the same time, the spread of the virus in copper-supplying countries - Peru and Chile - has "engendered acute supply concerns," the bank added.
- As a result, Scotiabank revised up its forecast for copper prices.
7. Corn prices in China skyrocket
- Corn prices in China are skyrocketing, opening up a huge opportunity for American farmers.
- China's corn prices have hit a five-year high, rising to over 2,300 yuan ($329) per ton, according to the Wall Street Journal.
- Higher prices will lead to more imports. American corn farmers have been hit by the pandemic, but prior to that the U.S.-China trade war.
- China's purchases of American corn have already shot up, following the phase 1 trade deal. China has imported more than 2 million metric tons so far this year, up from just 0.3 million metric tons in all of 2019.
- "China is going to have to buy more grains, and the trade deal with the U.S. shoehorns that demand toward the U.S.," Tobin Gorey, agri-strategy director at Commonwealth Bank of Australia, told the WSJ.