Global Oil Demand Is Weaker Than Expected

1. Oil demand weaker-than-expected

- The recent spike in covid cases in Europe and the U.S. could undercut oil demand figures in the fourth quarter and into 2021.

- According to Standard Chartered, demand could fall by 2.17 mb/d to 90.51 mb/d in November, largely due to the hit in Europe. Partial nationwide lockdowns have been announced in France, Germany, and the UK, among other places.

- Global demand could be down 8.73 mb/d in the fourth quarter, year-on-year, a 1 mb/d larger decline than the investment bank estimated two weeks ago.

- Restrictions could also return to the U.S., which just broke above 100,000 covid cases in a single day.

- Importantly, Standard Chartered says its numbers are more pessimistic than the EIA and IEA. The bank says the agencies have not yet factored in reduced mobility.

2. Solar demand tightens supply of glass

- The world’s largest solar company says that supplies of glass are tight because of demand for solar panels, pushing up costs.

- Prices for glass have surged 71% since July, according to Bloomberg. Longi, the largest solar company by market cap, said that rising costs for glass could also delay projects. “Solar power plant profits will drop below acceptable levels without government subsidies if glass makers go on to push up the costs,” a company executive said.

- Glass demand is also up because of the increasing deployment of bifacial panels, which incorporate glass on both the top and bottom of the system, generating energy by light reflecting off of the ground. Bifacial panels are expected to represent half of the market by 2022, up from 14% in 2019.

- Shares for glass manufacturers such as Xinyi are skyrocketing.

3. Gold prices surge thanks to Fed

- Gold prices have surged to above $1,940 per ounce, although recently took a breather after a year-long rally.

- Silver and platinum have also posted strong gains.

- Metals are benefitting from “tailwinds” due to the Federal Reserve’s loose monetary policy.

- Meanwhile, the U.S. election may also benefit metals. Crucially, a Democrat-controlled White House and Republican-controlled Senate vastly diminishes the prospects of massive fiscal stimulus.

- That, in turn, puts the onus back on the Fed. “As it looks as if the Republicans will hold a majority in the US Senate, the prospect of a major stimulus package has dwindled significantly. It is possible that the Fed will have to step into the breach instead,” Commerzbank wrote in a note.

4. Natural gas positioning more bullish

- U.S. natural gas prices have more than doubled from June to over $3/MMBtu. The slowdown in U.S. production and rebounding demand have helped tighten up the market.

- Prices surged to $3.35/MMBtu last week, but dipped this week as investors took profits after building up an extraordinary net length in their speculative positioning. Warmer weather and higher gas production from the Permian also dragged prices back towards $3.

- But bullish sentiment will likely return. “Despite these weather and production revisions, we maintain our view that 2021 US gas balances remain exceptionally tight, especially given 3Q20 earnings commentary from dry gas producers suggesting no production growth next year,” Goldman Sachs wrote in a note.

- The investment bank also pointed out that higher gas inventories stemming from warmer weather is offset by the coal-to-gas switching resulting from a dip in prices.

- The bank reiterated its $3.23/MMBtu gas price forecast for next year.

5. EU oil majors cut breakevens

- The European integrated oil majors have made progress on their cost structures, cutting costs, and also slashing dividends.

- The set of companies analyzed by Goldman Sachs beat consensus estimates on operating profit and adjusted net income by 45% and 132%, respectively.

- The group delivered $11.5 billion in aggregate free cash flow. The results “show the notable structural transformation that EU Big Oils have started in 2015, and which is now accelerating, through capital discipline, digitalization and self-help, allowing them to move lower on the cost curve,” Goldman analysts wrote in a report.

- The breakeven price for the group required to cover CAPEX and dividend commitments has declined 65% from a peak seven years ago, and now sits around $40 per barrel.

6. Niche sectors see surge in investment

- Investors are pouring money into sectors that may be poised to grow due to the pandemic.

- According to the Wall Street Journal, “thematic” funds have seen $42 billion in investment in the first nine months of the year. These funds track sectors such as renewable energy, cybersecurity, and health technologies.

- The logic is that the economy will shift somehow – increased digitalization, a push for cleaner energy, or aging populations.

- BlackRock’s iShares Global Clean Energy ETF (NASDAQ: ICLN) has increased 70% in value this year.

7. Refinery runs remain depressed

- Refinery runs remain well below average as demand for refined products remains down.

- Since mid-July, refinery processing in the U.S. has been down between 13% and 17% from the five-year average.

- “The sustained lower runs throughout 2020 combined with relatively low crack spreads…have resulted in several announced refinery closures in the United States and abroad,” the EIA said.

- Royal Dutch Shell (NYSE: RDS.A) announced on Thursday that it would shut down its Convent refinery in Louisiana in the coming weeks after failing to find a buyer.