Is The Worst Over? Supply Steady But Demand and Prices Rising

Friday November 25, 2016

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. China’s solar lead

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- China is the largest market in the world for clean energy, with the most installed solar capacity (50.8 GW) and also the most wind capacity (139.4 GW).
- After being a laggard for years, China has stepped up on international climate commitments. But China’s main motivation is to clean up its local air pollution problem. About 80 percent of China’s 338 cities fail to meet air quality standards, according to Bloomberg.
- U.S. President-elect Donald Trump may backtrack on American climate commitments, but that it is unlikely to cause China to give up.
- China already outspends the U.S. on clean energy – investing $48.1 billion so far this year compared to the U.S.’ $32.6 billion.
- China leads the U.S. on both clean energy installed and also manufactured. If the U.S. backtracks, that disparity will only grow.

2. OPEC jawbones the market again

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- A few days out from the OPEC meeting in Vienna the cartel has succeeded yet again in stoking a rally in oil prices, with WTI and Brent rising towards $50 per barrel.
- A Russian official told Bloomberg that Russian calculations show that its participation in OPEC talks helped boost oil prices, ultimately adding $6 billion to the Russian treasury. It is difficult to verify these numbers or attribute revenue gains so precisely. Nevertheless, there are tangible gains from the head fakes and rumors that OPEC and Russia have conducted this year.
- The recent uptick in oil prices is due to renewed optimism over the so-called “Algerian plan,” which calls for a six month agreement.
- The original proposal called for a 1.6 percent reduction in output from January-August levels, excluding Libya, Nigeria and Iran. OPEC is now looking at steeper cuts.
- Iraq has disputed the figures used to make the calculation and has also called for an exemption, and OPEC is meeting this week to iron out the technical disparities. Iraq has suggested it is open to cutting, sending WTI and Brent up towards $50 per barrel.

3. Commodities on the upswing?

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- The Bloomberg Commodity Index hit the sharpest three-day gain in nearly six months this week. Prices for industrial metals rose along with crude oil. Industrial metals have seen prices rise by about 14 percent over the past month.
- Some of the largest mining companies, including Anglo American (LON: AAL), Glencore (LON: GLEN), and Rio Tinto (NYSE: RIO) saw their share prices jump this week as commodity prices rose.
- Goldman Sachs has turned bullish on commodities, betting that higher rates of global manufacturing will arrive in 2017. Also, increased spending in the U.S. coupled with tax cuts in the Republican administration will lead to price inflation in the commodity space.
- Goldman’s “overweight” recommendation is the first bullish call on commodities in more than four years.

4. Oil demand rising

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- The two Bloomberg charts above should be analyzed together. The IEA projects that gasoline demand could remain flat over the next several decades. Electric vehicles and more efficient gasoline-powered vehicles will keep consumption from rising. Between 2015 and 2020, gasoline demand will fall from 23 million barrels per day to 22.8 mb/d.
- At the same time, demand for crude oil will continue to rise. Gasoline for passenger vehicles is only one component of crude oil demand.
- Gasoline consumption could fall, but oil consumption in aviation, petrochemicals, and freight will rise by much more.
- All together, the IEA expects global oil consumption to rise by 13.6 million barrels per day over the next 25 years.

5. Economic growth needs higher oil prices?

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- At the beginning of the down cycle for oil two years ago, many energy analysts and experts expected the collapse of crude prices to spur faster economic growth, often likening it to a tax cut.
- But Goldman Sachs argues the reverse is true in a recent research note. Higher oil prices causes a flood of capital to rush into oil producing countries such as Saudi Arabia, which in turn deposits much of that into savings that are then redistributed throughout the global financial market. The result is higher asset values around the world and improved consumer confidence.
- Goldman Sachs points to the 2000s in which oil prices grew in tandem with global GDP rates.
- “The difference between today and the 1970s is that oil creates global liquidity through a far more sophisticated financial system,” Goldman analysts wrote. “More sophisticated financial markets in the 2000s were able to transform this excess savings into greater global liquidity that increased asset values, lowered interest rates, and improved credit conditions that spanned the globe.”
- As a result, rising oil prices today should be viewed as a benefit to global growth.

6. Marine sulfur limits tighten

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- The International Maritime Organization, a 171-member state agency within the UN, agreed in October to tighten sulfur limits on marine fuels. Beginning in 2020, sulfur in marine fuels will need to decline from 3.5 percent by weight to 0.5 percent by weight.
- The limits will affect the 3.9 million barrels of oil per day that is used in global marine shipping.
- This presents challenges and opportunities for refiners. More low-sulfur fuels will need to be processed beginning in 2020, which could boost demand for low-sulfur crude. Refiners might also need to make investments in assets that turn heavy oil into lighter fuels.
- The limits could also affect the shipping industry – spurring widespread installations of scrubbers, or alternatively, boosting the use of LNG as a shipping fuel to replace bunker fuels.

7. Cost of solar panels fall at fastest rate in years

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- The cost of solar cells have dropped by 29 percent so far this year, the fastest rate in four years.
- Much of the fall has to do with the glut of supply on the market. The last time that occurred there was consolidation within the industry, as less competitive manufacturers were forced out of the market.
- On the one hand, this is bad for solar manufacturers: the share price of First Solar (NYSE: FSLR) for example, has fallen by more than half in 2016.
- But falling costs for modules could speed up solar adoption. Module prices make up 37 percent of the cost of a utility-scale solar project, Bloomberg Gadfly notes, which translates into $0.65 out of the total cost of $1.77 per watt. Lower solar costs will make solar much more competitive with coal and natural gas in the electric power sector.
- Bloomberg Gadfly says that the top solar manufacturers, most of which are in China – Jinko Solar (NYSE: JKS), Trina Solar (NYSE: TSL), JA Solar Holdings (NASDAQ: JASO), Canadian Solar (NASDAQ: CSIQ), and Yingli Green Energy Holding Co. (NYSE: YGE) – will survive the downturn and actually build market share.

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.