Is This The Start Of A Commodity Price Supercycle?

1. Silver prices spike

- Speculators rushed into silver this week, sending prices soaring, jumping 16% in just a few days, before falling back a bit.

- Goldman Sachs said in a note that despite the volatility, the much-talked-about short squeeze in equities these days does not transfer over to commodities, which stick closer to underlying fundamentals.

- Goldman stuck with its prices forecast for silver at $30/oz, noting an “aggressive solar push” by the Biden administration and also monetary expansion, which weakens the dollar and bolsters commodities.

- “On net, silver benefits from both the dollar debasement theme and the green energy led industrial recovery,” Goldman analysts wrote.

2. Shale drilling capex way down

- Oil prices are on the rise, and the negative prices of April 2020 feel like a distant memory.

- But the financial damage to the shale industry will take a long time to heal. For a lot of companies, they won’t (or didn’t) survive.

- Roughly $52 billion worth of M&A deals were completed in the U.S. oil sector in 2020, the most in years.

- Despite the rebound in prices, shale executives are promising shareholders that they won’t return to aggressive spending practices. Capex will remain a shadow of its former self.

3. Shale cash flow could finally turn positive

- The U.S. shale industry has bled cash since its inception. A Bloomberg estimate pegs the losses at $342 billion over the past decade.

- The debt overhang is profound. More than 100 drillers and service companies went bankrupt last year, affecting $102 billion in debt.

- But the capex cuts could finally flip the cash flow numbers into positive territory. Base production is higher, and if companies restrain spending, the cash flow could roll in.

- For now, the newfound restraint is improving the financials. A survey of 39 shale companies by Rystad Energy finds that cash flow outpaced capex by a combined $3.6 billion.

- But there are questions over how sustainable the positive cash flow is. Due to rapid decline rates, shale companies will have to step up drilling (and spending) in the years ahead to offset production declines.

4. ExxonMobil comes under pressure

- While U.S. shale E&Ps are seeing improvement, with some potentially moving into positive cash flow territory, the outlook for the oil majors remains murky.

- ExxonMobil (NYSE: XOM) posted a $20.1 billion loss in the fourth quarter, and also reported its first annual loss in decades.

- The oil major outlined a strategy this week to defend its dividend at all costs. The company said as long as oil prices remain at $50 or above, it can cover spending and dividends with cash flow.

- But 2020 was not an anomaly in some respects. Exxon has paid more to shareholders than it generated in free cash flows for 12 of the last 15 years.

- To protect its dividend, Exxon said its spending plans would be more flexible – the company would chop capex – not its dividend – if oil prices fall below $45 per barrel.

5. EV sales beat expectations

- Global EV sales grew by 40% last year, blowing away expectations of a rough year due to the pandemic.

- In Europe, EV sales more than doubled.

- That came despite an overall drop in total vehicle sales.

- “Backed by existing policy support and additional stimulus measures, the IEA preliminary estimate is that electric car sales worldwide climbed to over 3 million and reached a market share of over 4%,” the IEA wrote in a commentary.

- These numbers are still small relative to the size of the car market, but momentum continues to pick up. The GM (NYSE: GM) announcement that it aims to go all-electric by 2035 sent shockwaves through the auto market, and will no doubt accelerate the transition.

6. Lithium prices skyrocket

- Lithium carbonate prices surged 37% in January, the largest monthly gain since December 2015.

- Bloomberg Green notes that Europe is hoping to build a domestic lithium mining industry to cut dependence on Asia.

- Global demand for batteries continues to rise. China is stepping up support for batteries and electric vehicles. The growing prospect of a green-tinged economic stimulus in the U.S. is also bolstering the lithium market.

- "Demand for lithium chemicals has begun to outpace growth on the supply-side," said Benchmark Mineral Intelligence (BMI) analyst George Miller, said in January.

7. Natural gas prices set to rise

- Natural gas prices surged 16% this week on colder weather. But looking out further, the bullish trend is due to more than just temporary cold temperatures.

- Storage levels in the U.S. are shaping up to see a “sizable deficit head of next winter,” according to a note from Goldman Sachs.

- The investment bank said that natural gas prices need to rise to $3.25/MMBtu by the summer in order to curtail demand and/or boost supply, which would head off a storage supply problem by next winter.

- Beyond the summer, Goldman has an ongoing price forecast of around $2.75/MMBtu. But if prices don’t rise quick enough this summer, then there is “upside risk” to that $2.75 forecast.