Natural Gas Demand Crashes

Friday, June 12, 2020

1. Clean Energy out-performing the market

- Clean energy has outperformed the broader market since the downturn, despite the fact that renewable energy has been hit hard. Investors increasingly eye oil and gas firms with skepticism, and the 2020 collapse brought fears of peak demand into sharp relief.

- "There are ludicrous extremes such as Tesla Inc., but more down-to-earth stocks such as Danish wind pioneers Ørsted A/S and Vestas Wind Systems A/S or Florida's NextEra Energy Partners LP also command multiples oil majors should envy," Liam Denning at Bloomberg Opinion wrote.

- Ørsted A/S (CPH: ORSTED) and Vestas Wind Systems A/S (CPH: VWS) trade at 18.4 times Ebitda and 9.9 times, respectively.

- A new study from London's Imperial College Business School found that renewable energy firms generated higher and less volatile returns to shareholders over 5 and 10-year timeframes.

2. Occidental cuts dividend and faces debt wall

- On June 5, Occidental Petroleum (NYSE: OXY) saw its share price soar by more than 30 percent, a record one-day increase in percentage terms for the company.

- But Oxy's financial problems are substantial. Its purchase of Anadarko Petroleum in 2019 added around $40 billion in debt to the company.

- Oxy cut its dividend by 91 percent, down to just a penny per share. In March, Oxy cut its dividend at the onset of the downturn to 11 cents, from 79 cents. But the dividend cut will only save the company $360 million per year.

- "Already reeling from elevated debt, a weak fundamental backdrop and investors disgruntled by the Anadarko deal, Occidental doesn't have many near-term positives we can speak to," Bloomberg Intelligence analysts said.

3. Saudi phases out "extra" cuts

- Oil prices did not move higher immediately after the OPEC+ deal was announced earlier this week, in part because the upside of an extension was already priced in to the market.

- But traders also eyed the return of some additional supply. Mexico said it would not participate in the extension. Libya may or may not return oil from its largest field after the GNA gained the upper hand in its civil war. U.S. shale is also reopening shuttered wells.

- Saudi Arabia also said that at the end of June it would phase out the additional cuts that it had shouldered over the last three months. Along with its Gulf State allies, that means that 1.2 mb/d will return to the market in July, despite the OPEC+ extension.

- OPEC+ will maintain cuts of 9.6 mb/d in July. As it stands, those cuts will taper to 7.7 mb/d in August.

4. Banks exposed to oil and gas

- A growing number of banks and other financing institutions have made climate pledges and other ESG commitments.

- Roughly 20 banks have financed $1.4 trillion of debt for fossil fuel producers since the Paris Climate Agreement in 2015, according to a new Bloomberg analysis.

- JPMorgan (NYSE: JPM) stands out, with a leading $228 billion in financing for oil, gas and coal. As of March, the bank had $42.8 billion in outstanding loans to the oil and gas industry, the second most after Citigroup (NYSE: C).

- The bank became the target of a campaign by climate activists, and the bank decided to remove former ExxonMobil CEO Lee Raymond from its board, a seat that he held for more than three decades.

- JPMorgan also has committed to facilitating $200 billion in clean energy financing through 2025.

5. Renewables "wall of liquidity"

- Wind and solar have pulled in prodigious volumes of capital over the past decade, with the bulk coming from listed and unlisted funds, according to Wood Mackenzie. The role of passive investors, such as pension funds, is set to increase.

- Renewables had built a "wall of liquidity" before the Covid-19 pandemic, with the volume of available capital exceeding the number of investable opportunities.

- Hit by the pandemic, the pool of capital is smaller now, but the wall is "still standing," WoodMac said.

- Solar installations could drop by 18 percent in 2020, but will recover in 2021.

6. Weak refining margins could drag down oil prices

- Oil prices have staged an impressive rally since April and the OPEC+ extension keeps supply off the market. Saudi Arabia even decided to hike prices for its crude heading to Asia, a sign of Riyadh's intension to support the recovery.

- However, refining margins have crashed. Refiners are getting squeezed by higher crude prices, suggesting that product demand is not keeping up with the rally.

- "The world's awash with diesel," Alan Gelder, vice president for refining, chemicals and oil markets at Wood Mackenzie, told Bloomberg. "There's just loads of it everywhere."

- The gaping hole in jet fuel demand is complicating matters. Refiners are retooling to avoid making jet fuel, but that leads to relatively more diesel.

- Goldman Sachs warned that weak refining margins might end up dragging down oil prices. If refiners slow processing, crude stocks will build.

7. Natural gas demand plummets worldwide

- Global natural gas consumption could fall by 150 bcm/y, or about 4 percent compared to 2019 levels, according to a new report from the International Energy Agency.

- This would be the largest annual decline in history, and twice as large as the decline during the 2008-2009 financial crisis.

- Most of the decline occurs in mature markets, and the declines are concentrated in power generation. In Europe, gas is squeezed by lower electricity demand and rising renewables.

- Gas markets will bounce back, but scars will linger. The pandemic will erase 75 bcm from demand each year through 2025, a volume that is equivalent to the demand increase in 2019.