OPEC+ Throws U.S. Shale A Lifeline

1. Metals see a massive boost in EVs

- Robert Friedland has started a special purpose acquisition company (SPAC) called Ivanhoe Capital Acquisition Corp. aimed at investing $200 million in the energy transition.

- "The global shift away from carbon, boosted by ostensible Chinese environmental concerns as well as Biden's recent win, is driving capital to sectors involved with or likely to benefit from the focus on green or renewable resources," said Tai Wong, head of metal derivatives trading at BMO Capital Markets. "This focus is likely to improve supply over time."

- Demand for a variety of metals used in batteries needed for electric vehicles is expected to surge.

- Demand for nickel and aluminum will rise 14-fold between 2019 and 2030.

- Copper prices have already skyrocketed this year, but demand will rise 10-fold over the next decade.

2. China's power demand stretches the grid

- China's economy has rebounded strongly from the pandemic, and industrial demand, in particular, is robust.

- Demand for electricity is creating shortages, forcing cutbacks on power delivered to major industrial consumers.

- Electricity demand in China was up 9.4% in November, year-on-year. At the same time, an unusually cold winter has led to a spike in demand for heating.

- Local coal futures have shot up, as has the cost of natural gas.

- The power crunch "will probably linger as an issue for a couple more months," said James Stevenson, senior director for coal, metals and mining at IHS Markit.

3. Falling costs of renewables

- Even as renewables have grown quickly (from a low base), returns on equity for the oil and gas industry have long outpaced that of renewables.

- That is changing. According to BloombergNEF, newly built renewably generation have higher returns on equity than the oil industry.

- The global benchmark return on equity for offshore wind is 11%; for onshore wind, 9%; for photovoltaic solar, 8%, the firm says.

- Two trends lie behind those numbers. Returns in the oil industry are eroding. And costs for renewables are falling, improving returns.

4. OPEC+ and Saudi Arabia surprise market

- Not only did OPEC+ decide to hold off on another 0.5 mb/d production increase, but Saudi Arabia went a bit further by promising to cut an additional 1 mb/d for the next few months.

- Saudi Arabia's production will decline to 8.125 mb/d, only 0.6 mb/d higher than the low point reached in June 2020.

- Some analysts saw the move as a sign of weakness. After all, why is such a dramatic action needed? Demand faces a lot of downside risk in the near-term.

- Standard Chartered sees demand remaining weak in the first quarter, only up 0.3 mb/d from the fourth quarter. At 93.9 mb/d, demand remains 7 mb/d below pre-pandemic levels.

- Still, the markets rejoiced, and crude rallied by more than 5% after the announcement. The cuts will technically leave the market in deficit, allowing inventories to drain, according to the bank's numbers.

5. OPEC+ throws shale a lifeline again

- The OPEC+ deal surprised the market, and it is a godsend to struggling shale drillers.

- "We think that the gift will be particularly gratefully received in Texas and New Mexico," Standard Chartered analysts wrote in a note. "We think the rise in WTI prices above USD 45 per barrel (bbl) towards and beyond USD 50/bbl represents the difference between sharp decline and a relatively rapid stabilization in US oil output."

- At $40, U.S. oil production would decline through 2021, losing 1 mb/d on an annual basis. However, the OPEC+ deal combined with Saudi cuts changes the WTI forecast to $49.

- As a result, U.S. oil production may only lose 270,000 bpd, Standard Chartered says.

6. Copper prices hit 8-year high

- This week, copper prices shot above $8,000 per ton for the first time since 2013.

- The forces behind copper's rally are the same as they have been for the past few months: strong industrial demand in China, monetary easing and a weaker dollar, inflation expectations, and prospects for further stimulus.

- Those stimulus hopes received an extra boost this week - the U.S. Senate elections in Georgia flipped control of the Senate to the Democrats, giving them a stronger hand in the new U.S. Congress.

- "In addition, there are concerns about supply because roads to Peru's second-largest copper mine are blocked," Commerzbank wrote in a note. "According to the mine's operator, this has so far had only a limited impact on transportation of the copper from the mine to the port."

7. Crude inventories declined for much of 2020

- Despite the historic bust and the protracted recovery (which is still weak), global crude oil inventories have been mostly in decline since June 2020.

- While there is near-term weakness, Goldman Sachs reiterated its bullish outlook in a note to investors this week. "We continue to recommend a long Dec-21 Brent trade (currently trading at $52/bbl vs. our $65/bbl forecast) and expect sustained backwardation and lower implied volatility," the bank wrote.

- Goldman Sachs singled out the OPEC+ decision is the main reason it remains bullish, but the bank also cut its outlook for the first quarter, projecting a 0.25 mb/d surplus versus a previously anticipated deficit of the same amount.

- But beyond the first quarter, the bank struck a more optimistic tone. As vaccinations ramp up, demand will rise quickly, and OPEC+ could "struggle" to ramp up production to match demand, the bank said.

- As a result, Goldman sees the market in deficit to the tune of 1.3 mb/d in the second quarter.