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- While the V-shaped recovery hopes were dashed for 2020, the highly-effective vaccines set to be made available in the coming months promises a swift recovery in the latter half of 2021.
- But the story could be even bigger. Goldman Sachs says that the “recovery in commodity prices will actually be the beginning of a much longer structural bull market for commodities.”
- The investment bank said there are three main drivers: under-investment in supply, Covid-related fiscal stimulus, and a weaker dollar combined with inflation risk. All add up to a bull market in the coming years.
- Goldman says the 2020s could see a “structural bull market on par with the 2000s.”
- But the story doesn’t end there. The bank adds that green stimulus capex could be as big as BRIC’s investment 20 years ago, but developing countries (particularly China) will also see a consumer spending boost that did not occur the last time around.
2. OPEC+ probably needs to extend
- OPEC+ is scheduled to unwind the current production cuts of 7.7 mb/d to just 5.7 mb/d beginning in January. But the group has sent signals that they may have to wait on the production increase.
- Refining runs in the Atlantic Basin – Europe and the U.S. – remain at the lowest levels in two decades. Much of Europe and the U.S. is suffering through the worst coronavirus wave yet, prompting…
1. V-shaped recovery and a bull market
- While the V-shaped recovery hopes were dashed for 2020, the highly-effective vaccines set to be made available in the coming months promises a swift recovery in the latter half of 2021.
- But the story could be even bigger. Goldman Sachs says that the “recovery in commodity prices will actually be the beginning of a much longer structural bull market for commodities.”
- The investment bank said there are three main drivers: under-investment in supply, Covid-related fiscal stimulus, and a weaker dollar combined with inflation risk. All add up to a bull market in the coming years.
- Goldman says the 2020s could see a “structural bull market on par with the 2000s.”
- But the story doesn’t end there. The bank adds that green stimulus capex could be as big as BRIC’s investment 20 years ago, but developing countries (particularly China) will also see a consumer spending boost that did not occur the last time around.
2. OPEC+ probably needs to extend
- OPEC+ is scheduled to unwind the current production cuts of 7.7 mb/d to just 5.7 mb/d beginning in January. But the group has sent signals that they may have to wait on the production increase.
- Refining runs in the Atlantic Basin – Europe and the U.S. – remain at the lowest levels in two decades. Much of Europe and the U.S. is suffering through the worst coronavirus wave yet, prompting local and regional restrictions on travel and business closures.
- The IEA cut its demand forecast in the fourth quarter by 1.2 mb/d compared to its previous forecast.
- Meanwhile, Libya has added more than 1 mb/d of new supply since September. Libya is not bound by the OPEC+ agreement.
3. Renewables prove resilient during pandemic
- Renewables are set to expand at a record pace in 2021, adding nearly 218 GW of new capacity, according to the IEA. That would be a 10% increase over the additions this year.
- Even in 2020, renewables are proving more resilient in the face of the pandemic than previously thought. The IEA says the sector will growth by 7% this year, even as overall energy demand shrinks by 5%.
- Long-term contracts, priority access to the grid, and a pipeline of new projects have kept momentum relatively strong.
- Investors remain keen on renewables. “The shares of publicly listed renewable equipment manufacturers and project developers have been outperforming most major stock market indices and the overall energy sector,” the IEA wrote in a report. “This is thanks to expectations of healthy business growth and finances over the medium term.”
- The shares of solar companies worldwide more than doubled between December 2019 and October 2020.
4. Oil demand only growing in Asia
- The main energy forecasters – the IEA, EIA and OPEC – all recently downgraded their forecasts for oil demand.
- Only two countries – India and China – hold out as the lone bright spots for oil demand. China’s oil demand has grown for the past six months, and in fact, Chinese oil demand in the fourth quarter will exceed pre-pandemic levels.
- The IEA’s forecast for Q4 Chinese oil demand is now 1.1 mb/d higher than the forecast from six months ago.
- The IEA also upgraded India’s demand forecast by 190,000 bpd for the fourth quarter.
- “[W]e think the scope for positive demand surprises is growing,” Standard Chartered wrote in a note.
- “India’s oil demand returned to y/y growth in October, rising 142kb/d y/y led by 124kb/d growth in diesel,” Standard Chartered analysts said. “With diesel recovering, the main drag is now jet fuel demand, down 95kb/dy/y,almost exactlyhalf its y/y decline in April.”
5. Surge of ESG investing
- Investors have funneled $16.6 trillion into ESG (environmental, social and governance) assets in the U.S., including $4.2 trillion into the “climate” category, according to a Raymond James analysis.
- As recently as 2018, there was only $11.8 trillion in the ESG segment, so investment rose by 43% over two years.
- “Perhaps even more striking, the current figure comprises 33% of all managed assets, up from 26% in 2018,” Raymond James said.
- With the investment trend growing, more pressure is falling on the oil and gas sector, sparking a wave of commitments from companies to lower their emissions.
6. Flat U.S. oil production, but spending will need to rise
- Goldman Sachs is bullish on the oil market, notwithstanding the latest “speed bump” in the form of coronavirus infections. The bank says it is “well above consensus and strip prices.” In other words, compared to its peers, Goldman analysts think prices are heading higher.
- Goldman has Buy ratings for EOG Resources (NYSE: EOG), HESS (NYSE: HES), and Devon Energy (NYSE: DVN).
- But oil production should remain “relatively flattish” in 2021.
- However, operating on the assumption that prices rise next year, Goldman says production will start to “step-up” in 4Q21 and FY22.
- That means oil companies will also need to begin increasing spending as well.
7. WTI-Brent spread narrows as U.S. production falls
- The rebound expected following the distribution of vaccines could spark a revival in refinery runs as demand returns. That will pull more oil from upstream.
- “Refining runs will need to increase to meet this demand and if the US has less crude readily available, net crude imports will need to increase,” Bank of America wrote in a report.
- With production down and unlikely to rebound quickly, the WTI-Brent spread has narrowed dramatically and remain tight on the forward curve.
- “Should refinery runs pick up in response to a demand recovery next year, the US refining system may find itself short barrels, putting a bid under WTI and potentially pushing the WTI-Brent forward curve higher in the process,” Bank of America said.
- The risk to this scenario is the destruction of demand this winter in the event of stricter lockdowns. That would build up inventories, put downward pressure on prices, and lead to more production losses.
- Then again, more production losses would result in an even more upside risk to the WTI-Brent margin as supply losses fail to keep up with the eventual rebound in demand, the bank said.
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