Oil Major Debt Is Shrinking Rapidly

1. Bomb Cyclone Disrupts US Refining

- US refinery runs averaged 14.9 million b/d according to the most recent EIA data release, indicating that the downstream sector is taking much longer to recover from the December bomb cyclone.

- As things stand currently, refinery throughputs are 1.3 million b/d lower than before the cyclone, with utilization rates only increasing to 85.3% of operable capacity.

- Perhaps worryingly, at least 15 US refiners are planning to undergo maintenance in February-May 2023, peaking next month at 1.4 million b/d of processing capacity going offline.

- Having postponed maintenance for most of 2021 and 2022 because of the unprecedentedly good margins, maintenance will be twice as heavy as usual this year.

2. The UK Windfall Tax Is Starting to Bite

- The United Kingdom’s largest oil and gas producer Harbour Energy (LON:HBR) is planning to cut jobs due to the crippling effect of the windfall tax that was hiked to 35% from January 2023 onwards.

- UK oil industry groups have warned the government that the windfall tax is jeopardizing investment into the North Sea, with both Shell and Equinor vowing to reconsider their UKCS projects.

- Meanwhile, Britain’s opposition leader Keir Starmer said that if Labour were to come to power, there would be no more investment into new oil and gas fields as there “needs to be a transition”.

- Oil companies in the UK pay 30% corporation tax on their profits and a supplementary 10% on top of that, so with the windfall tax the total rate climbs up to 75% (though companies routinely deduct their expenses).

3. Gas Price Drop Brings Relief to German Industry

- Germany’s industry heavyweights have been breathing a sigh of relief as natural gas prices have halved over the past month, with the chemical and metals industries moving back to full-capacity production.

- In November, Berlin’s industrial output readings rose 0.2% on the month, reversing previous declines, with the final spurt in late 2022 helping to push Germany’s GDP growth to 1.9%.

- At 49, Germany’s December 2022 composite PMI reached its highest level in six months, and with two operational regasification FSRUs the optimism should extend into 2023.

- Europe’s TTF spot prices have been trading slightly above €60 per MWh (equivalent to $21 per mmBtu) as the upcoming Arctic blast across Europe has so far failed to make an impact.

4. The Lower the Debt, the Better the Returns

- The 5 most profitable Western oil majors – ExxonMobil, Chevron, TotalEnergies, BP, and Shell - are expected to garner almost $200 billion in 2022 profits, almost doubling the previous all-time high.

- Consequently, total debt held by these companies plunged to a 15-year low of $100 billion, quite a sea change compared to the $270 billion of debt amassed in the first Covid-ridden year of 2020 when prices collapsed.

- Analysts believe the same 5 majors would see their profits take a step lower to $158 billion this year, driven by inflationary pressures and weaker energy prices, but the debt-reducing trend would continue.

- The two US majors, ExxonMobil and Chevron, lead the pack in profitability as Europe’s leading oil firms have been hamstrung by separate windfall tax regimes.

5. Can Lithium Producers Keep Their Promises?

- After two years of a structural deficit, lithium markets are hoping that a swathe of new projects will ramp up supply and pour some cold water on red-hot lithium carbonate prices.

- Key lithium forecasters expect supply to grow between 22% and 42% this year, with production increments coming from majors like Albemarle and SQM, as well as more from more Chinese lepidolite.

- According to Bloomberg, the total spot value of lithium consumption rose tenfold since 2020 from $3 billion in 2020 to $35 billion last year, with prices currently at $71,500/mt.

- Amidst such a supply surge, prices are likely to fall about 8% from average 2022 levels, but there remains a big upside if the new projects fail to start on time.

6. Covid Scares Weigh Heavily on China Investment

- Foreign investment in China collapsed in the second half of 2022, with November-December seeing the most drastic decline on record as the country gradually relaxed Covid restrictions.

- The December FDI tally of $11.3 billion is equivalent to a 29% year-on-year drop, a damning outlook considering most foreign investments into China traditionally come from Hong Kong.

- With Q4 GDP growth coming in at zero, the 3% GDP growth that China registered for the entire year of 2022 is almost half of the government-set mandate of 5.5%.

- This year promises to improve matters as retail sales are improving and unemployment is going down, although a shrinking population and an ailing property sector (that fell 10% year-on-year in 2022) are a concern.

7. US-China Chip War Is Getting Serious

- After years of energy wars, chips are gearing up to become the next arena of geopolitical struggle as China’s ascent $52 billion subsidy program for its chip industry daunts the Biden administration.

- The SIA expects China to overtake the United States as the main chip designer globally by 2030, despite the plentiful limitations enacted by Washington.

- With two-thirds of Chinese exports to the US already subject to tariffs, Washington recently tightened export controls for semiconductors and prevented US citizens from working for Chinese chip companies.

- Almost 95% of semiconductor chips are being produced in Taiwan (and mostly designed in the US), meaning that a potential Chinese attack on the island could cripple global supply chains.