1. Gold prices surge
- Gold hit a new high this week, closing over $2,000 per troy ounce for the first time.
- While a specific reason for the latest rally is unclear, it is "probably the expectation of further stimulus measures on the part of governments and central banks that is driving prices ever further up," Commerzbank wrote in a note.
- The weakening U.S. dollar is boosting gold. "Bond yields are also on a clear downward path, which is likewise lending tailwind to the gold price," Commerzbank said.
- Some analysts like silver more - silver prices have soared too, and by more in percentage terms - because silver is used in industrial processes and is positioned to see demand rise as industrial activity rebounds. Analysts also see the prospect of a Biden presidency, and the potential for green stimulus, also boosts silver.
2. Mobility plateaus, questioning demand rebound
- Oil prices hit multi-month highs this week, on the back of strong inventory drawdowns.
- But refining margins have been squeezed by the rally in crude, JBC Energy wrote in a note.
- "Our global mobility indicator has trended flat since the second half of July with flare-ups of COVID-19 infections adding to worries, while the recent upside to PMIs largely came with the caveat of additional job cuts," JBC said.
- "Gasoline demand in the US has so far remained above our initial estimates ahead of the last round of COVID-19 countermeasures,…
1. Gold prices surge
- Gold hit a new high this week, closing over $2,000 per troy ounce for the first time.
- While a specific reason for the latest rally is unclear, it is "probably the expectation of further stimulus measures on the part of governments and central banks that is driving prices ever further up," Commerzbank wrote in a note.
- The weakening U.S. dollar is boosting gold. "Bond yields are also on a clear downward path, which is likewise lending tailwind to the gold price," Commerzbank said.
- Some analysts like silver more - silver prices have soared too, and by more in percentage terms - because silver is used in industrial processes and is positioned to see demand rise as industrial activity rebounds. Analysts also see the prospect of a Biden presidency, and the potential for green stimulus, also boosts silver.
2. Mobility plateaus, questioning demand rebound
- Oil prices hit multi-month highs this week, on the back of strong inventory drawdowns.
- But refining margins have been squeezed by the rally in crude, JBC Energy wrote in a note.
- "Our global mobility indicator has trended flat since the second half of July with flare-ups of COVID-19 infections adding to worries, while the recent upside to PMIs largely came with the caveat of additional job cuts," JBC said.
- "Gasoline demand in the US has so far remained above our initial estimates ahead of the last round of COVID-19 countermeasures, though weekly figures for July are nevertheless showing a stalling recovery," the firm added.
- JBC sees global gasoline demand coming in 7 percent lower year-on-year in the third quarter.
3. Jump in natural gas prices
- Natural gas prices surged 20 percent in the past week on a slightly more bullish outlook than previously.
- U.S. natural gas production has fallen very sharply, reducing the risk that the U.S. would struggle with inventories filling up towards the end of the "injection season" in the fourth quarter.
- "We expect injections to slow in the coming months to avoid end of season congestion- barring a very mild rest of summer- and thus do not see much further downside to front month prices from here," Bank of America Merrill Lynch wrote in a note. The bank sees gas stocks starting the winter at 3.92 trillion cubic feet - very high, but below the record set in 2016.
- Thus, the risk of natural gas prices falling below $1/MMBtu before October is "very small at this point."
- As LNG demand recovers, and U.S. production remains flat, inventories will decline rapidly. By March, Bank of America sees Henry Hub at $2.75/MMBtu.
4. Shale productivity reaching "limits"
- U.S. shale drillers ratcheted up production in recent years, but the increases were in part the result of the "bigger hammer" approach, as Raymond James puts it - drilling longer laterals, using more sand, more water, etc.
- Lateral lengths increased from an average of 6,800 feet in 2015 to 8,700 feet in 2019. "However, there's a practical economic limit to longer laterals, which we believe to be in the range of 10,000 ft," Raymond James wrote in a report. It's a similar story with the use of proppant - drillers are near their productivity limit.
- "[A]bsolute well productivity growth likely plateaus barring any additional technological advances," Raymond James says.
- Between 2018 and 2019, on a per-foot basis, well productivity only increased 2 percent across all major U.S. oil basins, according to Raymond James. Productivity increased 17 percent the year before.
- In the Permian, productivity per foot declined from 19 percent in 2017 to less than 1 percent in 2019.
- In the Eagle Ford, productivity actually contracted last year, falling by 8 percent compared to the year earlier.
5. Chevron hits pause button on Permian
- While smaller shale drillers have scrapped rigs and slammed on the brakes, there was speculation that the majors would pick up the slack, make acquisitions, and more or less stay the course on prior drilling plans.
- That is not turning out to be the case. Chevron (NYSE: CVX) is cutting capex by 75 percent in the Permian for the second half of the year.
- "As of July, we've reduced our operated rig count to four with one completion crew," Jay Johnson, executive VP of upstream at Chevron, said in its second-quarter earnings call.
- "At current activity levels, we expect production to decline by about 6% to 7% in 2021," he added.
- The company also said lower prices would lead to a downward revision in proved underdeveloped reserves.
- The cut in drilling activity means that Chevrons' long-term production guidance will need to be revised (see chart), and the company said it would offer an update next year.
- "The near-term production profile for the Permian has changed, but our long-term view of the asset's attractiveness has not," Johnson said.
6. Car sales plunge, but trucks take larger share
- In April, U.S. vehicle sales plunged to 8.7 million, down by half from 11 months earlier.
- Over the past few years, light trucks (pickup trucks and SUVs) have gained market share, pushed along by cheap gasoline prices.
- But the pandemic magnified this trend. Sales plunged, but when they rebounded, trucks made up a larger share. In May, 78 percent of vehicle sales were light trucks.
- In Europe and in Japan, the trend is reversed. Tiny cars and trucks are picking up momentum. And they are becoming electrified.
7. Oilfield service companies shift away from shale
- After a decade of drilling, the slowdown in the U.S. shale industry is hitting the oilfield service companies hard. As a result, they are beginning to look elsewhere.
- Schlumberger (NYSE: SLB), Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BKR) have written down a combined $45 billion in assets over the past year. Their combined market cap is now only $55 billion.
- Schlumberger said that it closed 150 North American facilities and Halliburton said it closed 100.
- They now see their best growth prospects outside of the United States.
- "North America is going to be a changed market moving forward," said Lance Loeffler, chief financial officer of Halliburton. "Our view is that the international markets will take share back from a supply perspective…and we need to be prepared for that."