Speculators Are Dragging Down Natural Gas

1. China and India drive oil demand

- The story of oil demand growth is really a story about Chin and India. Together, they account for more than half of global demand growth.

- China’s oil consumption is expected to grow by 440,000 bpd this year, slower than the 615,000 bpd from last year, according to IEA data that also includes petroleum products.

- India has undershot forecasts in the last few years. Demand grew by 155,000 bpd in 2019 and is expected to grow by 170,000 bpd this year.

- Total non-OECD demand growth is estimated at 920,000 bpd this year, which will account for the lion’s share of the 1.2-mb/d of total global demand growth.

2. Coronavirus drags down commodity prices

- Global supply outages are no longer affecting commodity prices. “Concerns about demand have definitely gained the upper hand, and are being fed by the further spread of the coronavirus in China, where the number of those infected and deaths continues to rise,” Commerzbank wrote in a note.

- Beijing has put Wuhan, a city of 11 million people, on lock down. “Significantly less oil than usual may well be consumed during the upcoming week of New Year’s Festival celebrations in China. This is a period of particularly high demand because normally many Chinese travel during the holiday week,” Commerzbank said. “Consequently, the oversupply that is already in place on the oil market risks becoming even bigger.”

- Goldman Sachs said that the outbreak could drag oil prices down by $3 per barrel.

- “The oil products not needed in China could be exported, thereby increasing the already plentiful supply of gasoline and diesel on the global market,” Commerzbank added.

3. Natural gas dragged down by speculators

- Henry Hub prices fell below $2/MMBtu, creating a financial disaster for shale gas drillers.

- Prices are at their lowest level in roughly four years, “on the back of falling power generation demand and warmer-than- average temperatures across almost all of the Lower-48 States,” JBC Energy wrote in a report.

- However, the firm said that strong supply and weak demand only explain part of the problem.

- “The amount of short speculative positions has been rising strongly since December, vastly outpacing the growth in long positions, in turn exerting additional pressure on HH futures’ prices as speculators pile in on an even more disappointing fundamentals picture than many had previously forecast,” JBC said.

- “The key takeaway from the previous (2015-16) slump being now, that HH prices can continue to fall for a while even after net speculative length takes a turn for the better.”

4. Wheat prices on the rise

- Wheat prices rose this week to their highest level since August 2018.

- The price increase is the result of concerns about supply. Russia has also been mulling restrictions on grain exports, which would put further supply pressure on the global market. Russia is the world’s largest exporter of wheat.

- “Now there is also a risk that wheat from France, the EU’s largest wheat exporter, will be in short supply. This is due to the ongoing strike by French railway workers in protest at the pension reform plans of President Macron,” Commerzbank said in a note. Grain shipments could come to a standstill.

- “The French grains industry is warning of serious consequences if the strike were to continue for any length of time, claiming that 450,000 tons of grain are currently stuck at the terminals,” Commerzbank added. “Alternative modes of transport, such as trucks, would incur extra costs of €4-6 per ton.”

5. Oil majors can’t afford their shareholder payouts

- Since 2010, the world’s five largest oil majors have had to borrow heavily and also sell off assets in order to afford their hefty payouts to shareholders.

- Over the past decade, the five majors have sent $536 billion to shareholders in the form of dividends and share buybacks, but they only generated $329 billion in free cash flow over that timeframe, according to IEEFA.

- That means that they needed to come up with $207 billion from elsewhere – debt and asset sales.

- “The oil majors are consistently under-performing the market and may believe that shareholders won’t notice, as long as they receive generous dividends,” said IEEFA director of Tom Sanzillo. “As these companies continue to sell off assets and acquire more debt, they reveal a sector in disarray.”

6. Plastic bans multiply

- The oil industry is betting on robust growth of plastic consumption as a hedge against peak demand in the transportation sector. In fact, “non-combusted” oil demand, which refers to petrochemical products, is expected to be a much larger source of demand growth than that of industry, road transport and other non-road transport.

- The oil industry plans on investing $34 billion in petrochemicals over the next five years.

- However, the proliferation of plastic bag bans is just one of the potential threats.

- China just announced a ban on plastic bags to be phased in by the end of 2020. As Liam Denning put it for Bloomberg Opinion, “The resort to policies of interdiction, rather than market-led solutions, is itself a green swan: fiat dislocation that is hard to model,” Denning wrote.

- “It doesn’t take a global ban on single-use plastics to present a problem to an oil industry that has (a) made petrochemicals a central part of its growth story and (b) begun deploying billions already in projects ranging from Saudi Arabian Oil Co.’s Asian joint ventures to Exxon Mobil Corp.’s shale-linked crackers on the Gulf coast,” Denning said.

7. Solar gets cheaper and cheaper

- Solar costs are falling so low that solar arrays are becoming the preferred choice, even in markets where the technology is not subsidized.

- “The training wheels are off,” Joe Osha, an equity analyst at JMP Securities, told Bloomberg. “Prices have declined enough for both solar and wind that there’s a path toward continued deployment in a post-subsidy world.”

- The cost of wind is down 50 percent since 2010, while solar is down 85 percent.

- As a result, solar and wind are now cheaper than coal and natural gas in two-thirds of the entire world, according to BloombergNEF.