- Car sales fell sharply this year, but sales of EVs held up better. Volkswagen and Daimler each saw record declines in auto sales, but their EV sales doubled.
- Next year, automakers will release 35 new all-electric models.
- A few battery makers recently announced that battery packs have dropped to $100 per kilowatt-hour, a widely cited threshold seen as the point at which EVs reach cost parity with gasoline and diesel cars.
- New regulations are also accelerating the shift. In Europe, EV sales accounted for 11% of total car sales in the third quarter, a rapid acceleration in market share for EVs and nearly double the 6% share that EVs capture in China, which dominated the EV race until this year.
3. U.S. shale growth comes to an end
- The U.S. shale industry has gone through multiple cycles over the past decade, collapsing with each downturn only to rise to new heights after getting recapitalized for another wave of drilling.
- However, most analysts now see growth as a thing of the past. U.S. shale has burned through $342 billion since 2010, and there is no sign that Wall Street will open the spigot in the same way that it did after each previous downturn.
- “In the future, certainly we believe OPEC will be the swing producer — really, totally in control of oil prices,” said Bill Thomas, CEO of EOG Resources (NYSE: EOG).
- Scott Sheffield of Pioneer Natural Resources (NYSE: PXD) said: “I see no more growth until 2022, 2023, and it will be very, very light in regard to the U.S. shale industry ever growing again.”
- The big question is whether or not the oil majors can pick up the slack. ExxonMobil (NYSE: XOM) announced substantial CAPEX cuts, but it also said that the Permian would be one of its top priorities going forward.
4. M&A activity slowed by poor valuations
- There is no shortage of oil and gas companies looking to dump assets to raise cash. But that means that there are too few buyers.
- The premiums that buyers used to pay for oil and gas companies over their market value has collapsed. This year, the average is about 8%. As recently as 2019, Occidental Petroleum (NYSE: OXY) paid a greater-than-50% premium for Anadarko Petroleum.
- At the same time, the entire sector is worth less than it used to be. The 25 largest U.S. oil and gas companies have seen their value drop by 32% since the end of 2019, according to the Wall Street Journal.
- On average, the market premium fell sharply after the 2014-2016 downturn, and never recovered. But the average fell even more sharply in 2020.
5. Metals surge higher and higher
- Gold prices fell further this week, after declining by 4.5% last week. In November, gold posted its worst monthly loss in four years.
- But it is “difficult to find any fundamental arguments to explain the sell-off,” Commerzbank wrote in a report, noting the weak dollar and extraordinary bond-buying by the European Central Bank.
- Meanwhile, metals are “still firing on all cylinders,” the bank said. LME copper has soared to $7,700 per ton, a more than seven-year high.
- Aluminum is at a two-year high at $2,030, and zinc is at a one-and-a-half year high at $2,840. The LME base metals index rose more than 10% in November.
- China’s industrial activity is one of the principal drivers. However, speculative purchasing is also at play, and from a technical perspective, “copper is now overbought,” Commerzbank said.
6. Margin for U.S. LNG exports opens up again
- The LNG glut seen earlier this year was clearly evident when TTF prices (gas prices in Europe) collapsed amid high storage levels. That closed the window for U.S. LNG exports for a period of time, leading to the cancellation of dozens of cargoes over the summer.
- “The arb from the US gulf coast, a major source of the increase in European LNG volumes over the last couple of years, was over $1/MMBtu out of the money at times this summer,” Bank of America said in a note.
- Imports to Europe remain subdued, in part because demand in Asia is strong. China’s strong recovery, and a cold start of winter in China, have led to a surge in LNG demand. JKM prices are trading at a sharp premium to TTF prices.
- That dynamic should, in time, pull up TTF prices. “Looking past the winter, US gulf coast export arbs are in the money by nearly 50 cents/MMBtu next summer on expectations that storage surplus in Europe will normalize,” Bank of America said. “Absent a very warm European winter, we expect near-maximum US LNG export volumes next year.”
7. Oil majors write down $70 billion
- ExxonMobil (NYSE: XOM) made big headlines this week when it finally decided to write down upwards of $20 billion, mostly related to gas assets leftover from its costly purchase of XTO Energy a decade ago.
- The five western oil majors have now written down a combined $70 billion this year.
- They are responding in very different ways. BP (NYSE: BP), Total (NYSE: TOT), and Royal Dutch Shell (NYSE: RDS.A) are pledging a shift to renewables, and BP has even pledged to cut production over the next decade (or, more likely, try to sell off assets).
- ExxonMobil and Chevron (NYSE: CVX) have refused to begin a transition, and for now, are planning to continue oil and gas drilling for decades to come.
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