1. The oil market's massive inventory problem
- Oil inventories increased in the second quarter at a rate of nearly 1.8 mb/d, more than four times the ten-year average, according to Standard Chartered.
- Inventories typically increase in the second quarter, but this was the largest build since data collection began in 1956.
- The oil market has technically flipped into a deficit, although at a much lower base. Instead of a 100 mb/d market, supply is right around 88 mb/d and demand at 89 mb/d, rebalancing at a lower level.
- If sustained, the market will draw down on inventories going forward, although the overhang will take around 2 years to drain back to normal levels.
2. Bloated distillate stocks
- Crude stocks rose last week, somewhat deflating the bullish momentum from recent weeks. Distillate stocks continue to climb to unprecedented heights even as gasoline stocks have begun to come down.
- Distillate stocks have surged to their highest level in nearly four decades. "This is a reflection of the ongoing weakness in truck transport and other industrial activities," Commerzbank wrote in a note.
- Refining margins have fallen dramatically. Squeezed margins are a reflection of rising crude prices but depressed demand for products.
- Bloated distillate inventories could ultimately cut into processing, removing a demand pull on crude stocks.
3. Major capex cuts
- The U.S. oil industry is…
1. The oil market's massive inventory problem
- Oil inventories increased in the second quarter at a rate of nearly 1.8 mb/d, more than four times the ten-year average, according to Standard Chartered.
- Inventories typically increase in the second quarter, but this was the largest build since data collection began in 1956.
- The oil market has technically flipped into a deficit, although at a much lower base. Instead of a 100 mb/d market, supply is right around 88 mb/d and demand at 89 mb/d, rebalancing at a lower level.
- If sustained, the market will draw down on inventories going forward, although the overhang will take around 2 years to drain back to normal levels.
2. Bloated distillate stocks
- Crude stocks rose last week, somewhat deflating the bullish momentum from recent weeks. Distillate stocks continue to climb to unprecedented heights even as gasoline stocks have begun to come down.
- Distillate stocks have surged to their highest level in nearly four decades. "This is a reflection of the ongoing weakness in truck transport and other industrial activities," Commerzbank wrote in a note.
- Refining margins have fallen dramatically. Squeezed margins are a reflection of rising crude prices but depressed demand for products.
- Bloated distillate inventories could ultimately cut into processing, removing a demand pull on crude stocks.
3. Major capex cuts
- The U.S. oil industry is expected to cut capex by as much as 50 percent this year, according to Goldman Sachs.
- "We believe that companies are unlikely to raise 2020budgets and that if they do the investor reaction will be negative," Goldman said.
- Activity will pick up in the second half of the year, but it will be "in line" with already-stated budgets. Analysts at Goldman said that based on the evidence from top Permian players, drillers are going to focus on free cash flow instead of growth. Goldman recommended EOG (NYSE: EOG) above others.
- The bank said it will be important to watch the commentary from executives on second quarter earnings announcements, which will offer clues into what happens next.
4. Dakota Access impacts
- Bakken E&Ps saw their share prices hit after a U.S. District Court ordered the Dakota Access pipeline to shut down.
- E&Ps with "sizable Bakken footprints…could face takeaway constraints and lower price realizations as differentials widen to reflect rail economics," Goldman Sachs wrote in a note. The bank singled out Continental Resources (NYSE: CLR), Marathon Oil (NYSE: MRO), WPX (NYSE: WPX), Hess (NYSE: HES) and EOG Resources (NYSE: EOG).
- The spread between Bakken and Brent markers could widen, Goldman added, from a base case of $7 per barrel in the second half of 2020 to $9-$11 per barrel.
- Railroads will be the chief beneficiaries of a permanent DAPL shutdown. Goldman pointed to Canadian Pacific (NYSE: CP), Norfolk Southern Corp. (NYSE: NSC) and CSX Corporation (NASDAQ: CSX).
5. Gold prices hit $1,800
- Gold's long rally continues, surpassing $1,800 per troy ounce this week.
- Gold prices are now at their highest level since 2011.
- "Gold is being lent buoyancy by increased risk aversion in response to further rising corona infections," Commerzbank wrote in a note.
- Gold ETFs "in the first half year could absorb almost half of global gold production during this period," the investment bank added. "This shows just how prominent a role this investment form is currently playing on the gold market."
6. Battery metals see EV-fueled bull market
- A few years ago, metals used in batteries surged in price, with particular rallies in cobalt, lithium and nickel. Prices sank as fears of supply shortages did not pan out.
- However, green stimulus measures in China and Europe could stoke demand once again.
- EV sales could rise from 2 million in 2019 to 8.5 million by 2025, according to Bloomberg New Energy Finance. From there, EV sales could really take off, topping 26 million by 2030.
- The market for lithium-ion batteries could reach $58.8 billion by 2024, up from $7 billion in 2018.
7. Gasoline demand on the mend, still down year-on-year
- U.S. gasoline demand has climbed back to levels seen before the pandemic. At 8.76 mb/d in the first week of July, gasoline demand has recovered from a low of around 5.5 mb/d in April.
- But gasoline consumption is still about 1 mb/d lower than usual for the time of year.
- Recovering fully will be difficult, given much higher levels of unemployment and surging coronavirus cases, which has sparked more closures of parts of the economy in some states.
- Yet gasoline demand will likely recover to pre-pandemic levels much faster than jet fuel demand will. Down roughly 50 percent, jet fuel demand could take years to rebound.