U.S. Oil Companies See Production Decline

1. Gold rally comes to "explosive end"

- The gold rally came to an "explosive end" this week, as Commerzbank described it. Gold lost 6 percent on Tuesday, the largest single-day loss since 2013.

- Silver prices plunged by 15 percent, the largest decline since 2008.

- But the rally may not entirely be over. After a historic bust in 2013, "it took nearly seven years for prices to regain their previous levels," Commerzbank said. "No such prolonged period is likely this time, however."

- The reason is that the fundamentals favor gold and silver - negative real interest rates, an unprecedented increase in the money supply and skyrocketing debt. The chance of an interest rate increase in the near-future is nil.

2. U.S. oil production declines from a few companies

- The U.S. accounted for 30 percent of the global quarter-on-quarter decline in oil output in Q2, with production falling by 2.36 mb/d, according to Standard Chartered.

- But the bulk of U.S. oil production declines has come from a surprisingly small number of companies. "50% of the decline in the sample came from the first 3 companies and 80% of the decline from the first 10," Standard Chartered said.

- The top 3 include EOG Resources (NYSE: EOG), ConocoPhillips (NYSE: COP) and Continental Resources (NYSE: CLR).

- With companies bringing supply back online, U.S. liquids output could rise by 425,000 bpd in the third quarter, the bank said. Still, that only restores 18 percent of what was lost.

3. Plastics may not come through for oil industry

- Global polyethylene prices - the main feedstock for plastics, and made from ethylene and natural gas liquids - has been declining for several years. The main reason is a large overbuild of cracker capacity.

- The worrying sign for the market is that the trend is not reversing, but is set to continue. "[Polyethylene] capacity expansions in China, the Middle East, and the US will likely continue to press ahead, even though demand has stalled and margins are weak," Bank of America Merrill Lynch said in a report. "This should result in further declines in operating margins in regions like Asia and Europe, as surplus production capacity competes for market share."

- The bank expects polyethylene supply to exceed demand growth for at least the next 2 to 3 years in China. That means that exporters of polyethylene from the U.S. and Middle East could be boxed out of China.

- But because China makes it a strategic priority to become self-sufficient, Beijing will likely try to displace imports with domestic production even if the economics don't make sense.

- "Ultimately, if it comes down to production cuts between Middle East and US PE producers, we expect Middle Eastern countries would win out due to superior economics and also deeper integration than their North American competition," Bank of America warned.

4. Shale productivity reaching "limits"

- Capital for the U.S. shale industry began to dry up in 2019, long before the pandemic. In 2019, the industry only raised $12.6 billion in external capital, compared to an annual average of $37.7 billion between 2014 and 2018, according to Rystad Energy.

- So far in 2020, the industry has raised $10.5 billion in new debt, mostly the result of moves made by EQT (NYSE: EQT), Laredo Petroleum (NYSE: LPI), Parsley Energy (NYSE: PE), WPX Energy (NYSE: WPX), Diamondback Energy (NYSE: FANG) and Pioneer Natural Resources (NYSE: PXD).

- Rystad said debt issuance should surpass the 2019 total by the third quarter of this year.

- ConocoPhillips (NYSE: COP) has $0.8 billion in interest due in 2021, the largest of the group.

5. China's copper imports surge

- China's imports of industrial metals have surged this year. Refined copper imports hit a record high of 494,000 tonnes in June, according to Reuters.

- In July, imports shot up again to a new high of 530,000 tonnes.

- Other imports are also on the rise, including aluminum, which rose to 254,000 tonnes.

- The import trend has echoes in the 2009 financial crisis, in which China helped engineer a global economic rebound by consuming commodities of all types. This time, however, there are supply disruptions stemming from Covid-related shutdowns in key markets.

- Copper stocks have declined sharply as a result of the surge in imports.

- In short, the trends are bullish for industrial metals.

6. Renewables eating into coal

- Wind and solar have doubled their share of the global electricity mix over the past five years. In an analysis of 48 countries representing 83 percent of global electricity, wind and solar increased by roughly 14 percent in the first half of 2020, according to Ember.

- Wind and solar now account for about 10 percent of the total in most countries.

- Renewables are forcing out coal, particularly in Europe. Even in China, the world's largest coal consumer, coal use slipped from 68 percent of its total five years ago to 62 percent this year.

- To hit climate targets, coal use needs to fall by 79 percent by 2030 from 2019 levels. That equates to an annual decline of 13 percent for the rest of the decade.

- Renewables are expanding quickly, but the pace is not fast enough to reach those targets.

7. Aviation struggling, hitting oil demand

- The IEA cut its oil demand forecast in its latest report, citing the lack of a rebound in aviation as the main culprit.

- Domestic travel has rebounded in China but remains below pre-pandemic levels. There have been smaller increases in the U.S. and Europe.

- Global traffic (measured as plane capacity multiplied by the distance traveled) was down by nearly two-thirds in July compared to normal levels, according to the IEA. That is an improvement from -75 percent in June and -79 percent in May, but far below normal.

- The summer months in the north are typically the most traveled. "This year's slow take-up indicates demand may remain suppressed for a while," the IEA said.

- The agency downgraded its jet and kerosene demand outlook by 380,000 bpd per month in the second half of 2020 and 185,000 bpd for the whole year. Overall, jet and kerosene demand should be down by 3.1 mb/d this year, down to 4.8 mb/d.