U.S. Oil Demand In Danger

1. U.S. oil demand rebound stalls

- Oil prices sank this week along with broader financial indices. But oil was also dragged down by the stagnating demand recovery.

- U.S. gasoline demand has plateaued just as peak U.S. driving season came to a close. In the last week of August, demand actually fell by 1.9 percent compared to the week before. The four-week average in August was down 18 percent from a year earlier.

- “The plateauing in demand is a symptom of the continuing aggressiveness of the coronavirus and is telling us that it will take longer to get back to normal,” said Daniel Yergin, vice chairman, IHS Markit, said in a statement.

- Meanwhile, India’s oil demand is still down 20 percent from year-ago levels.

- However, China posted a 19 percent increase in oil demand in July from the same month a year earlier.

- Still, oil prices plunged this week as both the fundamentals and the broader economic backdrop took on a gloomier tinge.

2. Copper prices continue to surge

- Speculative positioning on copper futures is the most bullish since the second quarter of 2018 in a “massive collective U-turn since the first quarter of 2020,” according to Reuters.

- A surge in imports from China has dramatically tightened copper markets. Imports have increased 38 percent this year to 4.27 million tonnes.

- At the same time, copper concentrate supply has decreased 1.4 percent by bulk weight in the first 8 months of 2020.

- Citi published a research note on September 2 titled “Why copper to $8,000 per tonne isn’t far-fetched.”

- Goldman Sachs agrees that there is more room to run, calling copper its “favorite” commodity on both cyclical and structural support. “Recent data points have been supportive, with a tight demand picture increasingly emerging as persistent on-shore demand in China has seen LME (London Metals Exchange) inventories fall to the lowest level since 2005 and falling treatment fees signaling a tight concentrate market,” Goldman analysts wrote in the note.

3. Shipping boom returns to U.S.

- Container imports are surging at American ports, rebounding from Covid-19 lows.

- The Port of Los Angeles is likely to see the best August in history in terms of activity.

- Vessel bookings suggest “September will be strong as well,” executive director of the port told the WSJ. “Retailers are currently restocking and redeveloping their inventories at their distribution centers and on their store shelves.”

- Shipments from Asia to L.A. are up 25 percent since May.

- Freight rates are on the rise as a result. The spot price to send a container from Shanghai to California rose to $3,758, a record high, according to WSJ.

4. Saudi Aramco struggles to pay its dividend

- When Saudi Aramco (TADAWUL: 2222) staged a partial IPO, one of its selling points was the hefty $75 billion annual dividend that it would pay shareholders. With oil at $40, Aramco has to take on debt to pay that dividend.

- Much of it goes to the Saudi government, but Aramco is cutting capex and delaying a slew of projects to bridge the gap.

- Fitch Ratings says that Saudi Arabia’s deficit will hit 15 percent of GDP in 2020, with revenue down 50 percent.

- Aramco’s gearing ratio went from -5 percent in March to 20 percent in June. Gearing could rise to 30 percent by 2023.

5. Soaring lithium demand

- Demand for lithium will surge if governments step up their climate policy ambition. In fact, lithium demand will rise sharply even on a current policies course, but the future growth in lithium demand could rise twice as fast if climate policy tightens, according to a new report from the IEA.

- Under the IEA’s more ambitious “sustainable development scenario,” demand for lithium will rise thirty-fold by 2070 compared to current levels.

- In an even more ambitious “faster innovation case,” that same growth trajectory is hit by 2040.

- Lithium is critical for batteries needed in EVs and other renewables. Lithium has a more stable supply chain than cobalt, another key metal for clean tech, which is more geographically concentrated in the Democratic Republic of the Congo.

- Still, lithium has physical properties that make it “nearly non-substitutable in the production of high energy density batteries,” the IEA said. It is also rarely recycled at this point.

6. Inventories drawing, but from high levels

- Inventories have drawn from recent highs, falling by 2.2 mb/d since the start of 3Q. The drawdown has slowed to 1.6 mb/d in the last 30 days, according to Morgan Stanley.

- Inventories remain at stratospheric levels, 600 million barrels above historical levels.

- The investment bank said that “short-term fundamentals remain soft,” and the bank stuck with a $40 Brent forecast for the fourth quarter.

- Global spare capacity sits at 6.7 mb/d, a 25-year high.

- Still, Morgan Stanley sees “improvement” in 2021. Demand should continue to recover, and there should be “steady undersupply throughout 2021.”

7. Rig count too low to sustain supply growth

- U.S. oil production ticked up in July by 750,000 bpd due to the reactivation of shuttered wells, after rising by 500,000 bpd in June.

- Shale wells decline precipitously, but new production came online at a faster rate than depletion for several years. For example, U.S. shale wells lost 3.5 mb/d in output from declines between December 2018 and December 2019. But 4.5 mb/d of new production was brought online, a net gain of 1 mb/d year-on-year.

- For 2020, the U.S. could add 2.6 mb/d of production, but lose 3.8 mb/d to declines, according to Rystad Energy.

- The number of drilling rigs remains substantially lower than the level needed to sustain pre-pandemic production levels, so there is little chance of a full rebound for the foreseeable future.