- Oil prices have remained mostly stuck in the low-$40s for months, but the oil market has participated in the broader lift in financial markets stemming from optimism surrounding effective vaccines.
- Oil prices surged to their highest levels since March this week. Needless to say, energy stocks rocketed upwards on the news.
- Diamondback Energy (NASDAQ: FANG) shot up more than 15 percent over two trading days.
- “It’s a total change of vibe,” Robert Yawger, director of the futures division at Mizuho Securities USA, told the WSJ. “Everything is much more positive now.”
- The S&P 500 energy sector surged more than 35% this week.
2. New green supermajors
- Enel (BIT: ENEL) and Iberdrola (BME: IBE) have emerged as new clean energy giants, or Green Supermajors, as the WSJ framed it.
- Enel said it will nearly triple its installed renewable capacity to 120 GW by 2030. Iberdrola hopes to double its capacity to 60 GW by 2025.
- In the U.S., NextEra Energy (NYSE: NEE) has become the largest clean energy provider. NextEra’s market cap tops $146 billion, briefly surpassing ExxonMobil (NYSE: XOM) a few weeks ago. (Exxon has climbed back to $172 billion market cap as oil prices have rebounded).
- The WSJ notes that the clean energy giants share characteristics to Big Oil: vertical integration, scale, and a pipeline of new projects.…
1. Energy catches fire amid broad rally
- Oil prices have remained mostly stuck in the low-$40s for months, but the oil market has participated in the broader lift in financial markets stemming from optimism surrounding effective vaccines.
- Oil prices surged to their highest levels since March this week. Needless to say, energy stocks rocketed upwards on the news.
- Diamondback Energy (NASDAQ: FANG) shot up more than 15 percent over two trading days.
- “It’s a total change of vibe,” Robert Yawger, director of the futures division at Mizuho Securities USA, told the WSJ. “Everything is much more positive now.”
- The S&P 500 energy sector surged more than 35% this week.
2. New green supermajors
- Enel (BIT: ENEL) and Iberdrola (BME: IBE) have emerged as new clean energy giants, or Green Supermajors, as the WSJ framed it.
- Enel said it will nearly triple its installed renewable capacity to 120 GW by 2030. Iberdrola hopes to double its capacity to 60 GW by 2025.
- In the U.S., NextEra Energy (NYSE: NEE) has become the largest clean energy provider. NextEra’s market cap tops $146 billion, briefly surpassing ExxonMobil (NYSE: XOM) a few weeks ago. (Exxon has climbed back to $172 billion market cap as oil prices have rebounded).
- The WSJ notes that the clean energy giants share characteristics to Big Oil: vertical integration, scale, and a pipeline of new projects. One of the differences is that clean energy projects face low financial risk and comparatively smaller returns; big, complicated oil projects are high-risk, high-return.
3. E&P hedging below normal
- U.S. oil producers have their future production hedged at a much lower rate than is typical. In the third quarter, hedging for oil for 2021 barely rose, but hedging by gas producers ticked up more significantly.
- Roughly 22% of 2021 oil production is hedged, according to Goldman Sachs, while 56% of natural gas production is hedged.
- The average price producers have locked in hedges for WTI stands at $45 for 2021, the lowest price in years.
- Among more oil-skewed producers, Hess (NYSE: HES), EOG Resources (NYSE: EOG), Continental Resources (NYSE: CLR), Apache (NYSE: APA), Magnolia Oil & Gas (NYSE: MGY) and Occidental Petroleum (NYSE: OXY) are the least hedged and most exposed to oil prices next year.
4. Gold tests technical support
- The slump in gold prices came to a halt this week at around the $1,800 per ounce mark, a technical resistance point at the 200-day moving average.
- “What is more, the gold price took two weeks in July to lastingly exceed this level, before embarking on its final rally to its record high,” Commerzbank wrote in a note.
- At the same time, there is “no sign yet of any real countermovement, so another attempt to push the price below $1.800 cannot be ruled out,” the bank added.
- Bank of America said the positive vaccine news has changed the market. “We are now neutral on gold,” Francisco Blanch of BofA said. “We see a risk of rising long-term interest rates.”
5. Covid lockdowns still hurting demand
- OPEC+ is likely to extend its current production cuts beyond January, rather than easing them, according to a wide range of analysts.
- The uncontrolled spread of Covid-19 in the U.S. and in parts of Europe increases the odds of an OPEC+ extension, while positive vaccine news also allows the group to postpone easing cuts, and also allows for a faster ramp-up in supply later in 2021.
- Goldman Sachs estimates that the latest wave of lockdowns shaves off 3.1 mb/d of demand at its worst point at the end of 2020.
- A ramp-up in shale drilling would “complicate” OPEC+’s calculations, but the recovery in U.S. shale drilling “remains modest and aimed at stabilizing production instead, as confirmed by recent earnings comments and a commitment to return cash to shareholders,” Goldman analysts wrote in a note.
6. U.S. shale production declines
- U.S shale production is expected to decline by 140,000 bpd in December, month-on-month, according to the EIA.
- The declines are spread across all major shale basins. The Permian is expected to lose 37,000 bpd, with further losses from the Bakken (-33,000), Eagle Ford (-27,000 bpd), Niobrara (-22,000), and Anadarko (-20,000 bpd).
- Natural gas production is also in decline, with the Permian losing 128,000 mcf/d, and further losses from the Anadarko (-140,000 mcf/d), Appalachia (-133,000 mcf/d), Eagle Ford (-112,000 mcf/d), and smaller losses elsewhere.
- Drillers continue to tap their drilled but uncompleted wells (DUCs) as a source of new production. The DUC backlog fell slightly by 86 in October, the latest month for which data is available.
- Without a larger increase in the rig count, shale basins could continue to decline. Only the Permian has seen a notable increase in rigs in recent weeks.
7. Copper prices continue to rally
- China’s continued expansion in manufacturing is helping to push copper prices up.
- At the same time, speculative funds are also piling into copper contracts, with net long bets at record highs on the London Metal Exchange.
- Investors are betting on China, but also on U.S. stimulus in the coming year. Fiscal and monetary expansion could also push up inflation, another bullish force for commodities.
- At the same time, speculators risk getting overstretched. “The physical reality of the metals market is a long way off from the speculative optimism,” LME broker Kingdom Futures warned in a client note. “That type of divergence does not last for very long so one side or the other will have to change and at the moment a huge surge in physical demand seems unlikely.”
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