Oil retreats following OPEC+ decision as Covid fears mount

Following a month of strong gains, oil price action has retreated.

Oil trading

OPEC & allies finally reached on the 18th last week after nearly two weeks of back and forth. OPEC+ will ramp up production 400,000 bpd every month from August onwards. These increases will stay in place until December 2022.

In practical terms, this should mean lower prices. We’ve seen oil push to new heights during the OPEC+ tussle. Tight supplies were supporting prices. In anticipation of the taps opening up, however, WTI and Brent contracts have dropped back to expected levels.

At the time of writing, oil prices had below the $70 mark for two of the three major benchmarks. WTI is currently trading for $67.15 – the same levels seen towards the end of May.

Brent is trading for around $69.40.

This is partly due to the OPEC decision, but also the very real threat of the global Covid-19 pandemic.

Despite economies like the UK cheering about freedom and lowering restrictions to almost pre-pandemic levels, the virus is still very much a threat. The delta variant, in particular, continues to push infections back to levels not seen since last summer.

This had fed into a growing sense of unease, which may explain the soft price action and retreat we’ve seen in oil prices over the past couple of days. Travel restrictions in Asia, for example, have blunted optimism around jet fuel recovery this year.

On the other hand, US oil stocks continue to fall at a rapid rate. The EIA’s crude oil inventory report for week ending July 9th showed a 7.9m barrel week-on-week fall. Oil inventories are now 8% below the five-year average for this time of year.

While US consumption appears to be healthy, it will be interesting to see how it contrasts with global volumes, particularly if more shutdowns occur.

Some are still feeling bullish. Goldman Sachs, for instance, has reiterated its belief an $80 for Brent will happen in 2021. Brent crude did almost reach that level during the recent rally, but it remains to be seen if oil can make such gains again before the end of the year.

Natural gas trading

Natural gas prices started the week on a bullish footing with prices floating around the $3.70 level.

According to EIA research, US gas consumption was up last week, driven by an uptick in power generation. For the week ended July 9th, total gas consumption was up 2.1% with a higher 3.4% week-on-week increase in natural gas consumed for power.

Despite this, more gas is being held in US inventories. The EIA report states working gas in storage rose 55 Bcf compared with the previous week for a total of 2,629 Bcf. Year-on-year, stocks are lower overall, standing at 543 Bcf less than last year and 189 Bcf below the five-year average of 2,818 Bcf.

A moderate demand outlook for the rest of the week into next week is forecast by Natural Gas Weather. Two weather systems, one bringing showers and cooler temperatures across Central, Southern and Eastern seaboard states, and another bringing hot temperatures in the Northwest, are creating a conflicting demand picture.

OPEC+ meeting breakdown sends oil sky high

Oil reaches some of its highest levels for years as OPEC and allies walk away from July’s meeting.

Oil trading

OPEC+ were on the cusp of making a new deal at its July meetings, but talks have broken down.

What the market was anticipating as being more of a formality than a full-blown tussle has turned into something sour. July’s meeting has been abandoned.

The cartel and allies have been steering the course of oil markets successfully over the pandemic, but now faces a major hurdle in establishing harmony.

The UAE and the rest of the cartel are at loggerheads over OPEC+’s production tapering proposals. A plan to raise output by 400,000 bpd from August to December, and keep cuts in place beyond the April 2022 deadline, are yet to pass muster with the UAE.

The emirate is willing to accept the deal if its quota requirements are upgraded to match Saudi Arabia’s. Obviously, as OPEC top dog, the Saudis aren’t particularly keen on that. As such, meetings have been called off.

What’s bad news for OPEC is good news for oil traders. Prices have shot to highs not seen since November 14. WTI is trading at $76.65.

Brent crude is pushing the $78 level, trading at around $77.70 at the time of writing.

However, the breakup of talks suggests two things. Firstly, that competition amongst OPEC+ is growing in the face of higher global oil demand and higher prices. Second, concerns about global oversupply are still there.

Away from OPEC, US crude inventories are now at some of their lowest levels for years. A combination of slowing domestic production and rocketing fuel demand means stockpiles continue to drop week on week.

According to EIA data, US reserves stood at 452.3m barrels as of week ended June 25th. That is a 15.2% year-on-year increase, and also 3.4% lower than in the same week in 2019.

Stocks at Cushing, Oklahoma, the US’ designated NYMEX crude futures delivery point, have dropped too. Stocks were down 1.5m barrels as of week ended June 25th, totalling 40.1m barrels – a 23.3% decline against 2019’s pre-pandemic levels.

Natural gas trading

Natural gas prices started the week at a bullish $3.738.

However, weather forecasts may cause fluctuations in demand over the coming weeks. According to NaturalGasWeather predictions, national demand is expected to ease this week with heavy showers over the Great Lakes and East.

Next week, national demand will increase next week due to hot conditions over the West and warm conditions over the South and East.

Attention is being paid to Cyclone Elsa brewing in the Gulf. Demand may fall upon the colder, rainy temperatures Elsa could generate. LNG cargoes could also slow.

Overall, the pattern remains just strong enough to be bullish over the coming week and into the next.

Looking at stockpiles, the EIA’s report for week ended June 25th showed natural gas in storage rose 76 bcf during the review period.

The injection boosted stockpiles to 2.558 trillion cubic feet (Tcf), which is still 5.3% below the five-year average of 2.701 Tcf for this time of year.

OPEC+ preview: Delta dawn to delay production cuts sunset?

  • OPEC+ expected to maintain slow increase in production
  • WTI & Brent trade close to three-year highs
  • EIA inventory report shows further tightening

The Organisation of Petroleum Exporting Countries and its allies (OPEC+) convene on Thursday, July 1st to discuss the next phase of production constraints. The cartel is already increasing output by 2.1m bpd from May through to July and has successfully carried off this increase whilst still presiding over rising prices. The focus on the meeting is whether to maintain this gradual easing of production curbs in August and potentially beyond. Market expectations suggest OPEC+ will increase output by around 500k bpd in August but there are still plenty of unknowns.

On Wednesday, OPEC secretary general maintained a bullish outlook for oil demand recovery this year but pointed to risks on the horizon. He said that while OECD oil stocks are now below the 2015-2019 average, significant uncertainty in oil markets calls for prudence, highlighting the considerable risk to demand outlook from Covid variants.

Demand recovery is uncertain. Whilst US air travel passenger numbers are almost back to 2019 levels, and German diesel demand has recovered to pre-pandemic levels, there are clearly risks that the spread of variants like Delta around the globe will constrain or delay the pick-up in demand that has generally been expected to take place this year. Delta keeps OPEC mindful of being too loose and suggests it might err on the side of less production for the time being – particularly as so much of this year’s demand is seen returning in the second half (see below).

E.g., Japanese oil demand is still pretty soft with consumption in May down 8.5% vs 2019. It highlights that outside of China, a combination of relatively low vaccination rates and the Delta variant continue to weigh on local crude demand.

Nevertheless, OPEC is unlikely to have to contend with a surge of Iranian oil imports onto the market as progress on the nuclear deal to lift sanctions is slow, with talks delayed, and may never happen. Meanwhile US production has not recovered as quickly as one might have thought – the rig count is higher at 470 but well below the ~800 before the pandemic.

Barkindo said global oil demand should rise 6m bpd in 2021, with 5bpd of that figure due to arrive in H2. This presents a risk that oil demand recovery is weighted to the second half of the year and may not emerge due to new restrictions on mobility in response to new waves of the virus. This could leave OPEC+ unwilling to ease of restraints as much as the market thinks it will. On the other hand, there is evidence the market is increasingly tight and OPEC may prefer to ease off a touch to loosen it. Goldman Sachs reckons global demand will rise by an additional 2.2m bpd by the end of 2021, which would leave a 5m bpd supply shortfall. “Ultimately, much more OPEC+ supply will be needed to balance the oil market by 2022,” the bank said in a note.

An internal OPEC report seen by Reuters indicates the cartel is worried the market will return to surplus after the self-imposed output curbs end in April 2022. This could lead to discussion about extending supply cuts beyond that date. An extension would pick up the back end of the curve, which is looking a bit tired, and net would be considered bullish for prices, but could be offset by a larger-than-expected increase in the near-term to compensate some members.

Prices have rallied strongly this year, but members of the cartel need even higher crude prices. The OPEC average fiscal breakeven oil prices stand at $93, according to RBC, which thinks OPEC+ could add anything from 500k bpd to 1m bpd in August.

EIA weekly report

Ahead of the meeting, the latest EIA report today shows a continued draw on inventories. Stockpiles declined by 6.7m barrels, vs the estimated draw of 3.8m, supported by a net 500k bpd decline in imports and a 200k bpd increase in refinery demand. Total products supplied over the last four-week period averaged 20.0 million barrels a day, up by 13.3% from the same period last year.

US commercial crude oil inventories decreased by 6.7 million barrels in the week to Jun 25th from the previous week, yet another weekly draw that leaves inventories at their lowest since March 2020. At 452.3 million barrels, inventories are about 6% below the five-year average for this time of year. Total motor gasoline inventories increased by 1.5 million barrels, whilst distillates fell by 900k.

WTI price action

Post the EIA report it’s pretty much as you were with all eyes on OPEC+. As we flagged in Tuesday’s morning note, there is something of a technical hitch for oil. So far this market has been a buy-the-dip affair as WTI edged up above $74 this week to its highest in almost three years, moving close to a 6-year high in the mid-70s; and market fundamentals are solid as supply remains tight. But Monday’s outside day bearish engulfing candle is a potential red flag, while the bearish MACD crossover on the daily chart is another. RSI bearish divergence is a third with a higher high on the price met by a lower high on the 14-day RSI, indicating buyer exhaustion. This is not necessarily the top but would call for a potential near-term pullback such as a ~10% correction as seen in Mar/Apr this year.

500k bpd is the baseline – go beyond that to 750k, 1m then it’s a bearish reaction in the market. Go under and it’s bullish. But these would be only the immediate responses and market fundamentals remain positive even with more crude coming on stream. Technicals are less inclined to support the bullish outlook in the immediate near-term sense. A temporary pullback would allow for the bulls to take a breath before resuming the uptrend.

Crude oil price action chart ahead of OPEC+ July meeting.

Oil dips ahead of OPEC+ meeting

The oil rally has hit resistance as OPEC and allies prepare to meet for another crucial conference.

Oil trading

Despite starting the week strongly with WTI and Brent trading above $74 and $75 respectively, the oil rally looks like it’s lost a bit of traction today.

WTI prices are now floating around the $73.00 level. Brent contracts are, at the time of writing, trading for around $73.77.

OPEC JMMC’s July meeting takes place on Thursday over a background of rising Asian Covid-19 cases. The Indian delta variant continues its spread, as tensions mount regarding lockdowns and case numbers throughout Asia. Demand recovery in this geography may take longer to get going as a result.

In terms of OPEC+, forecasts suggest the cartel will acquiesce to raising output volumes in line with rising global crude demand. Its expected OPEC+ will bring 500-550,000 bpd back onto global markets from the end of July onwards.

However, OPEC’s latest forecast models suggest this may not be enough. OPEC+’s output may fall short of expected demand by 1.5m bpd in August, according to the cartel, widening to 2.2m bpd by Q4 2021.

Dubai’s ADNOC, a key OPEC member, has already stated it will be dropping export volumes by 15% in September. There is no indicator as to why ADNOC has decided to announce this cut, especially ahead of an OPEC JMMC meeting where higher output is forecast.

If OPEC’s predictions are correct, however, that does give its members space to increase production volumes. But there’s the problem of Iran to contend with.

OPEC members are watching the ongoing Iranian-US nuclear deal talks closely. Iran pumped 2.5m bpd in May 2021. Prior to tighter US sanctions, it was pumping over 3.8m bpd. Adding the 1.3m bpd to global supplies would give OPEC+ less room to increase its own output without tipping towards a market surplus.

However, no breakthrough has been made between Iran and its negotiating partner yet.

On a more positive note, jet fuel is slowly recovering. As of Monday 28th June, worldwide air travel capacity had reached 62% of 2019’s total. The US has been whitelisted by the EU for inbound tourism, while the UK has added several popular tourist destinations, like Ibiza and Malaga, to its quarantine-free green list.

On the infrastructure front, 19 US oil & gas pipeline projects are nearing completion this year. This includes brand new petroleum pipelines, as well as upgrades and overhauls to existing pipework.

The total North American rig count, incorporating US, Canadian and Gulf of Mexico sites, is 587 – some 318 higher than this time last year.

As per the EIA’s storage report for week ending June 18th, US commercial crude oil inventories decreased by 7.6 million barrels from the previous week. At 459.1 million barrels, crude oil inventories are about 6% below the five year average for this time of year. Total motor gasoline inventories decreased by 2.9 million barrels last week and are about 1% below the five-year average.

Natural gas trading

Natural gas started the week on a bullish footing after gaining 8.5% in the previous seven days. On Monday, the $3.50 level had been breached as prices hit highs not seen since November 2020.

Hot temperatures are forecast to sweep across the US, creating higher overall demand as heat builds towards the weekend. Expect to see more demand for cooling gas to offset losses in gas-for-power consumption, as per Natural Gas weather.

As well as the weather, higher natural gas exports may also support prices going forward. Natural gas exports to Mexico jumped 3% last week to 7.0 Bcf per day – new weekly average record for Mexico-bound US gas exports.

Working gas in storage was 2,482 Bcf as of Friday, June 18, 2021, according to EIA estimates. This represents a net increase of 55 Bcf from the previous week. Stocks were 513 Bcf less than last year currently and 154 Bcf below the five-year average of 2,636 Bcf. At 2,482 Bcf, total working gas is within the five-year historical range.

On the infrastructure front, 19 US oil & gas pipeline projects are nearing completion this year. Seven of the total number of pipelines are for gas, representing a mixture of new lines or upgrades to existing infrastructure. This has helped improve transportation from key production hubs to export or transmission terminals and could also support prices going forward.

Can oil hit $100 this year?

Oil is undergoing a sustained rally. Reaching highs not seen since the start of the pandemic, key contracts are on an upward trajectory. Is it sustainable? Will we see an $100 oil price in 2021?

Oil trading

Oil prices retreated slightly on Monday morning from the previous week’s highs, but as of Tuesday growth was back on the cards.

WTI was trading at $72.90, while Brent contracts were being exchanged for $74.81. These are some of the highest levels seen in oil since before the Covid-19 pandemic took hold.

While $80 is the target, especially from Goldman Sachs, some bullish commentators and traders are eyeing up a potential $100 oil price in 2021.
What was unthinkable at the start of the year, is now not outside of the realms of possibility. Many traders and market analysts are taking an ultra-bullish stance.

Lots of factors are at play here. Firstly, OPEC+ has firm control over global oil supplies. Its gradual reintroduction of more crude onto global markets has supported oil prices across 2021 so far. The cartel is keen not to fully open the taps until pre-pandemic oil demand is back.

Goldman Sachs’ oil outlook suggests oil demand will return to normal levels by Q4 2021, feeding into the bullish feeling. A delay in the Iran-US nuclear deal is keeping 1m bpd out of circulation, again supporting prices.

A dramatic drawdown was reported by the EIA in its inventories review for week ending June 11th. Stocks decreased by 7.4m barrels at the end of the review period – highlighting the US’ increasing thirst for crude.

Despite this, OPEC is confident US oil output growth will remain subdued for the rest of the year, even though the US rig count is up to 373 – the highest level since April 2020, according to Baker Hughes.

Natural gas trading

Scorching temperatures across the southern US and California were forecast to support natural gas prices at the start of the week as cooling demand season hits. In fact, reports from Texas and California suggest gas use spiked as homeowners and businesses cranked their AC to counter intense heat.

As of Monday, a tropical storm was brewing in the Gulf of Mexico which may threaten LNG infrastructure and export activity in Louisiana and create bearish conditions in that region.

Total gas stocks stand at 2.427 Tcf, down 453 Bcf from a year ago and 126 Bcf below the five-year average, according to the EIA natural gas storage inventories report for week ending June 11th.

From this, natural gas temperatures remain around the $3.22 level. Cooling season is a transitionary period for gas use, so expect to see fluctuations on prices throughout the hotter summer seasons and into autumn.

Recovery demand stimulates oil price rally

Oil prices are at their strongest levels for months. Natural gas is performing strongly too. Is now a good time for hydrocarbons traders?

Oil trading

Oil prices are strong right now, in some cases reaching highs not seen for nearly three years.

Since starting the week strongly, WTI and Brent contracts are performing well, at $71.2 and $71.4 as of Tuesday morning.

More gains are potentially on their way. The summer is coming with looser lockdowns and freer travel. Analysts are forecasting higher air and vehicle traffic worldwide, stimulating demand for fuel, thus driving up prices.

The IEA, for instance, is forecasting a 30% spike in jet fuel consumption throughout the summer, mostly driven by domestic travel in the US and EU.  Global demand is expected to peak at 5.8 million bpd this year.

In the US, the EIA believes jet fuel demand will peak at 1.47 million bpd Q3 2021 – up from 1.13 million in the first quarter and more than 50% higher than a year earlier.

But let’s be real. Travel is not anything like it was pre-pandemic. It probably won’t be for some time. However, what we’re seeing here is incremental progress in key economies towards normality.

Despite this, the IEA is calling for OPEC & allies to really open the taps. The agency’s projections optimistically suggest oil demand will reach pre-pandemic levels as early as 2022. To cater for growing demand from springboarding economies, the IEA has stated that “OPEC+ needs to open the taps to keep the world oil markets adequately supplied”.

The above is good news for oil producers, but it does raise a big question. If world markets are in danger of being undersupplied like the IEA thinks, then why are oil traders anxious over Iran?

Ongoing discussions between Tehran and Washington sees the Iranian side hoping to see a lifting of US-imposed sanctions and a new nuclear deal hashed out. One of the many options being mooted is reintroducing Iranian crude onto global markets once more.

OPEC+ has been left feeling trepidatious. The cartel has been carefully controlling its output volumes across the pandemic to protect prices. A glut of Iranian crude washing over markets may lead to a glut, which may drop prices – something no one wants to consider in the middle of this rally.

US Secretary of State Antony Blinken signals a significant number of sanctions will remain in place, regardless of closer Iranian compliance to the US-Iran nuclear deal. Goldman Sachs, suggests negotiations will be slow, thus avoiding oversupplying markets and cooling bearish expectations.

Last week’s EIA inventories report showed a further drop in stockpiles, declining 5.2m barrels, reinforcing recovering demand throughout the US.

Natural gas trading

Natural gas traded above $3.20 on Monday morning as it looked to break through the $3.30 level, which it did on Tuesday in early trading.

Cooling season is here. Natural Gas Weather puts US nationwide demand on a high footing with heatwaves coming in California and Texas, while temperatures are on the warm to high side across the country.  

Total working gas in storage as of week ending June 4 stood at 2,411 Bcf, according to the EIA’s last natural gas storage report. This is 383 Bcf below last year’s volumes and 55 Bcf below the five-year average. 

Reduced pressure on the TETCO pipeline, one of the Gulf’s key nat gas arteries, is likely to remain at low-pressure operation until Q3 2021, further supporting prices. 

LNG feed gas levels have dropped off, down to 9.6 Bcf from the near 11 Bcf highs seen earlier in the year. However, rising LNG demand from China could spur on higher exports from US sources, again building up prices. As of now, however, key Texan infrastructure is closed for maintenance, hence the lower terminal volumes.

Investing in North American energy

The US stands at an energy crossroads. While it has long thrived on oil & gas, the world’s largest economy looks to be switching to clean sources for its power needs. With that in mind, we’re examining what both conventional and renewable energy in the US can potentially offer investors. 

Traditional & renewable energy in the US – a worthy investment? 

The wider North American energy picture 

The US needs an energy overhaul. Those are the signals coming from the Biden administration. The 46th President of the United States has made it clear his White House will be doing all it can to overhaul his predecessor’s less-than-enthusiastic attitude to climate change. For a start, Biden has realigned the United States with the historic Paris Climate Change agreements signed in 2016. 

Significant investment in clean power and renewable energy in the US is likely on its way throughout the next four years. At least. $380bn has been apportioned to the sector as part of a wider $2 trillion infrastructure plan. As such, investors are looking to some of the top US renewable energy companies for long term portfolio bolsters.  

But that is not to forget traditional energy sources. Shale oil and gas has turned the US from a net importer to a net exporter. 2021 however, has battered oil & gas markets – mainly oil – but demand recovery is predicted to surge throughout the rest of the year with economies worldwide opening up post-lockdown. 

Liquid natural gas (LNG) could also be a significant money-spinner for US energy firms. Rising import numbers from Asian markets are propping up the market currently. Feed gas volumes at Texan LNG terminals are nearing record levels at roughly 11 billion cubic feet per month. 

Midstream: a key component in North America’s energy system 

Midstream energy firms, i.e. those involved in the transportation, storage and processing of hydrocarbon products, make ideal investment vehicles. They are essential to the current fossil fuel-led global economy. This sector includes pumping stations, pipelines, storage facilities, tanker ships, tank trucks, and rail tank cars. 

Even in 2020, a torrid year for oil, yields from such investments could have been as high as 10%, as midstream firms typically operate on long, multi-year contracts with set fees. That gives them more dependable free cash flow compared with upstream (getting oil & gas out of the ground) firms, who struggled immensely due to the multi-billion-dollar cost of their activities. While midstream is expensive to set up, tax breaks ensure companies remain profitable by swallowing some of the cost. 

Looking at the Alerian Midstream Energy Index, an index tracking performance of midstream energy firms, we can see it gave a 10.4% yield in November 2020, and a 6.7% yield by March 2021. For context, the S&P 500 index’s yield for March 2021 was 1.5%.  

The case for US renewable energy for investors 

Moving back to renewable energy, there is a long term case for renewables. We spoke earlier about the Biden White House’s major spending plans. The current administration is targeting carbon-free nationwide electricity generation by 2035. That will require sustained capital injections across the solar, wind and other forms of clean power generation over the coming decade. A ten-year extension to the US’ current renewables tax credit scheme worth $400bn has been proposed too. 

Companies in the midstream oil & gas sector are looking to slash emissions. Natural gas pipeline company Williams Companies (WMB) is investing $400 million in solar installations to power its facilities and is targeting net-zero emissions by 2050. 

For investors looking to beef up their portfolios for companies with solid green credentials, or are just supplying clean energy and infrastructure, renewables companies could generate solid returns. 

This will take looking at the top renewable energy firms in the US, such as NextEra Energy. The Florida-based utility company is one of the nation’s clean power pioneers. It is currently in the midst of significantly boosting its green energy capacity, aiming to construct 30 GW of new power generation infrastructure by 2030. 

NextEra projects sales growth of 12% throughout 2021 too, although conservative estimates say a steady 6-8% rise per year until 2023 is more likely. Utility firms like NextEra work on fixed-rate power supply deals. That means firms like NextEra can count on steady cash flow generation. Factor in 5.5m Floridian homes already powered by NextEra, and its ambitious growth targets, long term ideals are there. 

Marketbeat recently upped NextEra’s target price to $75.00, with the stock currently trading at around $74, as of May 20th 2021. 

US renewable energy investment & risk 

When investing in North American renewable or conventional energy, risks must be taken into consideration. In 2020, for example, the pandemic caused the oil market to crash. It’s only now starting to claw its way back up but is nowhere near pre-pandemic levels of capital expenditure by oil companies, or product demand. Personal positions on oil as a commodity or on oil company stocks are likely to have shed considerable value across 2020. 

Renewable energy stocks are subject to volatility too. Turning back to 2020, we’ve seen utility firm share prices drop as they fail to get new projects off the ground owing to tougher working conditions or supply chains snags caused by Covid-19. Likewise, some equipment manufacturers have struggled to fulfil orders for the same reason, leading to their own share prices dropping. 

With any investment, be sure you can afford to ride out market volatility. Only do so if are comfortable taking any losses. 

Afternoon wrap: Shell loses emissions court case, Amazon inks MGM deal

A bit of a dreich day for European equity markets with nothing moving much at all. All the main bourses have traded flat. US markets are mildly higher as Wall Street’s bank chiefs testify in front of Congress. Oil recovered $66 as inventory data showed a bigger-than-expected draw in inventories as well as stocks of gasoline and distillates. US 10s at 1.55%, gold above $1,900 and Bitcoin is weaker in the afternoon session below $39k again.

The dollar caught a big bid into the London fix. Dovish comments from the ECB’s Panetta – too early to taper bond purchases – had already set the EUR on a downwards trajectory through the session. EURUSD retreated to 1.2210 where it seems to have found some support. GBPUSD has tried several times to breach 1.4120 on the downside today but the level is holding well. The dollar index had a run up to 90 but ran out of steam at 89.95.

Doubling Dutch emissions cuts: A court in the Netherlands has ruled Royal Dutch Shell must cut carbon emissions by more than twice the company’s current target of 20% by 2030. The Dutch ruling compels Shell to reduce emissions by 45% from 2019 levels by 2030. Currently, Shell has a goal of achieving this 45% target five years later in 2035, and to be net neutral by 2050.

Shares had been trading a little higher all day before the ruling saw them turn mildly negative, before turning back above the flatline towards the end of the session. Shell says it will appeal the ruling. It comes as Chevron and Exxon also face their own climate campaign fight in AGMs today. What does the ruling mean for Shell and peers?

It undoubtedly sets an important precedent that ties corporate actions to global and national policy in a way that has not been seen before. It’s acknowledgment that you cannot abstract the likes of Shell and other ‘polluters’ if you like from the legally-binding treaties and obligations nation states have signed up to. Similar judgments may start to emerge that compel polluters to better align their strategy with government policy (eg the Paris treaty). It could also have implications for other sectors (eg Utilities) though that is less clear right now.

It is not yet clear to what extent this really changes whether you want to own Shell stock right now. True it could face fines if it doesn’t meet the targets, rather than just shareholder disapprobation. It may also need to increase the near-term capex for ‘greening’. But really this is speeding up a process already in motion. Indeed, the recent investor vote on setting more ambitious carbon reduction targets highlighted the extent to which investors are fully behind Shell doing more, quicker, not less, slower. Which kind of says most investors will be comfortable with the ruling, in of itself. Worries about higher capex and lower returns are another matter. The quicker Shell moves on this, the sooner fund managers with ESG-criteria to box tick will take a kinder view to the stock. Shell will have to act on this, and it could speed up divestments and potential deal activity if it is looking to use its current scale to swallow up some green energy assets.

Ford shares rallied 7% as it announced a $30bn investment in electric vehicles through to 2025. Investors lapped up the ambition. The company says it expects 40% of its sales globally to be EVs by 2030. It’s the first investor day under new CEO Jim Farley and there seems to be a real buzz about Ford’s EV plans now – watch out Tesla.

Amazon shares were mildly higher as the company confirmed it is acquiring MGM for $8.45bn. Like just about any big Amazon deal, on the face of things this looks like bad news for competitors, all else being equal. It gives Amazon significantly more firepower in terms of its Prime streaming platform. The impressive catalogue from MGM (James Bond etc) will help Amazon drive further up-selling of content in the Prime mix. Owning MGM also allows Amazon to benefit from having more control in the content output from the studio, which puts more squarely in a straight fight for eyeballs with Netflix/Disney. Of course, we cannot like-for-like Netflix subs with Prime membership, but, on the margins, it could make Prime compete more fully for eyeball time, which a) makes it stickier with users and b) reduces consumer propensity to have another streaming service.

Netflix tracked the move in Amazon shares but this could be more about the broad 0.55% rally for NDX today. Disney shares rose 1%. Comcast rallied 3% as it’s not seen in a rush to do any further deals. We are seeing significant consolidation in the streaming space that acknowledges the requirement for scale in order to survive – only last week AT&T spun off Warner Media to merge with Discovery. A major deal but hardly transformational for Amazon.

Finally, meme stocks are back – GameStop shares rose 14% and are now up 35% on the week. AMC added another 12%. Both jumped yesterday as Redditors on /wallstreetbets renew their interest in their old favourites.

Optimistic demand recovery fuels oil prices

Oil markets are in a good mood this week so far. Prices are up alongside demand recovery. Natural gas, on the other hand, is about to transition into cooling season. Prepare for a bumpy gas price ride.

Oil trading

Oil prices started the week on a stronger footing. At the time of writing, WTI had cleared $65.50 and was knocking on the door of $66. Brent oil’s performance was similar. The contract had passed the $67 level and was now trading at $68.20.

Fuel demand is rising in tune with OPEC+’s optimistic outlook forecasts. Increased personal travel, reopening of economies, and largely successful vaccine rollout in key crude importers, is generally helping prices keep above $60.

Air travel passenger numbers are increasing too. The US Transportation Security Authority (TSA) reported over 1,800,000 passengers had passed through domestic airports on May 23rd – the highest number since March 2020’s mass flight grounding.

While this is all good news for oil markets, gains will likely be capped by rising coronavirus cases in and around Asia. India continues to grapple with the virus, for instance. We are by no means free and clear yet.

Let’s not discount Iran either. There’s been a lot of industry noise regarding Iran’s reintroduction to crude markets. US-led sanctions on Iran could be lifted and a new deal hashed out. However, this now looks unlikely, so a glut of Iranian crude is unlikely to wash over oil markets any time soon. Iran will continue to loom in the background, with pumps primed waiting for a deal to be struck.

US refiners are could be lining up for a big payday. Gasoline production margins have skyrocketed in the wake of the recent Colonial Pipeline shutdown. Margins are up to $24 per barrel from around $10.

Gasoline inventories amounted to 234 million barrels, less than 1% above the pre-epidemic five-year average, in the EIA storage report for the week ending May 14th.

Total US commercial crude oil inventories increased by 1.3 million barrels from the previous week. At 486.0 million barrels, US crude oil inventories are about 1% below the five-year average for this time of year.

As of Monday, 24th, a tropical storm was brewing in the Gulf of Mexico with a 60% chance of becoming a cyclone. This may result in a temporary closure of US Gulf and Texan oil & gas infrastructure should the storm increase in intensity.

Natural gas trading

The seasonal shift as we transition from spring to summer will affect natural gas prices. We’re already seeing it as prices lost momentum at the tail end of last week. Warmer temps mean less heating fuel demand, but it does mean a rise in cooling gas to power AC units.

Demand declines on lower heating consumption in the residential and commercial sector and reduced export volumes. Total US natural gas demand fell by 10.8% compared with the previous report week, according to the EIA’s report for week ending May 14th.

Working gas in storage was 2,100 Bcf, according to EIA estimate, a net week-to-week increase of 71 Bcf. Stocks were 391 Bcf less than this time last year and 87 Bcf below the five-year average of 2,187 Bcf.

As of this week, Natural Gas Weather suggests temperatures heating up across the nation, ranging from mild in the Northwest to very hot in Texas and the South. We may see a small moderate spike in demand towards the end of the week as cooling gas consumption may increase.

In terms of LNG, the US’ rising position maybe under threat. Qatar has pledged to open the world’s largest liquid natural gas production and export hub, which may be more convenient and cheaper for Asian markets to draw from.

Other LNG producers weren’t exactly ecstatic on the news. Qatar is also said to be dropping prices and expanding into the spot market to maintain its global LNG dominance.

The US has been able to capitalise on a boom in shale gas production. It’s gone from net importer to gas exporter. With the Qatar news, however, we may start seeing less US liquid natural gas on global markets.

Feed gas volumes at Texan gas terminals has been at near-record highs since February. Will these levels continue once Qatar’s latest megaproject gets rolling?

Rig counts jump on improving oil demand

Rig counts are improving throughout North American production bases. Oil prices are up, as is natural gas. Is a strong week ahead for both commodities?

Oil trading

Oil started the week with WTI was trading at roughly $66.80, whereas Brent was around $70.00, putting it on a strong footing.

Rig counts have jumped up in response to oil prices strengthening. As of May 14th, 5 more US oil & gas rigs had come online, bringing the total to 453. The US rig count is now 114 times higher than this time last year, a strong indicator of higher demand. The Canadian rig count increased too, rising by 4 to bring the total to 59 active rigs.

The EIA’s oil storage report for week ended May 7th showed a 0.4m barrels decrease in inventories during the review period. US crude oil reserves stand at 484.7m barrels. Inventories are roughly 2% below the five-year average.

Total deliveries of finished petroleum products over the past month, are up 23% y-o-y the EIA reports. Deliveries total 19.1m bpd. Motor gasoline deliveries are up 41%, reaching 8.9m bpd.

The Colonial Pipeline, hit last week by a cyberattack, is once again operating at full capacity. This may help support prices going forward, as US East Coast oil and fuel supplies return to their normal volumes.

India’s Covid-19 nightmare continues with skyrocketing cases strengthening the call of a new national lockdown. The crisis has impacted Indian crude imports, dropping to a two-decade low.

In turn, fuel use has dropped off across May. Diesel, gasoline, and jet fuel consumption is down 20%, 20% and 38% respectively in the first half of May against April’s levels.

Natural gas trading

Natural gas was on a strong footing at the start of the week, breaking above the $3.00 level. Resistance is expected with $3.20 forming the largest barrier.

Natural gas storage volumes showed a week-by-week increase as per the EIA’s Weekly Storage Report. As of week ending May 7th, the latest data available, US inventories stood at 2,029 Bcf – 71 Bcf higher than the previous week.

However, across the year, natural gas inventories are 378 Bcf lower last year at this time and 72 Bcf below the five-year average.

Demand is expected to be low-to-moderate throughout from week commencing May 24th onwards, according to Natural Gas Weather forecasts. Showers and thunderstorms across Texas, the South and Northwest US will be offset by “near perfect” temperatures over the rest of the country, dropping demand levels. Temperatures won’t be high enough during this period to warrant cooling demand, while they won’t be cold enough for high heating gas use either.

In the short term, though, natural gas prices enjoyed a 5% jump on Monday. Warm weather systems in the US, particularly in the Eastern half, are accelerating the shift from heating demand to cooling demand. In practical terms, that’s higher demand from generators used to power air conditioning systems.

However, as we pointed out above, colder temps are on their way in the next couple of weeks, so the full shift from heating to cooling season won’t happen until summer really kicks in. As such, the 5% jump in natural gas prices may not be indicative of the course the market is currently steering.

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