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Are the supply and demand fundamentals that have governed oil markets for decades coming unstuck?
In normal times, a surge in demand and rising prices would trigger supply increases. But as the past week has shown, these aren’t normal times.
The latest: Just two days after the Biden administration urged swift action to move towards a low-carbon economy, US National Security Adviser Jake Sullivan appealed to OPEC+ to increase oil production in order to curb rising gasoline prices.
The glaring contradiction highlights an uncomfortable fact: the world still needs oil. But there is growing pressure on major oil companies to ditch fossil fuels, and US producers are laden with debt.
That leaves Saudi Arabia, Russia and their OPEC+ alliance, which is taking a cautious approach and slowly unwinding production cuts despite a 60% surge in the price of Brent crude over the past year.
That means supply could remain tight over the coming months.
One big-picture reason: Investors’ growing climate concerns are keeping a lid on production growth at oil companies that are answerable to shareholders, Per Magnus Nysveen, head of analysis at Rystad Energy told me.
See here: Last year, global investment in oil and gas field development fell to around $348 billion, down from a peak of $740 billion in 2014, according to analysts at Morgan Stanley. They estimate that the lack of investment at public companies will start to drive their production into decline from 2024.
US shale producers have also kept output relatively flat, under pressure to return cash to shareholders following the past decade’s spending spree.
At the same time, demand has been rising. While the recent oil price rally has lost steam amid a surge in Covid-19 cases from the Delta variant, the International Energy Agency has kept its forecast for global oil demand growth over the next year largely unchanged.
In a report last week it said that the market could still be left slightly short of supply towards the end of the year, despite the decision by OPEC+ to ease production cuts. More supply could come online next year, it added.
Remember: The Delta variant poses a risk to oil demand in the near term, but the global economy is still projected to grow 6% this year, expanding 4.9% in 2022, according to the International Monetary Fund.
Longer term, demand is likely to prove “sticky” as the world’s population grows and GDP per capita increases, Morgan Stanley commodities strategists Martijn Rats and Amy Sergeant wrote in a research note last month.
“Combined, this leads to a growing supply/demand deficit from 2024 onwards,” they added.
What it means: A more favorable environment for OPEC and sustained higher prices. The alliance already controls more than a third of the world’s oil production, rising to about 50% when non-OPEC producers such as Russia and Mexico are included. “In 10 years from now, OPEC’s share of production will be higher,” remarked Nysveen.
Given dwindling investment by rivals, OPEC may no longer need to trade off supporting oil prices in the short term against defending market share in the long term, added Rats and Sergeant.
They expect Brent to be in the mid-to-high $70s for the remainder of the year and be well above $70 a barrel throughout 2022.
One big unknown: It took several rounds of negotiations for OPEC+ to agree on production increases recently and there are questions over whether alliance members will stick to output restrictions.
“OPEC+ members get seduced by higher prices, which usually means a breakdown in discipline and they produce more to get higher revenues,” Tom Kloza, global head of energy analysis at IHS Markit’s Oil Price Information Service, told me.
Bottom line: Notwithstanding billions of dollars of investment into low carbon energy sources, the world still needs oil. “The world oil industry is struggling to find new business models to navigate the energy transition … while still meeting sustained oil demand,” the IEA said.
Cineworld wants what AMC’s having
AMC’s rapid share price gain and loyal retail investor following appear to have caught the attention of its biggest rival.
What’s happening: Cineworld, the world’s second-largest cinema chain, unveiled last week that it’s considering a US listing. The company said it may also opt for a “partial listing” of Regal, which it bought in 2018, in a bid to tap the vast sums of cash sloshing around America’s stock markets.
“US equity capital markets are the largest and most liquid in the world and include a large number of publicly listed cinema companies including peer group companies,” Cineworld said in a statement. “These companies are typically covered by a significant number of North American equity analysts with a wide domestic investor following.”
Meme stock mania? It’s hard to believe that Cineworld hasn’t noticed AMC (AMC)’s share price boon. AMC (AMC)’s stock is up over 1,500% this year, thanks partly to an army of retail investors coordinating on Reddit.
By comparison, Cineworld has barely managed a 2% gain. The company’s CEO Mooky Greidinger told the Financial Times that the mooted listing had “nothing to do” with AMC’s recent stock performance. “This is only one option out of many options on the capital markets for us,” he added.
But the fact remains that individual investors have become a powerful new force on Wall Street and companies are embracing them. And why not?
AMC was able to raise $587 million in June as meme traders piled in, even though none of the analysts who cover the company recommend buying the stock and theater attendance remains way below pre-pandemic levels.
Watch this space: Cineworld said it will evaluate its options “over the coming months.” If it goes ahead with a listing, Greidinger can look to AMC CEO Adam Aron’s performance on the company’s earnings call last week for tips on how to win over the Reddit crowd.
Monday: Japan Q2 GDP
Tuesday: EU Q3 GDP flash estimate; US retail sales; BHP (BBL), Home Depot (HD), Monday.com, Roblox and Walmart earnings
Wednesday: Fed minutes; Tesla (TSLA) “AI Day”; Tencent (TCEHY), Weibo (WB), Lowe’s (LOW), Target (CBDY), Cisco (CSCO), Nvidia (NVDA) and Robinhood earnings
Thursday: US jobless claims; Kohl’s, Macy’s (M), Applied Materials (AMAT) and Ross Stores (ROST) earnings
Friday: Deere (DE) and Foot Locker earnings