The Permian Is Set For A Wave Of Massive Deals

1. Recession Worries Wipe Out Most of OPEC+ Upside

- Oil prices have been sliding for most of this week as weakening US labor market data play into wider fears of an oil demand slowdown in the US, aggravated by what many believe to be a technical gap-fill correction.

- With WTI trading around $77 per barrel, it is truly a sign of times that there was no mid-week increase following a 4.5 MMbbls build in US crude inventories and a 1.5 p.p. rise in refinery utilization, as slowing gasoline demand grabbed most of the attention.

- Whilst shrinking oil stocks and OPEC+ production cuts are still offsetting some of the downside pressure, the heyday of profitability seems to be over for now, even in Asia refining margins are at the lowest since October 2022.

- Apart from shrinking inventories, positioning would indicate further upside to prices as net length in the WTI futures contract from hedge funds and money managers rose to the highest since early November 2022 (+198.5 million barrels equivalent).

2. Tourism Renaissance Boosts China’s Jet Fuel Demand

- China’s opening after three years of shut borders and little to no international flights is finally materializing, with the upcoming May Day holiday seeing a 157% increase in bookings compared to April.

- Despite re-emerging flights to countries most dependent on Chinese tourism such as Thailand or Vietnam, the number of tourists traveling is still only 10% of same-month 2019 levels.

- China’s jet fuel demand is expected to increase 50% year-on-year to approximately 720,000 b/d, becoming the single most important source of demand growth in the Asian powerhouse.

- In the pre-pandemic period, some 155 million Chinese traveled abroad in a year, spending $255 billion and accounting for a third of all visitors in Thailand, Vietnam, or South Korea.

3. The Permian Is Ripe for Massive Deals

- The Permian basin is set for a wide-ranging wave of consolidation as the prospect of oil prices remaining higher for longer and unprecedented profits boost the appetite for M&A.

- With technically recoverable reserves of 50 billion barrels and some 300 TCf of natural gas, the Permian basin wields all the necessary infrastructure and well productivity for quick returns.

- Analysts believe Diamondback Energy (NASDAQ:FANG), Matador Resources (NYSE:MTDR), and Permian Resources Corp (NYSE:PR) are the main candidates to be bought out.

- Ryan Lance, the CEO of ConocoPhillips, poured more oil on the fire by saying that consolidation needs to happen among Permian Basin producers, with ExxonMobil and Chevron signaling the same.

4. Soaring Asian Power Demand

- This year is set for another steady increase in coal and gas consumption in Asia, buttressed by regional LNG prices trending around $12-13 per mmBtu and Newcastle coal futures falling below the $200 per metric tonne mark.

- It is expected that scorching heat will impact first and foremost coal prices as it accounts for 61% and 52% of power generation in China and India, respectively, with gas being in the single digits in both countries.

- Electricity consumption is set to move beyond historical averages this spring as heat waves are stretching power grids across South and Southeast Asia, with India seeing temperatures 5° C above normal.

- Despite India’s coal production increasing a whopping 14.8% year-on-year to 893 million tonnes in FY 2022-23, the market expects coal imports to move beyond the current rate of some 15 million tonnes per month.

5. Despite Wafer-thin Stocks, China Woes Weigh on Copper

- A key transition metal, copper has been rangebound this year with the LME three-month contract still trading at $8,900 per metric tonne, despite evaporating global inventories.

- Chinese is building up its clout in the copper markets as it has combined shrinking imports of the metal, down 13% year-on-year in Q1, with a build-up of copper inventories, by now larger than LME and CME combined.

- Goldman Sachs has recently warned that regulatory approvals for new copper mines fell to the lowest reading in a decade, expecting prices to soar to $15,000/mt by 2025 as new mines take at least a decade to commission.

- According to analysts, copper producers need to invest at least $105 billion in the next 10 years to build 6.5 million tonnes of new mine capacity by 2032.

6. Consumers Brace For The End of Nuclear in Germany

- From 15 April 2023, Germany is no longer a country with nuclear generation capacity after the three remaining reactors were shut down, creating a gap of 4 GW or some 6% of the country’s electricity generation.

- Berlin doubled down on its pledge to render all electricity generation fully renewable by 2035, bringing the policy deadline of phasing out coal as a power source to 2030 from a previous vow of 2038.

- Whilst many expected Germany to start importing more French electricity coming from its Western neighbor’s nuclear plants, EDF’s corrosion issues keep French capacity capped and their baseload prices remain 30% above German ones, at €214/MWh.

- Nevertheless, rising electricity prices are changing public opinion in Germany, with two-thirds of the population favoring the extension of the lifespan of oil plants and less than a third being for the phase-out.

7. Greenpeace Goes After Chipmakers’ Emissions

- The rapidly increasing energy demands of the chip industry are jeopardizing global climate goals, according to a recently published Greenpeace report, with further growth ahead.

- None of the 13 major semiconductor and final assembly firms have climate commitments reflecting IPCC recommendations, including majors such as TSMC or Samsung.

- Electricity grids in East Asia, home to almost 40% of global semiconductor manufacturing capacity, remain overwhelmingly reliant on coal and natural gas.

- TSMC’s power consumption is set to almost triple by 2030, consuming as much electricity as a quarter of Taiwan’s population, even though it pledged to reach net zero by 2050.