ExxonMobil just lost a huge boardroom battle.

At a shareholder meeting last week, 2 green-friendly directors — who will push for a lower carbon future — were voted onto the energy giant’s board of directors.

According to The Economist, it is “extremely rare” for a company of Exxon’s size to have even a single dissenting voice on the board (translation: things are going to change).

With climate change concerns…

… more pressing than ever, Big Oil is facing pressure from all angles (governments, consumers) to clean up their energy production.

The most aggressive moves have come from green-friendly Europe:

• BP has plans to reduce the carbon intensity of its products by 50% in the next 3 decades
• Shell will be carbon neutral by mid-century

While ExxonMobil has carbon-reduction plans in place, critics want more. To wit: The company’s current spending plan calls for $3B on green projects in the next 5 years (vs. ~$100B for its other projects).

A defeat has been years in the making

In 2013, ExxonMobil was the world’s largest company. Today, the company’s value has fallen ~40% from its peak and — last year — it recorded a $22B loss due to the pandemic.

A small activist hedge fund named Engine No. 1 started agitating for change in December.

It was backed by 2 massive California pension funds (CalPERS, CalSTRS). While they own <1% of ExxonMobil, the funds’ combined $700B of assets make them very influential, per The Economist.

To be carbon neutral by 2050…

… the world must stop all new oil and gas projects, according to a report from the International Energy Agency (IEA) released in mid-May.

While there is much work to do, ExxonMobil’s stunning board defeat is one step toward reaching that goal.

Each week Josef Schachter will give you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold newsletter covering the general energy market and 30 energy, energy service and pipeline & infrastructure companies with regular updates. We hold quarterly subscriber webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more. 

EIA Weekly Data: The EIA data on Wednesday May 26th was mixed. Commercial Crude Inventories fell 1.7Mb to 484.3Mb as Net Imports fell by 265Kb/d or by 1.9Mb on the week. If there had been no change in Net Imports, Commercial Stocks would have seen a modest increase. Motor Gasoline Inventories fell 1.7Mb as gasoline demand rose into the beginning of the holiday driving season. Refinery Utilization rose 0.7% to 87.0% last week (last year 71.3%). US Crude Production remained at 11.0Mb/d. Over the coming months we see this lifting to 11.5-12.0Mb/d as the increase in drilling activity and higher energy company cash flows are reinvested to stabilize production volumes which are still declining for many producers.

Total Product Demand rose last week by 685Kb/d to 19.96Mb/d. Gasoline Demand rose by 254Kb/d to 9.48Mb/d. Jet Fuel Consumption rose 213Kb/d to 1.4Mb/d. So far this year overall demand for products is 5.8% above last year as we recover from the pandemic plunge. Motor Gasoline demand is up by 9.4% from last year but Jet Fuel remains a negative component, down 2.4% from a year ago. This may turn positive in the coming weeks as it appears that travel around the upcoming Memorial long weekend will see record airline travel. Cushing Inventories fell last week by 1.0Mb to 44.8Mb compared to 53.5Mb last year.

Baker Hughes Rig Data: The data for the week ending May 21st showed the US rig count rise  by two rigs (up five rigs in the prior week). Canada had a decline of one rig (up four rigs in the prior week). Canadian activity is now up 176% from the pandemic lows of last year. There are 58 rigs working in Canada now compared to 21 rigs working last year. In the US there were 455 rigs active, up 43% from 318 rigs working a year ago. In the US they had an increase of four rigs drilling for oil to 356 rigs and this is up

50% from a year ago. The state with the biggest increase in rigs this week was Oklahoma.

Conclusion:

Over the next two months OPEC will increase production by 2.1Mb/d with latest industry  reports showing them having increased production by 1.0Mb/d in May. With worldwide demand now around 95-96Mb/d we expect by year-end demand may rise to 97Mb/d, but not back to pre-pandemic levels of 100-101Mb/d forecast by some energy bulls. Goldman Sachs and Barclays are calling for US$80/b by Q4/21 if demand rises to over 100Mb/d.

Bearish pressure on crude prices:

1. Vaccine hesitation and vaccine resistance is likely to delay herd immunity. Many individuals in the US who have their first shot of the Pfizer or Moderna vaccine have not gone to get their second shot even though they are eligible. The US as of yesterday was at 591K deaths. Worldwide deaths have risen to 3.46M.
2. Rising mutation caseloads in Malaysia, Singapore and Taiwan are new outbreak areas.  Japan’s ICU health care system is at capacity and their largest cities (Tokyo and Osaka) are facing rising case loads. There is increasing pressure to cancel the Olympic summer games. Vaccination rates in the country are extremely low at 5% inoculated so far. The US State Department has issued a travel advisor for the country.
3. Iran is making progress to return to the UN nuclear deal and if an accord is completed by June, they could increase production quickly by 1Mb/d and over the next year by an additional 1Mb/d to lift production from 2.39Mb/d produced in April 2021. Iran last produced over 4Mb/d in 2016. A deal would lift current sanctions on Iran’s oil, banking and shipping sectors. Iran has a new 1,00Km – 1Mb/d pipeline coming on this month that bypasses the Strait of Hormuz. It is situated in the Gulf of Oman. It will make shipping crude cheaper to buyers in Asian countries.

Bullish pressure on crude prices:

1. Rising vaccination levels across the US is lifting energy consumption.
2. Weather impacts should start soon in the Gulf of Mexico which would necessitate shutting in some of the offshore production.
3. Optimism over international travel, as restrictions are lifted, is gaining momentum and some forecasters expect global Jet Fuel demand will rise by 1.0Mb/d by year end. The exception is India which is seeing international flights cancelled due to the rapid spread of the disease.
4. Vaccine passports (or certificates) are getting more support from countries, increasing the likelihood of a 2021 summer tourism industry in Europe. The UK may lead the way with passports and may start to issue them as early as next month.

CONCLUSION: We remain skeptical of the optimism about a full recovery in energy demand before year-end. The tug of war between the normal summer holiday travel demand and the 3-4Mb/d increase in crude oil supplies  this year remains the key determinant of future energy consumption and crude oil prices. 

WTI crude oil prices are down modestly today to US$65.62. A breach of USS$60/b would have negative implications. Technically a close below US$57.63/b (the early April low) would be very bearish and set up a decline to US$48-52/b.

Energy Stock Market: The S&P/TSX Energy Index trades currently at 125. A close below 111.00 (the mid-April low) should initiate the next sharp decline. An initial downside target after such a breach is the 100 area. The expected general stock market weakness would be the catalyst for the energy sector to lose its current momentum and back off meaningfully.

Subscribe to the Schachter Energy Report and receive access to our two monthly reports, all  archived Webinars, Action Alerts, TOP PICK recommendations when the next BUY or SELL signal occurs, as well as our Quality Scoring System review of the 30 companies that we cover. We go over the markets in much more detail and highlight individual companies’ financial results in our reports. If you are interested in the energy industry this should be of interest to you.

We completed our review of 12 energy, energy service and infrastructure companies for our May Monthly SER which will be released this Friday May 28th. It will include reviews of all of the five Pipeline & Infrastructure companies we follow. If you want to access this report and to become a subscriber go to https://bit.ly/34iKcRt to subscribe.

• China plans to open two nuclear breeder reactors beginning in 2023.
• These reactors make weapons-grade plutonium as part of their operation.
• International scientists are worried about what this means for Chinese nuclear weapons.

On the tiny, nondescript island of Changbiao, in the Fujian province, the China National Nuclear Corporation is building two mysterious nuclear reactors that are drawing plenty of international attention—and concern.

The reactors, which are scheduled to power up in 2023 and 2026, are both a type called China Fast Reactor 600 (CFR-600). This kind of reactor is a “breeder,” meaning its nuclear reaction generates more fuel than it uses. And that’s what has scientists from around the world scratching their heads, according to a new report from Al Jazeera.

The goal with most nuclear power plants is to use as much of their fuel up as possible—not make more. That’s especially true when the reactor produces plutonium, which is easy to turn into nuclear weapons.

Read More

A year ago, as the pandemic ravaged country after country and economies shuddered, consumers were the ones panic-buying. Today, on the rebound, it’s companies furiously trying to stock up.

Mattress producers to car manufacturers to aluminum foil makers are buying more material than they need to survive the breakneck speed at which demand for goods is recovering and assuage that primal fear of running out. The frenzy is pushing supply chains to the brink of seizing up. Shortages, transportation bottlenecks and price spikes are nearing the highest levels in recent memory, raising concern that a supercharged global economy will stoke inflation.

Copper, iron ore and steel. Corn, coffee, wheat and soybeans. Lumber, semiconductors, plastic and cardboard for packaging. The world is seemingly low on all of it. “You name it, and we have a shortage on it,” Tom Linebarger, chairman and chief executive of engine and generator manufacturer Cummins Inc., said on a call this month. Clients are “trying to get everything they can because they see high demand,” Jennifer Rumsey, the Columbus, Indiana-based company’s president, said. “They think it’s going to extend into next year.”

Read more

China has told its companies to produce more domestic iron ore as commodity prices hit record highs, but analysts say this will not reduce its reliance on Australian exports.

Beijing’s warning to Australia that it will ramp up domestic iron ore production sounds like an empty threat to anyone who has visited a mining operation in China.

“I have visited 30 or more Chinese iron ore mines. I’ve been underground. I’ve been to the biggest ones,” says Tim Murray, the co-founder of equity and macro research house J Capital.

“So I’m quite familiar with the capacity for domestic iron ore. The short answer is there is no chance of domestic iron ore replacing imports. Definitely not in the short term.

“Their deposits are harder to get. They are a low Fe [ore minerals] and require a lot of energy and environmental impact to make the blast furnace red.”

Analysts and iron ore traders in China agree with Murray, although they will not say so on the record because they fear repercussions. Skyrocketing iron ore prices have become a politically sensitive issue in China, where record steel output is underpinning Australia’s economic growth at a time when Beijing wants to punish Canberra.

Read More