Are Oil Majors Spending Enough On Research And Development?

1. Upcoming OPEC+ Meeting Might be An Exercise in “Ouching”

- Saudi Arabia’s Energy Minister Abdulaziz bin Salman has warned oil market speculators that hey will be “ouching” very soon if they continue shorting oil futures.

- Trading positions of the managed money segment, comprising hedge funds and other non-commercial participants, have slumped to the lowest net length since at least 2011.

- Whilst refined products, especially gasoline in the US, have seen some lengthening recently, net sales of crude oil have continued last week, with CFTC data indicating a shortening of another 18 million barrels worth of contracts.

- The ongoing debt ceiling talks have added to the market’s frustration so the sentiment going into OPEC+’s June 4 meeting is as bearish as it was before the April summit.

2. Canada’s Oil Sands to Produce Higher for Longer

- S&P Global Platts has upgraded its outlook on Canadian oil sands production, arguing that the ongoing project optimizations will bring total production to 3.7 million b/d by 2030, 0.5 million b/d higher than today.

- Most of the incremental production would come from step-out optimization projects that target prospective areas adjacent to existing operational acreage and improved utilization of solvent-assisted extraction.

- Considering the above-average lifespan of Canada’s oil sands, the country’s oil production is only expected to start declining in the early 2030s at a very limited downward pace, provided government policy does not disrupt current output.

- Amidst widespread wildfires and an upcoming general election on May 29, oil and gas issues have been put on the back burner in the province of Alberta as new pipelines are being built and production steadily increases.

3. Lower Investments into Upstream Research Spell Trouble

- Explorers in the US shale patch have started to talk about an impending peak in Permian production as output gains from tight basin sweet spots across the country are slowing down and there’s no new technology to kickstart new growth.

- ExxonMobil’s (NYSE:XOM) R&D budget last year was the lowest since 2007 at $824 million, whilst its peer Chevron (NYSE:CVX) slashed its research investments to $268 million in 2022, a 40% drop compared to 2020.

- Even oilfield services companies are now spending less on research and engineering – Schlumberger used to allocate 3% of its revenues on R&D but now that share has dropped to 2.3%.

- Whilst the Permian might still see higher exposure to enhanced oil recovery techniques, the technology interests have switched to hydrogen and biofuels, lowering the probability of further unabated growth.

4. China Marks Major Breakthrough in Solar Technology

- Attesting to China’s increasing dominance in the solar manufacturing industry, Chinese producer Longi Green Energy has set a world record for silicon cell efficiency at 26.8%.

- This is the first time that a Chinese company has set an efficiency record (a measure of how much solar energy gets converted into actual electricity), with silicone’s assumed limit believed to be 29%.

- After the modern solar cell was invented in the US’ Bell Laboratories back in 1954, it was the US that has been setting efficiency records, followed by two decades of Japanese R&D breakthroughs in the 2000-2010s.

- China’s market share in all the manufacturing stages of solar panels exceeds 80% and might increase even further as Chinese solar companies seek to pioneer perovskite technologies.

5. Coal Prospects Marred by Weak Demand and High Stocks

- The combination of healthy coal stockpiles in European ports and easing natural gas prices across the continent have been keeping Europe’s coal demand subdued, pushing export volumes into Asia.

- Simultaneously, increasing domestic coal production in both China and India has slackened their demand for Indonesian and South African coal, with both benchmarks falling into double digits.

- As some European companies are trying to offer their leftover volumes into Asia, Asian buyers are unlikely to buy them as they were imported before the winter season and their calorific properties wouldn’t be the same.

- Adding to the pricing pressure, discounted Russian coal deliveries into Asia have further eroded coal prices in the region, worsening the longer-term outlook for coal producers.

6. Market Sentiment Sour on Copper as China Takes Time to Recover

- Weak Chinese demand has depressed copper prices to a six-month low as the metal’s value on the London Metal Exchange plunged below $8,000 per metric ton.

- Disappointing macroeconomic data coming from China, especially when it comes to construction activity have forced Chinese smelters to export as much -as they could, replenishing inventories globally.

- The plummeting of copper prices runs counter to the expectations of major market players with both Trafigura and Goldman Sachs previously predicting -that the base metal will hit all-time highs this year.

- Whilst there remain market bulls who point to the contango in copper futures, the widest it has been ever, copper’s status as a proxy for global economic growth will hinder drastic surges until recessionary fears subside.

7. Negative Electricity Prices in China Defy Western Logic

- The second-largest power producer and third-largest consumer by volume, China’s Shandong province in the northeast of the country, has experienced negative power prices for the first time in history.

- Considering 70% of Shandong’s power generation comes from coal and the majority of coal power plants are combined heat and power units, the negative price phenomenon only underscores the weak elasticity of baseload coal generation.

- Shandong has been one of the Chinese pioneers for spot power trading and the build-out of renewable capacity has been putting spot markets to a test – the combined effect of high solar generation and high coal baseload generation might trigger negative prices in the future.

- With very little connectivity to neighboring regions, Shandong’s woes might also prompt the Chinese government to build up battery storage capacity, currently only 1% of Shandong’s peak demand capacity.