CRUDE OIL
Oil prices have recovered solidly to be trading around the $70 per barrel mark, as stability and calm have returned to crude markets. The recovery has been based on a growing belief that the implications of the Omicron variant aren’t going to be as severe as first thought for oil markets. It was the emergence of the Omicron variant that caused crude prices to fall from the $85 a barrel mark to as low as $65 a barrel, before the return of confidence to the market.
Crude markets reacted in a somewhat knee-jerk fashion, compounded by factors like the release of crude oil from US strategic reserves and also OPEC+ decision to implement a further 400,000 barrel per day supply increase in January 2022. Crude markets had effectively factored in a net impact of 2 million barrels a day of demand destruction in early 2022 related to Omicron, so a less pessimistic outlook around the economic impact of the virus on crude consumption has led to oil price recovery.
Indeed, OPEC has raised its world oil demand forecast for the first quarter of 2022 and stuck to its timeline for a return to pre-pandemic levels of oil use, saying the Omicron coronavirus variant would have a mild and brief impact. In its monthly report, OPEC expects world oil demand to average 99.13 million barrels per day (bpd) during in the first quarter of 2022, up 1.11 million bpd from its forecast last month. Some of the recovery previously expected during the fourth quarter of 2021 has been shifted to the first quarter of 2022, followed by a more steady recovery throughout the second half of 2022. OPEC forecasts that world oil demand will grow by 4.15 million bpd in 2022 and that consumption will surpass the 100 million bpd mark during the third quarter of 2022, which will be the highest level of oil consumption since 2019.
In the US, we are seeing somewhat of a recovery in crude oil production, but virtually all of it is concentrated within the Permian Basin, which covers the area of West Texas and New Mexico. Output from the Basin is projected to reach 4.96 million barrels a day in December, which will beat the previous record of 4.91 million barrels a day that was set in March 2020. But even with the Permian’s growth, total U.S.oil output is still a long way from full recovery – as companies have focused instead on overall shareholder returns rather than production volumes. This is reflected in the capital spending figures of US shale producers, which are at multi-year lows.
UREA
The looming crisis with respect to urea has not gone away, with major sectors vulnerable – including agriculture, transport, tradesmen and everyday consumers. The world is confronted with a major shortage of urea, a key ingredient found in diesel exhaust fluid (DEF) – also known as AdBlue – and a major component in fertiliser production. A major factor in the supply disruption is the fact China – which previously supplied 80 per cent of Australia’s urea supplies – has recently banned urea exports in order to lower fertiliser prices domestically. The urea shortage is such a significant problem because AdBlue is injected into the exhaust systems of modern diesel vehicles in order to reduce emissions, which is a mandatory requirement for trucks, private vehicles and tractors. As a result, without urgent action there’s the possibility that tens of thousands of vehicles could be pulled off Australian roads within weeks – a move that would cause supply chain havoc during the busy holiday period.
Australia’s largest AdBlue manufacturer, AUSblue, says it is racing to secure urea supply or even formulated AdBlue from overseas in a bid to keep the haulage industry moving through the summer. The company has heavy-lift charter planes standing by to bring in 250 tonnes of urea each per flight from the Middle East and Asia.
Like most shortages in the resource sector, there are multiple factors at play. Aside from the China ban, maintenance work at multiple urea plants, COVID-related shipping constraints, and rising diesel consumption had created a “perfect storm” for a shortage to occur. Multiple producers of urea are either shut down or in maintenance, or they have been directed by their respective governments to focus on their agricultural urea market. In the case of China, they have closed some of their coal-fired power stations to clean up the air for the Winter Olympics – so they’ve switched to gas-fired power, which takes the urea plants offline, thus impacting supply.
URANIUM
Whilst we’re discussing the energy sector, it’s worthwhile reflecting on the uranium space so far in 2021. Physical uranium has traditionally been a pretty dull place to be as far as investors are concerned, with not a lot of price action or volatility, and most material traded between producers and buyers under contract arrangements. There has been a spot market for uranium, but it too has been a fairly sedate place to be. But we saw a significant change take place about six months ago, with the emergence of the Sprott Physical Uranium Trust. In a very short space of time it has accumulated physical uranium via the spot market that represents around a third of the world’s annual supply.
Sprott isn’t the first group to invest in physical uranium, but it is certainly the highest in profile. The arrival of the Sprott fund has shone a spotlight on the uranium sector and enhanced its speculative appeal. It’s also forced a rethink with respect to the demand-supply fundamentals of the uranium sector, based on the premise that the world will need more nuclear energy in order to meet climate goals. When the Sprott trust launched in July, the price of uranium was around $30 per pound – now, it’s 50% higher at around $45 a pound. Whether this will be enough to incentivise new production remains to be seen – we have seen period of higher prices previously, before retracement. Ultimately, whether we see new sources of production outside of the existing uranium heavyweights like Cameco will depend on the appetite of investors to fund new projects – and whether they have confidence in the uranium price to remain strong.
METALS PRICE PERFORMANCE
Way out front is tin – which has outstanding demand-supply fundamentals, and inventory stockpiles in metal exchanges around the world at critically low levels. Making matters worse is that the fact that the supply side looks unlikely to be resolved any time soon, suggesting ongoing price strength. Not surprisingly, 2021 has been a relatively poor year for precious metals, as investors have exited the sector and moved into higher risk sectors like industrial metals. This could suggest the potential for recovery in the years ahead.
Tin prices have nearly doubled from a year ago, and are on course for their biggest annual rise in over 30 years. Tin has recently moved past the $40,000 a tonne level for the first time ever, while in China, the world’s biggest refined tin market, prices are up around 100% on the Shanghai Futures Exchange this year. LME tin inventories had fallen to their lowest since 1989 at the start of November, and are currently not far above 1,000 tonnes. Supply has been impacted by lower exports from Myanmar and Indonesia, while at the same time white goods and electronics demand has increased.