A Freeze Coming to the Fossil Fuel Industry

A Freeze Coming to the Fossil Fuel Industry

And up they go again. US stocks have broken out into all-time highs again in overnight trade. This could set the stage for a nice run further up in the remaining months of the year. Aussie stocks will like this.

But it’s the energy markets that have me gripped right now. There are so many cross-currents and conflicting angles here.

I’ll show you what I mean – and touch on some of the investment implications that might spring from it.

Reuters reports that Chinese diesel demand is picking up at the fastest pace in five years. The Chinese diesel price is up 22% in 2018.

If we look at the consuming industries – mining, construction, freight and manufacturing – it’s hard to square this with the idea of a major slowdown.

Increasing Chinese diesel demand is also likely to trigger higher oil prices, which is exactly what we’re seeing right now.

Oil market: short term strength to long term demise

These same high prices are also fuelling – ha ha – the demand for alternatives. I told you earlier in the week how Beijing is now pushing for 20% of their truck fleet to be converted to electric vehicles to cut pollution and cost. Whether they can make it happen, and how fast, remains to be seen.

The same dynamic is playing out all over the world. The Australian Financial Review reported this morning on a farmer in NSW. He’s installed a solar-based pumping system that will cut his annual diesel bill from half a million bucks a year to actually earning renewable energy credits.

The farmer says it will take five years for him to get his payback on the cost of the solar installation, and he’s done it with government help.

Technology is a highly deflationary force. Renewable costs are highly likely to keep coming down, and more users will adopt this kind of tech.

We have the curious situation of oil strengthening as the trends undercutting the long-term market are clearly forming. There may be one last, big uplift for oil prices left.

You might be surprised to know that the high volatility – and high prices – of oil were not always features of the market. Oil market history goes back to 1859. There were decades where the oil price either fell or did nothing for very long periods of time.

That’s not all.

The fossil fuel industry is also likely to have a looming problem accessing bank finance. The Financial Times reported this week that major global bank ING is going to assess its US$600 billion loan book based off its climate impact and the goals established at the Paris Agreement.

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Look at the following quote from the article:

The policy, the first of its kind of a big bank, will include putting pressure on clients whose businesses do not conform with the climate goals of the agreement.’

I expect more banks to follow this lead. Companies within the fossil fuel industry are increasingly going to find themselves credit rationed. That means banks will increasingly be reluctant to lend to them.

That’s not to say such companies won’t be able to access finance at all. But it’s more likely to be via the share and bond markets, and it will probably come with higher rates than otherwise might have been.

Governments, like in China, will also structure legislation to favour the further adoption of electric vehicles and renewable energy.

That’s what makes the lithium sector so interesting right now. The stocks are down across the board, and quite heavily. And yet the outlook is incredibly bullish.

It’s actually not just about electric vehicles. Battery storage for the renewable energy sector is on an upward march, too. This all needs lithium ion batteries.

This sector is ‘on sale’ now

And the market may need more than previously estimated from a shorter life cycle becoming evident.

German investment bank Berenberg suggest the lifetime of a battery will not be as long as previously thought. Electric vehicle owners may be looking to upgrade to a new battery after five years.

This current wave of fear around a lithium oversupply could not come at a worse time regarding the long-term. That’s because it could make it harder for projects around lithium, nickel and cobalt harder to finance.

But capital is exactly what the market needs now to get projects funded and into development to meet the uplift that’s coming. The auto industry is not going to turn back now. Every brand has committed to electric vehicles.

It’s not even limited to cars. It’s all forms of transport.

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Regards,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia