– For the second year in a row, energy stocks have outperformed the broader US market in 2022 and, according to most analysts, this trend will continue next year thanks to their relative cheapness.
– With oil and gas stocks showing the highest free cash flow yield of any sector represented in the S&P 500, it should come as no surprise that Wall Street sees a further 16% of potential upside in 2023.
– A total of 61% of energy index companies have a buy rating, compared with 55% for the entire S&P 500, despite recession headwinds taming investors’ appetite.
– While oil prices are trading at a similar level to where they began the year, the S&P 500 energy index remains stubbornly some 50% higher year-on-year.
2. The Return of Chinese LNG Demand
– Similarly to China’s crude woes, the Asian powerhouse’s gas demand is set for its first annual decrease in the country’s history as it falls to 364 Bcm, down 1% from last year.
– The easing of China’s strict zero-Covid regulations, however, should bring it back to a growth trajectory as S&P Platts expects a 6% year-on-year surge in demand to 386 Bcm in 2023.
– The Chinese energy major CNOOC issued its first LNG buy tender since the start of the Russia-Ukraine war, a sea change to 2022 when China’s LNG buying fell a precipitous 25% compared to 2021.
– Seeing more pipeline…
1. Energy Stocks Outperform Stocks Market, Again
– For the second year in a row, energy stocks have outperformed the broader US market in 2022 and, according to most analysts, this trend will continue next year thanks to their relative cheapness.
– With oil and gas stocks showing the highest free cash flow yield of any sector represented in the S&P 500, it should come as no surprise that Wall Street sees a further 16% of potential upside in 2023.
– A total of 61% of energy index companies have a buy rating, compared with 55% for the entire S&P 500, despite recession headwinds taming investors’ appetite.
– While oil prices are trading at a similar level to where they began the year, the S&P 500 energy index remains stubbornly some 50% higher year-on-year.
2. The Return of Chinese LNG Demand
– Similarly to China’s crude woes, the Asian powerhouse’s gas demand is set for its first annual decrease in the country’s history as it falls to 364 Bcm, down 1% from last year.
– The easing of China’s strict zero-Covid regulations, however, should bring it back to a growth trajectory as S&P Platts expects a 6% year-on-year surge in demand to 386 Bcm in 2023.
– The Chinese energy major CNOOC issued its first LNG buy tender since the start of the Russia-Ukraine war, a sea change to 2022 when China’s LNG buying fell a precipitous 25% compared to 2021.
– Seeing more pipeline deliveries from Russia and Central Asia, many analysts are expecting that China will first land big-term contracts and then use them to redirect LNG flows to Europe where prices are expected to remain high throughout 2023.
3. Germany Struggling To Meet Power Demand Targets
– The European Union has set a mandatory target to reduce power consumption by 5% going into this winter and Germany’s demand data indicate Europe’s powerhouse has so far failed to cut so extensively.
– According to S&P Platts, Germany’s grid offtake was in line with historical averages in Jan-Sept 2022, dropping 4.6% and 2.9% below average in October and November, respectively.
– Low wind availability and a still-persistent cold spell have compelled German power generators to ramp up gas-fired plants, making it unlikely that Germany meets its -20% gas-saving target over this winter.
– At the same time, Germany’s industry has been curbing its electricity consumption much more markedly than households as grid offtakes on weekends have barely seen any change year-on-year.
4. Higher Renewable Utilization is Unthinkable Without European Grid Expansion
– Insufficient grid capacity will become one of the crucial challenges ahead for Europe, writes Rystad Energy, as the continent seeks to add as much as 530 GW of new solar and wind capacity by 2030.
– The main strain will be along the north-south axis as a substantial wind power build-up around the North Sea area and more solar in the southern Mediterranean would need to become interconnected.
– Even now, before the burst in renewables commissioning, the average European rate of renewable energy curtailment due to lacking cross-country infrastructure stands at around 5%.
– In this vein Spain, seeing tremendous amounts of new solar capacity coming onstream, is set to become a net exporter by the end of this decade, despite being a net importer of French electricity for years.
5. Fears of Downturn Destroy Global Container Rates
– Consumer shipping rates have dropped to the lowest level in years as worries over consumer demand and the clearing of coronavirus-triggered congestion weigh heavily on freight sentiment.
– Following impressive growth in global container shipments in 2021 (by 7.1%), this year is set to see only a marginal year-on-year increase of 1.1% despite a very robust start to the year.
– Latest spot assessment for 40-foot containers between Hong Kong and LA came in at 1,400 after seven consecutive weeks of decline, down almost 90% year-on-year and well below the long-term historical average.
– Whilst shipping companies hope for a brighter future in 2023 amidst easing fears of economic collapse, imports at key US ports last month dropped by 15-25% compared to November 2021.
6. US Sanctions Target China’s Chip Equipment Dependence
– China’s planned $144 billion fiscal package will, amongst other things, provide tax credits and subsidies for Chinese companies that produce semiconductor equipment as new rounds of US sanctions are curtailing their access to high-tech chips.
– With the White House announcing new export restrictions in the coming weeks, the US administration has stepped up efforts to pressurize governments in the Netherlands and Japan to join the ban.
– Chinese chipmakers have localized less than 8% of their annual equipment demand, remaining wholly reliant on lithography machine and photoresists exports from Europe and Japan.
– The Netherlands-based ASML (NASDAQ:ASML) controls 91% of global lithography exports whilst Japan’s Tokyo Electron (TYO:8035) dominates the market for light-resistant photoresists.
7. China Just Can’t Get Enough Coal
– China’s daily coal production reached an all-time high in November, at 13.04 million tons per day, as Beijing streamlines output to meet higher power generation demand.
– Even without December, China has already produced more coal this year than in the whole of 2021, with the January-November output tally coming in at 4.09 billion tons, a 10% year-on-year jump.
– The record production rate continues to surprise analysts that expected a slowdown amidst widespread lockdowns, but coal mines have switched to “closed-loop” methods which bar miners from taking leave.
– As the Daqin railway connecting China’s western and northern regions with the key port of Qinhuangdao is operating again, December output rates might see yet another record.
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