Oil Hits Pandemic High as Investors Bet on Green Energy | Sidnaz Blog

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Some investors are wagering that Wall Street’s preference for green energy will depress spending on oil extraction, setting the stage for supply shortages and higher fuel prices. 

The bets come as money managers line up trillions of dollars for wind, solar and other renewable programs and expenditures on oil projects tumble. The drop in fossil-fuel spending is becoming so severe that energy companies could struggle to quench the world’s thirst for oil, some analysts say.

Crude is still expected to remain in high demand over the next decade to make transportation fuels and petrochemicals used for plastics and other household products. U.S. consumption has surged lately following the worst of the coronavirus pandemic, and output cuts by the Organization of the Petroleum Exporting Countries have given prices a further boost. 

U.S. crude hit $71.48 a barrel Monday, its highest level in more than 2½ years, and has roughly doubled since the end of October. Some traders are using options, which allow the holder to buy or sell an asset at a specific price in the future, to wager on prices hitting $100 by the end of next year

Even after OPEC and its allies lift output in the months ahead, some analysts think production will struggle to catch up to demand, which the International Energy Agency projects will rise at least through 2026. Spending on oil extraction fell last year to about $330 billion, less than half the total from its 2014 record, according to research firm Wood Mackenzie. That figure is expected to rise just modestly this year and in the years ahead.

Leigh Goehring,

managing partner at commodities-focused investment firm Goehring & Rozencwajg Associates, said he thinks prices will soar in coming years as consumption tops production capacity for a sustained period for the first time ever. His firm lifted its investments in energy producers during last year’s crash and has maintained those holdings. 

“This is the basis for the next oil crisis,” he said. “We’re in uncharted territory.”

Analysts say an oil-price surge could happen like this: As more people resume travel following the pandemic, demand is expected to rise. That would allow OPEC to ease supply restrictions and lower global inventories of crude. If consumption continues climbing beyond 2022 as many expect, the world would then need more oil from the same companies currently being told by investors to limit spending, resulting in a supply shortfall. 

Some analysts expect surging demand and limited supply to lower global inventories and cause shortages.



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PHOTO: Drew Angerer/Getty Images

OPEC has the ability to quickly increase production, and there are currently ample reserves that could be tapped to respond to price spikes. But many on Wall Street are retreating from the fossil-fuel industry, leaving investors questioning whether companies would be able to raise enough money to fill any longer-term supply gaps. 

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What impact will Wall Street’s preference for green energy have on oil prices?

In recent years, growing output from U.S. shale producers and giant oil companies suppressed prices. Now, many analysts doubt that these companies will rapidly beef up spending in the face of industry consolidation and mounting environmental pressure. Energy firms have recently slashed the value of their assets by tens of billions of dollars as the sector copes with last year’s wave of bankruptcies and project setbacks. 

Planned investment in oil supply globally falls about $600 billion short of what will be needed to meet projected demand by 2030, according to JPMorgan Chase & Co. analyst

Christyan Malek.

Pressure to deliver cash to shareholders, partly driven by worries about the long-run outlook for oil demand, has limited the industry’s ability to plow money into new projects, he said.

“It’s just hard to see where the capital is going to come from to grow at a rate that will be needed from 2022,” said

David Meaney,

founding principal of Assert Capital Management LP. The Dallas-based hedge fund is positioning for higher oil prices through futures and options.

The wagers are a reminder that the unprecedented transition to renewables and electric vehicles is still in its early stages and could go through several phases. It also shows the challenges facing producers like

Exxon Mobil Corp.

,

Chevron Corp.

and

Royal Dutch Shell PLC.

In addition to concerns about spending and shareholder returns, they are contending with mandates to limit environmental damage. Shell said last week that it would accelerate efforts to cut emissions following a Dutch court ruling ordering the company to take more drastic action.

As the economy recovers from the pandemic, the question confronting the energy industry is whether demand will eventually fall to match limited supplies, investors say. That reverses a decadeslong paradigm of wondering if production can catch up to consumption, with Wall Street debating uncertain estimates about the speed of the renewable transition. 

“I’m bullish on electric vehicles. It still takes time before they can take a meaningful chunk out of oil demand,” said

Jason Bordoff,

a former Obama administration energy adviser and the founding director of Columbia University’s Center on Global Energy Policy.

Another obstacle for producers: declining output from existing wells over time. The number of rigs drilling for oil in the U.S. remains about 60% below levels from the end of 2018 even as prices have surged, figures from

Baker Hughes

show. 

“Investors have made it clear to the energy sector: ‘Don’t spend a lot of money,’” said

Rob Thummel,

senior portfolio manager at energy asset manager Tortoise. “Boards and management teams have to listen to the shareholders.”

The energy industry isn’t alone in its cautious approach. Miners, which burned through cash the last time industrial metals prices shot higher, have also been reluctant to drive money into projects because investors have encouraged greater discipline.

Some analysts argue that concerns about a dearth of oil are overstated, particularly when large suppliers are still intentionally withholding copious amounts due to coronavirus disruptions. Producers and investors might be less disciplined in limiting capital spending and supply if prices surge and they could profit, they say.

But for now, many are positioning for shortages.

Hayal Ahmadzada,

chief trading officer at the trading arm of Azerbaijan’s national oil company, drives a

Tesla Inc.

electric car but expects crude to rise above $100 a barrel next year. 

“The transition has to be very careful to avoid the big disruptions,” he said. 

Investors are lining up huge sums to back wind, solar and other renewable projects, but a lack of financing for oil producers could have unintended consequences, some investors say. 



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PHOTO: Bing Guan/Bloomberg News

Write to Amrith Ramkumar at [email protected] and Joe Wallace at [email protected]

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Hedge Fund Behind Amazon-MGM Deal Amasses Big Bet on Uranium | Sidnaz Blog

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The hedge fund behind the

Amazon.com Inc.

-MGM Holdings Inc. deal has another trade up its sleeve: going big on uranium.

New York hedge fund Anchorage Capital Group LLC has amassed a holding of a few million pounds of uranium, people familiar with the matter say, in a bet that prices of the nuclear fuel will recover after a decade in the doldrums. It is buying and selling uranium alongside mining companies, specialist traders and utility firms with nuclear-power plants, turning the fund into a significant player in the market.

Venturing into the uranium market, which is much smaller than oil or gold markets, is unusual for a firm that typically invests in corporate debt. It is another example of money managers straying into esoteric markets in search of returns after a yearslong run-up in stocks and slide in a bond yields.

Anchorage was recently in the spotlight after scoring about $2 billion in paper profits from Amazon’s deal to buy MGM in May. The hedge fund became MGM’s biggest shareholder after the Hollywood studio emerged from bankruptcy in 2010.

Anchorage’s physical uranium holdings are also a rarity because Wall Street firms don’t typically own physical uranium. Most investors bet on uranium prices by buying shares of mining firms, or through companies like

Yellow Cake

PLC., which acts as an exchange-traded fund.

In the 2000s, investors piled into uranium trades, helping to power a run-up in prices that peaked in 2007. Most funds exited either during the 2008-09 financial crisis or after Japan’s 2011 Fukushima nuclear disaster sapped demand.

Goldman Sachs Group

has pared back its uranium trading book and

Deutsche Bank AG

has quit the market, leaving

Macquarie Group Ltd.

as the financial institution with the biggest presence.

The uranium that is usually traded takes the form of U3O8, a lightly processed ore. Prices for U3O8 have sagged since Fukushima knocked demand, leading to a glut that traders say has yet to be whittled down.

The material this week traded at $32.05 a pound, according to UxC LLC, a nuclear-fuel data and research company. Prices reached an all-time high of $136 a pound in 2007, according to records going back to 1987.

Anchorage is wagering on a reversal. Spearheaded by trader Jason Siegel, the fund began acquiring uranium a few years ago, because its analysis showed most miners were booking losses at prevailing prices, a person familiar with the fund’s thinking said. The fund bet that uranium prices would rise to encourage miners to produce enough material.

Mr. Siegel didn’t respond to requests seeking comment.

The entry of a financial firm has caused a stir in the uranium market. Anchorage buys and sells infrequently, but in large quantities that put it in the same league as big uranium merchants such as Traxys Group, participants say.

A Honeywell Specialty Materials plant in Metropolis, Ill.



Photo:

Steve Jahnke/Associated Press

Anchorage hasn’t publicly disclosed its interest in the uranium market, the size of its holdings or the terms of any specific transactions. The exact size of Anchorage’s position—a topic of speculation in the market—couldn’t be learned. The person familiar with the fund’s thinking said it owned fewer than five million pounds of uranium. The overall spot market for the nuclear fuel turns over 60 million to 80 million pounds each year, according to UxC.

Due to strict rules about where uranium can be held, trading typically doesn’t involve moving the fuel around the world. Firms instead take ownership of U3O8 stored in drums at three processing facilities in France, Canada and the U.S. When they sell, buyers take ownership on the spot. The transactions aren’t reported publicly.

Anchorage’s wager relies on buying uranium and selling it to utility companies and others at a higher price for delivery several years in the future, in what is known as a carry trade. Doing so could generate annualized returns of roughly 5% for Anchorage, according to people familiar with the matter.

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How do you see the uranium market developing? Join the conversation below.

The hedge fund embeds options into sale agreements with utilities and other firms, people familiar with the matter say. This can involve selling fuel to a utility company at a discount in return for the right to deliver more uranium at a set price at a later date.

Anchorage isn’t alone in betting that prices are primed to rebound.

Investment firms including Segra Capital Management LLC, Sachem Cove Partners LLC and Azarias Capital Management LP expect that efforts to wean the world off fossil fuels will require new nuclear-power stations, according to executives at the funds. They are seeking to profit by buying shares of uranium miners or firms like Yellow Cake, which is up 31% in London trading over the past year.

Some investors hesitate to own uranium outright because of the perception that it can cause dangerous accidents, according to Joe Kelly, chief executive of brokerage Uranium Markets LLC.

“There’s a deterrent that does not exist in other commodities,” said Mr. Kelly.

Write to Joe Wallace at [email protected]

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