Daily Update: June 4, 2021

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Major players across the global oil market are taking different approaches to the accelerating energy transition from fossil fuels.

The International Energy Agency declared in its net-zero roadmap that the global economy needs to curtail all new oil and gas developments in order to achieve net-zero emissions by 2050—a scenario under which global oil demand would rebound from the lows of 2020 in the near-term before ultimately declining 75%. In response, the Organization of the Petroleum Exporting Countries (OPEC) denounced the outlook as “overly ambitious” and warned it would create an unstable oil market. Saudi Energy Minister Prince Abdul Aziz bin Salman, who oversees OPEC as chairman, offered a stronger critique, characterizing the roadmap as “La La Land” and asking, “Why should I take it seriously?"

The IEA’s late-March report came long after many international groups released plans advocating for an energy transition prioritizing sustainable generation. A multitude of oil market participants are already engaging in reducing their emissions and increasing investments in wind, solar, and other clean energy sources.

Investors are engaging with the energy giant BP’s strategic shift to increase investment in renewables and bioenergy, to the tune of an annual $5 billion by 2030, alongside cutting oil and gas production 40%. Climate-focused investors pushed Chevron and ExxonMobil to, respectively, “substantially" reduce emissions that come indirectly from energy assets not owned or controlled in the medium- and long-term and approve two new board members that will take more aggressive climate action. Global investment bank JPMorgan Chase has committed to helping its oil and gas clients, for which it is one of the largest financiers, to reduce their carbon intensity by 35% by 2030. The U.S. oil and gas industry will likely soon face higher taxes and increased restrictions on drilling under U.S. President Joe Biden’s climate initiatives.

“If the latest news reports about the effects of environmental, social, and governance (ESG) trends and climate change on the oil and gas sector is any indication of what may be in store, some companies may be in for a rough ride. The events of last week underscore and highlight the threats the oil and gas industry will face as renewable energy and measures to counter climate change take hold. Last January, S&P Global Ratings anticipated this risk and changed its industry risk assessment for oil and gas producers to moderately high from intermediate,” S&P Global Ratings said in a report this week. “Uncertainties about rates of change in demand and the energy industry as a whole present some of the most significant challenges for companies and their credit profiles.”

Either way, 2050 is likely too late a target for achieving net-zero emissions to prevent climate catastrophes, many analysts say. But that doesn’t mean the oil industry is at an immediate loss. Oil majors can rely on persistent demand and needs for their expertise and scale for a temporary period of time, even as pressure increases for them to diversify into sustainable offerings and curb their methane emissions, according to S&P Global Platts. Nonetheless, the IEA expects renewable investment to outpace upstream oil and gas spending this year.

As drilling, transportation, and processing of oil and gas account for 35% of all human-made methane emitted worldwide, global methane emissions from human activities must be reduced  40%-45% by 2030 to limit the average temperature rise to a critical 1.5 degrees Celsius, according to recent research conducted by the United Nations Environment Program and the Climate and Clean Air Coalition. The research found that the fossil fuel sector has the "best potential" to reduce human-caused methane emissions during this decade.

Today is Friday, June 4, 2021, and here is today’s essential intelligence.

Market Dynamics

What Canada Is Missing

Canadian investors have long participated in U.S. equity markets, but are materially underweight in U.S. mid- and small-cap companies.

—Read the full article from S&P Dow Jones Indices

Banking Industry Under Pressure

Spanish Banks' Q1 Profit, Provision Trends Improve, But H2 Credit Risk Awaits

Large Spanish banks enjoyed an overall improvement in profits and provisioning trends in the first quarter, but regulators have warned that credit risk could increase later in 2021 as the COVID-19 pandemic unfolds.

—Read the full article from S&P Global Market Intelligence

The Basel Capital Compromise For Banks: Better Buffers, Elusive Comparability

Banks around the world have held up well during COVID-19, demonstrating the effectiveness of Basel rules for increased capital over the past 10 years; CET1 about doubled for the world's 100 largest banks over that time. The Basel Committee's focus now is completing what's already been agreed, yet S&P Global Ratings believes uniform implementation of the rules will be difficult to achieve. To future-proof banks, supervisors' attention is shifting toward other types of risks, such as environmental. S&P Global Ratings expects limited appetite from standard setters globally for another hike in capital requirements in the next two to three years out of concerns about business model sustainability.

—Read the full report from S&P Global Ratings

Why Do Foreign Banks Expand In China Despite Weakening Profitability?

Although foreign banks in China have been falling further behind domestic lenders in key profitability metrics over the past two years, the growth potential in wealth management and cross-border financing in the world's second-largest economy might explain why they stay or even expand.

—Read the full article from S&P Global Market Intelligence

Technology & Media

DOD Continues Fight for JEDI Contract but Will Pursue Other Cloud Deals

The Pentagon is planning to continue the court battle over the U.S. Defense Department's long-delayed $10 billion Joint Enterprise Defense Infrastructure, or JEDI, cloud-computing contract, a move that surprised defense experts after defense chiefs earlier signaled a potential change of direction.

—Read the full article from S&P Global Market Intelligence

DC's Antitrust Suit Against Amazon Will Rely on High Burden of Proof – Experts

In a lawsuit filed May 25 in Washington, D.C., Superior Court, Washington, D.C.'s Attorney General Karl Racine claimed Amazon artificially inflated prices across the entire online retail market by prohibiting merchants that sell on Amazon's site from charging lower prices for the same products elsewhere. The lawsuit seeks to stop Amazon’s use of the price agreements, recover damages and impose penalties to discourage similar conduct by Amazon and other companies. But experts say the suit is limited in scope because any judgment would apply to the district alone. A lack of successfully litigated cases focused on this issue could also pose an obstacle.

—Read the full article from S&P Global Market Intelligence

Amid Content Creator Craze, Social Platforms Rush to Pay Up

The meteoric rise of short-form video platform TikTok Inc. is shaking up the social media business, with companies such as Facebook Inc. and Google LLC-owned YouTube LLC looking at expanding monetization opportunities for content creators.

—Read the full article from S&P Global Market Intelligence

ESG in the Time of COVID-19

Listen: The Essential Podcast, Episode 38: Elements of the Energy Transition #1 — Dysprosium

Terence Kooyker of Valent Asset Management joins the Essential Podcast to talk about the market and uses for everyone's favorite lanthanide: Dysprosium, lucky element #66 on the Periodic Table.

—Listen and subscribe to the Essential Podcast, from S&P Global

European Utilities Remolding Strategies After String of New Climate Goals

With European lawmakers tightening the screws on emissions, fossil-heavy utilities ramped up their rhetoric on decarbonization during the 2021 first-quarter earnings season. For their greener peers, a strained global supply chain and rising costs brought challenges, too.

—Read the full article from S&P Global Market Intelligence

Tesla Chair Says Mining to Underpin Potential Australian Battery, EV Production

Tesla Inc. wants to support Australian miners critical to facilitating the country's involvement throughout the electric vehicle supply chain, including possible EV manufacturing. Tesla Chairman Robyn Denholm voiced support for the country's mining sector at a June 2 Minerals Council of Australia event in Canberra, the nation's capital. Denholm is an Australian who was appointed chair of the Tesla board in November 2018, after joining in 2014.

—Read the full article from S&P Global Market Intelligence

The Future of Energy & Commodities

Gold Output Down Among Largest Producers In Q1'21 as Others Grow Footprint

The five largest of the top gold producers yielded fewer ounces in the first quarter of 2021 on both an annual and quarterly basis. However, coming out of the pandemic-driven lockdowns of 2020, several of the smaller producers in the group increased first-quarter production.

—Read the full article from S&P Global Market Intelligence

China Set for Record-Busting Soybean Demand as African Swine Fever Wanes

It's hard to believe that a couple of years back, China was reeling from the African swine fever epidemic, a disease that is 100% fatal to the pig population.

—Read the full article from S&P Global Platts

Listen: Do Fundamentals Support the Rise of Crude Futures to Two-Year Highs?

While the pandemic is far from over and coronavirus cases are still rising in some Asian countries, the front-month Brent crude futures breached on June 1 the $70/barrel ceiling and extended the rise the next day. From OPEC's optimistic demand forecasts to uncertainty over Iran's production, caution seems to dominate the medium-term, and the longer-term role of energy transition may not be as bearish for prices as one might think. In this episode of the Oil Markets Podcast, S&P Global Platts reporters Nicholas Baldwin and Eklavya Gupte discuss with Joel Hanley the reasons behind the bullishness in crude oil futures.

—Listen and subscribe to Oil Markets, a podcast from S&P Global Platts

Written and compiled by Molly Mintz.