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Opec’s out of touch outlook



Donald Trump is moving markets again. Oil prices rose this week when he came home from hospital. They fell yesterday — despite the shutting of output in the US Gulf ahead of another storm — when Mr Trump scrapped plans for new Covid-19 financial relief. Brace for a rocky few weeks in energy markets until November’s election.

Opec’s annual World Oil Outlook is out and its stunningly bullish outlook for the fossil fuel industry is the topic of today’s first note. Our second note is on hydrogen — by far the most fashionable energy transition technology at the moment — and its potential in the US economy.

Thanks for reading. Please get in touch at You can sign up for the newsletter here. — Derek

Opec does not buy into the energy transition

If your reaction last month to BP’s long-term outlook — with its slumping oil demand and pathways to curbing emissions — was horror then, boy, does Opec have a report for you.

Opec’s World Oil Outlook offers a starkly different view of oil’s future. It sees annual global GDP growing 2.9 per cent to 2045 compared with the supermajor’s forecast of 2.6 per cent to 2050. This partly explains the divergence.

Here are four main points of the report:

1. Peak oil? Says who?

In Opec’s baseline scenario, oil demand will rise from 99.7m barrels a day in 2019 to 109.1m b/d in 2045, and continue to dominate primary energy consumption. BP, by contrast, thinks oil demand — in all three of its scenarios — will fall by then, and so will oil’s share of energy.

Line chart of Million barrels a day showing Opec's oil demand projections are very bullish

Opec attributes the divergence to “cultural” factors:

“Some 20 years ago, in a period of lower oil prices, BP unveiled its ‘Beyond Petroleum’ campaign, with partly similar goals to diversify away from oil and towards a broader renewable energy portfolio . . . The fact that it is mostly European international oil companies that are redirecting interest and investments towards renewables suggests that there is a ‘cultural’ element to their thinking. Perhaps this is more influenced by domestic debates . . . .” the report authors write.

By contrast, US producers and national oil companies (NOCs) “currently have less domestic pressure, and NOCs in emerging economies are more cognisant of the role they will have to play in meeting rising energy needs as their economies grow”.

2. Scepticism towards electric vehicles

Opec doesn’t think electric vehicles will take much market share from petroleum-fuelled ones, expecting EVs to comprise just 16 per cent of the vehicle fleet by 2045. This compares with 31 per cent by 2040 expected by BloombergNEF, 18 per cent expected by Wood Mackenzie and a 22 per cent share of the light vehicle fleet forecast by FGE.

BP, though, sees EVs accounting for 85 per cent of the passenger fleet by 2050. Even in its business-as-usual scenario — its gloomiest outlook for the planet, where emissions don’t fall much over time — the UK oil producer says EVs will make up 35 per cent of the fleet.

3. Eyebrow-raising supply forecasts

US crude oil production, which is now hovering around 11m b/d after falling hard this year, will rise to 13.4m b/d in 2025, Opec forecasts. In the next two years alone it will add more than 1m b/d, the organisation thinks.

You would struggle to find anyone in the shale patch that agrees, given the rig count collapse of recent months.

“To get 2022 shale to grow that much means ramping rigs hard mid-next year. That won’t happen without strong prices ahead,” said Ian Nieboer, head of oil research at consultancy Enverus.

What of Opec’s production? Once the cuts are over, the cartel’s output will apparently rise by more than 10m b/d — or almost a third — between 2021 and 2045. No members are planning for this kind of growth. Where are the planned projects? The report offers no details.

4. Another unexpected rise: carbon emissions

Opec expects an increase from 34.4 gigatonnes in 2019 to 36.8 by 2045. By contrast, even BP’s business-as-usual case sees a moderation of emissions by 2050.

Line chart of Billion tonnes CO2 showing Opec sees energy emissions remaining elevated

What is missing? Opec offers brief alternative scenarios that imagine more stringent climate policies or slower/higher GDP or less tight oil. But details are scant. One scenario sees oil demand drop a bit, but even in the lower GDP one, global crude consumption in 2045 is still higher than it was last year.

Opec’s message is clear. Transition? Not us. The world is going to keep burning more oil. (Derek Brower)

Is hydrogen ready for lift-off?

Today is US National Hydrogen day. (The atomic weight of hydrogen is 1.008 — October 8). And so the “fuel of the future” is making headlines again.

A report released by McKinsey this week reckons hydrogen could supply 14 per cent of US energy needs by 2050.

It would be used in applications from power generation and transport to heating buildings and as feedstock for industry. In the process, the sector could reach a size at which it generates $750bn in revenue, creates 3.4m jobs and cuts CO2 emissions by 16 per cent.

How quickly could a “hydrogen economy” become a reality? ES spoke to some experts.

“While there is an existing hydrogen market, currently it doesn’t really reflect what the so-called future hydrogen economy might look like,” said Ben Gallagher, an analyst at Wood Mackenzie.

The US currently produces a little over 10m tonnes of hydrogen annually — around 10 per cent of the global total. But that is almost entirely created from fossil fuels. So if the aim of shifting to a hydrogen economy is to cut emissions, we need a rapid move away from this so-called “grey” hydrogen to “green” hydrogen (produced from renewables).

And for now at least, that is not feasible.

“For green hydrogen, the problem is there is extremely limited supply, investment has yet to be de-risked and costs are prohibitively high,” said Mr Gallagher. So right now, there is no business case for green hydrogen.”

To create a business case is simple, McKinsey reckons, but the US would need state support, in the form of:

  1. Clear decarbonisation goals

  2. Incentives to kickstart the market

  3. Systematic changes including researching new applications and creating a regulatory framework.

Hydrogen could be key to decarbonising heavy transport. © REUTERS

Will that happen? As ES has pointed out before, we have been on the brink of a hydrogen revolution for decades.

Yet ramping up renewables and decarbonising the power sector can only do so much. Hydrogen fuel cells therefore offer a way to potentially move to carbon-free trucks, ships and planes — and climate concerns have added urgency.

“What is different this time is that we have a decarbonisation policy agenda, which in the 2020s is moving towards those hard-to-mitigate sectors and therefore hydrogen comes into play as a contender or likely contender to replace fossil fuels,” said Ashim Paun, global co-head of ESG research at HSBC.

The European Union has vowed to produce 40GW of clean hydrogen by 2030. The US has yet to match this ambition — though Joe Biden makes vague mention of cheap “carbon-free hydrogen” in his manifesto.

More work is needed, but things are moving the right way, experts say. “There is money being put to work and policy being put out there,” said Mr Paun. “It makes me believe that it can happen.” (Myles McCormick)

Data Drill

Line chart of Million barrels a day showing US oil production remains well off its highs...

Line chart of Million barrels a day showing ...and it looks set to stagnate
Line chart of Number of frac fleets by basin showing The Permian is leading a recovery in US fracking activity...
Line chart of Number of rigs showing ...but the rig count remains depressed

Power Points


The dealmaking window is open in the US energy sector, suggests a note from Morgan Stanley. “The market has begun to reward M&A, a first, and we expect that to continue.” Shale deals will stress cost reduction and high grading. But ExxonMobil and Chevron could also see deals in the power sector as a way to “navigate through the energy transition”.

Among “hypothetical deals”, Morgan Stanley includes: Exxon and Pioneer; Exxon and EOG; Chevron and Cimarex; and ConocoPhillips and Parsley Energy. If the majors take the “potentially more attractive route towards the power sector,” Vistra and NRG Energy could be targets.

Among big shale independents, Morgan Stanley picks out Cimarex and Concho as link-up candidates in the Permian; Continental and Whiting in the Bakken; and EQT and CNX in Appalachia.

“Energy has had a turbulent history with consolidation . . . but could play a key role in the industry’s shift toward ‘more returns, less growth’,” Morgan Stanley’s analysts said.

Energy Source is a twice-weekly energy newsletter from the Financial Times. Its editors are Derek Brower and Myles McCormick, with contributions from David Sheppard, Anjli Raval, Leslie Hook and Nathalie Thomas in London, and Gregory Meyer in New York.

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‘Digital big bang’ needed if UK fintech to compete, says review




Sweeping policy changes and reform of London’s company listing regime will spark a “digital big bang” for the City and turbocharge the UK’s fintech industry, according to a government-commissioned review.

The report, to be published on Friday, warns that the UK’s leading position in fintech is at risk from growing global competition and regulatory uncertainty caused by Brexit

The review, carried out by former Worldpay chief Ron Kalifa, is one of a series commissioned by the government to help strengthen the UK’s position in finance and technology.

Both sectors are under greater threat from rivals since the UK left the EU in January amid growing global competition to attract and retain the fastest growing tech start-ups. 

Changes to the UK’s listing regime are recommended, such as allowing dual-class share structures to let founders maintain greater control of their companies after IPO. The review also proposes a lower free-float threshold to allow companies to list less of their stock.

Kalifa said the rapid evolution of financial services, from online banking and investment to digital identity and cryptocurrencies, meant that the UK needed to move quickly.

“This is a critical moment. We have to make sure we stay at the forefront of a global industry. We should be setting the standards and the protocols for these emerging solutions.”

John Glen, economic secretary to the Treasury, said more than 70 per cent of digitally active adults in the UK use a fintech service “but we must not rest on our laurels . . . all it takes is a bit of complacency to slip from being a leader of the pack to an also ran”.

He said the government would consider the report’s recommendations in detail. 

The review was welcomed by executives at many of the UK’s largest fintechs and leading financial institutions such as Barclays. Mark Mullen, chief executive of Atom Bank, said the review was “essential to maintain momentum in this key part of our economy and to continue to drive better — and cheaper outcomes for all of us”.

The review also recommended the government create a new visa to allow access to global talent for tech businesses, a move likely to be endorsed by ministers as early as next week’s Budget, according to people familiar with the matter.

Fintechs have been lobbying for a visa scheme since shortly after the 2016 Brexit vote, but the success of remote working since the onset of the coronavirus crisis has reduced its importance for some firms.

Revolut, for example, has ramped up its hiring of fully remote workers in Europe and Asia to reduce costs and widen its potential talent pool, according to chief executive Nik Storonsky.

Charles Delingpole, chief executive of ComplyAdvantage, a regulatory specialist, agreed that fintech was becoming more decentralised. He added that the shift in tone from the government could have as big an impact as specific policy changes. “Whilst none of the policies is in itself a silver bullet . . . the fact that the government recognises the threat to the fintech sector and is publicly acting should definitely help.”

The review also proposed a £1bn privately financed “fintech growth fund” that could be co-ordinated by the government. It identified a £2bn fintech funding gap in the UK, which has meant that many entrepreneurs have in the past preferred to sell rather than continue to build promising companies. It wants to make it easier for UK private pension schemes to invest in fintech firms. 

The report also recommended the establishment of a Centre for Innovation, Finance and Technology, run by the private sector and sponsored by government, to oversee implementation of its recommendations, alongside a digital economy task force to align government efforts.

The review has identified 10 fintech “clusters” in cities around the UK that it says needs to be further developed, with a three-year strategy to support growth and foster specialist capabilities.

Dom Hallas, executive director at the Coalition for a Digital Economy (Coadec), said it was now important that people “follow through and actually implement” the ideas in the review. The sector’s direct contribution to the economy, it is estimated, will reach £13.7bn by 2030.

However, the review also raised questions over the role of the Competition and Markets Authority, saying that the CMA should better balance competition and growth. 

“There is a case for more flexibility in the assessment of mergers and investments for nascent and fast-growing markets such as fintech,” it said. 

“Success brings scale but as some businesses thrive, others inevitably will fail. Some consolidation will therefore be critical in facilitating the growth that UK fintechs need in order to become global champions.”

Charlotte Crosswell, chief executive of Innovate Finance, which helped produce the report, said: “It’s crucial we act on the recommendations in the review to deliver this ambitious strategy that will accelerate the growth of the sector.

“The UK is well positioned to lead this charge but we must act swiftly, decisively and with urgency.”

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Coinbase: digital marketing | Financial Times




Coinbase will be a stock riding a runaway train. The US cryptocurrency platform wants investors to think long term about the prospects for a global “open financial system”. Most will be unable to tear their eyes away from wild, short-term price swings in bitcoin, the world’s largest digital asset. 

This has its benefits. Coinbase, which has filed for a US direct listing, makes most of its money from commissions on crypto trades. Sales more than doubled to $1.3bn last year. The company has swung from a loss to net income of $322m as crypto prices jumped.

But the company has given no detail on the financial impact of the 2018 bitcoin price crash. Will Coinbase’s 2.8m active retail users and 7,000 institutions hang on if there is another protracted price fall? 

Coinbase was valued at $8bn in a 2018 private funding round and $100bn in a recent private share sale, according to Axois. That rise looks remarkably similar to the increase in bitcoin’s price from less than $5,000 to more than $50,000 this year.

The rally is hard to justify. Bitcoin has not become a widely used currency — nor is the US ever likely to countenance that. It offers investors no yield. Volatility remains high. Elon Musk’s tweet this weekend that bitcoin prices “seem high lol” propelled a sharp fall that hit shares in crypto-related companies. Shares in bitcoin miner Riot Blockchain have lost a quarter of their value this week. 

Prospective investors in Coinbase should keep this in mind. Its listing will take cryptocurrencies further towards the financial mainstream. But risk factors are unusually numerous, including the volatility of crypto assets and regulatory enforcement. 

Both threats are widely known. Another risk factor in the listing document deserves more attention. Vaccination campaigns and the reopening of shuttered sectors of the economy is raising yields in safe assets such as Treasuries. Risky trades may become less attractive. Coinbase might be about to go public just as the incentive to trade cryptocurrencies is undermined. 

If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.

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US stocks make gains on Fed message of patience over monetary policy




Stocks on Wall Street reversed earlier losses after Jay Powell, the Federal Reserve chairman, reiterated the central bank’s desire to stick with accommodative policies during his second day of testimony to Congress.

The tech-heavy Nasdaq Composite ended the day up 1 per cent, having fallen almost 1 per cent at the opening bell. The S&P 500 climbed 1.1 per cent, marking the blue-chip benchmark’s second consecutive rise after five sessions of back-to-back losses.

A morning sell-off in US Treasuries also faded, with the yield on the 10-year note having climbed as much as 0.07 percentage points to slightly less than 1.43 per cent, its highest level since February last year, before settling back to 1.37 per cent.

Treasuries have been hit by expectations that US president Joe Biden’s $1.9tn stimulus plan will stoke inflation, which erodes the cash value of the debt instruments’ interest payments. However, the more recent rise in yields has also been accompanied by a rise in real rates, which are more indicative of the return investors make after inflation and signal an improving growth outlook for the economy.

Higher yields, which move inversely to the price of the security, also knock-on to equity valuations by affecting the price-to-earnings multiples investors are willing to pay for companies’ shares. A higher yield, analysts say, makes fast-growth companies whose earnings represent a slim proportion of their stock market value less attractive in comparison.

Shares in the 100 largest companies on the Nasdaq are valued at a multiple of 37 times current earnings, against 17 times for the global FTSE All-World index of developed market equities.

“When bonds yield close to zero, you are not losing out by investing in those companies whose cash flows could be years into the future,” said Nick Nelson, head of European equity strategy at UBS. “[But] as bond yields start to rise, that cost of waiting [for companies’ earnings growth] increases.”

Earlier on Wednesday, investors’ retreat from growth stocks rippled into Asia. Hong Kong’s Hang Seng index sank 3 per cent, its worst daily performance in nine months. Chinese investors using market link-ups with bourses in Shanghai and Shenzhen dumped Hong Kong-listed shares at a record pace, selling a net HK$20bn ($2.6bn) on Wednesday. China’s CSI 300 index fell 2.6 per cent. Japan’s Topix slipped 1.8 per cent, dragged down by tech stocks.

Column chart of Hang Seng index, daily % change showing worst day for Hong Kong stocks in 9 months

European equity markets closed higher, with the Stoxx 600 regional index rising 0.5 per cent and London’s FTSE 100 index up 0.5 per cent. UBS’s Nelson said European equities were less vulnerable to rising yields because European stocks generally traded at lower valuations than in Asia and the US. “We have fewer big technology companies here.”

While the bond market ructions have unsettled many equity investors, some believe this should not affect stock markets because the inflation expectations that have driven the Treasury sell-off are linked to bets of a global recovery.

“Rising bond yields and rising inflation from low levels provide a historically attractive environment for equities,” said Patrik Lang, head of equity strategy and research at Julius Baer. Traditional businesses whose fortunes are linked to economic growth, such as “industrials, materials and especially financials”, should do better in a reflationary environment than tech stocks, added Lang.

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