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Are natural gas producers’ best days behind them?



One thing to start: US oil demand is falling again — and Thanksgiving is not going to deliver the usual pick-me-up.

Natural gas has caused a drop in US power sector emissions over the past decade. But now plans to totally decarbonise electricity threaten its role.

Our first note looks at the challenges and opportunities facing natural gas producers under a Biden administration.

Our second is on the UK’s “Green Industrial Revolution” and the modest sums Prime Minister Boris Johnson plans to spend on it.

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

The threat facing the US natural gas sector

The US power sector is the biggest market for American natural gas. And gas-fired turbines are the biggest source of US power.

Joe Biden, who takes over the presidency in nine weeks’ time, wants American electricity decarbonised by 2035.

What gives?

“Here we are in 2020 and we have an administration that has pledged to [achieve] a zero-carbon energy sector by 2035 — and we’re using a lot of gas,” said Sarah Ladislaw, senior vice-president at the Center for Strategic and International Studies.

Electricity generation burnt through 31bn cubic feet of natural gas a day in 2019 — a third of the country’s total production. Without carbon capture technology, which is not available yet at sufficient scale, that market could totally dry up.

“There’s a real question about how to square that circle,” said Ms Ladislaw. “You’re either going to have to replace it . . . or have some sort of carbon capture and sequestration.”

Line chart of Billion cubic feet per day showing US natural gas production soared over the past decade

The president-elect’s ability to follow through on this promise is limited, however, by his lack of a majority in the Senate. Much hinges on what happens in the two Georgia run-offs in January.

If he cannot force through a national clean energy standard, Mr Biden may well just kick the task to the states, analysts said. A growing number of them have already set ambitious clean power targets for coming years.

Regional programmes — such as state-level energy standards or carbon pricing — would likely have come under pressure had Donald Trump won another term. Mr Biden, by contrast, may be able to co-ordinate them.

Joe Biden’s climate ambitions are likely to be tempered by his lack of a Senate majority. © AFP via Getty Images

The opportunity

Other analysts think a Biden administration could actually be good for gas, especially if a divided government forces compromises in Washington.

Switching US power from coal to gas — which emits about half as much carbon as coal when burnt — helped the US cut its emissions in recent years. While coal’s share of power generation has dropped from about half in 2005 to 23 per cent last year, gas’s share has doubled to 38 per cent. (Coal is likely to gain some market share at gas’s expense next year, contributing to a rise in emissions.)

Jen Snyder, an analyst at Enverus, said there is a lot more potential for gas to further reduce coal’s market share in the medium term. This would allow for more reductions in emissions (Mr Biden’s aim), without jeopardising the fossil fuel industry (Republicans’ aim).

“There is more running room for gas to effectively take market share from coal and reduce emissions in the mid-term, because renewables aren’t cost effective everywhere,” she said. “There’s more potential for compromise with the Biden administration and a ‘red’ Senate.”

As the reliance on renewables increases, analysts said, there will be more need for so-called “dispatchable” power generation, that can be called on to smooth the intermittency of solar and wind.

“Until battery storage technology evolves to the place where you can [effectively] store that renewable power, I think natural gas seems to be the most prudent lowest emission fuel for us to use going forward,” said Ms Snyder.

Line chart of Share of total generation (%) showing Gas has displaced coal in US power

Gas producers, having survived this year’s chaos much better than their oil-producing counterparts, are betting on the latter scenario.

Toby Rice, chief executive of EQT, the US’s biggest gas producer, said last month: “We anticipate that long-term US demand will increase driven by coal and nuclear retirements.”

For EQT and other industry players, though, much rides on the role gas plays in the energy transition — either as a “bridge fuel” aiding the process, or as another fossil fuel the world must urgently be weaned off. If it is the latter, they will be in trouble.

“We’re dealing with a fairly robust US natural gas industry that is deeply unprepared for a transition that could move faster than they’ve been planning on,” said Ms Ladislaw. 

“The reality is, the longer you don’t plan for that future, the less likely you have a chance of actually succeeding and existing in it,” she added.

(Myles McCormick)

The UK brings out its peashooter

Boris Johnson is not, to put it kindly, famous for his attention to detail. That much is clear from his budget, unveiled this week, to change the UK’s energy economy. Either the £12bn ($16bn) the prime minister pledged to spend over the next decade on a “Green Industrial Revolution” is woefully wrong — or it is woefully inadequate.

The plan brings forward a deadline for banning the sale of gasoline and diesel cars to 2030, and commits to install new electric vehicle charging infrastructure: moves that will help green the transport sector, now by far the UK’s biggest emitter. It proposes development of 40GW of offshore wind power — making the country “the Saudi Arabia of wind”. It scopes out investment in hydrogen, new nuclear reactors, insulation for buildings, and includes the obligatory promise to develop carbon capture and storage.

Winds of change or hot air? Boris Johnson is planning a ‘Green Industrial Revolution’ in the UK © FT Montage/Getty

Environmentalists — sceptical of a man who once derided wind power as unable to “pull the skin off a rice pudding” — have been mostly supportive. And yet, looking more closely, it all seems a bit paltry.

For a start, £5bn of the money for a “Green Industrial Revolution” is actually for flood defences. Only about £3bn of the announced £12bn is new cash.

Mr Johnson thinks the private sector will offer “potentially three times as much”. So call it £48bn. And yet the proposed Sizewell C nuclear plant could soak up £20bn of investment alone.

On an annual basis, the plan envisages spending equivalent to $6.4bn. That’s less than a self-respecting oil major pays in dividends — or writes off in a bad quarter. And it’s a rounding error in the $1.1tn the International Energy Agency says the world will need to spend yearly on renewables by 2030.

By contrast, Joe Biden’s climate plan envisaged $500bn a year for the next four. The EU’s Green Deal also dwarfs Mr Johnson’s modest vision.

Mr Johnson might argue that his government’s investments will have multiplier effects, and include savings on fossil fuels and climate mitigation. Or that these announcements are just the start. And the UK has already been doing a good job at cutting emissions.

But will these new measures get the country to its Paris climate targets or net-zero emissions by 2050?

Not a chance, say climate experts.

Mr Johnson, facing a pandemic- and Brexit-stricken economy, and the long-term threat of climate change, appears to have turned up to the fight wielding not a Biden-sized bazooka, but a pitiful peashooter.

“The funding in the government’s long-awaited 10-point plan doesn’t remotely meet the scale of what’s needed to tackle the unemployment emergency and climate emergency we are facing, and pales in comparison to the tens of billions committed by France and Germany,” said Ed Miliband, an opposition politician who ran the Department of Energy and Climate Change when he was in government.

(Derek Brower and Nathalie Thomas)

Data Drill

More than 100 oil and gas companies in North America have filed for bankruptcy this year, new data show, as the price crash continues to course through the sector.

Bankruptcies last month marked a slowdown from the middle of the summer when filings were at their highest, according to figures from law firm Haynes & Boone, but they climbed again nonetheless.

Column chart of Chapter 11 filings (cumulative) showing Oil and gas bankruptcies in North America have topped 100 in 2020

Power Points


Prince Abdulaziz, Saudi Arabia’s energy minister, said yesterday that he saw “a lot of correlation in the Biden administration in terms of climate change and renewables. We see eye-to-eye with their aspirations.”

Do they? Mr Biden’s aspirations include electrifying the US transport sector, a major market for Saudi crude. And he has openly talked of a transition away from the oil industry. These aren’t the kind of ambitions that have much traction in Riyadh.

So Prince Abdulaziz was probably right to focus on renewables. The kingdom might need to get used to a president who suddenly takes a lot less interest in the oil market — one who doesn’t even feel the need to berate Opec on Twitter when the crude price gets too high (or low).

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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Pimco’s Ivascyn warns of inflationary pressure from rising rents




US Inflation updates

A leading US bond manager has warned of inflationary pressure from housing rental costs that could push interest rates higher and overturn a sense of complacency among investors.

The comments by Dan Ivascyn, chief investment officer at Pimco, which has $2.2tn under management, comes after US 10-year interest rates eased in recent months to about 1.25 per cent. Fears of an inflation surge sparked alarm among bond investors at the start of the year and pushed the important benchmark to a peak of 1.75 per cent by the end of March.

“There is a lot of uncertainty on inflation and while our base case is that it proves transitory, we are watching the relationship between home prices and rents,” Ivascyn told the Financial Times. “There may be more sustained inflation pressure from the rental side.”

Owners’ equivalent rent is a key input used for calculating the US consumer price index. As rents become more expensive, investors could become increasingly concerned about “sticky inflation”, pushing the 10-year Treasury yield back towards 1.75 per cent, said Ivascyn. 

Line chart of US 10-year expected rate of inflation showing long-term bond market inflation expectations loiter near decade peaks

The Federal Reserve said in its latest policy statement last week that it had made “progress” towards its goals of full employment and 2 per cent average inflation. Jay Powell, the Fed’s chair, said there was more “upside risk” to the inflation outlook, although he expressed confidence in transitory price pressure over time.

The latest measure of core consumer prices, which is followed by the central bank, ran at 3.5 per cent over the 12 months to June, the fastest pace since July 1991.

“There is a lot of noise and uncertainty in the data” and “the Fed has a difficult job deciphering the economic information coming in”, said Ivascyn.

The fund manager said the potential for much higher bond yields is probably capped by the prospect of the central bank tightening policy in the event of inflation expectations breaking higher.

Bar chart of assets under management ($bn) showing Pimco Income ranks as the largest actively managed bond fund

“We do believe if the Fed sees inflation expectations rise out of their comfort zone, that they will probably act,” said Ivascyn. “That has been the message from Powell’s last two press conferences.”

Pimco expects the central bank will announce a tapering of its current $120bn monthly bond purchases later this year, with a view to starting the process in January. While the policy shift is being “well telegraphed” and data dependent, Ivascyn said higher bond yields and more market volatility were likely.

“This is a tough market environment and it is a time when you want to be careful,” he said, adding that Pimco had been reducing its exposure to interest rate risk as the bond market had pulled borrowing costs lower. 

“Valuations are stretched and it makes sense to adjust our portfolios.”

Ivascyn oversees the world’s largest actively managed bond fund, according to Morningstar. The $140bn Pimco Income Fund co-managed with Alfred Murata, has a total return of 2 per cent this year, versus a slight decline in the Bloomberg Barclays US Aggregate index. Over the past year, the fund has extended its long record of beating its benchmark, according to Morningstar.

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Wall Street stocks follow European and Asian bourses lower




Equities updates

Wall Street stocks followed European and Asian bourses lower on Friday after markets were buffeted this week by jitters over slowing global growth and Beijing’s regulatory crackdown on tech businesses.

The S&P 500 closed down 0.5 per cent, although the blue-chip index still notched its sixth consecutive month of gains, boosted by strong corporate earnings and record-low interest rates.

The tech-focused Nasdaq Composite slid 0.7 per cent, after the quarterly results of online bellwether Amazon missed analysts’ forecasts. The tech conglomerate’s stock finished the day 7.6 per cent lower, its biggest one-day drop since May 2020.

According to Scott Ruesterholz, portfolio manager at Insight Investment, companies which saw significant growth during the pandemic may see shifts in revenue as consumers move away from online to in-person services.

“[Consumers are] going to start spending more on services, and so those businesses and industries which have benefited in the last year, companies like Amazon, will be talking about decelerating sales growth for several quarters,” Ruesterholz said.

The sell-off on Wall Street comes after the continent-wide Stoxx Europe 600 index ended the session 0.5 per cent lower, having hit a high a day earlier, lifted by a bumper crop of upbeat earnings results.

For the second quarter, companies on the Stoxx 600 have reported earnings per share growth of 159 per cent year on year, according to Citigroup. Those on the S&P 500 have increased profits by 97 per cent.

But “this is likely the top”, said Arun Sai, senior multi-asset strategist at Pictet, referring to the pace of earnings increases after economic activity rebounded from the pandemic-triggered contractions last year. Financial markets, he said, “have formed a narrative of peak economic growth and peak momentum”.

Column chart of S&P 500 index, monthly % change showing Wall Street stocks rise for six consecutive months

Data released on Thursday showed the US economy grew at a weaker than expected annualised rate of 6.5 per cent in the three months to June, as labour shortages and supply chain disruptions caused by coronavirus persisted.

Meanwhile, China’s regulatory assault on large tech businesses has sparked fears of a broader crackdown on privately owned companies.

“It underlines the leadership’s ambivalence towards markets,” said Julian Evans-Pritchard of Capital Economics. “We think this will take a toll on economic growth over the medium term.”

Hong Kong’s Hang Seng index closed 1.4 per cent down on Friday, while mainland China’s CSI 300 dropped 0.8 per cent, after precipitous slides earlier in the week moderated.

Japan’s Topix closed 1.4 per cent lower, after the daily tally of Covid cases in Tokyo surpassed 3,000 for three consecutive days. South Korea’s Kospi 200 dropped 1.2 per cent.

The more cautious investor mood on Friday spurred a modest rally in safe haven assets such as US government debt, which took the yield on the 10-year Treasury, which moves inversely to its price, down 0.04 percentage points to 1.23 per cent.

The Federal Reserve, which has bought about $120bn of bonds each month throughout the pandemic to pin down borrowing costs for households and businesses, said this week that the economy was making “progress” but it remained too early to tighten monetary policy.

“Tapering [of the bond purchases] could be delayed, which in many ways is not bad news for the market,” said Anthony Collard, head of investments for the UK and Ireland at JPMorgan Private Bank.

The dollar, also considered a haven in times of stress, climbed 0.3 per cent against a basket of leading currencies.

Brent crude, the global oil benchmark, rose 0.4 per cent to $76.33 a barrel.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday

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US regulators launch crackdown on Chinese listings




US financial regulation updates

China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US, the Securities and Exchange Commission said on Friday.

Gary Gensler, the chair of the US corporate and markets regulator, has asked staff to ensure greater transparency from Chinese companies following the controversy surrounding the public offering by the Chinese ride-hailing group Didi Chuxing.

“I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a statement.

He added: “I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies.”

The SEC’s new rules were triggered by Beijing’s announcement earlier this month that it would tighten restrictions on overseas listings, including stricter rules on what happens to the data held by those companies.

The Chinese internet regulator specifically accused Didi, which had raised $4bn with a New York flotation just days earlier, of violating personal data laws, and ordered for its app to be removed from the Chinese app store.

Beijing’s crackdown spooked US investors, sending the company’s shares tumbling almost 50 per cent in recent weeks. They have rallied slightly in the past week, however, jumping 15 per cent in the past two days based on reports that the company is considering going private again just weeks after listing.

The controversy has prompted questions over whether Didi had told investors enough either about the regulatory risks it faced in China, and specifically about its frequent contacts with Chinese regulators in the run-up to the New York offering.

Several US law firms have now filed class action lawsuits against the company on behalf of shareholders, while two members of the Senate banking committee have called for the SEC to investigate the company.

The SEC has not said whether it is undertaking an investigation or intends to do so. However, its new rules unveiled on Friday would require companies to be clearer about the way in which their offerings are structured. Many China-based companies, including Didi, avoid Chinese restrictions on foreign listings by selling their shares via an offshore shell company.

Gensler said on Friday such companies should clearly distinguish what the shell company does from what the China-based operating company does, as well as the exact financial relationship between the two.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” he said.

He added that companies should say whether they had received or were denied permission from Chinese authorities to list in the US, including whether any initial approval had then be rescinded.

And they will also have to spell out that they could be delisted if they do not allow the US Public Companies Accounting Oversight Board to inspect their accountants three years after listing.

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