A Rebounding Oil & Gas Industry, Plus Global Liquid Natural Gas Growth, Positive for Molybdenum

  • Stable oil Industry supports molybdenum
  • LNG trade growth requires more molybdenum steel
  • Global oil & gas capex to recover in 2017

by Bruce Hansen

Commodity price recoveries are almost always volatile and their price trajectory is never a smooth curve upward. As we progress into summer, we have seen recent price weakness in molybdenum (moly), along with softer prices of oil and gas.

In the past couple of months, oil investors sweated as oil broke below $50 per barrel to approximately $45 currently from a recent high of $53.40 in April. Natural gas investors fretted as prices dipped below $3/MBTU at the beginning of July from the $3.30-$3.50/MBTU range in April-May. In the molybdenum business, we have seen this movie before as the current moly price at $7+ per pound retreated from a 2017-to-date high near $9 per pound in April.  

Despite the summer doldrums, we see encouraging signals for molybdenum demand coming out of the oil and gas industry. Oil and gas prices appear to be recovering from the sharp downturn in 2014-15.

The common bond for the molybdenum market and the oil and gas industry is the use of steels alloyed with molybdenum as well as molybdenum catalysts and lubricants in the extracting, processing, refining, and transporting of oil and gas products.

A stable and active oil industry is supportive of molybdenum prices through rising demand for these specialty steels and catalysts. This is a subtle causation effect in demand benefit to molybdenum from a rebounding oil and gas industry.

Typically, in response to end-use demand from oil and gas downstream activities, molybdenum demand will flow from a rise in orders for various specialty steel products and from inventory drawdowns, triggering increased production of steel and catalysts containing molybdenum.

We believe that moly prices will strengthen over the medium term driven by increasing steel demand from the resurgence in oil and gas drilling in North America and the flourishing LNG trade worldwide.

The oil and gas, and chemical and petro-chemical industries account for 30% of molybdenum end-use demand, according to SMR Research. Molybdenum end use in automotive (15%), other transportation (8%) and power generation (7%) account for another 30% of molybdenum demand.

The global energy mix is expected to shift with the growing adoption of renewable energy. Oil is expected to remain king in fueling all types of transportation globally for the foreseeable decades, according to BP’s updated Energy Outlook 2035. While the global automotive fleet is expected to double by 2035, only 6% is made up of electric cars, stated BP.

In addition, natural gas demand is estimated to grow faster than oil and coal, rising at 1.6% per year through 2035, reported BP. Natural gas is expected to overtake coal as the second largest fuel source, after oil, for global power generation in 2035, stated BP.

Charts 1 & 2: Primary energy growth and the changing fuel mix to 2035

Source: BP’s Energy Outlook 2035

Natural gas supply growth is driven by U.S. shale production and the expansion of global LNG trade.  BP projected global production of LNG to increase significantly at almost 8% per year through 2020.

The consensus among industry observers, including BP and Royal Dutch Shell, is that LNG will be the essential, low-cost fuel of choice to meet the rising electricity demand in emerging economies. Liquefaction technology has enabled natural gas produced in the United States to become a mobile product.

The Shell LNG Outlook report projected world LNG demand to rise at 4-5% per year from 2015 to 2030. Shell reported that in 2016, global LNG demand was 265 million tonnes with imports by 35 countries, led by China, Egypt and India. Compared with 2000, there were only 10 importing countries.

LNG is helping the U.S. move towards energy independence to be a net export of total energy in the 2020s, according to the U.S. Energy Information Administration(EIA).  The U.S. began exports of LNG in 2016 through Cheniere Energy’s new LNG Terminal in Louisiana.

The Trump Administration recently announced a milestone natural gas trade deal with China whereby Chinese companies are encouraged to import LNG from the U.S. through long-term contracts. The administration has pledged its support for greater LNG exports to China and other key Asian consumers such as Japan and South Korea. Korea Gas Corp. recently commenced its first LNG shipment from the U.S. under a 20-year contract with Cheniere Energy.

With the emergence of an era of rising global LNG trade, the construction of transportation vessels, storage and shipping facilities in addition to onshore and offshore rigs and pipelines, will all require high-strength, corrosion-resistant, molybdenum-containing steel.

Chart 3: Sharp increase in LNG world trade

Source: BP’s Energy Outlook 2035

Oil and gas capital expenditures are on an uptick after bottoming in 2016. After two years of double-digit declines, global exploration and production (E&P) capital expenditures are expected to rise 7% in 2017, according to media reports citing Barclays’ E&P spending survey.

North American E&P investments are expected to increase 27% YOY in 2017 compared with a 37% YOY decrease in 2016, reported Barclays. In the United States, upstream spending is expected to jump 38% to $120 billion in 2017 compared with 2016, which saw a 40% YOY drop, projected the Oil & Gas Journal.

Over the past year, oil and gas drilling in the United States and Canada has more than doubled to 1,129 drill rigs, reported Baker Hughes. Worldwide, including North America, active drill rigs rose 43% to 2,086 in June 2017 from a year ago.

Associated with the drilling ramp up in the U.S., production has risen to approximately 9.3 million barrels of oil equivalent per day at the end of June 2017, and is projected to reach a record average of 10 million barrels per day in 2018, according to the EIA.

Charts 4 & 5: Growing intensity of molybdenum use in drilling steel

Left hand chart, source: CPM/Baker Hughes
Right hand chart, source: Cowen & Company/Pipe Logix, OCTG Situation Report, Baker Hughes

Furthermore, U.S. oil rigs are consuming nearly 40% more steel today than in 2010 cited a report by Cowen & Company, interpreting Baker Hughes data. We extrapolate that, similar to the U.S., there is deeper and longer lateral drilling internationally requiring more moly-alloyed steel Oil Country Tubular Goods (OCTG) steels.

The World Steel Association’s data showed that global steel production grew by 4.7% YOY in the first five months of 2017, recording 11 consecutive months of YOY increases through May 2017.  All forms of steel account for more than 70% of molybdenum consumption.

All of the above is very positive for molybdenum.  Given the recovery of the oil and gas industry, particularly the booming LNG market in the United States, we expect molybdenum demand to gain strength in the medium to longer term.

As the oil and gas supply and demand rebalance and find higher support, we expect the molybdenum price to find higher highs and lows as it gradually recovers in the latter part of 2017 through 2018.

We hope you have time to peruse more interesting charts and a broader analysis in our recently posted Molybdenum Market Factors presentation on our website.

 

Moly Bits is a new blog published by General Moly, Inc. Bruce is the CEO of General Moly, the only pure-play listed molybdenum company, He is enthusiastic about the moly market and is an avid student of oil and gas. 

Market Corner

This message is the opinion of the writer. General Moly does not publish any updates or revisions of opinions nor of the information presented except as required by securities laws.

The information presented contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the safe harbor created by such sections.  Such forward-looking statements include, without limitation, (i) estimates of future molybdenum, other commodities and markets, as mentioned, prices, demand, supply and/or production; (ii) estimates of future capital expenditures; (iii) statements regarding cost structure, project economics, or competitive position; (iv) statements regarding cost structure, project economics, or competitive position, and (v) statements related to potential market signals.  Where the Company expresses or implies an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and believed to have a reasonable basis.  However, forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed, projected or implied by such forward-looking statements.  These risks and uncertainties include, but are not limited to, metals prices and production volatility, global economic conditions, currency fluctuations, increased production costs and variances in ore grade or recovery rates from those assumed in mining plans, exploration risks and results, political, operational and project development risks, adverse governmental regulation and judicial outcomes.  For a more detailed discussion of such risks and other factors that could affect the Company, see the Company’s Annual Report on Form 10K, which is on file with the Securities and Exchange Commission, as well as the Company’s other SEC filings.

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