Commodity Weekly (October 23 2020)

This week has been broadly positive for the commodity markets, especially natural gas benchmarks, which would be a positive talking point, but this week has been dominated by Permian Basin M&A activity, namely ConocoPhillips’ $9.7bn acquisition of Concho Resources, and more recently, Pioneer Natural Resources’ $4.5bn acquisition of Parsley Energy.

Consolidation has been long overdue in the Permian Basin, and with the combination of debt and low prices stressing balance sheets, these transactions would hardly be a surprise under normal circumstances.

The Democrats, however, have repeatedly spoken of regulating oil & gas production to meet climate change objectives, which makes these higher-risk times, and with a pending presidential election (4th November), there could yet be a rapid, and significant, deterioration in the outlook in the Permian; see out recent article here.

An orderly transition is one that is led by the market and not by regulation, irrespective of whether it is applied to supply or demand.

With Indian and Chinese demand growth and gentrification oftheir populations accelerating, demand is likely to be driven by increasingaccess to energy resources and more intensive energy use.

In this context, it is not difficult to imagine a scenario where within 10 – 15 years, that, where a reckless energy policy is pursued, it could have a disastrous impact on a country’s outlook, hence GDP, especially if costs to the consumer and supply security aren’t taken seriously.