Scott Barlow’s Noteworthy: The bear case for oil prices is worth attention

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The Globe and Mail’s market strategist offers five thoughts on the research, analysis and ephemera that’s crossed his desk this week.

1. RBC Dominion Securities analyst Sam Crittenden discussed the “looming supply crunch” for copper in a comprehensive research report this week, noting that decarbonization efforts will increase copper demand by about 1 per cent per year. Though it doesn’t sound like much, it will demand a new large-scale mine starting production every year. Mr. Crittenden expects copper prices to average US$4.50 per pound for 2025-2027 – 19 per cent above current levels – and suggests this is a conservative estimate. He lists First Quantum Minerals Ltd. FM-T, Hudbay Minerals Inc. HBM-T, Ivanhoe Mines Ltd. IVN-T and Lundin Mining Corp. LUN-T among the miners that will benefit from this trend.
2. Strategists from two major bank-owned brokerages expect the Bank of Canada to hike its benchmark interest rate again after last week’s increase. Scotiabank strategist Hugo Ste-Marie wrote, “Bank of Canada: Don’t Bet on One and Done,” in which he highlights core inflation in the 3.5-per-cent to 4.30-per-cent range and persistent excess demand. He believes inflation risk remains tilted to the upside and that “more hikes are likely needed.” BMO rates and macro strategist Benjamin Rietzes wrote: “Another 25 bp hike in July appears likely in our view given the BoC’s hawkish tone and limited data points until that meeting.”
3. Ed Morse, Citi’s global head of commodity research, provided the Financial Times with a multipart bear case for oil prices. Mr. Morse believes markets are overestimating a second-half surge in demand from China, where diesel demand has already peaked. Citi also believes that oil prices are less sensitive to GDP growth. In the past, a 1-per-cent rise in global GDP growth would cause a 0.5-per-cent increase in oil demand. Mr. Morse now believes that 4-per-cent GDP growth will result in a jump in oil demand of less than 1 per cent. OPEC may have cut output, but oil production is increasing in the U.S., Brazil, Guyana, Australia, Argentina, Norway, Canada and Venezuela. In the U.S., major shale operations can produce almost double the amount of oil they did in 2019 for the same price.
4. Morgan Stanley analyst Adam Jonas made a good point about Tesla Inc. TSLA-Q while simultaneously exemplifying the reasons investors get frustrated with sell side research. Mr. Jonas first noted the rising probability that Tesla will be able, by generating its own renewable power at relatively low cost, to dominate the charging station network that will replace gas stations. The frustrating part is that Mr. Jonas ranks Tesla as overweight, with a US$200 price target that is more than $50 below the current stock price. I’m not sure how we’re supposed to make sense of that.
5. BofA Securities analyst Tal Liani’s survey of executives highlighted the sustainability of corporate spending on network security hardware and software. Security-related spending is expected to increase 13 per cent in 2023, and 82 per cent of companies surveyed reported bigger security budgets in 2023 relative to 2022. Mr. Liani also noted management’s desire to reduce the number of vendors they deal with, which supports profit growth for Microsoft Corp. MSFT-Q, CrowdStrike Holdings Inc. CRWD-Q, Palo Alto Networks Inc. PANW-Q and, potentially, Zscaler Inc ZS-Q. Overall technology spending will decline if developed world economies enter recessions, but network security is among the last areas where budgets will be cut.