Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Crude scenarios
BofA Securities commodity strategist Francisco Blanch highlighted a lot of complexity underlying current oil markets,
“Before crude prices rebounded this week, other key metrics within the petroleum complex, such as middle distillate & gasoline cracks in the US & Europe, were already showing signs of stress. The reality of the oil market is that, despite a massive supply disruption in the Middle East & Ukrainian attacks on Russian energy assets, crude is relatively well supplied due to strategic inventory releases & low refinery run rates (i.e., demand). However, refined product cracks are at or near record levels, suggesting that a price breakdown could be around the corner. What are the key risks ahead? First, if tensions do not abate for weeks, Brent could reset again above $100/bbl. But if Hormuz instead reopens in a few days, crude supplies could overwhelm refineries, resulting in a oil price slump. Second, if OPEC+ supplies exceed demand & refineries struggle to come back online, record-high gasoline & diesel cracks may be required to entice China or others to allow fuel exports again. Third, if both crude & refined fuel supplies remain tight, the elasticities of demand are low enough that the fuel market may have to force a widespread consumption-rationing exercise (i.e., an economic downturn).”
AI rally continues
Scotiabank analyst Nat Schindler believes the AI buildout race and accompanying stock rally will continue,
“Cloud spend, AI adoption and infrastructure ownership remain the primary drivers of AMZN, GOOG and META equity performance. Our recent channel work suggests AI demand remains well ahead of available supply, with both AWS [Amazon Web Services] and GCP [Google Cloud Platform] posting accelerating commitment and consumption growth while customers commit dollars further in advance to secure scarce GPU, TPU and token-serving capacity. Capacity remains necessary but is no longer sufficient to explain cloud growth. Utilization, token intensity, commitments and production AI deployments are increasingly driving revenue growth beyond what capacity metrics alone would imply. We continue to prefer AMZN and GOOG given accelerating consumption, expanding backlog visibility, and increasingly compelling evidence that AI investment is generating tangible revenue growth. We also increasingly view GOOG as the primary AI infra share gainer. While META’s core business remains strong, investors still lack visibility into compute monetization and long-term AI ROI as they have for AWS & GCP.”
Electric winner
In a separate BofA Securities report, analyst Andrew Obin details the outlook for one of the biggest winners from decarbonization and electrification: GE Vernova.
“We forecast $19.6bn in 2Q orders ($11.1bn Power, $7.0bn Electrification, $1.6bn Wind). This represents 1.8x book-to-bill and 59% y/y growth … As Doc Brown said in Back to the Future, “1.21 gigawatts! Great Scott!” GEV will be well above this in 2Q. We expect management to expand the focus from gas equipment in gigawatts to include Electrification and pricing. Management signaled 2Q’s contracted Power Equipment will be 10-15 gigawatts (GW). Contracts includes both firm orders and slot reservation agreements (SRAs). This would be down from 21 GW of contracts in 1Q. For 2Q, we forecast 13 GW of contracts: 9 GW of firm orders and 4 GW of net SRAs (i.e., 11 GW of new SRAs less 7 GW converted to firm orders) … Our recent report highlights the power gap between implied US electricity demand growth (~230 GW) and accredited supply additions from utilities (~93 GW). Even allowing for solar/wind additions, coal plant life extensions, demand destruction from higher electricity prices, and– we see a big opportunity of natural gas power generation.”
Bluesky post of the day
Diversion
“The Top 10 TV Shows of the Year so Far, According to Streaming Data” - Lifehacker