Saudi Aramco released an IPO plan of sorts about how it plans to diversify from being the world’s largest energy company to being much more and the Federal Reserve, as expected, left rates unchanged.

Saudi Aramco’s New Plan

The world’s biggest energy company, Saudi Aramco, outlined financing plans on Wednesday that will support its expansion into new areas under a sweeping economic reform plan released in Riyadh this week. The reforms envisage Aramco transforming itself from an oil and gas firm into a “global industrial conglomerate” involved in many sectors and services, using its vast financial resources to create jobs and help diversify the Saudi economy beyond oil.

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The plans suggest Saudi Arabia’s state oil company, which Deputy Crown Prince Mohammed bin Salman estimated this week was worth over $2 trillion, aims to move rapidly into a new role offering diversified services such as shipbuilding and offshore rig services in the near term.

Fed, As Expected, Leaves Interest Rates Unchanged

Federal Reserve officials left interest rates unchanged and remained ambiguous about raising rates in June as mixed global economic signals and low inflation at home weighed on policy makers struggling to spark robust growth seven years after the recession’s end.

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In a statement Wednesday after a two-day meeting, the Fed stuck to its longstanding plan to move carefully on raising the benchmark federal-funds rate, which it has held between 0.25% and 0.50% since December, when it raised short-term rates after holding them near zero since 2008.

It would seem Iran is not the only major Middle East economy on the cusp of radical change. If the espoused wishes of deputy crown prince Mohammed bin Salman al-Saud (or MbS as the media have got into the habit of calling him) are realized, the desert kingdom is in for a period of change over the next decade that would be unprecedented in it’s recent history.

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Certainly, oil has transformed the kingdom since it was first commercially extracted in 1938 but the culture of Saudi society has been carefully nurtured, protected, even shielded — one might say — from the corrupting influence of the outside world.

Group of big fuel tanks. Ras Tanura oil terminal, Saudi Arabia

A group of fuel tanks in the Ras Tanura oil terminal in Saudi Arabia. If Prince Mohammad has his way, this will someday be a thing of the past in the kingdom. Source: AdobeStock/eugenesergeev.

Yet the days of a close compact between the House of Saud dynastic monarchy and the religious Wahhabi clerical establishment that, in exchange for control over education and the judiciary, has provided the rulers with legitimacy, may be seeing the beginning of its end.

The Prince’s Plan

The new King Salman’s son, Prince Mohammad, believes Saudi Arabia has been addicted to oil, an addiction that has cost it dearly in terms of economic development and progress. Trying to look into the future, he clearly feels Saudi Arabia needs to face up to the march of time before it is too late. Read more

Steel imports into the U.S. were up in March while a glut of oil and gasoline production in Asia threatens the recent price rally.

Gasoline Glut In Asia

A rebound in oil prices this year from 12-year lows is in danger of coming to a crashing halt soon.

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The main engine of global demand growth for the past several years, Asian demand, starts to sputter amid signs of a gasoline glut in both Japan and China.

Steel Imports Into the U.S. Up in March

Based on preliminary Census Bureau data, the American Iron and Steel Institute reported recently that the U.S. imported a total of 2.5 million net tons (nt) of steel in March 2016, including 2.097 million nt of finished steel (up 12.9% and down 0.1%, respectively, vs. February final data).

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On the year-to-date, through three months of 2016 total and finished steel imports are 7.49 million and 6.424 million nt, down 36% and 34% respectively, vs. the same period in 2015. Annualized total and finished steel imports in 2016 would be 30 and 25.7 million nt, down 23% and 18% respectively vs. 2015. Finished steel import market share was an estimated 24% in March and is estimated at 25% YTD.

Russia said it will increase oil production without a deal with Saudi Arabia and other Organization of Petroleum Exporting Countries members and the U.K. has reluctantly agreed to subsidize a deal to help sell Tata Steel‘s on-the-block U.K. mills.

Russia Says It’ll Increase Oil Production

Russia said on Wednesday it was prepared to push oil production to historic highs, just days after a global deal to freeze output levels collapsed and Saudi Arabia threatened to flood markets with more crude.

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Venezuela predicted prices could crash in the next few weeks if producers failed to resume dialogue and urged that non-OPEC participants be observers at a June OPEC meeting, as the specter of oversupply loomed once more.

Cameron Government Supports Nationalizing U.K. Steel Mills

Great Britain could part-nationalize Tata Steel‘s remaining U.K. interests by taking a 25% equity stake, as part of a support package worth hundreds of millions of pounds designed to attract a buyer and save at least 10,000 jobs.

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The Conservative Cameron government, which privatized the steel and other industries under former Prime Minister Margaret Thatcher, is seen as being anxious to avoid an imminent closure of the U.K.’s biggest steel works at Port Talbot in South Wales just before a referendum on European Union membership in case of a protest vote.

It could be argued that one explanation for the recovery in oil prices since February was hope for a deal among major producers to limit output.

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However, a recent meeting of representatives of major producer nations disappointed. Major oil producers supplying nearly half of global output — including members of the Organization of Petroleum Exporting Countries and other producer-nations such as Russia — ended their meeting in Doha, Qatar, over the weekend without reaching an agreement to cap production. This new development now leaves some questions for metal buyers.

Why Did the Talks Fail?

Iran had ruled out limiting its own production. International sanctions against the country were lifted in January and now that the country is able to export, its goal seems to be to regain lost market share rather than to cap production to help out OPEC neighbors and fellow members. Tehran’s position is understandable, to an extent, as other regional powers took advantage — even fellow members of OPEC — of Iran’s sanctioned status and filled the gap with their own oil before the international community even thought of lifting Iran’s sanctions. Once Iran made its intentions clear, Saudi Arabia — the world’s second-largest oil producer — walked away from any agreement that didn’t include its geopolitical rival Iran.

Does This Mean Oil Prices Back Below $30?

Not necessarily. This development is, of course, bearish for oil prices but there is a difference between what’s fundamentally bearish and how markets react to it. As you probably know, we are not here to make predictions but to constantly monitor markets.

This news is the kind that could hit market sentiment, especially at a time when oil prices seem ripe for a pullback. However, OPEC actions might not be required to balance oil markets. Some might argue that low prices are already creating the necessary market rebalance. There is no clear answer on whether oil fundamentals are set to improve or not.

The supply/demand equation is complex and many factors could weigh on prices throughout the year. Production in the U.S. is already declining while weaker economic growth in places such as China and Latin America is expected to weigh on global oil consumption. One thing is clear, however, the failure of the Doha talks and the gap between the Iranian and Saudi position has damaged the credibility of OPEC even further.

Oil prices 1 year out

Oil prices, one year out. Source: @StockCharts.com.

This will be a huge test for global markets. So far, markets reacted as expected, oil prices fell on Monday on the news but not by that much. If oil prices weaken that could mean that the price rally seen in Q1 was only caused by expectations that didn’t materialize. However, if oil prices continue to climb despite the bearish news, that would be a bullish development, suggesting that underlying supply/demand fundamentals are indeed improving.

What This Means For Metal Buyers

This new development is something that could bring oil prices down… or it might not. Metal buyers should keep a close eye on the price of oil. If oil prices actually decline, that would probably have a depressing effect on global markets. Stock markets could suffer and sentiment on commodity markets would worsen.

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The currencies of oil exporting countries would weaken against the dollar, that would help the U.S. dollar recover, driving metal prices down as well. On the other hand, if oil markets manage to pass this test, that would be bullish.

Saudi Arabia saw its oil exports fall in February and steel producer nations couldn’t agree on a plan to curb output.

Saudi Oil Exports Fall

Saudi Arabia’s crude oil exports fell in February to 7.553 million barrels per day from 7.835 million barrels per day in January, official data showed on Monday.

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The world’s largest oil exporter produced 10.220 million bpd of crude in February compared with 10.230 million bpd in January, the data showed. Saudi Arabia’s domestic crude oil inventories fell to 305.599 million barrels in February from 314.119 million barrels a month earlier. Despite falling exports, the Kingdom quashed any hope of a production freeze deal at a Doha, Qatar, meeting of producer-nations last week mostly over Iran’s newly unsanctioned production.

Steel Talks Don’t Result in Agreement

China and other major steel-producing countries failed to agree to measures to tackle a global steel crisis as the sides argued over the causes of overcapacity, prompting U.S. criticism of Beijing’s approach and an angry response from Chinese officials.

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A meeting of ministers and trade officials from over 30 countries, hosted by Belgium in Brussels and the Organization for Economic Cooperation and Development on Monday, sought to tackle excess capacity, but concluded only that it had to be dealt with in a swift and structural way.

Well, we thought the world’s major oil producers would at least manage to agree an oil production freeze — that shouldn’t have been so very hard and was always a paper tiger anyway — the world is pumping far more oil than we need so a freeze effectively meant nothing in the short term.

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The prospect of some kind of agreement, even one with no teeth like a freeze, has been supporting oil for the last few weeks in a rally that brought it to it’s year high last week. Following Sunday’s failure at the Organization of Petroleum Exporting Countries‘ sponsored meeting in Doha, Qatar yesterday prices have now gone into freefall again, falling over 7% in early trading this morning before marginally recovering.

Source: Financial Times

Source: Financial Times.

Once again, it was Saudi Arabia that took the hard line, after initially courting Russia and appearing to support the prospects of an output freeze it changed tack after the first draft of an agreement had been drawn up, apparently at the insistence of the 30-year-old Saudi Defense Minister Mohammed bin Salman, the desert kingdom’s deputy crown prince and second-in-line to the throne.

He is reported to have told Bloomberg that the kingdom would not sign up without Tehran, suggesting he had decided against giving any leeway to a fierce regional rival according to the Financial Times today.

Saudis Won’t Sign Up

Iran, who did not even bother to send a representative to the talks, had maintained all along that they would not be a party to an output freeze until their production had recovered to pre-sanction levels. The International Energy Agency estimates exports of Iranian crude oil rose to 1.6 million barrels per day in March — up around 100,000 bpd from February. Before sanctions were tightened in mid-2012, Iran was selling roughly 2.2m bpd of crude on world markets.

Other oil producers such as Iraq, Venezuela and Nigeria were bitterly disappointed, with budgets ravaged by low oil prices they had been hoping and expecting Saudi Arabia would rubber stamp a deal and the price could find a floor, if not climb higher. Now the question is how far will it fall. With only a strike among Kuwaiti oil workers that started yesterday likely to effect the downside oil, energy stocks and commodity-linked currencies have all dropped sharply this morning.

Lower Prices Will Stay

The news will be a mixed blessing in the U.S., shale oil and gas producers had hoped for a rebound in prices as many face potential bankruptcy this year as hedges expire and debt obligations become increasingly tough to meet, but consumers will welcome a halt to the rise in pump prices that a reversal would bring and energy-consuming industries will be viewing 2016 with a little more confidence.

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The chances of OPEC pulling together the wider oil-producing community in a repeat of this weekend’s meeting before the end of 2016 are slim. OPEC, itself, is set to meet in June but the twelve-member organization lacks the influence it once had and needs the participation of Russia, Mexico and lesser producers to have a chance of moving market sentiment. So, somewhat to our surprise it looks like we are in for more of the same: lower for longer is the order of the day for oil.

The oil price is doing rather well this week isn’t it?

Or you would think so, if you were an oil producer or resident in a net-oil-exporting country. For the rest of us, it’s a bit of pain pulling up at the gas pump only to find prices have crept up a few pence or cents since the last time we filled up.

The Organization of Petroleum Exporting Countries would have us experience a lot more of that pain if they had their way. The group of 13 oil-producing countries is meeting this Sunday in Doha Qatar to try to hammer out a deal to support prices.

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Various major oil exporters have voiced support for the idea of freezing output to support prices and, among a number of other factors, this rhetoric has had the desired effect. From a low of about $27 a barrel in January the oil price — both Brent Crude and West Texas Intermediate — have risen to 2016 highs. Brent to over $43 a barrel and WTI to over $40 a barrel. Russia and the Saudis have supposedly already agreed to freeze, at least, their output.

What’s OPEC Up To?

Not that the price rises have been solely down to OPEC talking up the market, the move higher has been mostly speculative and influenced by a number of factors such as rising automotive production in China where vehicle sales were up 8% in March.

The types of wells that built domestic driller Chesapeake Energy. Source: Adobe Stock/ W.Scott

West Texas Intermediate is up, as is Brent Crude. Source: Adobe Stock/ W.Scott

The threat of strike action by thousands of oil and gas workers in Kuwait next week and gradually falling U.S. shale oil production have added to a sense of slowing demand, plus a weaker U.S. dollar has had the impact of supporting any dollar-priced commodities. Read more

In a recent market review webinar for our subscribers, we talked at some length about the impact the oil price has had on metal prices and it made me think that, in many ways, the drop in the oil price has been a bit of a disappointment.

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Not that lower gas prices aren’t welcome, of course they are, but the expectation was that lower oil prices would be a major boost for the global economy. Not so long ago, the the International Monetary Fund calculated that every $20 per barrel fall in the oil price would increase global gross domestic product by 0.5%, rising to 1.2% if there were associated improvements in confidence.

Economists had widely predicted two effects from cheap oil. First, there would be a huge transfer of resources from oil producers to consumers, both within and between countries. And at the same time, the gains from lower oil prices would outweigh any losses from lower investment and activity in oil producing regions.

The theory went that, with their massive cash buffers, oil producers would continue social spending and infrastructure investment in spite of lower oil revenues. But maybe the extent of the fall, down almost 70% since 2014, coupled with continued anxiety about the future path of global growth has spoiled oil’s party.

Low Oil and Lower Growth

As a result of this turn of events, predictions of global growth — in large part predicated on lower oil prices — have been reduced from 3.5% to 2.5%, only marginally above the level of 2%. Anything below that and global growth is considered to be on the threshold of a recession.

Certainly, the deflationary environment in many net oil-importing countries (aided and abetted by the collapse in oil prices) has encouraged consumers to save their money rather than go out and spend the windfall.

In the US, personal savings rates rose to 5.4% in February, while spending growth was a modest half of that figure. It’s true to say consumers have responded to lower fuel costs by buying more SUVs and by driving further, a record 17.5 million vehicles in 2015 in the U.S. and 3.2 trillion miles, but it would seem that has limited impact in a country of approaching 250 million adult consumers.

Source: Financial Times

Source: Financial Times

Cheap oil is estimated to have lifted GDP by just 0.2% in the US and has probably had no more effect in Europe. Indeed, Europe has seen a deflationary environment as a result of lower oil prices actually encouraging consumers to hold off buying in the expectation prices would be lower a month later. The same effect is probably dragging on consumer spending in China, exacerbated by slowing growth and excess capacity encouraging manufacturers to slash prices as they fight for market share. Read more

Alcoa Inc. said its first-quarter earnings fell 92%, hurt by weak aluminum prices, and said it could cut as many as 2,000 jobs. Oil prices surged as Russia and Saudi Arabia agreed (again) to an output freeze.

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The aluminum smelter’s lukewarm results Monday underscore the company’s motive in spinning off its more profitable aerospace and automotive-focused business in the second half of this year.

The company is in the process of spinning off its faster-growing business units into a separate company, to be named Arconic. Alcoa reiterated that the spinoff remains on track for completion in the second half of this year and noted that profit grew at those businesses in the first quarter.

Alcoa traditionally kicks off earnings season by reporting its quarterly numbers first among major companies.

Oil Rises on Freeze Talks… Again

Brent crude oil reached a 2016 high above $44 a barrel today on a report Saudi Arabia and Russia have agreed to follow through with a production freeze regardless of whether Iran participates in the plan to tackle a supply glut. This is not the first time the two oil powers agreed to the freeze.

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Crude prices rose earlier in the session on hopes for the upcoming meeting, and by a weak U.S. dollar and further signs of strong demand in China.