Oil

 

Reuters_Brent_Crude_Futures_550_012816Brent crude futures were still down this week, but oil prices rose towards $34 per barrel, hitting a three-week high and bouncing well off a 12-year low set this month, supported by the possibility that major producers may cooperate to cut production. Source: Reuters

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Today in MetalCrawler, major oil exporters Saudi Arabia and the Russian Federation talked about possible cuts in production to combat low, low prices caused by a worldwide glut. Final figures for 2015 showed that US construction had a great year.

Russia and Saudi Arabia Talk Oil

Senior OPEC and Russian oil industry officials had vague talks, Reuters reported, about possible joint action to remedy one of the worst supply gluts in decades, while Saudi Arabia signaled its resolve to allow the market to balance itself.

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The latest volley of comments highlighted the intensifying pressure of $30 a barrel oil prices on cash-strapped countries such as Russia, but did not appear to tilt the scales meaningfully towards any concerted action to reverse the price crash from the Saudis and their controlling bloc of votes in OPEC. The Saudis are said to have asked for more “cooperation” on any future production cuts.

US Construction Starts Up in 2015

Dodge Data and Analytics reported that, for the full year of 2015, residential construction was up 14% to $265.4 billion, beating 2014’s increase by 4%, and non-building (mostly civil projects such as utility work) rose an impressive 23% to $176 billion, bouncing back from last year’s 8% decline.

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By contrast, non-residential construction fell 8% to $204.2 billion, giving back some of the 2014 increase of 24% but still 14% higher than 2013.

Following a global market slump and selloff to begin the year, last week markets were still volatile but, at the same time, more stable.

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Oil prices, and the Chinese and US stock markets managed to finish the week up. A well-deserved finish after the nose-dive we saw in previous two weeks. Now that investors’ eyes are on China, global markets seem more interconnected than ever. When China sniffs, oil prices and US equities get a cold. When one of them rises, the others follow.

A Market Rebound?

Thursday and Friday brought significant gains. Oil prices managed to rise back above $30. Fresh stimulus measures by major central banks helped bring some confidence of improving demand for the important commodity after US inventory data was released Thursday showed that stockpiles of crude and refined products increased in the second week.

Crude oil bouncing after sharp declines

Crude oil bounces after sharp declines. MetalMiner analysis of @StockCharts.com data.

Although a 14% increase in just two days seems like a lot, it’s not. The rise comes after a 42% decline over the past three months. We saw price rallies back in March and August only to then see prices fall back down. So far, the recent rally is being driven by investors hunting for bargains. Oil prices could continue to rally in the weeks ahead, as markets need some time to digest the latest declines, but there is no reason to expect a solid trend shift.

Similarly, stock markets finally made some effort to buck the falling trend, too.

Shanghai Stock Index bouncing off support levels

Shanghai Composite Index bouncing off support levels. Source: MetalMiner analysis of @StockCharts.com data.

In China, the Shanghai Composite Index is hovering near its August lows. That’s a big test for the market. A short-term rally from this level seems possible, but it’s yet to be seen if the index will remain above this level for long.

S&P 500 bouncing off support levels

The S&P 500 bounces off support levels. Source: MetalMiner analysis of @StockCharts.com data.

Not incidentally, here in the US the S&P 500 index is also testing its August lows. A short-term bounce is something reasonable to expect after the previous sharp declines and after US PMI came in above market expectations at 52.7 in January from 51.2 in the previous month.

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Whether this bounce is sustainable, of course, is yet to be seen but we remain very suspicious about it.

What This Means for Metal Buyers

Global markets remain linked and taking a breath after sharp declines over the first two weeks of January. So far, this bounce is nothing to get excited about. We haven’t seen a significant shift in market sentiment yet. For producers or for stock buyers, risk remains high.

Freeport McMoRan is selling part of a major Indonesian asset to generate cash as iron ore prices keep falling. The International Energy Agency said oil prices will fall even lower this year.

Selling Part of its Crown Jewel

Freeport McMoRan‘s Indonesian unit has submitted a divestment price to the Indonesian government for an additional stake in one of the world’s biggest copper mines, an energy ministry official said last week.

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Freeport Indonesia must sell the Indonesian government a 10.64% stake of the huge Grasberg copper and gold complex in remote Papua as part of the process to extend its right to operate beyond 2021.

Freeport valued its Indonesian asset at $16.2 billion, Bambang Gatot, the ministry’s director general of coal and minerals told Reuters and other reporters, adding that the divestment offered to the government was worth $1.7 billion.

IEA: Yes, Oil Could Go Lower

The oil price is set to fall further this year as supply vastly exceeds demand, with major oil exporter Iran’s return to the market offsetting any production cuts from other countries, the International Energy Agency told Agence France-Presse on Tuesday.

“Can it go any lower?” the IEA asked in its monthly oil market report.

“Unless something changes, the oil market could drown in over-supply. So the answer to our question is an emphatic yes. It could go lower.”

Oil dominated the headlines this morning as the lifting of sanctions on Iran brought unease to the markets and a major Chinese refiner made its first order of now exportable US oil.

Brent Crude Goes Below $28/Barrel

Brent crude, used as an international benchmark, fell as low as $27.67 a barrel, its lowest since 2003, before recovering to trade at $28.86.

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Investors fear the lifting of Western sanctions on Iran could worsen the existing oversupply problem.

Chinese Refiner Orders US Oil

Reuters reported that China’s state-run oil refiner Sinopec Corp. has purchased its first ever batch of US crude oil for export, a landmark transaction after the ending of a four-decade ban on domestic exports.

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The cargo, due to be loaded from a Gulf Coast port in March, may mark the start of a sustained flow of US oil to China, the world’s second-largest buyer, which is eager to diversify its energy sources. As the world’s second-biggest oil refiner, Sinopec buys more crude oil than almost any other company, and has worked to improve its supply security by seeking out diverse sources.

More ominous economic news greets you this morning in MetalCrawler. Stock markets continued to fall, globally, while US unemployment unexpectedly jumped.

Growth Slowing Worldwide

Economic growth is losing momentum across emerging and developed economies as is inflation. China’s slowing economy is now the biggest worry for 2016, according to the overwhelming majority of hundreds of economists polled by Reuters around the world.

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That comes despite several trillion dollars’ worth of stimulus and ultra-easy monetary policy from major central banks over the last half decade, and coincides with a growing sense of fear that is gripping world financial markets.

The benchmark S&P 500 US stock index closed below 1,900 for the first time since September on Wednesday, crude oil prices have fallen over 70% since mid-2014 to below $30 a barrel and US 10-year Treasury bond yields are back to two-month lows.

US Jobless Claims Rise

The number of applications for unemployment benefits unexpectedly increased last week, a sign labor market momentum may be starting to cool.

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Initial jobless claims rose by 7,000 to 284,000 in the week ended Jan. 9, the second-highest level since July, a report from the Labor Department showed on Thursday. The median forecast in a Bloomberg survey of economists called for a decline to 275,000.

Oil prices traded yesterday near $30 per barrel, the lowest level since 2003.

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The slump in oil prices is a result of China’s slowdown and the fact that drillers don’t stop pumping despite the oil glut. Also, a strong US dollar is not helping matters. Falling oil prices are a bearish driver for metal prices since it’s an asset closely followed by commodity investors. In addition, oil is the main benchmark for energy prices. Lower oil prices mean lower production costs, which improves the margins of metal producers, delaying the very much needed production cuts to help support metal prices.

Oil prices near $30 per barrel

Oil prices near $30 per barrel. Source: @StockCharts.com.

Together, US oil producers are losing around $8 billion per month at current prices. Energy companies took on huge debts to finance their work and now all they can do is keep pumping oil to generate cash to pay interest on their debts while hoping for demand to come back and lift prices.

Breaking Point?

At these levels, it is estimated that a third of US oil and gas producers could go bankrupt within the next year or two. Many are going to have huge problems and the longer it takes producers to throw in the towel, the longer oversupply stays and the more companies will need to eventually shut down.

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Today in MetalCrawler, Vale SA is drawing $3 billion from its credit line and one member says OPEC won’t meet about low oil prices after all.

Maybe OPEC Won’t Meet

The United Arab Emirates moved to quash talk of a potential emergency meeting of the Organization of the Petroleum Exporting Countries (OPEC) after Nigeria’s oil minister said on Tuesday a “couple” of members had requested a gathering.

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Benchmark Brent crude futures slipped towards $30 a barrel to a near 12-year low before rising slightly. They have shed almost three-quarters of their value since mid-2014 due to oversupply.

Vale Taps Credit Line

Vale SA, the world’s largest iron ore producer, said on Tuesday it drew down $3 billion from a revolving credit line to pay debt due this quarter, a move that shines a light on its fragile finances amid low commodity prices and faltering asset sales.

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Brazil-based Vale, which analysts expect to have a cash shortfall in 2016, said it took the action due to a delay in closing a deal announced at the end of 2014 to sell a stake in its Mozambique coal project to Japanese trader Mitsui & Co Ltd.

BP is cutting oil exploration and production jobs and Alcoa, Inc., has posted a loss for the last quarter of 2015, mostly due to its smelter closures.

BP Cuts Jobs Due to Low Oil Prices

BP is cutting some 4,000 jobs in exploration and production over the next two years amid sharp drops in the price of crude.

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The cuts in BP’s upstream business globally will include the loss of some 600 jobs in the North Sea.

The cost-cutting announced Tuesday comes as the price of oil dropped to a 12 year-low near $31 a barrel. Part of the decline is due to concern over a drop in demand in China, which is depressing commodity prices worldwide.

Alcoa Takes a Loss

Metals company Alcoa, Inc., on Monday reported a quarterly net loss after charges related to shuttering parts of its traditional smelting business.

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The New York-based company has been curtailing smelting capacity as the industry endures tumbling prices amid rising trade tensions with China. Alcoa said last week it would close a plant in Evansville, Indiana, which would bring US aluminum output to its lowest level in more than 65 years.

A major error has caused the Commerce Department to revise data going back 10 years and Saudi Arabia has cut oil prices to Europe in the prelude to what might be a price war with Iran.

Oops!

The US Department of Commerce revised its construction spending data going back 10 years because of an error in processing population data yesterday

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The new numbers are expected to increase US GDP for 2014 and 2015. The original reports apparently understated construction spending’s net increase — but when the revisions are considered, the reports appear to overstate the month-over-month rate of change, causing most of 2015’s month-by-month numbers to be overstated.

Commerce revised data back to January 2005 to correct an error in the tabulation of private home-improvement spending.

Best OPEC Frenemies

Saudi Arabia on Tuesday sharply cut crude oil prices in Europe, a move that could undercut Iran as sectarian tensions escalate between the rival Middle Eastern nations.

Our January Metal Price Outlook

The Saudi move appears to pave the way for a competition over European oil markets later this year when Iran is expected to increase its exports after the expected end of western sanctions over its nuclear program.