Oil

The International Energy Agency recently upgraded its estimate for rising U.S. shale production this year, projecting output will increase by 500,000 barrels per day by the end of 2017, which will translate to an increase of 170,000 bpd averaged over the year.

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Benchmark crude prices subsequently fell in London. In the first week of January, U.S. crude production rose to 8.95 million bpd, the highest level since April. Oil-rig use expanded to 529 in the prior week, a 67% increase from the 2016 low of 316.

Japanese Steel Officially Worried About Trump

Japan’s steel industry is concerned over the risks of a U.S. exit from the Trans-Pacific Partnership deal and reform of the North American Free Trade Agreement by the incoming Trump administration, a Japanese industry official said on Friday.

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“We are worried about the risks of the Trump administration taking protectionism actions or policies,” Kosei Shindo, chairman of the Japan Iron and Steel Federation, told a news conference.

China has issued its first batch of crude oil import quotas for non-state companies at 68.81 million metric tons, or 1.38 million barrels per day (bpd), four refining sources with knowledge of the matter told Reuters.

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29 Companies received quotas, including independent refiners and trading companies, the sources said, citing an official document.

Architecture Billings End Year Strong

The Architecture Billings Index (ABI) concluded the year positive, with the December reading capping off three straight months of growth in design billings. As an economic indicator of construction activity, the ABI reflects an approximate nine- to 12-month lead time between architecture billings and construction spending.

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The American Institute of Architects (AIA) reported the December ABI score was 55.9, up sharply from 50.6 in the previous month. This score reflects the largest increase in design services in 2016 (any score above 50 indicates an increase in billings).

After a recovery late last year, the oil market seems to have settled with a price around $55 a barrel… at least for now. That level is not likely to dissuade consumption but most Organization of Petroleum Exporting Countries members seem to feel it justifies their oil output cut agreed to late last year.

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A few producers, such as Venezuela, that are running massive budget deficits have targeted $70 or more, but most analysts would agree that if oil can hang onto recent price gains for the next six months it will be doing well. Read more

Brazilian flat steel producers have notified distributors they are raising prices of hot- and cold-rolled steel between 8 and 10% this month, a steel market source and an analyst told Reuters on Wednesday.

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Cia Siderúrgica Nacional SA, Usinas Siderúrgicas de Minas Gerais SA and the Brazilian unit of ArcelorMittal SA will keep zinc-coated steel prices unchanged, the source said. The price hikes are effective Jan. 1, Jan. 5 and Jan. 10, respectively, the source added.

Vitol Signs First Major Iranian Oil Deal

The world’s largest oil trader, Vitol, has clinched a deal with the National Iranian Oil Co. (NIOC) to loan it an equivalent of $1 billion in euros guaranteed by future exports of refined products, four sources familiar with the matter told Reuters.

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The pre-finance deal is the first such major contract signed between Iran and a trading house since sanctions were lifted in early 2016.

Following Russia’s military success in their support the Syrian regime, you could be excused for thinking Western sanctions, applied in 2014 in response to Russia’s annexation of Crimea, have had little or no effect on the country.

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Certainly, they seem to have had little impact in altering or encouraging a change in behavior but there are examples in which the sanctions have had quite a profound effect on the economy and particularly on certain industries.

A recent article in the Financial Times explores the challenges Gazprom Neft is facing in trying to exploit Russia’s vast shale gas reserves without the benefit of Western partners. Following the imposition of sanctions Western oil and gas companies withdrew support from any projects to exploit shale reserves requiring fracking technology, and as a result firms like Gazprom Neft, the oil division of state-controlled Gazprom, have been forced to go it alone in developing the technologies and practices necessary to exploit shale rock containing oil and gas resources.

Source: Financial Times

Progress has been slow, in spite of the huge potential. As Russia’s hydrocarbon resources dwindle from their peak in Soviet days, the country is sitting on vast shale resources rivaling the U.S. Read more

The Organization of Petroleum Exporting Countries‘ efforts to hold market share in Asia by keeping its customers, which take about two-thirds of its exports, supplied amid wider output cuts could prolong the global fuel glut and frustrate its attempt to bolster prices.

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Saudi Arabia, the defacto leader of OPEC will target its supply cuts at refiners in the U.S.and Europe rather than Asia. Ally Kuwait is following a similar strategy, and OPEC’s second-largest producer Iraq is even raising exports to Asia.

Vedanta Ordered to pay $100 Million Over Copper Mine

Konkola Copper Mines, owned by Vedanta Resources, has been ordered by a London court to pay the Zambian government more than $100 million for a claim related to the copper price, a state-owned company involved in the dispute said. The claim relates to outstanding payments under a 2013 copper price participation settlement agreement between KCM and ZambiaConsolidated Copper Mines Investments Holdings (ZCCM-IH).

So, an unprecedented coming together of the Organization of Petroleum Exporting Countries and non-OPEC oil producers has finally created the circumstances in which oil’s price decline has been reversed and sustainable higher prices assured.

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According to Oilprice.com, NOPEC producers have agreed to cut 558,000 barrels a day and OPEC producers will cut 1.2 million bpd. Saudi Arabia will take the biggest hit, cutting 486,000 bpd. Russia will contribute 300,000 bpd to the total NOPEC production cut.

All this amounts to is 2% of global supply, the article reports. Azerbaijan, Oman and Mexico will also contribute, reducing production by 35,000, 40,000 and 100,000 bpd respectively, although it should be said Mexico is suffering a slow and steady decline due to reservoir depletion and would struggle to maintain current output next year anyway.

We should all, therefore, be expecting higher oil prices in 2017, right? Maybe not. We have, after all, been here before.

Agreements signed in the early 2000’s collapsed due to the inability of OPEC members to keep to their commitments. There is a growing anxiety that if this agreement does not result in higher oil prices and the global stockpile does not reduce, then Saudi Arabia and Russia, in particular, could revert to full production.

The oil price.com article quotes former Saudi oil minister Ali al-Naimi who commented at a recent Washington symposium that OPEC members “tend to cheat” and therefore any tangible results from this latest agreement “remain to be seen.” With severe pressure on fiscal budgets, both Saudi Arabia and Russia would be tempted to cheat if they did not see tangible benefit, that is a rising price, resulting from their respective cutbacks.

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Source: Oilprice.com.

Over the last month, the price has risen strongly as the prospects of the deal have improved but, after the initial euphoria, prices eased back a little this week as anxiety grew over whether the participants would stick to the deal.

Inventory continues to build at Cushing and the Energy Information Administration’s short-term energy Outlook released last month is not supportive for continued price rises during the next year, saying. “EIA forecasts Brent crude oil prices to average $43 per barrel (b) in 2016 and $52/b in 2017. West Texas Intermediate (WTI) crude oil prices are forecast to average about $1/b less than Brent prices in 2017. The values of futures and options contracts indicate significant uncertainty in the price outlook.”

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So, the short answer seems to be a continued rise in the oil price off the back of this agreement is dependent on the price of oil continuing to rise all by itself. The extent to which consumers feel the need to hedge their exposure into 2017 will depend on the level of that exposure and the nature of their business, but just because OPEC and NOPEC producers have managed to reach an agreement with the aim of supporting prices, it does not automatically follow that they will continue to rise much above current levels during next year.

The copper market will go into deficit by 2020, just when Rio Tinto‘s, extension to the Oyu Tolgoi mine in Mongolia comes online, the company said on Tuesday.

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The Anglo-Australian mining major gave approval in June for a $5.3 billion expansion of Oyu Tolgoi, one of the world’s largest copper mines and a project central to the major’s efforts to become less dependent on iron ore.

Traders Still Skeptical of OPEC Output Cut

The Organization of Petroleum Exporting Countries‘ output set another record high in November, rising to 34.19 million barrels per day from 33.82 million bpd in October, according to a Reuters survey.

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Oil prices pared losses slightly after inventory data released late Tuesday from the American Petroleum Institute showed U.S. crude stocks dropped more than expected last week despite a hefty build of 4 million barrels in Cushing, Oklahoma.

The Obama administration slammed the brakes on the Dakota Access pipeline on Sunday, refusing to issue a required easement from the Army Corps of Engineers while saying it will conduct a more stringent environmental review to consider alternate routes and consult further with the Standing Rock Sioux tribe, which has bitterly opposed the project.

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However, the 1,172-mile pipeline may not be dead in its current form. Nearly all of the pipeline has been completed except a few miles that are planned to flow underneath the Missouri River and the manmade Lake Oahe in North Dakota. The Army has said they will ask Energy Transfer Partners, the developer of the pipeline, to consider alternative routes and said that would be best accomplished through an environmental impact statement with full public input and analysis.

The Army Corps had actually approved the easement back in June but stepped in again after a federal judge dismissed a lawsuit by the Standing Rock Sioux whose reservation is near Lake Oahe. President-elect Donald Trump came out in support of completing the pipeline as planned last week and his administration could, potentially, undo these recent actions by the Obama administration.

Yesterday, the Organization of Petroleum Exporting Countries finalized a deal to cut production by 1.2 million barrels a day starting in January, its first reduction since 2008.

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The production deal will last six months with a committee composed of three OPEC country members monitoring and reviewing the decision at their next meeting in May to determine if the cuts will extend for another six months.

Trading volume (at the bottom) surged as crude moved up on Wednesday

Trading volume (at the bottom) surged as crude moved up on Wednesday. Source: @StockCharts.com.

On Wednesday, U.S. crude jumped 9.3% to settle at $49.44 a barrel. The number of contracts traded on Wednesday rose sharply as prices made a one-month high. Rising volumes confirm that new money is supporting the price move, increasing the likelihood that the trend will continue. Read more