Oil

Traders love volatility.

They say that today’s electronic trading platforms play to that desire of investors to make a buck, regardless of the fundamentals, allowing investors to play each twitch up and each slip down at the touch of a button.

Oil Prices: Perception vs. Reality

Indeed, if you can shape the perception of those fundamentals so much the better, and that seems to be what has been happening in the oil market this year. In reality, the world is as awash with oil today just as it was six months ago. As it dawns on the market that nothing much has changed, prices fall and producers make statements like a cutback deal is near, or an output freeze is being discussed — bingo! up goes the market by several dollars a barrel and you can bet producers and investors alike are rubbing their hands in glee.

Then, news comes out reminding us of the reality of the situation: the Environmental Protection Agency reports that gasoline stocks are up 600,000 barrels and distillates like diesel up 4.6 million barrels. The news that refiners are drawing on crude reserves only to process it into unwanted downstream products depresses the markets and prices fall again. Read more

Oil prices fell as Saudi Arabia poured cold water on a potential deal with other Organization of Petroleum Exporting Countries members and other countries such as Russia. China is threatening to place tariffs on sugar imports.

Crude Oil Selloff

Crude prices are selling off today, aided by Saudi comments that a decision will not be forthcoming from next week’s Organization of Petroleum Exporting Countries meeting in Algiers.

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Many had thought that OPEC was close to reaching a deal to curtail production for up to a year with its members and non-member producers such as Russia, but the Saudi announcement makes it highly unlikely that any deal will happen soon now.

Clipperdata_OPEC_Production_500_092416

Source: Clipperdata.

Saudi Arabia has made production by regional rival Iran an issue in any deal to constrain production. The Saudis say Iran must abide by any deal just like other member-states and Iran and its allies say Iran should be allowed to bring its capacity up to full production, as it just re-entered markets after decades of sanctions, before it starts to cut.

China Explores Sugar Tariffs

China has launched a probe into soaring sugar imports following complaints by its domestic industry, the government said on Thursday, the latest sign that trade tensions between major commodities producing nations is intensifying.

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The Ministry of Commerce said the probe will look at imports since 2011 and into possible protectionist measures provided by foreign countries for their producers. It will last six months, with an option to extend the deadline, it said.

OPEC members are now talking about a deal that lasts one year, whether that means curtailing production for that period is still unknown. Australia is attempting to collect $766 million in taxes.

OPEC Deal Could Last a Year

A possible deal to support oil prices by the world’s leading producer-countries may last for one year, the secretary-general of the Organization of Petroleum Exporting Countries said on Tuesday, longer than other officials have indicated.

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OPEC and non-member producers including Russia are discussing a deal to stabilize the market by possibly freezing output, although key details such as the timing and baseline for any deal have yet to emerge.

BHP Vows to Fight Australian Tax Bill

BHP Billiton said it disagreed with Australian tax collectors’ assessment that the miner needs to pay $766 million in back taxes and charges for its Singapore commodities marketing hub, and that it could resort to court action to fight the claim.

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BHP is under investigation by the Australian Tax Office (ATO) for allegedly shifting billions of dollars in iron ore profits through marketing hubs in Singapore, where it operates under an effective tax rate of zero as part of a concessional tax deal.

Chinese authorities have frozen money invested by commodity trader Trafigura in a copper smelter there and Venezuela claims that an Organization of Petroleum Exporting Countries  (OPEC) agreement to curtail production will come together soon.

Trafigura Sees its Chinese Copper Smelter Stake Frozen

Chinese authorities have frozen part of commodity trader Trafigura’s investment in a Chinese copper smelter as part of a years-long probe into the Swiss firm’s oil trading, according to documents from the police and banks reviewed by Reuters.

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In October, police in the northern Chinese city of Cangzhou, froze $32.9 million Trafigura Pte Ltd had injected into the metals project, a joint venture with Chinese metals producer Jinchuan Group Co Ltd  in the southwestern city of Fangchenggang, documents dated Oct. 28, 2015 show.

OPEC Output Deal Imminent?

Venezuelan President Nicolas Maduro said on Sunday that OPEC and non-OPEC countries were close to reaching a deal to stabilize oil markets and that he aimed for a deal to be announced this month.

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OPEC members may call an extraordinary meeting to discuss oil prices if they reach consensus at an informal gathering in Algiers this month, OPEC Secretary-General Mohammed Barkindo said during a visit to Algeria, the country’s state news agency, APS, reported on Sunday. Venezuela’s economy has been facing complete collapse for more than a year now as oil prices have seen prices fall by more than half during that time.

It was on one of those weeks when a non-metal commodity dominated metals coverage. We mean the one that factors into just about every metal price through either production or transportation costs. The black gold that sluices across prairie and canyon in tanker cars, pipelines and trucks. The input whose value and production fluctuates at the whim of both Sheikh and wildcatter.

So, honey, then, right?

Saudi Arabia and Russia promised to work together on a “task force” to try to right-size the oil overproduction we’ve become accustomed to over the past two years. MetalMiner Co-Founder Stuart Burns warns that the days of $100 per barrel are, indeed, long gone but something could still come of this latest effort to rein in production. Naturally, the markets ebbed and flowed on speculation of what, exactly, that might be like a small ocean of the stuff filling to the brim a tanker bound for China.

Negative on that Manufacturing Growth

The Institute of Supply Management‘s manufacturing index turned negative in July for the first time since February. And the services gauge fell last month to the lowest level since early 2010. Perhaps the economy’s not doing as great as we thought it was?

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The manufacturing index dropped to 49.4% from 52.6% in August and the ISM services gauge retreated to 51.4% from 55.5%. The combined reading of two indexes was also the weakest in six years.

Transshipment Trouble

Last week, we wrote about China Zhongwang and its billionaire owner, Chinese Communist Party member Liu Zhongtian, buying U.S-based extruder Aleris. Well, more trouble this week for Zhongwang as the Commerce Department launched a new investigation into transshipments related to nearly 1 million metric tons of aluminum stored in rural Mexico.

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Zhongtian says he and his company have nothing to do with it. The Wall Street Journal? Well, it says shipping documents and sales receipts related to the massive stockpile all lead back to Zhongwang.

Less Titanium Production in Utah

Instead of forming titanium sponge by passing titanium tetrachloride in a gaseous phase over molten magnesium or sodium at its Rowley, Utah, facility, Allegheny Technologies, Inc., is cutting out the middle man. The specialty metals producer will now buy its titanium sponge on the open market. By idling the Rowley titanium facility indefinitely, ATI is also cutting 140 jobs. Read more

There is a delicate game of cat and mouse, feint and counter feint, smoke and mirrors going on among oil producers universally suffering from low oil prices.

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On the one hand we have Saudi Arabia, the architect of the current low-price environment which started pumping oil at record levels specifically to grab market share in the face of growing U.S. shale production and the return of archenemy Iran to the market after years of sanctions. The low prices that resulted have caused pain for all producers and driven some heavily oil-dependent economies to the brink of collapse.

Talk of a production freeze in the early part of this year got everyone excited and the crude price rose, only for Saudi Arabia’s powerful deputy crown prince, Mohammed bin Salman, to throw cold water on the idea if Iran was not willing to be a part of any coordinated freeze.

The Arabian Stallion and the Russian Bear

Since then, all parties have tried to tough it out. Saudi Arabia, with the largest sovereign wealth fund, has managed to maintain appearances but is still trimming budget deficits, burning through reserves and talking of selling its crown jewel, Saudi Aramco.

Russia has been partly shielded by a collapse in the value of the ruble that has partially compensated domestic budgets from low crude prices but is still desperate to achieve higher returns. Some 40% of the country’s revenue comes from oil and natural gas and the economy has languished in recession territory for the last two years.

Source: Financial Times

Source: Financial Times

It has taken five months but all the parties are now maneuvering to have another go at a production freeze in the hope that it will push up prices. Talk of a “task force” pact between Russia and Saudi Arabia was enough to drive the oil prices up in a matter of minutes last week. Read more

News from the G20 summit includes Russia and Saudi Arabia agreeing to create an oil task force and all of the G20 condemned steel overproduction and promised tough measures against it.

Russia and Saudi Arabia Create Oil Task Force

Saudi Arabia and Russia said they will work together in global oil markets through a newly-announced joint task force.

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The two top oil-producing countries plan to hold a Russia-Saudi Arabia task force on oil and gas next month, the Russian and Saudi energy ministers Alexander Novak and Minister Khalid al-Falih announced Monday in a joint statement at the G-20 summit in China.

G20 Pledges to Curb Steel Overproduction

G20 leaders have pledged to work together to address excess steel capacity that has punished the global industry with low metal prices for years while raising tensions between China and other major producers.

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A statement from the White House said that leaders at the G20 summit in Hangzhou, eastern China, on Monday accepted that overcapacity in steel and other industries is a global issue that requires a collective response.

European Commission President Jean-Claude Juncker warned Chinese officials Sunday that Brussels was devising a tough scheme of anti-dumping tariffs that would penalize Chinese producers for failing to rein in overcapacity.

Prescient hedge or foolish waste of money?

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Recent history has been on Mexico’s side on that one. As a significant oil producer, Mexico’s oil price hedging program has been the worst kept secret in the market recently, although it has been going on for a dozen years according to Reuters.

Trimming the Hedges

When it started, disclosure requirements were more lax and the volumes were lower making it easier to keep it under wraps, but the Dodd-Frank Act and success of the program has resulted in larger volumes that just can’t be kept under wraps. The 2015 hedge netted Mexico a record windfall of more than $6 billion last year as oil prices continued a three-year slide.

This year, Mexico has covered 250 million barrels of crude, more than last year’s 212 million but has been forced to accept a lower price at $42/barrel for 2017. The hedge is covered by 46 trades, the article states, with $38 per barrel covered by put options with seven derivatives traders. The remaining $4 per barrel is to be covered from money set aside in a government stabilization fund.

Why Hedge?

With some 20% of government revenue coming from oil, the purpose of the hedges is to help protect public finances for an economy which has already twice downgraded growth estimates for this year and is acutely sensitive to potential rate rises in the U.S. and the forthcoming U.S. presidential elections.

With previous years hedged at $76.40 in 2015 and $49.00 for this year, 2017 is already certain to show a lower revenue than this, yet time will tell if Mexico’s insurance policy is going to pay off. It has cost them over a $1 billion in fees but, arguably, the confidence it gives international bond investors in Mexico’s finances as a result of having the hedge in place has helped lower financing costs by a significant amount.

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It is not unlike major gold miners forward selling or hedging output, there is the potential to lose out if prices rise, sure, but of more importance to investors is the confidence of knowing revenues will meet budget commitments. That keeps ratings agencies grades up and borrowing costs down.

The Saudis counted them out. So did the Russians, even many domestic analysts said North American shale and tight oil and gas production would decline in the face of low prices an that investment would dry up and output would fall.

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Well, guess what? They have all been proven wrong. Sure, rig counts have dropped and there have been painful layoffs of workers, but the industry is surviving and against all the “experts” advice production of natural gas from the Marcellus and Utica shales of the U.S. Northeast is averaging 22.63 billion cubic feet per day in August, according to a Financial Times article.

Natural Gas Output Up

That is up 2% from July and the most since February’s all-time high of 22.78 billion cu-ft/d. Despite earlier U.S. government forecasts that combined gas output from the two shale areas lying beneath Ohio, Pennsylvania and West Virginia would decline, producers have managed to maintain volumes by tapping inventories of drilled but uncompleted wells and burrowing deeper, longer wells that yield more gas. Read more

Saudi Arabia is pushing for an oil production cut among its fellow OPEC nations as well as other big producers such as Russia. In China, Beijing is pushing local governments to cut steel overcapacity.

Saudis: Let’s Make a Production Cut Deal

The Organization of Petroleum Exporting Countries will probably revive talks on freezing oil output levels when it meets non-OPEC nations next month as top exporter Saudi Arabia appears to want higher prices, according to OPEC sources, although Iran, Iraq and Russia present obstacles to a deal.

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Riyadh sharply raised expectations for a global production deal between on Thursday when Energy Minister Khalid al-Falih said Saudi Arabia will work with OPEC and non-OPEC members to help stabilise oil markets.

China Vows to Accelerate Steel Capacity Cuts

China should quicken capacity cuts in its bloated steel and coal sectors, the country’s top economic planning agency said on Tuesday, putting pressure on local officials to meet annual targets despite some worries the steps could hurt economic growth.

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China has promised to slash steel capacity by 45 million metric tons and coal capacity by 250 mmt this year, as it tries to rejuvenate two industries suffering from slowing demand and a massive supply glut.