Oil

The sale process of Tata Steel U.K. continues and tensions between Iran and Saudi Arabia continue to plague any OPEC production deal.

Cameron Insists Tata Steel UK is Getting Offers

Tata Steel has received a number of serious offers for its businesses in Britain, Prime Minister David Cameron said on Wednesday as steelworkers marched past Downing Street to put pressure on the government to get a deal.

Two-Month Trial: Metal Buying Outlook

The U.K. steel industry has been hit by cheap Chinese imports, high energy costs and a global supply glut and in March Tata said it wanted to sell its remaining plants in the country, putting 15,000 jobs at risk.

Iran-Saudi Conflict Still Plagues Any OPEC Deal

The Organization of Petroleum Exporting Countries‘ thorniest dilemma of the past year — at least the one purely about oil — is about to disappear. Less than six months after the lifting of Western sanctions, Iran is close to regaining normal oil export volumes, adding extra barrels to the market in an unexpectedly smooth way that was helped by supply disruptions from Canada to Nigeria.

Free Download: The May 2016 MMI Report

Yet, Saudi Arabia is still unhappy with Iran and its production threatening its Mideast oil leadership and dominance. OPEC meets next week.

As we recently reported, the West’s energy watchdog, the International Energy Agency, faces a possible legal split from its parent body, the Organization for Economic Cooperation and Development, following decades of friction and fresh disagreements over cooperation with China.

Two-Month Trial: Metal Buying Outlook

A document seen by Reuters shows that the complexity of cooperation between China and Western organizations such as the OECD, which has a stated commitment to democracy and market economies, has created friction between the two organizations.

The IEA, whose role includes coordinated stocks releases to address global oil shortfalls, could leave the Paris-based OECD, which sent a letter to the IEA in April, proposing the split. The argument has everything to do with China and the difference between market economies and China’s planned one.

“The IEA started negotiating with China in 2016 to establish an IEA center in Beijing, without prior consultation with the OECD which, as the IEA was aware, was itself negotiating with China to create a policy center and a country office,” the document said.

Created in 1961 to stimulate economic progress and world trade, the OECD originated from the Organization for European Economic Co-operation, set up in 1948 to help administer the Marshall Plan to reconstruct Europe with U.S. financial aid.

The IEA was established in 1974 at the proposal of then U.S. Secretary of State Henry Kissinger to help industrialized nations deal with the oil crisis after the Arab embargo squeezed supplies and sent prices surging.

Since then, energy markets have changed radically. OPEC no longer has the same power and non-IEA China has overtaken the U.S. as the biggest energy user. The fight between the two organizations highlights the difficulty regulators face in attempting to work with China and account for its energy consumption using rules and regulations that were largely designed for market-based economies.

IEA Executive Director Fatih Birol made strengthening ties with emerging powers the agency’s top priority, choosing China for his first trip into the job and breaking with the practice of previous chiefs, who began their tenure by visiting an IEA country.

The OECD groups 34 of the world’s leading economies and has about 2,500 staff. The IEA has 240 employees and 29 member states, all of which are also OECD members.

Under its autonomous status, the IEA’s governing board consists of energy ministers of member countries, which contribute four fifths of its budget of around $30.74 million (27 million euros) with the rest generated from sales of publications.

Free Download: The May 2016 MMI Report

Even if OECD and IEA are able to work out their differences and continue to work together, the problem of trying to recognize China’s massive buying power while also regulating it the way that a market economy would be is one that won’t go away any time soon.

U.S. Crude oil reserves unexpectedly jumped this week and major miners and trying to move older assets but can’t close deals because of cleanup costs.

Crude Oil Reserves Rise

U.S. crude oil stockpiles rose unexpectedly last week even as gasoline and distillate inventories fell more than expected, data from the Energy Information Administration showed on Wednesday.

Two-Month Trial: Metal Buying Outlook

Crude inventories rose 1.3 million barrels in the week to May 13, compared with analysts’ expectations for a decrease of 2.8 million barrels and a 1.1 million-barrel drawdown reported on Tuesday by the American Petroleum Institute.

Miners Can’t Afford to Older Pits

Major miners are trying to avoid hundreds of millions of dollars in closure costs by selling off pits, as cash is tight due to a prolonged commodities price slump, but the crippling cost of environmental rehabilitation is making it tough to seal deals.

Free Download: The May 2016 MMI Report

Where mine sales have gone ahead, production is being prolonged, adding to oversupply in depressed markets, like coal.

Oil prices gained further traction this week as prices climbed above $48 a barrel, the highest level in eight months. Goldman Sachs said in a report on Monday that the oil market has gone from nearing storage saturation to being in deficit much earlier than the bank expected, adding that the global oil market likely shifted into a deficit in May.

Oil prices acting strong although they could meet resistance near $50

Oil prices acting strong although they could meet resistance near $50. Source: @StockCharts.com.

Goldman Sachs gave a bearish forecast just a few months ago, some other banks even predicted oil prices as low as $10/barrel this year. So, why were these predictions so off?

Free Download: The May 2016 MMI Report

The answer is simple: predicting what the price of an asset will be in the future is not possible. Well, it’s as possible as winning in the roulette game, you need a bit of luck, but you can’t do it with consistency. A smarter way to look at the markets is to forget about predictions, have a strategy with rules and react to present information.

Right or wrong, Wall Street needs its prophets. They perpetuate the myth that there is somehow a way to predict the market every time. I guess individuals need these predictions to take less responsibility for their own investment decisions. At the end of the day, you wouldn’t feel too stupid if the expert was wrong too.

Market Shifting Into Deficit

Although there is still plenty of oil in the market, most analysts agree that the world’s crude oversupply is slipping into a deficit as the oversupply has narrowed in recent weeks thanks to supply outages in Nigeria, Canada and elsewhere combined with stronger than expected demand.

Two-Month Trial: Metal Buying Outlook

Oil prices are acting strong and we previously noticed that the Doha meeting marked an inflection point. The failed Doha meeting is an indication of how strong market sentiments currently are. On another day, this failure to reach a production cut deal between major energy producers would have translated into a big sell-off.

More Bankruptcies

Another factor supporting oil prices is the number of bankruptcies we are witnessing in recent months. Last Sunday, Breitburn Energy Partners LP filed for bankruptcy and just a day after SandRidge Energy Inc. became the latest oil and gas company to file for bankruptcy after joining a growing list of producers that weren’t able to survive long enough to enjoy the recent rebound in oil. Sandridge was founded by former Chesapeake Energy co-founder Tom Ward who was eventually forced out of both companies.

Despite the rally this year, most industry analysts agree that oil prices remain too low for many producers to make money, so expect widespread pain in the U.S. oil industry and elsewhere to continue. In theory, this is also a good indicator that oil prices might have hit a floor this year.

The Outlook

Despite the more bullish forecast from Goldman Sachs, the bank sees a surplus again in the first half of 2017 due to returning output from Nigeria and rising production in Iran and Iraq, among other reasons. That’s a prediction, sure, but we’ll stick with what we witness right now: Oil prices are acting strong, supported by a more positive sentiment on commodity markets. On top of that we have a weakening dollar, which is bullish for oil and other commodities.

The situation could reverse, but right now there is no reason not to take this rally seriously. Oil prices might need to consolidate/pull-back after rising for three consecutive months but they could continue to climb during the rest of the year which would favor higher metal prices, too. Oil prices climbing above $50/barrel would be a signal that this uptrend is due to continue.

Architecture billings are up, a good sign for the consumption of construction metals here in the U.S., while the American Petroleum Institute has some problems with the new EPA proposed ethanol standards.

Architecture Billings Rate of Gain Declines

The American Institute of Architects’ Architecture Billings Index fell in April to 50.6 from March’s 51.9 but still remains in positive territory. Any score above 50 reflects an increase in architecture billings which, themselves, reflect an approximate one-year lag between design work and actual construction projects breaking ground.

Two-Month Trial: Metal Buying Outlook

Southern states showed the most strength, and the multifamily and commercial/industrial sectors saw the most billings.

API Calls on EPA to Limit Ethanol

The Environmental Protection Agency must do more to ensure Americans have access to fuels they want and can safely use in their vehicles until Congress changes the Renewable Fuel Standard (RFS) program, American Petroleum Institute Downstream Group Director Frank Macchiarola said following EPA’s proposal for the 2017 RFS mandates.

“Consumers’ interest should come ahead of ethanol interests,” said Macchiarola. “EPA is pushing consumers to use high ethanol blends they don’t want and that are not compatible with most cars on the road today. The administration is potentially putting the safety of American consumers, their vehicles and our economy at risk.”

Free Download: The May 2016 MMI Report

Higher ethanol blends, such as E15, can damage engines and fuel systems, the API said, potentially forcing drivers to pay for repairs, according to extensive testing by the auto and oil industries. The Congressional Budget Office found that consumer gas prices could rise by 26 cents per gallon unless EPA lowers RFS mandates. API is urging EPA to set the final ethanol mandate at no more than 9.7% of gasoline demand to help avoid the 10% ethanol blend wall and meet strong consumer demand for ethanol-free gasoline.

It was a good week for commodities in general and metals in particular as prices kept increasing and the broad metals rally looked like it has legs. But what if it’s all speculative investment?

Free Download: The May 2016 MMI Report

Oil nearly hit $47 a barrel, a 6-month high, bringing drillers back online and pushing up commodities in general. The Silver Institute predicted a deficit for the industrial/precious metal this year, the first in 13 years.

So prices are up, the U.S. dollar is down and it’s a good time to be invested in metals. But what if it’s all not real? What if it’s all based on rank speculation! Speculators snapping up all of the metals contracts out there looking to make a quick buck! Driving up prices only to dump their investments later!

That actually wouldn’t be such a bad thing, our own Raul De Frutos reported this week.

“Speculation is the act of trading an asset, with the risk of losing part of all of the capital invested, in the expectation of a substantial gain,” he wrote. “For traders to trigger a price rally there must be a fundamental reason justifying that the risk of loss is more than offset by the possibility of a significant gain; otherwise, there would be very little motivation to speculate. So, in reality, every price movement, especially in commodity markets, is speculative.”

That’s right, people snapping up iron ore futures and other contracts are actually helping the rally and it might not be short-term investing. That oil rally we talked about earlier? Yep, driven mostly by people buying and storing oil. Spot crude prices, time spreads and refining margins all showed signs of weakening since the start of this month before the big gains this week.

Two-Month Trial: Metal Buying Outlook

So, in short, get out there and speculate. People wouldn’t be doing if they didn’t think the potential gains outweighed the risks of losses.

A major fight between the OECD and the IEA might finally lead the organizations to separate. Big, multinational commodity houses are all seemingly refocusing on their core businesses.

OECD and IEA Might Separate

The West’s energy watchdog, the International Energy Agency, faces a possible legal split from its parent body following decades of friction and fresh disagreements over cooperation with China, a document seen by Reuters shows.

Two-Month Trial: Metal Buying Outlook

Any divorce from the Paris-based founder, the Organization for Economic Cooperation and Development, might complicate funding and confuse governance of the IEA, whose role includes coordinated stocks releases to address global oil shortfalls.

Big Commodity Trade Houses Change Strategy

Commodity trade houses are going back to their roots and focusing on what they know best, whether it’s energy, metals or agriculture, while shedding peripheral activities.

Free Download: The April 2016 MMI Report

From the world’s largest independent energy trader Vitol‘s retreat from agricultural markets, to trade house Gunvor pulling out of metals and Archer Daniels Midland disposing of its chocolate and cocoa businesses, traders are concentrating back on their historically strong activities.

Mining giants BHP Billiton and Rio Tinto Group are both shifting to a growth strategy after years of cost cutting and oil’s rally may be over.

BHP Joins Rio in Growth Shift

BHP Billiton has talked up its future growth options, joining fellow mining giant Rio Tinto in marking a shift in focus after four years of aggressive cost cutting. While big miners are still looking to sell assets to help cut debt or to exit businesses like nickel and coal, they are also preparing for a pick-up in demand as looming supply gaps in at least some commodities sow the seeds for higher prices.

Two-Month Trial: Metal Buying Outlook

While the big miners are still looking to sell assets to help cut debt or to exit businesses like nickel and coal, they are also preparing for a pick-up in demand as looming supply gaps in at least some commodities sow the seeds for higher prices.

Oil Rally Loses Momentum

The rally that carried oil prices up by more than $20 per barrel between the middle of January and the end of April seems to have run out of steam for the time being. Spot crude prices, time spreads and refining margins have all showed signs of weakening since the start of this month.

Free Download: The April 2016 MMI Report

Reuters’ John Kemp writes that prices for both West Texas Intermediate and Brent Crude recently closed below their 14-day and 20-day moving averages for the first time since early April.

One province is taking a novel approach to ending Chinese overcapacity, using prizes to discourage overproduction and pollution in steel and coal. Haliburton and Baker Hughes have decided to call their $28 billion merger off.

Sichuan Province Tries Prizes to Halt Overcapacity

China’s southwestern Sichuan province has allocated 2 billion yuan ($308.87 million) in prize money for companies that reduce their overcapacity in industries including coal and steel, state media reported on Tuesday.

Two-Month Trial: Metal Buying Outlook

The funding will be given to local governments and Sichuanese companies that are shifting away from energy-intensive, high-polluting, unsafe industries that do not comply with government policies aimed at dealing with overcapacity, the Sichuan Daily, the official newspaper of the provincial government, reported.

Baker Hughes, Haliburton Scrap Merger

Oilfield services provider Halliburton Co. and smaller rival Baker Hughes Inc. announced the termination of their $28 billion merger deal on Sunday after opposition from U.S. and European antitrust regulators.

Free Download: The April 2016 MMI Report

The tie-up would have brought together the world’s No. 2 and No. 3 oil services companies, raising concerns it would result in higher prices in the sector. It is the latest example of a large merger deal failing to make it to the finish line because of antitrust hurdles.

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.

Two-Month Trial: Metal Buying Outlook

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.

Free Download: The April 2016 MMI Report

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.