Oil

This morning in metals news, the strike at Freeport McRoRan’s Grasberg copper mine was extended for a second month, oil prices rose in expectation of supply cuts, and silver prices reached a three-week high.

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Freeport Indonesia Strike Extended

This past Saturday, the union representing thousands of workers at Freeport’s Grasberg copper mine in Papua, Indonesia announced that the ongoing strike will be extended beyond May 30, Reuters reported. As union industrial relations officer Tri Puspital told Reuters, “We will extend the strike for 30 more days.” Approximately 9,000 workers are participating in the strike.

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The reason for the strike revolves around employment. Last month, Freeport laid off about 10% of its 32,000 workers to cut costs, which accrued to the tune of millions thanks to an ongoing dispute with the Indonesian government over rights to the Grasberg mine. “With this problematic combination of protests from workers and tensions with the Indonesian government,” wrote MetalMiner analyst Raul de Frutos earlier this month, “it’s no wonder that investors are concerned about further supply disruptions this year.” It looks like supply disruptions will continue.

A Key Week for Oil

One hopes that this will be the only time when news source after news source mentions Saudi Arabia and glowing orbs in the same headline. In more important news, Bloomberg reported yesterday that Saudi Arabia has received Iraq’s support to extend oil output cuts for nine months, after Saudi Minister of Energy Khalid Al-Falih flew to Baghdad to talk to Jabar al-Luaibi, his Iraqi counterpart. Read more

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It isn’t an idle question. Oil prices are a proxy for energy prices, and a rising oil price can be supportive for energy intensive metals like aluminum.

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A rising oil price is also taken as a proxy for rising industrial demand – a bullish indicator that global growth is strong. A falling price, on the other hand, should be good for consumer spending as it keeps more money in drivers’ pockets and lowers the cost of goods sold for companies far and wide – but particularly for those in the transportation or more energy intensive sectors.

But despite rising last year following the agreement on the parts of OPEC and major non-OPEC oil producers to limit output, the price has since fallen back so consumers are not surprisingly wondering where it goes from here.

Just this month the two architects and key players in last year’s agreement, Saudi Arabia and Russia, announced they would continue with the agreement, set to shortly expire, until March 2018 and indeed will accelerate cuts to reduce near record inventories. It should be said the announcement still must be officially agreed at next week’s meeting of OPEC ministers in Vienna.

While initially slow to contribute, Russia has stepped up cut backs of late and combined non OPEC cuts are said to be some 255,000 b/d in April, but others such as Brazil and Canada are expected to increase output in Q2 and the USA has added substantially since last year. According to Oilprice.com, U.S. oil production has risen to approximately 9.3 million barrels a day and is projected by the EIA to reach 10 million barrels a day by 2018. Read more

Philadelphia Energy Solutions Inc., the largest refiner on the U.S. East Coast, will not be taking any rail deliveries of North Dakota’s Bakken crude oil in June, a source familiar with delivery schedules told Reuters on Tuesday, a sign that the impending start of the Dakota Access Pipeline is upending trade flows.

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At its peak, PES would have routinely taken about three miles’ worth of trains filled with Bakken oil each day. But after the $3.8 billion Dakota Access Pipeline begins interstate crude oil delivery on May 14, it will be more lucrative for producers to transport oil to refineries in the U.S. Gulf Coast.

Alcoa Moves Headquarters Back to Pittsburgh

Alcoa Corp. announced today that the company’s expansive Pittsburgh, Pa., office will soon serve as its global headquarters again, a decade after its predecessor, Alcoa Inc., left for New York City.

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Alcoa said in a statement that its headquarters in New York would be one of seven offices in the U.S., Europe and Asia that would shut in the next 18 months in a cost-cutting initiative. Alcoa had kept its offices in Pittsburgh’s North Shore even after it moved the headquarters to Manhattan, with the bulk of its administrative functions remaining in Pittsburgh. Now, the Pittsburgh presence will once again serve as the company’s international headquarters.

Ford Motor Company will invest $1 billion to upgrade and expand capacity at two assembly plants and $200 million to build a data center in Michigan. President Trump praised the move, which was part of a 2015 negotiation between the company and the auto union.

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The investments represent two strategies going forward: a traditional game plan that looks to create new models of high-demand trucks and SUVs; and a more forward-looking investment in the self-driving and connected vehicles that Ford and other companies are betting will drive the future.

Oil Traders Expect OPEC Cuts to Continue

Major oil traders gathered in Switzerland this week said they expected Organization of Petroleum Exporting Countries and non-OPEC producer-nations to extend their pact to curb output in the second half of this year, providing that main non-OPEC producer-nation Russia complies.

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“I think the surprise so far this year is how quickly shale came back on a relatively modest price rebound,” Gunvor CEO Torbjorn Tornqvist told a panel at the FT Commodities Global Summit in Lausanne.

NioCorp Developments Ltd. has successfully produced high-purity 99.9% commercial grade Scandium Trioxide from its Elk Creek, Ne., Superalloy Materials Project and the company has finalized plans for a proposed scandium purification circuit there.

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Niocorp also announced that it anticipates public release of the results of its Elk Creek Feasibility Study in the second calendar quarter of 2017. Following the release of the study, the company intends to intensify efforts to secure government permits and obtain project financing to prepare for the launch of construction operations in Nebraska.

NioCorp’s successful production of a high-purity commercial grade scandium, an element used to make superstrong and light alloys used in both the automotive and aerospace industries, was conducted at SGS Mineral Services lab in Lakefield, Ont., Canada. This is a major milestone in Niocorp’s plans to become one of the world’s largest producers of the high-value metal. A 99.9% purity level, otherwise known as 3Ns or “three nines” scandium, meets or exceeds the purity needed for the additive’s use in virtually all of its mainstream commercial applications, including ultra-high-performance aluminum-scandium alloys for the aerospace and automotive industries, in the solid oxide fuel cell industry, and in other defense and non-defense applications.

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NioCorp said in a news release that the test showed its scandium product meets or exceeds the purity specifications of all potential customers with whom it has been in discussions.

OPEC Output Cut Threatened: Saudi Arabia Demands Iranian Cut

Saudi Arabia may demand that Iran, which is allowed a slight rise in output under the Organization of Petroleum Exporting Countries’ deal with member-states and non-members such as Russia, commit to an output reduction as a condition of continuing the cuts, people familiar with the kingdom’s thinking told S&P Global Platts.

President Donald Trump said today that his administration has approved the Keystone XL pipeline, reversing the Obama administration’s decision to block the oil transportation project.

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Speaking from the Oval Office, Trump officially announced the approval shortly after the State Department issued TransCanada‘s permit, making good on one of his campaign promises. The approval greenlights the Canadian company to complete construction on the pipeline that will funnel crude oil from Canada to refineries on the Gulf Coast.

The American Petroleum Institute praised the approval.

“Today’s action to approve the Keystone XL pipeline’s cross-border permit is welcome news and is critical to creating American jobs, growing the economy, and making our nation more energy secure,” said API President and CEO Jack Gerard. “This critical infrastructure project has been studied longer than any pipeline project in U.S. history with exhaustive reviews by the State Department concluding that the project is safe for the environment and the best option for transporting domestic crude and Canadian oil to U.S. refineries.”

The 1,179-mile addition to existing pipelines that will stretch from Alberta, Canada to the U.S. Gulf Coast is estimated to create 42,000 construction jobs but only 35 full-time, maintenance positions once it’s completed.

Lopez Allows Suspended Mines to Ship Out Stockpiled Nickel Ore

The Philippines’ environment ministry, led by Environment and Natural Resources Secretary Regina Lopez, has allowed eight suspended nickel ore miners to ship out stockpiles of mined ore, sources told Reuters, temporarily boosting supply from the world’s top exporter of the raw metal after a major crackdown.

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More than half of all the mines in the Philippines have been ordered to permanently shut to protect watersheds in an eight-month campaign led by Lopez.

The Organization of Petroleum Exporting Countries in general, and Saudi Arabia in particular, have done the U.S. oil industry a massive favor, and they are probably ruing the day they tried to squeeze America’s shale industry out of existence.

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The collapse in oil prices that ensued after Saudi Arabia-led OPEC opened the spigots two years ago forced American companies, and their many subcontractors, to innovate in a way that would never have happened so fast or gone so far without the imminent threat of survival forcing the pace.

Oil Prices Allow Reopening of Old Wells

Now, U.S. shale producers have achieved economies of scale that allow them to return to previously closed wells in fields like Eagle Ford and achieve 30% returns even at $40 a barrel. U.S. explorers may be making hay in the domestic market, but huge potential exists for these same firms to take their technology abroad. Read more

Just a few weeks ago, the future looked bright for the oil price. Back in November, the Organization of Petroleum Exporting Countries and a number of non-OPEC producers agreed to cutbacks intended to reign in surplus global oil stocks and, in so doing, support the oil price.

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Initially, the agreement met with considerable success. Hedge funds and speculative investors went long on oil and the price rose. But, this week several comments and statistical reports coincided to remove some of that optimism and resulted in steep price falls. The West Texas Intermediate benchmark fell under $50 for the first time since December while Brent Crude was also down to $52.41 a barrel, its lowest level since November.

Source: The Financial Times.

According to the Financial Times, Wednesday’s decline came after the Energy Information Administration said inventories of U.S. crude stocks climbed by 8.2 million barrels, far more than analysts expected, as refinery oil purchases declined. If the rise in inventory was solely down to refineries slowing or delaying purchases, the impact would not have been as dramatic but the fear among investors is U.S. shale production is roaring back.

Reshalience Explained

Even Saudi Arabia’s oil minister, Khalid al-Falih, is quoted as saying OPEC’s agreement and the corresponding price increase has helped the U.S. shale market to recover and, perversely, undermined efforts to stabilize crude prices. U.S. shale producers have responded to low crude prices by innovating and cutting costs. Breakeven for many is now $40 a barrel, with some said to be as low as $25. Rig counts have doubled since the Spring of last year and output has continued to rise, contributing to the increase in WTI inventories.

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The oil price faces two major headwinds the FT reports. The first is little or no evidence the global oil market is really coming into balance as signatories to the agreement continue to cheat, and the second is an overhang of speculative length in the futures market. Part of this week’s price falls are said to be due to speculators bailing out of long positions after the realization that the market may not be coming back into balance as hoped late last year.

Where to, Brent?

Where the oil price goes from here is anyone’s guess but with even Saudi Arabia threatening not to renew the cutback agreement in the summer if global inventories do not fall back as expected — if other members of the agreement continue to cheat — the probability is the market overhang could get worse in the second half of the year.

U.S. shale oil producers appear to be enthusiastically ramping up production which will likely add do U.S. oil inventories and further depress the price. The oil price has a level which realistically reflects supply and demand but it’s almost certainly below $50 a barrel in today’s market.

Reuters reported that U.S. stock index futures rose to record intraday highs on Tuesday as oil prices surged and investors assessed earnings from top U.S. retailers.

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The theory is share prices are being driven higher by a strong oil price and retailers who are reporting better than expected store sales. Wal-Mart Stores, Inc., Macy’s, and Home Depot sales are all up on robust consumer demand. If stock prices were supported on consumer confidence alone, we could see an argument for this bull run in share prices to continue.

Stocks are up

Stock prices continue to rise thanks to strong retail sales and oil prices. Source Adobe Stock/Tiagozr.

There is plenty of optimism around. Donald Trump’s much-vaunted infrastructure projects are expected to create significant demand and have an inflationary impact on the economy… when they eventually see the light of day. 2018 At the earliest is our expectation since few are shovel-ready and all will have to get past Congress first. Meanwhile, though, the economy is adding jobs at a steady rate and unemployment is low.

Oil Supply

However, if Reuters is right and shares are being driven higher in part due to the oil price, we have a few concerns. The oil price was driven higher by the Organization of Petroleum Exporting Countries‘ production cap agreement last year, an agreement to which both major OPEC producers and 11 non-OPEC countries like Russia signed up to in an effort to reduce excess production and bring the market into balance by the summer. Read more

The U.S. Army Corps of Engineers approved the construction of the Dakota Access Pipeline on Tuesday, paving the way for an infrastructure project that has been surrounded by protest and controversy.

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Robert Speer, the acting secretary of the Army, announced the decision to Congress, saying he was ready to offer the pipeline’s owner a 30-year easement on a disputed patch of land.

In the decision, Speer said he would halt the preparation of an environmental impact statement meant to assess the effects of the pipeline, adding that he had sufficient information to support approval. The pipeline had already passed environmental review and a federal judge found for the pipeline after the Standing Rock Sioux Tribe flied a lawsuit, based on the tribe’s water supply and sacred lands, against it before then-President Obama halted the project last November. No part of the proposed route goes through tribal lands.

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The easement will allow for the completion of the last mile and a half of the 1,172-mile project, connecting oil production areas in North Dakota to a crude oil terminal near Patoka, Ill. The pipeline is owned by Energy Transfer Partners. In a statement, Sen. Heidi Heitkamp, D-N.D., said, “Today’s announcement by the U.S. Army Corps of Engineers brings this issue one step closer to final resolution — and delivers the certainty and clarity I’ve been demanding.”