Author Archives: Stuart Burns

According to the Financial Times, Norsk Hydro’s giant Alunorte refinery in Brazil has been given approval to restart production by the Brazilian authorities.

The announcement caught the market by surprise, coming some months earlier than had been expected.

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The restart is a boost for Hydro, whose Brazilian operations, which form bauxite for primary aluminum, have had a slow go of things for the last year. The firm has been forced to run its 6.3 million ton refinery at half its normal capacity following a 2018 dam tailings spillage.

The Financial Times reports production at Alunorte would hit 75-85% of its 6.3 million ton capacity within two months, adding some 2 million tons per annum to the market.

“Production at Hydro’s Paragominas bauxite mine will be increased in line with the ramp-up speed at Alunorte,” the company is quoted as saying. “A decision to increase production at Hydro’s part-owned Albras primary aluminium plant is also expected shortly.”

Alumina prices had been supported by Alunorte’s slowdown and further buoyed by environmental pressure on refineries in China. However, this month authorities ordered the closure of a major refinery in Shanxi province following spillage of red mud waste tailings.

But overall, China’s exports have been at a record high and new alumina refineries are coming on stream.

AluminiumInsider reports Emirates Global Aluminium’s Al Taweelah refinery will, at full capacity, produce 2 million tons per year, with output for 2019 expected to be around 0.7 million tons.

Other projects expected to restart or increase production in 2019 include: the Alpart Alumina refinery in Jamaica, India Vedanta’s Lanjigarh refinery and Friguia refinery in Guinea, the article notes.

Global alumina production (excluding China) is expected to increase by nearly 4 million tons this year compared to 2018, with further capacity coming on stream in 2020. All this new supply will undermine price support for spot alumina and, in turn, the primary aluminum price.

Many aluminum smelters caught between relatively high spot alumina prices and an already weak aluminum price have had their margins squeezed.

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To the extent that alumina prices ease this year, that pressure could ease — but so will support for the primary ingot price as smelters are allowed to adjust prices to the market.

The British government did not find common ground with private equity owners Greybull Capital and Britain’s second-biggest steelmaker, British Steel, went into insolvency this week.

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As we wrote earlier this week, Greybull has blamed Brexit uncertainty for the double whammy of falling sales to the firms’ European clients, who are nervous about what kind of relationship the U.K. will have with the E.U. post-Brexit and by the E.U.’s withdrawal of carbon credits (forcing the company to go cap in hand to the British government last month for a loan).

Greybull has some merit in their claim; Brexit is causing the firm problems. A combination of elevated iron ore prices — exacerbated by the weakness of sterling since the June 2016 referendum — and high energy costs have been squeezing margins at the same time as manufacturing sectors, like oil and gas and the automotive industry, have been facing headwinds in the U.K.

But does that, as many claim, mean the British government should step in and either nationalize or otherwise financially support the company?

Ministers claim they are prevented by E.U. rules from providing state aid in such circumstances and that to extend aid would be illegal. While direct state aid is against E.U. rules, a point I will come back to, there is nothing to stop the British government offering loans on commercial terms, as it did with £120 million provided last month to fund the carbon tax credit shortfall.

The reality is the British government can probably see little chance of ever getting its money back.  Indeed, last month’s loan will only be recoverable in the autumn if the company is still running and gets its carbon credit back.

Not surprisingly those with an adverse view towards the European Union stridently point out that if the U.K. were not in the E.U., it could simply bail out British Steel (much as previous governments did with Rolls-Royce, British Leyland and various other large industries considered at the time too big to fail).

But such arguments miss the point about why E.U. state subsidy rules — which were brought in with firm support from the British, it has to be said — precisely to counter European governments bailing out failing industries.

The U.K. was far from alone in lavishing state funds on propping up dead ducks and, in the process, delaying the restructuring of industries suffering from chronic underinvestment and overcapacity. Nor is the argument that British Steel should be kept alive on the basis that it plays a crucial role in the production of steel for defense and domestic infrastructure.

It’s true the company is a major supplier of rails to the British rail industry, but much of the company’s output is exported and the U.K. imports most of the specialist steel it needs for critical defense applications. Notoriously, Britain’s nuclear submarines rely on high-strength French steel for their hulls.

A more deep-rooted problem challenging British Steel is the need for a strategic shakeup.

The company runs two blast furnaces at the Scunthorpe plant, but according to the Financial Times, it does not have enough capacity for all their output at its downstream processing plants. One senior employee is quoted as saying “we produce 2.8 million metric tons of steel, which is too much for our profitable accessible market, so half of our products don’t make money.”

Greybull promised to spend £400 million investing in British Steel when it purchased the company for £1 in 2016 from previous owners Tata Steel. However, it’s unclear how much, if any, of this money has been forthcoming.

The accounts show that Greybull’s investment vehicle, Olympus Steel Ltd, has loaned British Steel £154 million. Although the accounts provided for over £17m of interest, both profits for 2016 and 2017 and the interest have been left in the company to provide cash flow, the BBC reports.

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It is estimated any new owner will need to spend at least £250 million investing in plant upgrades.  Although prospective buyers such as Liberty Steel have been mooted as potential new owners, in today’s pre-Brexit uncertainty it would be a brave investor who would take on a business like British Steel, with all its incumbent challenges, without a blank check from the U.K. government in some form or another.

Not content with putting the squeeze on Iran’s oil industry, President Donald Trump signed a new executive order last week extending existing sanctions to include Iran’s metal industry.

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According to the Financial Times, much of Iran’s non-oil income comes from metal exports, including $4.2 billion from the sale of steel and a further $917 million from copper and its downstream products.

Much of Iran’s metals industry is in the hands of its Revolutionary Guards — not ones to miss a profit, the country has ambitious plans to grow its steel and aluminum manufacturing capacity.

The country’s 2025 vision plan seeks to make Iran the world’s sixth-largest steelmaker by increasing production capacity from 31 million metric tons in 2017 to 55 million metric tons by 2025. The Financial Times goes on to say Iran has three greenfield primary aluminum smelters either under construction or recently completed.

The Salco smelter in Asaluyeh is due to come on stream this year with a capacity of 300,000 tons and is being funded by the China Nonferrous Metal Industry’s Foreign Engineering and Construction Company, a state enterprise.

Historically, Iran has not been a net exporter of aluminum, but the new smelters will change all that. Currently, the lion’s share of industrial metal exports come from the steel industry, with almost 79% total exports by value. Copper is second with 12%, but aluminum is set to grow dramatically from the turn of the decade.

Some immediate sources explain the enhanced sanctions in connection with steel, aluminum and copper used in the production of ballistic missiles and uranium enrichment centrifuges. In reality, the sanctions are all about squeezing Iran financially in an attempt to drive it to the negotiating table with a view to curtailing the country’s regional role in fermenting unrest. According to intellinews.com, the sanctions have thrown Iran back into recession while causing a collapse in the value of the Iranian rial and driving up inflation.

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How successful this latest escalation of sanctions proves to be remains to be seen, but the results could be a long time coming. Previous sanctions took years to drive Iran to the negotiating table and were better supported by the global community.

According to the BBC last week, British Steel, the U.K.’s second-largest steel producer, is knocking on the door of the British government for the second time in as many months looking for support.

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In April, the firm borrowed £120 million from the government to pay an E.U. carbon bill so it could avoid a steep fine, arising when the E.U. arbitrarily withdrew the carbon credits the firm would previously have used to offset such fines. However, the E.U. decided to suspend U.K. firms’ access to such free carbon permits until a Brexit withdrawal deal is ratified.

Having survived that, the firm is apparently now back on the brink of administration and asking for £75 million to help it cope with Brexit-related issues, the news channel says. The firm cites uncertainty over the U.K.’s future trading relationship with the E.U. as a deterrent to European clients to place business with the British steel company.

That may be so, but all European steel producers have been hit with a weak market.

Prices have fallen 16% this year, according to Platts, due to rising competition from eastern Europe and China, in addition to rising costs due to iron ore, electricity and environmental compliance costs.

So far, British Steel looks like a victim of bad fortune.

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The press has been all over the trade war-induced falls across stock markets. The New York Times reported this week that the S&P 500 was off 2.4% on Monday, the worst day since early January.

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In all, the S&P 500 is down 4.6% so far this month, while the tech-heavy Nasdaq composite index fell 3.4% — its worst decline in 2019.

European and emerging markets have likewise fallen sharply following tit-for-tat announcements between President Donald Trump and President Xi Jinping. This all comes despite the U.S. economy doing well, expanding 3.2% annualized in the first three months of the year and with unemployment down to 3.6%, its lowest level since 1969, the paper reports.

Indeed, it is suggested it is just those healthy numbers that have encouraged the president to up the ante in the face of apparent Chinese intransigence on certain key issues.

To keep stock-market falls in perspective, though they come on the back of a 17% rise so far this year, arguably the market has already achieved a year’s gains in just four months; a correction was to be expected.

The sharp falls, though, show how complacent the markets had become trusting a deal between the U.S. and China was just weeks, if not days away.

That this escalation of trade tensions came on the back of a return to robust growth is no surprise.

It is suggested by The New York Times that both sides have been emboldened by solid domestic growth, not to mention a need to pander to their domestic audiences – in Trump’s case, in the run-up to next year’s elections. Meanwhile, Xi is cognizant of his own nationalist rhetoric of recent years, making compromises to China’s Made in China 2025 march to global pre-eminence a personal humiliation.

So with the scene set for a possibly protracted standoff, you have to wonder why Trump has opened a second front with the European Union.

Conventional wisdom suggests generals wage one war at a time, as fighting on two fronts risks aligning your opponents against you and dividing your forces.

So why has the president chosen this moment to escalate his previous rhetoric with the E.U. over trade issues, threatening again in recent days to levy tariffs on automobiles from the E.U., among other categories? Possibly because the chances of securing a really meaningful victory over China are receding. Counterbalancing that with a win against Europe would allow some face-saving in the run-up to next year’s elections, but the risks are huge.

President Trump faces a May 18 deadline to decide whether to put tariffs on up to $53 billion worth of European cars. E.U. Trade Commissioner Cecilia Malmström is quoted by CNBC as saying she hopes the Trump administration could delay the deadline as it focuses on inking a deal with China, but recent comments from the White House suggest otherwise.

Trump may judge the Europeans more likely to compromise than China, as they certainly have more to lose. Europe is facing a shaky domestic economy already battered by trade tensions with China in the fallout from U.S. action, a decline in sanctions hit Russian trade and rising energy prices (in part due to U.S. action against Iran).

Last but not least, the ink is barely dry on the revised and still to-be-ratified United States-Mexico-Canada Agreement (USMCA). Cracks are showing among the trade partners, as Canada and Mexico mull tariffs of their own in order to pressure Trump to drop his steel and aluminum tariffs.

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If there is any takeaway from the current highly uncertain political and economic outlook, it is consumers need redundancy and options in their supply chains. Well-established, multiyear supply chains are having their economic fundamentals upturned on a tweet. While companies do not want to be chopping and changing suppliers on a whim, having options at least enhances supply chain durability and may just keep production lines running.

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Is President Donald Trump’s latest round of tweets and the resulting global stock market selloff just a negotiating ploy or is it the first signs the much-vaunted trade deal may not be going quite as smoothly as markets had obviously been pricing in?

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The following VIX graph of volatility illustrates better than words how investors had been assuming the trade deal was a done deal in waiting. (Instead, the U.S. on Friday, May 10 raised tariffs on $200 billion in goods from China, upping the rate from 10% to 25%, to which China vowed to respond.)

Source: Bloomberg via the Financial Times

Bolstered by stronger growth in both the U.S. and China during the first quarter, both sides seem unhelpfully bullish in the closing stages of the negotiations and, as such, rowing back on some previous commitments and playing hardball on still unresolved issues.

U.S. President Donald Trump’s renewed threat — which came to fruition — to raise tariffs on Chinese imports, specifically mentioning increasing the levy on $200 billion in Chinese goods to 25% on Friday of last week, sent stock markets into paroxysms.

The U.S. S&P tumbled as much as 2.4% earlier last week, the Financial Times reported, before it clawed back some of the losses.The European FTSE Eurofirst 300 index ended last Tuesday down 1.4% — its biggest one-day drop since February — and slipped a further 0.1% on Wednesday.

Asian markets reacted similarly, resulting in the MSCI World index of global stock markets falling 1.7% last Tuesday, its second-biggest decline of 2019. Coming on the heels of the president’s suggestion that the United States could subject remaining Chinese goods exports (worth some $300 billion to $350 billion) to annual tariffs, in addition to the previously identified $200 billion, has worried investors this deal may not be the done deal they had been thinking.

According to the geopolitical advisory firm Stratfor, up to this point China has focused its concessions on directly addressing the countries’ trade imbalance by guaranteeing increased purchases of U.S. goods and opening market access, along with addressing some structural issues. But reports from the U.S. Chamber of Commerce representatives who have knowledge of the negotiations have indicated that the White House had been backing off its demands over some structural issues, including China’s industrial subsidies and cybertheft, the firm reports.

The biggest snags now appear to be over China’s resistance to U.S. demands for legal changes addressing intellectual property theft and its disagreement with the enforcement mechanisms attached to U.S. demands. It could be that Beijing, having failed to enforce intellectual property rules itself, fears agreeing with the U.S.’s dictation of the judgement and compliance of any such agreement and, by extension, any sanctions Washington decides to impose in the future into some kind of legal framework as being an unacceptable risk.

Put simply, Beijing fears it cannot police or ensure compliance at the local level within China to any agreement reached.

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Nevertheless despite the unhelpful rhetoric and the pressure both Trump and Xi are no doubt facing from their core support — in Trump’s case to wring as many concessions out of China as originally demanded and in Xi’s case to give away as little as possible yet still achieve an agreement — and must be hampering both parties, progress does seem to be happening.

With nationalism on the rise in both countries, concessions are the last move more extreme elements in both camps will accept, but some concessions are an inevitable part of negotiation.

Maybe markets were a little too sanguine earlier this year to think it was a done deal, but nor should they be frightened off by a few tweets: an eventual deal is in both parties’ interest.

It is often tough to discern fact from fiction, particularly when it comes to corporations and politicians.

Two developments this month in Europe raise questions about the relationship and balance of influence between major corporations and government. Are corporations reacting to markets or seeking to stimulate political action is often the question?

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Following President Donald Trump’s imposition of 25% import tariffs on steel products, Europe took action to protect its domestic markets against a flood of foreign steel looking to find a new home by imposing a range of measures to monitor imports and impose safeguards.

According to the Financial Times, a European Commission official claimed the E.U. has some 52 anti-dumping and anti-subsidy measures in force on steel products, saying: “The EU reacted swiftly to the US tariffs on steel and imposed safeguard measures to protect EU industry from trade diversion.”

These measures preserve the traditional levels of imports into the E.U., ensuring fair conditions for a sector struggling with overcapacity. Even so, ArcelorMittal has said the measures are “insufficient” and announced its decision to temporarily cut production at some of its plants on the continent.

According to the Financial Times, the company said that it would idle steelmaking facilities at its Krakow site in Poland and decrease output at Asturias in Spain. In addition, it will slow down a planned increase of shipments by its Italian unit.

In total, these actions will reduce its annualized crude steelmaking production by 3 million tons — equivalent to 7% of its European output last year.

Imports are not the sole reason for the firm’s decision. The group also blamed high energy costs and increased prices for carbon credits, which polluters must use to compensate for emissions under a Brussels scheme aimed at curbing climate change. Foreign suppliers, of course, do not have to pay for carbon credits, which is another gripe of the firm; the firm would like to see a “green” tax on imports, equivalent to the carbon charges E.U. producers face, to level the playing field.

The E.U. produces 170 million tons of steel a year, yet remains heavily dependent on imports, which have the effect of dragging down market prices. As such, domestic producers frequently struggle to make a profit.

So bad had the situation got for German group ThyssenKrupp that it has been working to separate its steel and capital goods divisions for the last few years. Central to this strategy was the merger of its steel division with Tata’s European operations to create what would be the second-largest steel group in Europe after ArcelorMittal.

According to the FT, Margrethe Vestager, E.U. competition commissioner, had been taking evidence from consumers, particularly in the automotive sector, who fear the reduction in competition would give the remaining steel groups too much pricing power.

But despite working on the plan since 2017, they were scrapped last week after regulatory scrutiny from the European Commission made a deal untenable.

E.U. regulators forced ArcelorMittal to make significant divestments to gain regulatory approval for its acquisition of Italian steelmaker Ilva last year and demanded further concessions from ThyssenKrupp and Tata in return for approval.

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Who wins in politically charged Brussels remains to be seen.

With the European elections due next month, there is even more intrigue and jockeying going on in the corridors of power than normal.

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Not surprisingly, the most alarmist headlines were run by the most biased of news channels: the BBC.

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Long advocates of left-wing sympathies, the Beeb — as the BBC is affectionately known in the UK — has for many years also been leading the charge on environmental issues. Not that we have any problem with having an environmental conscience — anyone watching the rapid the bleaching of the world’s barrier reefs can’t help but feel a part of themselves die in the process — but we would much rather see the BBC reporting on sound scientific data than listen to them pushing one political angle, like some mogul-backed, partisan media outlet.

So when a BBC article shouts “UK Parliament declares climate change emergency” you expect it is possibly hyperbole. What does the statement even mean, you may ask. Are we about to be inundated by a monsoon, fry in a heatwave, be washed away in a tsunami or blown away in a typhoon?

Apparently desperate to address something other than Brexit, the British government appears likely to commit the U.K. to an even tougher carbon emissions target than it already has — indeed, tougher than any other major economy in the world.

According to the Financial Times, the proposals build on the 2008 Climate Change Act, which targeted reducing emissions by 80% from 1990 levels by 2050. The U.K. is on track to achieve this, having made steady progress in the interim with emission levels falling more than 40% over the last 29 years.

But the last 20% will be the hardest if the U.K. seeks to achieve zero emissions. The rest of Europe has signed up to similar targets, but exempted certain key industries (such as agriculture, aviation and shipping).

True zero emissions represent a significant challenge, whatever politicians may say.

It will require a sweeping overhaul of energy use from homes to transport to even what we eat. It involves a pledge to phase out diesel and electric cars by 2040, quadruple energy supplies from low-carbon sources such as renewables and supplement a hydrogen economy where natural gas is currently used (80% of British homes are reliant on natural gas for heating and/or cooking).

Heavy carbon-emitting industries will have to adopt carbon capture technology, which has to date proved less than satisfactory and expensive to operate. Nevertheless, the government has already invested some limited funds in pilot projects and has undertaken to do more.

The tough ones will be aviation (an alternative to fossil-fueled jet engines is a long way off), shipping (which is moving to 0.5% low sulfur fuel but still remains a massive source of carbon emissions) and agriculture, which is probably the worst offender.

There is no known trick of science that stops a cow breaking wind and little that can be done about the acres of corn that need to be cultivated to feed that cow. The Committee on Climate Change acknowledges one of the biggest and hardest changes will be to humans’ diets. More plant-based and less animal- and fish-based protein would have a profound impact on carbon emissions but will take a fundamental shift in the wider population’s habits.

Still, some trends are in favor of the needed changes.

Electric cars are predicted to be cheaper to buy and run than petrol- or diesel-fueled vehicles by 2030 (if not before). Wind power is already said to be cheaper than natural gas, the Financial Times says, providing storage costs to achieve continuity are subsidized, but even that may cease to be necessary as battery technology improves and wind turbine costs continue to fall.

The committee’s report suggests the changes needed, spread over the next 20-30 years, need not be onerous or disruptive to growth; indeed, they may present significant opportunities for new technologies and for the industries that exploit these opportunities.

Whether the world has 30 years, none of us knows. The U.N. says we could have just 12 years to effect change before we reach a point of no return; they may, like the BBC, be trying to promote a project fear agenda to effect change (we really don’t know).

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In the meantime enterprising firms have the opportunity to develop new products and services to meet what is already becoming a relentless process of change.

Every cloud has a silver lining.

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The International Maritime Organization’s (IMO) Jan. 1, 2020 deadline for shipping companies to use low-sulfur (0.5% max) fuel has been on and off in the news for months, but without much interest from those outside the industry or the environmental organizations that lobbied for its introduction.

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But now, with the deadline just months away, the implications are becoming more apparent.  Shipping lines are scrambling to fit scrubbers, but some are finding they have left it too late.

It currently takes some six weeks to retrofit a scrubber. With the surge in demand for scrubber equipment and a shortage of qualified engineers, yards are full of work over the next 12 months. Some 4.4 million twenty-foot equivalent units (TEU) in container ship capacity is taken out of service this year, according to JOC. That amounts to about 380 container ships and is already contributing to the worst on-time performance by carriers on the Asia-U.S. trades since 2012, the article reports.

In total some 550 box ships, totaling 6 million TEU, are due to be equipped with scrubbers — at a rate of about 30 vessels a month, consequently squeezing capacity.

Not all vessels are going for scrubbers, despite the current cost advantage.

The majority of vessels will opt to burn low-sulfur fuel oil, for which the premium is between U.S. $170 and $320 per metric ton over 3.5% sulfur fuel (apart from South America, where low-sulfur fuels already predominate and the premium is only $40/ton).

It costs between U.S. $5 million and $10 million for a scrubber system depending on the vessel and where it is fitted, plus greater maintenance and the downtime required for installation. But the price difference between low-sulfur fuel oil and heavy fuel oil can add U.S. $1 million to an Asia-Europe round trip for a ULVC.

Those opting not to fit scrubbers but pay the fuel premium are either biding their time by waiting for an installation slot or hoping the fuel premiums will fall. The change will likely also hasten the scrapping of older vessels deemed uneconomic to retrofit or operate at the higher fuel costs.

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As a result, shippers can expect rates to rise this year and next — either as a result of reduced capacity or lines paying higher bunker premiums (or both).

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What a difference a month makes in commodity markets.

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Just a month back, we reviewed the delicate balance OPEC was facing in trying to drive prices higher without having to make further cuts in output.

It seemed every time they squeezed the market higher, greater U.S. shale output slowed the advance, yet OPEC lost market share.

But now the U.S. seems to be coming to OPEC’s aid.

The market was finely balanced after a loss of output from Libya, where a civil war is raging, and Venezuela, where state bankruptcy and U.S. sanctions have put output into what appears to be, if not terminal decline, then a fall that could take many years of investment before it can recover.

The Financial Times and the Times both reported this week that moves by the Trump administration to remove waivers previously granted to key oil-consuming countries has taken the market by surprise. The news caused oil prices to spike in anticipation of the market being deprived of Iranian production.

Japan, South Korea, Turkey, India and China will, according to the Financial Times, face pressure to cancel Iranian oil imports as the U.S. seeks to increase pressure on Tehran over what it sees as its role in state-sponsored regional terrorism.

Source: Refinitiv

The oil price has already risen sharply this year. Brent crude climbed 2.6% on Monday to $73.80 a barrel, after hitting a high of $74.31 in early Asia trading following the announcement by a U.S. official. West Texas Intermediate, the U.S. marker, rose as much as 1.2% to a high of $64.74, the highest intraday level in two weeks, the Financial Times reported.

According to the Financial Times, the U.S. hopes its traditional oil-producing allies will raise output to offset further falls in Iranian supply — as they did last year — but this decision is not without complications.

Saudi Arabia and OPEC are in conflict with the U.S. in wanting higher oil prices and a balanced market, yet the U.S. is making no efforts to restrict its own shale oil output, expecting OPEC to raise or lower its supply to keep prices stable.

The latest forecasts from major agencies, including OPEC and the U.S. Energy Information Administration, see the market in a deficit of up to 500,000 barrels a day this year, before more supplies from Iran — and possibly Venezuela and Libya — are lost, the Financial Times reports.

A tighter oil market will increase gasoline prices, contrary to a campaign pledge from the president to lower them. The U.S. still imports at least one-third of its oil supply and remains exposed to global oil prices, despite being the largest producer in the world this year.

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It would appear prices could rise further as the removal of waivers begins to bite and major consumers switch to other supply sources. Despite slower global growth, energy and transport costs look set to continue to rise. (We will be covering a development in marine transport next week that predicts higher container rates in 2019-20 and suggests supply chain managers should be factoring in higher costs later this year and next.)