Iran

The assassination of Iranian top military official Qassem Soleimani outside Baghdad airport last week caused a near 4% surge in oil prices and a drop in share prices as investors took fright at the prospect of an all-out war between the U.S. and Iran. Not long after, however, oil prices retreated over 4% to below $60 per barrel Wednesday morning after President Donald Trump said Iran appeared to be “standing down.”

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In reality, while that remains a possibility, a more likely outcome is an ongoing lower-level exchange of tit-for-tats as evidenced by Iran’s attack overnight earlier this week on two airbases housing U.S. and coalition forces in Iraq.

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Judging by the share price of shale oil and gas producers, you would think the industry is one from which to keep well away.

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Goldman Sachs, however, is recommending clients go long on the premise that the fracking industry, while depressed now, is simply going through a down cycle.

In other words, today’s pain is tomorrow’s gain.

Rig counts are indeed down, as this graph from Oilprices.com shows:

Graph courtesy of Oilprices.com

Ample supplies have resulted in falling prices.

Natural gas inventories have surged this year, rising from a low point of 1,155 billion cubic feet (Bcf) in April to 3,724 Bcf at the end of October.

The falling rig count has reverberated down the supply chain.

The cost of consumables, like Permian frack sand, is down about 80% from its peak, Joseph Triepke, president of consultancy Infill Thinking, is quoted as saying.

Prices across the commodity spectrum have been undermined this year by a strong dollar and trade fears creating pessimistic investor sentiment. Oil and natural gas prices, however, have seen short-term support, as supply-side fears have spiked sentiment (only to fall back as fears have proved unfounded).

Having been boosted by the attacks to key Saudi Arabian production infrastructure earlier this summer, global oil prices came under further pressure as Saudi Arabia recovered rapidly in Q3, when output was back up to 10.3 million barrels per day in October.

Meanwhile, Iran announced it had discovered a giant oil field in the country’s south, Oilprices reports. The field may hold as much as 50 billion barrels of oil — almost as big as all of the reserves held in the U.S. (around 61 billion barrels).

If and when oil from Iran’s new field ever reaches world markets, however, is another matter.

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Indeed, Goldman’s advice appears to be for the long term.

Prices are not expected to recover anytime soon, with the bank suggesting it could be a year or two before falling output brings the market back into sufficient balance for prices to rise.

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On Thursday, two tankers carrying petrochemicals, one of which was a Japanese-owned ship, came under suspected attack in the Gulf of Oman. The incidents compounded the already simmering hostilities in what’s possibly the world’s most pivotal maritime corridor and spurred a significant 4% spike in the oil price, the Washington Post reported.

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The phrase “suspected attack” takes the limits of objective reporting to an extreme — there is no doubt these incidents were attacks, particularly coming hot on the heels of four previous such incidents last month.

The question is: who was behind them?

The U.S. administration is clearly of the opinion it is Iran, by which they mean the Iranian state, the proposition being the Iranian authorities are trying to show they consider the economic pressure the U.S. is exerting to be a form of economic warfare intended to bring about regime change. That is a high-risk game with the most powerful navy in the world floating off your shores, but what is less clear is whether this is the Iranian government or a hard-line faction authorizing actions by the Iranian Revolutionary Guards, or possibly another agency at work.

Iran has denied it is behind the tanker attacks.

The U.S. argues that footage of what appears to be an IRG patrol boat removing an unexploded magnetic mine from the hull of one of the stricken tankers, the Japanese Kokuka Courageous vessel, supports the U.S.’s assertion that the IRG behind this. However, the owner of the vessel contradicted the U.S. account of how the attack occurred, the Washington Post reported.

But there are even veiled suggestions it could be Saudi Arabia trying to prompt the U.S. into an armed conflict with the Saudis’ biggest rival.

In practice, though, neither side has presented any proof as to who exactly ordered these attacks or who carried them out. There has been lots of finger pointing but no proof – yet.

Does it matter, from a metals market perspective, who is behind the attacks? Well, yes. The more likely these incidents are the direct action of the Iranian state, the more likely the U.S. will reciprocate with force, and the greater the chance of further increases in the oil price.

The IMF calculates that for every 10% increase in the oil price, advanced economies suffer a 0.4% increase in inflation and a corresponding impact on the balance of payments, as most advanced economies are net importers.

Source: The Times

As the above graph from The Times shows, Brent crude had been moderating nicely, from a consumer’s point of view, since April.

Due to headwinds from rising U.S. oil inventories, moderating demand expectations in Asia, and uncertainty as to how robustly OPEC+ would be willing and able to continue oil output constraints, the oil price had been declining steadily. That trend, however, has reversed this week; a further escalation of tensions could see the price heading back toward $70 per barrel.

Oil analysts had expected prices to remain between $60 and $70 for the rest of the year according to a report by The Guardian, but further attacks could force prices back over $70. The Strait of Hormuz handles about one-third of global seaborne oil shipments, so any disruption there will have an impact on prices. The global economy will continue to turn, even if tensions escalate further and with non-OPEC supply likely to grow from 1.9 million barrels a day to 2.3 million next year, barring an all-out war.

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The price will likely fall back sharply when this current situation is resolved – quite when and how that will be, though, remains to be seen.

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.

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This morning in metals news, President Donald Trump added sanctions on Iran targeting its metals industry, Rio Tinto is shipping more aluminum to Europe and ArcelorMittal reported its Q1 2019 financial results.

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Trump Targets Iran’s Metals Sector

A year on after withdrawing from the 2015 Iran nuclear deal, President Donald Trump took aim at Iran’s largest source of non-oil export revenue: metals.

On Wednesday, the president signed an executive order imposing sanctions on Iran’s metals industry, including exports of iron, steel, aluminum and copper.

Rio Tinto Supplying More Aluminum to Europe

According to Rio Tinto CEO Jean-Sebastien Jacques, the miner has begun to ship greater volumes of aluminum to the European market amid flagging U.S. demand, Reuters reported.

The CEO cited the ongoing U.S.-China trade conflict as a factor contributing to the decline in U.S. demand.

Although negotiations between the U.S. and China continued this week, tensions escalated as President Donald Trump has threatened to increase the rate on a previously announced $200 billion in tariffs from 10% to 25%, setting a Friday deadline for the increase. The tariffs were originally imposed in September, with the tariff rate increase scheduled for Jan. 1 before the two countries reached an agreement on a negotiating timetable.

ArcelorMittal Reports Q1 Results

Steelmaker ArcelorMittal reported EBITDA of $1.7 billion in Q1 2019, down from $2.0 billion in Q4 2018.

Steel shipments were up 7.9% from Q4 2018 “primarily due to higher steel shipments in Europe (+14.4%) due in part to the acquisition of ArcelorMittal Italia (following its consolidation from November 1, 2018) and NAFTA (+2.8%), offset in part by lower steel shipments in Brazil (-5.7%).”

“Our first quarter results reflect the challenging operating environment the industry has faced in recent months,” ArcelorMittal Chairman and CEO Lakshmi Mittal said. “Profitability has been impacted by lower steel pricing due to weaker economic activity and continued global overcapacity, as well as rising raw material costs as a result of supply-side developments in Brazil.”

Mittal also addressed high import levels, even after Europe’s approval of steel safeguard measures earlier this year.

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“We continue to face a challenge from high levels of imports, particularly in Europe, where safeguard measures introduced by the European Commission have not been fully effective,” Mittal said. “Although we are somewhat encouraged by the firmer price environment in China, this is not being reflected in Europe where in order to adapt to the current market environment we have recently announced annualized production cuts of three million tonnes in our flat steel operations. It is important there is a level playing field to address unfair competition, and this includes a green border adjustment to ensure that imports into Europe face the same carbon costs as producers in Europe.”

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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.)

As if cheap steel imports from the Association of Southeast Asian Nations (ASEAN) was not enough of a problem to handle, India’s steelmakers are now fretting over heavily discounted steel imports coming in from Iran, a country that is under economic sanctions imposed by the United States.

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The first consignments from Iran’s Bandar Imam Khomeini port via was expected to land in Indian ports soon.

The U.S. sanctions dissuade allies from having a direct trading relationship with Iran. So, to avoid import restrictions, the paperwork of these imports is done through a third country.

According to some media reports, since December 2018 imports of flat steel were being routed through the U.A.E. — otherwise a net importer — which has seen a hike of almost five times to 65,000 tons.

The Economic Times reported that the Indian Steel Association (ISA), a representative body, had written a letter to the Indian Steel Ministry, asking it to ban imports of Iranian steel.

The Indian steelmakers’ allegation was that the spike in steel imports — for which the country of origin is usually listed as U.A.E. — is the result of steel that was actually manufactured in Iran.

The ISA has said there was a five-fold increase in steel shipments to India that could be traced back to Iran. The ISA is now worried that if India continues to accept Iranian steel, it could face some retaliatory action from the U.S. for sanction violations.

Iran’s steel exports have fallen significantly since sanctions were imposed last year. Surprisingly, however, Iran’s output is up 8% in the 11 months to February 2019.

As noted by the Economic Times, the members of ISA — which include Tata Steel, JSW, and Jindal Steel and Power Ltd. — have said Iran’s surplus capacity had reached 36%, or 12.2 million tons (MT), though per capita consumption was down by 14%. About 30% of Iran’s steel is exported to ASEAN nations, according to the report.

The ISA has said that imports from U.A.E. had increased 390%, calling the increase “alarming.”

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Iranian steelmakers, most of which are state-owned, produced 42.3 MT of finished and semi-finished steel products during the 11 months to Feb. 19, according to the Mehr News Agency, marking a 10.94% increase compared with the previous year’s corresponding period.

Drawing from an Economist article, there are at least two kinds of oil shock and they can have a distinctly different impact on the economics of the day.

Arguably, what we have seen this last 18 months represents the first kind oil shock. We have adjusted to price rises as the months have gone by, but we should not lose sight of the fact that prices have doubled in the last year and, at $85 per barrel, are three times above their low point in early 2016.

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Source: The Economist

Robust global growth has boosted demand, while supply has gradually been constrained in a coordinated move orchestrated by OPEC and friends.

So far, such a rise has been accommodated by both mature and emerging markets, as strong exports have countered rising import costs, even for big oil importers like China and India. This is not as bad as the jump in oil prices we saw in the mid-2000s, the Economist notes, caused by surging demand, but it has to date been demand-led.

What we haven’t had is a supply shock — yet.

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Is Oil Heading for $100/Barrel?

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Oil prices have been quietly rising for the last six weeks.

The Brent crude benchmark has now breached the U.S. $80/barrel level to $81.20 this week, a level not seen since late 2014, the Financial Times reports.

In the U.S., ample shale oil supply and constrained infrastructure remains a drag on the West Texas Intermediate price, the U.S. marker, but it still increased $1.30 a barrel in New York to close at $72.08 this week — its highest level since July, according to the Financial Times.

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Source: Reuters

Despite tweets of protest from President Donald Trump, OPEC and non-OPEC producers meeting in Algeria at the weekend did not see any reason to increase output, saying high pump prices were down to refinery issues rather than the crude oil price.

They may, up to a point, be right, although hard data supporting this case is hard to come by.

Refined petrol prices at the gas pump are near all-time highs. In the U.K., motorists are paying up to £1.40/liter, or U.S. $7/gallon. Refiners are investing in upgrading plants, often a sign margins are strong and utilization rates are high. Gas pump prices have hit levels not seen since the oil price was significantly north of U.S. $100/barrel, but crude demand is robust and geopolitical issues have also played a part in the rising crude price.

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This development could bring some cheer to India’s Steel Authority of India Limited (SAIL), the state-run corporation that has a monopoly in the supply of railway tracks, and some of the domestic steel companies.

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India and Iran recently signed a deal worth U.S. $2 billion dollars for cooperation in the rail sector. The agreement included a Memorandum of Understanding (MoU) worth $600 million that will enable Iran to purchase locomotives and freight cars from India. The new trains in Iran will help transport passengers and freight in Iran.

What’s more, they will also be used in the Chabahar-Zahedan railroad to accelerate development of the Chabahar Port, which will eventually connect to Central Asia and, ultimately, Europe.

Iran had recently announced the launch of the construction of the Mashhad-Zahedan railway. This is part of the plan to connect Central Asia with the Iranian port of Chabahar on the Indian Ocean coast.

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