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President Trump is not unused to controversy — some say he even courts it.

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So, a recent proposal following an executive order signed last April to widen energy exploration should come as no surprise.

The draft Five-year Outer Continental Shelf Oil and Gas Leasing Program has been enthusiastically welcomed by the oil and gas industry but vociferously opposed by a cross-party coalition of governors, lawmakers, environmental groups and the military.

The proposal is to open up 25 out of 26 regions of the outer continental shelf in which oil and gas exploration had been banned by former President Barack Obama near the end of his term. The ban blocked drilling about 94% of the outer continental shelf, but the Department of the Interior said the new proposal would open up 25/26 regions on the Eastern seaboard, the Californian coast, the Gulf of Mexico and in the Arctic.

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After hitting a low of below $43/barrel in mid-2017, the oil price has risen inexorably to its highest level since 2015, according to the Financial Times. Rising some 35% since July, Brent crude hit over $67/barrel as hedge funds heap long positions despite the market, by most accounts, still being in surplus.

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Source: MacroTrends.com

OPEC’s alliance with Russia and a few other non-OPEC producers has certainly restricted supply (and the market is tighter as a result). However, the U.S. Energy Information Administration forecast in December that U.S. oil production would rise by 780,000 barrels a day in 2018, as prices continue to increase.

But for the first time in several years, the talk is more about demand and geopolitical risk than about excess supply.

Venezuela is rapidly imploding with output from the world’s second largest proven oil reserves failing steadily. Iranian unrest has added further anxiety for fear the protests could continue and possibly begin to impact output. Meanwhile, one-off crises like cracks found in a major North Sea pipeline and a fire in Austria have added a sense of vulnerability to the market that wasn’t there just a few months ago.

“Geopolitical risks are clearly back on the crude oil agenda after having been absent almost entirely since the oil market ran into a surplus in the second half of 2014,” the FT quotes Bjarne Schieldrop, chief commodities analyst at SEB.

Meanwhile, though, the elephant in the room is stirring.

U.S. shale production is on the rise and U.S. exports are also increasing sharply, offering the potential to undermine global markets. Platts estimates in its December 2017 Insight report U.S. crude exports could average 2 million b/d by 2019, having already nearly breached this figure in late September. The capacity is in place to export 3 million b/d now and will be closer to 4 million b/d during 2018, Platts reports.

Source Platts

Nor is rising supply from U.S. shale the only source of supply-side excess.

New projects in Brazil and Canada could add as much as rising U.S. exports matching rising global demand and leaving the market at best in a balanced state. For now, the bulls have the market by the horns — to muddle my metaphors — but 2018 will see a fascinating tussle between OPEC-led cutbacks and growing supply from the Americas.

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On the plus side, strong global growth, both among mature and emerging markets, is lifting demand. For the time being, the bulls are in the ascendancy and it would be a brave wager to bet against them in the short term.

The 14-strong Organisation of Petroleum Exporting Countries (OPEC), along with 10 oil states outside of the cartel, has reached an agreement to limit oil output until the end of 2018. This decision comes after what has already been more than a year of production cuts, the Telegraph reports.

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This new deal, wider and more inclusive than the one running since the beginning of this year, will also extend to Nigeria and Libya. Previously, these two countries were exempt from the production quotas, despite being OPEC members, because of their struggles with internal political unrest.

OPEC crucially reached an agreement despite the last-minute posturing from Russian oil minister Alexander Novak, who warned that oil prices above $60 a barrel could reignite a production boom in the U.S. shale industry.

The agreement reached by the OPEC and non-OPEC members faces several serious challenges in achieving its objective of stabilising oil prices. The first is that one of its core members, Russia, does not appear to share the same objectives. They may be saying the right things, but according to Georgi Slavov, head of research at broker Marex Spectron, Russia’s cooperation is mostly “in words.”

“In reality Russia has been pumping oil like crazy and this will likely continue. As prices rise the incentive to cheat will too. Others may join the party,” Slavov said. “It is astonishing that the entire market is ignoring this. The market’s fixation is currently on what could happen. However, it is not paying attention to what is actually happening.”

A later article throws further light on the Kremlin’s position, saying Russia has a higher tolerance for depressed prices since the floating rouble cushions their budget.

Russia aims to balance the books at oil prices of $44 by 2021 under its fiscal plan, compared to $113 four years ago. Supported by ultra-low production costs, Russia is loath to cede market share and worried that prices above $60 a barrel will re-ignite significant U.S. shale activity, bringing prices down and reducing everyone’s market share as the same time. Read more

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This morning in metals news, the U.S. Department of Commerce launched an anti-dumping and anti-subsidy probe into Chinese aluminum imports, oil prices rise above $60/barrel and copper prices fall for a third consecutive day.

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Commerce Dept. Launches Aluminum Probe

On Tuesday, the U.S. Department of Commerce launched an anti-subsidy and anti-dumping probe of imported Chinese aluminum alloy sheet, Reuters reports. Beijing is less than happy about the investigation and released a strongly-worded statement on Wednesday, arguing that the move 10would harm both countries.

What sets this probe apart is that it was initiated by the Commerce Department itself, whereas usually these investigations are requested by companies and industries claiming harm from imports. The last time the Commerce Department initiated an anti-subsidy probe was in 1991, on Canadian softwood lumber.

If the probe proceeds, preliminary anti-subsidy and anti-dumping duties could be issued in February and April 2018, respectively.

The End of the Global Oil Oversupply?

Is it the beginning of better days for oil exporters? OPEC and Russia’s agreement last year on oil production cuts has helped prices recover. Brent crude oil reached $64 a barrel this week, the New York Times reports, and some analysts are expecting prices to top $70 next week. Read more

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Before we head into the weekend, let’s take a look back at the week that was.

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Before we dive into the weekend, let’s take a look back at the week in metals news:

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  • Our Stuart Burns started out the week with a piece on confirmation bias and how those in the media and metal-buying communities can sometimes let bias affect their interpretation of data.
  • What’s the diagnosis for the ailing U.K. steel industry? According to Burns, it’s a product of a lack of government support and global oversupply. A recent report showed that the U.K. steel industry has declined in monetary output value by 30% from 1990 to 2013.
  • In case you missed it, our July MMI report has long been in the books. You can download it here.
  • What did the recent G20 summit in Germany mean for India? Our Sohrab Darabshaw touched on the subject this week.
  • What’s up with oil prices? Unsurprisingly, as with the metal markets, prices are so low because there is just so much of the stuff out there. Burns dug deeper into oil price trends in a piece earlier this week.
  • What’s a Section 332? In short, it’s a fact-finding investigation by the United States International Trade Commission, which recently conducted a large-scale look into the competitive factors affecting the U.S. aluminum industry.
  • Another big story, the ongoing debate regarding a potential renegotiation of NAFTA, got an update this week when it was announced that the U.S., Canada and Mexico will come together for talks beginning Aug. 16.

Free Download: The July 2017 MMI Report

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Although oil and gas remain Iran’s most important exports by far, one beneficiary of the relaxation in trade embargoes has been the metals industry.

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According to an analysis by the Ministry of Industries, Mining and Trade, reported in the Financial Tribune, the data show growth in the production of crude steel, finished steel products, iron ore, coal concentrate and sheet glass in the last Iranian financial year running March 2016 to March 2017 compared to the year before, showing a significant uptick in output (much of it for export).

Coal concentrate saw the greatest increase with the rise of 10.6%, from 1.113 million tons in March 2015-16 to 1.232 million tons last year. Crude steel output had the second-largest gain, rising from 16.538 million tons to over 18 million tons (a 9% increase).

Iran holds the world’s 10th-largest reserves of iron ore. Despite dominance by Australia and Brazil, Iran still managed a 4.2% increase to 31.711 million tons, helping lift production of steel products 1.4% to 17.681 million tons.

These sound like modest increases for a country recently facing lower barriers to trade, but that may be because the benefits have yet to percolate through to the wider economy.

In the meantime, it is direct exports that have benefited the most. The Financial Tribune reported Iran’s total mineral products shipments last year registered a 17% and 38% increase in value and volume, respectively, year-on-year.

Source: Trading Economics

From a value perspective, it is difficult to make a judgement year-on-year for total exports because some 82% by value is oil and gas, for which prices have been highly volatile.

Even so, with a depressed oil price, Iran’s exports are heading back above their historical long-term trend of some $20 trillion, as the above graph from Trading Economics shows. The oil-price-induced spike of 2006-10 was an anomaly not seen before or since.

Economically, Iran would benefit enormously from a full and unfettered return to the international markets, but that is not going to happen while the autocratic mullahs remain in control. Liberal parties are dissuaded from the political process and many opposition politicians remain in jail. As in so many authoritarian regimes, those in power live well while the clear majority fail to enjoy the standard of living they could achieve based on their high standards of education and young, dynamic population.

Free Download: The July 2017 MMI Report

Even so, the country’s economic situation is trending positively. Foreign firms are showing greater confidence in returning to the Iranian market after years of sanctions.

It is no surprise that oil prices continue to fall when you look at the rising tide of oil production around the world.

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Source: Financial Times

The U.S. shale industry is frequently accused of being the main culprit, but tight oil is far from alone.

A recent FT article explores how investments that were started five or six years ago, when the oil price was $100 a barrel, are now coming on stream with a vengeance.

The FT quotes a forecast released by the Canadian Association of Petroleum Producers, which sees the country’s output increasing by 270,000 barrels a day this year and a further 320,000 barrels a day in 2018. The article notes that the combined two-year Canadian increase will be equal to almost a third of OPEC’s production cuts planned for this year.

Canada is home to the world’s third-largest reserves of oil and is the largest external supplier to the U.S. market, shipping in as much as the rest of the world put together. These new projects may not be making money at today’s prices, but they are making a contribution to the massive investments already incurred.

The FT quotes the Alberta Energy Regulator saying the minimum per-barrel oil price for a mining project to recover capital expenditures, operating costs, royalties, and taxes in 2016 ranged between $65-$80 a barrel. Meanwhile, the price for “in situ” plants using steam was $30-$50 per barrel. Today’s cost for oil shipped to the Cushing hub is at no more than $44 per barrel.

Costs for operational plants are lower, with estimates quoted by the FT is $22 per barrel for mining projects and as low as $11 a barrel for in situ plants. In addition, it could be that many of these new investments have hedged their forward sales at higher prices.

Source: Financial Times

That is certainly the case with the U.S. shale frackers.

A separate FT article estimates that some 40% of the industry was hedged at about $50 dollars a barrel, with some resource areas — like the Permian Basin of Texas and New Mexico — having hedging rates as high as 70-90%.

Unlike tar sands, tight oil can be turned on and off with considerable flexibility, like the hare to the oil sands’ tortoise.

Rig counts have been rising for 23 consecutive weeks, the FT notes, and with a growing stock of  drilled-but-uncompleted (DUC) wells rising by 22% to over 5,000 between December and May, there is considerable potential for output to be increased further.

As if rising production from Canadian tar sands and U.S. tight oil was not enough, OPEC is also seeing its own cartel members increase output by 336,000 barrels a day in May from April, led by big rises from Libya and Nigeria, according to FT.

Free Download: The June 2017 MMI Report

Saudi Arabia may well be ruing the day it opened the taps in order to drive down the oil in the hope of killing off “high cost” U.S. shale oil. The prospects of getting an oil price back above $100 must now look like a distant dream.

It won’t have escaped your notice that the shine has gone off the metals market.

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Prices have been softening across not just metals but other commodities, like oil, too.

Consumers, of course, will not be complaining, but are nevertheless keen to understand what is going on and whether we are seeing a temporary dip or a move into a prolonged bear period.

Commodities in general are facing multiple headwinds.

While demand for iron ore and oil is steady, both markets are in oversupply. Oil prices have received short-term support from favorable comments around output cuts. Prices have subsequently continued to soften as long positions have been unwound and investors have concluded prospects of a supply balance are receding.

In China, the authorities have been squeezing investors by increasing shadow banking borrowing costs, resulting in positions being unwound and prices softening.

In the U.S., markets surged after President Donald Trump’s election victory with the expectation his campaign promises of trillion dollar infrastructure investment would create a building and consumption boom.

Since those heady days, the realization has set in that the desperately needed investment may not be quite as significant as first thought.

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It is something of an unholy alliance, but Russia and Saudi Arabia are becoming ever closer allies in a graphic example of realpolitik.

The two would probably be implacable enemies if their contrarian positions in Syria were any gauge – Russia closely aligned with Iran in their support of Bashar al Assad, yet Iran is Saudi Arabia’s public enemy number one and only major rival in the Middle East.

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But economics trumps almost all, and the two’s interests are certainly aligned in trying to reverse the damage done by Saudi Arabia’s failed bid to squeeze U.S. shale drillers out of the market and the corresponding glut of supply forcing prices to painfully low levels – painful at least for oil producers.

As the FT observed in quoting RBC Capital Markets as saying, “Saudi Arabia and Russia are essentially now co-pilots of this operation (of restricting output to boost prices) and they’ve made it clear there will be no going back to chasing market share.” The article goes on to quote: “It’s a huge change from two years ago when Russia would not co-operate with OPEC and even questioned its relevance in the age of shale.”

The two agreed last week to not only extend but deepen production cuts for a further nine months into 2018.

But not all agree with the International Energy Agency’s prediction that the cuts will be enough to balance supply and demand later this year.

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