North American Crude Oil Bulletin #4

Chinese refiners are looking for new opportunities:

Shale oil boom has made it difficult to predict global supplies. Shale oil producers are much more responsive to oil prices movements than classic producers and it’s really difficult to understand how numerous individual drillers decisions will impact global oil supply. Before shale oil it was easier to predict what could be the future supply without taking in consideration outside political events.
Nevertheless, with WTI price around USD 50, it affects shale oil production as well as it is likely to boost the demand.
China is likely to take advantage of the cheap oil and following the recent 90 days trade-war truce agreed between the USA and China, some Chinese refiners are looking for opportunities in the US. However, the long-distance voyage between the US Gulf Coast and China makes it difficult for refiners who buy shale oil until the 1st march, date on which the truce ends. Chinese refiners demand the more assurances from the government, asking that cargo wouldn’t be affected with possible tariffs if shipment arrives after the 1st March.

America’s top oil producing region (Permian basin) has a new problem:

Shale crude oil is trading at 40$ a barrel in the Western Texas region. At this price, the oil is sell for less than the cost of developing new wells. That is a rude prospect for a region where oil production is booming and because Permian has permit to the United States to reach his highs production of barrels per day, making them the world’s top crude oil producer. So it will be better if the US government could find a solution in order to avoid a potential recession in this sector due to a production decrease and falling prices. During this time, we can see that West Texas Intermediate for January delivery fell $1.32 to settle at $49.88 a barrel on the New York Mercantile Exchange. Bears gained steam after the official close, with oil falling to $49.01, the lowest level since September 2017. The WTI February contract fell to $49.47. Brent for February settlement closed down 67 cents to $59.61 on London’s ICE Futures Europe exchange. The global benchmark traded at a premium of $9.41 a barrel to same-month WTI.

Spread between Brent and curve spot price:

This graph shows the spread between the brent spot price and WTI spot price from 2nd January 2007 to 14th December 2018. In grey at the bottom of the graph, there is a glimpse of the variations in the spreads.
From 2007 to the end of 2010, it was not surprising to see the spread in favor of the WTI. Several times the spot price WTI was higher than the Brent.
From January 2011 to today, the trends have reversed. The reason was the oversupply of WTI crude in USA from 2011. The spread value decreases from the begin of the year 2015 to the end of 2017 because Barack Obama try to take some government restrictions on the extraction of shale oil and gas.
A lot of people after the government restriction thought that the problem was solve. But as we can see in the graph it was not the case due to the lobby of US crude company who member/ have link with the US congress. As the Republicans have the congress majority and that some judges invalidated government measures to regulate shale oil’s extraction. The hopping spread trend didn’t follow Obama’s expectation.
One month before his departure, Barack Obama banned the creation of news crude oil’s extraction in the Arctic Ocean. But when Donald Trump became president in 2017, he began to facilitate the extraction of shale oil. It why we can see an increase in the spread during the year 2017.
Currently his team is working on a presidential decree in order to allow the extraction in Arctic. Since Donald Trump arrival, we can see that the crude production increase due to easing regarding the extraction process (reducing or eliminating restriction).

Future WTI curve

For the future curve, we have for the two last contracts (November and December) a contango situation. The future curve from June and September are in a situation of backwardation. The latest decisions from Donald Trump administration creates uncertainties about the price.

Appendix

https://www.erce.energy/graph/wti-futures-curve https://www.erce.energy/graph/brent-and-wti-spot https://www.letemps.ch/monde/barack-obama-bloque-forages-arctique https://www.lemonde.fr/planete/article/2016/06/22/la-justice-americaine-invalide-la-reglementation-de-la-fracturation-hydraulique-edictee-par-obama_4956113_3244.html https://www.theverge.com/2017/4/28/15451652/donald-trump-executive-order-offshore-oil-gas-drilling-climate-change https://www.bloomberg.com/news/articles/2018-12-13/saudi-arabia-is-said-to-target-u-s-with-sharp-oil-export-cut https://www.bloomberg.com/news/articles/2018-12-17/oil-halts-slide-near-51-on-signs-of-u-s-production-slowdown

Nigerian market struggles with surplus (WAC #4)

Price Mouvement Recap

Price mouvements

Due to the pressure from Donald Trump to reduce the price of crude, Brent as wellas West African Qua Iboe and Nemba prices were dropping down till the end ofNovember to less than $60 a barrel.

However, in the beginning of December, oil prices increased more than 2%. Saudi Arabia, Russia andother producers in OPEC decided to counterattack by cutting output in order to “drain” global fuel inventories and support the market. Consequently, Brent crude rose 2,9% to $61,70 a barrel.

Markets reacted well (hence the slight increase in prices early December) following the annoucement of OPEC. However, markets are still over supplied and therefore prices return to normal levels

Supply & Demand

Once again, high freight rates and weak Asian refining margins “kept buyers at bay” in West African market, which created a situation of unsold cargoes. Globaldemand growth of crude oil has weakened, especially from China, where refinershave a surplus of oil in storage.

“The Angolan market, which tends to be dominated by Chinese refiners, has beenslow to move. Traders said the Angolan market still has around 17 cargoes ofunsold January cargoes available, out of a total of 43 in the final loadingprogramme.” (reuters)

“The Nigerian market has suffered the most from freight rates and it’s heavily over supplied, to the tune of around 30 cargoes for December and early January,which traders said was “worrying” at this point in the supply cycle, with just a little over two weeks to go until the February loading programmes emerge.” (reuters)

Forward Curves

There is no significant change concerning the forward curves. It is still in a contangosituation and still better to store crude. Nothing has changed since the last bulletin.For September and October 2019 we can notice a slight decrease of the futureprice surely due to the output cut from the OPEC countries.

OPEC and selected non-OPEC countries agreed last week to cut their output by1.2 million barrels per day during the first six months of 2019. This 1,2millions bpdcut is based on the production of October 2018.

Most of the cuts will come from Saudi Arabia, with smaller contributions likely tocome from Russia, the United Arab Emirates, Kuwait and Oman.

Other OPEC and non-OPEC countries are unlikely to reduce their output voluntarily by any significant amount so their participation in the agreement is mostly symbolic.

Sources

https://oilprice.com/oil-price-charts

https://www.reuters.com/article/us-global-oil/oil-prices-climb-on-opec-led-cuts-but-off-session-highsidUSKBN1O603M

https://af.reuters.com/article/angolaNews/idAFL8N1Y95GV

https://twitter.com/realdonaldtrump/status/1070328136150200320  

https://af.reuters.com/article/angolaNews/idAFL8N1YC3T0

https://af.reuters.com/article/angolaNews/idAFL8N1YA4O5

https://af.reuters.com/article/angolaNews/idAFL8N1Y84BXE

– Iron Ore – Bulletin n4

Price Movement

As we can remark on this graph, after the previous falling price to 62,99 USD per Metric tonne on the 27th of November, we see an upward trend earlier this month. However, the slight drop on the start of this week indicates a current price at 66,82 USD /metric tonne especially due to the weakness in Chinese steel Futures Contracts.

Small decreases are present for the Lower and Higer grades of Iron Ore. The price of the iron ore fines 58% is fix at 42 USD/Mt and the 65% fines at 82,80 USD/Mt.

Supply and demand

Chinese steel production is still slowing due to the trade war with the US and also because China took measures to reduce air pollution. For instance, the city of Tangshan – China’s top steel production hub – announced on the December 8th, second-levels smog alerts which has led to an even more severe decline in steel production.

Therefore, 86.25million tonnes of iron ore was imported in December, down 2.4% from October and 8.8% from the same month a year earlier.

So far this year, China has imported 977.89 million tonnes of iron ore, down slightly from 991.26 million tonnes in the same period the previous year, according to calculations from Reuters (global news agency in London).

As a consequence, steel mills in the smog-prone city have to shut their sintering capacity by 30-60% or even shut down based on their emission level.

Deep future curve

The reason is the weakness in Chinese steel futures contract leading a decrease in futures contract number of iron ore.

Moreover, it is predicted that the iron ore supply will increase thanks to new investment in Brazil for the iron ore exploitation and cost decreasing by 5 %.

The Singapore Exchange (SGX) launched on the 3rd December the world’s first high-grade iron ore derivatives in order to answer the Chinese demand and to be in line with the new context of China’s environmental policy. Indeed, the new swaps and futures reference the 65% Fe Brazilian fines index, CFR Qingdao to manage high-grade segment exposure, with grade differentials in iron ore more volatile amid strong mills’ margins and the Chinese government’s targets to reduce emissions.

For instance, the top larger iron ore producers Vale is negotiating changes in its iron ore pellet contracts for 2019 from its current 62% Fe to the 65% Fe.

Recommendation

We should go long, we are expecting to see the price decline due to the rise of iron ore production.

OPEC+ found a deal ; Russia is taking it slowly ; uncertainty remains high

Russian crude oil – Weekly bulletin #4

Price movement

Oil prices were down on 4th December, as OPEC failed to give the market a clear signal regarding production cut, and whether Russia would be on board as well, should one be implemented.
Moreover, the USA as well are not helping the situation. Trump tweets stating that “the World doesn’t not want or need higher oil prices” and claiming America’s energy independence since, for the first time in 75 years, USA has become a net exporter of oil. The American Petroleum Institute (API) reported a huge crude oil inventory draw 10.18 million barrels for the week ending December 7, compared to analyst expectations that we would see a draw in crude oil inventories of 2.990 million barrels.

Qatar announcement of departure from the OPEC cartel, stating that its interest were no longer aligned with the other Persian gulf countries, probably had a significant impact on the Dubai benchmark which recorded a five dollars (-8%) drop in a day.
However, on December 7th, OPEC and OPEC+ managed to find an agreement on oil production cut – approximately 800,000 bbl/day for OPEC and 400,000 bbl/day for OPEC+. This announcement led to a small increase in most oil markets.

Supply and demand dynamic

The group of non-OPEC countries is expected to reduce production by 400,000 barrels a day, but Russia is to do its share only gradually over the next few months starting with initial cuts of 50,000 to 60,000 b/d, this is significant because Russia is the main player in the non-OPEC cohort. Therefore the cut may not be reached in due time.

Nonetheless, Russian Energy Minister Alexander Novak said on Tuesday that Russia hoped to achieve its goal of reducing oil production by 228,000 b/d, or 2%, in line with the reduction agreement of OPEC production within four months.

Russia has pledged to gradually reduce production, as freezing winter temperatures make rapid reduction difficult. The group is scheduled to meet in April to review the progress of the transaction.
Nearly a week after the OPEC+ agreement, confidence in the effectiveness of the deal is already becoming fragile.

Reccomendation for the future

Surplus supply could be further eliminated by unforeseen interruptions. Libya has just lost 400,000 bpd due to invading militias, according to the National Oil Corp. Venezuela and Iran are also expected to continue to lose production as they are still under US sanctions and meanwhile Nigeria remains under geopolitical risk. Unlikely events that could quickly erase any excess supply.

However, the oil market is not convinced that the OPEC+ cuts will be enough to raise oil prices significantly, despite the initial euphoria surrounding the Vienna agreement. There are also some other factors that could make the market saturated. Rips in the global economy are growing, the demand leads to some signs of tensions and the supply is still rising as US continue producing and Qatar is to be independent.

Despite an hectic past couple weeks, future curves show a slight contango and we are recommending investing long for the next six months.

Sources :
‘Brent Futures Curve’. ERCE. Accessed 11 December 2018. https://www.erce.energy/graph/brent-futures-curve.
‘Crude Oil Futures Trade Higher on API Data, OPEC Cuts | S&P Global Platts’. Accessed 13 December 2018. https://www.spglobal.com/platts/en/market-insights/latest-news/oil/121218-crude-oil-futures-trade-higher-on-api-data-opec-cuts.
‘Oil Prices Head Higher After API Reports Huge Crude Draw’. OilPrice.com. Accessed 11 December 2018. https://oilprice.com/Latest-Energy-News/World-News/Oil-Prices-Head-Higher-After-API-Reports-Huge-Crude-Draw.html.
‘Opinion | Why Is Qatar Leaving OPEC? – The New York Times’. Accessed 10 December 2018. https://www.nytimes.com/2018/12/10/opinion/qatar-leaving-opec-saudi-arabia-blockade-failure.html.
‘President Trump Throws Hail Mary Tweet On Eve Of OPEC Meet’. OilPrice.com. Accessed 13 December 2018. https://oilprice.com/Latest-Energy-News/World-News/President-Trump-Throws-Hail-Mary-Tweet-On-Eve-Of-OPEC-Meet.html.
‘Russia Will Cut Oil Production By 60,000 Bpd In January’. OilPrice.com. Accessed 13 December 2018. https://oilprice.com/Latest-Energy-News/World-News/Russia-Will-Cut-Oil-Production-By-60000-Bpd-In-January.html.
‘Russia’s Oil Production Cuts To Take Months To Implement’. OilPrice.com. Accessed 13 December 2018. https://oilprice.com/Latest-Energy-News/World-News/Russias-Oil-Production-Cuts-To-Take-Months-To-Implement.html.
‘Russia’s Oil Production Dips As Possible Production Cuts Near’. OilPrice.com. Accessed 13 December 2018. https://oilprice.com/Latest-Energy-News/World-News/Russias-Oil-Production-Dips-As-Possible-Production-Cuts-Near.html.
‘Urals-Brent Price Difference’. Neste worldwide, 19 February 2015. https://www.neste.com/corporate-info/investors/market-data/urals-brent-price-difference-0.
‘Why The OPEC+ Deal Won’t Cut It’. OilPrice.com. Accessed 13 December 2018. https://oilprice.com/Energy/Crude-Oil/Why-The-OPEC-Deal-Wont-Cut-It.html.

Soybean Bulletin N°4

As we can see in this graph that spans over the last week, the price of the soybean has risen quite a bit. Going from $9.10 and reach $9.20, all while experiencing a sharp dip early in the week. It was resolved almost immediately after.

Additionally, the last two days represented the highest the price has reached with this week’s peeking happening on the 12th and surpassing $9.20.

The fact that the price has gone past the 9 dollar mark displays that the market is slowly recovering from the slump it has been stuck in. If it continues to follow this trend, the effects of the Trade War will be considerably lessen.

However, we had the news that China has made his first major purchase of U.S soybean this last Wednesday 1.5 to 2.0 millions metric tons, providing some relief to U.S farmer who have struggled to sell their record-large harvest. The fact that a trade between the Chinese and the Americans happened not only brought hope for this market after months of trade war, but also has made the value of the soybean rise. Since it means that there is future with these nations trading in soybean, the price naturally went up to reflect the fact that these actors will finally make a decent margin.

Almost two weeks before the end of the year we can see always the same pattern regarding the forward curve of the soybean. However, we can see that there is a slight inverse position beginning at the end of July 2020. This inverse refers to the phenomena that we already describe a few weeks ago (seasonal pattern). Same pattern forecasting for July 2019.

In this graph we can clearly see the impact of the trade war on the Brazilian soybean exports, where, the previous years we can see that the curve is following the same pattern (again due to the seasonal pattern), so it is decreasing in November but with the trade war and China who was asking always for more soybean, Brazilian keep supplying ,for a longer period, China in order to respond to this huge demand.

https://www.cnbc.com/2018/12/12/reuters-america-grains-soybean-prices-ease-after-2-days-of-gains-chinese-buying-curbs-losses.html
https://www.farmfutures.com/story-weekly-soybean-review-0-30767
http://marketqview.com/forwardcurvechart.php?ID=74&TYPE=Price
https://www.ig.com/en-ch/news-and-trade-ideas/commodities-news/us-soybean-farmers-win-big-from-us-china-trade-war-truce-181213
https://markets.businessinsider.com/commodities/soybeans-price

Bulletin 3 – “LNG and NG, the best performing commodities in November 2018”

Spot price

We can see on the graph below that the US NG Henry Hub spot price was traded at USD 4.423($ per Million Btu) the 2018-12-06 at 09:01:11. As we can observe here, the price has risen since the beginning of November. As seen last time, we know that NG is a very seasonal commodity. Since winter has hit the US, it is normal to see these higher prices: demand is high. We can also compare with the weather temperature from September to see the correlation (see weather 2ndgraph below).

Beginning of October, spot price was at closing time 3,110$/BTu.

Beginning of November, spot price was at closing time 3,293, meaning a +5,88% increase. If we compare to now (4,423), it is an increase of +34,3% from 1stof November + 42,22% since 1stof October!

We can observe a sudden ‘’Wile.E coyote’’ moment the 15thof November, the actual highest November pick in the US, where it was reported to be at 65F (18C) a sudden hot day. It shows how volatile this commodity can be looking at the weather.

Fahrenheit to celsius calculation : (32 °F − 32) × 5/9 = 0 °C

Or here directly: https://www.rapidtables.com/convert/temperature/fahrenheit-to-celsius.html

AVG US :

October : Orange : 11c/ blue : -5c/ braun : 26c /  gray : – 25c

November :Orange : 3c / blue : -10c / braun : 18c / gray : -37c

Left to right: September and October heat map US 2018.

For today’s weather, available here: https://www.weathercentral.com/weather/us/maps/current_temperatures.html

What about other NG markets?

We can observe than the US gas is lower than European and Asia gas: not surprising since we know that US benefits from its large Shell gas supply since 2009. Asian gas LNG is the highest since most of its cost is due to the LNG transformation and freight costs. If we take Henry Hub as the benchmark, both EU and Asian gas are traded at a premium: 4.13$/BTu and 7.52$/BTu respectively. We can observe an abnormal rise in September in Europe: this was due to Outages in the North Sea that lasted 4 weeks, decreasing supply, now it has come back to normal. Something that we can also observe is both Asian and European gas seem to be in a constant positive slope compare to US, which seems to react more to seasonality (high in Oct-nov-dec-jan, lower the rest of the year).

Forward curve

The natural gas forward curve below shows the latest closing prices for the 24 future natural gas contracts. For the month of December 2018, the spot price equals to USD 4.46 per mmbtu (closing price on December 4th, 2018, available at: https://markets.businessinsider.com/commodities/historical-prices/natural-gas-price/usd) and is lower than the current forward price which is equal to USD 4.602 per mmbtu (forward contract January 2019. Contract expiration date: December 27th, 2018. Available at: https://bluegoldresearch.com/forward-curve).

Currently, natural gas market is in contango and the forward curve is upward sloping. This means that the forward price might increase over the cold months.

From the beginning of the spring months (March 2019), the natural gas and liquefied natural gas market will be in backwardation because of the decrease of the forward price. The factor that makes the depreciation of the forward curve is the weather data which shows some future warm temperatures above the normal level in the US for example.

If we compare the current forward price (January 2019) with the one presented in the previous bulletin (USD 4.53, bulletin no. 2 – “The rally of LNG and NG”), we notice that the current forward price is higher, and still higher than the spot price.

We might conclude and recommend selling natural gas and liquefied natural gas during the backwardation period which should arrive very soon.

https://bluegoldresearch.com/forward-curve

The winner of November 2018

Natural gas was considered as the best performing commodity in terms of forward price. Indeed, the future price of this commodity climbed at 41.1% for November 2018. The highest future price recorded in November had amounted to USD 4.837 per mmbtu. This commodity has not recorded a high future price such this one since February 26th, 2014.

The factors that pushed up the future price were the low storage of NG and LNG, the cold weather forecasts and the record exports of NG and LNG.

(Available at: https://www.marketwatch.com/story/natural-gas-leads-commodity-gainers-in-november-but-oil-prices-suffer-the-biggest-losses-2018-11-30?siteid=rss&rss=1)

Inventory levels

As we can see on the inventory level’s graph, on November 21st, the actual inventory level was lower than the forecasted level. The effect on the price was a bullish effect because of the high demand. Most of the time, this deficit of the inventory level might occur because of a non-linear demand, which increases during the cold weather periods.

The difference between the last two reported inventory levels (Nov 21st, 2018 and Nov 29th, 2018) was that the actual deficit is lower than forecasted, which pushed up the spot price of NG.

The unit used in this graph is in “the number of cubic feet of natural gas”.

https://www.investing.com/economic-calendar/natural-gas-storage-386

Creation of a new hub in Asia

Since more than one year, there is a rumour about the future creation of a hub in Asia. Actually, it is kind of a non-sense that in Europe work two gas hubs, the TTF and NBP and in United States the Henry hub so why not establish one or more in Asia?
The most advanced hub initiatives are in Singapore, Japan, and China. A number of institutional and structural requirements needed to create a competitive wholesale natural gas market. Six requirements put forward by the IEA “International Energy Agency” were settle.

The institutional requirements were as follows:

  1. A handsoff government approach to natural gas markets. An independent antitrust agency who will regulate the hub.
  2. Separation of transport and commercial activities.
  3. Wholesale price deregulation. Letting the market fix by itself the price and not the government.

The structural requirements were as follows:

  1. Sufficient network capacity and non-discriminatory access to networks.
  2. Competitive number of market participants Gas market requires a number of gas suppliers and traders with competitive market shares along with multiple producers and buyers of gas.
  3. Involvement of financial institutions.

Hence, by referring to the requirements above, which of the three following countries would be the best to host the Asian hub, Singapore, Japan or China?

Sources

Natural Gas Forward Curve, 2018. “Henry Hub Natural Gas Futures Price”. Bluegold Research (online). Consulted on December 5th, 2018. Available to the following URL: https://bluegoldresearch.com/forward-curve

SAEFOND, Myra P, 2018. “Natural gas leads commodity gainers in November, but oil prices suffer the biggest losses”. Market Watch (online). December 1st, 2018. Consulted on December 5th, 2018. Available to the following URL: https://www.marketwatch.com/story/natural-gas-leads-commodity-gainers-in-november-but-oil-prices-suffer-the-biggest-losses-2018-11-30?siteid=rss&rss=1

GONZALES, Leticia, 2018. “January Natural gas Plunges as Warming Trends Traders’ Attention”. NGI’s daily gas price index (online). December 3rd, 2018. Consulted on December 5th, 2018. Available to the following URL: https://www.naturalgasintel.com/articles/116659-january-natural-gas-plunges-as-warming-trends-finally-catch-traders-attention

U.S. Natural Gas Storage. Investing.com (online). Consulted on December 5th, 2018. Available to the following URL: https://www.investing.com/economic-calendar/natural-gas-storage-386

UK GAS-Prices rise on Norwegian supply disruptions https://af.reuters.com/article/energyOilNews/idAFL1N1V7057, consulted December 2018

averagetemp-monthly-cmb for 2018-10-00 | NOAA Climate.gov https://www.climate.gov/maps-data/data-snapshots/averagetemp-monthly-cmb-2018-10-00?theme=Temperature, consulted December 2018

Pubdocs.worldbank.org

http://pubdocs.worldbank.org/en/451911543968504757/CMO-Pink-Sheet-December-2018.pdf, consulted December 2018

Calendar Monthly Weather Forecast – weather.com

https://weather.com/weather/monthly/l/Calendar+USID0448:27:US, consulted December 2018

Plus500 WebTrader

https://app.plus500.com/trade/usa–g, consulted December 2018

 

NORTH AMERICAN CRUDE OIL#BULLETIN 3:

The crude price had plunged in the past two months on fears of a global oversupply. Oil at USD 50 is considered as the break-even point and shale drillers have been budgeting their spending plans considering this minimum price for the past years.

Most of the shale oil producers will announce their spending plans in January or February 2019 and there are already signs that they will cut their budget. This will be the first industry cut in North America since 2016

However in the past days, oil prices have reach highs in more than five months. Saudi Arabia and Russia have extended their cooperation and they will probably deal with production cuts during the next OPEC meeting. Following OPEC advisory committee recommendation, members should cut around 1.3 million barrels a day to balance the market.

An unprecedented supply cut was decided in the Canadian province of Alberta. Local producers have to decrease their production by 325’000 barrels or 8.7% a day starting next month until excess oil in storage is drawn down.

In another hand, the announcement from Qatar to leave the OPEC in January didn’t affect significantly the prices during this bullish period of time.

The OPEC meeting in Vienna will confirm if the bullish mood will continue or if the members do not agree on cuts and the prices will keep decreasing.

Oil price sink

WTI and Brent spot price

Leading up to 04 December 2018 data release from the American Petroleum Institute (API), crude oil prices were trading for the WTI at $53.12 (up $0.17 / +0.31%) and Brent crude at $62.06 (up $0.37 / +0.60%). This small increase is due to the recent announcement made by various OPEC players including Russia, giving hope that a production cut may be reached this weekend. The expected production cut could be as much as 1.4 million barrels per day.

China set to resume buying U.S crude oil after trade war truce

Following the weekend meeting between U.S president Donald Trump and Chinese President Xi Jinping, they have decided to make a truce on the trade war and pledged to immediately begin trade negotiations in view of possible deal within 90 days.

Chinese refiners are now willing to buy U.S crude oil by March 1 as the tentative halt to additional tariffs and lower oil prices are making U.S crude oil attractive again. Although U.S crude oil is not on China’s tariffs list, Chinese buyers have been staying away from U.S crude oil purchases since the summer.

It is important to remain that before the trade war escalated, the exportation of any crude oil to China were 510’000 barrels per day in June and 383’000 barrels per day in July.

COMPARISON WTI FUTURE CURVES FROM  30 MAY TO 30 NOVEMBER

As we can see in this graph, the future price path changed a lot from 30 May 2018 to 30 November 2018. But at the end, the difference of price between the price determined in 30 May 2018 is near of the last future contract indicated in 30 November 2018. The chart shows the price from 1 month to 80 Month in the future

Recommendation:

According to the political resolution about the production reduction from OPEC, the price in the next month will increase so we can buy now when the price is not high and sell after when the price will be high.

Appendix

https://oilprice.com/Energy/Crude-Oil/Shale-Drillers-May-Cut-Capex-As-Oil-Falls-To-50.html

https://www.bloomberg.com/news/articles/2018-11-29/shale-patch-seen-cutting-budgets-for-first-time-since-last-crash

https://www.bloomberg.com/news/articles/2018-12-03/alberta-orders-unprecedented-production-cut-to-ease-crude-crisis

https://www.bloomberg.com/news/articles/2018-12-03/oil-jumps-after-saudi-arabia-and-russia-agree-to-extend-pact

https://oilprice.com/Latest-Energy-News/World-News/China-Set-To-Resume-Buying-US-Crude-Oil-After-Trade-War-Truce.html

https://oilprice.com/Latest-Energy-News/World-News/Oil-Prices-Sink-On-Surprise-Inventory-Build.html

https://www.erce.energy/graph/wti-futures-curve

 

 

 

 

 

 

Copper Bulletin N°3 – The Adventures of Tariff Man

During last weekend’s G20 summit, the US President, Mr Trump and the Chinese President Xi Jinping agreed on a 90-day ceasefire in their damaging trade dispute. Trump decided not to increase its tariffs to 25% starting on January 1st and but to keep them at 10% till March 1st.
On Monday and thanks to to this agreement, the copper cash price first rose from 6,237$ to 6,306$ but decreased significantly the next to days to reach 6,161$, its lowest in a week, following Mr Trump’s comments that he will revert to tariffs if the two side cannot resolve their problems before the 90-days truce ends as well as its comment on twitter that he is a “Tariff Man”.

If you want to know more about tariff man, please press play :

Therefore, what was supposed to be a good news was received by a significant amount of worries by the market which still doubts about a the possibility to see a trade resolution soon. Moreover, in order to secure the 90-day ceasefire between the two countries China agreed to a number of additional commitments.

China agreed to purchase a “very substantial” amount of agricultural, energy, industrial and other products to reduce the bilateral trade imbalance. However, the exact amount has not yet been agreed.
Nevertheless, the cease-fire helped to reestablish the usual relation between the cash and the 3-month prices. Historically, a higher 3-month price compared to cash price has always been observed as copper is generally traded using 3-month contracts and also for carriage reasons. However, these last weeks, the trend switched and the cash price was traded with a premium relative to the 3-month prices. This situation was due to the unpredictable decisions President Trump could have made, consequently, people were rushing and settled price for direct delivery. With the 3 months truce, we believe that the market will experience a “temporary stability”.

To secure the 90-day ceasefire between the 2 countries and the of Mister Trump, China agreed to a number of additional commitments.
China agreed to purchase a “very substantial” amount of agricultural, energy, industrial and other products to reduce the bilateral trade imbalance. However, the exact amount has not yet been agreed.

Regarding the inventory, the LME warehouse level remain low (As shown in the graph). No big change since beginning of November. The offer and the demand are therefore meeting quite well. The price did not experience any big variation due to the inventory.

http://www.china-briefing.com/news/us-china-trade-truce-90-days-g20-summit/
https://finance.nine.com.au/2018/11/30/07/46/copper-gains-but-trade-thin-ahead-of-g20
https://www.cnbc.com/2018/12/02/dow-futures-surge-after-trump-and-xi-agree-to-pause-the-trade-war.html
https://www.cnbc.com/2018/11/30/reuters-america-metals-copper-steady-as-all-eyes-turn-to-g20-meeting.html
https://uk.reuters.com/article/global-metals/corrected-metals-copper-eases-on-soft-china-data-ahead-of-g20-meeting-idUKL4N1Y53KI
http://www.infomine.com/investment/warehouse-levels/copper/1-month/

Louis Dreyfus makes a move!

According to the composite and the future prices for both types of coffee beans, we can notice a significant decrease which continues the downward trend in the price that was seen in previous bulletins.

One reason for the price decrease in the composite graph, is the same as for the first two bulletins, it is that the Brazilian currency has been rising as we can see in the graph, we know that both are negatively correlated so when one goes up, the other generally goes down.

In terms of the futures prices, this decrease is due to a high supply of coffee beans on the  market. We will explain more on what happened below.

Following an article on CNBC, we understood that the November Robusta Future Contracts were traded at a discount of 11-33 dollars. Therefore, Louis Dreyfus, one of the leading agriculture trading company, bought the majority of stock of Robusta beans because of the attractive price which is also used to reduce significantly the carrying costs it has because Dreyfus owns a number of certified warehouses across Europe including Belgium(4stox and Molenbergnatie). This allowed them to stock the beans in their warehouses without it costing them as much as it normally would’ve thanks to the low price of the Robusta.

We believe that this was a strategic move by Dreyfus, as this purchase along with the purchase of 33,360 tonnes of Brazilian Robusta beans was done to have the majority of stocks. Having this important part of inventory allowed the trading company to have the control as well as the power, compared to its competitors, on the physical supplies of Robusta beans.

We have discovered that the high production and supply of Brazilian Robusta beans bought by the European Market made the Vietnamese Robusta beans drop in price as they have also a big supply but no many buyers because most have bought from Brazil which had cheaper prices.

Overall, the price of coffee has been dipping because of the fact that there is too much supply in the market.

We can highlight that this over supply and sharp decrease in price is like in the oil market at the moment.

 

https://www.nasdaq.com/markets/coffee.aspx?timeframe=1m

https://www.cnbc.com/2018/11/20/reuters-america-louis-dreyfus-poised-to-take-back-strategic-robusta-stocks–sources.html

https://fp.brecorder.com/2018/12/20181204428466/

https://www.theice.com/products/15/Coffee-C-Futures/data?marketId=5352189

https://www.theice.com/products/37089079/Robusta-Coffee-Futures/data?marketId=5545668

http://www.ico.org/prices/p1-November2018.pdf

https://www.xe.com/currencycharts/?from=BRL&to=USD

Iron Ore Bulletin N°3

Iron ore spot price

According to Metal Bulletin, the spot price for benchmark 62% fines tumbled 8.4% to $64.25 a tonne, its largest one-day percentage drop since April 12 last year.

It is the largest recorded declines in the era of spot pricing for lower and higher grades ore too.

The prices are declining for several reasons, the first one is the steel entering a bear market, and in consequence, the steel prices decrease, it means that the margin for steel mills are decreasing almost to nothing. To counter that, steel mills in China produce steel with low-grade iron ore, which is cheaper. Unfortunately, it is the first time since three year that Chinese mills report losses.

Moreover, today, china has less incentive to produces steel and the producers are offloading existing inventory in the market.

Future of iron ore

Based on a report from iron ore and steel data Analytics Company, they found out that steel mills are putting pressure on iron ore producer to decrease there price in order maintain their margin.

The steel mills are hedging their forward production profit margin because they expect higher production due to less sintering cuts from the government.

It means that with demand of steel decreasing because of the cold season, however in the first quarter 2019, the mills will increase production can maintain their profit margin by buying input at lower price.

The future contract of iron ore are down warding slopping because it reflect the steel industry future contract such as steel rebar and steel scrap

Like iron ore, that’s also been reelected in coking coal and coke futures on Monday with the most actively-traded contracts sitting at 1,289 and 2,137 yuan respectively, down from 1,321.5 and 2,170 yuan on Friday evening.

Steel futures are also under pressure with rebar and hot-rolled coil prices sitting at 3,575 and 3,397 yuan respectively, off Friday’s night session close of 3,627 and 3,465 yuan.

($1 = 6.9499 Chinese yuan)

Recommendation

We should go long, we are expecting to see the price decline due to the rise of iron ore production. Indeed, according to the Fitch Solutions Global Iron Ore Supply and Demand Outlook Report, the iron ore’s output will increase from Brazil and India from 2018 to 2027. Thanks to their new mining infrastructure.

References

Els, F. (2018). Iron ore price craters 8% | MINING.com. [online] MINING.com. Available at: http://www.mining.com/iron-ore-price-craters-8/ [Accessed 28 Nov. 2018].

Investing.com. (2018). Iron ore fines 62% Fe CFR Futures Contracts – Investing.com. [online] Available at: https://www.investing.com/commodities/iron-ore-62-cfr-contracts [Accessed 28 Nov. 2018].

Investing.com. (2018). Iron ore fines 62% Fe CFR Futures Contracts – Investing.com. [online] Available at: https://www.investing.com/commodities/iron-ore-62-cfr-contracts [Accessed 28 Nov. 2018].

Lme.com. (2018). London Metal Exchange: LME Steel Scrap. [online] Available at: https://www.lme.com/Metals/Ferrous/Steel-Scrap#tabIndex=2 [Accessed 28 Nov. 2018].

MINING.com. (2018). China iron ore hits 4-1/2-month low, steel market under pressure | MINING.com. [online] Available at: http://www.mining.com/web/china-iron-ore-hits-4-1-2-month-low-steel-market-pressure/ [Accessed 28 Nov. 2018].

Scutt, D. (2018). Iron ore is in free-fall. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/iron-ore-price-collapse-china-steel-production-profits-2018-11 [Accessed 28 Nov. 2018].