Analys

Trump holds the key for commodities

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6 år sedan

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31 augusti, 2018

SHB Handelsbanken - Tradingcase råvaror - Analys

In a summer when investors have been caught off guard by everything from emerging market woes and the dollar’s tailwind to a brewing trade war, commodity markets have once again appeared in the crosshairs in terms of market turbulence. This time, it is not China, OPEC or oil which are central to crisis, but rather it is the USD-financed emerging markets and their mined metal and soft commodity production. We do not think the emerging markets crisis will be a China crisis and we believe that copper and zinc are set to rebound.

Starting point is Trump’s politics

MSCI and S&P500

Three major President Trump-related developments are having a significant impact on the commodity universe right now. First, the US decision to leave the Iran agreement and impose sanctions in two stages against Tehran laid the ground for a more direct market pricing of any similar actions against other countries.

Second, sanctions were imposed on Russia, and and most recently, US import tariffs on steel and aluminium were doubled on Turkey.

Third, on top of sanctions, developments in the trade war stalled during the summer and the positions of the various sides appeared to become locked.

These developments served to illustrate the US approach to emerging markets, in our view, and changed market pricing, kicking off a divergence between the pricing of US assets and those of emerging markets.

Turkey will not spread to Asia

If the Turkish currency crisis is not staved off, the risk of a financial system meltdown and, ultimately, a government debt default is high. But even though Spanish banks are vulnerable, Turkey’s problems should not hurt the overall eurozone economy to a significant degree. Euro weakness and European stock market declines due to the escalation of Turkey’s crisis therefore seem to be overdone. However, Turkey is far from out of the woods yet and the situation might need to worsen still to convince Turkey to adopt a painful, but more sustainable, path toward regaining financial markets’ trust. Other emerging markets with similar challenges, such as South Africa, Argentina and Pakistan, also face tough times ahead.

China stands out

CDS

What ties the affected emerging market countries together this time is expensive USD financing. China is not among them. This is can be seen clearly by studying developments in the cost of credit default swaps, or CDS.

China has barely moved while Turkey and Argentina have gone through the roof. Among the worst hit are Brazil, South Africa and Russia. These countries have also seen their currencies underperform along with their local equity markets.

As currencies have fallen, investors have started to anticipate an increase in the export of commodities to secure income. We have seen agricultural commodities trading lower, as seasonal stockpiles are expected to be shipped at a higher rate than normal.

Numbers point to a brighter future

The idea that fear is stronger than greed is relevant here, in our view. We think the first phase of President Trump’s threatening of the emerging markets is over. Running the numbers on the impact of tariffs still points to a bright future. It is hard to prove that tariffs will take a meaningful toll on growth in consumption, we believe. The impact on corporate investment is more difficult to judge. Typically, there are many negative assumptions made ahead of investments decisions. After President Trump’s “flip flop” policies, there is scope for many more multinational companies. Our base case is that President Trump will sign a deal with China in November, in time to influence the midterm elections. In such a scenario, we think base metals would recover, especially copper. Within base metals, it is clear that those more exposed to the Asian construction sector, e.g. copper and zinc, have been the greatest losers, while nickel has done much better, supported by a larger share of demand coming from the US and Europe, posting positive data during the summer.

Oil is all about Iran

Annons

The first phase of the new US sanctions against Iran came into force in August. Among other things, this means that Iran cannot use USD. However, sanctions on oil exports will not come into effect until November. These sanctions will probably not hit the country as hard as the previous ones, as they do not have the support of the rest of the world.

Oil prices rose after, among other things, the French oil company Total announced at the OPEC meeting in June that it had already stopped buying oil from Iran. This decision was a typical action in line with American sanctions, whereby a company safeguards its activities in the US and prioritises trade with the US as the larger market. President Trump also always has the option of taking sanctions against Iran to the next level. As with the last occasion that the US used sanctions against Iran, the country could forbid all companies that trade with Iran from having access to the huge US market, and prevent dollar funding. This makes the US sanctions very effective.

In the first half of the year, leaders from the EU tried to get the US to remain in the Iran agreement and presented a series of measures to instead put pressure on Iran, including closing down the missile programme. The Trump administration considered the measures to be insufficient, and chose to withdraw from the agreement. Now, the administration has urged Iran to return to the negotiating table to formulate a more comprehensive agreement than the previous one; however, Iran has stated that the US must first revert to the agreement before negotiations can recommence.

In our view, the current sanctions are fully accounted for in the oil price and a certain amount of ‘over-compliance’, such as in the example of Total, is also priced in. However, what has not been included in the oil price, in our view, is the reality of President Trump taking a step further and cutting off Iran from the global economy completely. In that case, for example, China would not be able to import oil from Iran. The latest decrease in the oil price (from around USD 78/barrel in early July to USD 72) can mainly be attributed to the escalating trade war between the US and China, in our view, but this does not mean that the situation with Iran has become any less significant.

Sparkling electricity market

Power markets have surged during the summer as because of weak hydro supply and high temperatures (Nordic reservoirs now 18% below seasonal norm). Prices also supported by strong fuels complex and Emission Rights hitting a 7-year high EUR 19.33 at the time of this being published.

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Crude oil comment: Big money and USD 80/b

Publicerat

23 timmar sedan

den

21 januari, 2025

Redaktionen

Brent crude was already ripe for a correction lower. Brent closed down 0.8% yesterday at USD 80.15/b and traded as low as USD 79.42/b intraday. Brent is trading down another 0.4% this morning to USD 79.9/b. It is hard to track and assign exactly what from Donald Trump’s announcements yesterday which was impacting crude oil prices in different ways. But crude oil was already ripe for a correction lower as it recently went into strongly overbought territory. So, Brent would probably have sold off a bit anyhow, even without any announcements from Trump.

Bjarne Schieldrop, Chief analyst commodities, SEB

Extending the life of US oil and gas. The Brent 5-year contract rose yesterday. For sure he wants to promote and extend the life of US oil and gas. Longer dated Brent prices (5-yr) rose 0.5% yesterday to USD 68.77/b. Maybe in a reflection of that.

Lifting the freeze on LNG exports will be good for US gas producers and global consumers in five years. Trumps lifting of Bidens freeze on LNG exports will is positive for global nat gas consumers which may get lower prices, but negative for US consumers which likely will get higher prices. Best of all is it for US nat gas producers which will get an outlet for their nat gas into the international market. They will produce more and get higher prices both domestically and internationally. But it takes time to build LNG export terminals. So immediate effect on markets and prices. But one thing that is clear is that Donald Trump by this takes the side of rich US nat gas producers and not the average man in the street in the US which will have to pay higher nat gas prices down the road.

Removing restrictions on federal land and see will likely not boost US production. But maybe extend it. Donald Trump will likely remove restrictions on leasing of federal land and waters for the purpose of oil and gas exploration and production. But this process will likely take time and then yet more time before new production appears. It will likely extend the life of the US fossil industry rather than to boost production to higher levels. If that is, if the president coming after Trump doesn’t reverse it again.

Donald to fill US Strategic Reserves to the brim. But they are already filled at maximum rate. Donald Trump wants to refill the US Strategic Petroleum Reserves (SPR) to the brim. Currently standing at 394 mb. With a capacity of around 700 mb it means that another 300 mb can be stored there. But Donald Trump’s order will likely not change anything. Biden was already refilling US SPR at its maximum rate of 3 mb per month. The discharge rate from SPR is probably around 1 mb/d, but the refilling capacity rate is much, much lower. One probably never imagined that refilling quickly would be important. The solution would be to rework the pumping stations going to the SPR facilities.

New sanctions towards Iran and Venezuela in the cards but will likely be part of a total strategic puzzle involving Russia/Ukraine war, Biden-sanctions on Russia and new sanctions on Iran and Venezuela. All balanced to end the Russia/Ukraine war, improve the relationship between Putin and Trump, keep the oil price from rallying while making room for more oil exports of US crude oil into the global market. Though Donald Trump looks set to also want to stay close to Muhammed Bin Salman of Saudi Arabia. So, allowing more oil to flow from both Russia, Saudi Arabia and the US while also keeping the oil price above USD 80/b should make everyone happy including the US oil and gas sector. Though Iran and Venezuela may not be so happy. Trumps key advisers are looking at a big sanctions package to hit Iran’s oil industry which could possibly curb Iranian oil exports by up to 1 mb/d. Donald Trump is also out saying that the US probably will stop buying oil from Venezuela. Though US refineries really do want that type of oil to run their refineries.

Big money and USD 80/b or higher. Donald Trump holding hands with US oil industry, Putin and Muhammed Bin Salman. They all want to produce more if possible. But more importantly they all want an oil price of USD 80/b or higher. Big money and politics will probably talk louder than the average man in the street who want a lower oil price. And when it comes to it, a price of USD 80/b isn’t much to complain about given that the 20-year average nominal Brent crude oil price is USD 77/b, and the inflation adjusted price is USD 102/b.

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Analys

Donald needs a higher price to drive US oil production significantly higher

Publicerat

2 dagar sedan

den

20 januari, 2025

Redaktionen

Easing a bit towards the 80-line this morning following recent strong gains. Brent crude gained another 1.3% last week with a close of USD 80.79/b. It reached a high of USD 82.63/b last Wednesday. This morning it is inching down 0.3% to USD 80.5/b.

Donald needs a higher oil price to get another US shale oil production boom. Donald Trump declaring an energy emergency with promises of opening up federal land for oil exploration +++, may sound alarmingly bearish for oil. But the days when US oil production (shale) was booming at an average oil price of USD 58/b (2015-19) are behind us. Brent has averaged USD 81/b through 2023 and 2024, and US shale oil is now moving towards zero growth in 2026.

Donald Trump (and the US oil industry) needs a higher oil price to drive US oil production significantly higher over the next 4 years. The US oil industry also needs to know that there will be a sustainable need for higher US oil production. So, someone else in the oil market needs to exit to make room for more oil from the US. Iran and/or Venezuela will be the likely targets for Donald Trump in that respect. But it is still not obvious that the US oil industry will go for another period of strong oil supply growth with natural doubts over how lasting a possible outage from Iran and/or Venezuela would be.

Strong rise in speculative positions increases the risks for pullbacks below the 80-line. The new sanctions on Russia have pushed crude oil higher over the past weeks, but speculators have also helped to drive flat prices higher as well as driving the front-end of the crude curves into steeper backwardation. Speculators typically buy the front-end of the crude curves and thus tend to bend the forward curves into steeper backwardation whey they buy. So, curve shapes are not fully objective measures of tightness. Net-long speculative positions (Brent +WTI) rose 52.4 mb over the week to last Tuesday. In total they are up 415 mb to 577 mb versus the low point in the autumn of 162 mb in early September.

Brent crude has now technically pulled back from overbought with RSI at 65.2 and back below the 70-line. But washing out some long-specs with Brent trading sub-80 for a little while is probably in the cards still.

But this does not look like just a speculatively driven frothy flash-in-the-pan. But do not forget that time-spreads have been tightening since early December and flat prices have risen higher along with them. Thus, this is not just a speculatively driven frothy flash-in-the-pan. The new sanctions on Russia are also having a tightening effect on the market both on Crude, LNG and middle distillates. Add also in that Donald Trump needs a higher oil price to drive US oil production higher. So even if we find it likely that Brent crude will make a pullback below the 80-line, it does not mean that this is the end of the gains.

Net long speculative positions in Brent + WTI in million barrels

52-week ranking of speculative positions in Brent + WTI and 52-week ranking of 1-7mth Brent time-spread.

Brent crude 1mth vs. Dubai 1-3mth time spread. The Dubai time-spread is probably less impacted by speculative positions and thus a better reflection of actual physical conditions. This is rising yet a little more this morning.

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Crude oil comment: A little sideways with new tests towards the 80-line likely

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5 dagar sedan

den

17 januari, 2025

Redaktionen

Brent moves into sideways trading around USD 81.5/b with new tests to the 80-line likely. Brent crude traded down 0.9% yesterday to a close of USD 81.29/b and traded as low as USD 80.39/b within the day. This morning it is gaining 0.3% to USD 81.6/b. No obvious major driver for that and the move in oil is well in line with higher industrial metals this morning. The technical picture for Brent 1M is still overbought in terms of RSI at 70.2. But as Brent now has traded a bit sideways for some days the overbought bearish calculus has started to ease a bit. But new tests towards the 80-line seems likely with current RSI at 70.2.

Scott Bessent says he fully supports harder sanctions on Russian oil exports if Donald Trump wishes to use such a tool in the coming negotiations with Russia over Ukraine. That may add some support to oil this morning. The latest US sanctions towards Russia clearly have an effect with one example being the tanker Bhilva which has made a U-turn back towards Russia after having been on course to India (Bloomberg).

US EIA projects US liquids growth of 538 kb/d/y in 2025. The US EIA released its monthly STEO report earlier this week. What is clear is that the boom-years in US oil production are behind us for now. But exactly pinning down at what level US oil production will grow in 2025 is hard. The EIA forecast for US hydrocarbon liquids looks the following:

Estimated US crude oil production growth is projected to be virtually zero in 2026. But including all sources of liquids it still sums up to 312 kb/d y/y in growth. A lot or a little? If global oil demand in 2026 only grows with 1 mb/d in 2026, then the US will cover 30% of global demand growth. That is a lot. For 2025 the EIA expects a total growth in US liquids of 538 kb/d y/y.

Smaller losses in existing shale oil production. If we instead look at EIA estimates for US shale oil production right here and now and how its components are changing, we see that 1) New monthly production is 666 kb/d, 2) Losses in existing production is 622 kb/d and thus 3) Net monthly growth is 44 kb/d m/m which equals 4) A net marginal annualized growth of 12*44 of 523 kb/d/y. What stands out here is that the EIA in its December report estimated that this marginal annualization only equated to 378 kb/d/y. So, it has been lifted markedly in the latest report. It is however on a downward trajectory and as such the EIA estimate in the table above of y/y growth for US crude oil of 331 kb/d/y may be sensible.

US shale oil new production, losses in existing production, net new production and marginal, annualized production growth in kb/d/y.

Change in EIA STEO forecast from Dec-24 to Jan-25. What stands out is that estimated losses in existing production is adjusted lower by 16.8 kb/d since November. That is the marginal monthly change. In other words, production in existing production is falling less agressively than estimated in December. But a monthly decline of 622 kb/d/m is of course still massive.