Edge and Odds

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Saudi Arabia Surrenders! The End of OPEC?

BEARNOBULL’S WEEKENDER of April 11 reported on the message that Ali al-Naimi sent to “non-OPEC major producers” to participate in production cuts to “restore the supply-demand balance and reach price stability”. I wrote that

In effect, the June 5 OPEC meeting is already under way and Big Daddy wants every “major non-OPEC producers” to know that if they don’t come to the table and “participate in production cuts”, the pain will continue for an indefinite time. This is a 2-month very-high-stakes poker game and the Saudis have placed their chips for everybody to see. Do they really mean business or are they bluffing?

And concluded:

To me, this opening at this time means that the Saudis want (need) higher prices. Ali al-Naimi saying that “oil prices will improve in the near future” is a major departure from the Saudi stance since November which always was to talk prices down.

Later, I found this good WSJ piece (my emphasis)

Saudis Maneuver to Retain Oil Crown Saudi Arabia is struggling to maintain its share of the global oil market in a contest that pits the world’s largest crude exporter against allies in the U.S. and Persian Gulf.

The Saudi kingdom’s oil exports declined 5.7% in 2014 compared with 2013. Oil shipments to its fastest-expanding customer, China, reached their lowest levels since 2011 in the first two months of 2015, according to the China General Customs Administration. And its U.S. sales nearly halved in January compared with a year earlier, according to the U.S. Energy Information Administration. China and the U.S. are Saudi Arabia’s biggest importers, with 10% and 8%, respectively, of the kingdom’s production.

In China, Saudi Arabia is suffering from depressed demand and better deals being offered by its rivals in Russia, Kuwait and the United Arab Emirates. In the U.S., it faces competition from domestic shale producers whose flood of crude has helped shove down world oil prices. (…)

Instead, the kingdom has been forced into a fight with OPEC members, cutting its selling price to Asian customers six times in nine months. But Russia and Saudi Arabia’s Persian Gulf allies have outmaneuvered it, cutting better deals with Chinese, Indian and European refineries, industry analysts said. Kuwait, for instance, boosted its exports by signing a 10-year supply deal last year with China’s largest refiner, China Petroleum & Chemical Corp., known as Sinopec.

The competition could intensify as Persian Gulf countries like Kuwait and the U.A.E. move to boost production to keep market share as global energy demand is expected to rise in the next decade. (…)

Kuwait has made it a priority to ramp up production capacity to four million barrels a day from 3.2 million in 2020, while the U.A.E. wants to boost output to 3.5 million barrels a day in 2017 from about three million barrels a day.

Saudi Arabia’s share of total world output of crude oil fell slightly in 2014 compared with 2013, from 10.3% to 10.2%, according to the International Energy Agency, a Paris watchdog. (…)

In the long term, Saudi Arabia officials have said they are better off working for their share of the market now, than they would be cutting supplies to inflate prices. 

(…) With a political framework in place to lift sanctions in Iran, that country’s oil reserves could eventually flood the market and put pressure on OPEC to attempt to boost prices. Iran, a member of OPEC, has said it wants to double its oil exports if sanctions are lifted. Analysts estimate Iran could add between 500,000 and one million barrels a day to the global market. (…)

Oil exports to China from the U.A.E. jumped 116% and from Kuwait by 98% in the first two months of 2015, compared with the same period a year earlier, to their highest levels ever, according to China’s General Customs Administration, mostly at Saudi Arabia’s expense. In November, Kuwait also displaced Saudi Arabia as Taiwan’s top oil supplier, the Customs Administration in Taipei said.

Kuwait’s 10-year supply deal with Sinopec was an example of the kind of long-term contract the Gulf producers are using to lock in customers. Under the contract, which is nearly doubling Kuwait’s oil sales to Sinopec to 300,000 barrels a day, Kuwait will ship the oil itself, cutting transportation costs for the Chinese company, a Kuwaiti oil official said.

Even as Saudi Arabia loses business in Asia, it is becoming more reliant on it. Asia took nearly two-thirds of Saudi crude exports in 2014, according to a Wood Mackenzie report in March, up from 60% in 2006. That is partly because Saudi Arabia has lost customers to U.S. shale producers, despite price cuts to the U.S. market.

Motiva Enterprises LLC, a Gulf Coast refiner half-owned by a Saudi Aramco unit, has been buying less crude from Saudi Arabia and comparatively more from Angola and Venezuela, which tend to be more competitive because of lower shipping costs. Saudi sales to the refiner fell 27% in December 2014 compared with a year earlier, according to data by the EIA.

In Western Europe, Saudi Arabia has threatened to cut off customers who didn’t sign up for fixed volumes, with limited success. In Italy, Iraq overtook Saudi Arabia as the leading seller in late 2014 and 2015, according to Unione Petrolifera, the country’s refining-industry body.

The Saudi strategy was all about sacrificing prices for market share. After nearly a year of lower prices, they have lost market share, mainly to other OPEC and Arab nations which have “outmaneuvered” it to cut long-term deals with some of Saudi Arabia’s largest clients in all continents. In China alone, the most crucial market for the longer term, Saudi Arabia sold 7.9% less crude in 2014 while Iran, Iraq, Kuwait, Angola and the U.A.E. all increased their shipments.

So far, Saudi Arabia is losing on all fronts. Looking forward, the Saudis must be seeing that Iran’s production will be rising sharply again pretty soon and so will that of many of its allies.

Iran is believed to hold at least 30 million barrels in storage, and EIA believes Iran has the technical capability to ramp up crude oil production by at least 700,000 bbl/day by the end of 2016. (EIA)

See also on this: IEA sees sharp rise in Iran oil output in 3-5 years post nuclear deal

Russia has not blinked so far and is unlikely to do so given the drop in the ruble and its need for hard currencies. U.S. production has yet to peak but American producers stand ready to unload storage and resume drilling as soon as prices recover. Canadian production has proven that it is not price sensitive over the short-term. Libyan and Nigerian production have held up, so far, so has Iraq’s amid political/military chaos. Obviously, many capital projects have been deferred, shelved or abandoned, which will likely help boost prices longer term but the Saudis’ market share gambit is not working for them.

EIA numbers indicate that Q1’15 OPEC crude oil production rose 1.1% YoY or 330k bbl/d. Saudi Arabia’s production declined 1.0% or 100k bbl/d during the same period. Meanwhile, world consumption is estimated to have grown 1.2% or 1.1M bbl/d. Non-OPEC supply has gained 1.5M bbl/d during the 12-month period.

At the June OPEC meeting, the Saudis are likely to have little to announce in terms of production cuts from “major non-OPEC producers” while many of its fellows at the table will be ramping up their own production. The “Iran deal” will likely have gone ahead and rising Iranian shipments and production will be looming.

Saudi Arabia is now in face-saving mode.

The risk is that they get no help, realize they have much fewer friends then they thought, and decide to show who’s the boss…

NEW$ & VIEW$ (13 APR. 2015): Currency impacts; China: slow and slower; Earnings watch.

U.S. Import Prices Fall 0.3% in March Prices of imported goods fell last month, suggesting the weak global economy and moves by foreign central banks are holding back U.S. inflation.

Last month’s drop came entirely outside of oil, reflecting lower prices for everything from capital goods such as computers to industrial supplies to automobiles. Nonpetroleum import prices fell 0.4% last month and are down 2.7% over the past year—the biggest 12-month drop since fall 2009. (…)

But there were significant declines for other goods: a 0.6% drop in industrial supplies, a 0.1% decline in capital goods and a 0.3% drop in consumer goods. Auto-import prices fell 0.3% from February and 1.8% from a year earlier. The year-ago decline was the biggest since 1981.

Import prices ex-food and fuels have declined at a 4.9% annualized rate since December. Imported vehicles: –5.3%

Germany’s Rising Wages Bode Well

Germany’s metalworkers union IG Metall secured a 3.4% pay increase in February for workers in the Baden-Württemberg region, seen as a bellwether for other deals. Unions representing public-sector employees and chemical workers reached favorable pay gains, too.

When a recently enacted minimum wage of €8.50 ($9) an hour is included, German wages will probably rise 3.5% this year, the biggest jump since the early 1990s, said Andreas Rees, economist at UniCredit. With consumer prices largely flat, fatter paychecks will stay in workers’ wallets and won’t get eaten away by inflation. (…)

image

China Trade Data Point to Weak Growth

According to data released Monday by the General Administration of Customs, Chinese exports fell 15% and imports fell 12.7% last month in dollar terms as weak domestic and foreign demand weighed heavily on Chinese factories. (…)

The March trade figure contrasts with a 15 per cent year-on-year rise in exports — and 20 per cent fall in imports — for the first two months of this year.

Overall, first-quarter export growth slowed to 4.7 per cent from a year ago — and 8.6 per cent on the previous quarter.

All things being equal, most of the drop in imports in the first quarter can be attributed to lower prices for just two line items: oil and iron ore. By value, China’s first-quarter imports of these two were down $63 billion from a year earlier. But in volume terms, China imported more of both—albeit at a slower growth rate than in the go-go past.

Alternative indicators, meanwhile, hardly show a collapse in trade. Container throughput at China’s ports rose 7.4% in first quarter compared with a year earlier, according to Citigroup. (…)

A recent government survey found that more than a third of about 3,000 exporters see a stronger currency as hurting their business, a customs administration official told reporters Monday.

Import demand has been hard hit by China’s slumping property market and the painful ratcheting down of debt and overcapacity in such industries as steel and glass, which undercuts demand for imported commodities, economists said. (…)

(Zerohedge)

Global recovery at risk of stalling Weaker emerging markets rein in growth, according to Brookings Institution-Financial Times tracking index

Tiger index data

Dollar’s Rise Reshuffles Global Economy Into Winners and Losers

The greenback’s ascent to the highest in a dozen years on a trade-weighted basis is eroding the competitiveness of the U.S. and countries whose exchange rates track the dollar, including China. It’s also pushing down commodity prices, hurting producers such as Brazil, and threatening other emerging markets where companies borrowed in the U.S. currency when it was cheaper.

On the flip side, the euro area and Japan are cashing in as their companies gain the edge in world markets that economies need to boost growth. The likes of India are benefiting, too, by paying less for their energy imports. (…)

The currency’s last two prolonged surges — in the first half of the 1980s and the latter half of the 1990s — nevertheless caused disruptions.

In 1985, the U.S. and its allies were forced to band together in the so-called Plaza Accord to drive the dollar down after the currency’s appreciation led to an outburst of trade protectionism in America.

During the late 1990s, a rising dollar helped trigger a worldwide financial crisis that devastated the economies of Thailand, South Korea, Russia and Brazil.

While the currency’s advance this time hasn’t been as large, it is having an impact. Hooper and his team at Deutsche estimate it’s already enough to knock as much as 0.75 percentage point off annual U.S. output growth during the next several years by depressing American exports. (…)

The currency’s rebound now risks reducing the cost of commodities priced in dollars and increasing the burden of debts denominated in them. The rebound also could restrain the capital flows needed to plug current-account deficits and so force up local interest rates. (…)

Malaysia, Chile, Turkey, Russia and Venezuela are the most at risk, according to Slater. Close behind are Brazil, South Africa and Hungary.

India and China will fare better because they are net importers of commodities and their debt ratios are in line with historical averages. (…)

Oil Bulls Boost Wagers by Most Since 2010

Hedge funds boosted net-long positions on West Texas Intermediate crude by 30 percent in the seven days ended April 7, the biggest jump since October 2010, U.S. Commodity Futures Trading Commission data show. Long bets rose to a nine-month high, while shorts tumbled 21 percent.

U.S. crude output and inventories may peak this month amid a record drop in rigs exploring for oil, Goldman Sachs Group said. Refiners returning from seasonal maintenance will add about 500,000 barrels a day of demand by July, the Energy Information Administration forecast, helping ease the biggest glut in 85 years. (…)

U.S. refineries will use 16 million barrels a day of crude this month, the EIA estimated last week. That will jump to 16.5 million in July.

“Our rig-based modeling of near-term U.S. production points to production nearing a peak,” Goldman analysts including Damien Courvalin in New York said in the April 6 report. “Combined with an expected ramp up in refinery runs, we expect U.S. crude oil inventories to peak in April.” (…)

EARNINGS WATCH

While the majority of S&P 500 companies will report earnings results for Q1 2015 over the next few weeks, approximately 5% of the companies in the index (24 companies) have already reported earnings results for the first quarter.

Of the 24 companies that have reported earnings to date for Q1 2015, 20 have reported earnings above the mean estimate and 12 have reported sales above the mean estimate.

Of the 23 companies that have conducted earnings calls to date for Q1, 16 (or 70%) cited some negative impact or expressed a negative sentiment about the stronger dollar during the conference call.

During the upcoming week, 35 S&P 500 companies (including 7 Dow 30 components) are scheduled to report results for the first quarter. (Factset)

U.S. Widens Role in Yemen Campaign The U.S. is expanding its role in Saudi Arabia’s campaign in Yemen amid growing concerns about the goals of the Saudi-led mission.

The U.S. is expanding its role in Saudi Arabia’s campaign in Yemen, vetting military targets and searching vessels for Yemen-bound Iranian arms amid growing concerns about the goals of the Saudi-led mission, according to U.S. and Arab officials.

U.S. officials worry mounting civilian casualties will undermine popular support in Yemen and in other Sunni Arab countries backing the campaign. (…)

Worried by the risk of more direct intervention by Iran, U.S. officials say they are urging the Saudis to set their sights more narrowly on halting rebel advances and reaching what amounts to a battlefield stalemate that leads all sides to the negotiating table.

Seventeen days of Saudi aerial and naval bombardment have prevented the Houthis from holding Yemen’s main port city, Aden, but failed to thwart the group’s advances elsewhere.

The campaign has made one of the world’s poorest countries the center of a regional proxy fight with high stakes for the Obama administration. The April 2 framework agreement that the U.S. and other world powers reached with Shiite Iran to trade sanctions relief for limits on its nuclear program has prompted the Saudis and their Sunni Muslim allies to resist what they see as Iran’s efforts to impose its influence in the Middle East—often along sectarian battle lines.

Prince Saud Al Faisal, the Saudi foreign minister, underscored the tensions on Sunday, telling reporters his country is “not at war with Iran” in Yemen. But he demanded Iran end its political and military support for the Houthis, who adhere to the Zaidi offshoot of Shiite Islam. (…)

U.S. officials want to find a quick diplomatic exit to the fighting—one that enables the U.S. to restore its counterinsurgency operations in the country and resume drone strikes against Yemen-based al Qaeda in the Arabian Peninsula. Those operations were curtailed by the fighting last month. (…)

The Saudi campaign is still focused on trying to slow the Houthi advance, U.S. officials said. And the kingdom’s fighter planes aren’t in a position to go on the offensive against bands of Houthi rebels on the battlefield because the Saudis don’t have the intelligence or advanced military equipment to do so effectively.