- OPEC+ Set New Production Levels at their January 5th meeting with a surprise 500,000 barrel per day (bpd) cut by Saudi Arabia for February and March while Russia and Kazakhstan will increase their official production by a combined 75,000 bpd for those two months. Oil prices jumped on the news, which incidentally will help out beleaguered US shale producers (barring a restrictive move by the incoming Biden administration). The next meeting will be held in early March. OPEC oil output rose to 25.59 million (m)bpd for a sixth month in December, on increased Libyan, Iranian and Iraqi production. Saudi Arabia announced a 990 billion riyal ($263.91 billion) budget for 2021, around 7% less than estimated spending for this year, as the world’s biggest oil exporter seeks to tame a huge deficit caused by lower petroleum revenues and the coronavirus crisis. The kingdom expects to post a deficit of 12% of GDP, as crude revenues are slated to drop by over 30% in the New Year. Iran seized a South Korean oil vessel, saying that the Asian country owed it $7 billion. A number of oil and other vessels have been damaged or narrowly avoided mines in December in waters close to Iran. When will they shoot down another passenger plane (in memorium, Ukraine International Airlines PS752)? Pretty senseless.
- US Crude Oil Production held at 11.0 mbpd as operating drilling rigs continued higher, moving to 267 as of January 1st versus 241 on November 27th. Notably, frackers are bringing back equipment as oil prices pushed higher, surpassing $50 per barrel in early January. Bloomberg estimated that average Bakken well costs declined from $6.7 million in 2019 to $6.1 million in 2020, which is an 11% drop. Bakken break-evens dropped -$5.60 per barrel to $40.30, largely on the back of well costs savings. Furthermore, many producers have indicated that 30-70% of these cost reductions are structural, meaning that they are sustainable even if oil prices rise. Looking at US production on the right, I would not be surprised to see some good increases in the short term though Biden’s energy and environmental teams will likely clamp down the latter half of the year. Expected nominees Jennifer Granholm (Energy), North Carolina environmental regulator Michael Regan (EPA) and AZ Representative Deb Haaland (Interior) all pledged positions banning fracking and drilling on federal lands which would directly impact 22% of total U.S. oil production and 12% of U.S. natural gas production last year per the EIA. Add their opposition to pipelines and there could be a strong clampdown on US energy production to benefit of Russia and OPEC (and detriment to consumers everywhere). Meanwhile US exports of liquefied natural gas set a new record in December after a record-breaking November 2020, averaging 9.8 billion cubic feet per day (BCF/D) and US crude exports were at 3.6 mbpd last week – the highest level since March. On the import side, December ended with the US not importing any Saudi Arabian crude oil for the first time in decades. Will Biden kill this economic bright spot?
- Global Grain Production will be decent in the end but the market has been going berserk as Argentina soy and corn-related unions have been blocking exports and dry weather drove down production estimates (though the unions reached an accord and weather improved in early January). Brazilian rains returned to roughly normal with Conab seeing soy production at 134.5 million tons, up +7.8% from last season. In the meantime, China turned to the US for soy purchases, driving down inventories to the lowest levels since 2013/14 and driving up prices. US corn estimates for 2021 were revised lower on yields but would still be the third-largest crop in history. China will probably import 15 million tons for the current marketing year, compared with an earlier outlook for 7 million, per the USDA. The recovery of its hog herd from African Swine Flu to over 90% of previous levels propelled much of these grain prices. Looking at the increase of pork imports from the US (see graph right), one must wonder if there will be a crash as their herd fully recovers. Coincidentally (?), China’s live hog futures tumbled in their debut on the Dalian Commodity Exchange, with analysts attributing the sell-off to the contract’s high listing price and as expectations of increasing supply weigh on prices. Finally, to bring home the importance of China to the American farmer, October beef exports to China were 19.6 million pounds, +16.9 million pounds higher than a year ago. In other words, exports to Mainland China represented 7.8% of all US beef exports compared to 1.1% last year.
David Burkart, CFA
Coloma Capital Futures®, LLC
Special contributor to aiSource