- US Production Recovery is well in hand as the last of the big refineries (Motiva) come back on line with remaining units in early October though there are still a few in Houston and Beaumont / Port Arthur area that are recovering. There are also a few facilities that folded storm repairs into scheduled maintenance. Oil production, on the other hand, is back at full. As the graph on the right shows, the down blip in oil production from Harvey has been reversed and even has hit a new high versus from before the hurricane. Oil exports reached a new high for the first half of 2017 of 0.9 mbpd. Refined product exports also moved to a record level of 1.3 mbpd with Mexico and Brazil as the primary destinations (Central and South America generally). Drilled but UnCompleted wells (DUCs) continued to move higher (see the graph on the left), implying that more supply increases are possible – especially if prices increase. The US oil-drilling rig count did decline from 759 on September 1st to 750 on September 29th – though it started to increase at the end of the month so perhaps there were some lingering Harvey effects that are now behind us. Looking ahead, there are no hurricanes of note on the immediate horizon.
- OPEC Hard Data is Bearish… September’s OPEC oil output has risen this month by 50,000 (bpd) per Reuters as Iraqi exports increased and production edged higher in Libya, one of the producers exempt from a supply-cutting deal. OPEC’s adherence to its pledged supply curbs slipped to 86% from August’s 89%, the survey found. Iraqi oil exports averaged 3.2 mbpd in September; slightly up from August. Libya did have production issues at its largest field (Sharara) but it was back on-line at the end of the month. Russian oil output was steady in September from the previous month at a 2017 low of 10.9 mbpd. Looking ahead, Iran reiterated its plans to expand oil production capacity by 0.7 mbpd to 4.5 mbpd by 2021 but it needs an estimated $200 billion to do so. The first provisional contracts have been signed with Asian and Russian firms but no work has been done. The country needs to stay on the right side of Trump somehow or he could allow sanctions to come back into effect. The President signs sanction waivers from time to time as they come due so this issue will not go away. Iran of course says that it is complying with its side of the May 2015 agreement and the Europeans want waivers to continue but Trump follows his own direction. We shall see.
- …But OPEC Soft Data is Bullish! Leading the news here is that for the first time in history, the King of Saudi Arabia visited Russia in early October after a series of discussions promising closer coordination over production and pricing goals. These two countries are the two main rivals for the lucrative Asian markets (China, India and Korea) as well as being geo-political foes in the Middle East (particularly with the Russian support of Iran and Syria). Financially, Russia is in better shape with a broader economy and it has taken the axe already to its budget deficit. Saudi Arabia has avoided the hard choices, partially because of its leadership transitions and more fractured elites. It is not going away though – the Kingdom just sold $12.5 billion in bonds, has the Aramco IPO on tap next year and is considering to end in November the subsidization of gasoline and jet fuel (the retail prices would still be well below most countries). The outcome of this meeting should be interesting. Separately but also in the Middle East, the Kurdish region in Iraq voted for “independence” which may not have a practical effect but it caused neighboring Turkey (who has been battling a separatist Kurdish movement for thirty years) to lash out, threatening the region militarily. Iraqi reaction was more subdued but critical. Of course Turkey benefits from the transit of Kurdish oil to the Mediterranean so this may be just more posturing in the region’s endless power games.
- And Other Sectors… Russia continues to add to its gold horde, reaching 1.716 tons at the end of June (about $74 billion worth), quadrupling its holdings since 2007. In grains, summer-like weather ripened U.S. crops, easing fears of harvest delay after a late planting season. The USDA production report mid-September indicated large projected ending stocks (post-harvest) but the quarterly ending stocks announced at the end of September tightened, giving hope to the bulls. In a rare setback for Monsanto, the herbicide dicamba may be banned in the US or at least certain states as it tends to drift widely from the intended fields – and damage those neighbors that do not use the dicamba-resistant hybrids. With many weeds building tolerance against Monsanto’s mainstay glyphosate-based sprays, the biotech firm needs a replacement. Will its political power be sufficient to force a solution in its favor? Finally, in meats, Brazil’s total beef exports in August rose by 34% year-on-year both by volume and in revenue terms, indicating the worst of a food safety scandal that rocked Brazil’s meatpacking industry may be over. Recent US government reports place higher herds in both cattle and hogs with breeding animals rising as well. Cattle placements into feedlots were skewed to the heavier weights as decent pasture allowed younger animals more time to graze before final weight gain for slaughter. All eyes are on Asia to see if increased demand materializes.
David Burkart, CFA
Coloma Capital Futures®, LLC
Special contributor to aiSource
Additional information sources: BBC, Bloomberg, Financial Times, The Guardian, JP Morgan, PVM, Reuters, South Bay Research, Wall Street Journal and Zerohedge.