Rig Count Continues To Threaten Oil Price Recovery, Saudis Cut Prices To Asia (Again)

For the 11th week in a row, the number of US oil rigs rose (up 10 to 662 – the highest since September 2015). US Crude production continues to track the lagged rig count, pouring more cold water on OPEC’s production cut party.

The rig count grows, tracking the lagged oil price in a self-defeating cycle…

And crude production appears to have plenty more room to run…

And don’t forget, as Nick Cunningham detailed, there are thousands of drilled shale wells are sitting idle, unfracked and uncompleted.

(Click to enlarge)

Once the DUCs are completed, new production will come online. And just as before, that backlog still weighs on the market. Wood Mackenzie estimates that if the Permian Basin’s DUC list was completed, it would add 300,000 bpd in new supply.That supply sitting on the sidelines will put downward pressure on any new oil price rally.

And worse still, as OilPrice.com’s Tsvetana Paraskova, it seems the Saudis are starting to panic at the loss of market share… Abundant supply of light oil in Asia and weaker demand amid some seasonal refinery maintenance will likely prompt Saudi Arabia to cut the official selling price for most of its crude varieties bound for Asia in May.

At the beginning of March, Saudi Arabia unexpectedly lowered the April price for the light crude it sells to Asia. According to trade sources who spoke to Reuters, Saudi Arabia’s official selling price (OSP) for Arab Light was set for April at the low end of the range expected by a Reuters survey. At that time, the price for Arab Extra Light was cut by $0.75, which was more than expected.

For the May OSP, according to a Reuters survey of four Asian refiners, Saudi Arabia would likely cut the price of its Arab Light crude by $0.10-$0.40 per barrel from the April OSP.

“I’m seeing price reductions across the board,” one of the refiners surveyed told Reuters.

The Arab Light and Arab Extra Light grades prices are expected to drop more than the medium and heavy grades, since the Asian market is oversupplied mostly with light oil varieties, according to the sources Reuters has polled.

OPEC’s output cuts have made it profitable for oil traders to send crude from as far as the U.S., the North Sea and West Africa to Asia, and this has weakened demand for spot market purchases from Middle Eastern grades.

Another respondent in the Reuters survey for May prices said:

“The spot market is weak. Almost every type of crude is sold at discount against its OSP.”

Saudi Arabia releases OSPs for its grades around the fifth of each month, and as a policy Saudi Aramco does not comment on the monthly prices that Saudi Arabia is setting. The Saudi OSPs generally establish the trend for the prices that Iran, Kuwait, and Iraq charge for Asia-bound crude.

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Shell Nigeria Shuts One Bonny Light Export Line To Repair Theft Points

Shell’s Nigerian unit has shut down one of two lines that carry Bonny Light crude to the export terminal in order to remove oil theft points and repair leaks, Reuters reported on Friday, quoting Shell Petroleum Development Company (SPDC).SPDC is shutting down the Nembe Creek Trunk Line (NCTL) to “remove a significant number of oil theft connections and repair any leaks on the pipeline,” Shell’s Nigerian subsidiary said, adding that it “will work with the security forces during shutdown to clear illegal connections…

Venezuela Oil Woes Cut Gasoline Exports to Cuba

Venezuela’s problems are spreading to its trading partners: Cuba announced it will be cutting supplies of premium gasoline because of declines in imports from Venezuela. This puts Cuba in a difficult position as the Venezuelan fuel imports are subsidized, and replacing them will be a headache. Although premium fuel is used by a minority of vehicles on the island – diplomats and businessmen working in joint ventures, as well as state officials – a shortage is always bad news and drivers of newer cars that use premium fuels have…

China’s Record Iron Ore Glut: Enough To Build 13,000 Eiffel Towers

Earlier this week we discussed the reason for the recent drop in iron ore prices, which had been attributed to the discovery of massive data fabrication and misrepresentation of commodity production cuts in China (think OPEC), whose biggest steel-producing province was found lying about mandatory output reductions, and instead of curbing was in fact accelerating production.

A steel factory in Wu’an, Hebei province

As Reuters reported at the time, Hebei, China’s biggest steel-producing province, launched a probe into steel overproduction in the city of Tangshan “amid concerns that firms have continued to raise output despite mandatory capacity cuts.”

Tangshan is the heartland of Chinese steel production. The city is home to the headquarters of the state-owned Tangsteel Group, which in 2006 merged with other companies to form Hebei Steel Group, the second-largest steel producer in the world. Located around 100 miles east of the capital Beijing, Tangshan is on the frontline of the country’s “war on pollution”, and was seventh on the list of China’s ten smoggiest cities in the first two months of this year.

 

Hebei was ordered by China’s central government to investigate firms in Tangshan that have “restricted but not cut production, restricted production but not actually cut emissions, and cut capacity but actually increased output,” the provincial dated March 25 said, and circulated by traders on Monday.

 

The notice, sent on Saturday, cites orders from President Xi Jinping and Zhang Gaoli, the vice-premier, for Tangshan to investigate the problem of falsely reported plant closures and rising steel output.

Fast forward to Friday, when the environmental protection ministry quickly found pervasive problems “including data fabrication and output curb failure” in air pollution checks in 1Q at some 3,119 companies or nearly 40% of the 8,500 companies inspected, according to a statement from the ministry. Among the companies names, Chalco’s Henan unit didn’t fully implement output curbs in heavy pollution days, according to findings of the inspection while an affiliate to BAIC Group found to have “not strictly implemented VOC emission standards.” Amusingly, companies including a Foxconn affiliate in Langfang city tried to reject inspections The inspection covered more than 8,500 companies in regions including Beijing and Tianjin.

Ok, so China lied again; that in itself is hardly newsworthy. After all China lies about everything, from its GDP, to its gold holdings, to its reserve outflows, to the total debt in its economy.

However, for iron ore traders, the implications could be dire, as China’s activity means that instead of reducing production to reach a demand equilibrium, it had merely been stockpiling iron ore inventory at various ports around the country, while giving the world the false impression that output, and thus the market, was tighter than it was in reality, sending iron ore prices nearly doubling over the past year – one of the primary culprits for the global reflation wave that has been misconstrued as a global economic recovery – even though in recent weeks iron ore prices have stumbled as China’s ruse has finally been exposed.

The question then becomes what happens with China’s unprecedented iron-ore stockpiles, especially at a time when Beijing is actively seeking to impose curbs on the housing bubble. For those unfamiliar, this is what China’s total iron ore inventories look like as of this moment: they are now at all time highs.

That chart above, however does not do justice to China’s inventory glut, so here is another attempt at putting it in context from Reuters, which writes that with enough iron ore to construct Paris’s Eiffel Tower nearly 13,000 times over, China’s ports are bursting with stockpiles of the raw material and some of them are demolishing old buildings to create more storage space, trading sources said.

Inventory of imported iron ore at 46 Chinese ports reached 132.45 million tonnes on March 24, SteelHome consultancy said, the highest since it began tracking the data in 2004. A third of the stocks belongs to traders and the rest is owned by China’s steel mills, SteelHome said. That volume would make about 95 million tonnes of steel, enough to build 12,960 replicas of the 324-metre (1,063-foot) high Eiffel Tower in Paris.

Some ports, trying to manage their storage space, have in recent weeks rejected vessels carrying lower grade iron ore that is less preferred than higher quality material and could take months to clear, said a source at a foreign trading firm that has millions of tonnes of the steelmaking ingredient at Chinese ports.

“We have sent our people around the major ports in China and some are trying to find extra space. They’re demolishing some abandoned buildings to create more space,” said the source, who declined to be named because he is not permitted to discuss the matter publicly.

It’s only getting worse: if iron ore stocks continue rising “we’re going to reach maximum physical capacity at all ports in China by early June, said the source. “We saw some ports rejecting low-grade shipments which are very difficult to liquidate.”

* * *

Meanwhile, having believed China’s lies about production cuts and sending prices to a two and a half year high, global commodity traders are suffering from a case of accumulated buyer’s remorse with global iron ore prices now just above $80 a tonne from a 30-month peak of $94.86 reached in February, largely due to the growing port inventory.

Prices surged 81% last year, bringing relief to miners after a three-year rout. The rally stretched into 2017, inspiring marginal producers to resume business and lifting supply as China’s steel demand waned. Further falls in the price of iron ore risk shuttering Chinese capacity again. That could boost China’s reliance on top-grade exporters Vale, Rio Tinto and BHP Billiton.

The recent price surge only made matters worse, with China’s domestic iron ore production jumping 15.3% in January-February as a price rally last year extended into 2017, causing imported ore to pile up at the ports of the world’s top buyer.

Needless to say, local merchants and producers are already starting to panic at visions of iron ore prices in freefall. Including another 40 million tonnes of iron ore at China’s steel mills “that’s too much of stock,” said Li Xinchuang, vice chairman at China Iron and Steel Association. “It will be very dangerous for the price. That’s what’s very worrying about it,” Li told Reuters at an industry conference on Thursday. Worse, Li said most of the stocks in ports were high quality iron ore despite perceptions in the market that the bulk of it was low-grade eliminating the ability to deny low quality ore.

An official at Jingtang port in Tangshan told Reuters there are 15 million tonnes of iron ore stocked there currently, not far from its capacity of 20 million tonnes.

Paradoxically, even as China’s iron ore glut hits extreme proportions, China continues to import the commodity with Australian miner Fortescue Metals Group, the world’s No. 4 iron ore supplier which ships lower grade material mainly to China, saying its deliveries to the country are “continuing as normal.”

“While port stocks overall are at relatively high levels, Fortescue’s share of those stocks aligns with our market share of imported ore into China,” Fortescue CEO Nev Power said by email in response to a Reuters query.

A truck drives past piles of iron ore at the dump site of a port in Rizhao.

Chinese ports can refuse discharge of some shipments and it’s up to the importer to find another port but costs due to delays would be borne by the importer, said a shipping manager for a Chinese trading firm. Still, slow demand could swell port stocks further as more shipments tied to Chinese mills’ long-term contracts with miners arrive and traders scour the market for clients.

“We have a fleet of vessels on their way to China with no buyers. We’re trying to find buyers,” said the foreign trading source.

If no buyers are found, iron ore prices will plunge, resulting in another shock to China’s manufacturing sector, leading to another collapse in cash flows, a surge in bailouts and defaults, and a fresh deflationary wave being unleashed on the rest of the world as China’s wholesale inflation once again tumbles into negative territory.

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Germany (DAX); Monster bullish breakout test in play, says Joe Friday

Below looks at the DAX index from Germany over the past decade. The DAX index looks to be creating a bullish continuation pattern, that the Power of the Pattern feels, is important to investors in Europe and the St

German DAX

CLICK ON CHART TO ENLARGE

The lower left of the chart above reflects what an ideal “Cup & Handle” pattern looks like. These patterns historically take place in bull markets and are viewed as “continuation patterns.”

Below looks at the DAX/SPY ratio over the decade and why the ratio could be forming an important pattern too.

German DAX / SPY Ratio

CLICK ON CHART TO ENLARGE

Since the lows in 2003, the DAX has been much stronger than the S&P 500. Since 2008, the ratio has traded sideways, reflecting that the DAX and S&P have been traded off being stronger than another, no clear winner. At this time the ratio could be forming a reversal pattern (bullish inverse head & shoulders pattern) near the bottom of a 6-year trading range.

Joe Friday Just The Facts; A breakout above the top of the Cup & Handle pattern would send a bullish price message to the DAX. Strength in the DAX has historically been a positive for stocks in the states.

Bulls in Germany and the States have fingers crossed that the DAX breaks above 2015 highs!

 

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