Low Oil

Oil traded near the lowest closing level in seven months as U.S. gasoline supplies unexpectedly rose for a second week.

Futures were little changed in New York after slumping 3.7 percent Wednesday, the first drop in four sessions. Motor-fuel stockpiles expanded by 2.1 million barrels last week, the Energy Information Administration reported. Most analysts surveyed by Bloomberg had forecast a decline. Crude output climbed while nationwide inventories fell less than predicted.

Oil has declined almost 8 percent this month amid speculation that rising U.S. supplies will offset output curbs by the Organization of Petroleum Exporting Countries and its allies, including Russia. New production from OPEC rivals will be more than enough to meet demand growth next year, the International Energy Agency said Wednesday in its first forecast for 2018.

“Any build in U.S. commercial stocks gives us an indication of the uphill battle OPEC is facing,” said Tamas Varga, an analyst at PVM Oil Associates Ltd. in London. “Although last week the big bearish surprise came in the form of significant builds across the board, this time around gasoline was responsible for the consequences.”

West Texas Intermediate for July delivery was at $44.70 a barrel on the New York Mercantile Exchange, down 3 cents, at 10:01 a.m. London time. Total volume traded was about 46 percent above the 100-day average. Prices dropped $1.73 to $44.73 on Wednesday, the lowest close since Nov. 14.

Brent for August settlement was up 10 cents at $47.10 a barrel on the London-based ICE Futures Europe exchange. Prices slid $1.72, or 3.5 percent, to $47 on Wednesday. The global benchmark crude traded at a premium of $2.14 to August WTI.

U.S. crude stockpiles dropped by 1.66 million barrels last week, the EIA reported Wednesday. Inventories were forecast to decline by 2.45 million, according to the median estimate in a Bloomberg survey. Production rose by 12,000 barrels a day to 9.33 million barrels a day.

Oil-market news:

  • The Qatar crisis is reverberating in Libya, inflaming political divisions in the war-torn oil exporter and dragging commodity-trading giant Glencore Plc into a dispute over crude sales.
  • Iraq is driving up crude-oil exports to the U.S., the world’s second-biggest import market, just as there are signs Saudi Arabia is honoring a pledge to restrict such deliveries, according to tanker-tracking data.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

People Getting Serious About Marijuana

The taboo’s about even discussing the green weed have slowly relaxed over the last decade. It’s medical benefits have long been lauded despite the obvious stigma.

Imperial Brands Plc gained the services of a leader in the field of medicinal cannabis as the British tobacco manufacturer seeks to further its push beyond cigarettes.

Simon Langelier, a 30-year veteran of Philip Morris International Inc., joined the board as a non-executive director this week, the Bristol-based company said in a statement Tuesday.

Langelier is chairman of PharmaCielo Ltd., a supplier of medicinal-grade cannabis oil extracts. He joined the Canadian-based company in 2015 after a career at Philip Morris that included heading up the next-generation products unit from 2007 to 2010. Imperial stands to benefit from his experience in tobacco and “wider consumer adjacencies,” Chairman Mark Williamson said in the statement.

About 18 months after jettisoning the word “tobacco” from its name, the appointment advances Imperial Brands’s efforts to move beyond its main product, as smoking rates in developed nations dwindle. While focusing on e-cigarettes, Imperial previously resisted another alternative to cigarettes — heated tobacco devices, but that stance could be easing. Philip Morris’s main reduced-risk product is a heated tobacco device called iQOS.

In May, Imperial’s Chief Development Officer Matthew Phillips said the company was assessing whether demand for heated-tobacco devices would pick up outside of Japan, where iQOS has captured 7.1 percent of the country’s cigarette market since its launch in 2015. The company could have a product on the market within months, if needed, he said.

“Imperial’s one-pronged strategy in next-generation tobacco isn’t particularly wise,” Eamonn Ferry, an analyst at Exane BNP Paribas, said by phone. “It’s sensible that they appear to be now softening their stance on heat-not-burn, given the success of the format in Japan.”

At Philip Morris, Langelier established a joint venture for the worldwide commercialization of the company’s smoke-free products.

His experience at PharmaCielo will be beneficial in helping Imperial eke out opportunities should marijuana be legalized at the federal level in the U.S., Ferry said. The expertise tobacco firms have in crop farming and distribution has spurred speculation that they may eventually seek to enter the cannabis market. Cowen & Co. estimates the U.S. part of the industry will surpass $50 billion in sales this decade.

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

Sugar Not So Sweet.

It’s not this year’s price crash that haunts the $150 billion sugar industry. It’s the fear of worse to come.

Raw sugar’s 16 percent drop ranks it bottom of the 22 raw materials on the Bloomberg Commodity Index. Shocks to demand in top consumer India and prospects of more European supply are helping shift the market to a surplus, hurting prices. Yet beyond such market dampeners, hang darker clouds.

After decades of stable demand growth, almost doubling per person since 1960, the world is heading for a tipping point as shoppers turn against the cola and candy blamed for an obesity epidemic in the rich world. At the same time, sugar has to compete with cheap syrups increasingly used in processed food.

Demand is rising by some estimates at the slowest since at least the global financial crisis as companies like Coca-Cola Co., consuming about 14 percent of all sugar traded, and Nestle SA, the world’s biggest food company, react to such trends. Group Sopex and Green Pool Commodity Specialists see growth in 2017-18 below the average 2 percent a year of the past decade or so. The U.S. Department of Agriculture sees the first drop in demand in a quarter century.

“Growth is not what it’s been,” Tom McNeill, managing director of Green Pool, said in an interview. “There is undoubtedly a move by global bottlers and by a lot of global food manufacturers to reduce the sugar content in their products.”

Consumption may sink below 1 percent for a second year in the 2016-2017 season, less than half the average pace in the previous decade, Sopex figures show. The slowdown may mark a turning point for an industry that’s seen near linear growth for half a century on an expanding world population and rising wealth, concentrated most recently in dynamic economies like China.

Indeed, food giants are only just beginning to respond to noisy calls from customers, lobby groups and lawmakers to cut empty carbs from products.

Coca-Cola has 200 reformulations of products in the works to lower sugar content, Chief Executive Officer James Quincey said in October. PepsiCo Inc. has vowed that at least two-thirds of the company’s volume will have no more than 100 calories from added sugars per 12-ounce serving by 2025.

Coca-Cola’s Biggest Challenge Under Next CEO: Cutting Calories

Nestle said late last year it had found a way to reduce sugar in chocolate as much as 40 percent and would lower sugar in the chocolate and confectionery it sells in the U.K. and Ireland by 10 percent. Globally, companies curbed ingredients that raise health concerns such as sugar and salt in about a fifth of their products in 2016, says the Consumer Goods Forum, a retailing lobby.

“We are hearing from right, left and center all the intentions of the industrial users — food and beverage companies — to reformulate their products,” said Sergey Gudoshnikov, senior economist at the International Sugar Organization, representing producing nations. “Sooner or later it will work.”

U.S. cities such as Philadelphia and San Francisco and countries such as France and Mexico have added “sin taxes” previously reserved for tobacco or alcohol to sugary sodas, with others lining up to join them. The World Health Organization says its research shows that a 20 percent increase in the retail price of fizzy drinks results in a proportional drop in demand.

The industry is now having to adapt to what some have dubbed a war on sugar.

Cutting sugar alone won’t solve obesity concerns, according to Courtney Gaine, president and CEO of the Sugar Association, a Washington-based lobby group. Replacing sugar with starches or fat doesn’t reduce total calories, she said.

Blame Game

“It’s very important that the sugar industry preaches moderation and doesn’t say, ‘Hey, it’s not our problem’ because it’s the whole food and beverage industry’s problem to try and help the world be a healthier place,” Gaine said. “I would like for sugar not to be blamed as the sole cause, but we are also not innocent.”

Beyond the developed world, consumption of sugar isn’t going to fall off a cliff as long as the world’s population is still expanding and there are burgeoning middle classes in Asian and African cities, according to Rabobank International.

Trends in richer countries with more money to spend are significant, nevertheless. Demand is set to sink in Germany, France and the U.K., according to Tropical Research Services data for the season that starts in October.

Some middle-income nations are also hurting from weak economies. Brazilian demand has dropped by about 1 million metric tons over the past three to four seasons, according to Sopex. It’s also down in Argentina.

More significantly, sugar is losing out to cheaper sweeteners as food manufacturers protect profit margins. Soda makers in China and the Philippines are using more high-fructose corn syrup. The processed sweetener, made from corn starch, is about 3,680 yuan ($534) a ton cheaper than sugar, Sopex says.

“That’s seriously eroding demand,” said John Stansfield, an analyst at Sopex who has worked in the sugar industry for two decades.

High-fructose corn syrup displaced 3.3 million tons of sugar in China alone in 2016, according to the USDA.

The drop in raw-sugar futures prices this year in New York to 16.26 cents a pound can mostly be blamed on short-term problems such as the weak Brazilian economy and currency policies in India that disrupted demand.

But beyond such squalls, others hear distant thunder.

“Some of the changes are temporary, others are not,” said Sean Diffley, head of sugar and ethanol research at TRS, which advises hedge funds. “I suspect the food and beverage industry doesn’t go back to larger bars of chocolate or full-sugar Coca-Cola.”

Cheerio

The Pinstripe and Bowler Cub shares information with MF Solutions Ltd.

Trump Bomb Boosts Gold

Gold’s getting a boost from the turmoil in Donald Trump’s West Wing. The haven rose for a fifth day as the president’s latest controversy prompted references to the 1970s Watergate scandal that helped to sink predecessor Richard Nixon, hurting the dollar as investors cut back on risk.

The president “perhaps is facing his toughest time in the office,” said Naeem Aslam, chief market analyst in London at Think Markets U.K. Ltd. Investors are questioning whether there is “any possibility of impeachment becoming a reality, because certainly that would hit the confidence massively.”

Bullion for immediate delivery climbed as much as 0.6 percent to $1,245.07 an ounce, the highest since May 3, and was at $1,243.78 at 9:41 a.m. in London, according to Bloomberg generic pricing, as the Bloomberg Dollar Spot Index sank to the lowest since November. The precious metal’s winning run is the longest such stretch in a month, and takes gains this year to 8.4 percent.

Gold has risen after Trump’s firing of FBI Director James Comey a week ago, and following reports he shared intelligence with Russia. In the latest twist Trump is said to have asked Comey in February to drop an investigation into a former national security adviser, raising questions that he may have obstructed justice. The problems are seen as drawing the administration’s focus away from policies to aid growth, and have spurred recollections of former President Nixon, who was ensnared in Watergate and resigned.

“It’s a political dogfight,” Ole Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen, said by phone. “That does mean that his ability to act as a president, and to do what he’s promised, is sharply reduced and in that lies the risk of dollar weakness.”

Democrats say reports Trump asked Comey to drop the investigation into Michael Flynn amount to obstruction of justice, if true. “I hope you can let this go,” Trump told the FBI director, according to a Comey memo, as cited by the New York Times. The White House has denied that version of events.

‘Ability to Deliver’

On Trump’s position and the Comey fallout, “it’s much too early to say,” Hansen said, when asked whether the current situation is reminiscent of the Watergate era. “I don’t think the sum of that adds up to something that could potentially lead to the removal. But what it does do, is really just is bucking down the White House and the ability to deliver on promises.”

The concerns surrounding the White House may slow economic policy decisions, according to Westpac Banking Corp., which recommends investors short the dollar. “Regardless of the ultimate conclusion of the political storm over Trump’s actions on Russia and the security services, it will at the very least linger as a distraction that makes it more difficult for the White House to pass pro-growth policies,” said Sean Callow, a senior currency strategist.

“The rise in gold is largely a dollar play, with the dollar weakening because of Trump,” said Barnabas Gan, an economist at Oversea-Chinese Banking Corp., who also flagged overseas tensions. “There’s still more downside risk to gold in the long run, but in the short-term, given what the North Koreans are doing and what Trump is doing, the dollar is inherently weak.”

Bullion has advanced in 2017 — posting a run of four monthly gains through April — even as the Federal Reserve tightens monetary policy, with a rate rise in March and more increases likely to follow. Higher rates tend to curb the appeal of non-interest-bearing assets like gold.

While this year is a “pretty hazy year for bullion, the path of least resistance is on the bearish side,” said Singapore-based Gan, highlighting the Fed’s tightening cycle. “If we divorce away all the uncertainty, the rate-hike story should at least bring gold prices to $1,100.”

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

All Quite On the Oil Front

Earlier this year, Saudi Arabia’s Minister of Energy and Industry echoed Alan Greenspan in warning against “irrational exuberance” that his country, or OPEC, would support oil prices simply so rivals could get a free ride. In the weeks since, Khalid Al-Falih has swapped out Greenspan for another central banker: the European Central Bank’s Mario “whatever it takes”Draghi.

Just over a week ago, Al-Falih used that very phrase to emphasize OPEC’s commitment to draining the glut of oil inventories weighing on prices. And just this weekend, he apparently put substance behind the rhetoric: He said Saudi Arabia and Russia — which together produce more than a fifth of the world’s oil — favor prolonging through the first quarter of 2018 supply cuts they and other countries announced last November. As it stands, OPEC is due to meet on May 25 to decide whether to extend the cuts to the end of the year. Oil prices duly jumped.

“Jumped” maybe the wrong metaphor in this case, though; “stepped back from the brink” could be more apt:

The net long position of managed money in WTI and Brent crude oil futures shows the arc of belief in OPEC’s power from November to now. Like any good central banker, or aspiring one, Al-Falih’s verbal intervention was designed to revive flagging confidence in the power of his office.

Without it, prices might well have turned south again. The same weekend, it was reported that oil production in Libya, exempt from production cuts due to its civil strife, hit its highest level since October 2014, before the crash really hit its stride. This came after a report on Friday that Indian oil demand — a critical element of the bull case for prices — had risen in April after three months of declines, but was still lagging far behind the gains witnessed in 2016.

Saudi Arabia’s ultimate aim, along with that of fellow producers, is to shift the futures curve for oil to a point where it no longer makes sense for traders to put oil into storage and sell it for a higher price down the line. Undermining this carry trade means reducing the discount at which physical oil trades relative to longer-dated futures. You can see that this has moved somewhat in OPEC’s favor over the past week, helped by a drop in U.S. oil inventories reported last Wednesday and, of course, this weekend’s well-chosen words:

With 10 days to go until OPEC’s meeting, a combination of well-chosen words and the short positions built up by hedge funds suggest prices could go higher.

Yet it would be a mistake to conclude the tide has shifted in favor of Saudi Arabia, Russia and the rest.

That curve has flattened out before, almost flipping in February, only to dip again when it becomes clear there is no quick fix to what ails oil exporting nations. Higher prices, regardless of their foundation, encourage the rebound in U.S. shale development, which counteracts the supply cuts.

Above all, once the speculative heat around the May meeting dissipates, the reality of the situation should re-emerge, with Al-Falih’s own odyssey providing the essential narrative. In January, he speculated the initial cuts probably  beyond June. By March, he was sounding that warning about irrational exuberance. Come early May, he let it slip the cuts might extend into a vaguely defined “beyond.” And now, not long after, the cuts look set to push into 2018.

For those encouraged by the minister’s adoption of the Draghi doctrine, it is worth remembering the ECB chief took that stance as a desperate measure — and that, five years on, he is still playing backstop and choosing his words very carefully.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

 

 

Oil Traders Flag

OPEC and its allies are seeking to pump less for longer in a quest for higher prices. The world’s biggest independent oil trader says their efforts could be in vain.

Demand isn’t expanding as much as expected, and U.S. shale output is growing faster than forecast, according to Vitol Group. That’s increasing the burden on the world’s biggest producers, who need to stick to their pledges to cut supply just to keep prices from falling, said Kho Hui Meng, the head of the company’s Asian arm.

Oil has given up all its gains since the Organization of Petroleum Exporting Countries and other producers signed a deal late last year to limit supply for six months from January. Prices have been hit by surging output in the U.S., which is not part of the agreement. Any recovery in crude will depend on sustained usage by nations such as China, India and the U.S. as much as OPEC’s efforts to control supply.

“What we need is real demand growth, faster demand growth,” Kho, the president of Vitol Asia Pte., said in an interview in Kuala Lumpur. “Growth is there, but not fast enough.”

While consumption was forecast to expand this year by about 1.3 million barrels a day, growth has been limited to about 800,000 barrels a day so far in 2017, he said, adding that U.S. output had grown 400,000-500,000 barrels a day more than expected. “If demand goes back to where it should, where it’s forecast, then it’ll help, but my gut feel tells me it is still a bit long,” he said.

The International Energy Agency has trimmed its forecasts for global oil demand growth this year by about 100,000 barrels a day to 1.3 million a day as a result of weaker consumption in Organisation for Economic Co-operation and Development member countries and an abrupt slowdown in economic activity in India and Russia, according to a report last month. The Paris-based IEA cut its estimate for India’s 2017 oil-demand growth by 11 percent.

There’s also concern that consumption may slow in China, the world’s second-biggest oil user. Independent refiners, which account for about a third of the nation’s capacity, have received lower crude import quotas compared with a year earlier, promptings speculation their purchases could slow.

“The oil market is looking for growth but there’s no growth,” Vitol’s Kho said, adding that the refiners may only get approval for the same volume of imports as last year. And while U.S. gasoline consumption is expected to hit its seasonal summer peak soon, demand growth “is not there yet,” he said.

The world’s biggest crude exporter is nevertheless bullish. Saudi Arabia expects 2017 global consumption to grow at a rate close to that of 2016, Energy Minister Khalid Al-Falih said on Monday. “We look for China’s oil demand growth to match last year’s, on the back of a robust transport sector, while India’s anticipated annual economic growth of more than seven percent will continue to drive healthy growth,” he said in Kuala Lumpur.

While some fear a slowdown in Chinese oil demand, Sanford C. Bernstein & Co. doesn’t see any cause for concern. Growth in the nation’s car fleet will support gasoline demand, with increasing truck sales and air travel also helping fuel consumption, it said in a report dated May 9.

Saudi Arabia and Russia, the world’s largest crude producers, signaled this week they could extend production cuts into 2018, doubling down on an effort to eliminate a surplus. It was the first time they said they would consider prolonging their output reductions for longer than the six-month extension that’s widely expected to be agreed at an OPEC meeting on May 25.

Global oil inventories probably increased in the first quarter despite OPEC’s near-perfect implementation of production cuts aimed at clearing the surplus, the IEA said last month.

Shale Boom

“We’ve always talked about the call on OPEC, how much OPEC oil is needed to satisfy world demand,” said Nawaf Al-Sabah, chief executive officer of Kufpec, a unit of state-run Kuwait Petroleum Corp. “Now, in this new paradigm, it’s really becoming the call on shale. And the market is setting itself at the marginal cost of a shale barrel.”

U.S. output has jumped for 11 weeks through the end of April to 9.29 million barrels a day, the most since August 2015, Energy Information Administration data show. American benchmark West Texas Intermediate is trading near $46 a barrel in New York, while global marker Brent crude is near $49 a barrel in London. Both are more than 50 percent below their peaks in 2014.

“I am still watching the U.S. summer gasoline demand,” said Vitol’s Kho. “OPEC has said it will try and extend its output cuts beyond June. So if that happens, and the discipline is good, and if the U.S. lack of growth in demand changes into summer, then we may see oil go back to the low $50s, but the prevailing mood today is not.”

Cheerio.

The Pinstripe and Bowler club shares information with MF Solutions Ltd.

Commodity Rally – Maybe !

Commodity prices usually rally as the U.S. Federal Reserve heads into a hiking cycle, but it might be different this time, Goldman Sachs said in a note Monday.

Historically, “commodities perform the best when the Fed is raising rates,” Goldman said. “This makes intuitive sense because the reason why the Fed raises interest rates is that the economy displays signs of overheating. Strong aggregate demand and rising wage and price inflation are precisely the time when commodities perform the best.”

It added that rising interest rates in China also tend to coincide with better commodities performance, noting the mainland’s “outsized role” in demand.

That’s a driver of Goldman’s overweight call on commodities, with expectations for solid performance over the coming year as the Fed raises rates and the labor market runs at full employment.

But Goldman pointed to three risks that could derail its view.

Firstly, it noted that technology changes and U.S. shale oil production could have “a profound impact” on commodity returns.

“While conventional oil production takes time to ramp up, the response time for shale is much shorter,” it said. “This has increased the oil supply elasticity, which may contribute to lower commodities returns relative to historical experience even as demand strengthens.”

Secondly, Goldman said the China tailwind may be waning.

As an example, it cited China’s demand for refined copper, which rose to 10.2 million tons in 2015 from 660,000 tons in 1990, totalling 90 percent of the total global growth in copper demand.

“Going forward, the growth in the Chinese demand for industrial metals is likely to be much more muted, also contributing to lower commodities returns relative to historical experience,” Goldman said.

Finally, Goldman also pointed to a risk from the Fed’s hiking cycle itself, noting that the current pace has been much slower compared with previous cycles amid a gradual US and global economic recovery.

“While our U.S. economists expect three hikes this year and another four hikes in 2018, the fact that this hiking cycle has been different from previous hiking cycles imply that commodities returns may also differ from their historical performance,” it said.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.