Materials Risk Dynamic Hedge: OPEC deal or no deal, China’s accumulation problem

Chart of the week

2016-09-30_0512

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Coal rally puts the breaks on asset sales in sector (Mining)

Changes in cocoa output map boost vulnerability to weather setbacks (Agrimoney)

How electric cars may end up supporting the next bull market in oil (Materials Risk)

First US shale gas arrives at Ineos plant in Scotland (BBC)

Oil firms expected to increase capital spending in 2017 (Fuel Fix)

Significant Upside In Gold ‘Less Likely’ – Nouriel Roubini (Kitco)

China’s accumulation problem: the coming scrap age (CRU)

China Auto Boom Is Warning to World Miners Facing Scrap Age (Bloomberg)

The lithium supply battle starts to heat up (Reuters)

Central banks boost gold reserves as low interest rates bite (Guardian)

Apple, Samsung hungry for lithium, but cobalt supply an issue (Sydney Morning Herald)

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How electric cars may end up supporting the next bull market in oil

Expectations play a big role in commodity markets. From farmers deciding how much wheat to grow next season to consumer choices over what car to buy given their expectations over the price of fuel. Oil producers, like miners gave to look many years into the future to gauge what the demand will be for their output. The gradual introduction of electric vehicles is one such step change. The conventional wisdom is that it will result in lower demand for oil and hence lower prices. However, the opposite could be true, at least in the short term. 

In an interview with Real Vision Dwight Anderson, founder of the iconic Ospraie Management explains why. 

“So that EV side is going to be something that is really going to affect demand growth in crude next decade, and I actually think it could have the odd effect of keeping crude oil prices higher for longer at the tail end of this decade into early next. Because the huge projects that have to be sanctioned that really change the supply and demand, the 100 to 500,000 barrels per day, are ultra deep, deep oil sands, Arctic, and they are many billions of dollars and many years’ lead time. So by the end of this decade, when the oil executives are taking a look and they’re going, holy cow, and they’re starting to see electrical vehicles become more competitive outright economically, and start to gain share.”

“And that that will affect the demand growth the middle of next decade. I think they might not sanction some of the large oil projects. The largest, the longest lead time, but also the biggest size and capacity, because of concerns over what pricing will be then. So I think the oddity, actually, is that, at the tail end of this decade to early next, the penetration rate of electrical vehicles I think could lead to higher crude prices, potentially, rather than lower, until that demand really catches up middle to late next decade.”

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Materials Risk explains: How do pipeline shutdowns affect energy markets?

On the morning of 9th September a leak was discovered on a pipeline carrying gasoline in Alabama. The Colonial Pipeline carries 1.3 million barrels per day of gasoline from refineries in Houston to be distributed across the South East and eastern seaboard, all in all accounting for up to 40% of the regions gasoline supply. The authorities first concern is the potential environmental impact – on the local water supply and wildlife. Markets of course react immediately to facts and speculation as to the potential impact on supply as well as demand.

This short piece considers some of the things you should consider when thinking about the impact of a pipeline closure on energy markets.

    • Nigeria is often a flash point when it comes to pipelines. Rebel groups often try intentionally to blow crude pipelines up, and often unintentionally too (some groups try to siphon off crude for resell on the black market). Pipeline shutdowns result in crude not being able to move to export terminals, and once storage is full it may then result in oil production being shutdown.
    • Russia has frequently tightened the spigots on its gas pipelines flowing into Europe, sometimes at the height of winter in order to put financial and of course political pressure on Ukraine and other Eastern European countries. An alternative source such as Liquid Natural Gas (LNG) in the case of the European gas market can also act as a buffer. If prices for natural gas rise in Western Europe following a pipeline shutdown this provides a signal to LNG carriers in the Middle East to send shipments to Europe, to hopefully take advantage of any price differential between the two regions.
    • Product pipeline closures can be bearish for crude prices. The shutdown of a pipeline that carries products from refineries will mean that the facility will have no outlet for its product, causing it to reduce or halt its operation. Although this will result in higher product prices as supplies to the end consumer are cut, it will indirectly result in lower crude prices as demand is cut during the pipeline outage.
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  • Plenty of crude and product (e.g. gasoline) in stock helps to mitigate the impact of any disruption to supply. But this can only go so far. If a pipeline can’t carry products to where it is needed then, assuming that there are no alternative routes, prices for the end consumer (the price at the pump) will rise.
  • The cause of a shutdown can sometimes be a mitigating factor. For example, if the pipeline shutdown is the result of weather related factors (e.g. a hurricane or flooding affecting a wide area) then the negative impact on demand may serve to dampen the adverse supply impact.

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