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00:00Geopolitics Trump OPEC's OPEC warns the oil market is getting tighter. But it's the geopolitical risk premium supporting prices. Aluminum sent prices almost had to 2012 high as U.S. sanctions on Russia take a bite at a global supply and no trade fear LNG development is immune to a trade war as China demand powers on I'm Alix steel and welcome to our brand new show Bloomberg a commodities edge it's 30 minutes focused on the companies the physical assets and the trading behind the hottest commodities with the smartest voices in the business. Let's first kick it off with spot on. It's a macro view of the big stories of the week in our spotlight geopolitics pushing oil to its highest level since 2014 from the missiles to Syria to potential sanctions on Iran. I cannot forecast how the tensions will go and their impact on the prices but definitely this would be a reason to push prices up. We have also noticed premium geopolitical premium reimagined into the price formation. I think to the extent that the president decides not to sign the waiver and we do reimpose those sanctions not only will it be primary sanctions but there will be secondary sanctions and I believe that they will continue to have a very strong impact on the economy in Iran. Joining me now is Tina Saltman a senior adviser at Nautica the largest financial group in northern Europe and Regina Mayor Global Sector Head of energy and natural resources at KPMG. Ladies. Great to see you . Thank you for being here. Thanks Alex. Thank you. So Tina I want to start with you in your opinion how much geopolitical risk is in the market. I think at the moment it's quite a lot actually and it's long time since we've seen actually the geopolitical price has increased that much because today as well OPEC's released a report saying that the global inventories falls sharply for the last two years as they have tried to do as well but that means that it's less available oil in the market . So for the last two three years we haven't really seen the geopolitical price in the oil market even though it hasn't been quiet in the Middle East. And that is because it's been a lot of oil available at the market. But now Wendy when you and markets are seeing that inventories is declining or inventories are declining and then then starting to get scared again. Is it enough oil available and especially when they started to get more turbulent run to the Middle East fair but you know as people point out that Syria doesn't produce a lot of oil. So I understand the Strait of Hormuz argument I understand the sanctions but can you just give us the perspective of what is the risk that everyone's talking about for oil. Well we've seen this for the last couple of weeks and now we're seeing a spike in the last few days. It started with the administration changes with more hawkish elements so expected sanctions against Venezuela against Iran. But you're also seeing as Dana pointed out the lower supply that's driving a lot of that frankly I think my clients in Texas are quite excited that geopolitics are finally getting priced back into the equation because that hasn't been priced in but it's a very real risk in the markets starting to recognize that's your clients in Texas. What did they do when they surrendered 70. They're going to say they're disciplined are they. No absolutely not true. There is no governor over shale oil production. And I know people have talked about infrastructure limitations but frankly there's still storage. There's still ways to get this product to market and you're going to continue to see big investment with lots of folks coming in not just to the Permian but to many of the other basins because the U.S. looks like a stable regulatory regime with abundant supplies and onshore is a big focus. I thought what was interesting was the recent U.S. Gulf of Mexico bids that only attracted 1 percent of bids on the available tracks . That shows people are focused on onshore and the abundant light tight oil shale access. So that's where the U.S. side. But if you broaden out you mentioned OPEC Venezuela and Iran are obviously the two question marks that everyone's now paying attention to. Is it possible that you could see a doubling of an OPEC cut if you do have sanctions if you do have Venezuelan oil really roll off. Yeah I mean Iran produced approximately 800 to 1 million barrels less at the start of 2016. So it has increased the production quite a lot for the last one and half years. So if the U.S. is starting to put new sanctions on Iran we have to expect that the oil production is declining again . Venezuela has had a problem for a long time. So their oil production has fallen sharply and especially the last couple of years. So with the political instability in the country I don't see that that will change in the very short term. So there is a big risk that even more oil is going out to the market. And then how much control does really open cap. Right. Right. But then Seventy dollar oil that's a demand destruction story. TINA Yeah I think if oil prices go further from this point you will see that we saw in 2014 as well that Opal was thought to worry about exactly that. Oil demand will switch or you will go from oil to other energy sources and you will see the switch to green energy going even faster. So I think you know that OPIC should worry about this and I think also in the report released today they pinpointed that because this had to not fucking focusing that much on the inventories and the longer with how much has actually been invested for the last few years. Fair point but this is in the short term creating some interesting dislocations in the market. And I wanted to bring up a chart taking a look at the short term time spreads of WTI and Brent and Brent is really a lot tighter than WTI. It's over a dollar a barrel the spread between the 1 and 3 months. Why is that. Regina you would think that it would be universal why do we see WTI continuing to lag. Well because of the availability and the abundance and the ability for the US to both use it in its own market as well as to export it it also continues to drive downstream investments. So you have major petrochemical facilities that are are being invested in in the US you have refining expansions and and other investments for that product . And it can stay in the US or it can go elsewhere and it's quite it's quite cost effective to even go elsewhere but it's try to get a share. Sure through the pipelines and I'm wondering I know you talk to your clients and they say that they're feeling bullish but then they can't get their oil out of Midland for example. Does that when I'm crimping their availability to take advantage of a 70 80 dollar price it does. It does become a potential down word factor and the tariffs that were proposed also have an a limiting factor because a lot of the pipeline use imported steel that type sort of high grade steel. So we're trying to figure out what that will exactly mean but there's still quite a lot of bullishness and there's still quite a lot of way to get product out. We still use trains and we still use trucks right. So yeah we could still move it. Yeah all around the world turn it all around our continent to wrap it up with you you see the various geopolitical risks. So how much premium is sustainable and how much oil drain out. If for example there is no bombing a strategic bombing of Syria for example there is not Iranian sanctions coming back online. We have seen oil prices move up by round two to three dollars for the last week or so. So I think if we don't or we see this political risk fate I think the oil prices can fall to three dollars in the very short term in the longer term it depends on how much actually the American trade produces manage to get out to the market because there's no doubt that this litle is a big competitor to the likes for oil producers in Europe. Such a pleasure ladies thank you so much good to get your perspective on this very intense geopolitical commodity week. Our thanks to naughty as Tina Salvador and Regina mayor of KPMG. And coming up the aluminum market having its own Iranian oil moment. We're going to explain what that means as we had the break. Here are the big commodity moves of the last week their dramatic aluminum of over 14 percent soybean futures also grinding higher up 2 percent goal that safe haven bid also coming back in the markets . This is Bloomberg commodities edge I'm Alix steel this is Bloomberg commodities edge. It's time now for the data dig where we delve deep into the market trends . First up natural gas inventory numbers out this week down 19 billion cubic feet with the biggest draws in the Midwest . That's giving a nice boost to some gas prices because now storage three hundred seventy five billion cubic feet below that five year average. We also saw a monster build in the oil inventory number up three point three million barrels. But let's dig behind that. Here's the why. We saw a ton of Latin American imports four point six million. A lot of that made its way into Pad 2 here in Cushing and that wound up having a record build there for that area. At the same time exports hit a speed bump down 45 percent and U.S. production continued to climb . And talking about that climbing U.S. production it is all about the Baker Hughes oil rig no Friday at 1 p.m. So last week we learned that high oil prices means more rigs total crude rigs were added by eleven but with the horizontal oil rigs we're looking at the Permian was up to but as we wind up having oil prices continue to grind higher do more resources actually make their way into the Eagle Ford and other areas like the Bakken especially as a lot of Permian oil is landlocked. Right now we want to get into the ring. We talk about three trades on three commodity charts that are making headlines. Joining us is Mike McGlone. He is strategist for Bloomberg Intelligence. Mike you're the guy I call I need to know about all things soybeans but we're gonna talk about many other things now. Right . Aluminum the commodity of the week. If you take a look at this price chart you can see aluminum prices the blue line actually rallying the most since 2012. The white line is the demand versus supply dynamic. The net demand continues to pick up . There's aluminum need to break out even more. Yes. The key thing I think to remember from this chart is we've had a significant correction below that the annualized mean to a 50 day average. The most significant since is bull market yet . Demand for supply is still very strong. What really promoted that correction was this spiking VIX. Now the market's back to the trend. So it's one of those things you look at when you look at the market what's the path of least resistance. It's up . And what might Mike take for that happen. Where's the pain . We got through the pain. We did the dip and now it's back to the trend of course it had a catalyst and the catalyst is quite significant. Yeah it is that catalysts continue to provide the upside is that need to come from somewhere else. Now RTS based on that number you saw on that chart you see that demand vs. supply that data is a little bit dated. It looks pretty positive. The strongest ratio demand versus supply in 14 years . So that trends pretty strong. All right well let's talk about another supply demand demand dynamic and trade more that is soybeans. You take a look at this chart here it's a Bollinger band so you're basically measuring the standard deviation. The red line is two standard deviations to the upside and the green line is two standard deviations to the downside. Where are we after last week's sell off. This is a significant chart that I like to point out that bulls are bad the measure of the volatility markets and narrowest in 12 years. Marcus Reddy the breakout now it just had a little correction it dipped to the bottom to them. They mean basically the 52 week week week average and it bounced quite strongly above it for reason that was supposed not to memory well worried about Chinese the China cutting and cutting imports from us it looks like it might be the opposite in this case you look at market it needs an excuse not to go up it needs a very good growing season it's more likely to can you continue higher. I see that the narrowest most compressed range in 12 13 years. You can see beans in the teens just based on history beans in the teens. That needs to be at a lower third right now. Rounding it out here natural gas there is conversation that natural gas in Texas it's the warthog in the Permian Basin could actually go to zero. And this is sort of the why in a broader Henry Hub basis. So the blue line is natural gas prices the white line is that storage number continuing to roll over my question again. Do we need to breakout even more on a total U.S. basis. It looks like it's happening now. You can see that the inverse relationship prices in inventories that's both annualized measure and here. I just would like you to make the call the connection between natural gas and soybeans. The natural gas range last year was the narrowest in its history of the futures contract the percentage range so it's right to move. It's really the breakout and you can see the charts just showing you it's getting a better fundamental that natural gas inventories in the toys are declining. So to me natural gas is it's at some point it should continue the rally. In addition it's in backwardation and in natural gas that's an oxymoron. That's true. All right Mike McGlone of Bloomberg Intelligence thank you so much for the trades. And coming up aided our oil weaker regional oil prices what this means for Permian producer. I talked to one Randy Fouts CEO and chairman of Laredo petroleum. We discuss next . I'm Bloomberg commodities edge I'm Alix steel this is Bloomberg commodities edge and it's time now for the being brief. What you need to know on the alternative energy world. This week Bloomberg New Energy Finance hosted the future of energy summit where we heard from leaders in power transportation and energy finance LNG and natural gas will become part of the trade war for China and all countries around the world of course. Energy security is such an important part of overall security of the nation and I think that our administration really understands that natural gas is the fastest growing commodities. I think it's going to be part of the energy transition that's what this conference is all about. Also oil is pretty cool. We think oil will peak at some point over the next 20 years but then probably plateau as we look at 2030 and getting to this greenhouse gas reduction standards we see a system in our analysis that will move to having 80 percent of our resources be carbon free. Here to talk more about the buzz from the summit is Amy Gray's head of North American research at Bloomberg New Energy Finance. What is your biggest takeaway from the last couple days. I think my biggest takeaway from last couple days was this increased demand for flexibility in almost all markets we saw. So you know Angie you're hearing it as more product gets shipped spot versus long term contracts. There's more demand for flexibility in those contracts and power markets the increased penetration of renewables is putting more pressure on existing generators to provide flexibility. And of course there's this debate over which technologies provide that flexibility is at the all of the above strategy that Rick Perry talked about or are there going to be winners and losers. And is there going to be a loser that that's been bailed out. And that brings me to First Energy Solutions stock getting totally hammered as well as their debt . They basically want PJM to go in and buy nuclear and coal energy from them in order to protect the grid and make keep it reliable . What was the talk. Yeah there is a lot of debate over First Energy and I think more generally federal intervention and competitive power market. So as you mentioned first energy as the Department of Energy for this emergency intervention to save their coal and nuclear plants which have actually been paid for multiple times by the rate payers in PJM PJM has some of the highest reserve margins ever. And yet they're still seeking this emergency or support for their coal and nuclear assets . What do people want it to be saved. What was the read when Rick Perry was there. I'm sure he got asked about that. He definitely got asked about it he wouldn't of course say. He alluded that there may be multiple options on the table. But he did give a strong support for poor heating essentially coal nuclear assets although he referred to New England the assets the first energy houses or in PJM which is a different market . New England of course does face some gas constraints and they are heavily reliant on gas and don't have the pipeline capacity from the Marcellus Shale to take that up to New England. So there is probably more risk in New England. The question of is to use that argument to justify supporting the assets that first Entergy has. Great stuff. Amy thanks for catching up with us being Fs. Amy Grace let's turn now to commodity in chief and we focus on one executive in the commodity world and today it is Randy Fouts Laredo petroleum chairman and CEO. First let's take a closer look at the company Laredo. Petroleum is a Permian based oil company that delivered 17 percent production growth last year. This year it's adding a fourth rig completing as many as 65 net wells all with CAC backs down 12 percent. The problem getting the oil out of the Permian. The Houston Midland oil spread has blown out to nine dollars. As pipelines fill up leaving oil stuck in the middle of Texas instead it making its way down to the Gulf Coast to be exported. Producers talk a good game of expanding in the Permian but at what point does this shrinking takeaway capacity crimped producers plans. I recently caught up with Randy Fouts the chairman and CEO of Laredo petroleum. I think 80 gives us a lot of room to accelerate and we would probably look at Accelerate within cash flow. It feels like what the Saudis are also banking on is that the takeaway capacity in the Permian will be so constrained that guys like you won't be able to drill and produce as much as you would like at 80 dollars a barrel. What do you think about that . This is interesting to me because we've seen this conversation in my career a number of times and I think the facts are that that certainly on the Midland side and the Delaware side of the Permian we didn't anticipate this much production growth in terms of actual magnitude as an industry. But at Laredo we went to a lot of trouble to make sure that we spent a lot of money on infrastructure. A lot of money on data and we also spent a fair amount of money making sure that we can take our product on the crude side completely out of the basin and take it to to to the Gulf Coast and sell it there. Yes let's talk about that. So we've seen the Houston Midland spread really blow out to nine dollars on the worry that you're gonna see all this oil sloshing around can't get out. So how many pipelines do you have and what's the capacity at going to U.S. Gulf Coast. Well we have firm transportation on two different pipes taking our oil out of our acreage to the Gulf Coast. And we have twenty nine thousand dollars twenty nine thousand barrels a day of capacity and we're producing slightly less than that. So we're really in good shape making sure that our crude gets exposed to Gulf Gulf Coast pricing. Several years ago that differential blew out a for something at one point he got to think as high as little over 20 bucks a barrel and we never saw the impact. We just took our crude to the Gulf Coast. So this is something that one should almost expect in terms of we're finding lots of production and it takes to midstream marketing guys. They'll get there and the problem will resolve itself. But there could be several quarters in which there's a problem you really did impact Laredo. What about for natural gas. Some are saying that natural gas prices in the Permian could go to zero because there's just no way to take it out . It's a byproduct so it's harder to control that production. And I think that's also something that we've thought a lot about and plan for and we've we plan forward to other companies that are to be a firm contract for pipelines for that as well. We we sell are wet gas at the wellhead but we gather all of our gas internally on our field and we have two different major pipes that we take it to and there's something like 21 or so natural gas processing plants that we can do that too. So both of those major buyers of our gas tell us that that we're in good shape if one has a problem. We just take the surplus to the other one and Nejra Cehic thing about it is we don't see that being a problem with our two suppliers certainly in the Midland Basins. The two people that buy our gas. But we've also designed our system with our infield gathering such that if if it really got as bad as some people think which I don't agree it's going to get that bad. Then we also have some capacity to get go to the royal commission get permits to Slayer in Slayer again our natural gas is is 10 or 15 percent of our revenue. So we'd we'd hate to lose it by flaring but that wouldn't stop us from producing the program. Where would you be at full capacity for those natural gas pipelines. They're telling us that with the additions that they're making and we've verified this with the new pipe being built there there may be a window in the last quarter of 18 and the first quarter or two of nineteen where there's bumping up maybe to capacity but after that there's there's plenty of capacity . Here's what's on my commodity radar. All A's for Alcoa the world's sixth largest producer of aluminum will report its first quarter results on Wednesday we'll find out how investors weigh those Russia sanctions and potential tariffs and the premium that we're now seeing in the markets. Well that does it for Bloomberg commodities edge make sure to catch us each Thursday 1:00 p.m. New York time 6:00 p.m. in London .

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'Bloomberg Commodities Edge' Full Show (4/12/2018)

Bloomberg's Alix Steel talks to the smartest voices from the commodity world to discuss the biggest stories and trends in the market. "Bloomberg Commodities Edge" uses proprietary BNEF research to help break down the trade of the week and to dissect market dislocations and actively traded spreads. (Source: Bloomberg)

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