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tv   Bloomberg Pursuits  Bloomberg  June 17, 2018 5:30am-6:00am EDT

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♪ >> trade skirmishes rattle every market. the president adds volatility to the commodity world. it is getting hot in here. production in russia should fall 5%. ♪ >> i am alix steel and this is commodities edge.
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first, we kick it off with spot on, our analyst take on our big story. joining me is global head of commodities at merrill lynch. good to see you. >> thanks for having me. alix: in the spotlight, opec and russia, they are meeting on the sidelines of the world cup. russia had no problem on the field with a big blowout. on the oil front, the saudi's made headlines. the oil minister said an output increase is inevitable. he said they will likely come to an agreement that will satisfy the market. it will be reasonable and moderate but nothing outlandish. what does that mean? >> we will find out the details next week in vienna. today is all about soccer. it is all about the world cup. it kicked off a couple weeks ago in st. petersburg. i think it is pretty clear, opec is going to increase production.
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we expect a one million today barrel increase from here to the end of 2019. it is a gradual increase. on a quarterly basis, it is basically priced to bring the market into a better balance. right now, we are growing inventories probably at too fast a rate. alix: the saudis said 1.5, and this is what putin said, he said we are not interested in an endless rise in the price of energy and oil, we are satisfied with $60 per barrel, above that can lead to problems for consumers which is not good for producers. does 1.5 or 1.2 get him to $60? >> probably not. our baseline next year is $75 per barrel on brent. even if you bring 1.2 million barrels to the market, you will not have a surplus. you would have to ramp up from
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four players, russia, saudi, emirates and kuwait, to roughly 2 million barrels a day. that gets you into the low to mid 60's. if you increase 1.2, you'll probably stay around $75. while this is going on, we are losing venezuelan output and a fair amount of iranian output as u.s. sanctions kick in in november. these are key factors. alix: the other question, when we talk about an increase in spare capacity. when we look at opec's spare capacity, a continues to grind lower. what do they do about the criticism, the more they pump, e more they take away from future production? >> that is a key point. when i was here last time, i think we spoke about how geopolitics could be anchored along prices. we talked about that in april. since then, we've had an increase in the long-term price of oil. i'm sure opec is looking at the
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carefully and thinking how to deal with the issue. next week, we could see a major capex announcement plan. it could start popping up capacity again among these key players. that way the oil curve does not become anchored to sanctions. alix: they anchor the back of the curve at one price but don't say the price and at the front end, capex will do the vacillating. >> that is a great way to put it. i think they are going to look at term structure and volatility and other metrics, and inventory, to get a complete picture of the market. opec has been focused on getting back to a five-year average, but in our view, based on the amount of forward coverage, it is a much better metric. importantly, they're going to look at absolute price levels but we think they should look at
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structure, it is a cleaner way to look at whether the market is balanced. alix: how contentious will this be? if you take a look at fiscal breakevens across opec, they range in different directions, and saudi arabia is in the $87 range according to the imf. how do you deal with that if you are saudi or kuwait? quatar?e >> this is something we have been racing for a long time. you have the two main parties in agreement, russia and saudi, they have a fracture at the heart of the agreement. one is running on a floating exchange rate and one is running on a pegged exchange rate. saudi would like to see more dollars coming through, and russia would like more barrels into the market. there is that inherent tension in the deal. i think it has managed well, but in a different environment where it is falling and we have
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back.ela coming that would be a much more complicated situation for russia and saudi to work together. i think they're going to try to keep things not too high, above $80 per barrel, demand gets dented. eventually we get to $80 or $90 next year, i think saudi will be happy, but you can't go from an average of $54 last year to $88 per barrel this year, that would dent the world economy. that will dent the demand for oil. alix: when you look at how quickly this will come online and you look at russia and saudi and opec oil production, russia wants to reportedly get the production back up to 2016 months.n like three what is your base case for the increase? >> we think it will be gradual.
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roughly 200,000 barrels per day every quarter of incremental capacity. maybe some more initially, and then it flattens out to the end of 2019 depending on how u.s. shale is doing. u.s. shale supply is constrained because of the bottleneck in the permian. despite that, it is growing quickly, at the fastest rate ever in terms of barrels. remember, eventually all of these barrels will make it to the market and we won't need as much opec oil into 2019 and 2020. alix: time for your takeaway, gradual 1.2 million barrels a day increase over the next several quarters, a different way to look at the market and the big one, opec maybe announcing a capex plan. stay with me. president trump has a beef with dairy and cheese prices. and as we had to break, we want to look at the big commodity moves of the week. copper got hit along with industrial metals on weaker chinese economic data. this is bloomberg commodities edge. ♪
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♪ alix: i'm alix steel. this is "commodities edge." time to delve deep into the market trends. first up, oil inventory numbers saw a big draw in crude stocks, 4.1 million barrels. imports down, exports up, and u.s. gasoline demand at a record. in the crop market, it is getting hot in here. u.s. drought is causing big problems for wheat. the usda says the harvest for all winter wheat could be down more than 5%. the fda updated numbers this week, kansas down 19%. the outlook was left unchanged. many questions as to whether the number is too conservative. corn also had a wild ride this week. here's the bearish case. u.s. crop conditions have been perfect after planting, but the bullish case, corn stockpiles. the usda says u.s. inventories will fall with record exports at the end of august. they could hit about 2.1 billion
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bushels. rising world demand is finally starting to outstrip production. sticking with food, let's look at cheese prices. under pressure from mexico, u.s. dairy producers count on mexico to buy more than a quarter of the exports. joining me now is bloomberg's head of agricultural reporting. simon, good to see you. it was not just cheese, but also milk taking center stage at the g7. here's what president trump tweeted earlier this week, "canada charges the u.s. a 270% tariff on dairy products. they did not tell you that, did they? not fair to our farmers." how do dairy tariffs work? simon: in canada, they have something called supply management, established in the 1970's. it is basically matching production with the demand. that is in order to maintain a very stable income for farmers. it is very popular with farmers there. it is not so popular with
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farmers here and other countries as well. alix: 270% is other over-quota blended dairy powder. what is that? simon: there is a plethora of dairy products out there. the president is essentially correct. beyond a small import quota, tariffs go up really genetically dramatically to as much as 270% for this category of dairy products. it is an eye-popping number. alix: is canada being unreasonable? simon: very good question. the canadians would tell you no, they are understandably -- as i told you, it is popular with the farmers. the canadian government is always quick to say, we don't produce a surplus because we manage our production. we are not dumping production onto the global market. but, it has been subject to complaints not just from the u.s. government, but from new zealand and i believe mexico as
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well and the e.u. they have complained about the lack of access to the canadian market and unfair competition. alix: simon casey, thank you very much. let's get into the charts you want to watch this week. tariff battles keeping with sign commodity prices. ta a look at what is hpening to aluminum. the blue line is aluminum prices in the lme. london prices. the white line is prices in the u.s. francisco still with me. let's stick to it. describe theffect on trade, the aluminum prices here and in london. francisco: whenever you place a tariff on imported aluminum, you raise the u.s. price and depress the international price. right? and, that is well reflected on the pricing charts. that is something that has been going on quite a bit, as we have
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seen it in things like dairy products but also steel and pork. i mean, there is a whole debate around this. the problem with this administration is there is a lack of clear policy. it is a bit of shooting from the hip and seeing what happens. you shoot again, and you keep correcting issues. we have first, tariffs, then tariff exemptions for u.s. allies, then we have sanctions on rusal, the second-largest aluminum producer, about 6% world supply. rusal was exempted but kept in that pocket. this is a major issue for the commodity markets, but also a major issue for commodity consumers. alix: let's talk about cotton, it has also been affected by tariffs. walk me through this.
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franciso: mexico is trying to retaliate to aluminum and steel tariffs by hitting america where it hurts, and that is basically on commodities they import from u.s. that come mostly from red states. that is the plan. what is interesting is how the tariffs affect the domestic market, and how this could escalate into an outright trade war. can we end up in a trade war with these tariffs? the answer is yeah, we could. we could see a major offsetting effect to the benefit of the tax cuts on corporates. i think the former national economic council chair was saying earlier today, you can have a big negative affect from tariffs. how could that work? if you are a u.s. company producing buses in america, now
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you are at a big disadvantage, because the tariff is on the raw commodity, not on the finished product. your incentive is to move your capacity offshore. do you then slap a tariff on whatever is being built offshore? it keeps escalating. that's what nobody wants to get to. alix: all of that means more volatility in the commodity price. francisco, thank you very much. coming up, anthony marino tells us why he is betting big on canada. that is next on "commodities edge." ♪
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♪ alix: i'm alix steel, this is "commodities edge." it is time to look at alternative energy. we are looking at cobalt, used in electric cars. companies are getting creative on how to finance its mine development. the first major contract to extract the metal why is it so significant? joining us is r.t. watson. he joins us from rio de janeiro. what was the data behind the deal? what are the intricacies?
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>> basically it is a streaming deal, two companies that are going to be paying to get the cobalt that will be extracted. it's almost a watershed moment, if you will, because the prices tripled for the metal in the last couple of years. it's an opportunity to expand, go underground. they might not be doing that if it was not for the buzz around the electric car revolution. this provided an opportunity for them to get the financing they need. alix: $300 million, when you take a look at how much they might be getting over the next decade, what cobalt price does that imply? >> it implies a price level of about $40 per pound, very similar to what it is trading at today. it also gives us a marker of what big companies like apple or carmakers like bmw might have to pay in the future to secure this raw material that is so important to them. alix: it's not just cobalt, it is nickel and lithium.
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particularly nickel, there is another deal, they are moving forward to build underground operations, a nickel mine in canada. what is the significance? >> they are the largest producer of nickel, so this will help them retain that title. nickel has had a rebound spurred by the electric car battery boom. it is a great move for them. it will keep the local government and those employed by the mine happy for years to come. the mine's life has been extended beyond 2030. alix: thanks, r.t. watson. let's turn to commodity in chief, where we focus on an executive in the commodity world. today it is anthony marino. let's take a closer look at his company. investors pulled over $100 million from canada's energy stock etf this year despite crude's rally. where investors see loss, vermilion energy sees opportunity. the canadian company doubled down in southeastern saskatchewan, buying spartan energy for $1.4 billion and beefing up its presence in and near the balkans. it looks to increase its capex. here are the problems. heavy oil prices in canada are trading $15 lower than u.s. prices.
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canada cannot get the oil to the pacific and loses about $15 billion a year. it is hard to build infrastructure. canadian m&a for these companies did a paltry 29 deals this year. does vermilion's acquisition turn the tide, or is it one off value play in a struggling industry? i recently caught up with anthony marino to ask him about the acquisitions. anthony: we found on this m&a investment, we could make a high rate of return in comparison to our cost of capital in the current commodity environment. using the commodities to evaluate, we found very high returns on this transaction at the level we were able to do it.
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alix: a lot of investors or companies have wanted to get out of canada, and there are conversations about it not being the best place to be. what gave you the confidence to go forward? anthony: i could address that a couple of ways. the first, looking at the profitability of canadian light oil in general, we have gotten way lower differentials than in the permian, way lower royalties than the permian, and we have costs helped by the weak canadian dollar. it is a usd-denominated product, but with the weak exchange rate versus usd, costs are scrunched down in comparison to what they would be in the u.s. because of the effect you are talking about, the exit from canadian investment that occurred in the past couple of years, this market has actually come to represent great value for transactions like this one. that's why we went light oil in
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southeast saskatchewan as compared to a heavy oil product. alix: but if you compare to the permian, they have a lot of oil but also a lot of companies getting in, which raises cost, and they have tons of infrastructure and takeaway capacity issue do you worry about the issues coming into your play? anthony: not so much. the permian, despite its great geologic potential, has all of these problems. extremely high royalties, a big severance tax. rising service and infrastructure constraints. we don't have these, and we don't really have any of these things present in southeast saskatchewan, in my view. i think we are extremely unlikely to get to that point on any of those items. alix: would you make another acquisition in canada or elsewhere? anthony: i don't think we are going to make another
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significant canadian acquisition. there's always the opportunity to consolidate regions with small acquisitions, but i think we will renew our organic and m&a growth in europe particularly. we have a very balanced exposure. when you make a significant deal like we did with spartan, canadian exposure comes up some, and actually, in a way, it gives us better balance regionally and terms of free cash flow versus where we were at before. nonetheless, we have a strong european franchise. it's one which we can build on. we have a geographic footprint to access a number of different markets and projects there, and we will be very focused on increasing the european part of our portfolio. alix: where? anthony: we should have an organic growth program in germany. we have begun drilling activity in central and eastern europe in hungary. we expect to extend that to slovakia and croatia, and we will continue to have a moderate growth profile in the netherlands. these are be our sources of growth. we're also taking over operation of the large gas field off ireland, and we will have a modest step up in our ownership interest in that field as well. there's a lot of sources for
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growth for us in europe. these are the ones i am speaking for organically. there's always the potential for acquisitions. we've had a good record in that historically. can't predict when they would occur, but we are in a sufficient number of markets in europe that i think we can continue to expand that franchise, consolidate the industry, and continue this very rapid growth we've had over the last couple of decades in europe. alix: that was antny marino, vermilion ceo. here is what is on my commodity radar next week. sandridge's annual meeting. carl icahn owns 13% of shares, the largest shareholder. what winds up happening with his activist investment? later in the week, we have edf coming out with its latest methane omissions report. they are one of the only environmental groups oil companies listen to. and the event you have been waiting for, friday is opec's formal ministerial meeting. what will we know about more supply getting added to the market?
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that does it for bloomberg "commodities edge," catch us every thursday at 1:00. this is bloomberg. ♪ two, down, back up!
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♪ ♪ emily: this is "the best of bloomberg technology." we will bring you all of our next interviews from this week in tech. president donald trump's meeting with kim jong-un produced a handshake and a promise to keep talking. what is the summit signal for what is to come. we had to speak with some of the biggest names in gaming. on the latest trends and how they are k

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