INSIDE COMMODITIES Tuesday, October 14, 2014 BRENT OIL-OUTLOOK MARKETS SNAPSHOT Click on the chart for full-size image Brent fell as expectations faded that OPEC could cut output in an effort to shore up prices .London copper slipped from two-week peaks hit the session before after comments by the Federal Reserve fuelled worries over global growth while Gold retained overnight gains. European shares are expected to open low tracking Asian markets. Wall Street closed negative on Monday. To read more, please click here Contract (AS OF 0614 GMT) Last Change YTD NYMEX light crude $85.06 -0.79% -12.88% NYMEX RBOB gasoline $2.24 -0.59% -19.04% $760.25 -0.03% -19.46% $3.91 -0.18% -7.42% $1,235.04 -0.14% 2.64% -8.83% ICE gas oil NYMEX natural gas Spot Gold TOP NEWS  China trade data eases slowdown fears, more stimulus may still be needed LME Copper $6,719 0.13% LME Aluminium $1,942 -0.17% 8.06% CBOT Corn $3.49 0.94% -18.01% CBOT Wheat $5.08 0.49% -16.52% R2,173 0.74% -18.88% Malaysia Palm Oil (Ringgit) (3M) Index (Total Return) Latest Close Change YTD  Russian oil shift east accelerates, dictated by politics Thomson Reuters/Jefferies CRB 277.3874 0.41% -1.20%  Oil price slump yet to hit us shale oil production- IEA S&P GSCI 4299.5349 0.01% -10.63% Rogers International 3234.24 -0.43% -12.59% Dow Jones - UBS 134.6268 - - Cont Commod Indx 492.6898 0.28% -3.03% Latest Close Change YTD 16321.07 -1.35% -1.54% US DOLLAR INDEX 85.287 -0.44% 6.87% US BOND INDEX (DJ) 339.12 0.02% 6.80% chief  Statoil exits Shah Deniz gas project with stake sale to Petronas  Heat threatens Brazil’s already dry sugar, coffee areas Index (Total Return)  Thai rubber output seen dropping 10 pct in 2014 -rubber US STOCKS (DJI) assoc  India's 2014/15 cotton output seen at record high  Codelco keeps 2015 copper premium flat in Europe Sources  Freeport Indonesia has green light to resume open-pit mining -Govt  Three years after selling to Glencore, Pacorini returns to metal BEYOND THE HEADLINES  Facing new oil glut, Saudis avoid 1980s mistakes to halt price slide CLICK HERE FOR TECHNICAL CHARTS ECONOMIC WATCH GMT Indicators Unit Reuters Prior 08:00 IT CPI (EU Norm) Final MM pct 1.8 1.8 08:00 IT Consumer Prices Final MM pct -0.3 -0.3 08:30 GB PPI Output Prices YY NSA pct -0.3 -0.3 08:30 GB PPI Input Prices MM NSA pct -0.4 -0.6 08:30 GB CPI MM pct 0.2 0.4 08:30 GB RPI MM pct 0.3 0.4 09:00 DE ZEW Economic Sentiment -- 1.0 6.9 09:00 EZ Industrial Production MM pct -1.6 1.0 09:00 EZ Industrial Production YY pct -0.9 2.2 INSIDE COMMODITIES October 14, 2014 MARKET MONITOR Brent crude fell to just above $88 a barrel in a well-supplied market as expectations faded that OPEC could cut output in an effort to shore up prices. Brent crude fell -0.73 percent a barrel to $88.22 after touching $87.74 on Monday. U.S. crude dropped -0.75 percent a barrel to $85.10 to settle down 8 cents. The most-traded December copper contract on the Shanghai Futures Exchange climbed 0.6 percent to 47,830 a tonne. Gold retained overnight gains to trade near its highest in four weeks as investor appetite for riskier assets eased amid global growth worries. Spot gold eased slightly to $1,234.05 an ounce, but remained close to a four-week peak of $1,237.30 hit on Monday. The dollar rebounded modestly against the yen and euro following steep falls overnight, although risk aversion amid the fall in global equities and uncertainty on the timing of Federal Reserve interest rate hikes put a firm cap on the currency. The dollar crawled up 0.4 percent to 107.235. The euro slipped 0.2 percent to $1.2726. The Australian dollar gained 0.4 percent to $0.8807 on a tentative stabilisation in the price of iron ore. U.S. corn futures edged lower, falling after the grain posted its biggest one-day gain in nine months. Chicago Board of Trade front-month corn futures had fallen 0.1 percent to $3.45-3/4 a bushel. Front-month wheat futures fell 0.4 percent. Frontmonth soybeans rose 0.16 percent . London copper slipped from two-week peaks hit the session before after comments by the Federal Reserve fuelled worries over global growth, disturbing a fragile calm after robust Chinese economic data. Three-month copper on the London Metal Exchange had slipped 0.2 percent to $6,696 a tonne. European shares are expected to open low tracking Asian markets as unnerved investors worry about the strength of the global economy triggering a shift in funds to safe-havens such as U.S. bonds. Wall Street closed negative on Monday. TOP NEWS Russian oil shift east accelerates, dictated by politics China trade data eases slowdown fears, more stimulus may still be needed Russia is diverting more of its crude oil east with deliveries to China hitting a new record last month at the expense of Europe as geopolitical tensions between Moscow and the West dictate the latest shift in flows. As Russia's relations with the West deteriorated over the Ukraine crisis, the European Union and United States imposed wide-ranging sanctions on Russian firms, including oil and gas producers, leaving Moscow trying to forge closer ties with energy-hungry China. Russia's energy ministry says crude oil supplies to China surged in January-September by almost 45 percent year-onyear, to 16.8 million tonnes (450,000 barrels per day), while shipments from the Baltic Sea port of Primorsk plunged almost 20 percent to 33 million tonnes. Oil product exports to Europe have been rising and plans for state-owned monopoly Transneft to use crude oil pipelines for exports of diesel show the trend will likely continue. The decline in Russian crude oil exports comes as increasing volumes of crude oil are being processed at domestic refineries, reaching a post-Soviet high of almost 6 million tonnes in August as plants undergo a huge $55 billion modernisation programme. "Much greater changes can be seen in the geographical distribution of these shrinking exports, with flows to the West clearly losing out against prioritised links to the Far East -- a trend that could easily be accelerated further in the current political climate," JBC Energy consultancy said in a note. Russia pumps more than 10 million barrels of oil a day, but most of its exports are sold in either the Mediterranean or northwest Europe at a discount to the benchmark Brent blend, which has long irked the cash-hungry Kremlin. Analysts say it is more profitable for Russian companies to export processed oil products, such as diesel and fuel oil rather than crude oil. The modernisation of Russian refineries has already eaten into the margins of European plants, as oil product exports from Russia to Europe have surged. China's surprisingly strong trade performance in September may reduce the chances of aggressive policy action such as an interest rate cut, but the prospects of a prolonged property slump suggests more measures are still needed to shore up the economy. With the euro zone and Japanese economies floundering, a bounce in China's exports and imports would be welcome news for the world economy and investors increasingly worried about flagging global growth. But economists said it was too early to tell if China's trade sector has turned the corner, noting that its unexpectedly buoyant imports last month could be due to one-off factors, such as factories taking advantage of sliding global commodity prices to replenish inventories of iron ore, copper and oil. "Today's data is less good news than it appears," said Louis Kuijs, chief China economist at Royal Bank of Scotland in Hong Kong. "It suggests that China's export growth is holding up. However, the important caveat coming from the breakdown of the import data suggests that demand growth in China’s own economy remains weak." Exports rose 15.3 percent in September from a year earlier, beating a median forecast in a Reuters poll for a rise of 11.8 percent and quickening from August's 9.4 percent rise, data showed on Monday. Imports rose 7 percent in terms of value, compared with a Reuters estimate for a 2.7 percent fall, which would have marked their third consecutive decline. Iron ore imports rebounded to the second highest this year and monthly crude oil imports rose to the second highest on record. As a result, China posted a trade surplus of $31.0 billion in September, down from $49.8 billion in August. Most analysts expect China's exports to stay relatively robust in the coming months as the U.S. economy strengthens. 2 INSIDE COMMODITIES October 14, 2014 TOP NEWS (Continued) Oil price slump yet to hit us shale oil production- IEA chief Statoil exits Shah Deniz gas project with stake sale to Petronas The vast majority of shale oil in the United States is produced at costs far below the current price of crude, the head of the west's energy watchdog said, which means U.S. projects can withstand the market slump squeezing other producers. Brent oil stands at around $88 per barrel, down more than 23 percent from the year's peak above $115 in June, raising concern that some shale oil projects will become un-economic. However Maria van der Hoeven, executive director of the International Energy Agency said that only a tiny minority of shale oil production would be affected by the slump in prices to near-fouryear lows. "Some 98 percent of crude oil and condensates from the United States have a breakeven price of below $80 and 82 percent had a breakeven price of $60 or lower," she told Reuters in an interview on the sidelines of the launch of the Africa Energy Outlook publication. Statoil exited Azerbaijan's Shah Deniz gas project on Monday, selling a 15.5-percent stake to Malaysia's Petronas for $2.25 billion as part of asset sales to shore up returns to shareholders. Like other oil majors, Norway's Statoil has been selling assets amid rising costs and falling oil prices. It earlier sold a 10 percent stake in Shah Deniz. French oil major Total sold out of Shah Deniz in May saying it would focus on operating projects rather than holding minority stakes. Monday's deal also includes Statoil's stakes in a South Caucasus pipeline company and two other firms. "The divestment optimises our portfolio and strengthens our financial flexibility to prioritise industrial development and highvalue growth," Lars Christian Bacher, Statoil's head of development and production activities outside Norway, said in a statement. Heat threatens Brazil’s already dry sugar, coffee areas Thai rubber output seen dropping 10 pct in 2014 -rubber assoc High temperatures and a lack of rain this week are expected to punish Brazil's drought-stressed coffee and sugar cane areas for another week, threatening to sap more of the crops' productive potential this season, forecasters said on Monday. Both coffee and sugar futures have gained for three straight weeks and are rising again on Monday as concern rises about the Southern-Hemisphere's delayed spring rains. Consistent moisture over the next six months will define the size of the crops scheduled for harvest in the second quarter of 2015. Output from Brazil's coffee and sugar crops this season was decimated by a severe drought in early 2014. Precipitation has also been lower than normal during the April to October dry season, with important growing areas receiving half the normal moisture over that period. "It will be hot with little chance for rain in Sao Paulo or Minas Gerais for the entire week," said Marco Antonio, a crop weather forecaster at forecasting group Somar. Rubber output in top producer Thailand may fall as much as 10 percent this year as plummeting prices drive away tappers, a senior industry official said on Monday, reversing earlier estimates for output to increase. The change in the forecast came as members of the Association of Natural Rubber Producing Countries (ANRPC), which account for more than 90 percent of natural rubber output, met in Kuala Lumpur to discuss more drastic measures to tackle the slump in rubber prices caused by feeble demand. The drop in Thailand's output and stronger domestic consumption may help eat into Thai stockpiles, lending support to rubber prices that have fallen below production costs and sent benchmark futures to five-year lows. Codelco keeps 2015 copper premium flat in Europe Sources The world's top copper producer Codelco will offer its customers in Europe premiums of $112 per tonne in 2015, unchanged from last year, reflecting weak market conditions due to poor demand and rising supply, sources said on Monday. The flat premium - paid above the London Metal Exchange (LME) cash price to cover physical delivery costs such as transport and insurance - raises expectations that the miner might offer flat, or even slightly lower, term costs for its biggest buyer China in 2015, the sources said. Chinese customers paid $138 a tonne for 2014 deliveries, the sources with direct knowledge of the matter said. Chinese and foreign banks have tightened credit conditions in the copper trade in China since June, when an alleged scam came to light at Qingdao port involving metal being used multiple times as collateral for loans. India's 2014/15 cotton output seen at record high India, the world's second-biggest cotton producer and exporter, said it expected a record harvest of 40 million bales in this crop year that started on Oct. 1, a government statement said on Monday. But despite this season's higher output, exports in the new season are pegged lower at 9 million bales, compared with last year's 11.8 million bales due to the subdued level of demand expected from top buyer China, a government official said after a meeting of state-run Cotton Advisory Board. India's bumper output, rising global inventories and subdued demand from China are likely to pressure global prices. The government's output figure is close to the 40.37 million bales that the Cotton Association of India (CAI) estimated in August. "There is surplus cotton in the world and this is (India's cotton) going to be further added to the system," CAI President Dhiren Sheth said. 3 INSIDE COMMODITIES October 14, 2014 TOP NEWS (Continued) Freeport Indonesia has green light to resume open-pit mining -Govt Three years after selling to Glencore, Pacorini returns to metal Freeport-McMoRan Inc's Indonesian unit can resume open-pit mining at its Grasberg complex, one of the world's biggest copper mines, after it agreed to improve safety following a fatal accident last month, a government official said on Monday. Hundreds of angry protesters blocked access for two days in early October to the open-pit area of the copper complex, where production had been halted following the death of four workers on Sept. 27. That area accounts for more than half of the mine's output. Indonesia's mine ministry investigated the accident and then asked the Arizona-based firm to propose safety changes and policies last Thursday. These changes did not satisfy government officials, who asked Freeport to resubmit within two days. This has now been done and the miner has been given the green light to resume open-pit mining, said Bambang Susigit, a senior mines ministry official. Pacorini, the Italian family-owned soft commodities storage firm that sold its metals warehousing business to Glencore three years ago, is making a comeback, hiring two former executives to rebuild its metals operations. Six weeks after leaving Glencore's metals warehousing company Pacorini Metals, Mario Casciano joined Pacorini Global Systems (PGS) on Monday to set up the 91-year-old company's North American metals business, he told Reuters. He follows Daniel Saez who left Glencore's Pacorini in July and started at PGS a few weeks ago to run the European operations, he said. Saez has begun the process of reapplying to run storage sheds in the London Metal Exchange's vast global network. Casciano expects to offer trucking and other logistics services alongside storage both in LME and off-exchange sheds."The focal point is more ports, more network and more in-house services," he said. BEYOND THE HEADLINES to prop the prices and the price fell anyway," said analyst Yasser Elguindi of Medley Global Advisors. Instead they should have fought for market share, allowing "higher cost producers to shut in as the price fell - which is what they are doing now.” Last week, Saudi officials briefed oil market participants in New York on the kingdom's shift in policy, making clear for the first time that Saudi is prepared to tolerate a period of lower prices perhaps as low as $80 a barrel - in order to retain market share, Reuters reported on Monday. Saudi Arabia is not trying to push oil prices down, an oil source said, but is prepared to let the market find its floor and tolerate lower prices until others in OPEC commit to action. It has already cut selling prices to retain Asian customers. Their message is "don't expect us to somehow shoulder the responsibility for managing the whole oil market," said Sadad alHusseini, a former top executive at state-run Saudi Aramco. Brent crude oil traded below $88 a barrel on Monday, its lowest in almost four years, as traders realize that Saudi Arabia is in no hurry to curb the emerging oil glut. Facing new oil glut, Saudis avoid 1980s mistakes to halt price slide By Rania El Gamal Still haunted by its failed attempt to prevent a steep drop in oil prices by slashing production by almost three quarters in the 1980s, the world's top oil exporter Saudi Arabia is determined not to make the same mistake again. The oil glut of the 1980s, the early days of the modern crude market and a distant memory for most traders, has resurfaced recently in conversations with Saudi officials and veteran analysts who see it as the defining moment behind the kingdom's new strategy to protect medium-term market share. While the latest 25 percent slide in oil prices to below $90 a barrel is so far modest compared with the 1980s slump that took crude from $35 to below $10, many observers see similarities in a global market that is on the brink of a pivotal turn from an era of scarcity to one of abundance. Three decades ago, the spike in prices caused by the 1973 Arab oil embargo and Iran's 1979 revolution sapped global oil demand, while the discovery of oil offshore in the North Sea spurred a new influx of non-OPEC crude. With world markets awash in oil, Saudi Arabia embarked on a strategy of defending prices, which at the time were largely set by exporters rather than the nascent futures market. The kingdom slashed its own output from more than 10 million barrels per day in 1980 to less than 2.5 million bpd in 1985-86. Other producers failed to follow suit, however, both within the Organization of the Petroleum Exporting Countries and among new petroleum powers such as Britain and Norway. Prices fell into a years-long slump, leading to 16 years of Saudi budget deficits that left the country deeply in debt. Finally, in 1985, Riyadh shifted gears, revving up output and cutting prices in a move that triggered a final slump in markets but ultimately paved the way for a gradual recovery. "The big mistake was that they continued to cut production to try 1980s GHOSTS The grim circumstances of the 1980s dominated the formative years of King Abdullah's rule, when as de facto regent during the long illness of his predecessor King Fahd, he embarked on painful economic reforms that paved the way for years of growth. Riyadh this time wants to preempt a price collapse without sacrificing production levels or market share. In the 1980s, it was a drop in U.S. and European consumption coupled with the rise of the North Sea; now it is fears of easing demand from Asia and the unexpected growth of U.S. shale oil. The net effect is the same: An oil market potentially facing years worth of oversupply, a scenario the Saudis and OPEC have not been forced to grapple with since the early 2000s, before the rise of China triggered a decade-long price boom. 4 INSIDE COMMODITIES October 14, 2014 BEYOND THE HEADLINES Fellow Gulf Arab ally and OPEC exporter Kuwait has already said that OPEC is unlikely to cut oil production in an effort to prop up prices because such a move would not necessarily be effective. Venezuela became the first member to call for an emergency meeting to defend $100 oil. ing prices down to $10 a barrel but reestablishing themselves in the market. It took 16 years for prices to fully recover. "They decided they had enough – they were the swing producer and they increased production and drove prices down dramatically," said Dr. Gary Ross, chief executive of PIRA Energy Group, who has followed oil markets since the 1970s. This time around, Riyadh appears to be taking that stance from the start, with a focus on preserving the medium-term revenue of its 266 billion barrels of crude oil reserves rather than chase falling prices and sacrifice their market. "From an economics point of view, it’s much better to let prices go way down," according to Philip K. Verleger, president of consultancy PKVerleger LLC and a former advisor to President Carter. The emerging price war is "a war of necessity." OPEC DISUNITY Another similarity: OPEC disunity. During the 1980s, Riyadh learned the hard way that it could not count on fellow OPEC producers, many of whom continued to pump at higher rates than their agreed-upon quotas, leaving Saudi Arabia to bear the brunt of output cuts. Much of the disharmony was on public display. Iran and Iraq were engaged in an eight-year all-out war. Accusations by Iraq that Kuwait had been pumping above its OPEC quota led ultimately to the first Gulf War in the early 1990s. It was not until late 1985 that the issue came to a head. The kingdom and OPEC finally agreed to reclaim market share, driv- 5 INSIDE COMMODITIES October 14, 2014 3 month TECHNICAL CHARTS (12 and 50 days Exponential Moving Average) Click on the chart for full-size image NYMEX Crude ICE BRENT Crude Spot Gold Spot Silver CBOT Corn CBOT Wheat (Inside Commodities is compiled by Atiqul Habib in Bangalore) For more information: Learn more about our products and services for commodities professionals, click here Contact your local Thomson Reuters office, click here For questions and comments on Inside Commodities click here Your subscription: To find out more and register for our free commodities newsletters click here © 2014 Thomson Reuters. All rights reserved. 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