OPEC Production Cuts and Iron Ore Market Impact
Hello and welcome back to Freight Up, the number 1 commodities and freight markets podcast from FIS.
I'm your host, Fernanda and in this episode of Freight Up, we delve deep into the world of commodities and freight, exploring the latest developments and insights that are shaping the markets.
Our guest speakers, Hao and Archie, provide valuable analysis and updates on the iron ore and crude oil markets.
Archie shares his expert insights on just what's been going down in the crude oil market throughout Q1 so far, discussing the impacts of geopolitical tensions, production levels, and economic data on oil prices.
He also sheds light on the high sulphur East-West contract and its significant movements in the current market.
Meanwhile, Hao provides a detailed overview of the iron ore market, highlighting the factors contributing to a bearish sentiment and the potential impact of upcoming events such as the Platts iron ore index and the US Womack conference on market dynamics.
Listen to this episode for a comprehensive look at the evolving landscape of commodities and freight, as we 'navigate' through the complexities that are shaping the industry.
Timestamps
00:00 Crude stockpile slump spurs oil price rise.
06:36 High sulphur fuel prices driven by market factors.
10:46 Market outlook predicts drop due to oversupply.
13:35 Exciting year ahead with currency fluctuations. Potential chaos though!
Happy 2024. And happy almost year of the
Speaker:dragon. A 62% drop from early
Speaker:January to now. How pay has got the insight on what factors
Speaker:are impacting the iron ore market and how this could affect the rest
Speaker:of Q one OPec has strengthened calls for production
Speaker:cuts. But will everyone stay in line? Archie Smith has
Speaker:some thoughts for you, along with analysis on what has proven to
Speaker:be a roller coaster of a year so far for crude
Speaker:oil. So stay tuned because we have all this and more on
Speaker:freight up. Freight up.
Speaker:Welcome back to freight up. My name is Fernanda and I'll be your host as
Speaker:we navigate the seas of freight and commodities. I'm reporting to you live from
Speaker:a wind tunnel. Just kidding. Those are my airpods. But I am down under
Speaker:in the home of Rio Tinto, so you might notice a bit of
Speaker:difference in our sound quality this week. But nonetheless, we are so
Speaker:excited to be back and bring you the latest and greatest in
Speaker:freight commodity news. This week we've got updates
Speaker:from Smith 7th himself, hao pay, reporting
Speaker:straight from Shanghai. And without further ado, here he
Speaker:is, the people's broker, Smith seven.
Speaker:Archie Smith is back in the studio.
Speaker:But times have changed, folks. He is not the
Speaker:same Fis backstreet boy from yesterday. No,
Speaker:if you see Archie Smith at one of our FIS
Speaker:events, you won't recognize him because he's grown some facial hair.
Speaker:And frankly, I don't know who he is anymore. Archie, how are you
Speaker:doing? I'm all good, thank you, Fernanda. I'm all good. Good to
Speaker:be back in the seat. It's been a while. Good to be speaking with you
Speaker:again. I'm in the home of Rio Tinto, though, so
Speaker:it's pretty nice down under in Australia, the land
Speaker:that gave us Theo and Tim. But besides
Speaker:that, enough of iron ore, which is all anyone talks about
Speaker:here, what's been going on in oil. I
Speaker:suppose I'll kind of do a roundup of the year so far, seeing as we've
Speaker:not had a podcast yet. It was all pretty, not
Speaker:non exciting from the turn of the year. We were pretty range bound,
Speaker:and this is to talk about the crude. We were range
Speaker:bound pretty much the entirety of Jan, I've got the levels here. Kind of
Speaker:found the floor around $75 per
Speaker:barrel, just under, and then it was testing resistance at like
Speaker:$80.75 a barrel. And we was in that range for a whole
Speaker:month with the market
Speaker:participants tussling between geopolitical tensions,
Speaker:soft demand outlook, potential oversupply, et
Speaker:cetera, et cetera. Anyway, right at the end of Jan, we
Speaker:broke that range. We broke the upper end of that range and kind of hit
Speaker:the yearly highs. And that was triggered by
Speaker:a massive or much larger than expected
Speaker:drawback in us crude stockpiles. I think it was just shy
Speaker:of 10 million barrels drawback for the week. And that kind of
Speaker:offered that extra kick to break us out of that range, which we did.
Speaker:I think the highs touch
Speaker:$84 per barrel, just over 80, $417 per
Speaker:barrel. Since then, we've kind of slipped back
Speaker:off. We're very much looking just in the week or on the week
Speaker:we're in the red, and that's due to
Speaker:potential thought of oversupply. Basically what's happening is the
Speaker:non OPEC members have really, really stepped up in terms of production,
Speaker:especially the US, who have come out the back of that kind of down
Speaker:period when a lot of their production facilities were affected by cold weather,
Speaker:kind of December and beginning of Jan, but us come out
Speaker:of that now their production is ramping up. And as
Speaker:well as this, for those of you who were listening last year,
Speaker:I talked a lot about OPEC cuts, and new OPEC cuts are always
Speaker:getting introduced. Basically, there's a lot of OPEC members
Speaker:that may not be sticking to those as
Speaker:promised. We did mention this a bit last year. It seemed like
Speaker:there was, it felt like it was
Speaker:disjointed. Yeah, it very much was disjointed, and it still
Speaker:feels that way. That's just kind of the consensus of the market.
Speaker:People think that some of those members aren't going to be sticking to the
Speaker:cuts or at least as compliantly as they should
Speaker:be. So again, that's kind of adding downward pressure
Speaker:on prices and just kind of general soft
Speaker:economic data, especially out of China.
Speaker:When China economy looks weak, oil goes down. When China economy looks strong, oil goes
Speaker:up. That's kind of very much the case in 99% of the time,
Speaker:and that's what we're seeing here. So kind of all those downward pressures have
Speaker:helped us just kind of come back off into the red.
Speaker:But the last couple of days we have actually seen some support, and
Speaker:again, it just goes back and forth, back and forth. We've seen support last couple
Speaker:of days because now there's been a couple more Houthi strikes
Speaker:on vessels in the Red Sea and also the US.
Speaker:They've basically confirmed that they are going to be continuing their strikes on Houthi,
Speaker:rebel outposts or compounds, whatever, in
Speaker:retaliation to the three, I believe, personnel
Speaker:that they unfortunately lost in a strike attack. So
Speaker:we're kind of just in this point of limbo, really, where the short term direction
Speaker:is not too visible. If something happens in the Middle east, conflict wise, we go
Speaker:up and then later on in the day there'll be some weak economic data, we'll
Speaker:go back down. It's just kind of back and forth at the minute. It
Speaker:sounds like the year of the dragon is going to be a new
Speaker:chapter in what has already been a storied year for
Speaker:crude, at least. How are other segments doing?
Speaker:Yeah, so I suppose the main talking point in the fuel at the
Speaker:minute would be the high sulfur east west. It's getting absolutely
Speaker:hammered. Not down the pub
Speaker:front month contract, which is the. Oh,
Speaker:and for those listeners who may be new to the market or new to
Speaker:the podcast, the high sulfur east west is the differential between the
Speaker:high sulfur fuel coming in the Singapore hub and the high sulfur
Speaker:fuel oil in the Rotterdam hub. So kind of what it says on the
Speaker:tin, east west, high sulfur. So it's a price
Speaker:differential contract. So that's well into the negative.
Speaker:Now, it's down about $13 on the week, I think last trading
Speaker:around minus ten, negative ten, which means that the
Speaker:euro counterpart is trading a $10 premium to the
Speaker:Singapore counterpart. So that's been coming
Speaker:off like four or $5 a day. Reason for that?
Speaker:I think ahead of Chinese New Year, you might be able to argue that there's
Speaker:a lack of interest from kind of east asian buyers
Speaker:ahead of the holiday. And we've also just noticed that in
Speaker:the Shanghai arbitrage window, there have been net sellers of
Speaker:the high sulfur Singh, which is just kind of adding that downward pressure to the
Speaker:380 contracts against the barges, therefore kind of
Speaker:getting that differential deeper into the negative
Speaker:territory. Another factor affecting that, something that's actually
Speaker:providing strength to the high sulfur barges, which is the european high sulfur
Speaker:fuel oil, is the crack is really strong at the minute. It's
Speaker:up about $4 on the week. I'm hearing that there's some
Speaker:big physical players who are quite well bid kind of into
Speaker:q three on the high sulfur euro crack, which
Speaker:is providing a lot of strength in the front, and again pushing that
Speaker:east west down. The strength in the high sulfur euro
Speaker:crack has really tightened up the high five
Speaker:spread. High five spread being the price difference between the
Speaker:very low sulfur fuel oil and the high sulfur fuel oil in the same hub.
Speaker:So you have a euro high five and this thing high five. So looking at
Speaker:the euro high five, I mean, it's tightened up about $20 on the week because
Speaker:of that strength in the high sell for crack. So it was around
Speaker:$115 for the front month contract last week. And I think we're looking around
Speaker:kind of like $97 here. And we've seen a similar change in
Speaker:the Singh high five as well. About $20 on the week. So much tighter
Speaker:there. It's not beneficial for those
Speaker:who have scrubber fitted vessels. If you've got your scrubber fitted vessel,
Speaker:your interest to the high five being as wide as possible. So you're getting more
Speaker:bang for your buck. And before we let you go,
Speaker:Archie, I have one last question for you. And
Speaker:that's what's your biggest takeaway for the week so far?
Speaker:My biggest takeaway will definitely be
Speaker:keeping and eye on the high sulfur east west.
Speaker:Look where it's going for any kind of potential arbitrage
Speaker:opportunities. Obviously you got to take into account that the high sulfur
Speaker:barge is trading higher than the Singapore 380
Speaker:counterpart. I think with that being the thing that's moving the
Speaker:most at the minute in an otherwise pretty stagnant
Speaker:market, I think that's what you've got to keep your eye on.
Speaker:There you have it, folks. The people's broker has spoken.
Speaker:Archie, thank you so much. Amazing as
Speaker:always. No problem. Thank you for having me on the show,
Speaker:Fernanda.
Speaker:Now let's talk iron ore with how pay.
Speaker:We are back and it is halpay, ladies and gentlemen.
Speaker:Hao. How the heck are you? I'm fantastic. I can't
Speaker:wait for the new year coming in two days. That's amazing.
Speaker:Do you have a pretty big celebration plan? Not really.
Speaker:I need to reunion with my family and it's
Speaker:really out of tickets everywhere. It's like
Speaker:very crowded and I think it's going to be very
Speaker:expensive as well on the flights. So I'm not planning
Speaker:to travel really at this time, but probably by the last few
Speaker:days. Well, that makes sense. At least you'll have some really
Speaker:yummy food. But on that note, do you think the market fis already on
Speaker:vacation mode? Exactly. We
Speaker:still see iron ore drop first day or
Speaker:two over this week. It's more
Speaker:following the poor performance of equity market,
Speaker:I'm sure. But from this Wednesday we clearly see
Speaker:iron ore was really consolidated in a
Speaker:dollar or even narrow range for the whole day.
Speaker:And there is zero physical trade on the other side.
Speaker:So I think at least from this Wednesday, the
Speaker:market is entering holiday mode. That's
Speaker:awesome. What other insights do you have to share with
Speaker:our wonderful audience? It's been quite a while.
Speaker:I'm sure they've missed you and there's. A lot to catch up on
Speaker:with success. We say that the market is going to have a big
Speaker:drop in summer, early February or late January
Speaker:and we keep mentioning the top reversal risk
Speaker:in January report, although I think most of the
Speaker:analysts and traders were very optimistic at
Speaker:that point of time because they hear a lot of China stimulus
Speaker:and they hear a lot of the US interest cock.
Speaker:It's all good news for iron ords. It's all macro news. They
Speaker:happen every day consistently. And why we mentioned
Speaker:there's a huge risk on narrow market was that the Pei IRa
Speaker:entered a descending trend although the data was
Speaker:showing a slight pickup. But we think there are
Speaker:some of over calculation on that sample base which
Speaker:ignored some of the northern China capacities. But in fact
Speaker:northern mills carried more production than the south
Speaker:areas. But from the fasting, planning and
Speaker:maintenance as well as some of the oversupply of
Speaker:semifinished deals, we observed that pick iron
Speaker:consumption is going down in January and it's over calculated.
Speaker:That's how we reached this conclusion. And at the meantime,
Speaker:the stocks of iron ores were growing at significant
Speaker:pace, at least 200 and 300 million tons per
Speaker:week. And steel mills feel pressure on raw materials
Speaker:because of the highest dogs plus low margin
Speaker:last for more than five months and delivery was
Speaker:similar to last year. However, the port congestion is much
Speaker:better than the last three years and the heavy snow impact
Speaker:mostly emit China but it's not
Speaker:impacting the northern ports and its logistics
Speaker:inside of China were steady. So fundamental wise
Speaker:we're clearly feeling a bearish sentiment from this
Speaker:January. That's why we mentioned a high valuation risk
Speaker:and the market's priced at risk and it's going down
Speaker:significantly. Well on the other side, I
Speaker:think the big news would become a
Speaker:huge indicator for the market should be
Speaker:trading to pull the bureau in early March and
Speaker:at the same time US Womack is going to have the
Speaker:most important conference to discuss interest rate
Speaker:during the same week or two. So I think both could
Speaker:have a huge impact on market. There will be a lot of stories going
Speaker:on even during Chinese New year and even during the light
Speaker:season. And this is a very
Speaker:interesting time because normally by now the index and
Speaker:fundamentals are usually affected by the chinese long
Speaker:holiday. But that isn't the case this year, is it?
Speaker:I don't think so because there are already a lot of
Speaker:news going on January and February. It's going to be a
Speaker:very exciting year at least exciting?
Speaker:Let's say exciting Q one than any of Q
Speaker:one during the past five years for importers, the February
Speaker:index is almost fixed for the first half. Bills tend
Speaker:to hold cautious fuel and buying port cargoes. But
Speaker:in addition, the huge appreciation of us dollars
Speaker:by 4% during the past three weeks, if it's
Speaker:going down, it will support iron ore value. So there will be a lot
Speaker:of things going on on either the long
Speaker:side or the short side. There will be fights against both the
Speaker:two camps. I think it's not going to be a quiet Q one
Speaker:naturally, and the other huge
Speaker:thing is Brazil court is still struggling
Speaker:with the bank collapse payment to the
Speaker:civilians and there'll be a lot of stars going on on
Speaker:that side as well, although which happened like four
Speaker:years ago. But there will be a lot of irritations of stories,
Speaker:different versions, news media going on
Speaker:because the president of Brazil is environmental
Speaker:protectors. And I think there'll be a lot of stories going
Speaker:on in this Q one as well. If we
Speaker:go to the fundamental side, the iron ore is at least
Speaker:2.5 times than the overall cost plus rate.
Speaker:It's on 85% value of its price.
Speaker:But for example, some of the asian equities, like China
Speaker:equities is only at 10% lower range. And
Speaker:some of the commodities like agriculture,
Speaker:they are running as low as like 20 or 30
Speaker:percentiles. I mean, if we compare it with those
Speaker:commodities, if we standing on a fund to invest
Speaker:in a basket of commodities, iron ore is not cheap
Speaker:at this point of time. So just overall, I think we still need to
Speaker:mention that the iron oil price is still like, it's
Speaker:still like slightly overpriced at this value and at this
Speaker:level, we still need to be aware of it even. There could be
Speaker:some of the encouragement on the macro side or
Speaker:recovery of demand after Chinese New Year. It
Speaker:sounds like one way or another, the year of the dragon, at least for
Speaker:iron ore, is going to take us on a wild
Speaker:ride. Luckily for you and for me, we have Hal pay to keep us on
Speaker:the edge of our seats and on top of the news. Hal, thank you so
Speaker:much for this update. It's nice to work with you again, buddy. Thanks,
Speaker:Fernando, I feel the same way. Thank you. Well,
Speaker:sick of fork and us. That's it. We're done for this week. But we will
Speaker:see you next week. And I know you may be suffering from a bit of
Speaker:abandonment from our two month hiatus, but we are
Speaker:back and have some exciting news for you next week.
Speaker:But in the meantime, John B. Needs a personal favor
Speaker:from you and that is to go to Apple
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Speaker:to hit the button that says subscribe on it. Yes, that's
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Speaker:Assuming that you went and did that, we can go peacefully. We'll see you
Speaker:next week. Freight up.