tv Bloomberg Real Yield Bloomberg June 30, 2018 10:00am-10:30am EDT
>> oil prices 10%. trade battles claim another victim. we look for the opportunities on trade. china could buy 4 million tons of soybeans in brazil. the problem is recovering from a trucker's strike. alix: i am alix steel. welcome to "bloomberg: commodities edge," 30 minutes focused on the companies, physical assets, and the
commodities with the smartest voices in the business. let's kick it off with spot on, our analyst and investor take on the big story. joining me is mike mcglone, commodity strategist at bloomberg intelligence, and dan dicker, founder of the energy word, both former traders. watch out, they get rowdy. and today, our spotlight is on trade battles. ryan lance, ceo of conoco phillips, told me this week at the world gas conference in d.c. what he is afraid of. ryan: hopefully this does not escalate into a large-scale trade war, that will not be good for the world. our business probably is the aluminum and the steel tariffs that are placed on some of those products. for a company not having a huge impact in 2018, but i think if it is this persistent in 2019, 2020 and beyond, the cost of steel is rising. it has a material impact on the companies as we go forward. alix: but this week, industrial metals felt the pain.
the become industrial index down almost 2%. what is the relationship of metals and trade? dan: clearly, what you have is a president who is intent upon starting a trade war with the chinese. now, he has backed away a little bit in the past two days from this kind of intellectual property piece of the puzzle, but he has not backed away at all with this idea of steel and aluminum tariffs, not just on the chinese, but the canadians as well. that is having a domino effect on all of the industrial metals going forward. they are all feeling the effects of this domino move to apply taxes to both steel and aluminum, from our allies as well as the chinese. alix: the other thing that happened was a monster dollar rally over the past couple of weeks, particularly this week. how much of it is trade and how much of it is a dollar problem? mike: it is both. the dollar is a significant factor. from a sector standpoint, the metals have the highest negative correlation to the dollar. the dollar in the last quarter,
q2 was one of the strongest rallies we had seen in the dollar in years, when it peaked in 2015, 2016. that is a big factor. overall, what i see in metals as they are backing up to good support with demand and supply still very favorable. this trade issue is probably going to blow by. hopefully it will not get much worse. alix: let's talk about the individual metals for a second and kick it off with nickel. you want to buy nickel, copper, and aluminum on a dip. talk about supply and demand and what it means for prices. dan: for nickel, it is well that this supply. i go to the bloomberg terminal and find the best measures i can, and you can he in the chart demand is in excess of supply and it is trading higher, and might pull back a little bit, but is well above par. prices are very low, certainly compared to historic highs. they have a lot of room to run, and they are near the low. i look at nickel as being very attractive and it has that whole
electricity, new energy, new economy, advanced technology factor in there. electric demand for ev's and things. alix: but you have to be very sensitive to the tweets, to the trade wars, to the individuals coming out on tv and talking. how do you hedge risk in industrial metals? dan: it is very hard. mike is right. fundamentally, we are in the midst of a commodity renaissance. i said that would we were on last together. it is nearly being short-circuited by these threats of a trade war from the president. so how do you hedge? the best way to look at it is to assume, as the market has for several months, that the president cannot really go through with many of these threats he has against both our allies and the chinese. unfortunately, as we get closer to this july 7 deadline, when the first pieces of these tariffs will go into effect, the markets have been slacking off -- copper, tin, all the base metals, even palladium, gold, they have all started to sink. what can you do?
my idea is to play an options trade. it is a very speculative trade, and what you do is basically say that at one point, the president is going to have to give on this, at which stage you will have a tremendous surge in the prices of all the base metals. i have taken copper is one that you could use. the volatility in copper futures, the options on the futures in september are actually pretty low, 17%, which speaks to the fact that trump might go through with some of this, at least for a while. you could take a speculative play by some straddles or maybe a few call options on the september copper and hope the president blinks before the end of july. alix: you love investing on hope. where is all the trading floor handwaving? where is it? dan: this is not something you could predict. that is the problem. the president is the most unpredictable wildcard here. alix: it is time for the takeaways. dan -- buy copper, september calls, wait for trump to blink. mike -- demand exceeds supply, nickel recovery just heating up.
thank you to michael mcglone and dan dicker. dan will be sticking with me. and up next, the spread that perplexed everyone. is the wti brent narrowing here to stay, or are we headed for another blowout? as we head to break, we take a look at some of the big commodity moves of the week. it wasn't just the base metals, you also had silver getting hit along with wheat, and oil bucking the trend, up over 10%. this is bloomberg. ♪ alix: i'm alix steel, and this
first up, an ugly chart. it is the depth chart in gold, the short-term moving average is moving below the long-term moving average, a sign of short-term weakness, having the worst week since december 2017. yes, it is the strong dollar, but it did not help that the turkish central bank dropped its gold reserves by 4.6 tons. -- 8.6 tons. and the stocks here dropping at the fastest rate in almost two years, record high exports, refinery runs, and an outage in canada. some oil was taken out of the market. cushing saw draws of about 2.7 million barrels alone, and talk about that impact on oil prices. overall, the last five days, up about 7%. in the past three days, up 10%, sitting at a three and a half year high. traders are paying a premium to get oil out of cushing, because it has lost all that supply from canada. dan dicker, founder of energy word, is still with us. i want to dig deeper into the wti rally, because if you look at the short-term time spreads, one to three months, they blew out as well.
does this mean it is a short-term rally we are looking at? dan: everyone is assuming the sands oil that comes from canada will come back online and it will not last very long. but there are some systemic problems inside pi that are forcing the spreads back in that the eia did not predict was going to happen, although we kind of predicted it. alix: like what? dan: we were talking about, several weeks ago we were talking about the permian difficulties and the infrastructure difficulties. sheffield was on bloomberg very recently saying that by september, all the pipes will be completely filled. there will not be another ounce you will be able to ship from the permian towards the gulf coast. that will bring the trucks in, a $10 premium on that, and force shutdowns of the kind of permian increase in production that the eia had been looking for for the rest of the year. it just is not going to happen. alix: but if you look at the wti brent spreads, the widening we saw over $11 should remain, but this week we saw a narrowing of about five dollars.
it should be a bigger discount if you see permian oil stuck in texas. dan: are you saying we should go back to parity at some point? that big widening was a fact of eia expecting us to get closer to 10 million barrels, 11 million barrels here in the united states, which is not going to happen. clearly those projections will not happen. in addition to this, the opec deal has yielded another one million barrels a day, which will flow almost entirely to the benchmark brent price. that's what you see brent start to go down, and the wti price start to rise based on the increases of production not going to happen. so that temporary outage from canada only adds more fuel to the fire. it might be temporary, but these other things will become systemic. alix: in iran, it could be systemic, but we do not know the impact of that.
the big news this week for that was the u.s. was going to stop altogether buying iranian crude. if you look at the big buyers, it is france, italy, china, india. what is your expectation for that? dan: again, this is another piece of the puzzle, why we will not see the oil prices hover in the 70's, but continue to be instructive. -- constructive through the rest of the year. i have been looking at $85 for the end of 2018, and that is still my target price. besides the issue with the iranians pumping more oil and the saudis keeping down the amount they will increase over the production guidelines they already have, we have the problems in the permian, we have the problems in canada, we have problems in libya and nigeria. there has been a bad couple of lease arrangements in the gulf of mexico. problems in brazil. they are all over the place. we will continue to see a supply shortage going forward.
alix: really quick, the names you like on that. dan: the u.s. players that have a limited amount of hedging, that have the ability to the infrastructure to deliver product so they are not in the permian. so you want them in the bakken, the eagle, so names like marathon are what you want to look for. alix: let's get to the takeaway. so you want to focus on the shelf players that have optionality in production and have hedged less and can capture that $70 oil like a continental. thank you, dan dicker. let's get into the ring. one big trade of the week and it is literal. where will china buy its soybeans? it currently buys 2.3 million tons from brazil and 3 million tons from the u.s, and now u.s. soybeans are being directed away from china. i'm joined now by our sao paulo bureau chief, julia leite. how much do analysts expect china to buy from brazil after tariffs go into effect?
julia: the estimate is they can buy about 4 million tons in the last quarter of this year, so there is a lot of room for brazil to increase exports to china. alix: when you are taking a look at the soybean premium, you are going to get more demand from china and the soybean premium has been rising. can brazil take advantage of those high prices? julia: the problem is that premium, although it is rising a lot, it is not reaching brazilian farmers because most of the soy business in brazil, the buying of soy has virtually ground to a halt. there is not a lot of business going on and this is still a ripple effect from the truckers'strike in may. -- truckers' strike in may. alix: when will it wind up affecting exports? i assume a lot of beans went there before the truck strike happened. when do we start to see it in the export data, and what are some other issues? julia: the estimates are they
have enough soy to have no problems exporting until august, but we have not had a resolution to the price cost, which is still in the supreme court. the government set a new floor for high prices, which was more than doubling the cost and seen as unworkable for farmers. they are trying to come up with a solution in the supreme court, but there is no solution in sight. alix: our thanks to julia leite. coming up, tim dove, ceo of high and international resources, joins us to talk about how he is getting oil out of the permian. we discuss next on "bloomberg: commodities edge." this is bloomberg. ♪ alix: i'm alix steel, this is
"bloomberg commodities edge." it is time for the bnef brief, and this week, all eyes were on the world gas conference in d.c. we are joined now by our reporter from washington. the big talk was the iaea report. that china's gas demand will soar 35% in the next five years. was that your impression that it was transferred fuel or
permanent fuel? anastacia: the question is is there really a future for gas long-term over the next 50 years or so in the energy industry? alix: any answer? anastacia: this is the gas conference, so the answer is there has to be a role for gas. they are looking at making gas cleaner so it is sustainable for a low carbon future. they are looking at other sectors, such as transportation. there is a lot of innovation going on as to how to get gas to stick and where the new market might be. alix: the demand is great, but you have to get it there. which brings us to lng terminal. what was the talk about how quickly the new terminals could come online to meet the supply and demand? anastacia: it takes about four years to build a new lng terminal, and it looks like they will need more lng on global markets in the next five or six years, probably.
so those terminals need to start construction soon. the big question there is can they get enough contracts in place for that gas and enough contracts that investors are willing to invest in the project so they can move forward? alix: which also brings up the question of contracts. when i was there, that seemed to be all the talk as well. what kind of contracts are we going to see going forward? it typically was a 20 year contract, a couple really big buyers putting commitment in there to get the pipeline and -- in the terminal. anastacia: it looks like a long-term 20 year contract will be needed for a lot of these projects. two new contracts were announced this week at the conference for u.s. exports. those were contracts with poland for 20 year deals. it still seems like the long-term contracts, a least a few of them with clear off takers, are needed to move these projects ahead. alix: thank you so much. let's turn to commodity in
chief, where we focus on one executive in the commodities world. today we have tim dove, ceo of i in your natural resources. the first, ceo of pioneer natural resources. but first, let's take a closer look at the company. there is one big problem for any shale producer. fracking too hard, too fast. it is the stress of a parent-child relationship. the first well that you drill is a parent, and any well drilled 1000 feet in the same zone is a child. a couple bad things can happen, like a loss of pressure. if a child attracts, it might not be as strong. a frack hit. a child's fluid gets mixed up with the parent's, hurting production and reserves. and it can be to frack's in the same layer of rock, and two fracks in a different layer, it all becomes one big reservoir. enter pioneer national resources.
plans.d big crack -- it they are ramping up its 3.0 plus well, on track to bring 45 point 3.0 online in the first year, and operating 24 is on the rigs in the basin, and targeting production growth of 24%. can they sidestep the parent-child problems plaguing other companies? what is the plan? i recently caught up with tim dove about the performance of his version 3.0 plus wells. tim: they are well outperforming what we used to call 3.0. right now, our spacing is 750, 800 feet. we can drill six wells in a zone in each section, and we are drilling multiple sections. alix: were the results consistent? tim: very consistent. we have seen generally 40% to 70% uplift.
they do cost more because in general, you are adding more sand, water, so on, but we are saying the completion, even though it costs more, pays out very rapidly because the proliferation of the production from the wells. alix: in a one-mile section, how many wells do think you can get? tim: we generally think of these in two miles, one direction north and south. it would be conceivable to drill 30 plus wells in that area. alix: does your initial uplift translate into longer-term production raised equally? tim: we are pumping more water and more sand, which means it takes more time for the wells to clean up and get the water back off the well. so you are not seeing extremely high rates, but longer high rates. that is where the returns will be that much better. alix: where do you see the biggest take away capacity issue? is it pipelines? tim: the issue we face right now is constraints in the field, essentially. moving the oil out of the field and the gas out of the field. what happens is we are a product of our own success.
the industry has done such a good job of producing very prolific wells and producing the amount of gas we produced from these wells, so we filled up the field quicker than we planned. i think with the fullness of time, that gets resolved with more pipelines coming on. there is a slew of them. but getting in the second half of 2019 before the decks are cleared in that regard. alix: for you? tim: at pioneer, we have taken steps over the past couple of years to make sure we have firm transportation on pipelines to move all of our oil to the gulf coast, that which is not moving to cushing. alix: is 100% of the oil you want to move to the gulf coast getting there? tim: by july, that will be the case. we will be around 90% at the third quarter. at that point, we have added incremental volumes through time to match our production forecast in terms of transportation.
so we do not have to add any pipeline space until early 2021. alix: are you getting international pricing? tim: absolutely. if you look at our last few cargoes and the difference between wti and brent, it is a $10 differential. we have been selling cargo, selling our oil at substantial premiums, especially compared to world markets but further in comparison, if the oil was left in the basin. alix: do you envision a world where you will have excess capacity on your pipelines to get money to transport someone else's oil or gas? tim: it could be the case. even for ourselves, we have firm transportation that allows us to move oil ourselves. there are times we can ramp up that transportation that we have some excess, and could provide some space for others. it is really a 2019 opportunity for us. you have a tremendous number of rigs running today.
430 horizontal rigs running in the basin. every month, we see applications for and permits for 600 wells. these are all getting drilled, but how do you slow down? there is only one way to do it in our business. it is probably to slow down completion, and not put as many oil wells on production. alix: that was my interview with pioneer ceo tim dove. the other options are moving capital or diverting production out of the region. that is some thing conoco phillips is thinking about doing as they ramp up their production in texas. something else i'm thinking about, july 1, mexico's election. the question, will andres manuel lopez obrado win this sunday? a key problem for businesses. and tune in to bloomberg television for the boston pops fireworks spectacular on july 4. i will be hosting that with carol massar. there will be no commodity talk, but there will be fireworks. that does it for "commodities edge," check us out each
julie: this is "bloomberg etf iq." we focus on the access, risks, and rewards offered by exchange traded funds. we are halfway through 2018. we look at where the money has gone and where it is going for the rest of the year. plus, we go inside the classroom with the teacher of one of the first mba classes to focus solely on etf's and investing. we look at outperforming real estate etf's re