tv The David Rubenstein Show Peer to Peer Conversations Bloomberg February 2, 2019 2:00pm-2:30pm EST
alix: venezuela in crisis. the u.s. issues oil sanctions on the country, throwing regional oil differentials in disarray. brazil's mining catastrophe. vale shuts in 40 million tons of iron ore production a year. it's the aftermath of the dam rupture sending shock waves. the next era of technology. i sit down with the ceo of baker hughes. the company is a revolutionary in the oil and gas industry. we look at the next generation of technology. i'm alix steel. welcome to "bloomberg commodities edge." 30 minutes focused on companies
and trading behind the hottest commodities with the smartest voices in the business. first, spot on. our take on the big story. venezuela under siege. the threats to president maduro intensify with the u.s. implementing oil sanctions and the opposition leader's stirs more protests. john bolton tweeting this week, "my advice to bankers, brokers, traders, facilitators, and other businesses, don't deal in gold, oil, or other venezuelan commodities being stolen from the venezuelan people by the maduro mafia." joining me is david marino. the offshoot of what is happening to u.s. refiners. a lot of refiners on the u.s. gulf coast rely on heavy crude from venezuela. what do they do? >> they can look for supplies out of mexico, canada, columbia. but there is only so much heavy sour crude that they need to go around. after the opec cuts, there are
even more of a tightness in the market. alix: one of the biggest buyers is valero. they have their earnings. what are they saying? where are they able to get it, is there a shortage? >> they bought some canadian crude in the market. people in the market have said they have been running more canadian crude in the gulf coast refineries. they have had plans in place to adjust their supply to deal with any sanctions. alix: thank you to david marino. we want to move on to london, where energy aspects cofounder richard mallison joins me. the impact isn't on overall prices but spreads. that puts pressure on u.s. refineries. if you look at the mars blend versus the louisiana light sweet crude, the heavy crude in the u.s., you are seeing tightness there, not in the overall price. richard: exactly right. the markets are not too concerned about supply anyway. we have a lot of u.s. production growth despite opec cuts. it is really about the type of crude available. shale, other light, sweet crudes
are good for some things, particularly good for gasoline but not good for diesel. not optimal if you are a complex refinery. if they are not going to process venezuelan, they need canadian or other latin american heavy barrels. those are in short supply at the moment. alix: the other part is where does venezuela sell the crude it has? u.s., china, india are the three places where it can offload. if you take the u.s. out, do china and india buy more? richard: this is an interesting question. certainly, the assumption of some people is all of the flow, half a million barrels that venezuela sends to the u.s. can be redirected. that flows can reshuffle. i think there are challenges there. technically, venezuelan crude is hard to process, lots of impurities. it is very heavy. there are not many more refineries who will be able to take a lot of this. there is also the political pressure from the u.s. administration.
so, although these sanctions technically relate to u.s. refiners and businesses, the messages from bolton and others is very much be cautious here. the u.s. is watching who does business with the maduro government. i think there's a lot of caution. we heard a european buyer is concerned about the barrels coming its way. placing additional barrels with other buyers will be hard. even the volumes they sell might be subject to challenges, legal uncertainty. alix: the other hand is outsourcing more crude for the u.s. you mentioned canada. other potential suppliers, iraq and saudi arabia. we have a great function on the terminal where you can track tankers. you can see the last-ditch tankers headed from venezuela to the u.s. after that, does the u.s. call of saudi arabia and iraq and say -- call up saudi arabia and iraq and say you have to help me out?
richard: it is interesting because, first, you have to think about sailing times. venezuela is convenient to get to the u.s. gulf coast. the middle east will take a longer journey. if the middle east receives that call, how will they respond? remember that in the run-up to the iran sanctions, saudi arabia in particular ramped up its production, pushed more oil out in anticipation, only to find out at the last minute the u.s. gave waivers out, the oil price collapsed, it was not just about iran, but that was one of the things that tipped sentiment. there is probably be less willingness in riyadh and other places to instantly respond if there is a demand, a call from the u.s. what they have done is they've been continuing to supply their asian customers while making cuts to the amounts they are sending west, in order to fulfill the commitments they made as an opec group last month in vienna. alix: this is all dealing with the different trade flows, the
volume mismatch we are seeing. that's why were seeing regional differentials. when do we see it affect the overall oil market? what has to happen? richard: this is very much for the next few months going to be more about those physical mismatches. both on the supply side, too much light crude, too little heavy sour crude. on the demand side, weakness. still solid numbers for diesel, even good numbers for fuel. how does the system resolve that? it is going to be through repricing, but probably not the flat price or headline price of oil so much as it is about refinery margins, product prices, differential between different grades. for a lot of the players in the depths of the oil market, good news, they can see opportunities there. for a lot of people watching the broader market from a distance, they may not see the reaction they are expecting in the headline flat price. alix: thank you very much. coming up, caterpillar has its
biggest earnings miss in a decade and blames slowing growth in china. we will have the details for you. as we head to break, shell delivers some big numbers, generating more cash at lower oil prices, delivering double-digit returns to shareholders and keeping spending under control. cfo jessica uhl says the company can have it all. >> we are going to do it all, we need to do it all. our objective is to be a world-class investment case. for us to achieve that, we have to grow value for the company, have a strong balance sheet that is resilient through the cycle, and increase shareholder distributions. that is what we're going to do. our priority is generating the right level of cash so we can achieve all three of those objectives. ♪
edge." time for the data dig, delving deep into the market trends. the big surprise in oil inventory numbers was a draw in gasoline in pad three. demand jumped by 700,000 barrels in the four-week average, rising the most since 2013 despite the fact that we've been dealing with a big glut. it is cold outside, so cold that it will strain the power grid. the pgm grid said demand could reach 142,000 gigawatts on thursday. the question, what to watch when big oil reports. take a look at debt. the oil company debt at the six largest companies is near 15-year highs, 30%. at the end of last year, that hit a low of 18% in 2006. we are going to stick with earnings. joe deaux joins me now. caterpillar was hurt by a slowdown in china. the pain is not likely to end anytime soon. ceo jim umpleby warned about the outlook on the earnings call. >> within china, the industry is
very dynamic and there are a variety of forecast. we will continue to monitor the situation, but as for now, we are forecasting the overall china market to be roughly flat in 2019. alix: their biggest miss in 10 years. joe: everybody knows they have visibility in the market there, and everybody wants to know globally what we are talking about here. also china is a tell on commodities. if commodity prices are having trouble, the commodity space is having trouble, that's a problem for caterpillar. they are so interconnected to mining equipment that they sell throughout the globe and that is why people connect china with caterpillar, not because it's a huge market for them, but because of the bigger tell of the mining sector. alix: u.s. steel headed for its biggest loss of the year. they talked about demand in europe. that is not all they talked about. joe: they talked about the maintenance spend in the u.s. this is the big thing analysts
have been trying to figure out with u.s. steel for two years, now. how much are they spending? it seems like they're going to have more trouble. they had a fire at their claritin plant they will have to take care of. looks like the going to spend more on their plant. what happens from there, who knows? these are the questions that people are trying to wrap their minds around but they're not getting enough detail from u.s. steel. a lot of these commodity companies are not giving enough detail on calls and we are starting to see that be a problem for investors this season. alix: how much of that will be about tariffs? you spoke to the ceo of alcoa. to talk about their outlook and visibility. what did you learn? joe: more to come on that soon. speaking more broadly, what all of these guys are saying is the tariffs have taken effect. caterpillar pointed out we are offsetting the costs of the tariffs from higher material costs by raising prices. what we are starting to see coming in, and i know we talked about this before, it is demand destruction over the long term.
people were talking about we didn't see this hit on the bottom line from the start. what economists have been saying more generally is people were saying we are going to get 24 more months of growth. now they are starting to say, is it going to be 18 months, less? it didn't hit immediately in march or the summer of last year, but it is starting to be one of those things where people are not figuring out. i was talking to an analyst today who said we are getting lots of first half commentary from companies but not second half. that is where the worry is. alix: thank you, joe deaux. let's get into the ring with vale as it fights a very big problem. a deadly dam burst in brazil, which forced the company to shut 40 million tons a year of iron ore, 10% of its annual output. the stock suffered its worst week since november. we have been following the story. the 40 million tons a year, how material is that for vale? rt: it remains to be seen.
vale was already ramping up their operations up north. this accident happened in the south of brazil. they have been ramping up their operations in northern brazil , where they have higher grade ore, produced at a lower cost. it will come down to whether or not they can ramp up those facilities faster to offset that production. they also have inventories onshore and offshore that they could look to utilize. alix: the iron ore price had a huge run-up. goldman sachs stressed the case. you can even see iron ore hit $110 a ton a quarter. how much of that is going to be a long-term versus short-term impact, in that the damage could happen anywhere to any company? rt: in terms of the iron ore price, maybe we had a bit of a knee-jerk reaction. you saw the 40 million tons number, 10% of overall production, seems like a big shortfall to make up but lots of
analysts are only seeing a 10 million ton reduction in total supplies in the market. over time, we might see things settle down a little. alix: what does this mean for other offshoots of iron ore? you also have lower quality ore. like 58%. pellet prices. how does this affect the ripple effect for prices in the market? rt: vale will be reducing the production of lower grade iron ore. i would assume the price premium for high-grade iron ore would continue robust. maybe we will see a little bit of a recovery for the lower grades. they are pulling off about 11 million tons of pellet feed. that could influence the price and have that also increase. alix: what does this mean for the steel companies? iron ore is an input to make steel. you need it to make it. what does it mean to them, particularly in china? rt: they will certainly pay more. there is no shortage of lower grade iron ore. i think over the long term, it will not affect them to a
material degree where they are paying much higher prices than they were. in the short interim where you have this reaction to the market, they will be paying more for the short term. alix: thank you, r.t. watson. time for the note of the week. this week it's from citi. the fed reaffirms its bullish gold thesis. they say the tone and language of the fed statement and press appeared more accommodative versus consensus expectations. we continue to assign a 30% fat tail probability that gold prices could near 1400 by third quarter 2019. position for upside via call spreads. coming up, baker hughes delivers strong operating results for the fourth quarter. ceo lorenzo simonelli talks about how technology is helping his company get more oil out of the ground. that is coming up on "bloomberg commodities edge." ♪
alix: i'm alix steel. this is "bloomberg commodities edge." time for the bnef brief, which gives in-depth analysis on clean energy, transport, and emerging technologies. pg&e filed for bankruptcy this week, a record in the u.s. utility industry. the company listed $51.7 billion in total debt and $74.1 billion in total assets.
where does this leave pg&e? james: they filed for bankruptcy on tuesday. concerns of about $30 billion in wildfire liabilities. they have asked for continuing financing of operations like clean energy programs, normal operations for the grid. at the moment, no one knows how things are going. alix: the question also becomes in the future, if they build power lines, underground or above ground? that creates a systemic weather risk. how about the pricing for this? is that realistic? james: a lot of people are saying they should be putting their lines underground but the cost would be enormous. it might improve reliability, but underground lines costs about 20 times of overhead lines, and we did a rough analysis of this and a conservative estimate is at least $67 billion of transmission investment to put their lines underground. for context, they spend under a billion on transmission
investment annually. even if they doubled that, you would be looking at six to seven years worth of programs to do that, and all of the expense to customers. alix: what be the upside? james: less trees falling on lines, potentially less wildfire risk, outages from storms. things like that. europe, where there are more underground lines, does have better reliability than the u.s. it also has much better weather. it is hard to know exactly how much it would improve things. alix: the other question is how you wind up valuing pg&e going forward. if you look at the different assets and what they make their money on, walk me through what you see. james: two thirds to three quarters of the company's value as a regulated utility is in its electricity grid rather than its generation assets. however, generation would be easier to sell because it has not got wildfire risks associated with it. who would want to buy the electricity grid considering the liabilities? it is a big question. there has not been a resolution to what would happen if there are future wildfires. not clear who would be interested in those assets. alix: the same thing goes for the alternative energy contracts
that pg&e has with those companies. if you market them, alternative energy companies will be hurt because they are pricing so much higher than the market now, or they go bust. what happens? james: we did analysis of 18 contracts which have a value of $2 billion and we found the market value around $800 million, a significant discount. it is unclear whether pg&e will cancel those contracts. the federal regulator has said that it has concurrent jurisdiction with the bankruptcy court over that. pg&e would need ferc's permission to reject those. not clear yet whether the bankruptcy court would agree. we have to find out. alix: thank you, james. time for commodity in chief, where we highlight one ceo in the commodity world. today it is lorenzo simonelli, the ceo of baker hughes. the company reported strong earnings, and an earnings backlog. i sat down with him in florence,
italy and asked what the company can do to reverse oil decline rates. lorenzo: recovery rates have fallen short of taking the opportunity within all of these reservoirs. the dynamic of marrying some of the new technology we have with the production enhancement tools is allowing us to increase recovery rates. it is not just in the middle east. when you look at the north sea, and we have seen it prevalent in the north sea over the last year, you have old wells now coming back to life because we are able to extract more from the techniques we are applying. alix: how much more juice is in that kind of technology? lorenzo: precisely, it is hard to ascertain. from a global perspective, you have to look at all the different reservoirs and all the wells that have been drilled. i will tell you, we recently launched subsea connect, a brand-new family within our oilfield business.
we have estimated that that can actually provide up to 16 billion more barrels of oil. that is a tremendous amount of barrels that can be unleashed into the industry. alix: absolutely. how quickly? lorenzo: as you apply the technology into existing brownfields, again, with enhanced oil recovery, and existing wells, to further produce. alix: are your clients interested in spending money doing that versus greenfield projects? lorenzo: it is a blend. again, also the new players coming in. in the case where traditional player has decided to sell a lease or decided to move off, the brown field is an opportunity for new independents to come in. we are seeing new independents with tiebacks and brownfield opportunities. the international oil companies are also still focusing on green fields.
alix: what kind of oil recovery globally do you see that materially makes a difference to global supply? something that's been a surprise to everybody, not only u.s. shale but gulf of mexico, brazil, areas we didn't think we would continue to see the kind of supply we have seen, are we at the tipping point where it's a game changer, is there more to go? lorenzo: there will always be new technologies that come about. we see a steady increase in demand relative to oil over the course of time still for the next decade. there will always be new techniques that help us improve the production rates and enhanced oil recovery is a key factor. alix: what other areas of the world write off as dead that you feel are coming back? lorenzo: the north sea, norwegian continental shelf. as we go forward, you'll see also opportunities in west africa, if you look at some of the older oil fields that have been there. across the globe, there will be
more resources. alix: are there areas with a new technology that had not been explored that you feel are starting to be explored because of the opportunities that you can create? lorenzo: look, there is new exploration and we have seen this year some companies look to further afield. everyone knows there are exploration opportunities in parts of the world that have not been looked at. it is still to be seen. alix: like alaska, the arctic. lorenzo: the ones people keep on talking about. even off the coast of australia, new zealand, where to date there's been very little done from an exploration perspective. alix: that was my interview with baker hughes ceo's lorenzo , lorenzo simonelli. on my commodity radar, monday, south africa's mining begins in cape town. tuesday, earnings.
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jonathan: from new york city, to our viewers worldwide, i am jonathan ferro. "bloomberg real yield" starts now. coming up, another month for the payrolls report. u.s. hiring topping all forecasts. a fed retreat helping junk bonds deliver the best january in a decade. coming off a record-breaking month of european issuance. $255 billion in bond sales. we begin with the big issue, another solid jobs report. >> this is a blockbuster jobs