tv The David Rubenstein Show Peer to Peer Conversations Bloomberg March 23, 2019 2:30am-3:00am EDT
>> fires, blind spots. a u.s. jury finds that roundup second is linked to cancer with billions of liability and damages at stake. saudi arabia, russia, the u.s. vying for oil markets. the u.s. government finds that high oil prices are not that bad after all. and drilling for profit. investing offshore ahead of the bottom and rig rates. i sit down with him to see where he has pricing power. ♪ alix: i am alix steel, welcome to "bloomberg: commodities
edge." it is 30 minutes focused on the companies, physical assets and hottest commodities with the smartest voices in the business. first, spot on. our take on the big story. joining me is the cofounder of energy aspects. and our spotlight is on oil prices, trading at a four month high. opec pushed back a decision to extend production cuts until june. >> in consideration that market fundamentals are unlikely to materially change in the next to months, the jmmc decided forgo the full ministerial meeting in april, and schedule a meeting in may ahead of the opec conference meeting on the 25th of june. alix: was that the right call? richard: i think opec is buying itself a few more months to see how the data comes in. fundamentals have not done nearly as badly as expected in the first quarter. they also just don't know what
is going to happen with venezuela, with iran when the sanctions come up for renewal in june, looks like they may. better time to be trying to revisit that decision and think about the second half of the year than just a month in april. alix: is your base case that russia and saudi continue to do what they do together? richard: we think they do. we assume it's likely that there will be in extension the second half of this year, but beyond that, russia and saudi arabia have found a real sense of common purpose. they don't agree about everything. there are differences at the margin, but fundamentally they want to work together and deepen that cooperation. alix: how does the u.s. fit into this? usually you would see president trump against high oil prices -- saudi arabia obviously needs high oil prices. and the council of economic advisers came out and said hey, oil prices are not that bad even if they are high. if the u.s. becomes an annual net exporter of petroleum net
, gains would outweigh the higher costs for consumers. such a change would have a number of important policy implications. what is the u.s.'s role in setting oil policy? richard: certainly the u.s.'s experience of oil prices has changed dramatically in the last 5, 10 years because of u.s. shale and growing production. higher oil prices no longer means lower growth. but it's not unequal distribution. aboutonsuming states care high oil prices. your producing states care but for the opposite reason. looking at 2020, domestic politics, if you want the producing states like you, maybe -- to like you, maybe you want higher oil prices. but there is a limit because high gasoline prices hit everybody in the pocket. that is why we have seen president trump talk and tweet so much about oil prices when they hit these thresholds, the fear about consumers and backlash. alix: which brings us to sort of opec's big problem, what happens
with venezuela and what is going to happen with iran. if venezuelan exports continue to fall, and imports are now zero into the u.s., that basically means oil prices could go higher, which means the iran question with waivers is in question now too. richard: i think you're right. it is hard to see the u.s. pushed on both iran and venezuela in a really tough way. right now venezuela seems to be in the focus. that probably means iran's sanction waivers need to be rolled over, maybe a little lower, drop a couple countries. but if the market sees that, then we are tight but not overly tight. and then opec extends into the second half of the year to really finish the job in terms of the rebalancing. so that is i think again, opec -- you know last year, , it tried to preempt -- particularly saudi arabia, try to preempt the iran sanctions, and they backfired massively. prices collapsed and there was a lot of frustration among opec members. this time they want to wait and see and say the ball is in washington's court.
let's see what president trump does with iran and venezuela, and then we will respond. we will be the suppliers that look at how to keep the market in balance. alix: definitely one of the takeaways from opec this week. so the fair price for oil, where should it be trading based on the supply and demand fundamentals versus where it is trading at? richard: i think on the fundamental basis, we are tight. not for everything but for the heavy crudes, the margins are improving. easily five dollars, $10 higher on pricing. the reason we are not that sentiment is the fear of repeating last year. i don't think that will be shaken off anytime soon. particularly when we are still in turnaround season. i think we can have a couple more months where we trade relatively softly, where fundamentals are ahead of flat prices. and then into the summer, assume opec does roll the deal over, we could see prices moving into the 70's in brent. alix: energy aspects cofounder.
coming up, bayern's blind spot, the giant faces another legal setback in the accusations that roundup weed killer causes cancer. and the u.s. agricultural secretary told us that china is going to triple its buying of u.s. farm products. >> we could easily see if we are able to come to a trade resolution of doubling or tripling that number of a time of two to five years. ♪
part of this story is venezuelan imports going to zero and a huge jump in exports from the gulf coast. and it was a wild week when it came to iron ore prices, here's what happened. first you got a brazilian court that ordered vale to halt production at a number of iron ore minds. then another court said that they could resume operations and prices dropped. then you see a little bit of stability because you have a cyclone barreling towards western australia, potentially threatening some of those supplies. and severe weather also hitting here in the u.s. floods in nebraska spread to missouri and kansas, hurting crops, transportation, hitting the wheat market, in particular spring wheat, which really outperforming its winter peers like winter wheat. fargo, north dakota declared an emergency, ordering up to one million sandbags, calling on residents to volunteer to fill the sacks that will be making temporary walls to hold back the river. another news bayern is in
, trouble. the act giant -- ag giant loses its first phase of the trial about their roundup weedkiller, which allegedly causes cancer. for the ag impact let's bring in , sterling smith. what does this mean for actual farmers? sterling: actual farmers love roundup. it's one of the most widely used chemicals in the united states, and it will take a lot to get them to change. the amounts they use are comparatively small across an entire field, so the farmers are not going to take losing this very lightly. the way it is applied is not a big health issue, at least as far as we know right now for farmers. but there are not a lot of good alternatives. this has led to the massive crop sizes we have now. alix: right, which actually has not helped them in the long run either. trade is not resolved, and the price did not even move when sonny perdue said we could buy a lot more agricultural products -- send a lot more agricultural products to china. and you have weather impacts. where is my rally?
rally is your we need the weather to rally. if we see another round of flooding in the grass cutter, which is where i am from -- my hometown got flooded out, i am concerned we could see another round when we see the melt off from the rocky mountains. and we see true crop delays and we see acreage cut. a lot of balance sheets are getting put out of business. alix: if you look at the debt accumulated versus what they are actually bringing in, it is quite staggering. what is going to be the solution? sterling: agriculture has to change in the united states. we need to move away from the big industrial farming where we produce so many crops. i think we will see more organic crops. that is what people are going to see at their table. people are more conscious of this. we see grocery stores having difficulty selling processed foods. we are going to have to see -- the government could entice and incentivize this, but we are going to have to change the way we do business if are going to continue to do business. because the way this has been
done for the last six years is not sustainable. alix: no rally since 2012. thank you. sterling smith good to catch up , with you. now let's get into the ring, cyber warfare hits commodities. north hydro, one of the top aluminum makers was hit with a , ransomware attack that crippled operations. let's bring in mark from london. walk us through what happened. mark: it's been a week of turmoil for north hydro in the early hours of tuesday -- hydro. in the early hours of tuesday morning, they were hit by this ransomware attack that affected plants across north america and europe. to keep its production of aluminum metal going, it had to switch largely to a manual process, and the area of the business that has been really affected is the production of customized, specialized products it supplies to tesla, vw, etc. there is a high degree of
automation and product quality monitoring in the production of these alloys. and as a result, it simply has not been able to maintain production without access to the digital systems that control them. as of today, production in that area of the business is running about 50%, and the company still does not have full access to some of these crucial industrial systems. alix: so what does the company have to do to get that? how do they prevent this from happening again? mark: so the one route would be to pay the ransom that the attackers are asking for. but that is not obviously a desirable outcome, and it has is base case. what they are trying to do instead is restore access to the system by identifying the encryption process that the
hackers have used to lock them out of its system and decrypt its systems to restore operations. it's a very difficult process, it's taking some degree of time, despite huge efforts by the company. it is working alongside the norwegian sort of cyber security forces. it has brought in a crack team from microsoft to help with the process as well. but clearly, this is a difficult process to manage. and as you say, the question, once it has restored order is, how it might prevent these types of attacks in the future. it is a constantly evolving battle between hackers who are developing new ways to attack these types of systems and companies and cyber security experts whong -- are trying to foil those efforts. we have had several attacks like this in the past, and security analysts and industry analysts
expect them to only grow in frequency. alix: right. to that point, if they get operations back, and they get control of their system, how quickly can the company restart these kind of operations? mark: i think that process, once it is restored, access should be relatively quick. it is -- they have declined to give a timeline on how soon they expect it to take place. but really, there is a huge amount of urgency in this process, because in the supply of these aluminum products, it is not -- either norsk hydro or some of the customers have large volumes of these products on hand to fall back on. if there is a sustained outage, this could become a critical point in the supply chain. there are a huge number of consequences to their reputation as a reliable hire but also in
the production of automobiles, etc. alix: thank you. time now for the note of the week. it comes from the iea monthly oil report on maritime rules forcing tankers to you -- reduce the amount of sulfur they use. regulations will push large volumes of high sulfur fuel oil out of the marine fuel pool. this is likely to be used for power generation at least temporarily. our overall view is that they are manageable in the medium-term. and coming up, mark edwards will be joining us. that is next on "bloomberg: commodities edge." ♪
♪ alix: i am alix steel, this is "bloomberg: commodities edge." time now for the be enough brief, which gives an energy and -- in-depth analysis on clean energy and emerging technologies. the u.s. could export 65.4 million tons of natural gas per year by the end of 2020 and china could be the buyer. the problem is how it gets there. a new report shows that the next year the panama canal will , not be able to handle all of the supply coming online. joining me now is our correspondent. what did you find when you did the study? >> currently about half of u.s. exports are going to asia, and the majority of those are going through the panama canal. add in the u.s. exports going to the west coast of mexico and
every and that means couple of days one ship is going through the panama canal. there is a limit on how many ships can go through with lng per day. the u.s. is expected to double export capacity by next year. the atlantic can go through the pacific basin. the u.s. is expected to double export capacity by next year. and so by 2020 we will likely be trying to export more than one ship per day through the canal if we continue with the rate of exports going to asia. alix: huge. we have an interesting graph that is showing if you have two slots now. we are kind of right at the level. the pink area is the current asia bound lng. the blue is what we are likely to see come online. what's the solution? where do we go? how much cost does it add? >> this is what a lot of u.s. sellers and asian buyers are trying to figure out right out. there are a number of options. one is that the lng, that you really lock in those spots at
the canal, and make sure your timeline is on track so that the ships are getting to the canal when you have that plot and you guarantee your supply going through the canal. another option is to swap cargos. if there is cargo for the u.s. bound for japan, and cargo from qatar bound for europe, you could swap them in some situations. therefore you could avoid the canal. the third option is you just have to factor in the extra cost. it costs about -- up to 50% more to go around the cape of good hope in africa. it could take up to 30 days more, but it might be sending to -- the calculation you have to assume. alix: thank you very much. we turn now to commodity in chief. we focus on one executive in the commodity world. and today it's mark edwards, ceo at diamond offshore drilling. first, a closer look at the company. ♪ pure playfshore is a deepwater driller with a rough couple of months.
capex of $360 a million and investors punish the stops. they have 17 offshore rigs and works with major companies like anadarko. the problem is that the offshore market is oversupplied. so it is up to services companies to differentiate. so here is what diamond offshore is doing. pressure control by the hour to reduce downtime in equipment. troubleshoot equipment faster and blockchain drilling to report on construction and drilling, looking for ways to eliminate waste. using those upgrades the company , drilled one of the deepest wells in the gulf of mexico, way under budget. the take away is that the company invests now to command a premium rate which only gets better once the overall market bounces back. the issue is that oil services have underperformed the rest of the energy industry, which is struggling to attract capital. and diamond offshore is asking investors to wait, and investors are impatient. ♪
i recently caught up with mark and asked him why he decided to go against the grain and invest while everyone was retrenching. mark: we are taking the opportunity to invest in our current fleet, to upgrade it, and make it more competitive for when the wave returns, and we ride that wave to recovery. alix: if you didn't do that, what would you have to do instead? mark: if we didn't do that, we could preserve cash, which is i think what the investors are looking for us to do. but we look at things in the long term, not just in the short-term focus. and our industry as i have said is very, very cyclical and we are preparing for that recovery. we are one day closer to that recovery than we were yesterday. we are starting to see the green shoots. i think evidence of that really manifests itself when you look at the expiration budgets of our customers. and for the first time in for four or five years, they have come out and publicly stated that they are increasing
investment in expiration. you know some of the european , majors have suggested that their expiration budgets will double. some of the national oil companies have also put 30% or 40% increases in their budget. this year over last. i think if we retrospectively look back, those are the green shoots that we're looking for in terms of when a recovery is about to arrive in our space. alix: it is a very simplistic way. you invest, you soup up the rigs, you wind up cutting costs for your customers, and you give them more efficiency so they get more out of the wealth they do drill with you. this is a deal. marc: that is absolutely the deal. if we can do it better than everyone else, that means my assets stay employed. the worst thing in our space is to have a $650 million asset that is not generating any revenue. i think, unique for us, not only are we providing leadership to the industry, but unique to us as a result of that, all of my
marketed assets have contracts moving forward. and i don't think any of my peers can say that. alix: for how long -- so all of your assets are contracted, for how long? mark: it varies throughout the -- marc: it varies throughout the fleet. some have three-year backlogs, some we are putting to work on a more transactional basis, so it is like three months, six months, etc. but again, we just announced in the last quarter that those assets that are more short-term focused in terms of their contracting, we have showed that we are able to gap fill some of the brakes in those contracts and keep them contracted. alix: what kind of premium did you guys -- did you want to target? day rates are $10, let's look at low numbers. daybreak's are what do you need $10. to command to feel like you're getting a return? marc: day rates have collapsed down to about 25% of where they were at the last peak. we need to see them at least
double and perhaps even go higher than that so we can get back to the space whereby we are providing the correct return to our shareholders. that is our target. alix: when? marc: in -- i think it is closer than we think. it is not this year. you know we are bidding on work , for 2020 and beyond. but as i said earlier we are , starting to see the green shoots of recovery in our space. alix: you notice anymore pricing power and control in the 2020 contracts? or are you past that? marc: we are pushing pricing on 2020 contracts, so there is a significant increase to where we are today. alix: so what does significant mean? marc: significant to us is close to -- not quite but doubling of where day rates are today. alix: wow, that is quite significant. marc: if the long-term contracts 2020 and beyond, yes that is the , case. alix: here is what is on my commodity radar. tuesday -- actually, the monday bloomberg kicks off the
♪ carol: welcome to "bloomberg businessweek." i'm carol massar. jason: and i'm jason kelly. we're here at bloomberg headquarters in new york. carol: this issue is focused on equality, and how inequality damages the economy and businesses. jason: weighing the cost against -- carol: and how dell chemical