Monday, May 22, 2017

Dollar Steadies After Week Of Political Noise

By Ritvik Carvalho 
Reuters
May 22, 2017

The dollar steadied close to six-month lows against a basket of currencies on Monday, as investors took stock of a week of political turmoil in the United States and a resurgent euro zone economy.

The greenback has been pressured by uproar over U.S. President Donald Trump's firing of FBI Director James Comey, while improving economic prospects for Europe have also seen investors buy into the euro, further weighing on the dollar.

Trump's departure on a trip to the Middle East seemed to have cooled the temperature briefly on political drama in Washington that some fear could derail his administration's promises of tax reform and fiscal stimulus, if not his presidency.

The dollar index, which tracks the greenback against a basket of six major rivals, inched 0.2 percent higher to 97.366. But it was not far from the previous session's low of 97.080, its lowest level since Nov. 9.

"Our bias is still dollar positive," said Adam Cole, currency strategist at RBC Capital Markets in London.

"We're generally being kind of pushed back against the diminishing rate hike expectations, but things are quite quiet this morning and for the rest of the week ahead too."

St. Louis Fed President James Bullard said on Friday that the U.S. central bank's expected plans for rate increases may be too fast for an economy that has shown recent signs of weakness.

Several Federal Reserve policymakers are due to speak this week, and the central bank on Wednesday will publish minutes of its May meeting, which preceded the most recent political developments.

Futures traders are pricing in about a 3 in 4 chance of a June rate hike, but only about a 40 percent chance of two or more rate hikes in 2017, according to the CME Group's FedWatch Tool.

"We're still keeping our expectation of a June hike, but the impact of expectations of higher rates on forex could be limited because of the political moves," said Harumi Taguchi, principal economist at IHS Markit in Tokyo.

"And in the meantime, Europe is emerging as a bright spot in the global economy," she said.

Net long positioning on the euro rose to its highest in more than three years in the week ended May 16, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday.

Recent economic improvements in the euro zone have raised market expectations the European Central Bank will tone down its dovish language at its next Governing Council meeting next month.

The euro was 0.2 percent lower to $1.1169 after rising to a six-month high of $1.1212 on Friday.


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Oil Rises On Expectations Of Extended, Possibly Deeper, Output Cut

By Stephen Eisenhammer
Reuters
May 22, 2017

Oil rose on Monday, bolstered by confidence that top exporters will this week agree to extend supply curbs, with suggestions that the cuts could even be deepened.

Brent crude was up 50 cents at $54.11 a barrel, with U.S. light crude also up 50 cents at $50.83.

Both benchmarks have climbed more than 10 percent from lows hit earlier this month.

Prices have risen on expectations that a pledge by the Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russia, to cut supplies by 1.8 million barrels per day (bpd) will be extended by six to nine months, instead of covering only the first half of this year.

"The decision (to extend cuts) seems to be almost a done deal," said Bjarne Schieldrop, chief commodities analyst at SEB Markets. "There seems to be a very high harmony in the group."

The option of deepening the cuts was also being discussed ahead of a meeting of OPEC and other producers in Vienna on May 25, sources said.

"Oil soared ... as rumors swirled that OPEC... was considering recommending the double whammy of a production cut extension and deeper cuts ahead of this Thursday's meeting," said Jeffrey Halley, analyst at futures brokerage OANDA in Singapore.

Deeper cuts are required to balance the market, according to some analysts who point to a slight rise in OPEC exports this year.

The U.S. Energy Information Administration (EIA) said it expects OPEC net oil export revenues to rise in 2017, partly because of "slightly higher" OPEC output.

But deeper cuts might serve to stimulate U.S. shale production, said Schieldrop at SEB Markets.

"If you cut production, it's no free lunch. You get something in the short term, but you get a backflip in the medium term, which is more production in 2018 and 2019," Schieldrop said, referring particularly to U.S. shale oil output.

Goldman Sachs says that the U.S. rig count for new oil production has jumped by 404 since May last year, representing a rise of 128 percent.

U.S. oil production has already climbed by 10 percent, or almost 900,000 bpd, since mid-2016 to 9.3 million bpd.


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Budget Pressure Likely To Keep Saudis Propping Up Oil Price

By Andrew Torchia 
Reuters
May 22, 2017

Pressure on Saudi Arabia's finances will make it eager to secure a deal on oil output cuts at this week's talks among global producers, even if Riyadh has to shoulder the lion's share of the reductions.

A rapid decline in the government's huge budget deficit is unlikely to continue in coming months, particularly since Riyadh may have to spend more to support sluggish economic growth.

Saudi economic reformers, meanwhile, have staked much of their credibility on a successful initial public offering (IPO) next year by national oil giant Saudi Aramco, which they have predicted will achieve a valuation of at least $2 trillion.

The result, oil analysts and economists say, is that Saudi Arabia will go into the meeting of OPEC and non-OPEC producers in Vienna on May 25 determined to maximize its oil revenue through high prices, even if it must make large production cuts in return.

“The fiscal situation is going to remain challenging, especially in the context of an economy that has slowed," said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

"The government is going to have to pick up spending to support growth and diversify the economy, and for this it needs high revenues. They need to see oil prices at the very least at current levels.”

With benchmark Brent crude at $51 a barrel, Saudi energy minister Khalid al-Falih has said he wants current output cuts to be extended by nine months to next March.

Riyadh has already cut production by more than it agreed in that deal. Its cuts in April equated to 118 percent of its quota.

Sources told Reuters that an OPEC panel was considering the idea of not only extending but also deepening the cuts beyond the 1.8 million barrels per day (bpd) specified in the original agreement. (For a graphic on Saudi spending, revenues and reserves vs oil price click tmsnrt.rs/2oQu95X)

Reluctant Borrower

Thomas Streater, head of research at MB Commodities Capital in Dubai, said the possibility of the Saudis accepting deeper cuts could not be ruled out because a 1.8 million bpd reduction would only achieve a modest drawdown in global inventories.

Since last year Riyadh has averted financial crisis partly by borrowing abroad. Foreign investors are happy to lend it tens of billions of dollars, but that does not mean the government, which came close to eradicating its debt three years ago, is happy with the process.

"They will want higher oil prices to increase their revenues and not be dependent on borrowing, Streater said."

Saudi Arabia's budget deficit shrank 71 percent from a year ago to a smaller than expected 26 billion riyals ($6.9 billion) in the first quarter of this year, mainly because of oil revenue that jumped to 112 billion riyals from 52 billion riyals.

But the first quarter of 2016 saw the oil price's trough, with Brent dropping as low as $27. By the second quarter, oil was hovering around $45. Any future improvement in the deficit, therefore, is likely to be less dramatic.

Growth in Saudi Arabia's non-oil economy, meanwhile, has almost ground to a halt, increasing pressure on the government to stimulate activity and rein in unpopular austerity policies.

Riyadh backed down on one austerity measure last month, restoring civil servants' financial allowances at what one official said was an annual cost of about 15 billion riyals. Some officials say privately that fresh energy price reforms aimed at saving 29 billion riyals this year could be postponed.

Deficit Unease


The result is likely to be that the budget deficit for 2017 comes close to Riyadh's original projection of 198 billion riyals. Though that would be a marked improvement from last year's 297 billion riyals, at about 8 percent of gross domestic product it would still be too high for comfort.

Malik estimates that a $1 increase in average oil prices over a year reduces the Saudi budget deficit by 0.3-0.4 percentage points if spending remains steady, making a price increase of even a few dollars attractive to the Saudis.

Similarly, oil prices could have a big impact on the Aramco IPO. Consultants Sanford C. Bernstein have estimated that Aramco would make a net profit of $13.30 a barrel on its upstream production with oil at $50, but $16.90 at $60.

That suggests a $10 swing in the oil price could conceivably make a difference of hundreds of millions of dollars to Aramco's IPO valuation, helping to determine whether the government can claim it is getting a good price.

Other factors that have contributed to Riyadh's historical reluctance to reduce oil production also appear to be losing some validity, with some analysts arguing that improved fracking technology means that U.S. shale oil producers are no longer likely to be deterred by low crude prices.

Furthermore, concerns that output cuts would reward Iran with higher prices may be receding, given Tehran's failure to secure foreign investment over the past year and U.S. President Donald Trump's hard line toward the country. (For a graphic on Saudi GDP growth by sector, click tmsnrt.rs/2qcwITY)


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From Suspicion To Engagement: OPEC, Hedge Funds And The Sistine Chapel

By Dmitry Zhdannikov
Reuters
May 22, 2017

It was an unconventional venue for an unusual encounter.

In the Vatican's Sistine Chapel in the summer of 2016, OPEC's new secretary general Mohammed Barkindo bumped into Citigroup's global head of commodities research Ed Morse.

Their chat, at an energy industry event held in the Chapel, led to a series of meetings that have reshaped the way the Organization of the Petroleum Exporting Countries interacts with the hedge funds and trading houses that influence world oil markets.

Barkindo, elected to OPEC's top job in June 2016 to deal with an oil price slump, told Morse that OPEC wanted to better understand the way financial players worked in the oil markets.

It was a departure for OPEC from its long-held suspicion of such players. In the past it has routinely accused them of speculation that distorted oil prices, pushing them higher or lower than supply-demand fundamentals warrant.

OPEC and non-OPEC oil ministers meet in Vienna on Thursday to decide whether to extend beyond June 30 their deal to reduce output, and perhaps deepen it, in an effort to support prices.

"It was at the Vatican that we first discussed the idea of OPEC reaching out to the financial players in the oil markets," Barkindo told Reuters.

"The world of oil has changed, including the fundamentals and its dynamics. And so must OPEC."

He said Morse helped organise a meeting for OPEC officials with hedge funds at the end of 2016. "We went further to break the Berlin Wall with tight oil producers and met them in Houston in March," said Barkindo. Morse did not respond for a request for comment.

In separate meetings organised via different routes and facilitators, Saudi Arabia's energy minister Khalid al Falih and his team held discussions with hedge funds. They also met top trading houses Vitol and Litasco in Vienna in November, ahead of the last OPEC meeting, according to market sources.

Falih's predecessor, the veteran Saudi oil minister Ali al-Naimi, often took advice from oil market consultants, but had his own advice for hedge funds: leave the market alone.

"As the market got increasingly financialised, the Saudis and others at OPEC understood and accepted it is not just driven by fundamentals and decided it was worth engaging with those who move the market short-term," said Amrita Sen of consultancy Energy Aspects, which also often helps facilitate the dialogue between OPEC members and financial markets.

"Whatever It Takes"


The engagement with financial markets seems to be changing the tone of OPEC's public style. It now sometimes mimics the language of central bankers.

Over the past two months, Falih has twice used the phrase coined by European Central Bank President Mario Draghi five years ago in his successful bid to defend the euro.

OPEC will do "whatever it takes", to reduce an oil glut, was the message from Falih in April, repeated in a joint statement with Russia's energy minister Alexander Novak.

Hedge funds bought heavily into the oil market late last year as it became apparent OPEC would cut production. They have heavily sold those positions in recent weeks, stalling a recovery in oil prices near $50 a barrel, as they realised bloated world oil inventories would take longer than expected to shrink to normal levels.

"Even after a recent price correction, there is 700 million barrels of (investors') net length in the market," said Gary Ross, head of global oil at PIRA Energy, a unit of S&P Global Platts.

"It is exceptionally important for producers to understand the behaviour of financial market players and what they think about future price trends."

Non-OPEC Russia, having joined forces with OPEC to cut output, has also moved closer to the financial players.

Russian oil minister Novak surprised market watchers this year when his team held conference calls with investors about their oil market outlook, organised by banks such as Morgan Stanley or Sberbank - something his predecessors never did.

"Explaining The Logic"

"One of the government's obligations is to explain to investors the logic of its decisions," said Novak's head analyst Pavel Sorokin, who previously worked for Morgan Stanley.

"As far as joint policies with OPEC are concerned, the market is always full of rumours. Hence we need to be in contact with the market and investors. We explain our market vision and are learning about reactions to certain events and decisions. But we don't discuss anything confidential," he added.

People who attended the discussions between Saudi officials and market players, including hedge funds and traders, said they detected no hint of Saudi intentions.

One was at such a meeting in November, ahead of the last OPEC gathering.

"They were listening a lot and said little. If you made a bet based on that meeting, you probably lost money," said the participant, who asked not to be named because the meeting was confidential.

Saudi officials told top independent U.S. oil firms at a closed-door meeting in March they should not assume OPEC would extend output curbs to offset rising production from U.S. shale fields.

Prices fell steeply on the comments, as investors assumed Saudis would not be willing to extend production cuts. A month later Falih promised "whatever-it-takes" steps, including extending cuts well into 2018.

"Producers naturally want financial players to be long, so the tricky part for producers is not to give financial players any ammunition to go short," said Ross.


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Ford Set To Fire CEO Mark Fields As Shares Founder

By Laurence Frost and David Shepardson
Reuters
May 22, 2017

Ford Motor Co (F.N) is expected to announce the departure of Chief Executive Mark Fields in a broad management shake-up, a company source said - a move that reflects growing investor unease over the company's stock market performance and outlook.

Forbes and the New York Times reported that James Hackett, 62 and chairman of the Ford unit that works on autonomous vehicles, would take the helm. An announcement could come as early as Monday.

Ford shares are down nearly 40 percent since Fields, 56, took over three years ago, at the peak of the U.S. auto industry's recovery. Now, U.S. auto sales are slipping, and Ford's profit margins are trailing those of larger rival General Motors Co (GM.N).

Ford's board of directors and Chairman Bill Ford Jr. have been unhappy with the company's performance, and sought more reassurance that investments in self-driving cars, electric vehicles and ride services would pay off. Details of further executive moves were not immediately clear. The Wall Street Journal reported on Sunday that the company was considering new assignments for some of Fields' top lieutenants.

"We are staying focused on our plan for creating value and profitable growth," a Ford spokesman in Europe said in response to the reports, declining to comment "on speculation or rumors".

The turbulence at Ford comes as all three Detroit automakers are under pressure to prove they can avoid losses as the U.S.auto market, source of the bulk of their profits, is slowing down after last year's record sales.

GM Chief Executive Mary Barra is fending off attacks from hedge fund Greenlight Capital and its leader, David Einhorn, who wants to install three new directors on the automaker's board, and split GM's stock into two classes. FiatChrysler Automobiles NV is fighting accusations by U.S. and California regulators that it used software to cheat on diesel emissions tests, and Chief Executive Sergio Marchionne has so far been unsuccessful in his effort to find a merger partner for the company.

Challenging Times

Fields outlined a variety of initiatives to confront challenges from technology companies such as Alphabet Inc (GOOGL.O) that want to control a future of autonomous, data intensive vehicles.

"You have to have one foot in today... but also one foot in the future," Fields told reporters last month. "I think investors understand our strategy."

Among Fields' bets on technology is a plan to invest $1 billion over the next five years in tech startup Argo AI.

Ford has churned out strong profits under Fields, reporting a record $10.4 billion in pretax earnings in 2016. However, Ford dismayed investors earlier this year by forecasting lower profits for 2017 and higher costs for its investments in "emerging opportunities."

On Friday, Silicon Valley electric car maker Tesla Inc (TSLA.O) was valued at $51 billion, more than Ford's $43 billion. The contrast is a dramatic sign of how little confidence investors have that old-line automakers can transition to a future where software substitutes for pistons and transportation is sold by the mile or the minute.

At the same time, GM is turning up the pressure on Ford in the North American truck and sport utility business, the source of 90 percent of Ford's profits.

GM is gearing up an "onslaught" of trucks for the North American market, the automaker's President Dan Ammann told Reuters last week, including a new generation of the Chevrolet Silverado large pickup truck that competes with Ford's primary profit machine, the F-series line of trucks.

Ford is moving to cut costs to offset declining U.S. sales. Last week, the automaker said it would cut 1,400 salaried jobs in North America and Asia through voluntary early retirement and other financial incentives.

Fields earned $22.1 million in 2016.


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