Mark Latham Commodity Equity Intelligence Service

Friday 2nd September 2016
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    Byron Wien: Consensus

    Two conclusions emerged from the Benchmark Lunches this year.  The first was that the world was condemned to a prolonged period of slow growth unless vigorous fiscal spending took place in the major industrialized economies. Monetary policy had been helpful in the recovery after the 2008–2009 recession, but its effectiveness as an economic stimulus had diminished. The second was that considering the uncertainties caused by margin compression, limited revenue growth, the U.S. political outlook, terrorism, Brexit and other factors, the fact that the U.S. equity market is making an all-time high is remarkable.

    Every year I organize four Friday lunches for serious investors who spend their summer weekends in eastern Long Island. These sessions have evolved over the past thirty years from a single lunch for five people to four lunches in different venues for over 100. Participants include billionaires and academics, hedge fund managers, private equity leaders, corporate chiefs and real estate titans. Leading Republican and Democrat fundraisers interact with each other. The lunches are not social affairs; I actively moderate a discussion of the key issues for almost two hours at each session.

    As you might expect, the conclusions of a group like this might serve as a contrary indicator, and sometimes they do.  But in August 2001, one participant had warned of a major terrorist attack in the United States during the following year, and last summer a number of attendees thought the appeal of Donald Trump’s message was underestimated and he had a good chance to be the Republican nominee. In any case, those who came to the sessions this year were sufficiently confused that they listened carefully in search of an insight that would help them find clarity in the outlook.

    There were three major narratives threaded through the four lunches. The first was how important a factor populism was in the United Kingdom referendum that resulted in the decision to “leave” the European Union.  The movement also played a significant role in Donald Trump’s ascendency to the Republican nomination and Bernie Sanders’ surprisingly strong showing in the Democratic primaries. The second was low world productivity, which improved at 1.8% in the 1964–2014 period and was expected to increase .9% over the next fifty years, but was only up half of that recently.  In the U.S., productivity was actually down .4% in the second quarter of this year. Profit growth and standard of living increases depend on productivity improvement.  The third was “secular stagnation” caused by technology and globalization that has resulted in the slowing of the growth rate of the United States from more than 3% in the period 1945–2007 to a struggling 2% now.

    While the initial investor reaction to the Brexit vote was negative, two months later the impact appears to be largely local. The pound has declined more than 20%, asset values in the U.K. are down by 10% and the prospects for a recession in Britain have risen significantly. In Europe, the risk of contagion would appear to have diminished somewhat, although there were some recent murmurings out of Italy, but right after the U.K. referendum, Spain added seats to the establishment party. The French and German elections next year will be important. Overall, the group at the lunches believed that the slow European recovery would continue in spite of Britain’s vote to leave the EU.  One knowledgeable observer said that the impact on the world economy may be unnoticeable several years from now. It will take two years from the invocation of Article 50 of the Lisbon Treaty to implement the departure and during that period Britain will negotiate trade treaties that will soften the negative effect of leaving. Both sides will be practical; Europe has too much to lose by trying to punish the U.K. economically. The big issue is immigration. Britain will now be able to make it harder for Middle Easterners to settle and work in their country. Europe will make it harder for British citizens to travel in Europe, but there may be special visas to ease the border difficulties.

    We had an extensive discussion at all the lunches about the productivity question. Prominent executives from West Coast technology institutions were participants. Everyone knew that the productivity numbers were disappointing, but many questioned the way productivity was being measured. It was hard to believe that the smartphone with all of its new applications wasn’t adding to productivity. There were a million Uber drivers earning or supplementing their income by providing on-demand transportation; you could do your job from remote locations with great effectiveness; there was almost no information you could not retrieve instantaneously. On the downside, everyone acknowledged that millions of manufacturing jobs had been eliminated through robotics and other forms of technology. The employee attrition problem was likely to get worse as artificial intelligence becomes more prevalent as a tool in the white collar workplace, eliminating jobs in law firms, healthcare and elsewhere. Where will these displaced workers go?

    Those worried about productivity and inequality were perhaps not recognizing changes in the “quality” of life. Technology had definitely made our lives easier even if this isn’t reflected in the productivity numbers. Also, someone living in “poverty” in the United States probably has a residence, a refrigerator, television and other amenities not enjoyed by those in poverty in other countries. While this may be true, I do believe that a substantial portion of Americans go to sleep scared every night. They don’t have a job; they have one but it doesn’t cover all their bills; they have a good job but they are worried that business conditions or technology will cause them to lose it. Sanders, Trump and populism generally are products of an insecure population. They feel that their government’s policies have let them down.

    Perhaps the productivity problem is not as complicated as we make it out to be. When the economy is growing reasonably rapidly, say at 3% plus, companies are slow to hire new workers and the existing workers produce more. When the economy is growing slowly, say at 2% or less as now, even though technology enables companies to produce more with fewer workers, managers are reluctant to reduce the workforce and productivity declines.

    Adding to this problem are the impressive advances being made in healthcare and surgical procedures.  Doctors can now perform operations more effectively and more economically than ever before. The result will be that many people will live longer with a better quality of life than any previous generation. Life expectancy is increasing by several weeks a year in the U.S. When you put all of this together you have a larger aging population being supported by a diminishing number of workers who hold jobs that provide incomes that enable them to have a comfortable middle-class life. The inequality problem has grown in the last two decades and may get worse. Stronger growth would help create more well-paying jobs, but the top brackets may earn even more as prosperity improves, widening the inequality gap even further. Improving our educational system could alleviate the problem, but the progress there seems agonizingly slow. Charter schools have been providing encouraging prospects for part of the population, but on-line education had not gotten the traction everyone had hoped for. It wasn’t enough to have a student sit before a screen working on a well-conceived learning program. Teachers to provide guidance and inspiration and other students to foster an academic atmosphere were needed to enrich the experience.

    The third theme was “secular stagnation,” a term developed by Harvard professor Alvin Hansen in the 1930s, to describe the prolonged period of slow growth that he thought would follow the Great Depression. He was wrong, but the term has been resurrected by Larry Summers and others to describe the difficulties economies have when they are trying to come out of a recession in which both an economic and a financial decline occurred, as in 2008–2009. Monetary policy was the principal tool used across the world. The United States and others used selected fiscal measures as well, particularly at the beginning, but monetary policy, which requires no legislative approval, was the instrument used most extensively. In 2007 the balance sheets of the central banks of the United States, England, the European Union and Japan had total assets of $3.5 trillion; today, according to Bianco Research, the aggregate is more than $12 trillion. The slow pace of world growth is troubling when monetary policy has been so expansive. But central banks have had no incentive to stop printing it, because inflation has not followed the enormous growth in money. Milton Friedman must be rolling in his grave.

    Terrorism continues to be a threat to world financial stability and periodic incidents are unlikely to end. ISIS can be contained but probably not defeated. The Zika problem reminds us that the uncontrollable spread of infectious disease represents a lurking natural terror.  The climate change problem is real, but not immediate and it is hard to get policy makers to focus on it, despite rising temperatures and sea levels.  Only 50% of the public think this is a serious problem; 16% do not; the rest are undecided. That’s why it’s hard to get governments to act. According to some climate experts, in 200 years most major cities will be in danger, but there is not a sense of urgency that will get world leaders to deal with this problem now.

    Almost everyone agreed that the time has come for more fiscal spending on infrastructure, education, job training, research and development and other programs to improve growth and increase competitiveness. One participant knowledgeable in municipal finance pointed out that state and local governments were now amortizing more debt than they were incurring, thereby not investing enough to reduce the infrastructure problem. The companies that are doing well are the “disrupters” like Amazon, Google, Apple, Airbnb, Uber, Netflix and similar companies. The “old economy” companies will continue to face challenges from margin pressure and foreign competition.  Excessive regulation is also a problem that limits growth, as does labor union inflexibility. This may have a dampening effect on the market multiple in the long term, but it sure isn’t evident now. There was a feeling in the group that American consumers had enough “stuff” and their spending money on experiences and services rather than goods was having a negative impact on growth.

    At each lunch I ask the participants for their views on various asset categories. As the lunches proceeded and the market moved higher there were fewer bears. At the beginning, half of the group thought that the S&P 500 might be flat to down for the year by Christmas and the other half thought it would be up by 10% or more. Few saw a recession brewing before 2018. There were many bulls on gold at one lunch and almost none at another. More people expected the dollar to head toward 1.05 against the euro, but there were some dollar bears (at 1.20) as well. Conviction that oil (West Texas Intermediate) would be above $50 a barrel at year-end was high, while almost no one thought it would be below $40. There was a general feeling that interest rates were headed higher, but nobody thought the move would be large or that it would occur soon. The group slightly favored raising the minimum wage to $12. The consensus was that the current favorable but unspectacular performance of equities would continue. The U.S. was still considered the best place to invest in spite of all its problems, but there was nobody who expressed table-pounding enthusiasm about an investment idea.

    As for China, the general feeling was that the economy had picked up some strength in 2016 and the fear of a hard landing had diminished. While the non-performing debt problem was worrisome, it was not likely to bring down the whole economy and there was a sizable minority of investors willing to put money there. Chinese consumers were holding back on their spending because of a lack of government-supported healthcare and retirement programs. Some of the macro people were concerned about strained diplomatic relations between the U.S. and China. Part of this was related to disagreements about territorial rights in the South China Sea and the buildup of military bases there and part to confusion about the Trans-Pacific Partnership. India continues to be the most popular Asian investment, but it is ranked very low in terms of ease of doing business. What was surprising was the increasing interest in the emerging markets, including Argentina, Peru and the Middle East. Nobody, however, had an appetite for investing in Africa.

    In the past we could always count on the real estate people at the lunches to provide some optimism. This year their comments were more mixed. The effects of the internet on retailing are significant, having an impact not only on shopping malls, but also on urban retail rentals. Office rentals are still okay, and warehouses are doing well, but there has been some overbuilding of residential condominiums.  While apartment rentals continue to be in strong demand, rents are softer. The outlook there is good, however, because we are not building enough housing units to keep up with family formations. If interest rates rise, 3% cap rates won’t look so attractive for commercial property.

    Since this is a presidential election year a part of each session was naturally devoted to politics. A number of those attending had been major contributors to the Republican Party in the past. Some of them were supporting Donald Trump. Some were not voting for either Trump or Clinton; a few were voting for Gary Johnson, the Libertarian candidate. Many thought a Trump presidency would put the country at risk. One strong Trump supporter suggested that I not take The Donald’s statements literally. He said they were “metaphors” for what Trump believed. When he says he’ll build a wall with Mexico, he means he’ll do something about immigration. When he says he’ll prevent Muslims from entering the country, he means he’ll be very tight on entry screening. There were a few who expected Trump to be president. Most thought he had hurt his brand by running. When he entered the race more than a year ago, he thought the downside was that his brand would be enhanced whether or not he got the nomination. 

    Some said Trump might do surprisingly well in the debates because Clinton was so vulnerable. He was likely to hit her hard on her personal e-mail server, her failure to protect the Americans in Benghazi, her performance as Secretary of State, her fundraising for the Clinton Foundation while she was a cabinet officer and her relationship with her husband. Most participants believed Hillary Clinton would be the next president and that the Senate would shift to a Democratic majority by perhaps one vote. The Republicans would lose a number of House of Representatives seats as well, but would retain a majority.  Clinton would essentially continue Obama’s center-left policies but there would be no drastic changes out of Washington. That’s perhaps another reason the market has been working its way higher.

    As I reviewed my notes for the four lunches, I noted a mood of complacency. The setting was pleasant, the food good and the weather agreeable. All of the attendees had done well in their careers. Some truly frightening possibilities were looming out there, but they didn’t seem imminent. The intermediate future was likely to be like the recent past: lower but positive returns. Let’s see if that’s the way the next year plays out. 
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    China's overcapacity problem mainly due to slower global demand - vice finmin

    China's industrial overcapacity problems have arisen mainly due to slower global demand, Vice Finance Minister Zhu Guangyao said on Friday ahead of the G20 summit in Hangzhou.

    Excess capacity is a global problem requiring global solutions, Zhu said, echoing a line from a communique issued by G20 finance ministers and central bankers in July.

    Excess steel capacity in particular has been a hot-button issue for many G20 countries this year, amid a slowdown in global demand that has led to a steel glut, layoffs and idled mills.

    China looks set to export a record amount of steel this year, creating frictions with its major trading partners.

    Rising steel prices have complicated Beijing's efforts to reduce capacity, but it has pledged to quicken the pace of its industrial capacity cuts, particularly in steel, after falling behind earlier in the year. It produces half the world's steel.

    In the July gathering of G20 ministers, they cautioned that subsidies and other types of support from governments or government-sponsored institutions can cause market distortions and contribute to global excess capacity.

    China is looking to use market principles to address industrial overcapacity, China's Vice Finance Minister Zhu said on Friday.
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    Wall Street's language is now being applied to the human race, and it has scary implications

    Image titleWall Street's language is now being applied to the human race, and it has scary implications.

    Viktor Shvets, a strategist at Macquarie in Hong Kong, has a big note out on declining productivity. In it, he discussed a common Wall Street metric usually applied to capital or equity to humans.

    His argument, in short, is that the "return on humans" is declining.

    He said:

    "Long-term structural decline in rate of “return on humans” due to deep structural changes in relationships between humans; humans & machines; humans, machines & society. The pressure has been intensifying over the last three decades with the peak of ‘crescendo’ just around the corner."

    The bigger picture here, according to Shvets, is that the global economy is stuck in stagnation. There is, according to Shvets, "no growth; no trade; no return to conventional business and capital market cycles for years to come."

    The heart of the problem, according to Shvets, is a lack of productivity. 

    There are two key drivers of this lack of productivity, according to the note. The first is overleverage and overcapacity in services and merchandising economies, and the second is the decline in the "return on humans" during what it describes as the third industrial revolution.

    The note said (emphasis added):

    "It takes around 50-70 years to start enjoying productivity gains.However, the 3rd Industrial Revolution is even more disruptive than the first two, as it aims to replace rather than augment humans. In the middle of Industrial Revolutions, productivity rates tend to decrease; income & wealth inequalities rise; social and geopolitical tensions escalate."

    Sound familiar? The note added:

    "Technology is entering the sharp end of the S curve; innovations are multiplying in geometric progression vs. slow take-off in 1980s-00; it is destroying the middle class (i.e. accountants; lawyers; traders; logistics; clerks; pilots; economists; editors; investment advisors) and fissuring labour force (contingent employment). Whilst new jobs are created, these tend to be lower productivity occupations (at least in the first several decades)."

    Shvets argues that this is being exacerbated by loose monetary policy, as the flow of easy money is supporting consumption and slowing the closure of excess capacity and unproductive industries.

    This is most clearly happening in China, and Shvets argues that this is now taking place around the world.

    "We have described it as nationalization of capital markets and gross capital formation but in a polite company it might be called a 'mix of proactive fiscal and monetary policies'," the note said. "In other words, state would directly intervene in supporting consumption (such as income guarantees; vouchers); sponsoring investment and assisting with overextended pension and welfare liabilities. All directly funded by Central Banks (no borrowings)."

    That has broad implications for investors.  Shvet is predicting a period similar to the 1930s following the New Deal policies, and the late 1960s and 1970s, and suggests focusing on a handful of themes in investing:

    "Replacement of humans (robotics; automation; AI)."
    "Augmentation of humans (biotech)."
    "Societal control (security; intelligence; warfare)."
    "Entertainment & skilling."
    "Environmental control."
    "Manufacturing shifts (degrading supply & value chains)."
    Companies that benefit from "from government transfer fiscal & social payments; Infrastructure investment; R&D and skilling."

    Attached Files
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    The Italian Referendum Could Result In The Death Of The Euro

    An important election is coming up, and I’m not talking about the US presidential election. The upcoming referendum in Italy this fall will have a major macroeconomic impact on the world. But hardly anyone outside of Italy is paying much attention to it - yet.

    I’ve been saying for some time in interviews around the country that the referendum in Italy could have even more of an impact than the Brexit vote did in the UK. And like the Brexit vote, it is rife with emotion and political turmoil, making the outcome too close to call.

    The current prime minister, Matteo Renzi, has basically bet his career on this referendum, which would allow him to enact much-needed reforms. In fact, they’re the same reforms that I have written about in my letters over the past five years and that I talked about in my previous two books.

    Italy has about as sclerotic a governmental process as any country in Europe. And that is saying something. There is no end to corruption and crony politics. Each faction wants to keep the status quo and keep its perks but wants everybody else to give theirs up. If you’re a voter in Italy, your frustration is understandable.

    This vote in Italy needs to go on your economic radar screen. If the “no” vote wins, Renzi has promised to resign. This would throw Italy into a political crisis. Then there would be a real potential to elect parties that would call for a vote on whether to stay in the European Union. And at this point, it is not clear what the Italians would decide to do.

    Know this: The European Monetary Union does not work very well, if at all, without Italy. A “no” vote would be the death knell of the euro.

    Nick Andrews, who writes for my friends at Gavekal, gives an excellent summary of the situation in Italy. And, it is worth every bit of your attention.

    Renzi’s Great Gamble

    By Nick Andrews and Stefano Capacci

    Prime ministers come and go in Italy—four since the financial crisis—but precious little seems to change. The latest incumbent, Matteo Renzi, has pursued structural reform more energetically than his predecessors. But for all the progress he has made, he might as well have been wading through molasses. Now, in a bid to secure a popular mandate for his restructuring program, Renzi has bet his premiership on a referendum over badly-needed constitutional reforms. It is a high stakes gamble. If Renzi wins the vote, which is due in either October or November, his proposed measures will streamline Italy’s legislative process, breaking the parliamentary gridlock which has crippled successive governments, and opening the way to far-reaching economic reforms. If he loses, Renzi has promised to step down—a pledge that has turned the referendum into a popular vote of confidence in the unelected prime minister, his Europhile policies, and—by extension—Italy’s membership of the eurozone itself.As a result, a “no” vote in October will not just precipitate the fall of Renzi’s government; it could throw Italy’s long-term membership of the eurozone into doubt, plunging the single currency area once again into crisis.
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    PIC wants vote on Anglo American’s sales plan

    Anglo American Plc’s biggest shareholder, the Public Investment Corp., will meet with the company next week to discuss whether its plans to sell more than half of its mines including South African coal and iron-ore assets is the best option for the country.

    The PIC, which oversees the pension funds of South African government workers and owns about 14.5 percent of Anglo, wants the sale plan put to a shareholder vote because it’s concerned that selling mines after commodity prices plunged would not realize the full value of the assets, said Deon Botha, the Pretoria-based PIC’s head of corporate affairs.

    If the sale plan does go ahead, the PIC would prefer the creation of a new company from the South African assets and would want that company’s portfolio to include some of the platinum mines currently held by Anglo, Botha said in an e-mailed response to questions. The PIC doesn’t favour the sale of the assets as single mines, he said.

    Anglo is seeking to sell the assets as part of wider restructuring of the business after it spent $14 billion buying and building an iron-ore mine in Brazil that it may now dispose of because of plunging prices. The century-old firm plans to exit iron ore and coal and focus on diamonds, platinum and copper. Chief Executive Officer Mark Cutifani has repeatedly insisted that the company is not running a firesale and will rebuff offers that do not meet expectations.

    Anglo wants to cut debt to below $10 billion by the end of the year.
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    Oil and Gas

    Putin Pushes for Oil Freeze Deal With OPEC, Exemption for Iran

    Putin Pushes for Oil Freeze Deal With OPEC, Exemption for Iran

    Vladimir Putin said he’d like OPEC and Russia, producers of half of the world’s oil, to reach a deal to freeze supply and expects the dispute over Iran’s participation can be resolved.

    “From the viewpoint of economic sense and logic, then it would be correct to find some sort of compromise,” Putin said in an interview in Vladivostok. “I am confident that everyone understands that. We believe that this is the right decision for world energy.”

    While talks collapsed in April over whether Iran should join in, countries now recognize the nation -- freed just months ago from international sanctions -- should be allowed to continue raising production, Putin said. The Russian president said he may recommend completing the plan when he meets with Saudi Deputy Crown Prince Mohammed bin Salman at the Group of 20 summit in China next week.

    Oil rallied more than 10 percent last month on speculation the Organization of Petroleum Exporting Countries will reach an accord with non-members at an informal meeting in Algiers this month. The prolonged slump in crude prices -- stuck at half the levels seen two years ago -- is battering the economies of producer nations, giving oil-market rivals cause to cooperate.

    “I would very much like to hope that every participant of this market that’s interested in maintaining stable and fair global energy prices will in the end make the necessary decision,” said Putin. Prince bin Salman “is a very reliable partner with whom you can reach agreements, and can be certain that those agreements will be honored,” he said.

    Russian Energy Minister Alexander Novak had been a lead player in secret talks with OPEC producers at the beginning of the year, which culminated in a meeting in Doha in mid-April. The agreement collapsed just hours before it was due to be signed when Prince bin Salman insisted on Iran’s participation, leaving Novak diplomatically exposed.
    “Our Saudi partners at the last moment changed their view,” said Putin. “We didn’t reject the idea of freezing output. Our position hasn’t changed.”
    Until now, Russia had sounded wary of giving the proposal another chance. Novak said yesterday that no accord is necessary given current price levels, according to a report by RIA Novosti. Brent futures traded at $45.60 a barrel in London at 8:44 a.m. local time.

    The world’s biggest energy exporter, Russia is reliant on oil and natural gas for about 40 percent of its budget revenues and battling the longest recession in two decades as crude prices remain below $50 a barrel. Burdened by social spending and military commitments, the government is seeking ways to ease the budgetary pain before parliamentary elections later this year and a presidential vote in 2018.

    OPEC nations are scheduled to hold informal talks on Sept. 27 in Algiers, on the sidelines of an industry conference, the International Energy Forum. Novak is due to attend the conference.

    Putin said that oil producers recognize that Iran, which has mostly restored the output halted during three years of trade restrictions, deserves to complete its return to world markets.

    “Iran is starting from a very low position, connected with the well-known sanctions in relation to this country,” Putin said. “It would be unfair to leave it on this sanctioned level.”

    Saudi Arabia, whose rivalry with Iran in regional conflicts from Syria to Yemen remains unabated, has given only cautious support to renewed negotiations. Energy Minister Khalid Al-Falih said Aug. 26 that while a freeze would be “positive” for market sentiment, no “intervention of significance” is required as global markets are rebalancing by themselves.

    Even if a deal is concluded, analysts from Commerzbank AG to Citigroup Inc. warn that simply capping output at current levels -- rather than cutting production -- would do little to tackle the persisting surplus in global markets. Besides, most of the countries involved are already producing as much as they can, making a pledge to keep output flat irrelevant, they say.

    Other OPEC members, from Iran and Iraq to Libya and Nigeria, may still press on with plans to restore lost output or add new capacity, undermining the point of a “freeze,” the banks said. While supportive of a limit, Putin’s remarks indicated that Russian production has the potential to increase.

    “The oil companies, they are continuing to invest,” he said. “Our oil output is increasing.”

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    Russia Says Oil Output Freeze Not Needed With Price Near $50

    Russia sees no need for talks with other major oil exporters on freezing output with prices at around $50 a barrel, according to the Energy Ministry in Moscow.

    If prices fall, then Russia will consider resuming discussions, the ministry’s press service cited Energy Minister Alexander Novak as saying.

    The comments from Russia’s government come before OPEC nations and other oil producers meet for talks in Algiers later this month. Russia, the world’s biggest energy exporter, was a key negotiator in talks on an oil-output freeze with Saudi Arabia and other OPEC producers in April. That proposal failed after Iran declined to attend the meeting in Doha and Saudi Arabia refused to proceed with the deal without the participation of its Persian Gulf rival.

    Iran, which plans to keep boosting crude output until it regains its pre-sanctions share of OPEC production, has said it will take part in the Algiers talks. A cap on production would be positive for the market, Saudi Arabia’s Energy Minister Khalid Al-Falih said in August, while ruling out a cut to output. Speculation that the meeting may result in action to stabilize the market helped oil post the biggest gain in four months in August.

    Algiers Meeting

    Novak plans to attend the International Energy Forum -- 73 countries accounting for about 90 percent of the global supply and demand for oil and natural gas -- that starts a three-day meeting in the Algerian capital on Sept. 26. His ministry hasn’t commented on whether Novak will participate in the informal talks with Saudi Arabia and other OPEC nations.

    While OPEC export revenues are seen falling to a 12-year low this year, crude suppliers want a deal to manage output, the organization’s Secretary General Mohammed Barkindo told Al-Hayat newspaper last week.

    The comments by Novak were reported earlier by RIA Novosti.

    Right after the failed Doha deal, Russia said it may boost crude output to a new post-Soviet record of almost 11 million barrels a day this year. Production may climb further to 11.65 million barrels over the next three years, exceeding the record set almost 30 years ago, as low-cost fields allow producers to defy the slump in prices, Goldman Sachs Group Inc. analysts said in July.

    The Russian government’s preliminary target for next year was set at 10.5 million to 11 million, depending on the market. The state is now weighing a new tax increase for its oil industry in 2017 with a decision possible in the fall as the nation’s economy struggles with its longest recession in two decades.
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    Oil glut to ease by 2017, clean energy investment to rise - IEA's Birol

    The International Energy Agency (IEA) expects oil markets to reach a balance between supply and demand in 2017 as the current oil glut slowly eases, IEA chief Fatih Birol said during meetings in South Korea.

    The head of the Paris-based agency also exchanged views with energy minister Joo Hyung-hwan on the direction of the world's energy markets in the wake of the renewed commitment to tackle climate change after last year's Paris climate talks, South Korea's Energy Ministry said in a statement on Thursday.

    The IEA forecast in its August report that oil markets will slowly tighten in the second half of 2016 as global demand growth declines and non-OPEC supplies rebound.

    "Oversupply of oil markets will gradually be eased and (oil markets) will find a balance between supply and demand in 2017," Birol said in the statement.

    In a separate interview with Reuters after the statement was released, Birol said he saw two drivers for the rebalancing of the oil market.

    The first is a drop in production from countries outside of the Organisation of the Petroleum Exporting Countries (OPEC) of about 900,000 barrels per day (bpd), especially in the United States in 2016. The second is "demand that is growing in a healthy way" and that the IEA expects to climb by 1.4 million bpd this year.

    "We may be on a higher side compared to others (forecasts), this is mainly because we're more upbeat when it comes to Europe and emerging Asia demand in demand growth," he said.

    In the statement, Birol also said there is concern that a decline in upstream oil and gas investments because of the prolonged low oil prices could increase oil price volatility.

    The statement added that Birol believes the start of the new climate regime after Paris would spur research and development investments on clean energy technology, with fast growth expected from the solar, wind power and electric car sectors.

    Birol noted in the interview that solar energy costs have dropped by 80 percent over the last five years and wind power costs have declined by 35 percent which means more countries can afford them.

    "Several years ago renewables were considered to be a romantic story but now it's becoming a business," he said.

    Birol also commented in the interview on how changes in the global liquefied natural gas (LNG) markets could affect South Korea, the world's second-largest LNG buyer, and other countries, particularly regarding destination clauses that restrict LNG sales to the country of delivery.

    "A lot of gas is coming to markets ... and this creates a historic opportunity to push for flexibility in gas contracts, especially destination clauses," he said.
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    Iraq, Kurdistan jointly exporting Kirkuk oil again: trading sources

    Iraqi state oil firm Somo and Iraq's semi-autonomous region of Kurdistan have begun jointly exporting crude from the giant Kirkuk oil field again after cutting a new preliminary deal on revenue-sharing, trading sources said on Thursday.

    The Kirkuk flows, usually amounting to 150,000 barrels per day, have been suspended since March amid a dispute over revenue-sharing between the central government in Baghdad and Erbil.

    Before March, the Kirkuk flows were unilaterally handled by Kurdistan while Somo has not seen a cargo being exported on its behalf from the Turkish port of Ceyhan since the middle of 2015.
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    Saudi Aramco, Japan to expand Okinawa crude storage deal-CEO

    Saudi Aramco and the Japanese government are set to agree on a roughly 2 million barrel expansion of crude storage capacity in Okinawa, used by the state-run firm to store oil, Saudi Aramco CEO Amin Nasser said on Thursday.

    Under an agreement with Tokyo, Saudi Aramco and Abu Dhabi National Oil Co (ADNOC) each store up to 1 million kilolitres (6.3 million barrels) of crude oil in Okinawa, southwest of mainland Japan.

    In return for providing free storage space, Japan gets a priority claim on the stockpiles in case of an emergency.

    "It would be in the best interest for Saudi Aramco and Japan to increase the capacity," Nasser told reporters in Tokyo. "We are looking at a couple of million (barrels) more than what we have now."

    A Japanese trade ministry official said no agreement had yet been reached for additional storage, although a source familiar with the matter said the deal was set to signed in October.

    Nasser is accompanying Saudi Arabia's powerful Deputy Crown Prince Mohammed bin Salman on his visit to Japan this week, along with Saudi Arabia's Energy Minister Khalid al-Falih and other ministers.

    Japan treats the crude oil stored at Okinawa as quasi-government oil reserves, counting half of the barrels stored by Aramco and ADNOC as national crude reserves.

    Saudi Aramco has stored crude in Okinawa since February 2011, and has used the facility to supply oil to China, Japan and South Korea among others.

    Also on Thursday, Aramco signed memorandums of understanding on business cooperation in Tokyo with Japanese companies including three major banking groups.
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    Norway's Goliat oilfield shut at least until Sept 5 -ENI spokesman

    Production at energy firm ENI's Arctic Goliat oilfield will remain shut at least until Sept. 5, a spokesman for the company said on Thursday.

    Output from the field has been shut since Aug 26 when the Goliat rig was hit by a power failure.

    Electricity was later restored, but the company is still investigating the incident. At the earliest, production will resume when the firm has presented a report to Norway's Petroleum Safety Authority, ENI spokesman Andreas Wulff said.

    "Deadline is Monday (Sept. 5) to deliver (the) investigation," he added.
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    Russian state fund aims to take part in Bashneft privatization

    The Russian Direct Investment Fund (RDIF) is aiming to take part in the privatization of oil producer Bashneft, Kirill Dmitriev, head of the fund, said on Thursday.

    "We certainly will participate in Bashneft (privatization)," he told reporters.

    The Russian government plans to sell a 50.08 percent stake in Bashneft. The stake has been valued at around 300 billion roubles ($4.6 billion).

    The RDIF plans to look for investors and bid itself for one tenth of the Bashneft stake being offered, Dmitriev said. He compared the fund's plans with a model previously used when it took part in the privatization of diamond producer Alrosa earlier this year.

    Sovereign funds in the Arab world and Asia have showed an interest in Bashneft's privatization, Dmitriev said.
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    Shell Becomes First Non-Bank to Join Mexico’s Oil Hedge

    Royal Dutch Shell Plc participated in protecting Mexico against low crude prices in 2017, according to four people with knowledge of the matter, the first time an oil company has taken part in the world’s largest commodities hedging program.

    The Mexican government spent $1 billion buying put options -- contracts that give it the right to sell at a predetermined price -- to lock in an average price for its export basket of $38 a barrel for next year. Shell’s trading unit was one of the seven counterparties to the Mexican government, the people said, asking not to be identified because the information is private.

    Shell’s involvement is the first known participation of an oil trader in the hedge since Mexico started to lock in prices regularly 15 years ago. It shows that the retreat of some banks from commodity trading because of increased post-crisis regulation is opening up space for non-financial players.

    Alberto Torres, head of public credit at Mexico’s finance ministry, declined to name any of the counterparties. But in an interview, he said Mexico looks for partners "that are solid, who can manage their own risk in an efficient way, who are in the market each day. In recent years, the number of participating counterparties has grown."

    Shell declined to comment. Europe’s largest oil company, Shell describes its trading arm on its website as "one of the largest and most experienced energy merchants in the world." The company says it trades the equivalent of 13 million barrels of oil per day -- more than double the size of the world’s largest independent oil trader, Vitol Group.

    Dodd-Frank Act

    Shell trades so many derivatives the company is one of the only three non-financial firms registered as a swap dealer under the U.S. Dodd-Frank Act. Nearly 100 financial firms are also swap dealers, including all the major Wall Street banks. The other two non-financial firms are rival oil company BP Plc, which also operates a large in-house trading unit, and agricultural behemoth Cargill Inc.  

    Mexico has traditionally used banks including JPMorgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley, Barclays Plc, Citigroup Inc. and BNP Paribas SA for its annual hedge, according to government documents. The program is the largest sovereign petroleum hedge, and often roils the markets.

    Mexico bought the put options for 2017 between May 13 and Aug. 25 covering oil exports worth 250 million barrels, the Mexican government said Aug. 29.

    Budget Fund

    On top of the put options at $38 a barrel for the Mexican oil basket -- which equates to about $45 a barrel for West Texas Intermediate -- Mexico has set aside nearly $1 billion from its budget stabilization fund to guarantee the government will effectively receive $42 a barrel in oil revenues next year.

    The country’s budget for 2017 is based precisely on $42 a barrel. Mexico’s oil mix fell 1.4 percent to $38.96 a barrel at 2:37 p.m. in Mexico City. Last year, the country had locked in 2016 prices at $49 a barrel.

    The Latin American country has received handsome payouts from its oil guarantees, earning a record $6.4 billion in 2015 and $5 billion in 2009. If oil prices remain at current levels, Mexico is set to earn about $3 billion from the 2016 hedge.

    Despite Mexico’s hedging success, few other commodity-rich countries have followed suit. Ecuador hedged oil sales in 1993, but losses triggered a political storm and the nation never tried again. More recently, oil importers Morocco, Jamaica and Uruguay have bought protection against rising energy prices, but their deals had been relatively small.
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    Eni successfully drilled and tested Zohr 5x

    Eni informs that Zohr 5x, the fifth well on Zohr structure has been successfully drilled to the final TD of 14,271 ft (4,350 m). The Zohr 5x well is located in 1,538 m of water depth and 12 Km south west from the discovery well Zohr 1x.

    The well proved the presence of a carbonatic reservoir and gas accumulation also in the South-Western part of the Zohr mega-structure encountering about 590 ft (180 metres) of continuous hydrocarbon column in the carbonate sequence with excellent reservoir characteristics. The results are confirming the potential of the Zohr Field at 30 Tcf OGIP.

    The well was also successfully tested opening 90 m of reservoir section to production. The data collected during the test confirmed the great deliverability of the Zohr reservoir, in line with the Zohr 2 well test, producing more than 50 mmscfd limited only by the constraints of the drilling ship production facilities.

    In the production configuration, the well is estimated to deliver up to 250 mmscf per day.

    The drilling campaign on Zohr will continue in 2016 with the drilling of the sixth well that will ensure the accelerated start up production rate of 1 bcf per day. The steady progress of the project execution is confirming the schedule expected to reach the first gas by the end of 2017.

    Eni, through its subsidiary IEOC Production B.V., holds a 100% stake in the Shorouk Block. Petrobel is operating the activities on behalf of the Petroshorouk company, an equal joint venture between IEOC and the state company Egyptian Natural Gas Holding Company (EGAS)
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    Spain's Repsol, Criteria exploring sale of around 20 pct in Gas Natural

    Spanish oil firm Repsol and Criteria Caixa, an industrial holding company that owns Caixabank, said on Thursday they were in talks with various investors to each sell around 10 percent of Gas Natural .

    Two sources familiar with the matter told Reuters earlier that U.S. investment fund Global Infrastructure Partners (GIP) is in preliminary discussions with Repsol and Criteria to buy part of Gas Natural.

    Repsol and Criteria did not confirm which investors they were talking to. However, they said in separate statements to the stock market regulator that they were exploring the sale of a combined 20 percent in the gas company.

    A 20 percent stake of Gas Natural has a current market value of around 3.8 billion euros ($4.23 billion).

    GIP said it would not comment on speculation or market rumours. Gas Natural declined to comment.

    Criteria - the holding company of Caixabank and which has stakes in other Spanish companies such as infrastructure group Abertis - holds 34 percent of Gas Natural while Repsol has 30 percent of the gas company.

    "Repsol and Criteria are in contact with various investors," the oil company said. "This analysis is in a preliminary phase, and no decision has yet been taken."

    Repsol has sold off various assets in recent months, such as an offshore wind power business in Britain, as it looks to trim its debt.

    Criteria and its banking unit, meanwhile, are both under pressure to boost their solvency ratios in a more demanding global regulatory environment.

    In last month's Europe-wide stress test, both Criteria and Caixabank were among the weakest links in the health checks.

    Bloomberg earlier reported that the sale could value the Gas Natural stake at about 4 billion euros, citing sources familiar with the matter.

    Analysts at Banco Sabadell said that this price tag would be positive for the gas company, though they added this initial stake selldown raised the possibility of further disposals, which could weigh on the shares.

    "This disinvestment would be the official declaration by Repsol and Criteria that their remaining stakes (in Gas Natural) are not strategic for either of them," the analysts said.
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    LNG trading meets eBay as startup launches online auction site

    A group of liquefied natural gas industry executives is launching a digital platform that will allow LNG traders to buy and sell spot cargoes via online auctions.

    The Global LNG Exchange, or GLX, will begin testing its platform in October and plans to handle live deals starting in the first quarter, Chief Executive Officer Damien Criddle said. Criddle hopes the site can replace the current system of buy-and-sell tenders that are issued and bid on through emails, instant messages and phone calls, which dominate the current spot and short-term market.

    The launch comes as spot LNG trading expands and new liquefaction plants increase global supplies and spur some traditional buyers to resell cargoes they don’t need. Spot and short-term deals accounted for 28 percent of the global LNG trade last year, according to the International Group of LNG Importers, up from 16 percent a decade prior.

    “Right now you have to find information on the market through rumors and various angles,” said Criddle, a former Royal Dutch Shell attorney. “When you see supply and demand on a screen, that will lead to price discovery, which will lead to a more transparent market, which will lead to more liquidity.”

    Anonymous Bids

    The platform will allow members to post offers to sell or requests to buy cargoes, and then let other participants anonymously bid on proposals. When the auction is finished, the winning bidder and the auction poster will be connected so long as the bid meets a reserve price, and the two parties will be able to close the deal.

    “This is exactly the right time to be doing this kind of innovation,” said Jonathan Stern, chairman of the gas research program at the Oxford Institute for Energy Studies, who has been briefed by GLX executives. “We still have not seen the big wave of new LNG projects arrive, and when we do we’re going to see a lot of cargoes looking for homes.”

    GLX is in discussions with several LNG buyers and sellers to build a roster of members for the launch, although it hasn’t announced any participants yet, Criddle said. The exchange plans to charge an annual membership fee as well as a transaction fee for closed deals, Criddle said. The company is betting that the benefits of the platform, such as faster execution and the possibility of better prices, will make it worthwhile for market participants.

    ‘Right Price’

    “Getting the right price, in our view, is one of the key value drivers for the platform,” he said.

    Criddle said GLX’s management team includes former Woodside Petroleum board member Rob Cole and former BP executive Phil Home. The platform has been funded so far by the management and private investors from Australia. The company plans to operate out of Singapore, while its parent will remain headquartered in Perth.

    If successful, the data trove of completed trades could lead to price indexing for different locations around the world, Criddle said. Those indexes could then be used as the basis for trading of futures contracts and derivatives, possibly through other exchanges, he said. Other platforms, including Singapore Exchange, offer LNG futures contracts based on price assessments or pricing-agency reports, but none have any open interest at the moment.
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    Argentina reworks LNG import deals as mild weather hits demand

    Argentina is diverting or cancelling incoming shipments of liquefied natural gas (LNG) after mild late winter temperatures curbed fuel demand and forced state-run buyer Enarsa to rework some deals.

    South America's biggest LNG importer launched back-to-back tenders in June and July after a cold start to winter, lining up dozens of cargoes at bargain prices as global output continued to outpace demand.

    But a milder streak in August has undercut demand for heating fuel and left state-run LNG importer Enarsa juggling a supply overhang, the company and trading sources said.

    Enarsa said it had delayed three cargoes until next year because of one of the warmest Augusts in a decade.

    Stubbornly high stock levels at Argentina's two import terminals, Bahia Blanca and Escobar, also mean there is no storage for more imports.

    LNG trade sources who conduct business with Argentina say at least four cargoes destined for Bahia Blanca have been canceled or rescheduled.

    "The Bahia cargoes are being targeted for cancellation because it is more difficult to divert Escobar shipments," one source said.

    Argentina's LNG suppliers, which include major oil firms and leading trading houses BP, Gunvor and Royal Dutch Shell, can levy penalty fees of up to $5 million for cancellations, one trading source said.

    Fernando Pazos, head of institutional relations and communications for Enarsa, denied paying penalties. He said Enarsa sometimes pays a stop fee when a ship is outside the port but cannot enter due to weather conditions.

    LNG traders dealing with Argentina demand payment upfront due to concerns about the level of U.S. dollar reserves in the country after they were run down by the former president.

    Seven gas tankers are now crowded around Argentina's import terminals, live ship-tracking data shows.

    One of the Bahia Blanca-bound tankers already diverted, the Methane Alison Victoria chartered by Shell, discharged at Jordan's port of Aqaba on Wednesday, according to Thomson Reuters shipping data.

    Problems in the take up of LNG stretch beyond Argentina.

    "LNG imports into Latin America in the first half of the year are down by three million tonnes, or 28 percent lower than volumes received over the same period last year," independent LNG consultant Andy Flower said.

    In Mexico, cheaper pipeline imports from the United States pushed out LNG, while Brazil cut imports by 60 percent as heavy rainfall replenished hydroelectric reserves, he said.

    In Argentina, sea-borne LNG imports declined by 15 percent in the same period.

    Attached Files
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    First US Gulf Coast ethane cargo departs for Europe

    The first ethane cargo from the US Gulf Coast has departed from Enterprise's Morgan's Point, Texas, terminal, two weeks after loading began.

    The JS Ineos Intrepid -- which carried the first US waterborne ethane cargo from Sunoco's Marcus Hook, Pennsylvania,  -- Wednesday left for Rafnes, Norway, and expected to arrive on September 14, according to cFlow, Platts tradeflow software.

    US Coast Guard officials had confirmed the ethane transfer began late on August 18.

    The 260,000-barrel Intrepid is one of five ethane carriers in service globally and is one of Ineos' four ethane carriers.

    Enterprise's 200,000 b/d Morgan's Point terminal began initial flaring in July -- more than two years after the company announced plans to construct the fully refrigerated ethane export facility. The terminal is supported by long-term contracts including those with Ineos, Braskem, Reliance Industries and Sabic.

    Ineos and Enterprise did not immediately respond to requests for comment.

    Non-LST ethane, reflecting prices for September barrels at the Enterprise terminal in Mont Belvieu, was trading at 17.75 cents/gal, down 62.5 points from Wednesday assessment.

    Ethane prices rose as high as 24.875 cents/gal in June, incentivizing recovery from the natural gas stream. The increased supply then pressured prices lower through August.
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    U.S. onshore oil production has stopped declining; growth is coming from the Permian Basin

    Looking only at oil production in the Lower 48 states (excl. Gulf of Mexico), Rystad Energy observes 120 kbbl/d higher output in August 2016 compared to EIA's latest August 2016 STEO. Nearly 70 rigs in the Permian Basin have returned to operation since early May and current horizontal drilling activity in West Texas and New Mexico is comparable to the levels observed in 2Q-4Q 2015. Additional completion works on the drilled uncompleted (DUC) wells have also been initiated and new volumes coming from the Permian Basin are sufficient to balance the decline from more mature liquid plays in September-October 2016.

    Contrary to the recovery in the Permian Basin, major operators in Bakken and Eagle Ford have not yet accelerated fracking activity and several companies have called for a WTI price level of 55-60 USD/bbl in order to do so. However, as base production in these plays gets more mature, new activity in the Permian Basin will not only balance the decelerating decline in other plays, but will restore the growth trend in U.S. onshore oil production in November and December 2016.

    The modest decline pace of U.S. onshore oil production from June to August was masked by the summer maintenance on major Alaska fields and several disruptions in the Gulf of Mexico (including unplanned outages in July along with massive shut-ins due to the Tropical Depression Nine threat in late August). These outages caused more severe decline in the total U.S. oil production than implied by the natural decline in the Lower 48 states.

    Rystad Energy foresees a continuation of upward revisions to EIA's short-term U.S. oil production outlook in the upcoming months, which could slow down oil price recovery despite the counter-seasonal global stock draws in 2Q-3Q 2016.

    An upward revision of 200-240 kbbl/d has already been observed for 4Q16 Lower 48 oil production in the August 2016 STEO. However, we still observe that the current exit-2016 projections for Lower 48 oil production are about 450 kbbl/d below Rystad Energy's base case scenario. Even with zero shale well completions between September and December 2016, Rystad Energy forecasts that Lower 48 oil production exits 2016 at 6.07 mmbbl/d, which is just 90 kbbl/d below the forecast observed in the current STEO. Thus, further STEO upward revisions in the coming months are inevitable and the market should take notice. Rystad Energy expects the revisions to happen gradually over the next five to six months as more official production data becomes available and it becomes evident that the trend in oil production has already reverted.
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    S&P Global Platts Analysis of U.S. Energy Information Administration (EIA) Data

    U.S. crude oil and distillate stocks rose last week, though the size of the drawdown in gasoline inventories was less than expected, according to Wednesday's release of Energy Information Administration (EIA) data.

    Crude oil stocks increased 2.276 million barrels to 525.870 million barrels the week that ended August 26, EIA said.

    It was the fifth weekly build in six reporting periods, pushing crude stocks beyond historical levels. Crude inventories are 38.6% greater than the five-year average (2011-15) for this time period.

    With the end of the summer driving season and the start of refinery maintenance approaching, crude oil inventories will likely face upward pressure in the near-term, analysts say.

    'Petroleum demand has hit its seasonal peak, along with refinery runs,' said Anthony Starkey, energy analysis manager at Platts Analytics, the forecasting and analytics unit of S&P Global Platts. 'This implies we will again begin to see outsized builds in crude inventories in the weeks ahead, especially if imports remain as robust as they have been recently.'

    The biggest driver behind last week's build was crude imports rising 275,000 b/d to 8.917 million b/d. Crude oil imports have averaged 8.5 million b/d over the last four weeks, versus 7.6 million b/d year-to-date.

    By country of origin, there were large increases in imports from Saudi Arabia (up 531,000 b/d to 1.681 million b/d), Canada (up 350,000 b/d to 3.365 million b/d) and Mexico (up 228,000 b/d to 634,000 b/d).

    Most Canadian imports enter the US via the Midwest, where crude imports increased 424,000 b/d to 2.566 million b/d.

    Despite the uptick in imports, Midwest crude stocks drew 1.403 million barrels last week to 151.032 million barrels.

    Stocks at Cushing, Oklahoma -- delivery point for the New York Mercantile Exchange (NYMEX) crude futures contract -- fell 1.039 million barrels to 63.867 million barrels, the lowest amount since January.The weekly draw at Cushing was likely a factor behind NYMEX crude timespreads strengthening slightly Wednesday, even though oil futures were declining across the board.

    The difference between NYMEX crude's front-month and second-month futures contracts was about 2 cents narrower at minus 62 cents per barrel (/b), while the front-month/sixth-month spread was about 9 cents narrower at minus $2.86/b.


    The biggest build by region could be seen on the U.S. Gulf Coast (USGC). Crude oil inventories on the USGC increased by 2.911 million barrels to 275.550 million barrels. USGC crude runs decreased 132,000 b/d to 8.58 million b/d, helping push stocks highs.

    A slowdown in Gulf Coast refinery operations was expected, as the region continued to grapple with a slew of problems stemming from bad weather.

    Facilities still experiencing outages included ExxonMobil's refineries in Baton Rouge, Louisiana, and Baytown, Texas, and Marathon Petroleum's ultracracker at its Galveston Bay, Texas, refinery, while Motiva had flaring at its plant in Norco, Louisiana.

    Even though crude runs were down, Gulf Coast refinery utilization still rose 0.4 percentage points to 92.7% of capacity, as gross inputs were up 34,000 b/d to 8.817 million b/d.

    Total refinery utilization increased 0.3 percentage point to 92.8% of capacity. Analysts were looking for a decrease of 0.4 percentage points.

    U.S. crude oil exports were up 21,000 b/d last week to 698,000 b/d last week, EIA said.

    EIA's crude export figure released Wednesday covering the week that ended August 26 was calculated for the first time using more immediate petroleum export data from U.S. Customs and Border Protection.

    The EIA had previously estimated weekly exports based on monthly export data published by the U.S. Census Bureau.

    According to EIA, the new methodology should improve the weekly estimate of petroleum consumption, which includes exports as one of the variables in its calculation of product supplied, seen as a proxy for demand.


    U.S. gasoline implied* demand declined 148,000 b/d last week to 9.511 million b/d, EIA said.

    The drop in demand capped last week's gasoline draw at 691,000 barrels, which fell short of the 1.1 million-barrel decline analysts were expecting.

    U.S. gasoline inventories equaled 232.004 million barrels the week that ended August 26, a 10.5% surplus to the five-year average for the same time of year, according to EIA.

    Refinery outages helped strengthen Gulf Coast spot gasoline prices last week, though EIA data showed USGC gasoline stocks were up 555,000 barrels to 78.513 million barrels.

    An even bigger build occurred in the Midwest as gasoline inventories increased 1.497 million barrels to 49.859 million barrels.

    On the U.S. Atlantic Coast (USAC), gasoline stocks declined 1.936 million barrels to 67.178 million barrels, which was still 7.36 million barrels above the level from a year ago.

    USAC gasoline imports fell 22,000 b/d to 640,000 b/d, helping draw inventories lower.

    Distillate stocks rose 1.496 million barrels last week to 154.753 million barrels. Analysts had expected stocks to be unchanged.

    Implied demand increased 48,000 b/d to 3.838 million b/d, but production grew by 124,000 b/d to 4.973 million b/d.

    On the Atlantic Coast, stocks of low- and ultra-low sulfur diesel built 1.683 million barrels to 57.887 million barrels. That was 8.6 million barrels above last year at this time.
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    The Golden Age of Fracked Natural Gas has Arrived

    There is precisely one main reason why the United States produces 40% less carbon dioxide now than it did five years ago.

    Must be the onslaught of solar, right? Nope.

    How about wind. Yeah, wind power is coming on strong–I see those ugly windmills all over the place now. Must be wind power, right? Nope.

    Hydro? Nope. Biomass? Nope.

    There is only one main reason why we pump less CO2 into the atmosphere (if you care about that sort of thing), and it’s this: because fracked shale gas has replaced coal in electric generating plants.

    You would think environmentalists would celebrate. They don’t and they won’t, pointing out their uber-hypocrisy…
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    Alternative Energy

    Mined-out Chinese coal capital bets on photovoltaic industry

    The city of Datong in Shanxi Province has been moving residents out of a coal-depleted mining zone as the north China city bets on solar energy to revitalize its economy.

    Rivers have gone dry and cracks have appeared on land and houses following years of erosion from coal mining in the 1,687-square-km area of Datong.

    The municipal commission of development and reform said on Monday that 250,000 people have been resettled away from the mined-out areas, and the remaining 120,000 people will be moved out by the end of 2017.

    The city, once dubbed "China's Capital of Coal," churned out over 7.5 percent of the country's annual coal output at its peak in 1999. Coal mining in Datong dates back 1,500 years, and its modern mining industry took shape in the late Qing Dynasty (1644-1911).

    However, the heavy environmental costs have made Datong an exemplar of China's resource-depleted cities scrambling to build new economic pillars.

    "Infrastructure construction started in 2015 to turn the uninhabitable swaths into a huge photovoltaic base," said Zhao Yaodong, an energy official with the commission.

    According to plan, the city will a build photovoltaic project with an installed capacity of 3 million kilowatts on the deserted land from 2015 to 2017.

    The objective has made Datong the first Chinese city to plan a million-kilowatt photovoltaic industry.

    In June, power generated by Datong's photovoltaic facilities was connected to the state power grid.

    Under the city's photovoltaic development contracts, villagers who were removed from the land will share profits from 20 kilowatts of electricity annually. The emerging industry should also offer job opportunities to farmers who have lost their land.
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    Iowa approves giant $3.6bn wind project

    The Iowa Utilities Board has approved a 1,000 turbine wind project.

    The $3.6 billion (£2.72bn) Wind XI wind farm is expected to generate up to 2GW of electricity.

    It is MidAmerican Energy’s largest wind project, with 1,000 turbines to be installed by the end of 2019 at multiple sites across the state.

    President and CEO Bill Fehrman said: “Wind energy helps us keep prices stable and more affordable for customers, provides jobs and economic benefits for communities and the state and contributes to a cleaner environment for everyone.”

    The project is expected to generate more than $1.2 billion (£0.91bn) in landowner easement and property tax payments over the next 40 years as well as provide thousands of jobs during construction.
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    SolarCity adviser Lazard made mistake in Tesla deal analysis

    Lazard Ltd, the investment bank that advised SolarCity Corp on its $2.6 billion sale to Tesla Motors Inc, made an error in its analysis that discounted the value of the U.S. solar energy company by $400 million, a regulatory filing by Tesla showed on Wednesday.

    While the purchase price was within the valuation range that Lazard came up with for SolarCity even after accounting for the miscalculation, the error illustrates how even leading investment banks can make mistakes on some of the highest-profile deals.

    The mistake came after Tesla and SolarCity co-founder Elon Musk, who is the largest shareholder in both companies, went out of his way to create processes and structures, including a special board committee at SolarCity, aimed at alleviating concerns that he used his influence to force the two companies into a deal.

    An analysis by Lazard for SolarCity that indicated an equity value of between $14.75 and $34.00 per share was wrong because it double-counted some of the company's projected indebtedness, according to Tesla's filing with the U.S. Securities and Exchange Commission.

    This was the result of a computational error "in certain SolarCity spreadsheets setting forth SolarCity’s financial information that Lazard used in its discounted cash flow valuation analyses," according to the filing.

    The error was not included in the valuation analysis performed by Tesla and its financial adviser, Evercore Partners Inc (EVR.N), the filing said.

    After becoming aware of the mistake on Aug. 18, more than two weeks after the signing of the deal, Lazard realized the accurate valuation range was $18.75 to $37.75 per share.

    SolarCity and Tesla agreed however that the error would not change their view of the deal, according to the filing. The purchase price, to be paid with Tesla stock, equated to $25.37 per share.

    Lazard, SolarCity and Tesla declined to comment.

    Lazard ranks No. 10 in the Thomson Reuters Americas M&A league table so far this year, down two spots on where it was last year.

    This is not the first time a major investment bank has made a miscalculation on a big deal. An erroneous share count in the leveraged buyout of Tibco Software in 2014 by its financial adviser, Goldman Sachs Group Inc (GS.N), led to a Tibco shareholder lawsuit that was settled earlier this year.

    Goldman discovered it had overstated the number of Tibco's fully diluted shares only after the company agreed to sell itself to private equity firm Vista Equity.

    This had the effect of lowering the sale price to $4.14 billion from the $4.24 billion used in Goldman's fairness opinion. Nevertheless, Tibco decided not to ask Vista to pay the additional $100 million.

    Goldman and Vista agreed to pay $30 million to the Tibco shareholders as part of the settlement, the Wall Street Journal reported at the time.
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    USDA Sees 2016 Farm Income Crashing As Farmer Leverage Spikes to 34 Year Highs

    USDA Sees 2016 Farm Income Crashing As Farmer Leverage Spikes to 34 Year Highs
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    The plight of the American farmer has been a frequent topic for us over the past couple of months.  A few weeks ago we pointed out how declining corn, wheat and soybean prices were leading to the first declines in farmland values in the Midwest since the 80s.  We also questioned whether California farmland was overvalued by $70 billion as almond prices have been cut in half over the past year and drought conditions threaten farming sustainability in many regions of the Central Valley.

    Most food grown in the U.S. has come under extreme pressure in 2016 due primarily to lower Chinese consumption resulting from the combined effect both a weak Chinese economy and a relatively strong U.S. dollar.  This slack in demand has resulted in massive supply gluts for several commodities as producers failed to adjust supply quickly enough to meet new levels of demand.

    Unfortunately, per the USDA's latest farming income forecast for 2016, conditions only look to be getting worse for farmers as demand still remains low but supply has been slow to adjust in the wake of improving yields.  Below are a couple of the key takeaways from the USDA's 2016 forecast.

    Real farm incomes in 2016 are expected to sink below 2010 levels which represents a 34% decline from the recent peak and 14% decline YoY.

    Meanwhile farm debt continues to rise at an astonishing rate...


    While farmer leverage has spiked to the highest level since the early 80s.
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    And of course, lower incomes means less money to spend on shiny new John Deere tractors with equipment capex expected to decline 31% YoY.
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    And finally, farmer returns have crashed to the lowest levels ever.  We're not sure about you but a 2% ROIC seems a "little low" even in our current rigged interest rate environment.  So, there's only a couple of ways to fix that problem...either commodity prices have to recover quickly or farmland prices need to come down substantially.  Which do you think will happen first?

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    Attached Files
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    Banks backstop Sirius Minerals for $2.9B UK potash mine

    Plans for a new potash mine in northern England moved a step forward on Thursday when the mine developer announced it has lined up six companies to backstop the project.

    London-listed Sirius Minerals Plc said that JP Morgan, Lloyds Bank, Société Générale, RBS, Export Development Canada and ING will supply $2.6 billion in debt facilities to support the second stage of developing the mine such as tunnel boring. The non-binding agreement depends on the ability of Sirius to secure first-stage funding which will pay for higher-risk activities like shaft sinking, The Telegraph reported.

    York Potash mine, poised to be one of the world’s largest in terms of the amount of resources extracted, is set to generate an initial 10 million tonnes per year of polyhalite – a form of potash that is used in plant fertilizers.

    The newspaper said the company is in “active discussions” with companies that could provide first-stage financing which will be a mix of debt and equity. In June Sirius said it will use Associated Mining Construction UK (AMC), known for its expertise in shaft sinking for potash projects, for the design-build of the mine, as well as for site development works; and appointed Hochtief Murphy Joint Venture for the construction of the mineral transport system, specifically the tunnel that will link the mine with the materials handing facility.

    Sirius’ mine, poised to be one of the world’s largest in terms of the amount of resources extracted, is set to generate an initial 10 million tonnes per year of polyhalite – a form of potash that is used in plant fertilizers – before it enters a second phase that will double that production to 20 million tonnes a year.

    York Potash mine is expected to create about 1,800 jobs during construction and 1,000 permanent positions once opened. The project has attracted some controversy because it lies under the North York Moors national park, but defenders of the mine say that construction will be underground and include a 25-mile-long conveyor belt that will carry the ore to port.

    Sirius had originally expected to begin production in late 2016, with initial output of 5 million tonnes per year, and had signed a few future supply agreements. The current development schedule, however, points at 2018 as the most likely time for production to begin.

    Investors in Sirius Minerals have been rewarded this year for their staying power, with the equity advancing an impressive 154% year to date.

    The stock surge comes despite seemingly unfavourable conditions for a new potash mine. A global oversupply of the fertilizer has caused prices to tumble in the past year, leading to layoffs and mine closures across the sector.

    Prices for the fertilizer ingredient began their decline four years ago, as weak crop prices and currencies weakness pinched demand. Potash has also suffered from increased competition following the breakup in 2013 of a Russian-Belarusian marketing cartel that previously helped limit supply.

    Potash's collapse picked up speed in the past year, putting additional pressure on producers, whose profits have been hit by falling prices, largely due to weak currencies in countries such as Brazil and low grain prices.

    In August the world’s largest miner BHP Billiton, revealed it may place its Canadian Jansen potash project in the back burner if prices for the fertilizer ingredient don’t pick up by the end of the decade. A major potential consolidation is also underway, with Potash Corp. of Saskatchewan, the world’s largest producer of the fertilizer by capacity, and rival Agrium revealing recently they are in preliminary merger talks.
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    Precious Metals

    Implats sounds warning on platinum supply crunch

    Impala Platinum CEO Terence Goodlace has backed up the prediction made last week by Northam Platinum (Northam) CEO Paul Dunne that the platinum market is heading towards a crunch that will be triggered by sharp drops in supply from South Africa.

    Speaking on a conference call held today over Implat’s results for the year to end-June Goodlace commented, “ I believe the train is coming because of the lack of investment in the platinum industry.

    “We are not too far from the years 2020 to 2022 when supply from the country will drop off a cliff. I believe the big deficits we are seeing now are going to get worse. In the short-term pgm (platinum group metal) prices will remain subdued but I certainly believe there will be a big surprise in the future,” Goodlace said.

    Presenting Northam’s results on August 26 Dunne predicted South African platinum production would fall below 4moz during 2017 because of declining mine production which was an aspect of the business he believed was not fully appreciated by the market which was overly focused on the demand side of the demand/supply equation.

    He said the declining trend was being driven by underinvestment in replacement and new platinum mining capacity over the past decade as well as by the rising level of technical difficulty and costs involved in mining platinum at greater and greater depths.

    “We think there is going to be a large fundamental gap by 2025 between platinum demand and primary platinum supply out of southern Africa which holds 80% of the world’s total platinum orebody, “ Dunne predicted.

    While South Africa is by far the world’s largest platinum producer it does not dominate in palladium production where – according to Implats refining and marketing executive Paul Finney – there is also a major shortfall looming.

    Finney said market deficits in palladium would continue commenting, “ palladium recycling will not plug this gap and we don’t believe ounces (stockpiled) on surface will plug the gap either. “

    Implication is that automobile manufacturers may have to swing back to using greater amounts of platinum in autocatalyst from a situation where palladium was previously widely substituted for platinum in the autocatalyst needed to clean up emissions from petrol engines.

    Implats’ shares rose more than 11% in trading on Thursday morning after the release of the results which met market expectations and showed the group had not only managed to increase production but had hit targets on operating cost and capital expenditure reductions.   The group did not declare a dividend.

    This was Goodlace’s last results presentation because he will step down as CEO by the end of November. Asked why he was leaving Goodlace replied “it’s personal. I have been in the industry for 40 years. It’s time I left and relaxed a little bit.”

    Goodlace said the executive search for his replacement was continuing and commented, “we have identified a few candidates and we are doing the due diligence process. I am still on the hook until November 30.”
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    Investigation of Goldcorp Inc. Announced by Law Offices of Howard G. Smith

    Law Offices of Howard G. Smith announces an investigation on behalf of investors of Goldcorp Inc. (“Goldcorp” or the “Company”) (NYSE: GG) concerning the Company and its officers’ possible violations of federal securities laws.

    Goldcorp engages in the acquisition, exploration, development and operation of precious metal properties in Canada, the United States, Mexico and Central and South America.

    On August 24, 2016, Reuters reported that Goldcorp was currently being investigated by Mexican regulators concerning its handling of a contaminated water leak at the Company’s Penasquito goldmine. According to the article, the Penasquito mine was leaking selenium into the groundwater as early as October 2013; and Goldcorp had failed to disclose the extent of the environmental contamination to the Mexican regulators and the investing public.

    On this news, Goldcorp fell over 9% per share, closing at just $16.05 per share on August 24, 2016.

    If you purchased Goldcorp securities, have information or would like to learn more about these claims, or have any questions concerning this announcement or your rights or interests with respect to these matters, please contact Howard G. Smith, Esquire, of Law Offices of Howard G. Smith, 3070 Bristol Pike, Suite 112, Bensalem, Pennsylvania 19020 by telephone at (215) 638-4847, toll-free at (888) 638-4847, or by email to [email protected], or visit our website at
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    Steel, Iron Ore and Coal

    Coal India monthly output, shipments slump to lowest in 3 years

    Coal India, the world’s biggest miner of the fuel, reported the lowest production and shipments in three years after heavy rains flooded its mines.

    Coal production in August dropped 10.4% from a year ago to 32.4-million metric tons and shipments declined 9.6% to 36.72-million tons, both plunging to the lowest since the same month in 2013. Rains and local agitations cut output by 2.4-million tons, N. Kumar, technical director at the miner, said Wednesday.

    The Kolkata-based miner’s plans to double annual output in four years have been undermined by inadequate demand from power utilities, which account for almost 80% of its shipments. A government plan to revive power distributors may boost generation and push demand for the fuel that fires almost two thirds of the nation’s generation capacity.

    “The drop in production and offtake is a near-term negative for Coal India, but it’s still not a dire situation,” said Abhisar Jain, a Mumbai-based analyst at Centrum Broking Pvt. “Power plants continue to use their own coal inventory, which may have affected Coal India’s production and dispatches, coupled with strong monsoons. We expect things to improve in a month or so, as plants go for restocking ofcoal and monsoons subside.”

    Coal stocks at power plants monitored by India’s Central Electricity Authority dropped to the lowest level since April 4. Plants had stocks of 28.3-million tons as of Aug. 30, enough for an average 21 days.

    Coal India’s production in the five months ended August 31 rose 1.3%, while shipments increased 0.2%. The company plans to raise output almost 12% to 598.6-million tons in the year to March 31.
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    Glencore's interest in Rio Tinto coal assets reignited

    Glencore is once again considering an acquisition of Rio Tinto's $US 1 billion-plus coal assets, as revealed by Street Talk on Thursday.

    Deutsche Bank is understood to be in Rio's corner but it's unclear whether Glencore is using advisers.

    Street Talk understands this time around, Glencore is seeking to buy all of Rio's Australian coal, including the mining giant's coking coal assets in Queensland.

    The official book value at June 30, 2016, for Rio Tinto Coal Australia was $US1.15 billion.

    Glencore, which last ran a ruler over the thermal coal assets a year ago,  has had its eye on Rio's Hunter Valley portfolio for the best part of three years.

    The Swiss miner initially sought to merge its assets with Rio's in the Hunter Valley, then famously attempted to merge the two companies together in mid 2014.

    Both attempts failed.

    Rio shopped its Hunter Valley thermal coal assets in early 2015, and managed to sell the Bengalla mine to New Hope Corporation for $US616 million and the undeveloped Mt Pleasant asset to Mach Energy for $US224 million plus a share of future royalties.

    Mach Energy is a little known subsidiary of Indonesia's biggest conglomerate Salim Group.

    Those transactions prompted Rio and its joint venture partners to reorganise the corporate structure behind its remaining Hunter Valley mines.

    Many viewed the structure as making it simpler to conduct future asset sales. Rio put further sales on hold shortly before Christmas 2015.

    Glencore's acquisitive streak has been tamed over the past year by the commodity price downturn, which turned the notoriously acquisitive miner into a seller of assets.

    Ratings agency Standard & Poor's noted on Thursday that the recent improvement in commodity prices was giving Glencore some "extra headroom" within its current credit rating of BBB-.

    The interest in Rio Tinto's coal divisions comes on the same day that S&P said it wanted to see Glencore maintain a conservative fiscal attitude for longer.

    "In the context of a still-uncertain industry outlook, we would likely look for Glencore to establish a sustained track record of a more conservative financial policy, relatively robust and resilient operating performance, and actual and forecast positive discretionary cash flow before we would consider the potential timing or extent of any positive rating action," said the agency.

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    As Beijing aims for blue skies over G20, China's steel mills get unexpected boost

    When Beijing ordered hundreds of industrial plants to close ahead of China's first-ever G20 summit next week, the government wanted to spruce up the host city of Hangzhou and ensure world leaders would gather under clear blue skies.

    In doing so, China's leaders may have given the nation's stricken steel mills an inadvertent leg-up, helping to restore profitability after a years-long downturn caused by weak prices as a global glut swelled and demand slowed.

    Steel prices have jumped as much as 42 percent since late May, with the unexpected turn in fortunes all the more striking as the health of the global steel industry is set to feature on the G20 agenda amid escalating tensions over Chinese exports.

    Some Chinese steel plants are turning in the best margins in at least three years following increased demand, efforts to tackle a supply glut and an environmental crackdown, with temporary production curbs for events like the G20 accelerating the boost to profits and prices.

    "Many small mills in neighboring cities of Hangzhou have been ordered to suspend production for the world summit," said Wu Wei, an analyst with Yong'an Futures in Hangzhou.

    A survey of 32 construction-steel mills in the region by industry consultancy Mysteel found almost half have either halted or curbed output since July, cutting steel output by nearly 1 million tonnes as part of the G20 and environmental curbs.


    European and U.S. leaders have urged China to accelerate capacity cuts, blaming its big exports on slumping prices and accusing the world's top producer of dumping its metal in foreign markets. They have threatened sanctions or anti-dumping taxes on Chinese steel imports.

    China has promised to slash steel capacity by 45 million tonnes this year and cuts in the first seven months of the year amounted to 47 percent of the annual target, spurring Beijing to vow to quicken its pace.

    While the boon from the G20 cuts will only be fleeting, Chinese steel prices have still rebounded 51 percent since the beginning of this year after six consecutive years of falls as a slowing economy hits demand for industrial metals.

    Chinese mills that produce rebar, a product used in the construction industry, were earning up to 1,000 yuan ($150) a ton in April and are still turning a profit of up to 300 yuan a ton in August, said Zhao Chaoyue, an analyst with Merchant Futures in Shenzhen.

    Mills making hot-rolled coil for use in manufacturing were earning currently earning more than 300 yuan a ton, Zhao added.

    Liuzhou Iron & Steel Co Ltd <601003.SS> said last week it returned to profit in the first half of the year from a loss last year as it took advantage of the price rally.

    "Nobody earlier expected steel mills to have heydays and make a big profit this year," said Xia Junyan, an investment manager of Hangzhou CIEC Trading Co in Shanghai.
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