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Daily Intelligence Briefing – November 14, 2017

FEATURED TOPIC: OIL – Growing Supply Shocks Compound Accelerating Crude Demand

Yesterday, OPEC raised its forecast on demand for its oil in 2018 and said the production curb it has orchestrated with other producers to cut output was reducing excess oil in storage, potentially pushing the global market into a larger deficit next year. The organization said that the world would need 33.42 million barrels per day (bpd) of OPEC crude next year, up 360,000 bpd from its previous forecast and marking the fourth consecutive monthly increase in the projection from its first estimate made in July. Its oil output in October, as assessed by secondary sources, was below the 2018 demand forecast at 32.59 million bpd, a drop of about 150,000 bpd from September. In a further sign that the supply glut is easing, OPEC said inventories in developed economies declined by 23.6 million barrels in September to 2.985 billion barrels, 154 million barrels above the five-year average. In comparison, oil stockpiles in industrialized nations were 3.055 billion barrels at the end of February, about 330 million barrels above the five-year average. This is the final report before OPEC’s November 30th meeting where it seems almost certain that the cartel and its allies, led by Russia, will extend their supply-cutting deal further into next year, this time possibly joined by formerly exempt Nigeria and Iran.  OPEC members are leaning toward a nine-month extension of the production pact until the end of 2018.

Coinciding with this report are global tensions that could cause disruptions in production. Venezuela, the 11th-largest producer of oil in 2016, has seen its output fall to 1.955 million bpd in October, the lowest production rate in 29 years. This would not be so awful in and of itself, but the country’s debt crisis is the largest contributor to the fall in production, and could lead these paltry figures even lower. Venezuela belatedly came through with a $1.1bn PDVSA (Venezuela’s state oil company) bond payment last week, but only well after a three-day grace period following the bond’s maturity on Nov 3. This is the last payment President Nicolas Maduro has promised to make before attempting to restructure the country’s $150 billion debt, but considering Electricidad de Caracas — a state-owned electric company — has defaulted on just a $650 million bond payment, the prospects for PDVSA are not looking promising and a default of their own could lead to loss of huge international assets. Some analysts argue that if Venezuela defaults and creditors get their hands on its oil assets, buyers of its oil will start looking for other suppliers.

Just as Venezuela is embroiled in a violent conflict with rebel militia groups, Saudi Arabia is facing a similar problem with the Houthi rebels of Yemen. In the latest escalation of tensions, the Houthi’s have threatened to start attacking oil tankers and warships sailing under enemy flags if the Gulf coalition fighting it does not reopen Yemeni ports. Ports were closed to stop any more foreign missiles (supposedly supplies by Iran), similar to the one used to attack Riyadh, from reaching Yemen. On Sunday, the head of the Houthi supreme revolutionary committee, Mohammed Ali al-Houthi, doubled down and wrote on his Facebook page that the Houthis could begin rocket attacks on oil installations within Saudi Arabia as well. Just this past Friday, Saudi ally Bahrain accused Iran of anexplosion that caused a fire at a major oil pipeline a day earlier. An all-out Saudi-Iranian war would be a major disruption for oil markets, and while that still seems unlikely as of now, tensions are still escalating as a result of the fighting and supposed terrorism.

Added to this mixture are some interesting developments in the US shale industry. While US crude production last week reached a record high, and many would think that the shale could simply make up the loss in supply occurring outside the U.S., signs have started to emerge that the relentless intensification of drilling actually leads to diminishing returns in basins like the Permian, one of the US’s largest. Pumping twice as much sand as usual into Permian wells and drilling longer laterals also doesn’t deliver commensurate volumes of oil. What this does, however, is raise costs exponentially and that is exactly where the shale producers have struggled most as crude prices have remained low. BTU analytics has said that higher well costs may force additional capital discipline going into 2018, which could be a good thing for the overall supply and demand balance. Currently, shale is already behind the curve in relation to where they wanted to be at this time. As of June, the U.S. Energy Information Administration expected an average of 9.3 million barrels a day, more than 220,000 barrels a day higher than companies reported. Being on the border of profitability, combined with not producing up to par is definitely a cause for concern when new wells will inevitably have to be drilled near old ones and could decline in productivity by as much as 30%.

OPEC’s report and these three catalysts, while ominous, are very bullish for WTI Crude and Brent Crude, which have already rebounded more than 20% each since July 3rd when MRP reaffirmed our confidence that crude prices would rise to the $60-$80 per barrel range. Investors looking for exposure to oil can invest through the energy ETF XLE, crude oil ETN OIL, or oil services ETF OIH.

Here are two of MRP’s other past Viewpoints on our Oil theme:



HERE in the meantime are the latest articles on oil (the stories are summarized in the COMMODITY Section):

  • Oil – Aramco To List Shares In Hong Kong ‘For Sure’ 
  • Oil – Brazil Faces Offshore Oil Dilemma
  • Oil – OPEC Reaffirms Iran’s Pledge to Supply Cuts
  • Oil – Don’t Back U.S. Shale To Keep Oil Prices Down
  • Oil – OPEC points to larger 2018 oil supply deficit as market tightens 

CHARTS: Oil (OIL) vs Oil Services (OIH) vs Energy (XLE) vs S&P 500 (SPY)



  • Markets: 
    • Bonds – Riskiest countries are selling debt at record rate 
  • Economics and Trade:
    • Productivity – A smaller share of a smaller pie 
    • Greece – EU Heaps Praise on Greek Reforms as Post-Bailout Reckoning Nears 
    • NAFTA – NAFTA Negotiators Set to Look for Small Wins After US Threats 
    • F&B – Food prices would soar after no-deal Brexit, warns major dairy boss 
    • Fed – The One Yield Curve That Should Concern Powell  
  • Finance:
    • IPOs – IPOs Roar Back World-Wide, With Asia Driving the Boom 
    • 3DP – GE to hone digital efforts, leverage additive manufacturing as it focuses on core businesses 
  • Technology: 
    • Microgrids – The Microgrid Imperative 
    • AVs – Telecoms versus carmakers in race to get connected
  • Transportation:  
    • EVs – UPS Wants to Convert 1,500 Delivery Trucks in NYC to Electric by 2020 
    • Aerospace – China’s satellite start-ups vie for private contracts 
  • Commodities: 
    • Coal – CO2 emissions from coal fell by record amount in 2015, led by Texas and Midwest
    • Metals – The Time Is Right For Industrial Metals Miners 
  • Energy & Environment: 
    • Solar – Hurricane Maria has made Puerto Rico the land of opportunity for solar power
  • Biotech: 
    • Pharma – Why Legal Risks Matter for Generic Drug Stocks
  • Endnote: 
    • CHART: Euro Economy Is Heading Towards a Golden Period



  Autos  (S)

  India  (L)

  TIPS  (L) / Short-Dated UST (S)

  Defense  (L)

  Industrials & Materials (L)

  U.S. Financials & Regional Banks (L)

  Emerging Markets (L)

  Oil & U.S. Energy  (L)

  U.S. Homebuilders & Construction (L)

  France  (L)

  Palladium  (L)

  U.S. Healthcare Providers & Pharma (S)

  Gold & Gold Miners (L)

  Robotics & Automation (S)

  Video Gaming (L)

  Lithium (L)

  Steel  (L)

  Value over Growth  (L)

About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. 



  • United States, Treasury Budget, MoM, OCT: $-63.2 B from prior $8.0 B
  • Malaysia, Unemployment Rate, MoM, SEP: 3.4% from prior 3.4%
  • Kyrgyzstan, PPI, YoY, OCT: 1.7% from prior 0.7%
  • Slovakia, Core Inflation Rate, YoY, OCT: 1.7% form prior 1.6%
  • Portugal, Inflation Rate, YoY, OCT: 1.4% from prior 1.4%
  • Serbia, Inflation Rate, YoY, OCT: 2.8% from prior 3.2%
  • Russian Federation, GDP Growth Rate, YoY, Prei, Q3: 1.8% from prior 2.5%



Bonds – Riskiest countries are selling debt at record rate 

The world’s riskiest countries are issuing debt at a record rate, buoyed by the global economic upturn and investors’ search for yield in a world of historically low returns. Junk-rated emerging market sovereigns have raised $75bn in syndicated bonds so far this year, up 50 per cent year on year to the highest total on record, according to figures from Dealogic, a data provider. The increase has buoyed the total volume of debt-raising by developing economies; non-investment grade issuance has made up 40 per cent of the new debt syndicated in EM so far in 2017.

These rare and new issuers have been lured into the market by attractive pricing — strong investor demand for EM debt has pushed pricing up and yields down, making it one of the best-performing assets globally in 2017. According to Bloomberg Barclays indices, EM’s local currency-denominated sovereign debt has returned 10.4 per cent since the start of this year, while dollar-denominated debt has returned 7.6 per cent. By contrast, US Treasuries have returned 2.5 per cent while European nations’ debt has returned 0.9 per cent. FT




Productivity – A smaller share of a smaller pie 

Stagnant wages are at the heart of political developments in many western countries. That is obvious in an immediate sense, for example, in the US, where the “left-behind” have brought Donald Trump to power, and in the UK, where renewed wage squeezes have put additional pressure on an already fractured politics. But it is also a long-term political challenge. The extent to which the incomes of typical workers have decoupled from the overall growth of the economy during the past few decades matters enormously for what sort of political programmes are either possible or desirable.

But clearly wherever this pattern holds, a question for policymakers is how to interpret it and what to do about it. In the US until now, the loudest narrative has been that workers are no longer reaping the fruits of growth as they used to, and so the focus should shift to distribution and inequality rather than overall productivity growth.

Now Anna Stansbury and Lawrence Summers argue that this is the wrong way of looking at things. In a new paper, they examine the relationship between changes in productivity and changes in typical workers’ pay over one- to five-year time spans in the post-1948 US economy, and find that the relationship holds up well. As Summers puts it in an interview, it would be wrong to shift policy attention from growth to inequality. This is because in their research, whenever productivity does tick up, so do wages (and vice versa). The longer-term failure of wages to keep up, they argue, should be attributed not to a “delinkage” of productivity from pay, but to other forces that have held wage growth back. FT


Greece – EU Heaps Praise on Greek Reforms as Post-Bailout Reckoning Nears

The European Commission talked up Greece’s reform drive, as creditors are beginning to prepare for a discussion on what a post-bailout landscape could look like for the debt-ridden state. With Greece’s third financial lifeline set to expire in August, both Athens and European governments are trying to avoid a politically toxic discussion about another bailout package, which would come with strings attached. A rally in Greek government bonds on the back of a nascent economic rebound and the promise of additional debt reliefcould help avoid another rescue, even as the country has yet to fully regain market access.

After more than seven years of relentless belt-tightening, Greece is now running the highest budget surplus of all advanced economies when adjusted for the economic cycle, according to the International Monetary Fund. Under the bailout Prime Minister Alexis Tsipras signed in 2015, the country legislated additional austerity measures equal to 4.5 percent of its gross domestic product, or about 8 billion euros ($9.3 billion), according to the commission. Another fiscal package equal to 2 percent of GDP will kick in after 2018. B



NAFTA – NAFTA Negotiators Set to Look for Small Wins After US Threats

The fifth round of North American Free Trade Agreement talks starts Wednesday in Mexico City, two days earlier than initially scheduled. It’s the first meeting since U.S., Mexican and Canadian negotiators extended talks to March and added more time between sessions, abandoning Trump’s previous deadline. U.S. Trade Representative Robert Lighthizer capped the last session by chastising Mexico and Canada for balking at certain demands — it was the U.S. that sought the extension, according to two government officials familiar with the proceedings who spoke on condition of anonymity. 

One government official said NAFTA negotiations this week are expected to focus on smaller issues related to modernizing the deal, and the thorniest discussions will be put off until later rounds. Many observers expect the same.

NAFTA covers more than $1 trillion a year in trade and government officials have described essentially two sets of negotiations — one focused on modernizing a 23-year-old agreement for an Internet era, and another where Mexico and Canada essentially rejected high-profile U.S. demands on subjects that bear Trump’s finger prints, like dairy and autos. IW

F&B – Food prices would soar after no-deal Brexit, warns major dairy boss 

One of the UK’s largest dairy producers has warned that a badly handled Brexit could lead to price hikes for food, and scarcity in the shops from April 2019, with dairy and meat products particularly hit. Gabriel D’Arcy, the chief executive of LacPatrick in Strabane in Northern Ireland, complained that ministers were too focused on financial services and were putting the country’s food security and food standards at risk.

Leaving the customs union in a hard Brexit scenario could lead to the price of meat doubling and the price of dairy, half of which is imported, rising by up to 50%. A block of cheddar imported from Ireland that costs £1 now will cost £1.41 under World Trade Organisation rules, with Ireland being a major producer of cheddar. This would prompt a vicious economical cycle and a period of “runaway” food price hikes, he warned. Guardian

Fed – The One Yield Curve That Should Concern Powell 

Since U.S. President Donald Trump nominated Jerome Powell to be the next Chair of the Federal Reserve, the debate among economists has mainly centered on whether he will continue the central bank’s plan to raise interest rates at a gradual pace. Maybe they should take a close look at the bond market, which is signaling that Powell may need to take monetary policy in a direction almost no economist expects.

By just about any measure, the U.S. economy is humming. Gross domestic product expanded at a 3 percent or better rate in each of the past two quarters, the first time that has happened since 2014. At 4.1 percent, the unemployment rate is the lowest since 2000. Corporate earnings are rising at healthy clip and consumer confidence is soaring. Against that backdrop, it’s not too surprising that bond traders boosted the probability of a Fed rate hike in December and March by about 10 percentage points since Powell’s nomination.

What is surprising is what the bond market is thinking about what might happen later next year. In fact, market pricing suggests that traders believe the Fed is almost done boosting rates and could even move to a neutral stance by the end of 2018 — and then start cutting rates. Although many market participants are currently fixated on the shrinking Treasury yield curve, which is the narrowest in 10 years and is usually a signal that economic growth and inflation are poised to slow, parts of the money markets are sending a more dire message. B







IPOs – IPOs Roar Back World-Wide, With Asia Driving the Boom 

A flood of Chinese companies is driving the biggest world-wide surge of initial public offerings in a decade. More than 1,450 companies globally have gone public so far in 2017, putting this year on track to become the busiest for new listings since 2007, according to Dealogic data through Friday. Roughly two-thirds of the IPOs were in the Asia-Pacific region, which has roared past the U.S. to become the dominant region for new stock listings. 

Overall, the deals raised more than $170 billion globally, compared with the roughly 950 deals in the same period last year that raised around $120 billion. While deal listings have picked up sharply, deal volume is only the third highest over the past decade and far below the boom years in 2006 and 2007 before the financial crisis. A pickup in economies across Asia has led more companies to seek capital for expansion and growth by selling stock publicly. Increasingly, much of that capital is coming from investors with newfound wealth—particularly in China, which has powered much of the IPO surge.

A total of 377 Chinese companies have completed IPOs in Shanghai and Shenzhen so far this year, according to Dealogic, the most since at least 1995, when the firm started tracking the data. The deals make up one-fourth of all global IPOs by number of deals, the largest percentage on record and up from 10% as recently as 2014. Investors are being rewarded for diving into the new listings. 

Shares of newly public companies in Asia-Pacific, on average, have risen nearly 154% from their IPO prices this year through Friday, according to Dealogic. That compares with an average 32% gain for IPOs in the Americas and a 12% increase for new issues in Europe, the Middle East and Africa this year. WSJ


3DP – GE to hone digital efforts, leverage additive manufacturing as it focuses on core businesses 

GE will cut costs in its digital unit and focus efforts on its core businesses such as power, aviation and healthcare. CEO John Flannery on Monday outlined GE’s review of its businesses, plans to become more efficient and generate more cash flow and halve its dividend. During the review, analysts were speculating about what GE would do with its digital unit, which was seen as an investment in the future and the “industrial Internet.” 

Flannery said GE is looking to simplify and apply rigor to the company’s businesses. Now GE will look to cut $400 million in costs from its digital unit and aim for $1 billion in revenue from its Predix platform. ZDNet



Microgrids – The Microgrid Imperative 

These are the states and number of people who have been affected by power outages caused by damaged power lines this year – and that is certainly not all of them, just the highlights. These were enormous, costly events, which are increasing in frequency and underscore the need for a better way to deliver electricity to the public.

To date, microgrid uptake is slow. Soam Goel, Partner at Anbaric Development Partners explained during the conference that micrgorids are on the cusp of the “early adopter” phase but added that adoption has been growing tenfold every year. What’s holding them back? Microgrids require not only new technology and equipment, but utility adoption of them would require a whole new set of regulations and policies, not to mention money. 

For now, projects like the Marcus Garvey Village microgrid remain few and far between despite the overwhelming evidence that the grid system in the U.S. is vulnerable in many different ways. But Staker thinks that might be changing for a few reasons. First, he’s hopeful that utilities are beginning to consider microgrids as non-wires alternatives because of their ability to shape load and therefore avoid costly transmission upgrades. REW

 AVs – Telecoms versus carmakers in race to get connected 

A fierce debate has gripped Europe’s automobile industry that will shape the future of all cars sold across the region: how to get internet-connected vehicles to “talk” to each other while travelling on the road. It centres on two competing technologies that has broadly split the continent’s carmakers and telecoms providers into rival camps — and has even pitted two branches of the European Commission against each other.

Carmakers largely favour a short range technology using a dedicated band of spectrum or radio frequencies for car-to-car communication. This vehicle-to-vehicle system, or V2V, will be ready for operation once network equipment is built, which could be carried out relatively quickly. This layer of technology would allow cars to drive much closer together on the roads, synchronising braking to avoid accidents.

The telecoms companies, in contrast, are backing an open, long-range cellular system, which allows cars to share the airwaves with mobile phone signals. This will take longer to develop than V2V as it will have to wait for 5G, the next generation of mobile technology that is not expected to be rolled out globally until 2020.

The European Commission is due to announce its formal decision on the type of technology it favours next year with some big groups in the car and telecoms industry, such as Vodafone and BMW, backing a “technology neutral” position that would allow the development of both systems. FT



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