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OPEC’s Only Hope

The trade war continues to weigh heavily on the oil market as forecasts paint a gloomier picture for oil prices with every passing week. This week, analysts have again revised downward their oil prices as they see an economic slowdown as a result of the trade war. OPEC’s over-compliance with the production quota and tensions in the Middle East over Iran's oil sanctions have been an insufficient catalyst for propping up oil prices.

OPEC Can’t Wait for the Trade War to Be Over

OPEC still finds itself in rather a tight spot wedged between Brent crude prices that are almost back to where they started at the beginning of the year and its own production throttling that has not packed enough of a punch to boost oil prices.

OPEC’s been down this road before. Remember the start of its production cuts in late 2016? Brent was trading around $56 at the time. One cut and two extensions later and we’ve gained $3 per barrel. But what has OPEC lost? Market share. Saudi Arabia’s, mostly - and were it not for Iran and Venezuela, Saudi Arabia would have had to cut a lot more as part of its “whatever it takes” promise.

But this perception of a global overhang in crude inventories has been too much for the cartel to manage successfully. The trade war, which most analysts agree will have a negative impact on the economy, is constantly pushing prices down while OPEC is trying to lift them up.

So now what? This tit-for-tat US-China trade war will continue to be a thorn in OPEC’s side. OPEC can promise to extend cuts, to do whatever it takes, to cut oil exports to the most transparent oil market in the world - the United States, but the effect on prices have been only temporary, lasting only until the next Twitter update on the trade war events.

OPEC is pretty much out of cards to play in the oil price game - the cartel can only cut so much. Russia, which planned on lower oil prices anyway when designing its budget, may have a production cut card to pull out of its back pocket, but it is doubtful it will be coerced into playing it. OPEC’s only hope is that the trade war will come to an end, and soon.

Optimism for Cobalt, Lithium Still Languishing

Keep an eye on the battery metals in the coming weeks. Cobalt is already soaring in the wake of the shutdown of Glencore’s key cobalt mine in the Democratic Republic of Congo, and lithium is still languishing, waiting for that promised supply crunch to kick in.

Cobalt prices have shed more than 40% this year, but - as we anticipated earlier - the Glencore mine shutdown proved a nice boost.

Since early August, cobalt prices have gained 20% - halfway to recovery. And experts are predicting a bigger climb. UBS is predicting cobalt will gain 60% over the next 18 months and move back to $20/pound.

That’s great for struggling cobalt miners, but bad for manufacturers who use cobalt (particularly for EV batteries).

The 20% uptick in cobalt prices also happens to correspond to the 20% of cobalt that Glencore just took off the oversupplied market.

There isn’t a similarly upbeat story for lithium, yet. For August, 99% lithium carbonate spot prices in China shed another ~7.4%. EV subsidy cuts are also taking their toll here.

Lithium

Ganfeng Lithium Co, China’s biggest lithium producer, has seen H1 2019 profits plunge 59% as a result of the price slump.



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