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The Energy Commodities Struggling With Supply Gluts

1. Frac sand miners drowning in supply

frack sand

- The share prices of frac sand miners have plunged by more than 70 percent over the last two years, as a wave of new supply has hit the market all at once.
- Bloomberg reported that one company, Shale Support LLC, has started to export frac sand to Argentina, a move that boosted profits by 20 percent.
- But that is a relatively small market. For now, U.S. sand miners are battered because supply has grown by 50 percent in the last three years. In 2019, supply is expected to rise to 229 million tons, while demand will only reach 123 million tons, according to Bloomberg and Rystad Energy.
- Many new mines have opened in Texas, close to drilling operations. The older mines from Wisconsin are now struggling to stay afloat. 
- One company, Covia, has shut down 7 million tons of supply, the largest volume out of any other company, according to Bloomberg and Evercorse ISI.

2. U.S. refiners ramp up

refinery

- Refinery runs averaged 17.3 mb/d in 2018, the highest annual average on record and the fifth consecutive year that the industry broke a new record, according to the EIA
- One of the reasons for higher throughputs is the high margins for diesel, an attractive incentive for refineries to ramp up processing. Gasoline margins have been depressed, but diesel is much more profitable. 
- As refiners chase diesel, they have exacerbated the glut of gasoline since both fuels are produced when processing crude oil. 
- But the increases in processing could flatten out this year with more facilities expected to need maintenance.

3. Bitcoin skyrockets

bitcoin

- After months in the doldrums, Bitcoin and other cryptocurrencies roared back to life this week.
- Bitcoin surged from $4,100 on April 1 to above $5,300 before falling back a bit below $5,000 at the time of this writing. 
- The Bloomberg Galaxy Crypto Index, which tracks a basket of large cryptocurrencies, jumped nearly 30 percent this week. 
- Up until only recently, Bitcoin seemed to be lifeless, but the recent rally has fueled hopes that the down period was merely the bottom of the cycle.

4. Well completions set to rebound sharply

wells

- The pace of shale drilling has slowed dramatically in the last few months following the oil price bust in the fourth quarter. Rig counts and well completions are down, and U.S. oil production actually contracted in January by 90,000 bpd.
- But a rebound is likely on its way, helped by higher oil prices. “After a brutal 4Q18/1Q19, the hydraulic fracturing industry looks to be finding firmer footing,” Morgan Stanley wrote in a note. 
- The investment bank noted that the price responsiveness for drillers, which “has become almost instantaneous,” also exists on the upside. 
- That leads the bank to conclude that well completions will rise sharply in the second and third quarters, helped by typical seasonal increases following winter.
- That’s good news for the oilfield services industry. There “could be additional demand upside with small/private operators as the swing factor, which supports our view that a mid/2H19 ramp in completions activity has the potential to further tighten frac industry utilization,” Morgan Stanley noted.

5. Freight rates collapse on Brazil iron ore woes

freight

- Iron ore prices are surging on concerns over a supply deficit after Brazilian regulators ordered the closure of 56 tailings dams. The collapse of a dam earlier this year in Brazil has led to scrutiny. 
- Brazilian mining giant Vale said iron ore production would fall to between 307 million tonnes and 332m tonnes this year, down from 380m tonnes in 2018.
- Iron ore prices shot up 7 percent this week.
- The closure of tailings dams in Brazil “increases concerns among market participants that the seaborne market is sliding ever deeper into supply deficit and that the deficit will also be more prolonged,” Commerzbank wrote in a note. 
- The fallout has hit freight tanker rates. The “Baltic Capesize Index, which measures freight rates for the largest bulk carriers, has plunged by 95% since the dam collapse in Brazil at the end of January. It is currently at its lowest level since the data series began in the spring of 2014,” Commerzbank wrote.

6. Farmer switch to corn 

farmer

- U.S. farmers planed 92.8 million acres with corn for 2019, according to recent data from the U.S. Department of Agriculture, an increase of 4 percent from last year. Corn prices fell 5 percent on the news. 
- Soybeans, in contrast, saw plantings of just 84.6 million acres, a decline of 5 percent. 
- “The increase in US corn acres at the expense of soybeans is a departure from the trend seen over the past two years when US corn and soybean planted acreage was at the same level,” Standard Chartered wrote in a report. “The key factor behind the lower soybean acres, in our view, is the fallout from the US-China trade war and the ensuing import tariff China has imposed on US soybeans.”
- China’s roles as the largest soybean consumer and importer “cannot be overestimated,” the investment bank noted. U.S. inventories of soybeans are “bulging” as China has turned to Brazil instead.

7. Palladium prices fall from record highs

Palladium

- Palladium prices have fallen back from last month’s record highs, dipping below $1,370 per ounce, a decline of around 13 percent. 
- Palladium is a rare precious metal that is used in catalytic converters to reduce carbon monoxide emissions from cars and trucks. It is also used in electronics, jewelry, groundwater treatment and other chemical applications. 
- But the CEO of Platinum Group Metals (NYSE: PLG) told Kitco News that demand will remain strong even if auto sales in the U.S. and China slow. Tighter emissions standards are driving palladium demand higher. 
- “Even if global auto sales cool, [amount of palladium] per car is going up dramatically and that is the point everyone is missing,” Platinum Group Metals CEO Michael Jones said.

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