Oil prices rise on lower US crude inventories, global supply risks

Oil markets have been receiving general support due to a sense that there were high risks of supply disruptions. (Reuters)
Updated 18 April 2018
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Oil prices rise on lower US crude inventories, global supply risks

  • In the United States, crude inventories fell by 1 million barrels last week to 428 million barrels
  • For next year, ING expects lower prices due to rising US crude output
SINGAPORE: Oil prices rose on Wednesday, lifted by a reported fall in US crude inventories and by the ongoing risk of supply disruptions.
Brent crude oil futures were at $72.17 per barrel at 0539 GMT, up 59 cents, or 0.8 percent, from their last close.
US West Texas Intermediate (WTI) crude futures were up 59 cents, or 0.9 percent, at $67.11 a barrel.
In the United States, crude inventories fell by 1 million barrels last week, to 428 million barrels, according to a weekly report by the American Petroleum Institute (API) on Tuesday.
Official weekly US data will be published by the Energy Information Administration (EIA) on Wednesday.
Outside the United States, oil markets have been receiving general support due to a sense that there were high risks of supply disruptions, including a potentially spreading conflict in the Middle East, renewed US sanctions against Iran and falling output as a result of political and economic crisis in Venezuela.
“Oil prices are holding near three-year highs (reached earlier in April) for the time being, and with inventories back in line with normal levels, the supply glut of the last few years appears to be over,” said William O’Loughlin, investment analyst at Australia’s Rivkin Securities.
Beyond voluntary supply restriction aimed at propping up prices led by the producer cartel of the Organization of the Petroleum Exporting Countries (OPEC) since 2017, O’Loughlin said falling output in Venezuela due to its political and economic turmoil was supporting prices.
“OPEC production is currently lower than expected as a result of large declines in Venezuelan output caused by a deterioration in the economic situation there,” he said.
The lower OPEC supplies come as demand is healthy, with China’s refineries processing a record 12.1 million barrels per day (bpd) of crude oil in March.
Dutch bank ING said in a note to clients that Brent had risen back above $70 per barrel in April “due to geopolitical risks along with some fundamentally bullish developments in the market.”
It raised its average 2018 price forecast for Brent to $66.50 a barrel from $60.25, and its 2018 WTI forecast to $62.50 per barrel from $57.75.
For next year, however, ING expects lower prices due to rising US crude output, which has jumped by a quarter since mid-2016 to over 10.5 million bpd.
The structure of the Brent and WTI forward price curve also points to a tighter market this year than in 2019.
The premium for June 2018 over June 2019 prices for Brent and WTI is $5.5 and $6 per barrel respectively, creating a market structure known as backwardation in which it is attractive to sell crude immediately instead of keeping it in storage for later sale.


Nestle streamlines R&D to speed up product innovation

Updated 24 May 2018
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Nestle streamlines R&D to speed up product innovation

LONDON: Food giant Nestle plans to combine its scientific research operations into a single unit in an attempt to speed up development of new products at a time when competition from smaller rivals is intensifying.
The world’s biggest packaged food maker, with brands including Nescafe coffee and Perrier water, has been struggling with slowing sales growth for years. Now it is also under pressure from activist shareholder Daniel Loeb to increase investor returns.
To better compete, the Swiss company told Reuters it would merge its Nestle Research Center and Nestle Institute of Health Sciences (NIHS) into one organization called Nestle Research.
The new entity, to be announced later on Thursday, will continue to be based in Lausanne, Switzerland and will employ around 800 people.
The reorganization, effective July 1, will not involve job cuts or the closure of facilities, a spokesman said.
By linking the “blue-sky” research done at NIHS with the more commercially focused Research Center, it hopes to accelerate the translation of scientific discoveries into marketable products.
It also hopes this will help it compete with smaller, nimbler rivals who have been eating away at the market share of Nestle and other big firms like Danone, Unilever, Kraft Heinz and Kellogg.
Nestle Chief Technology Officer Stefan Palzer acknowledged earlier this month that his company had to keep pace with rising demand for goods that are organic, gluten-free or vegan.
“Big trends are embraced by smaller companies a bit more actively than the big companies,” Palzer told Reuters before Nestle’s streamlining plans had been finalized.
“We are adjusting our portfolio, doing many innovations and renovations to make the portfolio more relevant and to address those trends, but smaller companies are more agile.”
In the US — the world’s biggest packaged food market — small challenger brands could account for 15 percent of a $464 billion sector in a decade’s time, up from about 5 percent last year, Bernstein Research predicted last year.
The combination of research units is the latest move by Palzer aimed at speeding up development and ensuring research efforts are commercially viable.
Palzer, who took over Nestle’s innovation and research and development operations in January, is also supplementing long-term research projects with incremental product launches made faster by experimenting with new ideas more quickly.
Last month, for example, Palzer and colleagues got the idea for a vegetarian or vegan food product while on a business trip.
“Thursday we had an idea, Friday we returned to Switzerland and Monday evening I was able to taste the first prototype,” Palzer said. “Wednesday, this prototype was shown to the executive board, and Friday it was in the global pipeline.”
He declined to give more details of the product, except to say it is currently being assessed by the operations team to see how long it will take to produce and on what machinery.
Other steps include efforts to apply specific developments to more products, such as Nestle’s recent designer sugar crystals launched in low-sugar Milkybars in March, which will go into other products in the future.
The importance of agility was underlined by Nestle’s recent struggle to capitalize on resurgent demand for frozen foods.
The company says it reformulates one third of its product portfolio every year.
Nestle spent 1.72 billion Swiss francs ($1.73 billion) on R&D last year, down slightly from 2016 but up 22 percent from 2012. The company’s sales fell 2.6 percent over the same period.
As a percentage of sales, its expenditure has fluctuated only a little, but demands on the unit have increased.
Wells Fargo analyst John Baumgartner said that across 10 large publicly traded US food companies, median expenses for R&D and advertising have declined 20 percent over the past five years.
“As voids of ideas and marketing have emerged, start-ups have been more responsive to consumer needs, won the culture and created the emotional connections that drive sales,” he said in a recent note.
Palzer said some industry peers had been outsourcing innovation to cut costs, relying on acquisitions of small brands or partnerships with suppliers.
But he said it was critical for Nestle to maintain scientific expertise in-house to keep its own portfolio fresh and to be an attractive partner for collaboration with others. Nestle does R&D around the world, involving around 5,000 people.
Fundamental scientific research will remain key at Nestle, Palzer said, but he also highlighted the value of external partnerships and acquisitions that can bring in new research or capabilities more easily.
Scientific research and innovation itself is not necessarily the reason why big breakthroughs tend to be rare for multinational companies, said Shaun Browne, investment banker at Houlihan Lokey, who advises food companies on deals.
“They often don’t have the patience or passion that is really required,” Browne said. “Often these things are one individual who is just totally determined and passionate about their product and sees it through.”