Last Month a Disaster for Commodities

Tuesday, May 15th, 2012

I went to circle back today to look at what has been among the weakest areas of the market, and chart after chart came up in the commodity space.   Here is a chart of the performance of the futures in various markets (mostly commodities) over the past month (via Finviz) and it’s a mess.  Ironically, natural gas – the most hated commodity of most of the first quarter, was the standout.  Reversion to mean trade.   Coal is not listed, but that group looks as bad as solar stocks… ironic since the latter was supposed to supplant the former at some point.

There is an in depth story on the sector in the WSJ today as well.

• Commodities fell to nearly two-year lows last week, measured by a widely used benchmark, prompting investors to ponder whether the massive rally that began in 1999 may be faltering.
• China is cooling down at the same time the U.S. is struggling to heat up, clouding the outlook for the world’s two biggest consumers. And producers of some raw materials have ramped up supplies enough to create at least temporary gluts, particularly if appetites falter.
• For more than a decade, investing in commodities was practically a sure thing. Prices rose in nine of the 12 years starting in 1999. Even down years had explanations, such as the Sept. 11 attacks in 2001 and the global financial crisis in 2008.
• On Friday, the Dow Jones-UBS Commodity Index, which tracks futures contracts for 20 basic goods, fell 1% to the lowest level since September 2010. U.S. crude oil, gold and cotton—all components of the index—helped lead the way down, as each hit fresh lows for 2012. The index is down 4% this year after a 13% drop last year, putting it on track for the first consecutive declines since 1997 and 1998.

Tags: Appetites, Commodities Prices, Commodity Index, Commodity Space, Crude Oil, Declines, Dow Jones, energy, Futures Contracts, Global Financial Crisis, Gluts, Investing In Commodities, Lows, Massive Rally, Natural Gas, Raw Materials, Sept 11 Attacks, Standout, Sure Thing, Ubs, Wsj
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What the Next Decade Holds for Commodities

Saturday, January 14th, 2012

What the Next Decade Holds for Commodities

By Frank Holmes, CEO and Chief Investment Officer

U.S. Global Investors

What a decade! A rapidly urbanizing global population driven by tremendous growth in emerging markets has sent commodities on quite a run over the past 10 years. If you annualize the returns since 2002, you find that all 14 commodities are in positive territory.

A precious metal was the best performer but it’s probably not the one you were thinking of. With an impressive 20 percent annualized return, silver is king of the commodity space over the past decade with gold (19 percent annualized) and copper (18 percent annualized) following closely behind.

Notably, all commodities except natural gas outperformed the S&P 500 Index 10-year annualized return of 2.92 percent.

Last year did not seem reflective of the decade-long clamor for commodities. In 2011, only four commodities we track increased: gold (10 percent), oil (8 percent), coal (nearly 6 percent), and corn (nearly 3 percent). The remaining listed on our popular Periodic Table of Commodity Returns fell, with losses ranging from nearly 10 percent for silver to 32 percent for natural gas.

Download a pdf of the commodity table here

I think this chart is a “must-have” for investors and advisors because you can visually see how commodities have fluctuated from year to year. Take natural gas, for example, which posted outstanding increases in 2002 and 2005, but has been a cellar-dweller for the last four years as a result of overabundant supply and softening demand. The industry is also still trying to digest breakthrough technology that opened the door to vast shale deposits at a much lower cost.

On the other hand, oil finished in the top half of the commodity basket six out of the past 10 years. No stranger to volatile price swings, oil possesses much more attractive fundamentals as we continually see restricted supply coupled with rising demand.

After 11 consecutive years of gains, some are questioning whether gold can keep its winning streak alive in 2012. One of those skeptics is CNBC’s “Street Signs” co-host Brian Sullivan. In an appearance on Thursday, I explained how I believe the Fear Trade and Love Trade will continue to fortify gold prices at historically high levels.

I explained that one of the reasons the Fear Trade will persist in purchasing gold is the ever-rising government debt across numerous developed countries. During our Outlook 2012 webcast, John Mauldin kidded that the Mayans were not astrologers predicting the end of the world, but economists predicting the end of Europe. Whereas John believes the U.S. has wiggle room to decide on how to deal with deficits and debt, Europe and Japan are running out of time.

The situation is quite somber when you consider how much debt Europe, Japan and the U.S. owes this year alone, says global macro research provider Greg Weldon. In his preview of 2012, Weldon says that the maturing principal and interest on U.S. Treasury debt due this year totals just under $3 trillion. Austria, Belgium, France, Germany, Italy, Portugal and Spain together face nearly $2 trillion in principal and interest payments. Japan is the leader in the clubhouse, owing just over $3 trillion in 2012. With the combined debt for these developed countries totaling nearly $8 trillion, the interest payments alone dwarf the total GDP of many countries in the world.

This week, Germany sold a five-year government note for less than 1 percent, the lowest interest rate on record. Bids for the low-yielding debt were three times more than the amount sold, even as the consumer price index stands at more than 2 percent year-over-year. This means that investors have so few acceptable safe havens they are willing to accept negative real rates of return.

This is good news for gold as a safe haven alternative against depreciating currencies such as the euro, the yen and the U.S. dollar.

The overwhelming debt burden in developed countries translates to an expected slowdown in imports from the emerging world. However, the grandest of those countries, China, likely won’t be affected as much as some people assume. This is “the biggest misconception” about the country’s economy, says CLSA’s Andy Rothman. Exports only play a supporting role for the Chinese economy. The world’s second-largest economy is actually largely driven by domestic consumption from a population more than 1 billion strong with more padding in their wallets.

Andy says 10 years of tremendous income growth and little household debt, make China the “world’s best consumption story, for everything from instant noodles to luxury cars” in 2012.

According to December Chinese trade figures, month-over-month and year-over-year imports of aluminum and copper increased significantly. This may be a result of China restocking ahead of Chinese New Year, but M2 money supply growth rapidly rose in recent months, a sign the government is attempting to reaccelerate the economy. Also, the urban labor market has been robust over the past two years, with an annual change just below 5 percent—a record high over the past 15 years.

Along with rising urban employment, income growth has been tremendous as well. CLSA says that last year was “the eleventh consecutive year of 7 percent-plus real urban income growth,” with disposable incomes rising 152 percent over the past decade.

Investors shouldn’t expect China’s growth to be as robust as it’s been, as the country’s fixed asset investment growth drops below the 25 percent year-over-year pace of the last nine years, says CLSA. China’s 12th Five-Year Plan has less infrastructure spending compared to the 11th five-year plan. Transport and rail spending is also expected to drop, with only water and environmental protection spending growth rising.

As shown in the BCA chart above, GDP growth has declined below 10 percent, but the growth is currently not the lowest we’ve seen in recent years. CLSA believes that China will prevent GDP growth from slipping below 8.5 percent for the full year, as “Beijing has the fiscal resources and political will to quickly implement a much larger stimulus.”

Judging by the record number of articles mentioning a hard landing in China in late 2011, investor sentiment has swung from euphoria to excessive pessimism, according to BCA Research. Last fall, more than 1,000 articles discussed the risk of a “China Crash.”

As I’ve mentioned before, contrarians view extremely bearish sentiment as a potential attractive entry point. BCA believes the pessimism has been priced in, as technical indicators as well as valuations for domestic and investable markets appear “deeply depressed.”

What will happen over the next 10 years? I believe the supercycle of growth across emerging markets will continue with rising urbanization and income rates. This bodes well for commodities, especially copper, coal, oil and gold, and we’ll continue to focus on companies that will benefit the most from these much-needed resources.

Tags: Annualized Return, Breakthrough Technology, Cellar Dweller, Chief Investment Officer, Clamor, Coal, Commodities, Commodity Space, Emerging Markets, Frank Holmes, Global Population, Hand Oil, Natural Gas, Next Decade, Periodic Table, Precious Metal, Price Swings, Shale Deposits, Stranger, U S Global Investors
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Commodity Outlook Rosy, Cloudy, Murky

Wednesday, May 11th, 2011

By Cees Bruggemans, Chief Economist of FNB.

After a sharp speculative shakeout last week in the commodity space, quo vadis (whereto next)?

Outlook for oil is rosy, base metals cloudy, precious metals murky and coal a special case (there may be others as well).

With China standing on its monetary brakes, it is not unreasonable to expect a more subdued price performance out of base metals for a while, though allow for specific demand/supply situations.

Longer term (beyond this year) the fundamental Chinese growth story is expected to stay strong, in addition to which India is approaching its resources constraint, in future increasingly becoming import dependent as well if its GDP growth were to remain in 7%-9% territory.

Oil was fired by many things in recent months, as much economic fundamentals as political premiums and speculative froth.

The froth was creamed last week, but the fundamentals stay very positive, with political premiums about supply security hardly yet ready to fade.

With world economic growth set to continue at 4%-5% for some years, given the attempt to narrow the large rich world output gaps and the continuing EM growth dynamics, oil demand is expected to keep growing at 2mbd annually.

In contrast, oil supply seems to be expanding at only 1mbd annually, indicative that the oil balance will keep tightening. There may still plentiful oil in the world today (as variously claimed by Saudi, Exxon and President Obama), but reserve buffers will be eroding, underpinning high oil prices.

The Arab world remains in flux, with as yet no clear indication how far the Arab Spring will progress and how Saudi may be affected. Until much greater clarity prevails, the relatively unstable nature of the region will likely keep demanding oil price premiums regarding supply security.

Coal is a special case. It is benefiting short-term from the high oil price and the Japanese quake disturbance of nuclear space. In addition, world growth of 4%-5% also fuels coal demand, giving an upward bias to prices.

A special factor is Chinese import demand, following major internal changes since 2009 in the Chinese coal industry, turning the country overnight into a major coal importer.

These changes, however, are aimed to get better Chinese production efficiencies, and the world is uncertain whether therefore China has only temporarily become a major coal importer, using global supply to facilitate its domestic restructuring, eventually returning to greater domestic reliance.

This obviously has implication for the likely trajectory of coal prices.

Then also there is India.

It makes longer term coal price prospects uncertain.

Precious metals outlook is murky, meaning a high water mark could be near (after which could follow a long cyclical slide) or there could still be substantial upside potential.

The case for threading cautiously is based on a strong global growth performance of 4%-5%, with rich countries with large output gaps steadily succeeding in witling these down and eventually normalizing their monetary stances without inflation mishaps.

The main actor here is the US. It has now self-sustaining growth, its employment levels are gradually rising (from very low participation levels), deflation risk has become negligible and its core inflation is gradually lifting towards a more acceptable range.

At some point these processes will have progressed enough for the Fed to start dismantling its many emergency policy supports.

Indications are that the Fed will end quantitative easing (QE) after June. Indeed, it may already start to slowly run down its bloated balance sheet by not reinvesting bond runoff.

That change would amount to a minor policy tightening.

Actually increasing interest rates from zero will commence later, but probably not that far out in the future, the betting ranging from an early 2012 to an early 2013 start.

As US monetary policy starts to tighten in response to better growth and resource use, one would expect a change in fortune for the Dollar.

For long the Dollar has been an adjustment facilitator while the Fed was providing maximum emergency support, reaching new record trade-weighted lows only recently.

A change in the Fed policy stance will likely be accompanied by a Dollar bottoming and eventual partial recovery. When it does, one would expect both higher US rates and firmer Dollar to provide headwind to most commodity prices.

Thus getting beyond the growth and inflation scares of recent times in the presence of monetary normalization could be taken as an end to special circumstances boosting precious metal prices.

Recent margin requirement increases for silver were aimed at restraining excessive speculative leverage risk, in the process not only pulling back the silver price from elevated levels but also setting in motion a general commodity price pullback from generally overheated speculative levels.

Such technical changes, however, are not expected to be the main driver of commodity prices beyond the short term. Fundamentals are likely to reassert their influence ere long.

Whereas precious metals still have some upward potential in coming months before the change in Fed policy stance gets underway, and eventual topping out can be expected UNLESS other risk factors maintain the upward bias in precious metal prices.

Here one thinks of debt playouts in Europe, but also in Japan and the US, and the manner in which this could still eventually shape monetary policy in an inflationary sense.

The rich country debt playouts are likely to take many years still, with serious risk of dislocation remaining for some while. This may have direct effects on precious metal prices (enhancing its safe haven status in uncertain risky times) and indirectly via lingering suspicions inflation will be part of debt resolution.

This aside of any other sources of shock not as yet identified.

If the world were to evolve its debt problems in shock-like fashion, even at times pressing monetary policy into service to assist the playout, precious metal prices may still have substantial upward potential this decade before reaching their high water mark.

It remains to be seen which of these realities will eventually play out. European sovereign and banking debt problems appear politically difficult to resolve and may well eventually cause greater Euro strains and fallout.

Its eventual impact on precious metal prices is difficult to predict.

The longer term US debt situation could be resolved relatively easily, except it too harbours major political disagreements regarding the future make-up of American life and the role of the state.

Still, Americans have a reputation of doing the right thing, if only after exhausting all other alternatives (Churchill, and he should know).

The American debt problem may therefore become resolved eventually, if after the 2012 US presidential election, and probably not without some market threatening (along the lines of what played out in 2H2008).

This could also be a “short-term” precious metal booster (and crucially delay or slow the Fed’s exiting and normalization process). But eventually this watershed will come and go and the American Republic fully back in business, with precious metal risk premiums eroding.

Yet another source of shock is the Arab Revolt (and eventually a Chinese Awakening perhaps, too). If oil supply risk premiums were to drastically rise in coming quarters/years, not so much fired by climate change and ‘peaking oil’ but simply by supply disruptions, a still high growth environment could trigger major energy price surges and inflation fallout.

For a while this could boost precious metal prices, until fading away eventually (as many times in the past).

Thus the world is currently facing performance fundamentals (growth, inflation, monetary policy) and structural risks (debt, oil, politics) which are likely to shape various commodity prices differently, depending on their peculiar demand/supply balances.

On this score, agricultural commodities are in a league of their own, though also shaped by some of these forces (global middle class demand growth, natural supply disruptions, monetary support or headwinds, political shocks, energy displacement).

Source: Cees Bruggemans, FNB, May 9, 2011.

Tags: Base Metals, Chief Economist, Chinese Growth, Commodity Space, Economic Fundamentals, Fnb, Froth, GDP Growth, Growth Dynamics, India, Oil Balance, Oil Demand, Oil Price, Oil Supply, Output Gaps, precious metals, Price Premiums, Quo Vadis, Shakeout, Supply Security, Unstable Nature
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Crude Oil To Bust Through on Supply Concerns

Monday, January 10th, 2011

Since the start of the New Year, West Texas Intermediate (WTI) crude oil have been moving with significant bearish sentiment (See Chart) mostly on a lot of profit taking going around in the commodity space, and also on concerns over the high inventory and that supplies would exceed demand. The latest jobs report only further fanned the pessimism.

However, there are two new events that could turn the market around quickly before you can say “what happened?”

Shutdown – Canadian Upgrader

First, there was a fire on Jan. 6 at an oil sands upgrader (that’s where bitumen is converted to synthetic crude oil), which forced Canadian Natural Resources Ltd. to shut production at its 110,000 barrels per day (bpd) Horizon oil sands project.

Canada is the top region where the United States gets its crude oil and petroleum product imports. This 110,000 bpd capacity is almost 6% of the U.S. daily import volume from Canada.

Shutdown – Alaska Pipeline

Then, the Trans Alaska Pipeline, which is owned by BP, ConocoPhilips, Exxon Mobil Corp., Chevron Corp. and Koch Industries Inc., had to shut down on Saturday Jan. 8, after a leak was discovered at Prudhoe Bay. (Talk about how BP just can’t get a break.)

The 800-mile pipeline carries about 15% of U.S. oil production. Oil producers reportedly are in the process of cutting 95% of output, which is normally around 630,000 bpd. So far, there’s no estimate as to how long the shutdown will last.

Worse Than Hurrican Ivan

These two outages could potentially cut the U.S. crude supply by up to 709,000 barrels per day. That’s about 8% of the U.S. crude import, and around 3.6% of U.S. consumption.

To put it in perspective, this 709,000 bpd volume is more than the disruption caused by Hurricane Ivan. When Ivan hit the U.S. Gulf in 2004, it took down about one third of the oil output in the region, which is around 1.6 million bpd.

OPEC Eyeing $110 a Barrel

Last but not least, several OPEC members are increasinly talking about how the Cartel would not act unless crude crosses $110 a barrel.

This new tightened supply picture, couple with OPEC talks will most likely turn crude oil to move on its own momentum. As such, there will be new money coming into the market, more upward pressure, and lots short covering.

Breaking Above $93 on Supply Concerns

From a technical standpoint, there’s a high probability that crude could easily top $91 a barrel as early as Monday, Jan 10, from the current $88.41 price point, before busting through $93 a barrel levels by end of the week on supply concerns. And also look for WTI to outperform Brent during the week.

Disclosure: No Positions
Dian L. Chu, Jan. 9, 2011

Tags: Bearish Sentiment, Canadian Market, Canadian Natural Resources, Canadian Natural Resources Ltd, Chevron Corp, Commodity Space, Crude Supply, Exxon Mobil, Exxon Mobil Corp, Horizon Oil Sands, Hurrican Ivan, Hurricane Ivan, Import Volume, Koch Industries Inc, Mile Pipeline, Oil Producers, Oil Sands, Opec Members, Petroleum Product, Synthetic Crude Oil, Trans Alaska Pipeline, Wti Crude Oil
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