Energy and Natural Resources Market Radar (May 14, 2012)

Sunday, May 13th, 2012

Energy and Natural Resources Market Radar (May 14, 2012)

Strengths

• The S&P 500 Utilities Index posted a gain of 4.6 percent this week, the second-best performing sector, as investors sought lower volatility and higher dividend yields.
• Saudi Arabia is producing approximately 10 million barrels per day and storing 80 million barrels of crude oil to meet any sudden disruption in supplies, the Oil Minister said.
• Coal shipments from the Richards Bay Coal Terminal in South Africa, the world’s single largest export coal terminal, increased 7.6 percent year-over-year to 5.2 million tons in April.
• OPEC said its crude oil production rose to 31.62 million barrels per day in April and the world will consume 88.7 million barrels per day of crude in 2012.

Weaknesses

• Industrial metal stocks fell nearly 6 percent this week on growing concern over European debt issues and weakening economic data out of China.
• Thermal coal demand at Chinese power utilities was down 1.3 percent year-over-year in April and inventories rose to 25 days, representing the highest level in the last 2.5 years.
• Chinese refined copper output was down 3.7 percent month-over-month in April, to 491 thousand tons.

Opportunities

• Refined copper demand in China is forecast to grow at 5.2 percent annually through 2015, while that of aluminum is expected to grow at 8.6 percent annually, according to China Minmetals Nonferrous Metals Holding Corp.
• India’s Ministry of Coal has proposed to set up a sovereign fund to acquire coal assets outside India, as the government is under pressure to boost energy supplies to meet the targeted 76 gigawatt additional capacity over the next five years.

Threats

• The Australian Bureau of Meteorology expects El Niño conditions to returns later this year. El Niño events tend to bring flooding across the Americas and droughts across Asia.
• Peru’s federation of mining unions said on Monday it is planning to start a two-day nationwide strike on May 14, but individual unions have not yet confirmed their participation. Peru is the world’s second-largest copper producer.
• According to the World Steel Association, global steel consumption is expected to fall by 3.6 percent in 2012.

Tags: Australian Bureau Of Meteorology, Bureau Of Meteorology, China Minmetals, Chinese Power, Coal Assets, Coal Demand, Coal Shipments, Copper Output, Crude Oil Production, Debt Issues, Dividend Yields, energy, Energy Supplies, Export Coal, Market Radar, Metal Stocks, Nonferrous Metals, Oil Minister, Power Utilities, Refined Copper, Thermal Coal
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Is Africa as the Next Source of Incremental Demand for Oil?

Wednesday, April 25th, 2012

Tags: Agricultural Development, Consumption Growth, Crude Oil Production, Emerging Asia, Global Oil, Gregor Macdonald, Insensitivity, Leadership Position, Mbpd, Mobile Communications, Myriad Reasons, New Oil, Oecd Countries, Oil Consumption, Oil Demand, Oil Supplies, Q4, Short Trip, Trajectory, World Population
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Energy and Natural Resources Market Radar (April 16, 2012)

Sunday, April 15th, 2012

Energy and Natural Resources Market Radar (April 16, 2012)

Strengths

• China’s monthly steel exports exceeded 5 million tons in March for the first time since July 2010, according to Chinese Customs data. Exports increased to 5.03 million tons in March, up 48.4 percent month-over-month and 2.4 percent year-over-year.
• Supporting our food and agriculture investment theme, grain imports by China advanced to the highest level in at least seven years in March as the world’s most populous nation stepped up overseas purchases to meet rising demand. China imported 1.64 million metric tons of cereals and cereal flour in March, compared with 280,000 tons a year ago, the highest figure since at least January 2005. Imports in the first quarter totaled 3.84 million tons, up six-fold from a year earlier. “Grains imports are on a rising trend because of limited arable land, water and labour, at a time when demand is growing amid increasing incomes and changing diets,” said Li Qiang , managing director and chairman at Shanghai JC Intelligence Co.
• Soybeans have been the star performer among the agricultural complex so far this year, with spot prices up just over 20 percent compared to small price declines in corn and wheat. Part of this divergence reflects downgrades to the South American soybean crop. Further deterioration in China’s increasing import requirements for soybeans has also contributed.
• The International Energy Agency (IEA) reports that OPEC crude oil production increased to 31.43 million barrels per day in March, the highest level in more than three years.
• Summer demand continued to drive spot prices for Asian liquefied natural gas (LNG) higher this week with May delivery contracts rising to over $16.50 per million British thermal units (mmBtu). With the majority of its nuclear capacity still offline, Japan, the world’s largest LNG importer, was expected to continue stocking up on the fuel as it heads into summer. “Prices are over $16 and could be headed to $17 on the assumption that the Japanese will top up,” one market source said.

Weaknesses

• Natural gas futures fell below $2 per mmBtu this week, the lowest price in 10 years as forecasts for mild weather across the eastern U.S. signaled demand may fall even more.
• Overall mining output in South Africa fell 14.5 percent on a year-over-year basis in February as a six-week long strike at Impala Platinum’s Rustenburg mine and the government’s safety-related inspection and work stoppages hit platinum and gold production. Gold and PGMs output dropped 11.5 percent and 47.6 percent year-over-year in February, respectively.
• Aluminum products maker Novelis Inc, which cut its fiscal 2012 earnings estimate because of lower shipments and soft demand, will close its Saguenay Works in Jonquiere, Quebec in August.

Opportunities

• Comments made by the chairman of India’s top iron ore miner indicate a sharp decrease in future exports of iron ore from India. Given increased domestic steel production and government restrictions on both iron ore mining and exports, NMDC’s Narendra Kumar Nanda predicted that India would export only 30-40 million metric tons in the next fiscal year (April 2012 through April 2013). This projection represents a significant drop in exports from the world’s third-largest supplier. India exported 46 million metric tons of iron ore during the first nine months of the 2011-12 fiscal year, down 30 percent from the prior year.
• Investment bank J.P. Morgan filed paperwork to list a copper-backed exchange-traded fund (ETF) with NYSE Euronext. J.P. Morgan Commodity ETF Services filed a proposal to list and trade shares of JPM XF Physical Copper Trust in a filing dated April 2, 2012. The filing is the first sign since mid-2011 that the ETF, a security backed by physical metal, is likely to list. J.P. Morgan first logged a filing for shares of the ETF in October 2010, the same time as a similar filing by Blackrock. These filings against a tight supply backdrop helped fuel a rally in copper prices to record highs above $10,000 a ton in February 2011.
• Russian President-elect Vladimir Putin outlined proposed new rules for development of the country’s vast offshore oil and gas resources, offering some tax breaks for the far-flung projects. Putin offered to cancel export duties on oil and gas from new offshore deposits and proposed to introduce a lower mineral extraction tax for complex hydrocarbon projects in the Arctic. He also pledged that the new rules will be in effect for at least 15 years from the start of industrial output and offered Russian non-state companies access to the offshore oil and gas.
• Reuters cites Vale CEO Murilo Ferreira as stating Chinese demand for iron ore will remain strong. “Those who have been betting against Chinese growth since the 1990s will be wrong again,” Ferreira said. “China is just getting going.” To help meet that demand, Vale expects to invest more than $50 billion to expand iron ore, nickel, copper, fertilizer, coal and other mining output.
• Japan’s zinc demand may increase 7.2 percent to a four-year high this year as the economy recovers from an earthquake and tsunami as the weaker yen helps boost exporters, Nobuyuki Nakamoto, GM at Mitsui Mining & Smelting’s zinc business said. Demand will rise to 537,400 metric tons in 2012, up from 501,200 tons in 2011.
• The IEA estimates effective OPEC spare capacity (which excludes Iraq, Libya, Nigeria and Iran) fell to 2.54 million barrels per day in March. This is down from 2.75 million barrels per day in February, reflecting the removal of Iran from the count. Deutsche Bank commodity analysts think that supply disruptions, not only from Iran but a number of non-OPEC countries, will persist this year due to political disputes and weather disruptions. This means spare capacity levels are likely to remain eroded and below 3 million barrels per day for the rest of this year.

Threats

• Chinese data for March shows that real GDP grew 8.1 percent year-over-year in the first quarter of 2012. However, the moderation from 8.9 percent growth in the previous quarter is consistent with the weak monthly data, especially for January and February, already released.
• The Energy Information Administration (EIA) is expecting electricity generation from coal in the U.S. to decline by about 10 percent in 2012. In contrast, natural gas-fired electricity generation is forecast to increase 18.7 percent on a year-over-year basis.
• Spain’s foreign minister has reportedly sought an urgent meeting with Argentina’s ambassador in Madrid to seek clarity on the Argentine government’s intentions regarding YPF. Persistent rumors have suggested that the current Argentine administration is planning to renationalize the explorer, which is majority owned by Spain’s Repsol.

Tags: American Soybean, Cereal Flour, Chinese Customs, Crude Oil Production, Delivery Contracts, Gas Lng, Grain Imports, Import Requirements, International Energy Agency, Liquefied Natural Gas, Market Radar, Million Metric Tons, Nuclear Capacity, Overseas Purchases, Populous Nation, Price Declines, Qiang, Soybean Crop, Star Performer, Steel Exports
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Energy and Natural Resources Market Radar (January 16, 2012)

Saturday, January 14th, 2012

Energy and Natural Resources Market Radar (January 16, 2012)

Strengths

• Desjardins highlighted that Chinese December base metal import data is showing that unwrought copper imports reached 508.9 thousand metric tons, up 12.6 percent month-over-month and 47.7 percent year-over-year. Iron ore imports of 64.1 million metric tons were down 0.2 percent month-over-month while up 10.3 percent year-over-year.
• The latest SteelBenchmarker assessment by World Steel Dynamics shows a continuation of the upward trend in U.S. steel prices. The U.S. hot-rolled coil (HRC) assessment topped $800 per ton for the first time since July and scrap prices hit $466 per ton of shredded material, the highest level since August 2008.
• Reuters noted that OPEC’s crude oil production was more than 30 million barrels per day in December 2011, the highest volume since October 2008.
• Preliminary shipping data shows that Brazilian shipments were up 5.6 percent year-over-year. Shipments to China exceeded the 200 million tons per annum mark for the first time last year and iron ore exports reached an all-time high run rate in December.

Weaknesses

• The Global Resources Fund (PSPFX) underperformed its benchmark by a small amount over the last week due to being underweight large capitalization basic materials stocks and being overweight U.S. exploration and production stocks with natural gas exposure.
• Natural gas fell 14 percent this week to $2.64 per British thermal unit (Btu), a decade low. Supply growth in North America from rapid oil and gas shale basin development has created a glut of natural gas that will require a combination of increased industrial and power generation demand as well as a reduction in natural gas well drilling to balance the market.
• Deutsche Bank reported that the dry bulk index has fallen sharply in the beginning of 2012 while iron ore prices remain relatively supported. Deutsch Bank believes the decline in shipping rates is a function of slowing demand from Chinese steel production ahead of its New Year and lower shipments from Australia and northern Brazil due to rainy weather. China steel production has declined for six consecutive months. Deutsche Bank expects spot iron ore and freight rates to face ongoing headwinds in the first and second quarters of 2012. However, an end to the rains and an improvement in global growth during the second half of 2012 could lead to subsequent strength.
• China’s import growth fell to a two-year low in December, underscoring a slowdown in the fastest-growing major economy that deepens risks for the global outlook.
• The Central Dispatch Department of the Fuel and Energy Complex said that Russia’s crude oil exports fell by 3.9 percent year-over-year to 212 million tons in 2011.

Opportunities

• BCA research showed that equity multiples now discount a severe global growth slowdown at a time when mining stocks still offer leverage to the bullish China income convergence story. The unfolding recession in Europe and property slowdown in China have crushed mining share prices.
• Macquarie reports that Vale has now declared force majeure on certain iron ore deliveries, accounting for around 20 percent of January output. They emphasized that this now serves to indicate that the seaborne iron ore market will become fundamentally tighter during the quarter, requiring both destocking in China and a reincentivization of Chinese domestic output through higher prices.
• Deutsche Bank noted that oil production in the state of North Dakota climbed 42 percent (year-over-year) in November to 510,000 barrels per day. Success in developing tight oil plays across the country has created a realistic prospect that U.S. net oil imports as much as a percentage of total usage could fall significantly further. The figure has already fallen from 65 percent in 2005 to 47 percent in 2011.
• The U.S. Energy Information Administration (EIA) released its first Short Term Energy Outlook for 2012, in which the agency revised global oil demand downward by 140,000 barrels per day in 2012. This brings the EIA’s annual growth rate in-line with Barclays’ forecast at 1.27 million barrels per day. However, the key feature of the report was the large downgrade to non-OPEC supply for both 2011 and 2012. Non-OPEC supply growth for 2011 was reduced by a massive 310,000 barrels per day to just 90,000 barrels per day.

Threats

• Italy faces a “significant chance” of a downgrade by Fitch Ratings, which is reviewing all European sovereigns and will make a decision by the end of the month.
• Workers in Nigeria began a national strike, threatening to shut ports and disrupt oil production and exports. Workers are striking in reaction to the government’s decision to lift fuel subsidies, more than doubling gasoline prices. The strike makes Nigeria the third OPEC nation with an ongoing supply threat.
• Vale, the world’s largest iron ore exporter, reported that it had to halt some iron ore shipments from Brazil due to heavy rainfall that has killed dozens of people. Due to the rains that have affected its operations in Brazil, the miner estimates it will lose approximately 2 million tons of iron ore shipments, almost 1 percent of its annual output.

Tags: Basic Materials, Basin Development, British Thermal Unit, Crude Oil Production, Deutsch Bank, Exploration And Production, Global Resources, Hot Rolled Coil, Import Data, Iron Ore Exports, Iron Ore Prices, Market Radar, Million Metric Tons, Natural Gas Exposure, Resources Fund, Reuters, Shipping Data, Steel Dynamics, Steel Prices, World Steel Dynamics
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Sprott: Investment Outlook (October/November 2011)

Friday, October 28th, 2011

Oil or Not,
Here They Come

By Kevin Bambrough
Contributing Author: Paul Dimitriadis
Sprott Asset Management

Oil has been markedly absent in the financial headlines lately. While the recent clamor over EU solvency and weak global growth has temporarily displaced its media attention, oil’s crucial importance to the world economy has not dwindled in the slightest. Oil remains the world’s greatest single energy source today, providing over 1/3 of our energy supply. Although it is well understood that the oil price is critical to the global economy, we sometimes neglect to appreciate how tightly oil supply is correlated to global growth. By historical standards, the world has been coping with constrained oil production and high oil prices for most of the past six years. This tightness in oil supply has been a significant factor limiting global growth, and it would appear that no matter what financial solutions are eventually engineered by our politicians, global growth will remain significantly restricted by the real economy’s ability to produce oil. Limited global supply growth means that the Western world now faces significant competition for oil from emerging markets whose citizenry are willing to work much harder for far less. This will continue to result in a narrowing gap of per capita consumption between emerging and developed economies as the emerging economies continue to gain relative economic strength, wage growth, currency appreciation and purchasing power. We believe strategic investments in oil producers and service companies will offer an effective way to profit from this trend.

Production – Where’s the Growth?

We begin with a review of global oil production. We first wrote about Peak Oil back in 2005; and speculated that we were approaching the pinnacle of global crude oil production.1 As Figure 1 below illustrates, since that time, global oil production has grown very little, appreciating by a mere 2% in total production. This production plateau generated the 2008 oil price spike to nearly $150 per barrel. Subsequently, despite the economic stagnation experienced by developed economies, the price of Brent Crude Oil has averaged over $78 per barrel, four times higher than the ~$18 average that Brent traded at in the 1990s.2

Despite this extremely large and sustained increase in price, oil production has failed to grow meaningfully. Over the past ten years, most experts have consistently overestimated future production growth and have continually revised their forecasts lower as a result. Figure 2 from the U.S. Energy Information Administration (“EIA”) below charts production forecasts made in 2000, 2005 and 2010. Over the last decade the EIA has revised its global oil production estimates lower for 2015 and 2020 by 14% and 18%, respectively. In light of these downward revisions, it still seems extremely optimistic that supply will increase significantly in the coming years.

Figure 3 above illustrates that the International Energy Agency (“IEA”) estimates have been just as inaccurate, forcing it to reduce its global oil production estimates year after year.

Tags: Author Paul, Canadian, Canadian Market, Commodities, Crude Oil, Crude Oil Production, Dimitriadis, Economic Strength, Emerging Economies, Energy Supply, Financial Headlines, Global Economy, Global Growth, Global Oil Production, Global Supply, India, Investment Outlook, Oil Producers, Oil Supply, Outlook, Peak Oil, Solvency, Sprott Asset Management, Strategic Investments, Trend Production, World Economy
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Playing Cat and Mouse with Global Oil

Sunday, June 26th, 2011

Playing Cat and Mouse with Global Oil

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Oil markets took another dose of global geopolitics this week when the International Energy Agency (IEA) unexpectedly announced that it would be releasing 60 million barrels of oil from strategic petroleum reserves (SPR) around the globe. Thursday’s surprise announcement gave oil prices a 4.5 percent hair cut and oil prices closed Friday at $91.25, down 20 percent from their April 29 peak.

The IEA, a Paris-based agency comprised of developed countries around the world, said the release would take place in increments of 2 million barrels per day over 30 days beginning July 1, and is intended to make up for lost crude oil production due to the Libya crisis. The IEA estimates that the fall of Ghaddafi’s regime and civil strife that’s followed has cost global crude supplies 123 million barrels of oil.

Sixty-million barrels of oil is a large number but represents only a small amount of the 1.6 billion barrels worth of reserves held in SPRs around the globe that are for “emergency use only,” according to Barclays. The U.S. holds a little more than half of these reserves (56 percent) while Japan (24 percent), Europe (14 percent) and Korea (6 percent) hold the rest.

While the short-term effect of the SPR release manifested quickly, it’s difficult to gauge where the market goes from here. For starters, emergency SPR releases are rare and have only been initiated twice in history (Iraq’s invasion of Kuwait in 1990 and following Hurricanes Katrina & Rita in 2005). Then, the releases covered for a little less than 7 percent of global demand, according to Barclays. The current program would only cover a little greater than 2 percent of global oil demand.

This chart from Barclays shows the immediate downward effect the release has on West Texas Intermediate (WTI) prices, but prices returned to pre-Katrina levels relatively quickly.

It should also be noted that the U.S. only sold about half of its first lot and didn’t even offer a second amount of its reserves during the Katrina SPR release, according to J.P. Morgan.

One cannot ignore the politics in play. Prior to OPEC’s June 8 meeting earlier this month, the IEA called for an OPEC production increase and tipped their hand that they were prepared to tap the SPR. The IEA said “we are prepared to consider using all tools that are at the disposal of IEA member countries,” as reported by Barclays. When the highly contentious OPEC meeting broke without an increase, the IEA was all but forced to act on its threat.

Essentially, the IEA is trying to buy time for Saudi Arabia to increase its production. Saudi oil production has increased in June and that’s expected to continue in July. Despite the increase, Saudi production remains below peak 2008 levels despite global demand reaching new highs.

As long-term investors, we’re less concerned with the game of “cat and mouse” the IEA, OPEC and global politicians are playing with short-term supply and we’re focused on the positive long-term structural supply/demand dynamics. BCA Research forecasts that “further downside is limited” and says that “one-time stock release should have little impact on cyclical or medium-term horizons, as the flow demand for oil from emerging countries keeps steadily growing year after year.”

Barclays argues that the IEA decision to implement the SPR “sends the wrong signal” to the market and will likely result in lower Saudi oil production over the long term, perhaps even by the end of 2011. “The use of SPR, particularly when Saudi Arabia has restated its commitment to supply customers with the crude they need, send the incorrect signal,” says Barclays.

This is partly due to the fact that Saudi oil production doesn’t have much room to grow before it is maxed out. You can see from the chart that Saudi Arabia’s spare capacity is down roughly 25 percent from its peak around this time last year. Forcing additional Saudi production to market means this spare capacity could dry up even further.

Deutsche Bank (DB) says medium-term supply/demand fundamentals signal relatively tight markets going forward, which could easily return prices to $100 per barrel or higher. In fact, DB thinks the temporary drop in oil prices could relieve pressure on emerging market governments to reduce or eliminate fuel subsidies. Eventually, the IEA and consumers around will have to “surrender” to higher oil prices, says DB.

“The ultimate effect of the IEA’s decision may not just be a few months delay in market tightening, it could exacerbate that tightness, given the need for the SPR to be refilled at some stage,” says Barclays.

Broadly speaking, energy stocks were down 1 percent this week but the long-term appeal remains attractive. BCA cautions to not view the announcement as a reason to sell the S&P energy sector, but as a catalyst to remain bullish, especially given current “attractive” valuations.

We think one of the best opportunities in the market is in the oil services sector and we’ve adjusted our Global Resources Fund (PSPFX) portfolio accordingly. We see sustained higher energy prices as the catalyst for producers and the large, integrated oil companies to spend large amounts of capital on additional rigs, facilities and infrastructure.

One way to measure demand for new equipment is to look at the backlog of orders at construction & engineering firms. BCA said in a May 31 report that “backlog growth is still accelerating…while global leading economic indicators have declined and warn of a global soft patch.” As of the beginning of June, the project backlog for C&E companies was up over 20 percent from the year before—the highest rate since late 2007.

Additionally, this group has strong earnings growth potential because they haven’t yet seen their margins expand to match energy’s current price levels. BCA says “this group is likely to demonstrate significant earnings outperformance, especially as margins in the broad corporate sector begin to narrow.” In addition, higher commodity prices will encourage additional production and give these companies pricing power.

BCA has looked back at the previous 30 years of performance for oil service stocks during rising, falling and flat markets. They found that the S&P Energy Equipment & Services Index handily outperformed the S&P 500 Index during market moves upward. Performance dipped significantly when the credit crisis hit but returned when the market started to rise again.

Although we expect volatility to continue, we believe that an active hurricane season, strong seasonal demand or an additional uprising in the Middle East region all have the ability to further constrain supply and keep prices at historically elevated levels. That doesn’t even include some of the reasons we’ve outlined for you in the past—Read: Three Reasons to Believe in $100 Oil.

This and the factors laid out by BCA make a strong investment case for the oil services group.

Many people are also concerned with the recent performance of gold mining equities. I addressed these concerns in last week’s alert and the positive feedback this week from our highly-engaged readers has been fantastic. In case you missed my special message last week (I know we’re right in the middle of summer vacation season), here is a link—Read: Will Gold Equity Investors Strike Gold?

Director of Research John Derrick contributed to this commentary.

Copyright © US Global Investors

Tags: Cat And Mouse, Chief Investment Officer, Civil Strife, Crude Oil, Crude Oil Production, Frank Holmes, Global Demand, Global Geopolitics, Global Oil, Infrastructure, International Energy Agency, Invasion Of Kuwait, Oil Demand, Oil Markets, Oil Prices, Playing Cat And Mouse, Sprs, Strategic Petroleum Reserves, Surprise Announcement, U S Global Investors, West Texas Intermediate, Wti Prices
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Active Hurricane Season May Threaten Offshore Oil

Friday, June 3rd, 2011

by Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

It’s officially hurricane season in the Atlantic, and another year of above-normal activity is expected. If the prediction from several well-known weather forecasters comes to fruition, the potential disruption of offshore oil production may add to already turbulent oil prices.

The National Oceanic and Atmospheric Administration (NOAA) says due to a continuing high activity conditions, warmer water, and La Niña’s wind sheers, this season may produce 12 to 18 named storms, six to 10 of which could become hurricanes. Two or three of these hurricanes may be major. National Hurricane Center seasonal averages are 11 named storms, six hurricanes, and two major hurricanes.

And the more severe the storm, the more oil production is affected. As threatening weather arises, offshore energy companies suspend oil production to protect their facilities and employees. With damage to facilities from major hurricanes, there can be significant disruption to supply, thus causing an increase in oil prices.

Over the past several years, major hurricanes Katrina, Gustav and Ike wiped out substantial offshore natural gas and crude oil production in the Gulf of Mexico. In 2008, Hurricane Gustav, a Category 4 storm, caused 100 percent of Gulf crude oil and 95 percent of natural gas production to be temporarily shut in. Category 4 storms have winds up to 135 miles per hour and can cause a storm surge as high as 18 feet as they near the shoreline.

Hurricane Ike, another Category 4 storm, came through only weeks later. In total, almost 65 million barrels of crude oil and 400 billion cubic feet of natural gas supply were impacted by these two storms.

In contrast, 2009 was quiet, with only minor setbacks from Hurricane Ida affecting 2.5 million barrels of crude oil and 11.4 billion cubic feet of natural gas, according to the Energy Information Administration (EIA). Last year was an above-normal Atlantic season with 19 named storms, but the majority dissipated over the ocean.

These past two seasons have resulted in very little impact on commodities markets, giving investors what the Financial Times calls, “a false sense of security.”

Last year, we wrote about the effect an active hurricane season can have on oil prices (Read: “Extreme” Hurricane Forecast – Energy at Risk). We indicated that the Gulf Coast accounts for one quarter of U.S. oil production, 15 percent of domestic natural gas and 40 percent of the nation’s refining capacity. However, the warm, shallow waters of the Gulf make it a likely cauldron for summer hurricane activity.

With oil prices currently at high levels due to the Middle East unrest and the summer driving season upon us, oil prices could see another leg up if storms disrupt the Gulf’s supply.

Evan Smith, co-manager of the Global Resources Fund (PSPFX), has first-hand knowledge of how dependent these oil and natural gas supplies are on the weather. See the photos he snapped while touring facilities in the Gulf of Mexico.

Photo Slideshow – “Drilling in the Deep Blue Sea”

Tags: Chief Investment Officer, Crude Oil, Crude Oil Production, Energy Information Administration, Frank Holmes, Gulf Of Mexico, Hurricane Gustav, Hurricane Season, Minor Setbacks, National Hurricane Center, National Oceanic And Atmospheric Administration, National Oceanic And Atmospheric Administration Noaa, Offshore Energy Companies, Offshore Natural Gas, Offshore Oil Production, Oil Prices, Oil Production In The Gulf Of Mexico, Seasonal Averages, Storm Surge, U S Global Investors, Weather Forecasters
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The ‘Crude’ Reality of Unrest

Monday, February 28th, 2011

The ‘Crude’ Reality of Unrest

by David Andrews, CFA-Director, Investment Management and Research, Richardson GMP

Investor sentiment turned decidedly more cautious this week with major North American indexes retreating amid the growing pro-democracy movement in the Arab world. Following the mostly peaceful demonstrations in Tunisia and Egypt, the pro-democracy rallies in Libya turned ugly as protesters were met with a stiff and inhumane response from pro-Gaddafi supporters. Mercenaries and Militia were reportedly firing on unarmed crowds amidst the incoherent ramblings of embattled leader, Muammar Gaddafi. Gaddafi went so far to suggest the protesters were being drugged and under the influence of Al Qaeda. The unstable situation saw the price of Brent crude oil surge to 2-1/2 year highs near $120 a barrel.

As a result, Canadian commuters felt the sting at the gasoline pumps this week as prices seemed to increase a few cents a litre each night. Stock market investors also felt the pinch with the TSX slipping below the recently attained 14,000 level. Three consecutive down sessions on the holiday shortened week (Canadian and U.S. exchanges were closed Monday) were followed by a Friday reprieve as Saudi Arabia announced it would increase its crude oil production in an attempt to offset any global supply disruption from Libya. The influential Materials and Financial stocks surged and helped boost the index by 1.25% on the day and back above 14,000. For the week, the TSX lost a little more than half of one percent. The major U.S. indexes fell about 2 percent on the week as investors bet higher oil costs may unseat the early stages of the economic recovery.

Speaking of the economy, there were a few positive signs of things getting better with U.S. consumer confidence at 3 year highs in February despite higher food and fuel costs. U.S. weekly employment data also showed fewer Americans filed for jobless claims suggesting the employment situation is continuing the slow process of healing. If employment and confidence are a silver lining, housing continues to be the dark cloud. January new home sales were again below already depressed expectations. In Canada, retail sales in December fell but most of that was due to the auto sector. Ex autos, retail sales were up 0.6% which was expected.

IS Gold Set To Rally?

Despite the fact that Gold is trading near its record high, some suggest that Bullion will outperform Oil as surging inflation will underscore the metal’s role as an investment hedge. The chart to the left shows the price of both Gold and Oil since 2008. The chart below is the ratio of Gold to Oil, or how many barrels an ounce of gold will buy. At its peak in late 2008, an ounce of gold bought you about 28 barrels of crude oil. Currently, oneounce buys about 15 barrels. Notwithstanding OPEC’s spare production capacity, energy markets have priced in a considerable risk premium. If tensions ease and or production comes on stream, oil prices could drop rather quickly. Gold has fallen 1.6% this year following a 30% rally in 2010. Crude is up about 5% this year following last year’s 15% rise.

The Trading Week Ahead

Canadian stock market investors are expecting the rest of the Big Banks will be able to follow the solid start to bank earnings season set by CIBC and National Bank. Following a softer second half of 2010, the banks are poised to benefit from better market conditions for their retail and wholesale lending businesses. Investors looking for dividend increases will have to wait on National and Commerce but they may not have to wait on the others. Bank of Montreal reports Tuesday and is followed by TD and Royal on Thursday. (Scotia reports March 8th).

U.S. reporting season has concluded with another upbeat quarter and substantial positive earnings surprises. The biggest positive surprises were in the Materials sector where elevated commodity prices boosted the bottom line. Consumer goods, specifically Automobiles, provided the biggest earnings disappointment in the fourth quarter on the S&P500.

The economic calendar will likely continue with the theme of improving consumer and business confidence but scant signs of improvement in the U.S. housing market. Pending homes sales in January are expected to once again come in lower. The February employment report is released on Friday. For the past three months we have overlooked disappointing results and explained them away by bad weather. We did not have weather issues of significance this month so the non farm payrolls on Friday could be significant.

Commodities prices, specifically oil & gold, will be influenced by the evolving and volatile demonstrations in the Middle East and North Africa. Risk premiums for both oil and gold remain rather elevated helping to push the loonie higher. Watch for no move in policy by the Bank of Canada on Tuesday, but the wording of the statement will be scrutinized for signs of their next move likely around mid 2011.

Copyright (c) Richardson GMP

Tags: Brent Crude Oil, Canadian Market, CIBC, Commodities, Consumer Confidence, Crude Oil Production, Democracy Movement, Employment Data, Employment Situation, energy, financial stocks, Food And Fuel, Gasoline Pumps, Global Supply, Gold, Incoherent Ramblings, Investor Sentiment, Jobless Claims, Muammar Gaddafi, oil, Oil Costs, Peaceful Demonstrations, Positive Signs, Silver, Stock Market Investors, Supply Disruption, Unstable Situation
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Energy and Natural Resources Market Diary (4/10/2010)

Saturday, April 10th, 2010

Energy and Natural Resources Market

Strengths

• Russian crude oil production continued to see growth in March, continuing the trend since March 2009. In March 2010 crude oil output rose to 10,082 million barrels per day, up 3.3 percent year-on-year and up 0.4 percent month-on-month.
• Further evidence of an Organisation for Economic Co-operations and Development (OECD) recovery in the steel sector has come from Salzgitter, which plans to restart its 0.65 million tonnes per annum blast furnace C at its Flachstahl works in mid-2010, according to Steel Business Briefing, taking the plant back to full capacity. In addition, AMM reported that ArcelorMittal USA will restart the 1.4 million tonnes per annum #4 blast furnace at its Indiana Harbour facility this week.
• Hyundai Steel Co., South Korea’s second-biggest steelmaker, plans to build a third blast furnace to meet accelerating demand from builders and automobile makers. The 4 million metric ton capacity expansion, which will lift total capacity 21 percent, comes as its second furnace of the same size nears completion, more than a month ahead of schedule, Hyundai Steel said. The third facility will bring total capacity to 23.5 million tons, it said.

Weaknesses

• Per Deutsche Bank, Saudi Arabia has reportedly told a major term buyer that it will receive full nominated volumes next month after a 10 percent cut on nominated volumes in April. Some traders are interpreting this as a signal the Saudi are now prepared to “talk the market down” from recent highs.

Opportunities

• Rio Tinto’s head of copper, Andrew Harding, said that he expects to see a “meaningful” deficit in the global supply of copper next year after a balanced market this year. Even if near term demand from China and India doesn’t meet expectations, he doesn’t believe that global supply can meet demand and thinks that China may have to draw down strategic reserves. Mr. Harding also indicated that although copper prices have more than doubled over the past 15 months, he has not seen any signs of the copper supply chain improving.
• State oil giant Saudi Aramco will drill at least 300 development wells on- and offshore this year, as well as 48 exploration probes, an executive said. Aramco will maintain the level of rigs it is now operating at 96, of which 17 are for exploration and the rest for development wells, Hussain said.
• Small Chinese steel mills with steel blast furnaces less than 400 cubic meters in size are being told by the central government to shut down production by the end of next year. The State Council, China’s cabinet, published a document on Tuesday, saying all steel blast furnaces in this size class will be closed to rein in overcapacity and force upgrades in the industry.
• Bloomberg reported that “the U.S., the world’s largest corn exporter, plans to double overseas sales of a by-product from ethanol distillation in the next five years as demand from animal feed makers in China expands,” according to an industry group. Total U.S. exports of dried distillers’ grains with solubles, or DDGS, a high-nutrient feed used in the livestock industry, may jump to as much as 11 million metric tons a year, from 5 million tons now, U.S. Grains Council President Thomas Dorr said in an interview in Tokyo yesterday.

Threats

• According to Metal Bulletin, Chinese demand for copper from cable and wire producers will fall by 10 percent this year on reduced investment in the state power grid and construction industries.
• Australian Treasurer Wayne Swan may impose a national tax on mining companies like BHP Billiton and Rio Tinto Group to help care for an ageing population estimated to reach 36 million by 2050 from 22 million this year. Swan could release Treasury Secretary Ken Henry’s 10-year plan for a simpler and more efficient tax system within days. It may include a national tax on miners, replacing a web of state levies, to help pay for new hospitals, roads and schools in a country where a quarter of the population will be older than 65 by 2050, Treasury forecasts say.

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