The Macro Story as Told by Gold, Copper and Oil

Wednesday, May 22nd, 2013

By EconMatters

Gold’s been on a wild ride. After reaching a peak of $1,920 an ounce in September 2011, gold has tumbled 28% to the current ~$1,380 level forcing John Paulson to take a 47% loss in his gold fund during the first four months of this year, according to Bloomberg.

Unlike Paulson who maintained his positions in gold, other big players like George Soros and BlackRock cut their gold ETF holdings, while Goldman Sachs issued a sell recommendation on gold right before the yellow metal plunged 13% through April 15, the biggest drop in three decades. And by looking at the futures curve (chart below), market does not seem to expect gold to come back roaring any time soon.

Chart Source: S&P Capital IQ

QEs Not Hitting the Real Economy

Historically, gold is regarded as a good inflation hedge and store of value, typically thriving in an environment of high inflation, and/or weak U.S. dollar (currency debasement). With U.S. Federal Reserve’s three rounds of QE, the never-ending debt crisis in the Eurozone, hyperinflation and dollar debasement seem inevitable and supportive of gold for the long run, right?

Theoretically, Fed’s QE and near zero fed funds rate is supposed to encourage borrowing and spending from the private sector thus injecting money into the real economy. However, theory and reality don’t always see eye to eye.

Since the 2008 financial crisis, banks have significantly tightened the credit standard and are reluctant to lend. On the other hand, corporations are making money mostly from “streamlined” headcount and structure, but instead of the intended wealth distribution effect expected by the Fed such as investing back to the economy, or increase employee pay which would in turn increase consumer spending, most corporations are hoarding cash or use profits for dividend, share buybacks, or mergers & acquisitions with limited impact on the real economy.

Copper & Oil Indicating Weak Demand

The weak demand is also reflected in part of the commodity market fundamental. WTI crude oil inventory climbed to 82-year high and copper inventory at LME hit a 10-year high in April, while Goldman Sachs cut its “near-term” outlook for commodities.

Although some have argued oil and copper have lost their significance primarily due to increasing domestic oil production, and“temporary” excess copper supply. While the abundance of domestic shale oil production may have distorted the historical supply and demand relationship, but with the U.S. becoming the world’s largest fuel exporter, the fast and furious oil inventory build is nevertheless still an indication of a weak world economy. And I can’t imagine how the “temporary” buildup of copper inventory is not a sign of weak global economic condition?

Further Reading – Oil Market Manipulation Reaches Absurd Levels

Massive QEs, Limited Inflation?

On top of the overall weak spending and demand in the private sector, most of the developed countries are undergoing some shape or form of austerity with reduced government spending. China, the growth engine of the world, is having some problems of its own. The old-fashioned massive infrastructure building QE program got China through the 2008 financial crisis, and was the main driver behind commodity prices. But Beijing can’t afford another QE due to inflation concern (plus China has probably run out of things to build). Low wage levels means China consumers can’t really pick up the spending slack, coupled with bad credit problem (i.e., NPL: Non-Performing Loans), andrecent capital flight, which had many analysts worried enough to downgrade China’s growth prospect.

The simultaneous pullback from both the private and government sectors in U.S. Europe, and China is a major factor why Fed’s massive QEs have resulted in only limited inflationary pressure and increasing signs of deflation.

Dollar and Carry Trade Kills Gold

Nonetheless, when compared with Europe, China or any other regions in the world, the U.S., seems relatively more stable, and has been able to retain the “safe haven” status despite its own debt problem. With investors pouring money into U.S. equity and bond propping up the dollar, and weak demand suppressing inflation, two of the main conditions for a strong gold price — high inflation and a weak US dollar — are basically non-existent in the current macro environment. Furthermore, there was already a bit of disconnect between gold and the other commodity prices such as copper, and oil. So eventually, gold had to come to grip with the macro reality.

Chart Source: Stockcharts.com

Another major factor against gold right now is that gold has no yield and is out of favor with the huge yield-seeking yen carry trade crowd (borrowing yen to invest in higher yield options) since bond and equity now are offering much better returns. Unless there’s a shock to the system such as a war breaking out in the Middle East, or an eventual debt crisis in Japan when people start seeking safety, there’s not much upside momentum for gold.

Gold’s Volatility Game

For now, the prevalent view is that the Fed will slow or exit QE3, and gold is out of favor under the the current macro trend. For example, Lim Chow Kiat, the chief investment officer of the Government of Singapore Investment Corp (GIC), thinks gold still looks overpriced as the usage of gold for industrial or consumer products doesn’t quite justify the prices. GIC is one of the world’s largest sovereign wealth funds.

As long as dollar maintain its strength and inflation remains tame, gold prices most likely will see considerable volatility swinging between rumors and speculation (e.g., some central banks may need to unload some of their holdings due to debt crisis), and Asia retail buying on the dip (South China Morning Post reported that many shops in Hong Kong were running out of the precious metal for the first time in decades.)

Technically speaking, gold’s next support level should be $1,330 range with $1,320 as the major support when most physical retail buyers would rush in. If gold breaks below $1,300 hard, expect a major liquidation when even Paulson could be forced to sell and everybody piles in.

©EconMatters All Rights Reserved

Tags: Commodities, Copper, energy, Gold, Oil and Gas
Posted in Markets | Comments Off

Energy and Natural Resources Market Radar (May 21, 2013)

Tuesday, May 21st, 2013

Energy and Natural Resources Market Radar (May 21, 2013)

click to enlarge

Strengths

• South Korea’s liquid natural gas (LNG) imports grew 29 percent year-over-year to 3.51 million metric tons in April as domestic demand increased according to the Korea Customs Service.
• China’s refined copper output rose 14 percent from the prior year in April to 558,000 metric tons, according to NBS. As a result, output of refined copper for the first 4 months totaled 2.1 million metric tons, up 11 percent year-over-year.
• U.S. steel output remains at a 9-month high of 1.9 million tons for the week ending May 11, with higher output in Great Lakes offset by lower Southern region volume. As a result, quarter-to-date output is 11.2 million short tons, plus 4 percent from the prior period.

Weaknesses

• China’s crude processing decreased to 9.36 million barrels a day in April, the lowest level in eight months. That is the lowest since August and 8 percent below December’s record, according to data published today on the website of the Beijing-based National Bureau of Statistics.
• Industrial metals were under renewed pressure yesterday amid fears that Beijing may introduce more stringent policy on the property market. According to local media, real estate developers will need to obtain government approval for pre-sale of homes. This could limit new project growth and associated metals demand as pre-sale has been a key source of funding for properly developers.
• Further data points to a slowdown in China’s economy as year-to-date electricity growth remained low at 3.8 percent from the prior year and urban income growth slowed to 6.7 percent year-over-year, indicating a lack of momentum for industrial activity and consumption despite a further acceleration of credit growth and money supply.

Opportunities

• Africa’s oil demand will climb at a faster pace than most of the world in the next five years because of rising transport and power-generation needs, the International Energy Agency said. Gasoline and gasoil consumption are each forecast to rise 4.5 percent a year, while the use of jet fuel or kerosene will advance 3.9 percent. The gains will boost Africa’s oil use by 4 percent a year from 2012 to 2018 compared with an average of 1.2 percent growth globally.
• The Times of India reports that “China, the world’s largest rice consumer, is expected to become the largest rice importer this year, according to a new report. China’s rice imports this year will surge to three million metric tonnes from 2.34 million tonnes a year ago, according to a U.S. Department of Agriculture report. If the forecast holds true, it would represent a sharp increase as the country’s rice imports hovered around 450,000 tonnes per year over the five-year period that ended in 2011, official data showed. It would also make China outstrip Nigeria to become the world’s largest rice importer.
• China will probably commission additional storage sites for its strategic petroleum reserve this year, boosting crude demand even as construction work on the program takes longer than expected, according to the International Energy Agency (IEA). The nation, the world’s second-biggest crude consumer, will add 245 million barrels of capacity in the second phase of its emergency stockpile plan, the Paris-based IEA said in its Medium-Term Oil Market Report released this week. This is up 45 percent from the IEA’s original estimate of 169 million barrels.

Threats

• Credit Suisse issued a report that said gold will trade at $1,100 an ounce in a year and below $1,000 in five years, implying lower than expected inflation expectations and further weak sentiment for the commodity sector overall.

Tags: energy, Natural Resources
Posted in Energy & Natural Resources, Markets | Comments Off

Energy and Natural Resources Market Radar (May 11, 2013)

Monday, May 13th, 2013

Energy and Natural Resources Market Radar (May 11, 2013)

click to enlarge

Strengths

• China consumed a total of 320.54 tons of gold in the first quarter, surging 25.6 percent year-over-year, according to a report released by the China Gold Association Tuesday. In the first quarter, China produced 89.91 tons of gold – an 11.26 percent increase over the same period last year, according to the association. “The big increase shows that Chinese consumers have strong demand for gold products,” Zhang Bingnan, secretary-general of the China Gold Association, told the Global Times Tuesday.
• Recent data showed the strongest monthly US. coal exports since 1973, rising 58 percent in March (24 percent year-over-year) helped by higher shipments to Asia and Europe.

Weaknesses

• Commodity-based exchange traded products (ETPs) suffered record outflows of $9.3 billion in April, data showed on Thursday, as institutional investors dumped gold holdings. Leading wealth managers have been switching out of commodities since the start of the year in favor of equities and bonds as they look for yield, a trend which accelerated in April with a major sell-off across the commodities field, led by a collapse in the gold price.
• Chinese steel giant Baoshan Iron & Steel Co has cut product prices for the first time in nine months because of domestic oversupply. The company cut rates of hot-rolled products for June delivery by 180 yuan a ton and of cold-rolled products by 150 yuan. Baosteel had officially kept May prices flat after raising them for five consecutive months, but traders said the mill has been offering discounts for May bookings. Last time Shanghai-based Baoshan cut prices was on August 10, 2012, for September delivery.
• Copper imports by China declined to the lowest level in 22 months in April, raising concern that demand is waning from the biggest user. Inbound shipments of the refined metal, alloy and products were 295,799 metric tons last month, the General Administration of Customs said on its website today. That was the lowest since June 2011, down 7.4 percent from March and 21 percent lower than a year earlier, according to data compiled by Bloomberg. A drop in arrivals may help bring down local stockpiles as both official and private surveys showed China’s manufacturing expanded at a weaker pace in April.

Opportunities

• Mining assets apparently are depressed enough to attract private equity buyers.  The Wall Street Journal reported that Carlyle has bid for a Rio Tinto copper mine in Australia. The initial bid is for a majority stake in the Northparkes mine in New South Wales, WSJ said, citing an unidentified person with knowledge of the matter. The bid price was not revealed according to the report. Rio holds an 80 percent stake in the copper and gold mine and the remaining 20 percent is held by Sumitomo Group.
• Is sub-Saharan Africa, in agriculture, the Brazil of the 1970s?  Savills, the property consultancy, believes so – although acknowledging that acquiring land in the Dark Continent is “not for the faint-hearted.” “The African model is likely to show a similar, although accelerated, pattern to agricultural investment opportunities in Brazil,” the group said. “Forty years ago, Brazil had limited agriculture potential with poor infrastructure and a weak economy. However, investment in infrastructure, the availability of credit facilities and policy reform to consolidate land has turned around Brazil into a global hub of commercial agriculture”. The company highlighted “significant growth corridors” developing in southern and eastern Africa “that not only unlock the potential for export for investors, but also significantly strengthen local and regional markets.” These include swathes from Beira in Mozambique to Zambia and from Dar es Salaam in Tanzania to the Congo.
• Merger and acquisition opportunities continue in the oilfield equipment industry as Bloomberg reported that Dresser-Rand could be a takeover target for buyers such as Siemens AG, National Oilwell Varco and Cameron International Corp.

Threats

• Iron Ore supply growth to top demand, lowering prices, BHP says. Supply growth over the long term will outpace demand growth, Alan Chirgwin, GM of iron ore marketing, told a conference in Singapore. New supply will displace high-cost production, mainly from China, and result in lower prices and recent price volatility was a result of China’s inventory cycle after aggressive destocking in 2012. While the view on China is unchanged, rebalancing of the Chinese economy suggests resource intensity will consolidate at about half of GDP growth, Chirgwin said. China’s demand growth rate for many of company’s core products is expected to remain in the 2- to 4-percent per year range, he said at a gathering in Singapore.

Tags: energy, Natural Resources
Posted in Markets | Comments Off

Beyond Gold: 4 Reasons to Think Energy

Friday, May 3rd, 2013

by Russ Koesterich, Chief Investment Strategist, Blackrock Investments / iShares

While the selloff in gold has dominated headlines lately, another commodity – oil – has also experienced price declines in recent months.

The main US benchmark for crude prices is down roughly 5% from a February peak. But despite this drop, here are four reasons why I’m still a fan of energy stocks.

The Outlook for Oil Prices: While the price of oil has slid in recent months, it’s starting to inch higher and is currently up significantly from its April low of $85 a barrel. Looking forward, given that expected growth in oil demand is in line with likely new production, I expect oil prices to remain in a stable range between the high $80s and the mid $90s absent a Middle East supply shock, which would arguably drive prices higher.

Cheap Valuations: Though range bound oil may not be that exciting, it may be enough to support an energy sector that has dramatically underperformed the broader market so far this month. US energy companies are now trading at a 20% discount to the broader market and at just 12.5x trailing earnings, the lowest valuation of any sector.

High Dividend Yields: The large integrated oil companies are now offering dividend yields of around 3%, likely welcome news to yield hungry investors.

A Potential Hedge Against Inflation: The energy sector, at least historically, has had a positive correlation with inflation. In other words, energy stock prices have actually gone up as inflation has risen. This means that, though I don’t expect inflation to be a worry until at least next year, energy stocks can potentially provide some purchasing power protection over the long term, albeit with more volatility than traditional inflation hedges.

In short, with oil prices likely to remain relatively stable going forward, the energy sector has become an interesting value play, especially considering energy companies’ attractive yields and correlation with inflation. One way to access the sector is through the iShares S&P Global Energy Sector Fund (IXC).

The author is long IXC

Source: Bloomberg

Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog.  You can find more of his posts here.

Past performance does not guarantee future results.

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.  Narrowly focused investments typically exhibit higher volatility.  The energy sector is cyclical and highly dependent on commodities prices. Companies in this sector may face civil liability from accidents and a risk of loss from terrorism and natural disasters.

Copyright © Blackrock Investments / iShares

Tags: energy, Gold
Posted in Markets | Comments Off

Energy and Natural Resources Radar (April 29, 2013)

Monday, April 29th, 2013

Energy and Natural Resources Market Radar (April 29, 2013)

click to enlarge

Strengths

• Crude oil prices reversed a three week down trend and gained over 5 percent week-on-week on bullish U.S. inventory data.
• World industrial production, a key driver of commodity prices, rose by 0.5 percent month-on-month in February, according to data released on Thursday by research firm CPB. This was the fastest pace of expansion since the same month of 2012, with growth in all regions except Latin America.
• China imported 32.17 million tons of iron ore from Australia in March, up 12 percent year-on-year and up 27.5 percent from February, according to data released by the General Administration of Customs. Australia remained the top supplier of iron ore to China, accounting for 50 percent of total imports in March, compared with 45 percent in February.
• Central banks bought the most gold since 1964 last year just before the collapse in prices into a bear market underscored investors’ weakening faith in the world’s traditional store of value. Nations from Colombia to Greece to South Africa bought gold as prices rose for an 11th year in 2011, highlighting the reversal of a three-decade-long bout of selling that diminished the world’s biggest bullion hoard by 19 percent. The World Gold Council says they added 534.6 metric tons to reserves in 2012, the most in almost a half century, and expects purchases of 450 to 550 tons this year, valued now at as much as $25.3 billion.

Weaknesses

• Natural gas fell 6 percent from a 52-week high last week to settle at $4.15 per mmbtu as milder weather cut demand.
• Base metal prices came under pressure earlier this week as weaker than expected PMI GDP releases weighed on sentiment.

Opportunities

• Diesel prices are surging in the U.S. Midwest as farmers prepare to plant a record amount of crops this season, eating into below-average fuel supplies. Farmers may sow 174.4 million acres of corn and soybeans this year, boosting output by 30 percent, the Agriculture Department forecast. Midwest prices are at the highest seasonal premium to the Gulf Coast since 2007. The Energy Information Administration estimated agricultural distillate fuel use will rise 5.1 percent in 2013 to the most since 2010. Demand for fuel to run tractors and combines is growing as the U.S. attempts to recover from last year’s drought, the worst since the 1930s. At the same time, refinery maintenance may limit local production, pushing prices higher to entice suppliers to ship diesel north by pipeline from the Gulf Coast rather than send it abroad.
• South Africa needs to lure almost 100 billion rand ($11 billion) of investment in new coal mines to meet demand from electricity generators and prevent a repeat of 2008’s blackouts, the nation’s largest power producer said. Eskom Holdings SOC Ltd., supplier of 95 percent of South African power, sees an annual shortfall of as much as 40 million metric tons from 2018 after securing 80 percent of requirements for the next five years, it said in a presentation to lawmakers. “There is enough coal,” Eskom Chief Executive Officer Brian Dames told lawmakers today in Cape Town. Still, “it’s very important that we see new investment happening.”

Threats

• Caterpillar cut its 2013 forecast and lowered “significantly” its outlook for demand from commodities producers, Bloomberg reported. “We remain very positive on the mining industry for the long-term but it’s clear 2013 is going be a challenge for our mining business,” CFO Brad Halverson said in a video on the company’s website. The lower 2013 outlook reflects a sales decline of about 50 percent from last year for traditional Caterpillar machines used in mining and a drop of about 15 percent for sales of machines from the Bucyrus acquisition, Oberhelman said in the statement.
• The Financial Times reported that the cost of Japanese energy imports is spiraling higher as the yen weakens, prompting warnings about the consequences of Japan’s war on deflation. Japan relies on imports of crude oil, coal and liquefied natural gas for almost all of its energy needs, a dependency that has become particularly acute since the 2011 Fukushima disaster, which led to the closure of most of its nuclear power plants. With Japanese industry struggling to compete with U.S. rivals that have access to cheap shale gas, the government is looking for ways to secure affordable energy supplies. But Mr. Abe’s unorthodox economic policy, which has resulted in steep falls in the value of the yen, is instead raising the cost of imports. “The increase in energy prices is like a body blow to the economy. You don’t feel the pain until some time later, but then it hurts a great deal,” said Bob Takai, general manager for energy at Sumitomo, one of Japan’s largest commodity trading houses.

Tags: energy, Natural Resources
Posted in Markets | Comments Off

Reasons for Recent Rally in Natural Gas

Wednesday, April 24th, 2013

by SoberLook.com

The recent outperformance of US natural gas over crude oil has been quite spectacular – some 25% just since the beginning of March-2013.

Source: Ycharts

As usual, we want to understand the fundamentals behind this divergence. Natural gas of course is primarily used for power generation and heating in the US, while crude oil demand is driven by other, more global factors. We’ve discussed the recent weakness in crude oil earlier (see post). The strength in natural gas on the other hand has been impacted by two key developments.

1. The warm winter of 2011-2012 caused a large build in inventories, which ended up weakening natural gas prices. In areas like the Northeast however (and some other regions that rely on natural gas for heating), the warm weather pattern has been reversed this past winter.

Source: Rutgers University

2. Faced with a glut of gas in storage and protracted price weakness, energy firms such as Chesapeake Energy have curtailed production – as can be seen in the recent trend of rig count.

Source: Baker Hughes

That has led to declining amounts of gas in storage, which has reached levels that are more consistent with historical averages …

Source: EIA (blue = latest gas in storage for lower 48 states)

… and pushed natural gas prices comfortably above $4/mmBtu.

Source: Barchart

These higher prices will now halt and possibly reverse the declines in gas rig count and spur more activity in natural gas production. It may take some time to get to a balanced state, given the rapid changes in the US gas industry (see discussion). The oil-gas relative divergence however has likely played out its course for now.

Copyright © SoberLook.com

Tags: energy, Natural Gas, oil
Posted in Markets | Comments Off

Energy and Natural Resources Market Radar (April 22, 2013)

Monday, April 22nd, 2013

Energy and Natural Resources Market Radar (April 22, 2013)

click to enlarge

Strengths

• The price of natural gas climbed 4 percent this week, to another 52-week high of $4.40 per Mmbtu, on a less-than-expected storage injection following cold weather last week.
• Japan’s liquid natural gas (LNG) imports rose 4.4 percent year-over-year to 86.87 million metric tons in the fiscal year ended March, the highest level since the government started collecting data in 1981. By value, LNG imports rose 14.9 percent year-over-year to a record 6.2 trillion yen ($63 billion) which in turn helped to push the country’s trade deficit to an all-time high of 8.2 trillion yen.

Weaknesses

• Copper reached the lowest level in almost 18 months in London, heading for a bear market, amid concern that slowing growth from China to the U.S. will curb demand for industrial metals. Copper for delivery in three months slumped as much as 4 percent to $6,800 a metric ton on the London Metal Exchange, the lowest since October 20, 2011, and the first time since that month that prices fell below $7,000. A close at the current level would be 20 percent below the February 2012 peak, deemed a bear market by many investors.
• Brent oil has fallen below $100 for the first time since last July and WTI crude has hit its lowest point in four months due to speculation that that U.S. supplies rose.

Opportunities

• Brent oil prices have been weak recently but analysts at Deutsche Bank believe that physical oil demand will ramp up and spur a recovery in oil prices in the months ahead.  Asia is undergoing an extraordinarily heavy refinery maintenance period, which they estimate should peak in April and ease sharply in June.  This could mean up to 2 million barrels per day of capacity restarting which implies a significant pick up in feedstock demand.  China’s crude oil demand is also set to increase not only post turnarounds but for restocking purposes following five straight months of draws that have left inventories at the lowest level since March 2012.
• The coal division head of Indonesian state-owned utility PLN said that “Domestic consumption was only 18 percent of the total 2012 output as the rest was exported. But the domestic need for coal will surge in the coming years and we may have to import coal to meet the demand.” He cited research that with only 3 percent of global reserves, Indonesia was the world’s largest exporter. In 2012, Indonesia consumed 67 million tons of coal and exported 305 million tons, but by 2020, the domestic needs are expected to climb to 125.7 million tons according to the Jakarta Post.

Threats

• The Democratic Republic of Congo banned exports of copper and cobalt concentrates to force mining companies to add value to minerals before shipping them, Mines Minster Martin Kabwelulu said. Companies have 90 days to clear their inventories of concentrated minerals, he said. “We want companies to export mineral products with great added value,” Kabwelulu said. A separate letter dated April 12, attached to the decree and signed by Kabwelulu, says that companies can still export concentrated minerals for further processing if they receive permission from the mines minister, count the final metal content as coming from Congo, and pay the related taxes and fees to the Treasury.
• China’s GDP rose 7.7 percent year-over-year, the National Bureau of Statistics said. That number missed the consensus estimate of 8 percent and was below the 7.9 percent growth in the fourth quarter 2012. March industrial production gained less than estimated while retail sales growth matched forecasts. China’s industrial output in March rose 8.9 percent, the report showed. That compares with the consensus estimate of 10.1 percent and a 9.9 percent pace in the first two months combined. Retail sales grew 12.6 percent, matching the consensus forecast. Fixed-asset investment excluding rural households in the first quarter increased 20.9 percent, against the consensus estimate of 21.3 percent and a 21.2 percent pace in the first two months.

Tags: energy, Natural Resources
Posted in Markets | Comments Off

Energy and Natural Resources (April 15, 2013)

Sunday, April 14th, 2013

Energy and Natural Resources Market Radar (April 15, 2013)

click to enlarge

Strengths

• Natural gas futures (NYMEX) closed the week at another 52-week high of 4.23 per mmbtu.
• Imports of liquefied natural gas by Japan’s 10 major power utilities in the fiscal year ended March rose to 58.3 million tons from 55.5 million tons in the prior year, the Federation of Electric Power Companies said.
• Chinese car sales continue to boom, rising 15 percent year-over-year in March to 1.46 million vehicles, according to data released by the Chinese Passenger Car Association (CPCA). Over the first quarter they totaled 4.2 million, 19 percent higher year-over-year. This is potentially good news for palladium, as nearly one-sixth of total demand was from Chinese autos in 2012.

Weaknesses

• Bloomberg reported that coal miner Xstrata will sell thermal coal to Tohoku Electric Power at $95 per ton, the lowest settlement price since 2009.
• Three high-profile benchmark forecasters have lowered their global oil demand growth forecasts reflecting a more bearish tone to the outlook for this year. The U.S. Energy Department and the Energy Information Administration trimmed their 2013 growth forecast by 50 thousand barrels per day and now see oil demand growth at 960 thousand barrels per day this year. OPEC cut its 2013 forecast by 40 thousand barrels per day and now expects global oil demand to rise by just 800 thousand barrels per day this year. The International Energy Association cut its estimate by 45,000 barrels a day, predicting that world consumption will increase by a “subdued” 795,000 barrels a day, or 0.9 percent, to 90.58 million barrels a day this year.

Opportunities

• The Potential Gas Committee released its annual report this week and suggested that potential U.S. natural gas reserves are 2,354 trillion cubic feet (TCF) up by 486 TCF from last year. This is additional to the proven reserves of 305 TCF. The increase is attributed to a reassessment of the potential of the Marcellus and Utica shale plays. This group is funded in part by the exploration and production companies and the Wall Street Journal suggests that this new study will help lawmakers with decisions on U.S. gas exports.
• The high cost of energy in Chile is threatening the competitiveness of the country’s copper industry and poses a major challenge for new development, industry executives at a copper convention in the Andean nation said this week. Electricity costs in Chile, the world’s top copper producer, have risen 11 percent per year since 2000, making it one of the most expensive places in the world to secure energy for mining projects. With regulatory gaps making it difficult to permit new power infrastructure, the situation could get critical, according to Diego Hernandez, chief executive of Antofagasta Plc. “I think Chile can continue to have a huge advantage in mining,” he said. “We have the deposits, but if we don’t solve, among other things, the fundamental issue of making energy happen at a competitive price, it’s not going to succeed.”

Threats

• BHP Billiton Ltd., the world’s biggest mining company, said Australia’s mining industry needs a new plan as the sector battles costs that are rising faster than its global competitors. “When we talk about capturing the next generation of opportunities in the resources industry, we need a new plan – a plan with national productivity at its core,” Jac Nasser, chairman of the Melbourne-based company, said today in notes for a speech to the Australian British Chamber of Commerce. “The industry has experienced unprecedented growth. At the same time Australia’s costs rose more quickly than our global competitors.” BHP paid $9 billion in taxes and royalties in Australia last year, out of a global total of $11 billion, Nasser said. The company had 52 percent of its long-term assets located in Australia as of the year ended June 30, 2012. “This is an effective tax rate in Australia of 45 percent,” he said.
• Inventories of steel products in China hit a record high in March, the Ministry of Industry and Information Technology (MIIT) revealed, in further bad news for the nation’s steel sector, which has been hit hard amid the economic showdown. The total stockpiles of five major steel products across 22 cities reached a new record of 15.57 million tons during March, up 22.9 percent compared to a month earlier, the ministry said in a statement on its website, citing the latest figures from the China Iron and Steel Association (CISA).

Tags: commdities, energy, Natural Resources
Posted in Markets | Comments Off

Energy and Natural Resources Market Radar (April 8, 2013)

Monday, April 8th, 2013

Energy and Natural Resources Market Radar (April 8, 2013)

click to enlarge

Strengths

• The price of natural gas gained nearly three percent this week to $4.14 following a positive Goldman Sachs report that highlighted tighter supply and demand fundamentals after colder than normal temperatures last month.
• According to OPEC, China is expected to overtake the U.S. as the world’s top crude importer by 2014.  China’s crude oil imports may surpass 6 million barrels a day by the end of this year.

Weaknesses

• Oil refiners in Europe will shut 10 percent of their plants this decade as fuel demand falls to a 19-year low. Of the region’s 104 facilities, 10 will shut permanently by 2020 from France to Italy to the Czech Republic, a Bloomberg survey of six European refinery executives showed. Oil consumption is headed for a fifth year of declines to the lowest level since 1994, the International Energy Agency estimates. Two-thirds of European refineries lost money in 2011, according to Essar Energy Plc, owner of the U.K.’s second-largest plant.

Opportunities

• The U.S. petrochemicals industry is set to make a spectacular comeback after suffering from low demand and high feedstock costs for most of the previous decade. As per GlobalData, in the middle of the last decade, the discovery of shale gas changed the dynamics of the U.S. petrochemicals industry by leading to the revival of the natural gas industry which improved the ethane supply and created high profit margins at the end of 2011 and 2012.
• China, the world’s number two corn importer, may need to raise corn imports to a record 7 million tonnes this year due to heavy snow this winter that damaged the grain and made it less suitable as animal feed, according to China Daily. The projected import figure is close to the Chinese government’s import quota of 7.2 million tonnes for corn.
• Plans to build a new industry to export liquefied natural gas (LNG) off Canada’s West Coast have become a lot more complicated. Discontent among Asian buyers about high LNG prices has evolved into a standoff between Asian consumers and North American producers that could make it more difficult to get new projects off the ground. The pricing disagreement represents a new hurdle for the five LNG projects planned for British Columbia, which are facing high costs and construction challenges, and have been banking on the so-called “Asian premium” to make their economics work. Japan is paying about US$17 per million British thermal units for its LNG imports, but it is well aware of the shale gas revolution under way in the Western hemisphere and is pushing for prices that are reflective of the cost of supply,  plus liquefaction and transportation costs, Mr. Maeda said. The supply cost is around US$6 to US$7 in North America, while the market price is around US$3 to US$4 because of ample supplies from shale discoveries.

Threats

• The Chile port strike is set to continue as no accord reached with the union, Bloomberg reports. The strike, which began at Angamos March 16 and spread to other northern and central Chilean ports, is preventing about 9,000 metric tons per day of refined copper from being shipped, or about 60 percent of the country’s 16,000-ton total, Mining Minister Hernan De Solminihac told reporters in Santiago. The port strike is also restricting imports of materials such as sulfuric acid used by mines and may lead to the halting of some operations, he said.
• Gold is likely to be in a bear market by early 2014 as the world economy returns to “normality,” Thomson Reuters GFMS, the research group, said today at the launch of the 2013 edition of its annual gold survey. However, despite the present price weakness, it is premature to say it is there yet, they argued, predicting this year “one last flourish” that will see the gold price rise as high as $1,850 an ounce and average $1,730 an ounce, a nominal record (with a low of $1,530 an ounce). The rationale? A forecast surge in investment demand of 20 percent year-over-year, driven by easy money, sluggish economic growth, rising inflation and the possibility of shocks to the economic system. Otherwise demand is forecast to decline, with jewelry fabrication hit by the high price and sluggish economy, industrial demand suffering from substitution by cheaper alternatives and central bank purchases easing from 2012′s 48-year high. More supportive, however, will be weak supply, with only a modest increase in mine output and scrap supply.

Tags: energy, Natural Resources
Posted in Markets | Comments Off

Energy and Natural Resources Radar (April 1, 2013)

Saturday, March 30th, 2013

Energy and Natural Resources Market Radar (April 1. 2013)

click to enlarge

Strengths

• Oil production in Texas’ Eagle Ford shale formation climbed 50 percent in January versus a year earlier. Growing production out of Eagle Ford is helping fuel a renaissance in Texas crude. The state produced 2.22 million barrels a day in December, the highest monthly level since June 1986, according to the U.S. Energy Department’s Energy Information Administration.
• Front-month natural gas futures settled at $4.07 mmbtu, their highest level in 18 months, amid expectations that elevated demand could wipe out the longstanding glut in natural-gas inventories. The upswing in demand caused by a blast of unseasonably cold weather has led to several weeks of unusually large withdrawals from inventories. That has caused inventory levels, which have been well above normal for more than a year, to approach seasonal norms again.
• Platinum rallied after Russian Natural Resources Minister Sergey Donskoy raised the possibility of South Africa and Russia acting together in the platinum group metals markets, where they have a combined 80 percent of mine output. Speaking to Bloomberg at the BRICS summit in Durban, he said “our goal is to coordinate our actions accordingly to expand the markets for realization of these metals.” No details were given on how such coordination would work given the importance of private mining companies in PGM production, or the reaction of major consumers.

Weaknesses

• In an analysis report on the iron ore market, the National Development and Reform Commission said a supply glut in the iron ore market has been formed, as demands in China and other economies cannot digest the increasing supply at home and abroad. As China’s strong demand for steel begins to ease after the fade-out of the massive stimulus plan during the international financial crisis, combined with slower consumption in developed economies and a limited boost from emerging markets, momentum on the demand side is giving way to supplies. “Given the trend, an oversupply situation is inevitable,” the report said.
• Copper eased down 1.4 percent this week to close just above $3.40 per pound as warehouse inventories of the metal rise to multi-year highs.

Opportunities

• According to news on plastemart.com, the U.S. has overtaken the Middle East as the region with the cheapest petrochemicals feedstock, for the first time since the Gulf’s industry was established. The boom in shale gas production has created a wealth of cheap gas feedstock in North America, driving a new generation of petrochemicals expansion in the U.S. “The cash cost per ton of ethylene in the U.S. in Q4-2012 was lower than the cash cost in Saudi Arabia,” said Nexant vice president Graham Hoar, speaking at the MEED Middle East Petrochemicals 2013 conference. “It is a dramatic change in economics in the U.S.”

Threats

• The U.S. Department of Interior is cutting federal mineral payments to 35 states by about $110 million this fiscal year as part of the automatic federal spending cuts that started this month. Wyoming Governor Matt Mead announced this week that his state faces the biggest cut; at least $53 million over the next five months. Wyoming is the nation’s leading coal-producing state and last year received nearly $1 billion in federal mineral payments. Texas is losing only $324,742. The federal government paid a total of $2.1 billion last year to the states, representing their share of revenue from energy and mineral production that occurred on federal land within the states, as well as offshore.
• WSJ’s “Heard on the Street” column speculates that oil prices could head lower in the medium term as demand trends move lower due to fuel-efficient vehicles and environmental concerns. The article deduces that lower demand will lead to lower prices.
• Researchers at the University of Oklahoma, Columbia University and the U.S. Geological Survey published a report linking Oklahoma’s largest recorded earthquake to waste water disposal from oil production. Oklahoma’s geological office said this week that the 2011 earthquake was likely, “the result of natural causes.” The waste water blamed for the earthquake was from conventional wells in the Hunton formation.
• Stockpiles of steel products at large Chinese producers surged to a record, near 15 million tons as of mid-March, according to industry data on Wednesday; reflecting tepid demand that has forced mills to cut output.

Tags: energy, Natural Resources
Posted in Energy & Natural Resources | Comments Off