Gas Pipeline Network
Saturday, October 22nd, 2011
Mosaic K1 potash mine near Esterhazy, Saskatchewan, Canada. Underground, one kilometre beneath the surface. During approximately 45 years of mining activity, around 4700 km of tunnels have been bored. Specially adapted off-road vehicles are used to move around in the tunnels. photo: Martin Mraz
Energy and Natural Resources Market Cheat Sheet (October 24, 2011)
- The Global Resources Fund performance this week bested its benchmark and was in the middle of its peer group in another volatile week of trading. Our energy sector bets generally contributed to the outperformance as energy stocks (S&P 500 Energy) gained over 1 percent for the week while the S&P Materials sector fell nearly 3 percent.
- Weak equity markets since early August have created bargains in the oil patch but these may not last long as merger & acquisition activity in the energy sector remains active with two notable deals announced early in the week. Houston-based Kinder Morgan agreed to buy El Paso Corporation for $38.8 billion, creating the largest natural-gas pipeline network in the U.S., and marking the biggest energy deal in over a year. Also on Monday, Statoil of Norway announced an all-cash bid of $4.4 billion for Brigham Exploration which has a large land position in the oily Bakken shale play.
- Chinese coal imports in September rose 25 percent year-over-year to 19.1 million metric tons and set a new record for import volumes. The coal imports were said to have risen as import prices became cheap compared with the domestic prices. China’s National Coal Association said that China’s net coal imports may reach 150 million tons this year while output may exceed 3.5 billion tons, according to a report by Bloomberg news.
- Emerging markets remain the key driver for global oil demand. The latest Indian oil demand increased by 169 thousand barrels per day (6.1 percent) year-over-year in September to 2.935 million barrels per day, the highest September reading ever. The growth rate, in turn, was the strongest pace seen since January this year, and was supported by a very strong reading in diesel demand, which was higher year-over-year by 9.8 percent. Floods and political protests in various coal producing states and strikes at Coal India, the largest and primary coal producer, have adversely impacted coal supplies in the country, thereby leading to higher diesel usage in power.
- Base metals prices suffered this week from worries over slowing growth in China and the eurozone debt crisis. Copper fell 5 percent and made a 52-week low of $3.05 per pound on Thursday while aluminum also hit a 52-week low price on Thursday and closed the week down 4 percent. Metals and mining stocks generally underperformed the market this week due to the commodity price headwinds.
- Precious metals and related equities also fell this week as haven buying of gold and the dollar eased. Markets generally warmed up to the idea that European leaders will make progress in dealing with the eurozone debt crisis in meetings this weekend and sold the U.S. dollar and gold, which both fell this week.
- The U.S. Architecture Billings Index declined to 46.9 in September, compared to 51.4 in August (a mark of 50 bifurcates the indication of expansion and contraction). The positive reading in August appears to have been an isolated occurrence rather than a trend, as further evidenced by the decline in the new project inquiry index to 54.3 in September from 56.9 in August. The weak readings remain a threat to domestic construction activity and materials construction demand.
- We came away from PIRA Energy Group’s annual client seminar in New York quite constructive on the crude oil markets. Demand expectations are a bit softer in 2012 on assumptions of slower global economic growth; however, supply challenges remain prevalent. Inventories in the largest OECD countries are drawing rapidly, OPEC spare capacity is fairly tight, and non-OPEC supply outages are running nearly 2x the level of last year. Political tensions remain high in the oil supplying Middle East and relative stability seems fleeting which could throw the oil markets into even more disarray.
- Roubini Economics highlighted that Colonel Muammar Qadhafi’s death is unlikely to have any significant effect on the oil markets. In fact, it was noted that the removal of uncertainty over his whereabouts may encourage international oil companies to step up their plans to return to the country. Oil production in Libya has been rising in recent weeks to an estimated 350,000-390,000 bpd.
- The International Energy Agency has said that the Arab Spring has disrupted investment plans in oil and gas projects as governments have had to use the funds and resources for social purposes. As a result prices will have to go higher over the next 5 years to get the supply to meet demand. The IEA estimates that the world needs to spend US$38 trillion to meet projected demand over the next 24 years (US$1.58 trillion a year), up 15 percent from their 2010 forecast of US$33 trillion.
- The US Federal Reserve Bank of Philadelphia’s general economic index rose to 8.7 from minus 17.5 in September, the biggest one-month rebound in 31 years. The weak reading a month ago contributed significantly to the market sell-off seen at that time.
- Mineweb reported that Freeport-McMoRan Copper and Gold, the world’s biggest copper-gold mining operation, continues to be affected by ongoing strikes. The unrest at the company’s Grasberg operation in Indonesia could have an impact affecting global production of both copper and gold. Beginning in September, the strike is currently showing few signs of being resolved.
- Should the U.S. dollar strengthen, we could see downward pressures on commodity prices. Capital Economics published an article highlighting the inverse relationship between the value of the dollar and commodities when traded in dollars. Based on a chart illustrating the relationship using the U.S. currency’s broad trade weighted index and the CRB index of 19 commodity prices, it appears that a 5 percent appreciation in the dollar is associated with a 25 percent decline in commodity prices. Investors have recently sought safety in the dollar with the recent global financial crisis, and weakening industrial and consumer demand for commodities. Should global sovereign debt uncertainties persist, this could threaten commodity prices further.
- BHP Billiton said a slump in demand for iron ore from European steel mills has hurt prices while orders from China have so far been unaffected. “In Europe, many steel companies have, or are in the process of, reducing their steelmaking capacity and I think that that is what’s played through on the sentiment in the iron ore business,” Marius Kloppers, CEO of BHP said. “In China overall, which will over the long run be the driver of prices, we have not seen anything really happening there yet” he added.
- The U.S. derivative regulator voted 3-2 to curb commodity trading levels and restrict the numbers of contracts that can be held by a single firm. The rule limits traders to 25 percent of deliverable supply in the month nearest to delivery. Caps will go into effect 60 days after the agency defines the term “swap”, and agency declined to estimate when that will be. Limits outside the spot month are likely to go into effect in late 2012.
Tags: Acquisition Activity, Bakken Shale, Brigham Exploration, Canadian Market, Coal Association, Coal Imports, Coal India, Coal Producing States, Commodities, Crude Oil, El Paso Corporation, Energy Deal, energy stocks, Esterhazy Saskatchewan, Gas Pipeline Network, Gold, Import Volumes, India, Kinder Morgan, Land Position, Materials Sector, Million Metric Tons, National Coal, Natural Gas Pipeline, Oil Patch, Political Protests, Resources Fund, Saskatchewan Canada
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