Global PMI: The Trend is Your Friend

Tuesday, July 10th, 2012

by Frank Holmes, CEO, CIO, U.S. Global Investors

Manufacturing around the world weakened in June, according to the JP Morgan Global Manufacturing Purchasing Managers’ Index (PMI). Its reading of 48.9 was the lowest in three years and the first dip below 50 since September 2011. The current reading is also below the three-month moving average for the second month in a row. As you can see on the chart, PMI crossed below the three-month in May.

While Europe, China and the U.S. were primarily responsible for the slowed activity, we believe the trend is your friend. In April, global PMI crossed above the three-month moving average, and historically, when a “cross-above” has happened, it’s signaled higher prices for many commodities. Take a look at the chart below which shows the following:

Ninety percent of the time, copper rose 10 percent over the following three months. Eighty-five percent of the time, West Texas Intermediate oil has also increased. Its median three-month change has been an increase of 11 percent.

Materials and energy were also positively affected, with modest results: When the PMI crosses above the three-month average, 70 percent of the time, the S&P 500 Materials Index rose, with a median return of about 3 percent. The S&P 500 Energy Index had a median three-month return of about 5 percent, with an 80 percent chance of the three-month change being positive.

Using history as a guide, this suggests that by the end of July, we could see strength in these commodities and energy and materials stocks. Although volatility and uncertainty rule the markets these days, we believe that the world’s central bankers are taking note of slowed activity and will act if deemed necessary.

The trend is your friend only if your portfolio is “resourceful” enough to benefit. Read the Financial Planning article, which showed how U.S. Global Investors’ Global Resources Fund strengthened a diversified portfolio over the past 10 years. Read the article.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Diversification does not protect an investor from market risks and does not assure a profit.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500. The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.

Tags: Amp, Commodities, Copper, Diversified Portfolio, Energy Index, Financial Planning, Frank Holmes, Global Resources, Jp Morgan, Moving Average, Nbsp, Pmi, Purchasing Managers Index, Resources Fund, S Central, Three Months, U S Global Investors, Uncertainty, Volatility, West Texas Intermediate
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Energy and Natural Resources Markets Radar (July 2, 2012)

Monday, July 2nd, 2012

Energy and Natural Resources Market Radar (July 2, 2012)

Strengths

• In reaction to an insurance embargo on Iranian oil vessels, effective this Sunday, South Korea will halt all oil imports from Iran. These vessels rely on insurance to protect them against any accidents they may encounter, and most companies that provide this type of insurance are based in the EU. South Korea, Iran’s fourth largest oil consumer, is currently in talks with countries such as Iraq, Kuwait, Qatar, and the United Arab Emirates to find a new route to meet their demand.
• Strikes in Norway regarding pensions and retirement age led to the closing of three more oil fields, restricting more than 15 percent of the country’s oil supply and 7 percent of its natural gas supply. Last month, Norway produced 1.63 million barrels of oil per day, and Statoil has already reported losses of up to 250,000 barrels per day. Brent Crude Oil prices saw a slight increase as a result.
• Vale received an environmental license to expand the biggest iron-ore mine in the world, estimating that about $1 trillion worth of reserves are to be found. They hope to double their iron-ore capacity at Carajas in Northern Brazil, and by 2017 hope to increase their output to 230,000 tons per year.
• Crude oil futures (West Texas Intermediate) gained nearly 6 percent this week with most of the gain on Friday following news that European leaders had agreed to allow struggling European banks to borrow directly from bailout funds.

Weaknesses

• Aluminum has dropped in value to $1,845 per ton, its lowest price since June 7, 2010. Because of these deteriorating prices, Rusal plans to curtail 8 percent of its smelting capacity by 2013. Furthermore, provincial governments in China have granted subsidies to smelters to increase aluminum production. This comes after the government faced a loss in tax revenue and higher unemployment from the reduction of output in Henan, a province that contributes 20 percent to China’s total aluminum capacity. After the news let out, aluminum prices dropped 3 percent on the Shanghai Futures Exchange.
• Arch Coal, in the midst of low natural gas prices and slowing electricity consumption, temporarily suspended mining operations across the country, resulting in 750 layoffs. SouthGobi Resources also has plans to halt its coal mining operations in Mongolia because of weak demand and an unpredictable future.

Opportunities

• Lennar Corp. is in talks and has signed a memorandum of understanding with China Development Bank Corp. regarding an approximate $1.7 billion loan. This loan would help transform two former naval bases into a $13 billion housing project and greatly benefit the timber industry.
• Within a year, Bangladesh is planning on boosting domestic natural gas supply by 63.25 percent to meet a demand that has been increasing by about 14 percent a year since 2003. Chevron and many state-owned companies have already prepared to increase supply to the country.
• In a slow diamond market, Botswana’s Minerals Minister believes the country can turn towards copper and silver, in addition to coal mining, to provide a more prominent source of revenue. This transition of focus may diminish the weight the diamond industry has on Botswana’s economy.

Threats

• Iraq’s oil output has reached a 20-year high, passing 3.07 million barrels per day for the month of June, as it seeks to overtake Iran in becoming OPEC’s second largest producer. Iraq plans on producing 70,000 barrels a day at Halfaya field during the first week of July and hopes to more than double its output by 2015. This increase in output will weigh heavily on global oil prices.
• Guatemala’s President, Otto Perez Molina, has proposed reforms to the constitution, essentially giving the government up to 40 percent ownership in mining and exploration companies in the area. Molina campaigned on increasing foreign investment, but there may be unintended consequences should these proposals be ratified.

Tags: Aluminum Production, Bailout, Brent Crude Oil, Brent Crude Oil Prices, Carajas, Crude Oil Futures, Crude Oil Prices, European Banks, European Leaders, Iranian Oil, Iron Ore, Market Radar, Northern Brazil, Oil Imports, Oil Supply, Provincial Governments, Retirement Age, Statoil, United Arab Emirates, West Texas Intermediate
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Canada: Untangling Pipeline Projects to Realize Energy Export Potential

Thursday, May 31st, 2012

Canada: Untangling Pipeline Projects to Realize Energy Export Potential

by Thomas White

May 25, 2012

For a country richly endowed in natural resources, and with growing energy production, Canada has been facing a perplexing problem in recent years. While its producers are supplying oil and gas to U.S. refineries at prices below the international market, Canadian refineries on the east coast are paying higher international prices for the oil they import. It may seem odd that a major energy producer like Canada imports oil at all. But for Canada, it’s unavoidable. Truth be told, the Maple Leaf lacks the necessary infrastructure to transport oil from its domestic fields in the central part of the country to markets on the east coast.

With more than 175 billion barrels of proven deposits, in oil and oil equivalents, Canada has the third largest energy reserves in the world. Most of the reserves are in the Alberta province, which has traditionally shipped most of its oil exports to the Midwest U.S. Oil output in Alberta has steadily increased in recent years, the result of large investments to extract crude from oil sands. At the same time, oil and gas output in American Midwestern states such as North Dakota has also gone up substantially as improvements in fracking technology have allowed for increased energy production from shale deposits. This has led to a supply glut to refineries in the area, with average prices realized by oil producers dropping. For instance, when the West Texas Intermediate (WTI) crude oil benchmark was trading well above $100 a barrel, Canadian oil fetched an average of $75 a barrel in the U.S. By some estimates, Canadian oil producers who export 1.55 million barrels of oil and equivalents a day to the U.S. Midwestern states lose nearly $15 billion annually because of this price differential.

Until recently, Canadian oil producers were banking on the expansion of a major pipeline project that would eventually stretch from Alberta all the way to the Gulf Coast of Texas, where prices are set by the WTI benchmark. The first phase of this project, completed in 2010, currently brings Canadian oil to the U.S. Midwest. The second leg of the pipeline connects to Cushing, Oklahoma, where the world’s largest oil storage facility is located. The final stretch of the pipeline, which is expected to be completed by the end of next year, will drain the excess supplies from Cushing to the Gulf Coast. To accommodate the increasing oil output in Canada, a second pipeline from Alberta to Nebraska, which will join the existing pipeline, has also been planned. When completed, this project will potentially reduce the oversupply in the Midwest, and lift average prices for Canadian producers.

However, the pipeline expansion project from Alberta to Nebraska is now on hold after the U.S. government delayed permission on environmental concerns. The project will be reviewed again next year, only after a comprehensive environmental impact study is completed and alternate routes are evaluated. Nevertheless, the Cushing to Texas stretch of the pipeline was approved by the U.S. government earlier this year and is expected to be completed by the second half of 2013. In addition, an existing pipeline that now brings oil from the Gulf Coast to Cushing is being reconfigured and expanded to carry oil in the opposite direction.

Stung by the delays in the Alberta-Texas pipeline expansion, the Canadian government has been trying to speed up approvals for the $5.5 billion Northern Gateway Pipelines project connecting Alberta to British Colombia on the Pacific coast. The new transport project will seek to open new international markets for Canadian oil and thereby reduce the dependency on the U.S. market. What’s more, from the port of Kitimat in British Colombia, where the pipeline will end, the oil can then be easily transported to markets in Asia where demand remains high. Still, this project too has also been delayed on concerns over its impact on the environment and on the Native Indian population along the pipeline’s proposed route.

Another project to significantly expand the capacity of the existing Trans Mountain Pipeline System, which connects Alberta to refineries in the Vancouver area, has so far not faced much opposition. And the proposal to build a pipeline from Alberta to Montreal in the east, called the East Coast Pipeline Project, is at a very early stage and may take several years for the necessary approvals.

Nevertheless, lower energy export price realizations have become a drag on the country’s economic growth, as acknowledged by the Bank of Canada in its recent Monetary Policy Report. The central bank said ‘the price of oil that Canada exports has declined’ and the ‘deterioration in the oil-related terms of trade reduces Canada’s real gross domestic income’. Earlier studies by the central bank estimated that for every 10% increase in crude oil prices, real GDP growth gains by up to 0.3%.

The significance of the energy sector to the Canadian economy should only increase in the future as oil output expands, making it all the more important that these pipeline projects are completed without further delay. It is estimated that oil production in Canada will increase from the current 3.6 million barrels a day to more than 6 million barrels by the end of this decade. The Canadian Energy Research Institute expects that this increase in oil output will generate 700,000 jobs and add $3.3 trillion to economic output over a period of 25 years. The only apparent bottleneck that may prevent Canada from achieving this potential growth is the insufficient pipeline capacity. Promoting major infrastructure projects without ignoring environmental concerns demands a fine balance that most governments and policy makers find extremely difficult to manage. But it appears that Canada must find a way to untangle its energy pipeline projects and expand its export markets for energy. The alternative is living with the economically painful paradox of exporting cheap oil and importing the same commodity at higher prices.

Copyright © Thomas White

Tags: Canada Imports, Canadian Oil, energy, Energy Producer, Energy Production, Energy Reserves, fracking, India, Midwestern States, Necessary Infrastructure, Oil Exports, Oil Output, Oil Producers, Oil Refineries, Oil Sands, Perplexing Problem, Pipeline Project, Pipeline Projects, Shale, Shale Deposits, Shale Oil, Supply Glut, Thomas White, Time Oil, West Texas Intermediate, Wti Crude Oil
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Energy and Natural Resources Market Radar (May 7, 2012)

Monday, May 7th, 2012

Energy and Natural Resources Market Radar (May 7, 2012)

Strengths

• Nymex natural gas price has rallied 2 consecutive weeks to nearly $2.30 per million btu.  Low natural gas prices are driving incremental demand.  U.S. power plants increased natural gas use by 34 percent in February from a year earlier as decade-low prices prompted a switch from coal. Gas used in electricity generation rose to 672.4 billion cubic feet in February from 503.1 billion a year earlier, the Energy Department said in its Electric Power monthly.
• Corn prices gained 2 percent this week and were boosted by the sixth-largest daily sales figures released by the USDA since 1977, showing that private exporters sold 1.44 million tons for the year beginning September 1, 2012.

Weaknesses

• The crude oil price fell sharply this week against a background of record U.S. inventories and signals of slowing U.S. economic growth.  West Texas Intermediate closed near $98 per barrel, the first close under $100 per barrel since mid-February.
• The Richards Bay coal price fell below $100 per metric ton to $99.48 from $100.38.
• The Energy Information Administration’s latest coal stockpile estimate for February 2012 is 186.9 million tons, 44.8 percent above the 10-year average and 15.8 percent above one year ago. Stockpiles are estimated at 79 days of coal consumption, 58.0 percent above the 10-year average of 50 days for February at month-end.

Opportunities

• Indonesia will ban exports of 14 raw minerals effective May 6, with an exception for miners that plan to build local processing facilities. Those miners will be assessed an average tax of 20 percent on ore shipments. The regulation applies to copper, lead, nickel, gold, silver, zinc, chromium, bauxite, manganese, molybdenum, platinum, antimony, iron ore and sand iron, Energy and Mineral Resources Minister Jero Wacik said at a press briefing in Jakarta this week.
• Clarksons estimates that demand for the largest oil tankers is set to rise more this year than previously forecast as China increases crude imports.  Hiring of very large crude carriers (VLCCs) is 4.9 percent this year, up from the previous forecast of 3.6 percent.  VLCCs are expected to haul 5.4 million barrels a day into China by sea this year.
• Global upstream capital and operating expenditures are set to reach a combined record of $1.23 trillion for 2012 and expected to rise to $1.64 trillion in 2016, according to the latest IHS Upstream Spending report.
• The Iraqi Oil Ministry and the Planning Ministry have prepared a five-year program of development for Iraq’s oil and gas industry.  Under the plan, from 2013 to 2017, oil production increases from 2.9 million barrels of oil per day to six million barrels by the end of 2017.  The plan is dependant on large foreign investment to be successful.
• Japan is scheduled to shut its last working nuclear reactor this Sunday. With all 54 nuclear reactors closed, Japan will be wholly reliant on other fuel sources for electricity generation and will also seek to limit power consumption. Prior to the Tohoku earthquake, nuclear reactors accounted for about 30 percent of Japan’s power generation.

Threats

• Zambia plans to tighten its grip on the government’s share of profits made at the country’s mines, boosting tax revenue and ensuring a more level playing field for Chinese and other investors. Investors in miners operating in Zambia, which include Glencore, Indian miner Vedanta and Canadian-listed First Quantum, have fretted over possible increases in taxes under a government elected last year, against the backdrop of a surge of resource nationalism across Africa.
• A planned mining tax in Australia will add 3 percent to the price of iron ore, said ICAP Shipping International. Extra costs from the 30 percent tax scheduled to start July 1 will amount to $3.76 a metric ton for iron ore and coal produced in the country, the shipbroker said. “Some exporters may find it difficult to fully pass on any taxes to customers due to the lower-price environment for many dry-bulk commodities,” ICAP said.
• “A key threat to the stable outlook of the mining sectors is a rise in inputs costs,” Standard & Poor’s credit analysts warned in a recent industry report card on Asia-Pacific metals and mining companies. “A tighter labour supply and likely higher energy prices will pressure the profitability of many commodity producers. Metal producers will also be wrestling with more expensive raw materials,” the analysts advised.

Tags: Coal Consumption, Coal Gas, Coal Price, Coal Stockpile, Consecutive Weeks, Corn Prices, Crude Oil Price, Electricity Generation, energy, Energy Information Administration, Jero Wacik, Largest Oil Tankers, Market Radar, Metric Ton, Natural Gas Price, Natural Gas Prices, Nymex, Power Plants, Richards Bay, Silver Zinc, West Texas Intermediate
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Weighing the Evidence of Oil and Gold Stocks

Sunday, April 22nd, 2012

Weighing the Evidence of Oil and Gold Stocks

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

The MSCI Emerging Markets and the S&P 500 indices have increased double digits since the beginning of the year. Investors should be thrilled, but instead of cheers, the only sounds the markets are hearing are crickets. Many have been asking, where are the investors?

Since January 1, another $12 billion left U.S. stock mutual funds while about $100 billion went into bond funds. This continued the mutual fund flow trend that has been ongoing for several months now.

After leading markets since the rebound began in 2009, natural resources and gold took a break while severely punished stocks saw a big bounce in the first quarter of 2012. Taking a look at the returns below, the S&P Global Natural Resources Index rose only 4 percent and the NYSE Arca Gold Miners Index lost 9 percent.

As investment managers, we continuously weigh the evidence, dissecting macro factors in the market and comparing historical data. We believe this is the best way to find the next opportunity for our shareholders. Using history as our guide, we compared the performance of oil and gold companies against the results of the underlying commodities over the past three years.

West Texas Intermediate (WTI) crude oil has seen a tremendous rise over the past three years. In April 2009, the price of oil was $46; today, it’s $104. The SIG Oil Exploration & Productions Index closely followed the rise of Texas tea from April 2009 until August 2011. That’s when the disparity between oil and oil stocks began to gradually increase.

Over the past three years, the price of oil and the index have had an average ratio of 0.21. Currently, it’s 0.26. That may not seem like a big difference but today’s ratio represents a three-year high and is a 3.13 standard deviation event. This means the divergence between oil and oil stocks is in “extreme territory” and, under normal assumptions, there is a 99 percent probability that the gap will close. Either the price of oil should come down or oil stocks go up, or a combination of both.

Gold and gold stocks are also experiencing extraordinary circumstances.

As we mentioned last week, gold equities continue to lag the price of gold, with the trend accelerating recently. Below, you can see that for most of the last three years, gold stocks have outperformed gold. Recently, though, bullion has surpassed gold stocks while gold companies have significantly declined.

The price of bullion and the NYSE Arca Gold Miners Index (GDM) have had a three-year average ratio of 0.94. Similar to oil and oil stocks, the ratio is now 1.28, a 3.06 standard deviation event.

CIBC commented earlier this week on the extreme disparity, saying the minor drop in bullion compared with the huge drop in gold stocks suggests that “a massive oversold position for the equities has occurred in the last month.” This is an “unprecedented” period for gold stocks, says CIBC.

Case Study: Newmont vs. Treasuries

Many Americans probably own gold producer Newmont Mining, one of the world’s largest gold producers. The shares were most likely acquired not through individual purchase, but rather through a fund that tracks the broad index, the S&P 500, as it is the only gold company included in the index.

The company also boasts the highest dividend yield in the industry. Newmont pays an annualized dividend yield of nearly 3 percent, which is at least a percent higher than the 5- and 10-year Treasuries.

Through dividends, gold companies including Newmont make a commitment to return capital to shareholders. While gold stocks remain at depressed levels, dividends are especially attractive, as investors get “paid to wait” for shares to appreciate.

We believe in thinking contrarian and keeping a close eye on historical trends to discover inflection points, as stocks tend to eventually revert to their means. For example, in March 2009, we noted significant changes signaling the market had hit rock bottom; following that time through the end of the first quarter, the S&P 500 Index rose more than 100 percent.

Today’s extreme divergence in oil and gold stocks and their underlying commodities presents a rare opportunity: what these stocks need now are investors to take advantage of it.

Tags: Bond Funds, Chief Investment Officer, Double Digits, Extreme Territory, Frank Holmes, Gold Companies, Gold Miners, gold stocks, Macro Factors, Msci Emerging Markets, Mutual Fund Flow, Nyse Arca, Nyse Index, Oil Exploration, oil stocks, Price Of Oil, Texas Tea, U S Global Investors, West Texas Intermediate, Wti Crude Oil
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Energy and Natural Resources Market Radar (February 13, 2012)

Saturday, February 11th, 2012

Energy and Natural Resources Market Radar (February 13, 2012)

Strengths

• Total SA agreed to sell its ODC and OAM pipeline stakes along with associated assets to Sinochem for $1 billion.  Bloomberg noted that Chinese companies have purchased $21 billion of Latin American assets since 2010.
• Tightening corn marketing. The USDA lowered its 2011/2012 estimate of corn ending stocks by 45 million bushels to 801 million bushels. The forecasted stocks-to-use ratio of 6.3 percent, down from 6.7 percent last month, remains well below the previous five-year average of 12 percent.
• The U.S. Energy Information Administration (EIA) reported that it expects West Texas Intermediate to average about $100 per barrel in 2012, up slightly from its prior monthly forecast.
• According to China Iron and Steel Association, the country’s crude steel production increased to an average of 1.673 million metric tons in the last ten days of January, from 1.669 million tons during the second ten days of January.

Weaknesses

• According to Barclay’s, global copper mine supply experienced its first contraction in mine output last year since 2002, and the largest annual decline in tonnage terms on record. The industry has been plagued by a combination of lower ore grades, technical issues, slower-than-expected ramp-ups and labor disputes. Global mine production is anticipated to have fallen 200,000 tons year-over-year to 15.9 million tons in 2011.
• According to Rusal, the global copper demand is reducing by about 400,000 metric tons a year through substitution.

Opportunities

• Corn, soybean and wheat prices remain well above historical averages. USDA forecasts farm cash net income to increase 19 percent year-over-year in 2011, which should be supportive for farm equipment demand this year.
• China’s net crude oil imports are expected to reach 266 million metric tons in 2012, the China National Petroleum Corp. said.
• China National Petroleum Corp. also said that it is planning to increase its natural gas output to 79.3 billion to 82.1 billion cubic meters in 2012.

Threats

• Reuters reports that Iran’s food imports are being hit by U.S. financial sanctions, which could escalate tensions in the oil-exporting region.
• The International Energy Agency (IEA) said that it might reduce its latest world oil demand forecast for 2012 due to a weaker outlook for the world economy.

Tags: Bushels, Chinese Companies, Copper Mine, Corn Marketing, Crude Oil Imports, Crude Steel Production, Energy Information Administration, Labor Disputes, Market Radar, Million Metric Tons, National Petroleum, Oam, Ore Grades, Petroleum Corp, Sinochem, Steel Association, U S Energy, Usda Forecasts, West Texas Intermediate, Wheat Prices
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Energy and Natural Resources Market Radar (December 28, 2011)

Tuesday, December 27th, 2011

Energy and Natural Resources Market Radar (December 28, 2011)

Strengths

• A weak dollar and a new lending program from the European Central Bank helped drive prices for commodities and commodities-related stocks higher this week. West Texas Intermediate (WTI) Crude oil finished the week near $100 per barrel, up about 7 percent. Copper closed near $3.46 per pound, up 4 percent for the week.
• A record level of deals in the coal industry this year has slashed the number of potential takeout targets in Australia, the world’s largest coal-exporting country. Rising demand in China and India has pushed mergers and acquisitions globally to a record high total of $34.5 billion in deals this year. This compares to $30.3 billion in deals last year. Overall, 192 companies have been acquired. Australian deals reached an all-time high this month with the $5.1 billion Whitehaven–Aston deal and the $2.1 billion Gloucester Coal–Yanzhou Coal deal.
• China’s oil refiners boosted daily processing to a record 9.25 million barrels a day in November and increased net diesel imports to the highest level this year in October in order to alleviate a local shortage partially caused by seasonal maintenance.
• The latest Chinese import data shows a major jump in refined copper imports. Despite ongoing concern about a slowing Chinese economy, Macquarie Research highlighted that net imports of refined copper will be 700,000-750,000 tons higher in the second half of 2011 compared to the first six months of the year. Additionally, it was reported this week that refined-copper imports by China, the world’s largest user, climbed to the highest level since June 2009 as lower prices in London prompted an arbitrage trade.

Weaknesses

• Barclays recently analyzed commodity price performance for 2011. It noted that at the end of 2010, only seven out of 48 commodities showed negative price performance. This year, however, only 11 show a positive price performance. In addition, this year’s best performer, which is feeder cattle up 18 percent, is showing a dismal performance compared to last year when cotton led the way with a 93 percent increase. Only seven commodities have posted double-digit price gains for the year, while 37 did in 2010. Barclays said, “This year’s Christmas tree looks like it has been ravaged by the storm of European sovereign debt.”
• Data published by Worldsteel this week showed a 4 percent month-over-month decline in global steel production during November. Global production now totals 1,405 million tons on an annualized basis, marking the fifth-consecutive month below 1,500 million tons annualized.
• Bloomberg News reported that speculators have reduced bets on commodities to a 31-month low on concern that global economic growth is slowing. Commodity Futures Trading Commission (CFTC) data shows that money managers cut net-long positions across 18 U.S. futures and options by 9.6 percent during the week ended December 13.

Opportunities

• After growing almost 24 percent in 2011, Komatsu, the world’s second-largest mining equipment maker, expects growth of at least 10 percent next year. President of the Mining Equipment Division, Kazuhiko Iwata, said that demand for equipment in Indonesia, Australia and Chile remains strong despite turbulence in financial markets and a slowing global economy. With mined ore grade degradation set to be a persistent theme in the coming years, analysts at Macquarie see the mining equipment industry as the main beneficiaries.
• It is reported that in its first-ever report about thermal coal, the International Energy Agency (IEA) paints a fairly rosy outlook for the next five years. The report forecast strong demand for thermal coal from China and India until 2016. The IEA said that consumption would continue to expand over the next several years despite calls from environmentalists to cut reliance on this carbon-intensive fuel as a primary energy source. The IEA projects average thermal coal demand to grow by 600,000 tons per day over the next five years. This is a remarkable pace but is actually slower than the growth experienced from 2000 to 2010 when demand growth averaged 720,000 tons per day, according to Nomura Securities.
• Reuters reported that Monsanto won approval to sell a genetically engineered variety of drought-resistant corn in the United States, raising hopes for increased production of the grain. The U.S. Department of Agriculture approved the use of the modified corn after reviewing environmental and risk assessments, public comments, and research data from the seed giant. The company has been developing the product for years in collaboration with German chemical firm BASF.

Threats

• Rising costs to develop natural resources projects remain a common theme many companies are grappling with. For instance, Anglo American announced a 15 percent increase in the capital cost of its Minas-Rio iron ore project in Brazil. This is in addition to more than $5 billion the company had previously projected. The company said the increase in cost is due to general inflation in the mining industry coupled with the need to manage construction of the project around newly discovered caves of special scientific interest. Also, CAP, Chile’s largest steel producer and iron ore miner, has said that the cost of developing its Cerro Negro Norte project has increased nearly 40 percent to $800 million. The increase has pushed the anticipated start-up of the 4 million tons-per-year mine to fourth quarter of 2013 instead of the first quarter.
• Metal demand in China may grow at a slower pace in 2012 and prices may be lower than this year, Wang Huajun, deputy secretary-general of the China Nonferrous Metals Industry Association said at a forum in Shanghai. “It is unlikely to see metals demand to grow at more than 10 percent next year, given the macroeconomic environment,” Wang said. Refined copper demand may increase 6 percent, while primary aluminum consumption may grow 8 percent, he said. Lead and zinc consumption may rise by 7 percent and 5 percent, respectively, Wang said.

Tags: Agriculture, Chinese Economy, Chinese Import, Coal Industry, Commodity Price, day in november, Diesel Imports, Gloucester Coal, Import Data, Market Radar, Mergers Acquisitions, Mergers And Acquisitions, Months Of The Year, Oil Refiners, Price Performance, Refined Copper, Seasonal Maintenance, Weak Dollar, West Texas Intermediate, Wti Crude Oil, Yanzhou Coal
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Energy and Natural Resources Market Radar (December 19, 2011)

Sunday, December 18th, 2011

Energy and Natural Resources Market Radar (December 19, 2011)

Strengths

• The Brazilian fertilizer agency ANDA released November 2011 fertilizer data showing potash demand of 493,000 tons in November and total potash tonnage year-to-date of 7.04 million tons, up 24 percent year-over-year. Total Brazilian fertilizer imports were flat versus November 2010 with domestic consumption up 2 percent.
• In another sign of rising gold demand in emerging economies, China’s gold imports from Hong Kong surged 51 percent to a record in October as investors sought to hedge against turmoil in the financial markets and took advantage of the price gap between the two places. Mainland China bought 86,299 kg (86.3 metric tons) from Hong Kong in October, up from 56,977 kgs in September, according to the Census and Statistics Department of the Hong Kong government.
• Copper imports by China advanced 18 percent to 452,022 metric tons from 383,507 tons in October, the highest level in 20 months as stronger local prices than in London prompted traders to increase buying. Iron ore imports by China rebounded 29 percent in November from an eight-month low as some steelmakers replenished their stockpiles after prices fell. The country imported 64.2 million metric tons of iron ore last month, General Customs said. This is the highest since January, and compares with 49.94 million

Weaknesses

• Most commodity prices fell this week as global growth concerns, coupled with unresolved eurozone issues following last week’s EU summit, continue to rattle investors. Commodity-related equities fell about 6 percent this week.
• Crude oil (West Texas Intermediate) fell 6 percent last week to close near $93.50 per barrel as weekly Department of Energy data indicated rising inventories.
• Macquarie Research reported that preliminary Indian iron ore export volumes for November totaled 5.14 million tons, down 36 percent year-over-year. Total export volumes are down by 22.4 million tons year-over-year in the first 11 months of this year and are set to total only about 80 million tons in 2011, 15 million tons below initial expectations and 33 percent below recent peak levels in 2009.
• U.S. aluminum orders continued to weaken in November as buyers apparently destock towards the end of the year. Total orders (ex-cansheet) fell 3.4 percent month-over-month in November, according to the U.S. Aluminum Association’s monthly survey.

Opportunities

• JP Morgan highlighted that the International Energy Agency (IEA) medium-term coal report says that coal demand is set to increase by 600 kilotons per day over the next five years, driven by forecast growth from China and India. This compares well, under the circumstances, to the last decade’s 700 kilotons daily growth. The agency added that the increase in demand could put upward pressure on costs and prices as infrastructure maxes out. Interestingly, the study points to different scenarios for Chinese imports that vary between a bull case of 180 million tons by 2016 and a bear (for imports) at just 39 million tons depending on the success of domestic investment in mine and rail infrastructure.
• China’s Coal Transport and Distribution Association reported thermal and coking coal imports to increase by 13 percent in 2012. Chinese customers may push for more overseas purchases in the next year as they face the cheapest foreign supplies in three years relative to domestic costs. Chinese benchmark thermal coal traded $22 higher than supplies from Newcastle as of December 4. This is the widest difference since July 2008.
• Roubini Global Economics (RGE) highlighted that today the world’s largest consumers of potash are China (16 percent), followed by the United States, Brazil and India, with the world’s largest importers being consistent with the exception of the United States.  RGE has also forecasted that global potash demand will rise 11 percent to 58.3 million tons this year. While demand grew from India and China at an annual rate double the world average at 8 percent between 1993 and 2008, Indian production is set to grow as well in order to maintain the country’s position as the second-largest producer of sugar, rice, wheat, fruits and vegetables. RGE also highlighted that Brazil is slated to be the top potash consumer by 2020, despite having its own reserves. The seasonality in Brazil is such that there is an all-year demand for fertilizer. Overall, RGE believes potash investments in the medium- to long-term look positive, with short-term macroeconomic head winds such as heightened volatility.

Threats

• The China Non-Ferrous Industrial Association (CNIA) met with 10 major domestic aluminum smelters to discuss business strategy in light of current low aluminum prices and the losses of some producers. Macquarie Research reported that the overall outcome from the meeting appears bearish for the Shanghai Futures Exchange price, with no agreement reached on an alliance to idle capacity, a confirmation the SRB will not buy excess metal, and the prospect of CNIA pushing the Natural Resources Defense Council for preferential power rates (thereby reducing cost support).
• In its latest monthly report, the IEA also reduced its 2012 demand forecast by 200,000 barrels per day to 90.3 million barrels per day, representing a growth rate of 1.4 percent year-over-year. OPEC’s latest monthly report released this week also reduced its 2012 demand estimate by 140,000 barrels per day to 88.87 million barrels per day, equating to global oil demand growth of 1.1 percent, slightly lower than that of the IEA.
• The western Corn Belt has now been threatened, as the severe drought that has gripped Texas, Oklahoma and Kansas for the past year has spread north into eastern Nebraska, northwestern Iowa, and southern Minnesota. Barclay’s Capital reported that while some improvement is expected in southern Minnesota over the winter, the drought is expected to persist in that part of the state as well as in northwestern Iowa at least through the end of the most recent forecast period ending February 29. Soil cores being taken in parts of Iowa are coming back dry while field agronomists have reported that the soil is dry to depths of five feet in northwestern Iowa, which is now experiencing severe drought, according to the U.S. Drought Monitor. Parts of the state are as much as nine inches behind in precipitation. Soil in southern Minnesota is just as dry.
• Deutsche Bank believes that a hazard for the commodities complex would be a further appreciation in the U.S. dollar, as historically this has tended to push commodity index returns lower.  The dollar has been on a relatively steady strengthening path since hitting 1.42 in late October. The U.S. dollar strength may be linked to increasing concerns towards funding issues in Europe, as the first quarter of 2012 will mark the peak of the funding schedule for the euro area and specifically Italy and Spain.  Despite opposed announcements from the European Central Bank (ECB) last week, the likelihood of a rate cut in Europe in early 2012 is still a conceivable scenario which, once realized, would further weaken the euro.

Tags: Commodity Prices, Domestic Consumption, Emerging Economies China, Energy Data, Export Volumes, Global Growth, Gold Demand, Gold Imports, Growth Concerns, Hong Kong Government, Indian Iron Ore, Kgs, Mainland China, Market Radar, Million Metric Tons, Potash, Price Gap, Statistics Department, Stockpiles, West Texas Intermediate
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The Many Factors Fueling a Return to $100 Oil (Holmes)

Sunday, November 13th, 2011

The Many Factors Fueling a Return to $100 Oil

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

Oil prices rose about 5 percent this week to finish only a dollar short of regaining triple-digit status. Since dipping below $80 per barrel on October 3, West Texas Intermediate (WTI) prices have increased almost 28 percent. This increase is nearly twice that of the S&P 500 Index, up 15 percent since October 3, but reinforces a recent trend for oil prices—as equities go, so goes oil.

This chart put together by the U.S. Energy Information Administration (EIA), illustrates how WTI crude oil prices and equities have moved nearly in tandem over the past few months.

The EIA says “the recent strong relationship between oil and equity prices resembles that seen during the economic downturn and recovery in 2008-2010.” According to EIA data, crude oil and the S&P 500 Index have had a positive correlation in 12 of the past 13 quarters. A positive correlation had not occurred once in the previous 35 quarters. In fact, crude oil and equities experienced a negative correlation during five quarters over that time period.

This recent strong correlation implies that equities have the potential to move higher if oil prices continue along their current trajectory. Given oil’s current supply/demand fundamentals, there’s a good chance of that happening.

Demand Holds Strong Despite Global Uncertainty

One of the key drivers for rising oil prices is demand, which has held steady despite the turmoil in Europe, sluggish economic growth in the United States and a slowdown in China. In fact, Citigroup says there is “no indication of a demand collapse unfolding as in 2008.”

While year-over-year comparisons show global demand growth is slowing, Citigroup points out that this year’s data compares with a 2010 period propped up by government policies encouraging consumption, such as the Fed’s QE2 program. Citigroup says these comparisons are “obscuring the fact that demand continues to grow and, barring a sharp derailment of the global economy, is on course to make a record high in 4Q11 and on an annual basis in 2012.”

By the end of 2012, the EIA forecasts world crude oil and liquid fuel consumption will total nearly 90 million barrels per day. This chart from PIRA carries the demand curve further into the future, forecasting demand to surpass 110 million barrels per day by 2025.

What is driving this increase? The emerging market transportation sector.

In its World Energy Outlook released this week, the Paris-based International Energy Agency (IEA) says crude oil consumption will be driven by developing countries over the next 20 years. These countries will account for 90 percent of the world’s population growth, 70 percent of the increase in economic output and 90 percent of global energy demand growth over the period from 2010 to 2035.

The agency predicts global crude oil demand will rise to 99 million barrels per day by 2035 “as the total number of passenger cars doubles to almost 1.7 billion in 2035.” If this prediction holds true, it means that there will roughly be as many cars in the world as there were people 100 years ago.

Long-term, Short-term Constraints Threaten Supply

WTI prices have remained in backwardation since shifting from three years of contango in late October. Contango means that the price of commodity contracts expiring in the near term is lower than the forward, future price of crude contracts. Backwardation is the opposite: The price of a commodity today is higher than the future purchase price.

While everyday investors may get tripped up by the contango/backwardation jargon of oil markets, the most important thing to recognize is that this significant shift signals there are short-term constraints in supply pushing prices higher. In fact, crude oil inventories in the United States are now at the lowest seasonal level in seven years, according to Bank of America Merrill Lynch. When the shift occurred, BofA analysts wrote this “is a major development for the crude oil market” and “signals $105 oil.”

Backwardation is a short-term signal; a long-term signal is the growing amount of geopolitical unrest bubbling up to the surface in the world’s largest oil-producing region.

This week, the International Atomic Energy Agency (IAEA) released a detailed report that verified many suspicions of nuclear proliferation in Iran. The IAEA noted it was concerned about Iran’s “activities related to the development of a nuclear payload for a missile.”

This news does not sit well with others in the region, such as Israel, who have threatened military action should the country deem Iran a security threat. A research note from Barclays articulates the combustible situation with a quote from Amos Harel and Avi Issacharoff, writers for Haaretz: “A few more weeks of tension and one party or another might make a fatal mistake and drag the region into war.”

War and/or unrest in the region have the potential to have a tremendous effect on oil prices because of its proximity to the majority of global oil production. PIRA says that the Middle East accounts for over 70 percent of OPEC oil production and account for over 95 percent of the cartel’s capacity growth along with North Africa.

It’s not only production that is threatened. One of the largest chokepoints along the global oil supply chain is the Strait of Hormuz, which roughly 90 percent of all Persian Gulf oil tankers—some 18 million barrels per day—pass through, according to Barclays. With Iran controlling the entire northern border of the strait, there is a significant chance for disruptions should the country fall into conflict or war.

This is just one example of oil’s geopolitical DNA. With more than 40 percent of the world’s oil controlled under autocratic rule, oil supply in democratic nations likely depends on the state of autocratic nations.

Following the death of Moammar Gaddafi, The Wall Street Journal reports that oil companies are eager to begin pumping oil in Libya again but the new regime is still battling Gaddafi supporters and the country is a long way from being unified. Barclays notes several concerns: oil fields need to be repaired, Interim Transitional National Council has experienced growing factions, and there’s been a proliferation of weapons.

There’s also sanctions and persistent violence in Syria. In Yemen, an oil export pipeline was blown up a couple of weeks ago, making it the fifth attack in just a month. Barclays indicated that “almost half of Yemen’s 260,000 barrels per day of oil output has been offline since March” and it doesn’t look like the situation will improve any time in the near future.

Trends in Demand and Supply Maintain Pressure on Prices

While BofA analysts think that oil prices could be headed toward $105 per barrel in the short term, the IEA offered a longer-term view that should give natural resources investors calm for many years to come.

The IEA says “trends on both the oil demand and supply sides maintain pressure on prices. We assume the average IEA crude oil import price remains high, approaching $120 per barrel (in 2010 dollars) in 2035 (over $210 per barrel in nominal terms).”

That’s a distant projection but it certainly illustrates why you should consider investing a portion of your wealth in oil.

Tags: Chief Investment Officer, Citigroup, Collapse, Crude Oil Prices, Current Supply, Economic Downturn, Eia, Energy Information Administration, Frank Holmes, Global Demand, Government Policies, Negative Correlation, Positive Correlation, Qe2, Rising Oil Prices, U S Energy, U S Global Investors, West Texas Intermediate, Wti Crude Oil, Wti Prices
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Energy and Natural Resources Market Cheat Sheet (November 14, 2011)

Sunday, November 13th, 2011

Energy and Natural Resources Market Cheat Sheet (November 14, 2011)

Strengths

• The International Energy Agency monthly report indicated that Organisation for Economic Co-operation and Development (OECD) oil inventory data fell by 800,000 barrels per day in September and October which is more than twice the normal rate and implies a fundamentally tight oil market.
• Monthly data released by the Chinese government showed copper imports rose to the highest level in 17 months in October.
• West Texas Intermediate (WTI) crude oil has been among the best-performing commodities over the past week and month, up 4 percent and 19 percent respectively. Analysts at Deutsche Bank observed that unlike industrial metals, the energy sector, and specifically crude oil, WTI has been resilient to heightened levels of equity market volatility and disruption risk and instead focused on physical fundamentals which have been tightening.  This has seen U.S. inventories decline in Petroleum Administration for Defense Districts (PADD) 2, which has encouraged the forward curve to move into backwardation and contributed to a narrowing in the WTI-Brent spread.  Brent is likely being constrained somewhat by a better-than-expected recovery in Libyan oil production.
• The Global Resources Fund has had good relative performance versus its peer group median over the trailing month.

Weaknesses

• The Global Resources Fund underperformed its benchmark this week mostly attributable to stock selection within the energy sector.
• In spite of some supportive supply side news and positive Chinese import data, copper prices have continued to slide since the end of October and fell 3 percent this week to $3.46 per pound on the COMEX.
• A leading indicator for Chinese steel demand, October data for residential floor space under construction fell 6.1 percent year-over-year and sales fell 9.9 percent year-over-year, while starts also slowed sharply.

Opportunities

• In its World Agriculture Supply and Demand Estimates report, the U.S. Department of Agriculture cut its forecast for U.S. corn and soybean yield, with the decline in corn production larger than anticipated by the market.  Low inventories and lower production should support higher corn prices and, by extension, higher fertilizer prices.
• According to IEA, Libya’s crude oil production is expected to rise to 700,000 barrels per day by the end of 2011.
• China’s Ministry of Industry and Information Technology (MIIT) has announced its expectation that China’s annual crude steel consumption will be on the order of 750 million tons per year by 2015, as part of the five-year plan for the sector.

Threats

• Downside volatility could refocus if an agreement is not reached regarding Congress’ efforts to pass the budget next week, and later concerning the U.S. super-committee deadline on November 23.

Tags: Agriculture, Backwardation, Chinese Import, Copper Prices, Crude Oil Wti, Day In September, Development Oecd, Forward Curve, Industrial Metals, International Energy Agency, Leading Indicator, Market Volatility, Petroleum Administration, Physical Fundamentals, Residential Floor, Resources Fund, Steel Demand, Stock Selection, West Texas Intermediate, Wti Brent, Wti Crude Oil
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