Energy and Nat­ural Resources Mar­ket Cheat Sheet (August 29, 2011)

Strengths

• The Global Resources Fund per­formed rel­a­tively well for the week, despite over­all global eco­nomic uncer­tainty and volatile mar­ket activ­ity. Expo­sure to pre­cious met­als helped the fund, while main­tain­ing lit­tle expo­sure to negatively-performing sec­tors lim­ited down­side risk. The fund con­tin­ues to ben­e­fit from expo­sure to the food and agri­cul­ture sector.
• Refin­ing mar­gins con­tinue to remain very strong, with the spread between Brent Oil and West Texas Inter­me­di­ate (WTI) remain­ing con­sis­tent, by about $30. This has been con­tribut­ing to the strong per­for­mance of the oil and gas refin­ing sec­tor. The fund has also ben­e­fited from expo­sure to the refiners.
• Corn rose to a 10-week high in Chicago and soy­beans gained as wors­en­ing crop con­di­tions in the U.S., the top global exporter, raised con­cern that sup­ply may be smaller than esti­mated. The Depart­ment of Agri­cul­ture said Mon­day that con­di­tions dete­ri­o­rated last week for the U.S. corn and soy­bean crops. Corn for Decem­ber deliv­ery has already climbed 6 cents. Only 57 per­cent of the corn in the top 18 pro­duc­ing states was in good or excel­lent con­di­tion as of August 21, down from 60 per­cent a week ear­lier and 70 per­cent a year ear­lier, accord­ing to Bloomberg.
• Accord­ing to Bloomberg, U.S. wheat ship­ments to Egypt, Iraq, Japan and Saudi Ara­bia surged in the first half of this year, dri­ven by polit­i­cal tur­moil and nat­ural dis­as­ters, to wrap up the best export sea­son since 1992–1993. A drought led Rus­sia to cut off its exports from August until last month, giv­ing the U.S. an open­ing. Low rain­fall in Iraq and Saudi Arabia’s move to save water by reduc­ing domes­tic pro­duc­tion drove demand as well. Exports to Japan jumped because of a weather-shortened har­vest in 2010 and pos­si­ble food hoard­ing after the March earth­quake and tsunami.
• Deutsche Bank high­lighted that cop­per demand exceeded sup­ply by 80,000 tons in May which brought the short­age to 146,000 tons for the first five months of this year, com­pared with 162,000 tons in the same period last year, accord­ing to the Inter­na­tional Cop­per Study Group.
• The Energy Depart­ment said the nation’s oil sup­plies dropped by 2.2 mil­lion bar­rels last week, which helped to keep the price higher. Oil rose Wednes­day fol­low­ing news of strong U.S. man­u­fac­tur­ing activ­ity. Bench­mark West Texas crude rose 75 cents to $86.19 a bar­rel in New York, while Brent crude was up $1.34 at $110.65 per bar­rel in Lon­don that day.

Weak­nesses

• The fund also did not have any expo­sure to the con­struc­tion and mate­ri­als group, which expe­ri­enced pos­i­tive gains for the week.
• Deutsche Bank recently pub­lished an arti­cle stat­ing that out­put from Chile’s Escon­dida mine dropped 14 per­cent in the first half from the pre­vi­ous year to 452 kilo­tons due to declin­ing ore grade and labor issues. BHP Billiton’s Escon­dida mine, the world’s biggest cop­per mine, expe­ri­enced strik­ing issues the last few months. Chile is the world’s largest cop­per pro­ducer, account­ing for one-third of global supply.
• Alu­minum, zinc and nickel con­tinue their weak per­for­mance rel­a­tive to other met­als. The ongo­ing global sov­er­eign uncer­tainty, lower GDP fore­casts for the U.S., bleak con­sumer sen­ti­ment, a poten­tial world-wide reces­sion and over­all global neg­a­tive sen­ti­ment are all con­tribut­ing factors.

Oppor­tu­ni­ties

• Inde­pen­dent oil ana­lyst Andrew Lipow said refiner­ies along the East Coast will likely decide whether to shut down pro­duc­tion ahead of Hur­ri­cane Irene, which could dis­rupt gaso­line ship­ments and hit refiner­ies in New Jer­sey and Penn­syl­va­nia. Once stopped, refiner­ies usu­ally need 10 to 21 days to get back up and run­ning at full capac­ity. That means gaso­line sup­plies could drop and prices rise, he said.
• Accord­ing to Forbes, the gov­ern­ment reported that orders for long-lasting, durable goods like autos and air­craft increased 4 per­cent in July, the biggest increase since March. Man­u­fac­tur­ing is a major dri­ver of eco­nomic growth, and more man­u­fac­tur­ing boosts energy demand.
• The Finan­cial Times high­lighted that the U.S. ethanol indus­try, now the top domes­tic corn user, has not been slowed by high corn prices, with out­put up 4 per­cent from a year ago.

Threats

• Again, with no clar­ity on the issue of the global sov­er­eign debt, there is a risk that we will con­tinue to expe­ri­ence volatile mar­ket activ­ity. Already-established neg­a­tive trends may con­tinue among com­modi­ties and sectors.
• Dan Green­haus, Chief Global Strate­gist for BTIG LLC, reported that investors are likely dis­ap­pointed by the lack of any pol­icy specifics from Chair­man Bernanke’s speech Fri­day. He high­lighted that Bernanke said that the debt ceil­ing debate dam­aged the cred­i­bil­ity of the United States and sug­gested more such debates are likely to do fur­ther dam­age. Bernanke empha­sized that with­out sig­nif­i­cant pol­icy changes, the finances of the fed­eral gov­ern­ment will inevitably spi­ral out of con­trol, risk­ing severe eco­nomic finan­cial dam­age. He did not present a Quan­ti­ta­tive Eas­ing 3 out­line, which con­tributes to the nation’s remain­ing uncer­tainty for the future.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

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