Energy and Natural Resources Market Cheat Sheet (September 26, 2011)
Strengths
- The latest South Korean oil demand numbers released this week show the second straight month of year-over-year growth, following a weak second quarter. In August, Korean inland deliveries totaled 2.172 million barrels per day. In the year-to-date, South Korean demand growth has thus crept into positive territory, with the third quarter-to-date demand higher year-over-year by 4 percent.
- The American Institute of Architect’s Architecture Billings Index rebounded sharply in August to 51.4, shooting back above 50 (which indicates growth) for the first time since February.
- Despite a vicious bout of selling of stocks and commodities this week, the Global Resources Fund performed relatively compared to many of its peers over the past week as the fund management team has taken a more defensive position in the portfolio since early August.
Weaknesses
- Base metals prices fell sharply this week. The release of weak Euro area flash PMI data for September, suggesting a contraction is possible, combined with both a sub-50 China PMI reading for the same month and ill-received comments from the Fed on the state of the U.S. economy weighed heavily on broad market sentiment and drove risk aversion. Copper fell 17 percent this week to under $3.28 per pound, a 52-week low.
- The agriculture complex tumbled across the board as the downbeat economic outlook took its toll on market sentiment. Prices for corn futures fell 7 percent on the week.
- This week, metals giant Rio Tinto reported that some of its clients have begun asking to delay shipments of iron ore and other metals. Demand for coal is also decreasing, suggesting Asian activity could be waning.
Opportunities
- Peru’s government said it will not levy additional taxes on the country’s mining industry beyond those currently being debated in its Congress. Under the new law, mining companies will have to pay a sliding scale percentage of operating profits instead of the previous royalty system of 1 to 3 percent of revenue.
- At its Brazil Infrastructure Conference, Goldman Sachs estimated nearly R$85 billion of infrastructure projects will be executed over the next three to four years, including projects related to the 2014 FIFA World Cup, the 2016 Olympics in Rio de Janeiro, airports, subways, and highways.
- Oil supermajor Royal Dutch Shell’s CEO Peter Voser said in both the Financial Times and the Wall Street Journal that oil demand growth will outpace the growth in supply, so we should see "rising energy prices for the long-term." Voser said that the reason for the shortage of supply was a lack of investment after the global financial crisis.
- Analysts at Macquarie noted the chance of another (albeit weaker) La Nina is starting to build in the Australian coal space. The latest median rainfall probability forecasts from the Bureau of Meteorology give a 65 to 70 percent chance of above average rainfall for the northern Bowen Basin between October and December 2011 versus a 70 to 75 percent probability for the same period last year. The probability of above median rainfall is lower in the Hunter Valley and Gunnedah Basin at 55 to 60 percent. The forecast raises the possibility that the Queensland met coal chain could again be disrupted by inclement weather, while steel mills’ inventories remain low.
Threats
- The IMF forecast a decline in commodity prices in the second half of 2011 and in 2012 based on bigger harvests of food crops and slower economic growth weighing on demand for base metals. The IMF’s index of non-fuel commodities is forecast to slip about 5.5 percent in the second half of 2011 on better harvests, while base metal prices are expected to decline “modestly” in 2012 on improved supply, the IMF said in its World Economic Outlook report. The world economy will expand 4 percent this year and the next, the IMF said, down from June forecasts of 4.3 percent in 2011 and 4.5 percent in 2012.
