Energy and Nat­ural Resources Mar­ket Radar (Decem­ber 12, 2011)

Strengths

• In another sign of robust emerg­ing mar­ket oil demand, China’s refiner­ies boosted daily oil pro­cess­ing to a record last month after state plants max­i­mized pro­duc­tion to ease a domes­tic diesel short­age. Refin­ing rose 5.4 per­cent to 9.25 mil­lion bar­rels a day in Novem­ber from Octo­ber, sur­pass­ing a record of 9.22 mil­lion bar­rels a day in Feb­ru­ary. Refin­ers are boost­ing pro­duc­tion after plant sea­sonal main­te­nance led to a sup­ply short­fall. China Petro­chem­i­cal Corp., which sup­plies more than half of the nation’s fuel, will raise its refin­ery runs to 4.3 mil­lion bar­rels a day in Novem­ber, the second-highest on record.
• U.S. ethanol pro­duc­tion hit an all-time high last week, accord­ing to the lat­est fig­ures from the Energy Infor­ma­tion Admin­is­tra­tion. For the week end­ing Decem­ber 2, ethanol pro­duc­tion aver­aged 954,000 bar­rels per day, which is a new record, 24,000 bar­rels more than the pre­vi­ous week. Get­ting close to the end of the year now, the four-week aver­age for ethanol pro­duc­tion stood at 929,000 bar­rels per day, which trans­lates to an annu­al­ized rate of 14.25 bil­lion gallons.
• Costs to hire Cape­size ves­sels in the Atlantic Ocean headed for Asia climbed to a 2011 high for a sec­ond day this week on stronger demand to trans­port iron ore and coal. Rates climbed to $55,550 a day, accord­ing to the Baltic Exchange, the high­est rate since Nov. 10, 2010.
• Pal­la­dium prices have ral­lied 21 per­cent in the last two weeks on spec­u­la­tion that gains in car sales will boost demand for the metal used in pollution-control devices. Global pur­chases will rise 6.5 per­cent to a record 79.5 mil­lion cars and light com­mer­cial vehi­cles in 2012, accord­ing to LMC Auto­mo­tive Ltd., a research com­pany in Oxford, Eng­land. Also, U.S. sales of light vehi­cles in Novem­ber expanded at the fastest pace in more than two years.

Weak­nesses

• In a per­pet­ual Euro­pean head­line vor­tex in antic­i­pa­tion of an out­come from the EU sum­mit, energy stocks, which were up 10 per­cent last week, decreased 3–5 per­cent this week. Com­modi­ties over­all were down for the week, with pal­la­dium being an excep­tion, up just over 6 percent.
• Gold has been held hostage by macro devel­op­ments in Europe this week. Yesterday’s price action was tes­ta­ment to just how focused on Europe mar­ket par­tic­i­pants cur­rently are: a sharp sweep higher on the ECB pol­icy eas­ing and var­ied efforts to sta­bi­lize the finan­cial sys­tem were quickly reversed and the metal gave back all of the week’s gains after ECB Pres­i­dent Draghi indi­cated firmly that the cen­tral bank would not act as a lender of last resort in any way, and that the EU treaty does not allow for the ECB to mon­e­tize sov­er­eign debt. This came as a blow to hopes for Euro­pean quan­ti­ta­tive eas­ing, which would be a pow­er­ful cat­a­lyst for higher gold prices if it were to materialize.
• Expec­ta­tions for a pos­i­tive out­come of the EU Sum­mit have been run­ning high, sug­gest­ing that most par­tic­i­pants may already have adjusted posi­tions. The UBS Eco­nom­ics team antic­i­pates an agree­ment among the euro­zone mem­ber coun­tries, which would lay out fis­cal rules, includ­ing sanc­tions against violators.

Oppor­tu­ni­ties

• CLSA research high­lighted that Wood Macken­zie, min­ing con­sul­tant, unveiled a bull­ish out­look for the coal mar­ket at its global energy forum. Wood Macken­zie sees China’s thermal-coal imports and deliv­ered prices ris­ing to over 400 mil­lion tons and $150 per ton, respec­tively by 2020. Addi­tion­ally, the firm expects a strong import growth and pric­ing, and cites that coal equi­ties remain attractive.
• China may see its demand for iron ore reach 1.13 bil­lion met­ric tons by 2015, said the Min­istry of Indus­try and Infor­ma­tion Tech­nol­ogy when prepar­ing the newly issued steel indus­try blue­print for the 12th five-year plan period. Last year, China con­sumed 920 mil­lion met­ric tons of iron ore. The coun­try imported 618 mil­lion met­ric tons of iron ore from 40 coun­tries last year, which accounted for 67 per­cent of the total con­sump­tion, up from 35 per­cent ten years ago, due to the rapid devel­op­ment of the high energy-consuming steel indus­try. In the first ten months, China's iron ore imports grew 10.9 per­cent year-over-year and its domes­tic out­put of the min­eral grew at a fast pace of 26.4 percent.
• The rise of the mid­dle class in emerg­ing mar­kets is dri­ving increas­ing pro­tein con­sump­tion. The growth of U.S. beef export vol­umes and the antic­i­pa­tion of sub­stan­tial demand growth in com­ing years with new cus­tomers and grow­ing appetites for beef is cre­at­ing an excit­ing prospect for the beef indus­try. In the first three quar­ters of this year, U.S. beef exports amounted to more than 2.1 bil­lion pounds and were 27 per­cent larger than export vol­umes dur­ing the same period a year ago. Over 10 per­cent of the beef pro­duced in the U.S. is now exported and the U.S. is now a net exporter of beef.
• The prospect of oil top­ping $150 a bar­rel within a year has become the biggest bet in the options mar­ket as the U.S. and Europe work to limit Iran’s crude sales. The num­ber of out­stand­ing calls to buy oil at $150 next Decem­ber has jumped 29 per­cent, more than any other option on the New York Mer­can­tile Exchange. The con­tracts equate to about 38 mil­lion bar­rels of oil, or 43 per­cent of daily global demand, based on data from the U.S. Energy Department.

Threats

• BBC News reported that China warned of “severe chal­lenges” to exports to the west, attrib­ut­able to eco­nomic dif­fi­cul­ties in key West­ern mar­kets. Sales to Europe and the U.S., which is about 40 per­cent of total exports, were also not expected to recover next year. Exports to the Euro­pean Union and the United States fell 9 and 5 per­cent, respec­tively, in Octo­ber ver­sus a year ago.
• The U.S. Envi­ron­men­tal Pro­tec­tion Agency (EPA) this week released a draft analy­sis of results from its Pavil­lion, WY ground water inves­ti­ga­tion of sus­pected drink­ing water con­t­a­m­i­na­tion from shale gas frac­tur­ing. The EPA says deep mon­i­tor­ing wells in the aquifer con­tain syn­thetic chem­i­cals, like gly­cols and alco­hols con­sis­tent with gas pro­duc­tion and frack­ing flu­ids, ben­zene con­cen­tra­tions well above Safe Drink­ing Water Act stan­dards, and high methane lev­els. Detec­tions in drink­ing water wells, how­ever, are gen­er­ally below lim­its estab­lished in health and safety stan­dards. The inves­ti­ga­tion con­tin­ues, but points toward the need for base­line monitoring.
• Twenty-five out of 77 large– and medium-sized steel­mak­ers incurred total losses of 2.13 bil­lion in Chi­nese Yuan in October.

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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