Energy and Natural Resources Market Radar (February 3, 2014)

Energy and Natural Resources Market Radar (February 3, 2014)

Marcellus Dry Gas Production
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Strengths

  • Despite weakness in natural gas pricing late in the week, the prompt contract of Henry Hub stayed above $5 for three out of the last five days. The February 2014 contract expired this week at a 4-year high of $5.56 per million British thermal units (MMBtu). The prompt (March 2014) contract is up 9 percent from last week to $5.01/MMBtu.
  • Midwest physical premiums for aluminium remained above $0.20 a pound again this week, and came close to breaching $0.21 on Friday.Ā  Physical premiums are nearly double the level seen for most of last year.
  • Coffee futures have been very strong, posting the biggest monthly gain since August 2011 due to dry weather in Brazil that may curb output.Ā  Arabica futures have jumped 23 percent from very low levels in November.

Weaknesses

  • Chinaā€™s HSBC final manufacturing Purchasing Managersā€™ Index (PMI) dropped to a six-month low of 49.5 in January, indicating a contraction, as output and new order growth weakened. As a result, three-month London Metals Exchange (LME) copper dropped to a two-month low.
  • Caterpillarā€™s mining equipment sales declined 48 percent in 2013, resulting primarily from weaker demand for mining products, as mining companies have reduced their capital expenditures with almost the entire decline related to new equipment.
  • Asian spot iron ore prices continued to weaken this week before bottoming on Wednesday at $122.90 per metric ton, the lowest level since July 8, 2013.

Opportunities

  • Through most of this decade, non-Organisation for Economic Co-Operation and Development (OECD) demand growth has been a key driver for oil market balances, but what makes this year different is that the growth is poised to come from a diverse pool of countries rather than a few big sources that have been major contributors in the past, such as China and India.
  • China needs to invest more in overseas mining projects to improve its pricing power, according to the National Development and Reform Commission, adding Chinese iron ore imports would continue to rise and the country would remain dependent on imports.
  • Indonesia plans to issue export quotas for processed minerals and concentrates soon, according to a mines ministry official, as the government seeks to take greater control over shipments of its natural resources. Separately, the Mineral Entrepreneurs Association has filed a legal challenge against the ore export ban while Freeport and Newmont have yet to resume exports of unrefined ores since the introduction of the new export tax.

Threat

  • Headwinds from Fed tapering and some recent weak oil demand data suggest that there may be downside risks for oil demand heading into the year.
  • South Africaā€™s Association of Mineworkers and Construction Union (AMCU) rejected a wage offer from platinum producers, which was presented after four days of government-brokered talks. The union had been seeking a doubling of wages for workers at the three largest platinum producers globally, together accounting for more than 40 percent of global mining.
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