Energy and Natural Resources Market Radar (June 16, 2014)
Strengths
- North American crude oil producers led resource stocks this week following a breakout in the price of West Texas crude to $106 a barrel. Accordingly, Suncor Energy, Devon Energy and Sanchez Energy all made fresh 52-week highs along with numerous other oil producers.
- Gold- and silver-related equities outperformed this week as bullion prices increased in response to geopolitical instability in the Middle East. Both Franco-Nevada and Silver Wheaton outpaced our natural resources benchmark.
- Oil and gas drilling stocks, with exposure to growing resource plays in the Permian Basin and Eagle Ford shale, performed well in the period. Patterson-UTI Energy and Xtreme Drilling and Coil Services breached prior 12-month highs.
Weaknesses
- Equities with exposure to Iraq and Kurdistan underperformed in response to the fall of Mosul to a militant Islamic group. Gulf Keystone Petroleum declined approximately 15 percent on the week.
- Copper-related equities and other base metal companies declined this week due in part to ongoing probes by Chinese officials related to the accounting of copper used as collateral for loans. Lundin Mining lagged our benchmark by approximately 100 basis points in the week.
- Food stocks declined over the past five days after the fallout from Tyson’s final bid for Hillshire Farms was accepted by shareholders. Tyson Foods and Archer Daniels Midland fell by roughly 12 and 3 percent during the week.
Opportunities
- Despite small-cap weakness in the broader equity market, the Toronto Stock Exchange (TSX) Venture Index of junior resource stocks outperformed the large-cap-dominated Morgan Stanley Commodity Related Index by approximately 40 basis points this week. Expanding market breadth may imply further strength for our natural resource stocks over the near term.
- The International Energy Agency (IEA) said in its monthly report that it had raised its estimate of the demand for OPEC crude oil in the second half of this year by 150,000 billion barrels per day (bpd) from its forecast last month to an average of 30.9 million bpd. That is almost a million bpd a day more than the group was producing in May. The IEA is forecasting global oil demand growth of 1.3 million bpd for 2014.
- The latest escalation in Iraqi tensions has introduced new event risk for global oil markets. However, current options market pricing suggests oil markets are still attaching a low probability to an oil price spike over the coming months. This could reflect the fact that major oil infrastructure has not (yet) fallen into the hands of the militant extremists, which is constructive for producers in the region.
Threats
- The stakes are high for the oil market as the security situation in Iraq has taken a sharp turn for the worse with al-Qaeda-linked groups seizing control of large parts of Mosul, Iraq's second-largest city. Further turbulence in global markets could increase if extremist groups expand their attacks from the Kirkuk-Ceyhan pipeline to other energy infrastructure assets.
- This year global inventories for grains and soybeans are projected to be the second-highest on record. Moreover, global production for corn and soybeans is set to hit a new record. While demand may prove robust, bearish supply side developments could weigh further on soft commodity prices.
