Last Month a Disaster for Commodities

Tuesday, May 15th, 2012

I went to cir­cle back today to look at what has been among the weak­est areas of the mar­ket, and chart after chart came up in the com­mod­ity space.   Here is a chart of the per­for­mance of the futures in var­i­ous mar­kets (mostly com­modi­ties) over the past month (via Fin­viz) and it's a mess.  Iron­i­cally, nat­ural gas – the most hated com­mod­ity of most of the first quar­ter, was the stand­out.  Rever­sion to mean trade.   Coal is not listed, but that group looks as bad as solar stocks… ironic since the lat­ter was sup­posed to sup­plant the for­mer at some point.

There is an in depth story on the sec­tor in the WSJ today as well.

• Com­modi­ties fell to nearly two-year lows last week, mea­sured by a widely used bench­mark, prompt­ing investors to pon­der whether the mas­sive rally that began in 1999 may be faltering.
• China is cool­ing down at the same time the U.S. is strug­gling to heat up, cloud­ing the out­look for the world's two biggest con­sumers. And pro­duc­ers of some raw mate­ri­als have ramped up sup­plies enough to cre­ate at least tem­po­rary gluts, par­tic­u­larly if appetites falter.
• For more than a decade, invest­ing in com­modi­ties was prac­ti­cally a sure thing. Prices rose in nine of the 12 years start­ing in 1999. Even down years had expla­na­tions, such as the Sept. 11 attacks in 2001 and the global finan­cial cri­sis in 2008.
• On Fri­day, the Dow Jones–UBS Com­mod­ity Index, which tracks futures con­tracts for 20 basic goods, fell 1% to the low­est level since Sep­tem­ber 2010. U.S. crude oil, gold and cotton—all com­po­nents of the index—helped lead the way down, as each hit fresh lows for 2012. The index is down 4% this year after a 13% drop last year, putting it on track for the first con­sec­u­tive declines since 1997 and 1998.

Tags: Appetites, Commodities Prices, Commodity Index, Commodity Space, Crude Oil, Declines, Dow Jones, Futures Contracts, Global Financial Crisis, Gluts, Investing In Commodities, Lows, Massive Rally, Natural Gas, Raw Materials, Sept 11 Attacks, Standout, Sure Thing, Ubs, Wsj
Posted in Markets | Comments Off

Gold and Oil Outlook (Bart Melek)

Sunday, November 20th, 2011

This online video fea­tures Bart Melek, Head of Com­mod­ity Strat­egy, TD Secu­ri­ties, in con­ver­sa­tion with MaryAnn Matthews.

While the econ­omy and finan­cial mar­kets have been clouded with uncer­tainty, crude oil con­tin­ues to chart its own path. Bart dis­cusses what is behind this strength and also pro­vides his out­look on gold, sil­ver and nat­ural gas.

In this inter­view, Melek addresses the fol­low­ing questions:

• What is behind crude's strength and what's your outlook?
• Do you expect to see sea­sonal strength in nat­ural gas?
• Your thoughts on gold as a tra­di­tional safe haven?
• Your out­look for sil­ver and other pre­cious metals?
• What role can pre­cious met­als play in an investor's portfolio?

To view, click here or on image below:

Copy­right © TD Water­house

Tags: Addresses, Bart, Commodity Strategy, Crude Oil, Economy, Financial Markets, Gold Silver, Investor, Maryann, Melek, Natural Gas, Oil Online, Online Video, Outlook, Path, precious metals, Safe Haven, Td Waterhouse, Uncertainty
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Don’t Play Monopoly with your Portfolio

Thursday, November 10th, 2011

This Week's Fea­ture: BMO Equal Weight Util­i­ties ETF ( Ticker: ZUT )

Glob­ally equity mar­kets staged an incred­i­ble recov­ery from their Octo­ber lows. How­ever, Europe’s ongo­ing trou­bles ensure that height­ened anx­i­ety will remain. Even more rea­son to keep a care­ful eye on risk inside your portfolio.

Major equity indices for the United States, Europe and Emerg­ing Mar­kets ral­lied by 14% to 20% over the last five weeks. The S&P TSX 60 rose 12.5%. Com­modi­ties ral­lied too, with crude oil and cop­per up about 19%.

Euro-zone relief drove the rally, just as Euro-zone despair drove the drop. Until the Euro-zone begins to resolve its debt issues, every move it makes will agi­tate mar­kets. When the Greeks decided to put their debt plan before a ref­er­en­dum last Tues­day, Euro­pean equity mar­kets fell 5%.

In this volatile envi­ron­ment, investors must be more vig­i­lant in man­ag­ing port­fo­lio risk. One risk often over­looked is coun­ter­party risk. As the exchange-traded mar­ket has devel­oped, more, er…esoteric, ETFs have arisen, some of them with coun­ter­party risk.

First, I should stress that most ETFs invest directly in stocks or bonds. These plain vanilla ETFs pose no coun­ter­party risk. Other ETFs use futures con­tracts: no coun­ter­party risk here either, but they do have other issues such as lever­age that I have dis­cussed before.

Then, there are ETFs that use “over-the-counter” (OTC) deriv­a­tives con­tracts. These are the ones that come with coun­ter­party risk. These ETFs do not invest directly. Instead, they pay a fee to a coun­ter­party, say a bank, and in exchange, the bank pays the ETF the return on some index like the S&P 500. All goes well until the day the bank is unable to pay the return.

How can you tell whether your ETFs have coun­ter­party risk? You must read the prospec­tus. In a past role as a man­ager of OTC deriv­a­tives for a Bay Street fund man­ager, I was respon­si­ble for con­trol­ling coun­ter­party risk. Are most investors ready or will­ing to do that? Unlikely.

In Europe, insti­tu­tional investors are sell­ing their OTC ETFs in droves and shift­ing to plain vanilla ones. France’s sec­ond largest bank, Société Générale, has seen out­flows of Euro 4.4 bil­lion this year from the OTC ETFs man­aged by its Lyxor divi­sion. There is noth­ing inher­ently wrong with the ETFs but investors are wor­ried about SocGen’s expo­sure to Greek debt. SocGen’s stock price has fallen nearly 60% this year.

In recent notes, I dis­cussed sec­tor diver­si­fi­ca­tion and lower-risk, higher-dividend sec­tors like REITs. Another is the util­i­ties sector.

When we play Monop­oly, my sons tend to pass on Water Works and Elec­tric Com­pany in favor of Pacific Ave or Board­walk. Like them, most Cana­di­ans pass on util­i­ties for their portfolios.

That’s largely because the S&P TSX Com­pos­ite passes on util­i­ties. Three sec­tors dom­i­nate the Com­pos­ite – finan­cials, energy and mate­ri­als – with nearly 80% of the weight. Util­i­ties account for just 2%, even though their ben­e­fits would seem to mesh well with what most investors want.

Util­i­ties are less volatile than energy, mate­ri­als and even the Index as a whole. They pay bet­ter div­i­dends than the Index and every other sec­tor bar­ring tele­coms. Best of all, they are not so closely tied to the events in Europe.

There are a cou­ple of Cana­dian util­i­ties ETFs avail­able: the iShares S&P TSX Capped Util­i­ties (XUT/TSX) and the BMO Equal Weight Util­i­ties (ZUT/TSX). Of the two, BMO ZUT is larger with about $95 mil­lion in assets.

iShares XUT is mar­ket cap weighted and holds 11 com­pa­nies, with For­tis, TransAlta, Emera, Cana­dian Util­i­ties and Atco mak­ing up about 70%. XUT pays a div­i­dend of about 2.9%.

BMO ZUT is rebal­anced twice a year to equal weights across 15 com­pa­nies. It pays a div­i­dend of about 5.3%. ZUT also holds one oil pipeline com­pany, Pem­bina: not strictly a util­ity but the same idea.

The high yield will attract longer-term investors. In the near term, keep in mind that val­u­a­tions are rich. The aver­age price-to-earnings ratio for the com­pa­nies inside ZUT is 23.4 times, with a price-to-book of about 1.93 times. For the Com­pos­ite, the val­ues are 15.2 times and 1.84 times.

Some of the pre­mium is jus­ti­fied by the ben­e­fits. But a price fall in the near term is pos­si­ble and that would be a good time to enter.

ZUT is less volatile than XIU, the TSX 60 ETF.

The archerETF Global Tac­ti­cal Portfolio

archerETF offers Global Tac­ti­cal Port­fo­lio Management.

Our out­look is Global: we invest across coun­tries, sec­tors, com­modi­ties and other asset classes to improve returns. Our man­age­ment is Tac­ti­cal: we strive to select the right oppor­tu­ni­ties at the right times in response to chang­ing mar­ket con­di­tions to man­age and min­i­mize port­fo­lio risk.

Please call us at TF 1–866-469‑7990 for more information.

Tags: Bonds, Canadian, Careful Eye, Commodities, Crude Oil, Debt Issues, Debt Plan, Emerging Markets, Equal Weight, Euro Zone, European Equity, Futures Contracts, Greeks, Last Tuesday, Lows, Otc Derivatives, Outlook, Plain Vanilla, Play Monopoly, Portfolio Risk, Prospectus, TSX 60, Volatile Environment, Zut
Posted in Bonds, Brazil, Canadian Market, Commodities, ETFs, Markets, Oil and Gas, Outlook | Comments Off

Energy and Natural Resources Market Cheat Sheet (November 7, 2011)

Sunday, November 6th, 2011

Energy and Nat­ural Resources Mar­ket Cheat Sheet (Novem­ber 7, 2011)

Strengths

• The Global Resources Fund per­formed in line with the bench­mark for the week.  The NYSE Arca Gold Min­ers Index, Oil Explo­ration & Pro­duc­tion and the Met­als and Min­ing index were among the few indices pos­i­tive for the week.  With con­tin­ual uncer­tainty around the state of the Euro­zone, despite some clar­ity ear­lier on this week, investors sought refuge in gold.  The fund’s expo­sure to the pre­cious metal helped to reduce down­side risk.  The indices were up 1.4 per­cent, 0.86 per­cent and 0.9 per­cent respectively.
• Roubini Global Eco­nom­ics high­lighted that oil prices ral­lied in Octo­ber, nar­row­ing the Brent-WTI spread, with WTI appre­ci­at­ing over 24 per­cent to $94.2 per bar­rel and Brent ris­ing by 11 per­cent to nearly $111 per bar­rel.  Oil and oil prod­uct inven­to­ries drew down to below their five-year aver­age, as did growth, which was sur­pris­ing on the upside at an annu­al­ized adjusted rate of 2.5 per­cent for third quarter.
• Bloomberg reported that the num­ber of India’s power sta­tions with coal stock­piles of fewer than four days’ nor­mal use has tripled in two months, prompt­ing electricity-supply cuts and threat­en­ing to curb growth in Asia’s third-biggest econ­omy.  Coal out­put in India was dis­rupted with mon­soon rains flood­ing mines and a work­ers’ strike.  The country’s stock­piles dropped from 70.9 mil­lion met­ric tons of coal on Octo­ber 18 to 8.1 mil­lion tons on Novem­ber 1, also rep­re­sent­ing a 33 per­cent decline from the first of September.

Weak­nesses

• Con­sid­er­able weak­ness rel­a­tive to other indices was seen among con­struc­tion mate­ri­als, alter­na­tive energy and the Baltic Dry Ship­ping Index, all down 4.39, 4.82 and 4.17 per­cent, respec­tively for the week.
• Freeport-McMoRan Cop­per & Gold’s Gras­berg mine in Indone­sia is oper­at­ing at only 5 per­cent of its capac­ity of 230,000 tons of ore per day, accord­ing to the direc­tor gen­eral of min­eral resources and coal at the Energy Min­istry. This works out to a loss of over 1,600 tons per day of copper-in-concentrate. Freeport recently declared force majeure on ship­ments of cop­per con­cen­trates as a result of an increas­ingly acri­mo­nious strike over pay and con­di­tions that is now into its sixth week. Gras­berg is the world's second-largest cop­per mine equal to around 4 per­cent of global out­put and is also one of the world's largest gold mines.
• A Bloomberg report high­lighted that Brazil’s indus­trial sec­tor has been the hard­est hit by Europe’s debt cri­sis and slow­ing growth in the U.S.  The eco­nomic activ­ity index, a proxy for gross domes­tic prod­uct, con­tracted 0.53 per­cent in August, its biggest monthly drop since the global finan­cial cri­sis of 2008.  It dropped fur­ther for the month of Sep­tem­ber, post­ing its sec­ond steep­est decline since the finan­cial cri­sis, spark­ing the cen­tral bank’s argu­ment for more interest-rate cuts in Latin America’s largest economy.

Oppor­tu­ni­ties

• Global cop­per sup­ply remains chal­lenged.  Xstrata esti­mates 2011 global cop­per mine out­put growth to be the weak­est since 2002, with mine pro­duc­tion to rise by only 40 kilo­tons this year.
• McK­in­sey Quar­terly pub­lished a piece exam­in­ing the oil indus­try and whether or not sup­ply growth could accel­er­ate to meet global demand.  The report high­lighted that despite high oil prices for much of the past decade and surg­ing invest­ment out­lays by many major pri­vate and national oil com­pa­nies alike, capac­ity has only risen by more than 1 per­cent a year dur­ing that time.  The company’s cur­rent pro­jec­tion sug­gests that the world could reach a real­is­tic sup­ply capac­ity of around 100 mil­lion bar­rels a day by 2020, which is an increase from 91–92 mil­lion bar­rels per day today.  This num­ber, how­ever, would barely sat­isfy the roughly 100 mil­lion bar­rels of liq­uids the world would con­sume each in day in such a sce­nario, which is up from 88–89 mil­lion today.

Threats

• Bloomberg reported that Brazil plants to limit the expan­sion of min­ing com­pa­nies with con­ces­sions in size­able areas as part of new min­ing rules.  It has been spec­u­lated that this may affect com­pa­nies, such as Vale SA, neg­a­tively.  Vale is a Brazil­ian diver­si­fied min­ing multi­na­tional cor­po­ra­tion and one of the largest logis­tics oper­a­tors in the coun­try.  It is the largest pro­ducer of iron ore, pel­lets, and sec­ond largest of nickel.
• Roubini Global Eco­nom­ics is assign­ing a 60 per­cent prob­a­bil­ity to a reces­sion in devel­oped mar­kets in 2012.  The firm believes this will cap the recent surge in crude prices despite OPEC out­put tight­en­ing in the wake of Libyan sup­ply enter­ing the market.
• Arcelor­Mit­tal SA, the world’s num­ber one steel­maker, said that a sum­mer dip in demand is now extend­ing into a second-half slump, with even lower steel ship­ments and prices in the fourth quar­ter, lead­ing it to scrap some invest­ment plans.  Arcelor­Mit­tal glob­ally sup­plies between 6 and 7 per­cent of steel.  It is attribut­ing this to eco­nomic uncer­tain­ties, the risk of reces­sion in devel­oped mar­kets, and pol­icy tight­en­ing in China, and is caus­ing cus­tomers to be increas­ingly cautious.

Tags: Barrel Oil, Brazil, Coal Output, Crude Oil, Downside Risk, Electricity Supply, Eurozone, Freeport Mcmoran, Freeport Mcmoran Copper, Global Economics, Global Resources, Gold, Gold Miners, Grasberg Mine, Index Oil, India, Million Metric Tons, Monsoon Rains, Nyse Arca, Oil Product, Product Inventories, Resources Fund, Shipping Index, Wti
Posted in Brazil, Gold, India, Markets, Oil and Gas | Comments Off

Energy and Natural Resources Market Cheat Sheet (October 31, 2011)

Monday, October 31st, 2011

Energy and Nat­ural Resources Mar­ket Cheat Sheet (Octo­ber 31, 2011)

Strengths

• The com­modi­ties com­plex, includ­ing indus­trial met­als and crude oil, gained across the board as mar­kets wel­comed a deal by the euro­zone lead­ers this week. West Texas Inter­me­di­ate (WTI) crude oil gained nearly 7 per­cent and cop­per jumped more than 14 per­cent this week as investors’ risk appetite exploded. Commodity-related equi­ties also ral­lied which drove gains in the Global Resources Fund (PSPFX).
• Mac­quarie Research high­lighted that U.S. durable goods orders, exclud­ing trans­porta­tion equip­ment, rose 1.7 per­cent in Sep­tem­ber. This was greater than the con­sen­sus expec­ta­tion and is the strongest read­ing in the last six months.
• Sco­tia­bank noted that cop­per inven­to­ries in Asia are falling at a rate of 50,000 tonnes per week, cre­at­ing upward pres­sure on the cop­per price. The rapid decline means there’s poten­tial for zero inven­to­ries by Christmas.
• Ris­ing oil prices have led to a rise in cor­po­rate earn­ings for energy com­pa­nies. Major pro­duc­ers includ­ing Exxon Mobil, Royal Dutch Shell and France’s Total reported strong earn­ings results for the third quar­ter this week. Both Exxon Mobil and Royal Dutch Shell reported earn­ings 40 per­cent greater than a year ago, while Total’s profit rose 13 per­cent over the same time period, accord­ing to Resource Invest­ing News.

Weak­nesses

• Despite pos­i­tive num­bers across the board for the week, the Aler­ian MLP Index and the Baltic Dry Ships Index were lag­gards in the sec­tor. How­ever, each saw pos­i­tive gains, up 3.1 per­cent and 3.8 per­cent, respectively.
• A Mac­quarie report this week noted that the lat­est Steel­Bench­marker assess­ment by World Steel Dynam­ics has again high­lighted the pres­sures fac­ing the steel indus­try. The bench­mark World Export hot rolled coil (HRC) price fell 4.2 per­cent over the past 14 days to $656 per tonne, the low­est since Decem­ber 2010.
• Non-OPEC oil sup­ply out­ages have been run­ning twice the level seen in 2010. Fur­ther evi­dence of the supply-side dete­ri­o­ra­tion was seen in the extremely poor set of August num­bers for U.K. domes­tic pro­duc­tion. At 808,000 bar­rels per day, total pro­duc­tion is at its low­est lev­els since 1978.

Oppor­tu­ni­ties

• Data com­piled by Bloomberg this month shows that traders have ris­ing bull­ish expec­ta­tions for the agri­cul­ture sec­tor. Options traders are snatch­ing up pro­tec­tion against declines in agri­cul­tural stocks at the fastest rate in four years. Puts to sell the Mar­ket Vec­tors Agribusi­ness ETF out­num­ber calls by more than 2-to-1, the largest dis­crep­ancy in almost a year. Over the past month, $2.7 mil­lion has been invested in the agribusi­ness ETF, second-most among all U.S.-listed global equity ETFs.
• China will be report­ing its Octo­ber HSBC Man­u­fac­tur­ing Pur­chas­ing Man­agers Index (PMI) on Mon­day, Octo­ber 31. The flash PMI announced this past Mon­day showed expan­sion in the Chi­nese man­u­fac­tur­ing sec­tor for the first time since mid-summer and the coun­try con­tributed more than half of global incre­men­tal oil demand for the month of Sep­tem­ber, accord­ing to the Finan­cial Express. An accel­er­ated PMI could have a mean­ing­ful effect on commodities.
• A short­fall in diesel fuel sup­ply is spread­ing across China. The Xin­hau news agency is report­ing that pri­vate gas sta­tions are scour­ing the coun­try for diesel sup­plies and lines are grow­ing longer at fill­ing sta­tions in major cities. Diesel fuel short­ages are com­mon in the win­ter but longer and heavier-than-usual refin­ery main­te­nance mixed with a reduc­tion in retail prices could cre­ate the per­fect recipe for a squeeze once again this year. PetroChina imported 120,000 tonnes of diesel fuel in Octo­ber to meet the increas­ing demand while China National Petro­leum Corp. (CNPC) is run­ning its refiner­ies at full capac­ity. Refin­ery runs have increased 5.7 per­cent on a year-over-year basis and the com­pany has encour­aged refiner­ies to reduce naph­tha out­put to allow for higher diesel pro­duc­tion. Fur­ther, CNPC has said that it will raise refin­ery runs to the second-highest level on record next month in order to max­i­mize diesel output.
• Resource Invest­ing News says ris­ing pro­duc­tion costs are putting down­ward pres­sure on fer­til­izer prof­its. Fer­til­izer pro­duc­tion is very energy inten­sive, with pro­duc­tion requir­ing sig­nif­i­cant amounts of sul­fur, ammo­nia and nat­ural gas. Ana­lysts worry that ris­ing input costs and shrink­ing mar­gin prof­its may neg­a­tively impact the entire indus­try. How­ever, Potash Cor­po­ra­tion of Saskatchewan antic­i­pates improv­ing mar­gins over the near future due to “econ­omy of scale” in terms of potash pro­duc­tion. Accord­ing to Potash, “with demand expected to rise, we believe our expand­ing potash capa­bil­ity pro­vides a unique growth oppor­tu­nity. The pow­er­ful levers of sell­ing more vol­umes at higher prices, with the poten­tial for lower per tonne oper­at­ing costs, offer sig­nif­i­cant gross mar­gin poten­tial in the years ahead. Beyond the oppor­tu­nity for mar­gin expan­sion, the poten­tial for lower per-tonne min­ing taxes and improved earn­ings from our equity invest­ments pro­vides sig­nif­i­cant growth potential.”

Threats

• Sep­tem­ber PMI data across Emerg­ing Europe will be released on Novem­ber 1. Roubini Global Eco­nom­ics (RGE) is fore­cast­ing fur­ther weak­en­ing in man­u­fac­tur­ing con­di­tions, reflect­ing a decline in export orders and weak­en­ing growth out­look in the eurozone.
• On Wednes­day, Freeport McMoRan declared force majeure on ship­ments of cop­per con­cen­trates from its Gras­berg cop­per mine in Indone­sia as an increas­ingly acri­mo­nious labor strike over pay and con­di­tions con­tin­ued into its fifth week. Mineweb sug­gested that this would mean that the com­pany is not antic­i­pat­ing a pro­tracted period of dis­rup­tion at the mine.
• In the midst of earn­ings report­ing sea­son, Resource Invest­ing News reported that many ana­lysts are skep­ti­cal about pro­duc­ers being able to reach their pro­duc­tion tar­gets. As an exam­ple, Exxon Mobil will need to pump out 5 mil­lion bar­rels a day to reach its 4 per­cent growth tar­get for 2011. For the Sep­tem­ber quar­ter, Exxon Mobil reported pro­duc­ing 4.28 mil­lion bar­rels a day. Ana­lysts have spec­u­lated that one prob­lem for the pro­duc­ers is that com­pa­nies must sign production-sharing con­tracts with local gov­ern­ments in some coun­tries. This means oil pro­duc­ers receive a smaller out­put when coun­tries cash in on ris­ing crude prices. Such agree­ments are preva­lent in Africa, which accounts for 20 per­cent of Exxon Mobil’s crude oil supply.

Tags: agricultural, Alerian Mlp Index, Commodities, Copper Price, Corporate Earnings, Crude Oil, Durable Goods Orders, Earnings Results, Exxon Mobil, Hot Rolled Coil, Industrial Metals, Laggards, Opec Oil, Outlook, Rapid Decline, Resources Fund, Rising Oil Prices, Risk Appetite, Royal Dutch Shell, Same Time Period, Steel Dynamics, West Texas Intermediate, World Steel Dynamics, Wti Crude Oil
Posted in Commodities, ETFs, Markets, Oil and Gas, Outlook | Comments Off

Sprott: Investment Outlook (October/November 2011)

Friday, October 28th, 2011

Oil or Not,
Here They Come

By Kevin Bam­brough
Con­tribut­ing Author: Paul Dim­i­tri­adis
Sprott Asset Management

Oil has been markedly absent in the finan­cial head­lines lately. While the recent clamor over EU sol­vency and weak global growth has tem­porar­ily dis­placed its media atten­tion, oil’s cru­cial impor­tance to the world econ­omy has not dwin­dled in the slight­est. Oil remains the world’s great­est sin­gle energy source today, pro­vid­ing over 1/3 of our energy sup­ply. Although it is well under­stood that the oil price is crit­i­cal to the global econ­omy, we some­times neglect to appre­ci­ate how tightly oil sup­ply is cor­re­lated to global growth. By his­tor­i­cal stan­dards, the world has been cop­ing with con­strained oil pro­duc­tion and high oil prices for most of the past six years. This tight­ness in oil sup­ply has been a sig­nif­i­cant fac­tor lim­it­ing global growth, and it would appear that no mat­ter what finan­cial solu­tions are even­tu­ally engi­neered by our politi­cians, global growth will remain sig­nif­i­cantly restricted by the real economy’s abil­ity to pro­duce oil. Lim­ited global sup­ply growth means that the West­ern world now faces sig­nif­i­cant com­pe­ti­tion for oil from emerg­ing mar­kets whose cit­i­zenry are will­ing to work much harder for far less. This will con­tinue to result in a nar­row­ing gap of per capita con­sump­tion between emerg­ing and devel­oped economies as the emerg­ing economies con­tinue to gain rel­a­tive eco­nomic strength, wage growth, cur­rency appre­ci­a­tion and pur­chas­ing power. We believe strate­gic invest­ments in oil pro­duc­ers and ser­vice com­pa­nies will offer an effec­tive way to profit from this trend.

Pro­duc­tion – Where’s the Growth?

We begin with a review of global oil pro­duc­tion. We first wrote about Peak Oil back in 2005; and spec­u­lated that we were approach­ing the pin­na­cle of global crude oil production.1 As Fig­ure 1 below illus­trates, since that time, global oil pro­duc­tion has grown very lit­tle, appre­ci­at­ing by a mere 2% in total pro­duc­tion. This pro­duc­tion plateau gen­er­ated the 2008 oil price spike to nearly $150 per bar­rel. Sub­se­quently, despite the eco­nomic stag­na­tion expe­ri­enced by devel­oped economies, the price of Brent Crude Oil has aver­aged over $78 per bar­rel, four times higher than the ~$18 aver­age that Brent traded at in the 1990s.2

Despite this extremely large and sus­tained increase in price, oil pro­duc­tion has failed to grow mean­ing­fully. Over the past ten years, most experts have con­sis­tently over­es­ti­mated future pro­duc­tion growth and have con­tin­u­ally revised their fore­casts lower as a result. Fig­ure 2 from the U.S. Energy Infor­ma­tion Admin­is­tra­tion (“EIA”) below charts pro­duc­tion fore­casts made in 2000, 2005 and 2010. Over the last decade the EIA has revised its global oil pro­duc­tion esti­mates lower for 2015 and 2020 by 14% and 18%, respec­tively. In light of these down­ward revi­sions, it still seems extremely opti­mistic that sup­ply will increase sig­nif­i­cantly in the com­ing years.

Fig­ure 3 above illus­trates that the Inter­na­tional Energy Agency (“IEA”) esti­mates have been just as inac­cu­rate, forc­ing it to reduce its global oil pro­duc­tion esti­mates year after year.

Tags: Author Paul, Canadian, Canadian Market, Commodities, Crude Oil, Crude Oil Production, Dimitriadis, Economic Strength, Emerging Economies, Energy Supply, Financial Headlines, Global Economy, Global Growth, Global Oil Production, Global Supply, India, Investment Outlook, Oil Producers, Oil Supply, Outlook, Peak Oil, Solvency, Sprott Asset Management, Strategic Investments, Trend Production, World Economy
Posted in Canadian Market, Commodities, India, Markets, Oil and Gas, Outlook | Comments Off

Commodity Decline Could Provide a "Tax Cut" (Gibley)

Wednesday, October 26th, 2011

Com­mod­ity Decline Could Pro­vide a "Tax Cut"

Octo­ber 24, 2011

by Michelle Gib­ley, CFA, Senior Mar­ket Ana­lyst, Schwab Cen­ter for Finan­cial Research

Key points

• The global growth slow­down could offer some pos­i­tive news: a decline in com­mod­ity prices and inflation.
• Domes­ti­cally ori­ented countries—those that rely more on con­sumer or con­struc­tion spending—could ben­e­fit from the con­sump­tion stim­u­lus, while domes­ti­cally ori­ented, emerg­ing mar­ket coun­tries could receive a dual ben­e­fit as mon­e­tary pol­icy pres­sure lessens.
• Com­mod­ity prices may not decline to the same degree as in 2008, because another global reces­sion appears unlikely.

It's hard to cheer on a global eco­nomic slow­down, but there could be some good news for con­sumers amid the pes­simism. As eco­nomic growth slows, the demand for commodities—such as oil, met­als and food—typically slows, result­ing in falling prices. The impact of this could be sim­i­lar to a "tax cut" for con­sumers, giv­ing them more money in their pocketbooks.

The ben­e­fit of this "con­sump­tion stim­u­lus" is most likely to be seen in coun­tries where growth is gen­er­ated domes­ti­cally, either through con­sump­tion or con­struc­tion spend­ing. Exam­ples of devel­oped, domes­ti­cally ori­ented coun­tries include the United States, Japan and the United Kingdom.

In addi­tion to the "con­sump­tion stim­u­lus," emerg­ing mar­ket coun­tries could ben­e­fit from the down­ward pres­sure that falling com­mod­ity prices puts on inflation—reducing the need to hike inter­est rates.

Here, we'll discuss:

• Why might we see a "con­sump­tion stimulus"?
• Why is infla­tion likely peaking?
• Who is likely to ben­e­fit from the "con­sump­tion stimulus"?
• Why are com­mod­ity prices unlikely to decline as much as in 2008?
• What are Schwab's invest­ment resources for inter­na­tional investors?

Why might we see a "con­sump­tion stimulus"?

Com­mod­ity prices tend to fall when eco­nomic growth slows due to reduced demand from both con­sumers and busi­nesses. Con­sumers may cut back on energy use and pur­chase fewer goods and ser­vices to save money. Mean­while, busi­nesses may reduce pro­duc­tion in response to reduced demand.

In addi­tion, most com­modi­ties are priced in US dol­lars. When the dol­lar falls, com­mod­ity prices tend to rise as it takes more dol­lars to pur­chase the same amount of a com­mod­ity. And as we're see­ing now, the inverse is also true; com­mod­ity prices tend to decrease when the dol­lar rises.

While con­sumers pay atten­tion to the prices they pay at the reg­is­ter, investors care more about inflation—and notably, we may have seen the top.

Why is infla­tion likely peaking?

With eco­nomic growth slow­ing, some investors are wor­ried that infla­tion may increase because they may expect the Fed­eral Reserve to pur­sue QE3 (quan­ti­ta­tive eas­ing, or asset pur­chases), which could weaken the dol­lar and raise com­mod­ity prices.

How­ever, the dol­lar may not decline. Thus far, the Fed has done more to stim­u­late growth than the rest of the world. And with global growth slow­ing, other global cen­tral banks may begin to lower rates or pur­sue other stim­u­lus mea­sures in a "catch-up" phase. The impact of rate changes on cur­ren­cies is rel­a­tive. But the net effect of declin­ing rates abroad and poten­tially bet­ter growth prospects in the United States is that the dol­lar may have an upward bias.

Com­mod­ity prices have already started to fall as a result of the eco­nomic slow­down, but infla­tion has not yet shown a notice­able decline. How­ever, tak­ing out the impact of the dol­lar and hold­ing com­mod­ity prices unchanged from the lev­els reached this sum­mer, mea­sures of infla­tion are likely to decline rel­a­tively soon. The rea­son is that infla­tion is mea­sured as a per­cent change from the prior period.

Com­mod­ity prices likely peak­ing near-term

Source: Fact­Set, Com­mod­ity Research Bureau, Dow Jones, NYMEX as of Octo­ber 19, 2011.
* Indexed to 100 = 10/18/2006. 25-day mov­ing average.

Who is likely to ben­e­fit from the "con­sump­tion stimulus"?

Depend­ing on the type of econ­omy, the "con­sump­tion stim­u­lus" can have a dif­fer­ent impact:

• Domes­ti­cally ori­ented coun­tries, those with big­ger con­sumer sec­tors or reliant on infra­struc­ture spend­ing for growth, would ben­e­fit from lower com­mod­ity prices because a "con­sump­tion stim­u­lus" could result in bet­ter poten­tial for growth to reac­cel­er­ate. The extra money in con­sumers' pock­et­books can be used for dis­cre­tionary spend­ing, and make infra­struc­ture spend­ing more attractive.
• Export-oriented coun­tries tend to suf­fer in a global slow­down, although lower raw mate­ri­als prices can reduce mar­gin pres­sures for com­pa­nies with less pric­ing power.
• In emerg­ing mar­ket coun­tries, food price declines have a large impact on infla­tion, because food accounts for a dis­pro­por­tional share of con­sumer spend­ing. Emerg­ing mar­ket infla­tion has been a prob­lem due to ris­ing com­modi­ties and expec­ta­tions that prices increases would con­tinue. Addi­tion­ally, higher wages, which con­tributed to infla­tion when growth was accel­er­at­ing, are likely to ease along with slow­ing eco­nomic growth. Peak­ing infla­tion could pro­vide the cover for cen­tral banks to pause rate hike cycles, ben­e­fit­ting stocks.
• In devel­oped mar­ket coun­tries, the com­mod­ity that tends to get the most atten­tion is oil. Accord­ing to the Fed­eral Reserve's model, every $1 move in the price of oil equates to a 0.2% change in GDP in the United States. Through Sep­tem­ber 30, the price of Brent crude, the index most closely asso­ci­ated with changes of gaso­line prices at the pump, has fallen $24 from the May peak. And while gas prices at the pump typ­i­cally react a lot faster to spikes in oil prices than to declines, the national aver­age price at the pump has fallen back down to $3.50 a gal­lon on Sep­tem­ber 30 from the $3.96 May peak.

Emerg­ing mar­ket coun­tries with a domes­tic ori­en­ta­tion could receive a dual ben­e­fit from the "con­sump­tion stim­u­lus" and the reduced pres­sure on mon­e­tary policy.

Cur­rent out­look for select emerg­ing mar­ket, domes­ti­cally ori­ented countries:

• Brazil: the threat of a credit bub­ble could dam­age Brazil's growth, where con­sumer spend­ing grew on the back of exces­sive lend­ing. Con­sumers have started to become delin­quent on pay­ments, risk­ing the poten­tial for bad bank loans in the future. Fis­cal spend­ing needs to be redi­rected from social pro­grams toward productivity-enhancing invest­ments. The cen­tral bank was one of the first to cut rates. How­ever, with infla­tion still ele­vated, there's the con­cern that the rate cut came too early, and infla­tion could resume upward.
• India: per­sis­tent infla­tion forced the cen­tral bank to essen­tially decide to sac­ri­fice growth in the name of fight­ing upward prices. How­ever, infla­tion remained above 9% in Sep­tem­ber, well above the cen­tral banks' 4–6% tar­get, and rate hikes may con­tinue. Addi­tion­ally, the coun­try has longer-term issues with food sup­ply. Avail­able land has shrunk, crop yields have fallen due to flawed farm­ing prac­tices, and only 45% of fields are irri­gated, leav­ing pro­duc­tion at the mercy of weather. Other growth pres­sures include a large fis­cal deficit and the need for for­eign cap­i­tal. For­eigner investors have pulled out money, dis­cour­aged in part by ongo­ing cor­rup­tion alle­ga­tions and gov­ern­ment bureaucracy.
• Mex­ico: growth is typ­i­cally tied to the United States, as it's the des­ti­na­tion for more than 70% of exports. Among devel­oped nations, growth in the United States is attrac­tive rel­a­tive to the larger prob­a­bil­ity of a reces­sion in Europe. Mean­while, Mex­ico could ben­e­fit as auto pro­duc­tion comes off the bot­tom and reac­cel­er­ates glob­ally after the slow­down induced by the Japan­ese cat­a­stro­phes ear­lier this year. Rel­a­tive to other emerg­ing mar­kets, Mex­ico may have a bet­ter poten­tial for growth because many other emerg­ing mar­kets could slow due to reduced growth in China.

Why are com­mod­ity prices unlikely to decline as much as in 2008?

While com­mod­ity prices fell sharply in 2008, prices may not decline to the same degree this time, because another global reces­sion appears unlikely.

Emerg­ing mar­ket incomes have con­tin­ued to rise, increas­ing demand for both food and energy. Ris­ing incomes tend to result in improved diets, increas­ing con­sump­tion of pro­tein, which require more grains to pro­duce than basic grain-based diets. This sup­ports under­ly­ing demand for agri­cul­ture com­modi­ties. Addi­tion­ally, energy con­sump­tion has risen in tan­dem with greater auto­mo­bile pen­e­tra­tion. Emerg­ing mar­kets now out­pace devel­oped mar­kets in oil consumption.

Emerg­ing mar­ket oil con­sump­tion more impor­tant than devel­oped markets

Source: Fact­Set, BP Annual Sta­tis­ti­cal Review of World Energy as of Decem­ber 31, 2010.

Tags: Brazil, Commodities, Commodity Prices, Crude Oil, Downward Pressure, Dual Benefit, Economic Growth, Emerging Market Countries, Energy Use, Global Economic Slowdown, Global Growth, Global Recession, India, inflation, Infrastructure, International Investors, Investment Resources, Market Analyst, Monetary Policy, October 24, Outlook, Pessimism, Pocketbooks, Positive News, Schwab, Stimulus
Posted in Brazil, Commodities, India, Infrastructure, Markets, Oil and Gas, Outlook | Comments Off

Energy and Natural Resources Cheat Sheet (October 24, 2011)

Saturday, October 22nd, 2011

Mosaic K1 potash mine near Ester­hazy, Saskatchewan, Canada. Under­ground, one kilo­me­tre beneath the sur­face. Dur­ing approx­i­mately 45 years of min­ing activ­ity, around 4700 km of tun­nels have been bored. Spe­cially adapted off-road vehi­cles are used to move around in the tun­nels. photo: Mar­tin Mraz

Energy and Nat­ural Resources Mar­ket Cheat Sheet (Octo­ber 24, 2011)

Strengths

• The Global Resources Fund per­for­mance this week bested its bench­mark and was in the mid­dle of its peer group in another volatile week of trad­ing. Our energy sec­tor bets gen­er­ally con­tributed to the out­per­for­mance as energy stocks (S&P 500 Energy) gained over 1 per­cent for the week while the S&P Mate­ri­als sec­tor fell nearly 3 percent.
• Weak equity mar­kets since early August have cre­ated bar­gains in the oil patch but these may not last long as merger & acqui­si­tion activ­ity in the energy sec­tor remains active with two notable deals announced early in the week. Houston-based Kinder Mor­gan agreed to buy El Paso Cor­po­ra­tion for $38.8 bil­lion, cre­at­ing the largest natural-gas pipeline net­work in the U.S., and mark­ing the biggest energy deal in over a year. Also on Mon­day, Sta­toil of Nor­way announced an all-cash bid of $4.4 bil­lion for Brigham Explo­ration which has a large land posi­tion in the oily Bakken shale play.
• Chi­nese coal imports in Sep­tem­ber rose 25 per­cent year-over-year to 19.1 mil­lion met­ric tons and set a new record for import vol­umes. The coal imports were said to have risen as import prices became cheap com­pared with the domes­tic prices. China’s National Coal Asso­ci­a­tion said that China’s net coal imports may reach 150 mil­lion tons this year while out­put may exceed 3.5 bil­lion tons, accord­ing to a report by Bloomberg news.
• Emerg­ing mar­kets remain the key dri­ver for global oil demand. The lat­est Indian oil demand increased by 169 thou­sand bar­rels per day (6.1 per­cent) year-over-year in Sep­tem­ber to 2.935 mil­lion bar­rels per day, the high­est Sep­tem­ber read­ing ever. The growth rate, in turn, was the strongest pace seen since Jan­u­ary this year, and was sup­ported by a very strong read­ing in diesel demand, which was higher year-over-year by 9.8 per­cent. Floods and polit­i­cal protests in var­i­ous coal pro­duc­ing states and strikes at Coal India, the largest and pri­mary coal pro­ducer, have adversely impacted coal sup­plies in the coun­try, thereby lead­ing to higher diesel usage in power.

Weak­nesses

• Base met­als prices suf­fered this week from wor­ries over slow­ing growth in China and the euro­zone debt cri­sis. Cop­per fell 5 per­cent and made a 52-week low of $3.05 per pound on Thurs­day while alu­minum also hit a 52-week low price on Thurs­day and closed the week down 4 per­cent. Met­als and min­ing stocks gen­er­ally under­per­formed the mar­ket this week due to the com­mod­ity price headwinds.
• Pre­cious met­als and related equi­ties also fell this week as haven buy­ing of gold and the dol­lar eased. Mar­kets gen­er­ally warmed up to the idea that Euro­pean lead­ers will make progress in deal­ing with the euro­zone debt cri­sis in meet­ings this week­end and sold the U.S. dol­lar and gold, which both fell this week.
• The U.S. Archi­tec­ture Billings Index declined to 46.9 in Sep­tem­ber, com­pared to 51.4 in August (a mark of 50 bifur­cates the indi­ca­tion of expan­sion and con­trac­tion). The pos­i­tive read­ing in August appears to have been an iso­lated occur­rence rather than a trend, as fur­ther evi­denced by the decline in the new project inquiry index to 54.3 in Sep­tem­ber from 56.9 in August. The weak read­ings remain a threat to domes­tic con­struc­tion activ­ity and mate­ri­als con­struc­tion demand.

Oppor­tu­ni­ties

• We came away from PIRA Energy Group’s annual client sem­i­nar in New York quite con­struc­tive on the crude oil mar­kets. Demand expec­ta­tions are a bit softer in 2012 on assump­tions of slower global eco­nomic growth; how­ever, sup­ply chal­lenges remain preva­lent. Inven­to­ries in the largest OECD coun­tries are draw­ing rapidly, OPEC spare capac­ity is fairly tight, and non-OPEC sup­ply out­ages are run­ning nearly 2x the level of last year. Polit­i­cal ten­sions remain high in the oil sup­ply­ing Mid­dle East and rel­a­tive sta­bil­ity seems fleet­ing which could throw the oil mar­kets into even more disarray.
• Roubini Eco­nom­ics high­lighted that Colonel Muam­mar Qadhafi’s death is unlikely to have any sig­nif­i­cant effect on the oil mar­kets. In fact, it was noted that the removal of uncer­tainty over his where­abouts may encour­age inter­na­tional oil com­pa­nies to step up their plans to return to the coun­try. Oil pro­duc­tion in Libya has been ris­ing in recent weeks to an esti­mated 350,000–390,000 bpd.
• The Inter­na­tional Energy Agency has said that the Arab Spring has dis­rupted invest­ment plans in oil and gas projects as gov­ern­ments have had to use the funds and resources for social pur­poses. As a result prices will have to go higher over the next 5 years to get the sup­ply to meet demand. The IEA esti­mates that the world needs to spend US$38 tril­lion to meet pro­jected demand over the next 24 years (US$1.58 tril­lion a year), up 15 per­cent from their 2010 fore­cast of US$33 trillion.
• The US Fed­eral Reserve Bank of Philadelphia’s gen­eral eco­nomic index rose to 8.7 from minus 17.5 in Sep­tem­ber, the biggest one-month rebound in 31 years. The weak read­ing a month ago con­tributed sig­nif­i­cantly to the mar­ket sell-off seen at that time.

Threats

• Mineweb reported that Freeport-McMoRan Cop­per and Gold, the world’s biggest copper-gold min­ing oper­a­tion, con­tin­ues to be affected by ongo­ing strikes. The unrest at the company’s Gras­berg oper­a­tion in Indone­sia could have an impact affect­ing global pro­duc­tion of both cop­per and gold. Begin­ning in Sep­tem­ber, the strike is cur­rently show­ing few signs of being resolved.
• Should the U.S. dol­lar strengthen, we could see down­ward pres­sures on com­mod­ity prices. Cap­i­tal Eco­nom­ics pub­lished an arti­cle high­light­ing the inverse rela­tion­ship between the value of the dol­lar and com­modi­ties when traded in dol­lars. Based on a chart illus­trat­ing the rela­tion­ship using the U.S. currency’s broad trade weighted index and the CRB index of 19 com­mod­ity prices, it appears that a 5 per­cent appre­ci­a­tion in the dol­lar is asso­ci­ated with a 25 per­cent decline in com­mod­ity prices. Investors have recently sought safety in the dol­lar with the recent global finan­cial cri­sis, and weak­en­ing indus­trial and con­sumer demand for com­modi­ties. Should global sov­er­eign debt uncer­tain­ties per­sist, this could threaten com­mod­ity prices further.
• BHP Bil­li­ton said a slump in demand for iron ore from Euro­pean steel mills has hurt prices while orders from China have so far been unaf­fected. “In Europe, many steel com­pa­nies have, or are in the process of, reduc­ing their steel­mak­ing capac­ity and I think that that is what’s played through on the sen­ti­ment in the iron ore busi­ness,” Mar­ius Klop­pers, CEO of BHP said. “In China over­all, which will over the long run be the dri­ver of prices, we have not seen any­thing really hap­pen­ing there yet” he added.
• The U.S. deriv­a­tive reg­u­la­tor voted 3–2 to curb com­mod­ity trad­ing lev­els and restrict the num­bers of con­tracts that can be held by a sin­gle firm. The rule lim­its traders to 25 per­cent of deliv­er­able sup­ply in the month near­est to deliv­ery. Caps will go into effect 60 days after the agency defines the term "swap", and agency declined to esti­mate when that will be. Lim­its out­side the spot month are likely to go into effect in late 2012.

Tags: Acquisition Activity, Bakken Shale, Brigham Exploration, Canadian Market, Coal Association, Coal Imports, Coal India, Coal Producing States, Commodities, Crude Oil, El Paso Corporation, Energy Deal, energy stocks, Esterhazy Saskatchewan, Gas Pipeline Network, Gold, Import Volumes, India, Kinder Morgan, Land Position, Materials Sector, Million Metric Tons, National Coal, Natural Gas Pipeline, Oil Patch, Political Protests, Resources Fund, Saskatchewan Canada
Posted in Canadian Market, Commodities, Gold, India, Markets, Oil and Gas | Comments Off

News That Matters (October 21, 2011)

Friday, October 21st, 2011

By www.thetrader.se

Ft.com

Saab Automobile’s chances of avoid­ing bank­ruptcy dwin­dled after the two Chi­nese com­pa­nies that had agreed to invest in the com­pany instead offered to buy it for a token sum. Cit­ing peo­ple famil­iar with the dis­cus­sions, http://ftalphaville.ft.com/thecut/2011/10/21/708181/saab-investment-plan...

The Cab­i­net of Japan­ese Prime Min­is­ter Yoshi­hiko Noda signed off on steps to deal with the soar­ing yen on Fri­day, the WSJ reports. Flesh­ing out pro­pos­als made last month, Tokyo’s plan aims to curb fur­ther http://ftalphaville.ft.com/thecut/2011/10/21/708101/japan-moves-closer-t...

Dexia, the stricken Franco-Belgian lender that has been at the cen­tre of recent mar­ket tur­moil, loaned €1.5bn of fresh cap­i­tal to its two largest insti­tu­tional share­hold­ers which then used the cash to buy Dexia shares before 2008, http://ftalphaville.ft.com/thecut/2011/10/21/708106/e1-5bn-dexia-loans-u...

Daniel Tarullo, one of the five gov­er­nors of the Fed­eral Reserve board, says the cen­tral bank should con­sider large scale pur­chases of mortgage-backed secu­ri­ties if the econ­omy does not improve, the FT reports. “A large-scale MBS pur­chase pro­gramme has many of the ben­e­fits asso­ci­ated with pur­chases of longer-duration Trea­sury secu­ri­ties, http://ftalphaville.ft.com/thecut/2011/10/21/708096/fed-urged-to-weigh-n...

Euro­pean lead­ers will be forced to hold a sec­ond sum­mit, per­haps as early as Wednes­day, because of the inabil­ity of Ger­many and France to reach a deal on how to increase the fire­power of the eurozone’s €440bn res­cue fund. Euro­pean lead­ers con­firmed that a high-stakes sum­mit on Sun­day aimed at final­is­ing a plan to shore up the euro­zone would pro­ceed.http://ftalphaville.ft.com/thecut/2011/10/21/708091/europe-forced-into-a...

China will allow local gov­ern­ments to issue bonds directly for the first time in almost 20 years as Bei­jing acts to pre­vent poten­tial defaults by provin­cial and city-level gov­ern­ments that could wreak havoc in the country’s finan­cial sec­tor, http://ftalphaville.ft.com/thecut/2011/10/20/708031/china-municipalities...

Invest­ment banks are exploit­ing gaps in global pay reforms to per­sist with some of their most con­tentious prac­tices, includ­ing guar­an­tee­ing lucra­tive bonuses to employ­ees regard­less of their per­for­mance, indus­try data show. Guar­an­teed bonuses to new hires accounted for 8.5 per cent of the aver­age bonus pool for 2010 at 51 top finan­cial insti­tu­tions, accord­ing to a study pub­lished by the Insti­tute of Inter­na­tional Finance (IIF), an indus­try lobby group. http://www.ft.com/intl/cms/s/0/ee686396-fa4f-11e0-b70d-00144feab49a.html...

WSJ.com

Asian stock mar­kets were mod­estly higher in ten­ta­tive trade Fri­day, as con­fus­ing sig­nals from Euro­pean lead­ers on plans to con­tain the euro-zone debt cri­sis kept most buy­ers at bay. Japan’s Nikkei Stock Aver­age rose 0.1%, Australia’s S&P/ASX 200 added 0.4%, South Korea’s Kospi Com­pos­ite climbed 1.1% and New Zealand’s NZX-50 was up 0.2%. Dow Jones Indus­trial Aver­age futures were up 18 points in screen trade. Cop­per ticked up over 1.0% in early Asian trade after the red metal set­tled down 6.2% at a 15-month low in New York Thurs­day amid uncer­tainty over the Euro­pean sov­er­eign debt cri­sis, fears of slow­ing demand from China and the fall­out from a Chi­nese gov­ern­ment crack­down on metal-for-collateral. http://online.wsj.com/article/SB1000142405297020461870457664393297263281...

Stan­dard & Poor’s Corp. said on Thurs­day that it would likely down­grade the credit rat­ings of France, Spain, Italy, Ire­land and Por­tu­gal if the euro zone slips into another reces­sion, which many econ­o­mists say is likely. Bank rat­ings in the region would also take a hit under the two pos­si­ble sce­nar­ios ana­lyzed in the S&P report. “These stress sce­nar­ios are not our cen­tral expec­ta­tion, but a sim­u­la­tion of the pos­si­ble out­comes if such hypo­thet­i­cal events were to occur,” the rat­ings com­pany said. http://online.wsj.com/article/SB1000142405297020448530457664329126863486...

Two years ago, a French banker flew to Wash­ing­ton on an emer­gency mis­sion: Per­suade Inter­na­tional Mon­e­tary Fund chief Dominique Strauss-Kahn that his con­cerns about the health of the Euro­pean bank­ing sec­tor were unfounded. The trip was a suc­cess. Mr. Strauss-Kahn agreed to keep his fears under wraps to avoid caus­ing mar­ket panic, accord­ing to peo­ple famil­iar with the mat­ter.http://online.wsj.com/article/SB1000142405297020448530457664156154026649...

Span­ish bank­ing giant Banco San­tander SA fre­quently says that it doesn’t shut­tle money among its far-flung units, a dec­la­ra­tion meant to assure investors that its par­ent won’t raid those units for cash in a pinch. The bank has “a model of sub­sidiaries which are autonomous in fund­ing and cap­i­tal,” Chair­man Emilio Botín said in a speech here last month. The same day, Santander’s chief exec­u­tive deliv­ered a slide pre­sen­ta­tion that said “Each sub­sidiary is respon­si­ble for its own cap­i­tal­iza­tion and fund­ing needs… no cross bor­der fund­ing.”http://online.wsj.com/article/SB1000142405297020375260457664301323491477...

Marketwatch.com

The head of Japan’s auto indus­try asked trade and indus­try min­is­ter Yukio Edano on Fri­day for a dras­tic response to the per­sis­tently strong yen, warn­ing that Japan’s econ­omy is already “hol­low­ing out” due to the strong cur­rency. In a meet­ing between Edano and exec­u­tives of the Japan Auto­mo­bile Man­u­fac­tur­ers Asso­ci­a­tion, JAMA pres­i­dent Toshiyuki Shiga said “fun­da­men­tal coun­ter­mea­sures are needed against the strong yen.” http://www.marketwatch.com/story/japan-auto-group-head-need-major-respon...

French Pres­i­dent Nico­las Sarkozy and Ger­man Chan­cel­lor Angela Merkel will meet Sat­ur­day night in Brus­sels to pre­pare for the sum­mit meet­ing of Euro­pean lead­ers set for Sun­day, the lead­ers said in a joint state­ment Thurs­day. “The pres­i­dent and the chan­cel­lor have agreed to pro­vide a com­pre­hen­sive and ambi­tious response to the cur­rent cri­sis in the euro area,” which will include imple­ment­ing a revamped euro-zone bailout fund, strength­en­ing the cap­i­tal of Euro­pean banks and strength­en­ing eco­nomic inte­gra­tion and eco­nomic gov­er­nance, the state­ment said. http://www.marketwatch.com/story/merkel-sarkozy-to-meet-saturday-in-brus...

Reuters.com

ICE Brent crude for Decem­ber rose $1.37 to set­tle at $109.76 a bar­rel, hav­ing traded from $107.31 to $110.17. The expir­ing U.S. front-month Novem­ber crude fell 81 cents to set­tle at $85.30 a bar­rel. U.S. Decem­ber crude fell only 22 cents to set­tle at $86.07 a bar­rel. Brent’s trad­ing vol­ume was 1 per­cent below its 30-day aver­age and U.S. vol­ume 13 per­cent under. Brent’s pre­mium to its U.S. coun­ter­part rose to $23.69. Brent’s recov­ery and a fore­cast for a cold win­ter helped push U.S. heat­ing oil futures higher. U.S. gaso­line futures also ended with a gain. http://www.reuters.com/article/2011/10/20/us-markets-oil-idUSTRE7922QH20...

“Prices appear to be con­sol­i­dat­ing within the range of $1,550 and $1,700.” Spot gold gained 0.4 per­cent $1,625.12 an ounce by 0253 GMT, but was headed for a drop of 3.2 per­cent from a week ear­lier, its biggest weekly decline in nearly a month. U.S. gold rose as much as 1.1 per­cent to $1,630.9, before eas­ing to $1,626.90, on course for a 3.3 per­cent weekly decline. Tech­ni­cal analy­sis sug­gested spot gold could rebound to $1,650 dur­ing the day, said Reuters mar­ket ana­lyst Wang Tao. http://www.reuters.com/article/2011/10/21/us-markets-precious-idUSTRE78M...

The ranks of the poor rose in almost all U.S. states and cities in 2010, despite the end of the longest and deep­est eco­nomic down­turn since the Great Depres­sion the year before, U.S. Cen­sus data released on Thurs­day showed. Mis­sis­sippi and New Mex­ico had the high­est poverty rates, with more than one out of every five peo­ple in each state liv­ing in poverty. Mississippi’s poverty rate led, at 22.4 per­cent, fol­lowed by New Mex­ico at 20.4 per­cent. New Hamp­shire had the low­est poverty rate, at 8.3 per­cent, mak­ing it the only state with a poverty rate below 10 per­cent. Twelve states had poverty rates above 17 per­cent, up from five in 2009, while poverty rates in 10 met­ro­pol­i­tan areas topped 18 per­cent, the data showed. http://www.reuters.com/article/2011/10/20/us-usa-states-poverty-idUSTRE7...

Plans to tackle the euro zone debt cri­sis have stalled with Paris and Berlin at odds over how to increase the fire­power of the region’s bailout fund, French Pres­i­dent Nico­las Sarkozy said on Wednes­day. Sarkozy told French law­mak­ers the dis­pute was hold­ing up nego­ti­a­tions and flew to Frank­furt to talk with Ger­man Chan­cel­lor Angela Merkel in an attempt to break the dead­lock ahead of a make-or-break Euro­pean lead­ers’ sum­mit on Sun­day. The two lead­ers left that meet­ing with­out speak­ing to wait­ing reporters. Asked if a deal had been reached, Jean-Claude Juncker, chair­man of the Eurogroup of euro zone­fi­nance min­is­ters who attended the evening meet­ing, replied: “We’re still in meet­ings Sat­ur­day, Sun­day.” http://www.reuters.com/article/2011/10/20/us-eurozone-idUSTRE79I0IC20111...

Bloomberg.com

Euro­pean gov­ern­ments may unleash as much as 940 bil­lion euros ($1.3 tril­lion) to fight the debt cri­sis, seek­ing to break a dead­lock between Ger­many and France that is forc­ing lead­ers to hold two sum­mits within four days. Nego­ti­a­tions on com­bin­ing the Euro­pean Union’s tem­po­rary and planned per­ma­nent res­cue funds as of mid-2012, while scrap­ping a ceil­ing on bailout spend­ing, accel­er­ated this week after efforts to lever­age the tem­po­rary fund ran into Euro­pean Cen­tral Bank oppo­si­tion and pro­voked the French-German clash, two peo­ple famil­iar with the dis­cus­sions said. They declined to be iden­ti­fied because polit­i­cal lead­ers will have to decide. http://www.bloomberg.com/news/2011–10-20/eu-said-to-mull-wielding-1–3-tr...

Ital­ian Prime Min­is­ter Sil­vio Berlusconi’s sur­prise nom­i­na­tion of Ignazio Visco to run the Bank of Italy sets up a pos­si­ble clash with French Pres­i­dent Nico­las Sarkozy over the com­po­si­tion of the Euro­pean Cen­tral Bank’s Exec­u­tive Board. Berlus­coni chose Visco, a 30-year vet­eran of the Bank of Italy, to suc­ceed Mario Draghi, who is to become pres­i­dent of the ECB when Jean-Claude Trichet’s term ends this month. The Ital­ian pre­mier had indi­cated he might choose ECB Exec­u­tive Board mem­ber Lorenzo Bini Smaghi for the post, which would free up a seat on the ECB’s decision-making board for a French­man.http://www.bloomberg.com/news/2011–10-21/berlusconi-s-bank-choice-risks-...

Fed­eral Reserve Gov­er­nor Daniel Tarullo’s call for resum­ing large-scale pur­chases of mort­gage bonds may boost chances the cen­tral bank will start a third round of asset buy­ing aimed at reviv­ing U.S. growth. Pol­icy mak­ers should move the tool “back up toward the top of the list” because it would help the econ­omy through lower mort­gage costs that would boost home pur­chases and spend­ing by peo­ple who refi­nance their home loans, Tarullo said late yes­ter­day in a speech in New York http://www.bloomberg.com/news/2011–10-20/fed-s-tarullo-says-central-bank...

India’s rupee dropped past the 50 per dol­lar level for the first time since May 2009 on spec­u­la­tion slow­ing eco­nomic growth and faster infla­tion will deter for­eign invest­ment. The cur­rency was poised for its biggest weekly loss this month after China reported Oct. 18 that its third-quarter gross domes­tic prod­uct increased at the slow­est pace in two years. Food infla­tion in India accel­er­ated to 10.6 per­cent in the week ended Oct. 8 from a year ear­lier, the fastest pace since April, gov­ern­ment data showed yes­ter­day. Con­cern Europe’s debt cri­sis is wors­en­ing also sapped demand for emerging-market assets.http://www.bloomberg.com/news/2011–10-21/rupee-weakens-past-50-a-dollar-...

Dailyfinance.com

The econ­omy appears slightly health­ier than many had feared it was a few weeks ago, rais­ing hopes that it can end the year on an upward slope. A raft of data Thurs­day show lay­offs are trend­ing down to a six-month low and fac­to­ries in the Mid-Atlantic are grow­ing again after con­tract­ing for two months. Nev­er­the­less, home sales fell and the hous­ing mar­ket is expected weigh on the econ­omy deep into 2012. The out­look for the final six months of the year has improved from August, when many thought the econ­omy was at grow­ing risk of falling back into a reces­sion. Other recent reports showed hir­ing picked up slightly in Sep­tem­ber and con­sumers boosted their spend­ing on retail goods by the most since March.

http://srph.it/r7Qisa

Foxbusiness.com

The Obama admin­is­tra­tion and the reg­u­la­tor for Fan­nie Mae and Fred­die Mac are expected to unveil new steps to help dis­tressed home­own­ers in the next week or two, a senior con­gres­sional aide said on Thurs­day. The aide com­mented on the plan after Demo­c­ra­tic Sen­a­tor Dianne Fein­stein said the Fed­eral Reserve planned to send Con­gress “leg­isla­tive rec­om­men­da­tions” on hous­ing. The aide said Fein­stein “mis­spoke for a sec­ond” and meant the admin­is­tra­tion and the Fed­eral Hous­ing Finance Agency. http://www.foxbusiness.com/markets/2011/10/20/new-housing-plan-expected-...

USAtoday.com

Home sales are on pace to match last year’s dis­mal fig­ures — the worst in 13 years. The aver­age rate on 30-year fixed mort­gages was nearly unchanged this week after ris­ing last week. Fred­die Mac says the aver­age rate on 30-year loans edged down to 4.11% from 4.12% last week. The week before, it fell to 3.94%, low­est rate ever, accord­ing to the National Bureau of Eco­nomic Research. The aver­age rate on the 15-year fixed mort­gage ticked up to 3.38 per­cent from 3.37 per­cent. It hit a record-low of 3.26 per­cent two weeks ago. http://www.usatoday.com/money/economy/housing/story/2011–10-20/home-sale...

BBC.co.uk

EU lead­ers are to hold another sum­mit by Wednes­day, because they will not be able to agree a res­cue plan for the euro on Sun­day. French Pres­i­dent Nico­las Sarkozy and Ger­man Chan­cel­lor Angela Merkel said a cri­sis strat­egy would be dis­cussed on Sun­day and adopted at the next meet­ing. EU lead­ers need to agree a sec­ond bailout for Greece, how to recap­i­talise banks and a stronger bailout fund. Pres­i­dent Sarkozy also called for talks with the pri­vate sec­tor. The pri­vate sec­tor talks would be “to find an agree­ment allow­ing to strengthen the sus­tain­abil­ity” of Greek debt. Pre­vi­ous dis­agree­ments between France and Ger­many about the bailout plans have cen­tred on how much the pri­vate sec­tor would have to con­tribute to any pack­age. http://www.bbc.co.uk/news/business-15393260

Telegraph.co.uk

The ONS said sales vol­umes includ­ing petrol rose by 0.6pc on the month after a fall of 0.4pc in August, giv­ing an annual rise of 0.6pc. Ana­lysts had fore­cast flat sales on the month and an annual rise of 0.7pc. Exclud­ing fuel, retail sales went up 0.7pc on the month and were 0.4pc higher on the year, above ana­lysts’ expec­ta­tions for the monthly rise. The fig­ures offer a rare bit of good news for British retail­ers which oth­er­wise have been strug­gling. http://www.telegraph.co.uk/finance/economics/8838002/Retail-sales-rise-o...

Independent.co.uk

Euro­pean lead­ers were given a stark warn­ing last night that Greece’s debt bur­den remains unsus­tain­able, despite the €65bn (£57bn) in bailout fund­ing the coun­try has received since May 2010. The warn­ing was con­tained in the draft text of the deci­sion of the “troika” mis­sion of offi­cials – from the Euro­pean Cen­tral Bank, the Inter­na­tional Mon­e­tary Fund and the Euro­pean Com­mis­sion – on Athens’ progress towards sta­bil­is­ing its pub­lic finances. http://www.independent.co.uk/news/business/news/new-greek-bailout-cash-c...

The depart­ment store Deben­hams and better-than-expected retail sales data have pro­vided the UK’s belea­guered high street with some much-needed cheer ahead of the cru­cial Christ­mas trad­ing period. Deben­hams unveiled a 10 per cent rise in pre-tax prof­its to £166.1m for the 53 weeks to 3 Sep­tem­ber, a share buy-back and said it was “opti­mistic” about its prospects. The retailer also revealed exten­sive plans to grow its store num­bers in the UK and over­seas, as well as expand­ing online. http://www.independent.co.uk/news/business/news/the-uk-high-street-is-al...

Guardian.co.uk

Pol­i­cy­mak­ers must con­sider how to stim­u­late lend­ing to revive the econ­omy, the City’s chief watch­dog said, as he also con­ceded that reg­u­la­tors may never be able to pre­vent cus­tomers being “ripped off”. Lord Turner, chair­man of the Finan­cial Ser­vices Author­ity, told an audi­ence at the Man­sion House in the heart of the City on Thurs­day that cur­rent eco­nomic con­di­tions meant the author­i­ties should switch from impos­ing strict rules on banks to focus­ing on ways to make them lend more. http://www.guardian.co.uk/business/2011/oct/20/turner-fsa-regulators-ban...

Smh.com.au

The pos­si­bil­ity of an inter­est rate cut is off the table as infla­tion is not expected to ease sig­nif­i­cantly in the Sep­tem­ber quar­ter, econ­o­mists say. The Aus­tralian Bureau of Sta­tis­tics will on Wednes­day release the Sep­tem­ber quar­ter Con­sumer Price Index, the key mea­sure of infla­tion. In recent weeks, some mar­ket observers have been pre­dict­ing an inter­est rate cut before the end of 2011. The money mar­ket has been pric­ing in a series of rate cuts based on global growth wor­ries, spi­ralling gov­ern­ment debt in Europe and the weak non-mining sec­tors of the Aus­tralian economy.

Read more: http://www.smh.com.au/business/high-cpi-keeps-rate-cut-off-the-table-201...

Greek MPs have passed a deeply resented aus­ter­ity bill that has led to vio­lent protests on the streets of Athens, despite some dis­sent from one Social­ist MP. The new mea­sures include pay and staff cuts in the pub­lic ser­vice as well as pen­sion cuts and tax hikes for all Greeks. The bill passed by major­ity vote in the 300-member par­lia­ment. For­mer labour min­is­ter Louka Kat­seli voted against one arti­cle that scales back col­lec­tive labour bar­gain­ing rights. http://www.smh.com.au/business/world-business/greeks-pass-austerity-bill...

Xinhuanet.com

Chi­nese stocks fell to the low­est lev­els since March 2009 on Thurs­day, as mount­ing con­cerns over a slow­ing econ­omy and a stand­still of the Euro­pean bailout talks con­tin­ued to weigh on investors. The bench­mark Shang­hai Com­pos­ite Index slumped 1.94 per­cent, or 46.15points, to close at 2,331.37, the low­est level since March 2009. The Shen­zhen Com­po­nent Index suf­fered heav­ier losses by plung­ing 3.06percent, or 309.51 points, to close at 9,796.23, breach­ing the key 10,000 mark and set a new low since June 2010. http://news.xinhuanet.com/english2010/china/2011–10/20/c_131202627.htm

China is expected to replace Japan as the world’s second-wealthiest coun­try after the United States with total for­tune shoot­ing to nearly US$40 tril­lion by 2016, Credit Suisse AG said in a report yesterday.

How­ever, the accu­mu­la­tion of for­tune will be achieved along with an expand­ing wealth gap in China where the Gini coef­fi­cient, a com­monly used mea­sure of inequal­ity of wealth, has already passed an extremely dan­ger­ous level. China, which has sur­passed Japan as the world’s second-biggest econ­omy, will soon also catch up with the neigh­bor in terms of total wealth.http://news.xinhuanet.com/english2010/china/2011–10/20/c_131202237.htm

Peru’s Finance Min­is­ter Luis Miguel Castilla said Thurs­day the com­ing months won’t see a reces­sion, but warned that finan­cial author­i­ties should “be pre­pared” for a global eco­nomic slow­down as it would have reper­cus­sions on the Andean nation. Castilla said there are “remote” pos­si­bil­i­ties that a reces­sion may hit Peru’s econ­omy, but the ongo­ing effects of the inter­na­tional cri­sis are still dif­fi­cult to assess. “It is not cor­rect to speak about a cri­sis in Peru, because the country’s rates are grow­ing dynam­i­cally and the infla­tion is show­ing a down­ward trend,” he said.http://news.xinhuanet.com/english2010/business/2011–10/21/c_131204245.ht...

Cs.com.cn

China’s social financ­ing, a broad mea­sure of funds raised by enti­ties in the real econ­omy, shrank 1.26 tril­lion yuan (194 bil­lion U.S. dol­lars) from a year ear­lier to 9.8 tril­lion yuan in the first three quar­ters, the cen­tral bank said Thurs­day. All sub-indicators grew at slower paces from the same period last year, except foreign-currency loans which expanded by 184.9 bil­lion yuan from a year ear­lier to 477 bil­lion yuan, and entrusted loans which increased by 562.5 bil­lion yuan to 1.07 tril­lion yuan, the People’s Bank of China said in a state­ment on its web­site. The yuan-denominated lend­ing accounted for 58 per­cent of total social financ­ing, up one per­cent­age point from a year ear­lier, accord­ing to the state­ment. http://www.cs.com.cn/english/ei/201110/t20111021_3096128.html

Thehindu.com

Food infla­tion surged ahead to breach the psy­cho­log­i­cal double-digit bar­rier at 10.60 per cent for the week ended Octo­ber 8 against 9.32 per cent in the pre­vi­ous week, leav­ing no one in doubt that the Reserve Bank of India (RBI) will con­tinue with its hawk­ish mon­e­tary pol­icy stance on Octo­ber 25. More dis­turb­ing is the fact that the fresh spurt in WPI (whole­sale price index)-based food infla­tion does not suf­fer from the sta­tis­ti­cal anom­aly of base effect as the food price spi­ral dur­ing the same week last year was also at a high of 15.72 per cent. http://www.thehindu.com/business/Economy/article2554825.ece

Even as the U.S. has con­tin­ued to press India to under­take more investor-friendly reforms under the bilat­eral Strate­gic Dia­logue, the World Bank on Thurs­day vir­tu­ally con­grat­u­lated India and 29 other coun­tries for sig­nif­i­cant strides in mak­ing their reg­u­la­tory envi­ron­ments more business-friendly. In a report titled Doing Busi­ness 2012: Doing Busi­ness in a More Trans­par­ent World the World Bank and the Inter­na­tional Finance Cor­po­ra­tion said that between June 2010 and May 2011, there were 245 busi­ness reg­u­la­tory reforms world­wide, which was 13 per cent more reforms than in the pre­vi­ous year.http://www.thehindu.com/business/article2556115.ece

At a time when India Inc. is sad­dled with the twin prob­lem of high infla­tion and low indus­trial growth, Prime Minister’s Eco­nomic Advi­sory Coun­cil (PMEAC) Chair­man C. Ran­gara­jan on Thurs­day pitched for roll back of the excise duty stim­u­lus that was pro­vided to the indus­try to com­bat the slow­down in the wake of the global melt­down in 2008. At an inter­ac­tive ses­sion at the Eco­nomic Edi­tors’ Con­fer­ence here, Dr. Ran­gara­jan made out a case for urgent ratio­nal­i­sa­tion of sub­si­dies along with roll-back of excise duties to the pre-crisis lev­els if the bud­geted fis­cal deficit tar­get for 2011-12 is to be met. “Adjust­ment in sub­si­dies will have to be done as early as pos­si­ble. Oth­er­wise, we will not be in a posi­tion to con­tain [the] fis­cal deficit,” he said.http://www.thehindu.com/business/Economy/article2556047.ece

Economictimes.com

An amaz­ing surge in India’s exports to the Bahamas has stoked the lin­ger­ing sus­pi­cion that a slice of the country’s trades is sham trans­ac­tions done to bring back money stashed in secret accounts with off­shore banks. In just two years, exports to the Bahamas – best known as a tax haven – have shot up from $2.2 mil­lion in 2008-09 to $2.2 bil­lion in 2010-11, accord­ing to com­merce depart­ment data. The num­ber in no way matches the data on the Bahamas’ global imports, which accord­ing to UNCTAD – the global trade and invest­ments mon­i­tor­ing agency – was $2.8 bil­lion in 2010.http://economictimes.indiatimes.com/news/economy/foreign-trade/sudden-su...

Yonhapnews.co.kr

The heads of South Korean banks expressed con­cerns Fri­day that the cur­rent tur­moil in the global finan­cial mar­ket may lead to dif­fi­cul­ties in secur­ing mid– and long-term over­seas bor­row­ing, the cen­tral bank said. The Bank of Korea (BOK) quoted 10 chiefs of local banks as say­ing that local banks have secured a large bulk of for­eign exchange liq­uid­ity in advance in an attempt to fend off a poten­tial liq­uid­ity squeeze. How­ever, lin­ger­ing con­cerns about the global finan­cial mar­kets may make it dif­fi­cult for them to raise for­eign bor­row­ing in the mid-and long term, such as from bond sales. The remarks came when BOK gov­er­nor Kim Choong-soo met with local bank heads in a monthly meet­ing. http://english.yonhapnews.co.kr/business/2011/10/21/46/0503000000AEN2011...

Themoscowtimes.com

Syria may start using the Russ­ian ruble for bank­ing trans­ac­tions if the Euro­pean Union bans it from oper­a­tions in euros, cen­tral bank gov­er­nor Adib May­aleh said Thurs­day. As a first step, the Syr­ian cen­tral bank has begun post­ing the exchange rate for the ruble as well as the Chi­nese yuan on its daily bul­letin, May­aleh said in an inter­view with the Arabic-language Rus­sia Today chan­nel. “Don’t for­get that we can carry out oper­a­tions in rubles,” May­aleh said, accord­ing to an e-mailed tran­script of the inter­view. “In the near­est future we will agree on para­me­ters for switch­ing to close coöper­a­tion with Russ­ian banks and using the ruble for inter­na­tional set­tle­ments.” http://www.themoscowtimes.com/business/article/syria-may-switch-from-eur...

Fin24.com

Wash­ing­ton – The Inter­na­tional Mon­e­tary Fund and the World Bank have vis­ited Libya and will return there in “com­ing weeks” to assess eco­nomic and finan­cial needs, an IMF spokesper­son said on Thurs­day. Offi­cials from the IMF and World Bank vis­ited Libya ear­lier this month to con­duct a fact-finding mis­sion on the econ­omy and pub­lic finan­cial man­age­ment issues, IMF spokesman Gerry Rice told reporters. “Follow-up mis­sions are planned to under­take a needs assess­ment,” he said but was unable to give dates for the next vis­its. http://www.fin24.com/Economy/World-BankIMF-to-assess-aid-for-Libya-20111...

Thetrader.se

Greece will even­tu­ally fall. Where to look for the next set of vio­lence is prob­a­bly Italy and the very “quiet” Spain. The prob­lems Spain is fac­ing are huge. Spain is also the only coun­try with a prop­erty col­lapse, that is slowly col­laps­ing fur­ther, while peo­ple enjoy the sun. With so many unsold homes, the bal­ance sheets won’t look good for many years to come. Despite the polit­i­cal juice from Zap­a­tero, aus­ter­ity plans and talk of a brighter future, peo­ple are suf­fer­ing, and get­ting poorer by the day. Spain just hit new alarm­ing Poverty lev­els, and there is no lever­aged EFSF to save Spain.http://www.thetrader.se/2011/10/20/remember-spain-pain/

Good sum­mary of the Argen­tin­ian Default. What caused the col­lapse, and what lessons are to be learnt for the cur­rent Greek sit­u­a­tion? In 1998, Argentina entered what turned out to be a four-year depres­sion, dur­ing which its econ­omy shrank 28 per­cent. Argentina’s expe­ri­ence has been cited as an exam­ple of the fail­ure of free mar­kets and fixed exchange rates, among other things. The evi­dence does not sup­port those views. Rather, bad eco­nomic poli­cies con­verted an ordi­nary reces­sion into a depres­sion. Three big tax increases in 2000–2001 dis­cour­aged growth, and med­dling with the mon­e­tary sys­tem in mid 2001 cre­ated fear of cur­rency deval­u­a­tion. As a result, con­fi­dence in Argentina’s gov­ern­ment finances evap­o­rated. In a series of blun­ders that made mat­ters even worse, from Decem­ber 2001 to early 2002, suc­ceed­ing gov­ern­ments under­mined prop­erty rights by freez­ing bank deposits; default­ing on the government’s for­eign debt in a thought­less man­ner;http://www.thetrader.se/2011/10/20/argentinas-economic-crisis/

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The Future of Alberta's Oil Sands

Thursday, October 20th, 2011

by Dave Sum­mers, via OilPrice.com

If one exam­ines the fore­cast future sup­ply of liq­uid fuels that the EIA projects in their most recent Inter­na­tional Energy Out­look, that for 2011, the agency projects a con­sid­er­able growth in uncon­ven­tional sup­plies of liq­uid fuels.

EIA pro­jec­tions of future growth in liq­uid fuel sup­plies (EIA)

For North Amer­ica, the pro­jec­tions fore­see con­sid­er­able growth both in pro­duc­tion within the United States (ris­ing from 8.5 to 12.8 mbdoe) and from Canada (ris­ing from 3.4 mbdoe in 2008 to 6.6 mbdoe in 2035).

Regional growth in liq­uid fuels gen­er­a­tion 2008 to 2035 (EIA)

The growth in uncon­ven­tional fuels is most crit­i­cally antic­i­pated as com­ing from oil sands, with bio­fu­els (a topic for another day) close behind.

Future sources of uncon­ven­tional liq­uid fuels (EIA)

It is, in pass­ing and for folks such as Dr Yer­gin per­haps, worth not­ing that the EIA does not see much of a sig­nif­i­cant role for oil from shales through 2035. But it high­lights the crit­i­cal­ity of the Athabasca oil sands in the future well-being of the North Amer­i­can fuel sup­ply chain.

There have been a sig­nif­i­cant num­ber of posts, over the years, both at Bit Tooth and at The Oil Drum, in which both myself and oth­ers have writ­ten about these reserves that are play­ing an increas­ing part in North Amer­i­can oil sup­ply, and that will likely also grow to sup­ply other nations, par­tic­u­larly China. (A topic dat­ing back to the start of The Oil Drum). In this par­tic­u­lar post I will there­fore just briefly overview the reser­voirs, and the tech­nolo­gies used to extract the fuel, in look­ing at the pro­jected out­look for the future – given that this has been reviewed and changed a num­ber of times in the past. Some mea­sure of that vari­a­tion comes from the pre­dic­tive curves that Sam Foucher posted back in 2006.

Pre­dic­tions of oil sand pro­duc­tion from 5 years ago (The Oil Drum)

Con­sid­er­ing first the resource, the amount of oil that exists within the oil sands of Alberta has been esti­mated as being between 1.7 and 2.5 tril­lion bar­rels. It is found in three major deposits the largest of which is the Athabasca, and then there are Cold Lake and Peace River.

Loca­tions of the major oil sands in Canada (CAPP)

There are sev­eral dif­fer­ent ways in which the oil can be recov­ered, of which the one gen­er­at­ing the most vis­i­bil­ity is where the sands lie close enough to the sur­face that they can be mined. Early use of sin­gle, large-scale bucket wheel exca­va­tors did not work out well, since pro­duc­tion is tied to the well-being of a sin­gle machine. As a result the sands are mined by per­haps 15 shov­els within the min­ing pit, each scoop­ing about 100 tons of sand at a time, and load­ing trucks, which then carry the mate­r­ial, 300 tons at a time, to an in-mine crusher which breaks the rock into small frag­ments. These frag­ments (with waste rock largely removed) are then mixed with hot water and pumped to large tanks at the pri­mary Upgrader, where the sand, water and bitu­men are separated.

Load­ing a truck, it will take 2 to 4 shovel loads to fill the truck bed, depend­ing on its size.

There is a Youtube video of the process available.

The sand also con­tains small par­ti­cles of clay, which are dif­fi­cult to set­tle out of the water, and the large tail­ings ponds used for this have been the focus of con­sid­er­able con­tro­versy. This con­cern is rec­og­nized, and con­sid­er­able efforts are being made to reduce the time that it takes for the set­tle­ment, and for site recla­ma­tion. That effort is con­tin­u­ing with a col­lab­o­ra­tive effort between the min­ing com­pa­nies and four uni­ver­si­ties to improve the tech­nol­ogy over that cur­rently used.

Some 80% of the reserves lie too deep for min­ing to be an effec­tive solu­tion, and with the bitu­men being, in nat­ural form, too thick to eas­ily flow to wells, ways had to be found to encour­age that flow. The most com­mon, and that most often pro­jected for future devel­op­ment, is based on the use of Steam Assisted Grav­ity Drainage.

Artist's illus­tra­tion of the SAGD process (Devon Canada Corp)

There is a video of the SAGD process on Youtube.

One of the prob­lems with SAGD comes in the need to gen­er­ate the steam that is fed into the upper pipe, and which migrates up into the sand to heat and thin the oil. The typ­i­cal method to pro­vide the steam is with nat­ural gas, and as Dave Cohen noted some years ago, the sup­ply of that nat­ural gas becomes more of an issue, as the size of the oper­a­tion con­tin­ues to grow.

One of the more inno­v­a­tive of the tech­niques sug­gested over­comes that prob­lem through burn­ing some of the oil in place, in a process known as Toe to Heel Air Injec­tion (THAI) . Ignit­ing a sec­tion of the oil sand, and after using the heat to drive off the more volatile oil while con­tin­u­ing the burn with resid­ual coke left behind, as the flame front pro­gresses, has been shown to be viable.

It is an artist’s impres­sion of a side view of the site, with the blue dot­ted hor­i­zon­tal line rep­re­sent­ing the recov­ery well and air being fed in from a higher well into the formation.

The video show­ing the THAI process is also on Youtube.

How­ever, at present it has only a lim­ited planned future, though that may increase as infor­ma­tion on the tech­nique becomes more evident.

So what is the like­li­hood that, using these tech­niques, that pro­duc­tion will rise to the lev­els which the EIA project? Well in their Octo­ber 3rd edi­tion the Oil and Gas Jour­nal (OGJ) listed (reg­is­tra­tion required) those projects cur­rently planned for Canada in the period through 2020 and beyond. The list con­tains 144 projects, many of which are defined as the sep­a­rate stages of dif­fer­ent devel­op­ments. Tak­ing just those that relate to oil sand pro­duc­tion roughly 70% plan on using ther­mal meth­ods to recover deeper oil (mainly SAGD, though there are small amounts of THAI, cyclic steam and elec­trother­mal). 30%, roughly 2 mbdoe, of the increase in pro­duc­tion is planned to come from sur­face mining.

It is unlikely that the total 6 mbdoe of increased pro­duc­tion will all come to pass. How­ever, given that these are all defined projects, many bro­ken into sep­a­rate phases that can be geared back or advanced, depend­ing on mar­ket con­di­tions, and sup­ply – par­tic­u­larly in the fur­ther out years – the pro­jected increases that the EIA project would seem to be emi­nently rea­son­able to antic­i­pate. (Caveats on water and nat­ural gas avail­abil­ity are dis­counted at present).

I would be remiss in not thank­ing Here­in­Hal­i­fax who led me to the report on East­ern Cana­dian sup­plies, which pointed out that the flow of crude in the pipeline from Sar­nia to Mon­tréal, about which I wrote ear­lier, was orig­i­nally East­ward, car­ry­ing west­ern crude, but which was reversed as the mar­ket for the oil from Alberta devel­oped in the United States, and East­ern Cana­dian refiner­ies sup­ply switched to tanker import.

The increas­ing plans to pro­duce oil from Alberta depend, to a degree, on the abil­ity of pipelines to carry the result­ing prod­uct to mar­ket. Pro­duc­tion is there­fore likely to hinge on the suc­cess with which those advo­cat­ing the var­i­ous pipelines are able to achieve. And to a coon­sid­er­able extent these are polit­i­cal, rather than tech­ni­cal decisions.

By. Dave Summers

David (Dave) Sum­mers is a Cura­tors' Pro­fes­sor Emer­i­tus of Min­ing Engi­neer­ing at Mis­souri Uni­ver­sity of Sci­ence and Tech­nol­ogy (he retired in 2010). He directed the Rock Mechan­ics and Explo­sives Research Cen­ter at MO S&T off and on from 1976 to 2008, lead­ing research teams that devel­oped new min­ing and extrac­tion tech­nolo­gies, mainly devel­op­ing the use of high-pressure water­jets into a broad range of indus­trial uses. While one of the founders of The Oil Drum, back in 2005, he now also writes sep­a­rately at Bit Tooth Energy.

Tags: American Oil, Athabasca Oil Sands, Canadian, Canadian Market, Criticality, Crude Oil, Curves, Dave Summers, Eia, Foucher, Fuel Supply, International Energy Outlook, Liquid Fuel, Liquid Fuels, Oil Drum, Oil Sand, Oil Sands Of Alberta, Oil Supply, Outlook, Regional Growth, Reservoirs, Sand Production, Shales, Supply Chain
Posted in Canadian Market, Markets, Oil and Gas, Outlook | Comments Off

Energy and Natural Resources Market Cheat Sheet (October 17, 2011)

Saturday, October 15th, 2011

Tage­bau Garzweiler Open Pit Mine, North-Rhine West­phalia, Germany

Energy and Nat­ural Resources Mar­ket Cheat Sheet (Octo­ber 17, 2011)

Strengths

• Cop­per prices con­tin­ued to rally this week, gain­ing 4 per­cent to nearly $3.40 per pound, as sen­ti­ment towards com­modi­ties improved and the poten­tial of mine worker strikes threat­ens supply.
• China’s coal imports steamed ahead in Sep­tem­ber to reach an annu­al­ized rate of 244 mil­lion tons, which marked a 43 per­cent year-over-year rise.  Exports fell by 35 per­cent on the same com­par­i­son to only 14.7 mil­lion tons annualized.
• Brent Crude oil gained over 7 per­cent this week to $114 per bar­rel, the high­est level in 4 weeks, as sup­ply con­cerns in the North Sea and Mid­dle East sup­port prospects of a tight­en­ing market.
• China, the world’s biggest iron-ore buyer, boosted imports to an eight-month high in Sep­tem­ber fol­low­ing gains in steel prices. The nation imported 60.57 mil­lion met­ric tons of the steel­mak­ing mate­r­ial last month, China’s Gen­eral Cus­toms said this week, which is the high­est since Jan­u­ary and 15 per­cent more than a year ago.
• Cop­per imports by China climbed to the high­est level in 16 months in Sep­tem­ber as lower prices lured traders to place orders after domes­tic stock­piles were reduced ear­lier this year. Inbound ship­ments of the refined metal, cop­per alloy and prod­ucts rose 12 per­cent to 380,526 met­ric tons from 340,398 tons in August, accord­ing to Gen­eral Admin­is­tra­tion of Cus­toms.  Imports gained for a fourth month to the high­est level since May 2010, and were 3.3 per­cent higher than the 368,410 tons of a year earlier.

Weak­nesses

• The World Steel Asso­ci­a­tion low­ered its growth fore­cast for India’s steel use to 4.3 per­cent for 2011 from 13.3 per­cent pre­dicted in its April 18 report. The fore­cast for next year was cut to 7.9 per­cent from 14.3 per­cent as slower eco­nomic growth is expected to weigh on demand.
• In its third quar­ter 2011 earn­ings release, Alcoa high­lighted weak­ness in Euro­pean demand in an oth­er­wise pos­i­tive pic­ture, while main­tain­ing its view for global demand growth of 12 per­cent in 2011 with an upward revi­sion to Chi­nese demand growth to 17 per­cent off­set­ting weak­ness elsewhere.

Oppor­tu­ni­ties

• China's cab­i­net announced on Mon­day it will tax all resource prod­ucts start­ing on Novem­ber first. Crude oil and nat­ural gas nation­wide will be taxed at a rate between 5 and 10 per­cent of their sales value. The reg­u­la­tions impose a sales tax rang­ing from 8 yuan (1.25 U.S. dol­lars) to 20 yuan per met­ric ton on cok­ing coal, and from 0.40 to 60 yuan per met­ric ton on rare earth ore. Taxes on other types of coal stood unchanged at 0.30 to 5 yuan per met­ric ton. The tax rate for other non-ferrous met­als is set between 0.4 to 30 yuan per met­ric ton. Fer­rous met­als will be taxed at two to 30 yuan per met­ric ton. China's cur­rent resource tax is levied based on pro­duc­tion vol­ume instead of sales value.
• Accord­ing to a report from Busi­ness Line, the Indone­sian gov­ern­ment has cir­cu­lated a new draft decree seek­ing com­ments on impos­ing a ban on the export of coal below 5,100 gross kilo calo­ries per kilo­gram (Kcal/kg) from 2014. The ban, if imple­mented, could reduce the exports by 120–130 mil­lion tons; the coun­try exported 270 mil­lion tons in 2010. India will be impacted the worst as it imports coal grades from 5,000 Kcal/kg to as low as 3,500 Kcal/kg from Indonesia.
• Colom­bian Mines and Energy Min­is­ter Mauri­cio Car­de­nas said the coun­try seeks to ensure that gold, coal and other min­ing projects move ahead at full speed to boost pro­duc­tion and gov­ern­ment rev­enue.  Colom­bia wants growth in its min­ing indus­try to match ris­ing invest­ment in oil pro­duc­tion by help­ing projects that meet envi­ron­men­tal and social stan­dards and avoid delays, Car­de­nas said. Mil­ton Rodriguez, a mem­ber of a Sen­ate com­mis­sion over­see­ing nat­ural resources, and other law­mak­ers had pushed for tax increases on min­ing com­pa­nies. Colom­bia should work on imple­ment­ing recent changes in how min­ing rev­enue is dis­trib­uted by the gov­ern­ment, rather than on chang­ing tax rates, Car­de­nas said.  The Global Resources Fund holds sev­eral invest­ments in Colom­bian energy and min­ing assets.

Threats

• The Inter­na­tional Energy Agency (IEA) cut fore­casts for global oil demand in 2012 for a sec­ond month as the eco­nomic recov­ery loses momen­tum. The Paris-based adviser reduced esti­mates for world demand for next year by 210,000 bar­rels a day, to 90.5 mil­lion bar­rels a day in its monthly oil mar­ket report. That means con­sump­tion will increase by 1.3 mil­lion bar­rels a day, or 1.4 per­cent, from this year. Oil inven­to­ries in indus­tri­al­ized nations fell below their five-year aver­age for the first time in more than three years, accord­ing to the IEA.
• Cop­per sup­ply will begin out­pac­ing demand in 2013 as new mines enter pro­duc­tion, accord­ing to con­sul­tancy Brook Hunt. The sur­plus will start to accel­er­ate toward 2015, accord­ing to Richard Wil­son of Brook Hunt. The researcher esti­mates the mar­ket will be in deficit by 200,000 met­ric tons this year and bal­anced in 2012.

Tags: Brent Crude Oil, Commodities, Copper Alloy, Copper Prices, Crude Oil, Earnings Release, General Administration, Gold, Inbound Shipments, India, Iron Ore, Metal Copper, Million Metric Tons, North Rhine Westphalia, Open Pit, Refined Metal, Steel Association, Steel Prices, Steelmaking, Stockpiles, Supply China, Supply Concerns, Westphalia Germany, World Steel
Posted in Commodities, Gold, India, Markets, Oil and Gas | Comments Off

Energy and Natural Resources Market Cheat Sheet (October 11, 2011)

Monday, October 10th, 2011

Energy and Nat­ural Resources Mar­ket Cheat Sheet (Octo­ber 11, 2011)

Strengths

• This week, the Global Resources Fund out­per­formed its peers and bench­marks due to its defen­sive posi­tion­ing of the port­fo­lio. Expo­sure to seniors and larger mar­ket cap stocks helped limit the down­side risk to the Fund. Junior explo­ration stocks also rebounded from 52-week lows.
• Deutsche Bank high­lighted that global stain­less steel pro­duc­tion rose 3.8 per­cent to a record 16.4 mil­lion tons in the first half of 2011.
• Cop­per prices gained 4 per­cent this week on reports that LME can­celled war­rants jumped to 60,000 tons, the high­est level in over two years.
• Accord­ing to the Inter­na­tional Mon­e­tary Fund, Thai­land, Bolivia, and Tajik­stan added a com­bined 18.2 tons of gold last month.
• Crude oil gained 5 per­cent this week after the U.S. Depart­ment of Energy reported a sur­prise drop in crude stock­piles and on signs the U.S. may take fur­ther steps to sus­tain an eco­nomic recovery.
• Deutsche Bank reported strength among agri­cul­ture mar­kets. Corn was sup­ported by the U.S. Grains Coun­cil pre­dic­tion that China will need to import five times more corn than the 2 mil­lion tons the USDA is cur­rently esti­mat­ing in 2011-12.  Wheat futures rose by increased ten­ders from the MENA region.  Many nations there stocked up after last year's Arab Spring, but now are in a posi­tion where they need to import again. Additionally, Thai­land, the world’s largest exporter of rice, cut its main har­vest pro­duc­tion fore­cast by almost 10 per­cent after floods dam­aged crops.

Weak­nesses

• Bloomberg reported that Nige­ria, Africa’s top oil pro­ducer, plans to end fuel sub­si­dies, sav­ing the gov­ern­ment $7.5 bil­lion in 2012. Nige­ria is fac­ing declin­ing rev­enue as the price of oil, the source of more than 95 per­cent of export income and 80 per­cent of gov­ern­ment earn­ings, fell 28 per­cent in the past six months.
• Mac­quarie Research drew atten­tion to pre­cious met­als’ year-to-date per­for­mance, which has remained low. Pal­la­dium prices have been hit by large ETF redemp­tions, with pal­la­dium ETF hold­ings now close to lev­els seen in mid-2010.
• The lat­est steel mar­ket sen­ti­ment sur­vey results were high­lighted by Mac­quarie Research.  Fifty-seven per­cent of com­pa­nies glob­ally now expect prices to be lower in a three-month timescale, with only 13 per­cent see­ing upside. Eleven per­cent of global respon­dents expect global demand to rise this com­ing quar­ter, with 46 per­cent expect­ing it to fall.

Oppor­tu­ni­ties

• Gold­man Sachs Group reported that com­mod­ity prices may rise 20 per­cent over the next year as growth in emerg­ing mar­kets off­sets the impact of the sovereign-debt cri­sis in Europe and a slow­down in devel­oped economies. “With recent GDP revi­sions by our econ­o­mists falling hard­est on Europe but emerg­ing mar­ket growth expec­ta­tions still rel­a­tively solid, we con­tinue to believe that demand growth in 2012 will be suf­fi­cient to tighten major com­mod­ity mar­kets,” an ana­lyst for the bank said.
• Fed Chair­man Ben Bernanke said the cen­tral bank can take fur­ther steps to sus­tain a recov­ery that’s close to fal­ter­ing and cau­tioned law­mak­ers against mak­ing changes in fis­cal pol­icy that may harm growth. He went on to say that the Fed can give more infor­ma­tion about its pledge to keep inter­est rates low at least through mid-2013, reduce the rate paid on banks’ reserve deposits or buy more securities.
• Codelco said buy­ers in China should take advan­tage of a 14-month low in cop­per prices to boost imports of the metal. Cus­tomer orders from Asia look quite strong for next year, CEO Diego Her­nan­dez said, adding that Codelco has started talks with buy­ers for 2012 sales and expects them to match this year’s num­ber. Clients in Europe are cau­tious on require­ments and the com­pany has had some can­cel­la­tions, Her­nan­dez said. Other cus­tomers have sought to bring for­ward deliv­er­ies, he said.

Threats

• An Inter­na­tional Mon­e­tary Fund offi­cial warned that the euro­zone could see a “melt­down”’ in two to three weeks, unless pol­icy actions take place, says JPMor­gan.  This in turn would trig­ger a domino effect, pro­duc­ing a melt­down across the Euro­pean bank­ing system.
• Clau­dio Scliar, the Ministry’s Sec­re­tary for geol­ogy and min­eral roy­al­ties, announced that Brazil had plans to boost taxes on iron ore and that the gov­ern­ment is con­sid­er­ing a plan to dou­ble the roy­alty on iron ore to 4 per­cent of gross rev­enue from 2 per­cent of net sales, Nomura Research high­lighted.  She fur­ther went on to say that the min­istry aims to send Con­gress three bills this month to alter min­er­als roy­al­ties, change the way min­ing con­ces­sions are granted and cre­ate a new reg­u­lat­ing body.
• An energy econ­o­mist and pub­lisher of Petro­leum Eco­nom­ics Monthly recently said, “Nat­ural gas as an energy source is now roughly the equiv­a­lent of $24-per-barrel oil.”  Fur­ther­more, the pub­lisher believes that pro­jec­tions of crude-oil demand in 2025 are typ­i­cally 20 per­cent to 30 per­cent too high, and that crude-oil prices are likely to drop sharply as those fore­casts go awry.
• Mac­quarie reported that Gras­berg, Freeport McMoRan Cop­per and Gold’s mine in Indone­sia will see union work­ers extend their strike for a sec­ond month. Freeport has expe­ri­enced on-going labor dis­putes at a num­ber of their mines.

Tags: 52 Week Lows, Agriculture Markets, Brazil, Cap Stocks, Commodities, Copper Prices, Crude Oil, Downside Risk, Exploration Stocks, Export Income, Gold, Grains Council, International Monetary Fund, Junior Exploration, Largest Exporter, Lme, Mena Region, Nigeria Africa, Oil Producer, precious metals, Resources Fund, Stainless Steel Production, Tajikstan, Wheat Futures
Posted in Brazil, Commodities, ETFs, Gold, Markets, Oil and Gas | Comments Off

James Paulsen (Wells): Investment Outlook (October 5, 2011)

Wednesday, October 5th, 2011

Wells Cap­i­tal Management's Chief Invest­ment Strate­gist, Jim Paulsen, has just released his exhaus­tive invest­ment out­look. The com­plete report, which is longer than the fol­low­ing pref­ac­ing text, fol­lows in a slid­edeck, which you can either down­load or fullscreen.

by James Paulsen, Chief Invest­ment Strate­gist
Wells Cap­i­tal Management

Since its col­lapse in early August, the stock mar­ket has expe­ri­enced extreme daily price volatil­ity oscil­lat­ing within a broad range. These emo­tional daily price swings reflect a skit­tish investor strug­gling with a dichotomy between extremely attrac­tive rel­a­tive stock mar­ket val­u­a­tions and an array of esca­lat­ing fears. Investor wor­ries include a widen­ing con­ta­gion from the Euro­pean sov­er­eign debt cri­sis, the poten­tial for a hard land­ing among emerg­ing world economies, uncer­tainty intro­duced by uncom­mon and con­fus­ing Fed­eral Reserve pol­icy actions, and the like­li­hood of yet another debt ceil­ing debate loom­ing on the horizon.

While these con­cerns should keep daily price volatil­ity ele­vated, how the stock mar­ket ulti­mately breaks from its recent trad­ing range will prob­a­bly be deter­mined by whether the U.S. econ­omy avoids reces­sion. In the next sev­eral weeks, eco­nomic reports will either gal­va­nize reces­sion expec­ta­tions or con­sen­sus fears will once again calm, embrac­ing the like­ly­hood that the U.S. eco­nomic recov­ery will per­se­vere. Should a reces­sion become obvi­ous, the stock mar­ket would likely suf­fer a fur­ther sig­nif­i­cant decline. Alter­na­tively, investor greed may dom­i­nate the rest of this year should reces­sion fears fade as investors act to take advan­tage of a val­u­a­tion met­ric (about 11 times earn­ings with a sub-2 per­cent 10-year Trea­sury) which, with­out a reces­sion, rep­re­sents a fire sale!

A U.S. Recession?

An immi­nent U.S. reces­sion is unlikely. First, the tra­di­tional eco­nomic poli­cies which pre­cede a reces­sion are not evi­dent. The U.S. does not pos­sess an inverted yield curve, has not been sub­jected to sig­nif­i­cant short-term nor long-term inter­est rate hikes, and is not suf­fer­ing from restric­tive liq­uid­ity con­di­tions or tight fis­cal policies.

Sec­ond, can the U.S. suf­fer a reces­sion when there is noth­ing to recess? Reces­sions often result from “excesses in need of a cor­rec­tion.” Since the last reces­sion ended only two years ago and since it was so extreme, pri­vate sec­tor play­ers have thus far been well-behaved in the con­tem­po­rary recov­ery. Are indi­vid­u­als pay­ing up too much for houses today? Have con­sumers extin­guished pent-up demands for durable goods? Is the sav­ings rate too low (the sav­ings rate has been hov­er­ing about a 20-year high since the recov­ery began)? Are house­hold debt bur­dens oppres­sive (the house­hold debt ser­vice bur­den is in its low­est quar­tile since 1980 and no higher today than it was in 1985)? Have banks been aggres­sively overex­tend­ing loans? Has any­one been bor­row­ing too much lately? Are com­pa­nies over­staffed? Over­in­ven­to­ried? Have busi­nesses over invested in the last cou­ple years? Has the Fed tight­ened too aggres­sively? Have bond vig­i­lantes raised bond yields too much? Too much fis­cal tight­en­ing lately? Is any­one lack­ing for liq­uid­ity? Are house­holds over­ex­posed to the stock mar­ket today? Is opti­mism over the top? It is hard to see why the U.S. would expe­ri­ence a reces­sion when almost noth­ing requires a “cor­rec­tion.” Indeed, before the next U.S. reces­sion, the answer to at least some of these ques­tions will likely be yes!

Third, despite a sig­nif­i­cant eco­nomic slow­down since early this year (annu­al­ized real GDP growth rose only 0.7 per­cent in the first half and real GDI growth rose by only 2 per­cent), the econ­omy is already show­ing some signs of bounc­ing. After flat­ten­ing ear­lier this year, real per­sonal con­sump­tion is on pace to rise more than 1.5 per­cent in the third quar­ter, weekly retail chain store sales have remained rel­a­tively robust, and the annu­al­ized U.S. auto sales rate has risen by more than 14 per­cent since June to 13.1 mil­lion, helped by Japan bounc­ing back from its tsunami. Weekly unem­ploy­ment insur­ance claims remain in the low 400,000 range, reported pri­vate sec­tor ADP employ­ment gains have aver­aged 100,000 in the last two months and lay­off announce­ments as recorded by the Chal­lenger Job Cuts Index have remained subdued.

Cor­po­rate prof­its are still robust, indus­trial pro­duc­tion posted back-to-back gains in July and August, and recent reports for fac­tory orders and durable goods ship­ments sug­gest busi­ness spend­ing may have accel­er­ated. The ISM man­u­fac­tur­ing sur­vey sur­pris­ingly increased in Sep­tem­ber to 51.6 and the ISM ser­vices sur­vey is at a solid 53.3. Finally, U.S. net exports improved sig­nif­i­cantly in July sug­gest­ing inter­na­tional trade will add to third quar­ter growth. Over­all, we expect real GDP growth to be between 2 to 2.5 per­cent in the third quar­ter— hardly a reces­sion­ary reading.

Fourth, new “pol­icy stim­u­lus” added in recent months should soon improve the pace of eco­nomic growth. Many worry the Fed is out of bul­lets and fear fis­cal author­i­ties have been neu­tral­ized by grid­lock leav­ing the eco­nomic recov­ery with­out pol­icy assis­tance. Although the abil­i­ties of pol­icy offi­cials may be lim­ited, the econ­omy has turned to “self-medication.” The national aver­age 30-year mort­gage rate has fallen from 5.2 per­cent in Feb­ru­ary to only about 4 per­cent today! Sim­i­lar yield declines since the spring have been recorded by invest­ment grade cor­po­rate bonds and by munic­i­pal secu­ri­ties. This “large” decline in long-term credit costs should help boost eco­nomic per­for­mance in the next sev­eral months. Both con­sumers and busi­nesses should also get a boost from lower energy cost. Crude oil and gaso­line prices have declined by more than 20 per­cent from peak lev­els ear­lier this year. Fur­ther­more, even though the U.S. dol­lar has recently risen, the real broad U.S. Dol­lar Index is still about 10 per­cent lower today than it was in 2010 sug­gest­ing addi­tional improve­ment is forth­com­ing in U.S. trade flows. The U.S. M2 money sup­ply has exploded since June grow­ing at an annu­al­ized pace of about 25 per­cent! Finally, as Japan bounces back from its eco­nomic col­lapse after the early-year earth­quake, U.S. man­u­fac­tur­ing sup­ply chain prob­lems should alle­vi­ate fur­ther in the next sev­eral months. Indeed, U.S. auto sales have already strength­ened sig­nif­i­cantly in recent months as the Japan­ese impact diminishes.

What About Europe?

Unlike the U.S., the Euro region has been sub­jected to sig­nif­i­cant mon­e­tary and fis­cal tight­en­ing in the last year and does exhibit char­ac­ter­is­tics of a pre-recessionary econ­omy. How­ever, how seri­ous is the risk of either a reces­sion­ary or slug­gishly grow­ing Euro region for investors?

The best news sur­round­ing the Euro cri­sis is it has finally got­ten so bad! When the Euro sov­er­eign debt cri­sis first broke in Jan­u­ary 2010, the major play­ers (EMU pol­icy offi­cials, Ger­many and France) per­ceived the prob­lem as a polit­i­cal issue. Con­se­quently, the cri­sis has not received any sub­stan­tial assis­tance aimed at end­ing the eco­nomic and finan­cial con­ta­gion. Only recently have the major pow­ers in the region decided it is an eco­nomic threat and have begun to treat it more appro­pri­ately. Since offi­cials have done so lit­tle yet to arrest the cri­sis, many weapons are still left in the tool box. Only recently, EMU offi­cials finally sug­gested they will stop rais­ing inter­est rates. Soon they will begin to lower inter­est rates, per­haps pur­sue some non-sterilized bond pur­chases (i.e., those that actu­ally expand the cen­tral banks bal­ance sheet and thus rep­re­sent a true eas­ing of mon­e­tary con­di­tions), and even enter­tain a European-style TARP pro­gram sim­i­lar to the U.S. approach used in 2008 to back­stop ail­ing banks. After almost two years of smol­der­ing into a major eco­nomic threat, there is under­stand­ably great con­cern the cri­sis can­not be con­trolled nor extin­guished. How­ever, the lack of suc­cess to date is pri­mar­ily because so lit­tle has been done to address the cri­sis. This is begin­ning to change and will likely lead to much bet­ter results in the com­ing year.

The most seri­ous threat for the U.S. econ­omy is not a period of slug­gish or nonex­is­tent Euro region growth but rather a full-blown global finan­cial con­ta­gion. Although pos­si­ble, this seems highly unlikely in our view. First, the prob­lems are well-known and have been for some time. A more seri­ous finan­cial con­ta­gion could hardly be a “sur­prise” which is often the most dif­fi­cult aspect of crises. Sec­ond, most U.S. finan­cial insti­tu­tions do not hold large amounts of trou­bled sov­er­eign secu­ri­ties. Third, even if a finan­cial con­ta­gion were to infil­trate the U.S. finan­cial sys­tem, because of responses to the 2008 U.S. cri­sis, the U.S. sys­tem is now very well cap­i­tal­ized, it has already expe­ri­enced a major write down of bad debts, and is more highly liq­uid than in decades. Per­haps this is why for the first time, Euro­pean and U.S. 10-year gov­ern­ment swap spreads have sig­nif­i­cantly delinked. Euro swap spreads have exploded to 2008 wides while U.S. spreads remain near their low­est lev­els of the last decade.

The more likely U.S. fall­out from the Euro cri­sis is a slug­gish Euro region eco­nomic per­for­mance which would reduce U.S. export mar­kets. While this is very likely, it may have much smaller impact then most fear. Out­side of the Euro region, eco­nomic growth is likely to be main­tained includ­ing Japan, Canada, Aus­tralia, the emerg­ing world economies, and in the U.S. It is worth remem­ber­ing that in 1990 the world’s largest econ­omy at the time, Japan, fell into a depres­sion from which it would not return. Nonethe­less, the rest of the world includ­ing the U.S. pro­ceeded to enjoy an eco­nomic boom dur­ing the bal­ance of the 1990s! Today, the world econ­omy is com­prised by a new eco­nomic force (emerg­ing world economies), which did not exist in any mean­ing­ful fash­ion in 1990, which should help dimin­ish the impact of a smaller growth con­tri­bu­tion from Europe.

How About China and the Emerg­ing World?

A much more seri­ous blow to the global eco­nomic recov­ery would be a reces­sion in the emerg­ing world. Despite wide­spread fears of such an event, we think a “soft land­ing” is a bet­ter descrip­tion of what is hap­pen­ing among emerg­ing world economies. Dur­ing much of 2010, investors wor­ried about China and other emerg­ing economies over­heat­ing and col­laps­ing. As a result, most emerg­ing econ­omy pol­icy offi­cials have been tight­en­ing con­di­tions in the last year lead­ing to a notice­ably slower grow­ing emerg­ing world. How­ever, now pol­icy offi­cials in this region are begin­ning to turn back toward eas­ing poli­cies after most economies have slowed. For exam­ple, Chi­nese real GDP growth has slowed to a still very robust 9 per­cent rate from about 12 per­cent last year. This is prob­a­bly a healthy devel­op­ment and makes it more likely the global eco­nomic recov­ery will prove longer-lasting. Recently, China reported the sec­ond con­sec­u­tive monthly rise in its man­u­fac­tur­ing ISM sur­vey to 51.2 in Sep­tem­ber! The eas­ing poli­cies now being increas­ingly employed through­out the emerg­ing world sug­gests a quicker eco­nomic growth from this part of the globe in the com­ing year.

Mar­ket Sig­nals are Flash­ing Caution???

U.S. reces­sion expec­ta­tions have risen pri­mar­ily because sev­eral finan­cial mar­ket indi­ca­tors are pro­vid­ing sig­nals which often pre­cede a reces­sion. That is, reces­sion fears are due less to wors­en­ing eco­nomic fun­da­men­tals than they are being dri­ven by wors­en­ing finan­cial mar­ket signals.

The good news is the old adage which goes some­thing like “the stock mar­ket has pre­dicted 12 of the last five reces­sions.” While finan­cial mar­kets always worsen prior to reces­sions, poor finan­cial mar­ket action also fre­quently pre­cedes tem­po­rary eco­nomic slow­downs or pan­ics. Con­se­quently, it is hard to inter­pret the mes­sage of the mar­kets. How­ever, given the extra­or­di­nar­ily fear­ful, crisis-phobic cul­ture which has dom­i­nated since 2008, a good deal of cau­tion should be employed when rely­ing on sur­vey reports and mar­ket sig­nals (mar­kets which have been amaz­ingly emo­tional dri­ven) to access where the econ­omy is headed. We are cer­tainly in the mid­dle of an intense panic. A panic which may last longer and take finan­cial mar­kets even lower before it is extin­guished. How­ever, fun­da­men­tally the U.S. econ­omy remains sound, has some momen­tum, and because of self-applied stim­u­lus since spring, is likely to improve in the months ahead. More­over, Euroland prob­lems finally seem to be receiv­ing the “economic/ pol­icy” atten­tion it deserved a lot sooner. Finally, the rest of the global econ­omy, like the U.S., is still grow­ing (more likely in a tem­po­rary slow­down) or even grow­ing quite rapidly (e.g., emerg­ing world). Con­tem­po­rary finan­cial mar­ket sig­nals, owing to the cur­rent remark­ably emotionally-volatile period, may be exag­ger­at­ing upcom­ing eco­nomic prob­lems and under­es­ti­mat­ing the poten­tial for an eco­nomic reacceleration.

Out­look for the Stock Market?!?

The fate of the U.S. stock mar­ket dur­ing the bal­ance of this year will not likely be deter­mined by Euro cri­sis fears, by Fed actions, by a jobs bill, or by debt ceil­ing debates. Rather, the stock mar­ket is likely to be dri­ven by whether or not the U.S. avoids a reces­sion. That is, the stock mar­ket will ulti­mately rally or fail based on eco­nomic data flow com­ing from Main Street USA.

Should the data con­vinc­ingly por­tray a U.S. reces­sion, the stock mar­ket will likely decline sig­nif­i­cantly fur­ther from cur­rent lev­els. With the S&P 500 Index cur­rently slightly below 1100, the stock mar­ket already seems to be dis­count­ing a reces­sion­ary decline in earn­ings to about $70 (from the cur­rent likely yearend level with­out a reces­sion of about $100). That is, based on this reces­sion­ary earn­ings expec­ta­tion, the stock mar­ket cur­rently sells at about 15 to 16 times which is a rea­son­able reces­sion val­u­a­tion given a sub-2 per­cent 10-year Trea­sury bond yield. More­over, we believe if a reces­sion does actu­ally occur, “panic” will likely cause a much deeper decline in earn­ings pro­duc­ing fur­ther down­side risk in the stock market.

For­tu­nately, we believe the chance of a U.S. reces­sion remains quite low. If, dur­ing the next few weeks, the upcom­ing jobs report shows pos­i­tive gains (even if slug­gish) and if unem­ploy­ment claims, retails chain store sales, and other timely eco­nomic data do not fall off a cliff sug­ges­tive of a reces­sion, investor greed will likely return and begin to dom­i­nate the finan­cial mar­kets. If a con­sen­sus comes to believe a U.S. reces­sion is “off the table,” the cur­rent val­u­a­tion met­ric of less than 11 times year-end earn­ings while the 10-year Trea­sury yield is at a record low will become far too enticing.

We think a con­sen­sus which agreed the eco­nomic recov­ery will per­sist would result in a stock mar­ket will­ing to pay per­haps around 14 times for 2012 earn­ings of between $105 and $110 or a tar­get price of about 1500! This is not nec­es­sar­ily our fore­cast for next year, but rather an illus­tra­tion of the invest­ment poten­tial which exists should con­sen­sus reces­sion fears fade.

The incred­i­ble daily volatil­ity exhib­ited by stock prices dur­ing the last two months is fright­en­ing and tir­ing. It seem­ingly makes no sense when val­u­a­tions can change so rad­i­cally, so quickly, with lit­tle or no new fun­da­men­tal infor­ma­tion. How­ever, the char­ac­ter of these types of mar­kets, these peri­odic “gut checks,” may be what is in store for investors dur­ing this highly cri­sis­pho­bic period in finan­cial his­tory. Our best guess is investors should try to stay focused on fun­da­men­tals and not on the “market’s daily assess­ment of its worst cri­sis fears.” Ulti­mately, we believe the U.S. and global econ­omy is in a recovery—a recov­ery which will prove bumpy but will also likely prove per­sis­tent. And, if it does, those investors which approach this decline in the stock mar­ket as an oppor­tu­nity to raise expo­sure to cycli­cal sec­tors will likely fare best in the com­ing years.

James W. Paulsen, Ph.D.
Chief Invest­ment Strate­gist, Wells Cap­i­tal Management

20111005_EMP

Tags: Bonds, Canadian Market, Chief Investment Strategist, Contagion, Crude Oil, Debt Ceiling, Debt Crisis, Early August, Economic Policies, Economic Reports, Fire Sale, Inverted Yield Curve, Investment Outlook, Investor Worries, Likelyhood, Outlook, Policy Actions, Price Swings, Price Volatility, Recession Fears, Sovereign Debt, Stock Market Valuations, Wells Capital Management, World Economies
Posted in Bonds, Brazil, Canadian Market, Markets, Oil and Gas, Outlook | Comments Off

Energy and Natural Resources Market Cheat Sheet (October 3, 2011)

Sunday, October 2nd, 2011

Energy and Nat­ural Resources Mar­ket Cheat Sheet (Octo­ber 3, 2011)

Strengths

• The Global Resources Fund per­formed well this week due to its defen­sive posi­tion­ing in the portfolio.
• On a rel­a­tive basis, asset allo­ca­tion and stock selec­tion among food and grain proces­sors helped to limit down­side risk to the fund. Addi­tion­ally, weight­ing in senior pre­cious met­als also played a role in lim­it­ing a decline.
• Despite a sell-off in cop­per prices and poor sen­ti­ment towards min­ing stocks this week, M&A remains active. Min­metals Resources agreed to buy Anvil Min­ing for $1.3 bil­lion cash, gain­ing three cop­per mines in the Demo­c­ra­tic Repub­lic of Congo, which may pro­duce 60,000 met­ric tons of cop­per cath­ode annu­ally from next year.

Weak­nesses

• Cop­per fell almost 5 per­cent to a 13-month low on Wednes­day, plum­met­ing from ongo­ing Euro­pean fears. Copper’s drop came despite a 21 per­cent jump in Chi­nese imports in August. Gold had dropped almost 2 per­cent and wheat 5 percent.
• Freeport McMoRan Cop­per and Gold con­tin­ues to expe­ri­ence ongo­ing strikes at two of their prop­er­ties. Min­ing Weekly reported that up to 1500 work­ers in Indonesia’s Freeport remote Papua province protested out­side a gov­ern­ment office on Thurs­day, while work­ers went on strike that same day at the Peru­vian Cerro Verde mine. This is third stop­page at Freeport this month. The com­pany still main­tains that the labor con­cerns have had no effect on out­put. Freeport’s shares were at a 15-month low as it weath­ers these two strikes.
• Crude oil is headed for its largest quar­terly drop in 15 months over con­cerns of global eco­nomic slowdown.
• HSBC high­lighted that Sep­tem­ber data sig­naled con­tin­ued stag­na­tion of China’s man­u­fac­tur­ing sec­tor. After adjust­ing for sea­sonal vari­a­tion, the HSBC Pur­chas­ing Man­agers Index held steady at 49.9 in Sep­tem­ber. More­over, the index aver­aged its low­est quar­terly read­ing since the first quar­ter of 2009. Despite man­u­fac­tur­ing pro­duc­tion in China con­tin­u­ing to rise dur­ing Sep­tem­ber, pan­elists attrib­uted the sub­dued increase in pro­duc­tion to fewer intakes of new busi­ness and decreased demand conditions.

Oppor­tu­ni­ties

• The Don Coxe Strat­egy Jour­nal rec­om­mended an invest­ment strat­egy of main­tain­ing heavy weight­ing in agri­cul­tural stocks. Despite hav­ing high volatil­ity, the endoge­nous risk in their earn­ings is well below those of most cycli­cal stocks – com­modi­ties and oth­er­wise. He also rec­om­mended retain­ing strong expo­sure to U.S. oil pro­duc­ers oper­at­ing on land. The spread between West Texas Inter­me­di­ate and Brent oil, and U.S. and Euro­pean nat­ural gas prices, remains. Coxe says that at the moment, energy is the most con­spic­u­ous com­pet­i­tive advan­tage the U.S. possesses.
• The CEO of Anglo Amer­i­can gave an upbeat state­ment this week regard­ing cur­rent and forward-looking demand con­di­tions. The com­pany stated that demand from China con­tin­ues to be robust and that it doesn’t expect any of its clients to can­cel orders for the next 18 months to two years in their nickel and iron ore businesses.

Threats

• Should we con­tinue to see exces­sive volatil­ity in the mar­kets, we could poten­tially expe­ri­ence a global sell-off. World­wide neg­a­tive sen­ti­ment remains present, as ongo­ing con­cerns sur­round­ing the global sov­er­eign debt issues, lead­ing investors to lose con­fi­dence in global policymakers.
• After recently swear­ing in Michael Sata as Zambia’s new pres­i­dent, the new Mines Min­is­ter Wilbur Simusa report­edly said that the tax the coun­try is receiv­ing from Africa’s top cop­per pro­duc­ers is not enough and may need to be recon­sid­ered. Reuters high­lighted that cop­per min­ing is Zambia’s eco­nomic main­stay and any plans to increase the tax could hurt the indus­try tar­get of dou­bling annual cop­per out­put to 1.5 mil­lion tons by 2015.

Tags: Anvil Mining, August Gold, Cerro Verde, Commodities, Copper Cathode, Copper Mines, Copper Prices, Crude Oil, Democratic Republic Of Congo, Downside Risk, European Fears, Freeport Mcmoran, Freeport Mcmoran Copper, Freeport Mcmoran Copper And Gold, Global Economic Slowdown, Gold, Grain Processors, Labor Concerns, Papua Province, Purchasing Managers Index, Relative Basis, Seasonal Variation, Two Strikes
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Inter-Market Analysis in Guiding Cross-Asset Allocation

Sunday, October 2nd, 2011

Inter-Market Analy­sis in Guid­ing Cross-Asset Allocation

Monthly Strat­egy Report Sep­tem­ber 2011

Alfred Lee, CFA, DMS,
Vice Pres­i­dent & Invest­ment Strate­gist, BMO ETFs & Global Struc­tured Invest­ments. BMO Asset Man­age­ment Inc.
alfred.lee[at]bmo.com

Although it is debated in finan­cial acad­e­mia as to what per­cent­age asset allo­ca­tion con­tributes to port­fo­lio volatil­ity¹, we can per­haps agree that it is sig­nif­i­cant. There­fore in a volatile mar­ket envi­ron­ment, in which the CBOE Implied Volatil­ity Index (“VIX”)² remains ele­vated, as we have recently wit­nessed, port­fo­lio con­struc­tion becomes increas­ingly impor­tant. In fact, we will go fur­ther and say that going for­ward your asset allo­ca­tion will be one of, if not the most, impor­tant dri­vers in the returns of your port­fo­lio strat­egy. This month we wanted to take a closer look at the recent trends devel­op­ing between the three major asset classes we track: equi­ties, fixed income (or credit) and com­modi­ties. For our own pur­poses, we also mon­i­tor cur­ren­cies and volatil­ity as alter­na­tive asset classes, to bet­ter under­stand the inter-market rela­tion­ships between the three major asset classes pre­vi­ously mentioned.

About a month ago, shortly after U.S. Trea­suries were down­graded by the credit rat­ing agency Stan­dard & Poors (S&P), we issued a spe­cial bul­letin rec­om­mend­ing investors increase their allo­ca­tion to bonds. Although, we wouldn’t be sur­prised to see fre­quent relief ral­lies in equi­ties, we antic­i­pate stock mar­ket volatil­ity to remain ele­vated over the short-term. This is due to increased short­ing activ­ity in the mar­ket, lead­ing to short-covering, caus­ing upside and down­side moves to be exag­ger­ated. In addi­tion, macro-economic uncer­tainty remains, fur­ther com­pound­ing price move­ments as the mar­ket will have dif­fi­culty pric­ing the fair value of assets.

As a result, we believe bonds at this time are a good solu­tion to increase sta­bil­ity in volatile times. Fur­ther­more, as we have men­tioned in pre­vi­ous reports, the amount of lever­age in the finan­cial sys­tem makes diver­si­fi­ca­tion within one asset class inef­fec­tive in pro­vid­ing down­side pro­tec­tion as intra-market cor­re­la­tion remains elevated.

Although, we came into the year more bull­ish on equi­ties, our appetite for risk has dete­ri­o­rated as the year has pro­gressed. Eco­nomic data now sug­gests that the mar­ket weak­ness is more than just sea­son­al­ity or a soft-patch largely caused by sup­ply chain dis­rup­tions, and the mar­ket awaits clues of fur­ther mon­e­tary stim­u­lus after the market’s neg­a­tive reac­tion to “Oper­a­tion Twist³.” In response, the bond mar­ket has ral­lied sig­nif­i­cantly against equi­ties over the last month, as global investors seek out safe-havens. This recent trend in both U.S. and Cana­dian fixed income over their respec­tive equity mar­kets sup­ports our the­sis that fixed income is the pre­ferred asset class for the time being.

Fixed Income Expo­sure:
In terms of tra­di­tional fixed income, investors may want to con­sider slightly extend­ing their dura­tion expo­sure. With the Bank of Canada (BoC) tak­ing a much more dovish tone towards mon­e­tary pol­icy at their last meet­ing, inter­est rate hikes, bar­ring sur­prise infla­tion, is likely pushed-off until 2012. Some have even called for an inter­est rate decrease before the end of this year. A change in direc­tion of lend­ing rates is more sig­nif­i­cant than the amount of a rate move in our opin­ion and unless con­di­tions dete­ri­o­rate dra­mat­i­cally, the BoC will likely stand pat. Regard­less, this should ben­e­fit the long end of the yield curve, espe­cially if the U.S. Fed­eral Reserve’s (Fed) Oper­a­tion Twist impacts the Cana­dian yield curve by bring­ing down the long end. For tra­di­tional fixed income, increas­ing dura­tion to the mid­dle of the curve may be war­ranted, which would also help increase yield.

Poten­tial Invest­ment Oppor­tu­ni­ties:
• BMO Mid-Corporate Bond Index ETF (ZCM)
• BMO Mid-Federal Bond Index ETF (ZFM)

Com­modi­ties Los­ing Ground to Equi­ties, Tar­get Your Expo­sure Wisely As we have high­lighted in the past, we believe com­modi­ties to be in a super-cycle and for that rea­son, we have a sec­u­lar bias towards com­modi­ties. How­ever, the Thompson/Jefferies CRB Index, which is a broad com­mod­ity index, recently started los­ing ground to equi­ties in the short-term. As the dif­fer­ent com­mod­ity sub-groups react very dif­fer­ently to macro-economic and polit­i­cal risk, a more tar­geted approach to invest­ing in com­modi­ties is war­ranted at this point.

As our read­ers are aware, we have been pos­i­tive on gold over the long-term. How­ever, we stated that we wouldn’t be sur­prised to see some retrace­ment over the short-term. More­over, any tem­po­rary band-aid solu­tion to the Euro­pean sov­er­eign debt issues could lead gold to quickly fall. The recent rally in the U.S. dol­lar could also serve as a tem­po­rary headwind.

Poten­tial Invest­ment Oppor­tu­ni­ties:
• BMO Pre­cious Met­als Com­mod­ity Index ETF (ZCP)
– Buy on pull­backs and use stop loss order
• BMO Junior Gold Index ETF (ZJG)
– Buy on pull­backs and use stop loss order

We also believe agri­cul­ture com­modi­ties are a good long-term invest­ment despite short-term pres­sure. The Econ­o­mist mag­a­zine has esti­mated world pop­u­la­tion to hit 7 bil­lion at the turn of the year, a fac­tor con­tribut­ing to food short­ages, dri­ving prices higher. More­over, with ele­vated oil prices, the demand for bio-fuels is plac­ing fur­ther demand on corn. Agri­cul­ture based futures allow investors to gain pure price expo­sure to the under­ly­ing grains.

Tags: Alfred Lee, Asset Allocation, Asset Classes, Asset Management Inc, Bonds, Canadian, Canadian Market, Cboe, Commodities, Crude Oil, Economic Uncertainty, Gold, Good Solution, Implied Volatility, Investment Strategist, Market Environment, Market Relationships, Portfolio Construction, Portfolio Strategy, Stock Market Volatility, Stock Volatility, Strategy Report, Structured Investments, Volatile Market, Volatile Times, Volatility Index Vix
Posted in Bonds, Brazil, Canadian Market, Commodities, ETFs, Gold, Markets, Oil and Gas | Comments Off

Canadian Energy Firms Trading at Crisis Prices

Wednesday, September 28th, 2011

This Week: iShares S&P TSX Capped Energy  ( Ticker: XEG.TO )

by Vikash Jain, ArcherETF

Cana­dian energy com­pany shares are trad­ing at lev­els not seen since the depths of the 2008 cri­sis, lev­els that can only be jus­ti­fied if the global econ­omy falls into another reces­sion and oil prices drop by half.  Any out­come bet­ter than such a sce­nario and the sec­tor will rally.

The entire Cana­dian equity mar­ket has been hit hard this year. The iShares S&P TSX 60 ETF (XIU-TO) is down 8% year to date and down 14% from its March high. But energy firms have been hit harder. The iShares TSX Capped Energy ETF (XEG-TO) is down 18% year-to-date and 27% since March, bring­ing its price, at just over $16, down to Octo­ber 2008 levels.

Indi­vid­ual firms are even worse off. Year-to-date, Sun­cor (SU-TO) and Cana­dian Nat­ural Resources (CNQ-TO) are down about 25%, and Tal­is­man (TLM-TO) a gut-wrenching 37%. The one major excep­tion is Cen­ovus: born after the cri­sis, it has stayed in the black for the year to date.

On a val­u­a­tion basis, these stocks, and by exten­sion, XEG, are cheap. For­ward price-to-earnings ratios are in the 8 to 9 times range for all of them except Cen­ovus at 13.6 times. The same ratios were around 8 times in the autumn of 2008. They all have debt to equity ratios of less than 50%, a good thing if a reces­sion does occur.

Their prices are so low, in fact, that one firm, Sun­cor recently said it would buy back up to $500 mil­lion worth of its shares or about 1.1% of out­stand­ing issuance by next September.

One rea­son they are cheap is polit­i­cal and envi­ron­men­tal risk. “Your oil is really dirty”, they say, flash­ing National Geo­graphic pho­tographs of birds and bitumen-filled tail­ings ponds.  “But it is more eth­i­cal than oil from some misog­y­nis­tic medieval king­dom,” we reply.

Uncon­vinced, envi­ron­men­tal­ists in the United States, our main oil buyer, are work­ing to block Cana­dian oil-sands oil.  In August, 1,200 pro­test­ers at the White House con­demned TransCanada’s (TRP-TO) pro­posed Key­stone Pipeline. Two weeks ago, a list of Nobel Prize win­ners added their names to the protest. If the $7 bil­lion pipe is built, which is likely, it will trans­port oil from Alberta nearly 3,000 km to refiner­ies on the U.S. Gulf Coast.

How­ever, even in the unlikely event that the United States does close its doors, I sus­pect there would be no short­age of demand from less finicky buy­ers just as lum­ber from British Colum­bia, rejected by the United States sev­eral years ago, has found will­ing Asian buyers.

How­ever, most of the price decline is attrib­ut­able to reces­sion fears, in Canada and glob­ally. Here at home, expec­ta­tions for eco­nomic growth have been cut. The Inter­na­tional Mon­e­tary Fund now expects Canada to grow at about 2% this year and next, down from its ear­lier expec­ta­tion of about 2.8%. The lat­est data shows job growth stalled this sum­mer, with unem­ploy­ment stuck at just over 7%.

The IMF also revised its expec­ta­tions for global growth for 2011 and 2012 down to about 4.0% from about 4.3% earlier.

How­ever, even with the slower growth, oil con­sump­tion is expected to grow and prices, accord­ing to the U.S. Energy Infor­ma­tion Admin­is­tra­tion, are expected to remain in the mid-$90s per bar­rel into 2012 despite the slower eco­nomic growth. The price has ranged between $80 and $110 for the last year.

That is a far cry from late 2008, when prices for WTI crude fell to about $40 a bar­rel before recov­er­ing to the mid-$70 range 8 months later. The dif­fer­ence back then was the world was on the edge of a finan­cial precipice.

And while we are cer­tainly fac­ing eco­nomic prob­lems today – Euro debt, U.S. job­less­ness – they are not of the same mag­ni­tude as in 2008. If this view is cor­rect, then the energy sec­tor is an attrac­tive investment.

The dom­i­nant Cana­dian energy ETF is iShares’ XEG with nearly $800 mil­lion in assets. It holds 55 com­pa­nies, mainly oil but Encana rep­re­sents the gas sec­tor with a 5.7% weight. Sun­cor and CNR are the biggest hold­ings with about 15.7% and 12.4% of the allo­ca­tion. XEG’s div­i­dend yield, at about 2.2%, is lower than the broad mar­ket, but XEG will likely out­per­form the TSX 60 once it rebounds.

Dis­clo­sure: We may hold posi­tions in any and all secu­ri­ties men­tioned in this report.

The archerETF Global Tac­ti­cal Portfolio

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Tags: Bitumen, Canadian, Canadian Energy, Canadian Equity, Canadian Market, Canadian Natural Resources, Canadian Oil Sands, Commodities, Company Shares, Crisis Levels, Crude Oil, Debt To Equity Ratios, Energy Company, Energy Firms, ETF, Forward Price, Global Economy, Medieval Kingdom, Outlook, Photographs Of Birds, Suncor, Tlm, TSX 60, Vikash, Year To Date
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U.S. Equity Market Cheat Sheet (September 26, 2011)

Saturday, September 24th, 2011

U.S. Equity Mar­ket Cheat Sheet (Sep­tem­ber 26, 2011)

The domes­tic stock mar­ket was lower this week with the S&P 500 Index down by 6.54 per­cent. The fig­ure below shows the per­for­mance of each sec­tor in the index for the week. All ten sec­tors declined. The best-performing sec­tor for the week was util­i­ties which decreased 1.69 per­cent. Other top-three sec­tors were tele­com ser­vices and tech­nol­ogy. Mate­ri­als was the worst per­former, down 12.25 per­cent. Other bottom-three per­form­ers were energy and financials.

Within the util­i­ties sec­tor, the best-performing stock was Progress Energy, up 1.42 per­cent. Other top-five per­form­ers were PG&E Corp., Duke Energy, Domin­ion Resources, and Amer­i­can Elec­tric Power.

Strengths

• The health­care tech­nol­ogy group out­per­formed, up 2 per­cent on strength in its sin­gle mem­ber, Cerner Corp. The firm, which has been pros­per­ing from the sale of com­puter soft­ware for med­ical records, was among a list of stocks, pre­pared by the strate­gist of a major secu­ri­ties firm, which might outperform.
• The com­puter hard­ware group out­per­formed, down 0.05 per­cent, led by its largest mem­ber, Apple. The com­pany is hold­ing a press con­fer­ence on Octo­ber 4 where it is widely expected to unveil the next ver­sion of the iPhone.
• The footwear group out­per­formed, down 1 per­cent, led by its sin­gle mem­ber, Nike. The firm reported quar­terly earn­ings and rev­enue above the ana­lyst con­sen­sus esti­mate, and it raised rev­enue guid­ance for this fis­cal year.

Weak­nesses

• Five energy-related groups (coal & con­sum­able fuel, oil & gas equip­ment & ser­vices, oil & gas refin­ing & mar­ket­ing, oil & gas drilling, and oil & gas explo­ration & pro­duc­tion) were in the bottom-ten groups for the week, declin­ing between 15 and 23 per­cent. The price of crude oil declined for the week. Investor con­cern over a weaker econ­omy going for­ward was likely the rea­son for the declines.
• Three metals-related groups (diver­si­fied met­als & min­ing, steel, and alu­minum) were also in the bottom-ten groups, falling between 16 and 22 per­cent. Macro­eco­nomic con­cerns were likely respon­si­ble for the weakness.
• The multi-sector hold­ings group declined 18 per­cent on weak­ness in its sin­gle mem­ber, Leu­ca­dia National Corp. The diver­si­fied hold­ing com­pany this week acquired two mil­lion shares (about $25.2 mil­lion of stock) of Jef­feries Group, Inc. from the CEO of Jef­feries. Leu­ca­dia owned stock in Jef­feries prior to this trans­ac­tion. Macro­eco­nomic con­cerns may have con­tributed to the weakness.

Oppor­tu­ni­ties

• There may be an oppor­tu­nity for gain in merger & acqui­si­tion (M&A) trans­ac­tions in 2011. Cor­po­rate liq­uid­ity is high, thereby pro­vid­ing the means to pur­sue acquisitions.

Threats

• A mid-cycle slow­down in the domes­tic econ­omy would be neg­a­tive for stocks.
• An esca­la­tion in con­cerns over sov­er­eign debt oblig­a­tions in Europe would be neg­a­tive for stocks.

Tags: American Electric Power, Amp Services, Analyst Consensus, Cerner Corp, Consensus Estimate, Crude Oil, Domestic Stock Market, Dominion Resources, Duke Energy, E Corp, Gas Drilling, Hardware Group, Healthcare Technology, Investor Concern, Price Of Crude Oil, Progress Energy, Quarterly Earnings, Revenue Guidance, Securities Firm, Technology Materials, Telecom Services
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World Running Low on its “Energy Drink”

Friday, September 23rd, 2011

Sep­tem­ber 21, 2011

Did you know that China’s energy demand is set to grow so dra­mat­i­cally over the next 25 years that its con­sump­tion is expected to be 68 per­cent higher than that of the U.S.?

That was only one of the find­ings of the U.S. Energy Infor­ma­tion Admin­is­tra­tion (EIA). In its new Inter­na­tional Energy Out­look 2011, the EIA reports that through­out the world, energy con­sump­tion is expected to rise by 53 per­cent from 2008 through 2035 dri­ven by robust eco­nomic growth and expand­ing pop­u­la­tions in the devel­op­ing countries.

The EIA esti­mates growth to be rel­a­tively flat for OECD coun­tries, which are gen­er­ally the more advanced energy con­sumers. In con­trast, non-OECD—emerging countries—are expected to expand by an aver­age of 2.3 per­cent per year. Led by China and India, non-OECD Asia is expected to grow the most, ris­ing 117 per­cent from 2008 to 2035. By 2035, China and India are expected to con­sume 31 per­cent of the world’s energy.

In terms of fuel type, liq­uids remain the world’s “mon­ster energy drink” through 2035. The cat­e­gory includes petro­leum, nat­ural gas liq­uids, ethanol, biodiesel, coal-to-liquids and gas-to-liquids, and as you can see, the gap nar­rows between liq­uids and coal, but coal remains the sec­ond energy source to power the world.

Although demand for liq­uids is set to remain high, sup­ply may be harder to come by. Take oil for exam­ple, as coun­tries around the world are report­ing numer­ous short­falls. Our Global Resources Fund (PSPFX) invest­ment team dis­cusses this supply/demand imbal­ance often in our quest to find prof­itable, grow­ing oil com­pa­nies around the world. (Click here to see the video where Brian Hicks dis­cusses the prospects for oil in Brazil.)

Months of upris­ing have incurred sig­nif­i­cant dam­age to Libya’s 50-year old oil indus­try. It’s been only weeks since Gaddafi was dri­ven from power, and the National Tran­si­tional Coun­cil in Libya opti­misti­cally believes that the country’s pro­duc­tion of oil will return to a pre-civil war level within a year. Many believe it could take longer.

Fields and export ter­mi­nals along the south­ern Mediter­ranean shores show “vis­i­ble signs of dam­age,” says the Finan­cial Times. There is no power in the area, work­ers' homes are in sham­bles, and valu­ables have been stolen. Two of six ter­mi­nals are badly wrecked, and old oil reser­voirs have lost pres­sure. Tremen­dous work is needed just to get the coun­try back up and running.

Deutsche Bank and Wood Macken­zie believe there will be a “drawn-out recov­ery,” one that lasts around 36 months, to return to what the coun­try was pro­duc­ing before the cri­sis. This is assum­ing there is “a smooth tran­si­tion to an interim gov­ern­ment, swift removal of inter­na­tional sanc­tions and the return of Inter­na­tional Oil Com­pa­nies and for­eign workers.”

This speaks to the impor­tance of a new leader imple­ment­ing the right poli­cies. As FT pointed out, “In 1969, the year Gaddafi gained power, Libya pro­duced nearly as much as Saudi Ara­bia.” Today, Saudi Ara­bia is the largest liq­uids pro­ducer in OPEC and has the world’s largest oil reserves with nearly 18 per­cent of the world total, accord­ing to the EIA.

“Libya has for years punched below its poten­tial, ham­pered by lack of invest­ment as its leader diverted funds for other causes and his per­sonal use; sanc­tions pre­vent­ing the return of U.S. com­pa­nies; and an exo­dus of engi­neers to other coun­tries in the region. But exec­u­tives and offi­cials believe the coun­try, which boasts Africa’s largest reserves, could pro­duce much more oil in the next two decades if the new rul­ing class pur­sues the right poli­cies,” says FT.

With Libya’s oil, what mat­ters here is qual­ity, not quan­tity. Libya has pro­vided the world with only a small per­cent­age of oil, but it is a rare, high-quality crude account­ing for 10–15 per­cent of global out­put for that cal­iber of oil, accord­ing to FT.

Libya is one exam­ple of an inabil­ity to quench the world’s thirst for oil. Kaza­khstan, Brazil, Iraq and Mex­ico also have pro­duced less than expected for very dif­fer­ent rea­sons, says Bar­clays Cap­i­tal. Mexico’s oil fields have had high decline rates. In Brazil, a new oil law gives a 30 per­cent stake in all new sub­salt projects to state-oil com­pany Petro­bras, which could decrease the prof­itabil­ity of other com­pa­nies. For­eign oil com­pa­nies and state-run fields in Iraq have had to cut back their pro­duc­tion esti­mates because of an “infra­struc­ture bot­tle­neck.” To fix this issue, the coun­try has planned to build pipelines, tanks and ter­mi­nals to han­dle the growth, says Bar­clays, but the pro­duc­tion tar­gets in Iraq have been low­ered in the meantime.

Bar­clays says this “mis­match” between the tremen­dous demand and a prob­lem­atic sup­ply side is likely to keep prices high to bal­ance the mar­ket, sup­port­ing the “long-term fun­da­men­tals of the oil market.”

Because the Global Resources Fund con­cen­trates its invest­ments in a spe­cific indus­try, the fund may be sub­ject to greater risks and fluc­tu­a­tions than a port­fo­lio rep­re­sent­ing a broader range of indus­tries. For­eign and emerg­ing mar­ket invest­ing involves spe­cial risks such as cur­rency fluc­tu­a­tion and less pub­lic dis­clo­sure, as well as eco­nomic and polit­i­cal risk.

Hold­ings in the Global Resources Fund as a per­cent­age of net assets as of 6/30/11: Petro­bras, 0.00%, Eni 0.00%, Rep­sol 0.00%, Total 0.00%, OMV 0.00%, Occi­den­tal Petro­leum 0.00%, Cono­coPhillips 0.00%, Hess 2.74%, Marathon 1.41%, Exxon­Mo­bil 0.00%.

By click­ing the link above, you will be directed to a third-party web­site. U.S. Global Investors does not endorse all infor­ma­tion sup­plied by this web­site and is not respon­si­ble for its content.

Tags: Advanced Energy, Brazil, Brian Hicks, Coal To Liquids, Crude Oil, Energy Consumers, Energy Demand, Energy Information Administration, Energy Source, Fuel Type, Gas To Liquids, Global Resources, India, Infrastructure, International Energy Outlook, Investment Team, Monster Energy Drink, National Transitional Council, Natural Gas Liquids, Oecd Countries, Outlook, Resources Fund, Robust Economic Growth, U S Energy, World Energy Consumption
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Canadian Dollar Plummets As Stocks, Commodities Sink Worldwide

Thursday, September 22nd, 2011

TORONTO — The loonie tum­bled almost three US cents Thurs­day to its low­est level in about a year as a gloomy assess­ment of the U.S. econ­omy sent com­mod­ity prices reel­ing and traders to the safe haven sta­tus of the U.S. dollar.

The Cana­dian dol­lar was down 2.78 cents to 96.63 cents US.

That fol­lowed a drop of over a cent Wednes­day when the cur­rency closed below par­ity with the green­back for the first time since the end of January.

Traders fled risk and into U.S. Trea­surys after the U.S. Fed­eral Reserve said Wednes­day that there are "sig­nif­i­cant down­side risks to the eco­nomic outlook."

The Fed state­ment came as the cen­tral bank took steps to stim­u­late the econ­omy Wednes­day that had largely been expected.

But investors were trou­bled because the cen­tral bank’s state­ment showed it expected a deep and per­sis­tent downturn.

"We had a very neg­a­tive reac­tion to the Fed’s actions," said Mark Chan­dler, head of Canada FIC Strat­egy at RBC Domin­ion Securities.

"I sus­pect it was sim­ply a fact of the emperor’s clothes, that peo­ple are wor­ried that the (Fed’s) toolch­est is quite bare for pol­i­cy­mak­ers to do much at this stage."

Ris­ing global eco­nomic uncer­tainty has pushed investors to the green­back as it is per­ceived as a safe option dur­ing times of finan­cial turbulence.

When­ever there is a flight to qual­ity towards the U.S. cur­rency — even amid a slump­ing Amer­i­can econ­omy — the Cana­dian dol­lar usu­ally gets caught in the crossfire.

Besides a move towards the green­back by inter­na­tional money traders, falling com­mod­ity prices have also hit the Cana­dian cur­rency, which is seen as linked to the price of oil, min­er­als and other resources.

"Risky assets in gen­eral — and peo­ple usu­ally keep com­modi­ties within that group — are under pres­sure and as long as that con­tin­ues it will just exac­er­bate the weaker move of the Cana­dian dol­lar," added Chandler.

Oil prices plunged below US$82 a bar­rel, extend­ing losses from the pre­vi­ous ses­sion as wor­ries about much lower demand sent the Novem­ber crude con­tract on the New York Mer­can­tile Exchange falling $4.37 to US$81.55.

Cop­per prices also fell sharply with the Decem­ber con­tract 23 cents lower to US$3.54.

Ear­lier this week, cop­per prices hit a nearly 10 month low as demand weak­ened for the widely used indus­trial metal. Oil prices are also declin­ing as are prices of other com­modi­ties used in indus­try, con­struc­tion and other sec­tors around the world.

Despite the flight to safety, gold prices also tum­bled with the Decem­ber con­tract on the Nymex down $66.50 to US$1,741.60 an ounce.

Chan­dler also believes that eco­nomic con­di­tions will keep the Cana­dian dol­lar below par­ity for a while yet.

In the near term, there’s more scope for the Cana­dian dol­lar to weaken, he said.

If and when, the world gets a bit bet­ter news on growth, then you would see the cur­rency drift back toward par­ity. But it may be a story that’s really for the early to mid-part of next year.

Else­where Wednes­day, global min­ing giant Rio Tinto plc said some of its cus­tomers are ask­ing the com­pany to delay ship­ments of iron ore and other met­als — the lat­est sign the global eco­nomic slow­down is squeez­ing the resources sector.

"It is notice­able that mar­kets are some­what weaker," Rio Tinto CEO Tom Albanese said in an inter­view with the Finan­cial Times of Lon­don pub­lished Wednesday.

"In a few cases, cus­tomers are ask­ing to resched­ule deliv­er­ies. This is con­sis­tent with cus­tomers being cau­tious about the cur­rent state of business."

Lower com­modi­ties prices will put down­ward pres­sure on the Toronto Stock Exchange — a mar­ket where stocks of banks, min­ers and energy com­pa­nies play an impor­tant role. They also affect the Cana­dian dol­lar, a commodity-tied cur­rency that tends to rise when global prices for oil and met­als are on the way up and fall when they drop.

Com­modi­ties also make up nearly a third of the value of the London's stock mar­ket and are impor­tant to mar­kets in Aus­tralia, Brazil and South Africa.

Copy­right © Cana­dian Press

Tags: Brazil, Canadian, Canadian Market, Commodities, Crude Oil, Gold, Outlook
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Daniel Yergin and Peak Oil — Prophet or Mere Historian?

Wednesday, September 21st, 2011

Daniel Yer­gin and Peak Oil — Prophet or Mere Historian?

by John C.K. Daly of Oil Price

On 17 Sep­tem­ber The Wall Street Jour­nal pub­lished a fas­ci­nat­ing arti­cle on "peak oil," "There Will Be Oil," writ­ten by Daniel Yer­gin, chair­man of IHS Cam­bridge Energy Research Asso­ciates, an energy research and con­sult­ing firm and deserved recip­i­ent of Pulitzer Prize for his 1991 book, The Prize: The Epic Quest for Oil, Money and Power.

Accord­ing to The Wall Street Jour­nal, "There Will Be Oil" "is adapted from his new book, The Quest: Energy, Secu­rity and the Remak­ing of the Mod­ern World."

The essay will doubt­less have wide­spread influ­ence amongst pros­per­ous The Wall Street Jour­nal read­ers, but in his glib dis­missal of "peak oil" the­ory advo­cates, Yer­gin glosses or ignores a num­ber of issues fun­da­men­tal to the larger pic­ture, for what­ever rea­son, and these over­sights should be con­sid­ered in any eval­u­a­tion of the piece and the peak oil "specter."

Yer­gin notes, "Just in the years 2007 to 2009, for every bar­rel of oil pro­duced in the world, 1.6 bar­rels of new reserves were added." But this fails to take into account the fol­low­ing points.

First is that for oil pro­duc­ing nations reserves are like money in the bank and inflated reserve fig­ures are com­mon. Even with the newest tech­nol­ogy oil reserve fig­ures remain at best "guessti­mates" and should not be taken as hard and fast figures.

Sec­ondly, while the Mid­dle East for the fore­see­able future will remain the world's top pro­duc­ing area, it is unhap­pily also one of the most polit­i­cally unsta­ble regions of the world. The "Arab Spring's" impact is still play­ing out, much less poten­tial impact of Palestine's incip­i­ent bid at the United Nation's for recog­ni­tion, both of which could yet still throw a major span­ner in the works.

To recap briefly:

Saudi Ara­bia, the world's first or second-largest pro­ducer, vying with the Russ­ian Fed­er­a­tion for top posi­tion, is not immune from either of the two afore­men­tioned effects. Saudi Ara­bia does not allow for­eign oil com­pa­nies con­ces­sions and has adopted a strict con­ser­va­tion pol­icy, so don't expect to see a mas­sive rise in pro­duc­tion there any­time soon. As for Palestine's impact, last week for­mer head of Saudi Ara­bian intel­li­gence and ex-ambassador to Wash­ing­ton, Prince Turki al-Faisal in an essay in the New York Times warned that an Amer­i­can veto of Pales­tin­ian U.N. mem­ber­ship would end the ''spe­cial rela­tion­ship'' between the two coun­tries, and make the US ''toxic'' in the Arab world.

As for Iraq, eight years after the U.S.-led inva­sion, holder of mas­sive amounts of untapped reserves, the coun­try remains mired in a low-grade civil war and unre­solved polit­i­cal issues between its oil-rich north­ern Kur­dish region and Bagh­dad. Fur­ther east, Iran is most unlikely to boost pro­duc­tion sig­nif­i­cantly any­time soon because of U.S. sanc­tions imposed in 1979.

Libya remains the wild card, with only 25 per­cent of the country's oil poten­tial explored, but it has been wracked by six months of civil unrest, and the irre­den­tist cadre of Gaddafi sup­port­ers could eas­ily tar­get the country's oil infra­struc­ture in the future.

In the West­ern Hemi­sphere, OPEC recently announced that Venezuela's poten­tial reserves could top those of Saudi Ara­bia, but the dete­ri­o­rat­ing rela­tions between Cara­cas and Wash­ing­ton make an increase here unlikely any­time soon.

Many opti­mists pin their hopes on increased off­shore pro­duc­tion, from Brazil through West­ern Africa, the Mediter­ranean and the Caspian to the South China Sea but these regions' out­put will suf­fer from the twin curses of both greatly increased "lift­ing costs" in the bil­lions as well as polit­i­cal insta­bil­ity. West Africa is syn­ony­mous with cor­rup­tion and civil war; Lebanon, the Repub­lic of Cyprus, Israel and Turkey are spar­ring over east­ern Mediter­ranean hydro­car­bons; two decades after the col­lapse of the USSR Azer­bai­jan, Iran, Kaza­khstan, the Russ­ian Fed­er­a­tion and Turk­menistan have yet to reach a defin­i­tive agree­ment on the divi­sion of the Caspian's off­shore waters and ten­sion is ris­ing markedly in the South China Sea, where China, the Philip­pines, Tai­wan, Viet­nam, Malaysia and Brunei are all pur­su­ing con­test­ing claims.

Of the afore­men­tioned areas only Brazil has uncon­tested national sov­er­eignty claims over its off­shore deposits, and the gov­ern­ment is suf­fi­ciently con­cerned about their secu­rity that it is con­sid­er­ing build­ing a nuclear sub­ma­rine to patrol its off­shore oil plat­forms. As for the rest, it is dif­fi­cult to see how the nations involved will be able to attract large-scale invest­ment into poten­tial con­flict zones.

Fur­ther­more, quite aside from polit­i­cal wran­gles, off­shore drilling is both extremely expen­sive and comes with increased envi­ron­men­tal risks.

Inter­est­ingly, the word "envi­ron­ment" appears only once in Yergin's essay, in the sen­tence, "Envi­ron­men­tal and cli­mate poli­cies can alter the tim­ing and scale of devel­op­ment, as can geopol­i­tics and pol­i­tics within oil-producing countries."

Given that the major­ity of the future's oil pro­duc­tion increase will come from off­shore devel­op­ments, the term should have been given greater prominence.

BP's Deep­wa­ter Hori­zon Macondo oil spill in the Gulf of Mex­ico began on 20 April and spewed crude for three months in 2010 and was the largest acci­den­tal marine oil spill in the his­tory of the petro­leum indus­try, dwarf­ing the 1979 Gulf of Mex­ico Ixtoc I oil spill. Since the Deep­wa­ter Hori­zon inci­dent unleashed 4.9 mil­lion bar­rels of oil the Gulf of Mex­ico suf­fered another rig explo­sion and fire at the Ver­mil­ion Block 380 A Plat­form on 2 Sep­tem­ber 2010.

Across the Atlantic, on 12 August a British sub­sidiary of Royal Dutch Shell announced a leak at a plat­form flow line in its Gan­net field con­ces­sion in the North Sea.

As for the BP leak, on 12 May 2010 Cal­i­for­nia Demo­c­rat Rep­re­sen­ta­tive Henry Wax­man said that the House Over­sight and Inves­ti­ga­tions sub­com­mit­tee inves­ti­ga­tion into the Gulf oil spill revealed that the Deep­wa­ter Hori­zon Macaondo oil platform's blowout pre­ven­ter (BOP) did not pass a cru­cial pres­sure test just hours before the explosion.

Wax­man said, "This cat­a­stro­phe appears to have been caused by a calami­tous series of equip­ment and oper­a­tional fail­ures. If the largest oil and oil ser­vices com­pa­nies in the world had been more care­ful, 11 lives might have been saved and our coast­lines protected."

The Deep­wa­ter Hori­zon Study Group of Uni­ver­sity of California's the Cen­ter for Cat­a­strophic Risk con­cluded in its "Final Report on the Inves­ti­ga­tion of the Macondo Well Blowout," released 1 March 2011, "At the time of the Macondo blowout, BP's cor­po­rate cul­ture remained one that was embed­ded in risk-taking and cost-cutting...".

Track­ing back the signs of incip­i­ent fail­ure, on 28 Feb­ru­ary 2009 the Depart­ment of the Inte­rior exempted BP's Deep­wa­ter Hori­zon drilling oper­a­tion from a detailed envi­ron­men­tal impact study after con­clud­ing that a mas­sive oil spill was unlikely.

Four months later, on 22 June 2009 BP engi­neers warned that the Deep­wa­ter Hori­zon BOP's metal cas­ing might col­lapse under high pres­sure. Seek­ing to spread the blame, in April 2011 BP sued Cameron Inter­na­tional Corp., the maker of the failed Type TL 18¾in 15K dou­ble blowout pre­ven­ter on the Macondo well, Deep­wa­ter Hori­zon drilling rig oper­a­tor Transocean and Hal­libur­ton, the well's cement con­trac­tor, say­ing they were largely to blame for the accident.

There are 3,800 active oil plat­forms in the Gulf of Mex­ico — how long until another major spill?

So, where does all this leave the world? Older pro­duc­ing fields and nations, such as Indone­sia and Saudi Arabia's mas­sive Ghawar super­field have seen their pro­duc­tion decline. Indone­sia, which had begun pro­duc­ing oil in the early 20th cen­tury, saw its pro­duc­tion slide so much that it left OPEC in 2008, seem­ingly con­firm­ing Mar­ion King Hubbert's "peak oil" theory.

While it is true that Hubbert's pre­dic­tions, made in the 1950s, took no account of future energy devel­op­ments such as Africa, the Caspian and off­shore, all of these regions and projects come with increased costs, which ulti­mately will undoubt­edly be passed on to the consumers.

Is the world then run­ning out of oil then? No, but the increase in future global oil pro­duc­tion will likely be mod­estly incre­men­tal and pro­duc­tion could be thrown off course by any num­ber of pos­si­ble events, from an Israeli attack on Iran to (another, but suc­cess­ful this time) al Qaida attack on Saudi Arabia's Abqaiq oil refinery.

Accord­ingly, it is inex­pen­sive oil that is in ter­mi­nal decline, a devel­op­ment viewed pos­i­tively by Yer­gin, who writes, "Activ­ity goes up when prices go up; activ­ity goes down when prices go down. Higher prices stim­u­late inno­va­tion and encour­age peo­ple to fig­ure out inge­nious new ways to increase supply."

Many Amer­i­can motorists would disagree.

Source: http://oilprice.com/Energy/Crude-Oil/Daniel-Yergin-and-Peak-Oil-Prophet-or-Mere-Historian.html

By. John C.K. Daly of Oil Price

Tags: Brazil, Cambridge Energy Research Associates, Crude Oil, Daniel Yergin, Energy Research, Energy Security, Glosses, Infrastructure, Journal Readers, Money And Power, Money In The Bank, Nations Reserves, Newest Technology, Oil Money, Oil Producing Nations, Oil Reserve, Peak Oil Theory, Pulitzer Prize, Quest Energy, Regions Of The World, Spanner In The Works, Unstable Regions, Wall Street Journal
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