Natural Gas Tightens on Japan’s Nuke Shutdown and U.S. Utilities Switch from Coal (May 28, 2012)

Sunday, May 27th, 2012

Energy and Natural Resources Market Radar (May 28, 2012)

Strengths

• Global mining equities recovered from last week’s sell off with an average gain of 6.5 percent in the NYSE Arca Gold BUGS (HUI) and S&P/TSX Metals & Mining indices.
• The global LNG market has tightened considerably since Japan’s nuclear industry was shut down in 2011 after a serious nuclear power accident.  Japan’s LNG imports grew 14.9 percent to 6.91 million tons in April from a year earlier according to the finance ministry.

Will Truckers Ditch Diesel?

Weaknesses

• Natural gas futures closed lower this week after a 6-week rally.  Weekly inventory data from the Department of Energy knocked down prompt futures by about 18 cents per mmbtu from the prior week to close under $2.58 per mmbtu.
• Steel output in China declined in April from a record as buyers sought to defer imports of raw materials such as iron ore and coking coal, Bloomberg reported. China’s crude-steel production declined 1.6 percent to 60.57 million metric tons after soaring to a record 61.58 million tons in March, the World Steel Association said.

Opportunities

• The shale gas boom in the U.S. has led to a big drop in the country’s carbon emissions, as power generators switch from coal to cheap gas.  According to the International Energy Agency, U.S. energy-related emissions of carbon dioxide, the main greenhouse gas fell by 450 million tons over the past five years.
• The Financial Times reported that China is moving to accelerate investment in major infrastructure projects. The official China Securities Journal said that the government was stepping up approvals for infrastructure projects. “Some projects that were to have started in the second half of the year are being shifted to the first half, with the allocation of central government funding being brought forward,” the newspaper quoted a “related person” as saying. “There is a clear acceleration of the allocation of investment from the government budget this year compared with the last two years,” it said.
• Xstrata expects copper demand in China to recover in the second half of 2012 as it takes steps to boost its economy, Bloomberg reports. “The commentary from China that they’re going to look to re-stimulate the economy in some areas is positive,” Bloomberg reported citing Charlie Sartain, CEO of the company’s copper unit. Demand for white goods and household appliances, as well as continuing year-over-year growth in China’s power generation sector, will benefit from China’s stimulus efforts, Sartain said. “We see those parts of the economy in China as still pretty robust,” he said. “This decade we are going to see generally tight conditions in the copper market” he said, adding that higher costs related to new sources of production will help to keep copper prices at historically elevated levels in the future.

Threats

• U.S. manufacturers have attacked JP Morgan Chase’s plans to launch an exchange traded fund backed by physical copper, arguing that the ETF would drive up the cost of the metal and be detrimental to the global economy.
• China stainless steel demand growth this year will probably be the slowest since 2001, said Lu Ping, assistant general manager of Baosteel Stainless Steel. Demand in China may only rise 3 percent to 5 percent to about 10 million metric tons as a result of the slowdown in economic growth, Lu said. Output of stainless steel in China is likely to grow 3 percent to 5 percent to 12 million to 12.5 million tons.

Tags: Carbon Emissions, China Securities, Coking Coal, Crude Steel Production, ETF, ETFs, Gas Boom, Gold Bugs, Greenhouse Gas, Infrastructure Projects, International Energy Agency, Lng Market, Market Radar, Million Metric Tons, Natural Gas Futures, Nuclear Power Accident, Nyse Arca, Power Generators, Steel Association, Steel Output, U S Energy, World Steel
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Energy and Natural Resources Market Radar (May 21, 2012)

Saturday, May 19th, 2012

Energy and Natural Resources Market Radar (May 21, 2012)

Strengths

• According to the Shanghai Futures Exchange, its copper inventory fell 9,178 metric tons to 187,449 metric tons.
• China’s steel product output rose 7.9 percent last month to 81.1 million metric tons from a year ago, according to the National Bureau of Statistics.
• China imported a record high 25.05 million metric tons of coal in April, up 90.1 percent year-on-year, Platts reported, citing preliminary customs figures. Chinese year-to-date coal imports rose 69.6 percent year-on-year to 86.55 million metric tons of coal.

Weaknesses

• Stocks and commodities fell this week as the likelihood of a Greek exit from the eurozone has increased significantly during the past two weeks.
• Oil prices fell 4.8 percent this week. The current bout of concerns had arisen from the resurgent fears about the Spanish and Italian banking systems and speculation that Greece may have to exit the euro. Since then, for oil in particular, news reports suggesting that President Obama is seeking G8 cooperation on an oil stock release have compounded the depressing effect.
• Reuters reported that Chinese steel mills defer iron ore shipments owing to slowness in the steel market. Some Chinese steel mills are said to have postponed iron ore deliveries from suppliers such as Vale, given the slow steel markets. Producers are also expecting a further drop in prices.

Opportunities

• Global inflation might have already pushed the costs of exploring and producing oil from new most expensive projects, known in the industry as the marginal cost of production, above $100 per barrel, according to JBC energy consultancy. That compares to $50-$75 prior to the 2008 financial crisis. A decade ago, oil companies such as BP were saying they would start a project if oil traded above $17-$20. Even the International Energy Agency, which represents consuming nations, says production costs have gone up sharply. “There is not a single drop of oil in the world that cannot be produced at a price of oil of $85-$90,” IEA’s chief economist Fatih Birol told a summit.
• The Chinese government announced a new batch of new subsidies to promote the consumption of energy-efficient home appliances and autos on Wednesday. RMB6bn will be provided to fuel-efficient vehicles with engines below 1.6L, and an RMB26.5bn financial subsidy will be provided for energy-efficient appliance products, including all the major white goods products. This appears to be a clear signal of the government’s commitment to shift domestic demand toward more personal consumption and away from fixed asset investment.
• Oil industry executives and bankers are assuming oil prices will stay above $100 a barrel in the year ahead, despite mounting economic worries, as any fall below that level would trigger a cut in Saudi Arabia’s output and force closures at high-cost projects around the world. A Reuters straw poll of oil executives, traders, bankers and fund managers showed seven respondents predicting Brent crude trading at $100-$120 a barrel in the next 12 months.
• Boart Longyear, the world’s biggest provider of mineral drilling services, expects demand to remain strong as large mining companies proceed with projects. “We still see very strong demand, particularly from the majors,” Craig Kipp, CEO of the company said. “We haven’t heard from a lot of the majors outside of Australia that there’s a change in their plans or in their budgets. We haven’t seen any change in market dynamics – we’re operating all over the world,” Kipp said. “We do see that juniors, the second-tiers, have had problems getting financing,” he added.

Threats

• In a Wall Street Journal article last year at this time, Chief Executive Marius Kloppers said BHP would invest $80 billion by the end of 2015 to expand further. The eurozone crisis, slower Chinese growth, and falling metals prices are forcing BHP to now say it will be cutting those spending plans. Falling commodity prices and rising operating costs put its cash inflows at risk and, by extension, its commitment both to raising its dividend and keeping its single-A credit rating. BHP’s plans need to become clearer if it wants to reverse the 28 percent fall in its share price since a year ago.
• Agrimoney reported that the Federal Reserve has warned, “The surge in U.S. farmland prices, which in parts of the Plains achieved their strongest run of growth on record, may be about to fade, sapped by the worsened outlook for agricultural profits.” Farmland values posted sharply higher gains in states around Kansas in the year to the start of last month, reflecting higher crop prices and an easing in the drought which has plagued much of the area since 2010. “Strong farm incomes continued to fuel demand for farmland,” the Federal Reserve System’s Kansas City bank said, noting that values had now risen by more than 20 percent for two consecutive years for the first time since it began collecting data in the 1970s. Prices in Nebraska, which avoided drought, were particularly strong, with values of irrigated land soaring 41 percent.

Tags: Banking Systems, Bureau Of Statistics, Chinese Year, Coal Imports, energy, Energy Consultancy, International Energy Agency, Marginal Cost, Market Radar, Million Metric Tons, National Bureau Of Statistics, National Bureau Of Statistics China, Oil Prices, Oil Stock, Platts, Shanghai Futures Exchange, Steel Market, Steel Markets, Steel Mills, Steel Product, Stocks And Commodities
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Energy and Natural Resources Market Radar (April 16, 2012)

Sunday, April 15th, 2012

Energy and Natural Resources Market Radar (April 16, 2012)

Strengths

• China’s monthly steel exports exceeded 5 million tons in March for the first time since July 2010, according to Chinese Customs data. Exports increased to 5.03 million tons in March, up 48.4 percent month-over-month and 2.4 percent year-over-year.
• Supporting our food and agriculture investment theme, grain imports by China advanced to the highest level in at least seven years in March as the world’s most populous nation stepped up overseas purchases to meet rising demand. China imported 1.64 million metric tons of cereals and cereal flour in March, compared with 280,000 tons a year ago, the highest figure since at least January 2005. Imports in the first quarter totaled 3.84 million tons, up six-fold from a year earlier. “Grains imports are on a rising trend because of limited arable land, water and labour, at a time when demand is growing amid increasing incomes and changing diets,” said Li Qiang , managing director and chairman at Shanghai JC Intelligence Co.
• Soybeans have been the star performer among the agricultural complex so far this year, with spot prices up just over 20 percent compared to small price declines in corn and wheat. Part of this divergence reflects downgrades to the South American soybean crop. Further deterioration in China’s increasing import requirements for soybeans has also contributed.
• The International Energy Agency (IEA) reports that OPEC crude oil production increased to 31.43 million barrels per day in March, the highest level in more than three years.
• Summer demand continued to drive spot prices for Asian liquefied natural gas (LNG) higher this week with May delivery contracts rising to over $16.50 per million British thermal units (mmBtu). With the majority of its nuclear capacity still offline, Japan, the world’s largest LNG importer, was expected to continue stocking up on the fuel as it heads into summer. “Prices are over $16 and could be headed to $17 on the assumption that the Japanese will top up,” one market source said.

Weaknesses

• Natural gas futures fell below $2 per mmBtu this week, the lowest price in 10 years as forecasts for mild weather across the eastern U.S. signaled demand may fall even more.
• Overall mining output in South Africa fell 14.5 percent on a year-over-year basis in February as a six-week long strike at Impala Platinum’s Rustenburg mine and the government’s safety-related inspection and work stoppages hit platinum and gold production. Gold and PGMs output dropped 11.5 percent and 47.6 percent year-over-year in February, respectively.
• Aluminum products maker Novelis Inc, which cut its fiscal 2012 earnings estimate because of lower shipments and soft demand, will close its Saguenay Works in Jonquiere, Quebec in August.

Opportunities

• Comments made by the chairman of India’s top iron ore miner indicate a sharp decrease in future exports of iron ore from India. Given increased domestic steel production and government restrictions on both iron ore mining and exports, NMDC’s Narendra Kumar Nanda predicted that India would export only 30-40 million metric tons in the next fiscal year (April 2012 through April 2013). This projection represents a significant drop in exports from the world’s third-largest supplier. India exported 46 million metric tons of iron ore during the first nine months of the 2011-12 fiscal year, down 30 percent from the prior year.
• Investment bank J.P. Morgan filed paperwork to list a copper-backed exchange-traded fund (ETF) with NYSE Euronext. J.P. Morgan Commodity ETF Services filed a proposal to list and trade shares of JPM XF Physical Copper Trust in a filing dated April 2, 2012. The filing is the first sign since mid-2011 that the ETF, a security backed by physical metal, is likely to list. J.P. Morgan first logged a filing for shares of the ETF in October 2010, the same time as a similar filing by Blackrock. These filings against a tight supply backdrop helped fuel a rally in copper prices to record highs above $10,000 a ton in February 2011.
• Russian President-elect Vladimir Putin outlined proposed new rules for development of the country’s vast offshore oil and gas resources, offering some tax breaks for the far-flung projects. Putin offered to cancel export duties on oil and gas from new offshore deposits and proposed to introduce a lower mineral extraction tax for complex hydrocarbon projects in the Arctic. He also pledged that the new rules will be in effect for at least 15 years from the start of industrial output and offered Russian non-state companies access to the offshore oil and gas.
• Reuters cites Vale CEO Murilo Ferreira as stating Chinese demand for iron ore will remain strong. “Those who have been betting against Chinese growth since the 1990s will be wrong again,” Ferreira said. “China is just getting going.” To help meet that demand, Vale expects to invest more than $50 billion to expand iron ore, nickel, copper, fertilizer, coal and other mining output.
• Japan’s zinc demand may increase 7.2 percent to a four-year high this year as the economy recovers from an earthquake and tsunami as the weaker yen helps boost exporters, Nobuyuki Nakamoto, GM at Mitsui Mining & Smelting’s zinc business said. Demand will rise to 537,400 metric tons in 2012, up from 501,200 tons in 2011.
• The IEA estimates effective OPEC spare capacity (which excludes Iraq, Libya, Nigeria and Iran) fell to 2.54 million barrels per day in March. This is down from 2.75 million barrels per day in February, reflecting the removal of Iran from the count. Deutsche Bank commodity analysts think that supply disruptions, not only from Iran but a number of non-OPEC countries, will persist this year due to political disputes and weather disruptions. This means spare capacity levels are likely to remain eroded and below 3 million barrels per day for the rest of this year.

Threats

• Chinese data for March shows that real GDP grew 8.1 percent year-over-year in the first quarter of 2012. However, the moderation from 8.9 percent growth in the previous quarter is consistent with the weak monthly data, especially for January and February, already released.
• The Energy Information Administration (EIA) is expecting electricity generation from coal in the U.S. to decline by about 10 percent in 2012. In contrast, natural gas-fired electricity generation is forecast to increase 18.7 percent on a year-over-year basis.
• Spain’s foreign minister has reportedly sought an urgent meeting with Argentina’s ambassador in Madrid to seek clarity on the Argentine government’s intentions regarding YPF. Persistent rumors have suggested that the current Argentine administration is planning to renationalize the explorer, which is majority owned by Spain’s Repsol.

Tags: American Soybean, Cereal Flour, Chinese Customs, Crude Oil Production, Delivery Contracts, Gas Lng, Grain Imports, Import Requirements, International Energy Agency, Liquefied Natural Gas, Market Radar, Million Metric Tons, Nuclear Capacity, Overseas Purchases, Populous Nation, Price Declines, Qiang, Soybean Crop, Star Performer, Steel Exports
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The Oil Conundrum Explained

Friday, March 23rd, 2012

Submitted by Brandon Smith of Alt Market

The Oil Conundrum Explained

Oil as a commodity has always been a highly valuable early warning indicator of economic instability.  Every conceivable element of our financial system depends on the price of energy, from fabrication, to production, to shipping, to the consumer’s very ability to travel and make purchases.  High energy prices derail healthy economies and completely decimate systems already on the verge of collapse.  Oil affects everything.

This is why oil markets also tend to be the most misrepresented in the mainstream financial media.  With so much at stake over the price of petroleum, and the cost steadily climbing over the past year returning to disastrous levels last seen in 2008, the American public will soon be looking for someone to blame, and you can bet the MSM will do its utmost to ensure that blame is focused in the wrong direction.  While there are, indeed, multiple reasons for the current high costs of oil, the primary culprits are obscured by considerable disinformation…

The most prominent but false conclusions on the expanding value of oil are centered on assertions that supply is decreasing dramatically, while demand is increasing dramatically.  Neither of these claims is true…

The supply side of the oil equation is the absolute last factor that we should be worried about at this point.  In fact, global oil use since the credit crisis of 2008 has tumbled dramatically.  This decline accelerated at the end of 2011 and the beginning of 2012 all while oil prices rose:

http://www.energyasia.com/public-stories/markets-world-oil-demand-fell-3…

In its February Oil Market Report, the International Energy Agency (IEA) forecast a reduction in the growth of demand into the Spring of 2012, despite reports from the mainstream media that oil prices were spiking due to “recovery” and “high demand”.  Simultaneously, the IEA reported that petroleum inventories rose to the highest levels since October, 2008:

http://omrpublic.iea.org/currentissues/full.pdf

The Baltic Dry Index, which measures global shipping rates and the demand for freight in general, has fallen off a cliff in recent months, hovering near historic lows and signaling a sharp decline in world demand for raw materials used in production.  A fall in the BDI has on multiple occasions in the past been a predictive indicator of stock market chaos, including that which struck in 2008 and 2009.  A sharply lower BDI means low global demand, which should, traditionally, mean decreasing prices:

http://investmenttools.com/futures/bdi_baltic_dry_index.htm

So, supply is high across the board, inventories are stocked, and demand is weak.  By all common market logic, gasoline prices should be plummeting, and far more Americans should be smiling at the pump.  Of course, this is not the case.  Prices continue to rise despite deflationary elements, meaning, there must be some other factors at work here causing inflation in prices.

Ironically, stock market activity in the Dow has now come under threat from this inflationary trend in oil.  Rising energy costs have essentially put a cap on the epic explosion of equities, and many mainstream analysts now lament over this Catch-22.  The problem is that these investors and pundits are operating on the assumption that the Dow bull market is legitimate, and that the rally in oil is somehow an extension of a “healthier economy”.  This version of reality, I’m afraid, is about as far from the truth as one can stretch…

In the candy coated world of Obamanomics, high priced stocks are a valid signal of economic growth, and oil is rising due to demand which extends from this growth.  In the real world, stock values are completely fabricated, especially in light of record low trade volume over the past several months:

http://money.cnn.com/2012/01/19/markets/trading_volume/index.htm

Low trade volume means very few investors are currently participating in active trade.  This lack of investment interest in the markets allows big players (such as international bankers) to use their massive capital to swing stocks whichever way they choose, even to the point of creating false market rallies.  Throw in the fact that the private Federal Reserve (along with helpful hands-off approach by our government) has been constantly infusing these banks with fiat printed from thin air, and one can hardly take the current ascension of the Dow or the S&P very seriously.

Another issue which should be stressed is the renewed tensions in the Middle East, namely, the very distinct possibility of an Israeli or U.S. strike in Iran, and the possibility of NATO involvement in Syria (which has extensive ties to Russia and Iran).  Certainly, this is a tangible danger that would have unimaginable consequences in global oil markets.  However, the threat of growing war in the Middle East is in no way a new one, and has been ever present for the past decade.  It hardly explains why despite hollow demand and extreme supply, the price per barrel of oil has been an unstoppable rising tide.  Attempts by Saudi Arabia to reverse inflationary trends by promising increased production in the wake of Iran turmoil has so far been ineffective.

Simultaneously, large oil reserves have been discovered off the coast of Greece:

http://www.balkanalysis.com/greece/2010/12/08/greek-companies-step-up-offshore-oil-exploration-large-reserves-possible/

Off the coast of Ireland:

http://www.independent.ie/national-news/ireland-on-the-verge-of-an-oil-and-gas-bonanza-679889.html

Massive fields in Mongolia have been uncovered:

http://www.chinadaily.com.cn/bizchina/2009-08/08/content_8544985.htm

And of course, the vast shale oil fields in North Dakota and Montana are finally being tapped:

http://www.mtpioneer.com/archive-July-oil-reserves.htm

Oil supply has been ample and large oil reserves are being discovered yearly.  Speculation would be the next obvious assumed culprit, and there are certainly some signals of such activity.  Oil speculators traditionally use the forced accumulation of oil inventories to reduce market supply and artificially increase prices.  Inventories have indeed been high.  However, as previously stated, demand for oil has been static or fallen in most countries around the world since 2008, and there has been NO petroleum shortages due to manipulated markets.  In fact, there have been no petroleum shortages period.  Speculation has the potential to cause sharp but short term shifts in markets, but one must take into account the long term trend of a particular commodity to understand the root cause of its increasing or decreasing value.  Again, inadequate supply is NOT the trigger for the ongoing oil price problem, whether by threat of war, or by reduction through speculation.

This schizophrenic disconnection between the stock market, and oil, and true supply and demand, is, though, a symptom of one very disturbing illness lurking in the backwaters of the U.S. fiscal bloodstream; dollar devaluation.

We all understand that the Federal Reserve has been engaged in non-stop quantitative easing measures in one form or another since 2008.  We don’t know exactly how much fiat the Fed has printed in that time, and won’t know until a full and comprehensive audit is finally enacted, but we do know that the amount is at the very least in the tens of trillions (be sure to check out page 131 of the GAO report below to find their breakdown of Fed QE activities.  This is just the money printing that has been ADMITTED TO, in excess of $16 trillion):

http://www.gao.gov/assets/330/321506.pdf

The dollar is being thoroughly squashed.  Why is this not showing in the dollar forex index?  The dollar index is yet another example of a useless market indicator, being that it measures dollar value relative to a basket of world fiat currencies, ALL of which also happen to be in decline.  That is to say, the dollar appears to be vibrant, as long as you compare it to similarly worthless paper currencies that are being degraded in tandem with the greenback.  Once you begin to compare the dollar to commodities, however, it soon shows its inherent weakness.

The dollar’s only saving grace has long been its status as the world reserve currency and its use as the primary trade mechanism for oil.  This, however, is changing.

Bilateral trade agreements between China, Russia, Japan, India, and other countries, especially those within the ASEAN trading bloc, are slowly but surely removing the dollar from the game as these nations begin to replace trade using other currencies, including the Yuan.  I believe commodities, especially oil, have been reflecting this trend for quite some time.  The consequences of the dollar’s ties to oil are detrimental to all nations that consume petroleum, and they are clearly moving to insulate themselves from further devaluation.

Even after the release of strategic oil reserves back in the summer of 2011 in an effort to dilute prices, and the announcement of an even larger possible release of reserves this month, oil has not strayed far from the $100 per barrel mark.  High Brent crude price have held for years, even after numerous promises from government and media entities admonishing what they called “speculation”, and promises of a return to lower energy costs.  Not long ago, $100 per barrel oil was an outlandish premise.  Today, it is commonplace, and some even consider it “affordable” compared to what we may be facing in the near future, all thanks to the steady deconstruction of the last pillar of the U.S. economy; the dollar, and its world reserve label.

Ultimately, no matter how manipulated and overindulged the stock market becomes, no matter how many fiat dollars are injected to prop up our failing system, the price of oil is the great game changer.  As inflation is reflected in its price, and energy costs burn out of control, the Dow will begin to fall, regardless of any low volume or quantitative easing.  In all likelihood, this conundrum will be blamed on as many scapegoats as are available at the moment, including Iran, or China, or Russia, or Japan, etc.  Each and every American, and especially those involved in tracking the economy, will have to remind themselves and the public that at bottom, it was the Federal Reserve that created the conditions by which we suffer, including currency devaluation and high oil prices, NOT some foreign enemy.

The one positive element of this entire disaster (if one can call anything “positive” in this mess), is the manner in which the high price of oil tends to dash away the illusions of the common citizen.  It is an issue they simply cannot ignore, because it affects every aspect of their lives in minute detail.  Costly energy awakens the otherwise ignorant, and forces them to see the many dangers lurking on the horizon.  Hopefully, this awakening will not be too little too late…

Tags: Assertions, Brandon Smith, Commodities, Commodity, Conundrum, Credit Crisis, Culprits, Disinformation, Economic Instability, Energy Prices, False Conclusions, Global Oil, Iea, International Energy Agency, Inventories, Mainstream Media, Markets World, Oil Market Report, Oil Markets, Oil Prices, Russia, World Oil Demand, Wrong Direction
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Energy and Natural Resources Market Radar (December 4, 2011)

Sunday, December 4th, 2011

Energy and Natural Resources Market Radar (December 4, 2011)

This chart from Deutsche Bank shows how the projections made by the International Energy Agency (IEA) have progressed since July 2007. In 2007, the IEA estimated that oil demand over 2008 would range between 86 to 88 millions of barrels a day. Except for 2009, the IEA’s forecasts increased. The 2012 projection is currently much higher, with the IEA forecasting oil demand to be around 90 to 91millions of barrels per day.

Strengths

• Crude oil gained 4 percent this week to close above $100 a barrel in response to improving U.S. economic data, and a coordinated effort by global central banks to provide additional liquidity to Europe.
• Palladium is poised for a 12 percent advance this week, the most since December 2010, on concern that stockpiles are dwindling in Russia, the biggest supplier.
• Following months of contraction, steel market trends reversed in November with base prices increasing for all products.
• Iron ore bounced back strongly after more than a week of losses as falling prices encouraged some steel mills in China to return to the market. Iron ore with 62 percent iron content rose more than 2 percent to $133.60 a ton on Thursday.
• OPEC November crude production is up 390kb/d to a total of 30.4 mmb/d, the highest level in three years, says Bloomberg.

Weaknesses

• China’s daily crude steel output fell to 1.664 million metric tons in the first 10 days of November, the lowest level in a year.
• According to the India Coal Market Watch, the country’s coal production decreased by 9 percent to 39.59 mn tonnes in Oct 2011as compared to 43.51 mn tonnes in 2010.
• OECD demand is declining. However, virtually all of the world’s oil demand growth is in non-OECD nations, which has been resilient despite global economic concerns.

Opportunities

• Copper stockpiles monitored by the Shanghai Futures Exchange declined to the lowest level since July 2009, bourse data showed today.
• Vale plans to invest $21.4 billion in 2012 including investment on sustaining capacity. Vale made much of the difficulty it has in spending all the money it would like to and has had to significantly scale back its spend due to ongoing delays in getting project approvals. Its original capex plan for 2011 was $24 billion but in the first three quarters of 2011 it only managed to spend $11.3 billion, implying a major shortfall this year, probably by $6 to $8 billion.
• Iraq’s semi-autonomous Kurdish region will go forward with its exploration deal with U.S. oil major Exxon Mobil despite objections by the central government in Baghdad, the Kurdish president said on Wednesday.
• The OPEC Secretariat, using a GDP forecast of 3.6 percent in 2012 believes oil growth will be 1.2mmb/d.

Threats

• Oil price volatility could escalate as tensions between the West and Iran have ratcheted up over Tehran’s nuclear program, and with the suggestion that Europe could join the United States in banning the purchase of Iranian crude oil.

Tags: Bourse Data, Central Banks, Coal Market, Coal Production, Crude Production, Crude Steel, Economic Concerns, International Energy Agency, Iron Content, Iron Ore, Market Radar, Million Metric Tons, Mmb, Oecd Nations, Oil Demand, Shanghai Futures Exchange, Steel Market, Steel Mills, Steel Output, Stockpiles
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Energy and Natural Resources Market Cheat Sheet (November 14, 2011)

Sunday, November 13th, 2011

Energy and Natural Resources Market Cheat Sheet (November 14, 2011)

Strengths

• The International Energy Agency monthly report indicated that Organisation for Economic Co-operation and Development (OECD) oil inventory data fell by 800,000 barrels per day in September and October which is more than twice the normal rate and implies a fundamentally tight oil market.
• Monthly data released by the Chinese government showed copper imports rose to the highest level in 17 months in October.
• West Texas Intermediate (WTI) crude oil has been among the best-performing commodities over the past week and month, up 4 percent and 19 percent respectively. Analysts at Deutsche Bank observed that unlike industrial metals, the energy sector, and specifically crude oil, WTI has been resilient to heightened levels of equity market volatility and disruption risk and instead focused on physical fundamentals which have been tightening.  This has seen U.S. inventories decline in Petroleum Administration for Defense Districts (PADD) 2, which has encouraged the forward curve to move into backwardation and contributed to a narrowing in the WTI-Brent spread.  Brent is likely being constrained somewhat by a better-than-expected recovery in Libyan oil production.
• The Global Resources Fund has had good relative performance versus its peer group median over the trailing month.

Weaknesses

• The Global Resources Fund underperformed its benchmark this week mostly attributable to stock selection within the energy sector.
• In spite of some supportive supply side news and positive Chinese import data, copper prices have continued to slide since the end of October and fell 3 percent this week to $3.46 per pound on the COMEX.
• A leading indicator for Chinese steel demand, October data for residential floor space under construction fell 6.1 percent year-over-year and sales fell 9.9 percent year-over-year, while starts also slowed sharply.

Opportunities

• In its World Agriculture Supply and Demand Estimates report, the U.S. Department of Agriculture cut its forecast for U.S. corn and soybean yield, with the decline in corn production larger than anticipated by the market.  Low inventories and lower production should support higher corn prices and, by extension, higher fertilizer prices.
• According to IEA, Libya’s crude oil production is expected to rise to 700,000 barrels per day by the end of 2011.
• China’s Ministry of Industry and Information Technology (MIIT) has announced its expectation that China’s annual crude steel consumption will be on the order of 750 million tons per year by 2015, as part of the five-year plan for the sector.

Threats

• Downside volatility could refocus if an agreement is not reached regarding Congress’ efforts to pass the budget next week, and later concerning the U.S. super-committee deadline on November 23.

Tags: Agriculture, Backwardation, Chinese Import, Copper Prices, Crude Oil Wti, Day In September, Development Oecd, Forward Curve, Industrial Metals, International Energy Agency, Leading Indicator, Market Volatility, Petroleum Administration, Physical Fundamentals, Residential Floor, Resources Fund, Steel Demand, Stock Selection, West Texas Intermediate, Wti Brent, Wti Crude Oil
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The Economy and Bond Market Cheat Sheet (October 17, 2011)

Saturday, October 15th, 2011

The Economy and Bond Market Cheat Sheet (October 17, 2011)

The yield on the 10-year U.S Treasury note increased by 17 basis points to end the week at 2.25 percent.

Strengths

• Retail sales rose 1.1 percent in September, the largest gain in seven months and above the 0.7 percent consensus.
• The U.S Department of Agriculture announced Thursday that China had purchased 900,000 metric tons of corn. It was one of China’s biggest-ever purchases of corn on overseas markets.
• The NFIB Index of Small Business Optimism increased to 88.9 in September, the first gain in seven months, from Augusts’ 88.1 which was the weakest since July 2010. The index averaged 100.7 in the six-year expansion that ended in December 2007.

Weaknesses

• This week the International Energy Agency, the Organization of Petroleum Exporting Countries, and the U.S Energy Information Administration all lowered forecasts for oil demand in 2012, assuming a slowdown in global economic growth.
• New unemployment claims remain high.  New claims fell by 1,000 last week to 404,000, slightly below the 405,000 consensus, but claims at this level still suggest weak hiring.
• Economists polled by Reuters expect the rate of growth in the world economy to slow to 3.6 percent in 2012 from 3.8 percent this year.

Opportunities

• With the economy weak and concerns brewing about an additional financial crisis, the Fed will remain accommodative for some time and bonds appear well supported in the current environment.
• Globally central banks have become attune to the risks of a global slowdown and will likely act to bolster economic growth.

Threats

• The threat of a more significant global economic slowdown than many expected just a couple of months ago has increased sharply.
• The threat of another global financial crisis cannot be ruled out.

Tags: Basis Points, Bond Market, Bonds, Business Optimism, Central Banks, Department Of Agriculture, Energy Information Administration, Global Economic Growth, Global Economic Slowdown, Global Financial Crisis, Global Slowdown, International Energy Agency, Nfib Index, Oil Demand, Organization Of Petroleum Exporting Countries, Overseas Markets, Petroleum Exporting Countries, U S Energy, U S Treasury, Unemployment Claims, World Economy
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Energy and Natural Resources Market Cheat Sheet (September 19, 2011)

Sunday, September 18th, 2011

Energy and Natural Resources Market Cheat Sheet (September 19, 2011)

Strengths

• The Global Resources Fund gained this week and outperformed its benchmark as energy- and industrial metal-related stocks rallied with major stock indices.
• The latest Steel Benchmarker price assessment by World Steel Dynamics showed further stability in global steel prices, with the majority flat over the past two weeks. The exception was U.S. hot rolled coil, which rose 5.1 percent sequentially to $768 per ton, arresting three months of consecutive falls.
• The Baltic Dry Index of freight costs increased 7 percent this week as shipments of iron ore remain robust. This is the fifth consecutive weekly gain for the Baltic Dry Index.

Weaknesses

• Seaborne iron ore prices ended the week lower for the first time in 5 weeks on weakening steel prices. After hitting 3-month highs of $181 per ton last week, the TSI reference price has fallen nearly 2 percent to trade below $178 per ton. Per analysts at Citigroup, sentiment in the Chinese steel market is still deteriorating and buyers remain inactive owing to the lack of any clear direction.
• Corn prices fell 4 percent this week on a government report that corn crop conditions have improved recently.
• Despite news of additional supply constraints, copper prices slipped 1 percent this week on concerns of slowing demand in Europe and Asia.
• Southern Copper cut its production forecast by 8 percent for the year. Output will fall to 600,000 tons, from an earlier estimate of 650,000 tons, CEO Oscar Gonzalez Rocha said.
• The International Energy Agency released its Oil Market Report this week, revising its global oil demand growth forecast lower for 2011 by 160 thousand barrels per day to 1.04 million barrels per day, and for 2012 by 200 thousand barrels per day to 1.41 million barrels per day. The IEA attributes lower non-OECD readings and reduced economic growth expectations as the prime reason for its downward revision.

Opportunities

• Reuters reported that power rationing in China will likely persist in the first half of 2012, and the deficit should be between 10 gigawatts and 15 gigawatts in the first half of 2012. Other than low water levels impacting hydropower supply, power output has been hampered by insufficient coal production, low coal quality and a mismatch between coal and power prices. The grid has asked the local government to subsidize additional power generation.
• According to Alberta’s Energy Minister Ron Liepert, Canada’s oil sands producers need to build at least two more pipelines the size of the controversial Keystone XL project if they are to meet their ambitious plans for growth. “As we move forward, there will be a need for other pipelines … By 2020, we may need three Keystones,” he said.
• Peru’s Finance Minister Miguel Castilla commented that the country’s overhaul of its mining tax system will maximize government revenue while ensuring companies proceed with more than $40 billion of investment in new mines. Castilla also stated that companies won’t pay more than 50 percent of their operating profits under the new tax regime. Under Peru’s existing system, royalties are based on sales. He said that the new system will be fairer because it levies taxes on operating profits instead of revenue, and companies with contracts that protect them from higher taxes will be subject to a separate levy on profits.
• Australia’s Bureau of Meteorology sees La Niña conditions developing in Q4 this year. Historically this would mean cold winters in the U.S. northeast and stronger demand for heating fuels.

Threats

• Workers at Freeport MacMoRan’s Cerro Verde mine in Peru launched an indefinite strike today after discussions with the government failed to reach an agreement on wages and working conditions. The mine represents roughly 2 percent of the world’s mined copper production.

Tags: Baltic Dry Index, Canadian Market, Copper Prices, Corn Crop, Corn Prices, Crop Conditions, Global Steel, Growth Expectations, Hot Rolled Coil, International Energy Agency, Iron Ore Prices, Major Stock Indices, Oil Market Report, Oscar Gonzalez Rocha, Prime Reason, Resources Fund, Southern Copper, Steel Dynamics, Steel Market, Supply Constraints, World Steel Dynamics
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2011 Halftime Report: Oil and Copper

Sunday, July 24th, 2011

2011 Halftime Report: Oil and Copper

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Last week we recapped commodities’ performance for the first six months of the year and offered our outlook on gold. If you missed it, you can read it here. This week, we’re discussing our outlook for two other commodities that are poised to have an exciting back half of the year.

Oil Outlook Remains Strong
This year has been eventful for the oil patch. Natural disasters, revolutions, terrorist attacks and political maneuvering kept oil bouncing around $100 per barrel and 3.8 percent higher on the year at the end of June. Despite the volatility and large number of external forces affecting oil prices, the International Energy Agency (IEA) said in its most recent Oil Market Report that “the bull run evident since autumn 2010 therefore looks in large part to be justified by supply and demand fundamentals.”

Oil industry analyst PIRA estimates incremental demand will outpace supply by 1.1 million barrels per day on a year-over-year basis during the third quarter of 2011. The U.S. Energy Information Administration (EIA) says long-term supply/demand drivers indicate the market will remain tight for the foreseeable future as growing demand from emerging economies for liquid fuels and slowing non-OPEC supply growth “maintain upward pressure on oil prices.” The IEA forecasts oil prices to average $98 per barrel this year and $103 per barrel in 2012.

Oil Demand
The IEA forecasts the world will use 91 million barrels of oil per day in 2012, an increase of 1.5 million barrels per day. The IEA also revised its 2011 oil demand projections upward by 0.2 million barrels per day. Projecting outward to 2016, the IEA’s baseline scenario assumes a healthy 4.5 percent global GDP growth and an average oil price of $103 per barrel. With these assumptions, annual oil demand growth should average 1.2 millions barrels per day through 2016.

Emerging markets are almost entirely the source of this increased demand, with China accounting for 41 percent of demand growth over that time period, the IEA forecast says. The chart illustrates how developing (non-OECD) country oil demand has dramatically increased since the mid-1990s while developed world (OECD) demand has decreased. Through two financial bubbles and a global financial crisis, non-OECD demand has stair-stepped its way to nearly doubling in less than 20 years.

How is this possible? Many non-OECD markets have favorable demographics, rapidly urbanizing populations and industrializing economies that have returned many developing economies’ GDP growth rates to pre-crisis levels.

Rising incomes have also outpaced rising oil prices and sustained emerging market demand despite a general reduction in subsidies, the IEA says. Rising wealth has also established a new global middle class that the World Bank estimates will be more than 1 billion strong by 2030. In fact, the World Bank was cited in a National Geographic article earlier this year forecasting that for the first time ever, more people in the world will be classified as middle class than poor in 2022. Today, roughly 70 percent of the world’s population is classified as poor.

Major emerging market countries, such as China, India and Saudi Arabia, have reached the important GDP per capita range ($3,000-$20,000) where oil demand historically “takes-off.”

China carries the biggest stick among emerging markets when it comes to oil demand. Strict tightening measures from Beijing and rising inflation slowed the country’s oil demand growth to its lowest level since 2009 in June. However, China’s oil demand is still expected to grow 7 percent this year, which is in line with the country’s five-year average demand growth rate, according to Deutsche Bank. The summer months have historically been weak periods for oil demand in China but Deutsche Bank estimates growth rates will recover during the fourth quarter.

Chinese auto sales growth has slowed but still registered 10.9 percent year-over-year growth in June. In an interview with Maria Bartiromo for USA Today, Ford CEO Alan Mulally called China’s car market a “very exciting development.” The company is projecting China’s auto sales will reach 32 million by 2020—28 percent of the entire global market. Ford isn’t the only U.S. auto manufacturer tapping into China’s booming auto market; General Motors’ Buick brand is one of the most popular in the country. According to the Brookings Institute, General Motors sold 10 cars in the U.S. for every one car sold in China in 2004. Today, that figure is nearly 1-to-1.

In the developed world, the outlook for oil demand is less bullish. OPEC says the “austerity measures, combined with high levels of both debt and unemployment, are likely to dent the fragile recovery in major OECD countries.”

While demand growth in OECD countries is underwhelming, consumption rates have recovered from recession lows at a much faster rate than many expected. You can see that OECD demand contributed heavily to the recovery in global oil demand from early 2009 to late 2010. In fact, the developed world contributes little to global oil demand growth but still consumes more than half of the world’s total demand.

Despite China’s rise, OPEC says the fate of the U.S. economy is the most influencing factor for oil over the next 12 months. Oil demand in the U.S. was revised upward in May and the U.S. economy is forecasted to see 2.5 percent GDP growth in 2011.

PIRA says the U.S. economy is signaling strength in the second half of the year. It cites business capital expenditures as improving, which generally leads to employment gains and increased household consumption. It also expects a 20 percent hike in auto manufacturing output from the second quarter and an increase in consumer spending.

A big determinant of U.S. demand and consumer spending is gasoline prices, which the EIA forecasts to average $3.56 a gallon in 2011—up from $2.78 in 2010. U.S. consumers have already shown to be sensitive to higher prices with total motor gasoline consumption down more than 2 percent on a year-over-year basis during the second quarter. While OPEC expects U.S. gasoline consumption to return to normal rates, OPEC calls it oil’s “wild card” for 2012. Gasoline consumption could be negatively impacted by economic turbulence, such as a dip in employment.

This is just a portion of the Outlook for Oil, click here to read about factors constraining supply and why today’s market is much different than the 1970s.

Read full report

The Cues for Copper
Copper slightly disappointed investors, ending the first half of the year with a decline of 3.50 percent. Worries about global inflation and, more specifically, the potential slowing of China’s economy weighed on copper’s price. The red metal rose 5 percent quicklyin the new year, but similar to zinc, lead, palladium and platinum prices, declined sharply at the beginning of May.

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Copper Supply
Since the end of June, copper has been slowly inching its way up, with the past three weeks having produced positive results. Part of this rise is due to reduced supply issues. Chile, the world’s largest copper producer, has been plagued by power outages, strikes, accidents and heavy rains. Reuters recently reported that a “once in a half century winter storm” caused more than 12 mines to slow or stop operations after the open pit roads became too slippery in the South American country that mines about one-fifth of the world’s copper.

The election of Ollanta Humala in Peru–the second-largest producer of copper–has also been a drag on copper prices as investors debate the probability of Humala electing a mining-friendly cabinet. As I discussed in “Is Peru’s Humala Jekyll or Hyde for Mining?,” investors have worried the president-elect could retract policies that encourage mining investment.

The announcement came this week that Humala will appoint Luis Miguel Castilla, Peru’s former deputy finance minister, as the new finance minister. Carlos Herrera will lead the mines and energy ministry. However, according to the Financial Times, it is still not clear whether Humala will increase the corporate tax rate paid by miners and enforce tighter state controls. The actions of this leader will have an influence on the direction of copper prices for the remainder of the year.

Copper Demand
In terms of demand, copper is a necessary ingredient for numerous building projects. Electrical power cables, electrical equipment, automobile radiators, cooling and refrigeration tubing, heat exchangers and water pipes all require copper. With all the construction and infrastructure building in China over the past several years, it’s not surprising that this country is the No. 1 world consumer of copper. It’s estimated that China accounted for nearly 40 percent of global copper consumption last year.

Because of this large demand, similar to our outlook for oil, copper prices hinge on China’s ongoing development. While some have begun to wonder about the health of the country’s continuing growth and development, Macquarie Research believes that “real demand in the country remains robust.”

Take developer activity, for example, which Macquarie says has been a huge driver of construction growth in 2011. The media has focused its attention on ghost cities and lagging sales of property in China. Yet Macquarie thinks it’s important to consider the property sales across all different sizes of cities. In its Commodities Comment, subtitled “Chinese social house – another reason to buy copper and iron ore,” Macquarie acknowledges a weakness in property transactions in China’s larger cities. This was due to the government restricting investment demand to slow growth. However, these larger cities account for only 20 percent of the total market, says Macquarie.

Conversely, many smaller cities, such as Anquing, Guizhou, Luzhou, Mudanjiang, and Shijiazhuang, have had double-digit year-over-year growth in unit sales so far this year. In the case of Hohhot, the capital city of Inner Mongolia, sales growth has tripled. Government investment has led to urban space increasing from 80 square kilometers in 2000 to 150 square kilometers last year, according to the city’s government website. Hohhot, which means “green city” in Mongolian, has grown to more than 2 million people and has become a hub for agriculture and manufacturing.

Most importantly, Macquarie says the tremendous sales activity in these smaller cities indicates “there has been enough cash to keep construction activity going.”

In addition, China’s social housing project should drive incremental demand for copper. Macquarie indicated that China is “aiming for 10 million social housing units, up from 5.8 million in 2010.” The country has built only 3.4 million units so far this year, but based on China’s habit of exceeding its objectives, Macquarie thinks the target will be met.

Even if the naysayers think China’s growth will slow because of the government’s monetary policy restrictions, there’s consensus among research experts that the country’s inventory of copper is getting low. Goldman Sachs’ discussion of the copper market indicated that in the second half of 2011, the “winding down of destocking will lead to a stronger Chinese pull on global supply.” China seems to have no choice but to go back to the market for copper, if only to replenish its supply.

Tom Kendall, Credit Suisse’s vice president for commodities research, agrees. In a Mineweb interview on copper’s fundamentals and expectations of further growth, Kendall stated he has seen a “very sizeable drawdown” in Chinese copper inventories this year. He goes on to say, “some point in time, they will get to a point at which they have run down inventory levels to an uncomfortably low level and then there is no alternative to coming back to the international market.”

Tags: Baseline Scenario, Chief Investment Officer, Commodities, Demand Drivers, Demand Projections, Emerging Economies, Energy Information Administration, Frank Holmes, GDP Growth, Global Gdp, Halftime Report, India, Infrastructure, International Energy Agency, Liquid Fuels, Natural Disasters, Oil Demand, Oil Market Report, Oil Patch, Political Maneuvering, Report Oil, U S Energy, U S Global Investors
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Energy and Natural Resources Market Cheat Sheet (July 25, 2011)

Sunday, July 24th, 2011

Energy and Natural Resources Market Cheat Sheet (July 25, 2011)

Strengths

• Small capitalization and international energy stocks outperformed commodities this week, perhaps reflecting broad-based strength in the sector and improving sentiment towards risk or stocks in general. The S&P 600 Small Cap Energy Index gained 3 percent this week, and the S&P Global Energy Index gained 2.8 percent versus 2.6 percent for the CRX Morgan Stanley Commodity – Equity Index.
• The International Energy Agency has said it will not be extending its release of around 2 million barrels a day of crude into the market after the month-long action, although it stands ready to do so “if market conditions again warrant.”
• The International Copper Study Group released its latest monthly data citing that for the period from January to April, the refined copper market was in a 69 thousand ton deficit, with April witnessing a sizeable 36 thousand ton deficit.
• Global steel production rose again in June, led by record crude output in China, and U.S. steelmakers also produced more, despite slow growth in the world’s largest economy.

Weaknesses

• China’s factory sector shrank for the first time in a year in July, feeding worries among the country’s main trading partners that its growth is unsustainable and could lead to a slump. The HSBC Flash Purchasing Managers’ Index (PMI) fell to 48.9 in July, suggesting the manufacturing sector contracted at its fastest pace since March 2009, as monetary policy tightening and slack global demand weighed on the sector.
• Goldman Sachs says that its commodities trading desk was the reason for the large drop in second quarter trading profits, although its analysts correctly called for a pull-back in prices. Reuters reported, “In a sign of how an abrupt slump in commodities and energy prices caught out many big players, Goldman said it had ‘significantly lower results’ in its commodities and mortgage businesses.”
• Investors worried about global growth and risky markets pulled $3.9 billion of net investments out of commodities in the second quarter, the biggest global outflow in over six years, according to Barclays Capital.
• Union workers at the world’s top copper mine, Chile’s Escondida, started a 24-hour strike over a series of wage contract demands that, if not met, could lead to an indefinite work stoppage.

Opportunities

• Stronger profits will support Ecopetrol’s plans to invest a total of $80.3 billion between 2011 and 2020, although the company is unlikely to be able to finance the plan from cash flow alone. There have been reports that a new share sale will be launched as soon as next month, offering the equivalent of up to a 10 percent stake in the company.
• Petroleo Brasileiro SA (PBR) may submit to its board a 2011-2015 investment plan for as much as $230 billion. However, this is $30 billion below the amount originally planned by the company.

Threats

• In a trend that will spawn many challenges to World Trade Organization rules, countries including India, Indonesia and Russia are tightening their grip on natural resources as they limit exports to build their domestic industries. Export barriers are tightening on commodities ranging from food and coal to iron ore and coveted rare earths that have critical roles in high-tech devices as countries harden positions on what they see as a sovereign right to development.

Tags: Commodities, Commodities Trading, Copper Market, Energy Index, Energy Prices, energy stocks, Equity Index, Global Demand, Global Energy, Global Steel, Goldman Sachs, India, International Copper Study, International Copper Study Group, International Energy Agency, Manufacturing Sector, Morgan Stanley, P 600, Purchasing Managers Index, Refined Copper, Small Cap, Steel Production
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