Advisor Alert: Energy and Natural Resources Market

The following summary is part of the weekly Advisor Alert produced by US Global Funds for the week ending December 4, 2009.

Energy and Natural Resources Market

The U.S. Environmental Protection Agency postponed a decision until the middle of 2010 as to whether to permit the ethanol blend in gasoline to increase to 15 percent from the maximum limit of 10 percent. According to industry estimates, increasing the blend of ethanol into gasoline by five percentage points would increase ethanol demand by an additional 6 billion gallons per annum.

Strengths

• China's crude oil imports are expected to stay at a high rate of around 18 million tonnes per month, or around 4.3 million barrels per day in the coming two to three months, the official Xinhua news agency reported this week. With new oil tanks, pipelines and refining projects set to commence operation in coming months, crude throughput would likely hover around 33 million tonnes per month or about 8 million bpd, the report said. Domestic oil processing hit a high of 33.29 million tonnes in October, while crude imports, at more than 19 million tonnes in October, were the second highest in history.
• U.S. oil demand in September was up 523,000 barrels per day compared to a year earlier, the first year-over-year increase in oil consumption for any month since July 2007, per data released by the Energy Information Administration.
• Coal prices at China’s Qinhuangdao port, a benchmark in the world’s biggest producer and user of the fuel, rose 3 percent for an 11th week as heating demand increased during winter.
• Russia produced more than 10 million barrels per day of oil for the third consecutive month in November to retain its position as the world’s top producer.

Weaknesses

• According to American Iron and Steel Institute data, U.S. steelmakers operated with a capability utilization rate of 62.8 percent for the week ended November 28, down about 2.7 percent from the week before.
• Tidewater Inc., the world's largest provider of offshore supply vessels, does not expect pricing to pick up in the near term as oil and gas explorers continue to hold back on spending, according to its top executive.
• Weekly oil inventory data released by the U.S. Energy Information Administration indicates that adjusted four-week average oil demand is down 3.2 percent year-over-year.
• According to the European Aluminum Association, two-thirds of Europe’s primary smelters might shut in the near future due to high power costs.

Opportunities

• China's Ministry of Commerce said there remains plenty of potential to lift domestic automobile sales, and the ministry appears to be considering additional stimulus measures, which may include another round of subsidies and sales tax cut backs. Chinese auto sales are up 38 percent year-on-year, and are expected to reach approximately 13 million autos in 2009. Industry sources indicate that auto sales may reach as high as 17 million units by 2012, which should help to keep demand growing for steel.
• Yunnan Copper is considering buying a copper mine in Kazakhstan next year; the China Daily reported citing general manager Yang Chao. The company is also considering investments in Laos and Indonesia, the paper reported, citing an interview with Yang.
• Brazilian billionaire Eike Batista, who controls mining company MMX, said he expects iron-ore prices to increase between 10 and 20 percent next year as Chinese demand grows. The outlook for iron-ore is improving as China prepares to raise its annual production target 50 percent to 900 million tons a year, Batista said.
• Progress Energy's Carolina electric utility will shut 11 coal-fired units totaling nearly 1,500 megawatts by 2017 as it shifts to cleaner-burning natural gas to reduce emissions of carbon dioxide and other pollution, the company said this week.
• Global gas demand is likely to rise by 25 percent, while the use of liquefied natural gas is set to surge by 40 percent by 2020, the head of ExxonMobil's LNG business said on Wednesday.
• Canada may impose duties against Chinese Oil Country Tubular Goods (“OCTG”) material. The Canada Border Services Agency has ruled that China dumped and subsidized seamless and welded OCTG material in the Canadian market. As a result of this determination, a preliminary duty of 182 percent will be applied to OCTG imports from China, with the agency issuing a final ruling on Feb. 22, 2010. This should help to further insulate the U.S. market from Chinese OCTG, removing another conduit through which Chinese material could find its way into the U.S. market.
• Japan’s crude inventories fell to their lowest level in 37 years last week.

Threat

• LME copper inventories reach their highest levels since April 2009.
• OPEC production hit 28.9 million barrels per day last month, its highest level since December 2008.
• South Africa’s mines will be nationalized, according to Julius Malema, president of the youth wing of the ruling African National Congress (ANC) party. The ANC Youth League will use its influence to push through nationalization. The group will present a document backing nationalization to the general council of the ANC next year and a decision on timing will be taken in 2012, he said.
• China, the world’s second-biggest shipbuilding nation, will face a capacity glut from 2011 after shipyards work through existing orders and shipping lines slow new orders, according to Zhu Hongren, a government official. Global shipbuilding capacity will rise to 200 million deadweight tons annually in the next few years, while demand will struggle to reach the 156 million tons it averaged over the past six years, Zhu said.