Energy and Natural Resources Market Diary (4/5/2010)

Energy and Natural Resources Market Diary (4/5/2010)

President Obama proposed plans this week to open areas along the coasts of Virginia, the Carolinas, Georgia and northern Alaska for offshore oil and gas exploration.

Offshore drilling has been banned since 1981 for most of the U.S. coastline, but it seems that’s where the deposits are. The outer continental shelf (mostly Gulf of Mexico) now accounts for nearly 30 percent of U.S. oil production, up from 11 percent in 1990.

It will be years before production begins in this area, but the impact may be felt sooner in certain segments of the oil and gas sector. Jack-up drill rigs and offshore platforms — in high demand and short supply less than 18 months ago — may see renewed demand. In addition, new pipelines and other infrastructure would be needed to make production in these new areas economically feasible.

Strengths

• Consistent with historic seasonal patterns for March, crude oil increased 5 percent in the month to nearly $84 a barrel.
• Copper surpassed its January 2010 high to reach its highest level since August 2008 at $3.57 a pound.
• Bloomberg reports that Vale SA, the world’s largest iron ore producer, and BHP Billiton Ltd. ended a 40-year system of setting annual prices. They instead signed short-term contracts with Asian mills, with Vale winning a 90 percent increase.
• The price of natural gas gained over 6 percent this week above $4 per million BTU following a smaller-than-expected inventory build.
• China Petroleum & Chemical Corp., or Sinopec, said it agreed to acquire deep-water oil assets in Angola by buying a 55 percent stake in Sonangol Sinopec International Ltd. for US $2.46 billion.

Weaknesses

• In its Prospective Plantings report, the USDA forecast 2010 wheat, corn and soybean plantings in the U.S. to be lower from a year ago, suggesting weaker demand for fertilizer application this spring.

Opportunities

• PetroChina plans to spend at least US $60 billion in the next decade on overseas acquisitions, challenging Exxon Mobil Corp and BP Plc in the race to control oil and gas fields.
• U.S. coal stockpiles at power plants were 2.6 percent smaller than this time last year according to Genscape. U.S. generators now have 58 days of coal on hand, up two days relative to last week but two days less than the same period last year.
• China, the largest iron ore buyer, may import 610 million metric tons of the steelmaking material this year, near the 2009 record, as mills continue to expand on the government’s stimulus spending, Shougang Corp. said. Steel demand may grow by between 8 percent and 10 percent this year, Shougang’s chairman said. The Beijing-based steelmaker is the country’s seventh-biggest by output in 2009.
• Saudi Arabia plans to spend $170 billion over the next five years on energy and oil refining projects. Of that total, $90 billion is to come directly from Saudi Aramco, while current and future capital investment will account for the remaining $80bn of joint refining and marketing projects.
• China's coal-fired power stations may need an additional 35 million metric tons of the fuel to compensate for a 15 percent drop in capacity utilization at hydropower plants, Dave Dai, a Hong Kong-based analyst at CLSA Research Ltd., said in a report.

Threats

Aluminum Corp. of China Ltd. (Chalco) management has indicated that it believes that the aluminum market is in oversupply and that this will restrain upward pricing pressure, with management expecting that aluminum prices will average $0.91 - $1.09 per pound in 2010.