Energy and Natural Resources Market Diary (October 18, 2010)
Strengths
- Two more shale oil and gas deals were announced this past week in the Eagle Ford shale of South Texas with Statoil partnering with Talisman and CNOOC partnering with Chesapeake Energy. In total, over $75 billion of deals for oil and gas shale properties have been announced since 2008 including Exxon’s $35 billion takeover of XTO Energy. Deals continue to hit the market as large international oil and gas companies look to secure U.S. shale resources to ensure reserve replacement. The companies are also looking to acquire knowledge of drilling and completion technologies necessary to take shale extraction global.
- China’s crude oil imports increased 11 percent to 5.52 million barrels a day, compared with a month earlier, according to General Administration of Customs.
- The International Energy Agency (IEA) again raised demand estimates by roughly 300,000 barrels per day for both 2010 and 2011. The increase reflects stronger-than-expected demand during the third quarter of 2010 and the International Monetary Fund’s latest upward revisions to global GDP growth.
- China's iron ore imports jumped 18 percent in September from the previous month, showing that state-imposed steel production cuts failed to dent demand from the world's top buyer of the raw material.
Weaknesses
- Chinese net steel exports were 1.69 million tonnes in September, or 20.6 million tonnes annualized. This represents a 28.8 percent month-over-month rise from July, but remains well below the 29 million tonnes (annualized rate) so far this year and a peak of 50 million tonnes (annualized rate) reached in June.
- India’s next auction of oil rights may draw fewer international bids should the government delay Cairn Energy’s plan to sell a stake in its local unit to Vedanta Resources. India plans to offer 34 oil and gas fields in the nation’s ninth round of auctions starting October 15. In last year’s round, the government received bids for just 36 of the 70 blocks offered because of disputes over production-sharing contracts and the global recession.
Opportunities
- The head of the International Energy Agency (IEA) said that any delays to new offshore deepwater oil and gas drilling could have a significant impact on the oil market.
- Bloomberg reported that OPEC members have said that oil should rise to $100 a barrel to make up for the 13 percent decline in the U.S. Dollar Index. OPEC members say the U.S. currency’s weakness means the real price of oil is about $20 less than at current levels.
- Freeport-McMoRan Copper & Gold said opportunities for acquisitions are limited and the company may study returning excess cash to shareholders. “It’s a very competitive market out there,” Chief Executive Officer Richard Adkerson said. “That leans you heavily toward internal investments. We are aggressively looking for ways to invest.” Adkerson said.
- Codelco expects a tighter copper market next year because of continued demand from China and a lack of new supply. “China is continuing to have strong demand and from the supply side we have only a couple of new projects coming on-stream,” Codelco’s CEO Diego Hernandez said. He said the company is selling a little more than 40 percent of its copper to China.
- Analysts at Macquarie highlighted that Energy Resources of Australia reported quarterly production of 910 tonnes of uranium oxide in, up 10 percent quarter-over-quarter. That is well below market expectations due to further poor-yielding grades from the Ranger pit. The company has reduced full year guidance to 3,900 tonnes of oxide as a result and signaled that it will need to continue purchasing material from the market in order to meet contracted obligations. In Macquarie’s view, this has been a major factor behind the relative strength in uranium spot prices over the past three to four months.
- ETF Securities announced that it is preparing to launch a range of physically-backed base metals ETFs, according to Metal Bulletin. The range of products is to include physical aluminum, copper, lead, nickel, tin and zinc, as well as, a basket consisting of all six metals. The physical backing will be provided through ownership of LME warrants on metals in approved warehouses.
Threats
- Monday's release from the International Lead and Zinc Study Group suggested that despite a likely strong rise in zinc demand next year, a 10.7 percent year-over-year rise in zinc mine output should result in a 233 kilotonne surplus for the metal next year.
- U.S. steelmakers, working to block Chinese investments such as a planned venture by Anshan Iron & Steel Group in Mississippi, produced a report saying companies in China get illegal government subsidies. Groups representing Nucor Corp. and U.S. Steel listed government loans, tax breaks and payments they said their counterparts in China receive. Much of the aid violates World Trade Organization (WTO) rules and may give Chinese companies an unfair advantage if they invest in the U.S.
