Energy and Natural Resources Market Cheat Sheet (August 29, 2011)

Energy and Natural Resources Market Cheat Sheet (August 29, 2011)

Strengths

• The Global Resources Fund performed relatively well for the week, despite overall global economic uncertainty and volatile market activity. Exposure to precious metals helped the fund, while maintaining little exposure to negatively-performing sectors limited downside risk. The fund continues to benefit from exposure to the food and agriculture sector.
• Refining margins continue to remain very strong, with the spread between Brent Oil and West Texas Intermediate (WTI) remaining consistent, by about $30. This has been contributing to the strong performance of the oil and gas refining sector. The fund has also benefited from exposure to the refiners.
• Corn rose to a 10-week high in Chicago and soybeans gained as worsening crop conditions in the U.S., the top global exporter, raised concern that supply may be smaller than estimated. The Department of Agriculture said Monday that conditions deteriorated last week for the U.S. corn and soybean crops. Corn for December delivery has already climbed 6 cents. Only 57 percent of the corn in the top 18 producing states was in good or excellent condition as of August 21, down from 60 percent a week earlier and 70 percent a year earlier, according to Bloomberg.
• According to Bloomberg, U.S. wheat shipments to Egypt, Iraq, Japan and Saudi Arabia surged in the first half of this year, driven by political turmoil and natural disasters, to wrap up the best export season since 1992-1993. A drought led Russia to cut off its exports from August until last month, giving the U.S. an opening. Low rainfall in Iraq and Saudi Arabia’s move to save water by reducing domestic production drove demand as well. Exports to Japan jumped because of a weather-shortened harvest in 2010 and possible food hoarding after the March earthquake and tsunami.
• Deutsche Bank highlighted that copper demand exceeded supply by 80,000 tons in May which brought the shortage to 146,000 tons for the first five months of this year, compared with 162,000 tons in the same period last year, according to the International Copper Study Group.
• The Energy Department said the nation’s oil supplies dropped by 2.2 million barrels last week, which helped to keep the price higher. Oil rose Wednesday following news of strong U.S. manufacturing activity. Benchmark West Texas crude rose 75 cents to $86.19 a barrel in New York, while Brent crude was up $1.34 at $110.65 per barrel in London that day.

Weaknesses

• The fund also did not have any exposure to the construction and materials group, which experienced positive gains for the week.
• Deutsche Bank recently published an article stating that output from Chile’s Escondida mine dropped 14 percent in the first half from the previous year to 452 kilotons due to declining ore grade and labor issues. BHP Billiton’s Escondida mine, the world’s biggest copper mine, experienced striking issues the last few months. Chile is the world’s largest copper producer, accounting for one-third of global supply.
• Aluminum, zinc and nickel continue their weak performance relative to other metals. The ongoing global sovereign uncertainty, lower GDP forecasts for the U.S., bleak consumer sentiment, a potential world-wide recession and overall global negative sentiment are all contributing factors.

Opportunities

• Independent oil analyst Andrew Lipow said refineries along the East Coast will likely decide whether to shut down production ahead of Hurricane Irene, which could disrupt gasoline shipments and hit refineries in New Jersey and Pennsylvania. Once stopped, refineries usually need 10 to 21 days to get back up and running at full capacity. That means gasoline supplies could drop and prices rise, he said.
• According to Forbes, the government reported that orders for long-lasting, durable goods like autos and aircraft increased 4 percent in July, the biggest increase since March. Manufacturing is a major driver of economic growth, and more manufacturing boosts energy demand.
• The Financial Times highlighted that the U.S. ethanol industry, now the top domestic corn user, has not been slowed by high corn prices, with output up 4 percent from a year ago.

Threats

• Again, with no clarity on the issue of the global sovereign debt, there is a risk that we will continue to experience volatile market activity. Already-established negative trends may continue among commodities and sectors.
• Dan Greenhaus, Chief Global Strategist for BTIG LLC, reported that investors are likely disappointed by the lack of any policy specifics from Chairman Bernanke’s speech Friday. He highlighted that Bernanke said that the debt ceiling debate damaged the credibility of the United States and suggested more such debates are likely to do further damage. Bernanke emphasized that without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic financial damage. He did not present a Quantitative Easing 3 outline, which contributes to the nation’s remaining uncertainty for the future.