Energy and Natural Resources Market Radar (February 6, 2012)
Strengths
- CLSA reports that final oil demand numbers from China increased by 7 percent in 2011. While this level of growth is below the 12 percent in the prior year, December data showed a strong recovery in gasoline and natural gas demand.
- Commodity investments are expanding at the quickest pace in six years according to Bloomberg, as signs of rising economic growth gain momentum. The number of futures contracts on 24 commodities including oil and copper rose 9 percent last month, the most since January 2006.
- Cummins, Inc. cited on its fourth quarter conference call with shareholders that it expects a solid year of growth for its engines and industrial products in its mining and oil & gas businesses.
- Barclays reports an “unprecedented synchronized surge” in LME cancelled warrants, which stand at an average of 15 percent of total LME base metal stocks (versus a 5-year average just below 5 percent), is telling the market that inventories are going to be withdrawn on a significant scale from warehouses in the near term.
Weaknesses
- Copper stockpiles monitored by the Shanghai Futures Exchange increased to their highest level in nearly two years, which typically implies weaker regional demand for the metal.
- According to Darren Gee, CEO of Peyto Exploration & Development, Inc., many energy producers with natural gas exposure are requiring $6 per MMBtu to break even; this is compared to a current gas price of approximately $2.50. Even among low producers in North America, many companies are just barely “keeping the lights on” without any additional cash to reinvest reserve depletion.
Opportunities
- The beginning of 2012 has proved to be a rewarding period for risk assets such as commodities. Deutsche Bank attributes this strong performance to global central banks which continue to provide abundant liquidity to financial markets, and better real economic data in the U.S., China and the eurozone.
- The U.S. economy created 243,000 jobs in January, the greatest one-month increase since April of last year.
Threats
- While the focus has been on the potential for Middle East supply disruptions with Iran, a dispute over transit fees between Sudan and South Sudan has resulted in realized production losses of 350 thousand barrels a day at the end of January.
- UBS Commodities strategists remain cautious despite the recent market rally due to credit contraction in deleveraging countries, slower capital flows into emerging markets and ongoing signs of credit stress in the financial markets.
