Energy and Natural Resources Market Radar (April 2, 2012)
Strengths
- Recent data trends support the Global Resources Fund (PSPFX) managers’ long-term investment theme of higher food, agricultural commodity and land prices. After surging over 6 percent on Friday, corn futures closed flat for the week at $6.44 per bushel. The Friday surge came after new government data was released showing a drop in the amount of corn in storage. This raised concerns that corn supplies will remain tight and prices high in the near term.
- Iraq’s central government has approved payment of close to $560 million to oil producers in the autonomous Kurdish region after Kurdish authorities threatened to halt exports due to a lack of payments from Baghdad. Meanwhile, Iraqi oil sales are heading toward a post-war high this month as a new Persian Gulf shipping outlet provides a long-awaited boost to export capacity.
- Indian oil consumption increased by 67 thousand barrels per day (2.1 percent) on a year-over-year basis in February, the second-highest level on record. This was the fifth-straight month where demand totaled more than 3 million barrels per day, highlighting the country’s steady increase in oil consumption. Driven by improving industrial activity and continued penetration of diesel in the automobile sector, diesel sales, which make up over one-third of Indian demand, increased by 8 percent year-over-year to 1.423 million barrels per day, the second-highest level ever.
- U.S. crude consumption is holding up at around 14.55 million barrels per day, a 3 percent year-over-year rise so far this year. Despite high gasoline prices, growth is expected to rise by 1.9 percent quarter-over-quarter and 5 percent year-over-year.
Weaknesses
- The supply-side of the aluminum market has experienced a sharp bifurcating trend between China and the rest of the world so far in 2012 following several capacity cutbacks in North America and Europe at the turn of the year. Data from the International Aluminum Institute (IAI) showed that global aluminum output excluding China fell to 68,900 tons in February, the lowest level since December 2010 and the first year-over-year decline since the beginning of that year.
- Barclay’s Commodities Research visited China last week and met with a range of copper market fabricators, smelters and physical traders. Their key takeaway was that spot demand for copper is weak and improvement in the second quarter may be tepid. Sentiment among copper fabricators is negative because orders have been slow to improve. Inventories of copper cathodes are low, but inventories of finished product are higher than usual for this time of year.
Opportunities
- The government of Tanzania plans to invite oil operators to bid for 16 new offshore blocks under a new licensing round scheduled for September 2012.
- There are a number of analysts who now believe soybeans can increase to $14-$15 per bushel by late May, due to South America’s harvest progress and result. This drove Oil World to refine its forecast, saying that there was a "high probability that soybeans will exceed $14 per bushel for the July 2012 contract." The comments came in a report that forecasted world soybean inventories to plunge 20 percent to 60.6 million tons in 2011-12. This is a much steeper drop off than the 12.5 percent tumble expected by the U.S. Department of Agriculture.
- Despite price declines, Indonesia's coal production is expected to rise up to 5 percent from a year earlier to 390 million tons in 2012. "This year we estimate that production will reach 380-390 million tons even though prices have gone down," said Supriatna Suhala, deputy chairman and executive director of the APBI-Indonesia Coal Mining Association. Indonesia, the world's top thermal coal exporter, produced 370 million tons of coal in 2011. Suhala also forecasted that Indonesia's domestic coal consumption would jump 15 percent to 75 million tons in 2012.
Threats
- On Tuesday, the Obama administration announced long-awaited rules to limit carbon-dioxide emissions from new power plants. The rules will effectively block the construction of new coal-burning plants and make natural gas even more attractive as a fuel for generating electricity. The rules, which have been in the works since late 2009, will add more stress to the beleaguered coal-mining sector while encouraging development of renewable energy. The rules will also certainly add to Republican complaints of regulatory overreach by the Obama administration ahead of the November elections. The rules face serious opposition in Congress and the legal underpinnings are already being challenged in court.
- The proposed Volcker rule crackdown on trading and investing by banks could cause gasoline, electricity and natural gas prices to rise, according to a new report from IHS. With the report, HIS is seeking to gauge the rule's impact on energy companies and markets, including oil refineries, natural gas producers, and electricity providers. The report's authors said large banks play a key role in helping a variety of energy companies’ hedge risk and engage in timely trades on commodity exchanges. According to the report, any reduction in the banks' ability to play this role because of the Volcker rule will cause the cost of doing business to rise and that will lead to higher energy prices for consumers.
- Four weeks before the country’s presidential election, France is in talks with the U.S. and Britain on a possible release of strategic oil stocks to push fuel prices lower.
- Barclay’s Commodities Research also noted that although imports of copper are likely to remain strong in March and possibly April, they will likely trail off until later in the year. Overall, they believe that short-term Chinese demand is likely to disappoint before beginning on a recovery trajectory later in the second quarter. They also believe that imports will weaken until bonded stocks are run down, possibly in the third quarter of this year.
