Commodity Blog

Posts Tagged ‘oil’

Gold is a hot topic nowadays, experiencing high volatility, yet remaining primary investment medium. Precious metals have always been attractive to investors because of their tendency to keep their value. In times of economic crisis or inflation, for example, the value of paper money might fluctuate, but a hard asset will always be worth something. As a result, traditionally precious metals have been considered a ”safe haven” in times of crises of confidence and economic and financial instability. The question is: can gold keep on its rally? Or buying today would be buying high and selling low?

To answer this question we must consider factors influencing the precious metal. First, let’s look at two major factors on which gold depends: inflation and fear. Inflation usually occurs while the economy is growing. And, as result of growing economy, there’s little fear among trader and investors. Inflation makes investors to diversify, increasing gold appeal. In case when fear prevails, gold serves as a hedge against the unreliability of other kinds of financial assets. As you can see, the two conditions of gold’s performance are quite exclusive: if there’s inflation, there’s little fear, and if investors are fearful, inflation is likely to be subdued. If these two factors (fear and inflation) can somehow come together an optimal conditions for very sharp appreciation will be created. If dollar begins to decline uncontrollably, inflation would be inevitable, causing widespread panic and fear leading to the complete destabilization of the system. If the U.S. currency fails to inspire confidence as a source of value, gold could easily skyrocket to astronomical levels of many thousands of dollars. The problem with this scenario is that it is very difficult to expect the dollar lose its status as the global currency in the next five ten years except if a catastrophic economic cataclysm would destroy the international financial system.

Now we should consider other factors influencing gold. As side note, we should remember that all financial markets are mainly driven by the expectations of the events that may take place in the future, not by events themselves. And most expectations are either negative to the greenback (which is therefore positive for gold) or directly positive for the metal. Some of possible factors that are bullish for gold are: China is going to continue or even increase gold purchases; UAE, Saudi Arabia and other Arab banks are expected to fail, and they are stuffed with U.S. debt; U.S. is expected to have a double-dip recovery, which means another run from stocks and into gold soon; tension in the Middle East is growing; oil prices are expected to climb with the global economic recovery, causing the dollar to tumble; the Comex gold exchange in New York is expected to get in trouble as European countries demand return/delivery of their physical gold in masses; start of wedding season in India.

China is a very illustrative example of country, stockpiling gold on concern that falling dollar will shake the global economy. This country, being the largest gold producer expected to produce over 300 metric tons of the precious metal, does not export any. What’s more, it is going to build up its hold reserves to 10,000 tons over the next decade.

So, what conclusions can be made and what advices can be given? As you can clearly see gold is definitely bullish, remaining a reliable safe haven. Analysts estimate $850-$1,400 as a trading range in 2010. Instead of investing directly into the commodity at this late point in the game, many traders are purchasing future option contracts that allow them to speculate with leverage while managing risk. If you want to participate in the gold market, you have to decide what type of investor you are going to be. A long-term investor who thinks that gold will eventually reach $2,000 should not panic and may want to buy more on a correction. A short-term trader should have already been stopped out. Gold should not be purchased alone as an investment asset. Gold itself is speculative and is susceptible for highly volatile moves. That makes it too risky for the average individual investor. Taking all this into account we can say that gold should only be part of a diversified portfolio which includes other commodities (such as oil). While gold we talked about gold as a ”safe haven”, one shouldn’t think about this commodity as an investment only for troubled times. One of the greatest advantages of precious metals exists regardless of economic and market conditions. Therefore, investing in precious metals looks like a good diversification strategy for a portfolio comprised mainly of bonds, stocks and real estate.

Crude oil rose in New York, poised for a third weekly gain, after Goldman Sachs Group Inc. said prices may reach $85 a barrel by the end of the year as demand recovers and supplies shrink.

Oil surged to a seven-month high yesterday and gasoline climbed after the bank increased its year-end forecast from $65. The dollar’s drop over the past six weeks has boosted crude prices as investors buy commodities as an inflation hedge.

“It’s the funds that are pushing the market higher,” said Jonathan Kornafel, a director for Asia at options trader Hudson Capital Energy in Singapore. “When everyone reads the same report and comes to the same conclusion, then you’re going to have the market moving in one direction. The general trend is for the dollar to get weaker and for crude to get stronger.”

Crude oil for July delivery rose as much as 71 cents, or 1 percent, to $69.52 a barrel on the New York Mercantile Exchange. It was at $69.38 a barrel at 2:10 p.m. Singapore time. Yesterday, the contract rose $2.69 to $68.81, the highest settlement since Nov. 4. Prices are up 4.6 percent this week.

The U.S. Dollar Index, which values the greenback against a basket of international currencies, has dropped 5.5 percent since May 7, while crude has gained 22 percent.

“It really has been driven by pretty strong inflows from funds and that’s been encouraged by quite significant weakness in the dollar,” said Toby Hassall, an analyst at Commodity Warrants Australia Pty in Sydney. “Given the momentum crude seems to have at the moment, $85 as a high for 2009 doesn’t seem unreasonable.”

Exxon Mobil Corp., the world’s largest refiner, said the transition away from oil-derived fuels is probably 100 years away.

Petroleum-based fuels including gasoline and diesel, as well as hydrocarbons such as coal and natural gas, will remain the dominant sources of energy for factories, offices, homes and cars for decades because there are no viable alternatives, Chief Executive Officer Rex Tillerson told reporters today after Exxon Mobil’s annual shareholders meeting in Dallas.

In the U.S., which burns a quarter of global oil supplies, consumers probably face higher fuel prices if lawmakers impose greenhouse-gas rules that inflate fuel-production costs, Tillerson said. A plan introduced by Democrats this month would allocate a limited number of emission credits to refiners and electricity producers, with the aim of curbing greenhouse gases.

“The oil-gas-refining side of the business received a very, very small amount of the allocations, which means that sector will bear more of the costs more immediately,” Tillerson said. “If we’re going to place a price on carbon, let’s do that in the most efficient way. A carbon tax is more efficient than a tax that’s applied by way of a cap-and-trade mechanism.”

Tillerson, 57, said lawmakers are hurrying to restrict greenhouse gases when many scientific questions surrounding the global warming issue remain unresolved.

Tight credit is dampening copper-industry consolidation, even though some companies could be had cheaply right now.
Comex May copper closed at $1.6890 a pound, up nearly 10% for the week on Chinese-demand optimism and inventory declines. However, with the metal’s price off about 60% from last year’s record high, some producers may be feeling the squeeze enough to sell, quite likely at bargain values.
But the companies that might otherwise be in a position to buy are more focused on shoring up balance sheets, as the global economic downturn dents demand for their product. The credit-market crunch means few companies have money to spend on acquisitions, says Charles Bradford, equity analyst at Soleil-Bradford Research. And those that do have the cash are hoarding it.
To be sure, there are flutters of consolidation activity. Low copper prices are leading Norddeutsche Affinerie (ticker: NDA.XE), Europe’s biggest copper producer, to consider acquisitions in the European copper-fabrication market, as well as potential buys in South America and China, says Chief Executive Bernd Drouven. Sherwood Copper and Vancouver-based copper producer Capstone Mining (CS.Canada) merged in September. Frontera Copper (FCC.Canada) last month recommended that its shareholders accept an acquisition bid from Mexican investment firm Invecture Group, which bettered a competing offer from Grupo Mexico (GMEXICO.Mexico).
Among other factors crimping mergers and acquisitions is that producers are still eking out profits despite lowered prices. Falling input costs, such as oil and sulfuric acid, have helped. Still, “there is probably going to be some consolidation of the sector,” says Thomas Winmill, portfolio manager of the Midas Fund (MIDSX). For those acquisitions that do happen, bigger players would be more able to pay cash. Smaller-company activity would probably take the form of mergers of equals, Winmill says. He adds that he wouldn’t be surprised if Anvil Mining (AVM.Australia) — which in September had to scrap a private capital-raising because of poor market conditions — agreed to be acquired by a larger company. He says Capstone may be open to more corporate activity, and Equinox Minerals (EQN.Canada) might be attractive for a major.
Companies with relatively strong balance sheets are probably willing to wait out the lower prices, while those with weaker balance sheets and cash flow might be more open to being acquired, said Brian Hicks, co-manager of U.S. Global Investors’ Global Resources Fund (PSPFX). But they may have a hard time finding buyers. Mining companies are taking into consideration weak copper demand, multiyear lows for equities and swooning manufacturing. They aren’t looking to stretch their balance sheets on acquisitions, and will probably sit on the sidelines until the economy perks up and stronger prices emerge.
With this backdrop, large miners like Rio Tinto (RTO) and Xstrata (XTA.U.K.) aren’t likely to be shopping anytime soon, Hicks says. M&A activity probably won’t pick up until the second half of this year at the earliest.
“A lot of the large mining companies, like everyone else, are trying to pick themselves up off the mat,” Hicks says.
Rumination that recent OPEC cuts are tightening supplies lifted Nymex crude-oil; the April contract settled at $45.52 a barrel, up 1.7% on the week. Some also speculated that next week’s OPEC meeting would bring more cuts.

Gold N.Y. Spot $ 925.05
Silver N.Y. Spot $ 13.19
Lead LME Cash $ 0.5513
Copper LME Cash $ 1.6175
Zinc LME Cash $ 0.5357
Nickel LME Spot $ 4.33
Aluminum LME Spot $ 0.5720
Platinum N.Y. Spot $ 1065.50
Palladium N.Y Spot $ 198.00
Oil WTI Cushing $ 048.00
Natural Gas (Henry Hub)($/MMBtu) $03.94

USD-AUD $ 1.5788
AUD-USD $ 0.6334
CAD-USD $ 0.7774
USD-CAD $ 1.2863
EUR-USD $ 1.2628

Gold N.Y. Spot $ 898.20
Silver N.Y. Spot $ 12.27
Lead LME Cash $ 0.5049
Copper LME Cash $ 1.4517
Zinc LME Cash $ 0.5108
Nickel LME Spot $ 5.12
Aluminum LME Spot $ 0.6058
Platinum N.Y. Spot $ 0965.50
Palladium N.Y Spot $ 192.00
Oil WTI Cushing $ 040.30
Natural Gas (Henry Hub)($/MMBtu) $04.46

USD-AUD $ 1.5444
AUD-USD $ 0.6475
CAD-USD $ 0.8062
USD-CAD $ 1.2404
EUR-USD $ 1.3016

Royal Dutch Shell PLC, Europe’s largest oil company, said the cost of producing Canadian oil sands rose to about $38 (U.S.) a barrel last year, including fuel expenses.
Shell’s oil-sands production in Canada last year was 80,000 barrels a day, chief financial officer Peter Voser said yesterday on an analyst call. Costs averaged $29 a barrel in 2007, when Shell produced 87,000 barrels a day, he said.
“We expect that to make a profit” in Canada, CEO Jeroen Van Der Veer said yesterday in The Hague.
Shell withdrew an application in November for government approval of its Carmon Creek oil-sands development in Alberta because of rising industry costs.
In October, the company postponed the second-phase expansion of its Athabasca oil-sands project. Energy costs account for about 20 per cent to 25 per cent of the oil sands production expenditure.
Van Der Veer said “very soon our big projects will kick in.”

Gold N.Y. Spot $ 846.20
Silver N.Y. Spot $ 10.86
Lead LME Cash $ 0.4894
Copper LME Cash $ 1.4066
Zinc LME Cash $ 0.5604
Nickel LME Spot $ 5.62
Aluminum LME Spot $ 0.6872
Platinum N.Y. Spot $ 0931.00
Palladium N.Y Spot $ 183.50
Oil WTI Cushing $ 047.40
Natural Gas (Henry Hub)($/MMBtu) $05.40

USD-AUD $ 1.4017
AUD-USD $ 0.7134
CAD-USD $ 0.8260
USD-CAD $ 1.2107
EUR-USD $ 1.3587

The wild gyrations in commodities last year were a brutal reminder of how volatile and dicey this market can be, especially when the economy turns sour.

It was a classic boom-to-bust cycle. Prices that seemed to defy gravity in the first half had trouble finding a floor later in the year. Public uproar over rising costs was damped. As demand dried up, suppliers were forced to make painful production cuts. Investment gains that took years to build disappeared in just a few weeks.

All this is expected to leave a profound mark on commodities markets for years to come, and 2009 is expected to be another difficult year. The Dow Jones-AIG Commodity Index, a broad benchmark, finished 2008 with a 37% loss, the worst year since the index was launched in 1998. Oil fell 54% for the year to $44.60 a barrel, down $100.69 from its record settlement in early July.

Commodities kicked off the year on a strong note: On Jan. 2, the first trading day of the year, crude-oil futures touched $100 a barrel — the first time it had surpassed the three-digit mark — before settling at $99.62. With stocks weighed down by uncertainties about financial institutions’ subprime exposure, commodities gained favor among investors as an asset class they believed would help their portfolios weather the storm.

A rosy outlook for emerging markets like China and India, the primary driver of the commodities run-up for several years, kept traders flooding into the market. Investments that track a variety of commodities indexes gained 37% in the first half to $200 billion, according to the Commodity Futures Trading Commission.
Precious metals soared in March, in a flight to quality as Bear Stearns Cos., the nation’s fifth-largest investment bank, collapsed. Gold, a traditional investor safe haven, hit all-time highs of $1,003.20 a troy ounce and silver rose to $20.685 a troy ounce. Both platinum and palladium reached records in March, fueled by a severe power outage in South Africa that hurt production.

Corn and soybeans reached their all-time highs around late June due to severe flooding in Midwest, the U.S.’s main producing area.

Oil continued to move higher amid expectations that emerging markets’ insatiable appetite for energy would counter the economic slowdown in the U.S. Wall Street firms argued that global production couldn’t keep pace and one-upped each other with sensational forecasts. Goldman Sachs Group analysts shocked the market in May with a prediction that oil could reach $200 a barrel within two years. In June, Morgan Stanley called for oil to spike at $150 a barrel by July 4.

Morgan Stanley was close. Crude oil reached $145.29 a barrel on July 3, a 51% gain from the beginning of the year — the pinnacle of commodities’ 2008 surge.

Then the tide turned. Soaring gasoline prices in the summer led to less driving and had an effect on consumer spending. Politicians proposed legislation to curb speculation in the oil markets, which became an issue in the presidential campaign. Some market players were spooked by the prospect of stricter regulation and stayed away.

Entering the fall, commodities took another hit as the credit crisis worsened after the failure of Lehman Brothers Holdings. Prices of all assets plunged as hedge funds and investment banks liquidated their positions to shore up capital and reduce leverage.

Demand for basic materials weakened as the financial crisis spread and tipped the world economy into recession, and commodities’ downward spiral gained speed. Oil hit its low for the year, $33.87 a barrel on Dec. 19. The International Energy Authority predicted that global oil demand would shrink this year, for the first time since 1983.

The second half’s decline was so brutal that it wiped out gains commodities had accumulated since 2002. Oil hasn’t been around these levels since 2004. But some still showed gains. Cocoa jumped 31% and rough rice gained 13%. Gold rose 5.8%, its eighth consecutive annual increase.

“It’s very typical for commodities to have a late-cycle rally,” said Lawrence Eagles, head of commodities research at J.P. Morgan Chase & Co., speaking of the first half of the year. Although the U.S. recession began in December 2007, commodities rose for months before weakening demand besieged the market.
Many investors were new to commodities and rushed for the exits when prices started to tumble. “Some of the hedge funds had never experienced any substantial corrections in commodities, and they got caught up here, badly,” said Richard Feltes, director of commodity research at MF Global.

The commodities markets are likely to be even tougher in the coming year. Liquidity is a major concern, with the prospect of fewer players and tighter credit.

“We may see increased interest from end users hedging against price swings,” said David Goodman, co-head of global commodities at Merrill Lynch & Co. “This will not offset the gap left from the exit of several financial players.”
Worries about credit risk will continue to have an impact as lenders may require counterparties to post more collateral to guarantee transactions, which in turn will utilize more capital, Mr. Goodman said.
While demand continues to decline, there is evidence now that supply is contracting, leading some players to hope that prices may be close to bottoming out. Oil-producing countries, mining companies and steel mills recently announced massive production cuts, which could put a floor on prices.
But nothing is certain. On Dec. 17, members of the Organization of the Petroleum Exporting Countries agreed to slash another 2.2 million barrels per day from oil markets, but oil prices continued to fall and earlier announced cuts weren’t fully implemented.
The latest cuts were scheduled to take effect at the start of this year. It might take longer for demand to pick up and have an effect on prices. “The answer now depends on how long this recession will last,” said J.P. Morgan’s Mr. Eagles.

While TD Bank sees the commodities market starting to rebound in the second half of 2009, followed by more pronounced price increases in 2010, the World Bank believes that, over the long term, commodity prices will remain substantially below recent bull market highs.

“The commodity market boom has come to an end,” the World Bank says. This boom has been the most pronounced since 1900, and was caused by rapid demand growth which was not matched by supply growth. In a report entitled “Global economic prospects — commodities at the crossroads,” the bank says that the boom has ended because of slower GDP growth, increased supplies and revised expectations.

The World Bank does not agree with observers who say that the global economy is moving to a new era characterized by relative shortage and permanently higher commodity prices. Over the long run, commodity prices are expected to fall, but not to 1990’s levels, since such low prices will suppress exploration and new development in the resource sector.

Over the next two decades, GDP growth rates will slow down because of slowing population growth and moderating income growth, in turn putting a lid on commodity demand growth. Moreover, technological progress should improve the efficiency of both production and use of commodities, ensuring that supply keeps pace with demand.

The World Bank says that, while commodity prices are likely to be higher than they were in the 1990’s and early 2000’s, a period when prices were depressed by excess supply, “the recent peaks (in prices). .. are unlikely to be the new norms,” since demand is not expected to outstrip supply over the long term.

The World Bank sees a marked slowdown in growth rates in the coming year. The bank projects that in 2009, investment in developed economies will shrink 3.1%, while investment in developing economies will grow by 3.4% — a sharp pullback from the 13% growth seen in 2007. The bank forecasts that the global economy will grow by 0.9% in 2009. Developing economies are projected to grow by 4.5%, well below the 7.9% growth rate seen in 2007.

Phenomenal growth in China’s GDP has led to growth in metal intensity in the economy, defined as metal consumption per unit of GDP. This trend is explained by the boom in investment, manufacturing and exports in China. Currently, metal intensity in China is four times higher than in developed countries and twice that of other developing countries.

China’s metal intensity is expected to stabilize in coming years and then start falling as high investment rates in the economy moderate, and the movement of manufacturing capacity to China from the rest of the world likewise slows down. Another factor which will decrease metal intensity in China is the changing make-up of the economy, where the share of services will increase at the expense of construction and manufacturing.

If China’s metal intensity stabilizes and then falls in coming years, global demand growth for metals, which has exceeded GDP growth rates, should first decline to match GDP growth rates and then decline even further to below GDP growth. The World Bank forecasts that, between 2015 and 2030, the global demand growth rate for metals will be 2.7% per year.

Turning from metals to energy, the World Bank says that future energy demand growth depends heavily on the pace of technological innovation in the automotive sector. Energy efficiency in the transportation sector is key to moderating demand, since 75% of energy demand growth is projected to come from this sector.
The World Bank believes that the prospects for technological improvements in the automotive sector are good, using technologies such as flex-fuel, hybrid cars, plug-in hybrids, electric cars and hydrogen-powered vehicles. Together, these have the potential to double fuel efficiency. The bank believes that, by 2050, the market share of such innovative vehicles can reach 90% in the developed world and 75% in the developing world, which will help reduce dependence on oil.

The bank forecasts oil consumption to grow to 114 million barrels per day in 2030 from 87 million today. Energy consumption as a whole is projected to grow at a faster pace, since consumption of other energy forms (such as coal, natural gas etc.) will grow faster than oil demand.

“Over the next 20 years, supplies of extracted commodities are likely to remain ample,” the bank says. The pace at which supply in the oil and metals sector catches up with demand depends on how quickly the supply of labour and supply in the heavy and specialized equipment sector can be restored. Capacity in these sectors has been reduced by years of low prices and weak investment, leading to long delivery times and high costs.

Recent high prices have helped address these capacity constraints. With the current recession, and with lower commodity prices, investment demand has fallen, and demand for specialized and heavy equipment has fallen in tandem, as have equipment prices. Despite this, prices are projected to remain relatively high and there will be a backlog in equipment deliveries for the next several years.

Although more and more resources, both metals and energy, are extracted every year, which means that less and less remains, it is unlikely that resources will be exhausted anytime soon, the bank says. Historically, reserves of both oil and metals have tended to rise faster than the depletion rate through extraction. In the case of oil, reserves have tended to remain at 40 years of anticipated consumption. This is because, when companies tally reserves, they tend to include only resources that can be readily extracted, which excludes sizable known resources.

The bank expects that more resources will be discovered, even though they are likely to be lower grade or more remotely located, and therefore more difficult and costly to produce. Nevertheless, advances in extraction technology will likely offset these impediments. The long-term oil price is expected to be US$75 per barrel in real 2008 dollars, a level which will allow economic production from oil sands. The bank expects that the oil price will also average US$75 per barrel in 2009.

Even if the World Bank’s projection turns out to be partly wrong and certain resources do become scarce, the bank says that alternatives will start coming into play. For example, if the pace of oil discoveries declines, the rising oil price will make alternatives such as coal, nuclear, natural gas and renewable energy more attractive, as well as stimulate conservation and technological change. However in such circumstances alternative energy sources will also become more expensive.
The World Bank summarizes its forecast by saying that under reasonable assumptions the supply of commodities is likely to increase rapidly enough over the long run to meet anticipated increases in demand at prices that are lower than the current levels. (The report was issued on November 20, when commodity prices were somewhat higher than now.)

TD Bank economist Dina Cover focuses on short-term prospects for commodities. She has downgraded prospects for the global economy in 2009, projecting growth at a mere 0.5%. The U.S. economy will shrink by 2%, and growth in the Chinese economy will slow to 7.6%. Since the U.S. and China are the world’s largest consumers of many commodities, demand will be hit hard, particularly for oil, coal and industrial metals.

As a result, the TD commodity index is projected to fall by 15% from mid-December levels, for a 60% peak-to-trough decline, and it will bottom in the second quarter of 2009. This may drag the Canadian dollar further down, which should help cushion the effect of falling commodity prices on mining companies.

Energy and base metal prices will decline the most, since both consumer and industrial demand for these commodities will decline. Although some mining companies, notably zinc and nickel miners, have slashed production, demand has fallen much more, so prices will remain under pressure in the short term. For example, the oil price is now expected to bottom at US$30 per barrel.

As for gold, TD forecasts that fears about deflation and disinflation could put downward pressure on prices in the near term, but a projected drop in the U.S. dollar in 2009 will support the gold price.

The global economy will start firming toward the end of 2009 and into 2010, lifting commodity demand and prices. TD projects a 55% rebound in the TD commodity index by the end of 2010, led by more than doubling of the oil price to US$75 per barrel. Excluding energy, the index will rebound by only 22%. Commodity prices are not projected to reach their boom peaks, since global economic growth in 2010 is forecast at a lukewarm 3.2%, substantially below the 4–5% growth rates seen during the boom.

Another factor which will limit commodity price appreciation is lower investment demand, since other asset classes will also rebound, so they will compete for the same investment dollars.

TD projects that oil will cost US$45 per barrel in December 2009, rising to US$75 in December 2010. Thermal coal in Australia will cost US$65 in December 2009, rising to US$100 in December 2010. The silver price will be US$9.60 per oz. in 2009, rising to US$10.50 in 2010. Aluminum will cost US75¢ per lb. in 2009, rising to US$1 in 2010. Copper will cost US$1.50 per lb. in 2009, rising to US$1.80 in 2010. Nickel will cost US$5.15 per lb. in 2009, rising to US$6.50 in 2010. The zinc price is projected at US48¢ per lb. in 2009 and US70¢ in 2010. Uranium oxide is projected at US$52 per lb. in December 2009, and US$65 in December 2010.

TD forecasts that the only commodities which will see price falls between 2009 and 2010 will be gold and newsprint. The gold price is projected at US$815 per oz. in December 2009, falling to US$700 in December 2010.