Energy and Natural Resources Market Radar (December 12, 2011)

Energy and Natural Resources Market Radar (December 12, 2011)

Strengths

• In another sign of robust emerging market oil demand, China’s refineries boosted daily oil processing to a record last month after state plants maximized production to ease a domestic diesel shortage. Refining rose 5.4 percent to 9.25 million barrels a day in November from October, surpassing a record of 9.22 million barrels a day in February. Refiners are boosting production after plant seasonal maintenance led to a supply shortfall. China Petrochemical Corp., which supplies more than half of the nation’s fuel, will raise its refinery runs to 4.3 million barrels a day in November, the second-highest on record.
• U.S. ethanol production hit an all-time high last week, according to the latest figures from the Energy Information Administration. For the week ending December 2, ethanol production averaged 954,000 barrels per day, which is a new record, 24,000 barrels more than the previous week. Getting close to the end of the year now, the four-week average for ethanol production stood at 929,000 barrels per day, which translates to an annualized rate of 14.25 billion gallons.
• Costs to hire Capesize vessels in the Atlantic Ocean headed for Asia climbed to a 2011 high for a second day this week on stronger demand to transport iron ore and coal. Rates climbed to $55,550 a day, according to the Baltic Exchange, the highest rate since Nov. 10, 2010.
• Palladium prices have rallied 21 percent in the last two weeks on speculation that gains in car sales will boost demand for the metal used in pollution-control devices. Global purchases will rise 6.5 percent to a record 79.5 million cars and light commercial vehicles in 2012, according to LMC Automotive Ltd., a research company in Oxford, England. Also, U.S. sales of light vehicles in November expanded at the fastest pace in more than two years.

Weaknesses

• In a perpetual European headline vortex in anticipation of an outcome from the EU summit, energy stocks, which were up 10 percent last week, decreased 3-5 percent this week. Commodities overall were down for the week, with palladium being an exception, up just over 6 percent.
• Gold has been held hostage by macro developments in Europe this week. Yesterday’s price action was testament to just how focused on Europe market participants currently are: a sharp sweep higher on the ECB policy easing and varied efforts to stabilize the financial system were quickly reversed and the metal gave back all of the week’s gains after ECB President Draghi indicated firmly that the central bank would not act as a lender of last resort in any way, and that the EU treaty does not allow for the ECB to monetize sovereign debt. This came as a blow to hopes for European quantitative easing, which would be a powerful catalyst for higher gold prices if it were to materialize.
• Expectations for a positive outcome of the EU Summit have been running high, suggesting that most participants may already have adjusted positions. The UBS Economics team anticipates an agreement among the eurozone member countries, which would lay out fiscal rules, including sanctions against violators.

Opportunities

• CLSA research highlighted that Wood Mackenzie, mining consultant, unveiled a bullish outlook for the coal market at its global energy forum. Wood Mackenzie sees China’s thermal-coal imports and delivered prices rising to over 400 million tons and $150 per ton, respectively by 2020. Additionally, the firm expects a strong import growth and pricing, and cites that coal equities remain attractive.
• China may see its demand for iron ore reach 1.13 billion metric tons by 2015, said the Ministry of Industry and Information Technology when preparing the newly issued steel industry blueprint for the 12th five-year plan period. Last year, China consumed 920 million metric tons of iron ore. The country imported 618 million metric tons of iron ore from 40 countries last year, which accounted for 67 percent of the total consumption, up from 35 percent ten years ago, due to the rapid development of the high energy-consuming steel industry. In the first ten months, China’s iron ore imports grew 10.9 percent year-over-year and its domestic output of the mineral grew at a fast pace of 26.4 percent.
• The rise of the middle class in emerging markets is driving increasing protein consumption. The growth of U.S. beef export volumes and the anticipation of substantial demand growth in coming years with new customers and growing appetites for beef is creating an exciting prospect for the beef industry. In the first three quarters of this year, U.S. beef exports amounted to more than 2.1 billion pounds and were 27 percent larger than export volumes during the same period a year ago. Over 10 percent of the beef produced in the U.S. is now exported and the U.S. is now a net exporter of beef.
• The prospect of oil topping $150 a barrel within a year has become the biggest bet in the options market as the U.S. and Europe work to limit Iran’s crude sales. The number of outstanding calls to buy oil at $150 next December has jumped 29 percent, more than any other option on the New York Mercantile Exchange. The contracts equate to about 38 million barrels of oil, or 43 percent of daily global demand, based on data from the U.S. Energy Department.

Threats

• BBC News reported that China warned of “severe challenges” to exports to the west, attributable to economic difficulties in key Western markets. Sales to Europe and the U.S., which is about 40 percent of total exports, were also not expected to recover next year. Exports to the European Union and the United States fell 9 and 5 percent, respectively, in October versus a year ago.
• The U.S. Environmental Protection Agency (EPA) this week released a draft analysis of results from its Pavillion, WY ground water investigation of suspected drinking water contamination from shale gas fracturing. The EPA says deep monitoring wells in the aquifer contain synthetic chemicals, like glycols and alcohols consistent with gas production and fracking fluids, benzene concentrations well above Safe Drinking Water Act standards, and high methane levels. Detections in drinking water wells, however, are generally below limits established in health and safety standards. The investigation continues, but points toward the need for baseline monitoring.
• Twenty-five out of 77 large- and medium-sized steelmakers incurred total losses of 2.13 billion in Chinese Yuan in October.