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January 06 2015

Commentary by David Fuller

Cheap Oil Is Rich Opportunity for Asia

Across Asia, the lowest crude prices since 2009 are an almost unmitigated boon. Already, they've given Indonesia and Malaysia room to curb budget-busting fuel subsidies (although Malaysia, an Energy exporter, will suffer from a drop in oil revenues). In Japan, the Philippines, Singapore, South Korea, Taiwan and Thailand, sliding Energy costs stand to boost disposable incomes, household demand and corporate profits. Economist Glenn Maguire at Australia & New Zealand Banking Group thinks this "confidence multiplier" will lead to higher-than-expected growth. The drop in oil prices so far could add as much as 1 percentage point to global output. "We think this will be the defining, constructive dynamic that underpins Asian growth in 2015 and most probably 2016," Maguire says.

As India's Modi prepares to unveil his first full budget in February, he could hardly ask for a fairer tailwind. In the short run, says Peter Redward, principal at Redward Associates, oil trends will lead to a "massive improvement" in India's current account deficit, repair the government's balance sheet and restrain inflation, which should allow the central bank to cut rates.

Whether the pickup in growth can be sustained will depend on how bold Modi chooses to be next year. The Indian prime minister wisely slashed diesel subsidies when oil prices dropped, easing the hit consumers felt at the pump. But that was the easy part; it’ll be tougher to cut subsidies on liquefied petroleum gas and kerosene, which millions of Indians use for cooking. Together with diesel, subsidies for those two fuels cost the government $11 billion in the last fiscal year. Likewise, Modi will have to spend considerable political capital to abandon discounts on fertilizer. Without such cuts, it'll be difficult to free up space for more productive fiscal spending on infrastructure, education and health care. 

Nor can Modi afford to delay supply-side reforms. In addition to lower fuel bills, 2015 will feature a light election calendar: Only two of India’s 29 states will hold contests. This could well be the prime minister's best chance to push through politically difficult measures, such as allowing foreigners to hold majority stakes in key domestic sectors.

David Fuller's view -

Modi is ambitious, experienced and far more economically savvy than the head of government in most other countries, developed or undeveloped.  He also has an overall majority and a responsible central banker, so I do not think he needs our advice on how to run India’s economy. 

All politicians need an element of luck, and considerably lower oil prices are a huge benefit for all countries which import most of their Energy.  Luck has favoured them, although today’s prices for crude oil are in reality, a triumph for US technology.  Modi would also benefit considerably from a good monsoon, which he did not get in 2014.  However, this is in the hands of the weather gods.   

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January 06 2015

Commentary by David Fuller

Email of the day 1

On the third industrial revolution:

“I fully agree with your sense that the Third Industrial Revolution has a long way to run. I give presentations on this topic around the world. Analysis of the 1st and 2nd Industrial Revolutions shows they spanned 3-5 decades and involved not only a new communication system but new financial systems and new Energy sources too. The 1st Industrial Revolution from 1780-1830 involved synergy between the new Energy source (coal), the new communication system (coal-powered printing presses leading to mass newspapers and mass education for the first time ever, and the new financial system (the London stock market. The 2nd Industrial Revolution from 1880-1920 was driven by oil then electricity as the new power sources, the telegraph then telephone as the new communication system, and the Limited liability company as the financial breakthrough. Our present-day 3rd Industrial Revolution began with the Internet in the mid-1990s, and that part is progressing nicely. But the new Energy source (solar) is only just getting going, and we await a new financial system! When all three are in place and well-developed decades from now the world will be a very different place. Though I doubt the economics profession will have progressed quite so much!”

David Fuller's view -

Thanks for your informative email on a favourite subject, and your droll concluding sentence was also appreciated. 

Perhaps I lack imagination (or have too much of it) or hope to see too much more in my lifetime, but I think this ‘Industrial Revolution’, which I refer to as a visibly accelerating rate of technological innovation, has no natural end.  It includes the internet of everything, achieved with miniaturisation, plus new manmade resources such as graphene which will vastly improve the efficiency of many products, from solar Energy panels to infrastructure construction.  I believe that within the lifetime of middle-aged people we will also see new nuclear in various different forms and possibly also the holy grail of commercial nuclear fusion.  I also think we are only approaching the foothills of what will be an accelerating rate of development in artificial intelligence. Sentimentally, I hope that Stephen Hawking’s recent prediction on AI does not come true, although his conclusion was certainly logical. 

Lastly, I hope those of us in the London area and attending Markets Now on 12th January (see below) will question speakers’ views, not least Charles Elliott on his choices for performance among technology shares.      



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January 06 2015

Commentary by Eoin Treacy

Commodities Outlook 2015

Thanks to a subscriber for this report dated December 15th from Deutsche Bank which may be of interest. Here is a section: 

The fundamentals of copper do not mirror that of oil. In copper, there is no technological breakthrough which has opened up vast new resources, therefore copper should not suffer the same fall in pricing as that of oil. The fallout from oil has however impacted the overall sentiment towards commodities. However, copper remains a well-supplied market, and a lower oil price in combination with weaker producer currencies will lower the marginal cost support level, which we now estimate at USD5,800/t.

We continue to forecast a surplus market in copper for 2015E and 2016E, which in our view will see prices grind lower. However, we have cut the magnitude of the surpluses in both 2014 and 2015E by 200kt over the course of the year. The big increase in mined supply growth that we had previously forecast has been eroded by the latest round of downgrades to company guidance. Although we forecasts a more substantial surplus in 2016, we think risks are skewed to the downside, given the poor industry track record in delivering growth.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Energy represents a significant cost for mining companies and has been a major contributor to the commodity price inflation witnessed over the last decade. One might expect lower Energy prices to be a benefit for mining companies and they are. However the hard reality is this only helps marginal producers to survive longer and therefore prolong the supply surplus.

Oil prices are accelerating lower so Energy costs for mining operations have halved since the summer. This has contributed to the recent weakness in the industrial metal prices. The LME Metals Index broke downwards to new three-year lows this week and a clear upward dynamic would be required to check potential for additional weakness. 

 



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January 06 2015

Commentary by Eoin Treacy

Top Bond Managers Plan for 2015 Energy Rebound

This article by Matt Robinson for Bloomberg may be of interest to subscribers. Here is a section: 

Ken Leech, chief investment officer at Western Asset Management Co., has been adding Energy assets slowly, including debt from California Resources Corp., an exploration and production company. The Western Asset Core Plus Bond fund gained 3.02 percent after the risk adjustment.

Leech said he sees value in CMBS, residential-mortgage backed securities and U.S. investment-grade corporate bonds. The extra yield investors demand to hold company debt rather government notes rose last year for the first time since 2011 on slower global growth, which reduced returns. That trend probably will reverse this year as the economy accelerates.

 

Eoin Treacy's view -

I highlighted a number of high yield ETFs in a piece before Christmas when they were testing areas of previous resistance. I was led to this investigation by curiosity as to whether they had been affected by the fall in oil prices. What I discovered is that funds like HYG do not hold appreciable quantities of Energy sector debt and that the sell-off in high yield was more macro focused. 

In an effort to ascertain what effect the fall in oil prices has had on the debt markets I performed a search on Bloomberg for junk bonds, with ratings below BBB- and in the Energy sector. Coal companies, a number of which are at risk of bankruptcy, have the highest yields. 

 



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January 05 2015

Commentary by David Fuller

Email of the day 2

More on French nuclear power stations:

“The Government, which was in coalition with the Greens, decided to increase the % of "green" energies to reduce the French dependence (they should say independence) on nuclear electricity. To please the Greens, during the Presidential electoral campaign in 2012, Hollande promised to close Fessenheim (the oldest French nuclear plant). Since the departure of the remaining green ministers earlier this year, there are still talks of closing it down but other talks of lengthening its life (from what I read I doubt it since it would be very costly). In France, there is one nuclear plant under construction using a new technology  (EPR -Evolutionary Pressurized Reactors- a 3rd generation of PWR -Pressurized Water Reactor) in Flammanville; the second one has been suspended by EDF following Fukushima; in 2013 EDF announced that current demand did not warrant launching its construction. The first one under construction is in Finland and is a kind of financial disaster for Areva being 5 years behind schedule(!) so far and will probably increase to 9 years, due to design and construction problems (I understand the construction of this new generation is rather complex - I guess these are "normal" glitches for new babies).

“The French nuclear lobby is very powerful in France (even the communists are pro-nuclear) and I do not see how France could achieve 50% nuclear electricity by 2025 from 75% currently. The French nuclear plants are getting rather old and will need to be replaced: my guess is that most will be replaced but for any unforeseeable event.

“France badly needs nuclear electricity to balance (a bit) its Energy trade deficit. According to Areva, the nuclear industry represents EUR 6 billion of annual exports, employs 125,000 workers (410,000 in indirect and induced employment is added) plus several EUR billions of electricity exports. Finally, electricity is cheaper in France than Germany, one of the few competitive advantages of France.

“I have been very bearish on the French economy and I do not see any fundamental improvement. How long will the Germans tolerate France always signing agreements and never abiding by them? Time is running really short, and we are in an environment of artificially low interest rates which, when going up again, will really hurt the French budget (today, interest payments are higher than the income tax...). The mood in France is really bad (when talking to family and friends). I wrote an article a couple of years ago where I explained that it was France and not Italy that was the sick man of Europe, and I believe that the "chance" of an EU breakdown more possible than ever.”

David Fuller's view -

Thank you so much for this very detailed and informative summary.  The haunting question I ask myself: How much more prosperous might France and indeed most other European countries be today, without the Euro and the vast, often undemocratic and very expensive Brussels regime?  



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January 05 2015

Commentary by Eoin Treacy

Euro Slides to Weakest Since 2006 on ECB and Greece as Dollar Gains

This article by Lananh Nguyen and Lukanyo Mnyanda for Bloomberg may be of interest to subscribers. Here is a section: 

The euro slid against most of its major peers after President Mario Draghi said in an interview with German newspaper Handelsblatt published Jan. 2 that policy makers were ready to act if needed to counter deflation.

“The risk that we don’t fulfill our mandate of price stability is higher than it was six months ago,” Draghi said.

“We are in technical preparations to alter the size, speed and composition of our measures at the beginning of 2015, should this become necessary.”

Greece began an election campaign that Prime Minister Antonis Samaras said may lead to an exit from the euro region should the Syriza party win. Der Spiegel magazine reported German Chancellor Angela Merkel considers a Greek exit from the euro to be manageable.

 

Eoin Treacy's view -

The Austrian School of Economics has a justifiable fear of the impact inflationary policies have on the assets of savers not least because of the region’s experience in the early part of the last century. Government bond yields below the expected rate of inflation represent a significant challenge for savers who have relied more on the momentum in prices to contribute to total return than yields over the last few years. 

There is little potential for the situation to change with deflation still a factor in the Eurozone’s deleveraging, disinflation in the Energy markets and the potential for Greece to vote in favour of an anti-establishment party in its upcoming election. The ECB will announce later this month just what it has planned in terms of additional extraordinary monetary policy but its balance sheet is already expanding. 

 



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January 05 2015

Commentary by Eoin Treacy

Kravis KKR Leads Record Sales by Private Equity Firms in 2014

This article by Devin Banerjee for Bloomberg may be of interest to subscribers. Here is a section: 

“The exit activity is particularly significant, as many managers were still looking to exit deals done in the pre-crisis years and have been waiting for improved selling conditions,” said Christopher Elvin, Preqin’s head of private equity products.

Other big divestitures included Apollo’s $6.8 billion sale of oil and gas producer Athlon Energy Inc. to Encana Corp., which netted Apollo $2.2 billion in profit; Blackstone’s continued sale of shares in Hilton Worldwide Holdings Inc., the most profitable private equity deal ever; and Carlyle’s profit from Apple Inc.’s purchase of headphone maker Beats Electronics LLC, in which Washington-based Carlyle owned a minority stake.

Eoin Treacy's view -

A number of subscribers were wondering in the latter half of 2014 whether private equity firms would be capable of sustaining their outsized dividends. One way of looking at this question is as long as they are reaping the profits from earlier investments rather than raising debt to fund new purchases one might conclude they will continue with their partnership distributions. 



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December 31 2014

Commentary by David Fuller

U.S. Easing of Oil Exports May Foil OPEC Strategy

The Obama administration’s move to allow exports of ultralight crude without government approval may encourage shale drilling and thwart Saudi Arabia’s strategy to curb U.S. output, further weakening oil markets, according to Citigroup Inc.

A type of crude known as condensate can be exported if it is run through a distillation tower, which separates the hydrocarbons that make up the oil, according to U.S. government guidelines published yesterday. That may boost supplies ready to be sold overseas to as much as 1 million barrels a day by the end of 2015, Citigroup analysts led by Ed Morse in New York said in an e-mailed report.

Saudi Arabia led the Organization of Petroleum Exporting Countries to maintain its production quota at a meeting last month even as a shale boom boosted U.S. output to the highest in more than three decades. That prompted speculation OPEC was willing to let prices fall to force some companies with higher drilling costs to stop pumping.

“U.S. producers are under the gun to reduce capital expenditures given lower prices,” Citigroup said in the report. “Now an export route provides a new lease on life that can further weaken crude oil markets and throw a monkey wrench into recent Saudi plans to cripple U.S. production.”

Current U.S. export capacity is at about 200,000 barrels a day, which could be expanded to 500,000 a day by the middle of 2015, according to the bank.

David Fuller's view -

Commodity wars in the 21st century to date mostly involve knocking out export competition.  That is good for the global economy, corporations and consumers, provided countries are not overly dependent on exporting the commodities in question. 

President Obama has mostly opposed the US oil industry, despite benefitting from it.  However, led by the US Energy sector’s technological advances, he is now going for OPEC’s jugular.  That means weakening the Saudis who have been leading the cartel forcing oil prices higher since the 1970s.  Obama’s second target is the ruthless and irresponsible dictator Putin, who is still a major threat to Europe and possibly beyond. 

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December 30 2014

Commentary by Eoin Treacy

Musings From the Oil Patch December 30th 2014

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section

The EIA later makes the following point about its scenario in which there is even greater closures of coal-fired power plants, which was authored prior to the EPA’s introduction of its new carbon emission restriction plans for existing power plants. “If additional existing coal-fired and nuclear generating capacity were retired, natural gas-fired generation could grow more quickly to fill the void. In recent years, the number of coal and nuclear plant retirements has increased, in part due to a decline in profitability as low natural gas prices have influenced the relative economics of those facilities. The Accelerated Coal Retirements case assumes that both coal prices and coal plant operating costs are higher than in the Reference case, leading to additional coal plant retirements. In this case, natural gas-fired generation overtakes coal-fired generation in 2019, and by 2040 the natural gas share of total generation reaches 43%. In the Accelerated Coal and Nuclear Retirements case, the natural gas share of total generation in 2040 grows to 47%.”

What if there isn’t sufficient natural gas available, at least at reasonable costs? That would create a serious economic hardship on Americans and the American economy. We suspect one immediate remedy would be to ban the export of all LNG from this country. If possible, there could also be some restrictions imposed on gas exports to Canada and Mexico. If the gas shortage proved even more severe, we would probably begin restarting coal-fired power plants, much like the UK is doing this winter at a significant cost merely to ensure that the UK has sufficient power generating capacity available. What would that cost our economy both financially and in greater carbon emissions? Maybe by the time the gas shortages become severe, we will have addressed the storage challenge for intermittent renewable power sources. Building new nuclear power plants might become an option, but we know that they take years to be constructed so they are not a short-term solution. In either case, the EPA is counting on the EIA’s abundant gas supply scenario as it moves forward with power plant shutdowns.

While this debate over gas production forecasts may seem like a tempest in a teapot, its significance should not be understated. The impact on the future economic strength of the United States if insufficient gas resources are available cannot be underestimated. Not only would we have misallocated Energy capital for decades, but we would have significantly altered the health of our public utility industry, possibly leaving it so weak it could not meet the needs of its customers, forcing the federal and state governments to have to bail out the industry. Maybe we need a “time out” before we rush to implement the EPA’s plan to restrict the carbon emissions for power plants to the degree that we force the retirement of much of our coal-fired generation capacity. Rest assured that the gas production forecast debate, while seemingly academic at the moment, will become a much more serious and a more mainstream issue in the coming years.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Shale gas has, as predicted, been a true game changer for the Energy sector. Let’s look at this question from both the supply and demand sides of the equation. 

On the demand side the EPA is wholeheartedly devoted to the climate change hypothesis. In order to deliver upon commitments to reduce carbon emissions, it is imposing progressively more stringent regulations on coal fired power stations. Since natural gas prices are competitive with coal at current levels this has had little effect on consumers. However it is worth considering that coal is the largest fuel for electricity generation at present and the USA is by far the world’s largest economy. Replacing even more coal with natural gas is going to require a great deal more natural gas than is currently used.

 



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December 29 2014

Commentary by David Fuller

Oil Falls to 5-Year Low as Supply Glut Seen Lingering

Here is the opening for this report from Bloomberg:

Oil tumbled to the lowest level in more than five years on speculation a global supply glut that’s driven crude into a bear market will continue through the first half of 2015. West Texas Intermediate fell 2.1 percent while Brent slipped 2.6 percent, reversing early gains spurred by an escalating conflict in Libya. Fires have been extinguished at three of six tanks at Es Sider, Libya’s largest oil port, which were set ablaze after an attack by militants, said National Oil Corp. spokesman Mohamed Elharari. Crude also fell as the dollar climbed to a two-year high against the euro, reducing the appeal of raw materials as a store of value.

Futures plunged 46 percent this year, set for the biggest annual drop since 2008, as the Organization of Petroleum Exporting Countries resisted supply cuts to defend market share in response to the highest U.S. output in three decades. Trading was below average amid Christmas and New Year holidays.

“We’re looking at a significant supply-demand surplus through the first half of 2015,” Tim Evans, an Energy analyst at Citi Futures Perspective in New York, said by phone. “The problems in Libya and any reduction in the growth of U.S. production will only help limit the surplus, but it’s not going away anytime soon.”

David Fuller's view -

The continued weakness of Brent and WTI crude oil is clearly positive for oil importing countries and their consumers.  However, it will also be disruptive for many oil producers in 2015, not least Russia and Venezuela, and there may be some debt defaults.   

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December 23 2014

Commentary by David Fuller

Roger Bootle: Can President Putin Explain How Osborne Conspired To Bring Down the Oil Price?

The headline is a tongue-in-cheek repetition of the last sentence of this upbeat article from The Telegraph.  Here is the opening: 

In my last column before Christmas, I traditionally have liked to bring some good cheer. As you may recall, there have been some years when this has been a herculean task.

But this is not one of them.

I will leave a review of the year just passed to next week’s column. Today, I want to write more about one of the year’s most important developments: low global oil prices. The tale I tell is about the overwhelming power of markets and prices over politics.

Some weeks ago, I stressed that I thought that oil prices would fall further but even I had not imagined that they would fall as far or as fast as they have. Of course, we still do not know whether this is a flash in the pan. It could be. But it doesn’t feel like it.

Three factors have come together to produce this big drop. The first is the slowdown in the world economy, led by China, but reinforced by the sluggishness of the eurozone. The second is increased supply, principally due to the shale fracking revolution in the US. And the third is the collapse of cohesion in Opec.

The third of these seems essentially political in origin and, I suppose, could go into reverse. The key player here is Saudi Arabia.

Supposedly, it wants low oil prices to hurt its traditional rival in the area, Iran, which is more vulnerable financially. Yet there are also sound economic reasons behind the apparent fracturing of Opec’s power.

For the oil-producing group to work, when there is downward pressure on prices Saudi Arabia, the so-called swing producer, has to cut output.

For it to agree to this, it has to be sure that other producers will not step into the breach and supply the oil that Saudi has cut back. It has always been a temptation for others to do this, and to some extent they always have.

This issue has taken a new twist with the resurgence of US production. Saudi wants to hammer US shale producers to deter long-term supply. This represents a return to traditional Saudi oil policy.

The late Saudi oil minister, Sheikh Yamani, was fond of telling audiences that when the Stone Age came to an end it was not through a shortage of stones. The danger was that the Oil Age would come to an end, not through a shortage of oil, but instead through the production of oil substitutes and increased efficiency.

David Fuller's view -

Subscribers are certainly familiar with the OPEC oil situation up to at least this point.  Yes, it is clearly a boost for the UK and every other oil importing country.  The anti-UK and particularly anti-English leaders of the Scottish Independence Party should be counting their blessings over losing their divisive referendum, although I do not expect to hear that from Alex Salmond or Nicola Sturgeon.   

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December 23 2014

Commentary by David Fuller

Gary Shilling: Who Gets Hurt When Oil Falls

Here is the opening of this second report on oil by the author, published by Bloomberg:

When the Organization of Petroleum Exporting Countries failed to cutproduction quotas last month, the initial investor reaction was: Hallelujah! Lots more savings for Energy buyers! Blowout Christmas spending by consumers!

The celebrations may have been premature.

True, the $1 decline in U.S. gasoline prices since April is the equivalent of a 1 percent rise in consumer spending power. Of course, some of that may be saved and not spent, at least initially. And in countries with fixed fuel taxes, including China, the economic effect will be greater. At the same time, U.S. auto makers may benefit from increased sales of low-mileage SUVs and light trucks, which are highly profitable. 

Net Energy importers, including Japan, South Korea and other East Asian countries, also benefit from lower Energy prices. China imports 60 percent of the 9.6 million barrels of oil it uses each day.  

Other Energy importers helped by lower prices include India, Turkey and Western Europe. Pakistan, Egypt, India and other countries that subsidize Energy costs will be able to reduce those expenses. Some of the benefit, though, is offset because the euro and other currencies are weak and oil is priced in more expensive U.S. dollars. 

But the list of oil losers may overpower the winners. Almost immediately, Energy companies started to cut capital spending, which equaled 0.9 percent of U.S. gross domestic product in 2013, the largest share since the early 1980s. An index of oil-field service companies is down about 40 percent from its peak. 

David Fuller's view -

There are some interesting and controversial points in this article but my view remains unchanged.  Prices near $60 a barrel are a major benefit for countries that import most of their crude oil.  Oil exporters are the big losers, especially high-cost producers.  There are more of the former countries, many of which also have large populations, so lower oil prices are a net gain for the global economy.



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December 23 2014

Commentary by Eoin Treacy

Tech hardware and supply chain, Ten themes to watch in 2015

Thanks to a subscriber for this detailed report from Deutsche Bank, dated December 8th, but no less relevant today. Here is a section:  

What is Big Data?
The terms Big Data and Big Data Analytics are often used interchangeably, but they differ in one fundamental way. Big Data describes the processes used to collect and store large amounts of data. A data set is generally considered big when traditional relational databases or statistical programs become difficult to work with on existing hardware platforms. When this happens, new techniques must be used which are based on distributing the processing of the data set across hundreds or thousands of servers. Examples of these data sets can include shopping patterns collected by customer loyalty cards or location information collected from iPhones. Big Data Analytics is the process of collecting value from that data.

Market size and growth expectations for the Big Data market
IDC estimates that the combined Big Data and Business Analytics market was a $115B market in 2013, with Big Data representing 11% of the total, while Business Analytics represented 89% of the total. As seen in Figure 10, the combined market is expected to grow at a CAGR of 13% over the next 5 years, reaching $214B by 2018. The Business Analytics market is expected to grow at a CAGR of 11% during this period to a $173B market by 2018, largely driven by growth in services and software to support Business Analytics, while the hardware to support that growth is only expected to see modest growth. 

The Big Data market is a smaller market than analytics and was a $13B market in 2013. As seen in Figure 11, the Big Data market is expected to grow at a CAGR of 26% over the next 5 years, driven largely by growth in hardware to support Big Data. Servers and storage to hold Big Data are expected to see growth of 28-29% during this period, with this growth significantly helped bycloud infrastructure which is expected to grow 41% over the next few years. Growth in Big Data is being driven by increased use of social media, the digital market place, the proliferation of mobile devices, and the growth in the Internet of Things (IoT).

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The technology sector is in a constant state of flux, such is the rapid pace of innovation across its various subsectors. However some clear themes are evident such as mobility, connectivity, the accelerating output of data points from every part of our lives, increasingly intelligent machines capable of self diagnostics and rapid prototyping. All of these innovations are not occurring in isolation but are collaborative, so that developments in one area are quickly co-opted to accelerate growth elsewhere. While big data uses might be most apparent in social media and advertising, its application to the industrial, Energy and healthcare complexes is even more important. 

 



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December 23 2014

Commentary by Eoin Treacy

The Commodity Manual

Thanks to a subscriber for this report from Morgan Stanley. Here is a section on the cattle market: 

Cattle on feed data partially vindicates last week’s stampede. Cattle markets locked limit-down early in the week as participants squared positions ahead of Friday’s Cattle on Feed report in the face of weakening slaughter data and concerns over potentially improving seasonal feeder cattle supply. The feeder cattle contract, which has outperformed live cattle by 1100 basis points YTD, lost 4% in the first three days of the week before recovering slightly on Friday. Live cattle faced a similar, though shallower decline, ending the week down less than 1% WoW. Friday’s data largely justified the bearish move, with Dec 1 feedlot inventories rising 1.4% YoY vs consensus expectations of a 1.2% increase. Some may read this report as more bearish for live cattle than for feeders, as an 11.1% decline in marketings YoY (vs consensus expectations of just a 9.8% decline) indicated continued weakness in slaughter demand. Meanwhile placements down 4% YoY (vs consensus predictions of a 3.4% decline) could be read as a sign that feeder supply remains challenged. However, we see the weakness in placements as signaling poor demand from feedlots rather than supply constraints. Average placement weights set a 5+ year high in Nov, signaling that ranchers are still holding back cattle to raise them to higher weights, artificially inflating prices. With high feeder cattle prices keeping feedlot margins under pressure and slaughter demand prospects weakening, feeder cattle prices may need to weaken further relative to live cattle to increase the flow of feeder cattle onto feed as winter reduces grazing options.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Cattle prices have been among the best performing commodity contracts this year. Part of the reason for this was that the 2013 surge in grain and feed prices advanced the slaughter schedule resulting in a smaller herd and an inability to increase supply in 2014. Against this background demand has been relatively stable. 

A look at a long-term chart of cattle pricing highlights its cyclical nature. What has been different about this move has been its size and longevity which can at least be partially explained by rising feed and Energy costs as well increasing demand from the global middle class. 

 



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December 19 2014

Commentary by David Fuller

Oil Production and Climate Change

My thanks to a relative for this interesting and detailed report by James W Murray, School of Oceanography, University of Washington.  Because it consists mostly of graphics, here is the briefest opening:

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”

Mark Twain

There are many, many things that the public and policymakers know for sure about Energy that just ain't so.

"We like to think that the reason we enjoy our high standards of living is because we have been so clever at figuring out how to use the world's available resources. But we should not dismiss the possibility that there may also have been a nontrivial contribution of simply having been quite lucky to have found an incredibly valuable raw material that for a century and a half or so was relatively easy to obtain."

- James D. Hamilton (Dept. of Economics, UCSD)

Oil Production has beenon a plateau since 2005

David Fuller's view -

Many thanks for this interesting and informative report.  I have been reading, trying to learn from, and commenting on Energy reports for over 45 years.  Most have proved to be quite inaccurate, in terms of long-term forecasts, largely because their authors did not fully appreciate the march of technology.  Many also had biases, across the widest range, from green alarmists to industrial deniers.  Moreover, if what we know about Energy production and technology had remained unchanged from the '60s or '70s, we would be living in a much more economically depressed and Energy challenged environment today.  I think you could say the same about what we know today, relative to what will happen during the rest of our lives and well beyond.

Of course Climate Change is extremely important and worrying, and we are but one of its major causes, if we consider the long-term history of our planet.  Coal is currently the cheapest Energy source, widely available and the biggest pollutant.  Fortunately, the use of coal is being phased out by many countries, not least in China, for health reasons. 

Greens and political alarmists such as Al Gore persuaded Germany to invest fortunes in inefficient wind mills and early solar projects.  As a consequence, in addition to some of the world's highest Energy costs, Germany is burning more coal today because the renewables need back-up coal-fired plants to offset frequent, sudden shortfalls when the wind is not blowing or the sun is not shining.   

France closed some of its older nuclear power stations following Japan's Fukushima nuclear disaster in March 2011, caused by a massive earthquake and tidal wave.  Today, France burns more coal for the same reasons as Germany, and both countries have considerably weaker economies.  These mistakes have been repeated across much of Europe and the UK.

The report above, interesting though it is, has biases and inaccuracies, such as the sweeping generalisations in points 3 & 4 below:

3. They are environmentally damaging because the fracking fluid is highly toxic and much of it escapes during the blowback process and sometimes water wells are contaminated.

4. Because each well has low flow and depletes quickly, massive numbers of wells must be drilled creating significant infrastructure damage to roads and bridges. Currently no state or municipal authorities are capturing anything close to the total cost of the infrastructure damage from the shale operators which means taxpayers are gong to be left paying those bills.

 This item continues in the Subscribers’ Area, where the report is also posted.



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December 19 2014

Commentary by David Fuller

Berkshire Energy Fined for Eagle Death at Wyoming Wind Farms

Here is the opening of this distressing report from Bloomberg:

PacifiCorp, one of the utilities owned by Berkshire Hathaway Inc. (BRK/A)’s Energy unit, agreed to pay $2.5 million to settle charges that its wind facilities in Wyoming killed eagles and other birds.

The deaths near the Seven Mile Hill and Glenrock/Rolling Hills wind farms violated the Migratory Bird Treaty Act, according to a statement today from the utility. PacifiCorp said it will pay $400,000 in fines, $200,000 in restitution to the Wyoming Game and Fish Department and $1.9 million to the National Fish and Wildlife Foundation to help protect golden eagles near the facilities.

David Fuller's view -

Good.  I hope they continue fining nice Warren Buffett and other owners of wind farms which remain cuisenaires for birds, and also drive people mad who have the misfortune to live nearby.   



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December 19 2014

Commentary by David Fuller

Iain Little: Global Thematic Investors

Here is a brief sample from Iain’s latest Fund Manager’s Diary:

The market has focused its laser gaze on negatives. Q: How much oil-related corporate debt is there? (A: about 15% of US recent issuance occasioned by the fracking capex boom,; a lot, but hardly a disaster) Q: How will Mr Putin react? (A: ask Mrs Putin; like Mr Putin, an unknowable unknown.) Q: Where are the bankruptcies? (A: it depends on how long resources languish at these levels, but there will be casualties; there always are) Q: Is oil's weakness a symptom of a wider economic malaise (A: maybe, but one detects the hand of swing-producer Saudi Arabia, rattled by US fracking, seeking to embarrass both the fracking and renewable Energy communities; it only adds to general merriment in Riyadh if political scores-Russia, Iran, Venezuela come to mind- can be settled at the same time)

David Fuller's view -

If you would like to meet Iain Little, a fellow subscriber to this service for decades, you can do so and hear his views, particularly on the important subject of Investment Trusts (closed-end funds) at the next Markets Now meeting in London on 12th January – see details below.  



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December 19 2014

Commentary by David Fuller

You Are Not Disabled. You Eat Junk

Here is the opening of this topical article from Bloomberg:

The decision by Europe's highest court that obesity can be a disability will only make a bad problem worse. Too many people in rich countries are already overweight. Giving them legal grounds to feel righteous about their condition, regardless of its causes, will almost certainly expand their ranks.

The case brought to the European Court of Justice involved Danish child-minder Karsten Kaltoft, fired by the municipality of Billund in 2010 after 15 years of service. The town attributed the firing to redundancy, but Kaltoft, who is 5'8'' tall and weighs 352 pounds, claimed his employer got rid of him because he was overweight: his weight was mentioned in the conversations that preceded his dismissal. The court was asked to decide whether that would have violated a 14-year-old European Union directive banning discrimination against people with disabilities. 

The matter turned on whether obesity qualifies as a disability. It's not expressly described as such in any Danish or European statutes. But the Court ultimately sided with an opinion filed by Advocate General Niilo Jaaskinen. He argued:

In cases where the condition of obesity has reached a degree that it, in interaction with attitudinal and environmental barriers, as mentioned in the UN Convention, plainly hinders full participation in professional life on an equal footing with other employees due to the physical and/or psychological limitations that it entails, then it can be considered to be a disability.

In other words, if one gets to be so overweight that it hampers one's work, the employer should find ways to accommodate the obese worker, rather than seek to replace him or her. That might mean buying her an extra large chair or even installing an elevator so she doesn't have to use the stairs to get to her workplace. It doesn't matter, Jaaskinen wrote, "whether the person concerned became obese due to simple excessive Energy intake, in relation to Energy expended, or whether it can be explained by reference to a psychological or metabolic problem, or as a side-effect of medication." Even if the disability is self-inflicted, Jaaskinen (and the Court) determined that discriminating on that basis shouldn't be permitted. 

David Fuller's view -

So people who eat too much junk food are not responsible for their own weight?

With rare exceptions in developed countries, of course they are.  You are what you eat.  We are responsible for our actions. 

Temptation is another matter and so is corporate responsibility.  I approve of the pressure governments, the medical profession, health industries and responsible individuals put on firms to provide healthier meals and accurately list all ingredients, not least including sugars, fats and preservatives.  This is sound commercial good sense, judging from the queues I encounter in Waitrose and Marks & Spencer food stores.     



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December 19 2014

Commentary by Eoin Treacy

Stress Testing EM FX

Thanks to a subscriber for this heavyweight report which may be of interest to subscribers. Here is a section: 

We expect this uphill battle to extend into 2015 as the main forces that drove EMFX in 2014 are still in place. However, we believe that these headwinds are poised to ease as the year unfolds, since we believe that: 1) the upside for the USD into 2015 is about one-third of what we saw in 4Q14 (and possibly concentrated in 1Q15); 2) oil prices have already approached the bottom of our expected range; 3) the political calendar will be considerably lighter; 4) policy uncertainty has reduced; and 5) EM growth will likely pick up some steam over the next year. On aggregate, we forecast EMFX spot slightly stronger in 2015. This, plus the usual contribution from carry, as the chart below shows, should eventually benefit portfolio flows.

Central banks: Not to the rescue. As one important byproduct of the recent fall in commodities, investors will still face mostly dovish central banks. In addition to reduced inflationary pressures (mostly outside LatAm), central banks see EM currencies as their main line of defense against external and domestic shocks. This – in addition to policy divergence and differences in exposure to oil – have underpinned our preference for INR, IDR, TRY vs. BRL, RUB – and to a lesser extent ZAR (where downgrade risks will linger) – among the high-yielders.

Although we believe that the dovishness of central banks is to a large extent priced among the lowyielders in EMEA, it will likely continue to weigh on Asia FX. With the JPY, food and Energy prices down, we expect the need to preserve value to drive policy in SGD, KRW, and THB. We also see BNM shifting its line of MYR defense to 3.50, while PHP remains vulnerable to perceptions that monetary policy is falling “behind the curve”. In LatAm, the room for easing monetary policy is a lot less given high inflation and the region’s FX exposure to commodities, but we believe that further easing will keep CLP undervalued in the first part of 2015, at least.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The Dollar’s rally this year not only against the Yen but a host of emerging and developed market currencies has been both outsized and counter to the trend that has prevailed for the better part of a decade. Commodity prices, electoral cycles and central bank actions have all been major factors but the relative strength of the US economy is perhaps the most notable factor of all. 



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December 19 2014

Commentary by Eoin Treacy

Year-Ahead Outlook 2015

Thanks to a subscriber for this report from Deutsche Bank focusing on the credit markets. Here is a section:

 

Historically, it has been the case that lower oil provided a net benefit to the US and EU economies, both of which were large net importers of Energy. This remains the case in EU today, however we wonder to what extent this relationship might have changed for the US in recent years. Just looking at Energy companies in our IG and HY indexes, we are seeing their cumulative capital expenditures since Jan 2010 at $4.7 trillion, with $1.15trln coming in the last four quarters alone. The latter figure translates into 6.5% of the total US GDP, not an immaterial figure. We realize that not all of this capex went into US shale plays, however it is just as important to acknowledge that not all US shale players are captured by our IG/HY index data. What part of this capex budget gets cut next year is subject to uncertainty, however even a relatively modest cut of 10% could translate into a noticeable 65bp impact on broader GDP figures.

What makes this issue even more consequential to the US economy, is that the negative impact of lower oil is unlikely to remain confined just to the Energy sector alone. Some of the more obvious casualties will include capital goods and materials sectors, where suppliers of drilling equipment, pipes, storage containers, machinery, cement, water, and chemicals used in shale production are all likely to experience a negative impact. Now, readers should be careful to avoid double-counting the same dollars here, as a dollar of capex by oil producer is 80 cents of inventory sold from its suppliers; only incremental value-added is captured by the GDP. Add to this list railroads, where volumes exploded in recent years as large quantities of oil were ferried by rail cars.

All these are relatively obvious casualties of a pullback in Energy producers’ budgets. Perhaps somewhat less straightforward would be utilities – we wonder how much electricity was used to power all this new shale-related manufacturing, production, transportation, and refining activity? Taking one more step towards less directly impacted sectors, we think about financials, and not even in a sense of direct loan exposures to cash-flow challenged producers. Energy producers have raised $550bn in new debt across USD IG, HY, and leveraged loan markets since early 2010 (Figure 3). Lower capex budgets would imply lower need (and ability!) to borrow, thus squeezing a revenue source for investment banks.

And now to the least obvious, or perhaps even counterintuitive, candidates: think about consumer discretionary sectors, such as retail, autos, real estate, and gaming. States with the strongest employment growth in the US in the last few years were all states heavily involved in shale development – average unemployment rate in Dakotas, Nebraska, Utah, Colorado, Iowa, Montana, Oklahoma, Wyoming, and Texas is 4.1%, compared to a national aggregate of 5.8%. Average unemployment rate in oil-producing states today is lower than the national aggregate was at any point in time in the last twelve years.

While we still believe that lower oil prices would provide a net benefit to consumer discretionary areas, we think that historical parallels between Energy prices and their positive net effects could be challenged in this episode given significant changes to structural characteristics of the US economy. Just as we believe consensus has consistently underestimated positive externalities of the US Energy revolution in the past few years, it is positioning itself to underestimate the other side of this development now. 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The stock market appears to be currently focused on the benign economic scenario that has allowed the Fed to signal short-term interest rates may increase in 2015. With unemployment back to trend and early signs of wage increases, along with recovering economic growth, the Fed has good reason to want to use this environment as an opportunity to replenish its arsenal of policy tools. Consumers will find that they have extra money in their pocket every time they fill up at the pump or pay of heating oil and these benefits will pass on to Energy consuming sectors as well. 



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December 18 2014

Commentary by David Fuller

S&P 500 Caps Best 2-Day Gain Since 2011 Amid Global Rally

The Dow Jones Industrial Average (INDU) surged the most since 2011 and the Standard & Poor’s 500 Index capped its best two-day gain in three years as global equities rallied on theFederal Reserve’s pledge to be patient on boosting rates.

The S&P 500 added 2.4 percent to 2,061.23 at 4 p.m. in New York. The index climbed 4.5 percent over two days, the most since November 2011. The Dow gained 421.28 points, or 2.4 percent, to 17,778.15, the biggest one-day jump since December 2011. Technology shares soared as Oracle Corp. increased the most in six years. About 8.7 billion shares changed hands on U.S. exchanges, 22 percent above the three-month average.

“Just as with other instances, a dovish Fed is making up for a lot of bad news, fromEurope and from other parts of the world,” Russ Koesterich, chief investment strategist at New York-based BlackRock Inc., said in an interview on Bloomberg Television. “This is why you have this rebound rally after a few days of very harsh losses.”

U.S. stocks are rebounding from a seven-day decline that erased $1 trillion from equity prices and coincided with a 15 percent drop in West Texas Intermediate crude between Dec. 5 and Dec. 16. S&P 500 (SPX) Energy producers tumbled 8 percent over the stretch while chemical and mining companies lost 7.4 percent. The S&P 500 is now 0.7 percent away from wiping out all its losses from the recent selloff.

A full recovery would be the fifth time this year the S&P 500 has come back after falling more than 4 percent from a high. In comparable drops beginning in January, April, July and September, the index needed about a month to erase losses, data compiled by Bloomberg show.

A full recovery would be the fifth time this year the S&P 500 has come back after falling more than 4 percent from a high. In comparable drops beginning in January, April, July and September, the index needed about a month to erase losses, data compiled by Bloomberg show.

David Fuller's view -

The greater two-way volatility confirms that buying and selling pressure are currently more evenly matched.  Nevertheless, there is still no evidence that the bull market has ended, judging from this weekly chart of the S&P 500 Index.

This item continues in the Subscribers’ Area.



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December 18 2014

Commentary by David Fuller

Vladimir Putin Looks Like a Man Trying to Hide His Own Incompetence

Russia has surged ahead since the end of the Cold War by accepting post-Soviet international borders, finally joining the modern world economy and joining in many European integration processes. But those gains require commitment to ever more sophisticated rules and transparency that set limits on policy options. Under Putin’s leadership Russia in 2014 has given the strong impression that it sees any such limits as weakness, and no longer wants that basic deal.

Unfortunately for the Kremlin, its assertive stance has collided this year with the fast-accumulating consequences of Russia’s own bad policies: systemic corruption, weak property rights and unwise over-reliance on high Energy prices. Prospects for medium-term growth were already uncertain before the oil price started to tumble, wrecking Russia’s state budget calculations.

Western leaders may shrink from confronting Vladimir Putin in person. But the Kremlin can’t intimidate the planet’s anonymous, restless international financial markets: they are voting down Russia’s credibility. Sharp-toothed Western financial sanctions prompted by the Kremlin’s illegal foreign territory-grabs earlier this year have reinforced a sense of crisis.

David Fuller's view -

People say the Russian stock market is cheap.  Yes it is, and it is also rallying from a short-term oversold condition.  However, dictators have never been reliable long-term assets for stock markets, for one very good reason; they only survive by managing kleptocracies.  Europe had hoped that Russia was turning into a democracy, but Putin shattered that illusion because he wanted to stay in power.  His dictatorial regime limited the considerable entrepreneurial skills of its population and Russia fell behind.  

This item continues in the Subscribers’ Area, where a PDF version of The Telegraph article is also posted.  



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December 18 2014

Commentary by Eoin Treacy

Falling oil prices and the implications for asset quality

Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section:

Our country bank analysts have studied the financing of the local Energy production chain in 12 Asian markets and in this report evaluate the risks arising from sharply falling global oil prices. For the oil production countries, namely Australia, Malaysia and China, bank lending is primarily extended to the state-owned or globally established MNCs engaging in E&P (Exploration and Production), with some of them engaging in diversified Energy businesses; for example, gas, that can help offset part of the losses from falling oil prices. In Australia, banks have set aside economic overlays (3-6% of the exposure) to buffer against potential risks from the worsening asset quality of the mining and Energy sectors.

Impact for banks financing refinery businesses and overseas projects
While the refinery businesses of the major oil importing countries (India and Thailand) should benefit from falling global oil prices, the banks have less than 1% of loans pledged to the related industries, implying limited positive earnings impact. For Asian banks, such as Japanese banks, that have financed overseas projects, the borrowers are primarily strong companies with limited default risks.

Indian, Indonesian and Chinese banks historically the best performers
Since 2006, we identified four periods of global oil prices falling by an average of 46% within six months and we observed that global equity indices have been negatively affected, with MSCI Asia-ex JP financial index underperforming the S&P Index by 2%, but outperforming the global MSCI EM index by 4.7%. The best performers were India (+19%), Indonesia (+8%) and China (+4%), while HSBC (-14.5%), Standard Chartered (-21%) and Korean banks (-16%) were the worst. This order of performance is consistent with our preference among Asian financials based on our fundamental analysis.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

A number of Asian markets have been subject to some quite extreme volatility over the last couple of weeks as the impact of meaningfully low oil prices have shaken the status quo. 



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December 17 2014

Commentary by David Fuller

Fed Vows Patience on Rates While Dropping Considerable Time

Here is the opining of this article on the Fed’s meeting, reported by Bloomberg:

The Federal Reserve said it will be patient on the timing of the first interest-rate rate increase since 2006, replacing a pledge to keep borrowing costs near zero for a “considerable time,” and raised its assessment of the labor market.

“The committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the Federal Open Market Committee said today in a statement in Washington, removing a calendar-based phrase with language that gives it more flexibility to respond to economic data. “The committee sees this guidance as consistent with its previous statement that” rates are likely to stay near zero for a “considerable time.”

The labor market “improved further,” the Fed said. “Underutilization of labor resources continues to diminish,” it said, dropping the word “gradually” used in its previous statement.

The change in guidance is another step in the Fed’s plan to exit from the loosest monetary policy in its 100-year history. While a faster-than-expected drop in unemployment is pushing the central bank toward raising rates next year, plunging prices of oil and commodities are holding inflation below its target.

Today’s statement didn’t mention global market turmoil sparked by oil and the Russian currency crisis.

Restating language introduced in October, the FOMC said evidence of faster progress toward its goals of full employment and price stability could accelerate the timing of a rate increase, while disappointing figures could delay it.

The Fed repeated it will continue reinvesting proceeds from its bond portfolio until after interest rates start to rise. Three rounds of so-called quantitative easing have swollen the Fed’s balance sheet to a record $4.49 trillion. The central bank stopped purchases at the end of October.

Minneapolis Fed President Narayana Kocherlakota, Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher all dissented. Kocherlakota said the decision “created undue downside risk to the credibility of the 2 percent inflation target.”

David Fuller's view -

Three Fed officials dissented but I think Janet Yellen’s decision was correct.  She knows the Dollar’s strength - reflected here by the Euro-dominated US Dollar Index (DXY) and the Asia Dollar Index (ADXY) - is now a headwind for US exporters.  Additionally, soft commodity prices should keep inflation in check for up to a year.  Most importantly, much of this year’s job creation and wage increases have come from the US’s booming Energy sector which is about to see a shakeout in fracking due to low prices for crude oil.  

This item continues in the Subscriber’s Area and includes a review of stock market indices.  



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December 16 2014

Commentary by Eoin Treacy

Global Metals Playbook: 2015 Outlook

Thanks to a subscriber for this informative report from Morgan Stanley which may be of interest to subscribers. Here is a section: 

Metal’s flagship has got upside: Copper’s price has come under pressure late in the year, reflecting the Energy sector sell-off and a perceived short-term metal surplus. Weaker, but the price remains well above its long-term average, and above the industry’s 90th percentile. Robust support of its value comes mainly from two drivers: China’s overwhelming dependence on imports (70% of supply); and the fickle nature of copper’s complex supply chain (mine supply; concentrates; scrap). Unlike other commodities, copper’s mine supply growth never quite matched demand growth during the Super Cycle, a condition that is unlikely to change over the medium term – underpinning our bullish price outlook.

Why so bearish? Consensus view: copper’s trade will now report persistent surpluses. Yes, current signals point to adequate supply: inventories are rising; key merchant premia are soft; backwardation may just reflect concentrated LME positions. Elsewhere, concentrate flows are adequate (TC/RCs are high); scrap flows are expanding. We acknowledge these bear signals. We’re just not convinced by the mine supply growth story. Low-risk re-rating of Escondida output over the past two years was actually unusual. To expect short-term green/brownfield deployments to proceed without disruptions at a lower price level (assuming unchanged demand growth) ignores the history of this industry.

Projects to watch: Key mine supply growth drivers to watch include Las Bambas, Toromocho, Sentinel, Cerro Verde; track Codelco’s ability to fund growth to >2Mtpa; Indonesia’s exports remain at risk, politically; in 2016, Escondida may de-rate again on lower grades; Rio Tinto has pared Kennecott’s supply outlook. We expect ongoing supply disappointments, simply because it is a feature of the industry.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

There are a lot of moving parts to the commodity sector but the biggest change by far to the economics of production has been the falling oil price. We do not yet know at what level prices will eventually stabilise but the fact remains Energy costs have fallen almost 50% in six months. Considering how important Energy costs are for miners, this move will improve the average cost of production and prolong the ability of marginal producers to increase supply.



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December 16 2014

Commentary by Eoin Treacy

Norway Krone Drops to Parity With Sweden, First Time Since 2000

This bulletin by Paul Dobson for Bloomberg may be of interest to subscribers. Here is a section: 

NOK/SEK -2.2% to 0.9992, having fallen 5.8% so far this year.
* Norway’s krone is worst-performing major currency in 2014, having dropped more than 20% versus USD
* USD/NOK +1.5% today to 7.5989, reached 7.6091, strongest level since 2003
* NOTE: Sweden Readies Arsenal of Measures to End Deflation

 

Eoin Treacy's view -

As a major Energy exporter Norway has not been immune from the effects of the falling price of oil. However considering the fact that it has one of the world’s largest sovereign wealth funds and standards of governance on par with anywhere in the world, one might conclude that the indiscriminate selling of commodity currencies has fallen disproportionately on the Nordic nation. 



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December 15 2014

Commentary by David Fuller

A Second Chance for Abe

Tweaks -- taxing corporations that sit on their cash rather than investing it or raising wages, for instance -- might help around the margins. But the real problem is that for all his Energy and verve, Abe has not fundamentally altered the status quo in Tokyo.

Japan's entrenched bureaucracy waters down reforms almost instinctively. That means small changes are all but certain to be whittled to nothing. Abe’s first two arrows succeeded in part because of their size and shock value: They were designed to change expectations radically, and for a time they did. Abe needs another big bang -- something much more than a $25 billion stimulus package.

The most obvious place to start would be with the Trans-Pacific Partnership trade deal, which would crack open some of Japan’s most inefficient sectors. Abe barely mentioned the pact during the campaign, for fear of alienating the powerful farm lobby. Now he need not be so timid. While the U.S. Congress may still derail any deal, Abe could at least pressure Washington by making key concessions on agricultural and auto tariffs.

Abe has also walked too gingerly around the issue of immigration reform. The economy desperately needs new blood -- from nurses to care for the elderly, to construction workers, to high-skilled entrepreneurs who can teach Japan Inc. how to innovate again.

There is a chance that Abe could mistake his mandate as license to push ahead with more controversial elements of his agenda, including revising Japan’s postwar constitution. He would strengthen Japan far more if he instead worked toward his own Nixon-to-China rapprochement with Beijing next year, the 70th anniversary of the end of World War II. While tensions with the mainland are inevitable, the current chill in relations risks more harm to Japan than to China: By some estimates, China might need to import as much as $4 trillion to $6 trillion in services over the next decade -- a huge potential opportunity for Japanese businesses.

Some of the strongest resistance to all of these moves will continue to come from within Abe’s own party. But voters returned the Liberal Democratic Party to power because they saw little alternative and want to believe Abe can bring Japan's economy back. His party needs to let him try. 

David Fuller's view -

Neither Shinzo Abe nor anyone else can turn around an economy quickly that has been sliding for 25 years.  There are some interesting suggestions above, although I would not be increasing taxes on corporations, mentioned in the first sentence.  I would not raise the sales tax again either, at least not until the economy is clearly on a stronger footing.   

Japan is a high-tech entrepreneurial society, so it should be able to prosper once again in today’s environment of accelerating technological innovation.  Abe should promote this effort.  He could also champion Japan’s most underutilised asset - its educated women who deserve equal opportunity employment policies.  He could also show diplomatic initiative and attempt to break the 70 year old post WWII hostilities which make regional cooperation more difficult.  



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December 11 2014

Commentary by David Fuller

Mobius Says China Bull Market Is Just Getting Started

Here is the opening of this article from Bloomberg:

Mark Mobius says the bull market in Chinese stocks is just getting started and he’s using the biggest price swings in five years to boost holdings.

“We are buying more in China because we think this is the beginning of a longer-term bull run,” Mobius, who oversees about $40 billion as the executive chairman of Templeton Emerging Markets Group, said in a phone interview yesterday from Thailand.

The 78-year-old money manager, who’s been investing in emerging markets for more than four decades, is stepping up his wager on China after correctly predicting four months ago that the nation’s stock rally had further to run amid low valuations and government efforts to open-up state-dominated industries. The Shanghai Composite Index (SHCOMP)’s 51 percent jump from a four-year low in June 2013 is still less than half the average 122 percent gain during 26 bull markets since 1990.

China’s rally has accelerated during the past month as the central bank unexpectedly cut interest rates and mainland investors opened new stock accounts at the fastest pace in five years. While the Shanghai gauge posted its biggest one-day tumble since 2009 on Dec. 9, Mobius says increased volatility is creating opportunities to buy mispriced shares.

Mobius said he’s been buying Chinese stocks “across the board,” including oil-related companies, on expectations that crude prices will recover from five-year lows. Petro China Co., the nation’s biggest Energy company, has climbed 21 percent in Shanghai trading during the past month.

David Fuller's view -

One often sees a wide range of views in most markets, not least in today’s environment.  Nevertheless, Mark Mobius’ assessment of China makes sense to me.  

This item continues in the Subscribers’ Area and contains an additional article.



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December 11 2014

Commentary by David Fuller

Fed Bubble Bursts in $550 Billion of Energy Debt: Credit Markets

Here is the opening of this informative report from Bloomberg:

The danger of stimulus-induced bubbles is starting to play out in the market for Energy-company debt.

Since early 2010, Energy producers have raised $550 billion of new bonds and loans as the Federal Reserveheld borrowing costs near zero, according to Deutsche Bank AG. Withoil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for Energy junk bonds will double to eight percent next year.

“Anything that becomes a mania -- it ends badly,” said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management. “And this is a mania.”

The Fed’s decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns, raising concern that risks were being overlooked. A report from Moody’s Investors Service this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis.

Borrowing costs for Energy companies have skyrocketed in the past six months as West Texas Intermediate crude, the U.S. benchmark, has dropped 44 percent to $60.46 a barrel since reaching this year’s peak of $107.26 in June.

David Fuller's view -

What are the implications of this situation?

This item continues in the Subscribers’ Area.  



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December 10 2014

Commentary by David Fuller

Global Stocks Drop as Oil Renews Selloff; Yen Strengthens

Here is a section of this report from Bloomberg:

OPEC cut the forecast for how much crude it will need to provide in 2015 to the lowest level in 12 years amid surging U.S. shale supplies and lower demand estimates. U.S. crude inventories rose to the highest seasonal level in weekly data that started in 1982, the Energy Information Administration said. Energy shares in the S&P 500 tumbled 3.3 percent to the lowest since April 2013, while oil and gas producers led the slide in European equities and Canadian shares.

“Oil dropping is creating uncertainty,” Paul Zemsky, the New York-based head of multi-asset strategies at Voya Investment Management LLC, which oversees $213 billion, said by phone. “People are trying to figure out what it means for other markets. The indirect impact should be beneficial as gasoline prices drop but that happens later. There’s fear before benefits here.”

David Fuller's view -

A more nervous tone for global markets is very evident this week.  What might the contributing factors be?

I would start with vertigo, since Wall Street and many other markets had a good run following the mid-October lows, oil exporters excepted.  Primarily commodity producing countries have continued to underperform.  Celebrations of the oil price rout by industrialised economies have now given way to concern in economies that are also significant producers of Energy, including the USA.  

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December 10 2014

Commentary by David Fuller

Brent Crude Drops Below $65 as OPEC Sees Less Demand

Here is the opening of this report from Bloomberg:

Brent fell below $65 for the first time in more than five years as OPEC cut the demand forecast for its crude oil to a 12-year low. West Texas Intermediate dropped near $60 as U.S. inventories grew.

Both benchmarks are more than 40 percent below their 2014 peaks in June. OPEC reduced its projection for 2015 by about 300,000 barrels a day to 28.9 million in its monthly report today. U.S. crude inventories rose to the highest seasonal level in weekly data that started in 1982, the Energy Information Administration said.

Brent has collapsed 17 percent since Nov. 26, the day before OPEC agreed to leave its production limit unchanged at 30 million barrels a day, resisting calls from members including Venezuela to cut output to stabilize prices. The decision prompted the biggest one-day decline in more than three years.

“The sentiment is horrible right now,” said Paul Crovo, a Philadelphia-based oil analyst at PNC Capital Advisors. “People are just throwing in the towel. I don’t think anybody knows what OPEC wants to do.”

David Fuller's view -

Regarding the last sentence above, what we are really talking about is Saudi Arabia’s objective, as I have frequently been discussing in recent weeks.  Their gamble is that they can knock out high-cost producers. 

Can they?

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December 10 2014

Commentary by Eoin Treacy

Filling the tank before liftoff

Thanks to a subscriber for this report from Deutsche Bank. Here is a section on the USA:

The plunge in oil is concerning and is a net negative to S&P EPS, particularly for Energy, Industrials and Materials. We cut our 2014E EPS by $1 to $117.50 and our 2015E EPS by $5 to $121. We still expect 2015 EPS growth of ~3% as most macro data and company commentary do not suggest that global growth is careening. Europe is weak and hopes of improvement are policy dependent, but US growth remains healthy and consumption should stay strong on job gains and now cheaper oil. China and rest of EM is uncertain with what seems to be a controlled deceleration that isn't overly alarming, but is clearly weighing on commodities, materials and industrial goods' profits.

Our 2015E S&P EPS of $121 assumes 2015 avg. oil price of $65/$70 for WTI & Brent and euro doesn’t fall below $1.15. Every $5/bbl lower oil price lowers Energy earnings by 10% and S&P EPS by ~$1, net of benefits elsewhere. 

Since the S&P 500 is more of an oil producer than user, the ~30% decline in Energy sector profits that we expect next year, assuming oil at $65-$70/bbl, is too much of a hit for benefits at other sectors to fully offset. If oil price average ~$80/bbl next year then S&P EPS is likely $3 higher, all else the same.

The S&P is global: 40% of total profits from abroad, 25% in foreign currencies S&P 500 companies are among the largest and most successful multinationals in the world. We estimate that a third of S&P revenue and 40% of its net profits are earned abroad. This has been the case for at least 5 years and compares to 15-20% in the mid 1990s and likely 10-15% in the mid 1980s.

Excluding Financials, Utilities and Telecom, slightly more than half of S&P profits are from abroad. While some foreign profits are earned in dollars, we estimate that roughly 25% of total S&P profits are earned in foreign currencies. Thus, we estimate that every 10% gain in the dollar vs. a trade weighted basket of currencies reduces S&P EPS by ~$2 or ~2% from FX translation.

 

Eoin Treacy's view -

A link to full report is posted in the Subscriber's Area.

The above points relating to how the fall in oil prices and Dollar’s rally have the potential to impact the consolidated earnings of US companies are important. This is particularly true when the market has already been rallying for the last five years. When measured against the current short-term overbought condition on Wall Street potential for at least some consolidation and possibly mean reversion has increased. 



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December 09 2014

Commentary by David Fuller

Nuclear Poised to Be Winner as Abe Eyes Broader Japan Majority

Here is a brief section of this informative article from Bloomberg Businessweek:

As a result of the high cost of imported fuel, Japan’s current account registered a 367.9 billion yen monthly deficit in June, placing an extra burden on an economy that has contracted for two straight quarters after a sales tax increase in April.

In view of those numbers, some of Japan’s largest companies say nuclear Energy is critical to their operations.

“How much longer do we need to endure?” a group of Energy-intensive industries asked in a petition submitted to government ministers earlier this year. “We need to know the path for survival.”

Nippon Steel & Sumitomo Metal Corp. and Kobe Steel Ltd. are among the member companies belonging to the 11 industry groups that were signatories to the petition.

The absence of nuclear has also set back the nation’s climate goals. Japan’s greenhouse gas emissions have been on the rise since 2010 as thermal power generation increased to make up for lost nuclear capacity and the economy recovered after the 2008 financial crisis. Greenhouse gas emissions rose 1.6 percent in fiscal 2013 compared with the previous year and are 8.5 percent higher than the year before Fukushima, according to preliminary data by the Ministry of the Environment released on Dec. 4.

That’s bad news as climate envoys from more than 190 countries gather in Lima, Peru to debate a framework to keep the earth’s temperature from rising. Countries are to submit plans on their contributions to climate change in the first quarter of 2015, if possible, toward a universal agreement.

David Fuller's view -

Japan’s restart of approved nuclear power stations will be another important boost for its struggling economy, which has the potential to be one of Asia’s better performers in 2015.  



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December 09 2014

Commentary by David Fuller

Bank of America Sees $50 Oil as OPEC Dies

It will take six months or so to whittle away the 1m barrels a day of excess oil on the market – with US crude falling to $50 - given that supply and demand are both “inelastic” in the short-run. That will create the beginnings of the next shortage. “We expect a pretty sharp rebound to the high $80s or even $90 in the second half of next year,” said Sabine Schels, the bank’s Energy expert.

Mrs Schels said the global market for (LNG) will “change drastically” in 2015, going into a “bear market” lasting years as a surge of supply from Australia compounds the global effects of the US gas saga.

If the forecast is correct, the LNG flood could have powerful political effects, giving Europe a source of mass supply that can undercut pipeline gas from Russia. The EU already has enough LNG terminals to cover most of its gas needs. It has not been able to use this asset as a geostrategic bargaining chip with the Kremlin because LGN itself has been in scarce supply, mostly diverted to Japan and Korea. Much of Europe may not need Russian gas at all within a couple of years.

Bank of America said the oil price crash is worth $1 trillion of stimulus for the global economy, equal to a $730bn “tax cut” in 2015. Yet the effects are complex, with winners and losers. The benefits diminish the further it falls. Academic studies suggest that oil crashes can ultimately turn negative if they to trigger systemic financial crises in commodity states.

David Fuller's view -

These comments are interesting and add to my belief that Energy crises are largely over and even sooner than I have been predicting in recent years.  Oil crises have been a big concern since the 1970s, when OPEC could (and did) throw the global economy into recession by raising oil prices at will.  The last oil crisis was in 2008 and we are very unlikely to see another similar price spike in crude prices.

The comments on LNG from Australia being able undercut pipeline gas from Russia to Europe are certainly plausible.  However, I think Australia’ main target for these exports will always be Asia. 



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December 08 2014

Commentary by Eoin Treacy

Show me the money

Thanks to a subscriber for this report from Deutsche Bank focusing on Mexico. Here is a section: 

Mexico’s growth remains subdued despite 11 structural reforms passed months ago. Thus, baffled investors are now demanding prompt execution of projects to keep alive long-standing goodwill towards this administration.

Sentiment has been further hit by a pick-up in social unrest. We do foresee a marked turnaround in public and private spending in the short term, and prolonged dynamism in 2015-20. In turn, we highlight four themes investors should not miss and potential beneficiaries of these trends.

One developing superpower
Deutsche Bank anticipates approved reforms to support sustained GDP growth above 5% in the long term, practically double the average growth in the last three decades. The Energy Reform alone should contribute incremental GDP growth of 1.6% by 2025. Effective actions to control unrest are paramount to place Mexico in the selective group of developed economies, in our view.

Two signals of turnaround
Industrial production is likely to continue to accelerate supported by rising exports of automobiles (+10% YTD) and construction depicting faster growth (vs. contraction over the past three years). On this, housing starts are up 25% on a trailing 12-month basis and three months of supportive data hint that the downward trend of infrastructure activity has been broken. Three clear short-term catalysts

Round One of the Energy Reform should auction close to 170 exploration and extraction projects in 1H15. In addition, critical mid-term elections in June 2015 should unleash material public spending in the coming months. Finally, major projects under the National Infrastructure Program are starting to ramp up, and several more should be awarded next year. In sum, this means more than US$600bn of investments, equivalent to almost 50% of Mexico’s GDP.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The structural reforms introduced by the Mexican government over the last couple of years are encouraging from a governance standpoint. Those aimed at the Energy sector were particularly welcome since the sector was closed to outside investment for so long. As oil prices decline the question now being raised is whether these reforms were introduced too late to avail of the investment capital chasing shale development. 



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December 04 2014

Commentary by David Fuller

OPEC: Saudi Prince Says Riyadh Will Not Cut Oil Unless Others Follow

Saudi Arabia's influential royal Prince Turki al-Faisal al-Saud has said the kingdom would only consider cutting oil production if Iran, Russia and the US agreed to match those cuts because it wants to protect its market share.

Speaking in London, the Prince who is a senior Saudi royal and the former head of the country's spy agency, said that the kingdom would not repeat previous mistakes of surrendering its share of the global market for crude to its rivals. His remarks come just days after a controversial meeting of the Organisation of Petroleum Exporting Countries (Opec), when the group appeared split over a decision to keep producing at current levels.

"The kingdom is not going to give up market share at this time to anybody and allow - whether it is Russia, Nigeria, or Iran or other places - to sell oil to Saudi customer," said Prince Turki, who has also held Saudi Arabia top overseas diplomatic post as the kingdom's ambassador to the US.

Prince Turki added that Saudi Arabia and other producers would only consider adjusting production if other members of Opec adhered to the group's quotas and stopped making "under the table" deals to sell crude in barbed remarks apparently aimed at rivals Iran.

The remarks by the outspoken Saudi royal will add to the view that the kingdom - the world's largest oil exporter - is now locked in a bitter oil price war with the likes of Russia, Iran and shale oil drillers in North America. Oil has fallen by over 30pc since June to trade at around $70 per barrel with some analysts suggesting the level could fall further to as low as $40 per barrel.

David Fuller's view -

There you have it.  The Saudis obviously have no love for Russia, Iran or US shale oil producers.  They are not just commercial rivals but enemies in a costly war for oil producers.

What are the likely consequences?

This item continues in the Subscribers’ Area, with an 8-point list of medium to longer term forecasts.



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December 03 2014

Commentary by Eoin Treacy

Outlook on the Global Agenda 2015

Thanks to a subscriber for this report from the World Economic Forum which will form the basis of discussions at next year’s event. Here is a section: 

What we see today is a pattern of persistent, multidimensional competition and the simultaneous weakening of established relationships, a trend that trickles down and spills over into multiple sectors and issues. In this fluid, amorphous world order, we must manage both asymmetric and symmetric challenges together. The changing relationship between world powers has reduced the political Energy available for tackling shared problems like climate change and global health, not to mention second-order crises. Chaos has festered.

Yet in the face of potential globalization (and indeed de-globalization), rising nationalism and a deepening disbelief in multilateralism, the most important lesson from 2014 is that we cannot remain passive. We need more international cooperation, not less.

Regional and global intergovernmental organizations will be put to greater tests; meanwhile institutions like the World Economic Forum must continue to create a confluence of private and public actors, civil society and academia to impress upon political leaders the importance of collective reflection. Far from improving conditions for its participants, the current pattern of geostrategic competition threatens to harm us all.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Ballooning revenues from high commodity prices paper over a lot of cracks for Energy producers; not least those with kleptocratic or despotic tendencies. Governance is Everything and with lower Energy prices, pressure will inevitably come to bear on those countries incapable of the reforms needed to spur continued growth in the absence of surging oil revenues. 

At the recent OPEC meeting it was Venezuela that pleaded most fervently for a cut to output. Considering that nationalisation of production reduced its capacity to increase supply, lower Energy prices suggest an additional devaluation of the Bolivar is likely. 

 



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December 03 2014

Commentary by Eoin Treacy

Bloated with Gas

Thanks to a subscriber for this contemplative report from Deutsche Bank examining the LNG sector and its potential for growth. Here is a section:

There is a positive: capex likely much reduced, trading volumes enhanced
Today c15-20% of major IOC capex is on LNG developments. We think much will be deferred in 2015/beyond, potentially a material $10bn plus curb on near term IOC capex. For those with trading businesses (BP & BG) greater access to US volumes gives an attractive, low capital, source of annuity cash flow. 

Other industries?
For Europe, by 2022 70bcm (15% of supply) could come from the US, potentially cutting Russian dominance of Europe markets (to 22% from 33% now) unless significant ground is ceded on price. For European Oil & Gas E&C companies the shift in build to the US represents another nail in their coffin. Euro utility? Falling spot gas helps affordability but curbs UK power margin. 

Why bother writing this report?
LNG matters to the IOCs: long-lived, low maintenance it grows towards 20% of operating cash flows by 2020. With the downstream pressured, this shift has been central to the rebuild of cash cycles at Shell, Total, Chevron and Exxon. Relative winner? BP. A price disrupter and less dependent on Asia, BP is long US gas and short European, a positive given the likely trade flows. 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

A number of the international oil companies (IOCs) have been producing more gas than oil for a number of years which is why they report reserves on an Energy parity basis. Chief among these are Exxon Mobil and Royal Dutch Shell. There is no doubt that the US has the gas necessary to supply a substantial portion of the global LNG market but it is questionable at what price this can be achieved and whether today’s wide arbitrage will be sustained once US gas starts to be exported.   



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December 02 2014

Commentary by Eoin Treacy

Musings From the Oil Patch December 2nd 2014

Thanks to a subscriber for this edition of Allen Brooks ever informative report. Here is a section:

Given the monetary policies recently adopted the central banks in the European Union, Japan and now China, one has to assume that the U.S. dollar’s value will continue to strengthen putting increased downward pressure on global oil prices. A strong dollar is additive to the downward demand pressures from weak economic activity, demographic challenges, changes in attitudes toward the use of oil and inroads from renewables. The combination of these forces is likely to keep annual oil consumption growth to one million barrels a day or less for the next few years. It is quite possible that we could be living in a world where more than a million barrels a day growth in consumption represents a boom rather than the norm.

In that environment, the question becomes what will substantially lower prices – as a result of the OPEC meeting decision of last week – mean for global economic growth in the short-term? In our view, the Saudi Arabia and OPEC game plans are less about targeting Russian, Iranian and U.S. shale production, although those are beneficial outcomes, but more about restarting European and Chinese economic activity. Demand growth is what OPEC needs for its long-term future. Low oil prices will also help Saudi and OPEC limit the growth of new long-term oil supplies such as Canadian oil sands and deepwater output that should also help improve the relative attractiveness of Middle Eastern oil. Unfortunately, restarting demand may take longer to accomplish than many anticipate. Therefore, the pain petroleum companies are just beginning to experience will need to be endured for some period before the industry fundamentals change sufficiently to restore the good times we have recently enjoyed.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Technological innovation across a whole range of sectors and the productivity growth that is being achieved as a result, the USA’s lower cost of Energy particularly natural gas which is attracting industry, the demographic dividend of the millennials and immigrants as well as the effect on asset prices of loose monetary policy have all helped stabilise the US economy. Its relative strength at the present time when other major economies are still easing has helped the Dollar appreciate meaningfully. 



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December 01 2014

Commentary by David Fuller

Saudis Risk Playing With Fire in Shale-Price Showdown as Crude Crashes

Here is the opening of this topical and informative column by Ambrose Evans-Pritchard for The Telegraph:

Saudi Arabia and the core Opec states are taking an immense political gamble by letting crude oil prices crash to $66 a barrel, if their aim is to shake out the weakest shale producers in the US. A deep slump in prices might equally heighten geostrategic turmoil across the broader Middle East and boomerang against the Gulf’s petro-sheikhdoms before it inflicts a knock-out blow on US rivals.

Caliphate leader Abu Bakr al-Baghdadi has already opened a “second front” in North Africa, targeting Algeria and Libya – two states that live off Energy exports – as well as Egypt and the Sahel as far as northern Nigeria. “The resilience of US shale may prove greater than the resilience of Opec,” said Alistair Newton, head of political risk at Nomura.

Chris Skrebowski, former editor of Petroleum Review, said the Saudis want to cut the annual growth rate of US shale output from 1m barrels per day (bpd) to 500,000 bpd to bring the market closer to balance. “They want to unnerve the shale oil model and undermine financial confidence, but they won’t stop the growth altogether,” he said.

There is no question that the US has entirely changed the global Energy landscape and poses an existential threat to Opec. America has cut its net oil imports by 8.7m bpd since 2006, equal to the combined oil exports of Saudi Arabia and Nigeria.

The country had a trade deficit of $354bn in oil and gas as recently as 2011. Citigroup said this will return to balance by 2018, one of the most extraordinary turnarounds in modern economic history.

“When it comes to crude and other hydrocarbons, the US is bursting at the seams,” said Edward Morse, Citigroup’s commodities chief. “This situation is unlikely to stop, even if prevailing prices for oil fall significantly. The US should become a net exporter of crude oil and petroleum products combined by 2019, if not 2018.”

Opec has misjudged the threat. As late as last year, it was dismissing US shale as a flash in the pan. Abdalla El-Badri, the group’s secretary-general, still insists that half of all US shale output is vulnerable below $85.

This is bravado. US producers have locked in higher prices through derivatives contracts. Noble Energy and Devon Energy have both hedged over three-quarters of their output for 2015.

Pioneer Natural Resources said it has options through 2016 covering two- thirds of its likely production. “We can produce down to $50 a barrel,” said Harold Hamm, from Continental Resources. The International Energy Agency said most of North Dakota’s vast Bakken field “remains profitable at or below $42 per barrel. The break-even price in McKenzie County, the most productive county in the state, is only $28 per barrel.”

Efficiency is improving and drillers are switching to lower-cost spots, confronting Opec with a moving target. “The (price) floor is falling and may not be nearly as firm as the Saudi view assumes,” said Citigroup.

Mr Morse says the “full cycle” cost for shale production is $70 to $80, but this includes the original land grab and infrastructure. “The remaining capex required to bring on an additional well is far lower, and could be as low as the high-$30s range,” he said.

David Fuller's view -

The Saudi’s are certainly playing a dangerous game, and with a weaker hand then they have had previously. 

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December 01 2014

Commentary by Eoin Treacy

Email of the day on the Friday review of copper and other large movers:

Eoin, the steep reactions in these charts appear to offer opportunities, whether buying Energy shares or shorting airlines. Your thoughts?

Eoin Treacy's view -

“Acceleration is a trending ending but of undetermined duration” has long been the definition of Type-1 trend ending as taught at The Chart Seminar, so yes these extreme moves increase potential for reversions toward the mean and potentially medium-term bottoming and topping activity.



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November 28 2014

Commentary by Eoin Treacy

Copper Falls to 8-Month Low on Concern Oil Slump Will Cut Costs

This article by Agnieszka de Sousa for Bloomberg may be of interest to subscribers. Here is a section: 

Mining is an Energy-intensive industry and lower oil costs have a deflationary impact on producers, according to Macquarie Group Ltd. Copper also declined as a strike was set to end at Peru’s Antamina mine, the world’s sixth-largest copper mine.

“Whatever positive connotations lower Energy might have for global growth, the extent and pace of the decline in oil seems the more worrying factor for the moment,” RBC Capital Markets Ltd. said in a note.

 

Eoin Treacy's view -

Shale gas and oil are gamechangers for the Energy sector has been a refrain here at FullerTreacyMoney since 2007. Just how much of a gamechanger is quickly coming into focus. Oil is by far the most globally significant commodity because of its utility, portability and Energy intensity. Increasing global supply prompted by the high price environment represent a problem for traditional producers. Additionally, rising Energy prices were a substantial component in the rising cost of producing just about all commodities. 

Falling Energy prices improve the economics of mining operations, allowing greater production. However, in a falling price environment this is not a positive factor. The medium-term result of falling Energy prices will be to encourage economic growth and therefore demand but prices could easily fall further before a rebalancing is achieved. 

 



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November 26 2014

Commentary by David Fuller

WTI Oil Falls From 4-Year Low as OPEC Sends Mixed Signals

Here is the opening of this topical article from Bloomberg:

West Texas Intermediate fell from the lowest price in more than four years as Saudi Arabia’s oil minister said the price will stabilize by itself, while the United Arab Emirates said OPEC will do what it takes to balance the market. Brent declined in London.

Futures dropped 0.9 percent in New York after declining 2.2 percent yesterday. Saudi Arabia’s oil minister Ali Al-Naimi said tumbling crude prices will stabilize. The world’s largest oil exporter yesterday failed to agree with Russia, Venezuela and Mexico to curb output. U.A.E. Energy Minister Suhail Al-Mazrouei said he is confident OPEC will take the right decision to stabilize the market.

Crude has collapsed into a bear market amid the highest U.S. output in three decades and signs of slowing demand growth. A Bloomberg News survey showed 20 analysts were evenly divided on whether the Organization of Petroleum Exporting Countries will cut supply to support prices. The 12-member group, which pumps about 40 percent of the world’s oil, meets tomorrow to discuss its official production target of 30 million barrels a day.

“Investors were already struggling to hold their nerve ahead of tomorrow’s OPEC meeting, but comments from Ali Al-Naimi increased concerns,” Kash Kamal, an analyst at Sucden Financial Ltd. in London, said in an e-mailed note. “We could see a repeat of yesterday’s trading session, with prices gaining support early on before confidence wanes and gives way to further selling pressure.”

WTI for January delivery traded at $73.42 a barrel in electronic trading on the New York Mercantile Exchange, down 67 cents, at 1:49 p.m. London time. The contract dropped $1.69 to $74.09 yesterday, the lowest close since September 2010. Total volume traded was about 25 percent below the 100-day average for the time of day. Prices have decreased 25 percent this year.

David Fuller's view -

Fear is palpable as OPEC members are joined in Vienna, unusually, by officials from other nations dependent on oil exports.  There is also a measure of false (“What, me worry?”) bravado from some national representatives, notably from Russia.  This raises the question: then why are they in Vienna, talking to other oil producers?

The tragic-comic aspect to this frenzied gathering before OPEC’s meeting tomorrow has everyone running around calling for production cuts, from anyone but themselves.  The only oil representative in Vienna who could possibly be enjoying this spectacle, albeit in a sadomasochistic way, is Saudi Arabia’s oil minister, Ali Al-Naimi.  At least Saudi Arabia has enough cash and low-cost production to survive oil prices near current levels longer than any other country that is heavily dependent on oil export revenue.

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November 26 2014

Commentary by Eoin Treacy

Email of the day on commodity currencies

You have commented on the Aussie dollar and the Norwegian kroner as commodity-determined currencies. What is your view on the Canadian dollar?

Eoin Treacy's view -

Thank you for this question which others may have an interest in. Yes, Canada as a major commodity exporter cannot avoid Energy, grain and metal prices having an influence on the value of the Loonie. 

The US Dollar has held a progression of higher reaction lows against the Canadian Dollar since 2012 and a sustained move below C$1.10 would be the minimum required to question medium-term potential for additional strength. 

 



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November 24 2014

Commentary by David Fuller

Sun Sets on OPEC Dominance in New Era of Lower Oil Prices

Here is the opening of this informative article by Andrew Critchlow, Commodities Editor for The Telegraph:

It wouldn’t be the first time that a meeting of the Organisation of Petroleum Exporting Countries (Opec) has taken place in an atmosphere of deep division, bordering on outright hatred. In 1976, Saudi Arabia’s former oil minister Ahmed Zaki Yamani stormed out of the Opec gathering early when other members of the cartel wouldn’t agree to the wishes of his new master, King Khaled.

The 166th meeting of the group in Vienna next week is looking like it could end in a similarly acrimonious fashion with Saudi Arabia and several other members at loggerheads over what to do about falling oil prices.

Whatever action Opec agrees to take next week to halt the sharp decline in the value of crude, experts agree that one thing is clear: the world is entering into an era of lower oil prices that the group is almost powerless to change.

This new Energy paradigm may result in oil trading at much lower levels than the $100 (£64) per barrel that consumers have grown used to paying over the last decade and reshape the entire global economy.

It could also trigger the eventual break-up of Opec, the group of mainly Middle East producers, which due to its control of 60pc of the world’s petroleum reserves has often been accused of acting like a cartel.

Even worse, some experts warn that a prolonged period of lower oil prices could reshape the entire political map of the Middle East, triggering a new wave of political uprisings in petrodollar sheikhdoms in the Persian Gulf, which depend on the income from crude to underwrite their high levels of public spending and support less wealthy client states in the Arab world.

“We are now entering a new era in world oil and we will have lower prices for some time to come,” says Daniel Yergin, the Pulitzer prize-winning author of The Quest: Energy Security and the Remaking of the Modern World. “Oil was really the last commodity in the super-cycle to remain standing.”

David Fuller's view -

OPEC has a weaker hand today, controlling approximately a third of the oil market, down from about half twenty years ago.  The cartel would like to see Saudi Arabia cut production but that would cost the swing producer market share.  Even lower prices for Brent and WTI crude would slow US shale output but that would be a Pyrrhic victory OPEC which has continued to raise budgets in the apparent belief that oil prices would always rise.  

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November 20 2014

Commentary by David Fuller

Oil Industry Risks Trillions of Stranded Assets on US-China Climate Deal

China is already shutting down its coal-fired plants in Beijing. It has imposed a ban on new coal plants in key regions after a wave of anti-smog protests. Deutsche Bank and Sanford Bernstein both expect China's coal use to peak as soon as 2016, a market earthquake given that the country currently consumes half the world's coal supply.

The US in turn has agreed to cut emissions by 26-28pc below 2005 levels by 2025, doubling the rate of CO2 emission cuts to around 2.6pc each year in the 2020s.

Whether or not you agree with the hypothesis of man-made global warming, the political reality is that the US, China, and Europe are all coming into broad alignment. Coal faces slow extinction by clean air controls, while oil faces a future of carbon pricing that must curb demand growth far below what was once expected and below what is still priced into the business models of the oil industry.

This is happening just as solar costs fall far enough to compete toe-to-toe with diesel across much of Asia, and to reach "socket parity" for private homes in much of Europe and America. The technological advantage is moving only in one direction only as scientists learn how to capture ever more of the sun's Energy, and how to store the electricity cheaply for release during the night. The cross-over point is already in sight by the mid-2020s.

Mr Lewis said shareholders of the big oil companies are starting to ask why their boards are ignoring so much political and technological risk, investing their money in projects that are so likely to prove ruinous, and doing so mechanically as if nothing had changed.

"Alarm bells are ringing. Investors can see that this is unsustainable. They are starting to ask whether it wouldn't be better to return cash to shareholders, and wind down the companies," he said.

David Fuller's view -

Will the fossil fuel companies become fossils themselves?

Yes, but the all-important question for investors is when?

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November 19 2014

Commentary by David Fuller

Cheap-Oil Era Tilts Geopolitical Power to U.S.

Here is the opening of this topical article from Bloomberg:

A new age of abundant and cheap Energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others.

Some changes already are evident. Surging U.S. oil production enabled America and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports from the Middle Eastern nation. Russia, meanwhile, faces what President Vladimir Putin called a possibly “catastrophic” slump in prices for its oil as its economy is battered by U.S. and European sanctions over its role in Ukraine.

“A new era of lower prices is being ushered in” by the U.S. shale oil and gas revolution, Ed Morse, global head of commodities research for Citigroup Inc. in New York, said in an e-mail. “Undoubtedly some of the geopolitical changes will be momentous.”

They certainly were a quarter of a century ago. Plunging oil prices in the latter half of the 1980s helped pave the way for the breakup of the Soviet Union by robbing it of revenue it needed to survive. The depressed market also may have influenced Iraqi leader Saddam Hussein’s decision to invade fellow producer Kuwait in 1990, triggering the first Gulf War.

Russia again looks likely to suffer from the fallout in oil markets, along with Iran and Venezuela, while the U.S. and China come out ahead.

David Fuller's view -

There are several very important points here, which will not surprise subscribers of this service. 

1. This is the beginning of a secular change in which countries which receive most of their revenue from crude oil exports are losing their century-long control over global Energy prices.

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November 19 2014

Commentary by Eoin Treacy

Wages Poised to Rise as Signs Emerge of Improved U.S. Job Market

This article by Richard Clough, Victoria Stilwell and Jennifer Kaplan for Bloomberg may be of interest to subscribers. Here is a section: 

Jockeying for Houston workers goes beyond Energy, according to Ray Perryman, president of Waco, Texas-based economic consultant Perryman Group. Construction and even restaurant employees have received signing bonuses, he said by e-mail.

The dearth of pay raises since the recovery began has puzzled economists and surfaced as an issue in the midterm elections. Even as unemployment fell and the economy created jobs, inflation-adjusted compensation per hour rose by only 0.7 percent over the last five years, the weakest growth for any expansion of comparable length since World War II, according to Bureau of Labor Statistics data compiled by Bloomberg.

The most likely culprit, many economists said, was the continuing drag of millions of long-term unemployed people as well as those toiling part-time. That has allowed companies to staff without having to offer fatter paychecks.

Now, the strengthening economy is starting to tighten the labor market, putting pressure on some companies to offer more raises to retain and recruit workers.

 

Eoin Treacy's view -

Since the Fed doesn’t look at Energy or food prices in its measure of inflation, wages are an important arbiter of consumer health. The knock-on effect of lower labour force participation in an economy boosted by years of easy money, and more recently by lower Energy prices, is that wages need to rise to encourage people back into the system. This now appears to be taking place. 



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November 18 2014

Commentary by David Fuller

Coal Rush in India Could Tip Balance on Climate Change

My thanks to a subscriber for this controversial article from The New York Times.  The subscriber’s comments are immediately below, followed by the opening of the NYT’s article:

“I think this is an excellent article which discusses many of the contentious issues and dilemmas that countries face.  The comments are even better than the article – note the earlier comments that were made by people living in the East rather than the American comments made later in the day.”

 

DHANBAD, India — Decades of strip mining have left this town in the heart of India’s coal fields a fiery moonscape, with mountains of black slag, sulfurous air and sickened residents.

But rather than reclaim these hills or rethink their exploitation, the government is digging deeper in a coal rush that could push the world into irreversible climate change and make India’s cities, already among the world’s most polluted, even more unlivable, scientists say.

“If India goes deeper and deeper into coal, we’re all doomed,” said Veerabhadran Ramanathan, director of the Center for Atmospheric Sciences at the Scripps Institution of Oceanography and one of the world’s top climate scientists. “And no place will suffer more than India.”

India’s coal mining plans may represent the biggest obstacle to a global climate pact to be negotiated at a conference in Paris next year. While the United States and China announced a landmark agreement that includes new targets for carbon emissions, and Europe has pledged to reduce greenhouse gas emissions by 40 percent, India, the world’s third-largest emitter, has shown no appetite for such a pledge.

“India’s development imperatives cannot be sacrificed at the altar of potential climate changes many years in the future,” India’s power minister, Piyush Goyal, said at a recent conference in New Delhi in response to a question. “The West will have to recognize we have the needs of the poor.”

Mr. Goyal has promised to double India’s use of domestic coal from 565 million tons last year to more than a billion tons by 2019, and he is trying to sell coal-mining licenses as swiftly as possible after years of delay. The government has signaled that it may denationalize commercial coal mining to accelerate extraction.

“India is the biggest challenge in global climate negotiations, not China,” saidDurwood Zaelke, president of the Institute for Governance & Sustainable Development.

Prime Minister Narendra Modi has also vowed to build a vast array of solar power stations, and projects are already springing up in India’s sun-scorched west.

But India’s coal rush could push the world past the brink of irreversible climate change, with India among the worst affected, scientists say.

And:

“India is going to use coal because that’s what it has,” said Chandra Bhushan, deputy director of the Delhi-based Center for Science and Environment, a prominent environmental group. “Its strategy is ‘all of the above,’ just like in the U.S.”

Each Indian consumes on average 7 percent of the Energy used by an American, and Indian officials dismiss critics from wealthy countries.

“I don’t want to use the word ‘pontificate’ when talking about these people, but it would be reasonable to expect more fairness in the discussion and a recognition of India’s need to reach the development of the West,” Mr. Goyal said with a tight smile.

David Fuller's view -

The debate on this contentious subject is unlikely to change and one important reason for this is contained in the penultimate paragraph immediately above: “Each Indian consumes on average 7 percent of the Energy used by an American”. 

While I am wary of long-term alarmist forecasts from commentators on climate change, I have often said that we can all agree that atmospheric pollution should be sensibly and scientifically reduced.  

I feel there is a self-righteous tone to the article above, including from some of the people who are quoted.  Perhaps the author, Gardiner Harris, and the NYT could produce an article on how wealthy countries could provide economical pollution-lowering technologies for developing economies.  If they feel strongly about climate change, do they not also have a responsibility to help poorer nations that are striving to develop?  If they did, India could look after its poor and more readily improve the quality of its air.   



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November 18 2014

Commentary by Eoin Treacy

Musings From the Oil Patch November 18th 2014

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on LNG: 

Temasek, Singapore’s state investment company, has joined with RRJ, a private equity firm founded by Richard Ong, a Malaysian dealmaker, to purchase $1 billion in convertible bonds to be issued by Cheniere Energy (LNG-NYSE) for financing the construction of its liquefied natural gas (LNG) export terminal. The bonds have a 6 ½ year maturity and carry an annual interest rate of 4.87% and will be convertible into Cheniere’s common stock in a year’s time. RRJ already had an equity investment in Cheniere. This move comes at the same time Asian buyers appear less interested in buying U.S. LNG. We don’t know why they are turning down what is supposed to be cheaper LNG, but we wonder whether they have less confidence that U.S. LNG supplies will be available in the volumes projected, and especially at the current low price that is projected to remain so for many years. It is also possible that Asian gas demand will not grow as much as projected due to slow growing economies, increased conservation and efficiency that trim demand growth, and  other alternative gas supplies being available with long-term, fixed price terms that prove cheaper than U.S. gas volumes. We continue wondering whether the U.S. LNG export terminals will become white elephants just as the LNG import terminals did.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Natural gas prices are characterised by volatility not least because the demand component of the market is so heavily influenced by weather. This is more important now than in the decade prior to 2012 because in many respects the market has returned to a balance between new gas coming on line, displacement of coal in the power sector and a focus on profitability among drillers. This season’s injection pace is now being put to the test as winter weather arrives early and demand for heating rises. 



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November 18 2014

Commentary by Eoin Treacy

Uranium Climbs to Highest Since January 2013 Amid Utility Demand

This article by Ben Sharples for Bloomberg may be of interest to subscribers. Here is a section: 

Demand from utilities is driving prices higher after uranium entered a bull market in September amid a labor strike at Cameco Corp.’s McArthur River operation in Canada, the world’s biggest mine for the fuel. Kyushu Electric Power Co. this month received local approval for reactors at its Sendai power station to resume operations, clearing the way for the first nuclear plants in Japan to restart as soon as early 2015.

While uranium for immediate delivery is in demand through January, there’s also been a rise in buying interest for distribution of supplies later in 2015, Ux said. It has recorded 22 transactions for 3.8 million pounds this month.

Uranium and nuclear Energy is on a “more positive trajectory with a lot of upside to come,” John Borshoff, the chief executive officer of Paladin Energy Ltd., said on a conference call Nov. 13. Global production cuts of 6 million to 8 million pounds are starting to take effect, he said.

 

Eoin Treacy's view -

Increasing tensions with Russia have reduced supplies from that country while the restarting of at least some of Japan’s reactors represents some good news from the demand side of the equation. 

Uranium prices rallied in August to break the almost four-year progression of lower rally highs and continue to extend the rebound. Until recently the majority of related shares have been slow to respond but as metal prices extend the breakout investor interest in the sector is increasing once more. 

The following charts are in log scale in order to highlight the base formation characteristics without focusing on the depth of the prior declines. 

 



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November 17 2014

Commentary by David Fuller

Russia Seen as Biggest Threat in Poll Even as Oil Erodes Putin Power

Here is the opening from this assessment of the poll by Bloomberg:

Russia poses the biggest security risk to world markets and will be the biggest loser from the drop in oil prices, according to a Bloomberg Global Poll of international investors.

Asked which of five possibilities posed the greatest risk to global financial markets, 52 percent of participants chose the Russia-Ukraine conflict. Twenty-six percent cited Islamic State, while Ebola barely registered with 5 percent. The U.S. was seen as the most likely beneficiary from lower crude prices.

Russia is being buffeted by the twin blows of sanctions and an oil-market selloff that threatens to hollow out its economy. While the country is menacing Ukraine with tanks and sending its jets into foreign airspace, President Vladimir Putin said Nov. 14 that the drop in crude is potentially “catastrophic” for the world’s largest Energy exporter.

“The Russia-Ukraine situation is more dangerous as we have a sovereign state, which is trying to increase its power by creating chaos both through threatening actions of war,” Mikael Simonsen, chief sales manager for cross asset sales at Nordea Bank in Helsinki and a poll respondent, said by e-mail. “This might impact the common thinking of how developed we are today, and impact the risk premium.”

David Fuller's view -

Russia’s economy is in meltdown, due to bad management from Putin, international sanctions against his regime and the slump in oil prices.  This is reflected by Russia’s RTSI$ Index and the Ruble, shown inversely against the USD.  However, Russia’s military remains the third strongest in the world, and Putin wants to intimidate us with this power.  It is a war of attrition which the democratic West can win, if it holds its nerve. 

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November 17 2014

Commentary by David Fuller

Email of the day

On Friday Audios, etc.: 

“hi David always enjoy listening to your friday audio. by the way for me it is never too long. Following, i was wondering what could have been the trigger for oil/ gold /silver etc to reverse and go up this Friday? the first warning sign you mentioned was the reversal on nov 7 but today was an impressive reversal. So my question is: Could it be that the lower yield on the US 10yr Treasury Bond Yield which started to go lower on thursday and again yesterday caused the usd to weaken and therefore caused commodities to go up? i know the interest rate change looks minor but if i look at your charts the commodities were at their lows in the beginning of the trading day and went up when the interest rate went lower. would appreciate your expert opinion . On European autonomies, despite the fact valuations might be low for companies. The high Energy costs for companies and consumers hardly decreased because of the stronger usd and the high percentage of taxes. That destroyed the advantage of lower Brent prices almost completely ironically the lower Energy costs give US companies and consumers a huge and even greater advantage over European companies and consumers. i rather buy shares of Dow Chemical than Basf and probably also enjoy an additional advantage of an appreciating usd versus the euro. In this beauty contest it is hard to favor European shares over US shares or Asian shares. best regards”

David Fuller's view -

Thanks for your comments and perspective.  Living in the Eurozone, I can certainly understand why you prefer Dollar-denominated investments. 

Re commodities, many of them have been technically oversold and I agree that when the USD weakened from an intraday new recovery high, that led to some short covering of depressed resources on Friday.

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November 14 2014

Commentary by David Fuller

The Browning Newsletter, Covering Climate, Behavior and Commodities

My thanks to Alex Seagle of Browning Newsletter for the latest issue of this impressive letter, by Evelyn Browning Garriss.  Here is a brief sample:

The Wild Card

There is one major wild card in this scenario – the giant eruption in Iceland’s Holuhraun lava field.

Not all volcanic eruptions are explosive. In Hawaii, for example, volcano eruptions are usually relatively quiet lava flows. (There is currently one that is threatening the Pahoa subdivision. Ironically the greatest damage the community is enduring is from looters, not lava.) Similarly, the Holuhraun eruption is a low-lying eruption, with relatively small explosions (about the size of the Statue of Liberty) and lots of oozing lava and gas.

The volcano has been erupting since Au­gust and emitted between 20,000 -- 60,000 tons of SO2 per day (compared to all of Europe which emits 14,000 tons per day). Scientists are reporting that this is not high enough to affect climate, but this much low-lying acidic fog is affecting the daily weather. No one has died, but the Icelandic air is blue with an eye-stinging haze.

Scientists report that, given the amount of debris this volcano has emitted, it is the largest Icelandic eruption in centuries. His­torically, eruptions like this add to cooling and acid rain as far south as Great Britain and Central Europe. This is one more sign that Europe has a very high probability of a cold winter this year. If the cold affects the jet stream, then the ripple would allow colder air to penetrate downstream as well, in Siberia and portions of Northern China.

Of course, if the explosion grows more violent, penetrating the stratosphere, then it would affect the Icelandic Low semi-per­manent air pressure region and the impact would be huge. No one expects this to hap­pen.

However, stay tuned. There is a wild card in Iceland.

David Fuller's view -

Last winter was unusually mild in the UK, and I did not experience freezing temperatures in London.  A cold winter in Europe and the UK would increase the risk of Energy shortages, largely due to the inadequate Energy policies of most governments. 

The Browning Newsletter forecasts warm winter conditions for the US Pacific Coast, which would reduce drought problems from California to Texas.  In contrast, she says the Southern and East Coast regions are likely to be colder.  

The Browning Newsletter is posted in the Subscribers' Area.



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November 14 2014

Commentary by David Fuller

Gold Futures Post Biggest Two-Day Rally Since June

Here is the opening of this article from Bloomberg:

Gold futures jumped, capping the biggest two-day gain since June, as an oil rally damped concern that inflation will remain low and revived demand for the metal as a store of wealth. Silver surged the most in nine months.

Aggregate gold trading more than doubled compared with the 100-day average for this time, according to data compiled by Bloomberg. Today, an option wager on a price rebound to $1,200 an ounce surged as much as fivefold, while Brent crude jumped as much as 2.9 percent.

Oil tumbled into a bear market last month, and Federal Reserve officials warned that lower Energy costs may hold down consumer costs in the near term. Crude’s slump is increasing the likelihood that producers will curb output, helping to stabilize prices. Fed Bank of St. Louis President James Bullard said today that inflation expectations have rebounded since October.

“The spike in oil prices acted as a catalyst,” David Meger, the director of metals trading at Vision Financial Markets in Chicago, said in a telephone interview. “There was a lot of fund buying.”

Gold futures for December delivery rose 2.1 percent to settle at $1,185.60 at 1:38 p.m. on the Comex in New York. Earlier, the price reached $1,192.90, the highest for a most-active contract since Oct. 31. In two days, the price climbed 2.3 percent, the most since June 20.

Total volume rose to an estimated 315,276 contracts, the seventh time this year trading topped 300,000. Yesterday, aggregate open interest climbed to the highest since May 22, 2013.

More than 10,000 contracts for December delivery traded around 10:06 a.m., with prices jumping about 1.5 percent within six minutes and erasing earlier declines. Today’s session low was $1,146 at 8:35 a.m.

“A lot of buy stops were triggered at $1,167.40, and that brought in the upward momentum,” Phil Streible, a senior commodity broker at R.J. O’Brien & Associates in Chicago, said in a telephone interview. “Today’s run-up was largely technical, and a few investors bought gold after oil prices showed some strength.”

OPEC ministers have stepped up their diplomatic visits before the group’s Nov. 27 meeting, potentially seeking a consensus on how to react to oil prices that have plunged to a four-year low. Gold reached a five-year low of $1,130.40 on Nov. 7 as Energy prices tumbled and U.S. equities climbed to a record.

David Fuller's view -

Data in the article above is interesting and the price charts even more so.  

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November 13 2014

Commentary by David Fuller

The Weekly View: Job Gains Good For Sales

My thanks to Rod Smyth, Bill Ryder and Ken Liu for their excellent strategy letter published by RiverFront.  Here is a brief sample:

Last week’s elections produced a wave of Republican victories, with the US senate reverting to GOP control.  Although not enough to enact a full-scale conservative agenda with secure veto/filibuster-proof votes, we think the results increase the likelihood of more business-friendly legislation being sent to the president on immigration, trade, Energy, and taxes.  The Republican domination of state legislatures and gubernatorial wins are potentially more consequential.  Democratic control of state governments has been reduced to 7 from 14, the lowest since the 1860s.  We expect GOP-controlled state legislatures to enact pro-growth policies, which would likely be received favourably by financial markets, in our view.  

David Fuller's view -

I certainly agree that most investors interested in the USA will favour the Republican victories and expect more pro-growth economic policies. 

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November 07 2014

Commentary by David Fuller

Putin Jets Blast Through European Dream 25 Years After Berlin Wall Fell

Here is the opening and some latter paragraphs of this sobering article from Bloomberg

Europe’s post-Cold War order is fraying and there’s no consensus over how to stitch it back together.

Some blame the European debt crisis for exposing the folly of the drive for economic unification. Some point to Vladimir Putin for redrawing the map by force and sending his warplanes to buzz NATO borders. For others, the vision of a peaceful, post-national Europe died off with the World War II generation.

The makers of European memory will ponder those questions this weekend, marking on Sunday the anniversary of the fall of the Berlin Wall in 1989 and the ensuing euro-euphoria. The lessons of the intervening quarter-century are more sobering.

“The easy assumption was that the international liberal order was prevailing,” said Nick Witney, a former head of the European Defence Agency, who is now with the European Council on Foreign Relations in London. “The fact is that those who don’t share those values are coming back. We’re not somehow riding the wheel of history any more than communism was.”

And:

Juncker’s mission as the EU’s top civil servant is primarily defensive. The turn-of-the-century notion that Europe could export its economic model to places like China, India and Latin America has given way to renewed global power politics with Europe’s heft much diminished.

“Europe has a number of forces that are fragmenting it right now,” said Christopher Chivvis, a European security analyst at the Rand Corp. in Washington. “To a certain degree, Putin increases the fragmentation. But I think that on the whole, especially as people in Europe absorb the reality of what’s happened in Ukraine, it’s going to tend to create a more unified European response.”

For now, however, Putinism isn’t without its apologists. Some architects of the new Europe have turned against their creation. The most notable is Viktor Orban, a leader of the anti-Soviet student movement in 1989 who, as prime minister of Hungary, now preaches the downfall of the liberal model he helped usher in.

Building what he calls an “illiberal state,” Orban has spoken admiringly of Putin and cut Energy-supply deals with Russia in defiance of the EU. Orban’s party has rammed through a new constitution, curtailed the powers of the judiciary, clamped down on media and academic freedoms, and won another term this year in an election criticized by international observers.

In any case, there’s more than enough nationalism to go around in the European heartland. Parties with grievances against immigration, the euro, the EU and a sense of lost identity have made electoral inroads in Britain, France, Greece, Denmark, the Netherlands, Finland, Austria -- and even Germany, long seen as immune to bouts of populism.

“This is the worst possible time for geopolitical risk to be hitting the European continent,” Ian Bremmer, head of Eurasia Group, a New York-based risk consultancy, said this week on “Bloomberg Surveillance.” “On the one hand, you have an external environment that is much worse for the Europeans than anyone else. On the other hand, you have internal populism that’s going to make the Europeans grow farther apart.”

David Fuller's view -

Europe’s initial post WW2 goal, long before it became the European Union, was noble – bring a permanent halt to European warfare.  The first achievement was an alliance of friendly nations, offering free trade and open borders for each others’ citizens.  However, this was not enough for politicians who went on to create the European Union and the Euro, as the first stage of building a Super State. 

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November 07 2014

Commentary by Eoin Treacy

Transocean Takes $2.76 Billion Charge Amid Glut in Drilling Rigs

This article by Will Kennedy and David Wethe for Bloomberg may be of interest to subscribers. Here is a section: 

Transocean Ltd., owner of the biggest fleet of deep-water drilling rigs, is feeling the effect of an oncoming glut in the expensive vessels just as crude prices tumble.

The company will delay posting third-quarter results after saying earnings would be hit by $2.76 billion in charges from a decline in the value of its contracts drilling business and a drop in rig-use fees, the Vernier, Switzerland-based company said in a statement today. Transocean, which had been scheduled to report earnings today, fell 7.9 percent to $27.55 at 8:10 a.m. in New York before regular trading began.

Oil’s decline to a four-year low in recent months has caused companies to consider spending cuts, reducing demand for rigs and the rates it can get for leasing them to explorers. Rig contractors had responded to rising demand during the past few years with the biggest batch of construction orders for rigs since the advent of deep-water drilling in the 1970s. Almost 100 floating vessels are on order for delivery by the end of 2017, according to a June estimate from IHS Energy Inc.

“Ouch,” analysts from Tudor Pickering Holt & Co. wrote in a note to investors. The announcement “reflects the reality of this oversupplied floater rig market globally.”

 

Eoin Treacy's view -

A topic of conversation at The Chart Seminar is “How do the majority of market participants predict how a market is likely to trade?” The short answer is that people predict what they see. When prices have been static for a period of time, expectations go down and people assume that the situation will persist. When oil prices were ranging above $100 oil companies and those that service them made decisions based on the situation persisting. 



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November 06 2014

Commentary by Eoin Treacy

Confident U.S. Shale Producers Think They Can Outlast OPEC Moves

This article by Joe Carroll and Bradley Olson for Bloomberg may be of interest to subscribers. Here is a section: 

The U.S. companies believe they have a lot more staying power than many of Saudi Arabia’s partners in the Organization of Petroleum Exporting Countries, or OPEC. Several producers plan on increasing production.

“Saudi Arabia is really taking a big gamble here,” Archie Dunham, chairman of shale producer Chesapeake Energy Corp., said during a telephone interview. “If they take the price down to $60 or $70 a barrel, you will see a slowdown in the U.S. But you’re not going to see it stop. The consequences for other OPEC countries are far more dire.” 

 

Eoin Treacy's view -

Hydraulic fracturing and horizontal drilling techniques coupled with advanced geophysics make exploiting shale oil and gas possible but it is not a low cost production method. Despite oil price weakness, the benefits to the US economy of Energy independence suggest the question is more of at what price the balance between profit and loss exists rather than whether these resources are going to be developed. 

A number of companies have spent a great deal of money in securing acreage, leaving them at risk as oil prices decline. This would suggest that larger, better capitalised companies have an advantage in a weak price environment. 

EOG Resources dropped by a third between June and October but has held a progression of higher reaction lows since as it closes the overextension relative to the trend mean.
Conoco Philips and Marathon Oil share similar patterns. 

Chesapeake Energy retested its 2012 lows in October and continues to bounce. It will need to the hold the low near $16 on the next pullback to demonstrate a return to demand dominance beyond the short term. 

 



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November 04 2014

Commentary by Eoin Treacy

Musings from the Oil Patch November 4th 2014

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report. Here is a section on Canadian efforts to export its Alberta production: 

The other factor in play now is TransCanada’s plan to ship Canadian oil sands output east from Alberta to the Irving Company refinery and its oil export port in Saint John, New Brunswick. TransCanada formally submitted its 30,000-page application for the 1.1 million-barrel-a-day project, labeled Energy East, to Canada’s regulator, National Energy Board. Once in place, oil sands output could move from Alberta to the East Coast and then be loaded on ships and transported to the U.S. Gulf Coast refining complex for only a couple of dollars more than the proposed tariff to ship it to Texas on Keystone. In a low oil price environment, that cost might be considered an impediment to oil sands export, but it doesn’t appear to represent a significant economic hurdle. As a result, the environmental movement’s argument that by preventing Keystone from being built would prevent Canada from expanding its oil sands business and stepping up its exports would be severely weakened. Energy East requires no U.S. approvals, although it does need Canadian federal government ok and approvals from various provinces. Our understanding is that TransCanada has worked hard to win over those people with rational objections to the pipeline route by relocating the route and adding spurs to refineries in the provinces and export ports. We anticipate Energy East having an easier time winning approval than Keystone has experienced.

We have learned several things from watching the battle over Keystone. The view that environmental politics overwhelms Energy economics when the country is governed by the left was reinforced. Additionally, while pipelines represent the safest mode of oil transportation, the recent string of oil leaks from old pipelines has battered that safety image. The spills strengthened the hand of the environmentalists battling Keystone and the images of black oil oozing through people’s backyards, neighborhood streets and bubbling streams is a powerful weapon against the Energy business, and the Energy companies have not been proactive in trying to change their image. The environmentalists have demonstrated that they have learned how to fight Energy projects more effectively through the regulatory and legal systems. Lastly, low oil prices, should they continue for any duration, will disrupt the pace of development of the oil sands – just how much and exactly when remain uncertain – and possibly change the impetus for either or both Keystone and Energy East. In the end, oil sands output will reach markets, but where those markets are may be different

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

It is in Canada’s national interest to develop an export avenue for its crude oil. Since it has met with such stiff resistance to the Keystone pipeline, exporting via its Eastern border represents the next best thing. With Russian supplies now representing a risk for European refineries there is the possibility that Canadian supply will have more than one market rather than having to depend on demand from the US gulf coast. This may be part of the reason Saudi Arabia has been so keen to preserve its European market share by offering discounts. 



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November 03 2014

Commentary by David Fuller

CSEM White Solar Panels Are Made to Blend into Buildings

Here is the opening of this informative article from Gizmag:

Solar panels are seen as a way of making buildings greener and more sustainable, as well as making them less dependent on the grid for power. The problem is that the blue/black panels stick out like sore thumbs and end up exiled to rooftops. With the goal of making solar panels aesthetically invisible, the Swiss private, nonprofit technology company CSEM has developed what it bills as the world's first white solar modules – designed to blend into buildings instead of sitting on the roof.

The reason why most solar panels look like something off of a beetle’s back is because of the need to absorb visible light. Since nothing absorbs like something colored black, the photovoltaic cells that make up the panel are as dark as possible. That may do the job, but it also means that any solar panel installation looks like exactly what it is, which doesn’t leave architects with much latitude.

CSEM reasoned that what designers wanted was a panel that would come in different colors and has no visible connections, with white being the most desirable because of its versatility. The way in which the company managed this is with a plastic layer that goes over the panel. This layer acts as a scattering filter that reflects all visible light, yet lets in infrared rays, which allows the panel to generate electricity. CSEM claims that this layer works with any crystalline silicon cell and can be applied to any existing panel whether it’s flat or curved.

The company says that the technology has a number of advantages beside the cosmetic. Being white, the layer keeps the solar panels at a lower temperature, making them more efficient, as well as reducing air conditioning costs.

CSEM sees the technology as having not only applications in architecture, but in consumer goods such as laptops, phones, and vehicles such as cars and buses, as the layer is adapted to cover a range of colors.

The video below introduces the white solar panel technology.

David Fuller's view -

Hardly a week goes by without another new, creative breakthrough for solar power, which is by far the most versatile form of renewable Energy.  Yes, they do not work at night and they do not have the capacity to be a standalone solution to our power needs.  However, these solar panels are likely to be ubiquitous within a few years, available in all shapes, sizes and colours for our buildings, and even our laptops and mobile phones.  Mass production of these panels will lower costs helping to reduce our dependence on the grid for power.

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October 30 2014

Commentary by David Fuller

Why Oil Prices Went Down So Far So Fast

The reasons oil prices started sliding in June were hiding in plain sight: growth in U.S. production, sputtering demand from Europe and China, Mideast violence that threatened to disrupt supplies and never did.

After three-and-a-half months of slow decline, the tipping point for a steeper drop came on Oct. 1, said Ray Carbone, president of broker Paramount Options Inc. That’s when Saudi Arabia cut prices for its biggest customers. The move signaled that the world’s largest exporter would rather defend its market share than prop up prices.

“That, for me, was the giveaway,” Carbone said in an Oct. 28 phone interview from his New York office. “Once it started going, it was relentless.”

The 29 percent drop since June of the international price caught traders and forecasters by surprise. After a steady buildup of supply and weakening demand, the outbreak of an OPEC price war is casting doubt on investments in new oil resources while helping the global economy, keeping inflation in check and giving motorists a break at the pump.

Brent crude, the global benchmark, declined to $82.60 a barrel on Oct. 16, the lowest in almost four years, from $115.71 on June 19. In the U.S., West Texas Intermediate touched $79.44 on Oct. 27, the lowest since June 2012. U.S. regular unleaded gasoline is averaging close to a four-year low of $3.01 a gallon nationwide, according to AAA.

David Fuller's view -

The drop in WTI and particularly Brent crude oil are good for the global economy, oil producers excepted.  They know that their days of controlling the oil market and ensuring that prices are rising faster than inflation are largely over, thanks to the plethora of new Energy sources, current and planned. 

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October 30 2014

Commentary by David Fuller

Norway $860 Billion Wealth Fund Bets Big on Modi and India

Here is the opening of this interesting article from Bloomberg:

Norway’s sovereign wealth fund, the world’s largest, will increase its holdings “significantly” in India as Prime Minister Narendra Modi opens Asia’s third-largest economy to investments and competition.

The fund today revealed that it raised its holdings of Indian bonds and stocks to 0.9 percent of its fixed-income and equities portfolios, as part of a broader plan to increase its presence in emerging markets and generate bigger returns.

“India is one of those markets where you should expect that we will continue to increase our investments over time, significantly,” Yngve Slyngstad, chief executive officer of the Oslo-based fund, said in an interview after a press conference today. “Relative to the size of the economy our investments are smaller than you would expect.”

Foreign investors are increasing investments in India at a faster pace than in any of the seven other Asian markets tracked by Bloomberg. The Sensex index has jumped 28 percent this year, rallying after Modi in May won elections by the biggest margin in three decades on promises to create more jobs and lift growth. Since taking power, Modi has shifted toward more market-based Energy pricing, allowed more foreign investment in the defense industry and pushed to revive the manufacturing sector.

“The changes that we have seen have given us more confidence that we will have good investment potential in the coming years,” Slyngstad said. “We will continue to increase our investments there, both on the fixed-income side and in regards to our company investments.”

David Fuller's view -

Interest in India among foreign investors is growing by the day, and it started from a very low floor before Narendra Modi was swept to power with an overall majority. 

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October 30 2014

Commentary by Eoin Treacy

Email of the day on Norwegian oil services companies

I will revert in more detail on oil services tomorrow, but gut feeling is that a few shares have accelerated to the downside and are now trying to establish support. Several names are claimed by analysts to have overreacted to the downside becoming undervalued. One seismic company, Polarcus, need more equity and that is also raising worries among invstors regarding other companies. Feels a bit like capitulation the last down leg.

On the other side we need to keep in mind e.g. the recent oil price forecast from DNB Markets. I am not sure all investors have adjusted expectations to a much lower oil price environment, which will dampen upside potential for many Energy related stocks.

And 

I looked at the charts in your oil services section in the library (Eoin's favourites). Some stocks look like they have bottomed.  

For perspective I have attached the oil service index of Oslo Stock Exchange. No evidence of an end to the downtrend, apart from a "hope" that the 2011 low will provide support. Looking at individual constituents of the index:

AKSO (Aker Solutions; oil service products/services): consolidating after recent drop, but testing lows FOE (Fred Olsen Energy; drilling): has been accelerating down this fall, but another dramatic drop this week PGS (Petroleum Geo-Services; seismic): still in downtrend PRS (Prosafe; accommodation rigs): consolidating recent drop SDRL (Seadrill; rigs): consolidating after steep decline TGS (seismic): showing relative strength, only stock not to post 12 month lows.

Seems to me there is less signs in the Norwegian oil service sector of an end to the acceleration/downtrend than in your international oil service stocks. I am short SUBC (Subsea 7; short term trading position), long DOLP (Dolphin - seismic; likely quite undervalued today) and long PLCS (Polarcus - seismic; my biggest mistake this year...).

Conclusion: there are some signs of capitulation recently, but not yet evidence that all is over, although some stocks are arguably cheap. But there might be some further thinking among investors that oil price decks will have to be revised down. This could hinder the upside going forward.

What do you think?

 

Eoin Treacy's view -

Thank you for these generous emails. I’m sure other subscribers will be glad of your on the ground perspective in Norway. The oil services sector has taken a beating not least because the forecasts for demand growth they based expansion plans on are not panning out. The recent decline in crude oil prices has thrown this issue into sharper focus. 



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October 29 2014

Commentary by David Fuller

Fed Cites Improved Labor Market While Ending QE as Planned

Here is the opening of Bloomberg’s report on the Fed’s policies now that it has ended QE3

The Federal Reserve said it sees further improvement in the labor market while confirming it will end an asset-purchase program that has added $1.66 trillion to its balance sheet.

“Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate,” theFederal Open Market Committeesaid today in a statement inWashington. “A range of labor market indicators suggests that underutilization of labor resources is gradually diminishing,” the panel said, modifying earlier language that referred to “significant underutilization” of labor resources.

Policy makers maintained a pledge to keep interest rates low for a “considerable time.”

While saying inflation in the near term will probably be held down by lower Energy prices, they repeated language from their September statement that “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”

Stocks extended losses after the Fed announcement. The Standard & Poor’s 500 Index fell 0.8 percent to 1,969.29 as of 2:17 p.m. in New York. The benchmark 10-year Treasury note yielded 2.35 percent, up 5 basis points from yesterday.

Chair Janet Yellen is completing two years of bond purchases that started under her predecessor, Ben S. Bernanke, as the Fed nears its goal for full employment. She must now chart a course toward the first interest-rate increase since 2006 while confronting risks from a slowing global economy and declining inflation. The FOMC repeated it will consider a wide range of information in deciding when to raise the federal funds rate, which has been held near zero since December 2008. Most Fed officials expect to raise the rate next year, according to projections released last month.

The Fed said it will continue reinvesting proceeds from a balance sheet that swelled to a record $4.48 trillion in the course of three rounds of so-called quantitative easing that started in November 2008 during the longest and deepest recession since the 1930s.

David Fuller's view -

To the Fed’s credit, it has been totally transparent in its assessments of economic data, and carefully signalled every step in its policy of gradually phasing out QE3, to ensure that their have been no sudden surprises for consumers, businesses or the financial markets.

Sensibly, it has left its options open by not providing a detailed assessment of developments that would either hasten or delay the eventual increases in short-term interest rates which we can expect as the economy gradually recovers.  However, the Fed has reaffirmed its policy of keeping rates low for a “considerable time.”  It has also indicated that it will not end the reinvest of maturing instruments in its balance sheet until it has raised the benchmark interest rate.

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October 29 2014

Commentary by Eoin Treacy

Oil Market Outlook

Thanks to a subscriber for this report from DNB which may be of interest to subscribers. Here is a section: 

We have been tracking IEA´s monthly oil reports for the past 38 months to see how they have forecasted the growth in US oil production. The graph above to the left represents 38 monthly oil market reports from the IEA. When these lines are rising it means upward revisions to production growth. During the past 38 months we have seen 35 upwards revisions. This means that in almost every monthly oil market report issued by the IEA during the past three years the agency has revised its estimated growth in US oil production higher. That is quite remarkable. Something like that has probably never happened before. The forecasted growth for 2014, which was issued last summer (in other words several years into the shale revolution) started at 700 kbd. Now the last IEA estimate is that US oil production will grow 1.4 million b/d in 2014. This is in other words a forecasting error of 100% and at the time of the initial forecast, the agency had already witnessed growth of oil production of about 1 million b/d for both 2012 and 2013. This is not to criticise the IEA. They have not been alone in being too conservative to the US shale oil industry.

The large growth in US oil production has meant that non-OPEC production has been growing faster than 1.5 million b/d for more than a year now. The key growth is as mentioned coming from the US, but also Canada and Brazil are growing their output quickly. In Canada the growth is coming from oil sands production, mainly in-situ projects, but we also see growth in shale oil output from Canada. According to PIRA Energy, Canadian shale oil production has reached about 0.5 million b/d. We expect continued start-up of new projects in Canada in 2015. These will be projects that are not sensitive to today’s oil prices, as the investments have been taken several years ago. Going forward however, the investments in Canadian oil sands are set to suffer on a lower oil price but that will only lead to lower production growth as we approach 2020. Also in Brazil there will be no negative impact on production in the next couple of years due to lower prices. The country continues to ramp up its production from the pre-salt fields in the Santos and Campos basin. Pre-salt production reached a record 532 kbd in September which is 62% higher than the year before. We do however expect larger production growth from Brazil in 2016 than in 2015 as 900 kbd of platform capacity is then set to come on line. This could of course slip into 2017 but it will be coming to the market no matter what happens to oil prices in the coming two years.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Veteran subscribers will be familiar with our view that oil prices are likely to trend lower in real terms over the next decade. The DNB team have been among a small number of analysts to share this view. Unconventional oil and gas remain game changers for the Energy sector and this is likely to remain a significant factor for the foreseeable future. 



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October 29 2014

Commentary by Eoin Treacy

The Outlook for Energy: A View to 2040 2014

This report from Exxon Mobil may be of interest to subscribers. Here is a section: 

In 2010, coal was the world’s No. 1 fuel for power generation, accounting for about 45 percent of fuel demand. Though coal use will likely increase by about 55 percent in developing countries by 2040, it continues to lose ground in developed countries – primarily to natural gas and renewables such as wind and solar.

By 2040, demand for natural gas in the power generation sector is expected to rise by close to 80 percent. At that time, natural gas will be approaching coal as the world’s largest Energy source for power generation, and coal’s share will have dropped to about 30 percent. Natural gas will actually produce more electricity than coal, reflecting efficiency advantages of gas-fired versus coal-fired power plants.

Increased local natural gas production in North America and elsewhere, along with expanded international trade, is expected to supply the gas for power generation.

By 2040, we expect that the use of nuclear power will approximately double and renewables will increase by about 150 percent, led by wind and hydroelectric power.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

It’s hard to think of a more benighted sector than coal. Beset on all sides by obstacles such as tougher environmental standards, slower growth in major markets like China, excess supply, too much debt and low natural gas prices in the USA,  steaming coal has fallen back to test the 2013 lows. 



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October 28 2014

Commentary by David Fuller

Stocks Rise on Corporate Earnings Ahead of Fed Meeting

Here is a section of this informative report from Bloomberg:

Almost 79 percent of S&P 500 companies that have reported so far have beatenearnings estimates, while 62 percent have surpassed revenue projections, according to data compiled by Bloomberg. Profit for S&P 500 companies rose 6.3 percent in the third quarter and sales increased 4.1 percent, analysts predicted.

“The corporate sector seems to be alive and kicking,” said Christian Gattiker, head of research at Julius Baer Group Ltd. in Zurich. “This is good news especially after the breakdown of confidence we had earlier this month. The question is whether the market has to rely on central bank policy alone to drive asset prices higher. Certainly the earnings season so far shows there is some support from the corporate sector too.”

Data today indicated orders for durable goods unexpectedly dropped in September for a second month as demand for machinery and computers slumped. Bookings for goods meant to last at least three years decreased 1.3 percent after falling 18.3 percent in August. The median forecast of 83 economists surveyed by Bloomberg called for a 0.5 percent gain.

Consumer confidence advanced in October as Americans enjoyed further price drops at the gas pump and the job market continued to improve. The Conference Board’s index climbed to 94.5 this month, the highest since October 2007, from a September reading of 89 that was stronger than initially estimated.

“The consumer confidence index was really big as everybody’s been concerned about what the pullback in the stock market means for holiday spending,” John De Clue, the Minneapolis-based chief investment officer for the Private Client Reserve of US Bank, said in a phone interview. “When you approach this time of year you’re looking at a wall of money to be spent or not spent, and it looks like now the fall in gasoline prices is going to offset that.”

All 10 of the main groups in the S&P 500 advanced, with Energy stocks rising 2.3 percent to lead gains. Transocean Ltd. and Newfield Exploration Co. added at least 4.3 percent.

David Fuller's view -

Corporate earnings are mostly encouraging, yet the lower durable goods figures for the second consecutive month confirm that the US economy is far from overheating.  Lower gasoline prices are a big boost for consumer confidence ahead of the important Christmas season.  This year’s three black swans – tit for tat sanctions against Russia, Isil’s advance in Iraq, and Ebola - are mostly off the front pages. Importantly, monetary policy remains extremely accommodative despite the imminent end of QE. 

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October 23 2014

Commentary by Eoin Treacy

From mobility to connectivity

Thanks to a subscriber for this interesting report from Deutsche Bank focusing on the Internet of Everything theme which is likely to continue to gain attention over the coming decade. Here is a section: 

IoT-driven demand for servers to all benefit the Asian technology supply chain in 2015-20. In this report we focus on devices which have yet to become connected and will be new growth drivers in 2015-20. We expect the upstream semiconductor sector to see incremental sales contribution from IoT and wearable ICs in 2015-20. We anticipate server demand to benefit the downstream hardware sector more than the upstream semiconductor sector.

Internet of Things – the connectivity theme After the mobility theme drove the proliferation of smartphones and tablet PCs since 2005, we expect the connectivity theme to trigger IoT demand in 2015-20. We expect 1) low-power application processors and microcontrollers with connectivity and embedded memory, and 2) MEMS (micro-electro-mechanical systems) sensors to be the major growth drivers for the upstream semiconductor sector. The key IoT applications for the downstream hardware sector include smart cities, home automation, eHealth, retail, smart cars, logistics, industrial control, smart metering, and smart agriculture and farming. In our view, IoT will provide benefits such as life quality improvement, productivity improvement, Energy saving, and security enhancement.

Wearable devices to be key products in an IoT world
Wearable devices can be connected to mobile devices and belong to the concept of IoT. Major applications for wearable devices will be entertainment, healthcare monitoring, mobile communication (connection with mobile devices), and mobile payment, in our view. We expect wearable device units to grow at a 25% CAGR in 2015-20.

IoT infrastructure should drive continuous server demand growth
We believe IoT infrastructure will be based on the current cloud architecture. Once IoT connects more objects, machines, and networks for global cloudbased services, data will be routed through servers for applications and data analysis. The uptake of IoT should therefore result in growing demand for data analysis and storage in servers and continue to drive demand for servers in 2014-18 with 4.3% unit CAGR 

 

Eoin Treacy's view -

A link to the full report is posted in the Subsriber's Area.

Connectivity is an increasingly utility-like commodity which is essential to modern living. As 4G networks continue to evolve and speed up, the practicality of having access to the internet wherever you go, at an acceptable cost and for an increasingly wide array of uses is swiftly becoming a reality. Set aside for one moment the angst of what we are to do to ensure full employment and think of the productivity that can be gained from supplying an educated, astute worker with tools that make their jobs easier. The roll out of technology to the global workforce and the development of entirely new industries that benefit from big data, tech distribution and connectivity represents the type of development on which secular bull markets are based. 



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October 22 2014

Commentary by Eoin Treacy

Musings from the Oil Patch October 22nd 2014

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. This edition contains an enlightening post on climate change but here is a section on the oil price:

What gives us greater confidence in this scenario is the fact that the Saudi officials have suggested that they are prepared to accept these lower oil prices for up to two years. That time period is longer than the near-term impacts suggested by some of the other scenarios. More importantly, the time frame is too short to derail the U.S. shale effort, especially since the marginal cost of that effort is $70-$77, or below the low end of the Saudi target oil price range. Two years may be how long it will take for lower Energy costs to help Europe to recover. The last point about this scenario that seems quite interesting is the timing of the Saudi disclosure, even though it has been offering small price reductions to Asian and U.S. buyers in recent weeks. The Saudis appeared to disclose their price strategy almost immediately following the European Union’s decision to not label Canada’s oil sands as “dirty” oil. That ruling opens up this market to Canadian oil sands producers, just at a time when they are struggling with rapidly escalating development costs that has even caused some projects to be delayed. From our chart of marginal oil costs, oil sands is just at or above the top end of the Saudi target price range, suggesting that the Kingdom wants to make sure that by continuing to hold an umbrella above oil sands’ costs it would concede the European market to Canada. Essentially, the Saudi oil pricing strategy is all about attempting to restart economic growth that the world desperately needs for its political health and the Saudis and its fellow OPEC members need for their oil exports. The unknown unknowns (tip to Donald Rumsfeld) of this strategy are what we should be worrying about.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Regardless of the motivation behind the offering of discounts to Asian and European buyers, the fact remains that Saudi Arabia’s decision has had an impact on pricing and puts pressure on the more expensive sources of new production. 



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October 21 2014

Commentary by David Fuller

Oil at $80 a Barrel Muffles Forecasts for U.S. Shale Boom

Here is the opening of this topical article from Bloomberg:

The bear market in oil has analysts reassessing the U.S. shale boom after five years of historic growth.

The U.S. benchmark price dropped to $79.78 a barrel on Oct. 16, the lowest since June 2012. At that level, one-third of U.S. shale oil production would be uneconomic, analysts for New York-based Sanford C. Bernstein & Co. led by Bob Brackett said in a report yesterday. Drillers would add fewer barrels to domestic output than the previous year for the first time since 2010, according to Macquarie Group Ltd., ITG Investment Research and PKVerleger LLC.

Horizontal drilling through shale accounts for as much as 55 percent of U.S. production and just about all the growth, according to Bloomberg Intelligence. The Paris-based International Energy Agency predicted in November that the U.S. would pass Russia and Saudi Arabia to become the biggest producer in the world by 2015. Though some forecasts show oil rebounding or stabilizing, any slower increase in U.S. output would shake perceptions for the global market, said Vikas Dwivedi, an oil and gas economist in Houston for Sydney-based Macquarie.

David Fuller's view -

Oil prices slightly above $80 for WTI and $85 for Brent are bullish for the global economy, if not oil exporters who increased their budgets in line with their projections for higher export earnings.  Oil prices are oversold and have steadied, as I also mentioned yesterday in reply to Email of the day 2.

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October 20 2014

Commentary by David Fuller

Modi State Election Wins Pave Way for India Overhaul

Here is the opening of this informative article from Bloomberg:

It’s been a good weekend for India’s Prime Minister Narendra Modi.

Two days ago he took his biggest step yet toward boosting the economy with a shift to more market-based Energy pricing. Then yesterday his Bharatiya Janata Party came first in two state elections, building on his landslide victory in May.

Modi now has a stronger hand to push ahead with tougher steps to overhaul Asia’s third-biggest economy. Those include passing a goods-and-services tax, further opening up to foreign investment and making subsidies for fertilizer, cooking gas and food more targeted toward the poor.

“The decision to scrap fuel subsidies and raise gas prices is a potential game-changer in the realm of investor perceptions of Mr. Modi’s commitment to undertake major fiscal and structural reforms,” Nicholas Spiro, managing director of London-based Spiro Sovereign Strategy, said by e-mail. “The stronger the BJP is at the state level, the more scope there is for Mr. Modi to undertake meaningful reforms. Now the stars seem to be aligning for Mr. Modi.”

Thus the victories could make it easier to push through a six-year-old bill proposing to allow foreign investors ownership of as much as 49 percent of a local insurance company and also reach agreements to replace more than a dozen types of tax that increase incentives for corruption. Passing the tax law would require votes in both houses of parliament, plus the support of 15 of the 29 states to amend the constitution.

Formation of a single internal market offers the $1.9 trillion economy a significant boost, according to the National Council of Applied Economic Research in New Delhi.

“The prospects are very good of Modi being able to carry out other tough reforms,”Akshay Mathur, head of research at Mumbai-based Gateway House, said by phone. “GST requires a certain consensus and given his leadership and the kind of euphoria over his victory, chances are that he will push the GST through.”

The optimism follows on the heels of Modi’s Oct. 18 move to scrap controls on diesel prices and increase natural gas tariffs. These were his biggest steps toward curbing subsidies that have contributed to one of Asia’s widest budget deficits.

David Fuller's view -

For a country previously considered to be ungovernable, two elections have created one of the world’s strongest democracies, led by an economically savvy Prime Minister who inspires confidence, not least among ex-pat Indians living all over the world.

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October 17 2014

Commentary by Eoin Treacy

Deflation fears are overdone

Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

Overview:  Over the last three months, inflation has fallen significantly, rekindling fears of deflation. Moreover, the fact that Energy prices have collapsed—in part because of a stronger dollar—has caused the breakeven inflation rate to roll over. In turn, financial markets have pushed out the timing of Fed tightening and substantially reduced expectations for the terminal fed funds rate. Our analysis shows that core inflation is likely to trend higher over time, led by higher services prices. Goods prices have been soft, but there is little evidence to suggest they are likely to turn sharply lower. Finally, the dollar needs to appreciate significantly further to have any noticeable impact on core inflation. 

Lower Energy prices will not sink capex:  Financial market participants are fretting the impact of falling Energy prices on capital expenditures within the Energy sector. In our view, these fears are overblown as oil- and gas-related investment is only about 10% of total nonresidential investment in equipment and structures, which is where business spending is captured in the GDP accounts. In total, business investment accounts for roughly 9% of real GDP. Hence, while Energy-related capital spending could slow if oil prices remain depressed for a significant period of time, this may be worth only a tenth or two on inflation-adjusted output growth, which is not very much. In fact, as we recently highlighted, the positive effects from a boost to consumer spending should more than outweigh any negative impact from lower capital expenditures.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

There is the world of difference between deflationary and disinflationary action. In many respects the fall in oil prices is a major benefit for economies not least in terms of transport, heating/cooling and industry. If this translates into lower headline inflation it can be viewed as a positive for anyone with a medium to longer-term perspective. However for a central bank dedicated to fostering inflation in order to incrementally debase the value of outstanding debt it is not seen in such rosy terms. 



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October 14 2014

Commentary by Eoin Treacy

Giant Battery Unit Aims at Wind Storage Holy Grail

This article by Whitney McFerron for Bloomberg may be of interest to subscribers. Here is a section: 

Electric-car battery prices already have fallen by 50 percent since 2010 to about $500 per kilowatt hour, and “by drawing on auto-battery technology, battery makers may also be able to supply storage batteries at a lower price,” Citigroup said in a Sept. 25 report. Tesla Chairman Elon Musk said in July that battery packs for electric cars will drop to $100 in the next 10 years. The Tehachapi batteries are supplied by LG Chem Ltd. and are the same type used in General Motors’ Volt.

The Southern California Edison project is part of a push for more wind and solar power in the state, among the sunniest in the U.S. A third of California’s electricity must come from renewable sources by 2020, and mandates also require that the three biggest investor-owned utilities store 1,325 megawatts by 2024. California already has more than 12,000 wind turbines, the most of any state, according to the American Wind Energy Association.

Eoin Treacy's view -

Many of the efficiencies claimed by battery manufacturers have been achieved via scale in manufacturing rather than technological leaps. Tesla’s gigafactory takes this process further by introducing additional economies of scale to further reduce the price of lithium batteries. So far ground breaking innovation has been more difficult to achieve than previously envisaged by companies but one benefit of building utility sized batteries is that power to weight ratios which are so important for car batteries are no longer a consideration.  

 



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October 13 2014

Commentary by David Fuller

U.S. Stocks Sink as Oil Slumps to 4-Year Low; Gold Gains

Here is the opening of this market summary from Bloomberg:

The Standard & Poor’s 500 Index capped its worst three-day loss since 2011 as airlines sank on Ebola concerns and Energy shares plunged as Brent dropped to the lowest in almost four years. The dollar slid and gold climbed.

The S&P 500 (SPX) fell 1.6 percent to 1,874.82 at 4 p.m. in New York, the lowest since May and closing below its 200-day moving average for the first time since 2012. The Dow Jones Industrial Average lost 1.4 percent to a six-month low. The Bloomberg U.S. Airlines Index plunged 6.2 percent, the most in two years. Brent crude tumbled 1.5 percent after sliding into a bear market last week. The dollar weakened against most of its 16 major counterparts. Gold gained 0.7 percent.

Today’s selloff extended a rout that wiped $1.5 trillion from global equities last week amid concern about weakening economic growth. Federal Reserve Vice Chairman Stanley Fischer said during the weekend that U.S. rate increases could be delayed by slowing growth elsewhere. Confirmation that a Dallas health-care worker is infected after treating an Ebola patient who died has put a new focus on risks the virus will spread.

“There has been weakness all day and there’s no leadership so when you get this exogenous thing, whether it’s caused by Ebola or not, and airlines are getting decimated, it’s hurting everything else,” Michael Block, chief equity strategist at Rhino Trading Partners LLC, said by phone.

David Fuller's view -

What is causing this selloff on Wall Street?  Well, subscribers who have monitored this service’s Comments of the Day and listened to the Audios over at least the last two to three weeks are not surprised.  The first, early warning came from deteriorating market breadth, revealed by the Russell 2000 Index of smaller companies – the canary in the coalmine - which had been developing a large top formation all year, before breaking downwards last week.  The second warning came from overextended rallies which reached psychological reassessment points, notably 2000 for the S&P 500 Index.

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October 13 2014

Commentary by David Fuller

Putin Deals China Winning Hand as Sanctions Power Rival

Here is the opening of this informative article from Bloomberg:

Defying his former enemies in the U.S. and Europe may force Vladimir Putin to aid the ascent of his biggest rival in the east.

Isolated over UkraineRussia is relying on China for the investment it needs to avert a recession, three people involved in policy planning said, asking not to be identified discussing internal matters. This means caving in to pressure to grant China privileged access to the two things it wants most: raw materials and advanced weapons, two of the people said.

Russia’s growing dependence on China, with which it spent decades battling for control over global communism, may end up strengthening its neighbor’s position in the Pacific while hastening its own economic decline. With the ruble near a record low and foreign investment disappearing, luring Chinese cash may deepen Russia’s reliance on natural resources and derail government efforts to diversify the economy.

“Now that Putin has turned away from the west and toward the east, China is drawing maximum profit from Russian necessity,” said Masha Lipman, an independent political analyst in Moscow who co-authored a study on Putin with former U.S. Ambassador Michael McFaul.

China is wasting no time filling the void created by the closing of U.S. and European debt markets to Russia’s largest borrowers. A Chinese delegation led by Premier Li Keqiang signed a package of deals today in Moscow in areas including Energy and finance. Among the accords was a three-year 150 billion yuan local-currency swap deal, a double-tax treaty, satellite-navigation and high-speed rail cooperation and an agreement on implementing a May natural gas contract.

David Fuller's view -

This is a good deal for China which wants Russia’s oil, gas and sophisticated weapons.  Terms for agreement will be set mainly by China because Russia is a forced seller and very much in need. 

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October 10 2014

Commentary by Eoin Treacy

Autonomies

Eoin Treacy's view -

We created the Autonomies designation because it was evident from late 2009 that some very important secular themes were coalescing around a group of companies that benefit from lower Energy prices, the expansion of the global middle class and the accelerating pace of technological innovation. These types of companies have global reach, the freedom to take maximum benefit from the global economy, dominate their respective niches, have established businesses that foster brand loyalty and often pay solid yields.  

Such qualities represent important reasons why they should be considered for entry in investment portfolios with a relatively long time horizon. More than a few subscribers have told me that they use the universe of Autonomies as a pool from which they pick emerging trends to participate in for as long as they remain consistent and we anticipate they the group will continue to provide investment opportunities for the foreseeable future.  

As the Fed’s third QE program draws to a close, the liquidity fuelled rally which has had such an effect on both markets and investor psychology is coming into question. I thought it would be an opportune time to review the Autonomies considering the spike in volatility posted this week. 

I suspect a big question for many investors will be whether the current pullback will represent something akin to that posted in 2011. It might, but in a good many cases this reaction is already larger and occurring from a higher point. 

 



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October 09 2014

Commentary by David Fuller

Stealth Bear Markets in U.S. Stocks Are Hiding in Bushes

Here is the opening of this topical report from Bloomberg:

While the Standard & Poor’s 500 Index is still less than 4 percent below its September record, other gauges of U.S. stocks are revealing where risk has been taken off the most in front of an eventual “normalization” of monetary policy.

Most conspicuous are the 88 Energy companies represented in the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), a $1.1 billion fund. The ETF managed to rebound yesterday after falling 24 percent from its June record, though today it’s reversing those gains and setting a new 13-month low. Crude oil is down 22 percent from its high in September 2013 as the rallying U.S. currency lowers prices of dollar-denominated commodities.

While lower oil prices are good for many parts of the economy, keep in mind that crude and the S&P 500 are usually positively correlated, meaning they tend to move in the same direction. The correlation diminished in recent years, and even went negative for a short time in late July and early August. The last time it went negative for any significant period was around the bankruptcy of Lehman Brothers Holdings Inc. in 2008.

David Fuller's view -

Churning price action, as we are now seeing on Wall Street, is an important technical signal.  However, the implications depend entirely on where it is occurring in the market cycle.

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October 09 2014

Commentary by Eoin Treacy

Long Run Crop Price Outlook: $6 Corn and $13 Soybeans

I met Michael Devlin from Cere Partners at last week’s Contrary Opinion Forum and had a long chat about the merits of farmland in a diversified portfolio. Here was kind enough to send me their outlook for corn and soybeans which they farm in Indiana. Here is a section: 

Brazil has been expanding its soybean acreage for 20 years, but $16.00 soybeans made the economics attractive on even marginal ground, which may not yet be fully conditioned to neutralize the naturally high acidity. Consequently, we witnessed the second biggest expansion of Brazilian soybean acreage ever. (See Exhibit 3) Furthermore, $7.50 corn made not only 1st-crop corn attractive in Southern Brazil, but also 2nd-crop or safrinha corn. In some parts of the world, including major parts of Brazil, farmers are often able to get 2 crops by planting a soybean variety with a shorter growing season, and then immediately planting the second crop (often corn, cotton, or sorghum). "is acreage is able to rotate annually to whichever crop offers the best economics. But second-crop corn is risky. Farmers are gambling that the rainy season will continue until the corn is mature. However, at $7.50 or even $6.00 the economics have been compelling and in Brazil there was a major expansion of second crop corn in 2012 and 2013. For the first time ever, second crop corn (safrinha means “little crop” in Portuguese) was bigger than first crop corn, comprising 56% of the total production. 

Where $7.50 corn (and $16.50 soybeans) signals an expansion of acreage, Ceres believes $4.50 corn (more precisely $10 soybeans) signals a reduction of acreage. Mato Grosso State in West Central Brazil grows approximately 10% of the global soybean crop. But Mato Grosso soybeans must be hauled more than 1,000 miles by truck over poor roads to get to market. Net of transportation costs, the price farmers receive for soybeans is significantly below the price quoted in Chicago.

Currently the “basis” on bids for 2014 soybeans is reportedly ~$3.00 under Chicago. So $10 soybeans in Chicago (the ~price equivalent to $4.50 corn) translates into $7 soybeans in Mato Grosso. But $7 is the breakeven price for the average producer in the state (See Exhibit 4) according to IMEA, the Mato Grosso Institute for Agricultural Economics. Put another way, half of the soybean producers in Mato Grosso, comprising ~5% of worldwide soybean production, would be below breakeven in a $4.50 corn/$10 soybean environment. $10 soybeans might not have an immediate elect on soybean acreage because Brazilian farmers typically buy inputs and market their crops in advance. So it could take $4.50 corn/$10 soybeans lasting a full year for soybean acreage to drop significantly.

Additionally, at $4.50 corn, we would anticipate much less corn acreage in the second crop. Based on crop budgets from IMEA it will cost ~$2.50 to grow a bushel of second crop corn in 2014. "is breakeven at ~$5.00 corn given that IMEA estimates it costs another $2.50 a bushel to truck corn from the interior to the major grain exporting ports. Second crop corn would at best be a breakeven proposition at $4.50-$5.00. We would see some acreage planted as farmers need a cover crop, but it will be significantly less than we saw in 2013.

 

Eoin Treacy's view -

A link to the full report is posted in the Susbcriber's Area.

Farmers respond to higher prices by planting more in an effort to capture as much benefit as possible. Inevitably supply increases. In the period from 2006 relatively high historical prices have been sustained for lengthy periods of time. The weak Dollar, high cost of Energy, inclement weather, expensive nutrients and rising labour costs all contributed to this situation but the effect has been that supply increased nonetheless. 



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October 08 2014

Commentary by Eoin Treacy

International schemes hatch to tap nuclear for industrial heat

Thanks to a subscriber for this informative article from the Energy2blog which may be of interest: Here is a section: 

The HTR-PM is not to be confused with another ambitious high temperature project underway in China, in which the Chinese Academy of Sciences in Shanghai is developing small prototypes of a salt-cooled, solid fueled pebble bed reactors (Li Fu’s HTR-PM design uses gas cooling) and of a salt-cooled, liquid fueled molten salt reactor. It is targeting a 2019 completion date.

The two projects reflect a drive in China to develop nuclear power as part of an environmental and Energy security push. China even has other advanced reactor projects under way. For example, it hopes to operate a “super critical water-cooled reactor” by 2025, NucNet reported. And its current commitment conventional reactors has become legendary. As I wrote recently, whereas China currently operates only 20 nuclear reactors , it has another 28 under construction, an additional 58 planned, and a staggering 150 or so proposed.

It is also stepping up as an exporter of nuclear reactors and technologies to countries including Saudi Arabia and possibly the UK. Its penchant for selling abroad applies not only to conventional reactors, but to advanced reactors as well. In one of his Vienna slides, Tshinghua’s Li noted that the HTR-PM is “suitable for international market” and that its small size makes it “more flexible for developing countries.”

 

Eoin Treacy's view -

The development of Generation IV nuclear reactors represents a bold step forward for the prospects of a future with abundant Energy. However, the fact that China is the only country presently willing to commit to experimenting with a variety of potential solutions ensures that not only has it a better chance of solving its Energy dilemma but that it will gain a technological lead in what is a highly strategic sector. The deterioration in the price of oil and gas together with political ignorance of and ambivalence to new nuclear suggest that North American and European appetites are likely to remain tepid for developing these technologies. 



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October 07 2014

Commentary by David Fuller

Roger Bootle: Global imbalances succumb to the dwindling price of oil

Here is the latter section from this informative article by the author for Bloomberg:

Over the last few years, this picture has changed. America’s deficit has just about halved, and there has been a major reduction in the corresponding large current account surpluses around the world. Japan’s surplus has fallen dramatically so that it is now not much above zero. China’s surplus and the combined surpluses of the oil producers have just about halved.

What’s more, these trends may be set to continue. The oil price has been dribbling down and is now just over $90. At Capital Economics, we think that the price of Brent crude could be about $70 a barrel by 2020, compared to the 2008 peak of $143. This price weakness is being driven by a combination of increased supply coming onto world markets and increased Energy efficiency. If we are right about the prognosis, then some significant surpluses are going to evaporate. Russia’s is almost completely gone already.

But there is a new element to this story. While most of the global imbalances have been on a course towards reduction, in the eurozone, what wasn’t an imbalance ten years ago has recently become one. Of course, from the beginning of the single currency there were significant imbalances within the eurozone, with large surpluses for Germany and the Netherlands offset by large deficits in Spain and several of the other smaller economies.

What has happened over the last few years, however, is that the surpluses run by Germany and the Netherlands have remained constant, but the group of weaker peripheral countries – Portugal, Italy, Ireland, Greece and Spain – has moved from small deficits to a surplus. The primary driver behind this change has been Spain. As recently as 2007, it was running a deficit of 10pc of GDP. The balance is now nearly zero.

The upshot is that the eurozone’s combined current account surplus is now about double the size of China’s, and roughly equal to the combined surpluses of all the oil-producing countries in OPEC. The effort to keep the euro together has involved a massive deflation of demand in the European periphery that has depressed aggregate demand for the world as a whole. The surplus run by the eurozone as a whole represents an implicit attempt to Germanise the union and to export its way out of economic weakness, in the process exporting recessionary forces around the world. One of the prime sufferers from this development has been the UK, since we are the eurozone’s single biggest export market and it is ours.

Let me put this more provocatively. Some of the forces responsible for the fundamental weakness of aggregate demand which lay behind the financial crisis have been attenuated and/or are on the way to petering out. If oil prices continue to fall this will be a massive boon to the world economy. Just as this improvement has occurred, however, the gathering failure of the eurozone has replaced it.

Some notable American economists are banging on about the idea of “secular stagnation”, that is to say, the notion that demand is going to be weak for an extended period for deep-seated, systematic reasons, and that accordingly economic performance will be weak – for years, if not decades, into the future. They are barking up the wrong tree. The formation of the euro and the way that it has been managed in a deflationary manner is now the single biggest cause of weak aggregate demand and poor economic performance. Cure the euro problem, and the whole world economy would be much stronger. I surely don’t need to remind you of how the euro problem can be cured.

David Fuller's view -

Financial difficulties, not to mention crises, are well known catalysts for political change.  All of Europe remains in a political hot seat.  Scotland’s referendum vote nearly broke up the United Kingdom.  Putin’s mendacity in Ukraine, leading to sanctions, followed by a sharp drop in the price of Brent crude oil since June, make regime change a real possibility in Russia.     



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September 26 2014

Commentary by David Fuller

Nuclear Plants Across Emerging Nations Defy Japan Concern

Here is the opening of this interesting article from Bloomberg:

Three years after Japan closed all of its nuclear plants in the wake of the Fukushima meltdown and Germanydecided to shut its industry, developing countries are leading the biggest construction boom in more than two decades.

Almost two-thirds of the 70 reactors currently under construction worldwide, the most since 1989, are located inChinaIndia, and the rest of the Asia-Pacific region. Countries includingEgyptBangladesh, Jordan and Vietnam are considering plans to build their first nuclear plants, according to Bloomberg New Energy Finance in London. Developed countries are building nine plants, 13 percent of the total.

Power is needed as the economies of China and India grow more than twice as fast as the U.S. Electricity output from reactors amounted to 2,461 terawatt-hours last year, or 11 percent of all global power generation, according to data from the Organization for Economic Cooperation and Development and the International Energy Agency. That’s the lowest share since 1982, the data show.

“We see most of the constructions in the growing economies, in the parts of the world where you see strong economic growth,” Agneta Rising, the head of the World Nuclear Association in London, said Sept. 24 by e-mail. “In many developed countries there is a large degree of policy uncertainty concerning nuclear.”

China’s electricity consumption is forecast to jump 63 percent by 2020 to 7,295 terawatt-hours from 4,476 terawatt-hours in 2011, while India’s demand is predicted to grow by 45 percent from 2010 through 2020, according to the U.S. Energy Information Administration. Over the same period, demand growth in 22 European members of the OECD is forecast to be 3.6 percent.

David Fuller's view -

The world will need all of the Energy sources that it can develop and a significant increase in new nuclear plants would be a big factor in reducing CO2 emissions.  We are currently in the foothills of nuclear power’s recovery as it remains controversial, albeit less so in faster growing emerging countries. 

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September 24 2014

Commentary by David Fuller

Technology Revolution In Nuclear Power Could Slash Costs Below Coal

Here is a section from this interesting article by Ambrose Evans-Pritchard for The Telegraph: 

The Alvin Weinberg Foundation in London is tracking seven proposals across the world for molten salt reactors (MSRs) rather than relying on solid uranium fuel. Unlike conventional reactors, these operate at atmospheric pressure. They do not need vast reinforced domes. There is no risk of blowing off the top.

The reactors are more efficient. They burn up 30 times as much of the nuclear fuel and can run off spent fuel. The molten salt is inert so that even if there is a leak, it cools and solidifies. The fission process stops automatically in an accident. There can be no chain-reaction, and therefore no possible disaster along the lines of Chernobyl or Fukushima. That at least is the claim.

The most revolutionary design is by British scientists at Moltex. "I started this three years ago because I was so shocked that EDF was being paid 9.25p per kWh for electricity," said Ian Scott, the chief inventor. "We believe we can achieve parity with gas (in the UK) at 5.5p, and our real goal is to reach 3.5p and drive coal of out of business," he said.

The Moltex project can feed off low-grade spent uranium, cleaning up toxic waste in the process. "There are 120 tonnes of purified plutonium from nuclear weapons in Britain. We could burn that up in 10 to 15 years," he said. What remained would be greatly purified, with a shorter half-life, and could be left safely in salt mines. It does not have to be buried in steel tanks deep underground for 240,000 years. Thereafter the plant could be redesigned to use thorium, a cleaner fuel.

The reactor can be built in factories at low cost. It uses tubes that rest in molten salt, working through a convection process rather than by pumping the material around the reactor. This cuts corrosion. There is minimal risk of leaking deadly cesium or iodine for hundreds of miles around.

Transatomic Power, in Boston, says it can build a "waste-burning reactor" using molten salts in three years, after regulatory approval. The design is based on models built by US physicist Alvin Weinberg at Oak Ridge National Laboratory in the 1960s, but never pursued - some say because the Pentagon wanted the plutonium residue for nuclear warheads.

It would cost $2bn (overnight cost) for a 550-megawatt plant, less than half the Hinkley Point project on a pro-rata basis. Transatomic says it can generate 75 times as much electricity per tonne of uranium as a conventional light-water reactor. The waste would be cut by 95pc, and the worst would be eliminated. It operates in a sub-critical state. If the system overheats, a plug melts at the bottom and salts drain into a cooling basin. Again, these are the claims.

The most advanced project is another Oak Ridge variant designed by Terrestrial's David LeBlanc, who worked on the original models with Weinberg. It aims to produce power by the early 2020s from small molten salt reactors of up to 300MW, for remote regions and industrial plants. "We think we can take on fossil fuel power on a pure commercial basis. This is a revolution for global Energy," said Simon Irish, the company's chief executive.

David Fuller's view -

Here is a PDF version if you had any difficulty in opening the article above.

Molten salt reactors that provide cheap Energy, consume most of our nuclear waste, are vastly safer than nuclear plants in use today, and much cheaper to build, sounds too good to be true.  That is the reality today, but theoretically, the potential of future technologies is virtually unlimited. 

The prospect of commercially competitive molten salt reactors is presumably at least a decade away, assuming this fledgling industry receives the development capital required.  That will prove to be more of a political than economic challenge, I fear.  Backers of today’s various Energy sources will be opposed, as will most militant greens, and governments are too often looking for short-term solutions.  

Nevertheless, there is a clear ‘needs must’ incentive for reliable, economic, 24-hour a day Energy at a consistent rate, which does not pollute the atmosphere.  Molten salt reactor projects are certainly worth developing.

Looking ahead, I would welcome any informative articles and reports on this subject that readers are able to share with our Collective of Subscribers. 



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September 24 2014

Commentary by Eoin Treacy

Musings from the Oil Patch September 24th 2014

Thanks to a subscriber for kindly forwarding this edition of Allen Brooks’ ever informative Energy report for PPHB. Here are two important sections: 

The IEA’s comment about how remarkable the decline is, suggests that it did not have a grasp of the magnitude of the impact on oil demand from China’s ending the filling of its oil storage tanks during the past few months in response to the country’s growing economic weakness and financial stress. It would appear that the additional cost of this storage oil was too expensive for the Chinese economy and banking system to bear. Additionally, we believe the IEA’s model assumed too generous an estimate for economic growth in Western Europe and North America during the second half of 2014.

And

Besides the accelerating demand growth against limited non-OPEC supply increase case, the bulls point to the growing cost to find additional oil supplies. They also point to the new dynamic for OPEC, which is the high fiscal cost of their oil output. By “fiscal cost” they mean the price for a barrel of oil that multiplied by the number of annual barrels produced yields income sufficient to cover the cost of running the country’s government. That cost has risen sharply in a number of Middle Eastern and North African countries due to rapidly growing populations (these countries have some of the highest birth rates in the world) and the cost to mitigate social tensions associated with the ethnic struggles (Arab Spring) ongoing within most of these countries – what some of us might call political insurance. A number of analysts have crunched the budget numbers for these countries and created charts such as that below.

What this chart demonstrates is that only Qatar and Kuwait among the OPEC members have fiscal breakeven prices of around $75 a barrel. A substantial volume of OPEC production needs a price somewhere around $100 a barrel for the country to breakeven, while another substantial amount requires prices in the $125 per barrel neighborhood.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

There have been a number of headlines pondering the response of oil prices when geopolitical tensions have been so taut. China’s decision that its strategic reserve is large enough represents the withdrawal of a significant source of demand from the market at a time when supplies have been reasonably steady regardless of geopolitical tensions. 



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September 23 2014

Commentary by David Fuller

Martin Spring: On Target

My thanks to the author for the latest issue of his informative monthly letter.  Here is a brief sample:

Making a Mess of Power Supply

Britain’s National Grid has announced that emergency measures are going to be introduced to prevent the “lights going out” this winter.

Energy investment banker Allen Brooks says this is “an unintended consequence of the UK’s green Energy plan that has forced the closure of fossil fuel and nuclear plants,” pushing the nation’s surplus power availability “to a razor-thin margin that might disappear this winter” as a result of power-plant outages.” It may also be caused by “lack of renewable Energy at times when the wind doesn’t blow and the sun doesn’t shine.”

Emergency measures include compensation for offices and factories that agree to shut down for up to four hours a day to provide capacity for households, and asking owners of old fossil-fuel generating plants that we shut down to reopen before the start of winter.

Those such as former US vice-president Al Gore who argue that renewables increasingly make “good economic sense” because they’re heading towards commercial viability -- the cost of solar panels has halved over three years – ignore “the costs associated with the intermittency of the power output,” Brooks says.

“Wind farms do not generate power when the wind isn’t blowing, and solar power isn’t produced during the night. Electricity demand also varies… in ways that the output from wind and solar may not match.”

A recent cost-benefit analysis by Charles Frank of the Brookings Institute that takes into account all the costs of building and running power plants, including the costs of dealing with intermittency through providing standby power, shows that wind and solar are much more expensive using the standard measure of “levelized” cost.

“Solar power is the most expensive way to reduce carbon emissions. Wind turns out to be the next most expensive, with hydro-power providing a modest net benefit. The most cost-effective zero-emission technology is nuclear power.”

David Fuller's view -

I only question the last paragraph’s contention that solar power is a more expensive way to reduce carbon emissions than windmills.  I do not know how they measured this but solar panels are becoming increasingly efficient and I expect to see them on many industrial / commercial buildings and an increasing number of private homes over the next two decades.

This issue of On Target has an excellent lead section on Planning Your Portfolio, extensively quoting William Bernstein’s new book.

On Target is posted in the Subscriber's Area.



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September 19 2014

Commentary by David Fuller

The Weekly View: Keeping The Fed At Bay

My thanks to Rod Smyth, Bill Ryder and Ken Liu of RiverFront for their excellent timing letter.  Here is a brief sample:

Even with a strengthening economic environment, we don’t see any inflation trouble ahead.  This is partly because of falling Energy prices, which makes up about 10% of the consumer price index.  Other major global commodities, such as iron ore, corn, and rubber, have had big price declines and continue to trend lower.  We also credit US dollar strength in recent weeks for putting the lid on commodity prices in general.  A stronger dollar also helps lower import costs, which is another way to keep inflation under control.  Thus, one of the beneficial side effects of stronger economic growth and rising expectations of monetary tightening is to boost the currency (and its purchasing power) while actually lowering inflation expectations.

David Fuller's view -

The USA’s virtual Energy self-sufficiency puts it in a much stronger position to cope with a firming currency, in a competitive global environment, as the economy gradually recovers. 

This item continues in the Subscriber’s Area, where The Weekly View is also posted.



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September 18 2014

Commentary by David Fuller

Fracking, Drinking Water and Reality

As it turns out, fracking doesn't necessarily pollute the water supply. But the wells used for fracking might.

The distinction matters because drilling companies know how to make wells more reliable, even if all the effects of the fracking process are not yet well understood. One of the biggest worries, for example, has been that the hydraulic fracturing of deep underground rock to release the natural gas within it could somehow cause that gas to leak upward and contaminate drinking water supplies many thousands of feet closer to the surface.

But a new study finds that this danger is oversold. In places where the water near fracking sites has been contaminated, the culprit has been faulty steel tubing inside the vertical wells that lead down to the shale, or weak cement in the casing around it.

Making sure the wells are built soundly is something that drilling companies, and state regulators, can do. In about 5 percent of wells, the cement is imperfect enough to carry the risk of internal leaks.Poor cementing was partly to blame for the BP oil spill in the Gulf of Mexico four years ago.

So states need strong standards for well construction -- to ensure, for example, that the cementing is done effectively, that there are plenty of layers of casing, that the well runs straight and has smooth sides, and so on. And states need enough trained inspectors to see that the rules are carefully followed.

The good news is that many states have been putting such rules in place. Pennsylvania, Wyoming and Texas have all strengthened their regulations since 2010. In just the past year and a half, eight other states have updated their well-integrity rules, and six more have changes in the works.

Knowing that water pollution isn't inevitable with fracking should help both critics and defenders of the technology come together to agree on well standards. It wouldn't make fracking problem-free -- there's still a need for the safe handling of wastewater, as well as the noise, light and other distractions that many well neighbors hate. But it allays worries about a possibly dangerous side effect of a business that increasingly provides the U.S. with a relatively clean and inexpensive fuel.

David Fuller's view -

The technology continues to improve; effective regulation is in everyone’s interests; the world gets the Energy it needs.

If Europe embraced responsible fracking, its economies would be more competitive and Putin would be brought to heel more quickly.  



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September 18 2014

Commentary by Eoin Treacy

Uranium officially enters bull market

This article from Bloomberg on the 16th may be of interest to subscribers. Here is a section: 

The U.S. on Sept. 12 expanded sanctions against Russia to include OAO Sberbank, the country’s largest bank, because of the fighting in eastern Ukraine. The EU added 15 companies such as Gazprom Neft and OAO Rosneft, and 24 people to its own list of those affected by its restrictions.

In Canada, voting on Cameco’s new labor agreement will happen once workers are back on the job, the United Steelworkers said Sept. 12. The Saskatoon, Saskatchewan-based producer said Aug. 27 it had started shutting down the mine after receiving a strike notice from the union.

An agreement to end the strike will be negative for the uranium sector, Rob Chang, the head of metals and mining at Cantor Fitzgerald in Toronto, said in a Sept. 12 note. The brief shutdown may affect about 900,000 pounds of supply, he said.

Eoin Treacy's view -

The repercussions of the sanctions on Russia continue to be felt across an increasing number of sectors. Locking Sberbank out of large international capital markets is a major impediment to Russia accessing the working capital necessary to fund normal financial markets operations. By comparison, the ban on salmon exports from Europe and Norway has been a boon for the Faroe Islands but in the wider scale of things a pretty small consideration. Russia’s tactical advantages lie in the Energy sector and potentially in the cyber sector. 



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September 18 2014

Commentary by Eoin Treacy

Towards an Asian century of prosperity

This article from The Hindu newspaper by China’s Premier Xi Jinping may be of interest to subscribers. Here is a section: 

Both China and India are now in a crucial stage of reform and development. The Chinese people are committed to realising the Chinese dream of great national renewal. We are deepening reform in all sectors. The goal has been set to improve and develop the socialist system with Chinese characteristics and advance the modernisation of national governance system and capability. A total of over 330 major reform measures covering 15 areas have been announced and their implementation is well underway.

Under Prime Minister Narendra Modi’s leadership, the new Indian government has identified ten priority areas including providing a clean and efficient administration and improving infrastructure. It is committed to building a united, strong and modern India — Shreshtha Bharat. The Indian people are endeavouring to achieve their development targets for the new era. China and India are both faced with historic opportunities, and our respective dreams of national renewal are very much aligned with each other. We need to connect our development strategies more closely and jointly pursue our common dream of national strength and prosperity.

As emerging markets, each with its own strengths, we need to become closer development partners who draw upon each other’s strengths and work together for common development. With rich experience in infrastructure building and manufacturing, China is ready to contribute to India’s development in these areas. India is advanced in IT and pharmaceutical industries, and Indian companies are welcome to seek business opportunities in the Chinese market. The combination of the “world’s factory” and the “world’s back office” will produce the most competitive production base and the most attractive consumer market.

As the two engines of the Asian economy, we need to become cooperation partners spearheading growth. I believe that the combination of China’s Energy plus India’s wisdom will release massive potential. We need to jointly develop the BCIM Economic Corridor, discuss the initiatives of the Silk Road Economic Belt and the 21st Century Maritime Silk Road, and lead the sustainable growth of the Asian economy.

Eoin Treacy's view -

Ahead of Xi’s visit Chinese troops built a rudimentary road on the contested part of the India/China border and Indian troops destroyed it a day later. India boosted support for Vietnam, agreeing to export arms, the day before his visit. The above text is part of a charm offensive where both countries could benefit from greater bilateral trade, but no one is under any illusion about how much room there still is for relations to improve.   

 



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September 16 2014

Commentary by Eoin Treacy

Crude Rises as OPEC Secretary General Says Group May Cut Target

This article by Mark Shenk for Bloomberg may be of interest to subscribers. Here is a section:

“I am not really concerned about the prices declining at this short term,” OPEC’s El-Badri said. “I think the price will rebound by the end of the year. When we’re coming to the fall, things will look better.”

Saudi Arabia cut its crude production by 408,000 barrels a day to 9.6 million in August, the biggest reduction since the end of 2012, the kingdom said in a submission to OPEC.

OPEC officials, including Saudi Arabian Oil Minister Ali Al-Naimi, have said they see no urgent need to respond to oil’s drop. Prices “always fluctuate and this is normal,” Al-Naimi told reporters in Kuwait on Sept. 11. Oil will recover as demand for winter fuels climbs, Kuwaiti Oil Minister Ali Al-Omair said the same day. The group is next due to meet on Nov. 27.

‘Huge Decline’
“The huge decline in prices since June has been a major concern to all oil producers,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on Energy, said by phone. “The Saudis have already started to cut output and now we’re getting evidence of further action. The market appears to have found a bottom and the statements are a sign for the buyers to return.”

Russian and OPEC analysts will meet in the spring, Russian Energy Ministry spokeswoman Olga Golant said by text message. “High-level” talks are scheduled for the second half of 2015, according to a joint statement from OPEC and Russia today “I wouldn’t be surprised if the Russians and OPEC cooperated to support the market,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $2.6 billion, said by phone. “It’s in the interests of both parties to keep prices from falling further.”

Eoin Treacy's view -

Oil remains both the most important and most political of all commodities. The actions of OPEC, in supporting prices in the $100 region over the last three-years, have helped sustain the range evident in Brent crude prices. As a result traders have been waiting for a statement from the cartel on what their actions are likely to be with prices testing the lower side. They appear to have their answer. 



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September 12 2014

Commentary by David Fuller

U.S., EU Tighten Russia Sanctions in Ukraine Conflict

Here is the opening for this article on the latest developments regarding sanctions, reported by Bloomberg:

The U.S. expanded sanctions againstRussia to include the country’s largest bank, OAO Sberbank, Energy companies as well as five state-owned defense and technology companies, joining the European Union in tightening restrictions.

President Vladimir Putin, talking to reporters in the Tajik capital of Dushanbe, said Russia will hold off on retaliation for now and has no plans to “close itself off.”

Russia is locked in a standoff with its former Cold War adversaries over the fighting in eastern Ukraine that has claimed more than 3,000 lives. Putin has denied supporting pro-Russian rebels in the battle-torn region.

“Russia’s economic and diplomatic isolation will continue to grow as long as its actions do not live up to its words,” U.S. Treasury Secretary Jacob J. Lew said in a statement today. “Russia’s economy is already paying a heavy price for its unlawful behavior.”

The Treasury Department imposed sanctions that prohibit transactions in, provision of financing for, or other dealings in new debt of greater than 90 days maturity issued by OAO Gazprom (OGZD) Neft and OAO Transneft. For banks, the debt financing restriction now covers maturities greater than 30 days, instead of 90 days previously.

David Fuller's view -

Russia’s economy is weak and problems are compounded by the recent decline in oil prices.  Therefore, Putin may have decided on a quieter strategy over the next few months, knowing that European countries were already talking about lifting the latest sanctions as they reluctantly imposed them, if there were no further obvious invasions of Ukraine.  A rally in the price of Brent crude oil and / or the approach of winter will strengthen Putin’s hand and could embolden him, provided there is no real resistance to his policies within Russia.

This item continues in the Subscriber’s Area, and contains an informative interview.



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September 11 2014

Commentary by David Fuller

Obama Says U.S. to Join EU in Tightening Russia Sanctions

Here is the opening of this recently released article from Bloomberg:

The U.S. joined the European Union in stiffening sanctions on Russia over Ukraine, as the 28-member bloc offered to ease the restrictions once the Kremlin makes a good-faith effort to end the conflict.

The U.S. will “deepen and broaden” measures against Russia’s financial, Energy, and defense industries, President Barack Obama said in a statement today, adding that the sanctions will take effect tomorrow and details will be released then. The EU said it would also enact its latest round of economic restrictions tomorrow. Europeis acting against a peaceful solution in Ukraine, the Russian Foreign Ministry said.

The moves raise the level of confrontation and follow reprisals last month by Russian President Vladimir Putin with a ban on a range of food imports after an earlier round of U.S. and European penalties. Facing the most significant action against his country since the fall of the Berlin Wall, Putin denies any involvement in the fighting that broke out after he annexed Crimea in March and says Russia’s Cold War adversaries are to blame for the standoff.

“We have always stressed the reversibility and scalability of our restrictive measures,” EU President Herman Van Rompuy said in a statement from Brussels. A review of the cease-fire in eastern Ukraine by the end of September may lead to EU “proposals to amend, suspend or repeal the set of sanctions in force, in all or in part.”

Ending days of wrangling, representatives of the EU governments agreed to impose curbs on European assistance for Russian oil exploration and production and on the financing of Russian defense and Energy companies. The EU also slapped travel bans and asset freezes on 24 more people accused of destabilizing Ukraine, bringing the total to 119.

David Fuller's view -

Sanctions and the inevitable counter moves that we have seen from Russia are understandably inconvenient and painful for all parties, but preferable to military war.  They are also a medium to longer-term strategy so it is premature to say that they are not working. 

However, reading the article above, EU President Herman Van Rompuy’s comments sound like the novice, underfunded gambler making his last ante while simultaneously announcing that he will fold in the next round.  Instead, he should indicate that sanctions will continue to be tightened until Russia backs down. Unfortunately, his comments are more likely to encourage Putin. 

Putin’s policies ensure that Russia’s economic position is vulnerable, but so is Europe’s.  However, Russia is in a position of isolation relative to the European Union.   



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September 10 2014

Commentary by Eoin Treacy

Rand Conspiring With Deficit to Upend Doves: South Africa Credit

This article by Rene Vollgraaff for Bloomberg may be of interest to subscribers. Here is a section:

The Reserve Bank’s monetary policy committee meets next week and again in two months after raising the benchmark lending rate by 75 basis points this year to 5.75 percent. While inflation eased to 6.3 percent in July, remaining above policy makers’ target, the gauge stripping out food, Energy and gasoline costs climbed to the highest level since January 2010.

“We could see another interest-rate increase,” Ronel Oberholzer, an economist at Pretoria-based IHS Global Insight Southern Africa, said by phone yesterday. “The bank will probably use the rand’s movement as a reason, but then it would pause and see what happens with growth, which will be bad this year.”

 

Eoin Treacy's view -

The US Dollar remains in a consistent uptrend against the Rand and rallied this week from the region of the 200-day MA. A sustained move below ZAR10.50 would be required to question medium-term potential for additional strength. 

 



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September 09 2014

Commentary by Eoin Treacy

Email of the day on uranium mining investment vehicles

Your comment on the Uranium price is of interest to me. Prior to Fukishima , Geiger Counter was very much in vogue. Then came the collapse. I wondered what the view was now concerning the above and perhaps suggest other companies listed in London that have positive chart patterns .    

Eoin Treacy's view -

Thank you for this question which others may have an interest in. Geiger Counter generally runs a concentrated portfolio of high potential explorers and developers although its current holdings are peppered by some larger uranium names.  

I highlighted it as a potentially interesting fund offering exposure to the uranium market on August 22nd

 



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September 08 2014

Commentary by Eoin Treacy

Brent Crude Declines Below $100 for First Time Since June 2013

This article by Mark Shenk for Bloomberg may be of interest to subscribers. Here is a section: 

WTI for October delivery fell 98 cents, or 1.1 percent, to $92.31 a barrel on the New York Mercantile Exchange. Futures touched $91.80, the lowest level since Jan. 14. Volumes were 8.6 percent higher than the 100-day average. The U.S. benchmark grade traded at a $7.52 discount to Brent, compared with $7.53 at the close on Sept. 5.

“The fundamentals have been bearish and eventually the fundamentals win out,” Sarah Emerson, managing principal of ESAI Energy Inc. in Wakefield, Massachusetts, said by phone. “We’re looking at a weak global market.”

In China, imports fell for a second month as a property slump hurt domestic demand. The trade surplus climbed to a record of $49.8 billion in August as exports rose on the back of increased shipments to the U.S. and Europe.

The 2.4 percent drop in imports compares with the median estimate for a 3 percent increase. Exports increased 9.4 percent from a year earlier, the Beijing-based customs administration said today, compared with the 9 percent median estimate in a Bloomberg survey.

Eoin Treacy's view -

Brent Crude closed out the day close to $100 which has represented an area of support on successive occasions since 2011. Demand growth might be moderating but supply constraints are what helped prices maintain elevated prices over the last few years. This situation is easing as US production displaces imports and as some of the missing Middle Eastern barrels begin to come back to market. 



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September 08 2014

Commentary by Eoin Treacy

Tesla choice of Nevada for gigafactory boon to NV mining

This article by Dorothy Kosich for Mineweb may be of interest to subscribers. Here is a section: 

The plant is expected to begin production of 500,000 lithium battery packs by 2017 for use in Tesla’s Model 3 cars.

John Boyd, a principal of the site selection firm The Boyd Company, told the Wall Street Journal, “I think the single most important factor is the [site’s] low-cost green power, including solar, wind and geothermal Energy for the plant. He also cited Nevada’s lack of corporate and personal income taxes as positive factors.

Elon Musk, Tesla CEO, said the company has a commitment from Panasonic Corp, which already supplies batteries for Tesla’s Model S, to help run the battery cell-making operations and underwrite some of the costs.

Located near the former Sleeper Gold Mine in Humboldt County, Nevada, the Western Lithium’s King Valley project is often promoted thusly: “Nevada is uniquely positioned to support the world-wide increase in renewable Energy production and demand for electric vehicles through lithium mining—the key ingredients to the high-performance batteries, which will power electric vehicles and be used in utility-scale Energy storage projects.”

Eoin Treacy's view -

When the lithium battery gigafactory reaches full production it will represent a significant supply increase for the global sector which will put higher cost battery producers under pressure. Economies of scale should also help to ensure that the market for lithium batteries will also continue to grow. 



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September 05 2014

Commentary by David Fuller

September 05 2014

Commentary by Eoin Treacy

Back to school, miners league table

Thanks to a subscriber for this interesting report from Deutsche Bank assessing the outlook for European listed diversified miners. Here is a section:

Vedanta's planned group restructuring was completed in 2H13 calendar, with the court clearance of Sterlite's merger into Sesa Goa. This was an important step in simplifying the group's structure, reducing the scope for future conflict between majority and minority shareholders. Post the merger of Sterlite and Sesa, we see the group's buyout of the Indian government's stakes in HZL and Balco as critical for maximising cash fungibility across all group entities and expect progress on this in the next 12 months. Beyond this, management has set three near-term priorities for improvement for the group: an iron ore mining re-start, bauxite sourcing in India, and Copper Zambia development. We expect all of these areas to show improvement in 2015. Buy. 

Valuation 
Our price target is set at a 5% discount to our DCF valuation, to reflect some of  the inherent delivery risks within Vedanta's growth plan. Our DCF valuation (10.9% WACC - cost of equity 13%, post-tax cost of debt 6.1% and target gearing 30%: RFR 4.0%, ERP 6%)is calculated using life of mine cash flow analysis. 

Risks 
Key downside risks include lower metal prices than we expect, sustained strength in the Indian rupee, higher import duties, slower execution of projects and the slow or noreceipt of government permits for the alternative bauxite mines in Orissa and the Lanjigarh refinery expansion programme. The company has a large capex program which may require further debt funding or capital raising, either at the Sterlite or Vedanta level.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

The new Indian administration under Narendra Modi has lofty ambitions. Urbanisation, export oriented manufacturing and chipping away at the country’s infrastructure deficit are all goals the new government is working towards. Greater per capita consumption of just about all industrial and Energy commodities goes hand in hand with these objectives and India needs a concerted strategy for sourcing the resources it needs to fuel growth. 



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September 01 2014

Commentary by David Fuller

Merkel Says Europe Will Not Allow Russia "Attack" on Ukraine

Here is a section of this Bloomberg report:

German Chancellor Angela Merkelsaid the European Union will press ahead with tougher sanctions against Russia as evidence mounts that President Vladimir Putin is behind “attacks” on Ukraine.

“It’s become ever clearer that, from the beginning, this hasn’t been about a conflict within Ukraine, but a conflict between Russia and Ukraine,” Merkel told German lawmakers today in the lower house of parliament in Berlin.

The remarks underscore the German leader’s growing exasperation with the escalating conflict and her government’s more assertive role in seeking to resolve it as Russian soldiers continue an incursion into Ukrainian territory.

Merkel was among EU leaders over the weekend who said further measures against Russia are necessary, and gave the European Commission a week to deliver proposals for sanctions that may target Russia’s Energy and finance industries.

Addressing the risks involved for Europe’s largest economy should measures against Russia harden, Merkel said Germany is prepared for any economic fallout from the actions.

“Being able to change borders in Europe without consequences, and attacking other countries with troops, is in my view a far greater danger than having to accept certain disadvantages for the economy,” she said earlier at a press conference in the German capital.

David Fuller's view -

The headline above overstates Merkel’s position but she appears determined to up Russia’s costs for Putin’s murderous and cynical intervention in Ukraine.  What few Westerners are pointing out, however, is that Putin is violating the terms and spirit of the Budapest Memorandums on Security Assurances, 1994, when Ukraine agreed to give up its nuclear weapons.  This was initially signed by Putin’s predecessor, Boris Yeltsin, in 1994 but later reaffirmed by Putin on December 4, 2009.  Here is a sample:

1. The Russian Federation, the United Kingdom of Great Britain and Northern Ireland and the United States of America reaffirm their commitment to Ukraine, in accordance with the principles of the Final Act of the Conference on Security and Cooperation in Europe, to respect the independence and sovereignty and the existing borders of Ukraine;

2. The Russian Federation, the United Kingdom of Great Britain and Northern Ireland and the United States of America reaffirm their obligation to refrain from the threat or use of force against the territorial integrity or

political independence of Ukraine, and that none of their weapons will ever be used against Ukraine except in self-defence or otherwise in accordance with the Charter of the United Nations;

3. The Russian Federation, the United Kingdom of Great Britain and Northern Ireland and the United States of America reaffirm their commitment to Ukraine, in accordance with the principles of the Final Act of the Conference on Security and Cooperation in Europe, to refrain from economic coercion designed to subordinate to their own interest the exercise by Ukraine of the rights inherent in its sovereignty and thus to secure advantages of any kind;



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August 26 2014

Commentary by Eoin Treacy

Best Oil Bet Seen Supported by Political Shift

This article by Peter Millard and Julia Leite for Bloomberg may be of interest to subscribers. Here is a section: 

Silva’s entry into the contest as a replacement for Eduardo Campos, who died in an Aug. 13 plane crash, has upended the race, with polls showing her attracting previously undecided voters.

Her pledges to slow inflation, grant central bank autonomy and check rising spending that led the country’s debt rating to be cut appeal to the mainly affluent supporters of rival Neves, while her personal story as a former maid appeals to poorer voters, said Rafael Cortez, a political analyst at research company Tendencias Consultoria Integrada.

Silva criticized Rousseff’s management of the economy in an Aug. 20 news conference. Her economic adviser, Eduardo Giannetti, said the previous day that policies to contain Energy prices are “extremely harmful” in the short term.

Biggest Return
Silva would win in a run-off against Rousseff with 47 percent of the vote, compared with 43 percent for the incumbent, according to a Datafolha poll published Aug. 18. Rousseff’s 36 percent lead in the poll for the first round of balloting, compared with 21 percent for Silva and 20 percent for Neves, wouldn’t be enough to ensure a victory. To win in the first round a candidate needs more votes than the other competitors combined.

Petrobras returned 62 percent in dollar terms in the past six months, the biggest gain among the 20 most valuable oil producers. The average gain over the same span was about 15 percent.

Investors betting Petrobras will surge if Rousseff is voted out of office in October elections have a large chance of losing their money even if the she is defeated, said Robbert van Batenburg, director of market strategy at broker-dealer Newedge USA LLC.

They had better wait for evidence a challenger would swiftly phase out Rousseff’s expensive fuel subsidies to improve profitability at the most-indebted publicly traded oil company, Batenburg said in a phone interview from New York.

Eoin Treacy's view -

The Brazilian market was in need of a catalyst to reignite investor interest following the collapse of mining company OGX, the disappointing performance of iron-ore, the massive capital raising of Petrobras and what many see as inept political leadership amid failure to promote growth and control inflation.

The failure of the Brazilian football team at this summer’s World Cup might appear trivial but many Brazilians appear to have seen it is as symptomatic of the issues facing the country and are increasingly likely to vote for change. Whether a new administration decides to remove the fuel subsidy is an uncertainty but they would be more likely to do so than Rousseff. 



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