Commodity Corner

Views on commodities and energy

Branson’s Virgin Group gets into peak oil

Dire predictions tend to grab the attention – especially when an international celebrity lends a voice.

A report released in Britain this week with the unpromising title — the UK’s Industry Taskforce on Peak Oil & Energy Security – might have found only a specialised readership, but for the inclusion of Richard Branson’s Virgin Group in the six-member task force.

(The others were Arup, Foster & Partners, Scottish and Southern Energy, Solarcentury and Stagecoach Group.)

As it was the warning that oil shortages, insecurity of supply and price volatility will destabilise economic, political and social activity within five years was splashed across the press.

Beef off menus, on agenda in Argentina

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If there’s one thing that gets Argentines hot under the collar, it’s rising beef prices, so it’s not surprising that surging costs at the butcher shop are ringing alarm bells at the presidential palace.
    Local TV stations are reporting a collapse in sales and some angry steak lovers have even set up a Facebook group to promote a one-week beef-eating strike. Some cuts have gone up by as much as 50 percent since the start of the year, according to local media, forcing government officials to play down the hikes as a temporary blip and blame their old enemies — the farmers.
    Economy Minister Amado Boudou has blamed recent rains for the price rise, saying ranchers are keeping their animals out grazing on the lush Pampas pastures instead of sending them to market.
    President Cristina Fernandez, who enthusiastically promoted pork as an alternative to beef by comparing it to Viagra last month, also pointed a finger at the weather, but took a pop at ranchers too.
    “It’s true, beef’s gone up. It’s gone up a lot, as has the price the farmers are getting,” she said this week, drawing an angry response from farm leaders, who said short-sighted government policy and middlemen were the real villains.
    The government has curbed exports on-and-off for years to keep a lid on the cost of the nation’s favorite food and the current spike in prices has raised the specter of fresh disruption to shipments from the country, a leading exporter.
    But as beef becomes increasingly unaffordable, some Argentine shoppers might be taking the president’s pork recommendation a lot more seriously.

from Global Investing:

There’s oil in them thar wealth funds

Some interesting new data on sovereign wealth funds from State Street Global Advisors, a huge fund firm that does a lot of business with them. Most interesting, perhaps, is that the vast majority of sovereign wealth fund money comes from oil and gas revenues rather than from countries building up large foreign reserves from other trade, eg China.

    -- The U.S. firm identified 37 major sovereign wealth funds worth a total of $3 trillion. -- More than two-thirds, or 70 percent, of that money came from oil and gas interests. -- Of the 37, all had at least $3 billion in assets. -- Eight of them had more than $100 billion. -- Only 13 of the 37 funds were not based on commodity wealth. -- Asia had the largest number of SWFs at 13. -- The 10 funds based in the Middle East had nearly half the wealth, or 46 percent, between them.

These funds, incidentally, are becoming more like mainstream investment companies by the day. State Street says they are eventually going to turn into the equivalent of large public sector pension funds and could well start becoming more active as shareholders in companies in which they invest.

Fundamentals coming to bear on grain futures

U.S. grain markets will get their direction this week from old-fashioned supply-and-demand fundamentals after being pushed around recently by outside influences such as movements in the U.S. dollar and the price of crude oil.
“I do think that we are starting to focus more on the fundamentals than we have (been),” said Don Roose, an analyst with brokerage U.S. Commodities in West Des Moines, Iowa. “We kind of had this little gap where it was uncertain on the fundamentals so the technicals and some of these outside markets could rule a little more.”
The U.S. Department of Agriculture is due to release its estimate of the 2009 corn and soybean crops on Tuesday morning. It will provide the market with plenty of data to chew on and should drive price movement throughout the week. The government also will provide its first estimate of how much winter wheat acreage was seeded in the United States last autumn.
Another key for the grains markets will be weather in South America, where farmers in Brazil and Argentina are harvesting soybean crops.

“(This) week is the fundamental week,” said Darrell Jobman, a senior analyst TraderPlanet.com, a commodity trade site. “(We will) kind of get a new picture of things. We haven’t had any real good reports … for a couple of months. There has been a kind of a dearth of information.”
Analysts were expecting 2009 U.S. corn production to fall from earlier forecasts as harvest delays and wintry conditions forced Midwest farmers to shut down harvest operations before the cutting was completed. An average of estimates pegged the corn crop at 12.821 billion bushels, down 100 million from the government’s December forecast.
“The key … is probably going to be corn because that is probably the most questionable one,” TraderPlanet.com’s Jobman said. “It could be a surprise either way.”
U.S. soybean production in 2009 was estimated at a record 3.338 billion bushels compared with the December forecast of 3.319 billion. Soybeans benefited from good weather at the end of the growing season.
“The dominant issue is certainly going to be about supplies,” Roose said. “I think it is going to be about supplies in the U.S. and around the world.”
Winter wheat acreage around the United States was seen falling 6.5 percent as declining prices, plentiful global supplies and poor weather during key planting periods kept farmers out of the fields. [ID:nN
USDA also will release data on corn, soybean and wheat stocks for the fourth quarter and the 2009/10 marketing year.
CORN, SOY SALES EXPECTED ON THE CASH MARKET
Expectations for a pick-up in farmer selling could add some pressure the futures market this week, said Rich Feltes, senior vice president of MF Global Research in Chicago.
Most farmers had halted their marketing activities during December for tax purposes and were looking to re-enter the market with March corn prices around $4 a bushel and soybean prices topping $10 a bushel.
Snowstorms across the Midwest during the past week contributed to the light sales on the cash market as most farmers did not want to brave icy roads to deliver supplies to elevators and processors.
Farmers were likely to use the corn and soybean production estimates as benchmark for determining potential sales this week.
World supplies also were expected to have an impact on grains markets during the coming week.
Traders will be monitoring the weather in Brazil and Argentina as growers there prepare to harvest their soybean crops. Wet and warm conditions in the region have bolstered expectations about a bumper crop and raised prospects of overseas buyers turning their attention to South America to satisfy their soy needs.
“The unfolding South American situation will be important,” Feltes said.

Luanda hosts ‘OPEC lite’

OPEC’s decision to hold oil supplies steady on Tuesday played out the story of a meeting foretold. Three of OPEC’s twelve ministers – Venezuela, Iran and Kuwait – didn’t even see the need to make the trip.
Those who did brave the humidity and traffic jams experienced the slightly guilty pleasure of what one delegate dubbed “OPEC lite”.
In contrast to the tension of a meeting in Algeria this time last year when the oil price was crashing toward $30 a barrel and ministers were stung into a record output cut, the mood of the Luanda gathering could hardly have been more relaxed.
Instead of the usual frenzy of journalists screaming at ministers, following them into hotel lifts, skulking in hotel corridors and outside presidential hotel rooms, correspondents were treated to champagne and nibbles while OPEC’s market committee met in the pocket of luxury that is Luanda’s only five-star hotel. Ministers were relaxed and cordial, and rarely refused comment.
The meeting was swift and with few complicatons. With the price at $75 even after the worst recession in decades, many OPEC countries are in the enviable position of running fiscal surpluses rather than the crippling deficits governments elsewhere are facing.
“There’s no need to shake down the economy with any action here,” said one OPEC delegate. “The price is just right.”
For the rampaging OPEC journalists, the only problem was the familiar nagging concern that lurking behind the headline of an easy no-change, there might be another story yet to be told.

Angolan oil presents the solution and fuels the problem

In the Angolan capital of Luanda, where oil money is driving regeneration after decades of civil war, rumour has it the former Portuguese regime was less than delighted at the prospect of sitting on millions of barrels of crude.
When an official told the Portuguese dictator Oliveira Salazar Angola was thought to have oil, he replied “that’s all we need”, or so the story goes.
He had a point. Oil money, along with diamonds, helped to fuel the nearly three decades of war that followed the end of Portuguese rule.
Now it is funding glitzy sky scrapers for oil companies and new, supposedly affordable homes in one of the world’s most expensive cities. Prices are so high partly because expats working for oil companies occupy the best property.
Ministers attending this week’s OPEC meeting in Luanda were taken to see the town of Kilamba Kiaxi, which is springing up on the outskirts of the capital.
A joint venture between Angola and China, the world’s second biggest oil consumer after the United States, the first phase of the development should be completed in 2011 and provide accommodation for around 160,000 inhabitants, officials have said. Two other phases should follow.
Ministers opening the built-in wardrobes and tapping the walls in the show homes were told they would sell for “less than $1,200″ a square metre. That compares with an average of around $5,000 per square metre in Luanda, although it is still far out of reach for the vast majority of Angolans.
Among those taking particular interest was Oil Minister Hussain al-Shahristani of war-torn Iraq. He was not convinced he had found a bargain, but could draw inspiration from a state that signed a peace accord only seven years ago and is trying to build a new country on the basis of foreign venture partners and a surge in oil output.

There’s room at the OPEC inn, but only for a price

One of the many traditions of the Organization of the Petroleum Exporting Countries is that the holder of the group’s rotating presidency should host one of the group’s policy-setting meetings, typically the last of the year.
While regular conferences at OPEC’s Vienna home are a relatively straightforward affair, taking the group offsite has a tendency to generate major logistical challenges.
Last year, the highest hurdle for journalists attending an Algerian-hosted meeting in Oran was getting a visa to travel there.
This year, a big theme of the Angolan conference taking place on Tuesday in Luanda has been where to stay in a capital of scarce and exorbitantly-priced hotels.
Some of the journalists have resorted to sharing rooms in guest houses, far from the action, meaning a long crawl through the city’s traffic jams before they can get any access to the story they have already flown thousands of miles to cover.
The ministers meanwhile are staying in Luanda’s most opulent and very newest hotel, the Hotel de Convencoes de Talatona, where the biggest concern is that the paint is not yet dry.
It was inaugurated on Friday, just in time to accommodate the ministers in return for some serious petrodollars. Prices range from $600 for a standard single room to $5,000 a night for the presidential suite or $3,500 for one of the hotel’s luxury villas. Across the road, many Angolans live in shacks they have built themselves.

Why are commodities risky assets for investors?

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Recently I received an email asking me to explain why commodities are risky assets. ”I would think energy and raw
materials would still be in demand, even if Dubai defaults,” the writer said.

 It’s a good point. People need to eat, drink, drive and live. They can’t do it without commodities.

After the U.S. drought, the deluge?

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An interesting fact has emerged on the U.S. drought front that will be of interest to readers of this blog.

According to the U.S. Drought Monitor, as of last week about 78 percent of the country was “drought free” — the largest percentage since the monitor began tracking such trends over a decade ago.

CBOT fund-led wheat rally another Wall Street hurdle for grain exporters?

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wheat-jpg1                                                    The weakest U.S. dollar in 15 months along with ample American wheat supplies should be spurring strong U.S. wheat exports this season. But the United States, typically the world’s largest wheat exporter every year, is seeing exports of that grain down 30 percent from a year ago as many big overseas buyers source wheat from cheaper suppliers, namely Russia, France and Germany. 
 
What’s more, nearby Chicago Board of Trade wheat futures prices have jumped nearly 25 percent since October 1, ignoring the weak exports, weak domestic cash basis and ample stocks of wheat on hand.

The economics of wheat supply and demand don’t seem to be adding up. What gives?
 
Some grain traders and analysts who study the CBOT wheat market think the latest price action in wheat may just be another symptom of the malaise grain traders have complained about with “convergence.” A chorus of protests by grain users like the National Grain and Feed Association for two years have blamed “Wall Street Index Funds” for buying grains — particularly, CBOT wheat — en masse and far beyond what is merited by basic grain market fundamentals.
 
The price inflation has caused a persistent disconnect, they say, between CBOT wheat and real-world prices and essentially ruined CBOT as a reliable hedging market for grain firms because the inflated CBOT wheat futures prices no longer “converge” with cash markets in delivery periods. Now, some traders wonder if the same fund-driven demand for CBOT wheat contracts is pricing U.S. wheat out of the world export market at a time fundamentals should be letting it compete.
 
Egypt’s main government wheat buyer, for example, has passed on U.S. wheat in its last six snap tenders. The most recent snub occurred this past week when it bought cheaper French, Russian and German supplies. Egypt has long been the single biggest buyer of U.S. soft red winter wheat, the CBOT par delivery grade. U.S. wheat shipped from the Gulf of Mexico this marketing season has been running roughly $25 to $35 per tonne higher than the wheat from the Black Sea region or France, exporters say. Freight is also more expensive.
 
“What worsened the situation in just in the last week or two is we’ve seen U.S. wheat futures escalate 60, 70, 80 cents despite a weak fundamental outlook, basically on fund buying,” said Mike Krueger, senior analyst for World Perspectives, who also runs a grain advisory service in Fargo, North Dakota. “Funds of all types, index and hedge funds whatever you want to call them, have simply been buying wheat and that drove markets sharply higher.”