Commodity Corner

Views on commodities and energy

from MacroScope:

Running out of resources

Oil prices are more than double the December-February troughs and commodity prices generally are going up as the market cheers signs of an economic recovery.

Jeremy Grantham, chairman of U.S.-based money monager GMO, warns that the world is running out of resources in the long run yet is not correctly pricing the fact.

"We are simply running out of everything at a dangerous rate... As we move through our remarkable and irreplaceable hydrocarbon reserves, the price will, of course, rise remorselessly to ration supplies. We need, it seems, the shock of a Pearl Harbor to really gear up and make sacrifices," he says.

Grantham points out that in 1977 President Jimmy Carter warned that we were running out of oil and urged people to fully insulate 80% of the houses in 10 years.

Oil Market Contango Widening

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0709-contango-fig-11The spread between front-month oil futures and contracts for later delivery on the New York Mercantile Exchange (see Fig. 1) has widened dramatically this month. (See Fig. 2)0709-contango-fig-2The widening contango frequently portends a rise in inventories. For example, in Fig. 3, it can be seen that when the discount for fronth-month crude to second-month crude widened to near $4 a barrel earlier this year, inventories jumped to 19-year highs. The relationship between inventories and the outright futures price can be seen in Fig. 4. 0709-contango-fig-30709-contango-fig-41

Now in the movies: The gentle giant

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Gentle giant

German utility RWE – Europe’s fifth-largest power company and the continent’s biggest emitter of carbon dioxcide – has resorted to a new way to counter what it sees as a fundamental misunderstanding about power companies.

 

Its animated movie – to be shown on TV and in cinemas – is meant to show what the company is really about – and overcome the public’s distaste for an industry whose dominance has allowed it to mete out ever higher power prices.

Crude oil contracts held by U.S. Oil Fund LP

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Exchange traded funds like U.S. Oil Fund LP hold an increasing share of outstanding NYMEX energy contracts. The funds allow retail investors to bet on a rise in crude oil prices, but looming U.S. CFTC regulations aimed at curbing speculation could limit their positions in the future.

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U.S. export demand, weather to drive CBOT grain prices

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illinois-bean-field-july-12U.S. grain traders look for a mild rebound in prices in coming days after agricultural commodities tumbled to multi-month lows last week.
    
Analysts cite the big drop in grain prices and the soft dollar as likely stirring fresh export interest in U.S. corn, wheat and even still-pricey soybeans — even though soy exports have been red-hot all season.
    
“It’s going to be export-demand driven,” said Terry Reilly, a grain market analyst with Citigroup in Chicago.
    
If the past week was any indication, sales may be hefty. Last week, wheat export sales were the biggest since last September at 584,200 tonnes, corn sales topped one million tonnes for the third straight week, and China booked more than 1.0 million tonnes of soybeans, including another 283,500 tonnes for delivery before the start of the 2009 U.S. harvest.
    
Any hint that U.S. Corn Belt weather will heat up this week could also feed a bounceback in Chicago Board of Trade grain markets. Corn, the biggest row crop, is now entering its key growth stage of pollination when too much heat and too little moisture can erode final yields.
    
“There’s really no premiums built into market in weather because the weather has been fantastic for the U.S. growing season,” Reilly said. “Any little shift in the weather outlook, you’ll start to see those premiums build in the grain markets.”
    
Corn likes warm days and cool nights. Mostly mild temperatures and sporadic showers have so far created an ideal environment for corn and soybeans in the mid-summer growing season.
    
Given the recent ideal weather, after a cold rainy spring that had delayed seeding, markets ended lower last week as the U.S. Agriculture Department’s monthly supply/demand outlook forecast rising grain stocks for a year from now.
    
“We’re in that doldrums point where we don’t have a lot to trade right now. We’re watching weather and that doesn’t necessarily change that much — conditions are favorable,” said one Chicago grains broker, who said that was a reason outside markets will also stay on the radar for grain traders.
    
Corn, wheat and soybeans fell last week but so did crude oil, gold and other commodities along with equity markets. G8 leaders met in Italy and optimism about any quick recovery for the world economy was absent.
    
In that shadow of weak overall economic demand it remains difficult for commodities to rally. Another a bit unnerving for Chicago grain traders has been the growing signs of increased government regulation coming for commodity markets.
    
Tuesday will mark the last day of trading for July grain contracts as they expire. Given the volatility in the July soybean contract over the past three weeks, plenty of fireworks will be expected by expiration.
PHOTO: Northern Illinois soybean field taken July 12 by Christine Stebbins

Soybeans sizzle as demand stays hot; US weather ideal for corn

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july-cornGrain traders took a three-day breather over the holiday weekend with some looking to see if corn was “knee high by the Fourth of July,” but will be right back to keying on the prices of soybeans and soymeal, raging bull markets due to the razor-thin supply of U.S. soybeans. 
    
They say as beans rise or fall, so will wheat and corn. 
    
The U.S. Agriculture Department in its quarterly stocks data last week confirmed soybean stocks are dwindling — 597 million bushels on June 1, down 12 percent from a year ago.
    
Supplies look to get even tighter if China, the world’s top soy buyer, keeps buying up remaining stocks. USDA confirmed last week that China booked two more cargoes of American soy, 113,000 tonnes, to be shipped before the 2009 harvest begins. On Thursday, USDA also reported China booked 660,000 tonnes of U.S. soybeans for delivery after Sept. 1, a reminder of China’s continuing muscle in the physical grains market. 
    
“Of course we are always watching the Chinese on what they are going to do with the demand on beans,” said Don Roose, an analyst with U.S. Commodities. 
    
So are money managers, with CBOT floor traders citing new inflows of capital into soybeans with the start of the new trading month — and third quarter — on Wednesday. That interest came despite USDA on Tuesday estimating that U.S. farmers are planting a record-high 77.5 million acres to soybeans this spring and summer. Traders say the jury is still out: as of June 28, No. 2 producer Illinois, still had 12 percent of its soybeans to seed, some 1 million acres.
    
“There are lots of acres dedicated to beans and new-crop prices don’t warrant all that much support. But if speculators continue to buy them, bean prices have the potential to stay strong,” said Gavin Maguire, an analyst with brokerage EHedger. 
The spread play between old-crop July soybeans and new-crop November soybeans is also more jarring now that the Chicago Board of Trade July contract is in delivery. 
    
CORN NOW A SUMMER-WEATHER MARKET  
Midwest crop weather is also front and center for traders. 
    
“When you’re looking at a summer crop like corn, weather is the only thing that is going to move this market right now,” said Prudential Bache Commodities analyst Shawn McCambridge. 
    
The U.S. corn crop is “made” in July when it pollinates. So far, growing conditions have been nearly ideal west of the Mississippi River and behind to the east but still on track. 
    
“The weather is benign for corn through the middle of July so it’s going to be hard for market to get too excited about corn, especially with the big acreage number USDA came out with,” one veteran Chicago Board of Trade floor broker said. 
    
He cited USDA’s June 30 shocker: U.S. corn acreage at 87 million acres, the second-largest seedings since 1946. 
    
“The driver will continue to be beans and meal,” the trader said of the CBOT grain complex in the coming week. 
Photo: Corn knee high by the Fourth of July in northern Illinois, taken by Christine Stebbins

Wanted: self-starter ready to grasp “gas OPEC” challenge

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It can take years for organisations to get organised, if indeed they ever do. The oil producers’ club OPEC was founded in 1960, but only became a force to be reckoned with in the 1970s when the Arab oil embargo cut off supplies to the world’s biggest energy consumer the United States and oil prices rocketed.
The much less high profile Gas Exporting Countries’ Forum, which dates back to 2001, is still struggling to get its statutes in order.
Since last December it has had a charter. It has also commissioned reports and held irregular meetings.
The latest gathering took place this week in the sandy and very hot Qatari capital and agreed little. Notably, it failed to decide on one stand-out item on the modest agenda: who should be the group’s secretary general?
So far the only country to have submitted a candidate is Iran.
In the gas exporters’ club, Iran is the second biggest reserve holder after Russia, but on occasions has reneged on its export commitments, so it’s perhaps understandable the GECF decided to extend the application period.
Candidates now have until October to submit their C.V.s and the GECF should agree a secretary general at its next ministerial meeting, which takes place in December — in theory. Before this week’s session, the GECF had last meet last December after repeated rescheduling.

Fireworks likely from USDA, CBOT grain deliveries

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The stage is set for plenty of fireworks in the coming week for U.S. grain markets.

The U.S. Department of Agriculture will release two key reports on Tuesday morning. One will reveal how many soybeans are still in U.S. storage bins as of June 1. The second will report how much corn, soybeans and spring wheat farmers planted this season after an unusually wet spring in the eastern Midwest, a bellwether for world grain exports each year.

Fourth of July road trip? Not so many this summer

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The road trip, an American summer tradition, is falling victim to the recession as more Americans decide to stay home over the Fourth of July weekend, according to AAA.

The Independence day weekend is usually the busiest travel weekend of the summer driving season, but this year, the number of Americans travelling this year will drop 1.9 percent, mostly due to high prices at the pump and economic worries.

Base metals ripe for downside corrections

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USA/After an interview this week for Reuters Investment Summit,  Brian Fabbri, chief U.S. economist at BNP Paribas said he did not think gains in base metal prices over the last 3 months accurately reflect how weak fundamentals are, especially in the economies of major users U.S., Europe and Japan, adding that industrial metals prices would need to correct lower.

Asked whether growth in emerging economies would be enough to compensate for slowing in the U.S., he said: “No.”