The MasterCharts: April 2011
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Tuesday, April 12, 2011

Five reasons high oil prices are probably here to stay

Five reasons high oil prices are probably here to stay - Frank Holmes

   

The new geopolitics of oil, the continued decline of the U.S. dollar and increasing demand arejust some of the reasons why higher oil prices are likely to be with us for some time

Author: Frank Holmes
Posted:  Tuesday , 12 Apr 2011


SAN ANTONIO (U.S. Global Investors) - 

A number of forces continued to push oil prices higher last week, reaching their highest levels in the U.S. since September 2008.
One factor fueling the run has been the continued decline of the U.S. dollar. You can see from the chart that oil and the dollar historically are negatively correlated. This means that a rise in oil prices generally coincides with a decline in the dollar, and vice versa. The U.S. dollar has seen a dramatic decline since the beginning of the year as oil prices have moved some 30 percent higher. This could be due to fact that roughly two-thirds of the U.S. trade deficit is related to oil imports.

Despite the run up, oil's upward rate of change is still within its normal trading pattern over the past 60 trading days. Accordingly, this may imply that it isn't a spike and we haven't crossed into the extreme territory like we experienced in 2008 and 2009.
Conversely, oil prices are positively correlated with gold prices, which also saw a bounce this week. Looking back over the past one- and 10-year periods, oil and gold have roughly a 75 percent correlation. This means that three out of four times, when prices for one go up, prices for the other increase as well.
Another factor pushing prices higher is the seasonal strength that oil prices historically experience leading into the summer driving season. This chart shows the five-, 15- and 28-year patterns for oil prices. You can see that prices historically bottom in February before rising through the end of the summer.

We discussed in detail how these seasonal factors affect oil prices a few weeks ago. Click here to read "Oil's March Madness a Boost for Refiners."
Rising oil prices are also a result of what the Financial Times calls the "new geopolitics of oil." The FT says three elements creating this new environment are becoming clear:
Young populations with high unemployment rates and a skewed distribution of income are a volatile combination for the people in power.
To placate these groups, oil-producing countries are increasing public expenditures.
Governments are also to extend energy subsidies to shelter the country's consumers from rising energy prices.

A Deutsche Bank chart plots the share of population under the age of 30 for selected North African and Middle Eastern countries against the unemployment rate of this group. You can see that large oil producers such as Saudi Arabia have a high level of unemployment among youth populations.
This is why King Abdullah of Saudi Arabia has announced a total of $125 billion worth (27 percent of the country's GDP) on social programs for the public. For King Abdullah, this is the cost of keeping peace but has driven up the breakeven price for Saudi oil production to $88 per barrel, according to the FT.
Keeping these young populations happy and working is not only domestically important for these governments but for global oil markets as well. You can see from this chart that a significant portion of the world's oil production comes from the Middle East.

With the unrest in Libya-a top-20 oil producer-essentially knocking out the country's entire production, any further unrest in another country could threaten global supply. Upcoming elections in Nigeria have the potential to disrupt production for the world's fifteenth-largest producer.
But it's not just geopolitics that is threatening production. Natural decline rates from mature fields such as Mexico's Cantarell oil field are starting to make a dent in global production. Reuters reported this morning that Norway, the world's eleventh-largest oil producer, is experiencing a significant slowdown in production from the Oseberg oil field in the North Sea. Production is expected to be cut by 26 percent in May to only 118,000 barrels per day.
Meanwhile, oil demand has been picking up significantly in both emerging and developed markets. Oil demand in China and the U.S. has been rising since mid-2009, well before the uprisings began in the Middle East.
In China, a big driver has been growth in the Chinese automobile market. Auto sales increased 2.6 percent in February, and March data released by the Chinese Auto Association over the weekend shows auto sales grew 5.36 percent on a year-over-year basis in March.
The G7 economies have been in an up cycle since last year. In the U.S., employment rates and consumer spending have been steadily improving. Oil prices rising too fast remains a threat to this recovery but BCA Research estimates that oil prices need to rise above $120 per barrel before "significantly undermining consumer and business confidence."
Frank Holmes is CEO and Chief Investment Officer, U.S. Global Investors - www.usfunds.com 
Mineweb.com - The world's premier mining and mining investment website Five reasons high oil prices are probably here to stay - Frank Holmes - ENERGY | Mineweb

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Wednesday, April 06, 2011

As usual, Gold’s rally dismissed by equity bulls

Gold’s message dismissed by equity bulls- of course they're not in!!!

By Jamie Chisholm, Global Markets Commentator
Published: April 4 2011 05:40 | Last updated: April 6 2011 13:57
Wednesday 12.35 BST. Pretty much every major asset class is going up as traders seem to be having a final splurge before the age of ultra-loose monetary policy comes to an end.
Underlying optimism about the global economy is emboldening bulls, while signals flashing inflation warnings are being dismissed.
The FTSE All-World equity index is up 0.4 per cent to a fresh cyclical high, after Asian exchanges – Japan aside – shrugged off China’s out-of-hours monetary tightening.
US stock futures are up 0.7 per cent, and the FTSE Eurofirst 300 is higher by 0.5 per cent, helped by stronger than expected German factory orders in February.
Gold is up 0.6 per cent to $1,458 an ounce having hit a record of $1,461, while silver is at a fresh 31-year high of $39.62.
The sharp rise of late for bullion is supposedly being predicated on fears of building inflation pressures – US 5-year breakeven rates, a gauge of inflation expectations, are above 2.4 per cent, the highest since July 2008. And it is true that many commodities are challenging record levels.
Brent crude on Tuesday breached $122 a barrel for the first time since August 2008 as the conflict in Libya combined with worries about production out of Nigeria and Gabon to increase concerns about supply disruption at a time of increasing demand.

Factors To Watch

With oil at 30-month highs, US energy inventory data published at 15.30 will be eagerly scanned by traders.
And corn hit a record of $7.7075 a bushel on Tuesday, up 15 per cent in four days, adding to fears that higher food prices could exacerbate civil unrest in poorer countries. US-traded corn is currently down 0.7 per cent at $7.6150.
However, core bond yields are little changed on the session, suggesting the market is being somewhat selective in its immediate rationale for pushing various asset prices higher.
Indeed, it is possibly a misjudgement to assume that bullion’s rise reflects inflation concerns. Other factors cited by analysts and commentators over recent days for the strength in precious metals have included: worries over the eurozone; geopolitical problems; Japan’s nuclear woes; and even the possible US government shutdown.
But none of these issues seem to be having any lasting impact on other risky assets, so it would be strange if their influence was being applied to bullion alone.
Meanwhile, any traders who shorted industrial metals after Tuesday’s China rate rise will be smarting. A weaker dollar on Wednesday and hopes that Beijing may be coming to end of its tightening cycle has pushed the complex higher, with copper up 1.6 per cent to $4.33 a pound. Speculators remain wedded to the “reflation trade” even as commercial heavyweights warn that demand is slowing.



read the rest here: FT.com / FT's rolling global market overview - Gold’s message dismissed by equity bulls
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is Spain decoupling from its fellow PIIGS?

Spain drifts away

FT Alphaville



Spot the odd one out:

"...even under a stressed scenario [budget overshoot, higher than expected bank recapitalization costs and the potential direct costs to Spain if other fiscally challenged euro area countries restructure their debt] Spain’s debt levels (86.7 per cent of GDP) are considerably lower than Greece (156 per cent), Ireland (120 per cent) and Portugal (heading for 100 per cent).
That reflects the fact that Spain went into the great recession with lower levels of government debt than other countries (36 per cent at the end of 2007) and, says Jenkins, that the Spanish cajas are not that big relative to size of the overall economy." - Evolution Securities



It’s Spain of course, which has decoupled from other members of the periphery over the past three months with its bond yields not only tightening against bunds but also falling outright (from a high of 5.45 per cent to just over 5 per cent today.
The question, of course, is whether this can be justified.
Enter Gary Jenkins of Evolution Securities who has taken a closer look at whether this decoupling can be explained underlying factors.
We look at Spain’s projected fiscal path and then introduce some ‘stressed’ scenario events such a budget overshoot, higher than expected bank recapitalization costs and the potential direct costs to Spain if other fiscally challenged euro area countries restructure their debt. We then see how this changes Spain’s fiscal position and if the deficit/debt levels still remain ‘sustainable’ which would largely justify the decoupling from other peripherals that has taken place lately.
That’s the methodology and now the results.

As you can see even under a stressed scenario Spain’s debt levels (86.7 per cent of GDP) are considerably lower than Greece (156 per cent), Ireland (120 per cent) and Portugal (heading for 100 per cent).
That reflects the fact that Spain went into the great recession with lower levels of government debt than other countries (36 per cent at the end of 2007) and, says Jenkins, that the Spanish cajas are not that big relative to size of the overall economy.
It seems to us that the affordability of Spain’s debt is largely down to internal rather than external factors. Default by other peripherals will not have a significant direct effect on Spain, although there may be indirect effects, especially from a potential Portuguese default given Spain’s close ties with its Iberian neighbour. The factors that will have significant effect on the sustainability of Spain’s debt are the final cost of bailing out the savings banks, which in itself seems manageable and even in combination with a weaker economy and/or fiscal slippage would probably leave the debt at sustainable levels. Having successfully moved away from the other peripherals it is important that the fiscal discipline and economic growth expectations are met to ensure that Spain can avoid any contagion impact, if as we expect, we witness multisovereign restructuring in 2013 and beyond.
Ah, the cajas and all the real estate exposure. Here’s what Jenkins has to say about that:
In the name of prudence we will however use Moody’s worst case scenario where it sees a need for capital injections of up to €120bn, or nearly 8% of Spanish GDP when looking at the possible cost to Spain. This number highlights the difference between Ireland and Spain. Both countries have been affected by real estate and construction bubbles that brought at least parts of the banking sector down with them when they burst in 2007/2008. The cost of Ireland’s bank bailout has reached about 45% of GDP including the €24bn further recapitalisation needs announced last week (although at least in theory some of this may be raised from the private sector or subordinated debt holders rather than from government funds), Spanish cajas may be in a weak position, but relative to the size of the overall economy their losses and potential losses remain manageable.
read the whole story here:FT Alphaville » Spain drifts away
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