Renewed flight from gold ETFs

After a soft start to the week, the gold price jumped on Friday, coming close to retaking the psychologically important $1,200 an ounce level.

Gold's gains since hitting four-year lows early November are close to 5%, but the metal's resilience against a sliding oil price, a rampant dollar, record money flowing into equities and looming interest rate rises has not enticed investors to return to physical gold-backed ETFs.

Holdings in the bellwether exchange traded fund backed by physical gold, SPDR Gold Shares (NYSEARCA:GLD), fell by 11.6 tonnes on Monday, the worst performance in 18 months, and the sales continued in post-Christmas trade.

At the close on Friday holdings in GLD, which represents nearly 50% of the gold-backed ETF market, stood at 712.3 tonnes or 26.9 million ounces, the lowest since September 22, 2008.

Kitco quotes a research note from HSBC pointing to the risk to the gold price of continued ETF outflows:

"If ETF investors begin to liquidate more heavily, gold may be in for another round of declines," according to HSBC but the investment bank is not expecting further substantial selling during the holiday trading period.

After a positive start to December, this week's outflows have put GLD back in the red for the month with 5.3 tonnes of net redemptions.

The performance so far in 2014 is dismal with investors pulling just over 85 tonnes from the trust although outflows have slowed substantially from the 552 tonnes pulled from GLD in 2013.

Holdings in GLD peaked in December 2012 at 1,353 tonnes or 43.5 million ounces.

In November Barclays noted the risk to the early money invested in the dozens of listed gold-backed ETFs across the globe.

Almost 900 tonnes (700 tonnes on a net basis) were acquired between $900 – $1,000 an ounce.

If the gold price were to fall to $1,000/oz, an additional 100 tonnes would become cash negative according to the UK bank.

Ruble Rallies 34% After Biggest Russian Intervention In 5 Years

Since the Russian Ruble troughed at almost 80 RUB/USD, it has rallied an impressive 34% erasing most of the dramatic devaluation of December. However, as The CBR just announced, this 'strength' came at a price. Russia burned through $15.7 billion of reserves in the week ending Dec 19th - the biggest percentage weekly drop in reserves since Jan 2009, leaving reserves below $400 billion (still a significant amount) for the first time since Aug 2009. While CBR explained much of this will come back as repo trades mature, Vladimir Putin turned inward, blaming the government for "defects" in restructuring the economy.

The Ruble has soared in the last 2 weeks...

On the heels of the biggest intervention in almost 5 years...

•  
• *RUSSIAN INTERNATIONAL RESERVES FALL $15.7B IN WEEK TO DEC. 19
• *RUSSIAN INTERNATIONAL RESERVES AT $398.9B
• *BANK OF RUSSIA SAYS DROP IN RESERVES MOSTLY DUE TO FX REPO
• *BANK OF RUSSIA: FUNDS USED IN FX REPO WILL RETURN TO RESERVES
• *RUSSIA RESERVES ALSO FELL ON REVALUATION AS USD GAINED VS EURO

But, as Sputnik news reports, it's not just external factors, Putin points his finger internally...

The difficulties in Russia’s economy are not only because of outside factors, including sanctions, but also because the government has not worked out some defects, Russian President Vladimir Putin said Thursday.

“The difficulties that we have run into carry not only an outside factor. They are not solely tied to some sorts of limitations of sanctions or limitations tied with the objective international environment, they are tied to our not working out defects that have accumulated over the years,” Putin said during a government meeting in Moscow.

Putin said the government has taken efforts in order to change the structure of the economy in order to give it a more innovative nature, but said the efforts were below the needed measures.

“Much has been done in this but the latest events have shown that this is insufficient,” Putin added.

Russia is currently facing an economic slowdown, with dramatic fluctuations seen recently in the value of the Russian ruble against the US dollar and the euro.

The weakening of the Russian national currency is attributed to low oil prices. The sale of oil accounts for a significant part of Russian budget revenues. Economic sanctions imposed on Moscow by the West in the wake of the Ukrainian crisis are also cited among the reasons for the economic slump.

During a December 18 televised press conference, the Russian president said that the country's economic situation could begin to improve in the first quarter of 2015, with Russia's economy recovering completely over the next few years.

*  *  *

Still it's not like $400 billion is going to disappear tomorrow - for those proclaiming Russia's imminent default. (CDS imply a mere 5% probability of default over the next year based on 25% recovery assumptions)

Supply plays key role in 2014 global commodity market

The Chief Executive of Glencore one of the world’s top resource company, Ivan Glasemberg, stated that, the demand for the metals hasn't been bad this year.

He added that, the demand for oil, iron ore and also coal is growing, but the price of these materials is not progressing soon enough. He stated that, the reason behind the lagging of price for the commodities is that, the companies including Glencore has been investing largely in their projects, expanding the production, which finally lead to crisis.

Supply of commodities played a key role in the global market of metals this year. It was the judge to determine the winners and losers based on every market, starting from iron ore to nickel . Supply is also the reason why the commodities are performing at the worst for the third consecutive year.

According to the analysts, this trend could continue to follow the market for the year 2015, as none of the iron ore producers and the oil producers are showing signs to decline their rate of production for the next year.

According to the recent report published by the Citi Bank, the analyst stated that, it is too easy to assume that the main problem regarding the commodity market is the global growth of GDP. But actually the problems regarding the supply are the main issue which creates gluts in the market. The worst effect of supply can be seen in iron ore, as the metal has been marked as the worst performing metal of the year.

Iron ore, which is commonly known to be the key ingredient in the procedure of steel making, has declined over 50 percent in its value, which is noted to be five year low, due to the increase in the supply of iron ore, mainly from the mines of Australia. The increase in supply declined the demand of the commodity in the Chinese market.  

World Nickel market ended in 148 kt surplus: WBMS

The latest report published by the World Bureau of Metal Statistics (WBMS) indicates that global Nickel market has recorded a surplus during the initial ten months of the year. As per the report, the Nickel market ended in excess of 148,000 tons when matched with the surplus of 186,700 reported during entire year 2013.

The reported stocks held in the LME at the end of October this year were 124,000 tons higher when compared with the levels during end-2013.

Refined Nickel production from January to October this year totaled 1,593.4 kt. The nickel smelter production during the month of October 2014 alone totaled 167.1 kt, whereas the consumption was 145.1 kt. The WBMS report also states that the Japanese refinery output declined sharply by 2.5 kt when compared with the previous year.

Global Nickel mine production declined significantly on account of the export ban in Indonesia. The ten-month production totaled 1,471.7 kt, nearly 27% down when compared with the production of 2,013.7 kt during the comparable period last year.

According to World Metal Statistics-December 2014 published on 17th Dec, 2014, the world apparent demand during the first ten months of the year was 30.7 kt lower year-on-year. The demand for refined nickel was 1445.7 kt during Jan-Oct ’14.

Marubeni says LME aluminium prices may rise towards $2,300 a tonne next year

London Metal Exchange (LME) aluminium prices are forecast to rise gradually in the latter half of next year possibly to as high as $2,300 a tonne as smelter shutdowns and output cuts squeeze supply, Japanese trading house Marubeni Corp said.

"We expect the LME prices to move higher next year as the market will remain tight," Norinobu Ozawa, general manager at Marubeni's light metals section, told reporters on Wednesday.

Marubeni, a major aluminium trader in Japan, estimated the global aluminium market will see a deficit of 387,000 tonnes in 2015, against an estimated deficit of 125,000 tonnes this year. It sees the deficit to widen to 872,000 tonnes in 2016.

Many aluminium producers have cut loss-making capacity or shut down completely in response to low LME prices, high energy costs and a flood of new capacity from China.

"Given the slack LME prices, high-cost producers will be forced to reduce or end production next year," Ozawa said.

LME aluminium prices, which have gained about 4 percent this year, traded at around $1,875 a tonne on Wednesday.

Marubeni forecast that they would be between $1,900-2,300 in the third and fourth quarters next year, moving up from an expected $1,800-2,200 range in the first quarter.

Global aluminium demand is expected to grow by over 5 percent in 2015 and 2016, led by a solid recovery in the U.S. economy and steady growth in emerging countries, Marubeni said.

The trading firm also forecast that the squeeze on supply would lead to higher premiums in Japan next year, predicting the range between $400-480.

Japan is Asia's top aluminium importer and the premiums it pays set the benchmark for the region. This year, Major Japan Port (MJP) premiums have risen 64 percent to record $420.

Earlier this month, major aluminium producers asked Japanese buyers to pay record premiums of $435-$440 per tonne for January-March deliveries, up as much as 4.8 percent from the previous quarter. But no agreements have been made as buyers demand lower prices.

Global aluminium premiums are expected to reach fresh record highs by mid-2015 on a supply deficit in the United States and Europe, according to a Reuters survey. 

Natural Gas Suggests $33 Oil

In the last couple of months, the sharp reversion in oil prices has certainly caught the world’s attention.  While the majority of economists and analysts continue to expect incorrectly that falling oil prices are a positive input to economic growth, the reality is that it is not.  The negative impact to economic growth from the decline in oil prices are quite considerable when you consider that almost 40% of all the jobs created since 2009 have been in energy related industries. 

Furthermore, many of those jobs are in the highest wage paying areas of the country that leads to more consumption and further job growth in other areas of the economy.  In fact, for each job created in the energy sector there are nearly three jobs created elsewhere in the economy.

“What we have here is a failure to communicate.” - Cool Hand Luke, 1967

As I discussed at length previously, the current problem in the energy price is a realization of a supply / demand imbalance.

"First, the development of the‘shale oil’ production over the last five years has caused oil inventories to surge at a time when demand for petroleum products is on the decline as shown below."

"The obvious ramification is a ‘supply glut’which leads to a collapse in oil prices. The collapse in prices leads to production‘shut-ins,’loss of revenue, employee reductions, and many other negative economic consequences for a city dependent on the production of oil.”

$33 Oil – A Return To Normalcy

While the economists and analysts are hopeful for a sharp recovery in oil prices, the current decline in oil prices is nothing more than a return to historical normalcy.  Let me explain.

If you ask virtually any oil and gas professional, that has been around the industry longer than the graduating class of 2000, they will tell you that the historical relationship between oil and gas prices is roughly $8.  The chart below shows the highly correlated history of oil and gas prices until 2008.

Not surprisingly, the divergence between oil and gas prices came to fruition in conjunction with the massive interventions by the Federal Reserve, which lowered borrowing costs enough to sufficiently provide for funding of higher cost shale exploration.  As Yves Smith recently stated:

“The oil and gas sector is capital intensive. Drillers have borrowed phenomenal amounts of money, which was nearly free and grew on trees, to acquire leases and drill wells and install processing equipment and infrastructure.Even as debt was piling up,the terrific decline rates of fracked wells forced drillers to drill new wells just keep up with dropping production from old wells, and drill even more wells to show some kind of growth.One heck of a treadmill. Funded in part by junk debt.

Junk bond issuance has been soaring as the Fed repressed interest rates and caused yield-hungry investors to close their eyes and take on risks, any risks, just to get a teeny-weeny bit of extra yield. Demand for junk debt soared and pushed down yields further. And even within this rip-roaring market for junk bonds, according toBloomberg,the proportion issued by oil and gas companies jumped from 9.7% at the end of 2007 to 15% now, an all-time record.”

With an excess supply now realized, particularly as global demand continues to wane, oil prices are now returning back towards their historical long-term relationship. 

If we assume that natural gas, which has been trading around $4 per BTU, has already returned a more normalized supply/demand range this would imply that oil prices have further to fall. The chart below is an extrapolation of the current West Texas Intermediate Crude price forecasted into 2016 on a monthly basis.  It would currently require a decline in oil prices to $33 per barrel to return the WTIC/NatGas ratio back to its historic spread of $8.

As T. Boone Pickens notes in his interview, the main supply / demand divergence is in the process of returning back towards equilibrium particularly in light of the deflationary forces that exist on the global landscape. While it is certainly feasible that we could see a sharp “snap back” rally from the recent plunge in oil prices, it is likely an opportunity to reduce energy exposure in portfolios before the next leg lower.

Just as a reminder, the last time oil prices fell 50% from their peak was in 1985-86.  Oil prices then stayed at those levels until the turn of the century.  The rebalancing of supply and demand could leave oil prices at lower levels for much longer than the majority of analysts currently believe. Considering that oil production related states have done the majority of the work related to the current domestic economic recovery, such an outcome could derail the hopes for a continued economic revival.

NatGas Crashes Most In 10 Months As Polar Vortex Arrival Delayed

Natural Gas prices are down over 11.5% in the last 2 days, falling to their lowest price since January 2013, as a familiar tale of excess production in the face of ebbing demand looms large. As WSJ reports, BNP Paribas' Teri Viswanath notes "the delayed return of cold weather has simply curbed all buying interest," and this was exaggerated by technical selling as the market broke previous support around 3.50. Ironically, given its detrimental impact on GDP, Macquarie points out, "it is increasingly apparent to us that weather will need to bail the market out again this winter - otherwise prices could see material downside during the spring and summer months."

Moar tax-cuts, more discretionary spending!! oh and less employment, capex, and EPS for Oil & Gas stocks...

As The Wall Street Journal reports,

Natural-gas futures slid to their lowest prices this year and entered a bear market Friday, as investors come to grips with surging production that is beginning to push the U.S. toward potential oversupply.

...

“The delayed return of cold weather has simply curbed all buying interest,” said Teri Viswanath, natural-gas strategist at BNP Paribas in New York. “Unseasonably warm weather that persisted through the month of December now necessitates extreme weather conditions to avoid a (gas supply) surplus.”

Analysts said Friday’s selling was partly driven by technically driven trading as the market broke through levels where it previously rebounded.

...

Though the U.S. has begun to draw on natural-gas stockpiles for fall and winter heating needs, continued booming production from U.S. shale fields is helping to replenish supplies. As a result, withdrawals from storage have been smaller than average, and the U.S. has begun to erase a supply deficit that has persisted most of this year, after outsize demand from the severe winter last season dragged stockpiles to an 11-year low.

...

“It is increasingly apparent to us that weather will need to bail the market out again this winter—otherwise prices could see material downside during the spring and summer months,” Macquarie Bank said in a research note. “At this point, winter weather will determine just how low prices can go.”