Commodity Corner

There’s oil in them thar wealth funds

Jeremy Gaunt — Thu, 14 Jan 2010 12:38:08 +0000

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

Mark Weinraub — Mon, 11 Jan 2010 14:56:09 +0000

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’

Simon Webb — Tue, 22 Dec 2009 12:47:20 +0000

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

Barbara Lewis — Tue, 22 Dec 2009 11:56:10 +0000

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

Barbara Lewis — Sun, 20 Dec 2009 08:36:48 +0000

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?

Pratima Desai — Tue, 15 Dec 2009 12:39:36 +0000

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.

But for investors commodities are risky. That is because they mostly invest using commodity futures, which are subject to
wild price swings because they react strongly and immediately to demand and supply news and changing expectations for the future. Since commodities became more popular with investors they have also become highly influenced by market sentiment and macro economic indicators and that’s why they have been moving alongside equities.

More investors in commodity futures markets is also why the link between equities and commodities has become much stronger over the past year to 18 months.

But that’s an aside. Ultimately commodities are risky because they are volatile. Institutional investors don’t like volatility whether its price volatility or return volatility.

After the U.S. drought, the deluge?

Ed Stoddard — Tue, 24 Nov 2009 20:36:13 +0000

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.

“This is the most drought free that the country has been in the last 10 years,” said Brian Fuchs, a climatologist with the National Drought Mitigation Center at the University of Nebraska in Lincoln.

This state of affairs is partly explained by the emerging El Nino pattern and as always with weather and farming, the blessings have been mixed.

Recent good rains have heralded the end of a scorching drought in Texas which reached historic levels in some parched counties.

But drenching rains in the Midwest grain belt resulted in the slowest harvest in 30 years.

The entire grain belt is essentially shaded in white on the Drought Monitor’s map — which means it has no drought or even unusually dry conditions.

The shades of red that denoted the vast swathe of Texas that was in exceptional and extreme drought conditions has shrunk drastically and most of the state is now shaded white. Most of California remains dry or in drought, though it is not extreme in any part of that state, which is America’s top agricultural producer.

(PICTURE: Farmer Steve Pierce takes a break while harvesting soybeans outside Marengo, Illinois, November 4, 2009. U.S. farmers have struggled this fall with persistent rains that have set the harvest several weeks REUTERS/Julie Ingwersen)

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

Christine Stebbins — Sun, 22 Nov 2009 14:27:55 +0000

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.”

Weekly trader commitments data issued on Friday afternoon from the Commodity Futures Trading Commission confirmed the trend.

Index funds — funds which by their nature only hold a long position — were shown to be holding almost half (47 percent) of all the total long open interest in CBOT wheat as of Tuesday, Nov. 17.
Managed funds — speculators which hold both long and short positions based on daily market trends — were also buyers, reducing their net short position in CBOT wheat by 10,300 contracts in the same period. But these big players remained net sellers in the wheat market as a group.

So it all adds up to what? For starters, probably a more critical eye once again from the CFTC, which has been holding public hearings since the summer under its reform-minded chairman Gary Gensler seeking a solution to the convergence issue as a way to restore the CBOT’s role as a hedging market.
Few are happy with the “convergence” solutions proposed so far by the CME, including the most recent one — still under consideration — of tinkering further with wheat storage fees at elevators. CME — dependent on volume to remain the dominant market for world wheat speculators — continues to try to please all players, from Wall Street to Main Street.

But it may be only a matter of time before U.S. wheat exporters as a group — all of whom are members of the influential NGFA — come to CFTC and blame Wall Street’s financial engineers for sabotaging the world’s top wheat exporter.

OPEC moves from grey to sparkling white

Barbara Lewis — Fri, 20 Nov 2009 14:40:23 +0000

For more than four decades, OPEC occupied a grey building on the banks of the Danube Canal, a premises with which the press became wearily familiar during long nights of waiting for the ministers to agree to raise, lower or maintain oil output.
The old headquarters at Obere Donaustrasse 93 will be closed down from 1630 GMT on Nov. 25 and the organization is moving into its new Secretariat at Helferstorferstrasse 17 in Vienna’s first district.
OPEC hasn’t disclosed the cost of its new building, which is near the old stock exchange in a busy part of Vienna. Having acquired new members Angola and Ecuador and often inviting non-menbers to its meetings, the group needs more space.
The new and sparkly white building doesn’t have many windows and looks as if it could be short of parking space, but presumably OPEC has made arrangements that will avoid a line of black Mercs –- generally the oil ministers’ favoured mode of transport – backing up as they try to drop off their delegates.
Reporters got to know the old building, known among the local press pack as The Dump, when working around the logistical challenges it presented to newsgathering. One spot, right by the door, was coveted as it was the best place to catch a minister at the end of the meeting to confirm OPEC’s decision. The downside was having to stand there for hours, sustained only by coffee from the vending machine brought by a colleague.
For years, when entering the conference room for the pre-meeting news conference, indecorously known as the gang bang, they negotiated a tiny opening at the head of the horseshoe-shaped ministerial table. They then squeezed their way through, together with cameramen and photographers, to yell out questions at the ministers -– an experience closer to playing rugby than reporting.
To get to the conference room, they ran up four flights of stairs in a herd that sometimes resulted in reporters falling over or getting whacked by a camera.
Perhaps in the new premises, OPEC has made things even more of a challenge for the press, such as introducing Indiana Jones-style trapdoors and gigantic rolling rocks. Or maybe there will be a shorter flight of stairs and a wider gap, to facilitate news gathering?

Weather, dollar likely to keep grains in recent ranges at harvest

Christine Stebbins — Mon, 16 Nov 2009 13:34:11 +0000

If this week in Chicago Board of Trade grains is anything like the last couple, traders can expect plenty of volatility — lots of sound and fury — but with prices likely to stay in recent ranges.

“This really isn’t a trending kind of market,” said senior analyst Anne Frick with Prudential Bache Commodities.

Mother Nature and the dollar have had the biggest impact on grain prices this autumn. That looks set to continue. Analysts say those two uncertain and thus supportive price factors, countered by rising supplies of harvested grain, will tend to restrain “spikes” either way. Day-to-day moves on the other hand, are still seen as being more dictated by buy/sell trigger points on price charts and by speculative money flows.

Despite a steady to lower close in CBOT corn and soybeans on Friday, both closed higher on the week as did wheat. So some bullish technical indicators remain in place, analysts said. Fundamentals — huge U.S. harvests now under way — should be weighing on corn and beans. But U.S. farmers are struggling to wrap up the harvest. A soggy October has put them about four weeks behind on corn and, traders say, sowed seeds of doubt in the markets’ mind about final crop yields and quality.

Farmers finally saw some ideal harvest weather in November — warm, sunny days that allowed them to work all day and night to harvest and dry rain-soaked crops. But their luck may be running out. Rains are now forecast to return to the U.S. Corn Belt by Tuesday or Wednesday.

That is especially bad news for corn, as only about half the projected 13-billion bushel crop is expected to be off the field by Sunday, traders said. By contrast, they estimate soy harvest will be reported 90 percent complete when weekly crop progress updates are issued by the U.S. Department of Agriculture on Monday afternoon.

ARGENTINA DRYNESS STRIKES A NERVE
“No doubt for corn: weather is at the top of the list. And weather in South America for beans,” analyst Brian Basting with brokerage Advance Trading said, referring to concerns starting to surface about dryness in Argentina’s fields.

The world’s No. 3 soy producer is in the midst of planting its next soybean crop. Although it is too early in the season to get excited about the dryness and potential threat to yields, traders are hyper-sensitive to conditions in Argentina after a drought last season drastically reduced that important crop. The No. 1 concern now, traders noted, is in Cordoba, a top soy region in central Argentina.

Underscoring the current range-bound market mentality in grains, however, traders said any rallies in Chicago soybeans would likely be met by South American sales to price their new crop. That action was already detected on Friday.

“Once beans got above $10 in the March contract, we saw hedge sales out of South America,” said one CBOT floor broker with commercial grain clients.

Also, USDA on Nov. 11, repeated its rosy outlook for South America’s coming soy crops. It boosted the estimate of Brazil’s crop by 1 million tonnes to a record 63 million and raised its Argentine soy estimate 500,000 tonnes to 53 million. The U.S. crop this year equates to 90.3 million tonnes.

Aside from weather-related harvest news, the U.S. dollar will also remain a major influence on commodity prices. Generally, the two move inversely. A weak dollar lowers the price of U.S. grain exports for overseas buyers and attracts investorswho buy commodities as a hedge against inflation.

In recent months on days when the U.S. dollar was weak, corn futures rose 72 percent of the time, David Hightower of the Hightower Report told a CME grains panel last week.

Traders are also keeping a close eye on December corn options, which expire on Friday. Large open interest in the December $4 options is expected to act like a price magnet.
Photo: Northern Illinois corn field taken Nov. 8 by Christine Stebbins