Author Archive for Robert Balan

IS THE COMMODITY SUPERCYCLE ENDING?

By Robert Balan, Sr. Market Strategist, Diapason Commodities

There has been a lot of debate about the end of the “Commodity Supercycle” in recent days. The subject came up along market speculations that a hard landing will take place in China, and that the “miracle” is “over. The premise here is that if the infrastructure development of China is over, then surely the so-called “Commodity Supercycle” is over.

Could this meme be correct? We disagree with those notions on five counts: (1) We do NOT believe that China is in for a hard landing (we expect higher growth in Q2 2012), and (2) even if China’s growth ratchets down from “boiling” to “simmering” that does not necessarily mean an end to the upward trend in commodity prices as other emerging countries and even OECD economies would soon take up the “slack” from Chinese demand moderation;

(3) a China paradigm shift from investment to consumption does not necessarily derail the commodity gravy train — it just rearranges the order and the number of the train cars; (4) the Fed’s reaction function almost guarantees that rates will stay low too long again, and will likely re-ignite inflationary pressures in a 1970 context; and (5) the “commodity supercycle” being discussed is not really a “Supercycle”, but only a “boom” in a longer, larger, higher-amplitude period of economic activity (the “Long Wave” or “Kondratief (K) Wave”) which could top out in sometime in 2022-2026.

Read the full report attached below:

diap_strategy_30April2012

 

 

 

THE NATURAL GAS REBOUND IS NOT YET SUSTAINABLE…

By Robert Balan, Sr. Market Strategist, Diapason Commodities

  • Natural gas prices hit their lowest price levels since 2002 during the current decline at $2.289 in the March contract but has recovered by as much a 18.5% since Monday after Chesapeake Energy Corporation (the US’ second largest natural gas producer) said it will reduce dry gas drilling activity and production with immediate effect.
  • The price reversal looks dramatic, but what can we reasonably expect for natural gas prices development from here? The answer is not straight-forward, but net-net, Chesapeake’s cutbacks is a very good start, and this may indeed the beginning of a stability for natural gas, but much more has to be done by producers to prevent prices from sliding further.
  • There remains no clue as to when balance will be back in this market, so there are other good reasons to be cautious about the recent large rebound in prices in the U.S. We do not believe that we have seen the bottom in gas prices this year. Stabilization, yes, but absolute trough — perhaps not yet. Conditions for gas investment may be better by mid-year.
  • Other companies may announced drilling cuts in the coming months if prices do not rebound to more healthy levels (around $4 per million Btu). Encana, the U.S. fifth largest producer, is likely to be the next to announce drilling cuts.

Read the full report below:

diapcap_26January2012_pragcap

 

BASE METALS OUTLOOK – ROCKY RIDE IN H1, BUT IMPROVING IN H2

By Robert Balan, Sr. Market Strategist, Diapason Commodities

There is a disconnect between what the market is pricing in for raw industrial materials and our view for a U.S. and China recovery to develop in the early part of 2012, at least. That means we see upside risk to the base metals prices early in the year if Chinese policy continues to shift from inflation fighting to pro-growth and the U.S. economy’s solid inroads in manufacturing will be sustained in early part of H1.

At a global level, the worst of the decline in global manufacturing momentum may be over. The global PMI has already taken off, with the global composite PMI back well above the 50 break-even level as of last month, and the regional PMIs are converging higher. The main risks to base metals prices, in our view then, may come in Q2 when we expect a euro-zone contraction to reach it’s nadir. But we believe that its impact on commodity prices will be limited and brief.

Major central banks around the globe are itching to embark on further quantitative easing after two years of “unacceptable” slow growth and are just looking for an excuse to do it. A eurozone contraction may just be the thing they are looking for. New injection of liquidity may likely flow again into riskier assets like commodities and equities.

Read the full report below:

diap_cap strategy_20January2012_pragm

 

DIAPASON COMMODITIES OUTLOOK

By Robert P. Balan, Senior Market Strategist, Diapason Commodities Management

  • We believe that the new bull phase in equities is completing its first major correction. Despite the incomplete resolution of the euro debt crisis, signs that China and U.S. economies will fare modestly well for the rest of 2011, plus a Fed promise to intervene in case of external shocks or growth decline, will support the rally until Q1 2012.
  • We are now at the conclusion of our Sept 30 bi-directional short-term forecasts: an S&P 500 rally to the 1250 – 1275, then followed by another price reversion to the 1175 area. This call for 1175 levels is unlikely to be seen; support is now strong at circa 1200. The rally resumes in earnest soon, probably before month-end. We still expect the SPX to test the 1350 – 1375 highs by Q1 next year.
  • We are now at the tail-end of our Sept. 30 bi-directional short-term outlook for bond yields: a rise in 10yr yields to circa 2.40% – 2.45%, then followed by another reversion to 2.15% – 2.12%, which was substantially overshot (low was at 1.93% —it may still fall to 1.88%). However, yields should rally strongly from there before month-end. By Q1 2012, we expect the 10yr yield to be at the 2.95% – 3.00% area.
  • The U.S. dollar bear phase resumes soon— we are also forecasting that resumption of risk taking over the rest of the year, and into Q1 2012, will have the U.S. dollar falling to new historic lows.
  • Brent Crude Oil should continue to perform well in coming months — we may be on track to see $127/bbl – $130/bbl by Q1 2012 202012.
  • We also said that by Q1 2012, we are expecting gold prices to be back at the $1,880/oz – $1,900/oz range, which now looks likely to be surpassed, with $2000/oz the next market focus, if targets breached.

View the full report here:

Diapason

Source: Diapason Commodities

THREE REASONS TO EXPECT A BETTER Q4 GDP

By Robert P. Balan, Senior Market Strategist, Diapason Commodities Management

There are reasons to expect better Q4 GDP data: (1) the rebound in consumption was not an auto story (indeed, real auto consumption fell modestly) but rather reflected strength in more heavily weighted and less volatile services component, (2) strong profit and cash levels in the corporate sector should underpin further gains in equipment and software investment, and (3) the fall in inventory accumulation was a sign that firms responded quickly to the softness in domestic demand in H1, and is unlikely to be repeated in Q4. Our Q4 GDP tracking estimate remains at 2.7%, and at 3.2% in Q1 2012.

OUTLOOK ON EQUITY MARKETS

We are looking at a new bull market in equities in the making. The (partial) resolution of the euro sovereign debt crisis, signs that China and U.S. economies will do moderately well for the rest of 2011, and the Fed’s dispatching a brigade of governors to talk up QE3, laid the groundwork for a multi-month rally which may last till Q1 2012

We are now at the tail end of our Sept 30 forecasts: we projected then an S&P 500 rally to the 1250 – 1275 within three to four weeks, which may be followed by another price reversion to the 1175 area. We also recommended to get out whenever the 1250—1270 area is hit and restart long positions at lower 1175 levels. Nonetheless, we also said
to expect the SPX to test the 1350 – 1375 highs by Q1 next year.

The full Diapason Q4 outlook is attached:

RPBalan1

Source: Diapason Commodities Management

THE BRENT CRUDE PREMIUM OVER WTI IS HERE TO STAY

By Robert P. Balan, Senior Market Strategist, Diapason Commodities Management

The crude oil market has become almost like a surrealist Dali painting — it just seems all warped, distorted and twisted out of shape. Here are some examples: do you want crude oil delivered in the future, say a year from now? You can have your pick. If you want West Texas Intermediate (WTI) crude, get ready to pay up substantially higher– crude has jumped almost $15 in the past 8 trading days after it became apparent that the U.S. economy was not at risk of falling into another recession soon, and the eurozone might be finally getting its act together.

And not only that — WTI oil for delivery in a year from now costs about $2.20 more per barrel. The market is in contango, a sign of semi-plenty current supply, so there is a storage premium embedded in the price structure.

However, if you want Brent crude oil, you are actually in luck. Yes, it is more expensive and yields less energy, (relative to WTI) but delivery in a year would actually cost you about $5.10 less per barrel. That is backwardation, and it signifies a very tight spot market, where oil commands no storage premium. Unlike WTI, people want their Brent crude now and are willing to pay up.

Read the full report here:

brent crude premium over wti here to stay.v.1

Source: Diapason Commodities

DIAPASON COMMODITIES Q4 OUTLOOK

By Robert P. Balan, Senior Market Strategist, Diapason Commodities Management

  • The global economy has been experiencing a mid-cycle industrial led pause, which in our view is about to end. This will not develop into a recession mainly on account of continuing expansion in emerging economies and a modest improvement in the U.S. Global GDP growth this year will probably be 3.6%, vis-a-vis 5.% in 2010
  • The deterioration of confidence in European government debt presents the most serious challenge to the global economy. The sovereign debt crisis – and associated fiscal tightening – already cost the global economy $26 trln in financial and tangible assets since July. It will likely also take its toll on economic growth in the euro area, which is now expected to be just 0.5% in 2012, after 1.6% this year
  • European politicians and policymakers are getting closer to what may eventually be a sufficiently comprehensive and coordinated effort to address the problem of the erosion of confidence in euro area banks. This week’s announcement of non-standard policy measures (e.g., ECB covered bond purchase, year-long loans, BoE £75bln new QE) will likely limit the downside on valuations of European financials, and should even support European risk across asset classes
  • The underlying root problem, namely the sovereign debt concerns surrounding periphery countries, most notably Greece, remain yet to be satisfactorily addressed. However, Greece statement show that the government is having success meeting its requirements crucial to the release of the next tranche of the bailout fund; Greece has sufficient liquidity to run the country until mid-November.
Read the full report here:


Q4 2011 Commodities Sector Tactical Allocation_Oct.7 2011.sp

Source: Diapason Commodities

THE CASE FOR HIGHER OIL PRICES BY 2012, PART 2

By Robert P. Balan, Senior Market Strategist, Diapason Commodities Management

This is part 2 of Robert Balan’s “Case for higher oil prices by 2012″.  To read part 1 please see here.  

The physical oil market continues to show a remarkable strength even if futures prices are lagging amid worries about the impact of an economic slowdown on crude oil demand. The latest signals of supply and demand tightness come from Asia and the Middle East. One example: the cost of Oman-Dubai crude, the regional benchmark, in the spot market has surged significantly above the price for delivery into early 2012, as reported recently by the Financial Times.

The downward slope of the forward curve, known as backwardation (i.e., “inverted), is an indication of immediate tightness. Another: the premium that Saudi Arabia charges to Asian refiners for its main crude stream has jumped to an all-time high. The dire macro outlook continues to weigh on the oil futures complex, but there remains very little in the way of weakness visible in the physical crude oil market itself. The first-to-second month backwardation in Oman-Dubai crude – an indicator of physical tightness – has spiked recently to $1.40 a barrel, up from just 7 cents a month ago and about 60 cents six months ago.

The backwardation is among the strongest in recent years. The strength of Oman-Dubai is even
more surprising taking into account that the seasonal peak in oil demand in the Middle East – the
air conditioning season over the summer – has just ended.

Read the full research note here:

The Case for higher oil prices Part 2.1_final