Market Update & Important Indicators
Europe's broad equity-market benchmark closed higher Monday, hitting a seven-year high as investors weigh up the prospects for quantitative easing from the European Central Bank. The Stoxx Europe rose 0.2% to 353.18, its strongest close since early January 2008, according to FactSet data. That added to gains of nearly 4% over the past two sessions.Stocks on Monday reached session highs after French President Francois Hollande said policy makers at the ECB meeting on Thursday "will take the decision to buy sovereign debt, which will provide significant liquidity to the European economy and create a movement that is favourable to growth." On the country indexes, Germany's DAX 30 rose 0.7%, France's CAC 40 gained 0.4% and the U.K.'s FTSE 100 tacked on 0.5%.
Shanghai stocks plunged to their lowest level in more than six years Monday as investors worried that Beijing's move to clamp down on margin trading could derail the benchmark index's months-long winning streak. The Shanghai Composite slid 7.7% to end at 3,116, its biggest daily decline since the financial crisis, when the market sank 7.73% in June 2008.
China's securities watchdog on Friday suspended three large Chinese brokers from opening new margin-trading accounts for clients for three months, effectively making it more difficult for investors to borrow money to buy stocks. The regulator said it found that the three brokerages had rolled over margin-trading contracts for a large number of
clients, in violation of existing rules. Volatility in the mainland spread to Hong Kong, where Chinese shares slumped 5.5%. The Hang Seng finished down 1.5%.
Other markets in the region pared gains as investors grew skittish over the Shanghai stock slide. The Nikkei Stock Average finished up 0.9%, though the yen strengthened. Investors were rushing to the yen, regarded as a haven asset, which pushed the U.S. dollar to Yen117.08, from Yen117.62 late Friday in New York.
Base metals finished largely lower overnight, with copper down 1.0% as inventory increases weighed on the LME price. Gold gained 1.4% to $1,280/oz and Brent crude closed at $48.96/bbl.
Thought for the day
Oil Prices – Slippery
Background
The US Energy Information Administration (EIA) recently released its January 2015 Short Term Energy Outlook (STEO). In it the EIA estimated that global oil inventories grew by 0.8 million barrels a day (mmbbl/d) in 2014, largely supply driven as production outside of OPEC climbed a record 2.0mmbbl/d.
According to the EIA, non-OPEC petroleum and other liquids production averaged 56.2mmbbl/d in 2014. By far the greatest contributors were the US (14.0mmbbl/d) and Russia (10.6mmbbl/d), who on a combined basis were responsible for 44% of non-OPEC liquids supply. OPEC crude and other liquids production was estimated to have averaged 36.0mmbbl/d, with Saudi Arabia dominating (9.7mmbbl/d).
Forecast supply and demand
The EIA estimates that global consumption averaged 91.4mmbbl/d in 2014 (compared to supply of 92.2mmbbl/d), and that it will grow a further 1.0mmbbl/d in each of 2015 and 2016, with China the leading contributor to projected global growth.
What does this imply for oil prices?
Not surprisingly the EIA’s expectation is that global inventories will continue to build in 2015, keeping downward pressure on prices. However, as shown in Figure 2, this downward pressure will be concentrated in the first half of this year, with production in excess of supply leading to continued growth in global inventories. These are expected to grow a further 0.9mmbbl/d during the first half of 2015, before tapering off in the second half as supply, particularly from the US, falls as a result of lower prices
Brent is forecast to average US$58/bbl in 2015, with monthly average lows of US$49/bbl in January and February, before increasing through the year to average US$67/bbl in the fourth quarter. Brent is then expected to average US$75/bbl in 2016. The WTI price is expected to trade at a US$3-4/bbl discount to Brent.
Uncertainty a certainty!
However, as shown by the confidence intervals in the above chart, there is a very high degree of uncertainty in the price outlook. The EIA notes that based on futures contracts trading in the first week of the year, the 95% confidence intervals for the market’s expectations of the average WTI price in April 2015 was US$34/bbl and US$76/bbl! And this gap widens the further out the market looks.
Changes to global supply of oil in many cases will be based on political considerations rather than economic, which is one reason why it is so difficult predicting prices. It is unlikely to get any easier in the near term either. Taken together with the uncertainties surrounding currency exchange rates and the prices of other commodities it suggests that many corporates will hesitate to make investment decisions in the first half of 2015.
Of course this will have the inevitable impact on supply down the track and the cycle will begin again. It always does.
In This Issue
Austin Engineering (ANG)
Recent commodity price moves suggest we’re still deep in the trough of the current cycle. In this environment miners will continue to defer any discretionary opex and capex for as long as they can. Accordingly a decent recovery in earnings is going to take longer than we previously thought and we downgrade 2H15 and FY16 forecasts. Our main focus for the forthcoming results though will be the cash flow statement and progress on net debt reduction. Investors will remain sidelined in the near term, and a hold call remains appropriate despite the valuation upside based on longer term earnings potential.
Paladin Energy (PDN)
Paladin Energy (PDN) posted December Q results with production for its Langer Heinrich mine (LHM, 75% PDN, 25% CNNC) of 1.3Mlb U3O8, up 27% Q-on-Q, but below Argonaut’s forecast of 1.5Mlb. Sales were also higher Q-on-Q, up 53% to 1.9Mlb generating US$69.9m revenue. PDN’s balance sheet is in a stronger position following a placement and entitlement offer which raised $205m. With a cash balance of ~A$460m (Argonaut est.), market query regarding repayment of the US$300m 2015 convertible bond (CB) has been alleviated.
Recent Contacts & Presentations
Northern Star (NST), Doray Minerals (DRM), Troy Resources (TRY), Gold Road Resources (GOR), Saracen Mineral Holdings Limited (SAR), Beadell Resources Limited (BDR), Resolute Mining Limited (RSG) , RTG Mining (RTG), MACA Limited (MLD), Alexium International Group Limited (AJX), Decmil Group Limited (ACG), Pacific Energy Limited (PEA), Otto Energy Limited (OEL), Peninsula Energy Limited (PEN), Sandfire Resources NL (SFR), Atrum Coal (ATU)
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