Material Matters: Oil, Gold And Uranium

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED, and other companies. For more info SHARE ANALYSIS: ERA

By Chris Shaw

Stronger equity markets have helped push the oil price higher, though Commerzbank suggests the jump may also be a technical response to the more than 20% fall experienced over the past three weeks.

The bank views fundamentals as mixed, as while gasoline and distillate inventories have fallen for the first time in a couple of months crude oil inventories in the US this week rose by more than the market had expected.

According to Commerzbank the market is viewing this news selectively, the focus more on the gasoline and distillate numbers. This implies a temporary change in market mood, something the bank suggests is likely to see prices rise further in the near-term.

Barclays Capital is more positive, seeing the improvement in diesel inventories as a sign the expected rebound in diesel demand has finally arrived. This is significant as Barclays points out diesel is the part of the oil barrel most geared in relation to the current stage of the economic cycle.

The fact the last four distillate demand readings from the US have been positive gives Barclays greater confidence in its view, especially leading into the US summer driving season. As well it notes US trucking data shows the major increase is coming from the more than 1,000 miles category, which is potentially a sign of improvement in chain of goods movement.

Barclays sees this as an indication there is greater confidence among businesses to re-stock following the rundown in inventories experienced for several months. This comes at the same time as air-traffic volumes are also picking up steadily.

There is one other factor in the support of the oil price, in the view of Commonwealth Bank, and this is the potential for an active Atlantic Ocean hurricane season. The bank notes the US National Oceanic and Atmospheric Administration has said the 2010 season could be comparable to a number of extremely active seasons since 1995, which implies a greater chance of production disruptions in the Gulf of Mexico.

Commonwealth Bank is not as positive on the gold price outlook however, this despite the World Gold Council reporting jewellery demand in the March quarter was up 43% from year ago levels. While the increase in jewellery demand is significant because it comes at a higher price level, the bank continues to suggest investor interest in the metal may wane over the course of this year.

If this proves to be the case it suggests an easing in the gold price, though as Barclays notes investor interest across the precious metals remains high at present. Exchange Traded Product (ETP) holdings of gold have hit record highs this week, as have silver and platinum holdings.

In the view of Barclays, safe haven buying of gold remains strong and subdued official sector sales have kept the supply-side of the market in check. This, plus the ongoing European sovereign debt crisis, is supportive for gold in the group's view.

Turning to the uranium market, BA Merrill Lynch suggests the combination of ample supply, aggressive sales from new market entrants and well-covered utility requirements means there is little chance of any spot market tension (upside) this year without any major disruption to production.

On the flip-side, BA Merrill Lynch sees support and limited further downside risk to prices at US$40 per pound, as buying and holding material becomes attractive at this level when compared to term-escalated contracts.

Longer-term the broker remains positive on the market, as even allowing for some delays to proposed and planned reactor building the uranium market is likely to shift into material deficit post 2013 if required new mine supply is not commissioned.

Until that time BA Merrill Lynch expects declining market surpluses from this year will see prices slowly move higher, with momentum to pick up as inventory and supply security issues gain more attention.

BA Merrill Lynch's model suggests an average spot price in 2014 of US$60 per pound, while there is no change to the broker's long-term 2015 nominal price forecast of US$55 per pound. Price risk long-term is to the upside from incentive price arguments, geopolitical risk and any return of speculative buying in the market.

With uranium stocks having underperformed since the start of this year BA Merrill Lynch has re-initiated coverage on leading Australian plays Energy Resources of Australia ((ERA)) and Paladin Energy ((PDN)) with Buy ratings.

ERA would suffer under the proposed resources super tax but is attractive on valuation grounds, while also offering a more defensive exposure to the market in BA Merrill Lynch's view. Its Buy rating is accompanied by a price target of $18.00.

For Paladin, BA Merrill Lynch suggests the attraction is a combination of corporate appeal given the company offers significant production growth over the next three to four years. The broker has set a price target of $4.70 on Paladin.

The FNArena database shows Sentiment Indicator readings of 0.0 for ERA and 0.3 for Paladin. Average price targets according to the database of $18.33 for ERA and $4.24 for Paladin imply upside of more than 27% and almost 11% respectively. 

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