Commodities | Aug 24 2010
By Chris Shaw
The oil disaster in the Gulf of Mexico had appeared to be ending earlier this month, but as Barclays Capital points out, the implications of the oil spill on the industry as a whole will likely prove a game changer with long lasting impact.
The most obvious implications are the legal actions for damages begun by the state of Alabama, while Barclays notes the full effect of the spill is even being felt in places such as Norway where officials in that country have indicated the case for future deepwater exploration around that country has almost certainly been weakened.
As well, other oil spills are being treated far more seriously, Barclays offering the leak at the Enbridge pipeline 6b that equated to just 55 barrels per day of oil as an example. The pipeline was ruptured on July 26th and was set to be re-started by August 9th until this was rejected by the US Department of Transportation on the grounds of inadequate measures to assure no further immediate threats. Authorisation to re-start the pipeline may now take as long as 12 months.
In the view of Barclays, this heightened sensitivity to any spills or accidents in the US oil market is likely to remain for some time, something expected to contribute to growing anti-oil sentiment in that market.
Barclays expects this will make oil production in the US increasingly more arduous, this despite plentiful reserve and the industry being at the cutting edge with respect to frontier technology.
Across in the iron ore market, Goldman Sachs notes seaborne spot prices into China have been virtually unchanged over the past two weeks. The price stalemate seems likely to continue as index-linked fourth quarter contract prices are effectively capping any upside and reduced availability of Indian cargoes is limiting any downside.
Assuming spot prices hold at this level for the rest of August, Goldman Sachs sees the implied fourth quarter contract price coming in at US$138 per tonne or US$128 per tonne FOB Australia. This would be about 13% below the implied third quarter contract price.
Spot iron ore is trading almost US$10 per tonne above this implied fourth quarter contract price at present, which Goldman Sachs notes is seeing buyers refrain from making new purchases in the spot market. This is especially the case as the material may not arrive until October, which would be when lower contract prices became effective.
For Goldman Sachs, all this means current market conditions make it tough to have a positive short-term view on the outlook for iron ore prices. The broker does note there remains a range of pricing terms in the market and this state of flux means not too much should be read into current conditions.
In the precious metals market, Standard Bank notes recent data out of Switzerland indicates strong palladium demand. Switzerland traditionally is the international distribution hub for refined platinum and palladium, so flows from and into the country indicate possible demand requirements from other nations.
Switzerland was a net exporter of 400,000 ounces of palladium in July, the third largest monthly export volume over the past two years. Large importers from Switzerland in the period were Germany, Japan, the US and China, China's imports of 42,000 ounces its highest since July of last year.
While the data for platinum for July were not as bullish, Standard Bank remains positive on the outlook for both metals on a six-month timeframe, though the expectation is it will be cost-push rather than demand pull factors driving prices shorter-term.
Briefly on the base metals, Standard Bank notes recent data showed China to be a net exporter on aluminium in July. This has raised some concerns about weak Chinese demand for the metal, the bank suggesting this has contributed to sluggish price action in recent sessions.
Barclays also picked up on the figures, pointing out the fact Chinese exports rose at the same time as domestic production declined implies a reduction in the surplus of aluminium in the Chinese market. While this is a slight positive the market remains oversupplied, so Barclays expects imports into China will remain weak in coming months.
Other data in the global aluminum market released by the International Aluminium Institute showed growth in global production slowed 14.2% in July in year-on-year terms, largely reflecting Chinese measures to reduce the country's output. As prices have risen in recent weeks, Barclays doesn't expect any further cuts in aluminium output to be announced.
