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Oil Demand Up, What About Supply?
February 11, 2010
The International Energy Agency (IEA) raised its 2010 world oil demand forecast to 86.5 million barrels a day—up 170,000 from its January report and 1.8 percent higher than oil demand in 2009.
The upward revision comes on the heels of increased economic activity in Asia—which has led the global recovery so far. Oil industry consultant PIRA estimates that Asia has accounted for half of global economic growth over the past decade as Asia’s share of world GDP has jumped from 18 to 26 percent.
Nearly half—44 percent—of the 170,000 barrels per day increase from last month came from China.
While Asia has been the driving force, the effects of an economic recovery affecting energy demand are being seen across the globe. North America, Asia, Europe and the former Soviet Union (FSU) countries are all back to where demand was in 2008, when the oil price approached $150 per barrel.
PIRA is forecasting world oil demand to increase by 2 percent in 2010—more than half of that growth coming from “less developed” countries. They see demand growth in all areas of the world besides Japan—which is expected to remain flat.
And we’ve pointed out on many occasions that, while demand is growing, the long-term supply response has been weak. The low-hanging fruit has been harvested and now it is increasingly difficult, costly and sometimes dangerous to find and develop large new oil fields.
This growing imbalance between demand and supply raises the chances of shortages that could drive prices significantly higher in coming years.
Saudi Oil Flowing East
February 02, 2010
One more measure of China’s growing global clout – so much Saudi oil is flowing China’s way that it may soon replace the U.S. as the leading market for the world’s largest oil exporter.
A report from oil-industry consultant PIRA says Saudi Arabia accounted for 11 percent of total U.S. oil imports last year, down from 18 percent in 2003. Over the same period, China’s shipments of Saudi crude increased from 16 percent of total imports to 20 percent.
In just the past two years, Saudi oil imports to China have increased 60 percent, reflecting the rocketing demand for energy to fuel economic growth. Xinhua, China’s official news agency, says crude oil imports could surge more than 40 percent in the next three months after hitting an all-time high of 5 million barrels per day in December.
Oil demand in the U.S. fell about 4 percent in 2009 as a result of the economic slowdown, and imports from Canada are playing a bigger role.
The Saudi-China linkup appears to be growing on several fronts. Partnerships are being formed between the respective national oil companies, and Chinese companies are also doing more work in the Saudi oil patch.
In addition to the $20+ billion in cross-border deals China made last year, the country has increased its refining capacity and energy infrastructure for better transports from places like Russia, Latin American and the Middle East.
Just today, the Venezuelan oil minister arrived in Beijing to discuss refining and trade agreements with China. Venezuela is the fourth-largest importer of oil to the U.S.—about 11 percent of total imports.
In contrast, the U.S. continues to rollback its refining capacity while neglecting to invest in new infrastructure.
China’s ever-increasing appetite for oil will continue to play a major role in the country’s foreign relations with both partners and allies. Any disruption could cause volatility for oil prices.
Platinum Goes Platinum
January 28, 2010
Platinum lagged other industrial metals in 2009, but an improving global economy and a new investment vehicle may give it a lift this year.
This week, the International Monetary Fund (IMF) said the global recovery is off to a stronger start than expected. The IMF raised its global output expectations to 3.9 percent in 2010.
Since industrial use—mostly automobile manufacturing—makes up about 70 percent of platinum demand, a rise in global output would be expected to stimulate demand growth.
Another reason for optimism is the first exchange-traded fund backed by physical platinum debuted earlier this month. More than 160,000 ounces were accumulated in just its first two weeks.
It’s unlikely this pace is sustainable, but we’ve seen what can happen when the doors open to investing in attractive hard assets. Net retail investment in gold has jumped about 250 percent since 2004, when the first bullion-backed ETF was introduced.
Investment demand only makes up about 8-9 percent of total platinum demand, according to Deutsche Bank. Like gold, the metal possesses both ornamental and industrial value, which makes it appealing.
Another thing to watch is the gold-to-platinum price ratio, which provides a historical perspective on relative valuation. That ratio suggests that platinum may be relatively undervalued -- a recent Bloomberg story says the ratio is down 42 percent from its peak and down 23 percent compared to the 10-year average. #10-48
Wind Power – Not Hot Air
January 27, 2010
America’s commitment to wind power isn’t all hot air.
Roughly 10,000 megawatts of new wind-power generation capacity was built in the United States in 2009 – enough to provide electricity to nearly 2.5 million homes. That new capacity alone is adequate to power all of the homes in Colorado and Wyoming combined.
All together, wind-power capacity now stands at about 35,000 megawatts, according to a report from the trade group American Wind Energy Association. That’s only about 2 percent of the nation’s electric-generation capacity, but since 2003, the annual growth rate has been nearly 40 percent.
Our home state of Texas accounts for more than a quarter of the national wind-power capacity – wind farms, most of them in the western part of the state, provide 6 percent of the state’s electricity. Iowa and California are also big producers.
About 85,000 people are employed in the U.S. wind-power industry, with jobs including manufacturing, installation and maintenance. Not only is wind an energy story, it’s also a major infrastructure story.
The U.S. is the world’s leading wind power generator, but it’s also a growing energy component in China, where air pollution from coal-fired plants is a major health issue and potential threat to future economic growth.
A recent story in The New Yorker magazine points out that wind-generated electricity in China has doubled each year since 2006, and that the country is a leading innovator in wind turbine design and production.
The knock on wind is that it is not a viable power source in the U.S. without government subsidies, but that’s less of a knock than it used to be.
The AWEA says the cost of wind-generated electricity has been slashed by 90 percent over the past two decades – taller towers, better turbines and economies of scale created by large wind farms have all contributed. As the industry grows in size and acceptance, the economics stand to improve further.
*By clicking the links above, you will be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. The following security mentioned in the referenced articles was held by one or more of U.S. Global Investors family of funds as of 12-31-09: Apple Inc. #10-53
The Case for Commodities in 2010 (And Beyond)
January 25, 2010
The biggest emerging economies have ambitious plans that require a greater share of the world’s limited commodities. This trend is spurring profound and permanent disruptions in how these resources are allocated now and in the future. For investors, these disruptions present opportunities.
Simply put, an investment in natural resources is a vote of confidence in global economic growth.
Rapid urbanization and industrialization, better infrastructure and growing consumption in emerging markets are among the key themes in the global growth story. They are also key drivers in the rising demand for oil, steel, copper, cement and other resources.
Here are just a few of the many available data points to help gauge the scale of opportunity:
- Just over half of the world’s people now live in cities—that figure is likely to rise to 70 percent over the next four decades. The urban population in emerging nations has expanded by an average of 3 million per week for the past 20 years.
- India has embarked on a $500 billion plan to expand and upgrade its highways, airports and other transportation assets by 2012.
- More than 13 million cars and light trucks were sold in China in 2009, transforming a land once dominated by bicycles into the largest auto market in the world. Forecasts for 2010 call for vehicle sales to increase by as much as 10 percent.
Commodities (as measured by the Reuters-Jefferies CRB Index) shot up 24 percent in 2009, the largest single-year increase since the early 1970s, and the International Monetary Fund projects that prices will keep rising this year due to emerging-markets demand and global economic recovery.
China’s economic growth is often mentioned in the context of commodities prices and demand—indeed, China surprised many by growing its GDP at an 8 percent rate in 2009, with commodity-heavy infrastructure investment playing a major role.
Less often discussed is China’s rapidly growing middle class (chart). Estimates are that as many as 25 percent of Chinese—more people than the entire U.S. population—fall into this category now, with a doubling possible within the next decade. While most dramatic in China, it is also under way in India, Brazil and elsewhere. This rise of the “American Dream” in emerging nations is memorably portrayed in the Oscar-winning movie “Slumdog Millionaire.”
This trend has huge implications for commodities. Wealthier people want a better lifestyle. That means more and better housing—in addition to the structure itself (cement, steel), that means more wiring for electricity (copper), more plumbing (copper, zinc) and more basic appliances (steel, copper and other metals).
They also want better transportation, as we’ve seen in China. In only 10 years, China has gone from being the world’s 20th largest oil consumer to No. 2 behind the United States as a result of its accelerating shift from the bicycle to the car. Getting around also means more roads, more bridges, more airports, more and faster railroads—all of which add to commodities demand.
While demand is growing, the supply of many key commodities is not keeping pace.
It is increasingly difficult and costly to find and develop large new oil fields, and mining projects are often slowed down by environmental opposition and tighter regulatory requirements. Many promising new commodity sources are in countries with inadequate infrastructure and/or significant political risks.
Commodity supercycles typically last 20 to 25 years—the current supercycle began in 2000, so we are just at the halfway mark. A stress in the markets is that insufficient capital has been invested in resources in recent decades, while at the same time the world’s population has doubled and there has been spectacular growth in the middle class. Any supply disruptions quickly lead to price spikes.
There are other reasons to consider an investment in commodities or commodity-based equities, be it through an actively managed natural resources fund or a passive vehicle like an index fund or exchange-traded fund.
We’re hearing more talk about inflation—natural resources are one of the few asset classes that benefit from inflation. If prices for fuel or other commodities rise, one way to hedge against the impact of that price increase is to invest in those commodities.
Commodities are also a natural hedge against the erosive impact of a weak dollar. Given massive federal deficits for the next decade, yawning trade deficits and historically low interest rates, it is hard to see how the dollar could see a sustainable rally any time soon.
For the reasons detailed above, we believe that the secular bull market for commodities and natural resources stocks remains intact and could even intensify in 2010, depending on the extent of economic recovery in developed nations.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Reuters/Jefferies CRB Index is an unweighted geometric average of commodity price levels relative to the base year average price.
Net Asset Value
as of 09/08/2010
- Global Resources Fund
PSPFX $8.78 +0.05 - Gold and Precious Metals Fund
USERX $17.44 +0.03 - World Precious Minerals Fund
UNWPX $20.18 -0.01 - China Region Fund
USCOX $8.61 -0.02 - Eastern European Fund
EUROX $9.11 +0.13 - Global Emerging Markets Fund
GEMFX $8.17 +0.08 - Global MegaTrends Fund
MEGAX $7.71 +0.04 - All American Equity Fund
GBTFX $20.02 +0.09 - Holmes Growth Fund
ACBGX $16.04 +0.15 - Tax Free Fund
USUTX $12.58 -0.01 - Near-Term Tax Free Fund
NEARX $2.26 -0.01 - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change