- November 2, 2011
- Poland’s Power Play for Energy
Poland is setting the stage to become a rising player in the European natural gas market. Europe has long been reliant on Russia for its supply of natural gas, but domestic discoveries of shale gas—along with strong governmental support for drilling—might soon catapult Poland to the forefront of the energy landscape.
According to BP’s 2011 Statistical Review of World Energy, Poland’s production of natural gas has been relatively flat over the past 40 years. The country historically produced less than 1 percent of the world’s natural gas, vastly paling in comparison to one of the biggest natural gas players, Russia, which produced 18 percent of the world’s natural gas supply.
The European Union now imports 30 percent of its natural gas from Russia, says Morgan Stanley, and Poland has been one of the best customers. Last year, Poland alone imported nearly 63 percent of its natural gas—87 percent originating in Russia. The chart shows the vast web of pipelines that Russia has spun through Belarus, Ukraine, Slovakia and the Czech Republic in order to carry its gas to the other European nations.
BP reports that the only country outproducing Russia in natural gas is the U.S., which accounted for nearly one-fifth of the world’s natural gas in 2010. However, the U.S.’s natural gas production rose to its highest level since 1973 due to the extraction of shale gas. “Shale gas related horizontal drilling surged in early 2010 and shale gas output rose to account for 23 percent of total U.S. production,” reported BP.
The U.S’s new drilling technique, which extracts natural gas from rock deep underground, is “reshaping the world of natural gas,” BP says. To unlock the resource in shale basins, engineers must employ horizontal and hydraulic drilling, commonly referred to as “fracking” or “hydrofracking.” This requires pumping highly pressurized amounts of water, chemicals and sand underground to release gas trapped in shale formations.
Now this groundbreaking technique could shift Europe’s natural gas market to the East. A report by the U.S. Energy Information Administration (EIA) on “World Shale Gas Resources” found that Poland has the largest shale gas reserves in all of Europe, with 187 trillion cubic feet of recoverable natural gas resources.
Specifically, the EIA finds three organically rich shale formations in Poland that are favorable for gas exploration development.
The Baltic Basin is roughly 102,000 total square miles in size, larger than the Marcellus shale basin in the U.S., and extends over a portion of Poland, Lithuania, Russia, Latvia, Sweden and the Baltic Sea. This basin could contain significant levels of natural gas, making it the most promising deposit of this untapped resource in the region. Surrounding the Baltic Basin are Poland’s gas-rich regions of the Lublin and Podlasie basins.
Chevron began drilling the company’s first exploratory well in southeast Poland this week and that’s just the beginning. The EIA says a number of international firms such as ExxonMobil, Marathon Oil and PGNiG, Poland’s state-owned gas company, have been evaluating the Baltic and Lublin basins, but no exploratory wells have been drilled at Podlasie as of yet. Substantial infrastructure is also needed for companies to be able to extract and transport reserves, including thousands of miles of pipelines and dozens of rigs.
Helping to offset some of the transportation difficulties, Poland’s largest state-owned energy company recently announced plans to build approximately 620 miles of gas pipeline.
Although it may still be two to five years until the country is able to begin production, Morgan Stanley cites several reasons for Poland’s likely success: a large resource base, gas pricing that is almost twice the pricing of the U.S., a developed gas market, and political support that welcomes foreign firms and hydraulic fracking permits compared to other countries in Europe. Just as shale gas is significantly driving the supplies of natural gas in the U.S., Poland’s shale gas could shift where Europe gets its energy in the future.
The following securities mentioned in the article were held by one or more of the U.S. Global Investors Funds as of September 30, 2011: Marathon Oil. 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.
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- March 12, 2011
- 11 Reasons to Reconsider Russia
“10 Reasons to Own Russia,” courtesy of Merrill Lynch:
- Outperforming: In U.S. dollar terms, Russia is the only emerging Europe country with a positive return year-to-date.
- Positioning: Majority of investors and institutions investing in the region are underweight Russia and overweight Turkey.
- Commodities: Three key indicators—the CRB Index, the Baltic Dry Index and oil prices—have begun to stabilize after big tumbles last year.
- Sector Performance: Russia is heavily dependent on energy and materials, which are the two best-performing sectors in Europe year-to-date.
- Foreign Exchange: The ruble has performed well against other emerging market currencies.
- Cheap: The price-to-book ratio for Russian stocks is less than half that of the other BRIC countries.
- Discount: Russia is trading at a 62 percent discount to the trailing price-to-earnings ratio for emerging markets overall.
- Relatives: Gazprom and Sberbank are at multi-year lows compared with peers from other countries like Petrobras and Bank of China.
- Debt: The worst case scenario with Russian companies defaulting en masse did not come to pass and positive news is yet to be reflected in the share prices of those companies.
- Emerging Markets: Emerging markets have returned to trading at high premiums versus developed European equities but Russia still trades well below that level.
This list actually goes up to 11—Hillary Clinton’s meeting with Sergei Lavrov, Russia’s foreign minister, in Switzerland last weekend. Their symbolic button-pushing to “reset” strained diplomatic relations between the U.S. and Russia can’t be seen as anything but a positive sign for the future.
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. The Baltic Dry Freight Index is an economic indicator that portrays an assessed price of moving major raw materials by sea as compiled by the London-based Baltic Exchange. The following securities mentioned in the article were held by one or more of U.S. Global Investors’ clients as of 12/31/08: Petrobras, Gazprom, Sberbank. 09-196
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- August 6, 2010
- Risk and Recovery in Russia
Russia has a lot of upside, and a big part of why is the risk trade.
Russia was one of the top emerging markets in July, rising 10.3 percent as risk tolerance came back into the market.
And we think this upward trend can continue – Russia has a lot of catch-up potential. Its stock market remains 51 percent down from its May 2008 peak despite a 143 percent rally from its bottom in January 2009, according to Credit Suisse.
While the other BRICs have taken measures to keep their economies from overheating, Russia is just starting to benefit from stimulus implemented during the crisis.
Rising consumer demand accelerated GDP growth to 5.4 percent during the second quarter, and we think the consumer story is just getting started. Money supply is growing at a historically high rate of 30 percent, which should grease the economic engines for further expansion during the back half of the year.
U.S. dollar strength had been a headwind for Russian markets but that appears to have reversed. We’ve also seen a turnaround in the banking sector, which has historically been a positive for emerging markets.
The Russia story is just catching on. Capital inflows have been slightly positive so far in 2010, but still lagging the 2006-07 period, when monthly inflows exceeding $150 million were not uncommon.
Despite the promising outlook, some potential hurdles remain. For instance, to raise capital, Moscow is selling $35 billion of its equity in Russian companies between 2011 and 2013. This large amount of shares could pressure equity markets until this overhang is removed.
BRIC refers to the emerging market countries Brazil, Russia, India and China.
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- September 16, 2011
- A Yuan, Euro and Dollar Walk Into a Bank…
Currency markets have been the pawns in central bankers’ chess games around the world in recent weeks, as each country looks to gain the slightest edge in today’s growth-starved economy.
Weeks ago we saw a big intervention from the Bank of Japan, which stepped in and tried to stop the yen’s downward slide. Last week, it was the Swiss National Bank that moved to improve the Swiss franc’s stature among global currencies. Also recently announced was that the Hong Kong dollar soon will no longer be pegged to the U.S. dollar, which got foreign exchange traders excited.
Even gold has gotten in on the currency game. Despite disagreement from America’s own money man Ben Bernanke, many argue gold is currency since: A) the Constitution says so and B) it’s a store of value. But, paper currencies such as the euro, yen, yuan and the U.S. dollar are the main media of global finance today.
Paper money has been around a long time. It was first used by the Chinese during the Tang Dynasty in 806 AD–500 years before Europe began printing money in the 17th century. It would be another 100 years before America started circulating a national paper currency. And few Americans were more involved in the national paper money history than Benjamin Franklin, who wrote about, designed and printed paper money prior to the national currency. His face on the $100 bill today is our reminder of his contributions as a printer, scientist, scholar, writer and politician.
Given the important role paper currency plays, we’ve developed a quiz along the lines of our gold, oil and emerging markets quizzes so you can test how much you know. Give it a try. If you do well, don’t forget to show off your score to your friends.
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- September 15, 2011
- Chart of the Week – Turkey’s “Cut Rate” Path to Growth
As Western European countries grapple with anemic growth, Turkey’s second quarter GDP rose 8.8 percent.
Shares on the Istanbul Exchange sold off earlier this year on concerns of overheating, even after the economy grew 11 percent in the first quarter (recently revised to 11.7 percent), which outpaced China. Investors were concerned about high inflation and the rising disparity between the countries’ imports and exports. These, coupled with a deficit fueled in large part by the high price of crude oil imports, drove markets lower.
Many experts suggested Turkey increase interest rates to combat these inflationary fears. Instead, the Central Bank of Turkey (CBT) took the unorthodox move of cutting interest rates while at the same time raising overnight borrowing costs. The goal of this dual policy move was to slow down loan growth. Conversely, raising interest rates would have attracted even more carry trade.
When they were announced, the CBT’s unorthodox moves were splashed across headlines as unconventional and eccentric but the bank’s policies appear to have worked in the Turks’ favor. Because of a weakened Turkish lira and low interest rates, Turkey is now experiencing a tourism boom while also making exports more competitive in global trade. Data from Credit Suisse shows Turkey’s GDP expanded by almost 9 percent—2 percent greater than analyst estimates—during the second quarter.
Turkey’s industrial production, which is also highly sensitive to interest rates, has also increased recently. This chart from the Turkish Treasury illustrates the county’s first half industrial production growth compared to the same period in 2010. The country experienced a 6.7 percent year-over-year increase in industrial production in July, beating analyst expectations of a 4 percent year-over-year increase. (Read last week’s Investor Alert for more details.)
Interestingly the country’s growth in industrial production was largely driven by an increase in domestic demand, according to Credit Suisse.
Credit Suisse says the growth in industrial production is driven by increased domestic demand. Private investments in construction, retail trade, transportation and communication helped spur a 7 percent increase from the previous quarter, according to a report issued by Bahçe?ehir University’s Center for Economic and Social Research.
Tim Steinle, who co-manages the U.S. Global Investors Eastern European Fund (EUROX), says the Turkish economy has posted uninterrupted sequential growth in GDP for the last nine quarters.
Tim thinks these are all signs that the CBT policies have worked. The country’s budget now sits at a surplus of $2.8 billion lira, partly reversing a deficit of $3.5 billion lira posted in July. As long as no “credit crunch” hits the global marketplace, Tim says it appears the Turks have successfully engineered a soft landing. Long term, we think low interest rates paired with the CBT’s banking policies will help the country meet, or exceed, analysts’ predictions of 6-7 percent GDP growth through the second half of the year.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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