Monday, February 14, 2011
Oil & Metals Outlook - Metals & Miners Weekly Roundup
It is 5:51 AM. Have a cup of Valentine's brew. One thing I've learned in all these years is that today is not a good day to ignore your sweetheart. Pay Wendy a visit, it will forgive a lot of past transgressions...
Oil & Metals Outlook
We're starting this week with COMEX copper coming very near a new record pegging $4.6180/lb in the early hours. It has fallen back to $4.5975/lb which is still impressive given that the U.S. dollar has hit a 3-month high against the euro. Upbeat Chinese data has helped copper, tin and lead stay in the winner's circle for the morning. COMEX gold is huffing and puffing at $1363.9/oz with the more nimble silver staying above $30 at $30.285/oz.
The closely watched gold/silver ratio is at a very low 45.0 - strong silver, weak gold. The report often reminds the reader that the gold/silver ratio was in a range of 50-56 before the collapse of Lehman Brothers and at the height of the financial crisis the ratio spiked above the 80s. A ratio of 45 is low..low.
Here's where we stand in the record books for the big three:
COMEX Gold $1432.5/oz 08:25:00 ET 12/7/2010, February contract most active
COMEX Silver $31.275/oz 08:15:00 ET 01/03/2011, March contract most active
COMEX Copper $4.6375/lb 06:15:00 ET 02/04/2011, March contract most active
The beginning of 2011 continues to be period of rising copper, falling-to-sideways gold and resilient silver.
The ole Colonel has delayed his February oil & metals outlook but can wait no longer. I was hoping for a gold breakout to the upside but our lustrous friend is still suffering from a lack of investor interest and a strengthening U.S. dollar. Nuts.
I'm going to pick $1360/oz for my February nominal price and keep my "low ball" estimate right where I pinned it last month - $1320/oz. The bottom for gold should hold at $1309.1, set during the Egyptian crisis on January 28th.
Here's what my February models tell me for $1360/oz gold:
The fair value of NYMEX oil is $86.86/bbl in a range of $81.40/bbl to $92.32/bbl
The fair value of COMEX silver is $27.616/oz in a range of $24.869/bbl to $30.364/oz
The fair value of COMEX copper is $4.1146/lb in a range of $3.6503/lb to $4.5788/lb
NYMEX oil is trading just below fair value but has a growing spread with Brent crude which has remained steadfastly above $100/bbl (see discussion below)since trouble began in Egypt. Any change in the Middle East situation could lower this spread to the upside very rapidly.
COMEX silver is near its top range again showing off its relative strength with respect to gold. COMEX copper is even a bigger show-off actually exceeding its upper bound by a few cents.
Copper is negatively correlated with gold over the last 3-months given the recent inverse relation of copper and gold prices (see below). This upside-down relation and a very low silver/gold ratio are not sustainable patterns in my view. It is certainly not a good environment for mining stocks which still remain in a corrective phase while the broader markets soar. There are signs, however, that the copper/gold inversion may be shallow and return to positive country fairly soon.
Thankfully there has has been some pickup in the Eureka Miner's Index (EMI) which has again climbed above its 1-month moving average and it looks like a good morning for the miners. A copper/gold inversion of short duration would be supportive of future EMI improvement (further discussion below).
Eureka Miner's Index (EMI)
The Eureka Miner's Index (EMI) gives us the market temperature for the sectors that have the greatest impact on mining in Eureka County. Below is a chart of the EMI at Friday's close. The magenta line is the EMI with a low interest cap of 3% on 10-year Treasurys (LIRC) and adjustments for gold and silver prices (i.e., Au:Ag ratio). A 1-month moving average is given by the blue line. A larger and more readable chart appears near the bottom of this blog page.
This morning the Eureka Miner's Index(EMI) is above-par at 618.75, up from from Friday's 582.27 and breaking above the 1-month moving average of 561.70. Although a bulllish sign, the EMI continues to trend down from the high set on January 4th.
The 2011 record high for the EMI is now 816.78 set 01/04/2011; the 52-week low was set 6/7/2010 at 50.7. An EMI of 100 is the boundary between good lands and bad lands for the metals & miners relevant to Eureka County.
200-day averages are used in the EMI to normalize current mining company share price and are updated monthly. Upper and lower trend lines are updated weekly.
Daily Oil Watch
On February 1st we identified North Sea Brent crude oil as a good barometer for the developing crisis in Egypt. It is still above $100/bbl with a large spread from the North American benchmark, Western Texas Intermediate or "Texas light sweet crude", traded on the NYMEX (see note 1). The Report normally follows the latter but will track both until things settle out in the Middle East.
Here are the most active front-month contracts as of this morning:
NYMEX light sweet crude $85.71
ICE North Sea Brent crude $102.26
Spread (ICE- NYMEX) = $16.55 (Last Monday $11.51)
Here are the June contracts with a narrower spread:
NYMEX light sweet crude $94.92
ICE North Sea Brent crude $102.84
Spread (ICE- NYMEX) = $7.92 (Last Monday $5.86)
The spreads between NYMEX and Brent crude are dramatically higher with tensions easing in Egypt but fear of regional contagion keeping Brent above $102. Narrowing these spreads to the upside would favor higher oil prices for the summer. I'll stick with my December prediction that we will see NYMEX $100/bbl oil before the Fourth of July.
Oil & Copper Correlations with Gold
Oil & copper correlations with gold give us insight into what may happen next for the metals & miners. With supply and demand fundamentals driving the commodity space, diminishing correlations between key commodities are less alarming but trends should still be carefully monitored.
Here are the latest correlations given this morning's NYMEX/COMEX trading:
Oil/Au correlation +0.2506 (1-month) +0.3243 (3-month)
Cu/Au correlation 0.3249 (1-month) -0.0890 (3-month)
Cu/Oil correlation +0.0514 (1-month) +0.7289 (3-month)
Here are the numbers from the last roundup (2/7/2011):
Oil/Au correlation +0.5239 (1-month) +0.2739 (3-month)
Cu/Au correlation -0.0465 (1-month) -0.1026 (3-month)
Cu/Oil correlation +0.4785 (1-month) +0.8548 (3-month)
All these correlations remain positive except copper and gold which started a bearish "inversion" with negative one- and three-month values last week. There has been some improvement with the 1-month now positive signaling the inversion may be shallow. Copper remains in an over-valued state with respect to gold (2.1 standard deviations above the new February model "fair value" line).
Oil and gold are showing some strengthening in their 3-month correlation coming very close to fair value with respect to gold by -0.5-standard deviations. The 3-month correlations of copper & oil fell below 0.8 suggesting copper and oil price correlation has weakened with a near-zero 1-month number. Copper is presently overvalued with respect to oil by a shocking 5.2-standard deviations.
One way to visualize these correlations over time is to plot the "near-term" 3-month versus the "short-term" 1-month correlations (aka "rho") as shown below in a graph of oil versus gold and copper versus gold. The blue line indicates the correlation trajectory since October 1st; the magenta line is recent data since December 1st (ref: China to the Rescue?):
In the case of oil versus gold, we start out on 10/1/10 in the "+,-" or "yellow" quadrant and move upward until both are positively correlated (i.e. in the "+,+" or "green" quadrant). Copper correlated positively faster than oil and has been in the green quadrant longer. Correlation data in this region is typically considered bullish. The trend toward the "-,+" quadrant for oil is a bearish trend however copper is moving away from the very bearish "-.-" region.
Gold/Oil, Oil/Copper & Gold/Copper Ratios
The Report has been tracking the stability of the gold/oil, oil/copper & gold/copper ratios. Although they ended last year rock solid (<3% variation, 1-standard deviation/mean) the ratios continue to diverge. This is what prompted my January 14th comment to Adella Harding, Elko Daily Free Press, "The recent divergence of our lustrous friend [gold] from copper and oil...may signal a near-term correction for the overall metals and mining sector.". There are now signs that the bottom of the correction was 1/28/2011 and things are improving for the miners. For example, Freeport-McMoRan (FCX) has been trapped roughly between its 50-day and 100-day moving averages since 1/20/2011 but has a better than 3% bounce today. Let's see if it can break out of this range in the next several days.
Here is a plot of the variation for both ratios as well as the copper/oil ratio (a larger and more readable chart is given at the bottom of the blog page):
Once the ratios exceed 3% error, they become less useful in predicting the price moves of one commodity with respect to another in the ratio pair.
For the past 3-months we have these statistics given this mornings' numbers:
mean 15.58 bbl/oz
variation > 3.0% limit at 3.43% (1-standard deviation/mean)
mean 20.88 lbs/bbl
variation > 3.0% limit at 4.31% (1-standard deviation/mean)
mean 325.6 lbs/oz
variation > 3.0% limit at 6.71% (1-standard deviation/mean)
Weekly Molybdenum Roundup
Spot prices for molybdenum oxide remain in $17/lb territory out West and in Europe. Moly futures remain in a mild contango between spot prices and the London Metal Exchange (LME) 3-month and 15-month contracts (contango occurs when the price of a commodity for future delivery is higher than the spot price, or a far future delivery price is higher than a nearer future delivery; backwardation is the opposite of contango).
The 3-month seller at $18.14/lb is comfortably above the Colonel's mid-range moly price target for 2010 of $15.71/lb but below my target of $20.21/lb for 2011. The Report will give moly prices a "yellow-green" light on the Eureka Outlook Dashboard for now because I do believe we could see much higher prices this year. There is an excellent analysis of the supply/demand argument for $20+/lb moly provided by General Moly's Seth Foreman in the General Moly Update.
Here is a detailed pricing summary for last week:
Western Moly Oxide $17.00/lb (the price tracked by Base Metals on the General Moly Website)
Moly Oxide, Europe (Mo Drummed Molydbic Oxide EU) $17.92/lb (the price reported in the Metals Bulletin)
LME Futures Contracts
LME cash seller is at $38,200/metric ton $17.33/lb
3-Month (Buyer) $38,600/metric ton $17.51/lb
3-Month (Seller) $40,000/metric ton $18.14/lb
15-Month (Buyer) $38,300/metric ton $17.37/lb
15-Month (Seller) $40,300/metric ton $18.28/lb
Here is a chart of the LME 3-month contract (seller) from the February launch to the present:
Daily Market Roundup
Enough talk, let's walk the walk:
Eureka Outlook Dashboard
4-WD is ON - The metals & miners are still in a rough patch; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is below its 50-day moving average but still well above its 200-day average of $43.06 (our new warning level, 02/02 update after the FCX 2:1 stock split); 10-year Treasurys are safely below 4% preserving a low-interest rate environment.
The GREEN light is turned back on for Commodity Reflation with copper trading comfortably above $3.50/lb
The GREEN light is turned on for Stable Markets with the VIX below the 30 level (what's this?)
The YELLOW light is turned on for Inflation Watch as the Federal Reserve resumes buying Treasurys (aka QE2)
The GREEN light is turned back on for Investor Confidence as investment returns to the equity markets
The YELLOW light is turned on our Fuel Gauge with oil above $80
A ORANGE light is ON for possible adverse regulation/legislation: Mine Safety Violations, Miner's claim fee, Miner taxation, Cortez Hills, mercury emissions , General Moly Mt. Hope Water Rights, U.S. House committee debates miner workplace safety bill, R&R Partners parts ways with Nevada Mining Association
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
Commodity Market Morning Update
NYMEX/COMEX: Oil is up $0.13 in early trading at $85.71 (March contract, most active); Gold is up $3.5 to $1363.9 (April contract, most active); Silver is up $0.290 to $30.285 (March contract, most active); Copper is up $0.0615 to $4.5975 (March contract, most active)
Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $17.92; LME moly 3-month seller's contract is $18.14, LME cash seller is $17.33
Stock Market Morning Update
The DOW is down 28.19 points to 12,245.07; the S&P 500 is down 0.33 to 1328.82. Miners are up:
Barrick (ABX) $47.89 up 0.84%
Newmont (NEM) $56.99 up 0.21%
US Gold (UXG) $7.27 up 0.55%
General Moly (Eureka Moly, LLC) (GMO) $5.43 up 0.18%
Thompson Creek (TC) $13.87 up 1.17%
Freeport-McMoRan (FCX) $55.16 up 3.06% (a bellwether mining stock spanning copper, gold & molybdenum)
The Steels are mixed (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $37.49 down 1.03% - global steel producer
POSCO (PKX) $108.58 up 0.73% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is up 0.62% at $1,776,135.31 (what's this?).
Note 1 - West Texas intermediate (WTI), also known as Texas light sweet, is a type of crude oil used as a benchmark in oil pricing and is the underlying commodity of New York Mercantile Exchange's (NYMEX) oil futures contracts. The price of WTI is often referenced in North American news reports on oil prices, alongside the price of North Sea Brent crude (Wiki).
Write Colonel Possum at email@example.com for answers to your questions or to request e-mail updates on the market
Headline photograph by Mariana Titus