Published on March 5, 2014
SPECIAL MONTHLY REPORT ON Bullions & Energy (March 2014)
March 2014 BULLIONS AND ENERGY PERFORMANCE ( 31st January 2014 - 28th February 2014) (% change) Natural Gas -8.10 -4.79 Crude oil 3.27 BULLIONS & ENERGY Silver 10.51 7.05 Gold -10.00 5.41 6.76 2.13 -5.00 0.00 COMEX/NYMEX 5.00 10.00 15.00 MCX Source: Reuters and SMC Research 2
March 2014 BULLIONS BULLIONS Since the start of year 2014 bulls have dominated in the bullion counter as safe haven buying amid Ukraine tensions and strong Chinese demand supported its prices. Overall gold traded in range of 28600-30400 in MCX and $1240-1345 in COMEX in the month of February. Dollar index faced resistance near 81.3 level and plummeted lower in the month of February. Silver traded in range of $1922 in COMEX and 42900-48300 in MCX. After slumping the most since 1981 last year, gold witnessed first back-to-back monthly increase since August as data that trailed estimates fueled concern the U.S. recovery may be faltering. Prices gained even as the Federal Reserve lowered its bond-buying program by $10 billion a month in January and again in February, reducing the purchases to $65 billion. According to the MD of investment strategy at the World Gold Council, Marcus Grubb “The global gold market could slide into a deficit as demand continues to grow and as a large source of physical gold supply last year redemption of goldbacked exchange-traded funds (ETFs)is unlikely to be repeated again this year” In the month of March 2014 bullion counter can move with upside bias. On domestic bourses the movements of local currency Rupee will be key factor to watch out which can move in range of 61-63 in the month of March. Gold can trade in range of Rs 29400-31500 in MCX and $1260-1410 in COMEX. Silver can trade in range of 43000-51000 in MCX and $20-23 in COMEX. Geopolitical tensions in Middle East and in any other part of the globe will have positive impact on gold prices as it is considered safe haven in times of geopolitical uncertainty. Escalating tension in Ukraine and concern that a slowdown in China is deepening increased demand for a protection of wealth will increase the safe haven demand of gold. Gold investment demand Q3 of 2013 was another mixed quarter for the investment sector, as the two key elements of gold continued to diverge: demand for bars and coins increased by 6% while ETFs saw a third consecutive quarter of net outflows. The net result was a 56% decline in Q3 of 2013 investment demand. Inclusive of OTC investment and stock flows (which represents the less visible elements of institutional investment, as-yet unquantifiable stock changes and any statistical residual), total investment demand is broadly flat, down just 1% year-on-year. Ukraine tensions and Gold Recently escalating military tension between Ukraine and Russia bolstered demand for assets such as gold which is perceived to be relatively safe haven. Tensions between West and Russia since the end of the Cold War increases demand for the metal as a haven. As a result of the escalation of this conflict and the damages it's going to do to the European economy, people are going to continue to rotate out of the stock market into the gold market. The uncertainty surrounding Ukraine could push gold prices higher in the next few weeks although diplomatic and political solutions are going to be sought a lot will also depend on investor positioning. Latest World Official Gold Holdings WGC Demand summary The third quarter of 2013 saw a 21% contraction in gold demand from the third quarter of 2012, to 868.5 tonnes. Outflows from ETF positions were in pace than the previous quarter, were the main reason for the weaker quarterly total. However, demand at the consumer level was resilient; eastern markets remained the driving force behind growth in demand for gold jewellery, bars and coins. Central bank net purchases, which slowed in line with our predictions, were again a solid pillar of demand. The supply of gold was down by 3%, to 1,145.5 tonnes as a reduction in recycling activity more than offset a modest increase in mine production. Source: World Gold Council 3
March 2014 China economy and Gold While there is wide consensus that developed markets are in recovery mode, there is less certainty about the state of the Chinese economy. Following more than a decade of strong growth, some market participants fear the economy could continue to lose steam and that easy credit may have formed asset bubbles that could burst at any time. However, there is also an alternative view in the market: concerned with growth suitability, the Chinese government will continue a pro-market shift to economic policies, including financial reform and improving the budget management and tax systems, in the hope of structurally improving long term growth. Further, a recovery in developed markets could strengthen exports and reignite growth in various economic sectors. Indian Gold demand BULLIONS India continues to face political and economic headwinds. With a general election approaching, we expect that the current account and fiscal deficits, currency weakness (the rupee lost 13% against the US dollar during 2013) and a general slowdown in economic growth will remain front and centre in the political debate. In our view, while none of these issues will be fully fixed prior to the election, actions are being taken to try to reduce them, and any controversial policies will likely be postponed until after the general election. For gold, despite increased taxation, import restrictions and a weaker rupee in 2013, Indian demand during the first three quarters was not only higher than the same periods in 2012.Moreover, there has been discussion about the unintended consequences of the current gold restrictions (including an expanding unofficial market and the reduction of jewellery exports, to name a couple). We expect that investors will closely follow the general election and, subsequently, any developments in gold related policies, as many consider the gold restrictions to be unsustainable over the longer term. Indian consumers again expressed their strong affinity with gold in 2013: demand of 974.8t was the third highest annual volume. This was in spite of the government introducing a range of measures to limit demand. Higher import duties, strict import quotas and restrictions on gold-related lending and coin sales led to a contraction of supply to the domestic market as the government attempted to reduce the current account deficit. There is optimism that the gold import measures are having the intended consequence of reducing the current account deficit in India. Nevertheless, import restrictions are likely to remain in place at least until the end of the first quarter of 2014 and perhaps beyond, keeping supply from this source constrained. WGC Gold demand scenario The gold market became polarised in 2013 as 21% growth in demand from consumers and value-seeking investors contrasted with large-scale outflows from ETFs. The net result was a 15% decline in full-year gold demand in a year where jewellery, bar and coin demand reached an all-time high. Chinese consumers set a new annual record, while India was resilient in the face of import restrictions. The sharp fall in the gold price in the second quarter elicited a strong and swift response from consumers in Asia and the Middle East, an effect that extended out to western markets in the final quarter of the year. Gold supply Gold supplied to the market during the third quarter of 2013 totalled 1,145.5t, 3% below the same period in 2012. The year-on-year contraction is largely explained by lower levels of recycling, outweighing modest growth in mine supply. Year-to-date the supply of gold is 4% lower than the same period of 2012 at 3,196t. The primary driver is a contraction in the supply of gold from recycling almost to pre-crisis levels. 4
BULLIONS March 2014 5
March 2014 BULLIONS Gold Silver ratio Source: Reuters Analysis: Steady rise in the gold silver ratio from nearly 60.5 to above 63 recently indicates that gold outperformed silver .This ratio can move in range of 61-66 in the month of March. 6
BULLIONS March 2014 7
March 2014 Gold coin and India The fact that demand for gold bars and coins in India in 2013 almost equalled the 2011 record was fully due to the strength of demand in the first half of the year, in advance of the government's import restrictions. Gold supply The annual supply of recycled gold declined for the sixth consecutive year to the lowest level since 2008. Annual gold mine production grew by 154.4t (5%) in 2013, the bulk of which came through in the second half of the year. The fourth quarter saw a clear continuation of the trend that was in place throughout much of the year: new mines either coming on stream or building up to full capacity and growth in production of existing operations. BULLIONS China sets the pace… Demand for gold in China set a remarkable new record of 1,065.8t, exceeding our expectations for the year. Previous issues of Gold Demand Trends have discussed the strength of the response among Chinese consumers to the price action in Q2, and it was that quarter which had the strongest impact on the annual demand numbers. While some slowdown naturally followed such a powerful surge, demand picked up again throughout the fourth quarter as attention turned to the Chinese New Year, a traditional occasion for gift giving. The impact on the Chinese gold industry of the extraordinary growth in 2013 demand has been marked, with significant growth in both manufacturing and retail network capacity. applications. This industrial demand has been shifting dramatically since the turn of the century, as defunct applications for silver like photographic film have been replaced by new technologies like photovoltaic power. The evolution of silver's industrial applications continues unabated, with new uses being developed every year. In spite of a recent dip in demand for industrial silver due to global economic volatility, the fundamentals of the industries consuming silver look promising. Biotechnology Recent advances in biotechnology have brought a renewed focus on silver's centuries old history as an important medical weapon. The Silver Institute observed that the medical use of silver has helped reduce the growing threat of antibiotic-resistant germs spreading through a hospital. Today, the need to combat antibiotic-resistant superbugs and to suppress hospital-acquired infections has increased the importance and number of uses of silver-infused products. In the month of March 2014 bullion counter will remain on firm path as the Ukraine tensions may support the prices. Moreover condition of global economy and movement of local currency rupee coupled with Physical, ETF demand will also influence its prices. Range Gold MCX Rs 29400-31500 per 10 gms COMEX $ 1260-1410 per troy ounce GoldHedge NCDEX Rs 25700-28000per10gms Silver MCX Rs 43000-51000 per kg Growing Industrial Demand of Silver Silver conducts heat and electricity better than any other metal on Earth. It is also anti-bacterial. These amazing properties make silver indispensable in a vast array of modern industrial and technological COMEX $ 20-23 per ounce SilverHedge NCDEX Rs 4100-4700per100gms 8
ENERGY CRUDE OIL & NATURAL GAS
March 2014 ENERGY COMPLEX Crude Oil In the month of February crude oil prices continued its upside momentum as it tested the higher levels of $103 in NYMEX and 6400 in MCX. Crude oil got support amid speculation that crude stockpiles at Cushing, Oklahoma, fell as cold weather boosted fuel demand in the world's biggest oil consumer. Temperatures across the Midwest are forecast to crash below zero Fahrenheit as another round of arctic air sweeps south from Canada. On domestic bourses movement of local currency rupee kept the prices well supported. Prices traded in range of nearly $96.25- 103.70 in NYMEX and 6040-6437 in MCX. Crude oil futures can move with strong bias in the month of March amid fall in stockpiles and rising demand in US. Geopolitical tensions in Ukraine and Middle East may result in reduced supplies which may also support the crude oil prices. Recently Ukraine mobilized its army in response to Russian forces taking control of the Crimea peninsula. Libya's state run National Oil Corp. stated that crude output fell in the Sharara field. TransCanada Corp. began moving crude from the storage hub to Texas on the southern portion of its Keystone XL pipeline in January. Crude oil can move in range of 6200-6750 in the month of March. ENERGY Brent WTI Spread Source: Reuters Analysis: Brent WTI spread has narrowed recently to below 7 after testing high of nearly 15 in beginning of this year .This spread can hover in range of 5-9 in near term. The key reason for narrowing of this spread is due to recent surge in production in the United States has caused a buildup of crude oil inventories at Cushing, Oklahoma, where WTI is priced. This created a supply and demand imbalance at the hub, causing WTI to trade lower than Brent crude oil. 10
March 2014 Some key points from EIA estimates Global Crude Oil and Liquid Fuels Consumption EIA estimates that global consumption grew by 1.2 million bbl/d in 2013, exceeding 91 million bbl/d by the second half of the year. EIA expects global consumption to grow at a similar pace of nearly 1.3 million bbl/d in 2014 and 1.4 million bbl/d in 2015, exceeding 93 million bbl/d by the second half of 2015. Non-OECD countries account for almost all consumption growth over the forecast period. China is the leading contributor to projected global consumption growth, with consumption increasing by 400,000 bbl/d in 2014 and 430,000 bbl/d in 2015. However, China's economic and oil consumption growth have moderated compared with levels before 2012, when GDP growth exceeded 9% and annual oil consumption growth averaged 790,000 bbl/d from 2009 through 2011. ENERGY On the other hand, EIA expects OECD consumption to remain relatively flat over the next two years. Projected consumption declines in the OECD are led by Japan and Europe. EIA expects Japan's oil consumption to decrease annually by about 120,000 bbl/d in both 2014 and 2015, as the country continues to increase natural gas consumption in the electricity sector and returns some nuclear power plants to service. EIA projects that OECD Europe's consumption continues to decline by 100,000 bbl/d in 2014 and another 50,000 bbl/d in 2015, albeit at a slower pace compared with previous years. U.S. oil consumption growth, which was 380,000 bbl/d in 2013, is expected to slow to 30,000 bbl/d in 2014 and 60,000 bbl/d in 2015. Non‐OPEC Supply EIA estimates that non-OPEC production grew by 1.4 million bbl/d in 2013, exceeding 55 million bbl/d by the end of the year. EIA expects non-OPEC liquids production to grow annually by 1.9 million bbl/d in 2014 and 1.5 million bbl/d in 2015, reaching more than 58 million bbl/d by the end of 2015. EIA forecasts production from the United States and Canada to grow by a combined annual average of 1.2 million bbl/d in both 2014 and 2015. Brazil's production is expected to increase by an annual average of 0.15 million bbl/d over the next two years, attributed to new deepwater fields. EIA expects Kazakhstan's production to grow by 0.09 million bbl/d in 2014 and by 0.13 million bbl/d in 2015 as output ramps up at the Kashagan oil field. EIA estimates that Asia and Oceania's production will rise by an annual average of 0.17 million bbl/d over the forecast period, led by China. Unplanned supply disruptions among non-OPEC producers averaged 0.8 million bbl/d in 2013, a slight decline from 0.9 million bbl/d in 2012 but still considerably above the 2011 level of 0.5 million bbl/d. In January 2014, non-OPEC supply disruptions were less than 0.7 million bbl/d. South Sudan, Syria, and Yemen continue to account for more than 80% of total non-OPEC supply disruptions. OPEC Supply EIA estimates that OPEC crude oil production averaged 30.0 million bbl/d in 2013,a decline of 0.9 million bbl/d from the previous year, primarily resulting from increased outages in Libya, Nigeria, and Iraq. EIA expects OPEC crude oil production to fall by 0.4 million bbl/d and 0.3 million bbl/d in 2014 and 2015, respectively, as some OPEC countries, led by Saudi Arabia, reduce production to accommodate the nonOPEC supply growth in 2014. Projected OPEC noncrude oil liquids, which averaged an estimated 5.9 million barrels per day in 2013, increases to an average of 6.3 million bbl/d in 2015. U.S. Liquid Fuels Consumption Total U.S. liquid fuels consumption rose by an estimated 380,000 bbl/d (2.1%) in 2013. Consumption of hydrocarbon gas liquids registered the largest gain, increasing by 140,000 bbl/d (6.2%). Motor gasoline consumption grew by 100,000 bbl/d (1.1%), the largest increase since 2004. Stronger-than-expected growth in highway travel during the second half of 2013 contributed to that increase. Distillate fuel consumption increased 80,000 bbl/d (2.0%), reflecting colder weather and domestic economic growth. U.S. Liquid Fuels Supply EIA expects strong crude oil production growth, primarily concentrated in the Bakken, Eagle Ford, and Permian regions, continuing through 2015. Forecast 11
March 2014 Crude oil may remain upbeat with Ukraine tensions overshadowing increase in stockpiles at Cushing. Global macroeconomic numbers along with weekly inventory data in US will also affect the overall sentiments. Range Crude Oil MCX NYMEX Rs 6200-6750 per barrel $98-108 per barrel ENERGY production increases from an estimated 7.4 million bbl/d in 2013 to 8.4 million bbl/d in 2014 and 9.2 million bbl/d in 2015. The U.S. crude oil production forecast for both 2014 and 2015 was revised downward by 0.1 million bbl/d from last month's STEO because of indications that severe weather this winter has caused temporary slowdowns in completing new wells. The highest historical annual average U.S. production level was 9.6 million bbl/d in 1970. 12
ENERGY March 2014 13
March 2014 Natural Gas Natural gas futures in the month of February scaled vertically higher as colder weather conditions supported the prices higher but it melted lower in last week of the month erasing the past gains. Natural gas crossed the magical figure of $6 in NYMEX and 400 in MCX. Increased heating demand supported gas demand in the US. Overall it traded in range of $4.43-6.5 in NYMEX and 285402 in MCX. Natural gas can move in range of 250-320 in the month of March. Volatility will persist in natural gas as growing demand begins to test supply, potentially curbing plans to increase exports and switch power plants to gas from coal. But withdrawal of winter and slightly warmer temperatures can pressurize the prices lower. Natural gas demand has picked up recently due to colder winter in US. The low in Kansas City, Kansas, on March 9 may be 35 degrees Fahrenheit (2 Celsius), 2 above normal, according to AccuWeather Inc. in State College, Pennsylvania. About 49 percent of U.S. households use gas for heating, according to the Energy Information Administration, the Energy Department's statistical arm. According to EIA” Gas inventories at the end of March, when the heating season draws to a close, will drop to 1.33 trillion cubic feet, the lowest level since 2008” ENERGY Ukraine tensions and natural gas Natural gas can get support from the tensions in Ukraine as Russia, which provided 30 percent of Europe's natural gas last year, sends half of its supplies via Ukraine. So far, Russian gas shipments to Ukraine and the rest of Europe haven't been disrupted during the crisis. EIA Natural gas estimates U.S. Natural Gas Consumption EIA expects total natural gas consumption will average 70.2 Bcf/d in 2014. This represents an upward revision of 0.6 Bcf/d from last month's STEO and is largely attributable to an increase in January consumption. The projected year-overyear increases in natural gas prices contribute to declines in natural gas used for electric power generation from 24.9 Bcf/d in 2012 to 22.3 Bcf/d in 2013 and 22.0 Bcf/d in 2014. In 2015, total natural gas consumption increases by 0.8 Bcf/d with growth in use by the industrial and electric power sectors. EIA expects natural gas consumption in the power sector to increase to 22.6 Bcf/d in 2015 with the retirement of some coal plants. U.S. Natural Gas Production and Trade EIA expects natural gas marketed production will grow at an average rate of 2.2% in 2014 and 1.2% in 2015. Rapid Marcellus production growth is causing natural gas forward prices in the Northeast to fall even with or below Henry Hub prices outside of peak-demand winter months. Consequently, some drilling activity may move away from the Marcellus back to Gulf Coast plays such as the Haynesville and Barnett, where prices are closer to the Henry Hub spot price. EIA projects Gulf of Mexico production will increase by 1.7% in 2014 before falling 2.3% in 2015. Liquefied natural gas (LNG) imports have declined over the past several years because higher prices in Europe and Asia are more attractive to sellers than the relatively low prices in the United States. Several companies are planning to build liquefaction capacity to export LNG from the United States. The first of the new facilities to liquefy gas produced in the Lower-48 states for export is expected to come online in the fourth quarter of 2015. 14
ENERGY March 2014 Natural gas prices will depend upon weather conditions and power generation demand coupled with its consumption pattern and Range Natural gas NYMEX $4.20- $4.85 per mmBtu MCX Rs250-320 per mmBtu inventory position in the month of March 2014. 15
March 2014 Your valuable feedback will be appreciated For further queries Pls. Contact Sandeep Joon Phone E-mail Senior Research Analyst 011-30111000 Extn - 683 firstname.lastname@example.org Supportive team Pramod Chhimwal Graphic Designer SMC Global Securities Limited is proposing, subject to receipt of requisite approvals, market conditions and other considerations, a further public issue of its equity shares and has filed a Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI). The DRHP is available on the website of the SEBI at www.sebi.gov.in and the website of the Book Running Lead Managers i.e. Tata Securities Limited at www.tatacapital.com and IL&FS Capital Advisors Limited at www.ilfscapital.com. Investors should note that investment in equity shares involves a high degree of risk. For details please refer to the DRHP and particularly the section titled Risk Factors in the Draft Red Herring Prospectus. Disclaimer: This report is for the personal information of the authorized recipient and doesn't construe to be any investment, legal or taxation advice to you. It is only for private circulation and use .The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. No action is solicited on the basis of the contents of the report. The report should not be reproduced or redistributed to any other person(s)in any form without prior written permission of the SMC. The contents of this material are general and are neither comprehensive nor inclusive. Neither SMC nor any of its affiliates, associates, representatives, directors or employees shall be responsible for any loss or damage that may arise to any person due to any action taken on the basis of this report. It does not constitute personal recommendations or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/s. All investments involve risk and past performance doesn't guarantee future results. The value of, and income from investments may vary because of the changes in the macro and micro factors given at a certain period of time. The person should use his/her own judgment while taking investment decisions. Please note that we and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance if this material;(a) from time to time, may have long or short positions in, and buy or sell the commodities thereof, mentioned here in or (b) be engaged in any other transaction involving such commodities and earn brokerage or other compensation or act as a market maker in the commodities discussed herein (c) may have any other potential conflict of interest with respect to any recommendation and related information and opinions. All disputes shall be subject to the exclusive jurisdiction of Delhi High court.
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