Eugene Weinberg Commerzbank

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Eugene Weinberg Commerzbank

  1. 1. GMT – Greed, Might and Taxi drivers What comes after the strong price decreases for commodities? Eugen Weinberg ZCM Research Cyprus / March 18, 2009
  2. 2. “I can calculate the motion of heavenly bodies, but not the madness of peoplequot; Sir Isaac Newton „A politician needs the ability to foretell what is going to happen tomorrow, next week, next month, and next year. And to have the ability afterwards to explain why it didn't happen.“ Sir Winston Churchill 1 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  3. 3. Agenda Greed (of the financial investors) Crude oil – economic vs. investment subject • 1. Strong speculative interest and influence of investors • Manipulation and speculation on commodity markets – common issue • Might (of the commodity producers) • Are raw materials really scarce? 2. • Uneven distribution of the commodity reserves • Revenge of the “Old Economy” Taxi drivers (in Shanghai) • Decoupling of the Emerging Markets? 3. • China and India should follow the path of the Asian Tiger States • Enormous dynamics and importance of the Asian Ems for commodities Conclusions 4. • Expectations • Forecast error 2 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  4. 4. Commodity markets – quo vadis? • The future is uncertain und is dependent on present decisions • Mosaic theory: the more information one has to analyze the better is the forecast 1979 1999 2008 1986 3 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  5. 5. Oil price – just a speculative bubble after all? • the impact of financial investors significantly higher than before • most of the negative developments already priced in 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 180 180 180 180 Nasdaq (1989-2002) - indexed 160 160 160 160 140 140 WTI crude oil price, USD/barrel (1998-?) WTI crude oil price, USD/barrel (1998-?) 140 140 120 120 120 120 100 100 100 100 80 80 80 80 60 60 60 60 40 40 40 40 20 20 20 20 0 0 0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: Bloomberg, Commerzbank Corporates & Markets 4 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  6. 6. Investors – the most important pricing factor? Favourable fundamental environment and 9000 Amount outstanding of OTC commodity derivatives price performance sparked investor demand 8000 (in billions of US dollars) (“Commodity Beta”) 7000 6000 De-correlation enhances return of an Equity 5000 Portfolio (“Equity Alpha”) 4000 3000 Investors’ demand growing dramatically 2000 1000 • Direct investments grew from US$5 billion in 2000 0 to US$300 billion this year, market value of oil 98 99 00 01 02 03 04 05 06 07 companies & mining stocks around US$5 trillion 3500 150 Total open interest WTI ('000 contracts, NYM EX), ls Investors shape long-term … 3000 WTI price (USD/barrel, NYMEX), rS 125 • Growing long-only interest result in generally 2500 higher prices 100 2000 75 …as well as short-term trends 1500 50 • Non-professional speculative interest shape 1000 short-term development 25 500 0 0 • Daily WTI trading volume on NYMEX 500 bbl eq. 2000 2001 2002 2003 2004 2005 2006 2007 2008 million, daily WTI production 300.000 bbl Sources: BIS, NYMEX, CFTC, Commerzbank Corporates & Markets 5 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  7. 7. Speculation is dead… Long live investment! 180 150 US Oil Fund 160 • Oil-ETF: the easiest way to “invest” 130 140 in oil 120 110 • 4 billions USD invested 100 90 80 • Controls 20% of the total 1-month- contracts on WTI 60 70 40 • Controls 15% of the trading volume 50 20 • Contango constellation is supported 0 30 by the regular rolls of the USO Jul. 06 Jan. 07 Jul. 07 Jan. 08 Jul. 08 Jan. 09 25% • Regularly rolls lead to negative performance: 20% - Emission: 1 USO share = 1 WTI-Future 15% - Now: 1 USO = $27, WTI-Future = 45$ 10% 5% 0% Aug. 06 Feb. 07 Aug. 07 Feb. 08 Aug. 08 Feb. 09 6 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  8. 8. WTI is not an appropriate benchmark Relation between production and trading volumes biased • Production volumes decreasing: - 1986: 1,3 mm barrels daily - 2008: 0,3 mm barrels daily • Trading volumes increasing: - 1986: 10’000 contracts daily - 2008: 500’000 contracts daily • Relations biased verzerrt - WTI production:trading - 1:2000 - World production:trading - 1:6 Specific infrastructure problems of - WTI crudes • Low inventory capacities • “Land-locked” oil sorts • Pipelines difficult to divert or “switch” • New production from Canada 7 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  9. 9. Investors – markets strongly influenced by speculative interest Speculation and manipulation are not phantoms 60 60000 Inventory statistics used for price • This year the volume of commodity hedge-funds 50 50000 manipulation? increased to supposedly US$ 100 billions 40 40000 • Amaranth charged by CFTC of attempted 30 manipulation, Optiver Holdings charged by 30000 CFTC of manipulating oil & gas markets 20 20000 • Large hedge-funds collapses recently: 10 Amaranth, Red Kite, SemGroup, Ospraie Fund 0 10000 Dez. 04 Dez. 05 Dez. 06 Dez. 07 Unregulated markets susceptible for speculation LM E inventories, l Nickel (US$/tonne), r • Little information on positioning of different market participants available – FSA vs. SEC Enorm volatility and $30 intraday move - • Statistics sometimes easy to manipulate economic good vs. • Low liquidity – derivatives markets often Investment determine pricing in physical markets Events not always fundamentally explainable • Even ex-post not explainable • Hedge-funds and big investors influence short- as well medium-term developments Sources: LME, Bloomberg 8 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  10. 10. Contango – what does the forward curve tell us? Inventories 100 90 • Inventories are well filled 80 • Liquidity preference decreases attractiveness of inventory holding 70 60 Expectations WTI futures curve (currently - Jan. 16, 2009) 50 • The market expects higher prices going 40 WTI futures curve (1 year ago - Jan. 16, 2008) forward 30 • Positioning of the “peak-oil” supporters at the 6M 1Y 18M 2Y 30M 3Y 42M 4Y 54M 5Y 66M back end of the curve 20 170 Contango 24M -1M (USD/barrel), left Credit crunch 15 150 WTI crude oil price (NYM EX, USD/barrel), right • Arbitrage along the curve impossible 10 130 • Low credit availability results in short-end 5 110 selling 0 90 Increased pressure on the front end -5 70 Investment demand, speculative interest -10 50 decreasing -15 30 • Margin calls and forced liquidations -20 10 • Increased short-selling activities 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 9 Eugen Weinberg ZCM Research Cuprus / March 18, 2009 Source: ICE, NYMEX, Commerzbank Corporates & Markets
  11. 11. Agenda Greed (of the financial investors) • Crude oil – economic vs. investment subject 1. • Strong speculative interest and influence of investors • Manipulation und speculation on commodity markets – common issue Might (of the commodity producers) Are raw materials really scarce? • 2. Uneven distribution of the commodity reserves • Revenge of the “Old Economy” • Taxi drivers (in Shanghai) • Decoupling of the Emerging Markets? 3. • China and India should follow the path of the Asian Tiger States • Enormous dynamics and importance of the Asian Ems for commodities Conclusions 4. • Expectations • Forecast error 10 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  12. 12. Available reserves still sufficient … […on a theoretical basis energy supplies are not endangered for quite a while] Statistical reach of oil reserves: Proved reserves to consumption ratio (years of supply ) 50 45 40 35 30 25 20 15 10 5 0 1980 1985 1990 1995 2000 2005 Source: BP Statistical Review 11 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  13. 13. … but the allocation of reserves is quite uneven [most oil reserves located in different regions to where they are needed Crude oil Natural gas OECD countries are the world‘s Consumption Production Reserves Consumption Production Reserves biggest consumers, however OPEC 41% 75% 17% 44% 8% 11% they don‘t have any significant OECD 25% 7% 41% 8% 60% 52% M. East reserves 31% 62% 10% 41% 7% 9% FSU 14% 10% 28% 33% 5% 22% Resources often found in China 4% 1% 2% 1% 8% 2% countries with high political risks USA 25% 9% 3% 24% 20% 3% Total 81 mm 1189 2,7 bn cm 179,5 81 mm 2.7 bn cm License agreements (oil companies) State owned companies 21% International companies have 35% limited access to reserves participation High cost of oil production due to (oil companies) high political risks 12% Limited access Irak 10% 22% Source: International Energy Agency 12 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  14. 14. OPEC should react strongly to the falling oil prices [OPEC is risking longer-term budget deficits if not obeying to the production quotas] At what oil price the balance of external accounts is still in balance? 2000 2007 2008 2009 120 $/barrel 97 91 94 100 80 68 71 63 62 55 58 55 60 51 Current OPEC crude oil 49 49 45 45 48 basket 42 35 34 34 32 40 31 26 23 22 18 20 11 5 0 Algeria UAE Kuw ait Saudi Arabia Iran Nigeria Venezuela Source: PFC Energy, Commerzbank Corporates & Markets 13 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  15. 15. Non-OPEC production will disappoint … again [Production decreases in the non-OPEC countries not voluntarily ] Mature oil fields Mexico: Cantarell (1976) Kazakhstan: Tengiz (1979) 4500 4500 Ölproduktion Norw egen (Tsd. Barrel/Tag) Russia: Samotlor (1965), 4000 4000 Romashkino (1948) Ölproduktion M exiko (Tsd. Barrel/Tag) 3500 3500 USA: Prudhoe Bay (1969) 3000 3000 Norway: Forties (1970), Brent (1971) 2500 2500 Lack of financing, expensive 2000 2000 production 1500 1500 Kazakhstan : Kashagan (exp. 2005, 1000 1000 currently planned ffor 2014) 500 500 Brazil Sugar Loaf, Tupi 0 0 Canada: oil sands 1981 1985 1989 1993 1997 2001 2005 2009e Unavailable technologies / Know How 14 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  16. 16. Non-OPEC production will disappoint … again (II) [Production decreases in the non-OPEC countries not voluntarily ] Russia Mature oil fields (1960s-1980s) 45 Ölproduktion Russlands (M io. Tonnen pro M onat) Lack of technologies 40 Lack of commitment/financing 35 High duties and taxes 30 Low domestic oil prices (RUB 5000 per ton = $19 per barrel) 25 20 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 Canada Extremely high capital expenditures – USD 13,7 billions for 100.000 bbl daily expansion = $40/bbl (Chevron/RD Shell) Environmental hazard 15 Eugen Weinberg ZCM Research Cuprus / March 18, 2009 High royalties High natural gas usage
  17. 17. Bio-fuels are not the answer yet [… bio-fuels may currently only substitute an insignificant part of crude oil production] Economic aspects are questionable 100 Proportion of flexi-fuelers for new registrations (Brazil) • Only attractive taxation makes bio-fuels 80 competitive 60 Ecologic aspects are questionable 40 20 • Lacking energy efficiency: more input energy than output (exceptions sugar, corn) 0 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 • Poorly CO2-balance: Rain forests swept for palm oil plantages 4500 800 Palm oil price, left Dramatic price increases for raw 4000 700 materials Corn price, right 3500 600 • Economic efficiency vulnerable due to high 3000 500 commodity costs 2500 400 2000 300 Dramatic effect on food prices 1500 200 • Bio-fuels responsible for 75% of food price increases (World Bank) 1000 100 2003 2004 2005 2006 2007 2008 Source: ANFAVEA, CBoT, MDE 16 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  18. 18. Agenda Greed (of the financial investors) • Crude oil – economic vs. investment subject 1. • Strong speculative interest and influence of investors • Manipulation und speculation on commodity markets – common issue Might (of the commodity producers) • Are raw materials really scarce? 2. • Uneven distribution of the commodity reserves • Revenge of the “Old Economy” Taxi drivers (in Shanghai) Decoupling of the Emerging Markets? • 3. China and India should follow the path of the Asian Tiger States • Enormous dynamics and importance of the Asian Ems for commodities • Conclusions 4. • Expectations • Forecast error 17 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  19. 19. China and India • catching up with neighbours on commodity demand • should follow the path of other emerging Asian economies 9 8 Crude oil consumption (litres daily) 7 6 5 CHINA 4 INDIA 3 MALAYSIA 2 KOREA TAIWAN 1 THAILAND 0 0 2 4 6 8 10 12 14 16 18 GDP per capita (' 000 USD, real in 1995 US$) Sources: BP Statistical Review, IMF, Commerzbank Corporates & Markets 18 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  20. 20. China and India – immense catch-up potential 5 Number of cars per 1000 inhabitants China: basic passenger car sales (in mm) 4.5 800 4 700 3.5 600 3 500 400 2.5 300 2 200 1.5 100 1 EU USA China 0.5 Japan Brazil Korea Taiwan India Mexico Indonesia 0 2001 2002 2003 2004 2005 2006 2007 Sources: OECD, ACEA, CAA, Commerzbank Corporates & Markets 19 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  21. 21. New developments will change the Asian car landscape … again [Indian market will be the strongest growing car market worldwide in the coming 20 years] Ford Model T, 1908 Tata Nano, 2008 Source: WBMS 20 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  22. 22. Agenda Greed (of the financial investors) • Crude oil – economic vs. investment subject 1. • Strong speculative interest and influence of investors • Manipulation und speculation on commodity markets – common issue Might (of the commodity producers) • Are raw materials really scarce? 2. • Uneven distribution of the commodity reserves • Revenge of the “Old Economy” Taxi drivers (in Shanghai) • Decoupling of the Emerging Markets? 3. • China and India should follow the path of the Asian Tiger States • Enormous dynamics and importance of the Asian Ems for commodities Conclusions 4. Expectations • Forecast error • 21 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  23. 23. Oil prices might emerge much stronger from the crisis [… a pickup in demand might come unexpected and have strong medium-term effects] Reaction yet subdued due to lead time 500 150 Credit crunch 450 125 400 • Expansion (M&A, organic growth) plans 350 100 are not realized due to financing problems 300 75 • Smaller producing companies go bust, 250 green field projects are not reviewed at all 200 50 150 25 100 Falling output 50 0 • Prices fall below marginal costs, mining 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 closures as consequence Active oil rigs USA (Baker Huges), left WTI price (USD/barrel), right 160 Financing availability is worsening Nationalism 1500 140 1000 • Entry barriers and handicaps (duties, 120 royalties) higher than last time at these 500 100 prices 250 80 150 Low inventories 100 60 • Massive forced selling will lead to low 50 40 inventories for commodities for the demand Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 uptick (aluminum, basic metals, agriculture) CDS Gazprom (Senior, 5Y tenor), left WTI price (USD/barrel), right Sources: Baker Hughes, CMA 22 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  24. 24. Great bull-run is over for now… Long live uptrend! • Financial investments are susceptible to speculative excesses (to up- as well as downside) • The current constellation and speculative excesses to the downside are not unique S&P GSCI Commodity Index 23 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  25. 25. … provided that Chinese demand is still in place [expectations are always speculative - we have some pieces of the puzzle but not a crystal ball] Macro risks Shanghai A Shares – „to the moon and back“! Worldwide slowdown and recession China does not compensate for the demand fall in OECD countries …Stabilization or a dead cat-bounce? China und India cool down massively False inputs Invalid data Wrong assumptions Manipulation Manipulations of data Manipulations of prices System riska Financial system at risk Structured products and MTNs at risk Legislative risks Restrictions for commodity investments Forecasts Wrong picture Wrong timing 24 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  26. 26. Agriculture commodities – Negative effect is relatively small [Food demand is not significantly affected by the economic slowdown] Theory of little joys illustrated 7.5 2200 2000 7.0 1800 6.5 1600 6.0 1400 5.5 1200 5.0 1000 4.5 800 4.0 600 3.5 400 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 US unemployment rate (% ), left Cocoa price (LIFFE, GBP per ton), right Sources: LIFFE, BLS 25 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  27. 27. Disclaimer This document has been created and published by the Corporates & Markets division of Commerzbank AG, Frankfurt/Main or the group companies mentioned in the document (quot;Commerzbankquot;). Commerzbank Corporates & Markets is the investment banking division of Commerzbank, integrating research, debt, equities, interest rates and foreign exchange. This is a financial promotion/marketing communication (together “communication”). It is not “investment research” or “financial analysis” as these terms are defined in applicable regulations and has not been prepared by a research analyst. The views in this communication may differ from the published views of Commerzbank Corporates & Markets Research Department and the communication has been prepared separately of such department. This communication may contain short term trading ideas. Any returns or future expectations referred to are not intended to forecast or predict future events. Any prices provided herein (other than those that are identified as being historical) are indicative only, and do not represent firm quotes as to either size or price. This communication is for information purposes only. The information contained herein does not constitute the provision of investment advice. It is not intended to be nor should it be construed as an offer or solicitation to acquire, or dispose of, any of the financial instruments and/or securities mentioned in this communication and will not form the basis or a part of any contract. Any information in this communication is based on data obtained from sources believed by Commerzbank to be reliable, but no representations, guarantees or warranties are made by Commerzbank with regard to the accuracy, completeness or suitability of the data. The past performance of financial instruments is not indicative of future results. No assurance can be given that any financial instrument or issuer described herein would yield favourable investment results. This communication is intended solely for distribution to professional customers and/or eligible counterparties of Commerzbank. It is not intended to be distributed to retail clients or potential retail clients. Neither Commerzbank nor any of its respective directors, officers or employees accepts any responsibility or liability whatsoever for any expense, loss or damages arising out of or in any way connected with the use of all or any part of this communication. Commerzbank and/or its principals or employees may have a long or short position or may transact in financial instrument(s) and/or securities referred to herein or may trade in such financial instruments with other customers on a principal basis. The information may have been discussed between various Commerzbank personnel and such personnel may have already acted on the basis of this information (including trading for Commerzbank’s own account or communication of the information to other customers of Commerzbank). Commerzbank may act as a market maker in the financial instruments or companies discussed herein and may also perform or seek to perform investment banking services for those companies. No part of this communication may be reproduced, distributed or transmitted in any manner without prior written permission of Commerzbank. This communicatuion or the manner of its distribution may be restricted by law or regulation in certain countries. Persons into whose possession this document may come are required to inform themselves about, and to observe any such restriction. By accepting this communication, a recipient hereof agrees to be bound by the foregoing limitations. This communication is issued by Commerzbank. Commerzbank AG, London Branch is authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and subject to limited regulation by the Financial Services Authority. Details on the extent of our regulation by the Financial Services Authority are available from us on request. Italy: You should contact Commerzbank AG, London Branch if you wish to use our services to effect a transaction in any of the financial or other instruments mentioned in this communication. US: not for distribution in United States Japan: not for distribution in Japan Copyright © Commerzbank 2008. All rights reserved. 26 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  28. 28. Commerzbank Corporates & Markets Locations Main Offices Branches Paris Luxembourg Frankfurt Amsterdam 23 rue de la Paix 25, rue Edward Steichen DLZ - Gebäude 2 Strawinskylaan 2501 75002 Paris 2540 Luxemburg Händlerhaus 1077 ZZ Amsterdam France Luxembourg Mainzer Landstraße 153 Netherland Phone: +33 1 4494 1700 Phone: +352 477 9111 60327 Frankfurt Phone: +31 205 574 911 Germany Prague Madrid Phone: +49 69 136 44440 Budapest Jugoslavska 1 Ps. Castellana 110 Széchenyi rakpart 8 120 21 Prague 28046 Madrid H-1054 Budapest London Czech Republic Spain Hungary 60 Gracechurch Street Phone: +420 221 193 111 Phone: +34 91 572 4700 Phone: +361 374 8100 London, EC3V 0HR United Kingdom Singapore Milan Brussels Phone: +44 20 7653 7000 8 Shenton Way Via Cordusio 2 Blvd Louis Schmidt 87 Temasek Towers 20123 Milan BE-1040 Brussels Singapore 068811 Italy Belgium Singapore Phone: +39 02 725 961 Phone: +32 2 743 1866 Phone: +65 63110 000 Moscow Hong Kong Kadashevskaya naberezhnya 14/2 Shanghai 21/F, Hong Kong Club Building 25F, World Plaza 119017 Moscow 3a Chater Road 855 Pudong South Road Russia Hong Kong 200120 Shanghai Phone: +7 495 797 4800 China China Phone: +852 2842 9666 Phone: +86 21 5836 6666 New York 2 World Financial Center Johannesburg 31st Floor 5 Keyes Avenue New York, NY 10281 2196 Johannesburg USA South Africa Phone: +1 212 266 7200 Phone: +27 11 328 7600 27 Eugen Weinberg ZCM Research Cuprus / March 18, 2009
  29. 29. Eugen Weinberg Zentrale Kaiserplatz Senior Commodity Analyst/ZCM Research Frankfurt am Main www.commerzbank.de Tel. +49 (0)69 / 136 434 17 Fax +49 (0)69 / 136 427 60 Postfachanschrift Mail eugen.weinberg@commerzbank.com 60261 Frankfurt am Main Tel. +49 (0)69 / 136-20 Mail info@commerzbank.com Eugen Weinberg ZCM Research Cyprus / March 18, 2009

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