High Oil prices strain Gold mining companies, keeps stocks undervalued against Gold

High oil prices are squeezing the profits of oil companies who are already battling the headaches of high labour cost and higher taxes. And with gold prices stabilizing at the same time, some producers may just fell the heat until the yellow metal resumes its bull trend.

The high volatility in oil prices have forced gold companies to hedge their oil needs. Even the world's biggest gold producer- Barrick Gold- had to hedge oil prices considering the uncertainty in the markets. “As the oil spike relates to our cost structure, we've got things under control. But as far as what an oil price rise means to the broader economy, obviously we have some concerns there”, Reuters quotes Barrick CEO Aaron Regent.

Some analysts argue that high oil prices can dent the profits of gold miners even if gold climbs. And as the producer is forced to mine for lower grades, the company yields lower gold for every processed rock with energy costs remaining the same- and this situation of lower yields and higher input cost will inevitably lead to lower profits for the gold mining companies.

The market seems to have picked up on the reasoning as well as gold stocks have constantly underperformed gold prices for most of the gold's bull market- a period when input costs like energy, labour and other prices have been rising as well.

Chart showing performance of Gold (GLD etf) and Gold mining companies (GDX etf)

The good news behind high crude oil prices

WASHINGTON ( commodity news world ) : Rising oil prices often are the death knell for economic recovery. This time around the surge in crude oil is looking more like a harbinger of better days.

Political tensions over Iran's nuclear ambitions have pushed crude oil prices up 11 percent over the past month to around $123 a barrel, stoking concerns a violent confrontation that reduced supplies could send Brent crude above $150 a barrel.

Oil at that level could undermine a gradual strengthening of the world economy. Even at current levels, it could shave 0.2 percentage point from growth, analysts said.

Just as Europe's sovereign debt problems have started to ease, oil has emerged as a new headwind.

But the Iran-driven spike masks a broader underlying trend, and as long as military strikes are avoided, it appears to pose only a limited risk. In other words, there is a good news story.

Crude oil prices have been climbing in fits and starts since early October in line with slowly improving economic data, especially in the United States.

Equity prices have risen in lockstep with oil's advance. When the two rise together, it usually indicates a broad-based economic expansion. The Standard and Poor's 500 index is up 17 percent since the beginning of October, and MSCI's global equity index has recouped all its losses since the U.S. debt debacle last summer.

This suggests that roughly half of the 25 percent gain in the price of Brent crude since early October reflects a strengthening of global demand, economists said. The world's factories are churning out goods at a faster pace, a key indication of the economy's strength, meaning it is in better shape to handle a supply shock from Iran than a year ago.

"We think that crude oil prices have risen more because of improving sentiment regarding global growth than because of geopolitical risk concerns," Deutsche Bank told clients.

WAGES CUSHION THE BLOW

A sterner test will be whether consumers can absorb the higher costs at the gasoline pump, since their spending accounts for about two-thirds of all economic activity in developed economies. And that will depend upon wage gains.

So far, the news here is reasonably encouraging too. American wages and salaries have risen at a 5.7 percent annual rate in the seven months through January. Average hourly earnings, to be reported on Friday as part of the government's monthly jobs report, are expected to have advanced by 0.2 percent in February from the prior month.

U.S. gasoline costs have accelerated at an even faster pace. They are up by 10 percent from their lows late last year and in California have topped the psychologically important $4 a gallon level. But so far the hit to the American wallet has been less severe than during the Arab spring a year ago.

A warm winter and a 30 percent plunge over the past three months in prices for natural gas, the fuel used to heat most American homes, have cut the average household energy bill. And more people have jobs today, providing more of a cushion to absorb costlier gasoline.

"So far there is no sign that these higher prices are getting in the way of an improving trend in U.S. consumer confidence currently supported by a better labor market," said Jacques Cailloux, chief European economist at Royal Bank of Scotland.

The U.S. jobs report for February due out on Friday is expected to show 210,000 new jobs were added outside the farm sector, the third month in a row of gains above 200,000. Tom Porcelli, chief U.S. economist at Royal Bank of Canada, said he will watch closely for signs of growth in higher-paying sectors, which would provide further support to consumer spending.

Otherwise, rising gasoline costs could start to bite. Porcelli said three to six months above $4 a gallon could shave half a percentage point off U.S. GDP, which economists currently see expanding around a 2.2 percent rate in 2012.

INFLATION RISKS

The dent could be even larger in Europe, where wages are lagging. Adjusted for inflation, the Organization for Economic Cooperation and Development estimates that wages in the euro zone this year will expand on average by 0.4 percent, and even less for Germany, Europe's biggest economy.

Deutsche Bank reckons that if oil were to rise by 50 percent from its baseline, twice the advance so far, it would rob 0.4 percentage point from euro zone GDP in the first year. The region already is expected to contract slightly in 2012.

In Asia, the picture is more mixed and inflation the primary concern.

Many Asian economies have fuel subsidies, which would cushion the blow to households. But if governments start to pass on the energy costs, as Deutsche expects in India and Indonesia, inflation could rise sharply.

Inflationary pressures would complicate the role of central banks, possibly quashing prospects for further monetary support for the recovery.

But for now, rising oil prices largely are a growth story.

Crude oil prices fall; gas prices make gains

HOUSTON, Dec. 9
By Sam Fletcher
OGJ Senior Writer

Stock market and oil prices fell Dec. 8, with crude closing below $99/bbl in New York, as pessimistic markets shrugged off interest rates reductions by the European Central Bank (ECB) and a US government report of the lowest number of initial claims for unemployment benefits in 9 months.

However, natural gas rallied after the Energy Information Administration reported the withdrawal of 20 bcf from US underground storage during the week ended Dec. 2. That left 3.83 tcf of working gas in storage, up 102 bcf from a year ago and 307 bcf above the 5-year average.

Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “Despite a warm start to the heating season, the probability for the current La Nina event to continue through early spring (March-April) is higher than 50% according to forecasters at National Oceanic and Atmospheric Administration. This would introduce the potential of a more rapid storage drawdown this winter.”

Stock indexes turned around in early trading Dec. 9 after all 17 members of the Euro-zone agreed to a treaty that will provide more central authority over their individual budgets in response to the growing debt crisis in Europe. Another nine members of the European Union are considering signing the treaty that was hammered out in an all-night session. Only the UK turned it down.

Analysts remained skeptical of the latest European effort, however. “A pledge to regulate budgets is all well and good, but without a commitment from the ECB to print lots of euros, it doesn't address the immediate issue at hand,” said analysts in the Houston office of Raymond James & Associates Inc.

Despite their marathon overnight session, EU leaders failed to come up with a binding pact for all 27 nations represented and resorted instead “to intergovernmental treaties,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “The text of the agreement is to be finalized by March, and after that we will still have to go through the ratification process for those countries that want to join in.”

Meanwhile, everyone is waiting to see if Standard & Poor’s follows through on its threat to downgrade credit ratings of 15 Euro-zone countries, including the strongest European economies of Germany and France, pending the outcome of the Dec. 9 summit (OGJ Online, Dec. 6, 2011).

“Given the poor political unity between the EU-27 members, we have to increase the risk assessment that the next step is to see some downgrade review materialize maybe even before the end of the year,” said Jakob. “[Although] the Italian 10-year bond yields were falling sharply at the beginning of the week, they are now surging back towards their previous peaks. The Italian-to-German bond spread is back over 5%, and the Italian 10-year bonds back above the 7% mark. Not good.”

Jakob said, “For weeks, global assets have been supported by all sorts of rumors that the ECB will become the buyer of last resort, but yesterday the head of the ECB poured some water on those hopes. The ECB will stick to its constitutional mandate and will not engage in any financial engineering scheme with the International Monetary Fund. The ECB did cut interest rates from 1.25% to 1%, but overall it did not come up with any [balm for the European economy].”

The European Banking Authority later increased its estimate of the European capital shortfall under the stress-test, “which will likely lead European banks to sell more assets by June,” said Jakob.

Sieminski said, “Commodity index returns remain positively correlated to the US equity market. The fact that the current episode of risk aversion is one of the longest in history as well as the tendency of the S&P 500 Index to rally in US presidential election years are encouraging signs for index returns heading into 2012, in our view. However, ultimately the performance of index returns will be determined by the extent to which a more pronounced downturn in economic activity can be averted.”

In other news, he said, “We believe China will add about 950,000 b/d of new refinery capacity over the course of 2012 and utilize it. This could add to the country's stockpiling requirements, which could mean that the 5.5% consensus for oil growth in China is too low.”

Energy prices

The January contract for benchmark US light, sweet crudes continued to fall, down $2.15 to $98.34/bbl Dec. 8 on the New York Mercantile Exchange. The February contract dropped $2.14 to $98.54/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.15 to $98.34/bbl.

Heating oil for January delivery lost 5.26¢ to $2.93/gal on NYMEX. Reformulated stock for oxygenate blending for the same month declined 2.03¢ to $2.57/gal.

The January natural gas contract regained 3.6¢ to $3.46/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gave back 1.1¢ to $3.43/MMbtu.

In London, the January IPE contract for North Sea Brent lost $1.42 to $108.11/bbl. Gas oil for December dropped $9 to $948.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was down $1.08 to $109.02/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

Crude Oil Rises on Increasing U.S. Consumer Sentiment, European Accord

Oil climbed the most in more than a week after a report showed that confidence among U.S. consumers rose to a six-month high and as European leaders agreed to boost the region’s rescue fund and tighten budget rules.

Futures gained 1.1 percent after Thomson Reuters/University of Michigan preliminary index of consumer sentiment increased to 67.7 in December from 64.1 at the end of last month. European countries announced steps to ease the area’s debt crisis without forging an accord among all European Union members.

“The consumer confidence number is another positive signal about the U.S. economy,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “We seesawed earlier today as people tried to get a handle on the results of the European summit. The agreement is starting to give the market some reassurance.”

Crude oil for January delivery advanced $1.07 to settle at $99.41 a barrel on the New York Mercantile Exchange. It was the biggest gain since Nov. 29. Futures have increased 8.8 percent this year. Prices decreased 1.5 percent this week because of rising U.S. stockpiles and concerns about the debt crisis.

Brent oil for January settlement increased 51 cents, or 0.5 percent, to end the session at $108.62 a barrel on the London- based ICE Futures Europe exchange.

The U.S. consumer confidence reading was projected to rise to 65.8, according to the median estimate of 73 economists surveyed by Bloomberg News.

The U.S. was the world’s biggest oil-consuming country in 2010, responsible for 22 percent of global oil demand, according to BP Plc’s Statistical Review of World Energy released on June 8. The 17 countries using the euro accounted for about 12 percent of world demand last year, BP figures show.
Debt Rules



The European countries enshrined debt rules in a new treaty that leaves out the U.K. instead of amending EU agreements that date back to the 1950s.

European Central Bank President Mario Draghi hailed a “very good outcome” a day after he damped expectations that a deal would prompt the ECB to step up its bond-buying.

The agreement added 200 billion euros ($267 billion) to the region’s war chest and tightened rules to curb future debts. The leaders sped the start of a 500 billion-euro rescue fund to next year and diluted a demand that bondholders shoulder losses in rescues.
Market Driver

The Standard & Poor’s 500 Index (SPX) gained 1.7 percent, and the Dow Jones Industrial Average advanced 1.5 percent at 3:06 p.m. in New York on the rescue fund and the U.S. confidence figure.

“The oil market is being driven for the most part by what’s happening in equities,” said Kyle Cooper, director of research for IAF Advisors in Houston. “We could open a dollar higher or lower Monday based on the weekend headlines from Europe.”

Oil may fall next week on concern that the summit won’t ease concerns about the spread of the debt crisis, a Bloomberg News survey showed. Eleven of 27 analysts and traders, or 41 percent, forecast oil will decrease through Dec. 16. Nine respondents, or 33 percent, predicted futures will increase and seven estimated there will be little change.

EU governments are also considering imposing stiffer sanctions on Iran, OPEC’s second-largest oil producer after Saudi Arabia, amid “serious and deepening concerns” over the country’s nuclear program, according to a draft EU summit statement. Foreign ministers will decide on the next set of sanctions Jan. 30, the statement showed.

Japan issued new sanctions against Iran over the country’s suspected nuclear weapons program, the Trade Ministry said in a statement today in Tokyo.
Iranian Output

Iran pumped about 5 percent of the world’s crude last year, based on BP’s data. The country is on the Strait of Hormuz, through which about a fifth of global oil supply is transported, according to the U.S. Energy Department.


The Organization of Petroleum Exporting Countries may set a new collective production quota at its meeting in Vienna on Dec. 14 without setting individual country allocations, according to consultant PFC Energy. The group has not changed output targets since 2008.

Nymex will cut the margin requirement on crude and heating oil futures from the close of business Dec. 12, CME Group Inc., the exchange’s parent company, said yesterday. The margin for light sweet crude will be $7,560 per contract, 6.7 percent lower than the current level. The exchange last reduced the margin to $8,100 from $8,437.50 in May.

Oil volume in electronic trading on the Nymex was 555,760 contracts as of 3:06 p.m. in New York. Volume totaled 647,193 contracts yesterday, 1.8 percent below the three-month average. Open interest was 1.33 million contracts.


To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

Oil rises above $109, Iran in focus

(Reuters) - Oil rose above $109 a barrel on Friday as rising tension over major oil exporter Iran and a report showing the U.S. economy created more jobs countered concern about the euro zone debt crisis.

The EU and U.S. tightened their sanctions against Iran on Thursday in response to mounting concern over Tehran's nuclear work, increasing concern over a possible disruption to oil flows from the second-largest OPEC producer.

"The Iranian situation is one of those things that could have a really bullish potential impact," said Tony Machacek, energy broker at Jefferies Bache in London.

"At the moment, it's a supportive factor and one of the issues that makes you think the market won't come off too far from here even if there is more economic doom and gloom all of a sudden."

Brent crude rose 45 cents to $109.44 a barrel by 1349 GMT, down from an intra-day peak of $110.41. U.S. crude climbed 40 cents to $100.60.

For the week, Brent is heading for a more than 2 percent gain. U.S. crude is poised for a rise of over 3 percent, its first weekly gain in three.

In a further sign the U.S. economic recovery was gaining momentum, employment growth picked up speed in November and the jobless rate dropped to a 2-1/2 year low of 8.6 percent.

Nonfarm payrolls increased 120,000 last month, the Labor Department said on Friday, in line with economists' expectations for a gain of 122,000.

On Thursday, the Institute for Supply Management said U.S. manufacturing activity rose to its highest in five months, following earlier data on consumer spending and private-sector job creation that were also positive.

"Data out of the U.S. has been strong and that has helped support oil prices. The market wants to move higher, but is reluctant to, unless it sees a clear resolution to the euro zone crisis," said Victor Say, analyst at Informa Global Markets in Singapore.

In Europe, whose sovereign debt problems have weighed on oil prices for months, the European Central Bank signalled on Thursday it stood ready to act more aggressively to fight the region's crisis if political leaders agree next week on much tighter budget controls.

With sanctions against Iran being tightened, the prospect of disruption to its oil supplies remained in focus, possibly as a pre-emptive move by Iran.

"The political process (to impose sanctions) will take time, but if Iran sees a loss of income as inevitable, there is a greater risk that it takes what limited political and economic capital it has to the negotiating table by invoking a pre-emptive export ban," analysts at JP Morgan said in a report.

While such a move was likely to trigger the release of strategic reserves, the initial market shock could boost prices by $20 to $30 a barrel, the report said.

Royal Dutch Shell said on Friday it would cease operations in Syria, a much smaller oil producer than Iran, to heed new European Union sanctions against Damascus.

(Additional reporting by Francis Kan in Singapore; Editing by William Hardy)

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