World commodities

Published August 22, 2016

Oil

OIL prices rose on Thursday, with Brent topping $50/barrel for the first time in six weeks, as traders continued to talk up the potential for an output cut agreement at a meeting of Opec and non-Opec producers next month.

Brent crude oil futures were trading at $49.93/barrel, up 8 cents, after earlier rising as high as $50.05/barrel. West Texas Intermediate (WTI) crude futures were trading at $47.10/barrel, up 31 cents.

The strength of WTI on Thursday was also a result of a flood of new orders to ship US crude to Europe to take advantage of arbitrage opportunities resulting from a wide spread between the US and European benchmarks.

Benchmark North Sea Brent has risen 20pc from a low in early August on news the Opec and other key exporters will probably revive talks on freezing output levels when they meet in Algeria next month.

The unexpected fall in US crude inventories last week has already helped to support prices, with gasoline stocks also decreasing more than expected, data from the Energy Information Administration showed on Wednesday.

Prices remain more than 20pc higher than a six-week low hit earlier in August, supported by the potential freeze or even cut in output following next month’s meeting in Algeria between the Opec and other major producers like Russia.

Nigeria’s losses in daily oil production due to militant attacks have hit 900,000 barrels. Attacks on production and transportation infrastructure in the Niger Delta have taken their toll on Nigeria, which used to be Africa’s biggest exporter of crude. The groups responsible for the attacks insist that local communities are being deprived of their fair share of oil revenues, left to live in poverty and pollution.

Venezuela produced just 2.15m barrels of crude oil per day in June, according to S&P Global Platts estimates. That’s the weakest pace since February 2003, Platts said.

Kenya is set to join the ranks of oil producing nations after the country’s government approved plans to extract up to 4,000bpd from newly discovered reserves.

Tullow Oil has discovered crude deposits in the country’s Turkana region in 2012 and is partnering with Kenya as it readies for full commercial exploration. In its half-year results released July, Tullow Oil estimated that a pilot scheme will allow 2,000 barrels of oil to be produced by the middle of 2017.

A statement released by the Kenyan government is more bullish, putting initial extraction levels somewhere between 2,000-4,000bpd. As part of the plan, the government is promising an upgrade to infrastructure, allowing trains and trucks to ferry the oil from the country’s north-west region to the main port in Mombasa.

Gold

GOLD prices pared losses last Wednesday, after mixed signals in the Federal Reserve meeting minutes did little to change skepticism over the possibility of an imminent rate increase.

Gold for December delivery was recently down 0.3pc at $1,353.50 a troy ounce in electronic trading on the Comex division of the New York Mercantile Exchange. After an initial selloff that took prices as low as $1,340.50/ounce, gold recovered as traders shrugged off any signs that the central bank will raise rates sooner than expected.

Traders have noted that gold prices seem to be stuck in a price range in recent weeks as the market awaits further clues on whether the Fed will raise rates. This has placed increased importance on Fed speeches, meetings and minute releases.

Gold and silver have been among the best performing metals during 2016, powering a sharp rally in stock prices and helping miners to ease concerns over their finances. Since the start of the year, gold has risen 27pc while silver is up 46pc giving more scope to the sector — which had already worked hard to curb spiralling costs — to repay debts or reward investors.

In recent days large gold miners including Newmont Mining and Randgold Resources have talked up the prospect of higher shareholder payouts because of their improving balance sheets. Centamin, the UK-miner of Egyptian gold, last week more than doubled its interim dividend.

Underscoring the improved confidence Newcrest Mining, the largest Australian gold miner, on Monday announced its first dividend payment for more than three years.

Many miners slashed dividends after the price of gold, which peaked at about $1,900 in 2011, started to fall sharply in 2013. In some cases miners which had borrowed heavily to invest in projects abandoned investor payouts.

Randgold, whose shares have doubled in value this year, has said that by the end of the year it should add enough cash to its debt-free balance sheet to get to the level at which it could increase its dividend. The London-based body announced that investment demand for the yellow metal surged to 1,064 tonnes between January and June, up 16pc from the previous first-half high printed in 2009 when the global economy lurched into recession.

The World Gold Council announced that investment demand for the yellow metal surged to 1,064 tonnes between January and June, up 160pc from the previous first-half high printed in 2009 when the global economy lurched into recession.

Investor demand rose 127pc higher year-on-year in the first six months of 2016, the WGC noted, and carried a value of $41.6bn. This bubbly investor interest drove total gold demand during the half to some 2,235 tonnes, the second highest amount ever recorded.

The WGC commented that ‘for the first time on record, investment has been the largest component of gold demand for two consecutive quarters’, adding that ‘this has been in no small part due to demand from Western investors across the spectrum, from retail to institutional and for bars, coins and ETFs’.

Total jewellery demand came in at 925 tonnes in the first six months of 2016, down 17pc from the corresponding period last year. And demand in the key Indian marketplace registered at a meager 186.3 tonnes, the WGC said, the lowest total for seven years as elevated bullion values and depressed rural incomes weighed.

Published in Dawn, Business & Finance weekly, August 22nd, 2016

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