Commodities Seen Gaining on Renewed Global Confidence

After lurching forward on news of a rescue package for the Eurozone at the eleventh hour on Thursday, commodity prices across the board have fallen on profit-taking as investors assess near-term risks, including growth prospects in Asia and implementing the latest agreement reached among member nations of the European Union. Nevertheless, cautious optimism about Europe finally taking its first concrete steps to resolve the debt crisis plaguing the continent for nearly two years is likely to push up energy and base metals demand in the longer-term.

Early Friday, Brent crude is down 1.1 percent at $110.87 a barrel, while gold for immediate delivery is 0.6 percent lower at $1,737.80 an ounce, and copper is down 0.9 percent at $3.660 a pound.

Investors were quick to take profit on the euphoria over the EU’s agreement to push for a 50 percent writedown on Greek bonds, extend a second aid package to Greece, and increase the European Financial Stability Facility’s capacity to 1 trillion euros, or about USD$1.4 trillion. A rebound in the dollar also weighed down on commodity prices. Still, the fact that Europe now has a defined path to return to a more solid fiscal footing should provide greater confidence in the region and indeed in the global economy, which in turn would bolster demand for industrial metals as well as oil.

The problem, however, is that producers may not be able to keep up with their production targets. Exxon Mobil (NYSE:XOM), for instance, will need to pump out 5 million barrels a day to reach its 4 percent growth target for 2011, but many analysts are skeptical about the company being able to reach that number. For the latest quarter ended September, Exxon Mobil reported producing 4.28 million barrels a day. One problem is that in countries where companies must sign production-sharing contracts with local governments, oil producers receive a smaller output when countries cash in on rising crude prices. Such agreements are prevalent in Africa, which accounts for 20 percent of Exxon Mobil’s crude supply.

Still, rising oil prices have also led corporate earnings to rise too, and major producers including Exxon Mobil, Royal Dutch Shell (LON:RSDA) and France’s Total  (EPA:FP) reported strong earnings results this week. Both Exxon Mobil and Royal Dutch Shell reported earnings rising over 40 percent from a year ago, while Total’s profit rose 13 percent.

Gold is expected to retain its allure amongst those investors who continue to focus on the downside risks in the global economy, not least in worrying about how Europe’s latest rescue package will actually be implemented. Worries over China’s economy persist, particularly about a potential devaluation of the yuan as well as the prospect of liquidity tightening in the country that would put a damper on global growth. Furthermore, there is the wild card of whether and how China may get involved in bailing out Europe, and its effect on the Chinese as well as the global economy.

Still, just how long the yellow metal’s winning streak will last remains in question, as gold is up 22 percent from a year ago, and is on its 11^th year of yearly consecutive gains, its longest winning streak since at least 1920.

For now, though, gold producing giant Barrick Gold (TSX:ABX) has certainly gained on the back of the yellow metal reaching record prices in recent months. The company raised its quarterly dividend by 25 percent as a result. Newmont Mining (NYSE:NEM), however, reported third quarter earning falling over 8 percent, weighed down by a steep acquisition-related charge.

Copper is expected to gain momentum on renewed confidence for global growth, but there are concerns too about the supply of the red metal. Wednesday, the world’s biggest copper producer Freeport McMoRan  (NYSE:FCX) announced a force majeure on copper concentrate supplies due to a strike at its Grasberg mine in Indonesia which has been going on for the past two months. Platts reported that China’s Tongling Nonferrous Metals (SHE:000630) is seeking copper concentrate in the spot market as a result, as the Chinese group expects delays in deliveries from Freeport McRoRan.

Meanwhile, industrial fixture maker Mueller Industries (NYSE:MLI) reported third quarter net income tumbling 44 percent from a year ago as volatile copper prices cut into profits. The Memphis-based company reported net income reaching $10.5 million, or 27 cents a share, versus $18.9 million, or 50 cents a share, a year ago.

Disclosure: I, Shihoko Goto, have no interest in the companies mentioned in this article.