Weekly Round-Up: Rising Inventories Weigh on Commodities

Commodities are ending the week lower on rising inventories and concerns that the US economic recovery may be weakening.

On Wednesday, John Williams, president of the Federal Reserve Bank of San Francisco, said the Fed could start slowing its $85-billion-a-month bond-buying program, known as quantitative easing (QE), within months. “Assuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer. If that happens, we could start tapering our purchases then,” said Williams in a San Francisco speech quoted by MarketWatch.

Those comments, along with a strengthening US dollar (which makes dollar-denominated commodities like gold more expensive for buyers outside the country), helped push gold lower this week. Ongoing strength in US equity markets also drew investors away from gold.

However, the latest non-farm payroll report, out Friday morning, cast doubt on Williams’ forecast. The US created 88,000 jobs in March, the fewest in nine months and well below the 180,000 new positions that economists were expecting. The disappointing numbers gave gold a lift in morning trading thanks to the yellow metal’s safe-haven appeal.

Copper closed at an eight-month low of $3.33 a pound on Wednesday. Along with oil, the red metal weakened on concerns about increased inventories, with London Metal Exchange (LME) copper stockpiles hitting 572,325 metric tons (MT), according to The Wall Street Journal — that’s a 79-percent increase since the start of 2013. However, copper premiums, which customers pay on top of the LME cash price for the metal, have risen in Singapore, Reuters reported, due to concerns about a port strike in Chile and the closure of India’s largest smelter, both of which could hamper availability.

US oil supplies increased by 2.7 million barrels last week, reaching a total of 388.6 million. That was higher than the 1.5-million-barrel increase that analysts were expecting.

However, China’s economic recovery is continuing. The country’s official purchasing managers’ index for March came in at 50.9, the highest level in 11 months, though it fell short of the reading of 52 that economists were expecting.

“The data came in below market expectations, which could indicate that oil demand growth may not expand quite as quickly as we would like it to,” Carl Larry, president of Oil Outlooks and Opinions, told Reuters. “But China’s still growing, and that continues to be an underlying support factor long term for the market. Whether they are at 6 percent or 7 percent they are growing.”

In morning trade Friday, Brent crude is down 1.47 percent, at $104.70 a barrel, while copper is down 0.12 percent, at $3.35 a pound. Gold is up 1.01 percent, at $1,568.10 an ounce.

Gold

Gold investors can take some solace from a forecast from Thomson Reuters GFMS that gold will rise to over $1,800 an ounce by the end of 2013. The consultancy also disagrees with Williams’ prediction of an early end to QE. “Gold is likely to remain very sensitive to U.S. monetary policy, and even though we’ve had some hawkish noise from some within the Fed, it’s difficult to see a material unwinding of the QE … program until well into 2014 and so that should continue to underpin the gold price in 2013,” Neil Meader, the consultancy’s head of precious metals research and forecasts, said in an April 4 Kitco News article.

McEwen Mining (NYSE:MUX,TSX:MUX) has made a new gold discovery, called Twin Domes, at its 100-percent-owned El Gallo complex in Mexico. “The high gold grades encountered are reminiscent of historical mining grades that occurred throughout the El Gallo complex between 1800-1950, where approximately 180,000 ounces of gold at 20 g/t were mined,” the company said in an April 2 press release.

Northern Freegold Resources (TSXV:NFR) is arranging a non-brokered private placement of up to 16.67 million units at $0.06 each for total gross proceeds of up to $1 million. The company will use the proceeds for general working capital and for its mineral properties.

Excalibur Resources (CNSX:XBRR,OTCQX:EXCFF) began trading on the OTCQX this week. The Toronto-based gold exploration company is focused on its 49-percent-owned Catanava property in the state of Zacatecas, Mexico.

Oil and gas

ExxonMobil (NYSE:XOM) and BHP Billiton (NYSE:BHP,ASX:BHP,LSE:BLT) are planning to build the world’s largest floating liquefied natural gas (LNG) plant off the coast of Australia, Reuters reported. The vessel would add 6 to 7 million MT of output to the country’s annual LNG production, a nearly 30-percent increase. The project’s costs were not disclosed, but the move comes as other Australian LNG projects, such as Chevron’s (NYSE:CVX) massive Gorgon project, have faced serious cost overruns.

Meanwhile, Exxon’s 96,000-barrel-a-day Pegasus pipeline remains shut after spilling heavy oil in Mayflower, Arkansas. The shutdown may cut the flow of oil from Western Canada and create a further backlog of oil coming out of Alberta and the US Midwest. That, in turn, could put further pressure on prices for West Texas Intermediate oil and increase the gap between WTI and Brent crude.

In other pipeline news, TransCanada (NYSE:TRP,TSX:TRP) is soliciting commitments from oil producers for its plan to convert its 3,000-kilometer Mainline natural gas pipeline to oil for shipping Alberta crude to refineries in Eastern Canada, Bloomberg reported. The converted line, which RBC Capital Markets estimates would cost about $5 billion, would carry up to 850,000 barrels a day to these refiners, which currently rely on more expensive imported oil. Under the plan, the company would also add 1,400 kilometers of new lines to the Mainline system.

Copper

Chilean state copper commission Cochilco lowered its forecast for the country’s copper output this week. Chile is the world’s leading producer of the metal. Cochilco now sees Chile’s production for the year coming in at 5.58 million tons, according to Mining Weekly, down slightly from its earlier forecast of 5.59 million tons. The commission still forecasts an average copper price of $3.57 a pound this year.

Diego Hernandez, CEO of Chile-based Antofagasta (LSE:ANTO), said this week that he sees North America becoming a more prominent copper-producing region. “We believe that North America is again a more competitive area for copper production. The reason why [the region] lost the position that it had as one of the major copper producers was mainly related to dropping ore grades,” he told Dow Jones Newswires. “Now and longer-term, the grades in North America are not too different from the grades that we have in Chile. Chile is still better on average but that will not last forever and in less than ten years we will be at similar grades,” he added.

Highland Copper Company (TSXV:HI) reported assay results from the 543S chalcocite deposit at its Keweenaw project in Michigan’s Upper Peninsula. Highlights include hole CEN413, which returned 16.1 meters grading 2.93-percent copper and 2.6 g/t gold, including 3.5 meters of 8.4-percent copper and 4.1 g/t gold.

Paget Minerals (TSXV:PGS) completed optional work commitments at the Ball Creek copper-gold project in British Columbia and acquired 100 percent of the property. The acquisition is subject to a 2-percent net smelter royalty in favor of Pembrook Mining, one half of which Paget can buy for $1 million, as well as payments tied to the definition of a mineral resource and a positive feasibility study. Recent drilling highlights include 310.1 meters grading 0.15-percent copper and 0.44 g/t gold, including 102 meters grading 0.24-percent copper and 0.5 g/t gold.

Securities Disclosure: I, Chad Fraser, hold no positions in any of the companies mentioned in this article.