Commodities had a good day yesterday, with our portfolio moving strongly higher due to oil drilling results which we discussed yesterday. It is becoming obvious that the markets are telling us that commodity stocks need to move higher as we see physical commodity prices having moved higher with commodity stock prices having lagged. In bull markets these inverse, so if the data and other news we are seeing in the market are correct, then this may be the time for those who have been holding their firepower back might want to begin deploying some of that capital. That is what we have been doing over the past few weeks in both our regular trading accounts and our retirement account.
Oil & Natural Gas
Royal Dutch Shell (RDS.A) is planning to invest US$1 billion/year over the next few years to develop shale and unconventional oil and natural gas assets in China. This is just another example of China inviting an outsider with knowledge into the fold in order to benefit from their expertise and hoping to increase domestic energy supplies and even more important for China their domestic production. It is estimated that China has the world's largest untapped shale gas plays, but as of today they are for the majority untouched and unexplored. This will be good news for China and potentially all of Asia and if expectations for production are met over the next decade we could see China push natural gas prices throughout Asia down as they import less nat gas from abroad, however that is a long ways off.
This brings up two stocks long-term. Cheniere Energy (LNG) will be a natural gas exporter by that time and we believe that South America will be self sufficient by that time with the huge shale gas plays in Argentina and elsewhere providing ample supply on that continent. If China begins to grow production at a faster pace than their economy grows, which would not be hard to do based on what happened in Canada and the U.S. in the past, then we could see competition for the European market as Asian prices fall. Remember, Cheniere will be competing in a worldwide marketplace and the Persian Gulf, Australia and Africa will all be major players in the LNG marketplace, not even factoring in what Russia and others who deliver dry natural gas via pipelines will be doing. We still like the company, this is all "stuff" we knew but a perfect storm could provide headwinds for shares down the road.
A Chinese shale boom would also be an issue for Southwestern Energy (SWN), which continues to focus on their great dry natural gas fields in the United States. They have some great assets, some of the lowest cost in the industry, but have failed to branch out and seriously diversify the production mix like others have. Hedging helps, but if U.S. exports find Europe flooded with excess Russian and African gas then we would much rather be involved in a more diversified company. This is the reason we like those players in the 'wetter' plays here in the U.S., such as the Bakken, Eagle Ford and Utica.
Gold was up big yesterday and so too was Freeport-McMoRan (FCX) which saw shares climb $1.13 (3.20%) to close at $36.49/share - so we are once again above that $36/share figure we like. Volume was heavy yesterday with 25.3 million shares traded. The company makes most of its money from copper, but gold is a significant portion of the business as well and if gold moves strongly higher this shall too as it would become a play on economic recovery and inflation. Gold now faces resistance at the $1640/ounce level, as we have bounced off of $1600/ounce and need to take out the $1650/ounce area to really move higher. As discussed yesterday silver will be muted early on in a precious metals rally, but it is always a strong finisher. We have physical holdings in both gold and silver and are not looking to sell any of those positions in the near future.
The coal industry received good news yesterday as the US Court of Appeals said that the EPA was far too aggressive in their recent rules and sent them back to be revised, which will obviously cause less stringent regulations on electric power plants utilizing coal as their power source. The news pushed the entire industry higher, with Alpha Natural Resources (ANR) being one of the leaders yesterday. The stock was up early in the morning before sliding into the close, but it was still a good day nonetheless. Shares finished at $6.90/share after rising $0.40 (6.15%) on volume of 29.4 million shares. This ruling does not save the industry overnight, but it does lessen the initial blow and buys them time to shift sales overseas and work through the glut of production here in the U.S.