China Slows Commodities Grow

A weaker than expected China growth number and finality on the Italian election is giving commodities new life. The market is rebounding on the thought that despite the efforts of Wen Jiabao to slow the housing market in China, perhaps not all economic stimuli will fall to the wayside. Oil imports into China jumped 7.5 percent over one year ago levels. China’s manufacturing growth hit a four-month low in February, HSBC PMI hit 50.4 for the month, down from a final 52.3 in January. The figure was seasonally adjusted to take account of the Lunar New Year holiday that fell in the middle of the month.

Reuters reported that hopes of a victory for a pro-reform Italian government helped fuel a stock market rally and support government bonds on Monday in the final stages of voting in the general election. Opinion polls before the vote and a low turnout on the first day of voting on Sunday, prompted some traders to place bets on a victory for the centre-left Democratic Party (PD) of Pierluigi Bersani in coalition with outgoing Prime Minister Mario Monti. The surge in the Euro helped oil and products as well.

Natural gas is popping and readers of The Energy Report know that long term I think we have hit a major bottom and it looks like I am not alone! Bloomberg’s Naureen S. Malik, Yuji Okada and Shigeru Sato wrote, “Investors betting U.S. President Barack Obama’s summit with Japan’s Shinzo Abe today will spur American natural gas exports may find bargains in 2016 futures. Gas for delivery in three years may rise to between $5 and $8 per million British thermal units should LNG terminals from Texas to Oregon start moving cargoes, according to estimates from BNP Paribas, Price Futures Group and Barclays Plc. That’s at least 14 percent higher than where markets are pricing 2016 gas today, based on Bloomberg Commodity Fair Values. As much as 10 percent of U.S. output is likely to be earmarked for export as LNG by 2016, according to Goldman Sachs Group Inc. estimates.""

Japanese Prime Minister Abe will ask Obama to clear exports from shale deposits to Japan when they meet in Washington, seeking to secure U.S. gas that costs half as much as supplies in Asia, according to Japanese officials. While exporters from Exxon Mobil Corp. to BG Group Plc are anticipating U.S. consent, Dow Chemical Co. says it would drive prices higher and curb investment in new plants. “It would certainly be meaningful and it’s certainly the right thing to do,” Stephen Schork, president of The Schork Group Inc., a consulting group in Villanova, Pennsylvania, said in a Feb. 19 telephone interview. “It’s a very tough thing politically to go along with” and U.S. markets aren’t pricing in approval, he said. Export Plans! The Energy Department has received applications to build about 24.8 billion cubic feet a day of capacity to ship LNG to countries with which the U.S. doesn’t have free trade agreements, government data show. Both the export of LNG, gas frozen to liquid form for transportation on ships, and the construction or expansion of terminals require authorization from the Energy Department and the Federal Energy Regulatory Commission.

BNP Paribas recommends buying natural gas for 2016 to 2018 based on its forecast that 2 to 4 billion cubic feet a day of the proposed LNG projects will be developed within the next five years, adding to demand growth from the industrial and power sectors. U.S. prices will likely average $4.50 per million Btu in 2014 and reach $5 in 2016, according to Teri Viswanath, New York-based director of commodities strategy at France’s biggest bank. She expects competing LNG projects to build 15 billion cubic feet a day of capacity during the same period. “If we get a significant wave of export facilities being built and that is concentrated, I think we could see an uptick in prices in the 2017 to 2018 time frame,” Biliana Pehlivanova, an analyst with Barclays Plc in New York, said in a Feb. 20 phone interview.

Natural gas for March delivery added 1.2 cents, or 0.4 percent, to $3.258 per million Btu at 6:37 a.m. on the New York Mercantile Exchange. The futures have rebounded 71 percent since dropping to a 10-year intraday low of $1.902 last April. Abe is banking on cheap U.S. gas imports to help narrow last year’s record trade deficit. Japan, the world’s biggest LNG buyer, imported a record 8.23 million tons in January as all but two of the nation’s atomic reactors remained shut after the 2011 Fukushima nuclear disaster.

At the same time, natural gas is helping the U.S. meet more than 80 percent of its energy needs, according to Energy Department data. Dow Chemical, the largest U.S. chemical maker by sales, warned that indiscriminately exporting the fuel may derail billions of dollars in investments. Plus political uncertainty. “The main source of uncertainty regarding the development of such projects remains political,” Samantha Dart, a London- based analyst for Goldman Sachs, said in a Feb. 19 note to clients. The bank estimates that the U.S. will build liquefaction capacity totaling 70 billion cubic meters per year between 2016 and 2020, or about 6.8 billion cubic feet a day. U.S. gas production is forecast to average about 70 billion cubic feet this year.

Growing demand for U.S. LNG may not be enough to convince investors to bet on rising prices because of the lack of liquidity in longer-dated futures, according to Anthony Yuen, a strategist at Citigroup Inc. in New York, and Brison Bickerton, the head of strategy at Freepoint Commodities LLC in Stamford, Connecticut. Open interest, or outstanding bets, on gas for December 2016 delivery, was at 227 contracts on the Nymex on Feb. 21, compared with 201,626 for April 2013. “I don’t think the market is pricing in substantial volumes of LNG being exported,” said Bickerton, who sees shipments of between 6 and 10 billion cubic feet a day by 2020. “People will be a lot more interested in investing out along the curve when the department actually authorizes terminals.” Japanese utilities and trading houses have already signed supply agreements with three U.S. projects with the capacity to export 14.7 million tons a year, according to the Institute of Energy Economics Japan. Osaka Gas Ltd. and Chubu Electric Power Co. have agreed to purchase 4.4 million tons annually from Freeport LNG in Texas starting in 2016. Gas for delivery in 2015 costs an average of $4.21 per million Btu and $4.40 for 2016, according to Bloomberg Commodity Fair Value data. That may be underestimating the potential price if more export projects are approved, according to Phil Flynn, a senior market analyst at Price Futures Group in Chicago.

The Sabine Pass! “The LNG thing is going to happen,” said Flynn, who sees gas rising to $7 per million Btu in 2015 before trading in a range of $6 to $8. The market isn’t pricing in the LNG export potential yet because, “there is a little bit of a denial on how quickly natural gas exports can get done,” he said. “We’ve had this bearish outlook on gas a long time.” Cheniere Energy Inc.’s Sabine Pass terminal in Louisiana, with a daily capacity of 2.2 billion cubic feet, is the only project approved to export to countries without a free trade agreement, according to the DOE. Japan, China, Taiwan and India, all non-FTA countries, account for about half of world LNG demand, according to the International Group of Liquefied Natural Gas Importers. Gas from Sabine Pass would reach Asia at about $11 per million Btu based on current 2016 U.S. gas prices, according toPehlivanova at Barclays. Cheniere estimates the cost to deliver gas from its proposed terminal at about $10.60 per million Btu, based on Henry Hub prices at $4, liquefaction and shipping costs at $3 apiece and marine fuel at 60 cents, according to a Jan. 14 presentation on its website. LNG to northeast Asia rose to a record $19.40 this month, according to World Gas Intelligence. “U.S. LNG imports would be competitive even if domestic natural gas prices were to rise above $8 per million Btu,” Pehlivanova said.