Keep Oil and Gold In Your Portfolio, no substitutes renewables world reserve currency

No Oil Substitutes

Oil and Gas - Despite what many western governments and environmentalists are saying, the world has not moved away from oil.  While it is true that many modern vehicles are equipped with hybrid fuel technology, they still depend on gasoline for 80-90% of their fuel needs.  Virtually every home built twenty or more years ago is heated with oil and the cost to change that is high making the change to electricity an additional expense most homeowners simply cannot handle in a depressed economy.  Additionally the more popular modern power generators are only fueled by oil and gas.

Gold - The yellow metal holds a unique status in everything from religion to jewelry to wealth storage.  Even central banks and world governments look to gold as an inflation hedge and trade gold in times of economic trouble (2016 - Venezuela); no other metal enjoys this distinction not even platinum and there's no reason to think that will change anytime soon.  The last time fiat currency wasn't being used world trade relied fundamentally on the gold standard.  With the US dollar losing popularity as the world reserve currency and China looking to gold to prop up its own currency it appears as if the gold standard will once again run the world economic system.

Oil production still powers the economies of many key nations

And these are nations of influence - Saudi Arabia, Russia, Iran, Canada, United States.  Other key countries such as Nigeria and Venezuela are developing vast oil reserves as a source of future economic growth.  As long as oil is available there will be a market for it.  (nigeria oil reserves)

Renewable Energy Sources Continue To Be Too Expensive

With the world economy slumping along there is no reason to expect people to voluntarily shift to expensive sources of energy anytime soon.  Even the cheapest of these - energy derived from corn (corn demand, ethanol) in South America - is already wreaking havoc on commodity prices in that part of the world because it takes too much of the crop to replace just a fraction of the energy it needs.

Electrolux eluxy Doubles US Market Share (whirlpool whr), Jaguar Tata Motors ttm Organic Growth China luxury vehicle market

If you're into retail stocks here's one to consider -  Electrolux eluxy aka Sweden's version of Whirlpool is taking the US by storm.  On September the 8th it acquired General Electric's (ge.n) appliances business for $3.3 billion (7 times ebitda multiple).  The move doubles Electrolux's market share in North America ($4.0 billion in sales -> $10.0 billion) putting it in direct competition with market leader Whirlpool whr.n.

Electrolux is already the number two player worldwide but this deal means a lot given that the US is the world's third largest market for sales of major appliances (2013: 28% of Electrolux sales come from Europe vs 32% stateside).. also note that American demand for appliances is estimated to grow by 9% in 2014 (up from previous estimate 7%).  And don't forget about the $300 million in synergy cost savings.. increased profitability right off the bat !  Less competition in the industry could mean higher prices - but even if that doesn't happen, Electrolex will undoubtedly have more control over the market price of its products.

Electrolux was doing well in North America even before this move - organic growth there is at 7% compared to 0.4% in Europe.  Whirlpool has a market value 40% greater than Electrolux despite having similar revenue;  Electrolux quarterly profit though has been wildly inconsistent.  Annual earnings are comparable to Whirlpool with the exception of 2013 ($827 million vs $93 million) but don't let that bother you - Electrolux is expanding rapidly in emerging markets (also a gradual move in production to low cost regions is estimated to boost 2014 earnings by a hefty $284 million) and the costs associated with that process have been high but, by establishing itself early in those regions Electrolux is setting itself up for the future (and gaining an edge over the competition).

Tata Motors is growing.. very fast

Tata Group (private) is perhaps India's most diversified company.  It sells beverages such as coffee and mineral water, generates electricity for public use, mines salt, manufactures automobiles (both high and low end), provides telecommunications services in India (Virgin Mobile India), is a service company (hotels, airasia, financial services).  Its largest publicly traded subsidiary is Tata Motors nyse:ttm.  In 2012 the auto division was worth $15.2 billion, today it's at $25.2 billion (all organic growth !).

Despite no major acquisitions over the last few years, auto division Tata Motors finally appears to have an asset capable of providing organic growth.  In 2008 it acquired struggling automarker Jaguar Land Rover from Ford for $2.3 billion (today the Jaguar unit represents 95% of Tata Motors' valuation which translates into $23 billion !).  The deal instantly gave Tata a foothold in overseas markets (a plus for a company looking for international recognition) but unbeknownest to Tata, sales at Jaguar Land Rover didn't need much of a push to take off  - between 2009 and 2013 auto sales doubled to 425,000 units ; with 18.8% yoy growth last year.  In 2013 global sales of Jaguar models was up 37% (North America +50% vs -6% the previous year).  Demand from China will have a tremendous impact on future growth (is currently the leading market for Jaguars; will push unit sales up to 1 million by 2020).  Last fiscal year China accounted for 24% of Jaguar Land Rover sales vs 21% the year before.

China is embracing Tata Motors and why not ?  The country has low current luxury ownership rates, rising proportion of affluent individuals, and a strong affinity for premium brands.  

Currently Jaguar represents 7% of all luxury vehicle sales in China (luxury vehicle market); estimates show China's total demand will reach three million by the end of the decade, Tata will account for at least 250,000 units, if its share increases then expect auto sales to rise markedly.
more..  Tata makes electric vehicles and owns South Korea's second largest manufacturer of heavy commercial vehicles (Daewoo has been a part of Tata Group since 2004).  On the flip side Tata Motor's low end passenger vehicle business has fared poorly (sales in India of its own makes including the Tata Nano and Zest are down 33% so far this year 88th -> 58th) but the company is committed to reviving it and has the assets to accomplish that ($7 billion cash, a parent company that both operates leading European and Indian engineering technical institutes and even mines/fabricates the steel used in its cars).

Tata Motors stock price change : 1 mo -10%, 3mo +13%, 6mo +9%

Magna International Expands In India (nyse: MGA)

The largest auto parts marker in North America makes Asia a priority
September 29, 2014 - Magna announces plans for two new facilities to be built in Gujarat, India.  The plants will produce seat systems and body and chassis systems.  Magna already produces various parts in India for GM, Ford, and Nissan.

Bombardier Results Investor Analysis, Aircraft Deliveries Orders, Flexity Trains cs100 Jets

            Bombardier Inc (TSE:BBD.B) is a rare company in that it holds the disctinction of being both the world's largest train maker and the world's #3 manufacturer of aircraft.  The Germany-based train division dubbed Bombardier Transportation remains slightly more important to the company financially, however the gap is closing fast;  For the nine month period ended October 2011, sales of trains and related services accounted for 53% of company revenue and 59% of ebit - however during the nine month period ended September 2012 that fell to 49.8% and 54%, respectively.  Bombardier puts the blame squarely on European demand (lower activity/contracts reaching completion not being filled by as many new ones) which it says accounts for 88% of the decline in rail car sales (9-month period). 

I'm still optimistic about the Transportation division !  In China and Russia, demand for trains developed by Bombardier will inevitably go up due to key license agreements signed with major rail equipment companies in China (CSR Puzhen) and Russia (manufacturer Uralvagonzavod).  As well, business from North America is on the upswing which bodes well for Bombardier - 3Q revenue from North American customers was $373m (+17.7%) and $1,095m (+7.0%) in the nine month period.  Also, revenue from Asia-Pacific which was down considerably during the first two quarters, recovered strongly in the third when it increased by +31.3% qoq (still down -42.9% in 9M2012 but that's due to uncharacteristically low sales in the first two quarters).  Total company backlog as of September 2012 is $58.6 billion up +8.7% or $4.7 billion in just the last nine months:  44.5% aerospace, 55.5% trains.

Aircraft revenue is stable, which is a great sign considering more than $200 million worth of aircraft deliveries was postponed until the fourth quarter.  The postponement of the CS100 first flight by half a year (Jan 2013 to June 2013) is discouraging but nothing to be too concerned about;  The two larger aircraft manufacturerers, Boeing (787 Dreamliner) and Airbus (Airbus A380) ended up releasing their latest larger models three years behind schedule --> Bombardier's 100-149 passenger CSeries planes will compete directly with the Airbus A320 and Boeing 737.

The company remains a force in the manufacturing industry.  Its customer base remains diverse (Saudi Arabia was the biggest rail customer this quarter), it keeps innovating (Learjet 70 and 75 programs launched in May 2012, continuance of Learjet 40 and 45) and getting its jets certified in key geographic regions which gives it a competitive advantage (in June 2012 awarded aircraft type certification for the Q400 aircraft for operation in Russia).  There's also the well known fact that Bombardier's new planes are lighter and 20% more efficient on fuel.

Net profit remains stable and orders keep coming in !  

Diversified Investments Hon Hai Precision Industry, Seabridge Gold -sorry Motley Fool, Royal Gold

     With all the market turbulence it's imperative that investors not only diversify their stock portfolio but choose companies that are already diversified within themselves. Here are a few companies that fit the bill.

Hon Hai Precision Industry better known as Foxconn - This is the company that manufactures everything from the xbox game console for Microsoft to the iPhone4S for Apple as well as laptops for Hewlett Packard; Its HP laptop plant in Chong-qing that produces upwards of 20 million laptops annually, was built in 2009/2010 and made Hon Hai into one of the leading employers in China's 23rd largest mainland economy (where the electronics industry ranks first ahead of vehicle manufacturing). Keep in mind that each plant can have anywhere from a couple to 15 or even 20 factories, in fact Hon Hai's largest in Shenzhen is home to some 300,000 workers. In total Foxconn has factories in nine Chinese cities.

The technology industry has recorded massive growth over the last seven years led by Apple Inc (market capitalization 6X bigger today than it was in 2005 - 390 billion vs 65 billion) which is important to remember since Hon Hai plays an integral role in Apple's success (the iPad is made by Hon Hai at a plant in Chengdu, China, the iPhone4s is manufactured at the world's largest smartphone production facility, the 200,000 unit/yr plant at Science Park, Zhengzhou). In January 2012 it announced a plan to increase its workforce by ten times in a major Chinese manufacturing city, as well Hon Hai recently stated that it will be doubling the size of its flagship smartphone-manufacturing plant in Henan province with a $1.1B investment.
-The company is obviously preparing itseslf for huge jump in size and why not? the iPad holds anywhere from 60-90% of the global tablet market, a market which could grow by 42% in 2012 to 40 million units up from 29 in 2011. As of January 2012 Hon Hai's workforce numbers 1.2 million. On March 11, 2011 Hon Hai Precision Industry (Foxconn) had a market capitalization/valuation of $36.9 billion US dollars. (source: Forbes Global 2000 List 2011 Edition)

Hon Hai recently reported a 19.8% year-on-year jump in revenue to $92 billion over the 2011 calendar year (37% increase in December) boosted by especially strong results in the month of December (revenue in the fourth quarter alone was $30B). That's significant considering that Taiwan's other technology companies Quanta Computer, Compal Electronics and Acer, all reported decreases in revenue (-1% for Quanta to $60b, -21% for Compal to $23b, -23.5% for Acer to $12.4b). Hon Hai profited over $2.5B in 2010 only slightly higher than 2009. The company has $32.0B worth of assets. One thing that could become a problem for Hon Hai is fake Apple products in China. Since the iPhone4s launch was delayed in China, more fake products have been introduced to the market.

Royal Gold (MV 3.77B, 5-day -2.37%, 1 month -4.01%, 3 month +2.77%) Is one of the world's largest and most diversified royalty companies with direct exposure to many of the world's key mining operations through royalty agreements (buys the royalty usually before the mine enters production phase). It then collects royalties (in most cases net smelter return royalties) on the net revenue made from one of five precious or base metals (or all as in the case with Peñasquito). There is little risk considering it is not responsible for mining or exploration costs (like Silver Wheaton). Considering the fact that many of the mines are either not producing or in very early stages of production (Penasquito, Pascua Lama, Malartic) strong growth in revenue (& profit) is likely; unlike other mining stocks, for Royal Gold growth isn't contingent on metal prices (unless of course they collapse which is unlikely given that we're in a commodities bull market). In the 3rd quarter of 2011 Osisko Mining's Malartic gold property reached commercial production producing 73,814 ounces of gold and 40,000 ounces silver (Malartic is home to 10.71 million ounces of gold) - Royal Gold owns a 3% royalty on Malartic.
Diversification: The company remains gold-dominant but that's slowly changing with new base-metal mines coming on tap (like Goldcorp's billion ounce silver Penasquito mine in Mexico). During the 2011 fiscal year 64% of revenue came from gold which is down sharply from 81% in 2010 and 84% in 2009. In 2011 silver contributed 6% to revenue (up from 3% the two previous years), copper steady at 10%, nickel up significantly to 15% from 4% in 2010, 1% in 2009. Other minerals like zinc and potash made up 5% of revenue up from 3% and 1% in 2010 and 2009 respectively. Most of the royalty agreements are for 2-5% however a couple like Andacollo (1.6M oz of gold reserves) which is at 75%.
more on Royal Gold HERE including nickel, lead & zinc production data by mine by year updated to reflect 2011.

Financials: Stock is up 2.77% between Oct 17 and Jan 13 2012, up 7.98% during the six month period ended Jan 13 but down 9% in the month of December. Key royalty claims; 2% NSR claim on Canada's biggest gold/silver/copper/molybdenum project (KSM) purchased in 2011 for $160m; 2% claim on Goldcorp's only major silver mine Penasquito; Barrick Gold's Pascua Lama mine in Chile. In fiscal 2011 (ends in June) revenue was up 58.5% to US$ 216m which is great considering total operating expense was virtually unchanged at $97m pushing gross profit up 190.0%. The company profited 232% more ($71.39m) however dividends were up only 23.5% to 42 cents/share. Update second quarter 2012 fiscal year (ends December 2011): profit/earnings were a record for a quarter at $23.4M up 28% yoy or 42 cents a share on royalty revenues of $68.4M, up 22% qoq. For the 2012 half, net income was $45.9M (up 52.5%) or 83 cents a share (up from 55c) on revenue of $133.3M (up 31.07%). adjEBITDA was 90% of revenue in the second quarter or $62.1M up from $48.9M in 2Q2010. For the September-December 2011 period (2Q of the company's 2012 fiscal year) the price of gold increased 23% from $1367 to $1688 an ounce. The company recently paid $170 million on its debt (credit facility) expanding available credit under the facility to $225 million. $268.3 million was raised in an equity offering held in January 2012.

Royal Gold production update for 2012 Second Quarter
According to Goldcorp/operator of Penasquito (one of Royal Gold's most lucrative interests) gold production will be 425,000 ounces and silver production 26 million ounces for the 2012 calendar year. Malartic (1.0-1.5% nr) will produce between 610,000 and 670,000 ounces of gold in 2012. Barrick Gold's Pascua-Lama mine will bein producing during mid 2013 at 800,000 to 850,000 ounces a year in the first five years. Thompson Creek's Mt. Milligan (31% complete end of 2011) will begin producing 4th quarter 2013. Lac Cruces (produces copper cathode) will operate a 90% of design capacity in 2012, total production estimated to increase by 55% versus 2011 (calendar year). In the second quarter of 2012 Andacollo contributed $16.18 million of the comany's $68.84 million in royalty revenue which is 23.50% of the total up from 20.12%. The only other mine that contributed over 10% of RG's revenue is Voisey's Bay (2.7% net smelter return royalty) which gave the company 17.49% ($12.04M) of its second quarter 2012 revenue (up from $8.06M in the corresponding period of 2011). Royal Gold's four largest sources of revenue contribute 56% of revenue (second quarter 2012); total gold production by them was approximately 92,358 ounces of gold (up from 65,862 ounces) 27.4 million pounds of nickel (all from Voisey's Bay) in addition to Penasquito's output of 5.0m oz silver, 40.2m pounds lead, 78.4m pounds zinc. Quarter on quarter increases at Penasquito were mostly from zinc which was up 35.0%, silver was down 100,000 ounces but gold was up 23.8% or 13,052 ounces.


Seabridge Gold - Unlike Motley Fool I take a bullish position on the company. Since January 6 when Motley Fool considered a plunge in the stock Seabridge Gold is up 10% after being down more than 27% over the three months prior. Why has the stock underperformed in the long term? a couple reasons stand out. The spot price for gold is down 11.0% since early September, also down is silver (-29.1%), copper (-27.5% to $3.63/lb from $4.2 in September) and molybdenum. But unlike other metal companies Seabridge's long term valuation is predicated upon development of key mines Kerr-Sulphurets-Mitchell (capital cost is $4.7B) and Courageous Lake (capital cost is $1.26B).

When those projects do reach production-stage the company could become the next Ivanhoe Mines (keep in mind that royalty company Royal Gold has already committed $160m for a 2% nsr royalty on KSM). KSM is 100% owned by Seabridge and has a 52 year mine life (adjusted up in May 2011 from 37 yrs due to reserves increasing by 27% for gold and a whopping 61% for silver) and very low cash costs ($105/yr in the first seven years). Also of note: about half of the world's molybdenum production comes from China and China has at times threatened to limit production by labeling it a "national mining resource," which limits the export of the metal in the same fashion as rare earth elements and China can do that through its control of the China Molybdenum, the country's leading molybdenum producer. Seabridge is also exposed to Molybdenum having 257 million pounds of molybdenum in reserves.

Why have investors suddenly shown more interest over the last week? On January 10, 2012 the Courageous Lake property in the NWT added approximately 1.2 million ounces of gold to measured and

Planes Trains and Bombardier (competition)

   I talked about the jet segment before but what about trains, better known as Germany based Bombardier Transportation?

Yes, Bombardier is a top three player in the light jet segment with exactly 50% of its 2011 third quarter revenue (53% for nine month period) coming from the aerospace division ($2.3B up 27.8% from 2010) on net orders of 34 (up 48%) coupled with 68 final deliveries (up 33.3%) and a backlog of $22.3 billion (up 16%). The aerospace division relies sales of business aircraft which should be reassuring given that it's a global leader both in terms of revenue and units (43 business jets in the nine months up from 31 in 9M10). Business aircraft command relatively higher prices per unit and so that's also a key source of cash flow. By comparison, the leader in airplane deliveries, Boeing sold 127 planes (737's) for total sales of $17.7b (up 4%), earnings of $1.1b (up 31%); Only considering Bombardiers aerospace division, Boeing revenue was 7.7 times greater (profit 5 times greater) which is comparable to the market cap difference, however remember Bombardier only gets 50% of its business from planes, there's also the profitable train division from which it receives the other half of its revenue. In my opinion that makes Bombardier undervalued.
The Aerospace division is in the process of building its newest manufacturing plant in Morocco. The new plant will cost the company $200 million to build, be in construction mode for eight years but will begin manufacturing planes (and provide sub assembly capabilities) by 2013. By 2020 it will employ 850 workers.
In August 2011 Bombardier signed a deal (intent) with a major company in Russia for the sale of 10 midize CSeries aircraft for $660 million. The Russian deal may be a sign the company's larger aircraft business is about to take off or maybe I'm being too optimistic but keep in mind, the company's first 150-200 seater C919 series aircraft are on deck pending joint venture with China's Comac. January 19, 2012: PrivatAir SA becomes the eleventh company to order Bombardier's C Series planes after it entered into a contract for five 100 to 149 seater aircraft worth $309 million (and optioning another five for $327 million). The order, worth as much as $636 million brings the number of orders to 138 (262 including options) and first delivery of any of them hasn't even happened yet (end of 2012). Why are Bombardier's larger aircraft gaining popularity? Maybe it's the 20% improvement in fuel efficiency over existing planes. Lufthansa and Korean Air are two of the eleven companies with orders already placed. During Prime Minister Harper's trip to China in February 2012 it was revealed that Chinese private airline, Express Airlines is the Chinese company that purchased six 110-150 seater midsize CRJ900 NextGen planes back on October 29, 2011 for $254M. That company already uses 50 of Bombardiers older version of the model (CRJ200). The deal is significant since only about 80 Bombardier aircraft are currently in use in China. Depending on whether China Express picks up an additional five planes through an option agreement, the value of the deal could reach $491M.

Now let's look at the train segment dubbed Transportation. It is world's leading supplier in 7 of 11 product segments giving it a recognizable edge in the industry. As of October 31, 2011 the backlog is $33 billion (unchanged) or 50% more than Bombardier Aerospace not a great sign considering the difference was 75% at this time last year. Revenues of $2.3 billion in the quarter is steady with the previous period with any minor change attributable to currency effects (however in the nine month period revenue for the division is up 13%). Orders were down for the quarter and in the UK specifically, Bombardier Trains has contracted in size slightly, already beginning the process of cutting as much as half the workforce of 3,000, a plan conceived in July 2011 after failing to secure a key contract.
Part of the reason it struggled last quarter (orders down 57% in the third to $1.6 billion) is due to a controversial decision made by Britain's government in August to award a £1.4  billion contract to German company Siemens over Bombardier even though Bombardier would have built the trains at Britain's only remaining train factory in Derby (kind of ironic given that Bombardier Transportation is also based in Germany); that decision came only about two months after Germany chose Siemens over Bombardier for a £5bn contract. Another blow to the company happened the same month on July 25 when Bombardier made rail cars were involved in a massive bullet-train crash in Wenzhou that was ultimately blamed on design flaws. On the day of the crash, July 25 its stock fell 2.29% to 5.98; since then stock has fallen another 34.8% brining it down to 3.90 (by comparison Boeing stock is up 2.73% to 73.26, Embraer SA is down 15.0% to 24.95). I think investors overreacted to third quarter results, the company was banking on the contract and it wasn't really expecting to lose it given public opinion in the UK. Public opinion in Britain is continuing to pressure the government to support Bombardier's factory in Derby and really the only way for them to do that is to continue to award it key contracts which are also seen as job security for British workers. As recently as 2004 the company threatened to cut jobs at Derby but ended up not going through with it; it did however cut 7,000 jobs worldwide that year (since then the company's workforce has nearly doubled meaning the company is in a long term growth spurt).

The transportation division has strong support in India and America with new orders more recently coming from traditional customers in Chicago ($331 million order for 300 cars July 20), New Delhi ($120 million for 76 cars September 5) and Sao Paulo ($96 million order by mass transit September 21, 2011). Don't be fooled by third quarter results. During the nine month period the train division was the source of 53.1% of company revenue, $7.453 billion up 13.13% yoy with gross margin up 10.5% to $1.248 billion; That's 32.8% more than aerospace's $940 million.

Recent Good News
UK: December 28: Won a US$269 million contract to supply London South with as many as 130 Electrostar rail cars (adding to the 2,000 Electrostar models already in use there).
Germany: December 23 Receives new order worth US$648 million for 90 430 series electric trains to be used in Frankfurt. That's in addition to 87 others already ordered by DB Regio AG in 2011. The trains won't be delivered until sometime in 2014.

Over 100,000 rail vehicles presently in use around the globe, were built at a Bombardier Transportation factory. Bombardier rail equipment is designed and manufactured at 59 locations throughout the world however more than half of them are in Europe where 73% of its 35,000 employees work in 16 nations, with most residing in Germany (research is based in Switzerland). Outside of Europe, the company employs people in Canada (Ontario/Quebec), Australia, United States, and Mexico where Bombardier's newest Learjet plant was built. There's also India and China giving it a presence in Asia. In China the company has train and large commercial jet partnerships with local companies including newly formed Comac. For trains, Bombardier has three joint ventures and seven 100% enterprises in China, under which it manufactures propulsion equipment and signaling equipment. 13% of transportation 2011 fiscal revenue came from Asia. China is the focal point for Bombardier's future in the region which isn't a bad plan considering China plans to spend $434 billion on railway infrastructure between 2011 and 2015, that figure is the latest and is 41% higher than the previous one.

Bombarder remains a solid company in which to invest. It pays a dividend which has gone up every year for the past three years. The dividend has gone up from nothing in 2008 to 10 cents a share annualized in 2010 and is on track to reach 11.5 cents in 2011

Gold Prices, Eurozone Bond Sales (commodities weaker on strong US dollar, market selloff but long term fundamentals remain strong, Italy bond rates double in just one month)

Interesting Fact: 12% of the world's gold is produced at mines dug by individuals without advanced digging equipment. A lot of those mines are in countries like Mali and Somalia.
So far in 2011 silver's popularity has gone up while gold's has decreased slightly, at least according to sales reports by the US Mint. Between January and end of November 2011 the US Mint sold 37,859,500 ounces of silver (up 15.11% from 32,890,500 oz in 2010) and 934,500 ounces of gold (down 19.5% from 1,160,500 oz in 2010). In fact on October 1st it was rumoured that upwards of 737 thousand of silver ounces were purchased from the US mint, a one day record. If true that would amount to 42% of all silver purchased during the month of December 2010 and 24% of the three million ounces sold in October. Since the US moved towards a weak dollar policy in 2002 silver has tacked on about 500% of its present value which is still about 20% under its 200 day average. 2012 update France's credit rating was lowered to AA from AAA by Standard and Poor's. That's a bad position for the country to be in considering it recorded zero gdp growth during the year and given previous statements by Sarkozy as recently as October when he said he would do everything he could to keep France from being downgraded.

Negative Forces affecting the metals
     Over the last little while, particularly the last two weeks gold, silver and other iso traded precious metals showed vulnerability even though their long term outlook remains strong. The weaker prices are due in part to a stronger US dollar (equity markets weak driven lower by the strong dollar which negatively affects foreign investment, EU sovereign debt uncertainty causes US dollar to gain). The ECB's reluctance to purchase the soveriegn debt of Italy and Spain has also been a negative factor (ECB has been under pressure from Germany to refrain from handing out blank cheques to debt laden countries citing the repercussions and how greater ECB exposure to Italy would mean more exposure for Germany, France has a different opinion and is lobbying the ECB for more support). France thinks that more ECB buying is the only way to encourage other investors to buy sovereign debt; On Friday, 10-year Italian bond yields surpassed 7% after the country's debt auctions that day showed lackluster results (Italy did sell €8B worth of 1/2 yr bonds (@ 6.5%) & another €2B in 2 year bonds (@7.8%) however the rates commanded by buyers nearly doubled from only a month ago (was 4.63% and 3.54% respectively). 7% yields in Italy puts it in the same class Greece, Ireland and Portugal were once in (though rates did get much higher for those countries before their financial collapse, the 7% rate was seen as a point of no return), this is extremely dangerous because Italy is home to the world's 3rd largest bond market after the USA and Japan (worldwide exposure to Itay is 3 times what it was to Greece) with Barclays calling Italy's situation "mathematically beyond the point of no return".
Even more disconcerting: Germany, considered the strongest of the EU economies (more manageable debt/high gdp growth) is having problems raising money in the bond market; On Wednesday Nov. 23rd Germany sold only 60% of the 10-year bonds made available. Update: With Italy's debt crisis worsening and the ECB not stepping up with more support, the IMF is reportedly preparing to loan the country $794 billion (€400-€500 billion) at an interest rate of between 4% and 5%. The loan would allow the country 1-1.5 years to reform its system and hopefully regain its solvency. It must be noted however that the IMF may be relying on a new credit facility worth just over €420 billion that was offered it in 2009 by 39 countries, to put together the money for Italy given that only two months ago the IMF only had less than €300 billion available to be loaned. (wsj:IMF Can't Rescue Europe Alone) The news pushed European Equities higher (main equities index up 3.75% on Monday). (news broke in Italy's La Stampa)

There's also bad news coming out of China - Many companies are laying off workers in the manufacturing sector and that's leading to strikes in cities like Dongguan and Shenzhen. Less import demand by Europe is causing a decline in export growth (down to 16% in October). Many of the plants use commodities like gold (1,000 people left their positions in protest recently at apple/ibm plants in Shenzhen) and silver (Foxconn makes electronic components, automotive plants - cars require catalytic converters which are the largest source of demand for platinum group metals).

Grmike's view The commodities market is entering a consolidation and deflationary period as a result of the current US debt ceiling being capped until 2013, US dollar rally, and gold and silver's post 2008 rally. The gold to silver ratio is getting very close to 60 which represents a doubling in eight months (33 in April 2011). Central banks continue not surprising since silver and gold remain fundamentally strong investments. View the lower prices as an opportunity to buy more. Poor debt sale showings in Italy, Germany and Spain mean debt may literally be insurmountable. The effect that will have on currencies will be disastrous and that will cause central banks to hoard even more gold and silver making the commodities invaluable.

What about emerging market debt? The debt crisis is making the buying of debt associated with developed nations increasingly unpopular particularly amongst international investors. So where are they going? Well, a viable alternative for the long term that's attracting interest are emerging market bonds that is, emerging market debt denominated in their local currency (debt sales in the developing world traditionally happen this way). Even a year ago when the debt crisis wasn't as widespread, US pension funds forecast their participation at over $100 billion before 2015. The only limiting factor is that in many countries including the big players China, Brazil and India the system is designed to limit foreign capital investment so not all foreign investment is allowed and when it is some countries like Brazil impose a special tax. Though still in its early stages, restrictions on them are gradually being removed and that's leading to more investment.

Last Monday's 2.5% dip in gold put the spot price below its $1,700/oz 100 day moving average, possibly an important breach considering that level had been supported for over a month (December futures contract on Comex down to $1,685.7/oz). In the week of Nov 21-26 gold fell 2.3% after falling 3.5% the prevous week. So far for November, silver declined in price by nearly 10% meaning that on the year silver hasn't gained anything. Out of all the metals with an iso trading code palladium lost the most on the week, dropping 5.9% to close at $572/oz.

Positive forces on the metals:
Gold ETF's continue hoarding, with the total weight of all gold held by ETF's recently reaching a new high of 69.978 million ounces led by the world's largest, SPDR Gold Trust.

Eldorado Gold & European Goldfields, Low natural gas price affects production, What happened to Canadian oil company dividends? (no more trusts)

European Goldfields (% chg 5d, 1mo, 3mo, 6mo: -7.93% +29.54% -0.34% +26.5%) - updated as of December 19, 2011
Shares are currently trading above the 200 day moving average (in stark contrast to just a month ago-Nov 18 when they were below it).
For 9 of the last 11 months the stock has suffered (down about 29% until the last month when it showed some resilience, including last month's 18.4% increase the stock is still down 16% last 11 months) due to a longer than anticipated permit review process in which Greece decided whether or not to grant approval for the Olympias and Skouries gold-copper porphyry projects in northeastern Greece (permit initially applied for in 2006) (even after decided the stock continued to fall slightly, down 13% in the 3 months leading to mid November). Skouries alone has the potential to produce at a rate of 350,000 ounces of gold equivalent (about half of that coming from silver). The company took a while even just to make up the 9% stock decline experienced over the two months leading up to the decision (July 12, 2011). Base metals like copper continue their lacklustre showing ($4 August 22, 2011 compared to $4.45 on July 29th) making the copper assets less attractive. Dec.14 after takeover rumous subsided European Goldfields stock fell 8.8% on the day.

The two new permits take away a lot of the risk that scared investors away from the company. Including projects in Turkey and Romania, European Goldfields appears to be well on its way to becoming Europe's largest gold producer by 2013-2014 (over 400,000 ounces of pure gold/yr doesn't include silver and copper). Construction of the mines also won't be a problem with Greece's largest construction company, Ellaktor as its largest shareholder (19.36%), 2nd largest shareholder is Blackrock Investment at 7.3%. More reason to optimistic about the company outlook: takeovers! Eldorado Gold and Centerra Gold both operate projects in some of the same areas and would probably overpay in a takeover. Also, European Goldfields is considering a move to the main London Stock Exchange index moving up from junior AIM. In mid December 2011 there was a run on European Goldfields stock due to hints at a possible Centerra Gold takeover.
Also of note, first production at Olympias will be in 2012 & the company's only source of cash flow currently is a small mine in Stratoni, Greece.

European Goldfields acquired by Eldorado Gold Sunday December 18, 2011 for $2.5B. The new Eldorado Gold will have a market value of about $11 billion and produce 1.5 million ounces of gold by 2015. Shareholders of European Goldfields will receive 0.85 Eldorado shares and C$0.0001 in cash; The price being paid by Eldorado for EGF is about $13.05/share which is a 46.14% premium to the stock's month low of $8.95 reached on November 23, 2011. The deal comes at the same time the company is securing $600M from Qatar Holdings to finance the Skouries and Olympias projects in Stratoni Greece. The following day, on Monday Eldorado Gold pledged to spend $2 billion and create 2000 jobs in Greece over the next several years. Although Eldorado saw total cash operating costs per ounce go up $55 or 13.3% (9mo) owing to lower grade ore mined at Kinsladag (still the largest mine by output but ore grade is less than 1/4 as high as it is at the other mines), there were no negative effects felt on the company's income statement as the price of gold skyrocketed over the year, giving the company a 31% (9 months) and 38% (3rd qtr) boost in price realization per ounce to $1571 & $1700/oz respectively.

Natural Gas & Oil
    Since oil's near term rebound from below $80 back up to the $100 level (last 2 times oil breached that level: Feb 2011 & Oct 2008) many Canadian producers haven't added to their dividends. The reason? Ever since the end of the 2010 fiscal year the majority no longer enjoy the tax free incentive that came with being a trust in Canada, due to new government legislation doing away with the tax benefits (consequently many including Baytex, Vermilion, Provident, Penn West have since converted back into corporations). Although this may cause investors to lose interest it may not be bad for companies in the long run; More profit will be reinvested back into the company through expansionary efforts (they may see tax benefits to that). Berkshire Hathaway, for example pays no dividend even though it owns many companies which do. Maybe they should look to Exxon Mobil for advice, one of the world's ten largest companies it avoided paying US taxes in 2009 (used tax shelter practices to send earnings overseas). Exxon was not alone, of the 1.3 million US corporations only 33% paid taxes in their home country between 1998 and 2005 (another strategy used is using losses from previous years against current gains).

On October 27, 2011 Canada's third largest oil company, Cenovus Energy reported on the third quarter. Overall production was steady however natural gas production was down by more than 10% qoq, a trend not disimilar from its peers in the industry. It also set a long term production target for natural gas at 400-500 mmcf/d which is only half the rate at which it produced gas when the company first split from Encana in 2009. The lower results have nothing to do with resource depletions; Cenovus has been diverting capital expenditure away from gas and into oil which isn't surprising given that oil prices have increased by more than 400% since 2001 while natural gas prices (incluenced by supply and demand particularly the center of US deliveries in Louisina/NYMEX) are near a 9 year low of $3.32/m3. Natural gas was as high as $16 in 2008, $6 in 2009. Even the little amount that has been invested into natural gas assets ($22m in the 3q compared to over $220m for Christina Lake/Foster Creek) was done with a focus on oil ($200m increase in natural gas cash flow due to the $22m capex, was reinvested in oil assets). 36 mmcf/d of gas producing assets were sold off between 3q10 and 3q11. Between 2006 and 2010 Chinese imports of natural gas increased 1500%.
More on Oil Supply and Demand (2011-2016)

Alberta's oil sands, TransCanada's Keystone pipeline xl & Enbridge's attempt to access China

    Keystone XL, struggling through the approval phase, aims to bring more of Canada's oil to the United States in an effort to reduce their dependency on Middle East oil by 75% by 2020.

Among other top sources, Mexico is an unsustainable source due to dwindling resources there while Saudi Arabia (number 2) is viewed as unstable due to its situation within the Middle East & participation in opec (opec has tried to influence the price of oil by capping production). TransCanada's $7 billion pipeline (proposed in 2008) would double Alberta's oil exports to the United States. The Keystone Pipelines lowers delivery costs (reliance on overseas shipping/the many smaller pipelines that would be needed in place of it). The pipeline would be the safest pipeline in use so risks associated with oil spills would be minimal. There has already been over 40 months of review including three (and a final) major environmental assessments and numerous public meetings. Even with that considered, US President Obama put a key decision on the matter on hold until after the 2012 elections, by ordering another environmental assessment. The sticking point appears to be the pipeline's proposed route through Sand Hills, Nebraska (Sand Hills covers the mid to western portion of the state and has been designated an ecoregion by the WWF with 85% of Sand Hills (1/4 of Nebraska) being intact natural habitat). However, other routes result in a longer pipeline track and that creates more risk according to TransCanada Corp, Canada's 4th largest petroleum company. Even if another route is chosen it is highly likely that it will still impact Nebraska given that eight of the 14 different routes affect the state (only 1 avoids the sensitive Ogallala aquifer but six reduce the mileage across Sand Hills). The pipeline project would immediately create 20,000 American jobs while giving oil refineries in Texas a much needed boost in raw supply. According to TransCanada president Russ Girling “This project is too important to the U.S. economy, the Canadian economy and the national interest of the United States for it not to proceed." The 1,700 mile Keystone Pipeline would carry 700,000 barrels of oil per day to six Texas refineries in Padd III (would reduce Canada's reliance on refineries in Padd II where a glut of supply has depressed the price of Western Canadian Select oil). The Keystone Pipeline isn't the only major North American project underway, there's also the 800,000 bpd Wrangler Pipeline (Enbridge & Enterprise Product Partners) that will pipe oil from Cushing OK to the Gulf Coast. Another company, Kinder Morgan already operates three pipelines between Canada and the United States. (USA Today: Obama delay of Canadian pipeline won't stop tar sands) Oil price is up 25% over the last month and a half (ending November 16) driven by tensions between Israel and Iran.
Update January 20, 2011 Obama rejected a permit for the Keystone Pipeline. In response, Stephen Harper threatened to give more support over to the other pipeline project Northern Gateway Pipelines which will take the oil to British Columbia then overseas to destinations in China. Canada is home to 90% of 2P oil reserves outside of OPEC nations. The irony behind it all is that the decision by Obama makes the US more dependent on oil from unstable sources (Venezuela, Saudi Arabia) while also making the US a less financially secure/more hostile place to do business for traditional allies like Canada.

Alberta is home to nearly 170 billion barrels of proven and probable oil reserves (much of it amongst easily processed oil sand) exceeded only by Saudi Arabia and Venezuela (AP:China eyes Canada oil, US's energy nest egg) In Alberta alone, more than 1.6 trillion barrels of oil in inferred resource isn't even included because extraction methods SAGD and THAI/CAPRI aren't able to bring it to the surface by economically viable means. However, considering only conventional sources, Canada has major sources outside Alberta (Saskatchewan and Newfoundland combined have about 1.4 times as much oil reserves as Alberta). (NEB - Energy Reports Canadian Energy Ovewview) Approximately 20% of Alberta's oil sands are close enough to the surface to be recovered by open pit mining, the rest requires vairous in-situ technologies; the government of Alberta requires that oil companies bring the land back to 'equivalent land capability' that is, restore it to a level that makes it useful to the community either as boreal forest (which was initially destroyed) or pasture for bison (though many companies have only restored a fraction of that, for example Syncrude Oil restored 22%). Oil sands operations have been approved to use about 360 million m3 of water from the Athabasca River (runs through the mining district, water source is a glacier over 1,200 km away), that's twice as much water used by the entire city of Calgary though less than 1% of the water from the river is used by the province and oil operations; 24 m3 of water is used to produce 1 m3 of synthetic oil (1 m3= 6.29 barrels of oil). As oil sands production grows, companies like Canadian Natural Resources (ranks behind a couple companies in terms of oilsands production, Suncor is 1st at 355,000 bpd in January 2012) are improvising in order to reduce their usage of water from the Athabasca river so they continue to remain below the limit; CNRL now separates water from solids more effectively by injecting carbon dioxide captured from its hydrogen plant into tailings lakes reducing the need for additional water. 90% of conventional oil reserves are controlled by state owned oil companies.

By 2045 oil sands will produce close to 11M bbls/d and that will continue for a century. Tar sands crude is over five times more expensive to extract than middle east oil however with oil prices up more than 400% since 2001 and Alberta continuing to charge one of the lowest royalty rates in the world (down from $3/bbl in 2001 to $2/bbl in 2009) there is much profit to be made. Many smaller Canadian companies lack the billions needed to extract the oil and that has created opportunity for foreign companies including Norway's Stat Oil which has shown a lot of interest (Statoil's licenses in Venezuela were revoked by Chavez and their core reserves in the North Sea are nearing depletion). Fort McMurray is at the epicenter of Alberta's oil boom.

With crude oil fetching higher prices in Asia, Canadian producers are also looking to other markets outside North America (nearly all Canadian oil (2M bbls/d) currently heads south, 2010). The supply chain has, more recently become overwhelmed in the United States due to the release of 30 million barrels of reserve oil onto the market Parkersburg News and already filled up pipelines and storage tanks. With China's interest in Canada growing, another major pipeline project has been proposed; The 728 mile (1,200 km), 575,000 bpd Northern Gateway Pipeline proposed by Enbridge (construction by 2015, Enbridge already operates the world's longest oil pipeline). The new pipeline system is composed of two pipelines, 1 designated for the import of natural gas condensate, the other to the export of crude oil from Edmonton to Kitimat BC. Currently 99% of Canada's oil goes to just one market and even within that market (USA) Canada isn't getting as much in return for its oil as it could be getting since 55% of that oil goes to an area in the north east known as PADD II where a glut of supply is keeping prices down on West Canadian Select. The pipeline is gaining the attention of politicians and oil companies eager to broaden their customer base. More on Oil Supply and Demand (2011-2016)

The US delaying a key decision in the Keystone Pipeline case can only hurt North America’s energy indepedence given that China wants to tap into Canada’s oil supply and Canadian companies like that because heavy oil commands higher prices in Asia (than it does in the United States or even Canada). The Northern Gateway Pipelines which would carry Alberta oil to Kitimat BC then be loaded onto tankers headed for Asia. No Keystone Pipeline means China would eventually take a larger share of Canada’s oil putting US supply at risk (Canada is the largest source of US oil, Canada is also one of only a handful of countries with production growth).

Ironically, environmentalists are both helping and hampering efforts to provide access for Asia; The oil pipelines face fierce opposition from environmentalists and Native Indian groups concerned over wildlife and possible oil spills (like what happened with Enbridge in Michigan in 2010); at the same time American environmental groups have opposed the oil sands on the grounds that it makes excessive use of water and increases greenhouse gas emissions.

Here's what Newt Gingrich has to say about the Keystone Rejection

The Iranians are practicing closing the straits of Hormuz, the Canadian prime minister has already said to the US president, if you don't want to build this pipeline to create 20,000 American jobs and bring oil through the United States to the largest refinery complex in the world, Houston, I want to put it straight west in Canada to Vancouver and ship the oil direct to China so you'll lose the jobs, you'll lose the throughput, you'll lose 30 or 40 years of work in Houston. The president cannot figure out, I'm using milder words here, utterly irrational to say I'm now going to veto a middle class tax cut to protect left wing environmental extremists in San Francisco so that we're going to kill American jobs, weaken American energy, make us more vulnerable to the Iranians and do so in a way that makes no sense to any normal, rational American.

 According to Alberta's 2012 budgetary report, total oil production will reach 3M bpd by 2014, 2.4M of that is from non-conventional sources like bitumen (bitumen royalties totalled $5.7B in 2011 will be $9.9B in 2014).  2011-2012: non-conventional oil production was at 1.78 million barrels per day.  Conventional oil production will be 500,000 bpd in 2013.  Provincial royalty revenue:  Bitumen contributed $5.7B of the $6.5B total which includes conventinal, in 2012, 30% higher than the $4.4B earned the year before.  Total will be around $12.2B in 2014.

Euro zone leaders reach debt deal; Gold, Silver demand up/price up $100/oz on week

   In Brussels, European leaders alongside the IMF negotiated with the financial institutions that own Greek debt in the form of bonds. They struck a number of key agreements the main one being a reduction in the value of Greek bond debt by half (banks take on the 50% loss on the nominal value of those bonds) wiping out $100B worth of debt commitments, bringing debt to a more managable level (120% of GDP down from 160%). Some of the insurers affected such as France's Groupama (wrote 2 billion euro worth of CDS) could bear an even greater burden due to their issuance of credit default swaps (CDS contracts) which they'd have to honour if it's determined that a credit event has taken place (unlikely though given that the deal was not forced on either party). CDS contracts on Greek debt stand at $75 billion up 50% since 2009. To woo insurance companies, the EU made available to it a €30B+ credit. Also helping Greece; Government crackdown on corruption which could increase tax revenue by as much as €1.2B in 2011 (will force more businesses to collect taxes on sales).

Just because Greece was taken care of doesn't mean the European situtation has stabilized; Italian bond rates are currently at 6.5% (November 2011, was 5.867% on Oct 27) up from 4.6% in June 2011 meaning that Italy needs to raise €600 billion from private investors over the next three years just to finance its current debt level. In comparison, it was when the ten year Greek bond yield initially hit 8% that Greek debt became unmanageable. To deal with that problem the European Financial Stability Facility (EFSF) increased its available funds from €440 billion to €1.0 trillion euros (US$1.4 trillion) giving more security to Spain and Italy at least for the next couple years. Problems at the negotiating table remain an issue due to differences between Germany and France. News of the deal pushed the euro to a 7 week high against the US dollar ($1.42). Update: On November 3rd the yield on Greece's 2 year bond topped 100% for the first time.
2010 deficit to gdp ratio by country: UK: 10.4% (government debt is 80% of gdp), Spain 9.2% (Spain's unemployment rate suprassed 20% in 2010, total government debt to gdp ratio is 60%), France 7% (gov debt 81% of gdp), Italy 4.6% (gov debt 119% of gdp, austerity has included cutting back on public holidays). (CBC: TSX, loonie, soar on Europe crisis plan) The budget deficits in most of those countries is a direct result of deflation due to prices being too high/governments of the weak economies having no control over the currency (monetary policy). Also during the week, the EU approved another €130B bailout package.
Here is where Greece is coming from, Last year they had 800,000 civil servents collecting $48,000 annually in full pensions, those pensioners became eligible for that at age 52. New austerity measures are likey to impact those people significantly. European banks typically leverage about 80 times (debt used to acquire additional assets), that puts the EU in a more preciarious situation than the United States (40 times leverage). More info Buyers of Greek Bonds Choose only 1 of 4

Update - A new problem has since been acknowledged: The European Stability Fund is having a difficult time attracting investors. Canada has already said no to investment while China has "no concrete plans". The Fund recently delayed a €3B bond sale citing market conditions.

Gold is up again! Gold soared by 1.4% to $1,747.70 (after reaching a one month high of $1,728.11/oz, up half a percent before the day even began) as demand remains strong in China (high inflation, economic uncertainty, real estate bubble) and the rest of the world where many still view the EU's most recent deal as only a temporary fix that doesn't solve the root of the problem. SPDR Gold Shares added 16.645 tonnes over the last three sessions. Silver was up 5.77% or $1.80. There's also a temporary slowdown in demand from India (Diwali festival of lights festivities are ongoing; Diwali is a five day festival however the entire event including other festivities runs from the middle of October to the middle of November, most of its gold demand came in preparation for the festival) and Thailand (recovering from the worst floods in fifty years). In India, gold trades on the Multi Commodity Exchange (MCX) where the price is commonly listed per 10 grams. Indian gold demand was up 38% in the second quarter of 2011 and 29% in the last 12 months. Just to give you an idea of how unprecedented the price of gold is today; Over history, the last bull market high was $850/oz.

If, as many suggest, the People's Republic of China lets the RMB increase in value relative to the USD, that will weaken demand for gold in the short term as investors see the new exchange rate as a sign of economic stability but in the long run, the stronger RMB will increase Chinese demand for Gold due to its greater purchasing power. Also, a stronger RMB will raise Chinese import demand, indirectly increasing Gold demand from abroad too.
Platinum group metals increase Platinum was up 2.77% ($44.2/oz) by the end of the trading day Thursday to $1,641.4/oz. Platinum, used in everything from surgical equipment to white gold plating to catalytic converters, is produced at a rate of only 5-6M ounces a year (5-10% as much as gold). South Africa produces 80% of the world's platinum. Spot palladium up 2.78% to $665/oz reaching another one month high (also recorded one month high the day before). Palladium began the year around $799.5/oz but since then has dropped 20%, platinum began the year at around $1770/oz but has dropped 7.8% since.

Other Notes: In the July-September 2011 period the US economy grew 2.5% up from the 2.3% estimate.
Total EU-Canada (ex UK) trade is $50 billion (6% of total Canadian trade). News of the Greek debt deal boosted the exchange rates of a number of currencies against the American dollar however not versus the Chinese Yuan or Japan's Yen (Euro up 2% to US$1.42, Canadian dollar up 1.5 cents to above parity at US$101.02). Many non US currencies actually strengthened versus the euro and dollar (US & Cdn).
Sony buys out its partnership with Ericsson for $1.5B giving Sony complete control over its smartphone business, allowing it integrate more of its products and software. Ericsson will now be able to focus more on its wireless technologies. Total world debt represents about 5X total GNP.

Growth in Oil Supply is Lagging Demand, Refineries open in China in response to demand growth (Tianjin), Russia aims to diversify away from oil after World Bank Issues warning

   There are varying viewpoints regarding the state of supply and demand over the next 10-15 years. On one side are those who think massive shortages are inevitable, many of whom subscribe to the peak oil theory. In 2010 the US military warned of massive shortages in supply as early as 2015 with the annual shortfall reaching 10M bbls/d. Another research report released in 2009 by Merryl Lynch stated that by 2015 the world will need to replace an amount of oil output equivalent to Saudi Arabia's production, every two years (decline in oil production leading up to 2015 could be as much as 30M barrels/d).
On the other side are those who see shrinking demand and lower prices (In September 2011 the world bank warned Russia that its economic growth was too dependent on oil demand/oil prices; Russia has to be concerned by the sub $90 oil price and the 2011 forecast made in September by the US Energy Agency which cut its 2011 global demand growth outlook (demand still increases but not by as much). Update (Nov. 24): Opec price forecast changed to $85-95/bbl up from $75-85/bbl previously (notable since $100 is the price at which the majority of producers hedge).  Goldman Sachs expects oil to reach $140/bbl by the end of 2012.  The volatile situation in the arab world (Iran) and Middle East region (Syria, Tunisia, Egypt) has the west concerned that supply from major exporters could come to a hault, consequently putting a lot of positive pressure on oil/gas prices. Unlike Europe, the US doesn't import oil from Syria so inconsistant output there has less of an impact on the US.  Europe's oil embargo on Iran will have consequences for both Europe and Iran: 1st quarter of 2011 Iran was the source of 4.39% of oil imports ranking eighth overall after Russia, Norway, Libya, Saudi Arabia, Kazakhstan, Nigeria and Azerbaijan.  Iran imports 45% of its food, 60% of gdp comes from oil.

For the past 10 years, total supply each year has roughly equaled total demand (1995: 70.1 demanded/70.7 mbpd supplied, 2009: 84.7 demanded/85.0 supplied) but that could change as early as 2012. Also of note, even though retail prices for gas are much higher in Europe and Japan than the United States, industry margins aren't; In Japan, France and Germany consumers actually pay more in tax than they do for the crude itself (June 2008: taxes accounted for the following proportion of pump prices Canada 24%, USA 9.6%, Japan 34.7%, Spain 45.4%, UK 57%, Germany 59%. (International Energy Agency) (In Canada, an increase of C$1 in the price of a barrel of crude oil raises pump prices by about 0.63 cents/liter with only 0.03 cents of that due to the GST tax. (March 2010: National Energy Board of Canada-Gasoline Pricing-Energy Facts) Though oil may seem cheap today ($84.51/bbl after hitting $110 in April 2011) $80 still higher than its 2010 average of $79.45 ($61.92 in 2009). November 16, 2011: crude oil suprasses $100/bbl, the last time it passed that barrier was February 2011 and it stayed there for months before tumbling back down (before that it hadn't reached the level since October 2008); the reason being given for its current swing back up is tensions with Iran, the world's 4th largest producer. In 2011 the highest oil futures reached was $120/bbl which happened at the beginning of the year in January. Biofuels production isn't expected to grow significantly until the 3Q of 2012 when it is forecast to rise to 2.4M bbls/d (up 20% quarter to quarter). Though North America accounts for less than 15% of the world's oil supply, 2,109 of the world's 4,044 active oil rigs are stationed there.

Update January 25, 2011 The International Energy Agency made a couple of surprising announcements. It says oil prices will rise to $146/barrel by 2035 as China, India and the Middle East consume more energy. It also forecasts that U.S. production will increase 22% between now and 2020 to 6.7M bpd from 5.5M bpd (crude only, natural gas not included), allowing the country to rely less on imports. The U.S. will become a net exporter of natural gas by 2021. The bad news for the U.S.? Shale natural gas recoverable reserves in Marcellus, a vast area covering land from New York and Tennessee, was revised down from 410 million cubic feet to 141 million cubic feet. US production of natural gas is presently around 2.3M boe per day.

In January of 2009 the 12 member oil pact known as opec began implementing a plan that calls for 4.2M b/d in cuts to crude output even though key member Saudi Arabia wasn't in full agreement (defied opec and raised production to 9.8M bpd in July 2011; 1.1M bpd increase since the outbreak of war in Libya) ; as well, Algeria is over its opec production quota and is pressing for increases but Algeria probably isn't too concerned given that a lot of its output is in natural gas liquids, a petro component that's already exempt from quotas. OPEC's crude oil production fell to 30.15M bbls/d in September 2011. (Platts Survey: OPEC Crude Output Drops to 30M bpd); Annual crude output (opec) averaged 31.6m bpd as recently as 2008 (total supply including ngl's was 36.2m vs about 35m in 2010, rise of 0.8M in ngl's made up for some of the drop in crude). Crude production isn't the same as oil supply (oil supply also takes into account non-oil additives like ethane/ethanol, pentane, propane, butane as well as field condensates). According to the most recent data 2011 oil demand should increase by about 1.6% and average 88.2 million bpd over the year (in September it was at 88.7 mbpd). Production from Iraq could more than double by 2016 (4.1 mbpd compared to 1.5 mbpd in 2010).

In OPEC's 2010 annual report, Venezuela's proven oil reserves were given as 296.5 billion barrels (40.4% larger than in 2009, or roughly the same as Iraq and Iran combined) surpassing Saudi Arabia (264.5B barrels) however outside opec many dispute the estimates citing concerns regarding the economic viability of Venezuela's oil since a lot of has to be extracted by unconventional means (Venezuela's output is only about a quarter of Saudi Arabia's). The recent war in Libya has put a hault to oil production there but production is slowly coming back online with 1M bbls/d likely within six months and full recovery in 15 months (in 2009 Libya produced 2% of the world's crude and 0.5% of its natural gas). (OPEC oil output will fall as Libya recovers -SecGen) Saudi Arabia produced 9.606M bpd in June and 9.76M bbls/d in August (down from 10.5M in 2010) while Kuwait was at 2.6 mbpd in July (up from 2.45 mbpd in 2010). About $16-20 of oil prices (ranged from 80-95/bbl last couple months) is attributable to risk uncertainty in certain countries (Libya, Nigeria, Iran). The world is becoming less reliant on OPEC for oil (opec production down to around 30M bbls/d in 2011 from 33.3M bbls/d in 2009) however if as the US Energy Agency expects, non opec countries fail to meet consumption increases 5-10 years from now, production from opec could rise as more pressure is put on it to meet the extra demand. OPEC exports of natural gas were up 27.6% in 2010 (21% share globally) with some of the biggest increases coming from Qatar (gas production up over 70% since 2006 (109.335 vs 64.2 bil m3). Qatar was also the main source of Exxon Mobil's 10% increase in 2011 first half oil equivalent production. Graph: 2011 and 2012 uses data updated (Sept/Oct '11) from the US Energy Agency not IEA whose data is shown in the third table).

Graph shows production only for selected companies, other major companies such as Reliance Industries, Lukoil, Sinopec are not included).
In June 2011 Paris based IEA (agency) pegged 2016 consumption at 95.3 million bbls/d with 41% of the increase after 2010 (3 out of 7.3 million bpd) tied to China. That puts annual growth in demand between 2011 and 2016 @ 1.3% or 1.2M bbls/d (up from 0.5 mbpd previously forecasted by the agency). Oil production capacity will rise to over 100 mbpd from 93.8 mbpd in 2010. With demand that high, opec's plan to lower crude output to under 30M barrels seems unrealistic (opec thinks that lowering supply is the only way to keep oil prices at prices above $80-85/bbl, a price it's comfortable with). A lot of the world's new production will also come from Iraq (4.1m bbls/d up from 1.5 in 2010). Canadian supply will rise to 4.7 mbpd by 2016 while US supply grows to 8.3 million bbls/d with US onshore shale formations driving the growth (shale from North Dakota and Texas could eventually produce at a rate of 2.5 mbpd). (McClatchy Newspapers, August 5, 2011) Angola and the UAE's are the main sources of OPEC crude production growth (2012-2016) while transportation will be the source of 80% of the growth in demand in 2016. Supply growth in non-opec countries is being led by Brazil (in 2011 non-opec production was up 760,000 bpd). In September JP Morgan estimated that oil supply will rise to 91.2 mbpd by 2013, a bullish position to take considering opec doesn't plan on contributing anything to growth in crude output (2009 is the year its plan to lower crude output to 29.4 mbpd took effect). Biofuels aren't expected to grow significantly until the 3Q of 2012 when they are forecast to rise to 2.4M bbls/d (up 20% quarter to quarter).

2010 was a big year for opec ngl (gas liquids) production; Averaged over the entire year, output surpassed 5m bbls/d for the time ever (avg given as 5.5m by the IEA) up from 4.7m the year before, though during the year rates changed a lot (5.2m bbls/d early in the year down to 5.08m by May before rising later on). A lot of that increase came from Saudi Arabia (1.7M bpd, up 8%) where a number of projects started in 2009, finally came online. (Kingdom's growth expected to reach 6.5% this year) Algeria produces about 800,000 bpd of NGL's out of 2.125M bbls/d, the highest proportion of NGL output by any of opec's members. Algeria is also a top 6 producer of natural gas. World refinery capacity: 88.6773 million barrels per calendar day (b/cd) 9.9% of which came from opec (9.5% in 2006). What's striking is that the key sources of new production Venezuela (down 5.5% since 2006) and Canada (down 6.8% since 2006) aren't focused on refining their own oil (in Canada for example, oil is being redirected to other places such as the U.S. through new pipelines the largest of which will be the $7B Keystone Pipeline ($13B system) if approved (opposition from environmental groups despite approval from Greenpeace Founder, American refining capacity up to 17.869Mbblpd in 2010). Between 2011 and 2015 Keystone could create as many as 250,000 jobs associated with construction of the pipeline (20,000 long term in the US/$20B to US economy). (US Chamber of Commerce) China's refining capacity is 38% as much as the USA's even though it produces 50% as much oil. Saudi Arabia, the world's number two source of oil is also a big consumer, consuming 2.81 million barrels per day in 2011 75% higher than in 2001, in the 1990's its consumption grew by only 39%. In just 2010/2011 demand by Saudi's rose 5.4% per capita, 4X greater than the global average. Part of the reason it consumes so much has to do with its use of crude oil in generating electricity, rather than using refined oil it burns the oil directly making use of it inefficiently (2009 demand from there was 450,000 bpd or twice what it was just seven year earlier while in Riyadh demand is expected to exceed 580,000 bpd in 2011).

By Country

China - Oil output from China has risen steadily over the past decade (from 3.0M in 1995 up to 3.9M in 2009 and past 4M bbls/d in 2010; 7% growth in 2009) however Chinese oil demand has skyrocketed (3.3M bbls/d in 1995 (only 10% higher than domestic prod) to 4.1M in 1998, 5M in 2002, pushing past 8M by 2009). It took from 1998 to 2002 for China demand to rise by 1M bbls/d but only 1.5 yrs for the next 1M increase. Total demand by China is still less than American demand (18.7M bbls/d vs 8.4M bbls/d). Higher demand could force China to increase refining in the country by 14% (the Tianjin refinery in China is one of many being built; Tinjin is a $4.5B joint venture between Russia's Rosneft (China is a top 4 destination for Russian oil) and CNPC of China. Rosneft owns 49% of the 200,000 bpd refinery that will be 70% fed by oil from East Siberia. Between 2006 and 2010 Chinese imports of natural gas exploded by 1500% (1000 to 15,980M cubic meters).

Saudi Arabia - Production dropped significantly between 2008 (9-10M) and 2011 (8.9M in February-April but increased to 9.8M bbls/d by July; domestic demand : 2.4M bbls/d). (International Energy Agency - Oil Market Report 12 May 2011), (International Energy Agency - 2010 Edition) Crude oil exports by Saudi Arabia suffered in the late 1980's before recovering in the early 1990's (tripled in just a couple years). (opec.org) Between 2000 and 2010 consumption in Saudi Arabia has risen more than 75% (up to 3.1% of global demand) an increase that exceeds even changes in India's demand. Production averaged 8.8M bbls/d in the first half of 2011 (peaked at 9.1M in May) up from 8.3M bbls/d in the first half of 2010. Saudi Arabia ranks sixth in the world in terms of oil demand. The higher rates of production in the summer of 2011 were a direct response to Saudi Arabia's promise to replace Libyan production (Saudi Arabia increased its output by 1.1 mil bpd since the outbreak of war in Libya).

Alberta, Canada - According to Alberta's 2012 budgetary report, total oil production will reach 3M bpd by 2014, 2.4M of that is from non-conventional sources like bitumen (bitumen royalties totalled $5.7B in 2011 will be $9.9B in 2014).  2011-2012: non-conventional oil production was at 1.78 million barrels per day.  Conventional oil production will be 500,000 bpd in 2013.  Provincial royalty revenue:  Bitumen contributed $5.7B of the $6.5B total which includes conventinal, in 2012, 30% higher than the $4.4B earned the year before.  Total will be around $12.2B in 2014.


Russia - The world's largest supplier of oil. Russia's economy is heavily invested in oil (state oil company Rosneft produced more than 2M bbls/d while Gazprom is one of the world Oil Majors). On september 20, 2011 it was reported by the Voice of Russia that $20/bbl difference in the price of oil could mean the difference between GDP growth of 2% and a recession (predicated on oil prices decreasing to $60/bbl for an extended period of time). Consequently, a fall in oil demand would cause a 1.5% drop in gdp growth. Though unlike most developed countries, Russian household debt is low and so a recovery (from recession) would be relatively quick. (World Bank warns of possible global oil demand fall:Voice of Russia) In 2009 Russia surpassed Saudi Arabia in terms of production. Russia is also the world's second leading producer of natural gas, providing 19.3% of global supplies (gas reserves are the largest- proved reserves at 1680T ft3/26.7% of global reserves). In 2010 Russia's gas production rose 4.5% while domestic consumption fell 3.3% pushing net exports up 29% (6,539BCF ranking 86 among all countries). (U.S. Energy Information Administration: Russia Briefing) China was the 4th largest importer of Russian oil in 2009 (Germany was 1st), but China could be top 3 by 2011/2012 with exports to China rising from Russia increasing 20-30% annually (70% of crude used in China's newest refinery in Tiajin will come from East Siberia). Russian oil exports to the US were 21.% higher in 2009 (rank 9th, Canada is the main source of imported oil).

USA - In 2008 the United States depended on oil imports to supply 67% of what its refineries used but by 2010 that number dropped to 49%, the decline has more to do with a rise in exports of petroleum products (in 2010 the US became a net exporter of petro products for the first time since 1973). The last time the United States experienced such a drastic drop in foreign dependence to meet its oil needs was between 1977 and 1982 when foreign oil met only 28% of demand (production from Alaska also played a key role). Between 2006 and 2010 imported petro production fell by about 25% or 1 million bpd.

Libya - Crude: Production (at 100%) 2% of global supply, reserves: 3.3% of world total.
Natural Gas: production: 0.5% of global supply, reserves: 0.8% of world's total. (Afribiz.info: Libya: MIneral Industry Overview)
references: output for 2011 and beyond reflects revised data released by the US Energy Agency (not accounted for in IEA's September report shown in the table.

For more information about petroleum specifically the oil sands coming out of Canada visit Alberta Oil - North American Interests

Information from Saudi Arabia http://bit.ly/pzYH1A
International Energy Agency data from 1995 to 2009 http://bit.ly/kohS0N
2016 forecasts full report http://bit.ly/nw4PEk