Eugene Weinberg Commerzbank

GMT – Greed, Might and Taxi drivers
What comes after the strong price decreases for commodities?

Eugen Weinberg ZCM Research Cyprus / March 18, 2009

“I can calculate the motion of heavenly bodies, but
not the madness of peoplequot;
Sir Isaac Newton

„A politician needs the ability to foretell what is going
to happen tomorrow, next week, next month, and
next year. And to have the ability afterwards to
explain why it didn't happen.“
Sir Winston Churchill

1
Eugen Weinberg ZCM Research Cuprus / March 18, 2009

Agenda
Greed (of the financial investors)
Crude oil – economic vs. investment subject
•
1.
Strong speculative interest and influence of investors
•
Manipulation and speculation on commodity markets – common issue
•

Might (of the commodity producers)
• Are raw materials really scarce?
2.
• Uneven distribution of the commodity reserves
• Revenge of the “Old Economy”

Taxi drivers (in Shanghai)
• Decoupling of the Emerging Markets?
3.
• China and India should follow the path of the Asian Tiger States
• Enormous dynamics and importance of the Asian Ems for commodities
Conclusions
4. • Expectations
• Forecast error

2

Commodity markets – quo vadis?

• The future is uncertain und is dependent on present decisions
• Mosaic theory: the more information one has to analyze the better is the forecast

1979
1999

2008 1986

3

Oil price – just a speculative bubble after all?
• the impact of financial investors significantly higher than before
• most of the negative developments already priced in

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
180 180
180 180
Nasdaq (1989-2002) - indexed
160 160
160 160

140 140
WTI crude oil price, USD/barrel (1998-?)
WTI crude oil price, USD/barrel (1998-?)
140 140
120 120
120 120
100 100
100 100
80 80
80 80
60 60
60 60
40 40
40 40
20 20
20 20
0 0
0 0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: Bloomberg, Commerzbank Corporates & Markets
4

Investors – the most important pricing factor?
Favourable fundamental environment and 9000
Amount outstanding of OTC commodity derivatives
price performance sparked investor demand 8000
(in billions of US dollars)
(“Commodity Beta”) 7000

6000

De-correlation enhances return of an Equity 5000
Portfolio (“Equity Alpha”) 4000

3000
Investors’ demand growing dramatically 2000

1000
• Direct investments grew from US$5 billion in 2000
0
to US$300 billion this year, market value of oil 98 99 00 01 02 03 04 05 06 07
companies & mining stocks around US$5 trillion
3500 150
Total open interest WTI ('000 contracts, NYM EX), ls
Investors shape long-term …
3000 WTI price (USD/barrel, NYMEX), rS 125
• Growing long-only interest result in generally 2500
higher prices 100
2000
75
…as well as short-term trends 1500
50
• Non-professional speculative interest shape 1000

short-term development 25
500

0 0
• Daily WTI trading volume on NYMEX 500 bbl eq. 2000 2001 2002 2003 2004 2005 2006 2007 2008
million, daily WTI production 300.000 bbl
Sources: BIS, NYMEX, CFTC, Commerzbank Corporates & Markets
5

Speculation is dead… Long live investment!
180 150
US Oil Fund
160

• Oil-ETF: the easiest way to “invest” 130
140

in oil 120 110

• 4 billions USD invested 100
90
80
• Controls 20% of the total 1-month-
contracts on WTI 60 70

40

• Controls 15% of the trading volume 50
20

• Contango constellation is supported 0 30

by the regular rolls of the USO
Jul. 06 Jan. 07 Jul. 07 Jan. 08 Jul. 08 Jan. 09

25%

• Regularly rolls lead to negative
performance: 20%

- Emission: 1 USO share = 1 WTI-Future 15%

- Now: 1 USO = $27, WTI-Future = 45$
10%

5%

0%
Aug. 06 Feb. 07 Aug. 07 Feb. 08 Aug. 08 Feb. 09

6

WTI is not an appropriate benchmark

Relation between production and
trading volumes biased
• Production volumes decreasing:
- 1986: 1,3 mm barrels daily
- 2008: 0,3 mm barrels daily
• Trading volumes increasing:
- 1986: 10’000 contracts daily
- 2008: 500’000 contracts daily
• Relations biased verzerrt
- WTI production:trading - 1:2000
- World production:trading - 1:6

Specific infrastructure problems of
-
WTI crudes
• Low inventory capacities
• “Land-locked” oil sorts
• Pipelines difficult to divert or “switch”
• New production from Canada

7

Investors – markets strongly influenced by speculative interest
Speculation and manipulation are not phantoms 60 60000
Inventory statistics
used for price
• This year the volume of commodity hedge-funds 50 50000
manipulation?
increased to supposedly US$ 100 billions 40
40000
• Amaranth charged by CFTC of attempted 30
manipulation, Optiver Holdings charged by 30000
CFTC of manipulating oil & gas markets 20
20000
• Large hedge-funds collapses recently: 10
Amaranth, Red Kite, SemGroup, Ospraie Fund
0 10000
Dez. 04 Dez. 05 Dez. 06 Dez. 07
Unregulated markets susceptible for speculation LM E inventories, l Nickel (US$/tonne), r
• Little information on positioning of different
market participants available – FSA vs. SEC
Enorm volatility and
$30 intraday move -
• Statistics sometimes easy to manipulate
economic good vs.
• Low liquidity – derivatives markets often Investment
determine pricing in physical markets

Events not always fundamentally explainable
• Even ex-post not explainable
• Hedge-funds and big investors influence short-
as well medium-term developments
Sources: LME, Bloomberg
8

Contango – what does the forward curve tell us?
Inventories 100

90
• Inventories are well filled
80
• Liquidity preference decreases attractiveness
of inventory holding 70

60
Expectations
WTI futures curve (currently - Jan. 16, 2009)
50
• The market expects higher prices going
40 WTI futures curve (1 year ago - Jan. 16, 2008)
forward
30
• Positioning of the “peak-oil” supporters at the
6M 1Y 18M 2Y 30M 3Y 42M 4Y 54M 5Y 66M
back end of the curve
20 170
Contango 24M -1M (USD/barrel), left
Credit crunch
15 150
WTI crude oil price (NYM EX, USD/barrel), right
• Arbitrage along the curve impossible
10 130

• Low credit availability results in short-end 5 110
selling
0 90

Increased pressure on the front end -5 70

Investment demand, speculative interest -10 50
decreasing
-15 30
• Margin calls and forced liquidations
-20 10
• Increased short-selling activities
1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
9
Eugen Weinberg ZCM Research Cuprus / March 18, 2009 Source: ICE, NYMEX, Commerzbank Corporates & Markets

Agenda
• Crude oil – economic vs. investment subject
1.
• Strong speculative interest and influence of investors
• Manipulation und speculation on commodity markets – common issue

Are raw materials really scarce?
•
2.
Uneven distribution of the commodity reserves
•
Revenge of the “Old Economy”
•

3.
Conclusions
4. • Expectations
• Forecast error

10

Available reserves still sufficient …
[…on a theoretical basis energy supplies are not endangered for quite a while]

Statistical reach of oil reserves: Proved reserves to consumption ratio (years of supply )

50

45

40

35

30

25

20

15

10

5

0
1980 1985 1990 1995 2000 2005

Source: BP Statistical Review
11

… but the allocation of reserves is quite uneven
[most oil reserves located in different regions to where they are needed
Crude oil Natural gas

OECD countries are the world‘s
Consumption Production Reserves Consumption Production Reserves

biggest consumers, however
OPEC 41% 75% 17% 44%
8% 11%

they don‘t have any significant
OECD 25% 7% 41% 8%
60% 52%
M. East
reserves
31% 62% 10% 41%
7% 9%
FSU 14% 10% 28% 33%
5% 22%

Resources often found in China 4% 1% 2% 1%
8% 2%

countries with high political risks USA 25% 9% 3% 24% 20% 3%
Total 81 mm 1189 2,7 bn cm 179,5
81 mm 2.7 bn cm
License agreements
(oil companies)
State owned companies
21%
International companies have
35%

limited access to reserves
participation
High cost of oil production due to
(oil companies)

high political risks
12%

Limited access
Irak 10%
22%

Source: International Energy Agency
12

OPEC should react strongly to the falling oil prices

[OPEC is risking longer-term budget deficits if not obeying to the production quotas]

At what oil price the balance of external accounts is still in balance?
2000 2007 2008 2009
120
$/barrel
97
91 94
100

80 68 71
63
62
55 58
55
60 51
Current OPEC crude oil
49 49
45 45 48
basket
42
35 34 34
32
40 31
26 23
22
18
20 11
5
0
Algeria UAE Kuw ait Saudi Arabia Iran Nigeria Venezuela

Source: PFC Energy, Commerzbank Corporates & Markets
13

Non-OPEC production will disappoint … again
[Production decreases in the non-OPEC countries not voluntarily ]
Mature oil fields
Mexico: Cantarell (1976)
Kazakhstan: Tengiz (1979)
4500 4500
Ölproduktion Norw egen (Tsd. Barrel/Tag)
Russia: Samotlor (1965),
4000 4000
Romashkino (1948) Ölproduktion M exiko (Tsd. Barrel/Tag)
3500 3500
USA: Prudhoe Bay (1969)
3000 3000
Norway: Forties (1970), Brent (1971)
2500 2500

Lack of financing, expensive 2000 2000
production 1500 1500
Kazakhstan : Kashagan (exp. 2005, 1000 1000
currently planned ffor 2014)
500 500
Brazil Sugar Loaf, Tupi
0 0
Canada: oil sands 1981 1985 1989 1993 1997 2001 2005 2009e

Unavailable technologies /
Know How

14

Non-OPEC production will disappoint … again (II)
[Production decreases in the non-OPEC countries not voluntarily ]

Russia
Mature oil fields (1960s-1980s) 45 Ölproduktion Russlands (M io. Tonnen pro M onat)

Lack of technologies 40

Lack of commitment/financing 35
High duties and taxes
30
Low domestic oil prices (RUB
5000 per ton = $19 per barrel) 25

20
94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09
19

19

19

19

19

19

20

20

20

20

20

20

20

20

20

20
Canada
Extremely high capital
expenditures
– USD 13,7 billions for 100.000 bbl daily expansion =
$40/bbl (Chevron/RD Shell)

Environmental hazard
15
High royalties
High natural gas usage

Bio-fuels are not the answer yet
[… bio-fuels may currently only substitute an insignificant part of crude oil production]

Economic aspects are questionable 100 Proportion of flexi-fuelers for new registrations (Brazil)

• Only attractive taxation makes bio-fuels 80

competitive 60

Ecologic aspects are questionable 40

20
• Lacking energy efficiency: more input energy
than output (exceptions sugar, corn) 0
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
• Poorly CO2-balance: Rain forests swept for
palm oil plantages
4500 800
Palm oil price, left
Dramatic price increases for raw 4000 700

materials Corn price, right
3500 600

• Economic efficiency vulnerable due to high 3000 500
commodity costs 2500 400

2000 300
Dramatic effect on food prices
1500 200
• Bio-fuels responsible for 75% of food price
increases (World Bank) 1000 100
2003 2004 2005 2006 2007 2008

Source: ANFAVEA, CBoT, MDE
16

Agenda
1.

2.

Decoupling of the Emerging Markets?
•
3.
China and India should follow the path of the Asian Tiger States
•
Enormous dynamics and importance of the Asian Ems for commodities
•
Conclusions
4. • Expectations
• Forecast error

17

China and India
• catching up with neighbours on commodity demand
• should follow the path of other emerging Asian economies

9

8
Crude oil consumption (litres daily)

7

6

5
CHINA
4
INDIA
3
MALAYSIA
2 KOREA
TAIWAN
1
THAILAND
0
0 2 4 6 8 10 12 14 16 18
GDP per capita (' 000 USD, real in 1995 US$)

Sources: BP Statistical Review, IMF, Commerzbank Corporates & Markets
18

China and India – immense catch-up potential

5
Number of cars per 1000 inhabitants China: basic passenger car sales (in mm)
4.5
800
4
700
3.5
600

3
500

400 2.5

300 2

200
1.5
100
1
EU

USA
China

0.5
Japan
Brazil

Korea

Taiwan
India

Mexico
Indonesia

0
2001 2002 2003 2004 2005 2006 2007

Sources: OECD, ACEA, CAA, Commerzbank Corporates & Markets
19

New developments will change the Asian car landscape … again
[Indian market will be the strongest growing car market worldwide in the coming 20 years]

Ford Model T, 1908 Tata Nano, 2008

Source: WBMS
20

Agenda
1.

2.

3.
Conclusions
4. Expectations
•
Forecast error
•

21

Oil prices might emerge much stronger from the crisis
[… a pickup in demand might come unexpected and have strong medium-term effects]

Reaction yet subdued due to lead time
500 150
Credit crunch 450
125
400
• Expansion (M&A, organic growth) plans
350 100
are not realized due to financing problems 300
75
• Smaller producing companies go bust, 250

green field projects are not reviewed at all 200 50
150
25
100
Falling output 50 0

• Prices fall below marginal costs, mining 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

closures as consequence Active oil rigs USA (Baker Huges), left WTI price (USD/barrel), right
160
Financing availability is worsening
Nationalism 1500 140
1000
• Entry barriers and handicaps (duties, 120

royalties) higher than last time at these 500
100
prices 250
80
150
Low inventories 100
60

• Massive forced selling will lead to low 50
40
inventories for commodities for the demand Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08

uptick (aluminum, basic metals, agriculture) CDS Gazprom (Senior, 5Y tenor), left WTI price (USD/barrel), right

Sources: Baker Hughes, CMA
22

Great bull-run is over for now… Long live uptrend!

• Financial investments are susceptible to speculative excesses (to up- as well as downside)
• The current constellation and speculative excesses to the downside are not unique

S&P GSCI Commodity Index

23

… provided that Chinese demand is still in place

[expectations are always speculative - we have some pieces of the puzzle but not a crystal ball]

Macro risks
Shanghai A Shares – „to the moon and back“!
Worldwide slowdown and recession
China does not compensate for the
demand fall in OECD countries …Stabilization or a dead cat-bounce?
China und India cool down massively

False inputs
Invalid data
Wrong assumptions

Manipulation
Manipulations of data
Manipulations of prices

System riska
Financial system at risk
Structured products and MTNs at risk

Legislative risks
Restrictions for commodity investments

Forecasts
Wrong picture
Wrong timing

24

Agriculture commodities – Negative effect is relatively small
[Food demand is not significantly affected by the economic slowdown]

Theory of little joys illustrated
7.5 2200
2000
7.0
1800
6.5
1600
6.0
1400
5.5
1200
5.0
1000
4.5 800
4.0 600
3.5 400
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

US unemployment rate (% ), left Cocoa price (LIFFE, GBP per ton), right

Sources: LIFFE, BLS
25

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27

Eugen Weinberg Zentrale
Kaiserplatz
Senior Commodity Analyst/ZCM Research Frankfurt am Main
www.commerzbank.de
Tel. +49 (0)69 / 136 434 17
Fax +49 (0)69 / 136 427 60
Postfachanschrift
Mail eugen.weinberg@commerzbank.com
60261 Frankfurt am Main
Tel. +49 (0)69 / 136-20
Mail info@commerzbank.com

Eugen Weinberg ZCM Research Cyprus / March 18, 2009

Eugene Weinberg Commerzbank

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