I had the opportunity to speak with Andrew Geoghan and discuss the outlook with respect to various commodities. Please click on the link below to access and watch the interview:
https://ausbiz.com.au/media/gas-heats-up-on-wa-industrial-action?videoId=30937§ionId=1885
Market Overview
Resource markets have taken some confidence from recent dovish commentary around interest rates, combined with some encouraging indications on the inflation front. Nevertheless, China growth woes are an impediment to confidence in the sector, with government stimulus measures having only a modest impact on growth. Whilst BHP and RIO tend to hog the headlines, the overwhelming number of Australian resource companies are explorers and micro-caps, in fact there are more than 800 listed on the ASX.
The junior end of the market in Australia is consolidating close to where it began the calendar year. The junior end of the resource market has trended sideways to modestly positive over the past 12 – 18 months, largely due to risk-off market sentiment. This has impacted the overall level of fund raising that is available to junior companies, both in the form of exploration and project development funding. Financing has not been available in the same quantum as prior years – and is generally being done at lower share price levels. The performance of the junior sector over the past 2 – 3 years in many ways reflects the performance of the lithium price.
Figure 1: Graphic showing the performance of the ASX Small Resources Index.
Crude Oil
Fundamentally, oil is looking strong, with prices recording their sixth straight weekly gain, the longest streak in more than a year. WTI is trading above $84 a barrel, with US stockpiles falling by the biggest weekly margin on record, and OPEC+ heavyweights Saudi Arabia and Russia further extending supply curbs. There are also fears of oil supply cuts through the Black Ses due to an escalation of the Ukraine War. On the demand side, global oil consumption hit a record during July, outpacing supplies and putting the market in a deficit, with potential for a rally to $100 a barrel by year’s-end. In the US, extreme high temperatures in West Texas have resulted in vapor buildup that may slow pipeline deliveries to the ports
Figure 2: Graphic showing WTI crude oil price performance.
Gas
European natural gas has jumped by the most since March of last year amid the possibility of worker strikes in Australia, highlighting market jitters over potential supply disruptions. Traders are concerned about a long-lasting strike, with predictions that it could cause European gas and Asian LNG contracts for January to double. Workers at Chevron and Woodside Energy facilities in Australia have voted to strike, which has the potential to disrupt LNG exports. Asian buyers are likely to bid up LNG imports to replace Australian volumes if there are disruptions, which would affect Europe as well. It’s also possible that this week’s price surge caused a wave of position-covering by investors who previously bet on further declines in gas.
Gold
Gold is up ~15% in price terms over the past 12 months, but it has had trouble staying above the US$2000/oz level. This is largely due to the impact that prices at this level have on real-world demand for the metal, particularly jewelry markets in China and India, where businesses and customers are very price-sensitive. What we need to drive gold prices higher and to see them consolidate at higher levels, is for institutional investors to come back into the market in a major way.
One of the biggest contributors to gold price strength over the past 25 years (which has seen gold prices climb from below $300/oz in 1998 to ~$2000/oz currently) has been the reversal in attitudes of central banks. From significant sellers prior to 2000, central banks have become net buyers and in fact are purchasing gold in record volumes. The latest data from the World Gold Council shows record central bank first-half gold purchases during 2023. The reversal in central banks’ attitude to gold coincides with escalating world debt levels and corresponding currency devaluation.
Figure 3: Graphic showing central bank gold purchases by year, with H1 2023 representing a first-half record.
Uranium
Spot uranium prices are up by ~16% so far in 2023, and over the past five years has generated a ~146% gain, outperforming many other asset classes. In terms of market factors at play, one of the biggest was on May 31, which saw the U.S. Senate pass a major Act that accelerates a move towards nuclear energy, as well as on May 24 where it passed an Act outlining a path away from Russian nuclear fuel imports. At the same time, looming sanctions on Russian uranium are likely to have serious consequences for utilities regarding the security of supplies. Thus, in the U.S. conversion and enrichment providers have just announced active steps to increase capacity, which will assist in moving away from the current reliance on Russia.
Russia’s invasion of Ukraine sparked a global energy crisis that forced many countries to rethink their energy supply chains, and there has been an unprecedented number of announcements for nuclear power plant restarts, life extensions and new builds, which will likely create greater demand for uranium. However, the current uranium price continues to remain below incentive levels to restart tier 2 production, let alone greenfield development.
Figure 4: Graphic comparing uranium’s performance against other assets.