Home' Trinidad and Tobago Guardian : June 20th 2013 Contents JUNE 2013 • WEEK THREE www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG23
While gold prices are expected to decline
over the near term as perceptions of the US
improve, the medium term is less certain.
The Federal Reserve has indicated that it
intends to "taper" its activities which have
increased liquidity in markets, but not to
reverse it. As a result, liquidity may remain
in the financial system, potentially fueling
increases in inflation. If inflation does rear
its head, there could be a rush to gold.
In addition, any perceived weakness in
economic data and financial markets could
lead to increased investor appetite for the
The Organisation of the Petroleum Export-
ing Countries (OPEC) recently downgraded
its global oil demand growth forecast, indi-
cating that any slowdown in economic recov-
ery could upset the expected balance in the
oil market for the second half of 2013. With
heightened risks as we enter the Atlantic
hurricane season, uncertainties on the
demand and supply side can affect the mar-
The National Oceanic and Atmospheric
Administration (NOAA) Atlantic Hurricanes
Season Outlook predicts that the Atlantic
will experience above-normal activity during
2013 hurricane season.
The US Energy Information Administration
(EIA) simulation results indicated a 58 per
cent probability of outages and disruptions
in Atlantic offshore operations, due to the
above-normal season projected.
The increased probability of disruptions
in production and reduced supply could
result in market disequilibrium and place
upward pressure on prices.
Historically, crude oil prices and treasury
spreads are positively correlated, with invest-
ments in oil often viewed as a hedge against
inflation (similar to gold).
With the impact of the Federal Reserve reducing
its quantitative easing strategies, expected future
increases in interest rates may create positive momen-
tum for oil prices.
The recent energy sector performance thus far is
an instructive example of the effects of supply and
demand on commodity prices with North American
crude oil and natural gas production both increasing
during early 2013.
Year-to-date, Crude Oil WTI increased 2.95 per
cent compared to a decline of 10.82 per cent for 2012
(Exhibit 2). Volatility remains low thus far for 2013
when compared to historical data and supports the
recent price stability. Production levels have been
supported by rising OPEC spare production capacity
from 1.95 million barrels per day in June 2012 to 2.4
million barrels per day.
Year-to-date, Henry Hub Natural Gas spot price
performance increased 16.29 per cent. Declining pro-
duction and supply coinciding with increased demand
in 2013 is likely the main driver in the Henry Hub
In particular, most of the first half of the year was
marked by extended, colder-than-normal weather in
temperate climates. Supplies of natural gas inventories
ended April 2013 at around 1.8 trillion cubic feet (Tcf),
about 0.8 Tcf below the level at the same time in
2012 and about 0.13 Tcf below the five year average.
Production of natural gas in the Gulf of Mexico is
also expected to have disruptions during the 2013
hurricane season and forecasted colder temperatures
towards the end of 2013 and early 2014 are expected
to increase natural gas demand.
In the medium-to-longer term, commercial pro-
duction of Shale gas will play an important role in
the direction of natural gas prices.
Wheat and corn have declined year-to-date by
11.87 per cent and 5.9 per cent, respectively. In com-
parison, wheat increased by 6.5 per cent and corn by
six per cent in 2012 (Exhibit 3) better-than-expected
planting conditions have resulted in recent downward
moves in corn futures. Notwithstanding this, global
demand for agricultural commodities will help push
agri-commodity prices higher.
Wheat prices came under pressure from a decline
in demand for US white wheat, following the discovery
of an undesired genetically modified strain occurring
in the Midwest. The US top wheat consumer, Japan,
declined to bid for US wheat futures. South Korea
formally suspended US wheat purchases, while the
EU indicated that further testing will be done before
orders are placed.
Tightening stores of soy and additional strength
from a major sale of US soy beans to China helped
to increase soy demand and prices. The task now lies
ahead for commercial farmers to employ strategies
to mitigate and correct the effects of the genetically
modified wheat strain on the demand.
Taking a position in commodities
Exchange Traded Funds (ETFs) are the most con-
venient and cost effective way for investors to gain
direct exposure to commodities and add value to their
portfolios. ETFs track the performance of commodities
by attempting to mirror the performance of a specific
index or commodity. They are traded like stocks and
are thus subject to price volatility. Investors can choose
specific directional ETFs, depending on their outlook
for the respective commodity.
While commodity ETFs can provide investors with
added diversification and enhance their portfolio
returns, investors should only purchase ETFs after
thorough research and consultation with a qualified
Local investors can gain exposure to commodities
and can acquire ETFs from several licensed investment
firms within the local financial sector including Bourse.
Possible short-term decline in gold
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