Sectorial Analysis - ENERGY, MATERIALS & UTILITIES

Oil & Gas

Even if the price of crude oil grew positively during the first half of March as the US oil crude inventories were lower than expected, since then, it decreased steadily until the first week of April losing 11% of its value. As of the 5th of April 2016, the price for a barrel of WTI oil is worth 35.60USD (-6.7% of change in a week). Several factors drove these oil prices down like the investors’ expectations on the outcome of the meeting in Doha on the 17th of April during which many oil producers will gather to discuss a possible oil output freeze. Besides, the Fed’s rates and the surplus of oil supply in the US helped to decrease the price of oil.

An output freeze on the production of oil would imply a smaller supply and thus, a higher price for the crude oil. Despite the fact that many influent countries on the international oil supply will attend the meeting, investors do not expect the meeting to lead to something. Indeed, as economic sanctions on Iran were lifted, the country is willing to increase its energy production to catch up the sanctions’ losses. Therefore, Iran do not wish to attend the meeting as an output freeze will harm its economy once again. Following the previous announcement of Iran, another big oil player, Saudi Arabia, decided not to attend the meeting as long as Iran won’t to do it. As a consequence, this could jeopardize the output deal. In addition, the OPEP output was supposed to stabilize after the Doha deal reached in the middle of February but the production still increased. In March, oil producers in the south of Iraq extracted record amount of oil. Russia is also expecting to attend the meeting in Doha but doesn’t show any sign of commitment to an output freeze, scaring investors. Indeed, even if Russia is attending the meeting, its oil production rose by 0.3% in March. However, some participants of the Doha’s meeting in April are way more optimistic. The governor of Kuwait stated on the 5th of April he was well convinced that the meeting in Doha would lead to an efficient output freeze deal which would bring the supply and demand for oil to an equilibrium. According to the latter, the price of a barrel should reach 45 to 60$ in the second quarter of 2016 and then stays at these levels for a 2 years period at least.

Moreover, the last two weeks were an emotional rollercoaster for investors looking at the Fed interest rate’ announcements. In fact, the head of the Fed, Janet Yellen, issued two reassuring messages for investors, convincing them that the US reserve bank won’t raise its rates at least until June as the economic perspectives of the US were still unclear. This announcement drove the dollar down compared to other currency, making its oil exportations more attractive. The USD lost nearly 2% of its value since the 25th of March. However, other monetary policy members hinted that rates could rise soon as the US economy was steadily strengthening with in particular the declining unemployment. As a consequence, there was a rebound in the USDEUR pair, strengthening the dollar compared to the euro. Therefore, the gain of the oil price increase was erased.

Finally, another factor that drove the oil prices down was the higher than expected oil stockpiles in the US, the world’s major oil user, in the beginning of April. Once again, the amount of excess supply still reached an all-time high with the oil stockpiles in the US increasing by 2.3 millions of barrels in only one week (ending on March the 26th) and this increase is expected to be even bigger when it will be announced on the 6th of April.

The evolution of the Natural Gas (NatGas) did not followed the negative evolution of the oil one. Over the last 2 weeks (since the 28/03/2016), the NatGas price took almost 10% to reach 1.985 at midday on the 5th of April. Its price rose to an eight-weeks high amid speculation that an unseasonably cold winter could take place in the US. According to the weather-forecast agencies, the eastern US will be struck by below normal temperatures from the 9th of April to the 13rd, increasing the demand of NatGas for heating-related activities.

Renewable energies & materials

Since the middle of February the raw materials’ prices are on increasing slope driven by the oil price. But for the past two weeks, the raw materials’ prices collapsed, indeed the RJ CRB index decreased by 5.12% when the Brent oil decreased by 7.10%. The oil still plays a major role in the fluctuation of raw materials but some other factors played a more important role for the past two weeks. First, the emerging currencies rocket since the late January, the dollar lost 14% against the Brazilian real and 18% against the ruble. The economic situation in the emerging markets seems to be slightly better as international investors came back on those markets. Brazil and Russia are two major exporters of agricultural raw materials and so the appreciation against of their currency drove positively the amount of agricultural raw materials sold on the American markets. The coffee benefits from the fluctuation of Brazilian real pushing the producers to export more, the price went up by 32% since the beginning of the year. The sugar supply has to face some bad weather conditions in Brazil that drove the price down while Thailand announced that it will increase its exportations; the price reached a maximum point since 2014 on March 22nd showing that demand mostly driven by the emerging markets should start to recover after a decrease of 11% since the beginning of the year. The sugar might even face lack of supply because of the quick improvement of standards of living in emerging markets.

The metal raw materials went down also mostly because of the depreciation of the two currencies in which they are sold; the American dollar and the pound. The recent events in Brussels gave more credit to a possibility of a Brexit and pushed the pound down. As a consequence, most of the metals decreased for the past two weeks while aluminum remains stable. Aluminum resists better than the other because of an increase of seasonal demand in China combined with a drop by 6.5% of Chinese aluminum stocks last week after they lower their capacities last year. But recently one metal was in the limelight, it is steel with an increase of 16% on March 30th. Indeed, Tata Steel, one of the European leader in the production of steel announced that they want to sell their factory in Great Britain. If it’s not a big surprise, as this industry is in decline for 30 years now and that another major player on the European market Arcelor Mittal faced deep financial problems, this announcement raised concerns about the fact that Japan and China represent 2/3 of the world supply and that in several years they may have a monopole. So the Britain government is looking to nationalize the production of steel in order to save 15 000 employees and to not have a dependency to Chinese steel.

The Utilities industry was like two weeks ago driven by the difficulties of French nuclear companies; EDF and Areva. The financial difficulties of EDF, raised some concerns about the project of the EPR in Hinkley Point in the Britain parliament that finally it does not have a competitive price and may not be constructed if EDF goes in bankruptcy. Also, the Britain parliament is not pleased by the fact of being dependent to France for its energy supply especially on such dangerous energy as nuclear. The French government announced that it will recapitalize EDF if necessary to achieve this project. The main goal of the French government is to give a new breath to the French industry that is on a negative slope for many years now. In addition, an incident occurred in a nuclear central in France increasing doubts about the safety of nuclear. The attacks in Brussels also raised concerns about nuclear in Belgium which was not secured enough and might be hacked within the next five years by terrorists. These news might accelerate the decline in nuclear production throughout Europe especially in Germany which puts a lot of pressure on the French government to close the nuclear central in Fessenheim.

About the renewables energies industry, the United Nations announced that last year 286 billion of dollar were invested in this sector. It represents an increase by 5.9% in comparison with 2014 when only 130 billion dollars were spent for fossil energies. It shows that the countries are concerned by climate change and after signed the Paris agreement at the COP 21 they are ready to transform their promises in actions. Also, Total announced an ambitious plan for 2035, to become a key player in the renewable industry. With this diversification Total want to become an electricity producer as it already owned 20% of SunPower, an American company specialized in the construction of solar panels. They already started their plan as Total announced that they will installed in 2017 their first solar central in Japan.

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Analyse rendue le 5 Avril 2016 et réalisée par Marc DUCLOUX et Hadrien COCHET (Voir page L'EQUIPE).

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