Gold analysts ignore 40% of the market

Updated 15 December 2012
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Gold analysts ignore 40% of the market

LAUNCESTON, Australia: Take seven recent research reports on the outlook for gold from top-ranked investment banks and consultants and you’ll find one thing in common: Virtually no mention of China and India.
This is astonishing when you consider that those two nations account for 40 percent of the physical gold market.
Any oil analyst who ignored demand in the four biggest importers, namely the US, China, Japan and India, when writing about the crude outlook would struggle to be taken seriously.
Yet that’s exactly what gold analysts are doing when assessing the market and trying to determine the direction of prices.
Of the seven reports read for this column, which included among others articles from Goldman Sachs, Morgan Stanley, Deutsche Bank, Barclays and ANZ Banking Group, five didn’t contain the words China and India, one mentioned China but not India and only one talked a little about both nations.
Not one thought that demand in either, or both, of these nations was a key driver of the gold price, rather when mentioned it was as a supporting factor.
Instead all focused heavily on the quantitative easing in the United States, and the prospect for more in 2013.
The potential impact of solving, or not, the so-called US “fiscal cliff” of tax increases and spending cuts was also a major theme, as was the ongoing sovereign debt crisis in Europe.
Yet there is fairly solid evidence that in 2012 the price of gold has been influenced significantly by the physical market, and this largely means India and China.
Gold started the year around $ 1,565 an ounce, climbed to $ 1,785 by February, meandered lower to around $1,530 by the middle of the year, before climbing again to around $ 1,790 by October and then easing to current levels around $ 1,700.
In other words, the price has largely been range-bound, getting a lift from of the US Federal Reserve’s announcement of a third round of quantitative easing, but this wasn’t sustained.
Looser US monetary policy hasn’t been the only positive for gold this year, central bank buying has continued, albeit at a slower pace than in 2011, and holdings in exchange-traded funds have increased 10 percent since the beginning of the year.
ETF holdings are at the equivalent of 2,156 tons, after a strong net inflow of 136 tons in the third quarter.
But these positive factors, which also tend to be the major focus of investment bank analysts, have had to swim against the tide of weaker demand from India and China.
India, which is still clinging to its top spot in gold demand, has witnessed a recent pick up in buying after a weak first half of the year.
But demand in the South Asian nation was still down 28 percent in the year ended September, which equates to a massive 305.9 tons, according to calculations using World Gold Council data.
Chinese demand has also disappointed, falling to 176.8 tons in the third quarter, a drop of 8 percent from the same quarter a year ago and a bare 1 percent rise in year-on-year terms.
On balance, it appears the gold price has vacillated between its competing positive and negative influences.
This range-bound outcome has confused some of the analysts, with one report saying gold’s lackluster year came despite it having the “perfect set-up” for gains.
Needless to say this was one of the reports that didn’t mention China or India, or indeed physical demand.
It seems that monetary loosening in the United States, central bank buying and investor interest in ETFs isn’t enough to spur a new gold rally.
Fresh buying interest from China and India would certainly help, and ironically, lower prices may just be the impetus needed.
Indian gold demand appears sensitive to prices, having slumped when the rupee price reached a record and having recovered recently as the gold softened and the rupee stabilized.
Chinese investors appear to prefer buying gold into a rising trend, or when they are worried about domestic inflation.
Neither is occurring presently, but if gold can cobble together a few months of gains and stronger economic growth raises Chinese inflation concerns, this could be a renewed area of support for the precious metal.
And of our seven gold reports, where do they see prices moving?
Six of the seven see prices higher, albeit most are for modest gains over the next year, with targets clustered around $1,800 an ounce.
There is one notable ultra-bull, but this forecaster has been consistently wrong for an extended period, and their expectation of gold at $2,000 an ounce will require the US and European monetary debasement disaster they predict.
One of the seven forecasts gold to decline modestly over 2013, but not collapse. This bank was the only one to mention both China and India as a factor in the price.
— Clyde Russell is a Reuters market analyst.
The views expressed are his own.


Exxon faces setback in Iraq as oil and water mix

Updated 20 April 2018
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Exxon faces setback in Iraq as oil and water mix

  • Exxon’s talks with Iraq on water project hit problems
  • Losing the contract could deal a blow to Exxon’s broader Iraqi plans

LONDON: Talks between Exxon Mobil and Iraq on a multibillion-dollar infrastructure contract have reached an impasse, Iraqi officials and two industry sources said, in a potential setback to the oil major’s ambitions to expand in the country.

More than two years of negotiations on awarding the US firm a project to build a water treatment facility and related pipelines needed to boost Iraq’s oil production capacity have hit difficulties because the two sides differ on contract terms and costs, the officials and sources told Reuters.

Unless the differences can be resolved, the project could be awarded to another company in a tender, the officials said, without elaborating on the points of dispute.

Losing the contract could deal a blow to Exxon’s broader Iraqi plans, as it would be handed rights to develop at least two southern oilfields — Nahr Bin Umar and Artawi — as part of the deal.

Exxon declined to comment.

Further delays to the project could also hold back the oil industry in Iraq, OPEC’s second-largest producer; the country needs to inject water into its wells or risk losing pressure and face severe decline rates, especially at its mature oilfields. As freshwater is a scarce resource in Iraq, using treated seawater is one of the best alternatives.

The Common Seawater Supply Project (CSSP), which would supply water to more than six southern oilfields, including Exxon’s existing West Qurna 1 field and BP’s Rumaila, was initially planned to be completed in 2013 but has now been delayed until 2022.

“The CSSP would be expensive and challenging but there’s opportunity here (for Exxon) ... to get access to resources on a very large scale and to achieve something and really make a difference to its own business,” said Ian Thom, principal analyst at consultancy Wood Mackenzie.

Many of the world’s biggest oil companies, such as BP, Total, Royal Dutch Shell and Eni, have operations in Iraq, where a low-return environment and strict contract terms have squeezed returns in recent years.

With total oil production at West Qurna 1 at around 430,000 bpd, Exxon’s presence in Iraq is small compared with dominant player BP whose Rumaila oilfield accounts for around a third of the country’s total production of about 4.4 million bpd.

While the Texas-based firm is looking to grow in Iraq, its geographical focus remains on the Americas, including US shale fields and Brazil, in contrast to rivals such as France’s Total and Italy’s Eni who have been significantly expanding their activities in the Middle East in recent years.

The talks between Iraqi authorities and Exxon are still ongoing, according to the industry sources and officials from the Iraqi oil ministry.

However the state-run Basra Oil Company (BOC), which is overseeing the project, said it could now tender the project this month in a parallel process with the aim of completing a first phase by 2022.

“We have this one approach but we can have another approach as well,” Abdul Mahdi Al-Ameedi, head of the Iraqi oil ministry’s licensing and contracts office, told Reuters.

Iraq chose Exxon to coordinate the initial studies of the CSSP in 2010. At the time, Baghdad aimed to raise its oil production capacity to 12 million barrels per day (bpd) by 2018, rivalling Saudi Arabia. That target has been missed and been cut to 6.5 million bpd by 2022 from around 5 million bpd now.

Negotiations with Exxon fell through in 2012 due to red tape and cost disputes. In 2015, the company re-entered talks with the oil ministry, this time in partnership with China’s CNPC and with the CSSP folded into a much bigger development project known as the Integrated South Project. 

CNPC did not reply to a request for comment.

For Iraq, going down the non-Exxon route raises two major concerns: How to integrate the project between the water treatment facility and the oilfields and how to finance the project, Thom said.

Two Iraqi oil sources told Reuters that taking the non-Exxon path would raise financing concerns for Iraq.

Projected costs of the scheme have not been disclosed, but engineering studies have put the cost of treating 12.5 million bpd of seawater transported to six oilfields at $12 billion.

The capacity has been revised downwards, with the first phase set to have a 5 million bpd of water, and in the second phase an additional 2.5 million bpd of water will be added for additional fields.