Resource nationalism risk seen down as ‘shale boom’ changes perception of scarcity

Some interesting comments from Antoine Halff, from the International Energy Agency (IEA) on how the shale boom in the US has changed oil-producing nations perceptions of scarcity and their ability to negotiate (read impose) better terms for them with oil companies.

In an interview with Bloomberg he said “Back in 2008, we were at the peak of a cycle of resource nationalism among producing countries. Now we’re in a completely different situation, where some of the very same countries that had indulged in resource nationalism are back-pedaling, and making their investment terms more attractive to foreign companies,” Going on to say “Many countries feel threatened by the unconventional revolution in the U.S. There’s competition for investment, competition for technology.”

This view contrasts with those expressed by Dambisa Moyo (author of Winner take all: China’s race for resources and what it means for the world) who believes that the slowing growth in some emerging markets will be one of the main drivers of government action towards resource nationalism, fearing that “…we will continue to see much more talk and much more action around natural resources in the years to come.”

And despite the apparent correlation between resource disputes and crude prices depicted in the chart below Jaakko Kooroshy from Chatham House believes that “…conflicts with governments will not disappear because prices have fallen. Governments will continue to look to get a good deal, and where they feel they’re not getting that…they may act on this.”


What risk does Ebola represent to commodity markets?

With fatalities from the Ebola outbreak at least 932 now the US Centers for Disease Control and Prevention (CDC) on Wednesday issued its highest alert for an all-hands on deck response to the Ebola crisis in West Africa. This is the first time since 2009 that the Level 1 alert had been issued, at the time it was in response to the outbreak of H1N1 flu. After spreading through many West African countries today brought the news of the first person to die in Nigeria as well as a number of people infected (see reports).

The West African region is host to a number of key commodity exporters. Ivory Coast and Ghana being the two largest cocoa exporters and Nigeria a significant OPEC oil producer and exporter. Other exports from the region include a range of agricultural commodities (mango, pineapple, groundnuts, cotton etc.) and to a far lesser extent metals (copper, gold) and diamonds.

Most mining companies in the worst affected areas (Guinea, Sierra Leone and Liberia) report that mine, port and rail operations are unaffected so far, although various precautions have been taken, including frequent medical checks, the imposition of travel restrictions and the evacuation of non-essential staff. Mineral exports, including iron ore and diamonds, are increasingly likely to face disruption if mining companies place local workers on leave. Given the regions relatively small proportion of overall supply of metals and minerals even sustained disruption is unlikely to have a significant effect on prices.

An outbreak in Nigeria could have implications for its oil and gas sector. However, like the small scale oil operations in other countries in the region that are infected the energy industry in Nigeria is likely to be largely insulated from any outbreak. Foreign oil companies will evacuate non essential personnel but given the relatively low labour intensity of the industry and the large off-shore production off the coast of Nigeria, the impact on production and exports is likely to be minimal.

Perhaps the biggest concern from a commodity supply point of view is cocoa production and exports. Although only a small supplier (estimated at 10,000 tonnes) the Ebola outbreak is forcing farmers and their families to flee cocoa plantations in Sierra Leone. Already international buyers of cocoa have refused to visit the producing regions to buy seed. What if a similar outbreak occurred in the Ivory Coast, the largest cocoa producer in the world with an output of 1.6 million tonnes? Already cocoa prices have risen by 19% this year due to strong demand and poor weather adversely affecting supply.

Perhaps the biggest potential impact on commodity prices is for a demand side impact. So far the only impact has been the negative impact on the worst affected economies and the cancellation of a number of airline carriers’ routes to affected regions. The bigger worry is the affect that a wider outbreak could have on confidence, particularly in air travel and the knock on effect this could have on demand for oil.


Commodity prices, China and the US dollar

The recent appreciation in the US dollar has been a key factor behind the weakness in overall commodity prices over the past couple months. To recap looser monetary policy (one aspect of which could include lower interest rates but also printing money) reduces the cost of storing commodities and thereby increases the demand to hold them. Lower interest rates may also incentivise investor’s to put their money into riskier assets like commodities rather than bonds or equities. Finally, looser monetary policy could also mean that investor’s cash is channeled towards investments in emerging economies that will then indirectly result in an increase in demand for commodities. All of these factors work in reverse when considering a tightening in US monetary policy.

As the chart below shows while the US Dollar Index has strengthened to the highest level for almost one year the CRB Commodity Index is down 6% since late June, giving up almost all the gains made during 2014. With the US Fed due to end quantitative easing by October the next stage towards normalization of US monetary policy will be higher interest rates.


Back in December we highlighted research from ANZ bank which suggested that Chinese demand would be the key determinant of commodity price direction during 2014. The bank thought that the headwind from a stronger dollar was already priced in and that instead commodity buyers and investors should look at Chinese equity markets for clues as to the future direction of commodity prices. ANZ noting that while the relationship between US equity markets and commodity prices has broken down over the past few years, it has re-engaged between Chinese equity markets and commodities. As it turns out the Chinese equity market has been a poor indicator of overall commodity price direction. While weather related factors largely caused many commodity prices to rise at the beginning of the year, more recently commodity prices have declined just as the Chinese stock market has rebounded.

Related article: Chinese demand key to commodity prices in 2014


Looking back, although Chinese demand has a key factor in determining commodity prices the evidence over the past ten years suggests dollar weakness has been a much stronger factor determining commodity prices. In the chart below the red line plots the 10-year rolling correlation of annual returns on the CRB commodity index with China’s real GDP growth. The correlation between these two numbers has stayed close to 0.4 since the late 1990’s. Now take a look at the blue line, which shows a negative correlation between the CRB and the US Dollar Index. The correlation since 2010 has hovered around -0.8, implying that the dollar has much more explanatory power


In terms of an increase in the short-term federal funds rate the moment of reckoning could be as early as the middle of 2015 even though Fed Chairwomen Janet Yellen indicated in her most recent statement that she is quite prepared to continue to keep interest rates very low levels. Nevertheless the direction of travel is clearly towards a tightening in US monetary policy (Goldman Sachs forecasts interest rates will rise to 4% by 2018) and a stronger US dollar. Not all commodities will be affected equally however with precious metal prices in particular likely to remain subdued.