GLOBAL INVESTING: What's next for crude oil, silver and copper equities?

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GLOBAL INVESTING: Whats next for crude oil, silver and copper equities?
You could be forking out more for silver in 2017.

Dubai - Era of $70, let alone $100, is over for good

By Matein Khalid

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Published: Sun 19 Mar 2017, 9:46 PM

I doubt if West Texas crude oil rebounds beyond $52 in the short term without clear evidence that Saudi Arabia and its GCC allies can persuade Russia, Iraq, Algeria and Iran to keep their output cut promises amid a global glut and resurgent US shale oil rig count growth.
If Saudi Arabia wants to avert another oil price crash that will make the Aramco IPO unviable, it must cut out output again as well as impose quota discipline on Russia and Iraq. The kingdom's statement that it backed the Vienna output deal was crucial to avert a bearish stampede in the oil futures pits. When the Opec meets next in May, Saudi Arabia will have to engineer fresh cuts while global inventories are drawn down. There is no other choice. Riyadh underestimated the speed and scale of the US shale oil output snapback. The era of $70, let alone $100, is over for good.
The oil and gas major with the lowest cost output and longest life reserves in the Permian Basin in Texas, the epicentre of US shale oil drilling, is Occidental Petroleum. Oxy, whose late legendary chairman Dr Armand Hammer dealt with every Soviet leader from Lenin to Gorbachev, who wildcatted the great North Sea and Libya gushers in the 1970s, offers a 4.8 per cent dividend yield and five to six per cent output growth. If Harold Hamm is right and US shale oil drillers go for "measured growth" in order not to "kill the market", Oxy is a buy at 62 for at least a 10 per cent rise in its net present value. Exxon Mobil, as I had expected when it traded in the mid-1990s, has now sunk to 80. No interest, though Chevron is close to my 104 buy level and I remain committed to Total whenever France's sole Seven Sister hits ?42 for its fabulous free cash flow yield. My assumption is Saudi Arabia and Russia will defend the current oil order, not engage in a global game of chicken that destroys it.
Janet Yellen's (sort of) dovish stance at the March FOMC makes both gold and silver a tactical buy again, given that King Dollar is now a dangerously crowded trade. In such a market milieu, silver invariably outperforms gold as the Federal Reserve is willing to tolerate negative real interest rates since it believes a rise in inflation above two per cent is temporary. This is a formula for a lower US dollar and higher silver/gold prices. The gold-silver ratio, 32 in 2011, is now 72. This means Yellen has given us a green light to buy the "white metal". I am once again a passionate silver bull, haunted by the ghost of Nelson Bunker Hunt, beyond greed. Miner strikes in Peru, Chile and the Mexican peso swoon will limit supply while demand surges due to solar panel/auto/chemical catalyst/batteries applications. Global purchasing manager indices have begun to accelerate in the US, eurozone, India and China while Brazil and Russia emerge from recession, all bullish for silver's industrial demand curve.
The gold-silver ratio peaks at 84 I last saw were in February 2016 as China/crude oil were in meltdown mode and October 2008, when Lehman's failure ignited a global credit market seizure. This is the ultimate downside risk for silver's relative value trade. I believe spot silver can well rise to $22 by the end of 2017 as the silver bulls read the smoke signals from the Fed, South America's mines and the global industrial economy. The 2.5 per cent contango in the silver futures contract is simply irresistible?
Freeport McMoran is the one of the world's largest gold and copper producers but its New York-listed shares have been slammed from 17 to a recent 12.60 due to a contract dispute with the Indonesian government at its Grasberg mine and a miner strike at the Cerro Verde mine in Peru. Wall Street analysts have slashed earnings estimates for Freeport even as the shares tanked. Freeport halted copper concentrate exports from Grasberg, 50 per cent of earnings, in the past three months. A strike in Chile's Escondida, the world's largest copper mine, has amplified the deficit in the red metal. Dr Copper is up 30 per cent on hopes of Trump's infrastructure programme and China's fiscal/monetary stimulus. Dr Copper, with its PhD in macroeconomics, predicts stronger global growth. This will be hugely bullish for Freeport once it resolves its Indonesian dispute as it is the world's biggest pure-play copper miner.
The writer is a global equities strategist and fund manager.

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