Commodities Soar as Confidence Returns

Transcription

1 MARCH 19, COMMODITY TRENDS Commodities Soar as Confidence Returns Commodity prices have recovered overall since the beginning of the year (graph 1). The signs pointing to a possible trade agreement between the United States and China eased uncertainty, as improved relations between these two major economic powers could mitigate China s economic difficulties and improve the economic outlook globally, especially in the short term. This would be of particular benefit to the industrial metals and energy sectors. However, there are still a lot of unknowns surrounding the faith of the tariffs introduced in. The slowdown in global trade at the end of the year and some disappointing economic data have given rise once again to concerns regarding the health of the global economy. Moreover, several political and economic institutions have revised their forecasts for economic growth downward in (graph 2). Nevertheless, the higher caution demonstrated by the central banks would help gold end the year higher than had been anticipated. Despite the economic climate in, which has deteriorated compared to last year s expectations, the economic growth of the major economies should be positive overall. Taking into account the drop in the price of industrial metals and energy at the end of, it appears that conditions are ripe for prices to rise in. However, downside risks will be closely monitored. #1 BEST OVERALL FORECASTER - CANADA GRAPH 1 Commodities are regaining some of the ground lost Bloomberg Commodity Index and its components Jan. = 125 Index Energy Industrial metals Precious metals Cereals GRAPH 2 Economic growth forecasts were revised downward Economic growth in Desjardins forecasts Annual variation in % 7 6 EFO published in November EFO published in February François Dupuis, Vice-President and Chief Economist Carine Bergevin-Chammah, Economist 2 1 Canada U.S. Euro zone U.K. Japan China World EFO: Economic & Financial Outlook CONTENTS Editorial... 1 Energy... 2 Base Metals... 4 Precious Metals... 6 Other Commodities... 7 Tables... 8 François Dupuis, Vice-President and Chief Economist Mathieu D Anjou, Deputy Chief Economist Carine Bergevin-Chammah, Economist Joëlle Noreau, Senior Economist Desjardins, Economic Studies: or , ext desjardins.economics@desjardins.com desjardins.com/economics NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright, Desjardins Group. All rights reserved.

2 Energy Oil Prices Continue to Climb FORECASTS Less uncertainty, especially concerning trade relations, and the crude oil output cuts agreed to by the Organization of Petroleum Exporting Countries (OPEC), have helped oil prices to rise. The situation in Venezuela, which seems to be far from over, and the exemptions to the Iranian sanctions, which may not be renewed, are also restricting OPEC s oil supply. Therefore, prices can be expected to continue to rise moderately in spite of the strong output from the United States. The average price of a WTI (West Texas Intermediate) barrel is expected to be roughly US$59 in and US$6 in 22. The major rise in the price of natural gas in the United States at the end of appears to have been short-lived, as it fell back to below US$3./MMBTU (Million British Thermal Units). We anticipate that it will continue to hover around this level. OIL Oil prices have posted significant gains since the beginning of the year. The price of a WTI barrel is currently sitting at roughly US$6 and a barrel of WCS (Western Canadian Select) was able to close the gap, reaching more than US$45 (graph 3). The production restrictions in Alberta helped Canadian inventories fall and underpinned the rise in WCS prices. A recent issue of Economic Viewpoint explained that the strong demand for heavy oil in the U.S. Gulf Coast is also supporting the lower price spread despite the greater reliance on rail a costlier method to ship Canadian oil to the region (graph 4). The transportation issues of Western Canadian oil remain a reality, especially given the delays in building Enbridge s Line 3 pipeline, and risk impeding the Canadian energy sector in the years to come. Oil output in the United States is still increasing, and analysts are expecting growth to remain strong in the medium term. However, the abundant supply out of the United States is partially offset by OPEC s cuts as it attempts to manage the market to ensure prices remain high, and by the geopolitical problems in Venezuela and Iran. It is unlikely that Chinese and Russian investments in Venezuela s oil sector will be able to revive the country s oil production, since the economic and political situation seems far from settled. Nicolás Maduro s government still refuses to cede control despite the strong opposition and U.S. sanctions are likely to remain in place without a regime change. In addition, since the sanctions against Iran were announced at the end of March, Iranian oil exports have plunged roughly 1.3 million barrels a day (graph 5 on page 3). The exemptions granted to, among others, China and India the two largest customers of Iranian oil expire in May, and OPEC s ability to export may be restricted even further if the exemptions are not renewed. GRAPH 3 The gap between WTI and WCS prices decreased Oil prices US$/barrel 12 WTI Brent WCS WTI: West Texas Intermediate; WCS: Western Canadian Select Sources: Datastream, Bloomberg and Desjardins, Economic Studies GRAPH 4 Rail shipments of Canadian oil increased, and most of the oil is headed to the U.S. Gulf Coast Canadian exports of crude oil by rail Thousands of barrels/day 375 PADD 1 PADD 2 PADD 3 PADD 4 PADD PADD: Petroleum Administration for Defense Districts Sources: Energy Information Administration and Desjardins, Economic Studies MARCH 2

3 GRAPH 5 GRAPH 6 Iranian oil exports have fallen significantly since the sanctions were announced The demand for oil should remain relatively high in and 22 Iranian crude oil exports Growth of oil demand Milliers Millions of barrels/day Millions of barrels/day 2.5 Other India China IEA forecasts Sources: Bloomberg and Desjardins, Economic Studies According to the International Energy Agency (IEA), demand should continue to rise in (graph 6). The strong growth in oil output in the United States may continue to force OPEC s members to stick with their agreement to restrict production. This should allow the oil market to remain fairly stable in. Yet the downside risks for the global economy could weaken demand and cause surpluses to reappear in the oil market. Generally, we are still forecasting that the price of a WTI barrel in will average US$59, as prices are expected to rise gradually. Our assumptions include OPEC and Russia complying with the output cuts deal, Iran and Venezuela s problems persisting in and demand growing at a relatively stable rate. Still, the risk scale is tipping to the downside e IEA: International Energy Agency; e: IEA estimate Sources: IEA and Desjardins, Economic Studies GRAPH 7 U.S. gas prices are rising in tandem with oil prices US$/barrel Crude oil prices* (left) 85 Gas prices in the United States (right) 75 US$/gallon * Average WTI (West Texas Intermediate) and Brent prices. GASOLINE The increase in oil prices has started to have an impact on the price of gasoline in the United States, as it currently sits at roughly US$2.5 a gallon (graph 7). Gasoline inventories have also declined to reach a more normal level for this time of the year. The price should keep rising, given the anticipated change in crude oil prices and the increase in demand as summer approaches. NATURAL GAS Inventories of natural gas remain well below their 5 year average, yet this has not stopped the price from falling. Recently, it was hovering around US$2.8/MMBTU (graph 8). The high levels of U.S. natural gas production seem to reassure the market that the United States has the capacity to respond to demand. Therefore, temperature fluctuations seem to have a greater impact on price fluctuations than inventory levels. As a result, we expect natural gas prices to generally fluctuate around the current price, with greater volatility in winter, to reach an annual average of US$2.9/MMBTU in. GRAPH 8 The price of natural gas is back below US$3 Natural gas in the United States In billions of cubic feet 1, , US$/MMBTU year average spread in inventories (left) Prices (right) MMBTU: Million British Thermal Units MARCH 3

4 Base Metals Prices Are Starting to Catch Up FORECASTS Prices of the main base metals that we follow have generally risen since January. The odds of the United States and China reaching an agreement are looking better and better, which is fuelling the rise in prices. Yet fears concerning an imminent economic slowdown still weigh heavily on the markets. Despite the economic risks, some metals remain in short supply due to the lack of investment in mining, which should keep prices high in the short and medium terms. Therefore, we expect the LME (London Metal Exchange) index to climb back to 3,2 at the end of, for an annual average of around 3,. The return of a certain degree of optimism, primarily due to an easing of the trade tensions between the United States and China, and signs that an agreement could soon be reached between the two supported industrial metal prices. The LME index is currently sitting at around 3, compared with 2,8 in January (graph 9). Nevertheless, the fact that several institutions have revised their growth forecasts down and that the major central banks have adopted a more cautious tone has caused the concerns about the health of the global economy to resurface. Attention is largely focused on China, which recently softened its 6.5% economic growth target for to a range between 6.% and 6.5%. A slowing of the Chinese economy could lower industrial metal prices, as the country represents approximately half of the global demand for refined metals (graph 1). In addition, the decline in world trade in November and December is not reassuring in terms of prospects for industrial metals demand. It remains to be seen if the data is the result of temporary factors or a clear trend. Still, inadequate investment in mining projects in recent years and production deficits imply that LME inventories should remain low, which would support prices. GRAPH 9 Industrial metal prices perk up Index 5, 8,5 7,5 6,5 5,5 4,5 3,5 2,5 1,5 5 4,25 3,5 2,75 2, 1, LME index (left) Inventories of the six main metals (right) LME: London Metal Exchange GRAPH 1 The health of the Chinese economy could be a deciding factor for industrial metals Share of global refined metals consumption in 217 In % 55 China Advanced economies Aluminum Copper Nickel Zinc Sources: World Bank and Desjardins, Economic Studies ALUMINUM The price of aluminum has been oscillating between US$1,8 and US$1,9 per metric tonne since the beginning of (graph 11). Different factors appear to be offsetting one other, as the upturn in U.S. trade relations is putting upward pressure on the international price for aluminum, whereas the withdrawal of sanctions against Russia, China s economic difficulties and the weaker global growth outlook have put the brakes on the price s rise. With the ratification of the new free-trade agreement between Canada, the United States and Mexico, and the U.S. Chinese negotiations currently underway, these countries may attempt to have the U.S. tariffs on steel and aluminum removed. If they succeed, the international price of aluminum could potentially rise. There is still a huge amount of uncertainty on this topic, however. A price that remains this low for too long would be bad news for aluminum smelters, as Alcoa estimates that, at a price of US$1,87 a tonne, 3 to 4% of the smelters around the world are losing money. Therefore, a slight increase in the price is expected. MARCH 4

5 GRAPH 11 GRAPH 12 Aluminum prices and inventories Copper prices and inventories 5,6 5, 4,4 3,8 3,2 2,6 2, 1,4 8 8, 7,5 7, 6,5 6, 5,5 5, 4,5 4, ,6 2,4 2,2 2, 1,8 1,6 1, Prices (left) Inventories (right) COPPER The price of copper regained some strength with, among other things, the easing in the tensions between the United States and China and the renewed optimism on the stock markets. It was recently trading around US$6,5 per metric tonne (graph 12), an 8% increase since the beginning of. Inventories have continued to shrink, as the copper market is suffering a production shortfall for the second year in a row, and forecasts call for the situation to continue for several years to come. This should maintain upward pressure on the price of copper. A U.S. China trade agreement would reduce the challenges facing the Chinese economy, which could also benefit copper. Yet the downside risks for the global economy are still very real and could continue to limit any price increases. NICKEL The price of nickel has been recording solid gains of over 2% since January, reaching around US$13, per metric tonne (graph 13). Inventories continue to fall and are currently sitting at their lowest point since July 213. Demand is expected to remain strong, especially on the part of China s stainless steel mills. However, a sharper slowdown of the global economy could adversely impact this outlook. Nonetheless, we expect the price of nickel to hang on to the gains it made and maybe even go up a little. ZINC The price of zinc is currently around US$2,8 per metric tonne after rising 12% since January (graph 14). Still, it is far from its recent high in February. LME inventory counts fell once again, with an annual decrease of approximately 7% despite the disappointing demand in. This suggests that there are problems with supply, especially in China where the production of refined zinc has slowed as a result of the new environmental 216 Prices (left) 217 Inventories (right) GRAPH 13 Nickel prices and inventories 22, , 16, 13, 1, 7, Prices (left) 217 Inventories (right) GRAPH 14 Zinc prices and inventories 3,7 3,4 3, 2,8 2,5 2,2 1,9 1,6 1, , Prices (left) 217 Inventories (right) regulations. In, the zinc market experienced a shortfall for the third year in a row. The low inventories could support the price, but it is highly unlikely that we will see another spectacular rise as we did in 216 and 217. MARCH 5

6 Precious Metals Gold Benefits from Central Bank s Caution FORECASTS The pause in monetary policy tightening by the major central banks has helped gold. Despite the fact that the return to a certain degree of uncertainty caused the U.S. dollar to rise, the price of gold has posted some gains since the end of. The price of the yellow metal should, however, weaken again, but could end the year on a slightly higher note than initially anticipated reaching roughly US$1,28 per ounce, on average, in. GOLD & SILVER Fading expectations that the Federal Reserve will raise its key rates have helped the price of gold to regain the ground it has lost since the end of, which was close to US$1,3 per ounce (graph 15). Lesser worries about trade relations between the United States and China also boosted gold, while the value of the U.S. dollar fell. Still, the greenback s rebound, caused by the concerns surrounding the global economy, brought on a decline in the price of gold. Silver did not see as large gains as GRAPH 15 The slowdown in the pace of monetary tightening by the Federal Reserve has helped gold Expectations in the United States December In % 1,35 1, ,3 6 1, ,25 1,225 2 JUN. 1,2 AUG. SEP. NOV. DEC. Likelihood of key rates higher than 2.25% 2.5% (left) FEB. 1,175 MAR. gold at the start of the year, but it did feel the effects of the recent decline. At approximately US$15 per ounce, silver has fallen to almost the same level it had reached at the end of (graph 16). The gradual increase in bond yields in the United States should have a slight negative impact on the price of gold during the coming quarters. We expect an average price of US$1,28 per ounce in. PLATINUM & PALLADIUM The price of palladium continues to smash records, recently reaching a high of US$1,59 per ounce (graph 17). The strong demand on the part of the automotive industry and a significant shortfall on the palladium market are putting serious pressure on its price. Platinum s experience is quite different. While the supply of platinum more than meets demand, the price is struggling to rise above its low of US$8 per ounce. Given the properties that platinum and palladium share in the automotive industry, as explained in an issue of Economic News, there are doubts as to whether the market can sustain such a significant price spread between these two metals. Gold prices (right) Sources: Bloomberg and Desjardins, Economic Studies GRAPH 16 GRAPH 17 Gold and silver prices Platinum and palladium prices 1,45 Gold (left) Silver (right) 1,375 1,3 1,225 1,15 1,75 1, ,6 Platinum (left) 1,6 Palladium (right) 1,5 1,4 1,4 1,3 1,2 1,2 1, 1, 1, MARCH 6

7 Other Commodities Modest Price Hikes Possible FOREST PRODUCTS The rise in the price of lumber since November has peaked in recent weeks. The price is currently holding at roughly US$36/tbf (thousand board feet) (graph 18). After a dizzying drop between July and October, prices have once again started to climb a little without reaching the levels that prevailed at this same time last year. Production closures at the beginning of the year underpinned this rise. It would be surprising to see lumber prices follow the same trajectory they did in and smash records in the coming months. The stars are not aligned. In the United States, the number of housing starts, which slowed a little in the second half of the year, should start to climb again in. However, sales of existing homes slowed in, which does not augur well for renovation spending and the demand for materials. In Canada, the expected fall in residential housing starts compared with will also reduce the demand for construction lumber. Still, prices are expected to rise this spring due to sustained demand and limited supply in North America. The increases will not be comparable to those of, but market conditions suggest a rise in the coming months that will not be due solely to seasonal patterns. GRAPH 18 Forest product prices US$/tbf 6 Lumber (left) 1,45 Pulp (right) 55 1, ,3 1, ,15 4 1, , tbf: thousand board feet GRAPH 19 Cereal prices US$/bushel US$/bushel 8 Wheat (left) Corn (left) 16 Soy (right) 15 7 AGRICULTURAL COMMODITIES 6 The recent trend in cereal and oilseed prices is downward (graph 19). Wheat posted the largest loss, especially in February. Tough competition worldwide and the upward revision to global and U.S. inventories have depressed prices (graph 2). Corn and soybeans have also fallen in a harsh context. Corn inventories are declining around the world but rising in the United States. U.S. exports are down somewhat, and the demand for ethanol is waning. The abundance of soybean inventories around the world has put the brakes on any price increase for the time being. Moreover, the trade negotiations between China and the United States have cast a shadow over the outlook for corn and soybeans, in particular. While the tone of the discussions has softened, the most important disputes remain unresolved. As long as no official agreement is announced, the tension will weigh heavily on prices. However, considering the current low prices, some hikes are possible, but not in the short term. Seeding plans in the United States released at the end of March could exacerbate the current volatility GRAPH 2 Wheat inventories in the United States are expected to end at a historical high In millions of bushel 1,25 In % 6 Year-end inventories (left) Stocks-to-use ratio (right) 1, f 1 f: U.S. Department of Agriculture projections Sources: U.S. Department of Agriculture and Desjardins, Economic Studies MARCH 7

8 TABLE 1 Commodities VARIATION (%) SPOT PRICE LAST 52 WEEKS March 18-1 month -3 months -6 months -1 year Higher Average Lower Base metals LMEX Aluminium () Copper () Nickel () Zinc () 3,27 1,9 6,458 12,925 2, ,5 2,541 7,331 15,688 3,31 3,48 2,41 6,356 12,9 2,761 2,73 1,799 5,714 1,65 2,284 Precious metals Gold () Silver () Platinum () Palladium () 1, , , ,567 1, ,18 1, Other commodities Lumber (US$/tbf) Pulp () Wheat (US$/bushel) Corn (US$/bushel) Soybean (US$/bushel) 362 1, , , , Index Reuter-CRB (CCI) Reuters/Jefferies CRB Bloomberg Commodity Index Bank of Canada Energy Brent oil (US$/barrel) WTI oil (US$/barrel) Gasoline (US$/gallon) Natural gas (US$/MMBTU) CRB: Commodity Research Bureau; CCI: Continuous Commodity Index; WTI: West Texas Intermediate; MMBTU: Million British Thermal Units; LMEX: London Metal Exchange Index; tbf: thousand of board feet NOTE: Currency table base on previous day closure. TABLE 2 Commodities prices: History and forecasts ANNUAL AVERAGE WTI oil (US$/barrel) 217 f 22f Target: 59 (range: 45 to 7) Target: 6 (range: 4 to 75) Target: 2.9 (range: 2.8 to 3.5) Target: 3.1 (range: 2.7 to 4.3) Gold () 1,259 1,269 Target: 1,28 (range: 1,15 to 1,35) Target: 1,24 (range: 1,125 to 1,325) LMEX index base metals 2,969 3,141 Target: 3,5 (range: 2,7 to 3,3) Target: 3,29 (range: 2,6 to 3,4) Natural gas Henry Hub (US$/MMBTU) f: forecasts; WTI : West Texas Intermediate; MMBTU : Million British Thermal Units; LMEX : London Metal Exchange Index MARCH 8