Commodity Index Posts Energy-Led Advance

Transcription

1 A monthly commodity watch November 2016 Commodity Index Posts Energy-Led Advance Upcoming OPEC meeting making waves in the oil market The BMO Capital Markets Commodity Price Index advanced 2.7% in October thanks to an oil-driven jump in the energy index, which offset a drop in metal prices and ended a mild three-month losing streak in the overall index. So far in November, the index looks to have retraced at least some of its progress, in line with our outlook for a generally subdued commodity recovery. The Oil & Gas Index rose for a third consecutive month in October, with its monthly momentum accelerating sharply to 9.2%. This increase solely reflected a rally in crude oil as markets priced in a rising likelihood of some measure of production restraint arising from OPEC s November 30 th meeting (see Focus article). The price of natural gas edged down in October as a warmer-than-usual autumn reduced demand for heating, allowing pre-winter inventories to surpass four trillion cubic feet. Prices have subsequently gained some traction as the onset of cooler weather spurred a reversal in the previously over-sold market. The Metals & Minerals Index took another beating in October, posting a chunky 2.8% drop. The decline was enough to return the index to negative territory on a year-over-year basis (-1.4%). However, losses were confined to precious metals and uranium, while base metal prices registered small gains. These trends have been greatly amplified in the wake of the U.S. election, though we expect that the rally in industrial metals prices is overstretched and will correct in coming months. Meanwhile, higher interest rates and inflation expectations will weigh on gold and silver. The Forest Products Index inched upward with a 0.6% gain in October, but all indications are that it quickly reversed course in November. Lumber prices showed some late-month strength in September and that momentum carried over into the early weeks of October before eventually succumbing to a seasonal weakening of demand. All told, spruce-pine-fir gained $9/mbf despite some late-month softening. In oriented strand board, any upward impulse had already faded by late September and October saw prices dip a further $5, though the market now appears to be better balanced. The Agriculture Index posted a meek 3.1% rebound in October after losing a cumulative 15% during the prior three months. The upturn reflected firmer crop markets, with wheat and canola both off their bumper harvest-induced lows. Livestock prices remained in free-fall during the month, but have seen a decent bounce-back in November. ECONOMIC RESEARCH economics.bmocapitalmarkets.com Earl Sweet, Senior Economist & Managing Director earl.sweet@bmo.com Alexandros Koustas, Senior Economist alex.koustas@bmo.com Aaron Goertzen, Senior Economist aaron.goertzen@bmo.com Sarah Howcroft, Economist sarah.howcroft@bmo.com All Commodities Index BMO CAPITAL MARKETS COMMODITY PRICE INDEX (2003 = 100) A Publication of BMO Capital Markets Economic Research Douglas Porter, CFA, Chief Economist Oct. Level % Change from (2003=100) Mth. Ago Yr. Ago All Commodities Oil & Gas Metals & Minerals Forest Products Agriculture

2 Page 2 of 9 November 2016 Oil at the Crossroads Slow Progress to Market Rebalancing Earl Sweet, Head Economic Risk earl.sweet@bmo.com Oil prices have swung sharply over the past few months (Chart 1) on gyrating expectations of a successful agreement among OPEC members, and possibly Russia, to restrain production. West Texas Intermediate (WTI) had retreated from its mid-october peak of just over US$50/barrel to the vicinity of $43 during the second week of November, though it bounced this week on renewed enthusiasm about the deal s prospects. Prior to that move, oil had been a notable laggard among industrial commodities in the post-election period. The rise in the U.S. dollar following the November 8th presidential election has not yet exerted a significant impact on pricing, though any further dollar increase stemming from market assessments of potential fiscal and trade policy shifts, or from an increase in rates by the Federal Reserve, would restrain oil prices. Instead, the downdraft in pricing earlier this month reflected reduced expectations of meaningful restraint on production arising from OPEC s crucial ministerial meeting in Vienna on November 30th. In part, rising skepticism about the meeting outcome was fanned by the International Energy Agency s (IEA) release of October global data, showing OPEC output rising for the fifth consecutive month as production in Nigeria and Libya partially recovered earlier militancy-related losses, and output continued to climb in Iraq and Iran. Production in Russia also recorded a notable rise during September and October. The IEA estimates that total OPEC supply reached a record 33.8 million barrels per day (mmb/d) in October (Chart 2), well above the potential production cap in the range of mmb/d discussed at the late-september meeting in Algiers. Given perceived difficulties in negotiating quota agreements among OPEC members, as well as with Russia, the chances of lowering the cartel s output by 0.8 mmb/d or more are slim. Thus, the oil market is likely to remain in an excess supply condition at least through mid Based on information for the first ten months of the year, the IEA estimates that global oil demand will average 96.3 mmb/d in 2016, up 1.3 mmb/d (or +1.4%) from While it doesn t provide an estimate of global supply for the fourth quarter, if OPEC production were to remain at its October level for the rest of the year, then global supply would average 96.9 mmb/d, up just CHART 1: CRUDE OIL PRICES WTI (US$/barrel : as of Nov. 22, 2016) 20 Jan 16 Mar May Jul Sep Nov CHART 2: OPEC CRUDE OIL PRODUCTION (million barrels per day) OPEC s proposed range to cap production (from September meeting) Oct. Final bar is for October, not full Q4 CHART 3: GLOBAL OIL DEMAND AND SUPPLY (million barrels per day) e = estimate Demand Supply e 2017f f = forecast

3 Page 3 of 9 November 2016 mmb/d from 2015, despite about a 1.0 mmb/d increase by OPEC. The offset has come from declining output in the United States, Latin America, and China. Though these estimates indicate that the increase in global supply in 2016 has been much smaller than the increase in demand, the level of supply has nevertheless run about 0.6 mmb/d higher than the level of demand, adding approximately a further 220 million barrels to already-bloated inventories and restraining average WTI in 2016 to an estimated $43/barrel. Looking to 2017, we expect global economic growth to improve moderately, with firmer momentum in oilthirsty emerging markets, as well as high-income nations. Combined with continued relatively low oil prices, this should boost global demand by 1.4 mmb/d (moderately faster than the current IEA projection of 1.2 mmb/d) to 97.7 mmb/d (Chart 3). There is considerable uncertainty, however, about next year s global supply, as much will depend on the outcome of the November 30th OPEC meeting. If there were an agreement to cap output at 33 mmb/d (the top end of the range originally discussed in September) and there were adherence to that agreement, OPEC production for 2017 as a whole would be down slightly from that in 2016, by around 0.3 mmb/d (though down more, by around 0.8 mmb/d from its estimated 2016:Q4 level). Offsetting that would be a likely moderate increase in non-opec supply. Substantial cost-cutting and resource optimization should prompt an upturn in U.S. production and output in Canada will recover from its wildfirereduced level in There could also be a further increase in Russia, where taps appear to be completely opened. Overall, global supply would rise in the vicinity of 0.2 mmb/d to 97.1 mmb/d. With demand about 0.6 mmb/d higher than supply, the process of inventory rebalancing would be underway, with an annual drawdown of 220 million barrels, reversing the build-up in 2016 but still leaving them uncomfortably high until the following year. If this scenario of OPEC restraint were to unfold, then demand should surpass supply fairly early in the year and prices would likely rally moderately in anticipation of a quicker rebalancing of the market. However, if the meeting ends in failure and OPEC output were to continue to rise from its elevated 2016:Q4 level as members vie for share, it would take considerably longer for demand to catch up with supply, possibly not until the end of 2017, and inventories would continue to build through much of the year. It s possible that the November retreat in oil from the $50 mark may reinforce OPEC resolve in coming to a production-limiting agreement, particularly with the fiscal finances of many members, including Saudi Arabia, severely challenged by weak prices. However, given past experience with these types of agreements and the difficult issues to be resolved among OPEC members and with other large producers/exporters such as Russia, there is considerable risk of failure, which could lead to a sell-off. On the upside, an OPEC agreement to cap production somewhere in the range of mmb/d, with evidence of adherence, could break prices convincingly above the $40-$50 range in which they ve fluctuated since April. Given both upside and downside risks, we are maintaining our 2017 forecast for average WTI at $53/barrel.

4 Page 4 of 9 November 2016 Energy and Materials Crude Oil Natural Gas (WTI) (Henry Hub) (Alta. Empress) Lumber Pulp Newsprint US$/bbl US$/mmbtu US$/mbf US$/tonne y-t-d November December January February March April May June July August September October m-t-d November n.a. n.a. Forecast 2016 Avg Avg Commodity price forecasts are by BMO Capital Markets Economics and are independent of those used by BMO Capital Markets Equity Research. and indicate annual forecast changes from last month.

5 Page 5 of 9 November 2016 Base and Precious Metals Copper Aluminum Zinc Nickel Gold Silver US$/lb US$/oz y-t-d November December January February March April May June July August September October m-t-d November Forecast 2016 Avg Avg Commodity price forecasts are by BMO Capital Markets Economics and are independent of those used by BMO Capital Markets Equity Research. and indicate annual forecast changes from last month.

6 Page 6 of 9 November 2016 Agriculture Wheat Canola Cattle Hogs US$/bushel US$/tonne US$/cwt n.a. n.a n.a. n.a y-t-d November December January February March April May June July August September October m-t-d November Forecast 2016 Avg Avg Commodity price forecasts are by BMO Capital Markets Economics and are independent of those used by BMO Capital Markets Equity Research. and indicate annual forecast changes from last month.

7 Page 7 of 9 November 2016 Commodity Indices and Forecasts All Oil & Metals & Forest Agricultural All US$-terms : 2003 = 100 Annual Commodities Gas Minerals Products Products Commodities C$-terms Forecast Quarterly 2015 Q Q Q Q Q Q Q Forecast Q Q Q Monthly 2015 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Commodity price indices and forecasts are by BMO Capital Markets Economics. Forecasts are independent of those used by BMO Capital Markets Equity Research.

8 Page 8 of 9 November 2016 Historical Charts: All-Commodity Index Nominal US$-Terms (2003 = 100) Real US$-Terms (2003 = 100) Nominal (2003 = 100) US$-terms C$-terms

9 Page 9 of 9 November 2016 Technical Note The BMO Capital Markets Commodity Price Index is a fixed-weight, export-based index that encompasses the price movement of 19 commodities key to Canadian exports. Weights are each commodity s average share of the total value of exports of the 19 commodities during the period Similarly, weights of sub-index components reflect the relative importance of commodities within their respective product group. The all-commodities index and sub-indices consist of the following: Weight in Weight in All-Commodities Weight in All-Commodities Weight in Percent Index Sub-Index Index Sub-Index Metals & Minerals Forest Products Gold Newsprint Silver Market Pulp Aluminum Supercalendered Paper Copper Lumber Nickel OSB Zinc Uranium Agricultural Products Potash Wheat Canola Oil and Gas Hogs Crude Oil Beef Cattle Canadian Natural Gas All Commodities Unless otherwise specified, all indices reported in this publication correspond to prices in U.S. dollars. 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