Commodity Roundup. Treasury Research Group For private circulation only

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1 May-15 Jun-15 Aug-15 Sep-15 Nov-15 Dec-15 Feb-16 Mar-16 May-16 Commodity Roundup Treasury Research Group For private circulation only June 7, 2016 Radhika Wadhwa Commodity Roundup: May 2016 Crude oil prices recorded an impressive rise over May with WTI and Brent gaining 9.6% and 8.4% respectively. The month also marked Brent oil breaching the USD 50/bbl level for the first time since November Oil prices are trading at ~USD 50/bbl, mainly on the back of unplanned supply shortages from Nigeria, Venezuela, Kuwait and Libya coupled with the destructive wildfires in Canada that knocked off ~1 million barrels per day from the country s output. The rise in oil prices can also be attributed to declining US oil production and inventories. However, increasing OPEC production following the removal of sanctions on Iran and Saudi Aramco s plans to expand output are likely to cap gains. There also exists a real possibility of the return of US shale oil producers if oil prices maintain their upward trajectory. Gold prices remained subdued in May with the bullion closely tracking movements in the greenback. Gold prices advanced in the first half of the month post soft US data prints (thereby putting pressure on the greenback) and subdued risk sentiment in global markets. Thereon, a subsequent strengthening of the Dollar following the hawkish tone of the FOMC April meeting minutes and comments by several Fed officials weighed on the yellow metal. Going ahead, we expect gold to trade in the range of USD 1180/oz USD 1250/oz for the remainder of this year. Crude oil prices have been rising steadily since the start of 2016 Gold prices declined ~6% in May as talks of a Fed rate hike took centre stage Gold prices Dollar Index (RHS)

2 S. No. Contents Page no. 1 Market Summary Energy- Crude Oil Precious Metal- Gold

3 Market Summary Energy YTD WTI USD/bbl NYMEX Brent USD/bbl ICE Precious Metals Gold USD/oz COMEX Silver USD/oz COMEX Industrial Metals Copper USD/t LME Aluminium USD/t LME Zinc USD/t LME Lead USD/t LME Nickel USD/t LME Tin USD/t LME Agriculture Unit Exchange Soybeans cents/bu CBOT Soy meal USD/t CBOT Soy oil USD/lb CBOT Corn cents/bu CBOT Wheat cents/bu CBOT White Sugar USD/t LIFFE Raw Sugar cents/lb NYBOT Cotton cents/lb NYBOT Rice (Thailand) USD/MT --* Key commodity indices Current level Commodity price analysis Move over the last 30 days (%) YTD(%) from 1-Jan-2016 Average level CRB Index S&P-GSCI * Thailand white rice price issued by Thai Rice Exporters Association Last 5 years %change of the YTD average from 5 yr average 3

4 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Commodity Roundup Energy: Crude oil Crude oil prices recorded an impressive rise over May with WTI and Brent gaining 9.6% and 8.4% respectively this month. May also marked Brent oil breaching the USD 50/bbl level for the first time since November Oil prices gained momentum, mainly on the back of unplanned supply shortages from Nigeria, Venezuela, Kuwait and Libya coupled with the destructive wildfires in Canada that knocked off ~1 million barrels per day from the country s output. The rise in oil prices can also be attributed to declining US oil production and inventories. However, increasing OPEC production following the removal of sanctions on Iran and Saudi Aramco s plans to expand output are likely to cap gains. There also exists the real possibility of US shale oil producers returning to the market if oil prices maintain their upward trajectory. OPEC meeting a non-event The bi-annual OPEC meeting, which was held on June 2 nd, 2016 at Vienna, saw member countries maintaining status quo and keeping the level of oil output unchanged. This was widely expected due to the following reasons: The April 17 th Doha meeting ended without key players reaching an agreement to freeze output. This was mainly caused by Iran s resilience to reach pre-sanction production levels and Saudi Arabia s unwillingness to commit to an output freeze without Iran on board. The ongoing standoff between the two countries made any collusion unlikely. Secondly, in a bid to capture maximum market share, countries such as Saudi Arabia, Iran, and Iraq have expressed their intent to raise production and exports. Asian imports of Iranian oil have been rising steadily, bringing the country closer to its pre-sanction export levels. Reports suggest that Iraq will supply 5 million barrels of extra crude oil to its partners in June, while Saudi Aramco, the world s largest oil company, is expected to raise production by ~1 million barrels from its Shaybah oil field. Therefore, the effectiveness of OPEC as a cartel is likely to diminish as each country follows individualistic strategies. Unplanned shortages provide a fillip Supply disruptions were the single most important factor that supported oil prices in May. In the first half of the month a massive wildfire at the heart of Canada s oil sands region forced oil companies to suspend production. In Nigeria, a militant group damaged major infrastructure which led to a fall in the country s production. Elsewhere in Libya, political tension between the eastern and western factions cut its supply. Venezuela, where the world s largest oil reserves exist, is faced with economic and political turmoil that could potentially affect its oil supply adversely. In the wake of tightening supply conditions, oil prices touched 2016 highs. Outlook: Gradual uptick in prices expected Oil prices have gained recently in the wake of recent supply disruptions that also helped cushion Iran's re-entry into the export market (post removal of sanctions).the intent of key oil producers to raise production and strength in the greenback (on increased odds of a Fed rate hike) are likely to weigh on oil prices in the near term. However, falling non-opec oil production and rising demand over the medium term are expected to cap the downside. OPEC production has witnessed a gradual uptick this year Going ahead, the oil market is expected to rebalance only by the end of 2017 US Energy Department's forecasts for global crude oil market (mbpd) Total World Supply Total World Consumption forecasts Source: Bloomberg, EIA, ICICI Bank Research 4

5 May-15 Jun-15 Aug-15 Sep-15 Nov-15 Dec-15 Feb-16 Mar-16 May-16 May-15 Jun-15 Aug-15 Sep-15 Nov-15 Dec-15 Feb-16 Mar-16 May-16 Commodity Roundup Precious Metal: Gold Gold prices remained subdued in May with the bullion closely tracking movements in the greenback. Gold prices advanced in the first half of the month post soft US data prints (thereby putting pressure on the greenback) and subdued risk sentiment in global markets. Thereon, a subsequent strengthening of the Dollar following the hawkish tone of the FOMC April meeting minutes and comments by several Fed officials weighed on the yellow metal. Going ahead, gold is expected to trade in the range of USD 1180/oz USD 1250/oz. for the remainder of this year. Impending Fed rate hike to weigh on gold Gold prices hovered around 15-month highs at ~USD /oz. in the beginning of May as the greenback softened on the back of weak US data. Gold prices are currently hovering around ~ USD 1242/oz. The metal spiralled downward after the US Dollar regained lost ground as Fed officials, Dennis Lockhart and John Williams, said they see a case for 2-3 rate hikes in To add on to the pressure, the Fed released the minutes of its April policy meeting, which explicitly stated that a June rate hike was on the table, provided incoming data prints support the view of a strong US economy. However rising investment demand, global uncertainties to support Several factors are expected to support the bullion: In the near term, the yellow metal is expected to draw support from a sharply lower than expected May nonfarm payrolls data, which significantly reduced the probability of a June rate hike. In addition, uncertainty around the outcome of the upcoming British Referendum on June 23 rd has triggered demand for the safe haven metal. After subdued demand from India, given the recent jewellers strike, consumer spending on the yellow metal is likely to pick up. In addition, festive demand towards the year end will further aid prices. India, being one of the largest buyers of gold globally, can significantly affect prices. Risks emanating from China regarding the country s economic health and potential spill over effects on the global economy will see investment demand for the safe haven rise. In fact, this above mentioned trend is already manifesting in the form of increasing SPDR Gold Trust holdings, which have risen by ~217 metric tonnes this year. Investment demand for gold is currently at its highest level since October Gold to trade with a bearish bias in 2016 As the Fed continues to embark on its policy normalisation path, gold prices are likely to come under pressure. However, favourable demand-supply fundamentals are likely to continue providing support (specially increased demand from India and China on account of festive demand towards the end of the year). Consequently, we expect gold to trade in the range of USD 1180/oz USD 1250/oz during Upside risks to our view emanate from increased volatility in global markets, Brexit and a pickup in growth and debt related concerns over China. Gold prices declined ~6% in May as talks of a Fed rate hike took centre stage Gold prices Dollar Index (RHS) Investment demand for the yellow metal has been rising as the Brexit vote approaches Tonnes SPDR Gold Trust holdings 5

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