Commodities Forecast Update Battling extreme weather and geopolitics
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1 Investment Research General Market Conditions 29 April 2014 Commodities Forecast Update Battling extreme weather and geopolitics Commodity markets have enjoyed a bittersweet cocktail of extreme weather, geopolitical concerns and positive signs from the global economy over the past month, which has resulted in an overall decent performance of commodity prices. High risers have been less prominent commodities such as nickel, which has increased significantly on the back of the Indonesian mineral ore export ban, and coffee, which has felt the heat of the dry weather over Brazilian plantations. Both are up more than 15% over the past month. However, base metals have overall benefited from the signs of stabilisation in the Chinese economy and the improvement of the US and European economies, while dry weather in Brazil and the US in addition to concerns about the impact on supplies of the conflict between Ukraine and Russia have pushed grain prices higher. Uncertainty over when Libyan oil will return to the market, in combination with strong inventory demand from the US on the back of the freezing winter, is keeping the oil price elevated and little unchanged since the beginning of the year. OPEC is likely to turn up on the radar in commodity markets in coming months as we may see further progress being made in Libya but, more importantly, the 20 July deadline for a deal on Iran s nuclear programme is approaching. The conflict between Ukraine and Russia has been a dominant theme in the energy, grain and base metal markets, although it has not had any implications for the physical markets. In our view, it would take a significant escalation of the conflict for us to see a real effect on commodity markets, although concerns will continue to add to prices in coming months. Overall, we are looking for higher base metal prices over the forecast horizon. We expect the continued global recovery to be the main driver of this market, while it will have the opposite effect on the gold price, which we expect to inch lower. We expect the weather to play an important role in the market for agriculture commodities and push grain prices higher over coming years. When the short-term jitters keeping the oil price abate, we expect the downward pressure from the positive supply shock in the oil market to resume. Contents Oil: Short-term jitters... 2 Metals: Supply concerns... 3 Grains: Weather premium on the rise... 4 Forecasts overview... 5 Danske forecast overview NYMEX WTI ICE Brent Aluminium 1,879 1,965 Copper 7,055 7,356 Zinc 2,096 2,165 Nickel 18,656 20,900 Gold 1,269 1,215 Matif milling wheat Rapeseed CBOT wheat CBOT corn CBOT soybeans 1,502 1,613 Commodity prices since 1 January 2013 Danske main forecasts rebased Source: Macrobond, Danske Bank Markets Analyst Jens Nærvig Pedersen jenpe@danskebank.dk Important disclosures and certifications are contained from page 6 this report.
2 Oil: short-term jitters Geopolitical worries push up precautionary demand Geopolitical jitters have pushed up the oil price since the beginning of April. At the centre of attention has been the conflict between Ukraine and Russia, which has been a constant worry to the market since late February, when tensions started to escalate significantly. It has increased precautionary demand in the oil market on concerns that the conflict could lead to a disruption of energy supplies from Russia. The market reaction has so far been relatively modest as the general perception is probably that neither Russia nor Europe, Russia s largest market for energy exports, can afford disruptions to the bilateral energy trade. Hence, the market may price a risk premium on the oil price as long as the conflict continues but the premium will be minimal unless tension escalates significantly. Progress in Libya set to push global supplies higher Libya has taken a step further to normalisation of oil production as the government has moved closer to an agreement with rebels in the Barqa region in Eastern Libya, who have kept control of four major oil ports since last summer, effectively shutting down a large share of Libya s oil production. Although uncertainty still marks the outlook for Libyan oil production and exports, the recent progress does raise the likelihood of a near-term normalisation of Libyan oil supplies. A return of Libyan oil would add to the increase in global supplies on the back of higher North American production, although Saudi Arabia would probably adjust its production lower to limit the downward pressure on prices. Sharp decline in oil inventories Following the large draw on inventories over the winter season, which was much harsher than normal, the US has slowly begun stockpiling oil again. The harsh winter weather has sent inventories in the US to the lowest level since 2009, which is probably an uncomfortably low level. US inventory demand should support oil prices over coming months. Little upside left for prices Geopolitical worries, uncertainty regarding the Libyan supply situation and US inventory demand have driven the oil price higher over the past month. For now, it is likely to take a significant escalation in the conflict between Ukraine and Russia or perhaps a brighter outlook for the Chinese economy to send the oil price markedly above the level at which it is currently hovering, just below USD110/bl. While we maintain our view that the ongoing global oil supply shock will push prices lower medium term, the short-term jitters, especially due to the geopolitical crisis in Eastern Europe, are likely to support prices near term. Brent crude forecast vs forward WTI crude forecast vs forward Need for stockpiling in the US Significant OPEC spare capacity Source: IEA Source: Bloomberg survey 2 29 April
3 Metals: supply concerns Chinese demand concerns abating The recent stimulus initiatives from the Chinese central bank and government, notably the widening of the yuan trading band and the fiscal stimulus package, have added some comfort to the market as it seems likely that the Chinese economy is now bound to move forward, albeit at a slow pace, following the recent slowdown. This has lent support to base metal prices. If the Chinese economy gradually reaccelerates in the second half of this year, it would add further support to base metal prices along with a continued investment-driven recovery in Europe and the US. Nickel rallies on supply tightening Nickel has been one of the best performing commodities so far in Over the past month, the nickel price has shot up surpassing the USD18,000/MT mark and flirting with the peak from early last year. The main reason behind the nickel price surge is the Indonesian mineral export ban, which has removed Indonesian nickel ore from the market, leading to a substantial tightening of global nickel supplies. Adding to supply concerns have been worries that the conflict between Russia and Ukraine would affect Russia s nickel exports. Both factors are likely to continue to support prices over coming months. Copper and zinc market is tightening Aluminium and nickel stocks-to-use remain at high levels relative to copper and zinc but the Indonesian mineral export ban is likely to cut into nickel and aluminium stocks. Supply concerns and global recovery support base metal prices In the short term, several factors are likely to support base metal prices; most notably the Indonesian export ban and the potential consequences of the Ukraine-Russia conflict but so will recent signs of stabilisation in the Chinese economy and signs of overall improvement in the global economy following the temporary setback in the US over the extreme winter. While the continued global recovery will continue to be an important driver medium term, lower energy prices are set to weigh on base metal prices through lower costs for producers. Large nickel and aluminium stocks are also likely to limit price increases. Overall, we expect base metal prices in general to increase over the forecast horizon. Gold forecast vs forward LME 3M aluminium forecast vs forward LME 3M copper forecast vs forward LME 3M nickel forecast vs forward The gold price has been fairly resilient this year, as the temporary winter slowdown in the US and Chinese downturn have weighed on risk sentiment. However, the continued recovery of the global economy is likely to spell downside for the gold price. Plenty of aluminium in stocks Zinc market is tightening LME 3M zinc forecast vs forward Source: Macrobond and Danske Bank Markets Source: Macrobond and Danske Bank Markets 3 29 April
4 Grains: weather premium rising Grains and oilseeds demand on the increase Global demand for grains is set to pick up this year. We expect the recent positive signs from the global economy to add further to the bright demand outlook. Global corn demand in particular is set to be strong as large consumers such as the US, China, Europe and Brazil are all set to increase corn consumption significantly. Global wheat consumption is also set to increase, albeit at a slower pace, as it is mainly in China and India that demand will rise. Demand for oilseeds is also poised for a decent increase on the back of increased soybean consumption in Latin America and increased rapeseed consumption in China. El Niño weather approaching The combination of extreme weather events and geopolitical risks has spiralled supply concerns in the market over the past couple of months. The freezing North American winter weather, followed by dry weather in Brazil and the US and the escalation of the conflict between Ukraine and Russia, has pushed global grain prices up 15-20% so far this year. Adding to the concerns are numerous reports of El Niño weather approaching. While it seems rather certain that El Niño weather will heat up the Southern Hemisphere in the second half this year, it is still very uncertain how strong it will be. El Niño is especially worrisome for producers in Latin America, Australia and South-East Asia. Luckily global grain production is set to climb higher this year and the supply situation is, therefore, relatively comfortable as the more unstable weather approaches. Stockpiling on the back of production increase Although extreme weather has been a disruptive factor since the beginning of the year, the market is looking at large production increases this year. The boost to supplies will, to some extent, outpace the rise in consumption despite the support of the recovery in global growth. This would result in decent stock building this year, which would bolster the market amid El Niño weather approaching. Weather a key risk to prices With the bottom for grain prices months away, we expect grain prices to tick up further over the forecast horizon. It is still too early to determine how big a factor unfavourable weather will play but that unstable weather has resumed its central role in commodity markets means the market is likely to factor in a weather premium on grain prices over the short- and medium-term horizon. Furthermore, the unresolved conflict between Ukraine and Russia leaves some concern in the market about the potential negative impact it may have on Ukraine s grain supplies, especially the relatively large wheat production taking place on the Crimea peninsula. This should further support prices in the short run. However, the large harvest expected this year is likely to limit the upside. CBOT corn forecast vs forward CBOT wheat forecast vs forward CBOT soybean forecast vs forward Matif milling wheat forecast vs forward Corn and wheat market balance Soybean and rapeseed market balance Rapeseed forecast vs forward Source: USDA WASDE Source: USDA WASDE 4 29 April
5 Forecasts overview Danske commodity price forecast AVERAGE 29/04/14 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q Energy: front month (USD/bbl) NYMEX WTI ICE Brent Base metals: LME 3M (US$/t) Aluminium 1,841 1,754 1,900 1,920 1,940 1,950 1,960 1,970 1,980 1,889 1, Copper 6,754 6,996 7,000 7,075 7,150 7,225 7,300 7,400 7,500 7,354 7, Zinc 2,065 2,024 2,100 2,120 2,140 2,150 2,160 2,170 2,180 1,940 2, Nickel 18,515 14,723 19,500 20,000 20,400 20,600 20,800 21,000 21,200 15,097 18, Precious Metals: spot (US$/oz) Gold 1,303 1,292 1,280 1,265 1,240 1,230 1,220 1,210 1,200 1,411 1, Agriculturals: front month Matif Mill Wheat ( /t) Rapeseed ( /t) CBOT Wheat (USd/bushel) CBOT Corn (USd/bushel) CBOT Soybeans (USd/bushel) 1,517 1,358 1,530 1,550 1,570 1,590 1,610 1,620 1,630 1,407 1, Danske oil product price forecast Oil products forecasts AVERAGE 29/04/2014 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q NYMEX gasoline Euro-bob Oxy (USD/MT) Jet fuel CIF cargo (USD/MT) ULSD 10ppm CIF NWE cargo (USD/MT) ICE gasoil (USD/MT) ICE Brent (USD/bbl) % fuel oil FOB ARA barge (USD/MT) % fuel oil FOB NWE cargo (USD/MT) Crack spread forecasts AVERAGE (USD/MT) 29/04/2014 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q NYMEX gasoline Euro-bob Oxy (USD/MT) Jet fuel CIF cargo (USD/MT) ULSD 10ppm CIF NWE cargo ICE gasoil (USD/MT) % fuel oil FOB ARA barge (RHS) % fuel oil FOB NWE cargo April
6 Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ( Danske Bank ). The author of this research report is Jens Nærvig Pedersen, Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors on request. Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the date of first publication. General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report April
7 This research report is not intended for retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent. Disclaimer related to distribution in the United States This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to U.S. institutional investors as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to U.S. institutional investors. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements of a non-u.s. jurisdiction. Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non- U.S. financial instruments may entail certain risks. Financial instruments of non-u.s. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission April
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