A monthly commodity watch March 2018

Transcription

1 A monthly commodity watch March 2018 Oil & Gas Pull Commodities Lower in February Index starting to give back some of its earlier gains, further moderation likely in store The BMO Capital Markets Commodity Price Index ebbed 1.2% in February, retracing part of its outsized January rise. The decline was entirely due to a pullback in oil and gas prices, though some metals had also come under pressure by month-end. The index is primed for additional losses in the months ahead amid a broader recalibration of risk assets to higher interest rates and volatility. The Oil & Gas Index slipped 3.7% in February. West Texas Intermediate faced considerable volatility, with pronounced selling pressure during the first ten days partly reflecting a rising U.S. dollar at that time. Since then, prices fluctuated between US$59-64/barrel, though since late February the trend has been down, reflecting concern about the rapid bounce-back in U.S. shale oil output. Natural gas prices plunged in February despite the deep freeze in December-January that deflated underground storage to well below its five-year average. Once again, the market appears to be focusing on the recovery in U.S. shale production and perhaps the February warming to more seasonal temperatures. The Metals & Minerals Index was a mixed bag, slipping 0.2% from January s multi-year high. Nickel continued to defy fundamentals, rising 5.4% to its highest level since March 2015, while zinc posted a fresh ten-year high as physical inventory remained tight. Meantime, copper and aluminum fell back, with the latter whipsawed by the announcement of a new 10% tariff on U.S. imports. Gold held steady around the US$1330/oz-mark, despite the U.S. dollar recovery, as investors sought cover from higher volatility, protectionist threats and European political instability. The Forest Products Index surged 3.9% in February, riding an extended rally in framing lumber prices. Transportation delays supercharged an already tight market for Spruce-Pine-Fir as buyers, running on lean inventories, were left scrambling. Prices increased to US$523/mbf, continuing their march into unchartered territory. Meantime, Oriented Strand Board prices leapt US$59 to US$378/msf, with significant momentum carrying into March. Planned capacity additions have been slow to come online, putting buyers on the back foot as many had limited their inventory accumulation in anticipation of a buyers market this spring. The Agriculture Index advanced 3.8% in February amid firmer crop prices, as an ongoing drought in Argentina buoyed market optimism that the worst of the global crop glut may be over. Wheat prices gained 5.4%, breeching US$5/bushel for the first time since last summer, and remained firm into early March. Canola also advanced, albeit a lesser 2.0%, as a weaker loonie weighed on international prices for this staple Canadian crop. Aaron Goertzen (Agriculture) aaron.goertzen@bmo.com Sarah Howcroft (Metals & Minerals, Editor) sarah.howcroft@bmo.com Alexandros Koustas (Forest Products) alexandros.koustas@bmo.com Earl Sweet (Oil & Gas) earl.sweet@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 economics.bmocapitalmarkets.com Feb. Level % Change from (2003=100) Mth. Ago Yr. Ago All Commodities Oil & Gas Metals & Minerals Forest Products Agriculture

2 Page 2 of 9 March 2018 Commodity Focus: Precious Metals Investment demand expected to fade Sarah Howcroft sarah.howcroft@bmo.com Gold prices found renewed support in the opening months of The 200-day moving average price has moved steadily higher over the last six months and is currently sitting at a three-and-a-half year high (Chart 1). It s not unusual for gold to rise in January this has been the case in 12 of the last 16 years but prices remained lofty through February and into early March, marking the longest stretch above US$1300/oz since mid-2016 and suggesting that more than just seasonality is at play. Interestingly, this has occurred against the backdrop of surging bond yields, defying the typical inverse relationship between gold and interest rates. Bond prices have dropped and yields have risen throughout the advanced economies as of late. In the United States, the benchmark 10-year nominal Treasury yield approached 3% in recent weeks. The last time it hit this mark was at the end of 2013 and only for a brief period. Real yields have also increased, indicating that economic growth expectations are contributing to the bond retreat in addition to monetary policy normalization, mounting inflationary pressures and a sharp widening in the U.S. fiscal deficit. Historically, gold has responded negatively to higher bond yields given the increased opportunity cost of holding a noninterest bearing asset, but this relationship hasn t held as firm over the last six to nine months (Chart 2). It s unlikely that gold would be able to resist a further move upward in bond yields. And, while we don t anticipate a significant rise in yields over the near term, we do expect the U.S. 10-year Treasury to reach 3.05% by end-2018 and 3.45% by end (compared with our projections of 2.80% and 3.25% at the start of the year), guided higher by healthy economic growth and a steady pace of interest rate hikes by the Fed. This scenario should keep gold prices in check, unless rising inflation expectations (due, for example, to faster wage growth or a spike in oil prices) work to dampen real yields even as nominal yields march higher. This would boost demand for gold as an inflation hedge. Among the other key factors affecting the price of gold are the softer U.S. dollar and shifting investor risk sentiment. The U.S. dollar, which weakened throughout most of last year, dropped sharply at the start of By late January, the broad tradeweighted U.S. dollar index had sunk to its lowest level since mid before staging a modest recovery in February. The greenback is likely to remain under pressure over the coming years, reflecting the larger U.S. fiscal deficit and relative strength of other global 1,400 1,350 1,300 1,250 1,200 1,150 1,100 1,050 CHART 1: GOLD PRICES (US$/oz.) 200-day m.a. 1, ,400 1,350 1,300 1,250 1,200 1,150 CHART 2: GOLD VS. TREASURIES 1,100 5-year Real 1,050 Treasury Yield² 1, ¹ (lhs : US$/oz.) ² (rhs : percent : inverted scale) Gold Price¹ CHART 3: GOLD/SILVER RATIO

3 Page 3 of 9 March 2018 currencies on the back of their improving economies and gradually tightening monetary stances. Since gold (priced in U.S. dollars) typically moves in the opposite direction of the greenback, this bodes well for the precious metal. However, as noted by BMO s Global Head of FX Strategy, Gregory Anderson, the appointment of Larry Kudlow a long-time strong-dollar advocate as President Trump s new chief economic advisor could provide an offsetting lift to the dollar, at least in the short term. Safe-haven demand for gold has been supported by the recent return of volatility in global financial markets. The sharp equity market correction in early February, combined with fears of European political instability, U.S. protectionist trade actions and personnel turnover in the Trump administration, has driven up risk aversion and reminded investors of the utility of gold in portfolio diversification. In addition to volatility and geopolitical concerns, there also remains a risk that economic growth could underwhelm in the United States or elsewhere leading to a more measured monetary tightening cycle. Markets will remain particularly sensitive to developments in China s economy for clues about commodity markets and global trade in general. Evidence of faltering economic conditions could prompt a flight to safety, lifting demand for gold and other lower-risk assets. Recent developments in the price of silver also offer some insight into the likely trajectory for gold. Silver has struggled to keep pace with gold in recent months, taking a harder hit from the recent equity slump and currently sitting below its 200-day moving average. As a result, the gold/silver ratio has ticked up, reaching close to a twoyear high in February (Chart 3). Silver s relative underperformance, signalling a dearth of both industrial and investment demand, adds to doubts about the durability of gold s recent run. While most of the movement in precious metals prices of late has been driven by investor sentiment, it s worth mentioning the fundamental backdrop. Steady albeit mild growth in both supply and demand for gold will keep the market roughly in equilibrium over the medium term. Many large gold miners are now seeking to expand production (i.e., no longer solely focused on cutting operating costs and reducing debt loads), suggesting that investment risks are increasingly acceptable in the current pricing environment. Silver should benefit from rising global demand from the photovoltaic, automotive and jewelry industries and tighter supply, but these effects likely won t be felt until later in the forecast period. Based on the roughly balanced set of positive and negative risk factors, we maintain a neutral outlook for precious metals over the next months. Gold s strong early-year performance has caused us to upwardly revise our average price forecast for this year by US$10 to $1290/oz, implying some pullback in the months ahead. Conversely, we have lowered our silver forecast to $17.25/oz in 2018, down $0.35 relative to the start of the year. Forecasts for both metals in 2019 remain unchanged, at $1295 and $18.00, respectively.

4 Page 4 of 9 March 2018 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 March April May June July August September October November December January February m-t-d March n.a. n.a. Forecast 2018 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 March 2018 Base and Precious Metals Copper Aluminum Zinc Nickel Gold Silver US$/lb US$/oz y-t-d March April May June July August September October November December January February m-t-d March Forecast 2018 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 March 2018 Agriculture Wheat Canola Cattle Hogs US$/bushel US$/tonne US$/cwt y-t-d March April May June July August September October November December January February m-t-d March Forecast 2018 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 March 2018 Commodity Indices and Forecasts All Oil & Metals & Forest Agricultural All US$-terms : 2003 = 100 Commodities Gas Minerals Products Products Commodities Annual C$-terms Forecast Quarterly 2016 Q Q Q Q Q Q Q Forecast 2018 Q Q Q Monthly 2017 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb 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 March 2018 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 March 2018 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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