Commodities Forecast Update Weakness awaits rest of 2014

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1 Investment Research 15 October Commodities Forecast Update Weakness awaits rest of 2014 Key themes Oil A markedly stronger dollar and concerns about the outlook have weighed on demand for commodities over the past month. In our view, the dollar strengthening is not over yet as the US economy will continue to outperform the rest of the world, eventually leading to the Federal Reserve raising interest rates in Growth in China, Europe and Japan has weakened and probably will not turn before Supplies in the oil market continue to mount as new investments in e.g. Brazil, Canada and US yield a higher output but more importantly because OPEC is currently producing at a high level well above its present output target. That has raised speculation as to whether a price war in the oil market is imminent. The glut in the oil market has secured low energy prices for other commodity producers. Downward pressure on the oil price will prevail for the rest of the year and into 2015 as the market awaits a reaction from OPEC. During 2015 we expect the Brent crude oil price to climb back up towards USD97/bbl, averaging USD94/bbl revised down from USD98/bbl. Our forecasts are above forwards and we therefore recommend clients on the consumer side to hedge exposure at current low levels. Metals A stronger dollar, lower energy prices and weaker global growth will weigh on prices for the rest of the year. During 2015 higher global growth will support demand and give rise to gradual price increases we have revised down our forecasts marginally. We recommend clients on the consumer side to use the current low prices to hedge exposure in Grains Mounting supplies are currently weighing heavily on grain prices. We have made slight downward revisions to our forecasts, reflecting further improvements in the outlook for supplies and dwindling odds of an El Niño arriving this year. Overall, our forecasts are close to forwards. Commodity prices since 01/01/14 Danske Bank main forecasts rebased Contents Oil: it smells a bit like Market overview... 3 Crack spreads... 3 Metals: Support awaits in Market overview... 5 Grains: rain won t spoil recordharvest... 6 Market overview... 7 Crop calendar... 8 Forecasts overview... 9 Selected research Research Commodities On the brink of an 86 oil glut repeat? 7 October 2014 Danske Bank forecast overview NYMEX WTI ICE Brent Aluminium 1,881 2,050 Copper 6,853 7,050 Zinc 2,180 2,425 Nickel 17,471 18,625 Gold 1,278 1,225 Matif milling wheat Rapeseed CBOT wheat CBOT corn CBOT soybeans 1, Source: Danske Bank Source: Danske Bank Senior Analyst Jens Nærvig Pedersen jenpe@danskebank.dk Important disclosures and certifications are contained from page 10 of this report.

2 Oil: it smells a bit like 1986 Supply and demand outlook The market was wrong-footed by OPEC who pushed production significantly above its 30mb/d output target in September, flooding the global market with oil amid a softening of global economic growth. The question ahead of its meeting on 27 November remains whether OPEC will adjust production lower or whether the desire to protect its market share amid booming production in e.g. the US and Canada will lead OPEC to continue to produce at a very high level. Although this is definitely a risk scenario worth highlighting the present situation has striking similarities with the mid-1980s oil glut when OPEC pulled a similar stunt in our main scenario, OPEC lowers production again and furthermore global oil demand will find support from higher global growth over the course of 2015, halving the surplus on the oil market next year. Price outlook Fundamentally, further downside to oil prices is limited by relatively high marginal costs among unconventional oil producers in e.g. Brazil, Canada and the US and a high fiscal breakeven oil price among a large share of OPEC members, most notably Saudi Arabia. In addition to lower OPEC output and higher demand, this will support a gradually higher Brent crude oil price over the coming year. In the near term though, we are looking for the present weakness to persist. For now the market awaits a response from OPEC, while a positive outcome of the Iran and P5+1 nuclear talks in November might add further to the downward pressure. We forecast the Brent crude oil price to rise to USD97/bbl in Q4 15, averaging USD94/bbl in 2015 revised down from USD98/bbl. Brent crude forecast versus forward WTI crude forecast versus forward Hedging recommendation Even though we have revised down our forecasts for the Brent crude oil price since September, they remain slightly above the prices in the forward market and, therefore, we recommend clients on the consumer side to hedge their exposure at the current low levels. Lowest price since 2012 Mounting crude oil supplies Source: Macrobond Financial Source: Macrobond Financial

3 Market overview Crude oil market balance Crude oil stocks Crude oil OPEC spare capacity Brent price and forward discount Brent historical volatility WTI-Brent spread Crack spreads Gasoline Jet fuel Diesel Gasoil 1% fuel oil 3.5% fuel oil

4 Metals: Support awaits in 2015 Supply and demand outlook We remain confident that higher global economic growth and a peak in the dollar will push demand higher in For now though, the US economy may be the only bright spot in the global economy. That is currently not enough to mitigate weaker economic growth in, e.g. China, Europe and Japan and a sharp rise in the dollar all factors which have weighed on base metal demand in recent months and will probably continue to do so for the rest of the year. The global supply of base metals will continue to be pressured by the Indonesian mineral ore export ban which has resulted in a squeeze of the global bauxite and nickel ore supply. Furthermore, a potential supply disruption in Russia is looming if new sanctions constrain the country s export of nickel and aluminium. On other hand, producers will continue to benefit from low energy prices. LME 3M aluminium forecast vs forward LME 3M copper forecast vs forward Consequently, we expect a minimal surplus in the aluminium, copper and zinc market and a balanced nickel market next year owing mainly to higher global growth on top of the above-mentioned supply constraints. There is currently plenty of aluminium and nickel in stock, which should help absorb a rise in demand stocks-to-use for both metals remain in the region of 15% on an annual basis. Price outlook We expect base metal prices to rise gradually the coming year driven by higher global growth and tighter supply conditions. In the near term though, weak global growth, low oil prices and a stronger dollar will weigh on prices. For 2015, we target an average aluminium price of USD2,050/t (revised down from USD2,125/t), an average copper price close to USD7,050/t (revised down from USD7,225/t), a nickel price of USD18,625/t (revised down from USD19,125/t) and an average zinc price of USD2,425/t (revised down from USD2,475/t). Hedging recommendation Our forecasts remain above what is currently priced into the forward market. Hence, we recommend clients on the consumer side to hedge their exposure at current low levels. In particular, we see upside risks to the aluminium price if the Indonesian ore export ban starts to take its toll on this market as has been the case with the nickel market. LME 3M nickel forecast vs forward US economy looks strong Eurozone recovery weakening LME 3M zinc forecast vs forward Source: Macrobond Financial Source: Macrobond Financial

5 Market overview Aluminium market balance Aluminium stocks-to-use Aluminium price and forward disc. Copper market balance Copper stocks-to-use Copper price and forward disc. Nickel market balance Nickel stocks-to-use Nickel price and forward disc. Zinc market balance Zinc stocks-to-use Zinc price and forward disc

6 Grains: rain won t spoil record harvest CBOT corn forecast vs forward Supply and demand outlook With the northern Hemisphere wheat harvest over, the focus has turned to the corn and soybean harvest, both looking to yield record-high output. Consequently, we are looking for large surpluses in major grain and oilseed markets, although more precipitation in the US than normal for the season may cut into the soybean and corn surplus. Weather forecasts are stubbornly holding on to their call for El Niño weather to approach this year. Should El Niño weather materialise during the northern Hemisphere winter, it would mean Australian wheat farmers could benefit from dry weather during the harvest and Brazilian corn and soy farmers will have to deal with dry weather during planting. Price outlook Prices are stabilising following the sharp downward trend over the summer. In our view, another strong year of production in the 2014/15 market year should now have been more or less factored in the market, which should limit further downside. Therefore, we expect prices to inch up slowly from here, mainly reflecting a gradual rise in production costs and the risk of weather disrupting the benign outlook for supply the recent rainy weather in the US highlights the risk of the latter. We forecast average 2015 prices of USD526/bu for wheat (revised down from USD541/bu), USD361/bu for corn (revised down from USD381/bu), USD983/bu for soybean (revised down from USD1,093/bu), EUR169/t for milling wheat (revised down from EUR177/t) and, finally, EUR345/t for rapeseed (up from EUR321/t). Hedging recommendation Our forecasts remain relatively close to current prices in the forward market. With grains prices at the lowest level since 2010, we recommend clients on the consumer side to hedge, in particular weather risk, e.g. the risk of a disruptive El Niño, at current low levels. Rainy corn harvest Wet soybean farmers CBOT wheat forecast vs forward CBOT soybean forecast vs forward Matif milling wheat forecast vs forward Rapeseed forecast vs forward

7 Market overview Corn market balance Corn stocks-to-use Corn price and forward discount Wheat market balance Wheat stocks-to-use Wheat price and forward discount Soybean market balance Soybean stocks-to-use Soybean price and forward discount Rapeseed market balance Rapeseed stocks-to-use Rapeseed price and forward discount

8 Crop calendar World grain crop calendar Grain Country % of world % of world production exports Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Corn Argentina Harvesting Planting Brazil China Euro Zone Ukraine US Rapeseed Canada China Euro Zone Ukraine Soybean Argentina Brazil Paraguay Canada China US Wheat Australia Canada* China India Euro Zone Russia Ukraine US * Spring wheat Source: USDA, Macrobond Financial, Danske Bank

9 Forecasts overview Danske commodity price forecasts AVERAGE 14/10/14 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q Energy: front month (US$/bbl) NYMEX WTI ICE Brent Base metals: LME 3M (US$/t) Aluminium 1,950 1,754 1,839 2,007 1,925 1,975 2,025 2,075 2,125 1,889 1, Copper 6,753 6,996 6,768 6,973 6,675 6,825 6,975 7,125 7,275 7,354 6, Zinc 2,342 2,024 2,080 2,314 2,300 2,350 2,400 2,450 2,500 1,940 2, Nickel 16,585 14,723 18,529 18,631 18,000 18,250 18,500 18,750 19,000 15,097 17, Precious Metals: spot (US$/oz) Gold 1,233 1,292 1,291 1,281 1,250 1,240 1,230 1,220 1,210 1,411 1, Agriculturals: front month Matif Mill Wheat ( /t) Rapeseed ( /t) CBOT Wheat (USd/bushel) CBOT Corn (USd/bushel) CBOT Soybeans (USd/bushel) 953 1,358 1,470 1, ,000 1,407 1, /10/14 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q Oil products: front month (US$/t) NYMEX gasoline Euro-bob Oxy , Jet fuel CIF cargo ULSD 10ppm CIF NWE cargo ICE gasoil ICE Brent % fuel oil FOB NWE cargo % fuel oil FOB ARA barge Crack spread: front month (US$/t) NYMEX gasoline Euro-bob Oxy Jet fuel CIF cargo ULSD 10ppm CIF NWE cargo ICE gasoil % fuel oil FOB NWE cargo % fuel oil FOB ARA barge Source: Danske Bank AVERAGE

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