Global Economics & Market Volatility - Impact on Commodities Nagaraj Meda MD, TransGraph Consulting
Global economy summary Euro strength emanated from accelerated growth momentum and strong current account surplus despite accommodative monetary stance from ECB, highly diverging from that of its counterpart, the FED. Subdued inflation expectations for medium to long term while short term rates were continued to be increased by FED had led to flattening of treasury yield curve in US. The passage of the new tax reform bill for a ten year period effective this year, which would put significant negative impact on US fiscal account for the first couple of years had also weighed on the demand for short to medium term treasury bonds thus resulted in increase of yields. Euro Zone yield curve along with Japanese yield curve remained steep as short term rates are maintained at below zero levels while inflation prospects for medium term have picked up well. Debt markets priced in very quick normalization in long term Euro Zone rates as against US. For the short term, however, FED shall remain hawkish continuing with the rate hikes while ECB would do any kind of interest rate normalization only going into 2019 or beyond Real interest rate scenario bodes well for Dollar Continued expansion in Japan GDP even as the government is in fiscal consolidation mode shall bode well for Yen 2
EUR-USD decoupled from interest rate differentials 0.0-0.5-1.0-1.5-2.0-2.5 Interest rate differential vs Currency 5yr yield spread (Euro Zone - US) EURUSD 1.30 1.25 1.20 1.15 1.10 1.05 1.00 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2-Jan-15 2-Jul-15 2-Jan-16 2-Jul-16 2-Jan-17 2-Jul-17 2-Jan-18 2.5 Euro Zone treasury yield curve spread 2.0 1.5 1.0 10yr - 3m US treasury yield curve spread 10yr - 2yr 0.5 0.0 10y-3m 10y-2y 3
Technical Outlook Dollar Index and EUR-USD Dollar Index is likely to have limited downside potential below 87 and trade higher towards 94.50 in coming 5 to 6 months EURUSD Spot pair is likely to stay below 1.27 on any gains and trade lower towards USD 1.16 in coming 5 to 6 months 4
Technical Outlook Asian Currencies (CNY,INR,MYR, IDR) Likely to strengthen towards CNY 6.25 ahead of depreciating towards CNY 6.45 and higher in coming 5 to 6 months. Likely to have limited potential below MYR 3.83 and witness a phase of depreciation towards MYR 4.00 in coming 5 to 6 months. Likely to weaken towards INR 66 initially ahead of appreciating towards 62.50 in coming 5 to 6 months. IDR spot is likely to stay below 13800 and consolidate above 13200 in the in coming 5 to 6 months. Depreciation above 14000 is unlikely. 5
Crude oil summary US crude oil output is expected to continue to grow at a rapid rate and rise to 10.4 MBpd in 2018 from an average of 9.3 MBpd during 2017 amid higher prices facilitating higher profitability for shale oil producers. OPEC group compliance (1.18 MBpd production cuts through 2018 ) has remained impressive at above 70% consistently despite the rise in Libya and Iran production due to deeper than allotted cuts bysaudi Arabia. Non-OECD demand growth (1.1% YoY rise from 49.94 MBpd in 2017 to 50.52 MBpd in 2018) driven by the increasing consumption in India and China. Meanwhile OECD region growth is expected to witness moderate growth from 46.94 MBpd in 2017 to 47.08 Mbpd in 2018. Holistically, narrowing supply demand conditions in 2018 compared to 2017 is anticipated to provide support to prices in the long term. World oil Supply-Demand Balance Quarterly 96.8 96.0 97.5 97.2 97.7 97.7 97.5 97.3 97.6 96.9 97.8 98.1 98.0 98.2 0.79 0.74 0.26 0.18 0.02-0.15-0.29 AMJ 2017 JAS 2017 OND 2017e JFM 2018p AMJ 2018p JAS 2018p OND 2018p World oil supply (MBpd) World oil demand (MBpd) Source: IEA, TG Estimates S-D Balance Global oil supply/demand balance Source: IEA, TransGraph estimates 1.66 96.95 96.40 94.74 97.71 97.59 97.14 96.88 96.07 0.89 0.25 0.12 2015 2016 2017e 2018p Total supply (MBpd) Total demand (MBpd) Supply-Demand gap 6
ICE Brent Crude Oil Price Outlook ICE Brent Crude Oil 1M Futures prices are likely to test USD 74 and turn weak towards USD 57 ahead of retracing back towards USD 67 in the coming 5-6 months time frame. 7
Higher Crude Oil Price Helped Improve Bio-Diesel Margins 0 Biodiesel Margins in USD/T Singapore Diesel vs CPO FOB Indonesia PME Margin SE Asia PME Margin @ Rotterdam, NW Europe SME Margin @ Paranagua, Brazil SME Margin @ New York, USA SME Margin Upriver Argentina -50-100 -150-200 -250-300 -91-138.7-158.8-184.0-259.9-271.3-350 Palm and Soy Methyl Ester Margins improved at key locations -400 through Nov-Jan, but corrected in Feb as Crude oil prices slipped. Sep-07 Sep-22 Oct-07 Oct-22 Nov-06 Nov-21 Dec-06 Dec-21 Jan-05 Jan-20 Feb-04 Feb-19 8
Four Major Global Veg-Oil Scenario Attribute 2016-17 Soy Sun Palm Rape Overall 2017-18 2016-17 2017-18 2016-17 2017-18 2016-17 2017-18 2016-17 2017-18 Beginning Stocks 3.58 3.24 1.60 1.54 7.45 7.73 5.05 4.06 17.68 16.57 Production 53.82 56.01 18.26 18.28 60.81 67.02 27.05 28.24 159.94 169.54 MY Imports 10.97 11.30 8.84 8.26 43.97 45.84 4.29 4.3 68.07 69.70 Total Supply 68.37 70.55 28.70 28.08 112.23 120.10 36.39 36.59 245.68 255.80 MY Exports 11.34 11.56 10.12 9.45 44.81 47.99 4.28 4.42 70.55 73.42 Industrial Dom. Cons. 9.69 10.06 0.85 0.89 15.83 16.96 7.96 8.2 34.33 36.11 Food, Feed, Dom. Cons. 44.10 45.84 16.19 16.41 43.86 45.55 20.08 20.19 124.22 128.00 Total Consumption 53.79 55.90 17.04 17.30 59.69 62.51 28.05 28.39 158.57 164.11 Ending Stocks 3.24 3.08 1.54 1.32 7.73 10.08 4.06 3.78 16.57 18.26 S/C Ratio 6.03% 5.51% 9.02% 7.66% 12.95% 16.13% 14.47% 13.31% 10.45% 11.13% 9
BMD CPO and CME Soybean Oil Outlook BMD CPO 3M Futures prices are likely to stay below MYR 2650 and trade weak towards MYR 2200 in the coming 5-6 months time frame. CME SBO 1M Futures prices are likely to trade mixed below USc 34 and extend further weakness towards Usc 29.50/29 in the coming 5-6 months time frame. 10
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