Investment Research General Market Conditions 22 March 2012 Commodities Forecast Update Oil price forecast revised higher In the most recent issue of Commodities Quarterly from January 2012 we argued that an overly negative global growth outlook was priced into commodity market and that commodity prices would recover during 2012. We still keep this view as we continue to forecast global growth close to 4.0% in both 2012 and 2013. Especially, the recovery in the US has gained traction in the past couple of months with close to 250,000 jobs now being added each month in the US. But also the euro zone outlook has overall improved. The fear of the debt crisis derailing the recovery has diminished as the second LTRO from the ECB has been very effective in pushing peripheral yields significantly lower. The fear of Greece seeing a disorderly default has also been removed as the second bailout to Greece was completed relatively successfully. Overall, we continue to keep the view that the current recession in the euro zone will be short and relatively mild. China is currently attracting a lot of attention and the fear of a hard landing continues to be a dominant market theme in the commodity market. Once again we estimate that these fears are overstated. Our China macro economist points to the fact that inflation is not an issue in China at the moment. Hence, Chinese policy makers have plenty of room to stimulate the economy. In that respect it is pivotal that there are few signs that food prices will spike along energy prices as they did in 2008 and 2010. In respect of our forecast we have changed our base and precious metal forecasts very little compared to the Commodities Quarterly published in January. In general we have revised our Q1 forecasts slightly lower. The latter reflects the latest concerns about China that have weighed especially on the base metal segment. Copper, aluminium and nickel are expected to rise 5.9%, 10.8% and 17.8%, respectively, throughout 2012 compared with the present spot price. We have also kept our slightly bullish grains forecast more or less unchanged. It seems that especially the wheat market was positioned for a very bearish market and when more positive news hit the market in February the market was caught on the wrong foot. Corn prices continue to be supported from higher energy prices and soy beans from a surge in Chinese imports. Major upside revision to oil price forecast However, we have made significant revisions to our oil price forecasts. We have to admit that we underestimated the tightening of especially the European market in the aftermath of the Libyan supply problems and also the effect of the US extended sanctions on Iranian oil exports. We have therefore revised our 2012 and 2013 Brent oil forecast higher from USD114 and USD120 a barrel to USD127 and USD129 a barrel. We now expect oil prices to hit USD130 a barrel in Q2 and stay at or above that level throughout Q2 and Q3. We have not presumed a war with Iran. If that happens oil prices spiking above USD150 a barrel is likely. In case of the latter, we expect a global release of strategic oil stocks that should secure that the spike in oil prices only lasts for a limited period of time. Key points We continue to forecast that global growth will support commodities in 2012 and 2013. We have changed our base and precious metal forecasts very little compared to the Commodities Quarterly published in January. In general we have revised our Q1 forecasts slightly lower. The latter reflects the latest concerns about China that have weighed especially on the base metal segment. However, we have revised our 2012 and 2013 Brent oil forecasts higher from USD114 and USD120 a barrel to USD127 and USD129 a barrel. We now expect oil prices to hit USD130 a barrel during Q2 and stay at or above that level throughout Q2 and Q3. It reflects a tighter oil market and the geopolitical risks. Danske forecasts 2012 2013 ICE Brent 127 129 NYMEX WTI 114 119 Aluminium 2,284 2,375 Copper 8,838 9,375 Zinc 2,225 2,400 Nickel 20,975 23,000 Steel 550 569 Gold 1,706 1,788 Matif milling wheat 217 225 CBOT wheat 712 750 CBOT corn 677 733 CBOT soybeans 1,328 1,366 Chief analyst Arne Lohmann Rasmussen +45 4512 85 32 arr@danskebank.dk Bloomberg: DRFX <go> Important certifications and disclosures are contained from page 6.
The oil market is getting tighter The main reason why we have revised our oil price forecast higher is a tighter inventory and spare capacity situation. It also seems that we have underestimated the effect of the US and EU sanctions towards Iran. In that respect we would like to highlight the latest Oil Market Report from the International Energy Agency (IEA) that was released last week. We found the editorial quite interesting. In our view, the IEA goes a long way in arguing that oil prices are not just rising because of Iran and the fear of war, but primarily due to a tighter inventory and spare capacity situation. We very much agree, but we were still surprised at how outspoken the IEA was on this subject. The IEA says, Put simply, a post-recession OECD industrial stock overhang has gradually been whittled away. Inventories, notably crude in Europe and the Pacific, look very tight in absolute terms. The IEA also says that it is important to look at the absolute size of the stocks, which are far less comforting than the popular forward-demand cover implication of 58 days. The IEA continues, Current market dynamics are highly complex and include a heady brew of both real and anticipated supply-side risks, alongside a very evident tightening in actual market fundamentals that has been under way since mid-2010. Oil pushed higher by lower inventories not just geopolitics 130 130 Brent oil 125 125 120 120 115 115 110 110 105 105 100 100 95 95 90 90 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 11 12 Source: Reuters EcoWin Small oil stocks In respect of spare capacity (OPEC s ability to make up for production shortfalls), the IEA also sounds quite concerned. It estimates that higher OPEC production in February has led to a decline in OPEC s effective spare capacity to just 2.75mb/d. If OPEC/ Saudi Arabia has to add another 1mb/d later to compensate for, e.g. Iranian oil the effective spare capacity could become dangerously low, in our view. The IEA also points to the fact that other production outages of 0.75mb/d (South Sudan, Syria and Yemen) are currently haunting the market. In our view, these are supply outages that have received very little attention in the market as all focus is on Iran. Source: IEA Oil Market Report Second, the IEA estimates that exports of Iranian crude could drop by up to 1mb/d from mid-2012 onwards. Almost all of Iran s buyers are expected to scale back volumes in order to avoid falling foul of sanctions. Remember, this drop is due to the sanctions that have become much more effective since the US made it illegal to trade with the Iranian central bank for financial institutions. If a bank breaks the sanctions they will not be able to trade with US banks at all. It has been argued that China and to a lesser degree India, who have not accepted the extended US sanctions, would be able to buy Iranian oil leaving the global economy with an unchanged oil supply. However, the latest trade numbers show a significant decline in Iranian oil exports to China and India. According to Reuters, China s February crude import fell 41 percent versus January. All in all, we perceive the outlook as being quite constructive for oil prices. Basically, we argue that oil prices are not just high due to a geopolitical premium, but also due to a tighter market balance especially in Europe and the Pacific. In our view, Iran will, going forward, become a very important factor in the supply/demand balance even in a situation where an outright war is avoided. The IEA talks about a bumpy ride in the months ahead. We think the bumpy ride will push oil prices above USD130 a barrel in Q2 and even higher oil prices cannot be ruled out if either the fear of a Chinese slowdown abates, or tensions in the Middle East strengthen further. 2 22 March 2012
We recommend to lock in commodity exposure Our commodity price forecasts are in general well above the different forward curves. We therefore keep our recommendation unchanged to our January edition of Commodities Quarterly, i.e. that clients with commodity exposure should lock in exposure at the current prices. In particular, in energy we recommend to keep an above benchmark hedging ratio. We will publish the next issue of Commodities Quarterly in April 2012. It will contain in-depth analysis of the energy, base metals and grains markets. Commodity price forecasts Source: Bloomberg, Danske Markets. Commodities at Danske Markets Commodities Research: Arne Lohmann Rasmussen Chief Analyst, Head of FX and Commodities Research +45 45 12 85 32 arr@danskebank.dk Christin Tuxen(on leave) Senior Analyst, PhD +45 45 13 78 67 tux@danskebank.dk Commodities Sales: Martin Vorgod Senior Dealer (Denmark) +45 45 14 32 86 mavo@danskebank.dk Fredrik Åberg Vice President (Denmark/Sweden) +45 45 14 32 85 faberg@danskebank.dk Michael Winther Senior Dealer (Denmark) +45 45 14 67 67 miwin@danskebank.dk Kasper Mortensen Antti Malava Dealer (Denmark) Senior Dealer (Finland) +45 45 14 72 80 +358 (0) 105462057 kam@danskebank.dk antt@danskebank.com Anders Winnæss Senior Dealer (Norway) +47 23 13 91 57 awin@fokus.no Patrick Aran Shawcross Senior Dealer (Northern Ireland) +44 (0) 28 9089 1111 psha@northernbank.co.uk 3 23 March 2012
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