Commodities | Apr 07 2010
By Chris Shaw
The Easter period was a good one for base metal and oil prices as positive economic news saw a continuation of recent price strength, albeit on thin trading volumes. A stronger than expected US ISM Non-Manufacturing Index for March was the latest trigger, the reading of 55.4 the highest since May of 2006.
Barclays Capital notes the surge in oil prices saw the front-month for West Texas Intermediate (WTI) settle at US$86.62 per barrel, its highest level since early October 2008. The move reflects a steady rebound in global oil demand, Barclays noting this is being led by very strong demand from the non-OECD Asian and Middle Eastern regions.
Cumulative incremental demand from these areas averaged 0.61 million barrels per day last year, but Barclays notes this is expected to increase to 1.055 million barrels per day in 2010. At the same time, with the exception of Russia, non-OPEC supply continues to disappoint.
Increased investor interest has also played a part in the recent oil price gains, Commerzbank noting investors lifted their net-long positions considerably during the week to March 30th. Speculative net long positions are now approaching a new all-time high.
This trend is unlikely to last in Commerzbank's view as it suggests the recent gains are being driven by liquidity rather than fundamentals. JP Morgan agrees, seeing current conditions as temporary given now is the period of peak seasonal maintenance.
JP Morgan expects there will be a widening in the crude contango in coming weeks, as refiners buy inventory to lock in prices for the future, a process that appears to already be underway in the market.
The stronger economic data pushing oil have also been supporting base metal prices, Commonwealth Bank noting prices rose from pre-Easter levels thanks to a combination of investment inflows and positive market sentiment.
Seasonal factors are also working in copper's favour, CBA noting copper stocks typically decline between March and June and that the market tends to be tighter in the first half of each calendar year. Recent data suggest this trend is continuing as exchange copper stocks declined in March by around 31,000 tonnes.
This was a smaller decline than in 2008 but larger than in 2009 and while LME cancelled copper warrants are below recent highs, it still points to draws on LME stocks in the near-term in the bank's view.
Another key for copper going forward, notes Barclays, will be ongoing supply constraints and disruptions. Chile is a case in point as Standard Bank notes major producer Codelco may have less to spend on new projects and expansion plans following that country's recent earthquake.
In further supply side news, Pan Pacific Copper has announced it will keep its 7% output cut in place over fiscal 2010/11. The company has indicated the decision reflects its view conditions don't currently justify a return to full output levels.
The improving fundamentals in the copper market lead Barclays to suggest there is still scope for further sharp price appreciation. BMO Capital Markets agrees, taking the view further improvement in physical supply and demand fundamentals will likely mean inventories are driven lower. That's the bullish side of things.
Others take a counter view however, Commonwealth Bank analysts suggesting current base metals prices are well above their near-term forecasts, indicating prices have run up too far too fast. In copper specifically CBA suggests the price is above the level justified by fundamentals, in part thanks to buying in anticipation of future market tightness.
Commerzbank is also cautious on the copper price outlook, suggesting the risk of a sharp price correction appears very high as the price continued moving further away from justifiable levels. Commerrzbank does suggest as long as news flow remains positive, metals prices should remain well supported.
MF Global suggests for copper support currently rests at US$7.300 per tonne and resistance is at US$7.920 per tonne, this being the last resistance level on charts before a push into the US$8,000 per tonne range possibly takes place. MFG agrees fundamentals are less inspiring at current levels.
In aluminium, MF Global sees support at US$2,180 per tonne and resistance at US$2,400 per tonne, but any move above this level could prompt a sharp breakout in the MFG analysts' view. There is also potential for a double-top to form, so the sidelines appears the place to be until a clearer picture is revealed, they suggest.
For zinc, MF Global sees support at US$2,200 per tonne and resistance at US$2,550 per tonne, with the move above US$2,400 per tonne suggesting a push higher. In lead the analysts see support at US$2,000 per tonne and resistance at US$2,400 per tonne, with a sort-term down channel needing to be taken out before prices advance further.
Nickel prices met resistance at US$25,000 per tonne and so MFG analysts see scope for something of a pause here, though buying is expected to resume after a few days of sideways trading. Support is currently estimated to be at US$21,400 per tonne.