Commodities | May 07 2010
By Chris Shaw
The ongoing sovereign debt crisis in Europe has increased the risk of a short-term speculation driven price correction in the platinum group metals suggest analysts at Morgan Stanley. If correct, such a correction would not impact on what they see as a robust long-term story.
Supply and capacity constraints in the key South African market are the drivers of Morgan Stanley's positive view, as the stockbroker points out this country accounts for better than 80% of global supply for both platinum and rhodium.
Supporting the supply story is evidence of a cyclical recovery in auto demand, which has been enough for Morgan Stanley to lift its price forecast across the platinum group metals. For platinum, its US dollar estimates have been increased by 6-14% through to 2012, while its long-term price forecast has been increased by 61% to US$1,700 per ounce.
Palladium forecasts have been increased by 13-31% through 2012 in US dollar terms, while Morgan Stanley's long-term forecast has risen by 100% to US$567 per ounce. Rhodium estimates have been increased by 15-50% in US dollar terms, while the broker's long-term estimate has risen by 87%.
Soft commodity prices may not have been as volatile as those of other commodities, but as Commonwealth Bank commodity strategist Luke Matthews notes sugar prices have moved quite a lot as the fundamentals of the market have changed in recent months.
Prices have weakened significantly, raw sugar futures prices essentially halving since the beginning of 2010 as the supply/demand balance has turned around. Helping push prices lower was the discovery of an additional 3.5 million tonnes of sugar in India, which Matthews notes represented 25% of original crop size forecasts in that market.
At the same time, favourable weather in Brazil allowed for crushing to continue through their traditional off-season, a move estimated to have added one million tonnes to global supply.
Matthews notes in India the 2010/11 crop should now cover domestic consumption requirements, with potential for production to be as large as 24 or 25 million tonnes. This would make India an exporter given annual domestic demand of around 23 million tonnes.
Brazilian production is expected to reach 34 million tonnes in 2010/11, which would be an increase of almost 20% over last year. Matthews suggests this implies a global market deficit of around five million tonnes, well below previous estimates of a deficit of around nine million tonnes.
This is weighing on prices. Matthews suggests history shows prices fall until they erase most if not all of the previous gains. This would imply the price decline won't stop until prices are near their late 2008 level of less than US11c per pound.
To reflect this, CBA has cut its sugar price estimates, now expecting average prices of US14.7c in the June and September quarters and US13.5c in the December quarter. In 2011 the bank now expects average prices of US12.3c in the March quarter, US11.2c in the June quarter, US11.7c in the September quarter and US12.7c in the December quarter.
Turning to oil, Standard Bank suggests it too is at the risk of a further short-term correction in prices as the outlook remains one of downward pressure on the euro. The US dollar remains the primary beneficiary of increased sovereign credit risk in Europe and the bank notes oil remains sensitive to strength in the greenback.
Any correction could be sizable in the bank's view as it notes the speculative length in the crude market is high at present, this standing at odds with the current risk-averse mood of investors. Data last week showed net long speculative positions of almost 220,000 contracts, down almost 12% from the end of April but still at the highest level of the last two years.
From a technical perspective, Standard Bank suggests support for oil currently stands at US$79.63, though any break below this level could see prices challenge the 100-day moving average at US$76.39. (Crude oil futures closed at US$77.11/bbl overnight). For the June quarter Standard bank expects the oil price will average US$84 per barrel.
Barclays Capital also remains positive on the outlook for oil prices medium-term, suggesting the broad tightening in market fundamentals remains intact despite the current price falls.
The improvement in OECD demand continues to gain pace, with US demand strong and Japanese demand rising in year-on-year terms for the second month in a row in March. Non-OECD demand has also continued to rise strongly, Barclays noting demand from the Middle East and Asia combined in the March quarter was well above consensus estimates.
While European demand is set to lag this is no surprise according to Barclays, so it sees nothing in the fundamental picture to suggest the fall in prices to the bottom of the current US$80-$90 per barrel trading range is anything other than a temporary move.
Barclays continues to forecast an average oil price of US$86 per barrel for the June quarter and US$85 per barrel for 2010 overall. Commonwealth Bank chief commodity strategist David Moore's forecast for the end of 2010 is US$83 per barrel, with prices likely to trade in a broad band around recent levels for the rest of this year in his view.
While prices are expected to be range bound, Moore also expects volatility given competing pressures in the market at present. But Moore's view differs from that of Barclays in that he sees current prices as high relative to fundamentals.
Moore suggests US oil demand is still somewhat in the doldrums and inventories in that market are high. At the same time, he notes OPEC still has significant surplus capacity. In coming months Moore sees global oil inventory levels will be wound back slightly as demand recovers, with global demand forecast to rise by around 1.7 million barrels per day both this year and in 2011.
The pattern of stronger demand will be uneven, Moore expecting only modest improvement in developed economies but stronger demand growth in developing economies. There will be no shortage of oil capacity over the next three years according to Moore, but he expects OPEC will be cautious with respect to increasing production targets. Non-OPEC supply is expected to increase slowly through to 2015.
Given such a view, Moore is forecasting an (average) oil price of US$91 per barrel in 2011, rising to US$102 per barrel in 2012.
