Commodities | Dec 22 2011
This story features KAROON ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: KAR
– Chinese market mood more positive than expected
– NAB sees ongoing commodity headwinds
– Support for oil demand in 1Q12
– Oil price may fall slightly in 2012
– UBS outlines its preferred energy plays
By Chris Shaw
A marketing trip to China has offered a positive surprise, ANZ Banking Group noting the mood in that country appears more positive than had been expected. While the next six months will likely be challenging as export demand has slowed, the bank notes consumer stockpiles are at very low levels. This could potentially create a meaningful re-stocking phase in the coming six months.
The visit confirmed while producer order books are close to full for January, ANZ notes consumers are not yet prepared to lock in much further. But the bank also notes slowing demand is being blurred by seasonal weakness and what continue to be restrictive lending conditions.
ANZ remains of the view consumers are being overly cautious given the psychological impact of weaker eternal markets, the result being inventory de-stocking despite what appears to be firm underlying demand.
As an example, ANZ notes reports suggest bonded copper inventories are now between 150-200,000 tonnes, which is well below the 600,000 tonne estimate of a year ago. Such limited stocks could create a strong re-stocking phase as demand improves, something seen as most likely after the Chinese New Year.
Taking a medium-term view ANZ notes there are signs of optimism, this following the recent easing in lending restrictions and the likelihood of better clarity with respect to monetary policy in coming months.
From a domestic demand perspective ANZ notes there are signs of a two-speed economy, with State-owned enterprises holding up better than private operations. This is largely due to a lack of credit for those in the latter group.
Real estate remains a key market, ANZ pointing out the Chinese property market is viewed as being too big and too important to fail. This implies the central government will do whatever it can to ensure a soft landing for the economy.
This implies the challenge for policymakers will be the pace of policy adjustments, as ANZ suggests if changes are too slow or too sharp the impact would be felt by not only the housing market but by secondary markets such as metal, steel, manufacturing and appliance industries.
National Australia Bank notes concerns over the European debt crisis and the potential for further ratings downgrades and increases in borrowing costs, has created additional headwinds for some commodities denominated in US dollars.
This has pushed prices lower over the past month, as investor demand has weakened. At the same time NAB's outlook for the global economy has deteriorated over the last month as the European crisis continues to eat away at business confidence in Europe in particular.
A steeper recession in Europe is now expected, with NAB suggesting weaker European growth is likely to spill over effects on the rest of the world. Even China is unlikely to escape the crisis unscathed, something seen as having ramifications for industrial metals and bulk commodity demand.
NAB expects Chinese policymakers will be determined to maintain strong economic growth through more stimulatory policy settings, something seen as easier to implement given the amount of tightening that has occurred over the past year.
Looking at the markets, NAB notes oil price volatility has been relatively subdued as the weakening global economy impact has affected demand but geopolitical fears have continued to support prices. While the data of the last month has seen NAB trim its price forecasts, oil is still expected to generally remain above US$100 per barrel in 2012.
Investor appetite for base metals has fallen in recent weeks and this has pushed down prices, a trend NAB expects will continue for at least the short-term given no clear and satisfactory solutions are evident for the European debt crisis.
The stronger US dollar in recent weeks has likely curbed some investor demand for gold, but NAB points out the gold price of late has been less influenced by currency movements than has historically been the case.
The nominal price of gold remains elevated from a historical perspective and this situation is expected to remain given the volatility in financial markets NAB expects in coming months.
Overall, NAB expects prices as measured by the NAB Non-rural Commodity Price Index will rise by around 12.5% this year, before falling by just over 15% in 2012. In Australian dollar terms the moves should be similar, with a gain of 11% this year and a fall of 15.1% next year being forecast.
Looking more specifically at oil, JP Morgan expects energy supply constraints will support oil demand in the first quarter of next year. This is particularly the case in Asia, where Pakistan, India and China have all indicated there are factors stretching energy supplies at present as the winter period takes hold.
The likely outcome in the view of JP Morgan is increased use of oil in power and heat generation. Given this is likely to occur at a time when markets are quietening down for the end of year holiday season, it could well act to support prices and price volatility into 2012.
UBS also sees scope for oil prices to remain at relatively high levels in 2012, though the broker is anticipating a modest fall for the year overall. What should sustain prices in the view of UBS is a steep industry supply curve, changed priorities in the Middle East and risk.
Demand for oil is expected to rise by 1.3% or 1.2 million barrels per day in 2012, UBS noting this follows a 1.0% increase in demand in 2011. Non-OPEC supply is expected to have risen slightly this year, something UBS expects will see spare capacity rise to around three million barrels per day as Libyan production increases.
With inventories having fallen in 2011 UBS sees scope for stock building next year to support prices, though a moderation to prices of US$95 per barrel is expected by the end of next year. This is in line with the broker's long-term price forecast.
This spare OPEC capacity will be key theme for the oil market in 2012 in the view of UBS, while growth in unconventionals such as shale oil is also likely to be a feature of the market in the coming year.
Catalysts for prices according to UBS should be political turmoil in the Middle East, non-OPEC oil production levels, exploration and increased portfolio management by integrated producers.
For Australian investors UBS rates a number of stocks as key Buys, including Woodside Petroleum ((WPL)) and Oil Search ((OSH)) among the large caps, Aurora Oil and Gas ((AUT)) and AWE Ltd ((AWE)) in the mid caps and Karoon Gas ((KAR)) as an alpha play. Of these, Woodside has been upgraded to a Buy on valuation grounds, as UBS suggests the market is only pricing in current operating assets and Pluto LNG T-1.
Santos ((STO)), Tap Oil ((TAP)) and Horizon Oil ((HZN)) are also rated as Buy by UBS, while Caltex ((CTX)), Beach Energy ((BPT)) and Roc Oil ((ROC)) are all ascribed Neutral ratings.
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