Commodities | Apr 19 2012
– Oil price forecasts lifted
– PGM outlook less positive than gold
– Bulk outlooks updated
– NAB trims commodity price expectations
By Chris Shaw
With oil prices remaining elevated thanks to geopolitical issues such as the embargo on Iranian exports and low inventory levels east-of-Suez, Citi has revised its oil price expectations in coming years.
The broker has lifted its 2012 Brent crude forecast 14% to US$125 per barrel, while estimates in both 2014 and 2015 have been increased 10% to US$95 per barrel and US$98 per barrel respectively. Forecasts for 2013 are unchanged at US$120 per barrel.
West Texas Intermediate (WTI) forecasts have similarly been adjusted, Citi's numbers increasing 6% this year and 13% in 2014 and 2015 to US$107 per barrel, US$94 per barrel and US$97 per barrel respectively. Again, forecasts for 2013 are unchanged and stand at US$113 per barrel.
National Australia Bank suggests the recent weakening in the oil price reflects Iran price risk slowly being wound down and a return of risk-off sentiment in commodity markets. On the supply side there remains uncertainty from unplanned outages, which is more significant given non-OECD demand remains solid.
On balance this is enough for NAB to lift its oil price forecast for 2012, this to reflect the potential for supply side disruptions to push prices higher. The bank now expects an average Brent crude price of US$116 per barrel this year, up from US$112 per barrel previously.
The changes to its forecasts have seen Citi revise earnings expectations for Australian oil and gas producers, with forecasts increasing by more than 10% for Santos ((STO)) and Woodside ((WPL)) and more than 30% for Oil Search ((OSH)), Beach Energy ((BPT)) and AWE ((AWE)).
Citi's ratings have not been adjusted, meaning the broker continues to place Buy ratings on Santos, Woodside, AWE, Oil Search and Karoon ((KAR)). Both Beach and Aurora Oil and Gas ((AUT)) are rated as Sell.
Citi's top pick among the large cap plays remains Santos as at current levels the broker suggests investors are getting a largely free option on GLNG and longer-dated growth from projects such as PNG T3, GLNG T3 and Zola.
Among the smaller companies Citi suggests Karoon is the only stock in its coverage universe with the potential to deliver returns of more than 100%, while AWE's growth options continue to look undervalued in Citi's view.
In the platinum group metals, Standard Bank notes last week net speculative length for platinum has resumed falling, dropping 171,500 ounces for the period. This is the largest decline since last September and can be attributed to both an increase in short positions and the unwinding of some previous longs.
In the view of Standard Bank the increase in short positions is somewhat alarming, as it is a strong signal the market is turning against platinum. Net speculative length for palladium also declined, indicating the futures market is becoming more bearish on both metals.
On the plus side markets are far from overstretched, as Standard Bank notes while net speculative length has declined there has not been an associated drop in open interest. Platinum at US$1,550-$1,600 per ounce offers value in Standard Bank's view, while palladium is seen as offering value on any approach of US$600 per ounce.
In the gold market Credit Suisse has made no changes to its quarterly average gold price forecasts for this year. The broker's estimates stand at US$1,720 per ounce for the June quarter, US$1,810 per ounce in the September quarter and US$1,840 per ounce for the December quarter.
In the view of Credit Suisse the gold market in 2012 has so far followed its historical pattern, which includes some seasonal strength in April and May. The demand side will be a key and the broker notes seasonality plays a role in both jewellery and investment demand.
This reflects the fact India is the largest component of seasonal demand and its demand spikes in the second quarter in line with the Akshaya Tritiya festival. The traditional Indian festival wedding season in the third and fourth quarters is also a time of elevated gold demand in that market, while Christmas drives Western world demand and buying in China is influenced by Chinese New Year.
Credit Suisse expects Indian gold jewellery demand will rise this quarter, but any increase may be tempered by a new tax that will increase the price of branded jewellery. Despite this, the broker sees near-term upside risk for the gold price.
In the bulks market, Commonwealth Bank notes Chinese domestic iron ore output rose by 27% in March to 103.3 million tonnes, which is 9.4% higher in year-on-year terms. The increase was no great surprise as spring means mines in the north of China can resume output.
In CBA's view iron ore prices in a range of US$140-$145 per tonne has limited a modest amount of loss-making production in China, as the marginal cost in that market is estimated to be in the range of US$150-$160 per tonne.
There continues to be strong cost support for iron ore prices around US$125-$135 per tonne, leading CBA to suggest prices are unlikely to be sustained below those levels without any large loosening of the market overall.
Still on bulks, Credit Suisse has revised down thermal coal price forecasts for 2012-2015. The move was prompted by more Atlantic tonnes being freed for Asian markets thanks to the US's greater reliance on cheap shale gas and a warm winter in the Northern Hemisphere.
Credit Suisse is now forecasting thermal coal prices of US$113 per tonne this year, US$125 per tonne in 2013 and US$130 per tonne in 2014. These compare to previous forecasts of US$126 per tonne, US$138 per tonne and US$140 per tonne respectively.
Hard coking coal estimates have also been trimmed to reflect a lower than expected June quarter price settlement. Credit Suisse's estimates have been trimmed by US$10 per quarter to an average for 2012 of US$226 per tonne.
The changes to coal price expectations have impacted on Credit Suisse's earnings forecasts across the coal sector, with estimates lowered by an average of 11% through FY14. This has driven an average valuation decrease of 2%.
Among stocks under coverage, Credit Suisse prefers Stanmore Coal ((SMR)) and Bathurst Resources ((BTU)), the former given potential near-term catalysts such as port and rail allocations and the latter given significant upside potential is the company is successful in an Environmental Appeals Court hearing.
Tiger's Realm Coal ((TIG)) is also rated as Outperform, while Credit Suisse is currently restricted on Aston ((AZT)), Whitehaven ((WHC)) and Cockatoo Coal ((COK)).
With respect to steel, Deutsche Bank suggests Chinese steel production will continue to grow as long as GDP growth in the economy remains above 3%. The broker's forecasts call for steel intensity per capita to continue expanding until 2018.
This is because if growth in this measure was not maintained China would end up with a developed coastal region and an undeveloped inland, an outcome that is clearly not in the government's plans. Given such a view, Deutsche remains positive on the outlook for iron ore.
At present Deutsche estimates China's annual steel production at a little more than 700 million tonnes, but suggests this will need to increase to 850-900 million tonnes per year to meet normal levels of development.
Even assuming a lower pace of increase, and Deutsche is forecasting just a 4.9% increase in Chinese steel production this year, there is expected to be increased demands placed on a tight iron ore supply chain. While production is increasing in China in particular much of this is higher cost production, and this is setting the floor for the iron ore price at around US$135 per tonne in the view of Deutsche.
Looking at base metal markets in general, NAB notes prices fell by 2.75% in March and were 18.5% lower than the levels seen a year ago. Nickel prices recorded the largest decline for the month, while copper managed a small increase.
The bank suggests the weakness reflects both mixed global economic data and increased concerns with respect to the potential of a hard landing in China. Overall National Bank expects market conditions will remain relatively supportive of prices, though there continue to be significant downside risks given the global economic environment remains fragile.
Given the downside risk to demand appears slightly more elevated than previously thought NAB has trimmed its commodity price expectations. This leads to the expectation the NAB Base Metals Index will fall by around 2% in the June quarter, this following a 7.7% increase in the March quarter. For the full year an increase of around 5.5% is forecast for the index.
