Commodities | Aug 30 2010
By Chris Shaw
Some better US economic data late last week helped buoy oil prices but in the view of Barclays Capital the market's present focus on US economic data means any weaker than expected numbers will again put the oil price under pressure.
This has been reflected in recent pricing, as despite scope for upside from a solid oil demand outlook prices have continued to bump around the low US$70 per barrel level. While there is enough fundamental strength to support higher prices, Barclays notes concerns over the global macroeconomic outlook are making upward price breakouts difficult to sustain.
This implies a flatter than previously expected trajectory for oil prices, so Barclays has trimmed its price forecasts for both the remainder of this year and through 2011. For the September quarter, prices are now expected to average US$76 per barrel for West Texas Intermediate (WTI) and for the December quarter US$78 per barrel. This compares to previous estimate of US$85 and US$87 per barrel respectively.
The changes mean Barclays now expect a 2010 average price of US$78 per barrel, which compares to a previous forecast of US$82 per barrel. It is a similar story next year, Barclays revising down its 2011 average oil price forecast for WTI to US$85 per barrel, down from US$92 per barrel previously.
In gold, Standard Bank remains of the view prices are set to break through the US$1,300 per ounce level sometime in the final quarter of 2010. This reflects an expectation of a pick up in investment and physical demand for the metal, something it suggests recent data indicates is underway.
This pick up partly reflects seasonal factors but even allowing for this Standard Bank notes buying interest in gold is now much stronger than has been the case in recent months. This physical demand should remain strong through to the end of the year in the bank's view.
Long-term drivers of investment demand for gold in Standard Bank's view are liquidity and long-term real interest rates and it notes both of these are supportive for the gold price at present. As an example the bank notes US 10-year inflation linked bond yields are below 1.0%, down from 1.3% in June.
As a lower implied real yield favours gold investment Standard Bank has retained its positive medium-term view on the likely direction of gold prices.
In the base metals, Macquarie notes the latest data from the International Aluminium Institute shows world production of the metal remained strong in July as output was up 15% in year-on-year terms to an annualised rate of 41 million tonnes.
China remains the driving force of world production and continues to produce at near record levels. In the rest of the world production is up by around 6% from the lows earlier this year but remains below the peak levels recorded in 2008.
Looking ahead, Macquarie expects that while Chinese production should remain strong for August, in the rest of the world it is likely to see declines given some issues at a number of smelters. Such an outcome should support physical premiums in the broker's view, especially as a large portion of current aluminium stocks are locked up in warehouse financing deals at present.
Given key interest rates are still low and unlikely to move higher in the short-term, and given report warehouse space is being offered at discounted rates, Macquarie expects some buyers will look to acquire more metal to put into warehouse financing deals in coming weeks.
Looking generally at Chinese commodity production in July, Macquarie suggests while China's influence on global demand has fallen when compared to last year its net trade and production have remains at relatively steady levels in recent months.
This suggests the de-stocking seen in the first half of the year has largely come to an end, which implies Chinese apparent demand for commodities should be rising through the final quarter of 2010. This should at the least be a positive for sentiment in the sector.
With respect to the bulk commodities, Citi notes it is again time for contract prices to be set for the fourth quarter of the year. For iron ore the broker expects prices will be set at around US$132 per tonne Fines FOB Australia, which compares to a price of US$147 per tonne in the third quarter. This implies a reduction in forecasts as Citi had been expecting a final quarter price of US$147 per tonne.
In coking coal Citi notes contract negotiations are underway, with shippers believed to be offering US$210-$215 per tonne and Japanese steel makers understood to be asking for prices of around US$190 per tonne. Either way, Citi notes prices will be lower than the September quarter contract price of US$225 per tonne and below its previous forecast of US$250 per tonne.
Spot prices in the coking coal market appear to have turned, Citi noting following a slide to US$178 per tonne recently from US$230 per tonne in May there has been a mild recovery to prices around US$185 per tonne.
Deutsche Bank has added to the coal market commentary by analysing transport gridlocks in China, particularly as they relate to transporting coal from Inner Mongolia to the coastal cities. This follows recent reports of a massive traffic jam in the north of China.
Inner Mongolia is now China's largest coal producing province but as Deutsche notes the railway system connecting the region to the coast is significantly underdeveloped. This has forced coal suppliers to rely on trucks to the extent traffic on the G110 Expressway has hit around 80,000 vehicles per day.
This compares to regulations limiting daily traffic to 6,000 vehicles, these heavy volumes leading to a rapid deterioration in state of road infrastructure. Deutsche Bank expects this infrastructure bottleneck is likely to worsen as demand for power and coal continues to grow, which implies a growing reliance on the seaborne coal market for marginal supply.
