Commodities | Oct 30 2012
– Oil market outlook updated
– NAB sees little growth in base metal prices in 2013
– Chinese aluminium production continues to increase
– Platinum support at US$1,550 per ounce
– CBA comments on iron ore and thermal coal
By Chris Shaw
In the view of Citi, support for crude oil is fading as the market emerges from a tight period. This suggests prices will continue to soften in coming weeks, as the market eases further.
The weakness is no surprise in Citi's view, as the broker notes twice a year oil markets go through a period of maximum tightness when refiners are still to come out of maintenance. As the refiners return to the market margins come down, which is what is happening in the market at present.
With physical markets for products deteriorating significantly over the past few weeks cash premiums are also falling, prompting some liquidation among money managers that are still long the market.
As prices have come down so too have Brent time spreads. Citi points out the December 2012-December 2013 Brent spread has traded in lockstep with prompt Brent prices for most of this year, but the past month has seen some resilience to the move lower in front prices.
While this in part reflects producer hedging Citi suggests it also reflects the broader dynamics of price and structure in the Brent market. The tension between rising net import requirements into north west Europe continues to outpace the drop in crude demand stemming from the loss of European refining capacity.
Higher Russian flows have helped to fill the gap, but Citi suggests West African supply is also needed to balance the market. This creates some tension as Asia competes with Europe for this supply. Citi expects West African supply will increase into 2013, meaning north west Europe should be better supplied next year.
Utilisation rates should fall as margins come down from the levels seen this year, adding to the overall crude balance in north west Europe in Citi's view.
In National Australia Bank's view oil market attention is now shifting to Asia, where there has been some downside surprise in recent months and where demand expectations may be lowered in the months ahead. China is an example, as recent GDP numbers for that economy were quickly followed a a fall in Brent crude prices of around US$4 per barrel.
Oil market fundamentals remain reasonably tight according to NAB, this due largely to some field outages and ongoing geopolitical tensions between Turkey and Syria in particular. This tension is expected to lift prices from current levels through the December quarter.
NAB notes the October market review from the International Energy Agency (IEA) included a downward revision to global oil demand growth expectations, a move that was matched by OPEC given concerns over the recent slowdown in the Chinese economy. This supports the bank's view oil prices will likely consolidate in 2013, NAB forecasting an average price for next year of US$113 per barrel for Brent.
For the base metals NAB suggests demand fundamentals have been broadly unchanged in recent months, as the boost from additional economic stimulus measures have faded and downside risks stemming from the European sovereign debt crisis have also eased.
If the stimulus measures being announced fail to provide a real economic improvement, NAB sees risk of another bout of safe-haven asset buying pushing down industrial metal prices. A lack of demand catalysts also suggests industrial metal prices will struggle to move higher on any sustainable basis in coming months.
Fundamentals remain tight in copper and this leads NAB to suggest the metal will remain one of the more resilient in the sector, in contrast to aluminium where there remains a global glut of supply.
In general NAB suggests the benign demand outlook will offer little in the way of price upside in the shorter-term, particularly as any rebalancing of the Chinese economy could deliver weaker growth in base metals demand.
NAB's forecasts are for its Base Metals Price Index to gain 3.25% in the December quarter this year, followed by an increase of 1.25% in 2013.
September saw a new high in Chinese aluminium production, rising 11.2% in year-on-year terms for January to September. This was enough to deliver a 3.1% increase in total world output, as Macquarie notes ex-China output is down 3% for the same period.
The fall in global output is not all cost driven in the view of Macquarie, as labour disputes and technical problems have also impacted on some projects. Addressing these issues offers some scope for ex-China production to improve in coming months.
With Chinese aluminium production continuing to increase that market remains in significant surplus, as evident in rising stocks in SHFE warehouses. Macquarie notes exchange stocks have also risen by more than 300,000 tonnes in the past year, while there has been a similar increase in unregistered stocks.
In platinum, Standard Bank suggests prices are unlikely to decline below US$1,552 per ounce for any sustained period. This reflects a positive view on the outlook for gold prices, as well as still unresolved platinum supply issues in South Africa.
In Standard Bank's view the recent weakness in platinum is largely due to common market factors rather than any platinum specific news. Real commodity demand is not strong at present and this has contributed to at least part of the fall in the price of the metal.
Prices around US$1,700 per ounce are expected to be supportive for gold and if pries steady at this level and platinum declines to the US$1,550 per ounce range, the gold/platinum spread would have returned to previous levels of between US$150-$200 per ounce.
For Standard Bank, such a spread suggests there wold be little value in being short platinum at prices near the US$1,550 per ounce level.
In the bulks, Commonwealth Bank (CBA) points out Chinese iron ore output is near highs, having risen by 20% in year-on-year terms in September to 129 million tonnes. In CBA's view the increase is somewhat counter-intuitive as seaborne prices are low and China is a high cost producer.
What it suggests according to CBA is some state-owned mines are continuing to operate despite losing money. This likely reflects some fear of losing political and banking favour if the operations were to be shut, as well as the fact continuing to operating provides tax revenue and employment for local governments.
In thermal coal CBA notes US exports remain strong, this given increased availability of material for export given a number of US utilities are switching to natural gas power. Looking forward, CBA expects further increases in US thermal coal exports, as milder temperatures in coming months will see weaker power demand. This suggests more coal available to be exported.
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