Commodities | Apr 03 2013
-Oil prices retreat. For how long?
-Iron ore, coking coal underpinned
-Thermal coal under most pressure
-Platinum supported
By Eva Brocklehurst
Average oil prices retreated in March after several months of rises. Brent and Tapis fell around 6% and are now US$110/bbl and US$115/bbl respectively. West Texas Intermediate dropped 2% to finish March around US$97/bbl. National Australia Bank analysts have noted that the spread between Brent and WTI is at the narrowest since July 2012. This is the result of the relative strength in WTI, while Brent prices were affected by less European demand and a surge in North Sea production.
So what is in store for prices as 2013 progresses? The analysts are optimistic. Technical and economic indicators point to demand being more robust compared with last year. Production is improving in non-OPEC nations, which should offset the reduction in supply from areas of geopolitical tension and help keep a lid on prices. The austerity measures in Europe continue and should also keep prices contained. WTI prices may be boosted by a drop in oil reserves at the US delivery point at Cushing. Hence the spread to Brent could narrow even further. Overall, the analysts see the price of WTI lifting to around US$103/bbl over 2013, while the price of Brent is expected to lift to around US$117/bbl.
Further down the track, Citi believes oil prices should keep falling, given the push to substitute natural gas for oil. Ongoing improvements in fuel economy could mean oil demand levels off sooner than expected. Citi analysts cite a shift already underway in the US where shale gas production is gaining pace. Higher prices, the removal of fuel subsidies and rising fuel economy mandates have all contributed to make gas more compelling. The analysts believe structural bull market of the previous decade was a result of surging global oil demand and consistent disappointment in non-OPEC supply, compounded by a collapse in Iraqi and Venezuelan production. The outlook for each of these factors has now reversed, reinforcing Citi's long term view that by the end of the decade Brent prices are likely to hover within a range of $80-90/bbl.
Back from the future and the rally in bulk commodity prices has also stalled. National Australia Bank analysts have revised near-term price forecasts slightly lower for bulk commodities, reflecting adequate supplies in the market and a slower-than-anticipated recovery in Chinese steel demand. Nevertheless, an anticipated turnaround in global economic prospects later in the year should underpin prices. The average price for iron ore (62%) is estimated to have been around US$131 per tonne Free On Board in March, down from US$142 in February. The spot price is currently around US$137 per tonne. Although there could be some near term tightening in the iron ore market from re-stocking, the analysts do not expect prices to return to recent highs.
The analysts believe global steel production has grown at a good pace in recent months, driven by increasing Chinese production despite pressure on margins from easing steel prices, record high inventories and the elevated cost of inputs. In contrast to steel, reports show that the stockpiles of iron ore at steel mills have been depleted, particularly at small and medium sized mills. The National Australia Bank analysts suggest this running down of iron ore stockpiles will only lend temporary support to prices, as supplies of seaborne ore are increasing and there will be a running down of steel inventories as well.
Despite a similar end use in the steel industry, plentiful supplies of coal have prevented the same degree of price recovery that was seen in the iron ore market. Average spot prices for premium hard coking coal rose almost 4% in February, but have fallen by around 6% in March; the spot price is currently around 9% below its recent peak in mid February, note to the analysts. Conditions in the steel market are expected to remain subdued for some time, and stockpiles of coking coal may limit demand for imports. Any delayed impact of the investment stimulus in China should assist prices back toward US$175 per tonne by late next year.
Thermal coal prices for this Japanese fiscal year will be settled shortly and are expected to be set at a premium to market prices at or slightly below US$100 per tonne FOB. Over the longer term, the analysts believe shifts towards alternative energy sources, including caps on Chinese coal consumption, will likely limit potential price gains. Similarly, increasing coal supplies will restrain prices, particularly if planned port expansions in the US North West come to fruition. This would expand export capacity to Asian markets. On this note there is a common theme with the aforementioned view from Citi. Competition from natural gas is expected to reduce demand in the US market for thermal coal.
ANZ commodity analysts find a preference for growth over risk aversion is supporting the platinum complex. Looking at the speculative positions suggests most of the upside is priced in. The analysts believe downside risks are weighing on the near-term pricing and any improvement in South Africa's industrial scene could simply trigger a bout of profit taking. Standard Bank analysts believe platinum, approaching US$1,550, provides value but needs more speculative long positions before they contemplate the possibility of a rally. Moreover, price improvement is heavily dependent on the European economy, an important region for platinum demand. Without Europe in the equation the outlook in terms of demand is bleak.On palladium the Standard Bank analysts find a crowded market and therefore the price at US$760 does not provide value from a long-term perspective.
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