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Material Matters: Recession, Decarbonisation And Price Forecasts

Commodities | May 05 2023

A glance through the latest expert views and predictions about commodities: Recessions weigh, impacts from decarbonisation, World Bank forecasts & Morgan Stanley oil price forecast.

-Rolling recessions to weigh on demand for commodities 
-Decarbonisation impacts on commodity markets and economies
-The World Bank’s commodity price outlook 
-Morgan Stanley’s forecasts for the Brent oil price

By Mark Woodruff

Rolling recessions and a weaker US consumer to impact on commodities 

Citi believes the US consumer is beginning to crack and rolling recessions across various countries over the next 12 months could reduce commodity demand.

After posting robust returns and outperforming in 2021 and 2022, following the 2020 pandemic shock, commodities are down around -6.8% so far in 2023.

Regarding oil, a grim and uncertain economic outlook continues to weigh, observes Citi.

Crude oil prices have now reverted to pre-OPEC production cut announcement levels last week, and Intercontinental Exchange (ICE) Brent September futures suggest to the broker weak underlying sentiment. 

Commodity sub-index returns have varied, notes Citi, with precious metals and ICE soft commodities futures rallying versus industrial commodities. ICE softs have been the best performing sector, up over 20% year-to-date.

The broker remains structurally bullish on gold and silver into the end of 2023. 

Decarbonisation impacts on commodity markets and economies

An increasing reliance on electricity around the world due to decarbonisation will result in power shortages, suggests ANZ Bank, and will have implications for commodity markets and broader economies.

Increasingly volatile weather and surges in demand will place pressure on energy systems that have limited storage capacity, according to the commodity strategists.

The upshot will be strong demand for coal and LNG to support baseload power. It’s also believed further constraints on metal smelting, may arise, amid power interruptions and higher costs.

China is already building coal stockpiles in anticipation, with imports of coal in March rising by 151% year-on-year, despite higher domestic production. 

Electricity accounted for 10% of the world’s total energy consumption in 1980 but has grown to nearly 18% in 2022.

This additional usage is even greater in China amid an acceleration in the electrification of the transport sector, explains ANZ, which is placing additional pressure on the energy network.

At the same time, extreme temperatures and low water levels in China are threatening to dampen hydropower generation. Hydropower is a key part of the country’s energy mix, producing over 16% of total electricity in 2022.

The National Energy Administration in China has highlighted three elements needed to guarantee China’s energy security: domestic resources (mainly coal and coal power); renewables and nuclear; as well as better risk management.

The only real option in the short term, according to ANZ, is to expand coal-fired power capacity.

Moreover, the bank points out India’s coal imports are also remaining strong as it restocks ahead of summer demand. 

Over in Europe, base load power sources such as coal and natural gas are also expected to come under pressure, according to ANZ, while gas supply disruptions are anticipated amid the ongoing tensions with Russia. In addition, the region is experiencing issues with its current nuclear power supply. 

France has been enduring intermittent disruptions to power output from its nuclear power plants for several years, observe the strategists, and Germany has moved ahead with a planned phase-out of its nuclear power plants. 

In Australia, the supply-demand balance is very tight in New South Wales during periods of maximum demand, and there is a greater risk of unplanned outages amid an aggressive phase-out of fossil fuels, suggests ANZ.

Gas-fired generation is expected to play a crucial role, as coal-fired generation retires, complementing battery and pumped hydro generation in periods of peak demand.

In the near term, ANZ forecasts coal prices will face downward pressure due to weak demand from Europe and China. As concerns about energy shortages in Europe ease, lower gas prices are also expected to weigh on coal demand. 

Ultimately, ANZ predicts supply disruptions in China should see coal import demand pick up ahead of a recovery in industrial activity.

The World Bank’s commodity price outlook 

For the remainder of 2023, the World Bank predicts commodity prices will remain broadly unchanged, amid improved supply prospects and weakening global demand.

The bank’s biannual Commodity Markets Outlook (published in late-April for the period ending March 31) predicts an overall -21% decline in global commodity prices for 2023, -14% of which had already occurred by the end of March.

There won’t be a lot of relief for consumers, however, as the bank expects prices will remain above average levels experienced over 2015-2019, prior to the pandemic.

The surge in prices after Russia’s invasion of Ukraine has largely been unwound on a combination of slowing economic activity, favourable winter weather and a global reallocation of commodity trade flows, explains the World Bank.

Risks to the bank’s price forecast are tilted to the upside, primarily because many of the factors underlying the shocks to commodity markets in recent times still prevail.

These upside risks include possible disruptions in the supply of energy and metals (in part due to trade restrictions), intensifying geopolitical tensions, a stronger-than-anticipated recovery in China’s industrial sector and adverse weather events. 

Disappointing global growth is considered the major downside risk for commodity prices.

In 2023, the World Bank expects the energy price index will fall by -26% from 2022, mostly driven by a decline in natural gas prices, and remain broadly stable in 2024. Again, most of this decline has already occurred.

Brent crude oil prices are forecast to average US$84/bbl in 2023, down from US$100/bbl in 2022, before a slight increase to US$86/bbl in 2024 as supplies tighten.

Other World Bank forecasts for 2023/2024 include: Gold US$1,900/1,750/oz; iron ore US$115/110/t; Coal (Australia) US$200/155t and copper US$8,500/8,000/t.

Morgan Stanley’s forecasts for the Brent oil price 

The dominant narrative in the Brent oil market up till now has revolved around a second-half tightening in fundamentals.

By contrast, Morgan Stanley suggests the post-lockdown snap-back in oil demand in China is largely complete, and predictions of a decline in supply out of Russia are overstated.

The broker now forecasts Brent oil prices will remain in their recent US$75-85/bbl range, with a skew towards the bottom-end of that range by year’s-end, when the market enters a period of seasonal softness and OPEC's 'voluntary cuts' come to an end.

China’s crude imports and its refinery runs are already back to all-time highs, explains Morgan Stanley, leaving little room for more normalisation in the wake of lockdowns.

Also, Russia's oil production has been remarkably resilient, in the broker opinion, falling by around -0.4 mbbl/day only from recent peaks. This performance is despite the EU's long-standing crude and product embargoes on oil imports from the country.

While the oil market still has long-term supportive factors, with demand likely to continue to grow over the balance of the decade, according to Morgan Stanley, the structural and the cyclical do not always align. 

The broker predicts a modest oversupply for the Brent oil market in the early part of 2024, as part of the recent OPEC cuts to production will likely reverse. Also, nine non-OPEC countries are considered to be on a structural production up-trend.

Moreover, by 2024, Morgan Stanley points out China will have re-opened, the pace of recovery in aviation will likely slow down substantially and the rest of the world is already operating as normal.

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