Commodities Outlook 4Q18 - OCBC Bank research... · 2018. 10. 5. · Commodities Outlook 4Q18 More...
Transcript of Commodities Outlook 4Q18 - OCBC Bank research... · 2018. 10. 5. · Commodities Outlook 4Q18 More...
Commodities Outlook 4Q18
More questions than answers
Barnabas Gan
Economist
Global Treasury Research & Strategy
October 2018
1
Oil: Fundamentals does not support higher prices
2
• The rally in energy prices continued into end 3Q18, given potential supply shocks
emanating especially from Iranian sanctions amid OPEC’s reluctance to lift production in
response. Moreover, Saudi Arabia’s rhetoric to stay “content” should prices at $80/bbl or
higher could have given investors a price target.
• Fundamentals however are painting a different environment: OPEC’s oil production
since May 2018 when Iranian sanctions were announced were decisively higher, with
higher supplies seen from Saudi Arabia, Russia and Iraq. The upside in oil production
have in fact outweighed the lower production seen in Iran and Venezuela.
• Demand trend from oil importing economies were also slower in the first seven-
eight months of 2018. This suggest that the rosy economic environment seen in 2017
has somewhat dissipated into 2018. Downside risks to economic growth remains to be
US-Sino trade tension, Brexit risks into March 2019, and the ongoing flattening yield
curve in the USTs.
• Incoming oil inventory data is a mixed-bag: US crude oil inventories tuned below its 5-
year average to its lowest since Feb 2015 even as production climbed into Sept 2018.
However, floating oil inventories continue to sideline into 2018.
• Outlook remains bearish for now: Global oil production remains flushed given OPEC’s
pledge to pump an extra 1 million barrels a day of crude oil to fill production shortfall
created by the economic issues in Venezuela and sanctions against Iran. WTI and Brent
f/c at $70/bbl and $80/bbl, respectively.
Imperative to pinpoint the right drivers
3 Source: CEIC, Bloomberg, OCBC Bank
0
20
40
60
80
100
120
140
Mar
-08
Oct
-08
May
-09
Dec
-09
Jul-
10
Feb
-11
Sep
-11
Ap
r-12
No
v-12
Jun
-13
Jan
-14
Au
g-14
Mar
-15
Oct
-15
May
-16
Dec
-16
Jul-
17
Feb
-18
Sep
-18
A brief history of oil prices
WTI Brent
Lehman
Crisis
Cushing
Glut
Peripheral
Eurozone
Concerns
Onset of
shale oil and
oversupplies OPEC deal
to cut
production
Wall
Street
rally
• Street talks over further oil supply shortfall from Iranian shores starting 1st
November when US sanctions are effective amid further risk-taking appetite are key
drivers that are lifting energy prices. Note that several Asian economies including South
Korea, India and Japan have since ceased their Iranian oil imports to-date.
• The drivers in question have clear implications for crude oil’s fundamentals. Iran’s
crude oil production accounts for roughly 12% of total OPEC oil production, and is the
third largest producer in the OPEC cartel. Since the US decision to place Iran under
sanctions in May 2018, Iranian crude oil production has fallen by 300,000 barrels per day
(bpd) into August 2018. Compare this with Iran’s fall in production by 1.3 million bpd back
in 2010 – 2013 during the previous US-led sanctions may lead one to believe that further
production shortfalls can be expected into 2019.
• Higher oil prices may also be
attributed to stronger risk-
taking. US stocks across the
key indices have rallied into
10M18, with DJIA, S&P and
Nasdaq touching its record
highs. US-centric economic
prints remain rosy to-date amid
central bank rhetoric seen in the
past week.
The truth about fundamentals
4
80
85
90
95
100
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
mb
pd
Global Oil demand and supply
Global Oil Product Demand Global Oil Product Supply
Source: CEIC, Bloomberg, OCBC Bank
• Crude oil fundamentals have so far been
roughly balanced, while global supply
growth outpacing demand for six
consecutive months into August 2018.
• Supply glut in 2014 has narrowed
substantially into a mild under-supply
scenario in the 12 months leading to April
2018 before a balance seen to-date.
• Global inventories did fall marginally in
1H18 given supply shortage, though stocks
are expected to stabilise into 2019
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
Jan
-17
Ap
r-1
7
Jul-
17
Oct
-17
Jan
-18
Ap
r-1
8
Jul-
18
mill
ion
bar
rels
pe
r d
ay
Oil fundamentalsDemand - Supply
100
150
200
250
300
350
Au
g-1
0
Jan
-11
Jun
-11
No
v-1
1
Ap
r-1
2
Sep
-12
Feb
-13
Jul-
13
De
c-1
3
May
-14
Oct
-14
Mar
-15
Au
g-1
5
Jan
-16
Jun
-16
No
v-1
6
Ap
r-1
7
Sep
-17
Feb
-18
Jul-
18
(mill
ion
bar
rels
)
Inventories appear adequate, little risk of undersupply
Global Crude Oil Global Refined Oil
The misnomer on falling US inventories
5 Source: CEIC, Bloomberg, OCBC Bank
50006000700080009000100001100012000
0
2000
4000
6000
8000
Oct
-10
Ap
r-1
1
Oct
-11
Ap
r-1
2
Oct
-12
Ap
r-1
3
Oct
-13
Ap
r-1
4
Oct
-14
Ap
r-1
5
Oct
-15
Ap
r-1
6
Oct
-16
Ap
r-1
7
Oct
-17
Ap
r-1
8
Cru
de
Oil
Pro
d -
10
00
bar
rels
/day
Exp
ort
s -
10
00
bar
rels
/day
US Oil production and exports(10 week moving-average)
Crude Oil Exports Finished Motor Gasoline ExportsKerosene-type Jet Fuel Exports Distillate Fuel ExportsResidual Fuel Oil Exports Propane/Propylene ExportsOther Oils Exports Crude Oil Production (RHS)
300
350
400
450
500
550
Sep
-12
Jan
-13
May
-13
Sep
-13
Jan
-14
May
-14
Sep
-14
Jan
-15
May
-15
Sep
-15
Jan
-16
May
-16
Sep
-16
Jan
-17
May
-17
Sep
-17
Jan
-18
May
-18
Sep
-18
mill
ion
bar
rels
US crude oil inventories tuned higher as production picked up
DOE US Crude Oil Inventories 5-year average
0
500
1000
1500
2000
2500
3000
5000550060006500700075008000850090009500
10000
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
Jul-
14
Jan
-15
Jul-
15
Jan
-16
Jul-
16
Jan
-17
Jul-
17
Jan
-18
Jul-
18
10
00
bar
rels
/day
US crude oil net-imports fell into 2018(10-weeks moving average)
Crude Oil Oil Products (RHS)
• On the surface, US crude oil inventories
fell below its 5-year moving average, and
is at its lowest since early 2015.
• Delving into the details, note that crude oil
exports has increased into 8M18, leading
net-imports to its record low over the 10-
week moving average since data was made
transparent since July 2010.
• Note that refinery utilization rates hit its
1997 high of 98.1% in August 2018
US supplies to climb into 2019
6 Source: CEIC, Bloomberg, OCBC Bank
0
20
40
60
80
100
120
0200400600800
100012001400160018002000
Feb
-11
Au
g-1
1
Feb
-12
Au
g-1
2
Feb
-13
Au
g-1
3
Feb
-14
Au
g-1
4
Feb
-15
Au
g-1
5
Feb
-16
Au
g-1
6
Feb
-17
Au
g-1
7
Feb
-18
Au
g-1
8
$/b
bl
No
. of
oil
rigs
US oil rig count climbs into 2018
Shale Gas & Tight Oil Rigs Conventional Rigs WTI (RHS)
• There remains upside risk in US
shale oil production and overall strong
US oil supplies at 11.0 million bpd
(highest on record) as of Sept 2018 and
will average 11.5 million bpd into 2019
according to EIA’s estimate will surely
inject further upside supply risks.
• Note US oil production surpassed
Saudi Arabia, and is the second largest
oil producer globally.
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
May
-15
Au
g-1
5
No
v-1
5
Feb
-16
May
-16
Au
g-1
6
No
v-1
6
Feb
-17
May
-17
Au
g-1
7
No
v-1
7
Feb
-18
May
-18
Au
g-1
8
kbp
d
US Shale Oil Production
Others
Utica
Haynesville
Anadarko
Marcellus
Permian
Niobrara
Eagle Ford
Bakken
Bakken
Eagle Ford
Niobrara
Permian
Anadarko
OPEC’s recent production gains since May 2018
has effectively offset Iranian’s oil shortage
7
-400-300-200-100
0100200300400500600
Sau
di A
rab
ia
Ru
ssia
Iraq
UA
E
Ku
wai
t
Alg
eria
Ecu
ado
r
Qat
ar
Gab
on
Lib
ya
Nig
eri
a
An
gola
Ve
nez
uel
a
Iran
tho
usa
nd
bar
rels
pe
r d
ay
Oil production since May 2018
+1.37 mbpd -0.67 mbpd
Source: CEIC, Bloomberg, OCBC Bank
Will OPEC continue to flex its muscles? Maybe!
8 Source: CEIC, Bloomberg, OCBC Bank
33
.2
33
.1
33
.0
32
.6 32
.7
32
.5
32
.3 32
.5
32
.1
31
.9
31
.9 32
.0 32
.2
32
.3
32
.8
31
32
32
33
33
34
Jun
-17
Jul-
17
Au
g-1
7
Sep
-17
Oct
-17
Nov-…
De
c-1
7
Jan
-18
Feb
-18
Mar-…
Ap
r-1
8
May-…
Jun
-18
Jul-
18
Au
g-1
8
mill
ion
bar
rels
pe
r d
ay
OPEC oil production edging higher
60
%
58
%
61
%
65
%
72
%
63
%
73
% 86
% 10
6%
10
3%
12
0%
13
9%
12
9% 15
9%
16
1%
16
5%
14
7%
11
4%
11
1%
10
2%
-2600-2400-2200-2000-1800-1600-1400-1200-1000-800
0%
30%
60%
90%
120%
150%
180%
Jan
-17
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Jan
-18
Mar
-18
May
-18
Jul-
18 th
ou
san
d b
arre
ls p
er
day
OPEC's compliance levels continue to fall into Aug 2018
Compliance Rate Production cut from reference levels (RHS)
• The OPEC cartel and its production adjustments since 2017 have been
guiding oil prices. Back in January 2017, the cartel decided to reduce its
production by around 1.2 million barrels per day to 32.5 million barrels.
• In June 2018, OPEC cited its decision to increase oil production to bring
compliance back to 100%.
• In Sept 2018, OPEC commented that the crude oil market is well supplied
and there is no more need for further production increase.
+77.2%
Brent %chg
-10.9%
+6.8%
Demand story: Not so supportive so far
9 Source: CEIC, Bloomberg, OCBC Bank
-30%
-20%
-10%
0%
10%
20%
30%
40%
Jan
/20
17
Mar
/20
17
May
/20
17
Ju
l/2
01
7
Se
p/2
01
7
No
v/2
01
7
Jan
/20
18
Mar
/20
18
May
/20
18
Ju
l/2
01
8
EU28 China India US Asia Pacific
US
ChinaIndia
Asiapac
EU28
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
US
Sin
gap
ore
New
Zea
lan
d
Jap
an
EU2
8
Ho
ng
Ko
ng
UK
Ind
on
esi
a
Ind
ia
Ko
rea
Taiw
an
Ch
ina
Au
stra
lia
Thai
lan
d
Ph
ilip
pin
es
Oil import growth slowed for most economies
7M18 2017
• The flipside of the coin yields a rather
lackluster import pace since early 2018.
While global oil imports (led especially by the
US and Asia) rose rapidly into most of 2017, it
did serve as a high base into 2018.
• More importantly, import growth seen in US,
EU28 and Asia-Pacific effectively contracted
into the first seven months of 2018, while
imports led by India and China rose over the
same period.
China32.7%
India20.0%
Japan14.6%
HK1.8%
Taiwan8.4%
Malaysia0.6%
Indonesia3.8%
Korea12.4%
Philippines1.0%
Thailand3.7%
Vietnam0.9%Oil imports in Asia
Demand story: Not so supportive so far
10 Source: CEIC, Bloomberg, OCBC Bank
-30%
-20%
-10%
0%
10%
20%
30%
40%
Jan
/20
17
Mar
/20
17
May
/20
17
Ju
l/2
01
7
Se
p/2
01
7
No
v/2
01
7
Jan
/20
18
Mar
/20
18
May
/20
18
Ju
l/2
01
8
EU28 China India US Asia Pacific
US
ChinaIndia
Asiapac
EU28
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
US
Sin
gap
ore
New
Zea
lan
d
Jap
an
EU2
8
Ho
ng
Ko
ng
UK
Ind
on
esi
a
Ind
ia
Ko
rea
Taiw
an
Ch
ina
Au
stra
lia
Thai
lan
d
Ph
ilip
pin
es
Oil import growth slowed for most economies
7M18 2017
• The flipside of the coin yields a rather
lackluster import pace since early 2018.
While global oil imports (led especially by the
US and Asia) rose rapidly into most of 2017, it
did serve as a high base into 2018.
• More importantly, import growth seen in US,
EU28 and Asia-Pacific effectively contracted
into the first seven months of 2018, while
imports led by India and China rose over the
same period.
China32.7%
India20.0%
Japan14.6%
HK1.8%
Taiwan8.4%
Malaysia0.6%
Indonesia3.8%
Korea12.4%
Philippines1.0%
Thailand3.7%
Vietnam0.9%Oil imports in Asia
Further escalation of US-Sino trade tension to
drag oil demand lower
11 Source: EIA, CEIC, Bloomberg, OCBC Bank
Oil includes crude oil, all other petroleum liquids, and biofuels.
• US and China are the world’s largest
consumer of oil, and accounted for 1/3 of
total consumption in 2017.
• Crude oil remains to be a growth-
related commodity, which in turn could
see declines in import and consumption
from the largest two consumers should the
trade war drags into 2019.
1,054
663
245 218111
36 26 70
200
400
600
800
1000
1200
Mac
hin
ery
& T
ran
spo
rt
Man
ufu
ctu
red
Go
od
s
Ch
em
ical
s
Min
era
l Fu
els
Foo
d a
nd
Liv
e A
nim
als
Cru
de
Mat
eri
als,
(ex
-en
erg
y)
Be
vera
ge &
To
bac
co
An
imal
/Ve
g O
ils
USD
bn
US imports across products(12 months to July 2018)
824
296 293 270213
62 8 80
100200300400500600700800900
Mac
hin
ery
& T
ran
spo
rt
Min
era
l Fu
els
Man
ufu
ctu
red
Go
od
s
Cru
de
Mat
eri
als,
(ex
-en
erg
y)
Ch
em
ical
s
Live
An
imal
s
An
imal
/Ve
g O
ils
Be
vera
ge &
To
bac
co
USD
bn
China imports across products(12 months to July 2018)
20
12
4 4 4 3 3 2 2 2
0
5
10
15
20
25
US
Ch
ina
Ind
ia
Jap
an
Ru
ssia
Sau
di A
rab
ia
Bra
zil
Sou
th K
ore
a
Can
ada
Ger
man
y
mill
ion
bar
rels
pe
r d
ay
World's largest consumer of oil(12 months into Dec 2017)
Investors’ confidence to lead prices henceforth?
CFTC net-positions continue to point south to-date
12 Source: CEIC, Bloomberg, OCBC Bank
20
40
60
80
100
120
-250
-50
150
350
550
750
Jun
-10
De
c-1
0
Jun
-11
De
c-1
1
Jun
-12
De
c-1
2
Jun
-13
De
c-1
3
Jun
-14
De
c-1
4
Jun
-15
De
c-1
5
Jun
-16
De
c-1
6
Jun
-17
De
c-1
7
Jun
-18
$/b
blTh
ou
san
ds
Net-long positions fell into 1H18
Net non-commercial positions WTI (RHS)
Gold: Slaved to the dollar
13
• To understand gold, one must understand its characteristic. Traditionally, gold is
perceived to be a safe haven against uncertainty. It is also an hedge against currency
movements and inflation. As such, gold prices are usually higher during times of
economic stress, and/or during surging inflation environments.
• Gold is also a quasi-FX asset, meaning that it fluctuates in relation to dollar
movements. With the dollar rallying over 9.0% in 2018, gold declined over 14% in
response. VIX movements since March 2018 has also correlated with gold movements,
suggesting that risk-taking dragged gold prices as well.
• ETF holdings are also an important parameter to gauge gold demand. Paper gold
demand, in the form of ETF holdings, has been declining in tandem with lower prices.
Elsewhere, physical demand in India and China declined into the first seven-eight months
of 2018 as well, reinforcing the decline in gold prices.
• A dichotomy can be seen however between UST yields and gold prices, suggesting
some market imbalance in the horizon. Notably, the flattening yield curve, usually a sign
of market stress, is not accompanied by higher gold prices at this juncture.
• The economic backdrop into 2019 amid dollar movement then will be key
determinants for gold. To-date, while fundamentals stay relatively supportive, further
intensification of the US-Sino trade tensions, flattening yield curve and Brexit risks could
bring gold higher into the next year.
Where dollar go, gold goes
14 Source: CEIC, Bloomberg, OCBC Bank
88
90
92
94
96
98
100
102
1041000
1050
1100
1150
1200
1250
1300
1350
1400
1450Ja
n-1
6
Mar
-16
May
-16
Jul-
16
Sep
-16
No
v-1
6
Jan
-17
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Jan
-18
Mar
-18
May
-18
Jul-
18
Sep
-18
(In
vert
ed
)
$/o
z
Gold-DXY correlation remains water-tight
Gold Futures US Dollar Index (RHS-Inverted)
Risk-taking appetite dulls gold as an investment
15 Source: CEIC, Bloomberg, OCBC Bank
10
15
20
25
30
35
1,000
1,200
1,400
1,600
1,800
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
Jul-
14
Jan
-15
Jul-
15
Jan
-16
Jul-
16
Jan
-17
Jul-
17
Jan
-18
Jul-
18
VIX, or better known as the fear index, fell in tandem with gold prices
Gold Futures $/oz VIX Absolute (2m lead, 3mma, RHS)
Rate hikes can drag gold lower given the yellow
metal’s zero-interest yielding characteristic
16 Source: CEIC, Bloomberg, OCBC Bank
0.75%
1.50%1.75%
2.00%2.25%
2.50%
3.25%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2016 2017 1Q18 2Q18 3Q18 4Q18 2019
OCBC Fed Funds Rate Outlook: Three more hikes into 2019?
A total of four hikes are expected in 2018
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Jan
-17
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Jan
-18
Mar
-18
May
-18
Jul-
18
Sep
-18
%
Bank of England
2.85
2.9
2.95
3
3.05
3.1
3.15
3.2
3.25
3.3
Jan
-17
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Jan
-18
Mar
-18
May
-18
Jul-
18
Sep
-18
%
Bank Negara Malaysia
4
4.2
4.4
4.6
4.8
5
5.2
5.4
5.6
5.8
6
Jan
-17
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Jan
-18
Mar
-18
May
-18
Jul-
18
Sep
-18
%
Bank Indonesia
No surprise that paper gold demand faded
17 Source: CEIC, Bloomberg, OCBC Bank
40
45
50
55
60
65
70
75
10001050110011501200125013001350140014501500
Jul-
13
No
v-1
3
Mar
-14
Jul-
14
No
v-1
4
Mar
-15
Jul-
15
No
v-1
5
Mar
-16
Jul-
16
No
v-1
6
Mar
-17
Jul-
17
No
v-1
7
Mar
-18
Jul-
18
Mill
ion
s
$/o
z
Gold ETF demand faltered into August 2018
Total Known ETF Holdings (RHS) Gold Futures
Physical demand was weak as well
18 Source: CEIC, Bloomberg, OCBC Bank
971
1,071
975
835 787
955
587
889
615
535
0
200
400
600
800
1,000
1,200
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
8M
17
8M
18
ton
ne
s
India gold imports fared lower in 2018
112
385
788
1,483
1,080
992 938
717
494
399
0
200
400
600
800
1,000
1,200
1,400
1,600
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
7M
17
8M
18
ton
ne
s
Chinese gold imports from Hong Kong
Caveat? Rise in safe haven demand!
19 Source: CEIC, Bloomberg, OCBC Bank
18
38
58
78
98
118
1381,0001,0501,1001,1501,2001,2501,3001,3501,4001,450
Jan
-16
Mar
-16
May
-16
Jul-
16
Sep
-16
No
v-1
6
Jan
-17
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Jan
-18
Mar
-18
May
-18
Jul-
18
Sep
-18
bas
is p
oin
ts
US Treasury yield spread narrows even asgold prices fell
Gold Futures $/oz US 2-10 yield spread (Inversed - RHS)
Caveat? Rise in safe haven demand!
20 Source: Bloomberg
A flattening yield curve,
which resulted in an
inverted curve into 2005
– 2007 was likely a
precursor for the 2008/9
GFC
S&P Index
UST 10 – 2
yields
The picture now…
21 Source: Bloomberg
UST 10 – 2
yields
S&P Index
23
OCBC Commodity Forecast into 2019 Updated as of Oct 5, 2018
3y AVG Spot Q1 Q2 Q3 Q4F Q1F Q2F Q3F Q4F
Energy
WTI ($/bbl) 47.1 75.2 62.9 67.9 69.4 70.0 68.8 67.5 66.3 65.0
Brent ($/bbl) 50.7 84.8 67.2 75.0 75.8 80.0 73.8 72.5 71.3 70.0
Gasoline ($/gallon) 1.53 2.13 1.86 2.11 2.06 2.12 2.14 2.19 2.09 1.98
Natural Gas ($/mmbtu) 2.68 3.17 2.85 2.83 2.87 3.20 3.19 2.96 3.02 2.97
Precious Metals
Gold ($/oz) 1210.4 1,207 1,331 1,309 1,217 1,200 1,225 1,250 1,275 1,300
Silver ($/oz) 16.5 14.7 16.7 16.6 15.0 14.8 14.8 15.1 15.3 15.5
Platinum ($/oz) 994 834 981 907 815 805 825 809 813 812
Palladium ($/oz) 722 1,051 1,026 972 943 923 919 937 1,019 1,104
Base Metals
Copper ($/MT) 5,523 6,280 6,997 6,998 6,999 6,500 6,375 6,250 6,125 6,000
Tin ($/MT) 17,764 18,960 21,151 20,912 19,326 18,571 18,236 17,762 16,917 16,458
Nickel ($/MT) 10,630 12,436 13,277 14,488 13,275 12,264 11,943 11,705 11,394 11,094
Zinc ($/MT) 2,265 2,665 3,390 3,104 2,520 2,321 2,352 2,275 2,119 2,066
Aluminum ($/MT) 1,737 2,118 2,160 2,262 2,066 2,100 1,946 1,975 1,850 1,801
Asian Commodities
Crude Palm Oil (MYR/MT) 2,523 2,160 2,491 2,390 2,218 2,400 2,463 2,525 2,588 2,650
Source:
Historical Data - Bloomberg
Forecasts - OCBC Bank
Data reflects average price
20192018
Thank You
24