livesquawk's global 2018 outlook - commods/energy
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By Peter Devlin, Wednesday, 20 December 2017 

 

For the second consecutive year, commodities have outperformed in 2017, with metals and petroleum surpassing double-digit price increases, but as political uncertainties and supply disruption risks heighten into 2018, a third year of outperformance has the potential to be elusive.  

 

The consensus outlook for 2018 remains positive, with oil prices to rise due to steadily growing demand, agreed production cuts and stabilising US shale oil production. However, the surge in metals could be fleeting as uncertainties persist on supply dynamics.     

  

Analysts at Goldman Sachs forecast the commodities sector to generate expansive returns throughout 2018, more than any other assets over the long run. Benefitting from robust worldwide demand, the growth in raw materials should spur investors. 

  

Jeffrey Currie, global head of commodities research, noted "a positive carry in key commodity markets and already strong global demand growth across the commodity complex reinforces the case for owning commodities. And hence we maintain our 12-month overweight recommendation, now with a forecasted return of almost 10 percent." 

ERODING THE GLOBAL CRUDE GLUT

In September 2017, US government data showed production had risen 3pct to 9.48 million barrels per day with a view to cross the 10 million bpd benchmark. Adopting a combative stance, US shale oil producers have effectively triggered the recent global oil glut.

 

Gary Ross, founder of Pira consultancy, has remained cautious over production, warning “everywhere you look there is an ever-present risk to supply.”

 

Addressing the global glut of crude oil, members of the Organisation of Petroleum Exporting Countries (OPEC) met in November. The conclusion was an agreement among its producers to extend oil cuts until the end of 2018, signalling a possible early exit from the deal if the market overheats.

 

Oil rallied on a combination of OPEC supply cuts finally coming through and a growing conviction they would be extended, along with some geopolitical encouragement. When producers originally agreed to cut supplies a year ago, they similarly touched off a rally in oil prices, providing fuel for the recovery in US oil output.

DIVERGING VIEWS ON SHALE PRODUCTION

In a December report, OPEC reduced its estimate of global demand for its crude production in 2018 by 270,000 bpd to 33.15 million bpd due to larger amounts of US supply. OPEC members expressed this “should lead to a further reduction in excess global inventories, arriving at a balanced market by late 2018.”

 

Conversely, the view of the International Energy Agency (IEA) is a belief that as new supply growth surpasses demand, inventories will remain steady. The main divergence of opinion lies in the output of US shale producers, with OPEC forecasting rival supplies to expand one million barrels a day in 2018 compared to a 1.6 million expectation from the IEA.

Source: Bloomberg
Source: Bloomberg

Multiple analysts have emphasised OPEC’s unwillingness to properly consider the magnitude of shale producers.

 

“The US alone can achieve almost all of the supply growth that OPEC forecasts globally in 2018,” said Carsten Fritsch, an analyst at Commerzbank in Frankfurt. “So, without question, the IEA’s forecast is more convincing.”  

ANALYSTS REMAIN BULLISH ON OIL OUTLOOK

Analysts at JPMorgan concluded “OPEC’s decision to extend cuts through 2018 to take oil inventories down to the five-year average is clearly supportive of prices.”

 

The global commodities research team raised its 2018 price targets to $60 a barrel for Brent and $54.90 for WTI crude.

 

In relation to the upcoming OPEC meetings in 2018, JPMorgan assume the cartel will remain in continued agreement through to the end of the first quarter of 2019.

 

“We envisage that the cuts are maintained at current levels in June, but that prices will weaken in anticipation of uncertainty ahead of the meeting,” commented its analysts.

 

Similarly, the Barclays research team raised their fourth quarter 2017 Brent forecast to $62 from $60, maintaining a 2018 price outlook of $55 per barrel. However, the research team attributed the recent strength in oil to temporary factors that are likely to reverse in 2018.

 

The unexpected shutdown by Ineos due to the unplanned outage at its Forties North Sea crude pipeline in December have sent global crude prices soaring to two-year highs.

 

“Depending on the Forties pipeline outage duration, inventories could draw even more quickly in Europe, keeping prices elevated in the $60 range,” evaluated the Barclays Research team.

 

The World Bank reflected on the stabilising US shale oil production, forecasting oil prices to rise to $56 a barrel from $53.

 

“Energy prices are recovering in response to steady demand and falling stocks, but much depends on whether oil producers seek to extend production cuts,” commented John Baffes, Senior Economist and lead author of the Commodity Markets Outlook.

 

Francesco Stipo, President of the Houston Energy Club, cited a decline in global inventories and geopolitical instability as the main drive behind oil prices. In an exclusive interview with LiveSquawk News, he stated that “$60 per barrel is the new normal for oil prices.”

 

However, Stipo remained cautious on unbalanced production, emphasising that US production will account for most of oil supply in 2018.

 

“The strong supply in North America, in contrast to shortages in other parts of the world, will likely increase the spread between WTI crude and Brent crude,” he noted. 

GEOPOLITICAL RISKS WEIGHING ON PRICES

Geopolitical risks have always weighed heavily on the price of commodities and could reverse the price of oil through 2018. With Venezuela struggling through an economic crisis, the oil-dependent state has witnessed steadily declining production levels.

 

Helima Croft, analyst at RBC Capital Markets has voiced concern over worse-than-anticipated supply in Venezuela, warning oil production is poised to “plunge” in 2018.

 

She projected that oil prices would likely “ebb and flow” over the approaching months, while “geopolitically driven supply disruptions” were likely to be much more “consequential” in 2018. 

 

Another prevalent concern is the pending Chinese policy decisions and economic slowdown, implicating a prevention in the third year of commodity outperformance. Uncertainties surrounding slower than anticipated demand, or an easing of production restrictions on China’s industries pose as downside risks among metals.

 

Barclays’ research team have particularly noticed the effect of the Chinese real estate market on copper as it attributes to approximately 33pct of overall copper demand.

 

"Chinese demand growth (comprising 50pct of the global market) continues to slow as the real estate market suffers from credit tightening, slower price appreciation, and rises in construction input costs," commented Barclays. 

Analysts at Goldman Sachs have further considered the effects of doubt surrounding China, noting “miners have underperformed quite a bit on rising China fears around the pace of reforms and deleveraging being adopted by policymakers.”

 

However, their analysts have remained confident on 2018 growth, concluding “coupled with a muted dollar, commodities remain an attractive asset class.” 

GLOBAL MINING DISRUPTIONS

Another closely monitored potential supply risk on copper production is the threat of strikes in Chile. Mining disruptions have reduced copper supply by approximately 5pct on average over the past 13 years.

 

With Chile accounting for 30pct of the global copper supply, its heavily unionised workforce makes it prone to potential strike action.  

 

The Chilean Mining Council estimates that there are more than 25 collective labour contracts that expire in 2018 that could impact mines, the largest number since 2010.

 

Ahead of the Chilean elections in December, a backdrop of political uncertainty could potentially heighten potential disruptions.

 

Analysts at UPS have noted further uncertainties regarding Chile, noting “the probability of strikes tends to increase in a higher/rising copper price environment as workers look to get a larger share of increasing profile; the changes to Chilean Labour laws that came into effect in April 2017 may also increase the risk of industrial action in 2018.” 

RESTRICTED VOLATILITY IN GOLD

Despite rising interest rates, a strong US dollar and a persistent bull market in equities, gold managed to remain remarkably stable throughout the year.

 

John Reade, chief market strategist for the World Gold Council remarked “gold’s range has been relatively narrow and, apart from the geopolitically-inspired move above $1,350 an ounce in September, the moves have been extremely orderly.”

 

However, analysts at Goldman Sachs predict a reverse in the trend, cutting its gold price forecast to $1,200 an ounce by mid-2018. With the deterioration of geopolitical risks and a steady interest rate cyclical proposed by the US Federal Reserve, the belief is any significant upside risk will be restricted. 

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