Market Strategy - Global Commodities Strategy - DEC 2016
US Elections & Commodities: Our core view remains for Democrat presidential candidate Hillary Clinton to win the November 8 US election, but uncertainty has grown over recent days as Clinton has seen her lead in the national polls shrink. A surprise Trump victory or a potential dispute over the results of the elections would boost safe haven assets including gold prices in the days following the elections. In this scenario, risk aversion would also support the US dollar and put downside pressure to commodities except precious metals.
Oil: Brent has broken short-term support at around USD48/bbl and is at risk of further declines in the coming weeks. The physical market remains loose, with large output additions from Russia and OPEC and a bottoming out of production in the US. Demand should strengthen seasonally in November, although we believe the upside to be limited. A failure of the OPEC meeting on November 30 could be the trigger for a more decisive move downwards, although our expectation is for a 'soft' agreement to be reached. We hold to our 2017 annual average forecast for Brent of USD55.0/bbl ( see 'Softer Demand, Stronger Supply Still ' , November 3).
Industrial Metals: The likelihood that Chinese authorities will prolong their support to the economy has been growing over recent months, and we now believe Beijing will maintain fiscal support in the coming quarters via the public construction sector and the acceleration of public-private partnership (PPP) infrastructure projects ( see ' China Imports: Government Support To Sustain Metals Demand In 2017 ' , November 1). This reinforces our positive view on China's metal demand and industrial metal prices in the coming quarters. However, it is likely to be followed by a relapse in prices later in 2017, as structural weaknesses in the economy will come back to the fore.
Precious Metals: Although a 'risk-off' approach amidst growing uncertainty over the November 8 US elections results will support gold prices in the coming days, we believe this will prove temporary given our core view for a Democrat victory. Looking longer-term, we remain positive towards gold and silver prices in 2017. We believe the trend in real interest rates will be the most significant long-term driver of prices. In particular, persistently sluggish economic growth in developed markets should anchor central bank policy rates ( see 'Precious Metals: Near-Term Headwinds, But Long-Term Upside', October 4). We forecast gold to average USD1,400/oz in 2017, compared to an October 27 spot price of USD1,270/oz.
Grains: We expect the S&P GSCI Grains Index to maintain multi-year support around the 290 level over the coming months as we believe most of the bearish news regarding prices has been absorbed. Higher commodity prices in general, a return of headline inflation, and a rebound in sentiment after reaching bearish extremes will support prices. However, excellent US harvests, high stocks, and broadly favourable South American 2016/17 harvest prospects will prevent prices from staging a more significant rally. A loss by Clinton in the US election is a considerable downside risk for agricultural commodity prices.
Softs: The outlook for soft prices will diverge slightly in the coming months. Sugar is likely to see more muted performance in the short term following stellar performance so far this year ( see ' Sugar Prices Have Peaked For Now', October 25). Arabica coffee prices will face strong resistance around the USc175/lb level, as we anticipate upcoming weakness in the Brazilian real and speculative positions already are at bullish extremes. Palm oil prices will remain supported in Q416 and Q117 due to low stocks in South East Asia and especially China. We maintain our view for palm oil prices to ease later on in 2017.
La Nina: Chances that La Nina will develop in Q416 or Q117 remain low and are estimated at around 50 to 70% by the Australian Bureau of Meteorology and the US Climate Center. Uncertainty has prevailed this year around the emergence of La Nina. The development of unseasonal weather conditions could surprise and push grains and some softs prices higher.
|Coffee To Hold Resistance|
|Second-Month ICE Coffee, USc/lb (weekly) & RSI (below)|
|Source: Bloomberg, BMI|
|Commodity||Unit||Current Price||YTD (% Chg)||1 Year (% Chg)||2015 (ave)||YTD (ave)||2016f (ave)||2017f (ave)|
|Notes: All metal prices except steel and iron ore refer to generic third-month contracts; all energy and agricultural prices refer to generic front-month unless otherwise stated. *We are in the process of changing our corn forecasts so there will be a temporary discrepancy between our forecasts online. The figures in the table above represent our old forecasts; Source: Bloomberg, BMI. Last updated: November 3, 2016.|
|Class III Milk (Third-Month)||USD/cwt||15.83||11.6||3.7||15.75||14.88||14.50||15.00|
|Palm Oil (Third-Month)||MYR/tonne||2,749||10.6||19.0||2,235||2,557||2,500||2,350|
|Coal, Thermal (Newcastle)||USD/tonne||112.4||122.0||112.6||62.1||60.0||60.0||65.0|
|OPEC Basket, Oil||USD/bbl||44.5||42.4||2.0||49.5||39.5||42.5||52.0|
|Natural Gas (HH)||USD/mnBtu||2.8||18.4||22.8||2.63||2.42||2.43||2.90|
|Natural Gas (NBP)||USD/mnBtu||6.8||38.0||12.5||6.49||4.51||4.46||4.87|
|Iron Ore (62% CFR, Qingdao)||USD/tonne||65||49.9||31.9||55.5||55||53||55|
|China Domestic Hot Rolled Steel Average||CNY/tonne||3,114||56.2||64.0||2,244||2,591||na||na|