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COMMODITY TRENDS
François Dupuis, Vice-President and Chief Economist • Carine Bergevin-Chammah, Economist • Mathieu D’Anjou, Senior Economist
Desjardins, Economic Studies: 514-281-2336 or 1 866-866-7000, ext. 5552336 • desjardins.economics@desjardins.com • desjardins.com/economics
NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2018, Desjardins Group. All rights reserved.
CONTENTSEditorial ............................................................. 1Energy ............................................................... 2
Base Metals ....................................................... 4Precious Metals ................................................. 6
Other Commodities ........................................... 7Tables ................................................................ 8
After a roaring start to 2018, commodities prices have pulled back somewhat since the beginning of February. This initially seemed to reflect the sudden correction on stock markets, as demonstrated by the strong correlation between oil prices and the U.S. stock market (graph 1). As soon as some calm was restored on the markets, commodity prices erased a good chunk of the declines suffered in early February. However, concerns about a trade war also exerted some downside pressures on industrial resource prices in the last few weeks.
A slight drop in commodity prices is not worrisome after the price surge seen in the second half of 2017. The economic environment is still very favourable to the demand for industrial resources, justifying relatively high prices, but the supply could also adjust following the price surge seen in the last few quarters. The spectacular growth in U.S. oil output clearly illustrates this point (graph 2). We are far from the situation that prevailed in the early 2000s when the substantial surge in demand from China led to a genuine shortage of commodities. The most recent events confirm our expectations of relatively modest price advances for resources in 2018, despite the upbeat economic environment. We will also have to keep a close eye on the risks of a trade war.
François Dupuis, Vice-President and Chief Economist
Mathieu D’Anjou, CFA, Senior Economist
Prospects for Demand Remain Favourable
ECONOMIC STUDIES | MARCH 21ST, 2018
GRAPH 1 Falling oil prices in early February pushed oil prices down temporarily
* Average price of WTI (West Texas Intermediate) and Brent. Sources: Datastream and Desjardins, Economic Studies
40
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JAN. APR. JUL. OCT. JAN.
S&P 500 (left)Crude oil prices* (right)
2018
Index US$/barrel
2017
GRAPH 2 Climbing prices have already given U.S. oil output a big boost
WTI: West Texas Intermediate Sources: Datastream, Energy Information Administration and Desjardins, Economic Studies
Millions of barrels/day
20
40
60
80
100
120
6.57.07.58.08.59.09.5
10.010.511.0
2013 2014 2015 2016 2017 2018
Crude oil production (left) Price of WTI oil (right)
US$/barrel
United States
#1 BEST OVERALLFORECASTER - CANADA
ECONOMIC STUDIES
2MARCH 2018 | COMMODITY TRENDS
OIL
Oil prices erased their gains of the start of 2018, but they remain high compared with the last few years. Prices for a barrel of Brent and WTI have narrowed, with recent prices reaching close to US$65 and US$61, respectively. The problems related to limited pipeline capacities in Cushing were resolved when the Diamond pipeline opened in December. That said, these problems have yet to be resolved in Western Canada, which is dealing with the difficulties of transporting oil to U.S. ports and refineries. This has pushed the price of a barrel of WCS (Western Canada Select) further away from the cost of a barrel of Brent to about US$35 a barrel (graph 3).
The recent drop in oil prices appeared to be tied to the stock market correction, rather than a fundamental change. In fact, the oil market recently settled back to equilibrium. The inventories in member countries of the Organisation for Economic Co-operation and Development (OECD) have declined—settling at only 1.4% above their five-year average in February, the smallest difference since 2014. The sustained demand for oil and OPEC’s compliance to its output reduction objective helped offset the record level of U.S. production—close to 10.4 million barrels per day. However, production in OPEC countries needs to be watched closely; the growth in U.S. exports could tempt them
to try to win back market shares. OPEC’s objective to slash total output by 1.8 million barrels of oil per day is scheduled to be reviewed next June. If this objective is dropped, the market could be awash in a surplus of oil.
It should be noted that OPEC’s strict compliance with its objective is also hiding some problems. Iraq’s production remains volatile, given the ongoing conflict with the Kurds. Moreover, cuts to Venezuela’s oil output have accelerated in the last two years; it marked the biggest decrease in January after Saudi Arabia. The political and economic crisis in Venezuela, which started in 2016, has plunged the country into poverty and instability. Insufficient investment, a lack of qualified labour and the financial difficulties of the State-owned oil company reduced production capacity and the quality of Venezuela’s crude oil. The Energy Information Agency (EIA) expects the plunge in Venezuela’s output to continue at least until the end of 2019.
In the United States, the International Energy Agency (IEA) estimates that the increase in U.S. oil output should outpace demand growth in 2018. That said, the oil market should remain balanced throughout the year, if OPEC sticks to its agreement (graph 4). In our view, OPEC should abide by its cooperative
EnergyBack to a Balanced Oil Market
FORECASTSThe oil market should be balanced in 2018, with U.S. production growth offsetting growth in global demand. The production slowdown ordered by the Organization of the Petroleum Exporting Countries (OPEC) also acted as a moderator on the market. This leads us to forecast an average price of US$60 for a barrel of WTI (West Texas Intermediate) in 2018. The ongoing weakness in natural gas prices does not appear to reflect the sharp drop in inventories, but gradually climbing prices in recent weeks confirm our forecasts of a slight price hike.
GRAPH 3 Pipeline issues in Canada are penalizing the price of WCS
WTI: West Texas Intermediate; WCS: Western Canada Select Sources: Datastream, Bloomberg and Desjardins, Economic Studies
Oil prices
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60
70
2015 2016 2017 2018
WTI Brent WCS
US$/barrel
GRAPH 4 The global oil market set to remain relatively balanced in 2018
* International Energy Agency (IEA) outlook based on stable production by Organization of the Petroleum Exporting Countries (OPEC). Sources: IEA and Desjardins, Economic Studies
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100
-1.5-1.0-0.50.00.51.01.52.0
2012 2013 2014 2015 2016 2017 2018
Surplus or deficit (left) Global consumption (right) Global production (right)
Millions of barrels/day Millions of barrels/day
Forecasts*
3MARCH 2018 | COMMODITY TRENDS
ECONOMIC STUDIES
agreement; producing less oil at a higher price is more profitable for them than flooding the market (graph 5).
Some upside risk could weigh in the medium term, if demand remains this strong. The bulk of the oil industry’s investments involved shale oil. Exploration investments for shale oil however have been trimmed and may not be enough to replace maturing oilfields.
GASOLINE
Gas has been spared the volatility affecting oil prices in the last few weeks. Prices in the United States are up slightly since December 2017, reflecting the rise in the cost of a barrel of oil; they remain fairly stable at about US$2.50 a gallon (graph 6). Gas prices should not fluctuate wildly in the next few months, as a balanced oil market is expected in 2018. Prices should still tick up modestly.
NATURAL GAS
The strong demand for natural gas in the United States was maintained, with a significantly colder start to winter on the East coast. In a context where the United States is exporting more than it is taking in, inventories have plunged below their 5-year averages (graph 7). Prices seem relatively low at the moment, considering the weak inventories. Despite the spike in market prices during the extreme cold snap in early January, prices subsequently fell back to the level of futures, or about US$2.75/MMBTU (Million British Thermal Units) (graph 8). Investors appear confident that the sharp growth in U.S. production of natural gas will offset robust demand. A slight uptrend has been seen since February, and we expect this to continue in the months ahead. But prices are still expected to remain relatively weak.
GRAPH 8 Surprisingly, prices for natural gas futures did not follow spot prices
MMBTU: Million British Thermal Unit Sources: Energy Information Administration and Desjardins, Economic Studies
2
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7
JAN. APR. JUL. OCT. JAN.
Futures Market
2017 2018
US$/MMBTU
GRAPH 7 Inventories remain below their 5-year average
* From 2012 to 2016. Sources: Energy Information Administration and Desjardins, Economic Studies
In billions of cubic feet
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4,500
2013 2014 2015 2016 2017 2018
Average* Stocks
Maximum*
Minimum*
GRAPH 6 Oil price volatility spares gas prices
* Average price of WTI (West Texas Intermediate) and Brent. Sources: Datastream and Desjardins, Economic Studies
US$/barrel
1.50
1.75
2.00
2.25
2.50
2.75
3.00
25303540455055606570
2015 2016 2017 2018
Crude oil prices* (left)Gas prices in the United States (right)
US$/gallon
GRAPH 5 Production cuts were profitable in 2017
In annual variation
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Iraq Iran Libya Venezuela OPEC Russia
Crude oil revenues*Crude oil production*
OPEC: Organization of the Petroleum Exporting Countries; *Crude oil excluding condensates. Sources: International Energy Agency and Desjardins, Economic Studies
US$M/day Thousands of barrels/day
ECONOMIC STUDIES
4MARCH 2018 | COMMODITY TRENDS
While the brisk global economy has pushed up prices for the main metals since the start of 2017, the stocks surveyed by the LME are still at very low levels. A slight uptrend in stocks has been noted since this January, which might reflect the mining producers’ response to the price hikes (graph 9). The LME index of industrial metals prices declined in February, but remains high compared with the last two years. The average reading was 3,340 in February—an annual increase of 16%. The recent decline should be temporary, and seems to partly reflect fears of a trade war. The International Monetary Fund (IMF) expects
global real GDP growth to reach almost 3.9% in 2018 (graph 10), thus implying strong industrial output and sustained demand. Moreover, China is pursuing its environmental efforts and should limit its production of industrial metals, trimming inventories further. These two factors alone support our expectations for metals prices to post growth this year.
ALUMINIUM
On March 8, 2018, President Donald Trump announced a tax of 10% on aluminum imports and a 25% tax on steel imports, with Canada and Mexico exempted initially. Since about 40% of U.S. aluminum imports come from Canada, the inflationary impact on the United States should be muted. The risk of retaliation is more worrisome since it could lead to an economic slowdown and drive down metal prices. For the moment, aluminium price has been falling since January due to rising stocks. It reached an average of almost US$2,180 a metric tonne in February, but remains high, with a 17% increase since February 2017 (graph 11). China’s adherence to its environmental policy will have to be watched closely, it ramped up its aluminum output by 15% between November and December 2017. Excessive growth in China’s output could drive up Chinese exports and slash prices in 2018.
Base MetalsPrices Dip Slightly in February
FORECASTSThe robust growth expected for 2018 points to a strong demand for industrial metals this year. This means the LME (London Metal Exchange) index is expected to rise in 2018. However, China’s production and rising protectionism are risk factors for global markets. Supply could spike if China deviates from its reduction targets. What’s more, the tariffs on steel and aluminum recently announced by the United States could trigger retaliation on a global scale—and stifle the global economy.
GRAPH 10 Robust global real GDP growth in the next few years should support industrial output
Annual variation in %
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2011 2012 2013 2014 2015 2016 2017 2018 2019
Global real GDP Global industrial production
IMF forecasts
IMF: International Monetary Fund Sources: CPB - Netherlands Bureau for Economic Policy Analysis, IMF and Desjardins, Economic Studies
GRAPH 9 Industrial metal prices still relatively high
LMEX: London Metal Exchange Index Sources: London Metal Exchange and Desjardins, Economic Studies
Index
5001,5002,5003,5004,5005,5006,5007,5008,500
5001,0001,5002,0002,5003,0003,5004,0004,5005,000
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
LMEX (left) Stocks of the six main metals (right)
In millions of tonnes
GRAPH 11 Price and stocks of aluminum
Sources: Datastream and Desjardins, Economic Studies
US$/tonne
5001,0001,5002,0002,5003,0003,5004,0004,5005,0005,5006,000
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2013 2014 2015 2016 2017 2018
Price (left) Stocks (right)
In thousands of tonnes
5MARCH 2018 | COMMODITY TRENDS
ECONOMIC STUDIES
COPPER
Copper prices weakened a bit in February. This price drop seems tied to the stock market correction, given that brisk demand should have applied upside pressures. Globally, the copper market appears balanced, but uncertainties about labour disputes persist. Despite the almost 5% price decline since the beginning of 2018, copper prices were up 24% year-over-year from January 2017 (graph 12). Expectations for global growth suggest that copper prices should continue to climb.
NICKEL
Nickel stocks continued to decline, with prices staying close to US$13,000 per metric tonne (graph 13), a price that is relatively soft compared with pre-2015 levels, despite the annual 35% price increase. The robust demand expected in 2018 should push prices up further.
ZINC
Recurring zinc shortages have driven prices up significantly in the last two years, to almost US$3,200 per metric tonne. Zinc stocks have grown by 43,150 metric tonnes in the last month however, resulting in price drops of about 7% during the same timeframe (graph 14). It is still too early to see if this trend will hold for the rest of the year.
GRAPH 14 Price and stocks of zinc
Sources: Datastream and Desjardins, Economic Studies
US$/tonne
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1,2501,5001,7502,0002,2502,5002,7503,0003,2503,5003,750
2013 2014 2015 2016 2017 2018
Price (left) Stocks (right)
In thousands of tonnes
GRAPH 13 Price and stocks of nickel
Sources: Datastream and Desjardins, Economic Studies
US$/tonne
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Price (left) Stocks (right)
In thousands of tonnes
GRAPH 12 Price and stocks of copper
Sources: Datastream and Desjardins, Economic Studies
US$/tonne
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2013 2014 2015 2016 2017 2018
Price (left) Stocks (right)
In thousands of tonnes
ECONOMIC STUDIES
6MARCH 2018 | COMMODITY TRENDS
GOLD & SILVER
Gold prices have not shown a clear trend since mid-January, but they are still slightly above US$1,300 an ounce (graph 15). The last few weeks have been more difficult for silver prices, which have fallen to about US$16.50 an ounce. In theory, rising uncertainty at the beginning of February could have boosted the appeal of precious metals, especially gold, given their safe-haven status. Concerns about spiking inflation and bond yields lifted the greenback temporarily, which in turn weighed on gold (graph 16). The possibility of a diplomatic breakthrough in
Precious MetalsThe Greenback’s Weakness Could Stay a Strong Support
FORECASTSHovering financial market and geopolitical uncertainties could keep gold prices at relatively high levels despite the strong economic growth that should favour interest rate hikes. We have raised our target for 2018 overall to US$1,300 per ounce, assuming that the U.S. dollar remains relatively weak.
GRAPH 17 Price of platinum and palladium
Sources: Datastream and Desjardins, Economic Studies
US$/ounce
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1,0001,1001,2001,3001,4001,5001,6001,7001,800
2013 2014 2015 2016 2017 2018
Platinum (left) Palladium (right)
US$/ounce
GRAPH 16 Despite a few recent jolts, the U.S. dollar remains weak
Sources: Datastream and Desjardins, Economic Studies
Index
1,0001,0501,1001,1501,2001,2501,3001,3501,400
889092949698
100102104
2015 2016 2017 2018
Trade-weighted U.S. dollar index (left) Price of gold (right)
US$/ounce
GRAPH 15 Price of gold and silver
Sources: Datastream and Desjardins, Economic Studies
US$/ounce
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Gold (left) Silver (right)
US$/ounce
Korea also curbed the appeal of precious metals for investors. Despite some blips, the U.S. dollar is still weak, especially in an environment where U.S. bond yields are tracking a clearer uptrend. However, the recent tax overhaul in the United States is likely to worsen the budget deficit and the U.S. trade deficit, which may account for the negative sentiment toward the greenback. U.S. protectionism could potentially work against gold prices however, if it was to trigger a surge in the dollar.
PLATINUM & PALLADIUM
As is the case for most metals, platinum and palladium prices have dipped somewhat in recent weeks. After briefly reaching US$1,000 an ounce more than once, platinum prices fell back to about US$950 (graph 17). This seems to partly reflect the decision of an administrative court in Germany confirming that cities had the right to ban some diesel-powered cars to reduce pollution. The drop in palladium prices was a tad sharper, but this is not surprising after the spectacular surge that saw prices reach a historic peak.
7MARCH 2018 | COMMODITY TRENDS
ECONOMIC STUDIES
FOREST PRODUCTS
U.S. protectionist measures continue to dominate the news on North American markets about North American forestry products, as new preliminary antidumping duties have just been levied on several Canadian paper producers. It is becoming increasingly clear that U.S. consumers are big losers of these protectionist measures. With prices already high at the end of 2017, lumber prices have soared about 18% since the beginning of 2018, settling at more than US$510/tbf (thousands of board feet) (graph 18). This represents a peak for the series we are using, which began in 2004. In addition to the tariffs, strong demand for lumber and a reduced supply due to the unprecedented forest fires in British Columbia last year as well as the problem of congested railways prompted the Wall Street Journal to talk about a genuine shortage of lumber in some parts of the United States. It would be surprising if lumber prices were able to stay at their current level for any some time, but relatively high prices should be expected as long as the trade conflict is unresolved. The recent decision to exclude Canada and Mexico from the tariffs on steel and aluminum raises hopes about the North American Free Trade (NAFTA) renegotiation, but much still needs to be done.
AGRICULTURAL COMMODITIES
Prices for the three main cereals have shown strong gains in the last few weeks (graph 19). Difficult weather conditions for winter wheat in the United States and for corn and soybeans in Argentina seemed to have piqued investor’s interest for grains (graph 20). The latest forecasts of the U.S. Department of Agriculture confirm that the recent downgrade of the soybean harvest and stronger demand for corn, especially for ethanol production, could trigger a sharper drop in inventories for these two grains at the end of this season. That said, wheat stocks are expected to rise significantly. Grain prices could be volatile over the next few months, when the release of U.S. farmers’ seeding plans at the end of March turns the spotlight on the upcoming harvest season. The flare-up in trade tensions represents a substantial downside risk as some countries, including China, could decide to tackle the substantial U.S. grain exports.
Other CommoditiesRecord Prices for Lumber
GRAPH 20 Cereal prices
Sources: Datastream and Desjardins, Economic Studies
US$/bushel US$/bushel
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Wheat (left) Corn (left) Soybean (right)
GRAPH 18 Price of forest products
tbf: thousands of board feet Sources: Datastream and Desjardins, Economic Studies
US$/tbf
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275300325350375400425450475500525
2013 2014 2015 2016 2017 2018
Softwood lumber (left) Pulp (right)
US$/tonne
GRAPH 19 Speculators have recently become more upbeat about cereal
Sources: Bloomberg and Desjardins, Economic Studies
In thousands of contracts
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2015 2016 2017 2018
Mill
iers
Wheat Corn Soybean
Net speculative positions
ECONOMIC STUDIES
8MARCH 2018 | COMMODITY TRENDS
SPOT PRICE
March 21 -1 month -3 months -6 months -1 year Higher Average Lower
IndexReuter-CRB (CCI) 423.0 -0.5 3.1 3.5 0.1 434.7 413.1 385.8Reuters/Jefferies CRB 194.2 0.0 3.4 5.9 5.4 200.5 185.0 166.5Bloomberg Commodity Index 86.7 -1.8 1.7 2.3 2.1 90.8 85.2 79.4Bank of Canada 445.1 0.7 5.9 6.3 13.4 460.4 422.9 391.2
EnergyBrent oil (US$/barrel) 67.3 3.0 4.1 19.5 31.5 70.8 57.3 45.5WTI oil (US$/barrel) 63.4 2.7 8.6 25.3 34.8 66.3 53.1 42.5Gasoline (US$/gallon) 2.60 1.6 6.0 -1.4 11.9 2.69 2.47 2.26Natural gas (US$/MMBTU) 2.68 0.6 3.0 -9.2 -13.5 3.63 2.98 2.55
Base metalsLMEX 3,227 -5.8 -2.6 2.5 13.7 3,464 3,087 2,694Aluminium (US$/tonne) 2,053 -7.1 -3.8 -4.3 7.3 2,275 2,040 1,855Copper (US$/tonne) 6,725 -5.0 -4.5 4.4 17.0 7,254 6,423 5,462Nickel (US$/tonne) 13,408 -2.8 11.6 22.7 32.8 14,107 11,059 8,736Zinc (US$/tonne) 3,203 -10.2 -1.0 2.7 14.0 3,606 3,034 2,429
Precious metalsGold (US$/ounce) 1,313 -1.3 3.7 1.6 5.6 1,359 1,283 1,210Silver (US$/ounce) 16.3 -1.1 0.7 -4.1 -6.1 18.6 16.9 15.2Platinum (US$/ounce) 945 -5.3 3.1 1.3 -2.9 1,020 948 877Palladium (US$/ounce) 982 -4.5 -4.9 7.2 24.6 1,129 931 753
Other commoditiesLumber (US$/tbf) 506 1.2 17.4 20.2 27.8 512 433 396Pulp (US$/tonne) 1,210 0.0 1.7 10.0 17.5 1,210 1,130 1,030Wheat (US$/bushel) 4.54 -0.2 5.1 2.9 9.4 5.64 4.43 3.89Corn (US$/bushel) 3.41 -0.9 5.9 9.3 2.1 3.69 3.33 3.06Soybean (US$/bushel) 9.76 -2.1 6.7 3.6 1.0 10.33 9.38 8.78
CRB: Commodity Research Bureau; CCI: Continuous Commodity Index; WTI: West Texas Intermediate; MMBTU: Million British Thermal Unit;LMEX: London Metal Exchange Index; tbf: thousand of board feetNOTE: Currency table base on previous day closure.
TABLE 1Commodities
VARIATION (%) LAST 52 WEEKS
2016 2017 2018f 2019f
Target: 60 Target: 64(range: 56 to 66) (range: 52 to 70)
Target: 3.00 Target: 3.25(range: 2.60 to 3.30) (range: 2.50 to 4.00)
Target: 1,300 Target: 1,250(range: 1,260 to 1,360) (range: 1,150 to 1,400)
Target: 3,450 Target: 3,700(range: 3,100 to 3,700) (range: 3,200 to 4,200)
LMEX index—base metals 2,377 2,969
f: forecasts; WTI : West Texas Intermediate; MMBTU : Million British Thermal Unit; LMEX : London Metal Exchange IndexSources: Datastream and Desjardins, Economic Studies
Natural gas Henry Hub(US$/MMBTU)
2.49 2.96
Gold (US$/ounce) 1,249 1,258
TABLE 2Commodities prices: History and forecasts
ANNUAL AVERAGE
WTI oil (US$/barrel) 43 51
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