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


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


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!


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


-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


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


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


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


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


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


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!


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

commodities outlook 4q18 - ocbc bank research... · 2018. 10. 5. · commodities outlook 4q18 more...

Documents