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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 • [email protected] • 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
Since our last issue of Commodity Trends, commodity prices trended generally higher, driven mainly by the energy sector (graph 1). Oil market surpluses that have been wiped out as well as concerns over supply pushed up prices close to 2014 levels. Industrial metals, meanwhile, show no clear trend despite strong global economic growth. The rise in the U.S. dollar and bond yields has certainly affected industrial and precious metal prices. Mounting geopolitical tensions also brought greater volatility to the commodity market. In addition, the drought conditions faced by some major cereal producers led to lower crop forecasts. These factors caused the various commodity components to follow divergent trends.
Aside from this instability, robust global economic growth remains anticipated, which should sustain commodity prices (graph 2). However, it has to be taken into consideration that certain geopolitical factors, currently inflating prices, could ease and producers might be incentivized to increase production given the high prices. These elements may curb the rise in commodity prices.
François Dupuis, Vice-President and Chief Economist
Carine Bergevin-Chammah, Economist
Oil Steals the Spotlight
ECONOMIC STUDIES | MAY 29, 2018
GRAPH 1 Energy prices stand out from other commodity prices
Sources: Datastream and Desjardins, Economic Studies
Bloomberg Commodity Index and its components
Jan. 2018 = 100
75
80
85
90
95
100
105
110
115
JAN. APR. JUL. OCT. JAN. APR.
Index Energy Industrial metals Precious metals
2017 2018
GRAPH 2 A robust global economy normally goes hand-in-hand with high industrial metal prices
Annual variation in %
-100-80-60-40-20020406080100
-15-12-9-6-30369
1215
2001 2003 2005 2007 2009 2011 2013 2015 2017
Global industrial production (right) LMEX (left)
Annual variation in %
LMEX: London Metal Exchange Index Sources: CPB - Netherlands Bureau for Economic Policy Analysis, Datastream and Desjardins, Economic Studies
#1 BEST OVERALLFORECASTER - CANADA
ECONOMIC STUDIES
2MAY 2018 | COMMODITY TRENDS
OIL
Oil prices increased significantly, reaching 2014 levels. The WTI barrel price lately sat around US$70, while the Brent barrel price was close to US$80. Also worthy of note is that the spread between WTI and WCS (Western Canadian Select) prices has narrowed, indicating that oil transportation congestion in Canada has decreased (graph 3). Whether this will last remains to be seen. However, the spread between the price of the WTI and the Brent barrel widened recently due to bottlenecks in the Permian Basin.
Many factors played a part in the rising oil prices. First, OPEC and other major oil producers have thus far kept to their oil production target. With the problems in Venezuela, OPEC production even remained below its target, as the country is currently producing 550,000 fewer barrels per day than its allotted quota. This contraction in supply contributed to the considerable decline in commercial inventories. U.S. production, which continues to increase, was insufficient to offset OPEC’s cuts. Organisation for Economic Co-operation and Development (OECD) inventories fell below their five-year average as a result (graph 4). Although this average is inflated by high inventories from the past few years, the absolute level is also down considerably. For the time being, OPEC wants to continue
with the agreement and claims that it is aiming to achieve market equilibrium. However, Russia and Saudi Arabia recently stated that they would be prepared to increase their production in order to insure sufficient supply. Oil prices weakened as a result.
Added to this restriction in supply are geopolitical conflicts. The Venezuelan crisis is showing no signs of abating, limiting the country’s production and oil exports. PDVSA (Petróleos de Venezuela, S.A.), the national oil company, is also facing legal action for having missed a number of payments to its suppliers and for having expropriated oil projects in the past. It lost in one of these lawsuits and now owes US$2B to a foreign oil company. The United States also announced new sanctions against Venezuela on May 21st in response to the country’s controversial election. These recent developments are expected to only further soften production and oil exports from Venezuela. In addition, the United States recently withdrew from the nuclear deal with Iran and will impose new sanctions, which should limit that nation’s oil exports. The European Union is currently pushing back against this decision and is trying to bypass it. Iran could potentially continue to export to other countries, such as China and India. The effect of these sanctions on Iranian production is therefore unclear, but a decline is nonetheless a possibility. Some OPEC countries, particularly Saudi Arabia, seem ready to offset
EnergyOil Prices Reach Their 2014 Levels
FORECASTSUncertainty has crept into the oil market with the renewal of U.S. sanctions against Iran and the lack of transparency from the Organization of the Petroleum Exporting Countries (OPEC) regarding their future oil production. It remains that OPEC countries and Russia appear willing to offset some of the potential losses resulting from the sanctions, which leads us to forecast a return to equilibrium, with an average barrel price of US$67 for WTI (West Texas Intermediate) oil in 2018. Venezuela and Iran, however, pose upside risks. Low natural gas prices, despite more constrained inventories, have led us to revise our forecasts downward slightly.
GRAPH 3 Canadian oil prices make up the ground lost with WTI and Brent
WTI: West Texas Intermediate; WCS: Western Canadian Select Sources: Datastream, Bloomberg and Desjardins, Economic Studies
Oil prices
US$/barrel
0
20
40
60
80
100
120
2013 2014 2015 2016 2017 2018
WTI Brent WCS
GRAPH 4 Commercial crude inventories are shrinking rapidly
OECD data
2,500
2,600
2,700
2,800
2,900
3,000
3,100
3,200
-200
-100
0
100
200
300
400
2013 2014 2015 2016 2017 2018
5-year average spread (left) Commercial crude oil inventory (right)
In millions of barrels In millions of barrels
OECD: Organisation for Economic Co-operation and Development Sources: Energy Information Administration and Desjardins, Economic Studies
3MAY 2018 | COMMODITY TRENDS
ECONOMIC STUDIES
a drop in Iran’s production. A significant upside risk nevertheless remains for oil prices.
At the same time, oil demand is still strong. Chinese imports in the first quarter of 2018 saw a 7% annual increase and were at a record high. Globally, growth in major economies continues to be robust, despite some slight slowdowns. In light of the economic outlook for 2018 and 2019, oil consumption is expected to stay strong and to continue putting pressure on prices. However, easing geopolitical tensions and the offsetting of supply deficits by OPEC members would have the opposite effect. In short, we foresee that upside pressure should wane as the market returns to its equilibrium. The annual average of the WTI barrel price could settle at around US$67 in 2018.
GASOLINE
Higher oil prices put pressure on gas prices in the United States, pushing them up by more than 10% in the past two months (graph 5). This spike could adversely affect households’ budget and therefore their consumption. The price at the pump is now above US$2.90 a gallon. It could stabilize if the oil market returns to equilibrium.
NATURAL GAS
Natural gas inventories are sitting well below their 5-year average (graph 6), even though production has kept up its high pace. This is thus pointing to strong demand. Low inventories would normally cause prices to rise further. That said, the lack of movement in prices seems to indicate that the market is not worried about supply, as significant oil production in the United States is also boosting natural gas production. Insufficient pipeline transportation capacity also influenced natural gas prices, reducing even further some regional prices among other things. Futures prices hovered around US$2.90/MMBTU (Million British Thermal Units) (graph 7), barely surpassing the 200-day average. Higher production and the start of storage injection season point to fairly low prices up to the end of the year.
GRAPH 7 Natural gas prices did not react to the low inventories
MMBTU: Million British Thermal Unit Sources: Datastream and Desjardins, Economic Studies
US$/MMBTU
1
2
3
4
5
6
7
8
2013 2014 2015 2016 2017 2018
Natural gas 200-day average
GRAPH 6 Natural gas inventories are hovering well below their average for the past five years
* From 2013 to 2017. Sources: Energy Information Administration and Desjardins, Economic Studies
In billions of cubic feet
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2013 2014 2015 2016 2017 2018
Average* Inventories
Maximum*
Minimum*
GRAPH 5 Rising oil prices drove up gas prices
* Average WTI (West Texas Intermediate) and Brent price. Sources: Datastream and Desjardins, Economic Studies
US$/barrel
1.50
1.75
2.00
2.25
2.50
2.75
3.00
253035404550556065707580
2015 2016 2017 2018
Crude oil prices* (left)Gas prices in the United States (right)
US$/gallon
ECONOMIC STUDIES
4MAY 2018 | COMMODITY TRENDS
The prices of the main LME metals followed diverging trends. On the one hand, the rebound in bond yields and in the U.S. dollar prompted investors to move away from industrial metals in favour of other assets. On the other hand, the uncertainty surrounding trade disputes and sanctions affected prices, particularly of aluminum. A more secondary metal recently saw its price nearly quadrupled from 2016. Cobalt has grown widely in popularity because of growth in the electric vehicle market, as reported in our Economic News published on May 16 (graph 8). This increase could lead mining companies to invest in copper and nickel mines since it is mainly from such mines that cobalt is extracted. In short, the LME price index has not had a clear trajectory despite the strength of the global economy and has been posting a loss of about 2.4% since the start of 2018 (graph 9). It is nonetheless sitting at around 3,330, which is still high. Inventories of the six main metals remain low, despite rising somewhat. Notwithstanding the uncertainties affecting the market, global economic growth is forecast to remain robust, and we therefore expect strong demand for industrial metals. The LME index should therefore see a slight upward trend this year.
ALUMINIUM
On April 6, the United States announced sanctions against Russia, targeting among others United Company Rusal, an aluminum producer. Fears of a serious aluminum deficit as a result of these sanctions caused aluminum prices to shoot up to a peak of US$2,540 per metric tonne. After the sanctions were eased, prices fell but remained high at close to US$2,250 per metric tonne (graph 10 on page 5). Tensions on the aluminum market continue, as China and Japan are still subject to the aluminum and steel tariffs introduced earlier this year and as the tariff exemption deadline for other countries is drawing near. Furthermore, the United States asked the European Union to reduce its aluminum and steel exports to the United States by 10% from 2017 levels. The continuing uncertainty surrounding aluminum and the sustained demand for this metal have kept prices high. Given its already high level, prices may remain fairly steady, but news of trade disputes or sanctions could continue to cause large swings.
Base MetalsDiffering Trends
FORECASTSThe strong global economic growth expected in 2018 should be synonymous with higher industrial metal prices. Some risks associated with the yet unresolved trade disputes might have a negative effect on prices in certain cases by reducing trade between countries or a positive effect on others by limiting supply. These issues will therefore have to be monitored. We foresee an average of 3,400 on the LME (London Metal Exchange) index of industrial metal prices for the full year.
GRAPH 9 Industrial metal prices have not shown a clear trend since the beginning of the year
LMEX: London Metal Exchange Index Sources: Datastream 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) Inventories of the six main metals (right)
In thousands of tonnes
GRAPH 8 The price of cobalt is rising much faster than that of other industrial metals
Sources: London Metal Exchange, Bloomberg and Desjardins, Economic Studies
Jan. 2016 = 100
50
100
150
200
250
300
350
400
2013 2014 2015 2016 2017 2018
Cobalt Nickel Aluminum
Price index
5MAY 2018 | COMMODITY TRENDS
ECONOMIC STUDIES
COPPER
Copper prices show no clear trend. The recent decrease in LME inventories does not appear to have affected prices, meaning that the market does not believe it reflects a real shortage (graph 11). The rising U.S. dollar and bond yields have certainly weighed on copper prices as well. Having started the year off on a strong note, copper is now sitting in negative territory with a loss slightly above 4% since early 2018. However, it is showing significant growth compared with last year. The market seems fairly balanced at this time, and there appears to be no indication that this will change in the short term.
NICKEL
An uptrend in nickel prices has been noted since mid-2017, putting the metal above US$14,500 per metric tonne, over a 17% gain since the beginning of January 2018 (graph 12). The considerable decline in inventories appears to support this growth. They have now reached the level they were at in June 2014, when the price was US$5,000 higher. The strong demand expected for 2018 and 2019 could cause inventories to continue to shrink and prices to rise.
ZINC
Zinc prices have been on a negative trajectory since February, when inventories began to increase (graph 13). However, it is worth noting that the price had reached an unsustainable level and a retreat was inevitable. It was recently just above US$3,000 per metric tonne: more than 9% lower compared with the beginning of the year. Prices could continue to fall given a return to equilibrium in the global zinc market.
GRAPH 13 Zinc prices and stocks
Sources: Datastream and Desjardins, Economic Studies
US$/tonne
100
300
500
700
900
1,100
1,300
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 12 Nickel prices and stocks
Sources: Datastream and Desjardins, Economic Studies
US$/tonne
100
200
300
400
500
7,000
10,000
13,000
16,000
19,000
22,000
2013 2014 2015 2016 2017 2018
Price (left) Stocks (right)
In thousands of tonnes
GRAPH 11 Copper prices and stocks
Sources: Datastream and Desjardins, Economic Studies
US$/tonne
100
200
300
400
500
600
700
4,000
5,000
6,000
7,000
8,000
9,000
2013 2014 2015 2016 2017 2018
Price (left) Stocks (right)
In thousands of tonnes
GRAPH 10 Aluminum prices and stocks
Sources: Datastream and Desjardins, Economic Studies
US$/tonne
1,0001,5002,0002,5003,0003,5004,0004,5005,0005,5006,000
1,400
1,600
1,800
2,000
2,200
2,400
2,600
2013 2014 2015 2016 2017 2018
Price (left)
Stocks (right)
In thousands of tonnes
ECONOMIC STUDIES
6MAY 2018 | COMMODITY TRENDS
GOLD & SILVER
Despite higher U.S. interest rates, the price of gold was healthy in the opening months of 2018, when geopolitical and trade tensions sustained demand for this safe haven and the U.S. dollar was struggling. It hit US$1,350 an ounce a few times in the first weeks of April. Things have since then changed, however. Subsiding fears of a trade war, a further interest rate hike and, especially, a surge in the U.S. dollar pulled the price of gold down to around US$1,290 an ounce (graph 15). The recent jump in the U.S. dollar reflects a certain optimism about the
economic outlook for the United States, which contrasts with mounting concerns about Europe and emerging countries. The contrasting messages coming out of the central banks, with the Federal Reserve planning to slightly accelerate its monetary tightening, while the ones in Europe express greater concern, also caused the greenback to appreciate. The price of silver showed more resilience in recent weeks (graph 16). Industrial demand for this metal should be buoyed in the coming years by the growing popularity of electric vehicles and solar panels.
PLATINUM & PALLADIUM
The price of platinum declined by just over 5% since mid-April to about US$900 an ounce (graph 17). In addition to reflecting gains in the U.S. dollar, it would appear the price of platinum is still being adversely affected by the fading popularity of diesel vehicles in Europe. The global platinum market nonetheless seems to be fairly balanced. The price of palladium stabilized at around US$1,000 an ounce after retreating slightly at the beginning of the year.
Precious MetalsAdverse Impact from the Greenback’s Renewed Momentum
FORECASTSA further surge in the U.S. dollar could intensify the recent downturn in the price of gold and quickly bring it below US$1,250 an ounce. However, we expect the greenback to stabilize in the coming months, as some concerns about Europe and emerging economies should diminish. In this context, the price of gold could hold at around US$1,300 an ounce, our target for 2018 as a whole.
GRAPH 16 Platinum and palladium prices
Sources: Datastream and Desjardins, Economic Studies
US$/ounce
400
500
600
700
800
900
1,000
1,100
1,200
800900
1,0001,1001,2001,3001,4001,5001,6001,7001,800
2013 2014 2015 2016 2017 2018
Platinum (left) Palladium (right)
US$/ounce
GRAPH 15 Gold and silver prices
Sources: Datastream and Desjardins, Economic Studies
US$/ounce
10
15
20
25
30
35
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
1,800
2013 2014 2015 2016 2017 2018
Gold (left) Silver (right)
US$/ounce
GRAPH 14 The recent rebound in the U.S. dollar pushed down the price of gold
Sources: Datastream and Desjardins, Economic Studies
Index
1,0001,0501,1001,1501,2001,2501,3001,3501,400
889092949698
100102104
2015 2016 2017 2018
Trade-weighted U.S. dollar index (left) Gold prices (right)
US$/ounce
7MAY 2018 | COMMODITY TRENDS
ECONOMIC STUDIES
FOREST PRODUCTS
Forest product prices continued to rise in North America (graph 18). The combination of high demand and limited supply by U.S. tariffs and by rail transportation issues is still contributing to a genuine shortage. After pulling back slightly in April, softwood lumber prices soared again in recent weeks to another record peak of US$578/tbf (thousand board feet). The benchmark lumber price has therefore skyrocketed more than 30% since early 2018, rising by more than 60% over the average price observed in 2016, before tariffs were imposed on Canadian lumber exports. Although it is impossible to tell exactly how lumber prices would have fared without the tariffs, this seems to perfectly illustrate how consumers are often the main victims of protectionist measures imposed by their government. Even though negotiations to renew the North American Free Trade Agreement (NAFTA) appear to be progressing, it will be very difficult for a full agreement to be reached quickly. Moreover, there is no guarantee that a new NAFTA would resolve the softwood lumber issue. Forest product prices should therefore remain high in the coming months.
AGRICULTURAL COMMODITIES
Prices of the three main cereals have continued to rise in recent weeks, showing significant gains since the start of 2018 (graph 19). Weather unfavorable to crops among major cereal producers have contributed to this price increase. The price of wheat did particularly well, while winter wheat crops suffered in the United States. Initial forecasts from the U.S. Department of Agriculture for the 2018–2019 season are also encouraging for cereal prices, as they suggest a decline in global wheat, corn and soybean inventories (graph 20). The slightly more modest seeding intentions of U.S. farmers for soybeans and corn might be a sign that the low cereal prices of recent years are beginning to limit supply. This situation could point to a consolidation of cereal prices at a higher level than last year. However, more widespread crop problems would be needed to indicate a further price jump. Inversely, favorable weather conditions could bring back downward pressures on prices.
Other Commodities2018 Is Favourable Thus Far
GRAPH 19 Cereal inventories are expected to decline
Sources: U.S. Department of Agriculture and Desjardins, Economic Studies
Global cereal inventories
In days of consumption
405060708090
100110120130140
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
Wheat Corn Soybeans
GRAPH 17 Forest product prices
tbf: thousand board feet Sources: Datastream and Desjardins, Economic Studies
US$/tbf
850
900
950
1,000
1,050
1,100
1,150
1,200
1,250
1,300
250
300
350
400
450
500
550
600
2013 2014 2015 2016 2017 2018
Softwood lumber (left) Pulp (right)
US$/tonne
GRAPH 18 Cereal prices
Sources: Datastream and Desjardins, Economic Studies
US$/bushel US$/bushel
8
9
10
11
12
13
14
15
16
17
2
3
4
5
6
7
8
9
2013 2014 2015 2016 2017 2018
Wheat (left) Corn (left) Soybeans (right)
ECONOMIC STUDIES
8MAY 2018 | COMMODITY TRENDS
SPOT PRICE
May 29 -1 month -3 months -6 months -1 year Higher Average Lower
IndexReuter-CRB (CCI) 439.9 1.8 2.4 4.1 7.6 441.0 416.3 385.8Reuters/Jefferies CRB 203.3 1.0 4.8 6.5 11.7 206.4 188.1 166.5Bloomberg Commodity Index 90.9 1.7 3.1 5.2 8.2 91.6 86.1 79.4Bank of Canada 508.0 4.1 13.3 14.8 22.3 508.3 435.1 389.7
EnergyBrent oil (US$/barrel) 76.4 2.4 19.9 20.6 48.5 80.5 61.3 45.5WTI oil (US$/barrel) 67.9 -0.3 11.4 18.6 37.0 72.3 56.5 42.5Gasoline (US$/gallon) 2.92 4.5 14.7 15.4 21.5 2.92 2.54 2.26Natural gas (US$/MMBTU) 2.94 6.1 9.0 -7.5 -9.1 3.63 2.90 2.55
Base metalsLMEX 3,331 1.3 0.1 4.6 20.3 3,494 3,185 2,703Aluminium (US$/tonne) 2,254 1.4 4.7 9.7 15.6 2,541 2,099 1,855Copper (US$/tonne) 6,865 1.6 -0.3 2.0 21.8 7,254 6,633 5,586Nickel (US$/tonne) 14,724 6.5 9.8 28.5 62.9 15,224 11,883 8,736Zinc (US$/tonne) 3,049 -2.5 -10.7 -4.1 15.9 3,606 3,128 2,429
Precious metalsGold (US$/ounce) 1,299 -1.8 -0.5 1.2 2.5 1,359 1,296 1,210Silver (US$/ounce) 16.7 0.8 2.2 -1.3 -3.6 18.2 16.8 15.2Platinum (US$/ounce) 908 -0.3 -6.3 -3.9 -5.5 1,020 943 877Palladium (US$/ounce) 978 -0.5 -3.3 -3.6 25.4 1,129 964 780
Other commoditiesLumber (US$/tbf) 578 14.2 13.6 32.0 42.4 578 451 397Pulp (US$/tonne) 1,295 4.4 4.4 11.6 19.9 1,295 1,169 1,080Wheat (US$/bushel) 5.55 13.3 8.6 28.2 30.3 5.64 4.56 3.89Corn (US$/bushel) 3.76 3.6 4.7 20.5 6.8 3.78 3.37 3.06Soybean (US$/bushel) 10.05 -0.4 -2.0 5.3 11.9 10.33 9.50 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: 67 Target: 65(range: 63 to 70) (range: 55 to 75)
Target: 2.90 Target: 3.10(range: 2.70 to 3.10) (range: 2.60 to 4.00)
Target: 1,300 Target: 1,255(range: 1,270 to 1,340) (range: 1,150 to 1,400)
Target: 3,400 Target: 3,600(range: 3,150 to 3,600) (range: 3,200 to 4,200)
TABLE 2Commodities prices: History and forecasts
ANNUAL AVERAGE
WTI oil (US$/barrel) 43 51
LMEX index—base metals 2,375 2,969
f: forecasts; WTI : West Texas Intermediate; MMBTU : Million British Thermal Unit; LMEX : London Metal Exchange IndexSources: Datastream and Desjardins, Economic Studies
Natural gas Henry Hub(US$/MMBTU)
2.55 3.02
Gold (US$/ounce) 1,248 1,259
