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COMMODITIES WEEKLY Summary - June 4, 2015

Core Content Overview

This document provides an analysis of commodity markets, focusing on energy, precious metals, and base metals. It outlines the impact of El Niño weather patterns, the implications of the OPEC meeting, and the outlook for gold, copper, zinc, and other commodities. The report also discusses currency movements, market fundamentals, and investment strategies.

Main Viewpoints

1. El Niño Impact on Commodity Markets

• El Niño is a natural climate phenomenon occurring every 2–7 years in the Pacific Ocean.
• It is expected to result in extreme weather events, including:
  • Flooding in Chile, affecting copper mining operations.
  • Warm winter in the US, reducing natural gas demand.
  • Drought in Brazil, Australia, Indian subcontinent, and Western Pacific, which could reduce crop yields and agricultural output.
• Cocoa production is likely to fall by 2.4% globally, with Ecuador experiencing a 6% drop and Ghana a 22% yoy decline.
• El Niño may also reduce palm oil and rice output in Southeast Asia.
• Increased typhoon activity in the Pacific could affect supply chains, while Atlantic hurricane activity may be subdued due to higher wind shear.
• The phenomenon could prolong droughts in Brazil, impacting agricultural stocks and commodity prices.

2. OPEC Meeting and Oil Market Outlook

• The OPEC meeting on June 5, 2015, is expected to maintain or increase production quotas, as Saudi Arabia has shifted its strategy to maintain market share.
• This decision is bearish for oil prices, as it reflects a paradigm shift in OPEC policy from supporting prices to maintaining supply.
• Saudi Arabia and UAE are increasing oil exploration and production, while Iran is expected to add 500,000–800,000 b/d to its output within 6–12 months if sanctions are lifted.
• Oil prices have fallen by 50% since last year due to oversupply and weak fundamentals.
• OPEC's average production in April 2015 was 31mn b/d, slightly above the call-on-OPEC.
• North Sea loadings of Brent and WTI are expected to increase, but this is not supportive for prices due to discounted cargoes and potential strikes in Norway.

3. Oil Market Fundamentals and Saudi Arabia's Strategy

• Saudi Arabia has been increasing its refining capacity to export value-added oil products and minimise losses from low oil prices.
• The country is facing a fiscal deficit of $130bn in 2015 due to low oil prices.
• Saudi Arabia is liquidating foreign investments to cover its budget deficit.
• The dollar's strength is a key factor in oil price volatility, as it affects demand and investment flows.
• US oil inventories have decreased, and refinery processing rates are high, but oil product stocks are rising due to low demand and high processing.

Key Information

Precious Metals

• Gold:

  • Price: $1,183/oz
  • Forecast: $1,161 in 2015, $1,055 in 2016
  • Current view: Cautious long
  • Factors affecting price:
    • Dollar strength is reducing gold's appeal as a safe haven.
    • Central banks reduced gold holdings by 80 tonnes in Q1 2015.
    • Chinese gold imports fell to an eight-month low of 52 tonnes in April.
    • Indian gold imports increased by 68% yoy in Q1 and 74% yoy in the first four months.
    • ETPs have seen a drop in holdings, indicating weaker western interest.

• Silver:

  • Price: $16.49/oz
  • Forecast: $15.88 in 2015, $13.5 in 2016
  • Current view: Cautious long

• Platinum:

  • Price: $1,108/oz
  • Forecast: $1,246 in 2015, $1,500 in 2016
  • Current view: Long outright or vs gold

• Palladium:

  • Price: $759.3/oz
  • Forecast: $775 in 2015, $740 in 2016
  • Current view: Cautious long

Base Metals

• Copper:

  • Price: $5,992/tonne
  • Forecast: $6,150 in 2015, $6,800 in 2016
  • Current view: Long
  • TC/RCs have dropped to $82/t and 8.2c/lb, down 25% from December 2014.
  • Mine output is struggling, with declines in Zambia, Peru, and Chile.
  • Smelting capacity is expanding, adding to downward pressure on TC/RCs.

• Zinc:

  • Price: $2,158/tonne
  • Forecast: $2,225 in 2015, $2,520 in 2016
  • Current view: Long

• Aluminium:

  • Price: $1,717/tonne
  • Forecast: $1,840 in 2015, $2,000 in 2016
  • Current view: Cautious long

• Lead:

  • Price: $1,912/tonne
  • Forecast: $1,800 in 2015, $1,850 in 2016
  • Current view: Neutral

Investment Outlook

• Gold is expected to be negatively impacted by rising bond yields ahead of the Fed's first rate hike, which is anticipated in September 2015.
• Base metals are under pressure from a stronger dollar, but copper and zinc show strong fundamentals and are preferred for long positions.
• Investors are advised to reinitiate long positions in base metals if the dollar weakens further.
• The dollar's strength is expected to continue, which may pressure metal prices and worsen trade balances.
• The Fed's rate hike is a key driver for gold prices and commodity market volatility.

Conclusion

The report highlights the interconnectedness of weather patterns, geopolitical events, and monetary policy in shaping commodity prices. El Niño is expected to cause regional supply and demand imbalances, while OPEC's production strategy and Fed rate expectations are key drivers for energy and precious metals. Base metals remain attractive for long positions due to strong fundamentals in copper and zinc, despite the dollar's negative impact.