Analys

Gold outlook: flat for the year

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7 år sedan

den

9 januari, 2018

Redaktionen

Summary

Our base-case fair-value for gold is broadly flat over the coming year, as support from rising inflation will counter the downward pressure from rising interest rates.

Despite policy interest rates rising in 2017, the US Dollar has depreciated and US Treasury yields have declined. We expect these paradoxical trends to abate in 2018.

Most of the variation in gold price in our bull and bear cases (compared to our base case) comes from assumptions around investor positioning. Many measures of market volatility are currently subdued. However, several risks – both political and financial – exist. Sentiment towards gold could shift significantly depending on which of these views dominate market psyche.

US Federal Reserve to continue tightening

We believe that in addition to the fully-priced-in December 2017 hike, the US central bank will follow through with three further rate hikes in 2018. That comes on top of the balancesheet run-off that the Fed has already announced. Although some market participants think that under a new Chair, the Fed will become more dovish, we believe the central bank will remain data-dependent and trained staff economists’ analysis will become more influential in the Board’s decision making. In light of strengthening domestic demand and a tight labour market, the inflationary potential will be hard to ignore.

Inflation to gain momentum

Inflation has been subdued in 2017, despite so many signs of cyclical strength, but a large number of idiosyncratic factors account for this apparent weakness in price movements. Dominant wireless phone service providers changing pricing; solar eclipse changing the timing of hotel stays; severe hurricane disruptions; budget airlines opening new routes are some of the idiosyncratic factors that are unlikely to be repeated. Also the calculation of owner occupied equivalent rent has caused some distortions in the inflation numbers as it is sensitive to energy prices. With volatility in energy prices having fallen, we expect these distortions to subside. The unemployment rate is at its lowest in 16 years and a healthy number of jobs are being added every month (notwithstanding hurricane disruptions). The strength in the labour market is now likely to show up in inflation as per its traditional relationship2.

We expect US inflation to rise to 2.4% in June 2018 and 2.6% by December 2018 (from 2.2% in September 2017). These levels will likely be uncomfortably high for the Fed, but given the lags in policy and price response, there is little the Fed can do next year to stop it (the inflationary pressure has been built up this year). However, we believe three rate hikes in 2018 will be required to keep inflation expectations sufficiently anchored.

US Treasury yields

During the rate tightening that has taken place in 2017, the US Treasury yield curve has flattened. While there have been 75bps of policy rate increases since December 2016, nominal 10-year Treasury yields have fallen from 2.60% to 2.34%. We don’t think that 10-year yields can continue to decline. We expect 10- year Treasury yields to rise to 3.1% by the end of 2018.

We expect the US Dollar to appreciate modestly (see FX Outlook 2018), reversing some of the weakness that we have seen in 2017. We expect the DXY (the trade weighted US dollar index) to appreciate to 102 by the end of 2018 from 94 currently. A lack of progress in implementing pro-growth policies that the Trump Administration had promised, a lack of tax and budget reform and a generally stronger Euro and Yen have weighed on the US Dollar in 2017. Some of these trends will continue to drag on dollar performance in 2018, but rising interest rates will lend some support. We believe that the policy divergence between the Federal Reserve, European Central Bank and Bank of Japan will become more pronounced as the market becomes increasingly disappointed by the pace of tapering by the latter two central banks. That will reverse some of the strength in the Euro and Yen.

Market sentiment

We expect CFTC futures market positioning in gold to hover around 120k contracts net long, lower than current positioning (190k), but marginally higher than the long-term average positioning of around 90k contracts net long. Currently positioning is elevated due to investor fears around continued sabre-rattling between US/Japan and North Korea and some of the tensions in the Middle East. These concerns could fall away if new developments on these geopolitical issues do not resurface. We have observed that when such geopolitical issues simmer in the background, political risk-premia tends to dissipate from the price of gold. It requires keeping the issues at the forefront of market psyche for the premia to endure.

Bull case

Our bull case for gold assumes only two rate hikes in 2018. As a result the DXY only rises to 99 and treasury yields only rise to 2.8%. We assume that inflation rises to 3%.

We raise the investor positioning in gold to 200k contracts net long for the whole forecast horizon. This is one of the main drivers of higher gold prices in this scenario compared to the base case. There are numerous risks which can push demand for gold futures higher:

Continued sabre-rattling between US/Japan/South Korea and North Korea; • The proxy war between Saudi Arabia and Iran escalates;
A disorderly unwind of credit in China;
Italian policy paralysed by the inability to form a government after the election;
Catalonian independence pushing Spain close to civil war
A potential second general election in Germany; and
Market volatility measures such as the VIX (equity), MOVE (bond) spike as yield-trades unwind

In the bull case scenario, gold will rise to US$1420/oz by the middle of the year, and ease to just below US$1400/oz by the end of 2018.

Bear case

Annons

In our bear case, we assume the Fed delivers four rates hikes in 2018 as it tries to anchor inflation expectations. 10-year nominal Treasury yields rise to 3.3% by the end of the year, while the DXY appreciates to 105. By year-end inflation falls back to 1.6%. In this scenario we assume that the absence of any geopolitical risk premia or adverse financial market shock and so speculative positioning falls to 40k contracts net long. In the bear case scenario gold falls to US$1110/oz by end of 2018.

Relaterade ämnen:etf securities research gold

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SEB Råvarubrev 9 januari 2018

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Analys

Unusual strong bearish market conviction but OPEC+ market strategy is always a wildcard

Publicerat

1 timme sedan

den

30 april, 2025

Redaktionen

Brent crude falls with strong conviction that trade war will hurt demand for oil. Brent crude sold off 2.4% yesterday to USD 64.25/b along with rising concerns that the US trade war with China will soon start to visibly hurt oil demand or that it has already started to happen. Tariffs between the two are currently at 145% and 125% in the US and China respectively which implies a sharp decline in trade between the two if at all. This morning Brent crude (June contract) is trading down another 1.2% to USD 63.3/b. The June contract is rolling off today and a big question is how that will leave the shape of the Brent crude forward curve. Will the front-end backwardation in the curve evaporate further or will the July contract, now at USD 62.35/b, move up to where the June contract is today?

Bjarne Schieldrop, Chief analyst commodities, SEB

The unusual ”weird smile” of Brent forward curve implies unusual strong bearish conviction amid current prompt tightness. the The Brent crude oil forward curve has displayed a very unusual shape lately with front-end backwardation combined with deferred contango. Market pricing tightness today but weakness tomorrow. We have commented on this several times lately and Morgan Stanly highlighted how unusual historically this shape is. The reason why it is unusual is probably because markets in general have a hard time pricing a future which is very different from the present. Bearishness in the oil market when it is shifting from tight to soft balance usually comes creeping in at the front-end of the curve. A slight contango at the front-end in combination with an overall backwardated curve. Then this slight contango widens and in the end the whole curve flips to full contango. The current shape of the forward curve implies a very, very strong conviction by the market that softness and surplus is coming. A conviction so strong that it overrules the present tightness. This conviction flows from the fundamental understanding that ongoing trade war is bad for the global economy, for oil demand and for the oil price.

Will OPEC+ switch to cuts or will it leave balancing to a lower price driving US production lower? Add of course also in that OPEC+ has signaled that it will lift production more rapidly and is currently no longer in the mode of holding back to keep Brent at USD 75/b due to an internal quarrel over quotas. That stand can of course change from one day to the next. That is a very clear risk to the upside and oil consumers around should keep that in the back of their minds that this could happen. Though we are not utterly convinced of the imminent risk of this. Before such a pivot happens, Iraq and Kazakhstan probably have to prove that they can live up to their promised cuts. And that will take a few months. Also, OPEC+ might also like to see where the pain-point for US shale oil producers’ price-vise really is today. So far, we have seen no decline in the number of US oil drilling rigs in operation which have steadily been running at around 480 rigs.

With a surplus oil market on the horizon, OPEC+ will have to make a choice. How shale this coming surplus be resolved? Shall OPEC+ cut in order to balance the market or shall lower oil prices drive pain and lower production in the US which then will result in a balanced market? Maybe it is the first or maybe the latter. The group currently has a bloated surplus balance which it needs to slim down at some point. And maybe now is the time. Allowing the oil price to slide. Economic pain for US shale oil producers to rise and US oil production to fall in order to balance the market and make room OPEC+ to redeploy its previous cuts back into the market.

Surplus is not yet here. US oil inventories likely fell close to 2 mb last week. US API yesterday released indications that US crude and product inventories fell 1.8 mb last week with crude up 3.8 mb, gasoline down 3.1 mb and distillates down 2.5 mb. So, in terms of a crude oil contango market (= surplus and rising inventories) we have not yet moved to the point where US inventories are showing that the global oil market now indeed is in surplus. Though Chinese purchases to build stocks may have helped to keep the market tight. Indications that Saudi Arabia may lift June Official Selling Prices is a signal that the oil market may not be all that close to unraveling in surplus.

The low point of the Brent crude oil curve is shifting closer to present. A sign that the current front-end backwardation of the Brent crude oil curve is about to evaporate.

Brent crude versus US Russel 2000 equity index. Is the equity market too optimistic or the oil market too bearish?

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Analys

Oil demand at risk as US consumers soon will face hard tariff-realities

Publicerat

2 dagar sedan

den

28 april, 2025

Redaktionen

Muted sideways trading. Brent crude traded mostly sideways last week, but due to a relatively strong close on the Friday before, it ended the week down 1.6% at USD 66.87/b with a high-low range of USD 65.29 – 68.65/b. So muted price range action. Brent crude is trading marginally higher, up 0.3%, this morning amid mixed equity and commodity markets.

Strong Chinese buying in April as oil prices dipped. Chinese imports of crude continued to accelerate in April following a surge in March with data from Kepler indicating that Chinese imports averaged near 11 mb/d in April. That is an 18mth high and strongly up versus only 8.9 mb/d in January (FT.com today). That has most certainly helped to stem the rot in the oil price which bottomed at an intraday low of USD 58.4/b on 9 April. It has probably also helped to keep the front-end of the Brent crude oil forward curve in consistent backwardation. The strong buying from China is both opportunistic stockpiling due to the price slump but also rebuilding of oil inventories in general.

Oil speculators are cautious with oil demand at risk as US consumers soon will face hard tariff-realities. But oil market speculators are far from bullish. While net long speculative positions are up 52.2 mb over the week to last Tuesday, it is still only the 15th lowest speculative positioning over the past 52 weeks. The underlying concern is of course the US tariffs which is crippling exports of goods from China to the US with bookings of container freight down by 30% according to Hapag-Lloyd. Bloomberg’s Chief US economist, Anna Wong, is saying that empty shelves in US shops will soon be the reality. Thus US-China trade relations need to be fixed quickly to avoid hard realities for US consumers. The lead-times are long and the current tariffs and uncertainty around these is now risking availability for US consumer goods for the holiday seasons in H2-25. Tariff realities for US consumers are increasingly just around the corner. ”Rubber will hit the road” very soon and that is when we might see weaker oil demand as well.

Brent crude traded mostly sideways last week though ended down 1.6% in the end.

Net long speculative positions in Brent and WTI up 52.2 mb over week to last Tuesday but still at 15-week low over past 52 weeks.

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Analys

Brent crude is now trading below its nominal 2018-19 average in EUR/barrel terms

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5 dagar sedan

den

25 april, 2025

Redaktionen

Brent crude gained a meager 0.65% yesterday with a close of USD 66.55/b. That was not much given that US equity markets rallied 2% yesterday with Nasdaq now is almost back to its pre ”Liberation Day” level. Brent crude is trading unchanged this morning with little impulse to do anything it seems.

Equity markets have gotten a boost along with easing US tariff rhetoric. The Brent crude oil price has however not gotten the same rebound and is today still trading USD 8.5/b lower than its USD 75/b level from 2 April.

Two factors at hand here: Expectations of softer growth and more oil from OPEC+. One is that global growth in 2025 will still take a hit with softer growth and thus softer oil demand growth due to the US tariff-turmoil. Even if rhetoric has eased. The second is that OPEC+ has upped its production plans with a softer market as a result going forward. The latter message to the market happened almost at the same time as the ”Liberation Day” on 2 April.

Spot market still as tight as it was on 2 April. Still, the front-end market is more or less equally tight today as it was on 2 April. The average Brent, WTI and Dubai 1-3mth time-spread is USD 1.4/b today versus USD 1.5/b on 2. April.

The market setup/pricing is thus that the market is still tight, but that surplus will come. Either because global growth will slow due to US Tariff-turmoil or because OPEC+ will add more barrels.

Will OPEC+ resolve its internal quarrels? Worth remembering on the latter is that the latest more aggressive OPEC+ production growth plan is due to internal quarrels over quota breaches by Iraq and Kazakhstan. OPEC+ could potentially ease those growth plans just as quickly if the internal quarrel is resolved.

Brent crude in EUR/barrel is now trading at the nominal level from 2018-2019. That is nominal! Not taking account of any kind of inflation which cumulatively is up 20-30% since primo 2018. The average, nominal Brent crude oil price in 2018-2019 was EUR 59.1/b. The front-month Brent crude oil price is now EUR 58.4/b. And Brent forward 36mth is only EUR 55.5/b and in real terms one could subtract some 5-10% for the next three years from that nominal forward price. Quite sweet for consumers!

Brent has rebounded along with equities (here US Russel 2000 index in orange), but the rebound in oil has become more hesitant the latest days. Brent still trading USD 8.5/b below its pre ”Liberation Day” of USD 75/b

Brent crude forward curves. Today versus 2 April (’Liberation Day’). Still a tight current market but now with expectation that surplus is coming.

The Brent crude oil price versus the average Brent, WTI and Dubai 1-3mth time-spread. The latter is today on par with where it was on 2 April while the Brent 1mth price is down USD 8.5/b.

Brent crude in EUR/b is down to its 2018-2019 nominal price level. Not bad for euro-based oil consumers!!

Yearly averages for Brent crude in EUR/barrel. The Brent 1mth in EUR/barrel is today trading below its nominal average from 2018-2019 of EUR 59.1/b. And 36mth forward Brent is trading at only EUR 55.5/b. And that is nominally both ways. Add in some 20-30% inflation since primo 2018 and 5-10% additional inflation next three years. Think real terms!