Analys
Short term recovery due for platinum and palladium
The green industrialised precious metals – platinum and palladium have started 2020 on a weak footing owing to the spread of the COVID–19 pandemic globally. The price decline for platinum, down-21.0%, has been more severe than palladium -6.83% since the start of 2020. Palladium and platinum are known to derive a large portion of their usage (accounting for nearly 34% and 84% respectively) from the auto industry.
Owing to their extensive use in vehicle auto catalysts, demand for platinum and palladium remains particularly sensitive to economic, industrial and market conditions. Falling demand from the global auto industry due to automotive shutdowns being imposed globally are denting sentiment towards both platinum and palladium. Platinum has a more diverse demand base compared to palladium. In addition to auto demand – jewellery, industrial and investment demand account for about 25%, 28% and 13% of platinum’s total usage, respectively.
However, amidst the COVID-19 crisis, both jewellery and industrial demand are expected to fall further but investment demand is likely to strength amidst the uncertainty. While the weakness on the demand side remains a key focus, we expect attention to increasingly start to shift to the supply side aiding a short-term price recovery.
The slump in auto industry should start to recover in H2 as stringent lockdowns ease
The impact of the COVID-19 crisis on the global automobile industry has been severe as production and sales of motor vehicles have come to a sudden halt globally. In the first quarter of 2020, the EU commercial vehicle market contracted by 23.2% as a direct consequence of March’s substantial slowdown. In March 2020, demand for new commercial vehicles fell by 47.3% across the EU, as measures to prevent the spread of the coronavirus led to the suspension of production at auto manufacturers.
Meanwhile in China, where the epidemic peaked in February, the market is slowly returning to normality. The Chinese automotive market recovered significantly from its prior slump in March. As the China Association of Automobile Manufacturers (CAAM) reported on 10 April 2020, car sales increased more than fourfold (compared to February) to 1.04mn units. According to reports from the CAAM, the Chinese auto industry regained around 75% of its normal operating level in March. The CAAM expects the vehicle market to continue its recovery in the second quarter although full capacity is only likely to be reached again in the second half of the year. In Europe, assembly lines are now restarting production and the same is expected in North America around mid-May.
As lockdown measures start to ease gradually across the rest of the globe, we expect to see a gradual recovery in demand for the green metals from the auto industry in the second half of the year. However, we remain cautious of end-consumer demand which is anticipated to stay weak as consumer’s propensity to purchase cars will be lower due to the economic impact of the COVID-19 crisis on their purchasing power.
Supply side destruction is likely to have a bigger impact on platinum vs palladium
South Africa’s Platinum Group Metal (PGM) producers have been hit by severe disruptions since the lockdowns have been imposed in April. South Africa produces around 38% of palladium and 75% of platinum globally. In the past, the South African mining industry faced a range of health issues, including HIV infections, and such concerns have always posed a risk to supply. The five-week lockdown in South Africa ordered by President Ramaphosa is expected to come to an end in the coming days.
While producers are attempting to prepare themselves to restart production at the mines again, the police are preventing them due to the spread of COVID-19. This implies that the current market tightness will only last for short duration. However, the process of ramping operations back to normal is likely to take time even after the shutdown period. It is also hard to determine at this stage if a second wave of infections might trigger another round of shutdowns causing supply disruptions to linger for longer. Initially the mines are expected to be allowed to operate at 50% capacity.
Palladium normally occurs as a by-product of platinum mining (South Africa) or nickel mining (Russia). About 40% of palladium’s supply comes from Russia. Supply of palladium appears to be at less of a risk as the world’s largest palladium producer Nornickel from Russia expects the global palladium market to show a small supply surplus this year for the first time in eight years.
This is because demand for palladium has been impacted severely by the COVID-19 led crisis. Nornickel reduced its 2020 estimate of palladium consumption owing to weaker global car sales. Reflecting on 2011, Gokran, the Russian state reserve fund unexpectedly supplied about 750,000 ounces out of its own stockpile which was followed by three years of palladium’s price decline. The caveat is no one knows how big Gokran’s stockpile or whether they would use this current period of weak demand for palladium to build up stockpile.
No substitution so far, despite palladium’s price premium over platinum
The recent price correction has driven the palladium to platinum ratio down from its peak of 3.1x to 2.4x. Despite palladium’s price premium to platinum it is less likely for platinum to be substituted for palladium in auto catalysts. The chief reason for this is platinum’s lower thermal durability which curtails its use in the widespread adoption of three-way catalysts.
The implementation of Real-Driving Emissions (RDE) testing involves stricter test cycles with faster driving speeds and higher engine temperatures which poses technical hurdles to platinum’s adoption in the three-way catalysts. At high operating temperatures experienced in a gasoline car, platinum particles may sinter, resulting in loss of surface area and hence of catalytic activity according to Johnson Matthey. Compared to palladium-rhodium formulations, the effectiveness of platinum-containing catalysts tends to deteriorate more rapidly as they age. While there might be some near-term potential for platinum to substitute some of the palladium used in diesel catalyst, we do not see a substitution effect in gasoline catalysts this year.
Platinum and palladium have witnessed a sharp downward price correction in 2020 owing to weak sentiment emanating from dwindling demand in the auto industry. Intermediate supply disruptions should aid a short-term price recovery for the green metals. The roll out of more stringent emissions standards globally are also likely to require higher content of platinum and palladium per unit of vehicle which should help offset the impact of weaker demand from the auto industry. Platinum’s supply is more concentrated in South Africa due to which platinum appears more exposed to supply disruptions versus palladium. In addition, palladium derives most of its use from the auto industry in comparison to platinum has a more diversified demand base. Platinum stands to benefit more than palladium owing to the prospect of having a more diversified demand base coupled with the exposure to higher supply risks.
Brent rallied 2.5% last week on bullish inventories and bullish backdrop. Brent crude gained 2.5% last week with a close of the week of USD 89.5/b which also was the highest close of the week. The bullish drivers were: 1) Commercial crude and product stocks declined 3.8 m b versus a normal seasonal rise of 4.4 m b, 2) Solid gains in front-end Brent crude time-spreads indicating a tight crude market, and 3) A positive backdrop of a 2.7% gain in US S&P 500 index.
Brent falling back 1% on diesel concerns this morning. But positive backdrop may counter it later. This morning Brent crude is pulling back 0.9% to USD 88.7/b counter to the fact that the general backdrop is positive with a weaker USD, equity gains both in Asia and in European and US futures and not the least also positive gains in industrial metals with copper trading up 0.4% at USD 10 009/ton. This overall positive market backdrop clearly has the potential to reverse the initial bearish start of the week as we get a little further into the Monday trading session.
Diesel concerns at center stage. The bearish angle on oil this morning is weak diesel demand with diesel forward curves in front-end contango and predictions for lower refinery runs in response this down the road. I.e. that the current front-end strength in crude curves (elevated backwardation) reflecting a current tight crude market will dissipate in not too long due to likely lower refinery runs.
But gasoline cracks have rallied. Diesel weakness is normal this time of year. Overall refining margin still strong. Lots of focus on weakness in diesel demand and cracks. But we need to remember that we saw the same weakness last spring in April and May before the diesel cracks rallied into the rest of the year. Diesel cracks are also very seasonal with natural winter-strength and likewise natural summer weakness. What matters for refineries is of course the overall refining margin reflecting demand for all products. Gasoline cracks have rallied to close to USD 24/b in ARA for the front-month contract. If we compute a proxy ARA refining margin consisting of 40% diesel, 40% gasoline and 20% bunkeroil we get a refining margin of USD 14/b which is way above the 2015-19 average of only USD 6.5/b. This does not take into account the now much higher costs to EU refineries of carbon prices and nat gas prices. So the picture is a little less rosy than what the USD 14/b may look like.
The Russia/Ukraine oil product shock has not yet fully dissipated. What stands out though is that the oil product shock from the Russian war on Ukraine has dissipated significantly, but it is still clearly there. Looking at below graphs on oil product cracks the Russian attack on Ukraine stands out like day and night in February 2022 and oil product markets have still not fully normalized.
Oil market gazing towards OPEC+ meeting in June. OPEC+ will adjust to get the price they want. Oil markets are increasingly gazing towards the OPEC+ meeting in June when the group will decide what to do with production in Q3-24. Our view is that the group will adjust production as needed to gain the oil price it wants which typically is USD 85/b or higher. This is probably also the general view in the market.
Change in US oil inventories was a bullish driver last week.
Crude oil time-spreads strengthened last week
ICE gasoil forward curve has shifted from solid backwardation to front-end contango signaling diesel demand weakness. Leading to concerns for lower refinery runs and softer crude oil demand by refineries down the road.
ARA gasoline crack has rallied towards while Gasoil crack has fallen back. Not a totally unusual pattern.
Proxy ARA refining margin with 40% gasoil crack, 40% gasoline crack and 20% bunker oil crack.
ARA diesel cracks saw the exact same pattern last year. Dipping low in April and May before rallying into the second half of the year. Diesel cracks have fallen back but are still clearly above normal levels both in spot and on the forward curve. I.e. the ”Russian diesel stress” hasn’t fully dissipated quite yet.
Net long specs fell back a little last week.
52-week ranking of net long speculative positions in Brent and WTI as well as 52-week ranking of the strength of the Brent 1-7 mth backwardation
So far this week, Brent Crude prices have strengthened by USD 1.3 per barrel since Monday’s opening. While macroeconomic concerns persist, they have somewhat abated, resulting in muted price reactions. Fundamentals predominantly influence global oil price developments at present. This week, we’ve observed highs of USD 89 per barrel yesterday morning and lows of USD 85.7 per barrel on Monday morning. Currently, Brent Crude is trading at a stable USD 88.3 per barrel, maintaining this level for the past 24 hours.
Additionally, there has been no significant price reaction to Crude following yesterday’s US inventory report (see page 11 attached):
- US commercial crude inventories (excluding SPR) decreased by 6.4 million barrels from the previous week, standing at 453.6 million barrels, roughly 3% below the five-year average for this time of year.
- Total motor gasoline inventories decreased by 0.6 million barrels, approximately 4% below the five-year average.
- Distillate (diesel) inventories increased by 1.6 million barrels but remain weak historically, about 7% below the five-year average.
- Total commercial petroleum inventories (crude + products) decreased by 3.8 million barrels last week.
Regarding petroleum products, the overall build/withdrawal aligns with seasonal patterns, theoretically exerting limited effect on prices. However, the significant draw in commercial crude inventories counters the seasonality, surpassing market expectations and API figures released on Tuesday, indicating a draw of 3.2 million barrels (compared to Bloomberg consensus of +1.3 million). API numbers for products were more in line with the US DOE.
Against this backdrop, yesterday’s inventory report is bullish, theoretically exerting upward pressure on crude prices.
Yet, the current stability in prices may be attributed to reduced geopolitical risks, balanced against demand concerns. Markets are adopting a wait-and-see approach ahead of Q1 US GDP (today at 14:30) and the Fed’s preferred inflation measure, “core PCE prices” (tomorrow at 14:30). A stronger print could potentially dampen crude prices as market participants worry over the demand outlook.
Geopolitical “risk premiums” have decreased from last week, although concerns persist, highlighted by Ukraine’s strikes on two Russian oil depots in western Russia and Houthis’ claims of targeting shipping off the Yemeni coast yesterday.
With a relatively calmer geopolitical landscape, the market carefully evaluates data and fundamentals. While the supply picture appears clear, demand remains the predominant uncertainty that the market attempts to decode.
Brent crude has fallen USD 3/b since the peak of Iran-Israel concerns last week. Still lots of talk about significant Mid-East risk premium in the current oil price. But OPEC+ is in no way anywhere close to loosing control of the oil market. Thus what will really matter is what OPEC+ decides to do in June with respect to production in Q3-24 and the market knows this very well. Saudi Arabia’s social cost-break-even is estimated at USD 100/b today. Also Saudi Arabia’s purse is hurt by 21% US inflation since Jan 2020. Saudi needs more money to make ends meet. Why shouldn’t they get a higher nominal pay as everyone else. Saudi will ask for it
Brent is down USD 3/b vs. last week as the immediate risk for Iran-Israel has faded. But risk is far from over says experts. The Brent crude oil price has fallen 3% to now USD 87.3/b since it became clear that Israel was willing to restrain itself with only a muted counter attack versus Israel while Iran at the same time totally played down the counterattack by Israel. The hope now is of course that that was the end of it. The real fear has now receded for the scenario where Israeli and Iranian exchanges of rockets and drones would escalate to a point where also the US is dragged into it with Mid East oil supply being hurt in the end. Not everyone are as optimistic. Professor Meir Javedanfar who teaches Iranian-Israeli studies in Israel instead judges that ”this is just the beginning” and that they sooner or later will confront each other again according to NYT. While the the tension between Iran and Israel has faded significantly, the pain and anger spiraling out of destruction of Gaza will however close to guarantee that bombs and military strifes will take place left, right and center in the Middle East going forward.
Also OPEC+ wants to get paid. At the start of 2020 the 20 year inflation adjusted average Brent crude price stood at USD 76.6/b. If we keep the averaging period fixed and move forward till today that inflation adjusted average has risen to USD 92.5/b. So when OPEC looks in its purse and income stream it today needs a 21% higher oil price than in January 2020 in order to make ends meet and OPEC(+) is working hard to get it.
Much talk about Mid-East risk premium of USD 5-10-25/b. But OPEC+ is in control so why does it matter. There is much talk these days that there is a significant risk premium in Brent crude these days and that it could evaporate if the erratic state of the Middle East as well as Ukraine/Russia settles down. With the latest gains in US oil inventories one could maybe argue that there is a USD 5/b risk premium versus total US commercial crude and product inventories in the Brent crude oil price today. But what really matters for the oil price is what OPEC+ decides to do in June with respect to Q3-24 production. We are in no doubt that the group will steer this market to where they want it also in Q3-24. If there is a little bit too much oil in the market versus demand then they will trim supply accordingly.
Also OPEC+ wants to make ends meet. The 20-year real average Brent price from 2000 to 2019 stood at USD 76.6/b in Jan 2020. That same averaging period is today at USD 92.5/b in today’s money value. OPEC+ needs a higher nominal price to make ends meet and they will work hard to get it.
Inflation adjusted Brent crude price versus total US commercial crude and product stocks. A bit above the regression line. Maybe USD 5/b risk premium. But type of inventories matter. Latest big gains were in Propane and Other oils and not so much in crude and products
Total US commercial crude and product stocks usually rise by 4-5 m b per week this time of year. Gains have been very strong lately, but mostly in Propane and Other oils
Last week’s US inventory data. Big rise of 10 m b in commercial inventories. What really stands out is the big gains in Propane and Other oils
Take actual changes minus normal seasonal changes we find that US commercial crude and regular products like diesel, gasoline, jet and bunker oil actually fell 3 m b versus normal change.
Diesel concerns drags Brent lower but OPEC+ will still get the price it wants in Q3
Londons roll som ett globalt nav inom råvaruhandeln
’wait and see’ mode
Also OPEC+ wants to get compensation for inflation
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