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 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!
Brent crude prices have lost the positive momentum seen from Monday evening through midday yesterday. The price initially bottomed out at USD 65.7 per barrel on Monday afternoon, before climbing steadily by USD 3 to USD 68.7 on Wednesday morning. However, that upward momentum quickly reversed course. Brent tumbled nearly USD 3.4, hitting a weekly low of USD 65.3 per barrel before recovering some losses. As of this morning, it trades at USD 66.6 – a reflection of continued and substantial volatility.
Market fundamentals have largely remained in the background, with tariff rhetoric still dominating headlines. However, yesterday’s drop was clearly driven by the supply side of the equation, after reports emerged that several OPEC+ members are pushing for an accelerated oil output increase in June.
The timing of this move – amid global trade uncertainty and softening demand – may seem counterintuitive. But internal rifts within OPEC+ appear to be taking precedence. In May, Saudi Arabia already surprised the market with an output hike aimed at disciplining quota violators. That move failed to restrict Kazakhstan, the group’s largest overproducer, and has now triggered discussions of yet another sizeable production boost in June.
A later statement from Kazakhstan’s energy ministry, pledging renewed compliance, may have helped lift crude prices slightly this morning.
The next OPEC+ meeting is set for May 5, with the proposed June output hike expected to top the agenda. The group will likely choose between a scheduled, incremental increase of 138,000 barrels per day, or a more aggressive jump of 411,000 barrels per day – equivalent to ish three months’ worth of increases rolled into one. The latter scenario would put downward pressure on oil prices and highlight deepening tensions within OPEC+, while also exacerbating concerns in a market already clouded by weak demand expectations.
Although the final decision on volumes remains unclear, OPEC+ has demonstrated it still has pricing power, and that it can pull prices lower quickly if it chooses to do so.
________
US DOE DATA
U.S. refinery activity picked up in the week ending April 18, with crude inputs rising by 326,000 barrels per day to a total of 15.9 million. Utilization rates also climbed to 88.1%. Gasoline output strengthened to 10.1 million barrels per day, while distillate fuel production edged lower to 4.6 million.
Crude imports declined by 412,000 barrels per day to 5.6 million last week. Over the past month, import volumes have averaged 6.1 million barrels per day – down 6.8% compared to the same period a year ago. Gasoline and distillate imports came in at 858,000 and 97,000 barrels per day, respectively.
Inventories were mixed. Crude oil inventories (excl. SPR) rose slightly by 0.2 million barrels to 443.1 million, still 5% below the five-year average. Gasoline inventories posted a sharp draw of 4.5 million barrels and are now 3% under seasonal norms. Diesel inventories dropped by 2.4 million barrels, leaving levels 13% below the five-year average. Propane inventories rose by 2.3 million but remained 7% under typical levels. Total commercial petroleum inventories saw a net decline of 0.7 million barrels on the week.
Product demand was generally stable. Total products supplied averaged 19.9 million barrels per day over the last four weeks, up 0.4% year-on-year. Gasoline demand slipped by 0.4%, while distillates and jet fuel rose sharply, by 12.8% and 13.8%, respectively.
Brent carried higher by relief rally across markets as Trump backs away from sacking Powel. Brent crude rose 1.8% ydy to USD 67.44/b with an intraday high of USD 68.04/b. The gain was driven by a relief rally across markets as it became clear that Trump would not try to force out Powel from his role as chair of the US Fed. US equities rallied more than 2.5% as a result and pulled oil along upwards in relief. The gains continue this morning both in equities and oil with the latter up 1.2% to USD 68.25/b.
Forward oil in euro looks very appealing for consumers. Even after recent oil price gains. A weaker USD and a lower oil price at the same time recently has strongly lifted the appeal for oil purchases by non-US denominated oil consumers. The euro has rallied against the USD. On Monday Brent closed at EUR 57.57/b while the 3yr forward Brent price closed at a nominal EUR 53.95/b when the forward fx rate is applied. But this is nominal three years forward basis. If we also assume that Eurozone inflation will average 2% pa. for the next three years, then the real forward euro price for oil is even lower. The price for Brent crude today is EUR 60.1/b for the front-month while the 36mth contract is EUR 55.1/b when the forward eurusd rate of 1.2 is applied. If we also assume a 2% annual inflation for three years then the real forward price is only EUR 51.9/b. Compare this to the average nominal price of Brent crude from 2015 to 2019, the shale oil boom-years, when Brent crude only averaged USD 58.5/b and EUR 51.3/b. This period was the tragic oil-years when US shale oil companies were chasing volumes rather than profits with many of them going bankrupt as a result. Even after the recent rally in Brent crude oil prices, the forward 36mth price in EUR is still relatively cheap in historical terms and especially so when the 36mth real forward price is taken into account.
The 36mth real forward price for Brent crude in EUR/b is almost down to the ”valley of death” period from 2015 to 2019 when Brent crude nominally averaged USD 58.5/b and EUR 51.3/b. That was the period when US shale oil producers aimed for volume over profits which led many of them to bankruptcy.
Brent crude is now trading below its nominal 2018-19 average in EUR/barrel terms
OPEC+ tensions resurface: Brent slides to $66.6
Mjölkpriset har gått upp 80 procent på fem år – nu mår bönderna bra
Nam, nam, nam. Give me more 36mth forward Brent crude in EUR/barrel
Crude oil comment: The forward curve is pricing tightness today and surplus tomorrow
Danska Seaborg Technologies siktar på serieproduktion av smältsaltsreaktorer till mitten av 2030-talet
Brent Edges Lower After Resisting Equity Slump – Sanctions, Saudi Pricing in Focus
Oljepriserna slaktas på samtidiga negativa faktorer
Guld kostar över 3100 USD per uns och 1 miljoner kronor per kilo
Tariffs deepen economic concerns – significantly weighing on crude oil prices
-
Nyheter4 veckor sedanDanska Seaborg Technologies siktar på serieproduktion av smältsaltsreaktorer till mitten av 2030-talet
-
Analys4 veckor sedan
Brent Edges Lower After Resisting Equity Slump – Sanctions, Saudi Pricing in Focus
-
Nyheter3 veckor sedanOljepriserna slaktas på samtidiga negativa faktorer
-
Nyheter4 veckor sedanGuld kostar över 3100 USD per uns och 1 miljoner kronor per kilo
-
Analys3 veckor sedan
Tariffs deepen economic concerns – significantly weighing on crude oil prices
-
Nyheter3 veckor sedanTvå samtal om det aktuella läget på råvarumarknaden
-
Analys4 veckor sedan
Crude inventories fall, but less than API signal
-
Analys3 veckor sedan
Lowest since Dec 2021. Kazakhstan likely reason for OPEC+ surprise hike in May