Analys

Gold outlook 2019 – recovery expected to continue

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5 år sedan

den

29 januari, 2019

Gold staged a recovery late in 2018. The yellow metal has recovered most of its losses since June 2018. A collapse in speculative positioning in gold futures drove prices down in the second half of the year, sentiment toward gold is clearly recovering in recent weeks. We expect the recovery to continue as many risks that were being ignored by the market start to get priced-in to gold. Our base case scenario is for gold to reach close to US$1370/oz by year end.

Figure 1: Gold price forecast

Source: WisdomTree Model Forecasts, Bloomberg Historical Data, data available as of close 31 December 2018. Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties.

Approach

Using the framework we outlined in our paper Gold outlook: gold to flatline out to June 2019 in the absence of shocks, we apply our views on inflation, exchange rates, interest rates and investor sentiment to try to project where gold will be by the end of the year.

Speculative positioning drives recovery

In 2018 speculative positioning fell to the lowest level since 2001 briefly before recovering very late in the year. Judging by flows into gold Exchange Traded Products, sentiment toward the metal is clearly recovering. Asset market volatility in the final weeks of the year was one of the main catalysts behind the recovery in gold positioning. The S&P 500 lost 14% and Brent oil fell by 35% in the final quarter of 2018. Moreover, the volatility of both benchmarks has risen substantially.

A government shutdown in the US acted as a jolt to investors to remind them that the world’s engine of growth (at least in recent times) is not invincible. Meanwhile concerns around China’s slowing growth rate also led investors to become less optimistic about cyclical assets.

Fed to continue to tighten policy

We expect the Federal Reserve (Fed) to raise rates twice in 2019 (50 basis points), in line with the dot-plots in the central bank’s recent economic forecasts . That’s also in line with consensus forecasts by economists, however, Fed fund futures are not pricing in any rate increases for 2019. We side with the Fed’s guidance as we believe that economic data from the country is strong enough and labour markets are tight enough for the central bank to continue to raise rates. However, we acknowledge the risk to rates is on the downside – which in general should play to the upside for gold prices.

US Treasury bond yield curve to invert

Although we expect a total of 50 basis points increase in policy rates by Q4 2019, we think that 10-year bond yields will only increase around 25 basis points to 3.0% in that time horizon. 2-year bond yields are likely to capture more of the gains in policy rates, but further out in the curve, we are likely to see less yield increases. That’s because the Fed’s holding of a large stock of bonds is likely to hold yields back from rising too aggressively. Also, recent tax cuts are likely to have the most impact in the very short term. As the growth impact peters out over longer horizons, the uplift to yields at the longer end of the curve will be less than at the short end. Although many people see yield curve inversion as a financial signal of impending economic downturn, we believe that an inversion can occur for the less benign reasons outlined above and so it is not necessarily a precursor to an economic recession. If anything, we believe the Fed will err on the side of dovishness, as it will be reluctant to drive policy too far from other central banks. In fact, Fed fund futures indicate that the market thinks that the Fed will stop raising rates altogether this year. That could prove to be supportive for gold prices over the course of 2019.

Figure 2: Nominal US 10 year Bond Yields forecast

US Dollar appreciation to be short-lived

While the Fed remains the only major central bank raising interest rates over in the first half of the year, we expect the US Dollar to continue to appreciate, especially as judging by Fed fund futures, the market is currently not expecting further tightening. However, as other major central banks – the European Central Bank, Bank of Japan, Bank of England for example start to think about policy normalisation, we could see interest rate differentials narrow and the US Dollar weaken. Additionally, with growing indebtedness in the US – exacerbated by recent tax cuts – we expect a depreciation in the US Dollar.

Figure 3: US Dollar Exchange Rate Forecast

Inflationary pressures to persist, but remain contained by Fed’s policy

US consumer price index (CPI) inflation peaked at 2.9% in July 2018 and declined to 2.2% in November 2018. Volatile energy prices were responsible for a large part of the rise and decline. We expect the Fed’s policy tightening to continue to keep demand-driven inflation in check, but a recovery in oil prices will likely place upward pressure on inflation at the headline level. We expect a small increase in inflation to 2.3% by year-end.

Figure 4: Consumer Price Index inflation forecast

What will help sentiment toward gold improve?

Summarising the monetary/economic drivers of gold – small increases in interest rates, minor appreciation followed by depreciation of the US Dollar and inflation moving marginally higher – are not going to move the dial for gold in a big way. We believe that that gold prices will end the forecast period higher mainly as a result of sentiment towards gold continuing to move out of a depressed state. This process had started already in the final week of 2018 as most markets displayed excessive volatility. We have had multiple bouts of equity market volatility in 2018, but for most part developed world equities have snapped back. That does not guarantee resilience in the face of the next shock. We note that the last time speculative positioning in gold hit levels as low as they did in 2018 was in 2001 – the year when an Argentine debt crisis was brewing, and an overvalued technology sector was imploding. Gold reacted to the stress scenario but with latency. Gold prices rose 25% in 2002 (compared to 2% in 2001).

There are other risks, that could be supportive for gold as historically a safe haven asset, which could drive positioning in gold futures higher:

No deal Brexit– The UK’s prime minister appears to have insufficient support for the terms of withdrawal from the EU that she has been responsible for negotiating. Although she survived a vote of no confidence from her own party, it clear that the proposal is detested by leave and remain MPs alike. Renegotiating the terms of withdrawal appear impossible at this stage and so it is difficult to see how either side will be appeased by the current deal. We believe the most likely outcome will be for some form of extension beyond the March 30th deadline, however, there is a risk that doesn’t happen and there would be` no withdrawal deal in place. Leaving the EU in such an uncertain manner is likely to be very disruptive for both the UK and EU. Even if there is an extension to the deadline, uncertainty will linger, which will support demand for haven assets.
Trade-wars – Our working assumption is that rising protectionism in the US is not going to damage global economic demand. In fact, there are signs that the rift between the US and China is beginning to thaw. However, we have seen similar signs before which have been followed by a deterioration of the relationship. If tit-for-tat protectionist measures escalate, the market could be driven into a risk-off mindset.
The US government is currently shut down as President Trump vies congress to fund his border wall with Mexico. The risk of the standoff becoming prolonged could support demand for haven assets. Indeed, even if the government reopens soon, the risk of the Trump administration continuously using the threat of shutdowns as a strategy to gain leverage over congress is likely to hurt investor confidence in cyclical assets.

In our forecast, we bring back speculative positioning in gold futures to levels consistent with what we have seen in the past five years.

Figure 5: Gold futures speculative positioning

Combining the monetary, economic and sentiment driven factors affecting gold, we believe gold will reach close to US$1370/oz by the end of this year.

Alternative scenarios

We have also developed alternative scenarios for gold as summarised below. Most of the sensitivity comes from our measure of sentiment, speculative positioning. But even in our bear case, we increase positioning into positive territory. In our bull case scenario, we assume the Fed will allow the economy to run hot, only raising rates once, which will put less pressure on bond yields to rise, aid US Dollar depreciation and keep inflation elevated at 2.9%. In the bear case, conversely, we assume the Fed acts more hawkishly and has more impact on the longer bond yields. The US Dollar appreciates as the Fed surprises the market with its hawkishness.

Conclusion

In our base case scenario, we expect gold prices to rise close to US$1370/oz by Q4 2019, mainly as a result of speculative positioning in the futures market being restored. Some US Dollar depreciation and small gains in inflation will also aid gold’s rise.

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Analys

’wait and see’ mode

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17 timmar sedan

den

25 april, 2024

Redaktionen

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.

Ole R. Hvalbye, Analyst Commodities, SEB

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.

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Analys

Also OPEC+ wants to get compensation for inflation

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3 dagar sedan

den

23 april, 2024

Redaktionen

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

Bjarne Schieldrop, Chief analyst commodities, SEB

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.

Price of brent crude — Source: SEB calculations and graph, Blbrg data

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.

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Analys

Nat gas to EUA correlation will likely switch to negative in 2026/27 onward

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6 dagar sedan

den

20 april, 2024

Redaktionen

Historically positive Nat gas to EUA correlation will likely switch to negative in 2026/27 onward

Historically there has been a strong, positive correlation between EUAs and nat gas prices. That correlation is still fully intact and possibly even stronger than ever as traders increasingly takes this correlation as a given with possible amplification through trading action.

The correlation broke down in 2022 as nat gas prices went ballistic but overall the relationship has been very strong for quite a few years.

The correlation between nat gas and EUAs should be positive as long as there is a dynamical mix of coal and gas in EU power sector and the EUA market is neither too tight nor too weak:

Nat gas price UP => ”you go black” by using more coal => higher emissions => EUA price UP

But in the future we’ll go beyond the dynamically capacity to flex between nat gas and coal. As the EUA price moves yet higher along with a tightening carbon market the dynamical coal to gas flex will max out. The EUA price will then trade significantly above where this flex technically will occur. There will still be quite a few coal fired power plants running since they are needed for grid stability and supply amid constrained local grids.

As it looks now we still have such overall coal to gas flex in 2024 and partially in 2025, but come 2026 it could be all maxed out. At least if we look at implied pricing on the forward curves where the forward EUA price for 2026 and 2027 are trading way above technical coal to gas differentials. The current forward pricing implications matches well with what we theoretically expect to see as the EUA market gets tighter and marginal abatement moves from the power sector to the industrial sector. The EUA price should then trade up and way above the technical coal to gas differentials. That is also what we see in current forward prices for 2026 and 2027.

The correlation between nat gas and EUAs should then (2026/27 onward) switch from positive to negative. What is left of coal in the power mix will then no longer be dynamically involved versus nat gas and EUAs. The overall power price will then be ruled by EUA prices, nat gas prices and renewable penetration. There will be pockets with high cost power in the geographical points where there are no other alternatives than coal.

The EUA price is an added cost of energy as long as we consume fossil energy. Thus both today and in future years we’ll have the following as long as we consume fossil energy:

EUA price UP => Pain for consumers of energy => lower energy consumption, faster implementation of energy efficiency and renewable energy => lower emissions

The whole idea with the EUA price is after all that emissions goes down when the EUA price goes up. Either due to reduced energy consumption directly, accelerated energy efficiency measures or faster switch to renewable energy etc.

Let’s say that the coal to gas flex is maxed out with an EUA price way above the technical coal to gas differentials in 2026/27 and later. If the nat gas price then goes up it will no longer be an option to ”go black” and use more coal as the distance to that is too far away price vise due to a tight carbon market and a high EUA price. We’ll then instead have that:

Nat gas higher => higher energy costs with pain for consumers => weaker nat gas / energy demand & stronger drive for energy efficiency implementation & stronger drive for more non-fossil energy => lower emissions => EUA price lower

And if nat gas prices goes down it will give an incentive to consume more nat gas and thus emit more CO2:

Cheaper nat gas => Cheaper energy costs altogether, higher energy and nat gas consumption, less energy efficiency implementations in the broader economy => emissions either goes up or falls slower than before => EUA price UP

Historical and current positive correlation between nat gas and EUA prices should thus not at all be taken for granted for ever and we do expect this correlation to switch to negative some time in 2026/27.

In the UK there is hardly any coal left at all in the power mix. There is thus no option to ”go black” and burn more coal if the nat gas price goes up. A higher nat gas price will instead inflict pain on consumers of energy and lead to lower energy consumption, lower nat gas consumption and lower emissions on the margin. There is still some positive correlation left between nat gas and UKAs but it is very weak and it could relate to correlations between power prices in the UK and the continent as well as some correlations between UKAs and EUAs.

Correlation of daily changes in front month EUA prices and front-year TTF nat gas prices, 250dma correlation.

EUA price vs front-year TTF nat gas price since March 2023

Front-month EUA price vs regression function of EUA price vs. nat gas derived from data from Apr to Nov last year.

The EUA price vs the UKA price. Correlations previously, but not much any more.

Forward German power prices versus clean cost of coal and clean cost of gas power. Coal is totally priced out vs power and nat gas on a forward 2026/27 basis.

Forward price of EUAs versus technical level where dynamical coal to gas flex typically takes place. EUA price for 2026/27 is at a level where there is no longer any price dynamical interaction or flex between coal and nat gas. The EUA price should/could then start to be negatively correlated to nat gas.