Analys

Silver outlook 2019 – not as good as gold

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6 år sedan

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23 januari, 2019

Alongside gold, silver has staged a rally late in 2018, gaining just over 10% in the month of December 2018. Silver’s close correlation with gold (around 80%) helps explain the sharp movement. As we discussed in Gold Outlook 2019, volatility in cyclical asset markets helped defensive assets like gold as investors sought refuge in a safe haven asset. We expect silver to rise to US$16.6/oz by Q3 2019, before easing to US$16.3/oz at the end of the year from US$15.7/oz at the time of writing (07/01/2019). Silver’s gain is likely to be less impressive than gold because manufacturing activity is slowing, and mining activity is likely to start increasing the supply of silver.

Figure 1: Silver price forecast

Source: WisdomTree, 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

To formulate our forecasts, we utilise the framework outlined in Silver outlook: Searching for a silver lining. In contrast to gold, silver has many traits of an industrial metal, with more than 50% of its use in industrial applications. Supply and demand for physical silver matter more for silver, whereas gold prices tend to be driven more by monetary factors such as Treasury yields, exchange rates and inflation.

Demand for silver could be weighed by decelerating manufacturing growth

Global manufacturing Purchasing Managers Indices (PMIs) peaked in early 2018. We expect PMIs to continue to decline in 2019, although avoid falling below the 50 demarcation between expansion and contraction. However, deceleration in manufacturing activity is likely to slow demand for silver.

Figure 2: Global manufacturing PMIs

Source: Bloomberg, WisdomTree, 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.

Mining activity could rise as capital investment has been recovering

With mining capital expenditure (capex) having recovered in 2018 after a prolonged period of restraint, we could start to see supply of silver increase as more metal comes out of the ground. Most silver comes as a by-product of mining for other metals. So, the fact that silver looked cheap relative to gold for the last few years, did not mean that miners would restrain from mining the metal.

Figure 3: Top 100 miners capital expenditure growth

Source: Bloomberg, WisdomTree, data available as of close 03 January 2019. Historical performance is not an indication of future performance and any investments may go down in value.

Silver in a supply surplus

The latest revision of data from the Silver Institute places silver in a supply surplus in both 2017 and 2018. In World Silver Survey 2018, published in H1 2018, the Silver Institute indicated that the silver market was in a deficit in 2017. The facts that they revised the deficit into a surplus and increased the surplus in 2018, indicates an overhang for the metal.

Figure 4: Physical silver supply-demand balance

Source: GFMS Thomson Reuters, Silver Institute, WisdomTree, 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.

Rising exchange inventory also indicates strong metal availability

Although most of the gains in silver inventory are in the form of eligible (i.e. meets exchange’s requirements but has not been pledged as collateral against a futures market transaction) as opposed to registered (i.e. meets requirements and has been pledged as collateral for futures market transactions), both have been rising. The trends indicate that there is ample metal availability.

Figure 5: COMEX silver inventory

Source: Bloomberg, WisdomTree, data available as of close 31 December 2018. Historical performance is not an indication of future performance and any investments may go down in value.

Relatively cheap, possibly for a reason

The gold-to-silver ratio points to silver being cheap relative to gold, with the ratio over 1 standard deviation above its historic norm. However, with recent gains in silver, that gap is moderating. We believe that gold is likely to outshine silver as a pure defensive asset that does not have the same exposure to the industrial cycle.

Figure 6: Gold to silver ratio

Annons

Source: Bloomberg, WisdomTree, data available as of close 31 December 2018. Historical performance is not an indication of future performance and any investments may go down in value.

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Ole R. Hvalbye, Analyst Commodities, SEB

In addition, gasoline inventories saw a slight decrease of 0.2 million barrels, now about 1% below the five-year average. Diesel inventories decreased by 2.1 million barrels, marking a 12% drop from the five-year average for this period.

Refinery utilization averaged 84.9% of operable capacity, a slight decrease from the previous week. Refinery inputs averaged 15.4 million barrels per day, down by 15 thousand barrels per day from the prior week. Gasoline production decreased to an average of 9.2 million barrels per day, while diesel production increased to 4.7 million barrels per day.

Total products supplied (implied demand) over the last four-week period averaged 20.4 million barrels per day, reflecting a 3.7% increase compared to the same period in 2024. Specifically, motor gasoline demand averaged 8.4 million barrels per day, up by 0.4% year-on-year, and diesel demand averaged 4.3 million barrels per day, showing a strong 14.2% increase compared to last year. Jet fuel demand also rose by 4.3% compared to the same period in 2024.

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Higher on confidence OPEC+ won’t lift production. Taking little notice of Trump sledgehammer to global free trade

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Ticking higher on confidence that OPEC+ won’t lift production in April. Brent crude gained 0.8% yesterday with a close of USD 75.84/b. This morning it is gaining another 0.7% to USD 76.3/b. Signals the latest days that OPEC+ is considering a delay to its planned production increase in April and the following months is probably the most important reason. But we would be surprised if that wasn’t fully anticipated and discounted in the oil price already. News this morning that there are ”green shots” to be seen in the Chinese property market is macro-positive, but industrial metals are not moving. It is naturally to be concerned about the global economic outlook as Donald Trump takes a sledgehammer smashing away at the existing global ”free-trade structure” with signals of 25% tariffs on car imports to the US. The oil price takes little notice of this today though.

Bjarne Schieldrop, Chief analyst commodities, SEB

Kazakhstan CPC crude flows possibly down 30% for months due to damaged CPC pumping station. The Brent price has been in steady decline since mid-January but seems to have found some support around the USD 74/b mark, the low point from Thursday last week. Technically it is inching above the 50dma today with 200dma above at USD 77.64/b. Oil flowing from Kazakhstan on the CPC line may be reduced by 30% until the Krapotkinskaya oil pumping station is repaired. That may take several months says Russia’s Novak. This probably helps to add support to Brent crude today.

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Brent looks to US production costs. Taking little notice of Trump-tariffs and Ukraine peace-dealing

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Brent crude hardly moved last week taking little notice of neither tariffs nor Ukraine peace-dealing. Brent crude traded up 0.1% last week to USD 74.74/b trading in a range of USD 74.06 – 77.29/b. Fluctuations through the week may have been driven by varying signals from the Putin-Trump peace negotiations over Ukraine. This morning Brent is up 0.4% to USD 75/b. Gain is possibly due to news that a Caspian pipeline pumping station has been hit by a drone with reduced CPC (Kazaksthan) oil flows as a result.

Brent front-month contract rock solid around the USD 75/b mark. The Brent crude price level of around USD 75/b hardly moved an inch week on week. Fear that Trump-tariffs will hurt global economic growth and oil demand growth. No impact. Possibility that a peace deal over Ukraine will lead to increased exports of oil from Russia. No impact. On the latter. Russian oil production at 9 mb/band versus a more normal 10 mb/d and comparably lower exports is NOT due to sanctions by the EU and the US. Russia is part of OPEC+, and its production is aligned with Saudi Arabia at 9 mb/d and the agreement Russia has made with Saudi Arabia and OPEC+ under the Declaration of Cooperation (DoC). Though exports of Russian crude and products has been hampered a little by the new Biden-sanctions on 10 January, but that effect is probably fading by the day as oil flows have a tendency to seep through the sanction barriers over time. A sharp decline in time-spreads is probably a sign of that.

Longer-dated prices zoom in on US cost break-evens with 5yr WTI at USD 63/b and Brent at USD 68-b. Argus reported on Friday that a Kansas City Fed survey last month indicated an average of USD 62/b for average drilling and oil production in the US to be profitable. That is down from USD 64/b last year. In comparison the 5-year (60mth) WTI contract is trading at USD 62.8/b. Right at that level. The survey response also stated that an oil price of sub-USD 70/b won’t be enough over time for the US oil industry to make sufficient profits with decline capex over time with sub-USD 70/b prices. But for now, the WTI 5yr is trading at USD 62.8/b and the Brent crude 5-yr is trading at USD 67.7/b.

Volatility comes in waves. Brent crude 30dma annualized volatility.