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Silver outlook to Q4 2021: A year for the hybrid metal

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4 år sedan

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19 januari, 2021

Nitesh Shah, Director, Research, WisdomTree, provides his 2021 outlook for silver, including the potential drivers of performance and the continued recovery of industrial demand.

“After a slow start, silver outpaced gold and most industrial metals in 2020. Initially riding gold’s defensive coattails and then getting a tailwind from its industrial traits, silver was an outperformer, gaining 47% in 2020. That compares to gold (24%), copper (27%) and nickel (21%). Silver’s hybrid status served it well in 2020 and we expect more of the same in 2021. As we articulated in Gold outlook to Q4 2021: at the crossroads of hope and fear, we start 2021 with the hope that COVID-19 vaccines will offer a route out of the malaise that the pandemic has wreaked on the health of the human population and the economies that we operate in. However, as has been abundantly clear in December 2020, the path to the recovery is likely to have many bumps along the road. Silver, playing both a defensive and cyclical role could do very well this year.

“Silver’s hybrid status has not gone unnoticed by investors. Silver held in exchange traded products (ETPs) rose to an all-time high in 2020 (Figure 1), and more remarkably at a pace never seen before. With 275mn ounces of silver added to silver exchange traded commodities in 2020, the year marks more than double the next highest year of silver ETP gains (2009 with 137mn ounces added). There was strong buying when silver was under-priced relative to gold in the first half of 2020. However, that buying slowed in the second half of the year as silver prices caught up with gold.

Silver in exchange traded products — Source: WisdomTree, Bloomberg. 28/04/2006 to 30/12/2020. Data based on Bloomberg spot prices.

Framework

In “Gold and silver: similar, but different”, we argued that silver’s price performance is 80% correlated with gold. In our modelling framework, gold price is therefore the main driver of silver price. However, we also find the following variables as important drivers of silver price:

Growth in manufacturing activity – more than 50% of silver’s use is in industrial applications (in contrast to gold where less than 10% comes from that sector). We use global manufacturing Purchasing Managers Index (PMI) as a proxy for industrial demand
Growth in silver inventory – rising inventories signal greater availability of the metal and hence is price negative. We use futures market exchange inventory as a proxy
Growth in mining capital investment (capex) – the more mines invest, the more potential supply we will see in the future. Thus, we take an 18-month lag on this variable. Given that most silver comes as a by-product of mining for other metals, we look at mining capex across the top 100 miners (not just monoline silver miners).

Gold outlook Q4 2021: at the crossroads of hope and fear

In Gold outlook to Q4 2021: at the crossroads of hope and fear we laid out our forecasts under three scenarios.

Consensus – based on consensus forecasts for all the macroeconomic inputs and an assumption that investor sentiment towards gold remains flat at where it is today.
Continued economic uncertainty – further monetary intervention, possibly through yield curve control – limits Treasury yields and the US dollar continues to weaken, while investor sentiment towards gold strengthens.
Hawkish Fed – despite having adjusted its inflation target, the Federal Reserve (Fed) behaves hawkish and Treasury yields rise substantially, the US dollar appreciates back to where it was in June 2020 and inflation remains way below target. As US dollar debasement fears recede, positioning in gold futures declines.

In our silver forecast, we focus on the ‘Continued economic uncertainty scenario’ where the gold price reaches US$2130/oz at the end of the forecast horizon.

Silver forecasts

“We believe in growth terms, silver could outpace gold, reaching US$34/oz in Q4 2021 (33.6% from today’s levels, versus 13.3% for gold. We explain the other drivers to this forecast below.

Industrial demand to continue to recover

“Manufacturing Purchasing Managers Indices (PMIs) have risen strongly in the past few months and are now in the expansionary post-50 region (Figure 3). Coming from a period of tight lockdowns, it’s unsurprising that the relative recovery from spring 2020 levels for the PMIs was strong as lockdown conditions eased. Renewed lockdowns could temporarily halt the improvement, but in general many businesses – with the support of a monetary and fiscal stimulus – will continue to see improvement. As with most historic recoveries, the pace of rebound is likely to slow in in the second half of the year. However, peaking at over 55, the PMIs indicate plenty of industrial demand for silver to be expected.

Global PMI — Source: WisdomTree, Bloomberg. Actual data: January 2009 to December 2020.

Mining supply could expand in 2021

“Our model approach uses the capital expenditure in mines as a proxy for future silver supply. While capital expenditure has declined in the past quarter (Figure 4), given the lag that we apply to this input, the rising capital expenditure we saw before that acts as a headwind for silver prices in our model approach.

Mining capital expenditure — Source: Bloomberg, data available as of close 30 December 2020.

“We know that earlier in 2020 many mines were unable to operate at full capacity due to social distancing and therefore silver mine production has been lower than it would have otherwise been. Figure 5 shows how much these COVID-19 related losses were estimated to be by Metals Focus. Assuming we don’t see lockdowns reintroduced in 2021, we are very likely to see mine production of silver rebound.

Silver mine supply — Operating – mines that are currently operating, Construction – mine is being constructed, Feasibility – a detailed feasibility study has taken place, Pre Feasibility – a preliminary feasibility study has taken place, COVID Loss – estimated loss of production due to virus.

Silver exchange inventory rising again

“Silver inventory in Comex warehouses took a dip earlier in 2020 as sourcing metal became difficult under COVID-19 related operational hurdles (including flying metal from refiners in Europe, which became very difficult during lockdown). However, the supply of silver at the futures exchange was always plentiful and did not experience as sharp a dislocation from the over-the-counter spot bullion market as gold did. In recent months silver inventory on exchange has resumed its upward trajectory (Figure 6). We expect this trend to continue, adding some headwinds to silver price.

“We should note that there is a distinction between registered and eligible inventory. Eligible means the metal meets exchange’s requirements but has not been pledged as collateral against a futures market transaction. Registered means the metal meets requirements and has been pledged as collateral for futures market transactions. Eligible can easily be converted into registered, and that is why we look at the aggregate. However, most of the gains in recent years have come in the form of eligible rather than registered. That could simply be the choice of warehousing more in Comex warehouses rather than other warehouses. Nevertheless, the greater source of visible inventory has had a price dampening impact on silver. We expect rising inventory to continue to have this effect in the future.

Silver Comex futures exchange inventory — Source: WisdomTree, Bloomberg. 30/01/1996 to 30/12/2020. Comex is a futures and options trading market, now owned by Chicago Mercantile Exchange.

Silver is not as cheap as it was in 2020

“After spiking to a modern-era high in Q1 2020, the gold-to-silver ratio is now sitting only slightly above its historic average since 1990 (Figure 7). In this regard silver is not as ‘cheap’ as it was in Q1 2020. We still expect silver outperformance over gold this year however, and our current forecasts (under the ‘continued economic uncertainty’ scenario) would put the gold-to-silver ratio at 63 at the end of 2021, just below the historic average of 68.

Conclusion

“Although silver faces some headwinds from potential supply increases, its correlation to gold should act as strong tailwind. Moreover, its hybrid status will allow it to benefit from a cyclical upswing, as we pass the ‘bumps in the road’ in combating the COVID-19 pandemic. Silver has outperformed gold in 2020 and its historic high gold-beta may continue to see it outperform gold when gold is rising.”

Nitesh Shah, Director, Research, WisdomTree

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Crude oil comment: A little sideways with new tests towards the 80-line likely

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23 timmar sedan

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17 januari, 2025

Redaktionen

Brent moves into sideways trading around USD 81.5/b with new tests to the 80-line likely. Brent crude traded down 0.9% yesterday to a close of USD 81.29/b and traded as low as USD 80.39/b within the day. This morning it is gaining 0.3% to USD 81.6/b. No obvious major driver for that and the move in oil is well in line with higher industrial metals this morning. The technical picture for Brent 1M is still overbought in terms of RSI at 70.2. But as Brent now has traded a bit sideways for some days the overbought bearish calculus has started to ease a bit. But new tests towards the 80-line seems likely with current RSI at 70.2.

Bjarne Schieldrop, Chief analyst commodities, SEB

Scott Bessent says he fully supports harder sanctions on Russian oil exports if Donald Trump wishes to use such a tool in the coming negotiations with Russia over Ukraine. That may add some support to oil this morning. The latest US sanctions towards Russia clearly have an effect with one example being the tanker Bhilva which has made a U-turn back towards Russia after having been on course to India (Bloomberg).

US EIA projects US liquids growth of 538 kb/d/y in 2025. The US EIA released its monthly STEO report earlier this week. What is clear is that the boom-years in US oil production are behind us for now. But exactly pinning down at what level US oil production will grow in 2025 is hard. The EIA forecast for US hydrocarbon liquids looks the following:

Estimated US crude oil production growth is projected to be virtually zero in 2026. But including all sources of liquids it still sums up to 312 kb/d y/y in growth. A lot or a little? If global oil demand in 2026 only grows with 1 mb/d in 2026, then the US will cover 30% of global demand growth. That is a lot. For 2025 the EIA expects a total growth in US liquids of 538 kb/d y/y.

Smaller losses in existing shale oil production. If we instead look at EIA estimates for US shale oil production right here and now and how its components are changing, we see that 1) New monthly production is 666 kb/d, 2) Losses in existing production is 622 kb/d and thus 3) Net monthly growth is 44 kb/d m/m which equals 4) A net marginal annualized growth of 12*44 of 523 kb/d/y. What stands out here is that the EIA in its December report estimated that this marginal annualization only equated to 378 kb/d/y. So, it has been lifted markedly in the latest report. It is however on a downward trajectory and as such the EIA estimate in the table above of y/y growth for US crude oil of 331 kb/d/y may be sensible.

US shale oil new production, losses in existing production, net new production and marginal, annualized production growth in kb/d/y.

Change in EIA STEO forecast from Dec-24 to Jan-25. What stands out is that estimated losses in existing production is adjusted lower by 16.8 kb/d since November. That is the marginal monthly change. In other words, production in existing production is falling less agressively than estimated in December. But a monthly decline of 622 kb/d/m is of course still massive.

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Crude oil comment: The rally has legs, but it takes time to wash out ingrained bearish sentiment from H2-24

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2 dagar sedan

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16 januari, 2025

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Brent crude jumped jet another 2.7%. Brent crude jumped 2.7% yesterday to USD 82.03/b following a pull-back on Tuesday. Intraday it reached USD 82.63/b and its highest level since 26 July last year. Bullish US oil inventory data was a key reason for the jump higher yesterday coming on top of a steady tightening market since early December and fresh US sanctions on Russia last week.

US crude stocks down 17.6 mb since mid-November and total US commercial stocks down 65 mb since mid-July. US crude stocks fell 2 mb last week to its lowest level since April 2022. US crude stocks have declined every week since mid-November with a total of 17.6 mb. Total US commercial oil inventories fell 3.4 mb last week and have been in steady decline of close to 300 kb/d since early July. These declines in US oil stocks are the proof of the pudding in terms of the balance of the global oil market and explains well the rising oil prices since early December.

The IEA estimates a 400 kb/d deficit in H2-24. If so, then all global draws took place in the US. The IEA released its monthly Oil Market Report (OMR) yesterday with an estimate that the global oil market ran a deficit of about 400 kb/d through H2-24. If so, then close to all inventory draws in the whole world solely took place in US inventories which drew down by around 300 kb/d. That is hard to believe.

If we assume that US inventory draws were proportional to the US demand share of the world (about 20%), then global inventory draws in H2-24 probably was closer to 0.3/20% which equals 1.5 mb/d. Maybe a bit high but estimates by FGE indicates that global inventory draws were close to 1.0 mb/d in H2-24 depending on whether you equate on apparent demand or real demand. Higher if equated on real demand.

IEA surplus in 2025 is adjusted down by 200 kb/d. In reality it is now only a surplus of 400 kb/d. We think this surplus estimate will erode further as demand will be adjusted yet higher and supply will be adjusted yet lower going forward. The IEA adjusted 2024 demand higher by 100 kb/d with base effect to 2025 with the same. It also adjusted its non-OPEC production estimate for 2025 down by 100 kb/d. The effect was that call-on-OPEC rose by 200 kb/d for 2025. The IEA still estimates that OPEC must reduce its production by 0.6 mb/d in 2025 to keep market balanced and prices steady. But within that estimate it assumes that FSU increases production by 200 kb/d as if it is not a part of OPEC+. IEA estimate for call-on-OPEC+ thus only declines by 400 kb/d y/y in 2025. We think that this surplus will evaporate as: 1) US production will likely deliver a bit lower than expected. 2) Supply will also disappoint here and there around the world. 3) Global demand estimates will be revised higher for 2024 and 2025.

The rally thus has legs, but the technical picture is still in overbought territory so there will be some pullbacks on the way higher. Unless of course we rally all the way to USD 95/b and THEN we get the technical pullback. The market still seems to have bearish skepticism deeply ingrained in its back following H2-24 doom and gloom and is partially reluctant to trade higher. But that is attitude and not fundamentals.

The Dubai 1-3 mth time-spread is going through the roof as Asian buyers scrambles for supply from the Middle East.

The average 1-3 mth time-spread of Dubai, Brent and WTI is now way up. Lots of room for Brent 1M to move USD 90-95/b

US crude stocks declined by 2 mb last week and total commercial stocks by 3.4 mb.

US commercial crude and product stocks in steady decline since June/July last year. Down 65 mb since mid-July.

US crude stocks at lowest level since 2022.

Brent 1M still overbought with RSI at 72.5. So, pullbacks will happen but from what level. On the upside the next targets are probably USD 87.95/b and USD 92.18/b.

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Crude oil comment: Fundamentally very tight, but technically overbought

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4 dagar sedan

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14 januari, 2025

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Technical pullback this morning even as the dollar weakens. Brent crude gained another 1.6% yesterday with a close at USD 81.01/b and an intraday high of USD 81.68/b which was the highest level since mid-August. The gain yesterday was supported by strong, further gains in the 1-3 mth time-spreads. This morning Brent is pulling back 0.6% to USD 80.5/b even though the USD is weakening 0.4% while time-spreads are strengthening even further. This makes it look like a technical pullback.

Brent is trading very weak versus current time-spreads. The current price of Brent crude at USD 80.6/b is very low versus where the 1-3 mth time spreads are trading. Brent should typically have traded somewhere between USD 80-95/b with current time-spreads when we compare where this relationship has been trading since the start of 2023. Brent is now trading in the absolute lower range of that with lots of room on the upside.

How long will the new sanctions last? Natural questions are: How long will Donald Trump leave the new sanctions operational? How strictly will they be enforced? How easily could Russia circumvent them?

A bullish H1-25 if Donald Trump leaves sanctions intact to negotiate over Ukraine. If Brent continues to trade around USD 80/b and not much higher, then the underlying assumptions must be that the new sanctions will not be enforced harshly and that they will be lifted by Donald Trump within a couple of months max. Donald Trump could however keep them in place as a leverage versus Putin in the upcoming negotiations over Ukraine. If so, they could stay intact for maybe 6 months or more which would put H1-2025 on a very bullish footing.

Fundamentally very tight, but technically overbought. Market right now looks technically overbought with RSI at 72 but also fundamentally very tight with the Dubai 1-3 mth time-spread at USD 2.74/b, its highest level since September 2023. As such the Brent crude oil price has the potential to coil up for further gains following some washing out of technically overbought dynamics. But maybe the current Asian panic over access to medium sour crude oil fades a bit over time and time-spreads ease with it.

Brent has been on a strengthening path well before the new sanctions. Worth remembering though is that Brent crude has been on a rising trend along with tightening time-spreads since early December. The latest bullishness from new US sanctions comes on top of that. Brent moving higher into the 80ies thus seems highly likely following a near term washout of technical overbought dynamics.

1-3 mth time-spread (average of Dubai, Brent and WTI spreads) versus the Brent 1M price. Very strong, bullish signals from the time-spreads, but Brent 1M is trading at the very lower level of where this relationship has been since the start of 2023. So, plenty of room for Brent 1M to move higher.

Brent 1M is technically overbought with RSI at 73. Pullbacks are likely near term to wash that out. On the low side the USD 70/b line has given solid support since mid-2023.