Analys

Trump holds the key for commodities

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6 år sedan

den

31 augusti, 2018

SHB Handelsbanken - Tradingcase råvaror - Analys

In a summer when investors have been caught off guard by everything from emerging market woes and the dollar’s tailwind to a brewing trade war, commodity markets have once again appeared in the crosshairs in terms of market turbulence. This time, it is not China, OPEC or oil which are central to crisis, but rather it is the USD-financed emerging markets and their mined metal and soft commodity production. We do not think the emerging markets crisis will be a China crisis and we believe that copper and zinc are set to rebound.

Starting point is Trump’s politics

MSCI and S&P500

Three major President Trump-related developments are having a significant impact on the commodity universe right now. First, the US decision to leave the Iran agreement and impose sanctions in two stages against Tehran laid the ground for a more direct market pricing of any similar actions against other countries.

Second, sanctions were imposed on Russia, and and most recently, US import tariffs on steel and aluminium were doubled on Turkey.

Third, on top of sanctions, developments in the trade war stalled during the summer and the positions of the various sides appeared to become locked.

These developments served to illustrate the US approach to emerging markets, in our view, and changed market pricing, kicking off a divergence between the pricing of US assets and those of emerging markets.

Turkey will not spread to Asia

If the Turkish currency crisis is not staved off, the risk of a financial system meltdown and, ultimately, a government debt default is high. But even though Spanish banks are vulnerable, Turkey’s problems should not hurt the overall eurozone economy to a significant degree. Euro weakness and European stock market declines due to the escalation of Turkey’s crisis therefore seem to be overdone. However, Turkey is far from out of the woods yet and the situation might need to worsen still to convince Turkey to adopt a painful, but more sustainable, path toward regaining financial markets’ trust. Other emerging markets with similar challenges, such as South Africa, Argentina and Pakistan, also face tough times ahead.

China stands out

CDS

What ties the affected emerging market countries together this time is expensive USD financing. China is not among them. This is can be seen clearly by studying developments in the cost of credit default swaps, or CDS.

China has barely moved while Turkey and Argentina have gone through the roof. Among the worst hit are Brazil, South Africa and Russia. These countries have also seen their currencies underperform along with their local equity markets.

As currencies have fallen, investors have started to anticipate an increase in the export of commodities to secure income. We have seen agricultural commodities trading lower, as seasonal stockpiles are expected to be shipped at a higher rate than normal.

Numbers point to a brighter future

The idea that fear is stronger than greed is relevant here, in our view. We think the first phase of President Trump’s threatening of the emerging markets is over. Running the numbers on the impact of tariffs still points to a bright future. It is hard to prove that tariffs will take a meaningful toll on growth in consumption, we believe. The impact on corporate investment is more difficult to judge. Typically, there are many negative assumptions made ahead of investments decisions. After President Trump’s “flip flop” policies, there is scope for many more multinational companies. Our base case is that President Trump will sign a deal with China in November, in time to influence the midterm elections. In such a scenario, we think base metals would recover, especially copper. Within base metals, it is clear that those more exposed to the Asian construction sector, e.g. copper and zinc, have been the greatest losers, while nickel has done much better, supported by a larger share of demand coming from the US and Europe, posting positive data during the summer.

Oil is all about Iran

Annons

The first phase of the new US sanctions against Iran came into force in August. Among other things, this means that Iran cannot use USD. However, sanctions on oil exports will not come into effect until November. These sanctions will probably not hit the country as hard as the previous ones, as they do not have the support of the rest of the world.

Oil prices rose after, among other things, the French oil company Total announced at the OPEC meeting in June that it had already stopped buying oil from Iran. This decision was a typical action in line with American sanctions, whereby a company safeguards its activities in the US and prioritises trade with the US as the larger market. President Trump also always has the option of taking sanctions against Iran to the next level. As with the last occasion that the US used sanctions against Iran, the country could forbid all companies that trade with Iran from having access to the huge US market, and prevent dollar funding. This makes the US sanctions very effective.

In the first half of the year, leaders from the EU tried to get the US to remain in the Iran agreement and presented a series of measures to instead put pressure on Iran, including closing down the missile programme. The Trump administration considered the measures to be insufficient, and chose to withdraw from the agreement. Now, the administration has urged Iran to return to the negotiating table to formulate a more comprehensive agreement than the previous one; however, Iran has stated that the US must first revert to the agreement before negotiations can recommence.

In our view, the current sanctions are fully accounted for in the oil price and a certain amount of ‘over-compliance’, such as in the example of Total, is also priced in. However, what has not been included in the oil price, in our view, is the reality of President Trump taking a step further and cutting off Iran from the global economy completely. In that case, for example, China would not be able to import oil from Iran. The latest decrease in the oil price (from around USD 78/barrel in early July to USD 72) can mainly be attributed to the escalating trade war between the US and China, in our view, but this does not mean that the situation with Iran has become any less significant.

Sparkling electricity market

Power markets have surged during the summer as because of weak hydro supply and high temperatures (Nordic reservoirs now 18% below seasonal norm). Prices also supported by strong fuels complex and Emission Rights hitting a 7-year high EUR 19.33 at the time of this being published.

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Analys

Brent prices slip on USD surge despite tight inventory conditions

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3 dagar sedan

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19 december, 2024

Redaktionen

Brent crude prices dropped by USD 1.4 per barrel yesterday evening, sliding from USD 74.2 to USD 72.8 per barrel overnight. However, prices have ticked slightly higher in early trading this morning and are currently hovering around USD 73.3 per barrel.

Ole R. Hvalbye, Analyst Commodities, SEB

Yesterday’s decline was primarily driven by a significant strengthening of the U.S. dollar, fueled by expectations of fewer interest rate cuts by the Fed in the coming year. While the Fed lowered borrowing costs as anticipated, it signaled a more cautious approach to rate reductions in 2025. This pushed the U.S. dollar to its strongest level in over two years, raising the cost of commodities priced in dollars.

Earlier in the day (yesterday), crude prices briefly rose following reports of continued declines in U.S. commercial crude oil inventories (excl. SPR), which fell by 0.9 million barrels last week to 421.0 million barrels. This level is approximately 6% below the five-year average for this time of year, highlighting persistently tight market conditions.

In contrast, total motor gasoline inventories saw a significant build of 2.3 million barrels but remain 3% below the five-year average. A closer look reveals that finished gasoline inventories declined, while blending components inventories increased.

Distillate (diesel) fuel inventories experienced a substantial draw of 3.2 million barrels and are now approximately 7% below the five-year average. Overall, total commercial petroleum inventories recorded a net decline of 3.2 million barrels last week, underscoring tightening market conditions across key product categories.

Despite the ongoing drawdowns in U.S. crude and product inventories, global oil prices have remained range-bound since mid-October. Market participants are balancing a muted outlook for Chinese demand and rising production from non-OPEC+ sources against elevated geopolitical risks. The potential for stricter sanctions on Iranian oil supply, particularly as Donald Trump prepares to re-enter the White House, has introduced an additional layer of uncertainty.

We remain cautiously optimistic about the oil market balance in 2025 and are maintaining our Brent price forecast of an average USD 75 per barrel for the year. We believe the market has both fundamental and technical support at these levels.

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Analys

Oil falling only marginally on weak China data as Iran oil exports starts to struggle

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6 dagar sedan

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16 december, 2024

Redaktionen

Up 4.7% last week on US Iran hawkishness and China stimulus optimism. Brent crude gained 4.7% last week and closed on a high note at USD 74.49/b. Through the week it traded in a USD 70.92 – 74.59/b range. Increased optimism over China stimulus together with Iran hawkishness from the incoming Donald Trump administration were the main drivers. Technically Brent crude broke above the 50dma on Friday. On the upside it has the USD 75/b 100dma and on the downside it now has the 50dma at USD 73.84. It is likely to test both of these in the near term. With respect to the Relative Strength Index (RSI) it is neither cold nor warm.

Lower this morning as China November statistics still disappointing (stimulus isn’t here in size yet). This morning it is trading down 0.4% to USD 74.2/b following bearish statistics from China. Retail sales only rose 3% y/y and well short of Industrial production which rose 5.4% y/y, painting a lackluster picture of the demand side of the Chinese economy. This morning the Chinese 30-year bond rate fell below the 2% mark for the first time ever. Very weak demand for credit and investments is essentially what it is saying. Implied demand for oil down 2.1% in November and ytd y/y it was down 3.3%. Oil refining slipped to 5-month low (Bloomberg). This sets a bearish tone for oil at the start of the week. But it isn’t really killing off the oil price either except pushing it down a little this morning.

China will likely choose the US over Iranian oil as long as the oil market is plentiful. It is becoming increasingly apparent that exports of crude oil from Iran is being disrupted by broadening US sanctions on tankers according to Vortexa (Bloomberg). Some Iranian November oil cargoes still remain undelivered. Chinese buyers are increasingly saying no to sanctioned vessels. China import around 90% of Iranian crude oil. Looking forward to the Trump administration the choice for China will likely be easy when it comes to Iranian oil. China needs the US much more than it needs Iranian oil. At leas as long as there is plenty of oil in the market. OPEC+ is currently holds plenty of oil on the side-line waiting for room to re-enter. So if Iran goes out, then other oil from OPEC+ will come back in. So there won’t be any squeeze in the oil market and price shouldn’t move all that much up.

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Analys

Brent crude inches higher as ”Maximum pressure on Iran” could remove all talk of surplus in 2025

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1 vecka sedan

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13 december, 2024

Redaktionen

Brent crude inch higher despite bearish Chinese equity backdrop. Brent crude traded between 72.42 and 74.0 USD/b yesterday before closing down 0.15% on the day at USD 73.41/b. Since last Friday Brent crude has gained 3.2%. This morning it is trading in marginal positive territory (+0.3%) at USD 73.65/b. Chinese equities are down 2% following disappointing signals from the Central Economic Work Conference. The dollar is also 0.2% stronger. None of this has been able to pull oil lower this morning.

Bjarne Schieldrop, Chief analyst commodities, SEB

”Maximum pressure on Iran” are the signals from the incoming US administration. Last time Donald Trump was president he drove down Iranian oil exports to close to zero as he exited the JCPOA Iranian nuclear deal and implemented maximum sanctions. A repeat of that would remove all talk about a surplus oil market next year leaving room for the rest of OPEC+ as well as the US to lift production a little. It would however probably require some kind of cooperation with China in some kind of overall US – China trade deal. Because it is hard to prevent oil flowing from Iran to China as long as China wants to buy large amounts.

Mildly bullish adjustment from the IEA but still with an overall bearish message for 2025. The IEA came out with a mildly bullish adjustment in its monthly Oil Market Report yesterday. For 2025 it adjusted global demand up by 0.1 mb/d to 103.9 mb/d (+1.1 mb/d y/y growth) while it also adjusted non-OPEC production down by 0.1 mb/d to 71.9 mb/d (+1.7 mb/d y/y). As a result its calculated call-on-OPEC rose by 0.2 mb/d y/y to 26.3 mb/d.

Overall the IEA still sees a market in 2025 where non-OPEC production grows considerably faster (+1.7 mb/d y/y) than demand (+1.1 mb/d y/y) which requires OPEC to cut its production by close to 700 kb/d in 2025 to keep the market balanced.

The IEA treats OPEC+ as it if doesn’t exist even if it is 8 years since it was established. The weird thing is that the IEA after 8 full years with the constellation of OPEC+ still calculates and argues as if the wider organisation which was established in December 2016 doesn’t exist. In its oil market balance it projects an increase from FSU of +0.3 mb/d in 2025. But FSU is predominantly part of OPEC+ and thus bound by production targets. Thus call on OPEC+ is only falling by 0.4 mb/d in 2025. In IEA’s calculations the OPEC+ group thus needs to cut production by 0.4 mb/d in 2024 or 0.4% of global demand. That is still a bearish outlook. But error of margin on such calculations are quite large so this prediction needs to be treated with a pinch of salt.

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