Commodities | Mar 31 2015
-Iran is the bigger issue for oil
-FX, weak demand hit palladium
-Copper supply balance tightens
By Eva Brocklehurst
Oil
Supply risk has returned to the oil markets, with the conflict engulfing Yemen threatening disruptions through the Bab el-Mandeb Strait. The price turned sharply higher in response to the latest air strikes against Yemeni rebels, widely believed to be backed by Iran. Citi believes it is fear of an escalation of the conflict, rather than importance of Yemen to global oil markets, that is behind the price action. The risks in Yemen itself are small, as that country is a marginal oil producer. Its strategic position on the strait, near the Suez Canal, if fighting progressed in that direction, is unlikely to stall oil tankers altogether. Tankers could still take the longer route around Africa if they needed to avoid it.
What is more significant is that the actions against the rebels, spearheaded by Saudi Arabia, highlight the tensions between the two major oil economies, Saudi Arabia and Iran. Citi maintains that given the crucial stage of the Iran nuclear negotiations, that country would be unlikely to want to disrupt oil flows via the Bab el-Mandeb Strait. Instead, Saudi Arabia has signalled a blockade could be a possibility. ANZ commodity analysts also believe the real issue lies with Iran, particularly around the nuclear negotiations.
Any relaxation of sanctions on Iran could have immense implications for the oil market. Iran not only has the ability to immediately increase exports to western countries once sanctions are lifted but can sustain these exports well above current levels, the analysts contend. There are growing expectations that a deal may be reached with other powers by the end of March.
The timing of any reduction in sanctions is important If negotiations end in a stalemate, a possibility the ANZ analysts acknowledge, as the talks have been going on for 12 years, oil prices will likely be supported by the Yemeni conflict. If sanctions are lifted gradually – the ANZ analysts' base case – then the impact will be marginal this year but Brent oil would likely lose its recent risk premium and fall back. If, in the unlikely event sanctions are lifted immediately, Iran's inventory hits the market this could mean Brent returns to its recent cyclical low, the ANZ analysts maintain.
Palladium
Palladium is ailing, in Macquarie's opinion. Foreign exchange movements, investor fatigue and slumping demand have taken a toll. The price is well below last September's high and recent rallies have appeared half-hearted. Macquarie suspects some investors are now getting out of a long-time favoured commodity as the US dollar rises while other currencies important to palladium weaken. Historically, palladium has performed well when the US dollar has been on the rise as for decades the US was the largest consumer of palladium.
Recent FX moves are so large they cannot be ignored and the euro, rouble and rand are the three that are important to palladium. As the euro has devalued the palladium price in euros has risen, which may have induced investors to take profits, Macquarie suspects. South Africa has very large palladium exchange traded funds (ETFs), and with the rand price of palladium at an all-time high on March 10, this may have also triggered some redemptions.
Typically, a higher price should mean more mine supply as the metal becomes more profitable but palladium is a co-product of a more important metal, platinum, in South Africa's case, and in Russia, nickel. Hence, Macquarie suspects that the price/supply mechanism becomes less pronounced in this instance as overall profitability is still determined by the main product.
On the demand side, around 80% of palladium is destined for auto-catalysts, the vast majority in petrol-driven cars. Vehicle output has fallen notably in Thailand, Japan, Brazil and Russia, while growth in China has slowed. Macquarie suspects this may have meant car makers needed to purchase less metal at this time. Hence, the weak patch for palladium appears to have been based on a number of bearish factors which, if they continue, mean the price will be unlikely to rally convincingly. Nevertheless, Macquarie suspects a second half recovery is in the wings and could potentially take palladium back to US$900/oz by the end of the year.
Copper
Torrential rain has led to the partial suspension of a number of copper operations in the Atacama region of Chile. Chile accounts for around a third of world copper mine output. Most of the problems have been with open pit operations, which represent all the major facilities in the north of the country. Several mines resumed pit operations subsequent to the rain event but many remain suspended.
The disruption adds around 5,000 tonnes to Macquarie's outage model, so far, but this figure could well be increased as further information becomes available. This latest disruption takes the broker's estimate of total copper mine outage for the year to date to 284,000t, or around 30.1% of the model's 2015 allowance. The figures signal the probability of raising the annual disruption rate, which would then act to tighten the brokers forecasts for the refined copper balance over 2015.
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