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Material Matters: Commodity Prices, Oil And War
FNArena News - September 04 2012

 - Environment remains supportive for better 2H12 commodity prices
 - QE3 in US to help, China also likely to ease policy
 - Danske Bank and Capital Economics update commodity forecasts
 - JP Morgan sees increased risk of Israeli strike on Iran

By Chris Shaw

While China offers a weaker outlook than had been forecast a month ago, Danske Bank suggests its analysts' existing forecasts for commodity prices for the year are largely on track. This means a more supportive environment for commodities in the second half of this year on the back of any further easing in Fed policy, some stabilisation in the Chinese economy and the European Central Bank acting as a backstop for debt-ridden sovereigns in the region.

August Fed minutes suggest to Danske a further round of quantitative easing is now likely unless economic data flow improves markedly. This is expected to provide support to risk assets including commodities in the near-term.

An improvement in Chinese economic data has yet to materialise, but with inflationary pressures in that economy continuing to weaken Danske suggests Chinese policy makers continue to have some room in terms of moving to a more accommodating policy stance.

While it may take longer than previously thought for the Chinese economy to emerge from its current slump, Danske still sees an improvement this year and expects this will be positive for commodity prices in the final quarter of 2012.

Across the commodity spectrum, Danske suggests the oil price floor is likely to move lower as the hurricane premium is taken out of the market. Geopolitical issues remain a key to prices, as does the potential for releases from strategic petroleum reserves. 

Danske expects inventory builds in oil both this year and in 2013, which implies fair value for the market should gradually move lower. Danske suggests Saudi Arabia is happy for the oil price to fall to around [Brent] US$100 per barrel, as this would dampen the current negative impact on the global economy of higher prices while still delivering solid oil revenues.

In industrial metal markets Danske notes Chinese buying has yet to re-emerge, though the market appears to be upbeat on the potential of policy moves from both the US and China to support prices. Such a boost is likely to be short-lived though, as apart from copper most commodity markets appear headed for surpluses.

The fundamentals suggest copper has the most bullish outlook in Danske's view, so while in general base metal prices should generally head lower, copper may move higher on inventory drawdowns

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Our archive tells no lies. FNArena warned its readers well before the price of crude oil peaked in 2008 the speculator bubble would deflate with devastating consequences for those holding oil company shares. In August we warned the most severe correction in modern history was forthcoming for natural resources. In 2007 we warned the problem with US subprime mortgages would prove much bigger than experts and media were anticipating (among other things).

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