Material Matters: Oil, Natgas And Nickel

Commodities | Mar 09 2018

A glance through the latest expert views and predictions about commodities. Crude; natural gas; and nickel.

-Oil prices likely to remain range-bound, as shale production remains robust
-Natural gas market has potential for price gains amid very low inventories
-Stainless steel demand still the major driver of the nickel price


By Eva Brocklehurst


PIMCO observes the growth in shale production that sparked a bear market in natural gas seven years ago, ultimately spreading to oil, remains intact as a theme for the industry. Oil, the largest component in nearly every commodity index, is therefore expected to remain range-bound. Oil prices briefly touched US$70 a barrel early this year amid a combination of production outages, global growth and OPEC discipline.

PIMCO expects inventory drawdown in the second half to support prices after a period of seasonal build. Yet several factors should keep the curve anchored and limit the upside. The main, but not the sole, driver of this is US shale production growth.

US shale production is expected to grow by 1.25m b/d for crude and 1.5m b/d including natural gas liquids. The analysts envisage incremental investments and some non-shale conventional resources, such as offshore, as efforts to drive down costs make these economical. Furthermore, when oil prices move higher, alternative energy sources become even more viable, and this dents demand.

Positive returns from oil are still likely, PIMCO suggests, given investors' ability to roll the higher-priced, short-term contracts into lower-priced, long-term contracts. These opportunities are expected to be important contributors to returns on oil.

In the latest US data, crude output has been revised up to a new high while imports have surged. Weekly estimates of crude production have risen to 10.37m b/d. Citi notes the build-up in crude inventory has more than offset the small draw-down in a number of petroleum product categories.

Natural Gas

The natural gas market is the area of the complex with the greatest potential for price gains, PIMCO believes. Inventories are expected to end the US winter at the second-lowest level for the past 10 years, owing to strong demand and export growth. Strong production growth will be required to rebuild inventory to normal levels and provide supplies for next winter.

PIMCO is sceptical that this growth can happen at current prices, particularly given that several of the largest gas-focused E&P companies are guiding to lower capital expenditure and slower investment growth.

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