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.
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.
Nickel prices have risen over the last few months because of a weaker US dollar, hopes for global demand and a view that lithium ion batteries will increase the consumption of nickel. Moreover, China's nickel ore imports nearly doubled in annualised terms in January, as imports from Indonesia surged. This more than offset the decline in imports from the Philippines.
Whilst Commonwealth Bank analysts believe nickel sulphate demand will lift in response to advances in battery demand and technology, any shortage is likely to be the story for the next decade. Nickel prices are expected to be driven by developments in the stainless steel market because this accounts for around two thirds of nickel consumption.
The analysts envisage downside pressure on nickel prices this year because of the surplus building in the nickel ore and nickel pig iron market. Around 2% of global nickel supply was probably added last year. The analysts believe Filipino nickel ore exports should also recover this year, although it may take longer than previously expected.
Macquarie also suggests that ascribing the rise in LME nickel prices to the speculation regarding electric vehicles is incorrect. The market has moved into a significant deficit because of booming stainless production, in Indonesia particularly, amid shortfalls in nickel production from conventional producers.
In addition to the stainless market, non-stainless applications such as alloy steel, plating and non-ferrous alloys and batteries are also growing strongly. Physical market premiums for all nickel products, with the exception of nickel pig iron, have risen to record levels. Plating products have also risen strongly as have standard cathodes and briquettes, indicating a shortage in specialised areas.
Macquarie believes there could be a short sharp correction in the nickel price although overall demand conditions in 2018 remain positive. Despite the growth in nickel pig iron, the broker notes the rest of the world is struggling to produce nickel and major producers are all guiding to lower 2018 production than would have been the case a year ago.
Macquarie assumes global nickel production growth of 6.5% this year, but also some potential upside from the re-starting of idle capacity if prices maintain recent strength. However, this would have more of an impact in 2019 than 2018.
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