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Material Matters: Oil, Gold And Silver

Commodities | Jul 12 2018

A glance through the latest expert views and predictions about commodities. Oil; aluminium; gold; and silver.

-Political risk premium for oil likely to climb
-Little downside risk but significant rebound unlikely for aluminium
-Gold benefits from equity weakness although US dollar remains a headwind
-Cuts to Chinese solar subsidies bode poorly for silver

By Eva Brocklehurst


RBC Capital Markets observes proliferating supply outages will make it extremely challenging for OPEC to satisfy President Trump's demand that it puts more barrels on the market. Libya's oil outage rose with the closure of the Hariga and Zueitina terminals and this, the analysts suggest, effectively removed nearly all eastern oil crescent exports from the market. As of last night, Libya is flagging the recommencement of production. 

Fears centre on President Trump tapping strategic reserves if oil prices stay firm ahead of the upcoming mid-term elections, triggering a fall in prices. The effectiveness of such a reserve release would be judged by whether refiners could absorb the additional barrels. US Gulf refiners are running at near all-time high levels.

Meanwhile, the analysts suspect the political risk premium for oil will continue to climb, as a first set of sanctions on Iran are put back in place in around a month. The analysts believe it will be nearly impossible for European leaders to offer anything meaningful to Iran in order to retain the nuclear deal, given exposure of their corporates to US markets.

They envisage a real risk of Iran resuming suspended nuclear activities by the end of the northern summer.Aluminium

The imposition of tariffs by US and China across a range of products has coincided with the start of softer demand for aluminium, leaving it vulnerable to a sell-off. Morgan Stanley notes the fall in the price of aluminium has pushed it back to marginal cost at around US$2,100/t from a peak of US$2,541/t during the April disruption related to Rusal.

The broker acknowledges the price weakness might be surprising given the disruption in the markets but points out there has not been a global shortfall this year, and estimates a global market surplus of 1.07mt in 2017. Inventory built up in Russia in April is also now being released to the market and this is further weighing on the price.

Given cost pressures on both smelters and refineries, Morgan Stanley envisages little more downside risk to the aluminium price, although a significant rebound through the weak summer months is also unlikely.

Meanwhile further up the supply chain, alumina refineries are also under pressure, particularly in China, amid plans to cut -770,000 tpa of capacity as the local bauxite price rises following government closures of illegal mines. This reduces the likelihood of a substantial correction in alumina prices in the near term, the broker suggests.


Both gold and silver stabilised over the past week, ahead of last night, helped by a pause in the US dollar's ascent as some doubts were cast on the hawkish outlook for US official interest rates. However, Macquarie expects imminent inflation data, likely to be firm, could rebuild the hawks' confidence in gold.

RBC Capital Markets observes gold has benefited from both equity weakness and weakness in US interest rates, although the US dollar remains the headwind and a prime mover of the yellow metal. The analysts are beginning to witness some weak upside risk versus forecasts but remain of the view that there needs to be a significant risk-off event to spark a wave of gold allocations.

Meanwhile, Australian gold miners continue their strong quarterly themes, Macquarie noting both St Barbara ((SBM)) and Perseus Mining ((PRU)) produced exceptional production results. The former reported a record result for the June quarter with 119,400 ozs of gold across Gwalia and Simberi. Perseus reported strong preliminary production estimates from both Edikan and Sissingue.

Resolute Mining ((RSG)) is also driving cost savings with automation at the underground sub-level cave at the Syama project. Meanwhile, the ramp up of Dacian Gold's ((DCN)) Mount Morgans is on track. Macquarie expects Mount Morgans to be positive for cash flow over the second quarter of FY19.


Macquarie observes silver has been knocked to its lowest price in seven months by fears of a trade war and a reduction in Chinese solar subsidies. The broker believes the sell-off has gone far enough, although the case for significant upside has been damaged.

The fears of a trade war took their toll on the market after the US imposed tariffs on US$35bn of Chinese goods in June. While silver did not fare as badly as some base metals it was nevertheless affected.

Another policy decision in June was more specifically bad for silver, the broker asserts. This was the announcement by China of potentially large and comprehensive cuts to its solar subsidy regime. If implemented, this would imply reductions equivalent to about one fifth of total global installations and a large impact on silver demand.

Silver was affected by these two negative factors just as other negatives – an ebbing US dollar rally and the first quarter slowdown in global industrial growth – faltered. Macquarie highlights that, despite the potential and existing threats to industrial demand for silver, the metal is actually maintaining most of the gains it achieved against gold from April to June.

Assuming the US dollar has stabilised, the broker does not envisage more downside for silver and, if trade wars recede, then there should be some upside. However, speculative positioning does not point to an immediate bounce and a strong recovery does not appear imminent to the broker.

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