Material Matters: Energy, Thermal Coal & Gold

Commodities | Apr 15 2019

A glance through the latest expert views and predictions about commodities. Energy; thermal coal; and Oz gold miners.

-2019 oil prices seen underpinned by falling production and supply cuts
-Spot LNG prices hovering at levels sufficient for Japanese utilities to switch out of coal
-Emerging surplus risks in thermal coal
-Macquarie observes some underperformance emerging in individual gold stocks


By Eva Brocklehurst


Macquarie has upgraded its forecasts for 2019 oil prices, noting just as oil prices rally, LNG prices ease. The broker's forecasts for Brent have been lifted to US$67/bbl for 2019 on the basis that OPEC cuts are likely to be renewed, and there will be indefinite sanctions maintained against Iran and Venezuela.

Commonwealth Bank analysts envisage Brent oil finishing 2019 at US$70/bbl. While falling production in Venezuela and Iran have added to the tightness in markets both countries, along with Nigeria, were exempt from the OPEC-led supply cuts because oil production appeared well below normal levels.

Last minute waivers were issued to eight countries that import oil from Iran to avoid a spike in the price of oil and this has prevented Iran's oil exports dropping to zero. However, parts of the US government, the analysts note, are pushing for Iran's oil exports to reach zero, and this poses even more downside risk to supply and upside to prices.

Macquarie agrees there is potential downside to supply forecasts, which could further boost prices. However, the broker is increasingly bearish on Brent through 2021 and expects structural global oversupply is more likely to push prices back towards US$60/bbl, versus the consensus estimate of US$70/bbl.

Credit Suisse raises its Brent forecasts to US$66.50/bbl for 2019, also noting Saudi Arabian production cuts are steeper than previously expected and there is a decline in Venezuelan production that has eroded the large surplus in the December quarter. Credit Suisse maintains Brent forecast of US$67/bbl for 2020 and US$70/bbl for 2021.

Ord Minnett believes the oil sector is now becoming fully valued. The broker adjusts its price forecasts, lifting estimates for the June quarter to US$70/bbl, followed by US$65/bbl for the remainder of 2019 and 2020. The forecast for 2021 is unchanged at US$60/bbl.

Meanwhile, spot LNG prices are hovering around US$4/MMBtu, which Macquarie notes are sufficient for Japanese utilities to switch out of coal. Credit Suisse reduces its LNG spot estimates to US$6/MMBtu for 2019/20 and suspects 2020 will prove softer than 2019. 2020 is considered to be the year when oversupply is most likely.

The broker notes Oil Search ((OSH)) has reduced its LNG spot exposure. Previously the company was the most sensitive to spot LNG prices but now is similar to Woodside Petroleum ((WPL)).

National Australia Bank analysts envisage LNG export volumes topping out in 2019 as projects come to full operating capacity. This will mean the GDP boost that came from LNG exports will fade. The analysts expect natural gas prices for domestic use in eastern Australia will remain high by historical standards.

Thermal Coal

Commonwealth Bank analysts consider the downside risks have increased for Australian thermal coal prices, on the back of emerging surplus risks and the restrictions on Australian coal imports in China.

In the past China has implemented coal import restrictions to favour domestic producers and the analysts would default to this motive, if Chinese customs clearance times have increased for all oil cargo. However, it appears that Australian cargo is specifically taking longer to clear customs so the motives are more likely to be political.

The analysts also point out any official stance would breach China's free trade agreement with Australia, so it is in the best interests of China to keep any restrictions on Australian coal imports is unofficial as possible. Spot prices may be at the lowest level since July 2017 but the analysts have not yet downgraded forecasts.

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