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.
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.
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.
Liquidity in the spot market appears to be the main issue, exacerbating emerging surpluses in seaborne thermal coal markets. These concerns reflect rising US and Russian exports in the Asian basin as well as weak Japanese demand.
Thermal coal prices have recently plumbed US$70/t and Credit Suisse believes the main driver is competition from the spot LNG prices, which competes with the coal price. Demand for coal has softened, particularly in Europe where coal to gas switching has been prevalent.
However, the broker believes there is a reasonable case for the Newcastle price to recover. As May thermal coal shipments were sold down to US$70/t July shipments were trading at US$80-82/t. Still, recovery can only be sustained if it occurs in both Newcastle and the Atlantic, Credit Suisse asserts.
National Australia Bank analysts revise down forecasts for thermal coal to US$88/t in 2019 and believe a prolonged trade disruption in China provides downside risk to this forecast.
Oz Gold Miners
Macquarie observes Australian gold producers have been priced for perfection for some time. The outperformance in FY18 has been replaced with individual underperformance in FY19, the broker observes, and quarterly production reports will present potential catalysts.
The most recent examples of underperformance the broker cites are downgrades to production from St Barbara ((SBM)) and Dacian Gold ((DCN)). Regis Resources ((RRL)), Saracen Minerals ((SAR)) and Northern Star ((NST)) have all suffered sell-offs from various missteps post the earnings season.
Macquarie reduces its expectations for Northern Star's Kalgoorlie and Pogo grades and moderates second half production forecasts as a result. Given the ongoing strength of the Australian dollar gold price the broker expects Northern Star to opportunistically take lower grade ore, as was the case in the December quarter. Saracen Minerals recently upgraded FY19 guidance and the ramping up of Whirling Dervish is a key component.
There is possible upside for Saracen Minerals, Aurelia Metals ((AMI)) and Alacer Gold ((AQG)). In some instances, the broker notes, the market is still willing to pay a premium. In this case Newcrest Mining and Evolution Mining have maintained valuation multiples.
Broadly, Macquarie considers the sector is on track to meet both production and cost guidance although upward pressures on costs are appearing. The broker believes grades at Cadia could provide upside for Newcrest. The weather is likely to have had some impact on Evolution Mining's Queensland operation, although full year guidance was unchanged post severe weather in February.
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