Material Matters: Commodities To Trend Lower

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Analysts see commodity prices trending lower as demand drops due to the virus.

-Oil prices low, supported by OPEC cuts
-Gas prices could be close to bottoming
-Credit Suisse sees gold at record US$2,000/oz
-Australian gold equities remain attractive

By Nicki Bourlioufas

Gold shines amidst the gloom

Analysts see most metal and commodity prices grinding lower over coming months, with only gold benefitting from the coronavirus crisis.

Oil prices have fallen hard despite planned production cuts as the coronavirus pandemic wreaks havoc on the energy market, though gas prices could be bottoming, experts say.

The ongoing COVID-19 outbreak has substantively affected both the demand and supply side of metals and bulk commodities. According to Citi, demand has dropped sharply for most commodities, and the supply contraction won’t be enough to stop prices from falling.

“For most commodities, we estimate that cumulative identified and ‘highly likely’ mine and scrap supply losses do not appear enough to offset the ongoing demand shock, especially during 2Q 2020.”

Citi predicts both iron ore and coking coal prices are expected to fall over the near and medium term, as the likelihood of a major virus-related disruption decays over time and supply increases.

However, Citi is particularly bullish on copper, nickel and platinum taking a longer-term perspective.

Oil and gas under pressure

Oil prices are expected to remain very low. Brent crude fell to US$27.50/bbl last week after Chinese gross domestic product (GDP) numbers showed the world’s second largest economy contracted in the first quarter of 2020 by -6.8% from a year earlier, its first contraction in 28 years.

[The Brent price has since fallen under US$20/bbl.]

China is the biggest importer of oil worldwide, so any economic slowdown in demand there will hit demand and prices hard. 

Societe Generale forecasts Brent prices to remain around US$30/bbl in 2Q 2020 down from almost US$70.00 in January on the premise that post-pandemic demand normalcy returns, and OPEC proposed cuts are successful.

OPEC recently agreed to a historical production cut of -9.7m barrels per day starting May 1. Societe Generale says the size of the cut and the duration is unprecedented – the previous largest cut was -2.2mb/d in 2008, and the duration.

The -9.7mb/d production cut will be applied during the months of May and June but will be extended to year-end at -8mb/d and then -6mb/d during the entire year of 2021 and into 2022.

However, as the production cuts take effect, “we think the oil price could grind towards $40/bbl by 4Q 2020, with the contango shrinking to 30% and volatility returning to more “normal” levels of around 40%,” says Societe Generale.

The longer-term outlook for gas is subdued, given a surplus existed before the coronavirus struck and the fact that China will likely no longer be as robust a growth driver for global LNG demand.

Gas demand growth in 2020 might only be ~4% year-on-year, or ~13-bcm/year, according to Citi.

The surplus is due to both robust supplies, including new LNG supply terminals coming online and strong expected Russian gas exports, and much weaker-than-expected demand given a mild European winter and the coronavirus.

“As a new decade begins, the market right off the bat is slammed with an estimated ~60 to 70-Bcm or so of oversupply, or about 6% of the overall size of the ‘global gas’ market,” says Citi.

However, Citi also believes prices could be close to bottoming, with some of the oversupply being absorbed by greater European gas consumption away from coal, rising gas consumption in India, and a reduction in supply from some facilities.

“As COVID-19 hits demand amid an already oversupplied market, prices could be near the bottom,” Citi says.

Gold headed to US$2000

Gold rallied to over US$1,700/oz in April, as investors seek the precious metal as insurance against further financial market volatility and as a hedge against inflation.

With unprecedented levels of global monetary policy and fiscal stimulus driving US debt to record levels and negative real interest rates, gold could strike an all-time high of US$2,000/ounce, according to Credit Suisse global equity strategist Andrew Garthwaite.

The need for governments globally to increase gold as a proportion of central bank reserves could drive a doubling in gold demand, he predicts.

According to Credit Suisse, applying the spot price in Australian dollars, the entire gold mining sector is looking cheap, trading at ~0.94x price/net asset value for large caps and ~0.55x for midcaps.

The broker believes some gold equities would benefit from the higher gold prices more than others, with Evolution Mining ((EVN)) and Northern Star Resources ((NST)) the most leveraged to the gold price.

Of the large caps, which are in greatest demand overall from investors seeking gold exposure, Credit Suisse prefers those stocks over Newcrest Mining ((NCM)) and of the mid-caps, the broker prefers St Barbara ((SBM)) and Alacer Gold ((AQG)).

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