Material Matters: Oil, Base Metals And Softs

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A glance through the latest expert views and predictions about commodities: oil; base metals; softs; and carbon

-Upbeat outlook for energy stocks as demand accelerates
-Strengthening economies drive demand for base metals
-Yet significant rise in Indonesian production dents nickel outlook
-Grain supply/demand dynamics improving
 

By Eva Brocklehurst

Oil

Macquarie increases forecasts for Brent oil by 20% for 2021 and 7% for 2022, anticipating it will peak at US$72/bbl in the third quarter of 2021. In doing so, Oil Search ((OSH)) is upgraded to Neutral as the risk/reward is considered more balanced.

Given a dislocated oil market during the pandemic made it difficult to finalise transactions, the broker expects it will now be easier with higher oil prices in 2021 and this will help both Oil Search and Woodside Petroleum ((WPL)) sell down stakes in Alaska and Senegal, respectively.

Macquarie now prefers Woodside Petroleum and Beach Energy ((BPT)) in the large cap energy stocks and Karoon Energy ((KAR)) and Senex Energy ((SXY)) in the smaller stocks.

Morgan Stanley is upbeat about energy stocks, too, envisaging demand growth will substantially outperform supply in crude markets and US natural gas, anticipating the oil market will be structurally undersupplied throughout 2021.

Inventory is likely to normalise by mid year and spare capacity go back to 2019 levels by the end of the year. Oil demand in non-OECD countries has largely recovered while weakness in global demand is concentrated in the OECD, where vaccination programs for coronavirus are most extensive.

The broker cites Israel, which is leading the charge in vaccinating its population, noting there is only a lag of short duration between rolling out vaccinations and mobility statistics improving. This should bode well for the recovery in global oil demand.

Nevertheless, the broker expects limitations to the rally in oil prices and Brent could overshoot US$70/bbl in the third quarter of 2021 when inventory drawdown accelerates.

Longer-term, Morgan Stanley believes the global LNG market is entering a multi-year “up cycle” while still expecting an oversupplied LNG market during northern summer. The market should then improve in 2022 and shift to a shortfall by 2023.

Base Metals

A V-shaped economic recovery, rising inflation expectations and weakness in the US dollar are providing upside across the metals segment, although Morgan Stanley suspects much of the upside has been realised.

The main tailwinds are strong GDP growth and inflation. In base metals, while the broker envisages some potential for fresh strength throughout the second quarter of 2021, downside is likely for year-end in copper, nickel, zinc and lead.

Morgan Stanley notes the aluminium market has tightened dramatically on a combination of short term and structural factors. China's move to decarbonise is putting pressure on its domestic smelter costs and output, pushing prices in Shanghai higher and opening up the arbitrage to draw in metal from elsewhere.

There is still supply growth for aluminium in 2021, so the broker expects some short-term risks to the downside but favours aluminium among the base metals.

Macquarie notes, since 2000, the contribution to annual copper demand growth outside of China has averaged a decline of -0.4% compared with China's average demand growth of 10.5%.

While China remains the largest single contributor to the increase in copper demand to 2025, the broker assesses the rest of the world is starting to pull its weight. The strong growth outlook is expected to be funded from cash flow and a solid dividend stream maintained.

Macquarie reiterates OZ Minerals ((OZL)) as its preferred play in base metals as the stock offers an impressive growth profile and greatest leverage to stronger gold prices from the base metals sector. Electrification and the energy transition represent a material shift for the demand drivers of copper and hereby lies significant upside for Sandfire Resources ((SFR)) as well.

While Sandfire offers the greater leverage to copper, the broker acknowledges it comes with higher development risk. In FY21, Western Areas ((WSA)) and Mincor Resources ((MCR)) have downside risk in a spot nickel scenario. Macquarie reduces nickel prices across its forecast horizon by -2-8%, the one negative aspect of its revamped base metals outlook.

The broker points out reality has confronted the nickel market, given the significant rise in production in Indonesia. Prices have corrected sharply on news that Tsingshan, the world's largest producer, intends to raise 2023 capacity to 1.1mtpa.

The broker's preference for pure nickel exposure is Nickel Mines ((NIC)) as it is expected to double production over the next three years, yet 2022 estimates are cut by -7%. Developments at Mincor and Panoramic Resources ((PAN)) offer the potential for some positive catalysts over the short term.

Macquarie believes Chalice Gold Mines ((CHN)) offers a unique exposure to future palladium and platinum production through its Julimar discovery and, although exploration is at an early stage and a maiden resource for the deposit is not expected until later this year, confirmation of economic mineralisation presents material upside to the base case.

Softs

Morgan Stanley envisages improving supply-demand dynamics for grains over the short term because of higher feed consumption. Longer term the risk is to the downside.

The broker prefers sugar over grains, envisaging a small short-term surplus amid a large rise in anticipated output from Brazil and India. Upside stems from longer-term maturities that are at levels where Brazilian producers will prioritise ethanol, risking shortages elsewhere.

Carbon

Morgan Stanley assesses fair value is most likely to be the incentive price for climate change technologies such as green hydrogen and carbon capture & storage. This is consistent with its 2030 carbon price forecast of EUR90/t, even if initially new technologies are more expensive and need subsidies as support.

Less supply and rising demand will likely drive prices higher and the broker envisages upside risk above EUR50/t for carbon allowances by mid 2021 followed by some softening in the second half before momentum resumes in 2022.

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