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Material Matters: Oil, Wheat, Copper And Nickel

Commodities | Mar 10 2022

A glance through the latest expert views and predictions about commodities: forecasts for oil & gas, wheat and copper; oil price scenarios and broker downgrades for Nickel Mines.

-Forecast prices for oil, gas, wheat and copper
-Options to limit upward pressure on oil prices
-Broker downgrades for Nickel Mines

By Mark Woodruff

Six-month forecasts for oil, gas, wheat and copper

Danske Bank assesses implications for oil, gas, wheat and copper prices from the Russian/Ukranian conflict.

It’s estimated Brent crude oil could trade at US$150/bbl over the next six months should all trade sanctions remain in place, while an escalation in the war hinders trade of commodities.

In a second scenario, should trade resume without severe disruptions, the bank sees oil prices at US$125/bbl over the next six months.

While the bank fears a protracted period of unrest in Ukraine, the war is not expected to spread to other countries in Europe. Nonetheless, trade sanctions against Russia are expected to remain and may indeed be stepped-up by the West.

Regarding European natural gas prices, the bank sees a moderation over the next six months to EUR100/mwh as markets adapt to the new environment. In normal times, natural gas prices are valued at about a quarter of the oil price, yet the current price of EUR200/mwh now exceeds the oil price in equivalent terms.

Tightening of monetary policy, especially by the Federal Reserve, is also expected to assist in lowering natural gas prices.

Under the second (six month) scenario above, the bank also expects a moderation in wheat prices to US$700 per bushel from the current levels around US$1,270. Copper is also expected to moderate to US$9,000/t from US$10,300/t.

The bank points out the interrelated nature of commodity prices. When energy prices rise the cost of producing energy intensive aluminium goes up, for example. In the case of agricultural production, the fertiliser price depends on natural gas prices, and so on.

The effect of banning US imports of oil from Russia

With Brent crude oil trading in a US$20/bbl range over a 24-hour period recently, RBC Capital Markets feels anything is possible.

Oil prices could conceivably rocket to US$200/bbl by the northern summer, spur a recession and end the year closer to US$50/bbl. Thankfully, this is not RBC’s base case.

The investment bank suggests replacing Russia’s refined products exports to Europe will be much more difficult than backfilling for Russian crude oil. It’s estimated that finding trade partners for Europe to source replacement refined products will be difficult. The US exports plenty of crude to Europe, but minimal refined product.

Flow-on effects are everywhere. A banning of US imports of oil from Russia (now officially announced, red) would sharply reduce exports to South and Central America, explains RBC. Disruption to normal flows could potentially lead to price-on-price competition for product with Europe, leading to a massive inflationary event for all regions involved.

Separately, RBC has reviewed recent mobility data in the US to get a feel for petrol demand. Data suggest that not only are consumers driving more but also driving further. While average US retail gasoline prices topped US$4/gallon, history suggests US$5.20/gallon initiates demand destruction.

Near-term options to alleviate upward pressure on oil prices

A lifting of sanctions against Iran or demand destruction are the only real short-term options to relieve the current upward pressure on oil prices, according to Morningstar. An immediate OPEC or US driller supply response is considered unlikely.

To account for demand destruction, Morningstar reduces its 2022 global consumption forecast by -600mmb per day to 100mmb per day, though notes this still exceeds the pre-pandemic level of global demand.

Should President Putin be willing to accept further turmoil at home, a complete suspension of Russian exports would leave the rest of the world critically short of crude, in Morningstar’s opinion. This could trigger widespread fuel spikes that would severely drag on economies around the world.

While some demand will likely be destroyed on the margin at current prices, Morningstar thinks it's likely to take higher prices for a meaningful reaction. The removal of Russian volumes could well be the trigger for higher prices. On the flipside, higher oil prices would antagonise Russian allies like India and China.

In separate research, Morningstar notes increased natural gas demand in Europe has sent prices soaring and impacted upon the global liquid natural gas market. This comes as European buyers compete with Asian buyers for spot LNG cargoes.

Future spikes are not ruled out as the energy transition will likely be uneven, opening the door for more supply/demand imbalances.

As a result of the above factors, demand for long-term contracts could potentially help underpin future expansion for Australian LNG companies like Woodside Petroleum ((WPL)), in Morningstar’s opinion.

Nickel Mines impacted by links with joint venture partner

The share price for Nickel Mines ((NIC) today and yesterday fell materially on media reports of China-based company Tsingshan being caught on the wrong side of a short squeeze in nickel prices.

Nickel prices more than doubled in one day, reaching more than US$100/kg from US$45/kg, before the London Metal Exchange suspended trading, with limited spot inventory driving the rally. 

Nickel Mines is the junior partner co-investing in production assets with Tsingshan in several Indonesian nickel projects.

Some brokers see risks while others sense an opportunity.

Bell Potter notes the underlying fundamentals of the business are unchanged, apart from upward pressure on nickel pig iron prices. The overreaction of the share price is seen as a time to acquire more stock. The broker’s Buy rating and $1.76 target are retained.

Citi equally notes there is minimal risk to Nickel Mines' operations and retains its $1.90 target and Buy rating.

Meanwhile, in the opposite corner of the market, Credit Suisse has downgraded its rating to Neutral from Outperform with its target price falling to $1.35 from $1.74. The broker feels a large cost base exposure to price rises in nickel ore and coal were already placing pressure on the company’s margins.

Ord Minnett believes negative sentiment will weigh on Nickel Mines’ near-term stock price, given ties to Tsingshan. The broker has downgraded its rating to Hold from Accumulate, while its target price of $1.60 is retained.

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