Tag Archives: Precious Metals

article 3 months old

Material Matters: Coal, Gold And Iron Ore

A glance through the latest expert views and predictions about commodities. China and coal; ASX gold sector; outlook for energy sector; iron ore prices.

-Re-introduction of China's 276 work-days rule may underpin coking coal
-Rising oil price supports a better outlook for energy stocks: Deutsche Bank
-More growth than investors allow for in Woodside: Morgan Stanley
-Iron ore price likely to incentivise additional supply

 

By Eva Brocklehurst

Coal

The question of whether the Chinese government will re-impose the 276 work-days rule for Chinese coal mines is an important one for coking coal prices, Credit Suisse attests. Prime hard coking coal has fallen to around US$170/t, around US$35/t below Tangshan in price parity terms. Stronger steel production, as China enters its spring construction season, and the work-days rule being imposed at the end of March, are two factors that may help the price.

The thermal coal price is not yet in the government's target range, having hovered close to RMB600/t since the start of the year. For China to impose the 276 work days rule, the broker expects thermal coal would need to enter its targeted price range which is believed to be RMB500-570/t FOB.

Thermal coal is not yet abundant in China, with Credit Suisse noting stocks at the port in Guangzhou were depleted to 900,000 tonnes in the first week of February, the lowest level in the broker's eight years of recording the data.

Gold

The ASX gold sector has reported strong production in the December quarter, leading the way on cost improvements with 75% of miners, overall, beating Deutsche Bank's forecasts. The broker notes the sector has increased 12% in the last month, which compares with the US dollar gold price being up 4% and the Australian gold price being flat.

The best performing equities were St Barbara ((SBM)), Newcrest Mining ((NCM)) and Regis Resources ((RRL)). The broker expects the sector to be focused on organic growth and exploration over the next three months. Deutsche Bank updates its models following the December quarter production reports, downgrading Evolution Mining ((EVN)) and OceanaGold ((OGC)) to Hold and Regis Resources to Sell on valuation.

Energy

Deutsche Bank has become more constructive for the near-term outlook in Australian energy coverage, supported in its view by a much firmer and rising oil price. In 2017 the broker expects demand to outstrip supply on forecast, which underpins a forecast for US$55/bbl Brent oil for 2017, as excess inventory is a gradually depleted. The degree of adherence to OPEC's production cuts remains the key swing factor.

Longer term, new production is likely to be necessary from higher-cost regions and a price signal will be required for such projects to proceed. While spot LNG markets have recovered in recent months from stronger demand, the broker expects a medium-term oversupply as the build up in new LNG capacity accelerates.

The broker's top pick in the sector remain Oil Search ((OSH)) because of its high quality assets. Santos ((STO)) also features in the broker's preferred exposure, with its exposure to PNG LNG and strong leverage to a rising oil price. The broker also likes Caltex ((CTX)), which it believes is currently pricing in unrealistically low expectations.

Morgan Stanley believes there is more growth than investors allow for in Woodside Petroleum ((WPL)). The growth plans that are underway are likely to exceed expectations over time. The broker notes the company's low-cost and low-capex LNG assets have enabled it to re-position its portfolio over the past 12 months. These projects should drive production and cash flows from the beginning of the next decade. Production is set to grow to 96.1mmboe in 2018 and 100mmboe by 2019. This should lead to higher operational earnings (EBITDA).

The projects become key drivers of value over the next 12 months, in the broker's view, as the market is applying little value to them. Capital expenditure is expected to be stable, meaning free cash generation will improve. There is also spare debt capacity of over US$1bn in 2018, providing potential for capital management and this should become a focal point for investors in the latter half of this year.

Moreover, the broker believes the company's M&A strategy over 2016 was right and expects Woodside will focus on oil opportunities outside of Australia that are either producing or have near-term development potential. Morgan Stanley upgrades its valuation for Senegal, Scarborough, Myanmar and North West Shelf backfill. The broker has an Overweight rating and $40.00 target.

Iron Ore

Ord Minnett observes the drivers of the recent iron ore price rally to US$80/t appear to be a combination of Chinese demand, solid consumption in the rest of the world as China reduces steel exports, and relatively flat supply. The broker expects tight conditions to persist through the first half of FY17 but the price will eventually provide incentives for additional supply to come on line, and this could remove some of the current pricing tension.

Ord Minnett raises its 2017 forecast for iron ore to US$73/t but still expects a downward trend towards the year-end as supply grows. Overall, the broker expects major miners to add 71mt in 2017, with global demand growth of 43mt expected. While viewing the market as broadly balanced, the broker acknowledges a risk in the growth in non-traditional supply, with the incentive of higher prices.

Macquarie observes iron ore is the only steel-making ingredient for which prices are still holding up, as coking coal, manganese and steel scrap prices have all weakened from recent peaks. The broker expects prices will ease for iron ore now that the Chinese new year holidays are over, as supply is clearly abundant. Steel mills are expected to pressure iron ore sellers, despite the traditional post Chinese New Year pick up in steel output and demand.

Full year Chinese trade data shows total iron ore imports rose 7.5% in January year on year, while the broker estimates iron ore consumption rose by less than 1% last year. Indian iron ore exports also show the biggest response to higher prices, Macquarie observes, aided by the removal of low-grade export taxes and export bans last year.

While the Indian government has maintained export taxes of 30% on fines above a 58% iron grade in the February budget, the broker envisages India could still export 30m tonnes or more of iron ore at current prices.
 

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article 3 months old

More Copper, Less Gold For OZ Minerals

More copper and less gold production is expected from OZ Minerals in coming years and Carrapateena's imminent feasibility study could be a catalyst for the stock.

-Main risks in the trajectory of the copper price and AUD
-Production outlook materially improved at Prominent Hill
-Is the market overlooking the risks with Carrapateena?

 

By Eva Brocklehurst

Copper-gold miner, OZ Minerals ((OZL)), has revised its medium-term guidance for Prominent Hill, with more copper and less gold expected over the next three years. The Carrapateena feasibility study is expected early in the June quarter, and brokers expect this could be a catalyst for the stock.

The company's 2016 copper production of 116,900 tonnes beat guidance of 105-115,000 tonnes and gold production of 118,300 ounces was within the guidance range of 115-125,000 ounces. 2016 C1 cash costs of US 74.1c/lb were in line with expectations, despite the 15 days of power black-outs in South Australia. Management has confirmed the share buy-back will continue.

Citi forecasts higher milling and underground mining rates and raises its expectations for copper and gold grades in FY17-19. Accordingly, earnings per share estimates are increased for those years. Citi expects the news flow will now focus on Carrapateena, one of the world's largest undeveloped copper resources, and possibly include M&A, as the company seeks to acquire base metal and gold assets which can diversify its production footprint.

The main risks for the stock are in the copper price and the Australian dollar. Citi notes copper is highly geared to economic recovery and any change in economic activity has the potential to alter earnings assumptions and valuations for OZ Minerals.

Clearer Path For Prominent Hill

A revision to the mine plan at Prominent Hill has materially improved the production outlook for copper in 2018 and 2019, and Macquarie believes the focus on copper ore in changes to the open pit plan should mean a production rate close to 100,000 tonnes per annum is maintained through to 2019. The broker lifts copper production forecasts at Prominent Hill by 4% for 2017, 13% for 2018 and 53% for 2019 to match guidance.

The drive to produce more copper means the broker's gold production forecasts fall -10-20% over the next three years, while cost assumptions (AISC) rise 32% and 10% for 2017 and 2018 respectively. Factoring in the longer mine life at Prominent Hill means the broker's price target is raised 11% to $9.30.

Other brokers agree a clearer plan for Prominent Hill has now been established and the market's focus should shift back to Carrapateena, but both Morgans and Credit Suisse highlight the current share price appears to ignore the risks from the undeveloped project.

Morgans upgrades forecasts for earnings per share in line with higher copper price assumptions and the benefits to medium-term operating assumptions at Prominent Hill. The broker notes a significant portion of the upgrade to the Prominent Hill reserve in November was driven by reduction in the mining reserve cut-off grade, which the company believes to be sustainable.

Credit Suisse believes the greatest near-term opportunity is from the re-optimisation of the Prominent Hill underground mine, to progressively include additional resources which, while already defined, have an in-situ value that is too low relative to the cost base. Ultimately, the broker believes exploration success underground will need to be balanced by a cost structure that is more appropriate to the re-configured, lower underground-only milling rate.

The broker believes power availability in South Australia has impacted the company's decision on the configuration of the mill, with a steady power draw possibly more readily accommodated if supply is fragile in coming years.

Carrapateena The Catalyst

Morgans notes Carrapateena remains a technically complex project, where relatively small changes in key inputs can have large detrimental effects on value. The broker also lauds the company's agility during the October power outage in South Australia, as it mined more underground ore, maintaining its 2016 copper guidance. The company displaced lower-margin gold-only ore with higher-value copper ore.

Morgans suspects the recent rating upgrade of the stock has been driven by general demand for large, liquid and high-margin copper exposures amid rising copper prices. Such stocks are scarce on the ASX and this helps to explain the stock's premium. Still, with prices now well ahead of fundamentals the broker believes the market is overlooking inherent risks and downgrades to Reduce from Hold. Morgans retains a preference for Sandfire Resources ((SFR)) in copper.

Ord Minnett believes the risks to the share price are evenly skewed. The broker remains bearish about the near-term copper outlook, expecting prices will retrace towards US$2/lb in 2018. Ord Minnett maintains a Hold rating. The stock remains the key pick in the copper space for UBS, supported by its two long-life assets and a positive outlook towards copper. UBS has a Buy rating.

The broker notes investors are somewhat cautious regarding Carrapateena, with a view that the asset is marginal and the risk profile elevated. The broker expects the full feasibility study due by the end of the March quarter to deliver the details necessary to de-risk the asset further.

On FNArena's database there are two Buy ratings, three Hold and three Sell. The consensus target is $8.01, suggesting -10.4% downside to the last share price. Targets range from $5.80 (Morgan Stanley) to $10.50 (Citi).
 

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article 3 months old

Material Matters: Silver, Zinc And Coal

A glance through the latest expert views and predictions about commodities. Silver use in PV cells;  zinc markets; China's coal policies; dividend outlook for miners.

-Silver demand in solar cells likely to decline in the medium term
-High price of zinc relative to other metals will begin to destroy demand
-Coal output restrictions likely to return in China
-Morgan Stanley suspects relative underperformance in mining sector

 

By Eva Brocklehurst

Silver

Citi suspects demand for silver in the photovoltaic (PV) cells market may improve in 2018, based on optimistic estimates of global cell capacity. Demand for silver in solar cells is in a state of flux and likely to decline over the medium term, as 2017 becomes a year of de-stocking of capacity and global demand catches up with supply.

Demand for silver emanating from solar cells comprised 7% of total silver demand in 2016, according to industry estimates. It is believed, based on these estimates, that the volume of silver used within PV cells is declining around -5% every year, because of continued efforts to reduce costs.

In the event that silver prices rise rapidly, the broker believes companies may adopt more stringent cost-cutting programs, or invest in non-precious metal components altogether. Alternative technologies are still too expensive to displace existing solar cells but the risks of copper substitution within IBC solar cells could decrease the silver paste market share over the medium term.

Meanwhile, PV rooftop tiles may eventually improve end use in residential markets and grow the distributed energy network. The amount of silver used in roof tiles is not yet clearly evident. Much depends on whether the tile is a thin-film solar cell or a monocrystalline silicon. Hence, based on current arrangements, Citi approximates 100-120 mg of silver per tile could be in use. The broker expects both the efficiency and rising adoption rates will increase the penetration of PV cells among US households.

In the current market, where the Chinese government has clamped down on feed-in tariffs for solar PV systems, Citi believes only the lowest-cost manufacturers are likely to survive and possibly increase market share. Policy and subsidy changes may begin to slow down production and, while solar growth in China exceeded expectations in 2016, the broker question is whether the rate of growth is sustainable.

Zinc

Chinese trade and smelter production data have confirmed that market tightness is yet to emerge. Nevertheless, zinc prices look robust in the high US$2000/t range, Macquarie asserts. Chinese smelters are now making minor reductions in output and the ex-China market is preparing for a marathon negotiating period for 2017 concentrates. Macquarie believes the wind is favouring sellers at this juncture.

The broker agrees continued price strength suggests prices will be above US$3000/t by the end of the year. After that, the trajectory is less certain. Glencore's shuttered mines are likely to return to production at some point while new projects are being accelerated.

The price of zinc relative to other materials such as aluminium will begin to destroy demand the longer the price remains high. In 2018 the broker expects continued shortages of metal but also a subsiding of demand growth. Macquarie's current base case rests on a re-start of the Glencore mines in mid 2017. A combination of these changes is likely to dampen prices before more concrete physical market re-balancing arrives in 2019/20 to bring zinc prices back down to earth.

Coal

China is expected to underpin the global coal market in the near term. If prices continue to slide, Macquarie expect some form of output restrictions will come back, such as the 276 days policy, which was suspended in November until the end of the first quarter. The government recently outlined a thermal coal price target around the annual contract price of RMB535/t.

Supply intervention now appears only likely if prices are above RMB600/t or below RMB470/t. The Chinese government's pronouncements may be enough to prevent prices trading outside this range and the broker's confidence in this scenario is one of the main factors underpinning its recent upgrades to coal price forecasts.

The broker also contemplates a scenario where China will pull back from its readiness to accept coal imports, as an alternative measure to support domestic coal prices, particularly as the policy goal is to support domestic mining.

Macquarie notes Beijing's ability to strongly intervene in domestic supply renders traditional supply and demand analysis for coal largely obsolete. It is possible the government could make further adjustments to import taxes and/or coal quality cut-off levels, in an effort to dissuade imports and provide more assistance to domestic coal mines.

This is not Macquarie's base case. Nonetheless, the broker believes it is a risk worth highlighting, as if this was to happen it would clearly provide downside risks to seaborne coal price forecast.

Dividends

The potential for the mining sector to re-rate on structural changes in dividend policies is a key debate, Morgan Stanley observes. Yet, analysis indicates the mining sector is unlikely to re-rate on a shift to dividends, based on pay-out ratios.

Analysis of long-term dividend trends suggest there is a modest historical correlation between dividend yield and relative performance, except at extreme levels. The broker warns the market is currently close to such an outlier and, historically, this has driven 2% relative underperformance in the following 12 months.

The broker believes dividend signals are not as strong as the debate suggests and the market is currently close to such a level which is not helpful for sector performance. The broker notes a switch from progressive dividends to pay-out ratios reduces the risk of over-investment during periods of high cash flows. On average, Morgan Stanley calculates companies are targeting 50% pay-out ratios.

This compares to 42% and 44% for Rio Tinto ((RIO)) and BHP Billiton ((BHP)) respectively. The pay-out ratio dropped to 26% and 32% respectively during the super cycle, as progressive dividend policies encouraged more re-investment in growth relative to dividends. In the pre-super cycle period pay-out ratios reconcile neatly with the new dividend policies, the broker asserts.

Considering the outlook for volume growth across commodities Morgan Stanley believes it will be hard to replicate double-digit rates of growth. On a base case estimate the broker's forecasts imply 3% and 2% growth in dividends per share for Rio Tinto and BHP Billiton, respectively, for the 10 year period 2017-27.
 

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article 3 months old

Cash Is Trumps At Evolution Mining

Gold miner Evolution Mining is cashing up and brokers laud the company for its production and debt-free potential.

-FY17 guidance appears relatively easy
-Exploration program has potential upside surprise
-Decision regarding Cowal stage H cut-back due

 

By Eva Brocklehurst

Evolution Mining ((EVN)) is cashing up. The gold miner is appealing to many brokers, given perceived upside potential in the near-term gold price. The company sustained record production in the December quarter. Operating cash flow was flat, as reduced cash costs offset a declining realised gold price.

The company has been able to re-pay $70m in debt and net debt now stands at $588m. Debt amortisation is ahead of schedule and there are no further repayments until October. The Cowal (NSW) mine had a record quarter under the company's ownership, producing 71,900 ounces at costs (AISC) of $815/oz. The company has revised the mine plan and is now intent on mining more low-cost tonnage from the open pit.

The offtake from Ernest Henry (Queensland) started to contribute to Evolution Mining from November 1 and the company forecasts FY17 production of 55-60,000 ounces of gold at cost of $100-150/oz. Deutsche Bank and Credit Suisse rate the stock a Buy and Outperform respectively, noting achieving FY17 guidance appears relatively easy.

Macroeconomic Risks Provide Appeal

While the market has been testing 10-year lows since the election of Donald Trump, Morgans believes this indicates excessive complacency had materialised, given risks that were inherent in the execution of the US President's intended economic reforms.

With this situation, and the abundance of separate macro economic risks in 2017, the broker recognises upside in the short term gold price and therefore the appeal of large, liquid gold producers such as Evolution Mining.

Morgans slightly reduces its valuation but maintains an Add rating, recognising risks to market volatility offer upside. Upside also exists in exploration, the release of positive mining studies at Cowal and Edna May (Western Australia) and commodity price appreciation.

Production beat Macquarie's forecasts, as output from Ernest Henry was over estimated. The broker make some changes to account for the treatment of the Ernest Henry gold revenue. The adjustments result in a -22% decrease to the broker's FY17 estimates but a 4-5% increase in long-term forecasts. There are number of key decisions on the horizon which the broker believes should provide a catalyst or two for the stock. The exploration program also has a potential for an upside surprise. Exploration results were particularly promising at the Cowal stage H cut-back. A board decision regarding the cut-back is expected in the current quarter. The company expects long-term gold recovery can be lifted by 5-88%.

Softer Second Half At Cowal Likely

Despite expectations FY17 guidance will be comfortably achieved, Canaccord Genuity notes a softer second half is expected at Cowal. While continuing to rate the stock amongst the premier gold miners on the ASX, the rally in the last six weeks means it is trading in line with the target. Hence the broker, not one of the eight stockbrokers monitored daily on the FNArena database, downgrades to Hold from Buy.

Canaccord Genuity highlights the company's growing reputation for cost control and also notes accounting treatment has made for a messy reconciliation in the short term for Ernest Henry, although this should normalise by FY18.

Evolution Mining expects to account for production/sales of gold/copper/silver from Ernest Henry thus: under the offtake from Glencore, copper and silver revenue will be recognised in the month of production, while gold revenue will be treated with an effective three-month delay. In contrast, costs will be reported as they are incurred.

Consensus Overweight

Consensus is overweight the stock for a reason, Morgan Stanley asserts. The broker sticks to its Overweight rating. Rapid debt reduction can be accelerated by the company reaching the high end of its FY17 guidance. While several mines contributed to the outcome in the December quarter, the flagship Cowal mine stood out, yet the broker acknowledges it will encounter lower grades in the third and fourth quarters.

Overall, FY17 guidance is for 800-860,000 ounces at cost of $900-960/oz. Some mines will produce lower grades in the second half such as Cowal and Mungari (Western Australia) but there are others with positive drivers, the broker notes, such as Mt Carlton and Crakow in Queensland.

Morgan Stanley expects the company to be net cash by the middle of 2018. The broker also adjusts for a lower gold price forecast, which brings FY17 estimates for earnings per share down -21% while FY18 and FY19 estimates are adjusted up 3% and down -3% respectively. While the gold price might have been volatile of late, Australian dollar prices and cash flow are considered robust.

The stock remains a top relative exposure in the broker's opinion, given the free cash flow expected over the next three years. While Evolution Mining has significant leverage to ongoing cost reductions and conversion of resources to reserves, the downside risks include a slumping in commodity prices/strengthening of the Australian dollar, as well as mine life reductions and potential problems with the integration of new projects.

Citi continues to rate the stock as a Buy on the basis of valuation, after the value-adding acquisition at Ernest Henry, which provides leverage to copper. The broker divides the company's projects into three high-quality mines - Cowal, Mungari, Mt Carlton - and three of intermediate value – Crakow, Mt Rawdon (Qld), Edna May.

The stock shows seven Buy ratings on the FNArena database including UBS, which is yet to update on the production report. The consensus target is $2.49, signalling 17.4% upside to the last share price. Targets range from $2.30 (Credit Suisse) to $2.70 (Morgan Stanley).
 

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article 3 months old

Trump Inauguration Takes Centre Stage

Market analysts at FXCM asses likely responses in major currencies and the gold price as the Trump presidency looms.


by  Ilya Spivak, Sr. Currency Strategist ; Michael Boutros, Currency Strategist ; David Song, Currency Analyst ; Christopher Vecchio, Sr. Currency Strategist ; Tyler Yell, CMT, Forex Trading Instructor ; James Stanley, Currency Strategist ; Renee Mu, Currency Analyst  and David Cottle, Analyst

Financial markets face the return of high-profile event risk in the week ahead but US policy uncertainty may keep all eyes on the nearing Trump inauguration.

US Dollar Forecast - US Dollar May Fall Further as Trump Inauguration Nears

The US Dollar may continue to weaken as disillusioned traders continue to scale back exposure to the so-called “Trump trade” ahead of the nearing Presidential inauguration.

Euro Forecast - EUR/USD Set to Face Neutral ECB, Even as Data Improves

A further improvement in the Euro’s fundamental drivers in the short-term continues to shield the single currency from longer-term political concerns. This week, attention turns to the ECB for their first meeting of 2017.

Japanese Yen Forecast - Rising U.S. CPI, Hawkish Fed Rhetoric to Tame USD/JPY Pullback

The failed run at the December high (118.66) keeps the near-term outlook for USD/JPY tilted to the downside, but the key developments coming out of the U.S. economy may prop up the exchange rate next.

British Pound Forecast - GBP Clings to Support Ahead of Inflation, May’s Brexit Speech

Ever since the Brexit referendum in June, markets have volleyed the various prospects that might come from the actual execution of the split from the European Union.

Canadian Dollar Forecast - Canadian Dollar Looks to Poloz for Further Strength

The Canadian Dollar has been a resilient currency at the start of the year. Much of the strength is due in part to Oil’s consistency above a long-term focal point on the chart.

Australian Dollar Forecast - Australian Dollar Fightback Can Continue

Is the Australian Dollar in a sweet spot? Well, that might be premature optimism but it’s certainly in a better place than it was back in November.

Gold Forecast - Weakness to be Viewed as Opportunity- US CPI on Tap

Gold prices are higher for a third consecutive week with the precious metal up 1.8% to trade at 1194 ahead of the New York close on Friday.

Chinese Yuan Forecast - Chinese Yuan Eyes on China 4Q GDP, Davos Forum

This week, the offshore Yuan remained stronger than the onshore Yuan and the PBOC’s guidance. On Friday, the USD/CNY closed at 6.8984, slightly weaker than the Yuan fix set on Friday of 6.8909.


 

Reprinted with permission of the publisher. The above story can be read on the website www.dailyfx.com here.

The views expressed are not by association FNArena's (see our disclaimer).

For real time news and analysis, please visit http://www.dailyfx.com/real_time_news

DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.

www.dailyfx.com

Disclaimer

Forex Capital Markets is headquartered at Financial Square 32 Old Slip, 10th Floor, New York, NY 10005 USA.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before you decide to trade the foreign exchange products offered by Forex Capital Markets, LLC, Forex Capital Markets Limited, inclusive of all EU branches, FXCM Asia Limited, or FXCM Australia Limited, any affiliates of aforementioned firms, or other firms under the FXCM group of companies [collectively “FXCM Group”] you should carefully consider your objectives, financial situation, needs and level of experience. If you decide to trade foreign exchange products offered by FXCM Australia Limited you must read and understand the Financial Services Guide and the Product Disclosure Statement. FXCM Group may provide general market information and commentary which is not intended to be investment advice and the content of this email must not be construed as personal advice. By trading, you could sustain a total loss of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading in foreign exchange products. Foreign exchange products are only suitable for those customers who fully understand the market risk. FXCM recommends you seek advice from a separate financial advisor.

FXCM Group assumes no liability for errors, inaccuracies or omissions in these materials and does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXCM Group shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. This email is not a solicitation to buy or sell currency. All information contained in this e-mail is strictly confidential and is only intended for use by the recipient. All e-mail sent to or from this address will be received by the FXCM corporate e-mail system and is subject to archival and review by someone other than the recipient.”

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

Gold Prices Are Still Bearish; But Very Oversold

The direction of the price of gold is now linked to the direction of US interest rates, says James Stanley, Currency Strategist, FXCM.

By James Stanley, Currency Strategist, FXCM

-Gold Technical Strategy: Bearish, and will likely remain as such until/if we see the Fed soften their stance.
-Gold prices have attempted to establish support since our last article, building a short-term bear-flag; but sellers have remained active, offering prices lower as resistance gets tested.
-For oversold metrics, weekly RSI is at 30 and Daily RSI is below-30; be careful of chasing the trend-lower here.

In our last article, we looked at the continued down-trend in Gold prices. And as we said, if the bullish thesis for Gold prices hadn’t completely died already; it was on its way. And this is unlikely to change as long the Federal Reserve remains hawkish. Dollar strength has become a pervasive theme, and this will likely persist as the Fed is one of the lone major Central Banks looking at tighter policy options.

Of course, this does come with risks; and we heard Chair Yellen mention those risks last January when she said that un-checked USD-strength could potentially create issues in the American economy as exporters may begin to face pressure in foreign markets. And if the U.S. is one of the few economies actively looking to raise rates, this could expose the Greenback to considerable capital flows; thereby driving the currency even-stronger. But given Chair Yellen’s positivity at the last FOMC meeting, it doesn’t appear that this is a major concern at the moment so we’re probably not yet near an area where the Fed is looking to soften their stance towards rate hikes in 2017, 2018 and 2019. This could continue to drive pressure into Gold prices, so traders would likely want to retain a bearish stance until something in the underlying conditions change.

Now, with that being said, Gold prices are exhibiting tendencies of a deeply over-sold market. The short-term bear-flag with an aggressive up-ward sloping angle (showed up last week, shown below) is indicative of a market that was lacking sellers, at least until resistance came into-play. And while sellers did return when price action approached resistance in the $1,142-$1,144 area, they were scant to be found on the move-higher off of support at $1,122 to $1,142. Perhaps more disconcerting – with so many tests of this area of resistance, how much longer might it hold? This could lead to a ‘blow off’ move that could volley price action-higher, at least temporarily, as sellers relent off of this zone of resistance at $1,142-$1,144.

This means that traders will likely want to be a bit more careful with these short-term resistance swings and, instead, look for a deeper resistance level to plot bearish continuation entries. One such level exists at $1,150, as this is the 23.6% Fibonacci retracement of the May 2013 high to the December 2015 low.



 --- Written by James Stanley, Strategist for DailyFX.com

Reprinted with permission of the publisher. The above story can be read on the website www.dailyfx.com. The direct link is:
https://www.dailyfx.com/forex/technical/home/analysis/xau-usd/2016/12/21/gold-daily-classics-12-21-2016-srepstans.html?DFXfeeds=forex:technical:home:analysis:xau-usd

The views expressed are not by association FNArena's (see our disclaimer).

For real time news and analysis, please visit http://www.dailyfx.com/real_time_news

DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.

www.dailyfx.com

Disclaimer

Forex Capital Markets is headquartered at Financial Square 32 Old Slip, 10th Floor, New York, NY 10005 USA.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before you decide to trade the foreign exchange products offered by Forex Capital Markets, LLC, Forex Capital Markets Limited, inclusive of all EU branches, FXCM Asia Limited, or FXCM Australia Limited, any affiliates of aforementioned firms, or other firms under the FXCM group of companies [collectively “FXCM Group”] you should carefully consider your objectives, financial situation, needs and level of experience. If you decide to trade foreign exchange products offered by FXCM Australia Limited you must read and understand the Financial Services Guide and the Product Disclosure Statement. FXCM Group may provide general market information and commentary which is not intended to be investment advice and the content of this email must not be construed as personal advice. By trading, you could sustain a total loss of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading in foreign exchange products. Foreign exchange products are only suitable for those customers who fully understand the market risk. FXCM recommends you seek advice from a separate financial advisor.

FXCM Group assumes no liability for errors, inaccuracies or omissions in these materials and does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXCM Group shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. This email is not a solicitation to buy or sell currency. All information contained in this e-mail is strictly confidential and is only intended for use by the recipient. All e-mail sent to or from this address will be received by the FXCM corporate e-mail system and is subject to archival and review by someone other than the recipient.”

Technical limitations

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article 3 months old

Is Perseus Mining Being Treated Unfairly?

Gold miner Perseus Mining disappointed the market and its share price was savaged, but several brokers believe this is an over-reaction.

-Perseus Mining announced production downgrades at Edikan, delay of first production at Sissingue and reduction in resource
-Yet, company is debt free and a self-funded future producer of around 500,000 ozs per annum
-Confidence in independent consultant estimates undermined

 

By Eva Brocklehurst

The share price of Perseus Mining ((PRU)) has been trounced lately, as the market airs its disappointment with the latest guidance. The company has reduced its first half guidance for gold production and increased cost estimates for its one producing mine, Edikan, Ghana. First production at Sissingue, Cote d'Ivoire, is delayed, in tandem with a reduction in the resource.

Gold guidance for the first half is reduced to 70-80,000 ounces from 80-100,000 ounces, after an extended shut-down to the mill and lower-than-expected grades. Costs are expected to increase to US$1550-1650/oz from the previous estimate of US$1285-1595/oz. Production is still expected to lift in the second half, to 125-145,000 ozs.

Morgan Stanley believes the stock is being persecuted unfairly. It may be frustrating to learn of another delay, but the sharp reaction in the equity price appears overdone, argue the analysts. The company is debt free and a self-funded future producer of around 500,000 ounces per annum, yet its market capitalisation is now just $350m.

Perseus will report a loss for the first half but is believed to be in control of the way forward, as the broker notes it will use less project finance than the US$60m previously planned. A slowing time line should comfortably fund the Sissingue development.

Guidance for Edikan for the December half is reduced by 15,000 ozs. While the lost production is considered a downgrade, the broker understands the mill is operating well after the shut-down and output is expected to rise 80% in the June half. The Sissingue resource is reduced by 20% and the start date pushed out four months, with first gold now due in late February 2018.

While a negative reaction to some extent was to be expected, removal of 35% of the market cap is unwarranted, Morgan Stanley asserts. The broker lowers forecasts for earnings per share by 2-3c over FY17-19, after capturing recent operational data and guidance.

While one of the broker's three catalysts which drove its September upgrade to Overweight is now beyond a 12- month horizon - the start up at Sissingue - all three still exist, so the current share price is considered a fresh entry point. Morgan Stanley likes the concept of cash flow from Edikan and Sissingue financing Yaoure, to take the company to 500,000 ozs per annum.

Others Are Disappointed Too

The downgrade at Edikan disappointed Citi, which notes similar revisions occurred in FY15/16. The broker has added a High Risk to its Neutral rating until it is satisfied that Edikan can meet guidance and generate cash.

Citi reduces its valuation of Sissingue by 20%. A new inferred resource at nearby Bele has restored 260,000 ozs, which could offset the loss somewhat. At Yaoure the company has experienced difficulties with access and this could delay completion of the definitive feasibility study that was scheduled for mid 2017.

Another downgrade from the company's only cash generating asset, Edikan, has been attributed largely to negative reconciliation and Credit Suisse observes, while plant failures can be addressed, missing grades cannot. The broker had assumed lessons were learned and management was now on the top of the geology, but now CS is not so sure.

Moreover, the market has been accustomed to accept consultant estimates as a positive external endorsement of management estimates because of perceived independence. The downgrade to Sissingue, when the broker was expecting a potential upgrade, undermines confidence in the accuracy of the independent consultant's estimates.

The 2010 resources estimate that was cross checked in 2015 appears to have over-estimated grade by overlooking smearing from RC drill results. The broker believes this is a wake-up call for the industry which has trusted consultant numbers over those generated in house.

Nevertheless, Credit Suisse retains a Outperform rating on valuation as the stock is trading at a material discount to its peers. The broker believes operating stability and diversifying to a second mine is needed for that discount to close, but this appears even more elusive after the latest announcement.

UBS was also hopeful that the company had turned a corner this year but this latest downgrade negates that view. While the company is still expected to reduce costs and increase production in 2017, confidence is reduced again. Moreover, gold prices are falling and sentiment is weak and the broker finds it hard to justify exposure to low margin, West African growth.

There are two Buy ratings on FNArena's database and two Hold ratings. The consensus target is $0.63, suggesting 80.0% upside to the last share price. This compares with $0.75 ahead of the update. Targets range from $0.42 (Citi) to $0.85 (Credit Suisse).

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article 3 months old

Independence Group: Focus Shifts To Nickel

Independence Group has released an interim report from its Long Island study, which should de-risk the Tropicana gold project. The focus is expected to return to the upside potential at Nova.

-Significant upgrade to Tropicana resources and improved production outlook
-Challenge to keep unit costs down with increased material movement
-Nickel to account for 50% of the company's revenue from FY18

 

By Eva Brocklehurst

Independence Group ((IGO)) has released preliminary findings from its Long Island study, which is optimising the production and cost profile at the Tropicana project (30% owned by Independence). Results include a significant upgrade to resources and an improved production outlook through to 2019. The study should be completed by mid 2017.

UBS was expecting a full update but notes management has cited recent drilling results have meant that estimates needed to be updated. Hence, the full release is subsequently delayed. Production is to grow slightly to over 450,000 ounces by FY18, supported by increased milling rates to 7.9mtpa as well as higher grades. Annual material movements are expected to increase to 80mtpa. In this regard, the broker notes the challenge will be in keeping unit costs down.

The company is expecting costs to be reduced by 25-30% from 2019, when a bulk mining approach will be fully utilised. UBS believes this latest announcement will help to de-risk Tropicana and investors will again renew their focus on the upside potential at Nova, which is on track for nameplate production by the end of FY17.

Nova will shift the company's revenue split towards nickel and away from gold. By FY18, nickel will account for around 50% of revenue, up from less than 15% in FY16. Tropicana accounts for around 60% of the broker's group net present value and, while it has genuine mine life, UBS suspects the market will view the stock as more a nickel producer rather than gold producer going forward.

Canaccord Genuity expects the longer-term production profile at Tropicana to average 400-450,000 ozs per annum and updates its model in accordance with the company's guidance, extending mine life by two years to capture the enlarged reserve base and potential for further upgrades. The broker, not one of the eight monitored daily in the FNArena database, has a Hold rating and $4.05 target.

The company has announced a return to grade streaming, preferentially stockpiling lower grade ore, which will mean head grade increases to 2.3g/t from 1.8g/t. The broker notes, while FY17 guidance is unchanged, the company expects costs will be at the high-end of the range of $1150-1250/oz as a result of accelerated mining rates and increased capitalised stripping expenditure.

Ore reserves are increased by 58% to 60mt at 1.97g/t for 3.8m ozs. The company has foreshadowed further resource/reserve upgrades for the Havana South and Boston Shaker pits in the first half of 2017. Canaccord Genuity now assumes production at Tropicana up to FY27, implying a 10-year mine life.

The so-called value enhancement update for Tropicana is well named, in Citi's opinion, given it is a blend of reserve and resource increases, higher mill grades and an increasing production. The next milestone is finalising the strip mining strategy in the first half of 2017. The broker retains a Neutral rating on the stock, based on valuation. The increase in gold production from Tropicana means higher earnings in FY17-19 and this increases Citi's target to $4.50.

The broker also notes that nickel will dominate the company's profile once Nova is in full production in 2017. The company has three other operating assets: 100% of the Long Nickel and Jaguar Bentley underground mines and a 30% stake in Tropicana, with the latter and Nova being the drivers of value.

Macquarie found the study slightly better than it anticipated but considers most of the upside is already captured in its price target of $5.10. The broker retains an Outperform rating. The continued ramp up of Nova, which appears to be running ahead of guidance, remains the next major potential catalyst.

The broker makes some changes to assumptions to incorporate the updated estimates and only a minor adjustment to assumptions regarding the mining inventory, having already expected a major upgrade to reserves.

Macquarie also expects resources at Boston Shaker and Havana South will be upgraded next year. FY17 gold production forecasts rise by 4% for Tropicana, to 431,000 ozs. The broker's earnings estimates are largely unchanged for FY17, while FY18 and FY19 are raised by 7% and 12% respectively.

The database has two Buy ratings, three Hold and one Sell (Deutsche Bank). The consensus target is $4.28, suggesting 6.0% upside to the last share price. Targets range from $3.70 (Deutsche Bank, Morgan Stanley) to $5.10 (Macquarie).

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article 3 months old

Material Matters: Coal, Oil, Iron Ore and Metals

Coking coal uncertainty; few bearish catalysts for oil; iron ore softens; Ord Minnett raises copper forecasts, lowers gold; tight primary supply of lead.

-Seaborne coking coal prices to remain elevated over lack of clarity on China's reform program
-Is OPEC underestimating the cost curve for new US shale?
-Iron ore expected to soften with slight oversupply in 2017
-Ord Minnett upgrades Alumina Ltd and Whitehaven Coal
-Lead prices spike, expected to retrace to low US$2000/t range

 

By Eva Brocklehurst

Coking Coal

Price negotiations for metallurgical (coking) coal in the first quarter of 2017 are soon to begin. Morgan Stanley observes corresponding spot prices are falling from a great height, while the state of China's local mines remains a market mystery. The broker does not believe conditions have normalised. While the quieter northern winter trade has begun, seaborne spot prices are likely to remain elevated into 2017, mainly because of the lack of clarity over the ongoing reform program in China.

Morgan Stanley believes a review of China's altered import flows is now needed to re-set the price outlook, given what is known about the scale/duration of the reform program. A reasonable estimate of the potential upside risk to the market's 12-month price outlook for key coking coal products would be at least 30%, in the broker's calculations.

The broker also notes the return from bankruptcy of US-based coking coal plays, Alpha Natural and Arch Coal, highlights the extraordinarily tight conditions prevalent in global coal trades.

Oil

There are few bearish catalysts for oil in the near term, Morgan Stanley contends. Other than a complete collapse of the deal gained at the recent OPEC meeting, the broker does not envisage many catalysts that will reverse the recent rally. Evidence of falling OPEC production in January could add to bullish price action. Scepticism regarding compliance is warranted, in the broker's opinion, but any evidence to support this is unlikely to emerge before March or April next year.

Nevertheless, OPEC appears unconcerned about a US supply response and Morgan Stanley suspects the organisation may be underestimating the cost curve for new shale, and the size of the response if both OPEC and its non-OPEC allies cut production. Morgan Stanley notes positive onshore trends in the US started to emerge even before the OPEC agreement and resultant price surge. Given the amount of hedging and rig activity, US production may surprise both in magnitude and its timing.

Iron Ore

Buoyant iron ore prices are currently based on a combination of coking coal strength, resilient Chinese demand and broader risk appetite, Ord Minnett observes. As 2017 progresses the broker expects prices to soften from current levels, as the market digests a slight oversupply and coal prices ease as marginal production responds. The broker's revised forecasts envisage around 58mt of oversupply in 2018, before the market starts to look more balanced.

Ord Minnett upgrades price forecasts to US$60/t and maintains 2017 Chinese steel production growth assumptions. At the same time, the broker expects the major miners to add 77mt to the market. 2018 appears to have the weakest pricing fundamentals, in the broker's opinion and the long-term price forecast of US$50/t is unchanged.

Metals

Ord Minnett increases its price forecasts for coking coal and copper, while downgrading near-term forecasts for gold. The broker believes the mining sector can continue to re-rate based on the significant value that exists, with around half the broker's coverage trading at net present value or lower. Significant cash is being generated at base-case prices and balance sheets are also in good shape.

Ord Minnett raises 2017 copper price forecasts by 7%, although still expects copper to decline to US$2.03/lb in 2018 from the spot price of around US$2.60/lb. Coking coal forecasts for 2017 and 2018 are raised 30% to US$175/t and 7% to US$125/t, respectively. Gold price forecasts are reduced by 9% to US$1225/oz for 2017 and to US$1291/oz for 2018.

Ord Minnett upgrades Alumina Ltd ((AWC)) to Accumulate from Hold. Spot alumina continues to look strong at US$325/t and presents upside potential to the broker's earnings estimates. The broker also upgrades Whitehaven Coal ((WHC)) to Accumulate from Hold, recognising it may be late with its call but is factoring in higher coal price forecasts and the company becoming net cash within the year.

Among major miners, the broker continues to prefer Rio Tinto ((RIO)), based on more attractive valuation metrics and a higher chance of capital management. Fortescue Metals ((FMG)) remains a key pick as its strong free cash flow yield will start to migrate to a dividend yield as the company hits its US$3m net debt target in the next year.

Newcrest Mining ((NCM)) is the broker's least preferred gold stock for its stretched valuation and likely gold sector de-rating. For those seeking gold exposure, Ord Minnett recommends Regis Resources ((RRL)).

Lead

Lead prices rallied sharply in the past week, hitting an intra-day, five-year peak of US$2576.50/t before a dramatic sell-off the following day. Macquarie believes the usual suspects, Chinese investors, scooped up the relatively unfashionable metal before selling it off again. The reason is probably because lead was looking left behind by the rest of the complex.

The metal was becoming highly discounted to its sister metal zinc and, while zinc was also moving up, the subsequent rally has reduced lead's discount to well below US$400/t.

Speculative momentum aside, Macquarie notes the fundamental lead market does look a little tighter. Primary supply is tight and lead mine output has been hit by the same reductions as in zinc, although has also been experiencing a contraction in Chinese domestic output because of intensifying environmental scrutiny at the country's mines. Traceable mine output data signals a drop of 11% in the first nine months of the year versus the same period over 2015.

In the scrap market, which contributes around 51% to overall supply, battery stocks were drawn down in October, as high lead prices drew out material. The broker observes the market is somewhat lean. Nevertheless, with this side of the market well covered, buyers have felt no pressure to accept the rally in lead prices, and scrap prices have failed to keep pace.

Macquarie observes demand, which is dominated by lead acid batteries, has been supported by much stronger automobile sales and production across several regions over the year. The broker envisages a better outlook for demand. Still, while lead prices deserve to lift somewhat, the recent rally is considered to be well in excess of the fundamentals.

Macquarie expects prices will retrace back to more justifiable levels in the low US$2000/t range, with the potential for further slippage after the peak battery demand in the northern winter period. On the other hand, a sharp fall in winter temperatures would facilitate more battery failures and may create a squeeze in the scrap market, in turn causing buyers to accept some of the higher prices.
 

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article 3 months old

Material Matters: Outlook, Iron Ore, Steel And OPEC

Outlook for metals; iron ore outlook becoming more constructive; steel demand; the upcoming OPEC meeting.

-Supply restrictions, economic reductions should boost oil, coking coal, nickel, natural gas and zinc
-Sustained downturn in iron ore pricing looking less likely
-Chinese steel demand improving and more resilient than expected
-Oil market expected to move into deficit in 2017

 

By Eva Brocklehurst

Commodity Outlook

Goldman Sachs notes that historically, when the US and Chinese output gap closes and inflation begins to rise, this is a buy signal for commodities. Supply restrictions from policy actions should benefit oil, coking (metallurgical) coal and nickel in the near term, while economic reductions should boost natural gas and zinc. The analysts downgrade three and six-month gold price forecasts to US$1200/oz on a stronger cyclical outlook.

Morgan Stanley notes the shock of the US election is now passing and commodity prices are normalising, largely via currency adjustments. The broker suspects the proposal to rebuild US infrastructure is probably bullish for metal trades given the size of the US economy. The US economy currently consumes up to 20% of the world's metal ore supply and was the biggest buyer before China became fully engaged in global trade a decade ago.

The US remains heavily dependent on oil, lead and coal. Nevertheless, Morgan Stanley highlights that any lift in demand growth these particular commodities can probably be met by domestic supply. The broker calculates that a reasonable boost for the US economy would be one where consumption rates lift back to historical highs, which would represent a 2-5% lift in global demand for copper, aluminium, alumina, zinc and lead but little change to nickel.

Iron Ore

ANZ's analysts believe a sustained downturn in the iron ore prices looks increasingly unlikely. A combination of seasonally strong steel demand in China and risks for further supplier disruptions could mean the market enters a period of tightness.

Supply-side issues are seen having a greater potential impact on the market. Growth in exports from Australia have been slowing for some time but there are signs the slowdown will accelerate in coming months. Rio Tinto ((RIO)) recently announced it would shut its Hope Downs mine for two weeks in December to reduce operating costs and maximise cash. While a shut-down of this nature will only have a small impact, the analysts note this appears to signal a shift from the strategy of expansion at all costs.

Meanwhile, the potential for further disruptions over the southern hemisphere summer is also higher. The Australian Bureau of Meteorology is forecasting an above average number of cyclones in 2016/17 and the Pilbara coastline has a 63% chance of more tropical cyclones than average.

Goldman Sachs is also more constructive on the iron ore outlook in 2017. Demand has surprised to the upside in China after the credit stimulus earlier this year. Supply, on the other hand, was slow to increase because of delayed capital expenditure and operational challenges.

Besides the fundamentals, a rally in metallurgical coal prices and a weaker Chinese currency, as well as the risk-on sentiment after the US election, have also supported iron ore prices. Goldman Sachs upgrades its iron ore price forecasts for the next three months to US$65/t, six months to US$63/t and 12 months to US$55/t.

From 2018 and beyond, the broker revises up its long-term equilibrium price forecasts to US$45/t from US$35/t. The broker expects Chinese steel demand will weaken in 2018 and the iron ore inventory re-stocking process run into physical constraints. Political uncertainties at the macro level and elevated levels of port inventory at the micro level suggests significant risks to the broker's forecasts, and the high level of volatility seen in the market this year is expected to continue.

Steel

Macquarie's latest steel survey from China shows a broader based improvement in demand and sentiment. Domestic orders improved over the past month for Chinese steel mills and, while property and infrastructure demand for steel has eased, a clear improvement has been witnessed in the machinery and automotive sectors.

The analysts note steel mills continue to re-stock raw materials and coking coal inventory is falling on tight supply, while iron ore stocks are flat month on month. Despite the rise in raw material costs, such as iron ore and coking coal, steel mills report they are in positive margin territory and are maintaining stable capacity utilisation rates.

Goldman Sachs also notes steel consumption is more resilient than previously expected and demand for iron ore is likely to be supported by further incremental re-stocking across the steel supply chain.

OPEC

ANZ analysts expect OPEC (Organisation of Petroleum Exporting Countries) will reach an agreement at next week's meeting in Vienna and observe money managers have been aggressively shorting oil as OPEC members have increased their output. This suggests the market remains unconvinced that the cartel will reach an agreement.

Yet the analysts note comments from various OPEC members signal an agreement is possible. Iran's oil minister has said it was highly probable that members would reach a consensus. OPEC production is near a record high, driven by strong output from Saudi Arabia and smaller members. Nevertheless, the analysts point out that any agreement must take into account Iran's production remains below its peak achieved nearly 10 years ago.

Prices have been trading in a tight range over the past six months, and strong support appears established around US$43-44/bbl. With positioning already so short, even if OPEC fails to reach agreement the analysts expect selling to be relatively limited. Instead, the risks are seen firmly skewed to the upside in the short term, with agreement on production cuts likely to mean prices test the highs seen in 2016, at around US$53/bbl for Brent.

The analysts estimate the market will move into a deficit in the first quarter of 2017, assuming OPEC cuts production by 750,000 b/d in the first half. Without production cuts the deficit would likely be delayed until the September quarter. This is because most members are pushing towards capacity and this should mean limited increases in output in 2017.

Stronger-than-expected demand growth and lower production from high-cost countries increases Goldman Sachs' confidence that the global oil market will shift into deficit by the second half of 2017, even with OPEC production at current levels. Thus, there is now stronger incentive for OPEC producers to halt inventory growth in the first half and normalise the current high level of inventories with a short duration cut to production, in the broker's view.

Goldman Sachs believes a cut to production would help OPEC grow market share by sidelining higher-cost producers and reducing oil price volatility, which would increase the valuation of members' debt and equity.
 

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