Daniel Lacalle

Commodities … Still In Nowhere Land

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Brent down c2% MTD at $106.94, WTI down 3.7% MTD at $99.34/bbl. Brent-WTI spread rises 28% this month to $7.6/bbl. Market is not reducing exposure to oil despite sanctions between Russia and US having no discernible effect on supply. Russian exports to OECD Europe fell to about 3 mbpd in 2013 as more Russian crudes flow to Asian destinations. However, the overall volumes still accounted for approximately 36% of total net crude oil imports into OECD Europe. Russia is also a key oil product exporter to Europe, especially of gasoil and fuel oil. According to the International Energy Agency (IEA), of total net gasoil imports of about 620 kbpd to OECD Europe in 2013, around 69% on a net basis came from Russia.

According to Oil Movements OPEC needs to cut supply by 1mmbd to avoid a market oversupply.

DOE saw crude stocks rise by a sharp 5.8mb (consensus +2.75mb) to 375.9mb. Production continued rising to average above 8.2m b/d for the first time in decades. Crude stocks in the US remain in the top half of their 5-year range. Weekly demand declined 0.4mb/d to 8.5mb/d while imports moved up to 0.4 mb/d.

Coal moves up 30bps MTD at $81.60/mt. The Merrill commodities team believes the coal supply overhang will persist in 2014 and reduce forecasts for Newcastle coal to $74/mt as an average for 2014, down from $82/mt previously. They also expect front prices in Europe (API2) to hit $70/mt at some point during 2Q. This is consistent with a cautious view on Central European power prices.  South Africa, Colombia, and Australia output set to grow while Chinese, European demand will likely remain weak.

CO2 falls 14% MTD €6.14/mt as ETS demand still sliding by 5mt.

US gas is down 4.1% MTD at $4.43/mmbtu. Weekly natural gas storage withdrawal of 48 Bcf was bearish, less than the consensus median withdrawal estimate of 59 Bcf.  Total working storage is now at 953 Bcf, 932 Bcf below last year’s 1,885 Bcf and 876 Bcf below the 5-year average of 1,829 Bcf.

UK gas is down 14bps MTD at 56.45p/therm as the Ukraine dispute continues to have no real impact on price.

Following the completion of the 55 Bcm/year Nord Stream pipeline in 2012, a lower portion of Russian gas
shipments to Europe transits through Ukraine. The current mild winter weather across Europe has allowed stocks at gas storage facilities to remain higher than historical averages. According to Platts, UK gas storage is 55% full, compared with 21% at the same time last year, and storage in Germany is 60% full, compared with 41% at the same time last year. In Italy, storage is 51% full, versus 48% full last year

Power prices continue to fall in Germany (-1.8% MTD) at €35.40/mwh.  Profits for German mid-age coal-power units fell 2.8% last month vs. January, prompting EnBW to announce plans to decommission 250 megawatts of capacity at hard-coal plant in Heilbronn.

Nordpool is down 50bps MTD at €30.75/mwh driven by poor demand and higher hydro levels.

At the end of February, hydropower reserves reached their highest level in Nordpool countries since 2010, Spain since at least 2007 and in Portugal since 2011. This has contributed to a decline in power prices, which may continue later in the year, as the hydropower surplus is consumed according to Bloomberg.

Copper at $293.85 (-7.8% MTD) while Baltic Dry rises 28.8% this month to 1621… Signalling the China slowdown (copper) amidst a small improvement in global trade (BDI).

Precious Metals

According to Deutsche Bank, the mid-cycle correction in the gold price since the end of December is at risk of unravelling heading into the second quarter, likely triggered by an improvement in real economy data in the US, a pronounced rise in US real yields and a strengthening in the US dollar.

Industrial Metals

Near term headwinds could persist due to weak macro data from China and a lack of meaningful recovery in industrial activity, but market sentiment is slowly shifting on expectation that China’s government could loosen funding restrictions for property developers and speed up construction projects to support economic growth

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