Commodity Roundup: November 2014


Commodity prices mostly fell in November, led by losses in crude oil.

Crude oil prices plunged as OPEC refrained from trimming its oil output despite falling prices. OPEC seems more focussed on preserving its market share and does not seem inclined to provide any floor to oil prices. Thus, there remains scope for further downside to prices in the near-term. The Brent crude oil price has fallen 15% this month and is hovering around USD 73/bbl.

Gold staged a slight recovery in November after witnessing losses the month before. Easing of monetary policy stance by Japan and China aided sentiments around gold. However, firm Dollar and continued ETF outflows limited the upside.

Industrial metal prices were mixed in November. Nickel rose 5% amid disruption in supply of nickel-ore from Philippines owing to adverse weather conditions. On the other hand, copper fell by 3% given downbeat growth outlook in China and Europe, which together account for 45% of global copper usage.

Agricultural prices were also mixed. CME wheat and corn prices rose, while NYBOT cotton and sugar prices fell. In fact, cotton prices are down 29% on a year-to-date basis, with slowing imports to China posing further downside risks to prices.

Market Summary

Energy: Crude Oil

Global crude oil prices have fallen consistently since mid-June and touched fresh 4-year lows in November

Review of November: Crude oil prices fell amid OPEC inaction

Crude oil prices rose initially in March as Russia-Ukraine tensions raised concerns over supply of natural gas to Europe, ther eby spurring a rally in energy commodity- peers. However oil prices have eased sinc e then as markets factored in adequate alternative sources of supply of gas for Europe. Besides, extreme cold weather in northern hemisphere has begun to recede, further aiding the fall in energy prices. Consequently Brent oil pric e eased from ~USD 111/bbl in early-March to USD 106/bbl


OPEC refrained from curtailing oil output in November 27th-meeting

OPEC refrained from curtailing oil output in November 27th-meeting

The 12-member OPEC (Organization of Petroleum Exporting Countries) cartel met this week in Vienna for a much-anticipated (scheduled) summit meeting. Officials of other important oil exporting nations – Russia and Mexico – were also present in Vienna, to discuss the current situation of falling oil prices.

However, OPEC decided against any production cut and kept the collective oil output target unchanged at 30 million barrels per day (mbpd). In the run up to the meeting, market reports and official statements had indicated that Saudi Arabia and Kuwait were against any production cut while Venezuela, Libya and Iran were reportedly in favour of production cuts (to arrest the decline in crude oil prices). However, post the meeting, the Iranian official’s statement seemed to indicate that Iran was well on board with the current strategy of Saudi Arabia.

OPEC seems more focussed on preserving its market share and does not seem inclined to provide any floor to oil prices

Why OPEC refrained from trimming oil production?

In the past, OPEC had often intervened (by raising or trimming output) to provide stability to crude oil prices. However, in the current episode, it seems OPEC members are trying to preserve their market share and therefore have made peace with lower oil prices. Apparently, OPEC members hope that their lower costs of oil extraction will help them to compete against newer oil production (viz. high cost US shale oil and Canadian oil sands). 

Lower oil prices likely to affect future investment in costlier sources of crude oil, viz. US shale and Canadian oil sands

Implication of falling oil prices

Lower oil prices will pose risks to profitability of new sources of crude oil like shale and oil sands (refer to chart below). US Bakken shale oil reportedly costs USD 58- 70/bbl to produce, much higher than Saudi Arabia’s costs of USD 5-7/bbl. With prices falling, there remain risks that future investment in shale oil (and oil sands) will slow down.

We maintain a bearish view on oil prices for the nearterm

Outlook: Scope for further downside in prices

The latest OPEC meeting has revealed that the cartel is focussed on preserving its market share and it does not seem inclined to provide any floor to oil prices. In the absence of an “OPEC floor” to prices, the market is expected to stabilize near the marginal costs of supply.

At present, US shale oil (technically ‘tight oil’) constitutes around 3 mbpd of US aggregate oil production of 9 mbpd. Meanwhile, the global oil market surplus is estimated at around 2 mbpd currently. Thus, in effect US shale oil is currently acting as the marginal producer (with estimated marginal costs in the range of USD 50- 70/bbl). Consequently, there remains the possibility that crude oil prices will slide further down in the near-term.


Precious Metal-Gold

November was a relatively favourable month for gold, with prices rising ~1.8%


Gold staged a slight recovery in November after witnessing losses the month before.The international spot gold price edged higher towards the USD 1,200/oz mark amid reported pick up in physical buying and easing in monetary policy stance by Japan and China. Prices are poised to end the month higher by ~1.8%. 

Easing of monetary policy stance by Japan and China, and dovish rhetoric from ECB aided sentiment and helped prices recover

Easing of monetary policy stance by Japan and China aided sentiment

Market sentiment received a boost this month amid signs of increased monetary stimulus from major central banks, which in turn aided prices. Bank of Japan unexpectedly expanded monetary stimulus early this month. China surprised markets by cutting benchmark interest rates in mid-November, in a bid to boost its economy. Further, recent comments from ECB officials have underscored the Central Bank’s commitment to do all that it takes to maintain price stability.

However, strength in the greenback and continued sell-off in the ETF space limited gains

However, firm Dollar and continued ETF outflows limited the upside

Gains in the bullion, however, remained capped as the US Dollar continued to trade firm, north of the 87-mark. Further, outflows from the ETF space continued, with selloff to the tune of 33 metric tonnes (MT) this month. 

WGC report showed global gold demand in Q3 remained subdued

WGC update: Q3 2014 global gold demand largely subdued

The World Gold Council (WGC) published its quarterly update on gold demand trends for Q3 2014 (July-September). It reported a slight decline in global gold demand (down 3% from Q2 2014), largely amid normalisation in Chinese demand (following last year’s surge) and ETF outflows.

However, Q3 demand from India surged on festive buying

…but India’s gold demand up amid festive purchases

India’s gold demand in Q3 rose by 10.3% QoQ, boosted by festive season purchases.Recent monthly data show that gold demand from India remains firm gold imports in September rose to USD 3.8 bn, while in October surged to USD 4.2 bn. With India’s wedding season in progress, gold demand is likely to remain elevated in Q4 as well.

Sources have hinted that India may impose further gold import curbs

Meanwhile, Indian Government officials and industry sources have hinted that further curbs on gold imports may be imposed. Sources suggest that an import ban on star-trading houses (which was revoked in May, 2014), might be re-imposed. If this happens, the premium on India’s spot gold price over the international price will rise and this risks encouraging gold inflows through illegitimate channels.

With ETF outflows likely to continue and US Dollar expected to trade firm over the medium-term, we maintain our bearish outlook on gold for 2014

Outlook: Gold to trade with a bearish bias in medium term

We continue to maintain our bearish outlook on gold. With the QE programme concluded, and the Fed looking on track to commence rate hikes next year, the US Dollar is expected to strengthen further, which is likely to lead to a further downside in gold prices. Also, we believe there is little to encourage fresh investment in bullion this year. Thus, we maintain our 2014 year-end price call of USD 1,200/oz.


Industrial Metal: Copper

Copper resumed its downward trend in November

 Copper resumed its downward trend in November

The benchmark 3-month LME copper price fell by ~3% in November, resuming its downward trend after having briefly stabilized in October (+0.4%). Copper continues to remain under pressure owing to persistent growth concerns relating to the largest consumer and importer – China. However, prices have come off recent lows as China’s Central Bank cut interest rates in its bid to support growth. Nevertheless, the long-term outlook for copper demand remains subdued owing to China moving towards a lower growth trajectory. The industrial metal is as yet holding on to most of this year’s losses (-10% YTD) and the LME 3-month copper price is currently hovering around USD 6,600 per metric tonne (MT), down from a peak of USD 7,175/MT witnessed in early July.

Weak sentiment around China and Europe continue to weigh on copper

Weak sentiment around China and Europe continue to weigh on copper

Data released in November showed that China’s industrial production growth fell to 7.7% YoY in October from prior 8.8% YoY in September. Urban fixed assets investment also ticked lower. Falling home prices in China also suggest a largely subdued outlook for construction spending in China, which is again a negative for copper prices. Meanwhile, Eurozone continues to face twin problems of low growth and deflationary tendencies. The European Commission (EC) in early November slashed Eurozone (EZ) growth forecasts for both 2014 and 2015. EC now expects EZ to grow at 1.1% in 2015, down from May forecast of 1.7%. China accounts for around 40% of global refined copper consumption while Europe accounts for around 15%.

Shanghai copper spot premiums decline in November amid comfortable supply and weak demand

China spot premiums have trended lower

Market reports suggest that copper supply situation has improved in China. The Shanghai spot premium (for immediate copper delivery) (compared to 3-month LME price) has declined in November (refer to chart below). While data from SHFE (Shanghai Futures Exchange) reveals that copper stockpiles in SHFE-affiliated warehouses have actually fallen (from ~105,000 tonnes in mid-July to currently ~95,000 tonnes), it should be noted that increasingly more of copper stockpiles are being held in bonded warehouses, which is contributing to excess supply and weighing on copper prices (and premiums). Not only spot, but reportedly term premiums have also been pushed lower. Large Chinese copper smelters (which produce refined copper) have reportedly cut their term premiums for 2015 exports by around 7% (compared to last year), amid weak demand globally.

ICSG expects a copper market surplus of 400,000 in 2015

Meanwhile, the International Copper Study Group (ICSG), in its November bulletin said that the global market was in a surplus of 83,000 tonnes in August 2014, following a 40,000 tonnes surplus in July. ICSG expects a copper market surplus of 400,000 in 2015.

We expect copper prices to trade with a bearish bias in the near-term

Outlook: Prices likely to remain subdued in the near-term

Going ahead, copper demand is expected to remain subdued amid faltering demand from its largest consumer China. However, recent efforts by policymakers (like interest rate cuts by the People’s Bank of China) are expected to provide some support to China’s economic activity and hence limit the downside in prices. Meanwhile, CFTC data show that speculators remain net bearish on copper. We continue to expect copper prices to trade with a bearish bias in the near-term.

Agricultural Commodity: Cotton

Cotton price is down nearly 29% on a year-todate basis amid expectation of excess supply

 Cotton prices are down 29% on a year-to-date basis, being one of the worst performers in the agricultural commodities space. The New York one-month generic cotton price is down 7.4% in November amid expectation of excess supply. It is currently hovering around 60 cents/lb.

World ending stockpiles are forecast to increase, aided by firm production and high beginning stocks

World ending stocks estimated to rise for the fifth consecutive year

The United States Department of Agriculture (USDA) estimates world ending stocks of cotton to rise above 107 mn bales in the 2014-15 marketing year (August-September), marking the fifth consecutive year of increase amid firm production in countries like US and India and higher beginning stocks. In US, output is estimated to be higher by 26%and for India, 2014-15 production is expected to equal previous year’s output of 31 mn bales. On the demand side, USDA expects an increase in mill use of cotton, spurred by lower prices. However, much of the demand is expected to be met locally, implying a reduction in cotton trade.

On balance, supply of cotton this season is expected to exceed demand. Other agencies like the International Cotton Advisory Committee (ICAC) also expect a rise in ending stockpiles this year. Against this situation of emerging excess supply, prices have remained under pressure.

Meanwhile, demand by mills is expected to rise, spurred by lower cotton prices. Cotton imports by China the largest importer, are likely to fall sharply as the country has limited its import quota to
encourage local mills to draw on domestic inventories

Lower import demand from China pose further downside risk to prices

China, earlier this year, scrapped its cotton stockpiling programme which guaranteed higher prices to farmers. The policy had led to a burgeoning of China’s cotton stockpiles as local manufacturers found it cheaper to import cotton than pay higher domestic prices. However, last month, China limited its import quota to the minimum allowed by the World Trade Organisation, in a drive to encourage local mills to draw on the country's huge domestic inventories. Data show that Chinese cotton imports for October fell by ~40% YoY to 81.9 metric tonnes—lowest since January 2009.

The repercussions of lower Chinese cotton imports are likely to be felt by exporters of the fibre such as India and US. The Cotton Association of India recently estimated Indian exports to ease to 9 mn bales in 2014-15 marketing year vs. 11.8 mn bales in 2013-14.

Investors have turned increasingly bearish on cotton

Data from the US Commodity Futures Trading Commission (CFTC) shows that investors have cut their long positions in cotton this year amid expectation of a further slip in prices, given the situation of excess supply.

With global stockpiles set to record another year of increase and imports from China likely to be lower, cotton prices are seen trading with a bearish bias

Outlook: Cotton to trade with a bearish bias in the near-term

The downward spiral in cotton prices since the beginning of the year has been driven mostly by fundamentals- firm production and largely unchanged demand. An added factor this year has been a change in China’s cotton stockpiling policy. Going ahead, with global ending stockpiles set to record another year of increase, cotton prices are likely to trade with a bearish bias.