Commodity Roundup: January 2015

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


Crude oil prices plunged further as OPEC continues to refrain from substantially curtailing its output in the face of excess supply and falling prices. Nevertheless, steadily falling oil prices pose a risk to profitability of oil extraction in US shale fields and Canadian oil sands. Expected slowdown in oil sector investment should eventually lead to narrowing in the supply-demand gap for crude oil. Consequently, we expect crude oil prices to recover in late-2015.


Gold was the outlier among commodities and gained more than 4%. Safe-haven demand (amid political uncertainty in Greece and global growth concerns) aided prices in January. Investment demand rebounded in January and gold-backed ETF holdings marked a net accretion of 66 metric tonnes, the first increase in holdings since July 2014.


Industrial metal prices fell in January amid concerns over China’s growth prospects. Data released in January showed that China’s 2014 GDP growth came at 7.4%, slowest since 1990. Copper was the biggest loser among the major industrial metals, falling by 15% in the month.


Agricultural commodities also fell. Wheat fell 15% and corn fell 8% in January.

Market Summary

Energy: Crude Oil

Global crude oil prices have fallen consistently
since mid-June and are now near the lowest levels
in 5-1/2 years

Review of January: Crude oil prices continued to fall

Crude oil prices continued to fall in January, extending their downward trend since mid-2014. Both Brent and WTI fell around 15% in the month of January, following around 18% plunge in December. The front-month Brent contract has fallen to around USD 48/bbl, near the lowest levels in five and a half years. 

Death of Saudi King has raised speculation that Saudi Arabia’s oil policy might change going ahead

Some Saudi officials have expressed unease with low
oil prices which increase fiscal deficit

Saudi Arabian policy in focus as new King assumes responsibility

The Saudi Arabia’s King Abdullah died in January and has been succeeded by King Salman. Markets await cues whether the change might translate into a change in the country’s oil policy. Until now Saudi Arabia has maintained that it does not want to cut oil production to support prices as it would only translate into a lower market share for Saudi Arabia. However, several of royal family members (in charge of various ministries) have reportedly expressed dissent with the current policy as it leads to lower Government revenues and higher fiscal deficit. Prince Al Waleed bin Talal (member of royal family) warned that there was a danger that lower oil price would translate into fiscal deficits, thereby forcing Saudi Arabia to borrow from abroad.

However, no change in the country’s oil policy is expected in the near-term as emphasized by the new King. Moreover, the Oil Minister remains the same, Ali al-Naimi (since 1995). Besides, it does not seem Saudi Arabia has any other better option than to let prices fall now and preserve its market share over the longer term.

But, no change in Saudi policy expected in the
near-term as oil policy remains with Oil Minister Al Naimi (since 1995).

Low oil prices pose risks to US shale and other unconventional oil

Lower oil prices will pose risks to profitability of new sources of crude oil like shale and oil sands, as these unconventional crude oil have higher costs of production. Recent market reports suggest that costs of production for US shale oil stand in the range of USD 40-70/bbl (with costs varying over different fields). Thus, there remain concerns that investment into US shale oil-sector (and also Canadian oil sands) will slow down, eventually leading to lower oil output from both the countries. The IEA said in its latest report that rigs drilling and drilling permits in the US “substantially decreased” in 4Q14 and beginning of 2015. This should reduce the existing surplus in the global crude oil market and gradually move it towards a balanced market.

IEA and OPEC expect oil price to rise towards end- 2015 as lower oil price will lead to slower rise in oil supply

OPEC & IEA: Oil prices might have hit a floor

OPEC Secretary-General Abdullah al-Badri said on Monday that oil prices may have reached near a floor and would go higher from current levels. Similarly, the International Energy Agency’s chief economist, Fatih Birol said last week at Davos World Economic Forum that oil prices could face upward pressure by year-end.

In the near-term, Brent is expected to hover around USD 50/bbl

In the slightly longer-term, oil prices should correct upwards as low oil prices will slow investment in unconventional oil


Oil price outlook: Gradual uptick expected in late-2015

Near-term: Volatility to persist
Crude oil prices have remained volatile in the last few weeks and have often oscillated between losses and gains on alternate days. Markets appear to be searching for direction and is reacting substantially to any cue. While an increase in US crude oil stockpiles last week led to a fall in oil price, a reported decline in Iraqi oil exports led to a rise in price the next day. The Brent price might hover near USD 50/bbl in the near-term, amid continued volatility.

Medium-term: Upward correction in oil prices
Lack of investment in shale and oil sands is expected to reduce the oil market surplus gradually in 2015. Consequently, we expect oil prices to trend higher in late-2015.


Precious Metal: Gold

January has been a favourable month for gold

Gold prices rebounded in January, after ending 2014 on a flat note. The yellow-metal benefited from higher safe-haven demand as concerns emerged over Greece and global risk sentiment turned bleak amid continued decline in oil and industrial metal prices. Gold is poised to end the month higher by ~4.7%.

Concerns over Greece and weak global risk sentiment aided bullion’s safe-haven demand

Safe-haven demand drove prices higher

Gold prices gained steadily through the month and even breached the USD 1,300/ozmark in two sessions. Safe-haven demand increased as uncertainty over Greece emerged, first on account of the several rounds of elections and more recently, when the anti-austerity Syriza party clinched victory. Meanwhile, global risk sentiment also came under pressure in January as oil and industrial metal prices slipped lower. As the chart below shows, gold prices closely tracked gains in the safe-haven 10Y US Treasury. Further, announcement of QE by the European Central Bank (ECB) also aided sentiment.

However, gains were capped amid strength in the US Dollar

However, strength in the greenback limited gains

Gains, however, were limited amid strength in the greenback. The US Dollar index advanced by 4.8% in January as the monetary policy divergence between US and its developed market peers, particularly Eurozone, became evident. Gold price slipped by ~2% in the session following the US FOMC policy decision, which suggested that the Fed is likely to hike rates in H2 2015.

Investment demand for gold rebounded. ETF holdings witnessed the first net accretion since July, 2014

Investment demand rebounded in January

Gold-backed ETF holdings marked a net accretion of 66 metric tonnes, the first increase in holdings since July 2014. Meanwhile, data from US Commodity Futures Trading Commission (CFTC) showed that net non-commercial long positions in gold rose by 40% in January (till Jan 20th).

Strength in the US Dollar, a global backdrop of weak inflation and expected monetary tightening by the Fed are expected to weigh on gold price On balance, we expect gold prices to trade with a bearish bias in 2015 

Outlook: Gold to trade with a bearish bias in 2015

Gold’s upbeat performance this month was largely driven by safe-haven demand. However, such gains would be difficult to sustain going ahead. There are a number of
factors that are likely to have a bearing on gold prices this year—some positive and some negative. Among factors that are likely to be gold price negative: a) the US Dollar is expected to strengthen going ahead, reflecting the growth and monetary policy divergence with other developed market peers, b) A disinflationary global
scenario is likely to limit demand for gold as an inflation-hedge and c) Monetary policy tightening by the Fed is likely to weigh on overall sentiment.

However, there are likely to be some positive factors as well: a) Global growth concerns and any geo-political risk would aid safe haven demand, b) Demand from
India and China is expected to be strong and c) Liquidity from the ECB and BoJ are likely to somewhat offset monetary policy normalisation by the Fed.

On balance, we expect gold prices to trade with a bearish bias in 2015.


Industrial Metal: Aluminium

LME aluminium prices have edged lower amid slowdown in demand from China and EZ

Aluminium prices edged lower in January

The benchmark 3-month LME aluminium price has dropped by ~9% since December 1st, 2014. This sharp fall in aluminium prices can be majorly attributed to a demand slowdown amid a slew of weak data prints from China and Eurozone. In fact, China and EU together comprise about 60% of world aluminium consumption.

However, premia on aluminium contracts are on an upward trajectory
suggesting artificial hoarding in LME aluminum ware houses

But aluminium spot premium has been rising

While, LME prices have been on a downward trajectory over the past few months, there has been a steady rise in premia throughout 2014. This indicates that there has been a rise in artificial hoarding in LME aluminium warehouses in order to seek higher rental income by the owners.

Moreover, Indonesia ore ban is expected to weigh on aluminium production

Indonesia ore ban to put additional pressure on supply

Indonesia constituted more than 20% of bauxite production in 2013. This figure has dropped to a meagre 1.76% in 2014, owing to the ore ban in Indonesia. In fact, news reports suggest that aluminium market is expected to face a substantial shortage in case the ban is not lifted off this year. Indeed, supply-demand gap (i.e. excess supply) in the aluminium market has dropped sharply over the last few months.

On balance, we expect international aluminium prices to remain subdued in the near-term as aluminium market remains in substantial excess supply

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

According to the discussion above, demand for aluminium has weakened due to growth slowdown in China and Eurozone, which weighs on prices. However, at the same time the metal’s supply has dropped sharply due to 1) continued hoarding of stocks in LME warehouses 2) Indonesia ore ban.

Nevertheless, aluminium prices are expected to remain under pressure in the near-term as there still remains excess capacity to the tune of 2.73 mn metric tonnes in 2014 (as of November 2014). Moreover, our statistical analysis in our paper “Industrial metals: China slowdown suggests end of super-cycle in prices”1 showed that China’s demand for the metal is a much more important determinant of aluminium prices than the other
factors such as excess supply.

On balance, aluminium prices will trade with a bearish bias in the near-term.


India's Aluminium Story

The long drawn battle between the administration and the locals has intensified recently in Niyamgiri hills in Odissa. The villagers in Niyamgiri have planned an expedition on February 21st opposing the extraction of bauxite by Vedanta Resources for its alumina refinery in Lanjigarh. Going ahead, given the recent changes in India’s land acquisition laws, it would be interesting to see how the Government proceeds on the issue of bauxite mining.