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G. Chandrashekhar

Supply-side constraints to be a key factor in metals, energy

Mumbai , Jan. 7

Tactical positioning in commodities markets remains heavily weighted towards the agricultural sector with net long positions in CBoT (Chicago Board of Trade) corn and wheat, and NYBoT (New York Board of Trade) cotton all moving up over the past week.

Negative view

In energy, net long positions in US natural gas and oil and refined products have all been cut, as is also the case in precious metals. Funds retain a very negative view of copper price prospects with the net short position in Comex copper, already at a four-year high, continuing to extend.

This year is expected to be another strong one (like 2006) for commodity prices with many of the themes of 2006 persisting, according to Barclays Capital Research. Global growth may be slowing, but it is expected to stay above trend with commodity-intensive economies outside of the OECD continuing to outperform, while supply-side constraints are likely to remain a key factor in many base metals and energy markets.

Nevertheless, overall percentage gains are unlikely to match those made in 2006, the research report pointed out adding that in terms of annual averages, zinc and nickel are forecast to be the biggest price gainers in 2007. Energy prices should also continue to make steady gains, with the US natural gas set to regain some of the losses made in 2006.

$ depreciation over

But there are also likely to be more losers mainly in the precious metals sector with gold unlikely to maintain its strong performance of the past weeks. According to Barclays Capital, the bulk of the depreciation in the value of the dollar is now over.

Interestingly, 2006 was another exceptionally strong one for commodities prices, with most markets registering gains over their 2005 averages, with the exception of US natural gas. The strongest sector was base metals, with zinc, copper and nickel leading the way, followed by precious metals and then energy.

Energy: Oil prices started the year sluggishly, market sentiment being heavily influenced by mild US winter. Some experts assert the market may be exaggerating the importance of this factor. Heating oil accounts for only 6 per cent of US oil demand on average in December and January.

Risk of over-tightening

Of greater significance could be the steep decline in US oil inventories relative to seasonal norms and in OECD levels more generally, highlighting that the oil market is tightening quickly, even before the full impact of OPEC's November production cuts are felt. This emphasizes the risk of OPEC over-tightening the oil market and this risk has risen with last December's decision to cut a further 500,000 barrels per day from current output effective February 1, 2007. There seems to be an upside to crude oil prices in the first quarter and also to gasoline crack spread, according to analysts.

However, crude prices tended to rally during the weekend as traders built long positions at lower prices.

Base Metals: Price volatility continues in the base metals markets amid concerns of a macroeconomic slowdown. Recent big increases in LME copper inventories are helping to keep market sentiment negative, though absolute inventory levels are still very low and most markets remain extremely vulnerable to supply problems.

Experts are still bullish on copper price prospects and believe markets are underestimating the impact of current raw material market tightness on refined production. Positively, Chinese imports of copper have picked up, though scrap is being substituted for refined metal. Price risk is also still to the upside in zinc. LME inventory withdrawals may have slowed, but even so zinc stocks are perilously low and are likely to fall further in the first half of this year.

Precious Metals: As we move into 2007, the positive and negative price-determining factors seem to be relatively balanced. On the negative side, gold demand has proved greatly vulnerable to high price levels and the pace of producer de-hedging has slowed markedly. While fabrication demand might recover somewhat should prices prove relatively stable - the prospects for gold are likely to remain highly dependent on the dynamics of external factors.

The combination of forecasts for dollar weakness and oil price strength along with continued geopolitical tensions should continue to keep prices well underpinned, but overall some analysts see little chance for a significant further upwards move, short of a dramatic weakening in the value of the dollar.

Agriculture: It could pay to continue to be positive on price prospects for the corn (maize) market in light of the market's tight fundamentals, with demand buoyed by robust feed demand from China in tandem with strong US ethanol demand. Cotton could be viewed with a positive bias due to China's rising cotton import demand due to its expanding textile industry as also because of the possibility of lower acreage in the US in the forthcoming planting season.

More Stories on : Commodities | Commodity Markets | Gold & Silver | Petroleum

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