The Hindu Business Line : Crude, metals prices set to rule firm for now

Bullish outlook
Dollar weakness, inflation concerns and geopolitical risks continue to pressure the market.
Supply uncertainties are at the top of metals market concerns

G. Chandrashekhar

Mumbai, March 17 In recent weeks, a bullish sentiment has gripped the energy market. Prices are hitting new highs and it is happening all along the curve. Importantly, not only has the front end witnessed steep gains, even far forward values are increasing.

Impacting factors

Both demand side and supply side factors continue to impact. Non-fundamental factors too are playing a big role. Dollar weakness, inflation concerns and geopolitical risks continue to pressure the market. Demand-supply fundamentals continue to tighten; and market uncertainties are set to continue.

In other words, do not expect any respite from high prices anytime soon.

No wonder, agencies like Barclays Capital hold a constructive long-term view on oil prices. The forecast for WTI prices in 2015 is $137 a barrel.

Further adjustment

According to Barclays Capital, the concerted shift-up in prices represents further adjustment of market expectations regarding long-term equilibrium prices. The growing imbalance between demand and supply dynamics means that this process has further to run.

According to experts, the flow of data so far in 2008 does not provide much of a case for a sustained price retreat from the current levels. OECD demand looks weak as it has been for three years. The latest composite leading indicators for major OECD countries are not too encouraging. Non-OECD demand looks robust. Chief among non-OECD nations is China whose demand is seen improving.

Varying opinions

The much-feared US recession could potentially dampen the price sentiment. But opinions about the gravity of the situation vary. Outside of the US, many of the global numbers look strong. There is also strong view that the US economy may recover in the second half of this year. In the event, prices might receive a further boost.

On the supply side, the combination of weak non-OPEC output and cautious OPEC output policy should help keep the market tightly balanced going forward.

Base metals: Supply uncertainties are at the top of market concerns and they set the tone for base metals prices. Power-related production losses that span the globe highlight the fragility of the supply side of the market and the speed at which metals balance can tighten. In other words, going short on base metals could be a risky proposition.

Supply losses

The metal most at risk is aluminium given its extremely energy-intensive production process which is proving to be a major vulnerability in a world of tightening power supply and high energy prices. There are supply losses from China, South Africa and South America while supply growth looks vulnerable to disruption.

According to Barclays Capital, aluminium’s increasingly precarious supply outlook combined with the strongest long-run demand prospects of all the base metals is recipe for tighter market and higher prices.

The global balance may tip into a deficit this year, beginning in the second quarter. The second quarter is usually a strong demand season and there could be drawdowns from LME stocks. The market, expected to tighten further in 2009, can potentially send prices even higher to $4,500 a tonne. Dips to $2,900/t are a buying opportunity.

Copper scenario

From a fundamental perspective, copper looks the tightest market. Supply losses are stacking up and sluggish growth is expected. A very substantial market deficit is seen emerging in the first half of 2008. With inventories returning to all time lows, prices could be testing all time highs. It may be advisable to build length on dips to high $7,000s.

Nickel prices are set to firm through the second quarter this year in line with a pick up in stainless steel activity. Less volatile prices may be seen during the year, with fluctuations between $25,000 and $30,000/t likely.

The market balance for zinc looks weak. Although there is short-term upside risk, prices may fall below recent support at $ 2,200/t. Tin fundamentals look like undergoing further tightening. More prices gains are expected to come.

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