Itaú BBA - A New Reality for Crude Oil

Commodities Monthly Report

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A New Reality for Crude Oil

November 5, 2014

The Itaú Commodity Index (ICI) has declined by 4.5% since late September

  • We have lowered our price forecasts for some base metals and crude oil (to reflect OPEC’s declining market power).
  • Prices for the major agricultural commodities have risen amid supply risks, logistical bottlenecks in the U.S. and technical adjustments. In our view, the supply risks will not materialize and prices are likely to fall again.

The Itaú Commodity Index (ICI) has declined by 4.5% since late September, driven by falling oil prices. Meanwhile, our Agricultural sub-index climbed by 7.3% in response to supply risks, logistical problems in the U.S. and rising demand for animal feed. The Metals sub-index remained relatively stable in the period. The ICI is down 19.3% year-to-date.

The price of Brent crude fell to USD 82.0/bbl in October from USD 115.0/bbl in June due to the new reality of the market. Demand growth has been sluggish and slower than the increase in non-OPEC production since 2013. Furthermore, production in the politically unstable OPEC countries has been rising this year, leaving the burden of stabilizing the market to the rich nations in the cartel (Saudi Arabia, Kuwait and the United Arab Emirates). The output-cutting response of non-OPEC countries to falling prices is likely to take some time, even in the cases of projects for which total production costs exceed current prices. Hence, the outlook for prices depends on OPEC’s reaction.

Even while assuming some production cuts by OPEC ahead, we have lowered our forecasts for crude prices. We assume that some OPEC nations will soon reduce their output, leading to a partial recovery in prices. Still, we reduced our YE14 price estimates for Brent (to USD 93.0/bbl from USD 100.0/bbl) and WTI (to USD 87.0/bbl from USD 93.0/bbl). Our revision is based on the cartel’s declining ability to influence the market, which is creating a new reality in which Brent prices are sustainable below USD 100.0/bbl.

We have lowered our price forecasts for oil and some industrial metals, so that the estimated ICI for December 2015 is now 2.8% lower than in our previous report. The latest forecast implies an 8.0% increase from current levels. The rebound is modest compared with the cumulative drop of more than 25% registered since late 2012.

The price hike in agricultural commodities (corn, soybeans and wheat) in October was caused by a combination of logistical bottlenecks in the U.S., weather risks and the unwinding of technical positions. In our basic scenario, weather risks (for planting in Brazil and harvesting in the U.S.) will not have a material impact on output, and the impact of the logistical bottlenecks will probably be limited to the short term. Hence, we maintain our forecast of lower prices by year-end, implying a 3.8% drop in the ICI-Agriculture by the end of 2014.

We have lowered our price forecasts for some base metals (copper, nickel, zinc, lead and tin). The revision follows the incorporation of current prices, a lower risk of supply interruptions and the absence of news likely to drive a recovery in prices in the coming months. All in, our forecast for the ICI-Metals in December 2015 is now 1.8% lower. Nonetheless, our forecast still implies a 3.6% increase from current prices by the end of 2014.

Iron-ore prices remained close to USD 80.0/ton in October, as they were not much affected by the uncertainties about growth in developed economies or by the better-than-expected activity figures in China. We maintain our scenario of a slight rebound in prices to USD 85.0/ton by YE14, which would result in much lower average prices in 2015.


Artur Manoel Passos

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