Itaú BBA - Higher oil prices in 2018

Commodities Monthly Report

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Higher oil prices in 2018

January 11, 2018

Given the recent decline in inventories, we increased our year-end forecasts to USD 52/bbl for WTI and to USD 55/bbl for Brent.

For the full report, see enclosed file
 

• Commodity prices continued to rally in December, boosted by energy and metal subcomponents.

• Given the recent decline in inventories, we have revised our year-end forecasts to USD 52/bbl (from USD 45/bbl) for WTI and to USD 55/bbl (from USD 47/bbl) for Brent, on the higher end of this range.

The Itaú Commodity Index (ICI) has risen 5.0% since the end of November – namely agriculture (2.3%), metals (7.1%) and energy (5.4%) – as global economic activity maintains a strong pace.

Higher oil price forecasts in 2018. WTI prices rose 8% to USD 61/bbl last month, due to a larger-than-expected decline in US inventories and renewed geopolitical risks. We estimate that oil prices in the range of USD 45-55/bbl may stabilize U.S. rig investment and help balance supply and demand this year. Given the recent decline in inventories, we have revised our year-end forecasts to USD 52/bbl (from USD 45/bbl) for WTI and to USD 55/bbl (from USD 47/bbl) for Brent, on the higher end of this range.

Fine-tuning our metal prices forecast. Metal prices continued to rally in December, but we still foresee a correction ahead as the Chinese economy slows down modestly. We raised our year-end copper prices to USD 6500/mt (from USD 6200/mt) and iron ore prices to USD 60/mt (from USD 58/mt,).

For agricultural prices, there were no major changes to our scenario, despite the risks associated with La Niña. We increased our 2018 YE price forecast for sugar due to the adjustment in oil prices.

Oil: Higher prices in 2018

Oil prices continued to rally in December, supported by inventory draws and geopolitical risks. WTI and Brent rose 8% in the month, staying close to USD 61/bbl and USD 67/bbl, respectively. 

However, prices above USD 50/bbl over recent months are likely to stimulate shale-oil investment in the U.S., which will translate into future production. We still estimate that the WTI range of USD 45-55/bbl may stabilize the U.S. rig count and help lend balance to the market in 2018 (see chart). 

Given the recent decline in inventories, we have revised our year-end forecasts to USD 52/bbl (from USD 45/bbl) for WTI and to USD 55/bbl (from USD 47/bbl) for Brent, on the higher end of this range.

Metals: Moderate change in our forecasts

The Metals ICI increased 7.1% in the month, on strong performance in iron ore and copper. Iron ore prices rose to USD 73/ton from USD 68/ton, supported by strong steel production in China, while copper prices rose to USD 7,147/ton, from USD 6,762/ton at the end of November. 

Nonetheless, we still foresee a correction ahead as the Chinese economy slows down modestly. We raised our year-end copper prices to USD 6500/mt (from USD 6200/mt) and iron ore prices to USD 60/mt (from USD 58/mt).

Grains: Weather-related risks in 2018

Wheat and corn prices rose 4.3% and 2.6%, respectively, in December. In the meantime, soybean prices have dropped 3.4%. 

The increase in wheat and corn prices stems from concerns of dryer weather in Argentina as a consequence of La Niña.

We maintained our scenario for the three commodities’ prices. Our YE18 forecasts are:

  • Soybeans: USD 10.2/bushel
  • Corn: USD 4.0/bushel
  • Wheat: USD 5.0/bushel

Our scenario assumes an active La Niña that is going to last until the end of 1Q18. As La Niña implies drier weather in the Southern Hemisphere, it may affect the next crop in Brazil and Argentina.

Sugar/Coffee: Slow recovery in sugar prices

International contracts for raw sugar and coffee have remained broadly stable in December, as sugar increased 0.5% and coffee decreased 0.1%.

The recent increase in sugar prices reflects rising oil prices. As oil prices have a direct impact on ethanol prices, when fuel prices rise, sugar prices tend to move in the same direction.

Our coffee price forecast for YE18 is unchanged at USD 1.31/lb. Nonetheless, we have increased our YE18 sugar prices to USD 0.152/lb, from USD 0.144/lb, reflecting the change in oil prices.


 

Paula Yamaguti
Laura Pitta


 

For the full report, see enclosed file



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