Itaú BBA - Lower Oil Prices in 2018

Commodities Monthly Report

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Lower Oil Prices in 2018

June 9, 2017

Commodities continued to decline in May, led by metal and energy prices.

For the full report, see enclosed file

• Commodities continued to decline in May, led by metal and energy prices.

• OPEC’s deal and the decline in U.S. inventories are expected to support oil prices, but only in the short term. We maintained our Brent forecast for YE17 at USD 54/bbl, but lowered our forecast for YE18 to USD 51/bbl due to the decline in the marginal cost of U.S. shale oil producers.

• We expect the ICI to gain 2.8% from its current level by the end of 2017. The increase will mainly stem from higher oil and agricultural prices.

The Itaú Commodity Index (ICI) fell by 3.7% in May, led by metal and energy prices indexes. Metal prices fell  8%, following a 20% drop in iron ore prices, while energy prices declined 3.2% due to a correction in oil prices.

OPEC’s deal and the decline in U.S. inventories are expected to support oil prices, but only in the short term. Even with the extension of OPEC’s deal, the deficit is likely to continue this year. We maintained our Brent forecast for YE17 at USD 54/bbl (WTI: USD 52.5/bbl), but lowered our forecast for YE18 to USD 51/bbl (WTI: USD 50/bbl) due to the decline in the marginal cost of U.S. shale oil producers.

Firmer global growth limits declines in metal prices. The downside risks to an improvement in the global manufacturing cycle seem limited at the moment, even with a slowdown in China. If the global 

Manufacturing PMIs remain close to their current levels, metal prices are unlikely to enter a downtrend. This is consistent with our forecast of a 3% decline in the ICI Metals from the current level, with iron ore prices falling to USD 55/mt by the end of the year. 

Agriculture prices have remained broadly stable since the end of April, despite the sharp 11.3% drop in sugar (mainly caused by a stronger-than-expected supply x demand balance). We therefore lowered our price forecast for sugar. Soy and wheat decreased by 3.6% and 0.4%, respectively, in the same period.

We expect the ICI to gain 2.8% from the current level by the end of 2017. The increase will mainly stem from higher oil and agricultural prices.

Metals: China-related concerns continue to affect iron ore and copper prices

Iron ore prices have dropped 19% since the end of April, possibly reflecting sector-specific factors and renewed concerns over the Chinese economy. The still-high iron ore inventories in China might explain the recent decline in iron ore prices. We also expect supply increases in 2017, by both big and non-traditional players, in response to the current higher-price scenario (vs. the average for 2016).

Copper prices have recently lost some momentum, also due to a combination of micro factors and China-related concerns. LME inventory data continued to show a significant build-up in copper inventory in May. However, weaker refined supply will likely result in a tighter market in the months ahead, supporting the high prices.

We forecast a 3% decline in ICI Metals from the current level. Specifically, we expect iron ore prices to fall to USD 55/mt and copper to remain stable at USD 5600/t by the end of the year.

Oil: Lower Oil-price forecast for 2018

At the end of May, OPEC and non-OPEC members extended the production cut until March 2018, with unchanged volumes; Libya, Nigeria and Iran are exempt. Even with the deal extension, Brent and WTI prices have dropped by 2% since the end of April. 

OPEC’s deal extension and the decline in U.S. inventories (albeit from high levels) are expected to support oil prices in the second half of 2017. We estimate that the market reached a small deficit in 1Q17. Given the impressive compliance so far and the nine month extension of the OPEC’sdeal , the deficit is likely to continue this year. We therefore maintained our YE17 Brent forecast at USD 54/bbl (WTI: USD 52/bbl).

However, we lowered our yearend Brent forecast for 2018 to USD 51/bbl (WTI: USD 50/bbl), due to the decline in the marginal cost of U.S. shale oil producers.

Grains: Soybean prices fell sharply due to the higher expected supply

Corn prices have risen by 1.1% since the end of April, while soybean and wheat prices fell by 3.7% and 0.5%, respectively, over the same period.

Expectations of a higher supply led to a drop in soybean prices, despite prospects of an increase in demand. The drop in soybean prices and the rise in corn prices is consistent with the expansion of the planted soybean area in the U.S. at the expense of corn. The soybean crop in Brazil is also expected to be higher, driving prices lower. 

We maintain our YE17 price forecasts for corn (USD 3.75/bushel), soybeans (USD 9.5/bushel) and wheat (USD 4.8/bushel).

The probability of an El Niño-like weather anomaly is lower, but remains our base case. For U.S. crop production, an El Niño cycle in 2H17 increases the risks of excessive rainfall, possibly delaying/jeopardizing the harvest. 

Sugar/Coffee: Lower prices

International contracts for raw sugar and coffee have dropped by 11.3% and 2.6%, respectively, since the end of April. 

The recent drop in sugar prices may have been caused by the anticipation of a surplus in the 2017/18 crop year and by the depreciation of BRL. Although a shift from deficit to surplus was expected in April, the current outlook is that the oversupply of sugar could be even larger, while the currency depreciation has also pressured prices.

Sugar prices in Brazil have already reached ethanol levels, possibly causing the mills to start producing more ethanol than sugar to balance the supply and raise sugar prices. Because the price of gasoline in Brazil is currently lower than ethanol, the shift in supply could make it more competitive.

We maintain our coffee price forecast at USD 1.40/lb for YE17 and expect sugar prices to average USD 0.17/lb in 2017.


 

Paula Yamaguti

Laura Pitta


 

For the full report, see enclosed file


 

 



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