Itaú BBA - Recovery Sustained by Crude Oil

Commodities Monthly Report

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Recovery Sustained by Crude Oil

March 10, 2015

Brent crude prices continued to trend upwards in February, reinforcing our scenario of some recovery.

• Brent crude prices continued to trend upwards in February and remained above USD 60.0/bbl. This move reinforces our expectation of some recovery from a recovery of Brent prices to USD 70.0/bbl by year-end.

• We lowered our price forecasts for sugar and coffee to USD 0.158/lb. and USD 1.5/lb., respectively, after incorporating the prospect of better supply from Brazil in view of February weather conditions. Our new forecast for sugar assumes parity between ethanol and sugar prices at the producer level in Brazil.

• We increased our price forecast for corn to USD 4.2/bushel from USD 3.8/bushel, given signs of a reduction in the planted area in the next crop.         


Aggregate commodity prices have remained at the same levels since February 10, sustaining the partial recovery seen since the beginning of the year. The index has been roughly stable because rising energy prices (+4.0%) are being offset by declines in agricultural (-3.4%) and metal prices (-3.1%).

The rebound in oil prices continued in February, as Brent crude reached USD 61.0/bbl, consolidating our expectation of prices at USD 70.0/bbl by year-end. The recovery is consistent with several signs of lower capital expenditures in non-conventional output in North America. The number of prospective wells has fallen by over 26% since late January (-41% since October), according to Baker Hughes rig count data, and more companies have reported delays in new investments.

For oil, even though the recent evolution is in line with our scenario, new risks to market normalization have arisen. The likelihood of an agreement between Iran and the P5+1 has increased. The end of sanctions against the country could lead to a supply increase of up to 500 kbpd and would create another headwind to the adjustments needed to get rid of the current oversupply in the market.

The adjustments to our agricultural and metal price forecasts offset each other, so our estimates for the ICI are virtually unchanged. We expect the ICI to climb by 12.1% in 2015, compared with current levels, and to go up by a further 3.4% in 2016.

The ICI-Agriculture declined in February, dragged down by sugar, coffee and wheat. Sugar and coffee prices were affected by favorable weather in Brazil, which improved prospects for the next crop, reduced risks arising from the January drought and led us to cut our price forecasts. Wheat prices slid in response to weak demand for U.S. output. We have increased our year-end price forecast for corn due to evidence of declines in the planted area for the next crop-year.

Metal prices have continued to drop as a lack of news about improvements in the demand outlook sustains the perception of oversupply. We have lowered our year-end price estimate for iron ore to USD 63.0/ton from USD 67.0/ton, acknowledging the lack of triggers, and we see additional downside risk for prices.

Copper was the exception to this broad-based price decline. Copper prices have risen by 3.0% since late January in response to news of lower future investments. However, we do not think that this recovery is sustainable and maintain our expectation of a drop to USD 5,600/ton by year-end.

Grains: Signs of a decline in corn planted area

Corn, soybean and wheat prices have behaved differently since late January. The most-traded international contracts for corn were virtually stable; contracts for soybeans climbed but later dropped to the same level; and wheat contracts continued to decline.

Corn contracts were little changed for two reasons: i) favorable weather in Brazil in February; and ii) evidence of a reduction in the planted area in the U.S. in the next crop. The situation in Brazil reduced the risks arising from the January drought (downward pressure on prices), while signs of a smaller planted area in the 2015-16 crop in the U.S. reduced the likelihood of oversupply (upward pressure on prices).

The increase (and subsequent drop) in soybean prices was caused by strikes by truck drivers in Brazil. Stoppages by truck drivers took place at a key moment for the harvest. In addition to causing delays in shipments, the strikes jeopardized the harvesting process due to a lack of fuel for farm equipment, which could lead to crop losses. Prices fell again in response to news that the protest was losing momentum.

The supply-demand balance continues to point to oversupply for both corn and soybeans, but the risks are greater for corn. The uncertainties surrounding corn output are greater, and the global oversupply expected in the 2014-15 and 2015-16 crops is less intense. In particular, the forecasted adjustment in the planted area in the U.S. in the next crop signals that corn prices will likely outperform soybean prices.

In view of the greater risks, we have raised our year‑end price forecasts for corn to USD 4.25/bushel from USD 3.8/bushel for 2015 and to USD 4.5/bushel from USD 4.0/bushel for 2016. Our price estimates for soybeans remain at USD 10.0/bushel in 2015 and USD 10.5/bushel in 2016, so the ratio between the two commodities has become slightly more favorable for corn compared with the historical average, which is consistent with a smaller oversupply for corn in the supply-demand balance.

We have maintained our year-end price estimates for wheat at USD 5.4/bushel for 2015 and USD 5.8/bushel for 2016. The consolidation of oversupply is offset by higher forecasts for corn. As there is some room for demand substitution between wheat and corn, we believe that it is better to use the supply-demand balance for wheat, instead of absolute prices, to estimate its premium over corn.

Soft commodities: Rainfall in February reduces the risks for the Brazilian crop

International prices for sugar and coffee have declined since late January, by 9.1% and 16.6%, respectively.

Both commodities were affected by the same downward drivers: depreciation in the Brazilian currency and favorable weather in the country in February. Weather conditions reduced the risks arising from a drought in January. If the weather had remained dry in February, both commodities would have experienced severe crop losses.

After incorporating the prospect of higher output, we reduced our year-end forecasts for both commodities. Our new estimates are USD 1.5/lb. for coffee (previously: USD 1.8/lb.) and USD 0.158/lb. for sugar (previously: USD 0.17/lb.).

Our scenario for sugar assumes relative prices for sugar and ethanol that would not induce Brazilian producers to favor one over the other.



Artur Manoel Passos

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