From Mark Shenk:
Oil dropped from a seven-month high as the US dollar surged after the Federal Reserve published minutes of its latest monetary policy meeting suggesting a June hike is possible. Commodities fell as the Bloomberg Dollar Spot Index, which tracks the US currency against 10 others, surged. The April minutes showed that policy makers saw an interest-rate hike appropriate in June if labour markets and economic growth continued to strengthen…..
Goldman Sachs has cut its long-term crude oil forecasts:
The inflection phase of the oil market continues to deliver its share of surprises, with low prices driving disruptions in Nigeria, higher output in Iran and better demand. With each of these shifts significant in magnitude, the oil market has gone from nearing storage saturation to being in deficit much earlier than we expected and we are pulling forward our price forecast, with 2Q/2H16 WTI now $45/bbl and $50/bbl. However, we expect that the return of some of these outages as well as higher Iran and Iraq production will more than offset lingering issues in Nigeria and our higher demand forecast. As a result, we now forecast a more gradual decline in inventories in 2H than previously and a return into surplus in 1Q17, with low-cost production continuing to grow in the New Oil Order. This leads us to lower our 2017 forecast with prices in 1Q17 at $45/bbl and only reaching $60/bbl by 4Q2017.
But these forecasts are premised on a Chinese recovery:
Stronger vehicle sales, activity and a bigger harvest are leading us to raise our Indian and Russia demand forecasts for the year. And while we are reducing our US and EU forecasts on the combination of weaker activity and higher prices than previously assumed, we are raising our China demand forecasts to reflect the expected support from the recent transient stimulus. Net, our 2016 oil demand growth forecast is now 1.4 mb/d, up from 1.2 mb/d previously. Our bias for strong demand growth since October 2014 leaves us seeing risks to this forecast as skewed to the upside although lesser fuel and crude burn for power generation in Brazil, Japan and likely Saudi are large headwinds this year.
While production growth continues to surprise:
…..This expectation for a return into surplus in 1Q17 is not dependent on a sharp price recovery beyond the $45-$55/bbl trading range that we now expect in 2016. First, it reflects our view that low-cost producers will continue to drive production growth in the New Oil Order – with growth driven by Saudi Arabia, Kuwait, Iran, the UAE and Russia. Second, non-OPEC producers had mostly budgeted such price levels and there remains a pipeline of already sanctioned non-OPEC projects. In fact, we see risks to our production forecasts as skewed to the upside as we remain conservative on Saudi’s ineluctable ramp up and Iran’s recovery.
We expect continued growth in low-cost producer output
Saudi Arabia, Kuwait, UAE, Iraq, Iran (crude) and Russia (oil) production (kb/d)
Tyler Durden has a more bearish view:
While there is much more in the full note, the bottom line is simple: near-term disruptions have led to a premature bounce in the price of oil, however as millions more in oil barrels come online (and as Chinese demand fades contrary to what Goldman believes), the next leg in oil will not be higher, but flat or lower, in what increasingly is shaping up to be a rerun of the summer of 2015.
Source: Goldman Cuts 2017 Oil Price Forecast Due To Slower Market Rebalancing | Zero Hedge
From Andy Semple at Andika:
The iron ore price has slumped to a one-month low as investors fret over the strength of Chinese demand. The commodity weakened 1.7% to $US53.50 a tonne at the end of last week, its lowest price since April 11. It’s the commodity’s seventh red session in the past eight and the price has now dropped to below the [Australian] government’s recent budget forecast of $US55 a tonne.
Not quite a classic cup and handle pattern, but gold’s 2-week flag after a broad saucer through March-April suggests strong buyer interest. Breakout above $1280 would signal a fresh advance. Follow-through above $1300 would confirm, offering a long-term target of 1550 (the lows of Sep/Dec 2011 and May 2012).
* Target calculation: 1300 + ( 1300 – 1050 ) = 1550
Disclosure: Our managed portfolios are invested in Australian gold stocks.
Australian gold stocks have had a good run since the index (XGD) broke resistance at 2800. At some stage there is bound to be a correction but the up-trend now looks pretty robust, rising 13-week Money Flow confirming buying pressure.
From Frik Els:
According to Platts Mineral Value Service, a Munich-based iron ore and steel research company, domestic iron ore’s contribution to the Chinese steel market has declined from 36% of market share in 2010 to around 22% in 2015.
Domestic iron ore output from an industry plagued by fragmentation, high costs and low grades (only around 20% Fe) has halved since 2013 and may dip below 200 million tonnes Fe 62% equivalent this year…..
Even if more Chinese mines shut down and the shift to seaborne ore continues, the seaborne market is not exactly short of tonnage. All-in-all new seaborne supply set to increase by approximately 245 million tonnes by end of 2018 according to Platts MVS.
The big three – Vale, Rio Tinto and BHP Billiton – last week lowered future production guidance, but the aggregate 35 million tonnes in possible lost production hardly changes the oversupply picture and the giants would still hit actual annual output records even at these lowered levels. Citigroup’s analysts expect around an additional 75 million tonnes of iron ore this year to be shipped out of Australia, more than a third of which would come from Roy Hill. The Gina Rinehart mine has brought forward ramp-up plans and now expects to be producing at full annualized capacity of 55 million tonnes by the end of this year. Later this year, Rio’s board is likely to give the go-ahead to build Silvergrass which would add another 20 million tonnes of high-grade, low cost ore to the company’s Pilbara output.
Source: Iron ore price: Only question now is how rapid the fall | MINING.com
Where All The Commodity Gains Have Come From
Tyler Durden:
Trading in futures on everything from steel reinforcement bars and hot-rolled coils to cotton and polyvinyl chloride has soared this week, prompting exchanges in Shanghai, Dalian and Zhengzhou to boost fees or issue warnings to investors. Eventually, the excesses will need to be curbed and maybe that starts a new phase of risk-off within China.
As Bloomberg reports, While the underlying products may be anything but glamorous, the numbers are eye-popping: contracts on more than 223 million metric tons of rebar changed hands on Thursday, more than China’s full-year production of the material used to strengthen concrete.
The frenzy echoes the activity that fueled China’s stock market last year before a rout erased $5 trillion, and follows earlier bubbles in property to garlic and even certain types of tea. China’s army of investors is honing in on raw materials amid signs of a pickup in demand and as the nation’s equities fall the most among global markets and corporate bond yields head for the steepest monthly rise in more than a year. Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong, says the improvement in fundamentals and the availability of leverage to bet on commodities is making them irresistible to traders. “These guys are going nuts,” Hong said. “Leverage exaggerates the move of the way up, but also on the way down – much like what margin financing did to stocks in 2015.”
China’s fresh boom nears peak just as amateurs pile in
Tyler highlights the “irrational exuberance” in commodities futures markets but Ambrose Evans-Pritchard at The Telegraph nails the cause:
China’s reflation drive has been explosive. New home sales jumped 64pc in March from a year earlier. House prices have risen 28pc in Beijing, 30pc in Shanghai, and 63pc in the commercial hub of Shenzhen. The rush to buy has spread to the Tier 2 cities such as Hefei – up 9pc in a single month.
“The housing market is on fire,” said Wei Yao, from Societe Generale. “In the first quarter, increases in total credit exploded to 7.5 trilion yuan, up 58pc year-on-year. There is no bigger policy lever than this kind of credit injection.”
“This looks like an old-styled credit-backed investment-driven recovery, which bears an uncanny resemblance to the beginning of the “four trillion stimulus” package in 2009. The consequence of that stimulus was inflation, asset bubbles and excess capacity. We still think that this recovery will not last very long,” she said.
Yang Zhao from Nomura …. said the law of diminishing returns is setting in as the economy nears credit exhaustion. The ‘incremental credit-output ratio” has deteriorated to 5.0 from 2.3 in 2008. Loans are losing traction and the quality of investment is falling.
“Be careful. We are nearing the point where things are as good as they get for the first half of 2016. We recommend taking some money off the table,” said Wendy Liu and Vicky Fung, the bank’s equity strategists.
….Michelle Lam from Lombard Street Research said Beijing has retreated from reform and resorted to pump-priming again. “This may last for one or two quarters. But how much longer can Beijing go on creating debt at a breakneck pace?” she said.
Their actions reveal desperation at the PBOC. Faced with the unpalatable choice between running down foreign reserves at the rate of more than $50 billion a month, to support the dollar peg, or devaluing the Yuan which would fuel even greater capital flight, the central bank opted to inject a further round of credit stimulus to ease the immediate pressure. There are no free lunches: further credit expansion pushes China’s economy ever closer to a financial crisis.
We are in for a volatile year. Make that a decade…..
Source: The Stunning Chart Showing Where All The Commodity Gains Have Come From | Zero Hedge
Source: China’s fresh boom nears peak just as amateurs pile in | Ambrose Evans-Pritchard
Sylvain Leduc, Kevin Moran, and Robert J. Vigfusson in the FRBSF Economic Letter:
Why has consumption not responded more to cheap oil? Clearly, the U.S. economy was buffeted by headwinds over the past year, like weak foreign growth and the substantial appreciation of the dollar, that may have masked the positive effects of cheaper oil. Moreover, the decline in gas prices has been more muted than the drop in the price of oil. However, another possible reason is that the impact of changes in oil prices on the economy depends not only on the magnitude of the change, but also on its perceived persistence. Consumer spending is more likely to rise if people believe the decline in oil prices will last for a while; by contrast, if consumers think lower oil prices are not here to stay, they may simply decide to save what they don’t spend at the pump.
Figure 4: Estimated share of permanence in oil price movements
Source: Economic Research | The Elusive Boost from Cheap Oil
From Andrew Batson’s interview with Cai Rang, chairman of the China Iron & Steel Research Institute Group:
China’s current steel production capacity is 1.2 billion tons, but domestic demand cannot completely absorb this capacity. In 2015 China exported about 100 million tons of steel products; this was a relief for domestic capacity but a shock to the international market. Already nine European countries have made antidumping complaints, and Japan, Korea and India have also complained. This shows that our country’s current steel production capacity is not sustainable, and must be genuinely reduced.
Now the relevant departments are drafting the 13th five-year plan for the iron and steel industry, and the preliminary plan is to first cut 200 million tons, and eventually stabilize steel capacity around 700 million tons.
How will a 40 percent cut in Chinese steel production impact on Australian iron ore exports? Not well, I suspect.
Where oil goes, stocks will follow. Crude oil prices are the canary in the coalmine at present. June 2016 Light Crude futures retreated from resistance at $43/barrel. Breach of medium-term support at $38 warns of another test of primary support at $32/barrel. Failure of support at $32 would offer a target of $22/barrel*, while respect of support would suggest that a bottom is forming.
* Target calculation: 32 – ( 42 – 32 ) = 22
The ASX started Monday with an early rally but ran into a spate of selling before the close. ASX 200 follow-through below 5000 would warn of a test of primary support at 4750. Declining 21-day Twiggs Money Flow, below zero, indicates medium-term selling pressure. Failure of primary support would reaffirm the long-term target of 4000*.
* Target calculation: 5000 – ( 6000 – 5000 ) = 4000
