Commodities Outlook: Gearing Up For A Comeback‏

In a week during which the ECB held rates steady, so, too, did commodity prices -- at least until the U.S. came out with a strong employment report. Brent oil has for the most part trading in a remarkably narrow range between USD110 and 112 per barrel, copper and aluminium have consolidated their February declines to the 7,750 and 1,975 levels, respectively. Gold is hovering around its newfound 1,580 level but is dropping notably on the back of upbeat non-farm payrolls. With global economic data set to improve further going forward and the large drop in EUR/USD likely to be behind us as the ECB dismisses deposit rate cuts, the selloff in cyclical commodities could soon come to an end, although the U.S. fiscal situation still has the potential to temporarily halt such a move.

Chavez’s Oil Legacy -- Things Can Only Get Better?
Venezuela moved back onto the oil market agenda following President Chavez’s demise early in the week. However, the news of Chavez passing away caused little more than a blip in oil prices. Chavez has presided over an overall decline in the country’s oil production during his 14 years in the post, with most observers claiming the country is now way below its potential in production and exports. Hence, while the president’s death means some degree of political uncertainty going forward as the Venezuelans elect a new leader, the overall reaction seems to have been that for oil producers things can only get better. Venezuela is estimated to hold close to 300 billion bbl of crude in proved reserves and is thus (according to the latest BP Statistical Review) greater than Saudi Arabia in terms of reserves. Production is a different story, however. Chavez largely dispelled foreign oil companies and nationalised the oil industry and there are reserves that are more difficult to extract than those of the average OPEC country and for example, the country’s Orinoco belt, which contains heavy oil that requires specialised production and refining equipment to extract and process. With the state-run oil company, Petroleos de Venezuela (PdVSA), left without the foreign expertise (which has helped Canada accelerate production from, for example, its Alberta tar sands in recent years), production has stagnated. Thus, in the longer run a new regime in Venezuela should increase the likelihood of the country making better use of its resources.

Not-So-Happy New Year For Base Metals
Chinese imports of commodities came in at disappointing levels across products in February (see table next page); in value terms imports declined more than 15% y/y last month whereas exports were in fact quite strong, up more than 20% y/y. Our economists stress, however, that distortions due to the Chinese New Year were significant this year, with not least the import side affected. The average level of seasonally-adjusted imports for January and February as a whole is up 4.9% compared with average monthly imports in Q4 last year. Thus, on balance, the import data is still consistent with a recovery in China. Base metals have seen a fairly dismal performance since the New Year with all gains now more than erased over the past month.

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