Commodities: Lowered Forecasts, But Still See Q2 Rebound‏

This week we sent out new commodity-price forecasts, see Commodities Forecast Update for details. Overall, our forecasts for Q1 have generally proved too optimistic and we look to revise the level of our forecast profiles lower for most products. However, we still expect to see a peak in commodity markets in Q2, as the underlying cyclical picture continues to improve but much depends on the euro zone: if the ECB goes for a rate cut, Italy remains without a government and/or the debt crisis resurfaces, commodities stand to miss out on the H1 risk recovery altogether. From the summer, conditions stand to deteriorate as an improving supply outlook, softer demand from China and markets eyeing the Fed exit should weigh on the complex.

Oil Forecasts
We have revised our oil-price forecast a little lower in the near term but kept our average 2014 Brent forecast broadly unchanged; we now see Brent averaging USD113/barrel in 2013, down to USD106 in 2014. We think there is scope for oil to head higher in Q2 as geopolitics is set to move back on the market agenda with MENA unrest still omnipresent, Iranian nuclear talks showing little signs of progress, and lately the North- Korean war rhetoric. Further out much will depend on the Saudi response to rising production elsewhere (US/Canada, Brazil, Iraq, etc.) -- we think the cartel will fail to coordinate a supply response and end up leaving the oil market in a surplus for 2013 as a whole which should weigh on prices.

Metals
Also for metals, our forecasts have been lowered. We have revised our metals forecasts lower. Notably, we have to acknowledge that the supply story for copper has evolved rather differently of late than expected just a few months back: global output has surprised markedly on the upside, questioning one of the few bullish commodity cases left in the aftermath of the super-cycle. We no longer project that copper will be able to see a sustained move higher: years of prices above costs for most producers have induced investment in new capacity which is now finally starting to be seen in world production figures. Copper will most likely still be prone to a large degree of volatility as labour strikes, a general decline in ore grades and adverse weather haunt the industry. We now see copper averaging close to USD8,100/MT both this year and the next. For the rest of the base-metals complex, the story remains a little more bearish though: we see aluminium broadly unchanged on the year averaging USD2,065/MT in 2013, but heading lower in 2014 to USD1,990 as cyclical conditions become less supportive and monetary policy less accommodative. Similarly, gold is expected to continue correcting south from current bubble terrain.

Grains
We have revised our grains-price forecasts lower on the better prospects for the southern hemisphere crop this season and a decent start to the northern one (US). The recent normalisation in prices should continue this season albeit some near-term dollar weakness may cap downside in Q2.

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