Commodities: Oil Demand Softens

Commodities currently appear to be torn between strong U.S. figures and the resulting stronger USD. We think an oil rebound is around the corner as the cyclical outlook improves and EUR/USD bounce back but metals could stay sidelined still due to a significant inventory overhang unless China picks up more firmly.

Oil Market Reports: Softer On Demand Across The Board
The International Energy Agency (IEA) this week cut its demand estimates for Q4 12 and Q1 13 and said that its weak overall 2013 projection of 90.6 mb/d would be kept in place due to the recent sluggish activity data from many regions. Separately, in its monthly outlook the US Department of Energy (DOE) said it sees global oil demand at 90.13 mb/d. OPEC held its projection for global demand this year unchanged at 89.67 mb/d this week. On supply, the IEA noted that OPEC production edged higher in February on a continued increase in oil flows from notably Iraq, and Saudi Arabia appears to be looking to ramp up production going forward. While the IEA remains concerned about the ongoing unrest in the Middle East and the North African (MENA) region also beyond Syria, the agency is fairly complacent when it comes to Venezuela. As we wrote in last week’s Commodities Update: Stabilisation but gearing up for a comeback things can really only get better for the Venezuelan oil industry (and thus global oil consumers) after the passing of Chavez. Outside of OPEC, North America remains the bright spot offsetting declines in production in the North Sea and Latin America. Overall, the oil market remains characterised by weak demand growth and decent supply at present although the IEA stresses that the risks attached to turmoil in the MENA area, including the Iranian nuclear issue, should not be dismissed. We still think there is a risk of the oil market being oversupplied for the year as a whole – conditional on no geopolitical events, that is - despite our relatively upbeat activity outlook: supplies are set to surprise on the upside led by the US, Brazil (including biofuels) and Iraq.

Gold: Losing Its Appeal
The sell-off in gold has taken a breather in recent weeks and although we would not rule out a temporary up-tick on a rebound in EUR/USD, on the whole, we think the way forward for gold is south. Some of the key reasons investors had for buying into gold in previous years such as the euro debt crisis, fears of a hard landing in China and the US fiscal cliff are by now, if not gone, then at least not as acute as was the case just one year back. Also, while interest rates are set to stay low for long, markets will soon be looking at pricing an exit for from quantitative easing from the Fed. Couple this with a general improvement in global cyclical conditions without any signs of inflationary pressures (helped by a structural stabilisation in commodity prices) and the reasons for buying into the yellow metal only really exists if one is worried central banks will not manage to exit their unconventional easing schemes in time in avoid inflation. We do not fear such an outcome. Our fair-value model for gold suggests that a reasonable price for the yellow metal at the moment is as low as USD1,250 per troy ounce and that bullion is significantly (in a statistical sense) overbought given current fundamentals.

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