Consumers, Beware Of Higher USD Amid Likely H2 Sell-Off‏

We are no longer looking for a sustained price rebound in Q2, and have taken our oil and metals forecasts for both 2013 and 2014 lower. We now project Brent at USD106 this year on average, and USD99 in 2014, the latter being notably below the forward curve. Commodities should be resilient in coming months with a little help from old friends such as the EUR/USD and global demand, but we see energy, metals and grains alike slightly down in H2. Commodities have less potential to move lower on a faster-than-expected Fed tapering of QE than e.g. equities. This, combined with the risk of a broad-based USD rebound against the EUR and the Scandi currencies materializing later in the year, suggests that consumers should be aware of the risk of higher costs of energy and raw materials in local currency terms despite our call for USD prices of commodities heading lower.

Commodities have stabilized following the April sell-off, but failed to move higher as we projected in April’s Commodities Forecast Update. Prices could move a little higher in Q3 as EUR/USD withstands Fed talk of tapering quantitative easing (QE) and as global demand should stay decent with US in recovery still and China not falling off a cliff growth-wise. But for Q4 we look for stabilisation and some downside heading into 2014. While demand will of course stay key for cyclical developments, rather it is on the supply side things are moving rapidly at present - and it is this (positive supply shock in, not least, oil) that is set to drive prices (lower) in the longer term.

The outlook for market balances has continued to point in a bearish direction, with most markets set for inventory builds this year. At the same time, geopolitics have failed to move oil higher and no immediate threats suggest geopolitical concerns for oil should remain limited. U.S. shale could continue to surprise on the upside, underlining the size of the ongoing oil supply shock (i.e. end of super-cycle story) and OPEC is still likely to overproduce. Although we still see leading indicators pointing to an ongoing recovery in China we have to acknowledge that the economy looks increasingly fragile, albeit not enough to trigger more stimuli from the Chinese authorities. Recent Fed communications hint that the Fed’s current balance-sheet expansion could wear off faster than anticipated. We have for a while been eyeing higher U.S. yields and a stronger USD, but there is a risk that both may arrive earlier than we expected. Such market developments will clearly have repercussions including in the commodities sphere, and could eventually weigh on prices of energy, metals and oil alike.

We have made downward revisions to our forecasts for oil and metals, but revised slightly up on grains. We now see Brent crude averaging USD106/bbl this year, down to USD99 in 2014. We also see base metals lower across the board; copper (previously our favoured long bet) and zinc with the better fundamentals. The gold correction south could go further.

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