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The fundamentals on the ground Vs the price action



March 14, 2016 – Comments (0) | RELATED TICKERS: FCX , USO

Miners and oil and gas producers have rallied of late, there are some self-help stories such as Anglo American, Freeport McMoran and Glencore that are up over 100% from their recent lows (although the reasons for this groups rise is very varied, from asset sales to debt refinancing)

However there seems to be a real disconnect forming again in the commodities space,  between what the futures curves are saying and analyst expectations.



The oil markets futures curve and the median view from Q3 outwards start to diverge quite considerably, differences in 2017 appear drastic. Is the futures curve missing something?

If you take the supply and demand situation on the ground, the evidence would suggest that the world is awash with oil, to the point we are literally running out of space to store it (Rotterdam the biggest oil storage facility In the world is 96% full), so unless supply falls, this increasing excess will only force oil prices down again, until the market can balance itself as producers whom can’t store it sell at any price or shut in production.

Europe's Biggest Oil Hub Fills as Ship Queue at Seven-Year High

Even when supply does fall there is now a predicted 3 billion barrels of oil in storage (which equates to about 31 days of global demand) to work through which some think could take until 2021 to deplete, leading to the view of lower prices for longer.

So it would maybe be jumping the gun to think that the oil market is in a long term uptrend, but rather exhibiting signs of a short term head fake, a mini cycle of sorts.

If oil remains at the $40 level for a significant amount of time production in the Eagle Ford and Spraberry formations in the US starts to look profitable again and will come back online relatively quickly. This will create a natural ceiling for oil prices unless demand increases or production is cut elsewhere.Various US formations break-evens

Goldman Sachs makes the point that :-

 Commodity markets are physical spot markets, not anticipatory financial markets that are driven by expectations. This is why an early rally in oil prices would prove self-defeating before a real deficit materializes as it would reverse the supply curtailments that are expected to rebalance the market in 2H16…… current oil market is still in a large surplus as witnessed by last week’s large US inventory build and the large global stock overhang. To keep the financial pressure on producers, we maintain our near-term view of a trendless oil market with substantial volatility between $40/bbl (under which creates financial stress) and $20/bbl (under which creates operational stress)”


Other major commodities such as Copper (the bounce in which especially is aiding the recovery of  Anglo American, Freeport McMoran and Glencore) also seems to be trading oddly, in that the world’s biggest producer of the metal Codelco said last week

 Chilean state-owned copper miner Codelco, the world’s top producer of the industrial metal, said Wednesday oversupply is likely to last through this year and next, bringing prices down again to around $2 to $2.10 a pound”

As we can see bullish bets on copper have moderated over the last few days implying that this surge in prices may be short lived as the markets runs ahead of itself.


Iron ore seems to be maybe the worst of the   big   three   commodities, expansion plans from the likes of RIO,BHP,FMG and Vale will still dump millions of extra tonnes of iron ore into the market this year, despite it struggling under an already insurmountable oversupply (one of Vales mines alone will add 90 million tonnes of high quality ore).

According to UBS

“Port Inventory has eased a little from levels at the start of the year, now 98Mt last week +19Mt since Sep-15 & still up from lows of 78.7Mt at end June (bearish). The stabilisation and lift of port stocks likely reflects slowing steel production and better seaborne supply.

Inventory at a sample of mills had lifted to around 29 days of imported iron ore according to Mysteel data which compares to four year average level of 30 days, but has since eased to around 23 days. This may reflect a bit of a restock into Chinese New Year, potentially partially explaining spot’s recent strength. This restock has been more modest though than prior years given tough downstream conditions, tight credit in the steel and iron ore industry and little anxiety of underlying supply shortages, restocking has been more modest this year. Neutral.”

So no real shortage at the ports or mills either.

The futures market is implying that ore prices will fall from $60t to $50t by   October (although without a Chinese stimulus package this could well fall to $42 as it was just a prior week)

China also recently announced that it will take out 150mt of steel capacity from the market (its building boom days seem over   or at least curtailed) which logically implies   that   the   iron ore that would have   been used to   create this steel will no longer be required. w

After Mondays (7/03/16) 19% rally in Iron ore prices (the biggest one day jump on record) on what we expect is the market pricing in a large Chinese stimulus package (after all the jump was mainly on a 190k tonne Rio Tinto tender rather than large volume buying across the board) any near term disappointment from the likes of the ECB or China and the market will quickly back pedal as the futures curve still looks dire for commodity producers.

Morgan Stanley come up with the oddest reason for the spike (although the rise seems to have dumbfounded most industry analysts)

In summary   Iron ore, copper and oil   are   all looking   to varying degrees   oversupplied, these bounces on sentiment   will not help miners or oil producers  longer term.  A s despite cutting back cap-ex heavily, will quite possibly see a continuation of this leg down until we see a reaction from either the supply side, demand side or both.  

There may be a number of mini-cycles in between, but all this will do is prolong the inevitable and keep the marginal producers artificially in business for longer than they should be.

The caveat being ECB QE, an OPEC cut or any stimulus from China (who’s figures are increasingly souring) may prop these prices up in the short term. Speculation on   all or any   of these events will add to price volatility (one reason Glencore is being bid up at present given its more trader than miner, the former which benefits from commodity volatility).

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