Commodities Outlook 4Q18

More questions than answers

Barnabas Gan
Economist
Global Treasury Research & Strategy
October 2018

1
Oil: Fundamentals does not support higher prices
• The rally in energy prices continued into end 3Q18, given potential supply shocks
emanating especially from Iranian sanctions amid OPEC’s reluctance to lift production in
response. Moreover, Saudi Arabia’s rhetoric to stay “content” should prices at $80/bbl or
higher could have given investors a price target.
• Fundamentals however are painting a different environment: OPEC’s oil production
since May 2018 when Iranian sanctions were announced were decisively higher, with
higher supplies seen from Saudi Arabia, Russia and Iraq. The upside in oil production
have in fact outweighed the lower production seen in Iran and Venezuela.
• Demand trend from oil importing economies were also slower in the first seven-
eight months of 2018. This suggest that the rosy economic environment seen in 2017
has somewhat dissipated into 2018. Downside risks to economic growth remains to be
US-Sino trade tension, Brexit risks into March 2019, and the ongoing flattening yield
curve in the USTs.
• Incoming oil inventory data is a mixed-bag: US crude oil inventories tuned below its 5-
year average to its lowest since Feb 2015 even as production climbed into Sept 2018.
However, floating oil inventories continue to sideline into 2018.
• Outlook remains bearish for now: Global oil production remains flushed given OPEC’s
pledge to pump an extra 1 million barrels a day of crude oil to fill production shortfall
created by the economic issues in Venezuela and sanctions against Iran. WTI and Brent
f/c at $70/bbl and $80/bbl, respectively.

2
Imperative to pinpoint the right drivers
• Street talks over further oil supply shortfall from Iranian shores starting 1st
November when US sanctions are effective amid further risk-taking appetite are key
drivers that are lifting energy prices. Note that several Asian economies including South
Korea, India and Japan have since ceased their Iranian oil imports to-date.
• The drivers in question have clear implications for crude oil’s fundamentals. Iran’s
crude oil production accounts for roughly 12% of total OPEC oil production, and is the
third largest producer in the OPEC cartel. Since the US decision to place Iran under
sanctions in May 2018, Iranian crude oil production has fallen by 300,000 barrels per day
(bpd) into August 2018. Compare this with Iran’s fall in production by 1.3 million bpd back
in 2010 – 2013 during the previous US-led sanctions may lead one to believe that further
production shortfalls can be expected into 2019.
A brief history of oil prices
• Higher oil prices may also be 140 Lehman Cushing
Onset of
Crisis Glut
attributed to stronger risk- 120 shale oil and
oversupplies
taking. US stocks across the 100 OPEC deal
key indices have rallied into 80
to cut
Peripheral production
10M18, with DJIA, S&P and 60 Eurozone
Concerns
Nasdaq touching its record 40 Wall
highs. US-centric economic 20 Street
rally
prints remain rosy to-date amid 0
Mar-08

Mar-15
Aug-14
Oct-08

Dec-09

Dec-16
May-09

Apr-12
Nov-12

May-16
Sep-11

Jun-13

Oct-15
Jan-14

Jul-17

Sep-18
Jul-10
Feb-11

Feb-18
central bank rhetoric seen in the
past week.
WTI Brent
Source: CEIC, Bloomberg, OCBC Bank
3
 The truth about fundamentals
• Crude oil fundamentals have so far been Oil fundamentals
Demand - Supply
roughly balanced, while global supply 3.0
growth outpacing demand for six 2.5

million barrels per day

2.0
consecutive months into August 2018.
1.5
• Supply glut in 2014 has narrowed 1.0
0.5
substantially into a mild under-supply 0.0
scenario in the 12 months leading to April -0.5
2018 before a balance seen to-date. -1.0
-1.5
•

Apr-15
Global inventories did fall marginally in

Apr-14

Apr-16

Apr-17

Apr-18
Oct-14

Oct-15

Oct-16

Oct-17
Jan-14

Jan-15

Jan-16

Jul-16

Jan-17

Jan-18
Jul-14

Jul-15

Jul-17

Jul-18
1H18 given supply shortage, though stocks
are expected to stabilise into 2019
Global Oil demand and supply Inventories appear adequate, little risk of
350 undersupply
100 300

(million barrels)
95 250
mbpd

90 200

150
85
100
80
Aug-10

Mar-15
Aug-15
Dec-13
Apr-12

May-14

Apr-17
Jun-11

Oct-14

Jun-16
Jan-11

Nov-11

Jul-13

Jan-16

Nov-16
Sep-12
Feb-13

Sep-17
Feb-18
Jul-18
2014

2017
2006

2007

2008

2009

2010

2011

2012

2013

2015

2016

2018

Global Oil Product Demand Global Oil Product Supply Global Crude Oil Global Refined Oil

Source: CEIC, Bloomberg, OCBC Bank

4
 The misnomer on falling US inventories
• On the surface, US crude oil inventories US crude oil net-imports fell into 2018
fell below its 5-year moving average, and 10000 (10-weeks moving average) 3000
9500
is at its lowest since early 2015. 9000 2500

1000 barrels/day
8500
• Delving into the details, note that crude oil 8000
2000

exports has increased into 8M18, leading 7500 1500

7000
net-imports to its record low over the 10- 6500 1000
6000 500
week moving average since data was made 5500
transparent since July 2010. 5000 0

Jan-14
Jan-11

Jan-12

Jan-13

Jan-15

Jan-16

Jan-17

Jan-18
Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18
• Note that refinery utilization rates hit its
1997 high of 98.1% in August 2018 Crude Oil Oil Products (RHS)

US Oil production and exports US crude oil inventories tuned higher as

8000 (10 week moving-average) 12000 production picked up
550

Crude Oil Prod - 1000 barrels/day

Exports - 1000 barrels/day

11000

million barrels
6000 10000 500
9000
4000
8000 450
2000 7000
6000 400
0 5000
350
Apr-11

Apr-14
Apr-12

Apr-13

Apr-15

Apr-16

Apr-17

Apr-18
Oct-17
Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

300
Jan-13
May-13

May-14

May-15

May-16

May-17

May-18
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18
Sep-13

Sep-17
Sep-12

Sep-14

Sep-15

Sep-16

Sep-18
Crude Oil Exports Finished Motor Gasoline Exports
Kerosene-type Jet Fuel Exports Distillate Fuel Exports
Residual Fuel Oil Exports Propane/Propylene Exports
Other Oils Exports Crude Oil Production (RHS) DOE US Crude Oil Inventories 5-year average

Source: CEIC, Bloomberg, OCBC Bank

5
 US supplies to climb into 2019
• There remains upside risk in US
shale oil production and overall strong
US oil supplies at 11.0 million bpd
(highest on record) as of Sept 2018 and
will average 11.5 million bpd into 2019
according to EIA’s estimate will surely
inject further upside supply risks.
• Note US oil production surpassed
Saudi Arabia, and is the second largest
oil producer globally.
US oil rig count climbs into 2018 US Shale Oil Production
8,000
2000 120 Others
1800 7,000
100 Utica
1600
6,000
No. of oil rigs

1400 80 Haynesville
1200 $/bbl 5,000 Anadarko
1000 60 Anadarko
kbpd 4,000
800 Permian Marcellus
600 40
3,000
400 20 Niobrara Permian
200 2,000
0 0 Eagle Ford Niobrara
1,000
Aug-13
Aug-11

Aug-12

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18
Feb-16
Feb-11

Feb-12

Feb-13

Feb-14

Feb-15

Feb-17

Feb-18

Bakken Eagle Ford

0
Bakken

May-17
May-15

May-16

May-18
Aug-15
Nov-15

Aug-16
Nov-16

Aug-17
Nov-17

Aug-18
Feb-16

Feb-17

Feb-18
Shale Gas & Tight Oil Rigs Conventional Rigs WTI (RHS)

Source: CEIC, Bloomberg, OCBC Bank

6
OPEC’s recent production gains since May 2018
has effectively offset Iranian’s oil shortage
Oil production since May 2018
600
thousand barrels per day

500
+1.37 mbpd -0.67 mbpd
400
300
200
100
0
-100
-200
-300
-400
UAE

Nigeria
Qatar

Libya
Iraq

Algeria

Iran
Kuwait
Saudi Arabia

Russia

Gabon
Ecuador

Angola

Venezuela
Source: CEIC, Bloomberg, OCBC Bank
7
 Will OPEC continue to flex its muscles? Maybe!
Brent %chg
• The OPEC cartel and its production adjustments since 2017 have been
guiding oil prices. Back in January 2017, the cartel decided to reduce its +77.2%
production by around 1.2 million barrels per day to 32.5 million barrels.
• In June 2018, OPEC cited its decision to increase oil production to bring -10.9%
compliance back to 100%.
• In Sept 2018, OPEC commented that the crude oil market is well supplied +6.8%
and there is no more need for further production increase.

OPEC oil production edging higher OPEC's compliance levels continue to fall into
33.2

34
33.1

Aug 2018
33.0

32.8

165%
161%
159%
32.7

33 -2600

147%
million barrels per day

32.6

139%

thousand barrels per day

180% -2400

129%
32.5
32.5

120%

114%
111%
-2200

106%
103%
32.3

32.3

102%
150%
32.2

33 -2000
32.1

86%
32.0

120% -1800

73%
72%
31.9
31.9

65%

63%
61%
60%
58%
90% -1600
32 -1400
60% -1200
30% -1000
32 -800
0% Jan-17

Jan-18
May-17

Jul-17

Jul-18
May-18
Mar-17

Mar-18
Nov-17
Sep-17
31
Mar-…
Nov-…

May-…
Jan-18
Jul-17

Jul-18
Apr-18
Dec-17
Aug-17
Jun-17

Oct-17

Aug-18
Jun-18
Sep-17

Feb-18

Compliance Rate Production cut from reference levels (RHS)

Source: CEIC, Bloomberg, OCBC Bank

8
 Demand story: Not so supportive so far Vietnam
• The flipside of the coin yields a rather Oil imports in Asia 0.9%
Thailand Philippines
lackluster import pace since early 2018. 3.7% 1.0%
While global oil imports (led especially by the Malaysia
0.6%
US and Asia) rose rapidly into most of 2017, it Korea China
Indonesia 12.4%
did serve as a high base into 2018. 3.8%
32.7%

• More importantly, import growth seen in US, Taiwan

8.4%
EU28 and Asia-Pacific effectively contracted HK
into the first seven months of 2018, while 1.8% Japan
14.6% India
imports led by India and China rose over the 20.0%
same period.
40%
20%
Oil import growth slowed for most economies
30%
15%
20% 10%
10% India 5%
China 0%
0%
Asiapac -5%
-10% -10%
EU28
-20% US -15%
-20%
-30%

Australia
India

Korea
EU28

Hong Kong

Indonesia
US

China
UK
Singapore

New Zealand

Taiwan
Japan

Philippines
Thailand
Mar/2017

Mar/2018
May/2017

May/2018
Jan/2017

Jul/2017

Jan/2018
Sep/2017

Nov/2017

Jul/2018

EU28 China India US Asia Pacific 7M18 2017

Source: CEIC, Bloomberg, OCBC Bank

9
 Demand story: Not so supportive so far Vietnam
• The flipside of the coin yields a rather Oil imports in Asia 0.9%
Thailand Philippines
lackluster import pace since early 2018. 3.7% 1.0%
While global oil imports (led especially by the Malaysia
0.6%
US and Asia) rose rapidly into most of 2017, it Korea China
Indonesia 12.4%
did serve as a high base into 2018. 3.8%
32.7%

• More importantly, import growth seen in US, Taiwan

8.4%
EU28 and Asia-Pacific effectively contracted HK
into the first seven months of 2018, while 1.8% Japan
14.6% India
imports led by India and China rose over the 20.0%
same period.
40%
20%
Oil import growth slowed for most economies
30%
15%
20% 10%
10% India 5%
China 0%
0%
Asiapac -5%
-10% -10%
EU28
-20% US -15%
-20%
-30%

Australia
India

Korea
EU28

Hong Kong

Indonesia
US

China
UK
Singapore

New Zealand

Taiwan
Japan

Philippines
Thailand
Mar/2017

Mar/2018
May/2017

May/2018
Jan/2017

Jul/2017

Jan/2018
Sep/2017

Nov/2017

Jul/2018

EU28 China India US Asia Pacific 7M18 2017

Source: CEIC, Bloomberg, OCBC Bank

10
 Further escalation of US-Sino trade tension to
World's largest consumer of oil
drag oil demand lower (12 months into Dec 2017) 25
20

million barrels per day

• US and China are the world’s largest 20

consumer of oil, and accounted for 1/3 of 15 12

total consumption in 2017. 10

• Crude oil remains to be a growth- 5

4 4 4 3 3 2 2 2
related commodity, which in turn could 0
see declines in import and consumption

Japan

Canada
India
China

Saudi Arabia

Brazil
US

Russia

Germany
South Korea
from the largest two consumers should the
trade war drags into 2019.
US imports across products 824
China imports across products
1200 1,054 900
1000
(12 months to July 2018) 800 (12 months to July 2018)
700
800 663 600
USD bn

USD bn
600 500
400 296 293 270
400 245 218 300 213
200 111 200 62
36 26 7 100 8 8
0 0
Chemicals

Chemicals

Live Animals
Mineral Fuels

Animal/Veg Oils

Mineral Fuels

Animal/Veg Oils
Beverage & Tobacco

Beverage & Tobacco

Machinery & Transport

Machinery & Transport

Crude Materials, (ex-

Crude Materials, (ex-

Food and Live Animals
Manufuctured Goods

Manufuctured Goods
energy)

energy)
Source: EIA, CEIC, Bloomberg, OCBC Bank
Oil includes crude oil, all other petroleum liquids, and biofuels. 11
Investors’ confidence to lead prices henceforth?
CFTC net-positions continue to point south to-date
Net-long positions fell into 1H18
750 120
Thousands

550 100

350 80

$/bbl
150 60

-50 40

-250 20
Dec-10

Jun-16

Jun-17

Jun-18
Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17
Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Net non-commercial positions WTI (RHS)

Source: CEIC, Bloomberg, OCBC Bank

12
Gold: Slaved to the dollar
• To understand gold, one must understand its characteristic. Traditionally, gold is
perceived to be a safe haven against uncertainty. It is also an hedge against currency
movements and inflation. As such, gold prices are usually higher during times of
economic stress, and/or during surging inflation environments.
• Gold is also a quasi-FX asset, meaning that it fluctuates in relation to dollar
movements. With the dollar rallying over 9.0% in 2018, gold declined over 14% in
response. VIX movements since March 2018 has also correlated with gold movements,
suggesting that risk-taking dragged gold prices as well.
• ETF holdings are also an important parameter to gauge gold demand. Paper gold
demand, in the form of ETF holdings, has been declining in tandem with lower prices.
Elsewhere, physical demand in India and China declined into the first seven-eight months
of 2018 as well, reinforcing the decline in gold prices.
• A dichotomy can be seen however between UST yields and gold prices, suggesting
some market imbalance in the horizon. Notably, the flattening yield curve, usually a sign
of market stress, is not accompanied by higher gold prices at this juncture.
• The economic backdrop into 2019 amid dollar movement then will be key
determinants for gold. To-date, while fundamentals stay relatively supportive, further
intensification of the US-Sino trade tensions, flattening yield curve and Brexit risks could
bring gold higher into the next year.

13
Where dollar go, gold goes
Gold-DXY correlation remains water-tight
1450 88
1400 90
1350 92
1300 94

(Inverted)
1250
$/oz

96
1200 98
1150 100
1100
102
1050
104
1000
May-16

May-18
Mar-16

Mar-17
May-17

Mar-18
Sep-17
Jan-16

Nov-16
Jan-17

Nov-17
Jan-18
Jul-16
Sep-16

Jul-17

Jul-18
Sep-18
Gold Futures US Dollar Index (RHS-Inverted)

Source: CEIC, Bloomberg, OCBC Bank

14
Risk-taking appetite dulls gold as an investment
VIX, or better known as the fear index, fell in
tandem with gold prices
35
1,800
30
1,600
25
1,400 20
1,200 15
1,000 10
Jan-13

Jan-15
Jan-10

Jan-11

Jan-12

Jan-14

Jul-15
Jan-16

Jan-17

Jan-18
Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-16

Jul-17

Jul-18
Gold Futures $/oz VIX Absolute (2m lead, 3mma, RHS)

Source: CEIC, Bloomberg, OCBC Bank

15
Rate hikes can drag gold lower given the yellow
metal’s zero-interest yielding characteristic
Bank of England Bank Indonesia
0.8 6
0.7 5.8
5.6
0.6
5.4
0.5 5.2
0.4 5
%

%
0.3 4.8
4.6
0.2
4.4
0.1 4.2
0 4
Mar-17

Mar-18

Mar-17

Mar-18
Jan-17

May-17

May-18

Jan-17

May-17

May-18
Jul-17

Nov-17

Jan-18

Jul-17

Nov-17

Jan-18
Sep-17

Jul-18

Sep-18

Sep-17

Jul-18

Sep-18
OCBC Fed Funds Rate Outlook: Bank Negara Malaysia
3.3
Three more hikes into 2019?
3.25
3.5% 3.25%
3.2
A total of four hikes are
3.0% expected in 2018 3.15
2.50% 3.1
2.5% 2.25%
%
2.00% 3.05
2.0% 1.75% 3
1.50%
2.95
1.5%
2.9
1.0% 0.75% 2.85
Mar-17

Mar-18
May-17

May-18
Jan-17

Nov-17

Jan-18
Jul-17

Sep-17

Jul-18

Sep-18
0.5%
2016 2017 1Q18 2Q18 3Q18 4Q18 2019

Source: CEIC, Bloomberg, OCBC Bank

16
No surprise that paper gold demand faded

Gold ETF demand faltered into August 2018

1500 75

Millions
1450
1400 70
1350 65
1300
60
$/oz

1250
1200 55
1150 50
1100
1050 45
1000 40
Nov-13
Mar-14

Mar-15
Jul-15

Mar-16

Mar-17

Mar-18
Jul-13

Jul-14
Nov-14

Nov-15

Jul-16
Nov-16

Jul-17
Nov-17

Jul-18
Total Known ETF Holdings (RHS) Gold Futures
Source: CEIC, Bloomberg, OCBC Bank
17
 Physical demand was weak as well
India gold imports fared lower in 2018 Chinese gold imports from Hong Kong

1,200
1,600
1,071 1,483

1,000 971 975 1,400

955
889
835 1,200
787 1,080
800
992
1,000 938
615
tonnes

tonnes
587 788
600 800
535 717

600
400 494

385 399
400

200
200
112

0
0

2015
2010

2011

2012

2013

2014

2016

2017

7M17

8M18
2013
2010

2011

2012

2014

2015

2016

2017

8M17

8M18

Source: CEIC, Bloomberg, OCBC Bank

18
Caveat? Rise in safe haven demand!
US Treasury yield spread narrows even asgold
1,450 prices fell 18
1,400
38
1,350

basis points
1,300 58
1,250
78
1,200
1,150 98
1,100 118
1,050
1,000 May-17 138

May-18
May-16
Jan-16

Jan-17

Jan-18
Jul-16

Jul-17

Jul-18
Mar-18
Mar-16

Mar-17
Nov-16

Nov-17
Sep-16

Sep-17

Sep-18
Gold Futures $/oz US 2-10 yield spread (Inversed - RHS)

Source: CEIC, Bloomberg, OCBC Bank

19
Caveat? Rise in safe haven demand!

S&P Index

A flattening yield curve,

which resulted in an
inverted curve into 2005
– 2007 was likely a
precursor for the 2008/9
GFC

UST 10 – 2
yields

Source: Bloomberg
20
The picture now…

S&P Index

UST 10 – 2
yields

Source: Bloomberg
21
 OCBC Commodity Forecast into 2019
Updated as of Oct 5, 2018 2018 2019

3y AVG Spot Q1 Q2 Q3 Q4F Q1F Q2F Q3F Q4F

Energy

WTI ($/bbl) 47.1 75.2 62.9 67.9 69.4 70.0 68.8 67.5 66.3 65.0
Brent ($/bbl) 50.7 84.8 67.2 75.0 75.8 80.0 73.8 72.5 71.3 70.0
Gasoline ($/gallon) 1.53 2.13 1.86 2.11 2.06 2.12 2.14 2.19 2.09 1.98
Natural Gas ($/mmbtu) 2.68 3.17 2.85 2.83 2.87 3.20 3.19 2.96 3.02 2.97

Precious Metals

Gold ($/oz) 1210.4 1,207 1,331 1,309 1,217 1,200 1,225 1,250 1,275 1,300
Silver ($/oz) 16.5 14.7 16.7 16.6 15.0 14.8 14.8 15.1 15.3 15.5
Platinum ($/oz) 994 834 981 907 815 805 825 809 813 812
Palladium ($/oz) 722 1,051 1,026 972 943 923 919 937 1,019 1,104

Base Metals

Copper ($/MT) 5,523 6,280 6,997 6,998 6,999 6,500 6,375 6,250 6,125 6,000
Tin ($/MT) 17,764 18,960 21,151 20,912 19,326 18,571 18,236 17,762 16,917 16,458
Nickel ($/MT) 10,630 12,436 13,277 14,488 13,275 12,264 11,943 11,705 11,394 11,094
Zinc ($/MT) 2,265 2,665 3,390 3,104 2,520 2,321 2,352 2,275 2,119 2,066
Aluminum ($/MT) 1,737 2,118 2,160 2,262 2,066 2,100 1,946 1,975 1,850 1,801

Asian Commodities

Crude Palm Oil (MYR/MT) 2,523 2,160 2,491 2,390 2,218 2,400 2,463 2,525 2,588 2,650
Source:
Historical Data - Bloomberg
Forecasts - OCBC Bank
Data reflects average price

23
Thank You

24