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COMMODITIES - Supply side will remain key in 2019


The performances of base metals and oil diverged quite significantly in 2018 (oil outperformed the base metal index by more than 30%).

This is almost extraordinary, even in a very volatile world like commodities, however, there are some important and clear reasons for such a dislocation, most of them related to oil movements, and these will likely last into next year.

Base metals suffered as usually happens during dollar appreciation, and because of economic momentum deteriorating thanks to trade war concerns. In addition, the deceleration in overcapacity cuts for base metal producers did not help to underpin those commodities.

November 2018

Novembre 2018

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Oil: short-term pressure on the upside in H1, long-term pressure on the downside in H2

Our target ranges for 2019 are still $65-$75 for WTI and $70-$80 for Brent. Oil prices moved up remarkably by supply disruption concerns in Iran and Venezuela due to Trump restoring sanctions on the former and the political situation in the latter. So far, Iran has cut its oil exports by 0.9 Ml b/d since April, inflating concerns of a global oil shortage. At the same time, actual OPEC oil production is very close to OPEC overall capacity production, and the OPEC production/capacity ratio reached the highest level since 2008. As a result, the oil price is quite vulnerable to supply disruptions as the buffer in production is limited and is not likely to be enough to fill the gap in the case of huge disruptions in the troubled countries (Iran and Venezuela). This is the main reason why oil prices skyrocketed in recent months, reaching above $80 levels for Brent, which is most affected by the Middle East. On top of that, US shale oil producers, after having recovered from 2016’s battering and boosted production, are suffering bottlenecks in their pipelines and in oil transportation and they cannot replace the OPEC gap and rebalance the supply-demand equilibrium in the short run. Supply disruption vulnerability will continue in the coming months and the risk remains on the upside in H119. We do not expect a structural jump to $100 because there are some countries, such as Saudi Arabia in the OPEC cartel and Russia, that are tacitly collaborating and they have margins to boost production in case of need. In the US, shale oil production should revamp in the long run once the sector solves the bottlenecks in pipeline and oil transportation. In fact, the expected scenario is for another 3 Ml b/d to begin repumping in the US shale oil space by the end of 2019 or the beginning of 2020. Therefore, the pressure will shift to the downside in H219, also taking into account the expected demand deceleration in 2020 due to economic cooling

Gold: historical tailwinds and new headwinds will affect prices in 2019

Gold is not overvalued and its high prices are underpinned by secular trends, namely the enormous and increasing amount of debt around the world and the extraordinary central bank balance sheet expansion. In such an environment, gold should still be considered as a meaningful hedge to protect from a financial crisis and it is still perceived as the ultimate safe haven and last resort of global savings. Having said that, recently some headwinds for gold and its hedging efficacy have appeared in the market: not only higher real rates concerns, inflated by expected Fed hikes, which are not usually supportive for gold as it is negatively correlated with them, but also and above all the attempts and plans of China’s administration to replace the US dollar with the Yuan as the safe haven currency, at least in Asian countries. Correlation between gold prices and Yuan spiked to 80% in 2018, suggesting a sort of peg of the Chinese currency to gold as the first step to gaining credibility in the financial markets. Trade war escalation and the recent Renminbi devaluation hurt gold’s performance in recent months, partially offsetting its hedging capacity. Chinese policies will also affect gold next year by limiting the expected upside for gold (the range is 1,300-1,350 for 2019). In the long run gold remains supported by the fact we are in the mature phase of financial markets and the probability of downside risk to the economy increased in 2018; in such a scenario gold has still strong arguments in its favour.

Amundi Research & Investment Insights Unit
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COMMODITIES - Supply side will remain key in 2019
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