Lower Libyan output proves supportive
Last week news about the possibility of a rise in Libyan oil output triggered some relief for oil prices. This week, however, oil prices found some support based on the news that strikes pushed Libyan oil production to the lowest level since the 2011 civil war. Currently, Libyan oil production is around 400,000 barrels per day. In June, this was still 1.3 million barrels per day. The lower output does not immediately lead to supply constraints as there is ample supply and Saudi Arabia will be able to meet any shortfall. In total, OPEC produces around 30.5 million barrels of oil per day. Nevertheless, the lower Libyan output does increase worries about possible supply shortages and leads to an increased risk premium based on the spill-over risk. As a result, Brent oil neared USD 110/bbl. Also WTI was trading higher, partly due to Brent support, but also due to another report of lower US crude inventories. This is the fifth drop in weekly inventories in the last six weeks. Nevertheless, the upside in oil prices remains limited as the uncertainty about the timing of Fed easing the pace of its asset purchases continues to hang above the market.
Copper recovery continued
Copper prices at the London Metal Exchange (LME) have risen by 8.5% since the low set at the end of July. Hopes of a stronger than expected demand from China was the main reason for the rally, which pushed all base metals higher. As a result, copper prices traded at a 9-week high. However, also for copper prices, the Fed tapering continues to hang above the market. We believe that the impact of the Fed unwinding will have less impact on base metals, including copper, than for most other commodities. This is because of the cyclical character of copper. As a result of relatively strong economic growth in emerging Asia, demand for industrial metals will remain robust. This will dash the effects of higher yields and a stronger USD. Currently, copper is trading at USD 7’272/tonne, which is below our expected average of USD 7,400/tonne for 2013
Mixed direction in softs
Corn prices dropped to the lowest level since September 2010 on the back of record crop expectations in the US which will point to ample supply next year. Crop expectations are improving due to the favourable weather conditions. As a result, prices of corn were pushed lower, and even more downside is possible due to speculative trading, as the US Department of Agricultural will update its forecast next month (12 September). Wheat traded roughly in line with corn and also continued its downtrend. All other soft commodities traded higher. Cotton, for instance, touched the highest level since mid-March based on worries about the possibility of tight supplies in the US. This, in combination with the cotton buying programme of China, will keep the cotton supplies low.
Low conviction move in gold
Since the Fed has started to sound more dovish clarifying the difference between tapering bond purchases and the start of the hiking cycle, the USD lost ground and gold prices recovered. But the recovery in gold has been volatile, relatively modest and with low conviction. It may become stranger though, if the Fed continues to sound very dovish and the USD falls under heavy pressure. But we believe that this is unlikely. With INR weakness ongoing, gold (priced in INR) will remain expensive. Moreover, recent data show that physical gold demand from China may also be slowing.