 "Crude oil, gold to remain under pressure for some time: Nic Brown")
Nic Brown, head of research at London-based Natixis Commodity Markets Ltd, has advice for Indian companies aspiring to acquire assets or capacities abroad in the segment. Edited excerpts from an interview with Rajesh Bhayani:
Several metals, industrial raw materials, fuels and crude oil prices have fallen significantly in the past couple of quarters. Do you see this as an opportunity for Indian companies to buy global assets in these areas?
Indian companies must tread carefully. Oil prices are not expected to retrace all their recent losses. Any asset whose value is dependent upon elevated oil prices, e.g non-conventional oil such as shale, oil sands, deep-water or arctic fields, might remain unprofitable for an extended period.
Indian companies must tread carefully. Oil prices are not expected to retrace all their recent losses. Any asset whose value is dependent upon elevated oil prices, e.g non-conventional oil such as shale, oil sands, deep-water or arctic fields, might remain unprofitable for an extended period.
Other commodity-related assets might offer more attractive investment opportunities. Where the underlying fundamentals are good, some commodity prices might ultimately benefit, as the positive effects of low oil prices help to boost global demand.
Will the benefits of lower crude oil eventually outweigh the ill-effects?
Lower oil prices represent a major transfer of income from oil producing countries to oil consuming ones. The overall global effect of lower oil prices, therefore, depends upon the net saving and consuming behaviour of oil producers versus consumers, in response to this gain/loss in income. In general, oil producers will save less, while oil consumers will boost consumption of other goods. As a result, you can view the fall in oil prices as a balanced-budget Keynesian stimulus for the global economy as a whole.
Some economies will experience growth in household consumption of non-oil goods and services, e.g the US, Europe. Some countries will benefit, instead, from an improvement in government finances and current account deficits as governments take advantage of low oil prices to reduce energy subsidies and/or raise energy taxes. Those countries keen to accumulate strategic petroleum reserves might view the collapse in oil prices as a golden opportunity to boost these.
These positive forces should boost global economic growth but it would be wrong to ignore the potential downside risks with lower oil prices. Many oil producers, both companies and countries, are dependent upon high prices and we should, therefore, expect to see an increase in bankruptcies and sovereign defaults as a result.
How do you see 2015 for various commodities?
In oil, we expect Brent prices to remain under pressure in the first quarter of 2015. However, as seasonal demand improves from the second quarter and as low oil prices help to stimulate demand and curb investment in new output, we would expect to see some support for oil prices, especially in the latter half of 2015, when these could again rise above $70/bbl. Lower oil prices have already started to have an impact on worldwide investment in oil drilling and capex. We could equally see some of the weaker producing countries defaulting, leading to a slowing in supply as we move into the third quarter, even if Opec’s (the petro exporters cartel) core members do not cut back.
On gold, loose monetary conditions in both Europe and Japan will help weaken these currencies versus the dollar, especially as the Fed approaches its first prospective rate rise. The growing US economy should also help to lift the dollar. As the dollar strengthens, so the need for gold as a safe haven in times of crisis is expected to dissipate. Against this backdrop, we would expect gold prices to remain under downward pressure during the first half of 2015. However, by the time the fixed-income market has fully priced-in prospective US Fed rate hikes, we would expect precious metal prices to have formed a base from which they might begin to recover over the coming years.
In oil, we expect Brent prices to remain under pressure in the first quarter of 2015. However, as seasonal demand improves from the second quarter and as low oil prices help to stimulate demand and curb investment in new output, we would expect to see some support for oil prices, especially in the latter half of 2015, when these could again rise above $70/bbl. Lower oil prices have already started to have an impact on worldwide investment in oil drilling and capex. We could equally see some of the weaker producing countries defaulting, leading to a slowing in supply as we move into the third quarter, even if Opec’s (the petro exporters cartel) core members do not cut back.
On gold, loose monetary conditions in both Europe and Japan will help weaken these currencies versus the dollar, especially as the Fed approaches its first prospective rate rise. The growing US economy should also help to lift the dollar. As the dollar strengthens, so the need for gold as a safe haven in times of crisis is expected to dissipate. Against this backdrop, we would expect gold prices to remain under downward pressure during the first half of 2015. However, by the time the fixed-income market has fully priced-in prospective US Fed rate hikes, we would expect precious metal prices to have formed a base from which they might begin to recover over the coming years.
Metal prices are falling and a bellwether like copper is trading at a multi-year low. Do you think metal prices will rebound during the year? If yes, when and why?
Some industrial metals are enjoying an improvement in underlying fundamentals, either due to strong growth in demand or weakness in supply. These include aluminium and zinc, with the potential for nickel and lead to also benefit. Copper, in contrast, is expected to push into surplus, due to a rapid increase in output of refined metal.
Even with an improvement in fundamentals, negative headwinds will remain. For example, the stronger dollar will inevitably dampen dollar-denominated prices for most commodities. Further, low oil prices reduce the cost of production and transportation for many commodities, suggesting supply will be stronger for any given price. The rebound we expect in industrial metal prices is, therefore, likely to be relatively muted this year.
Some industrial metals are enjoying an improvement in underlying fundamentals, either due to strong growth in demand or weakness in supply. These include aluminium and zinc, with the potential for nickel and lead to also benefit. Copper, in contrast, is expected to push into surplus, due to a rapid increase in output of refined metal.
Even with an improvement in fundamentals, negative headwinds will remain. For example, the stronger dollar will inevitably dampen dollar-denominated prices for most commodities. Further, low oil prices reduce the cost of production and transportation for many commodities, suggesting supply will be stronger for any given price. The rebound we expect in industrial metal prices is, therefore, likely to be relatively muted this year.
The dollar index has strengthened significantly but gold hasn’t weakened to that extent. Either their correlation is breaking or one of these should correct to achieve a 1:1 correlation. What is your reading?
Over the past couple of months, gold prices have remained steady, despite the continued strength of the dollar. We would attribute this to a general perception of higher global risk, with gold playing its traditional role as a safe-haven store of value during times of potential crisis.
Economic challenges in Europe have continued to mount, with the euro dropping to a nine-year low as the European Central Bank contemplates quantitative easing and the market weighs the risks of Greece exiting the euro. In the developing world, the Russian ruble has collapsed, as the economic situation there is expected to deteriorate further in the face of low oil prices and the West’s economic sanctions. A number of other oil producing countries are at risk of default, as well as a wide range of companies that specialise in producing oil from non-conventional sources. Against this backdrop, it is not surprising that gold prices have performed well, despite the strength of the dollar.
Over the past couple of months, gold prices have remained steady, despite the continued strength of the dollar. We would attribute this to a general perception of higher global risk, with gold playing its traditional role as a safe-haven store of value during times of potential crisis.
Economic challenges in Europe have continued to mount, with the euro dropping to a nine-year low as the European Central Bank contemplates quantitative easing and the market weighs the risks of Greece exiting the euro. In the developing world, the Russian ruble has collapsed, as the economic situation there is expected to deteriorate further in the face of low oil prices and the West’s economic sanctions. A number of other oil producing countries are at risk of default, as well as a wide range of companies that specialise in producing oil from non-conventional sources. Against this backdrop, it is not surprising that gold prices have performed well, despite the strength of the dollar.