Crude Oil News
1 JUL 2014
China fears fuel price slide

Fears of a slowdown in China played a key role in commodity price volatility in the last 12 months, and with supply ≠levels still rising in key commodities such as iron ore, there is widespread agreement prices are past their peaks.

Iron ore and copper, have been hardest hit in the last 12 months, despite strong performances in the first half of the financial year.

The final quarter of the financial year saw iron ore fall to 21-month lows at $US89 ($92). The bulk metal has plummeted 30 per cent this year.

Copper has slumped nearly 6 per cent in the calendar year to $US6945 a tonne.

ìIron ore and copper are mirroring each other to some degree. Theyíre both the two heavy underperformers in the market,î ANZ head of commodities Mark Pervan said.

ìIn the last six months, theyíve both had a negative demand dynamic and a negative supply dynamic.î

BHP Billiton, Rio Tinto and Vale are all chasing record iron ore volumes of 217 million tonnes (220 metric tonnes), 295  million tonnes and 360 million tonnes respectively. The Chinese government is trying to stamp out finance deals where iron ore and copper have been used as collateral because companies have been unable to get finance through traditional lending. ìI think the government is about to start easing up on this tighter monetary backdrop to meet government growth targets,î Mr Pervan said. ìIt wonít be a strong rebound, there will still be a ≠reasonably healthy level of caution for the remainder of this year.î

ìWhere commodity markets have faced additional headwinds has been the tough stance from Chinese government authorities on cracking down on the shadow banking industry,î Mr Pervan said.

ANZ is forecasting an iron ore price of $US114 a tonne by the end of the calendar year, falling to an average of $US100 a tonne next year. The bank forecasts copper to be at $US7200 a tonne at the end of 2014 and up to $US7400 a tonne in 2015.

However, a slump for some metals is not the same for all commodities. Nickel has been one of the strongest performers over the financial year.

Most of its rise can be pinpointed to January 12 when Indonesia banned the exporting of raw materials follo≠wing frustrations with the lack of investment to create jobs and infrastructure from miners.

ìThis time last year there was very little interest in either nickel or nickel equities. That all changed on January 12 this year,î UBS commodities analyst Jo Battershill said.

Indonesia dominates world nickel trade, with around 18 per cent of global supply, according to UBS. The metal has surged 18 per cent in the last quarter alone to $US18,780 a tonne amid global supply concerns.

Oil prices have also surged higher over the last 12 months, with crises in North Africa and more recently in Iraq, sparking concern about global supply. West Texas Intermediate crude oil has jumped just over 8 per cent so far this year to $US105.46 as tensions continue to fester in the Middle East, which accounts for nearly 40 per cent of global production.
ìI think it would be fair to say that the bulk of the price reaction has been speculative drive, given, as we saw over the last few days LME stockpiles finished over 305,000 tonnes, thatís the highest on record,î Mr Battershill said.

ìThe deficit is in the raw material end of the chain. Obviously the market needs to work through the current stockpiles before we start seeing potential deficits in the refined space.î

The price may have run ahead of itself, Mr Battershill said, but any forecasts for the metal will be contingent on how Indonesia moves forward, whether it loosens restrictions and whether miners commit to refining in the country.

ìIraq has risen to become OPECís second biggest producer during the past couple of years during which time supply disruptions from Libya and the embargo against Iran has seen the combined production from these two countries drop by around 2.4 million barrel per day since the Arab Spring began in late 2010,î Saxo Bank head of commodity strategy Ole Sloth Hansen said.

A sharp increase in US oil production in recent years has helped remove some of the concerns surrounding supply disruption in the Middle East and North Africa.

ìIf the current crisis is being maintained at current levels we should probably not look for Brent crude much higher than $US115 per barrel while any realised threat to supplies could see a return to the 2011 and 2012 peaks and possibly beyond.

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