What impact will Euro QE have on commodities?

Following (but not exactly hot on the heels) of the US, UK and Japan, the Euro-zone is finally about to pump billions of Euro’s into their economy in the hope of getting it kick started and avoid the threat of deflation. The size of the monthly bond-buying stimulus, expected to be announced on Thursday, could total as much as €1.1 trillion (£840bn), or €50 billion per month according to reports. So what, if any impact will it have on commodity markets? The first thing to note is that markets have already priced in a very high probability of some form of quantitative easing being announced today. Having said that the size of the stimulus now being thought likely is twice what was originally expected.

La2-euro” by This photo (C) Lars Aronsson – Own work. Licensed under CC SA 1.0 via Wikimedia Commons.

If you look at commodity prices after the introduction of quantitative easing (QE) in the US by the Federal Reserve, they initially jumped as expectations rose that the waving of a magic wand would lead to a return to growth giving a boost to commodity demand. This played out for a while but commodity prices plateaued and then fell as demand growth disappointed.  Indeed a large bout of QE may be seen as a sign of how bad things have got in Europe and do little to revive demand. The key commodity where the impact is likely to be felt is gold. When coupled with the uncertainty over the Greek election this Sunday and other recent events  this could boost demand for gold as a safe haven asset.

The Euro has been under pressure versus the US dollar and is likely to see further weakness if full blown QE is announced. One impact of this will be to increase demand for those commodities that the Euro-zone exports, wheat and barley for example. Commodity buyers in the Euro-zone are also likely to face higher commodity import bills. Despite the recent media attention, in Euro terms commodity prices are actually up by almost 5% over the past year according to The Economist commodity price index.

More on Goldman’s oil price forecast

 Goldman Sachs has warned that WTI crude prices could fall below its 6 month forecast of $39 per barrel (~$43 per barrel for Brent).
To accommodate the substantial expected first half inventory build and using the storage arbitrage to the one-year ahead swap, we are revising down our 3-, 6- and 12-month price forecasts for Brent to $42/bbl, $43/bbl and $70/bbl, respectively, from $80/bbl, $85/bbl and $90/bbl, and for WTI to $41/bbl, $39/bbl and $65/bbl from $70/bbl, $75/bbl and $80/bbl. The later expected trough in WTI prices is due to excess US storage capacity.
Looking further ahead the market is expected to balance perhaps providing a floor to prices.

Once a 2H15 US supply growth slowdown is more certain and given the very high decline rates on US production, renewed Libyan disruptions and an already visible demand response in the US, we expect the market to rebalance with inventories drawing rapidly from 3Q15 onwards.

However, future rallies could be thwarted by the speed at which any lost shale output can recover.

“Shale has fundamentally changed this market…The lead time between when you put money in the ground and when you get production has collapsed from three-to-four years, all the way down to 30 days.”


Related article: Oil price floor now $35-$40 per barrel

Copper bottom: The red metal slides to five and a half year low

Copper prices slumped to the lowest level in five and a half years yesterday (Wednesday), the metal suffering its biggest one day decline for over three years. Three-month copper on the London Metal Exchange fell as much as 6.6% to $5,323 per tonne at one point before settling at $5,552 per tonne.

Analysts have pinned the blame on the actions of Chinese funds aggressively selling copper. A downgrade to global growth for 2015 to 3% and warnings of a hard landing in China providing fuel for the fire.

Although the red metal comes with the nick name Dr Copper, a reference to its perceived status as a bellwether of economic activity the metal has become increasingly driven by demand for its use as collateral in recent years. This means that significant volatility can occur without an apparent strong fundamental reason for the price move.

Indeed, demand from China remains strong for the time being. According to figures from Chinese customs authorities, China imported 420,000 tonnes of copper in December, lifting the 2014 total to a record 4.83 million tonnes, beating the previous record of 4.65 million tonnes in 2012.

At this time of year though physical traders prefer to hold as little inventory as possible this time of year as manufacturing activity usually slows over the forthcoming Chinese Spring holiday (which starts 19th February). Taken together with the negative sentiment that is affecting other commodities the sharp drop is likely to have been an over reaction.

Although there is potential for further weakness in coming weeks the sharp drop in the copper price could be an opportunity for China’s State Reserve Bureau (SRB) to take on more copper reserves providing a floor to prices. More broadly though the sharp drop in the oil price has raised questions about what the longer term cost floor for copper prices is. The drop in the oil price will have reduced costs for copper miners and refiners.

Related article: Is $5,000 per tonne copper’s price floor?