Only a few weeks ago the chocolate manufacturers Cadbury’s announced that it was changing the recipe for its Creme Eggs provoking an eggstreme reaction from its British fans. The change – a reduction in the cocoa content from 20% to 14% has been blamed on recent high cocoa prices. This is unlikely to have been the first or indeed the last example of so called ‘shrinkflation’ by manufacturers desperate to sidestep rising commodity costs. So are consumers going to have to get used to less cocoa in their favourite chocolate?
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.
Looking further ahead the market is expected to balance perhaps providing a floor to prices.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.
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.”