Oil prices caught in a vice

Brent oil price volatility during 2013 was at its lowest level since 2006. The minimum closing price for Brent crude in 2013 was $97.69 per barrel on April 17 and the maximum closing price was $118.90 per barrel on February 8, representing a trading range of $21.21 per barrel for the year (see EIA report). As we have discussed before oil prices are caught between oil producers represented by OPEC desperate to stop oil price falling and US shale oil producers who due to the US export ban are unable to capture the full earnings potential of their production, preventing the shale supply shock from being passed down to end consumers in the form of lower oil prices. 2014 is currently following the low volatility trend. Brent crude hit a low of $105.78 per barrel on 4th February before rising to a high of $111.20 per barrel in early March, a trading range of $5.42 per barrel. Iraqi oil output at the highest level since the early 1990′s while the threat of sanctions on Russia and more turmoil in Libya potentially restricting oil supplies appears to be more of the same. Early days!

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Dairy prices set to sour after record prices

According to Rabobank global dairy prices should ease from mid to late Q2 2014 after a year of record prices. Wholesale milk powder (WMP) prices doubled between July 2012 and March 2013 due to drought in New Zealand. The firmness in prices has also reflected “frenetic” buying by China, which “like a dragon that just drinks more when supply improves”, according to Rabobank. Since mid-2013 WMP prices have traded near record levels of around $5,000 – $5,200 per tonne. Over the past month prices fell by 11% to around $4,400 per tonne as concerns that slowdown in the Chinese economy would reduce demand for dairy products, coupled with better supply prospects.

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Source: Global Dairy Trade

Higher prices and higher margins for suppliers are seen to have incentivised higher production volumes. Rabobank expects a 20% increase in supplies available for shipment in the first half of 2014, equivalent to an extra 5bn litres in milk equivalent terms.

Despite on-going drought conditions in many part of New Zealand the final three months of the season (to May 2014) are forecast to see milk production at least 20% to 30% higher than the drought-impacted finish to the 2013 season with exports during 2014 forecast to continue to be at least 10% above 2013 levels.

Rabobank expects European production to rise by 4% in 1H 2014, fuelling a surge in exports. The EU will likely make a substantial contribution to boosting international supply in 2015 when current quotas are eliminated. Supply growth in the US is only expected to show modest growth over 2014, but exports could grow strongly in 1H 2014.

The bank forecast WMP prices falling back from $5,000 per tonne in Q1 2014 to $4,200 a tonne in the first quarter of 2015, down 16% year on year. This will only bring prices back to early 2013 levels so prices are likely to remain high at least by historical standards. According to Rabobank the rate of price reduction will be limited by “structural constraints on suppliers, the need to replenish depleted buyer inventories, and ongoing demand growth in line with a slow economic recovery.”

Related article: Dairy prices to stay near record levels

Copper markets sanguine as Chinese manufacturing slumps to 8 month low

More evidence of slowing demand from China emerged this morning with manufacturing activity dropping to an 8 month low. The HSBC/ Markit flash purchasing managers index (PMI) fell to 48.1 in Mar, down from 48.5 in Feb and against expectations of a bounce in activity to 48.7. Copper futures initially fell on the news before recovery to around $6,490 per tonne on hopes that the recent flurry of bad data from China would spur the authorities into action and introduce further stimulus measures.

However, Bloomberg reports comments from Finance Minister Lou Jiwei suggesting China will focus on quality of growth this year, which means no shotgun stimulus program. Lou added that China will pay more attention to the environment and won’t use  large-scale fiscal stimulus to spur investment in order to reduce overcapacity. Although the Chinese authorities have set a 7.5% growth target for 2014, China’s premier has alluded to a level of flexibility – research from China’s National Development and Reform Commission sees growth at 7% in 2014.

Related article: Chinese demand key to commodity prices in 2014

Nevertheless, concerns about copper demand from China may be overstated according to research from Barclay’s. Demand for copper from the power sector (more than 40% of China’s copper consumption) is expected to rise in 2014, potentially offsetting lower growth in property and infrastructure. According to Barclay’s China’s grid companies invested 40 billion yuan (about $6.4 billion) in the first two months of the year, up 22% year-over-year with China’s main two providers both expecting to invest 13% more than last year.

Related article: Copper price at four year low may be buying opportunity

Chart: Chinese manufacturing activity

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Source: ZeroHedge