OVERVIEW
COMMODITIES OUTLOOK
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Reports of an imminent, and highly effective, vaccine against COVID-19 point to much stronger commodity demand. Once there is more information available on the vaccine, the base forecasts will be reviewed. Other sources of uncertainty, such as the US election, are starting to disappear as well. There has been a dazzling rebound in copper prices, and there are factors such as negative real rates and record levels of negative yielding assets, which could be supportive for gold. in the short term. However, there are signs that the positive surprise from copper is behind us, with some indication of weakness on dips driven by long liquidation for the metal. Gold should have a last leg of rally before the return of normalcy draws a bearish scenario.
Oil: Market looking ahead to normalcy as OPEC+ manages supply dynamically
Uncertainty over the next US president has now almost disappeared. Moreover, since the result of the race has been closer than anticipated, it is unlikely that many of Biden's policies that might have had an impact on oil consumption will come into effect on the short term, such as tax credits for electric vehicles.
Copper: We expect a long
liquidation risk to materialise
Although China demand was the main driver for the copper price rally this year, some of it may be doubtful as genuine consumption as the State Reserve Bureau could be boosting its strategic reserves instead. The build-up of another kind of inventories is becoming noticeable as Chinese bonded stocks increase, which could signal that perceived demand is larger than actual consumption.
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This page contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale, at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of the Societe Generale group. This content has been prepared for use by institutional and professional investors and is not intended for retail investors. Investors should consider this report as only a single factor in making their investment decision.
© Societe Generale 2020
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This page contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale, at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of the Societe Generale group. This content has been prepared for use by institutional and professional investors and is not intended for retail investors. Investors should consider this report as only a single factor in making their investment decision.
© Societe Generale 2020
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Gold: COVID-19 vaccine discovery
is bearish in longer term
Post-election, growing confidence of a Biden win, coupled with a split US congress, has lifted risk sentiment, with the S&P 500 up 9% since the start of November. As the dollar has weakened, gold has rallied with equities. However, over the longer term, we believe that the outcome of the election will have only a limited impact on US fiscal policy. The current ultra-low interest rate and low inflation environment will remain the norm and a principal driver for gold prices in the near term.
Copper: We expect a long
liquidation risk to materialise
The outlook has improved considerably over the last few months and much of the success in reducing the massive volatility and creating the stabilization of prices is down to OPEC+ being extremely effective in managing supply to balance the market. Due to their coordinated and mostly compliant actions, and given our path of economic recovery, we expect demand to continue to normalize in our base case outlook and our call on OPEC to progress steadily higher through 2021. This results in a very moderate increase in prices and we see Brent oil climbing steadily toward $50/bbl by the end of 2021. We feel that if our base scenario (for economic growth of 5% GDP) plays out through 2021 and OPEC+ manages supply effectively, prices should trade in a fairly narrow range. $50/bbl is the OPEC+ target, which is Russia's current comfort level and is intended to keep US shale rigs at bay while stimulating demand growth. We expect the time spread (1m-12m) to gradually become less negative as inventories decline relative to the 5-year average. By 1Q21, we forecast that the time-spread will decline to -5% and to -1% to 2Q21.
Gold: COVID-19 vaccine
discovery is bearish in longer term
Recovery in China helped prices to rally and economic activity and copper demand has been exceptionally strong in China in 2Q20, especially in power infrastructure. Industrial production for June of $521bn reported by the World Bank beat the latest record of December 2019. While the rebound was dazzling, most of the positive surprise is now behind us and this should not continue to significantly support copper prices at these high levels. Indeed, we expect the copper market to witness a surplus in the current year and for it to extend into 2021. This should see the end of the copper rally and bring back prices toward $5,700/t in 2021. In 2022, prices may rise again gradually to $6,200/t as the market switches back to deficit driven by the virus impact fully dissipating, copper demand for investments plans in infrastructure and renewables reaching the physical market and a lack of investments constraining mine supply output.
OPEC compliance with supply cuts has been remarkably high. Provided the supply control is maintained as demand increases, as well as a period of economic recovery and demand restoration, we expect a moderate increase in prices during 2021, with a sharper increase the next year.
Time spread (1m-12m) is expected to gradually become less negative as inventories normalise towards to the 5-year average. It is expected that the time spread will rise slightly above the 5 year historical average on 2021 as the demand depletes inventories, and fall back to the average the year after.
While the rebound in copper prices was dazzling until July, most of the positive surprise is now behind us and the copper market saw some sign of weakness with dips driven by long liquidation. The metal broke above the $7,000/t resistance level in November, $7,000/t is an important psychological level as it played a support role in 2013-14 whereas it represented resistance in the 2017-18 period. Despite two recent long liquidations, one at September-end and the other at October-end, the metal remains extremely overbought according to our OBOS model.
News of a vaccine with over a 90% effectiveness rate sent gold prices down $100/oz on that very day. We have for several months forecast that a return to ‘normalcy’ would be a bearish factor for gold. While we expect prices to jump in the short run, we forecast that by the second half of the year, gold prices will start to decline from record highs.
ACCEPT
Due to the coordinated and mostly compliant actions of OPEC+ members, and given our path of economic recovery, our analysts expect demand to continue to normalize in our base case outlook. This results in a very moderate increase in prices and they see Brent oil climbing steadily by the end of 2021.
If Societe Generale's base scenario (for economic growth of 5% GDP) plays out through 2021 and OPEC+ manages supply effectively, prices should trade in a fairly narrow range. $50/bbl is the OPEC+ target, which is Russia's current comfort level and is intended to keep US shale rigs at bay while stimulating demand growth.
Even before the COVID-19 outbreak, the environment was already advantageous for gold, with a perfect mix for a gold rally: low real interest rates, with the Fed cutting rates three times in 2019, threats to international trade from US-China tensions, and strong physical demand from central banks diversifying their reserves away from the US dollar.
Even before the COVID-19 outbreak, the environment was already advantageous for gold, with a perfect mix for a gold rally: low real interest rates, with the Fed cutting rates three times in 2019, threats to international trade from US-China tensions, and strong physical demand from central banks diversifying their reserves away from the US dollar.
China refined copper imports jumped to a record level since June 2020 and have since stabilised
The long-term decline of China’s copper scrap imports cannot explain the jump in refined copper imports
The path of negative real rates will be a significant driver of the gold price
A strengthening CNY elevates gold