Commodities Retreat after Rallies

ONG Focus | Insights | Written by Oil N' Gold | Fri Nov 05 10 07:23 ET

Commodities pulled back in European session ahead of US employment report. Recent rallies have also spurred profit-taking. The front-month contract for WTI crude oil price surged to a 2-year high of 87.22 before easing to 86.4. Its outlook remains firm as demand should recover as the US resumed growth. Gold price rose to as high as 1394.4, a few steps below psychological level of 1400, before retreating to 1383. Others in the precious metal complex also pulled back modestly but stayed elevated in multi-year highs.

The OPEC raised its oil demand forecasts for 2014 to 89.9M bpd, up +5.15% from 2010. This also represents a +0.8M bpd revision from last year's projection. Major growth driver will be in non-OECD countries, especially Asia. Indeed, OECD oil demand will ‘fall slightly over the medium-term, with demand having peaked in 2005. Over two-thirds of growth in developing countries will come from developing Asia, with China seeing the largest expansion'. Meanwhile, the cartel trimmed demand for its output by -0.9M bpd as ‘non-crude forms of liquid supply will play in satisfying demand'. Despite the cut, the world still needs 30.6M bpd of OPEC's output in 2014, signaling the need to increase production from current level.

Base metal prices have been boosted by Fed's QE and weakness in USD. Copper surged to a 28-month high above 8700 in European session as workers at Collahuasi mine, the world's third largest copper producer, plan to start a strike after wage negotiations failed.
Recent improvement in TC/RC (treatment and refining charges) has triggered speculations about an increase in mining output. Yet, according to mine data provided major producers, supply changed little in 3Q10 from previous months. Indeed, the International Copper Study Group (ICSG) forecasts global copper concentrate output capacity will expand by less than 2.5M metric tons between 2010 and 2013. Recent price rally might have induced scrap supply but the amount is not significant enough to result in the rise in TC/RC. On the demand side of the equation, closure of smelters is probably a reason. Take China as an example, some smelters in Yunnan Copper and Jiangxi Copper will be shut down for maintenance by the end of the year. Moreover, destocking is usually taken place towards the end of the year. Therefore, we believe the rise of TC/RC is only affected temporarily by seasonal factors. This should not be treated as a sign of increase in copper supply.

Apart from the October employment report, the US will report pending home sales which probably grew +3% m/m in September, easing from +4.3% a month ago.

 

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