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Commodity UpdateGroup Economics
4 September 2013
Oil prices driven by Syria and Fed tapering
Now US support for military action in Syria is no longer
an issue, it seems to be a matter of time before the
actual attack on Syria is a fact. The main question is
what this will do with oil prices.
Graph: Brent and WTI crude prices (in USD/bbl)
Source: Thomson Reuters
We believe that, during the attack, oil prices will find
some support. This is after all the Gulf region where
approximately one third of global oil production takes
place. A test of this year’s high (USD 119.70/bbl) could be
seen and oil prices may even jump above USD 120/bbl for
a short-period of time. Oil production within the region
already dropped significantly within Iraq, Iran and Libya.
This production is replaced by increased production in
Non-OPEC region and Saudi Arabia. So, the contagion
risk will lead to an increased risk premium of several
dollars. Nevertheless, since the US indicated that this will
be a limited strike, which is not meant to depose the
Assad regime, the risks should be short-lived. Our base
case scenario indicates that there will be no escalation
within the region and, as a result, oil production will be
unaffected or only for a limited extent. Therefore, we
expect oil prices to ease in just a few days after a possible
attack, bringing it back to current levels, or even lower. Of
course, in case of escalation – especially towards the
major oil producers like Saudi Arabia, Iraq and Iran – oil
prices could rally much further for a longer period of time.
Again, this is only a risk scenario which we do not believe
it is likely to occur. A lot will also depend on timing. If an
attack takes place ahead of the Fed meeting, focus could
Market sentiment influenced on Syria and US Fed tapering
Oil prices found support from increased tensions in the Middle East region and worries regarding the Fed cutting
back its stimulus measures. A spike in oil prices cannot be excluded if Syria comes under attack. But we believe
this support should be short lived. Going forward, uncertainty will remain over Syria and the US Federal
Reserve’s plans to pull back its quantitative easing measures, which will increase volatility in commodity prices.
The outlook for the international steel sector remains clouded, with weak demand and oversupply.
This week’s numbers
55.7The US ISM Manufacturing PMI came in
at 55.7 (vs 54.0 expected). This is the
highest reading since June 2011. The
outcome suggest that US economic
growth is gaining speed, paving the way
for the Fed to announce tapering of its
stimulus policy.
52.8The Chinese services PMI was released
at a 5-month high of 52.8. The outcome
was well received as it is seen as a
confirmation that a hard landing is being
avoided helped by government
measures.
USD 1,402Gold prices eased from the recent high of
1,433 set on 28 August but remain in a
short term uptrend channel. Gold found
support on worries regarding the Fed
tapering and safe haven demand. We
hold on to our forecast for lower gold
prices into Q4 and 2014.
shift towards the Fed and the awaited announcement of
tapering the stimulus measures. This would certainly
push oil prices lower. If an attack, however, will happen
after the Fed meeting, the immediate impact of the Fed
announcement could be dimmed as investors will
continue to focus at the tensed situation in the Middle
East. In all cases, we expect oil prices to ease in the
medium to longer term based on Fed tapering leading to
higher yields and a stronger USD, in combination with
ongoing global oil overproduction. Therefore, we have
no plans to adjust our oil price forecasts in the near
term, even if Syria does come under attack.
Steel price and raw materials down
The average price for steel (global, hot rolled coil) has
decreased by 20% over the last two years and settled at
USD 579/t on 3 September. Weak sentiment, poor
demand and overcapacity are weighing heavily on the
Graph: Price for steel & raw materials in downtrend
Source: Thomson Reuters Datastream, ABN AMRO
sector. Although the number of transactions is currently
also influenced by seasonal factors, demand volumes by
end-using sectors are still below their pre-crisis levels.
Conditions are especially worrisome in Europe and China,
while the US is performing relatively better. And together
with sluggish steel market conditions, demand for raw
materials (iron ore, coking coal and steel scrap) also
deteriorated and prices decreased accordingly. Since the
start of 2013, however, prices for steel scrap and coking
coal decreased more strongly than the prices of steel and
iron ore. And with steel prices maintaining their current
level and some restocking activity after the summer lull,
raw material suppliers will be able to negotiate price
increases going forward. Longer term, conditions are
expected to remain feeble. Producer discipline is not
forthcoming in China. Steel output in China continues to
increase, despite government announcements that steel
production by small and inefficient mills will be cut. This is
weighing on prices.
US natural gas rallies within downtrend
The rally seen in US natural gas prices has meant that it
has broken out of its downtrend. Since the low set on 8
August, the US Henry Hub 1st contract rallied by more
than 17% to USD 3.67/mmBtu. Hot weather conditions in
the central part of the US, triggering an increased use of
air conditioners, was the main driver. Although stocks are
approximately 7% below last years’ record level, the
current level is still 2% above the 5-year average. While
summer demand will run to its end, winter demand will
come into place. We expect US natural gas prices to
continue to trade higher in the coming months.
Commodity Prices
Group Economics | Commodity Research
Contact information ABN AMRO | Group Economics:Primary area of expertise: Phone: E-mail:
Commodity Research:- Hans van Cleef Energy +31 20 343 46 79 [email protected]
- Casper Burgering Ferrous and Non-ferrous metals +31 20 383 26 93 [email protected]
- Georgette Boele Precious Metals +31 20 629 77 89 [email protected]
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