Prospects for Demand Remain Favourable - Desjardins* International Energy Agency (IEA) outlook based on stable production by Organization of the Petroleum Exporting Countries (OPEC)

COMMODITY TRENDS

François Dupuis, Vice-President and Chief Economist • Carine Bergevin-Chammah, Economist • Mathieu D’Anjou, Senior Economist

Desjardins, Economic Studies: 514-281-2336 or 1 866-866-7000, ext. 5552336 • [email protected] • desjardins.com/economics

NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2018, Desjardins Group. All rights reserved.

CONTENTSEditorial ............................................................. 1Energy ............................................................... 2

Base Metals ....................................................... 4Precious Metals ................................................. 6

Other Commodities ........................................... 7Tables ................................................................ 8

After a roaring start to 2018, commodities prices have pulled back somewhat since the beginning of February. This initially seemed to reflect the sudden correction on stock markets, as demonstrated by the strong correlation between oil prices and the U.S. stock market (graph 1). As soon as some calm was restored on the markets, commodity prices erased a good chunk of the declines suffered in early February. However, concerns about a trade war also exerted some downside pressures on industrial resource prices in the last few weeks.

A slight drop in commodity prices is not worrisome after the price surge seen in the second half of 2017. The economic environment is still very favourable to the demand for industrial resources, justifying relatively high prices, but the supply could also adjust following the price surge seen in the last few quarters. The spectacular growth in U.S. oil output clearly illustrates this point (graph 2). We are far from the situation that prevailed in the early 2000s when the substantial surge in demand from China led to a genuine shortage of commodities. The most recent events confirm our expectations of relatively modest price advances for resources in 2018, despite the upbeat economic environment. We will also have to keep a close eye on the risks of a trade war.

François Dupuis, Vice-President and Chief Economist

Mathieu D’Anjou, CFA, Senior Economist

Prospects for Demand Remain Favourable

ECONOMIC STUDIES | MARCH 21ST, 2018

GRAPH 1 Falling oil prices in early February pushed oil prices down temporarily

* Average price of WTI (West Texas Intermediate) and Brent. Sources: Datastream and Desjardins, Economic Studies

40

45

50

55

60

65

70

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

JAN. APR. JUL. OCT. JAN.

S&P 500 (left)Crude oil prices* (right)

2018

Index US$/barrel

2017

GRAPH 2 Climbing prices have already given U.S. oil output a big boost

WTI: West Texas Intermediate Sources: Datastream, Energy Information Administration and Desjardins, Economic Studies

Millions of barrels/day

20

40

60

80

100

120

6.57.07.58.08.59.09.5

10.010.511.0

2013 2014 2015 2016 2017 2018

Crude oil production (left) Price of WTI oil (right)

US$/barrel

United States

#1 BEST OVERALLFORECASTER - CANADA

http://desjardins.com/economics

ECONOMIC STUDIES

2MARCH 2018 | COMMODITY TRENDS

OIL

Oil prices erased their gains of the start of 2018, but they remain high compared with the last few years. Prices for a barrel of Brent and WTI have narrowed, with recent prices reaching close to US$65 and US$61, respectively. The problems related to limited pipeline capacities in Cushing were resolved when the Diamond pipeline opened in December. That said, these problems have yet to be resolved in Western Canada, which is dealing with the difficulties of transporting oil to U.S. ports and refineries. This has pushed the price of a barrel of WCS (Western Canada Select) further away from the cost of a barrel of Brent to about US$35 a barrel (graph 3).

The recent drop in oil prices appeared to be tied to the stock market correction, rather than a fundamental change. In fact, the oil market recently settled back to equilibrium. The inventories in member countries of the Organisation for Economic Co-operation and Development (OECD) have declined—settling at only 1.4% above their five-year average in February, the smallest difference since 2014. The sustained demand for oil and OPEC’s compliance to its output reduction objective helped offset the record level of U.S. production—close to 10.4 million barrels per day. However, production in OPEC countries needs to be watched closely; the growth in U.S. exports could tempt them

to try to win back market shares. OPEC’s objective to slash total output by 1.8 million barrels of oil per day is scheduled to be reviewed next June. If this objective is dropped, the market could be awash in a surplus of oil.

It should be noted that OPEC’s strict compliance with its objective is also hiding some problems. Iraq’s production remains volatile, given the ongoing conflict with the Kurds. Moreover, cuts to Venezuela’s oil output have accelerated in the last two years; it marked the biggest decrease in January after Saudi Arabia. The political and economic crisis in Venezuela, which started in 2016, has plunged the country into poverty and instability. Insufficient investment, a lack of qualified labour and the financial difficulties of the State-owned oil company reduced production capacity and the quality of Venezuela’s crude oil. The Energy Information Agency (EIA) expects the plunge in Venezuela’s output to continue at least until the end of 2019.

In the United States, the International Energy Agency (IEA) estimates that the increase in U.S. oil output should outpace demand growth in 2018. That said, the oil market should remain balanced throughout the year, if OPEC sticks to its agreement (graph 4). In our view, OPEC should abide by its cooperative

EnergyBack to a Balanced Oil Market

FORECASTSThe oil market should be balanced in 2018, with U.S. production growth offsetting growth in global demand. The production slowdown ordered by the Organization of the Petroleum Exporting Countries (OPEC) also acted as a moderator on the market. This leads us to forecast an average price of US$60 for a barrel of WTI (West Texas Intermediate) in 2018. The ongoing weakness in natural gas prices does not appear to reflect the sharp drop in inventories, but gradually climbing prices in recent weeks confirm our forecasts of a slight price hike.

GRAPH 3 Pipeline issues in Canada are penalizing the price of WCS

WTI: West Texas Intermediate; WCS: Western Canada Select Sources: Datastream, Bloomberg and Desjardins, Economic Studies

Oil prices

10

20

30

40

50

60

70

2015 2016 2017 2018

WTI Brent WCS

US$/barrel

GRAPH 4 The global oil market set to remain relatively balanced in 2018

* International Energy Agency (IEA) outlook based on stable production by Organization of the Petroleum Exporting Countries (OPEC). Sources: IEA and Desjardins, Economic Studies

88

90

92

94

96

98

100

-1.5-1.0-0.50.00.51.01.52.0

2012 2013 2014 2015 2016 2017 2018

Surplus or deficit (left) Global consumption (right) Global production (right)

Millions of barrels/day Millions of barrels/day

Forecasts*


ECONOMIC STUDIES

agreement; producing less oil at a higher price is more profitable for them than flooding the market (graph 5).

Some upside risk could weigh in the medium term, if demand remains this strong. The bulk of the oil industry’s investments involved shale oil. Exploration investments for shale oil however have been trimmed and may not be enough to replace maturing oilfields.

GASOLINE

Gas has been spared the volatility affecting oil prices in the last few weeks. Prices in the United States are up slightly since December 2017, reflecting the rise in the cost of a barrel of oil; they remain fairly stable at about US$2.50 a gallon (graph 6). Gas prices should not fluctuate wildly in the next few months, as a balanced oil market is expected in 2018. Prices should still tick up modestly.

NATURAL GAS

The strong demand for natural gas in the United States was maintained, with a significantly colder start to winter on the East coast. In a context where the United States is exporting more than it is taking in, inventories have plunged below their 5-year averages (graph 7). Prices seem relatively low at the moment, considering the weak inventories. Despite the spike in market prices during the extreme cold snap in early January, prices subsequently fell back to the level of futures, or about US$2.75/MMBTU (Million British Thermal Units) (graph 8). Investors appear confident that the sharp growth in U.S. production of natural gas will offset robust demand. A slight uptrend has been seen since February, and we expect this to continue in the months ahead. But prices are still expected to remain relatively weak.

GRAPH 8 Surprisingly, prices for natural gas futures did not follow spot prices

MMBTU: Million British Thermal Unit Sources: Energy Information Administration and Desjardins, Economic Studies

2

3

4

5

6

7

JAN. APR. JUL. OCT. JAN.

Futures Market

2017 2018

US$/MMBTU

GRAPH 7 Inventories remain below their 5-year average

* From 2012 to 2016. Sources: Energy Information Administration and Desjardins, Economic Studies

In billions of cubic feet

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2013 2014 2015 2016 2017 2018

Average* Stocks

Maximum*

Minimum*

GRAPH 6 Oil price volatility spares gas prices

* Average price of WTI (West Texas Intermediate) and Brent. Sources: Datastream and Desjardins, Economic Studies

US$/barrel

1.50

1.75

2.00

2.25

2.50

2.75

3.00

25303540455055606570

2015 2016 2017 2018

Crude oil prices* (left)Gas prices in the United States (right)

US$/gallon

GRAPH 5 Production cuts were profitable in 2017

In annual variation

-600

-400

-200

0

200

400

600

-400

-300

-200

-100

0

100

200

300

400

SaudiArabia

Iraq Iran Libya Venezuela OPEC Russia

Crude oil revenues*Crude oil production*

OPEC: Organization of the Petroleum Exporting Countries; *Crude oil excluding condensates. Sources: International Energy Agency and Desjardins, Economic Studies

US$M/day Thousands of barrels/day

ECONOMIC STUDIES


While the brisk global economy has pushed up prices for the main metals since the start of 2017, the stocks surveyed by the LME are still at very low levels. A slight uptrend in stocks has been noted since this January, which might reflect the mining producers’ response to the price hikes (graph 9). The LME index of industrial metals prices declined in February, but remains high compared with the last two years. The average reading was 3,340 in February—an annual increase of 16%. The recent decline should be temporary, and seems to partly reflect fears of a trade war. The International Monetary Fund (IMF) expects

global real GDP growth to reach almost 3.9% in 2018 (graph 10), thus implying strong industrial output and sustained demand. Moreover, China is pursuing its environmental efforts and should limit its production of industrial metals, trimming inventories further. These two factors alone support our expectations for metals prices to post growth this year.

ALUMINIUM

On March 8, 2018, President Donald Trump announced a tax of 10% on aluminum imports and a 25% tax on steel imports, with Canada and Mexico exempted initially. Since about 40% of U.S. aluminum imports come from Canada, the inflationary impact on the United States should be muted. The risk of retaliation is more worrisome since it could lead to an economic slowdown and drive down metal prices. For the moment, aluminium price has been falling since January due to rising stocks. It reached an average of almost US$2,180 a metric tonne in February, but remains high, with a 17% increase since February 2017 (graph 11). China’s adherence to its environmental policy will have to be watched closely, it ramped up its aluminum output by 15% between November and December 2017. Excessive growth in China’s output could drive up Chinese exports and slash prices in 2018.

Base MetalsPrices Dip Slightly in February

FORECASTSThe robust growth expected for 2018 points to a strong demand for industrial metals this year. This means the LME (London Metal Exchange) index is expected to rise in 2018. However, China’s production and rising protectionism are risk factors for global markets. Supply could spike if China deviates from its reduction targets. What’s more, the tariffs on steel and aluminum recently announced by the United States could trigger retaliation on a global scale—and stifle the global economy.

GRAPH 10 Robust global real GDP growth in the next few years should support industrial output

Annual variation in %

0

1

2

3

4

5

2011 2012 2013 2014 2015 2016 2017 2018 2019

Global real GDP Global industrial production

IMF forecasts

IMF: International Monetary Fund Sources: CPB - Netherlands Bureau for Economic Policy Analysis, IMF and Desjardins, Economic Studies

GRAPH 9 Industrial metal prices still relatively high

LMEX: London Metal Exchange Index Sources: London Metal Exchange and Desjardins, Economic Studies

Index

5001,5002,5003,5004,5005,5006,5007,5008,500

5001,0001,5002,0002,5003,0003,5004,0004,5005,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

LMEX (left) Stocks of the six main metals (right)

In millions of tonnes

GRAPH 11 Price and stocks of aluminum

Sources: Datastream and Desjardins, Economic Studies

US$/tonne

5001,0001,5002,0002,5003,0003,5004,0004,5005,0005,5006,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2013 2014 2015 2016 2017 2018

Price (left) Stocks (right)

In thousands of tonnes


ECONOMIC STUDIES

COPPER

Copper prices weakened a bit in February. This price drop seems tied to the stock market correction, given that brisk demand should have applied upside pressures. Globally, the copper market appears balanced, but uncertainties about labour disputes persist. Despite the almost 5% price decline since the beginning of 2018, copper prices were up 24% year-over-year from January 2017 (graph 12). Expectations for global growth suggest that copper prices should continue to climb.

NICKEL

Nickel stocks continued to decline, with prices staying close to US$13,000 per metric tonne (graph 13), a price that is relatively soft compared with pre-2015 levels, despite the annual 35% price increase. The robust demand expected in 2018 should push prices up further.

ZINC

Recurring zinc shortages have driven prices up significantly in the last two years, to almost US$3,200 per metric tonne. Zinc stocks have grown by 43,150 metric tonnes in the last month however, resulting in price drops of about 7% during the same timeframe (graph 14). It is still too early to see if this trend will hold for the rest of the year.

GRAPH 14 Price and stocks of zinc


US$/tonne

100

300

500

700

900

1,100

1,300

1,2501,5001,7502,0002,2502,5002,7503,0003,2503,5003,750

2013 2014 2015 2016 2017 2018



GRAPH 13 Price and stocks of nickel


US$/tonne

100

200

300

400

500

7,000

10,000

13,000

16,000

19,000

22,000

2013 2014 2015 2016 2017 2018



GRAPH 12 Price and stocks of copper


US$/tonne

100

200

300

400

500

600

700

4,000

5,000

6,000

7,000

8,000

9,000

2013 2014 2015 2016 2017 2018



ECONOMIC STUDIES


GOLD & SILVER

Gold prices have not shown a clear trend since mid-January, but they are still slightly above US$1,300 an ounce (graph 15). The last few weeks have been more difficult for silver prices, which have fallen to about US$16.50 an ounce. In theory, rising uncertainty at the beginning of February could have boosted the appeal of precious metals, especially gold, given their safe-haven status. Concerns about spiking inflation and bond yields lifted the greenback temporarily, which in turn weighed on gold (graph 16). The possibility of a diplomatic breakthrough in

Precious MetalsThe Greenback’s Weakness Could Stay a Strong Support

FORECASTSHovering financial market and geopolitical uncertainties could keep gold prices at relatively high levels despite the strong economic growth that should favour interest rate hikes. We have raised our target for 2018 overall to US$1,300 per ounce, assuming that the U.S. dollar remains relatively weak.

GRAPH 17 Price of platinum and palladium


US$/ounce

400

500

600

700

800

900

1,000

1,100

1,200

800900

1,0001,1001,2001,3001,4001,5001,6001,7001,800

2013 2014 2015 2016 2017 2018

Platinum (left) Palladium (right)

US$/ounce

GRAPH 16 Despite a few recent jolts, the U.S. dollar remains weak


Index

1,0001,0501,1001,1501,2001,2501,3001,3501,400

889092949698

100102104

2015 2016 2017 2018

Trade-weighted U.S. dollar index (left) Price of gold (right)

US$/ounce

GRAPH 15 Price of gold and silver


US$/ounce

10

15

20

25

30

35

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

2013 2014 2015 2016 2017 2018

Gold (left) Silver (right)

US$/ounce

Korea also curbed the appeal of precious metals for investors. Despite some blips, the U.S. dollar is still weak, especially in an environment where U.S. bond yields are tracking a clearer uptrend. However, the recent tax overhaul in the United States is likely to worsen the budget deficit and the U.S. trade deficit, which may account for the negative sentiment toward the greenback. U.S. protectionism could potentially work against gold prices however, if it was to trigger a surge in the dollar.

PLATINUM & PALLADIUM

As is the case for most metals, platinum and palladium prices have dipped somewhat in recent weeks. After briefly reaching US$1,000 an ounce more than once, platinum prices fell back to about US$950 (graph 17). This seems to partly reflect the decision of an administrative court in Germany confirming that cities had the right to ban some diesel-powered cars to reduce pollution. The drop in palladium prices was a tad sharper, but this is not surprising after the spectacular surge that saw prices reach a historic peak.


ECONOMIC STUDIES

FOREST PRODUCTS

U.S. protectionist measures continue to dominate the news on North American markets about North American forestry products, as new preliminary antidumping duties have just been levied on several Canadian paper producers. It is becoming increasingly clear that U.S. consumers are big losers of these protectionist measures. With prices already high at the end of 2017, lumber prices have soared about 18% since the beginning of 2018, settling at more than US$510/tbf (thousands of board feet) (graph 18). This represents a peak for the series we are using, which began in 2004. In addition to the tariffs, strong demand for lumber and a reduced supply due to the unprecedented forest fires in British Columbia last year as well as the problem of congested railways prompted the Wall Street Journal to talk about a genuine shortage of lumber in some parts of the United States. It would be surprising if lumber prices were able to stay at their current level for any some time, but relatively high prices should be expected as long as the trade conflict is unresolved. The recent decision to exclude Canada and Mexico from the tariffs on steel and aluminum raises hopes about the North American Free Trade (NAFTA) renegotiation, but much still needs to be done.

AGRICULTURAL COMMODITIES

Prices for the three main cereals have shown strong gains in the last few weeks (graph 19). Difficult weather conditions for winter wheat in the United States and for corn and soybeans in Argentina seemed to have piqued investor’s interest for grains (graph 20). The latest forecasts of the U.S. Department of Agriculture confirm that the recent downgrade of the soybean harvest and stronger demand for corn, especially for ethanol production, could trigger a sharper drop in inventories for these two grains at the end of this season. That said, wheat stocks are expected to rise significantly. Grain prices could be volatile over the next few months, when the release of U.S. farmers’ seeding plans at the end of March turns the spotlight on the upcoming harvest season. The flare-up in trade tensions represents a substantial downside risk as some countries, including China, could decide to tackle the substantial U.S. grain exports.

Other CommoditiesRecord Prices for Lumber

GRAPH 20 Cereal prices


US$/bushel US$/bushel

8

9

10

11

12

13

14

15

16

17

2

3

4

5

6

7

8

9

2013 2014 2015 2016 2017 2018

Wheat (left) Corn (left) Soybean (right)

GRAPH 18 Price of forest products

tbf: thousands of board feet Sources: Datastream and Desjardins, Economic Studies

US$/tbf

850

900

950

1,000

1,050

1,100

1,150

1,200

1,250

275300325350375400425450475500525

2013 2014 2015 2016 2017 2018

Softwood lumber (left) Pulp (right)

US$/tonne

GRAPH 19 Speculators have recently become more upbeat about cereal

Sources: Bloomberg and Desjardins, Economic Studies

In thousands of contracts

-200

-100

0

100

200

300

400

2015 2016 2017 2018

Mill

iers

Wheat Corn Soybean

Net speculative positions

ECONOMIC STUDIES


SPOT PRICE

March 21 -1 month -3 months -6 months -1 year Higher Average Lower

IndexReuter-CRB (CCI) 423.0 -0.5 3.1 3.5 0.1 434.7 413.1 385.8Reuters/Jefferies CRB 194.2 0.0 3.4 5.9 5.4 200.5 185.0 166.5Bloomberg Commodity Index 86.7 -1.8 1.7 2.3 2.1 90.8 85.2 79.4Bank of Canada 445.1 0.7 5.9 6.3 13.4 460.4 422.9 391.2

EnergyBrent oil (US$/barrel) 67.3 3.0 4.1 19.5 31.5 70.8 57.3 45.5WTI oil (US$/barrel) 63.4 2.7 8.6 25.3 34.8 66.3 53.1 42.5Gasoline (US$/gallon) 2.60 1.6 6.0 -1.4 11.9 2.69 2.47 2.26Natural gas (US$/MMBTU) 2.68 0.6 3.0 -9.2 -13.5 3.63 2.98 2.55

Base metalsLMEX 3,227 -5.8 -2.6 2.5 13.7 3,464 3,087 2,694Aluminium (US$/tonne) 2,053 -7.1 -3.8 -4.3 7.3 2,275 2,040 1,855Copper (US$/tonne) 6,725 -5.0 -4.5 4.4 17.0 7,254 6,423 5,462Nickel (US$/tonne) 13,408 -2.8 11.6 22.7 32.8 14,107 11,059 8,736Zinc (US$/tonne) 3,203 -10.2 -1.0 2.7 14.0 3,606 3,034 2,429

Precious metalsGold (US$/ounce) 1,313 -1.3 3.7 1.6 5.6 1,359 1,283 1,210Silver (US$/ounce) 16.3 -1.1 0.7 -4.1 -6.1 18.6 16.9 15.2Platinum (US$/ounce) 945 -5.3 3.1 1.3 -2.9 1,020 948 877Palladium (US$/ounce) 982 -4.5 -4.9 7.2 24.6 1,129 931 753

Other commoditiesLumber (US$/tbf) 506 1.2 17.4 20.2 27.8 512 433 396Pulp (US$/tonne) 1,210 0.0 1.7 10.0 17.5 1,210 1,130 1,030Wheat (US$/bushel) 4.54 -0.2 5.1 2.9 9.4 5.64 4.43 3.89Corn (US$/bushel) 3.41 -0.9 5.9 9.3 2.1 3.69 3.33 3.06Soybean (US$/bushel) 9.76 -2.1 6.7 3.6 1.0 10.33 9.38 8.78

CRB: Commodity Research Bureau; CCI: Continuous Commodity Index; WTI: West Texas Intermediate; MMBTU: Million British Thermal Unit;LMEX: London Metal Exchange Index; tbf: thousand of board feetNOTE: Currency table base on previous day closure.

TABLE 1Commodities

VARIATION (%) LAST 52 WEEKS

2016 2017 2018f 2019f

Target: 60 Target: 64(range: 56 to 66) (range: 52 to 70)

Target: 3.00 Target: 3.25(range: 2.60 to 3.30) (range: 2.50 to 4.00)

Target: 1,300 Target: 1,250(range: 1,260 to 1,360) (range: 1,150 to 1,400)

Target: 3,450 Target: 3,700(range: 3,100 to 3,700) (range: 3,200 to 4,200)

LMEX index—base metals 2,377 2,969

f: forecasts; WTI : West Texas Intermediate; MMBTU : Million British Thermal Unit; LMEX : London Metal Exchange IndexSources: Datastream and Desjardins, Economic Studies

Natural gas Henry Hub(US$/MMBTU)

2.49 2.96

Gold (US$/ounce) 1,249 1,258

TABLE 2Commodities prices: History and forecasts

ANNUAL AVERAGE

WTI oil (US$/barrel) 43 51

Documents

Prospects for Demand Remain Favourable - Desjardins* International Energy Agency (IEA) outlook based on stable production by Organization of the Petroleum Exporting Countries (OPEC)