Commodities: Stabilising near lows – Westpac

FXStreet – Imre Speizer, NZ Markets Strategist at Westpac, forecasts crude oil to remain in low at around $30s in 2016, iron ore around $40 while the whole milk powder to remain flat.

Key Quotes

“Oil supply and demand: In 2015 strong growth in US crude oil production led to significant oversupply. US crude inventories hit new record highs. Near year end, fears of a demand shock in China added to market uncertainty. While crude oil drilling rig count has collapsed in the US, production is yet to adjust and Saudi Arabia is aggressively discounting crude ahead of the re-entry of Iranian crude into the market. We expect Brent crude to trade in the low $30s for much of 2016, climbing to the mid-high $30s in 2017.

Iron ore dynamics: Chinese demand weakened in 2015. Its 1% decline in steel production in 2015 the first contraction seen in the data since 1999. We forecast no more than a 2% increase in production in 2016, conditional on an improvement in total Chinese construction activity. Regarding supply, iron ore producers have already started adjustment. Marginal Chinese miners have significantly reduced production, although total Chinese iron ore production still needs to fall another 5% in 2016 to balance the market. Output from Australia and Brazil has risen, although there are recent signs of stability in the former. We expect iron ore (62%fe) to spend much of 2016 around US$40/tonne, rising to the mid-$40s in 2017.

NZ whole milk powder: Weak global demand and no drought-related shrinkage in supply have conspired to push prices lower at the international GDT auctions. Such global demand/supply imbalances are common to most major commodities, and it is no accident their price cycles are synchronised. Indeed, the NZD/USD exchange rate appears to have as strong a relationship with oil prices as with NZ whole milk powder prices. We expect NZ whole milk powder to range around current levels for much of 2016, and rise gradually in 2017. Our current forecasts for Fonterra’s milk payout are $4.20 for the year ending May 2016, and $5.20 for the year ending May 2017, but with downside risks.”

Imre Speizer, NZ Markets Strategist at Westpac, forecasts crude oil to remain in low at around $30s in 2016, iron ore around $40 while the whole milk powder to remain flat.

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