ICG Commodity Update – November 2019

The ICG Commodity Update is our monthly published comment on energy, industrial metals and precious metals market.

Energy

For energy investors this week should be adventurous with the OPEC meeting in Vienna on Thursday and Friday that will likely provide some theatrics. According to most surveys market participants expect OPEC+ to extend the current supply pact (which expires at the end of March 2020), rather than make deeper reductions. Deeper cuts seem unlikely at present, but production would likely stay low if the group succeeds in convincing countries with weak compliance to implement their pledged cuts. While some oil ministers might propose deeper cuts as an option ahead of the meeting, negotiating them has always been cumbersome. Though the average OPEC+ compliance rate is currently 136% according to the IEA, the distribution among members is unequal: some OPEC+ members (e.g. Iraq and Nigeria) have raised their production (resulting in a negative compliance rate), while the de facto OPEC leader, Saudi Arabia, has cut more than twice what it pledged. Indeed, reports surfaced last week that Saudi Arabia is growing frustrated with other OPEC members cheating on their production quotas. This combined with comments from Russia that they favour wait until closer to April to decide whether to extend output cuts contributed to a 5% decline in crude oil last Friday. Even so, crude oil prices have risen during the month and ended slightly positive in November benefiting from positive trade headlines and falling oil inventories. Some analysts believe the world’s supply and demand balance could be tighter than some expect. They see non-OPEC output growth falling short of forecasts while global demand increases could be higher than expected. Hardy from Vitol Group, the world’s largest independent oil trader, recently said “The market’s fear of a global recession has receded. There are problems here and there, but in general the music hasn’t stopped and demand didn’t follow the 2008 model”. A steady decline in US drilling activity also raises the question if US oil supply growth for next year, could fall short of market expectations. Across the industry, oil traders and executives believe US production will grow less in 2020 than this year, and at a significant slower rate than in 2018. E.g. Vitol Group expects US production to increase by +0.7mboe/d in 2020 vs. IEA +1.2mboe/d, EIA +1.7/mboe/d. Apple is now worth more than all large-cap US energy stocks put together. This is astonishing, considering that the Oil Majors have the highest dividend yield, by far, of any major sector in the S&P (~5% yield vs. ~2% S&P average), with competitive growth, leverage, FCF, and have received almost no credit for significantly transforming the business/cost structure over the past 4 years to make that FCF sustainable and growing.

 

Industrial Metals

Despite the seemingly interminable back-and-forth between US and Chinese negotiators working on phase one of the trade deal, base metals prices are signaling a revival of global economic growth, particularly in EM economies, in 2020. Fundamentally, most global base metals inventories continue to draw hard, as the rates of growth in consumption and production diverge. Any recovery in organic growth could spark a rally. Supply in the biggest components of the LMEX, copper and aluminum, is contracting, while demand is holding up or slightly growing. This causing global stocks to draw, as incremental demand is met from inventory. According to analysts, base metals consumption is expected to move higher next year – part of this will be led by improving Chinese demand, which accounts for more than 50% of base metals demand globally. Base metals markets continue to tighten, as supply growth remains significantly behind demand growth. Looking at nickel, the rally is fading fast as signs of faltering demand left the metal with the biggest monthly loss among major commodities. Prices have declined 18% in November on the LME. The rout has sent nickel tumbling from near five-year highs seen a few months ago as supply anxiety swept through the industry in the wake of Indonesia’s decisions to expedite a ban on exports of raw ore. Producers in Indonesia have been boosting shipments to China in the run-up to the January ban, causing inventories to build throughout the steel industry, while the strain on demand grows.

 

Precious Metals

Gold declined in November while data on China’s economy pointed to an improvement, curbing demand for havens as equities rose. Investors also assessed the latest on trade, with newspapers reporting that Beijing wants tariffs to be rolled back as part of a phase-one trade deal with the US. A gauge of China’s manufacturing jumped unexpectedly in November, signaling a recovery in activity amid state support and stabilizing global growth. The official manufacturing purchasing managers’ index rose to 50.2, according to Bloomberg. Also, demand for US business equipment unexpectedly increased in October by the most since the start of the year, while revised gross domestic product for the third quarter showed growth in slightly better shape than previously thought. The monthly price drop is the biggest in three years. Looking at Palladium, prices steadied after climbing to a record on expectations its eight-year supply deficit will widen next year. Palladium supply has trailed demand since at least 2012 and prices are up 45% this year on expectations that a shortage will continue. Norilsk Nickel, the world’s top miner of the metal, said that global demand growth for the commodity will accelerate in 2020 and a deficit could be more substantial on an anticipated recovery in the auto market and tighter emissions legislation. Palladium has expanded its premium to platinum to a fresh record, being more than twice more expensive currently.

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ICG Commodity Update – November 2019

The ICG Commodity Update is our monthly published comment on energy, industrial metals and precious metals market.

Energy

For energy investors this week should be adventurous with the OPEC meeting in Vienna on Thursday and Friday that will likely provide some theatrics. According to most surveys market participants expect OPEC+ to extend the current supply pact (which expires at the end of March 2020), rather than make deeper reductions. Deeper cuts seem unlikely at present, but production would likely stay low if the group succeeds in convincing countries with weak compliance to implement their pledged cuts. While some oil ministers might propose deeper cuts as an option ahead of the meeting, negotiating them has always been cumbersome. Though the average OPEC+ compliance rate is currently 136% according to the IEA, the distribution among members is unequal: some OPEC+ members (e.g. Iraq and Nigeria) have raised their production (resulting in a negative compliance rate), while the de facto OPEC leader, Saudi Arabia, has cut more than twice what it pledged. Indeed, reports surfaced last week that Saudi Arabia is growing frustrated with other OPEC members cheating on their production quotas. This combined with comments from Russia that they favour wait until closer to April to decide whether to extend output cuts contributed to a 5% decline in crude oil last Friday. Even so, crude oil prices have risen during the month and ended slightly positive in November benefiting from positive trade headlines and falling oil inventories. Some analysts believe the world’s supply and demand balance could be tighter than some expect. They see non-OPEC output growth falling short of forecasts while global demand increases could be higher than expected. Hardy from Vitol Group, the world’s largest independent oil trader, recently said “The market’s fear of a global recession has receded. There are problems here and there, but in general the music hasn’t stopped and demand didn’t follow the 2008 model”. A steady decline in US drilling activity also raises the question if US oil supply growth for next year, could fall short of market expectations. Across the industry, oil traders and executives believe US production will grow less in 2020 than this year, and at a significant slower rate than in 2018. E.g. Vitol Group expects US production to increase by +0.7mboe/d in 2020 vs. IEA +1.2mboe/d, EIA +1.7/mboe/d. Apple is now worth more than all large-cap US energy stocks put together. This is astonishing, considering that the Oil Majors have the highest dividend yield, by far, of any major sector in the S&P (~5% yield vs. ~2% S&P average), with competitive growth, leverage, FCF, and have received almost no credit for significantly transforming the business/cost structure over the past 4 years to make that FCF sustainable and growing.

 

Industrial Metals

Despite the seemingly interminable back-and-forth between US and Chinese negotiators working on phase one of the trade deal, base metals prices are signaling a revival of global economic growth, particularly in EM economies, in 2020. Fundamentally, most global base metals inventories continue to draw hard, as the rates of growth in consumption and production diverge. Any recovery in organic growth could spark a rally. Supply in the biggest components of the LMEX, copper and aluminum, is contracting, while demand is holding up or slightly growing. This causing global stocks to draw, as incremental demand is met from inventory. According to analysts, base metals consumption is expected to move higher next year – part of this will be led by improving Chinese demand, which accounts for more than 50% of base metals demand globally. Base metals markets continue to tighten, as supply growth remains significantly behind demand growth. Looking at nickel, the rally is fading fast as signs of faltering demand left the metal with the biggest monthly loss among major commodities. Prices have declined 18% in November on the LME. The rout has sent nickel tumbling from near five-year highs seen a few months ago as supply anxiety swept through the industry in the wake of Indonesia’s decisions to expedite a ban on exports of raw ore. Producers in Indonesia have been boosting shipments to China in the run-up to the January ban, causing inventories to build throughout the steel industry, while the strain on demand grows.

 

Precious Metals

Gold declined in November while data on China’s economy pointed to an improvement, curbing demand for havens as equities rose. Investors also assessed the latest on trade, with newspapers reporting that Beijing wants tariffs to be rolled back as part of a phase-one trade deal with the US. A gauge of China’s manufacturing jumped unexpectedly in November, signaling a recovery in activity amid state support and stabilizing global growth. The official manufacturing purchasing managers’ index rose to 50.2, according to Bloomberg. Also, demand for US business equipment unexpectedly increased in October by the most since the start of the year, while revised gross domestic product for the third quarter showed growth in slightly better shape than previously thought. The monthly price drop is the biggest in three years. Looking at Palladium, prices steadied after climbing to a record on expectations its eight-year supply deficit will widen next year. Palladium supply has trailed demand since at least 2012 and prices are up 45% this year on expectations that a shortage will continue. Norilsk Nickel, the world’s top miner of the metal, said that global demand growth for the commodity will accelerate in 2020 and a deficit could be more substantial on an anticipated recovery in the auto market and tighter emissions legislation. Palladium has expanded its premium to platinum to a fresh record, being more than twice more expensive currently.

Read More

Senior PM backs commodity exposure following oil price hike

Oil prices have hit a five-month high following Opec’s production cuts. According to Independent Capital senior portfolio manager Pablo Gonzalez, that means it is time for investors to boost their exposures.

 

Gonzalez, who manages the Industrial Metals Championsfund and the White Fleet II Energy Championsfund, told Citywire Switzerlandthat the energy and gas sector is in its best shape for 10 years.

 

‘Oil prices are off to their best-ever start to a year, as fears of a supply glut cool – part of a 2019 recovery in risky investments from stocks to commodities. Estimates of oil demand growth have been revised many times over the past few years, and exactly the same happened again some days ago, as the International Energy Agency observed that global energy demand grew by 2.3% in 2018, nearly two times the average rate of global energy demand growth since 2010,’ he said.

 

‘Demand remains more robust than it appears to be. This is critical, as a less oversupplied oil market would require a smaller production cut by Opec+ to rebalance the oil market. Therefore, provided that compliance to the Opec+ production cut deal improves and oil demand remains healthy, the market should tighten further.’

 

He also explained that commodity producers have hit a ‘sweet spot’ in their cash flow cycle, which is a sign of management discipline and responsible capital spending.

 

What’s more, he believes that some companies could be free cash flow positive at $40 per barrel around 2020.

 

‘We clearly favour oil and gas equities and industrial metals equities, as we think they may enter the sweetest stage of the cycle. The strong performance year-to-date shows the first signs of this trend. Even so, valuations remain undemanding.’

 

Link to citywire

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Senior PM backs commodity exposure following oil price hike

Oil prices have hit a five-month high following Opec’s production cuts. According to Independent Capital senior portfolio manager Pablo Gonzalez, that means it is time for investors to boost their exposures.

 

Gonzalez, who manages the Industrial Metals Championsfund and the White Fleet II Energy Championsfund, told Citywire Switzerlandthat the energy and gas sector is in its best shape for 10 years.

 

‘Oil prices are off to their best-ever start to a year, as fears of a supply glut cool – part of a 2019 recovery in risky investments from stocks to commodities. Estimates of oil demand growth have been revised many times over the past few years, and exactly the same happened again some days ago, as the International Energy Agency observed that global energy demand grew by 2.3% in 2018, nearly two times the average rate of global energy demand growth since 2010,’ he said.

 

‘Demand remains more robust than it appears to be. This is critical, as a less oversupplied oil market would require a smaller production cut by Opec+ to rebalance the oil market. Therefore, provided that compliance to the Opec+ production cut deal improves and oil demand remains healthy, the market should tighten further.’

 

He also explained that commodity producers have hit a ‘sweet spot’ in their cash flow cycle, which is a sign of management discipline and responsible capital spending.

 

What’s more, he believes that some companies could be free cash flow positive at $40 per barrel around 2020.

 

‘We clearly favour oil and gas equities and industrial metals equities, as we think they may enter the sweetest stage of the cycle. The strong performance year-to-date shows the first signs of this trend. Even so, valuations remain undemanding.’

 

Link to citywire

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Boutique PM doubles gold exposure amid market sell-off

Independent Capital has roughly doubled its gold exposure in response to market volatility, senior portfolio manager Pablo Gonzalez told Citywire Switzerland.

 

Gonzalez, who manages the boutique’s White Fleet II Energy Champions Fund, said the sector is still a safe haven despite taking some hits during a market sell-off last week.

 

‘Obviously we saw quite the sell-off, including in the commodity sector. Gold, unsurprisingly, didn’t suffer a lot,’ he said.

 

‘Gold equity has suffered this year, so we increased exposure mostly to small and mid caps. We think there are a lot of producers that have huge margins, and if you look to the commodity space, the sector that has the highest commodity beta is gold.’

 

Gonzalez is also positive on oil and gas, largely because of its cash-rich profile.

 

He said: ‘The commodity space is still really cheap and generating a lot of free cash. Oil and gas producers can break even in the low $50’s.

 

‘In our fund we have an implied oil price of $40, so from my point of view energy will continue to be one of the best performing sectors year-to-date.’

 

Link to citywire

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Viewpoint: IAMs on the hottest commodities

Pablo Gonzalez

 

Independent Capital Management
Basel

 

We are still bullish on commodities and even more so on commodity-related equities.
The long-term drivers of demand – including industrialisation
and urbanisation – are far from complete in the developing world.
Urbanisation is driving a per capita wealth increase and with it demand for resources. For example, in the next few years, India and China will have more than 1 billion new middle-class citizens.

 

The Bloomberg Commodity Index is still close to a 17-year low,
and the ratio to the global equity market has never been so low.
Commodities have cycles, and now we are in the adjustment phase where demand and inflation recover, supply tightens and inventory draws. That’s already visible in some commodities.

 

Crude oil had its recent pullback, with the Opec and non-Opec
oil producers (Opec-plus) stating that they are likely to boost oil
production gradually in the second half of 2018.

 

On the one hand, Opec wants to ease consumers’ fears, but on the other they do it because the oil market is tight. Inventories are well below five-year averages, and growth in oil demand is strong and has probably been underestimated.

 

Goldman Sachs estimates that even an increase of 1 million barrels of oil equivalent per day would leave the market in deficit through the third quarter of 2018.

 

The longer-term oil prices in the back of the curve have either barely moved, or have actually increased. This makes oil and gas equities very interesting because analysts may start to increase their longer-term oil price deck and their price targets.

 

The stronger focus on capital discipline and profitable drilling will result in companies having better margins in the future than at times when oil prices were above the $100 per barrel level.

 

Free cash flow yields of energy companies are already higher than
those of the MSCI World index or the S&P 500 index. With record low valuations – absolute as well as relative – we think an improvement in sentiment will come.

 

For energy exposure, we are invested in the Energy Champions
fund, which has outperformed 90% of its peers so far this year and has a strong North America shale focus. For a more balanced commodity exposure along all commodities, we have the Gateway Natural Resources fund, which invests in commodity futures and commodityrelatedequities.

 

Link to citywire

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