Global Commodities Focus — Stumbling Toward ‘Normalcy’: 2Q’16
Confronting extraordinary volatility and led by energy, commodity markets are
stumbling to normalcy. Across commodities, cost curves are stabilizing and
supply/demand fundamentals are moving toward equilibrium if not deficit. For the
first time in about three years, probabilities around a base-case are shifting to the
bullish rather than the bearish side. Citi expects markets to remain choppy into
the summer, depending on fickle financial flows, growing open interest in
financially-traded commodities and the persistent growth of high frequency
trading. Energy is uniquely critical to a commodities rebound, given the energy
intensity across commodities, Oil markets now look likely to enter a period of
sustained inventory draws, ushering in higher prices, propelled by demand
growth and declining non-OPEC production. Supply-side disruptions look more
likely than lower demand or higher supply. But energy and therefore all
commodity prices can be capped by a return to drilling in unconventional
resources.
Metals & Mining — Too Fast Too Soon – Taking Sector Stance to Bearish
Sector Performance — The UK metals and mining sector is up 47% since we
published our last chart pack on 29th Jan 2016 (link), at that time we suggested
that valuations were by and large pricing the pessimism and on an individual
stock basis we saw value in the sector. Fast forward only three months and these
conditions have now flipped, in the short term, we think that the stocks have run
too hard too fast & valuations look stretched both on an absolute and relative
basis. We are switching our 6-month view on the sector to Bearish from Neutral,
however we note the longer-term outlook for the sector has improved.