Tuesday May 17th 2016

The Oil rally

Tuesday May 17^th 2016

Oil

Last week we saw a moderate stocks sell off and treasuries bid in what have been a risk-off week. We saw Oil consolidating on relatively high levels due to more supply disruption and better than expected inventories data. Whereas we looked at a rather sharp sell-off in Copper, Aluminium and Nickel which capped gains also for the rest of the base metals complex. The move south started on Monday May 9^th when China April’s trade balance was released showing a -21.8% of refined copper and -8.3% of copper concentrates imports with respect to March. Further, prices steel rebar and iron ore did extend losses in China as the slew of bearish data hastened the reversal of last month’s rally triggered by speculation that economic stimulus and industrial reforms would drive up demand and curb supplies. Also, last Friday we saw the number on Chinese new loans (yuan) came out disappointing at 550B vs exp. 820B and dragged Copper 3M prices at roughly 2 months low.

Current week started with oil prices hitting six-month highs on Monday on worries about global supply outages and as long-time bear Goldman Sachs turns mildly bullish. "The oil market has gone from nearing storage saturation to being in deficit much earlier than we expected," said Goldman, which added that supply likely shifted into a deficit in May. The bank also cautioned that at around $50 a barrel, supply could flip back into a surplus in the first half of 2017 if exploration and production activity picked up. Very interesting will be too see how this week inventories data will play out as we are at 49.27$ for Brent and 48.14 for WTI. The strength in Oil helped base metals digesting another disappointing data from China with industrial production coming out at 6.0% vs exp. 6.5% and fixed asset investment at 10.5% vs 11% data shows for April. Copper did not so far extend the losses even though we are still trading at significant low levels looking for a decent piece of news from China.

Forex

The forex market remains fairly muted with some good bid coming in  the oil related currencies and decent dollar strength across the board with the EUR/USD coming off the 1.1616 peak. Tomorrow we will be looking at the FOMC minutes to have a better gauge on what could happen at the June FED meeting where a rate hike is still likely.

Metal

Finally it could be worth to highlight last week key facts on MetalBulletin conference on Nickel (London) and Zinc (Madrid). Zinc producers were pretty bullish on Zinc due to a lack of raw materials and increased demand from China; "Zinc was first two metals to recover and we believe that zinc is the market to watch as there is a shortness of supply. We must not ignore the volatility in the market as well, which for zinc prices will be strong for the medium-to-long term," Vedanta Resources CEO Deshnee Naidoo said. China's demand growth rate is expected to be around 3-3.5 percent this year due to urbanization and industrialization, which could also support zinc prices despite a slower growth rate compared with few years ago, she added.

Speakers at Metal Bulletin's nickel conference this week were divided on whether the surprisingly strong demand for nickel from China's stainless steel sector in the first quarter of the year is sustainable.  Chinese imports of ferronickel rose 11 percent year-on-year in the first quarter and the imports of refined nickel jumped 350 percent, Barry Jackson, Anglo American, said on Wednesday. Most market participants doubt whether demand from world's biggest nickel-consuming country will last given the widely held belief that credit has been the main driver of the improvement rather than genuine end-user consumption. Nevertheless most of the participants see the market price at the bottom and possibly at around 10,000 per tonne by the end of the year and with an average of 11,000 per tonne during 2017.

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