Commodity markets traded lower in early trade Wednesday following a new note from Credit Suisse highlighting that they expect weakness in commodity markets over the next few years.
The analysts at Credit Suisse slashed their price targets for nearly every commodity for 2013 and 2014 on both lower demand forecasts but more so due to higher supply forecasts.
"It is unlikely, therefore, that commodity demand will be strong enough anytime soon to pull the entire complex higher, although neither should it be weak enough to see a generalized move lower. Rather, we expect individual supply factors to be the key driver in 2013, with many of the remaining 'outperformers' (gold, iron ore, copper and, with a lag, oil) likely to begin to come back to earth."
The analysts are especially bearish on iron ore, and more broadly industrial metals, on supply factors. The analysts note that increased supply will weigh on iron ore, and to a lesser extent copper. The analysts also see future weakness in gold as the Central Bank put reduces threats to the global financial system. Lastly, they see oil remaining strong through 2013 until supply growth kicks off in 2014, when they expect prices to begin to decline. Summary of price target changes to major commodities (2013 year average price):
Brent Crude: lowered to $112.00 per barrel from $115.00 per barrel, or 2.6 percent.
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WTI Crude: lowered to $98.00 per barrel from $102.75 per barrel.
Natural Gas: raised to $4.00 per million BTU from $3.70 per million BTU.
Copper: lowered to $7,482 per ton from $8,113 per ton.
Gold: lowered to $1,580.00 per ounce from $1,740.00 per ounce.
Silver: lowered to $28.50 per ounce from $32.20 per ounce.
The bank also noted a few trade ideas for the near term. First off, the analysts note that they are short-term bearish natural gas after its 30+ percent run higher since mid-February. "Specifically, gas markets would lose too much power-gen demand to coal at gas prices between $4-4.25/MMbtu. As such, we anticipate a downward price correction for the summer contract months, or before." The analysts recommend buying June $3.60 calls and funding it by selling June $4.50 calls. On gold, the analysts are also bearish and are looking for the $1,620-$1,625 level to act as resistance on any move higher. "We would look to sell gold on a move up to $1,615, with a stop at $1,626, targeting $1,550 initially. Depending on volatility and skew, buying bearish risk reversals (buy put/sell call) of three to six month tenors may also be attractive." The note is a stark contrast to previous years in which commodity price forecasts were largely dependent on demand growth slowing. However, now the analysts are truly afraid more of supply growth than demand growth. With new mines coming online globally for metal ores, the U.S. oil boom continuing to boost supply, and financial risk declining lowering demand for gold, the markets look set for weakness.
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