Brewin Dolphin’s predictions for commodities in the New Year

Commodities have surprised on the downside this year, particularly when it comes to the shock fall in the oil price. Brewin Dolphin is forecasting that oil will recover to $80 a barrel and a fall in the gold price to $1,080 an ounce.

Nik Stanojevic, mining analyst, makes the following predictions:


Gold will continue to fall: Our preferred model is looking at real interest rates and we believe that the main cause of the rout in mid-2013 was lower inflation expectations. Given our house view of low inflation expectations and very modest increases in nominal interest rates, our best guess is that gold continues falling in absolute terms. Extrapolating trends since the second half of 2013, we get to a 2015 year end estimate of $1,080/oz. (current price $1199 /oz.)


A small premium on Copper: Industrial metals prices tend to fluctuate between the marginal cost of production and the point of demand destruction. For copper, the marginal cash cost of production is around $6,000-6,500 and the point of demand destruction is likely to be in excess of $8,000/t. Consensus expectations are for copper to be in surplus for the next two years. If this plays out, we would expect the metal to remain close to the marginal cost of production, and potentially go below it on a spot basis. Financial investors may be willing to pay a small premium to this level due to the favourable structural attributes of the industry (a well-established long term trend of declining grades meaning that the industry needs to open new mines just to stand still, plus the very high barriers to entry). Given this, we conservatively estimate $6,500 as an average and year end spot price for 2015


Iron ore: The surplus we anticipated over 2014 and the impact on the marginal cost of production has been far larger than we anticipated. The surplus of around 100mt (we now expect demand growth of 40mt and supply growth of 140mt over the year) has resulted in high cost capacity closing and the marginal cash cost moving  from $130/t to below $100/t, perhaps as low as $80/t. We expect further surpluses over the next two years although not quite of the magnitude of 2014 (e.g. perhaps around 50-70mt per year). This will lower the marginal cost of production and could cause sport prices to temporarily fall lower than the marginal cost driven by stocking cycles. We expect an average iron ore prices of $70-75/t over 2015, with a year-end price at the higher end of the range because December falls in a the seasonal restocking period ahead of the Chinese new year (versus a current price of $68/t).



Iain Armstrong, oil sector analyst, forecasts that the Brent oil price could recover to just over $80 per barrel by the end of 2015. There could be more movement on the tax position in the North Sea particularly given the forecasts of a sharp decline in investment expected from 2017 onwards, following record investment in 2013 and a similar amount invested this year despite the fall in the oil price. However, the larger producing fields, which get less of the special investment incentives, are also hit with higher corporation tax than other UK companies (30% versus 24%) plus Petroleum Revenue Tax. This means they are effectively paying 81% marginal tax, making the North Sea one of the least attractive operating areas globally. The North Sea has been a political football and the Chancellor has made numerous changes to appease the Scots (as well as increase the Treasuries coffers) so it is about time that he sorted out an attractive medium / long term tax regime.


We are a little surprised at the violent price reaction to the expected no-cut decision made by OPEC and suspect that the fall is partly due to the disappointing economic reports from China and Russia which resulted in revisions downwards to the forecasts for the increase in global oil demand.


The decision by OPEC not to cut production combined with the decision by Saudi Arabia to reduce their official selling prices of oil has damaged oil traders’ trust in OPEC. However, unlike the market’s swift reaction to falling oil prices, we think that the producers’ reaction will be more protracted. This, partly due to the time-line of oil projects which involve making investment decision several years ahead of first production. The investment horizon for US shale producers is shorter but without a significant u-turn on their plans for production growth the global surplus is likely to remain high. We now think that the possibility of a meaningful rally in oil prices is unlikely.  The lower year end base for the oil price reduces the magnitude of any bounce in the price in the second half.


We remain confident of a second half bounce in part, due to the increased likelihood of 15-30% of US shale production either being shut-down or mothballed and lower production from Russia and other relatively high cost operating areas , including the North Sea.  In addition, several oil and gas companies inside and outside the US are close to, or already have broken their bank covenants and will be forced to cut back on capex. Finally, the global economy is a net beneficiary of lower oil prices and while the impact on demand is likely to be lower in emerging markets due to reduced subsidies to consumers, we think that it could add about 0.5mboepd to demand.

Therefore, a combination of modest but growing cuts in production by non-OPEC producers combined with a modest stimulus in demand from lower oil prices will help to make inroads in to the global oil surplus.