Commodity Update; Gold – 15 September 2014

Crude oil benchmarks fall on rising supply and calmer Ukraine; spike on new sanctions

Both crude benchmarks fell further last week, with Brent reaching its lowest level since 2012. Much of the impetus for the lower prices came from ongoing expectations for the market to remain amply supplied over the near to medium term.

Further validation was afforded to this belief when the US EIA’s weekly energy report was released on Wednesday highlighting a projected increase, to 900,000 barrels per day, in North American production during 2015. This represents the highest level of output since 1970.

In addition to rising supply; sanctions against Russia, slowing growth in China and an uncertain economic environment in Europe all call the “demand growth” side of the oil price equation into question over the near to medium term.

Consequently, official price forecasts for both Brent and WTI looking forward to 2015 have each been revised downwards, with the IEA now anticipating that Brent will average $103 per barrel over the next year.

While we do not dispute that rising supply, driven by advances in technology and the advent of shale gas extraction, will likely provide a much needed cap on prices during the years ahead; we draw attention to the fact that the average price forecast implies a midpoint that is some $7 above the current market price.

With this in mind, and taking into account that events in Ukraine and the middle east still pose a threat to supply during the near term; we continue to expect further downside from current levels to be limited.




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