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Presentation
October 6, 2014
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI(P) 148/04/2014
Commodity Themes Into 2015 Michael Lewis | (+44) 20 754-52166 | [email protected] Michael Hsueh | (+44) 20 754-78015 | [email protected]
Deutsche Bank
Markets Research
Markets Research
Deutsche Bank Michael Lewis | (+44) 20 754-52166 | [email protected]
October 6, 2014 1
Commodity Themes
#1 How to play an OPEC quota reduction
Long Feb’15 vs. short May’15 Brent time spread
#2 Pipeline expansions into Cushing, Oklahoma
Long Brent vs. short WTI
#3 Commodities and divergent central bank policy
Short gold
#4 Winners & losers from a Chinese property market slowdown
Long nickel vs. short copper
#5 West Africa & Ebola event risk
Long cocoa
#6 Valuation in the agricultural sector
Long SPGSCI agricultural sub-index
#7 Tightening fundamentals in the PGM sector
Long palladium vs. short gold
#8 Commodity volatility risk premium
Short DB Brent crude oil vol index
#9 Positioning for a cold northern hemisphere winter
Long Mar’15 vs. short Apr’15 US natural gas time spread
Executive Summary
Markets Research
Deutsche Bank Michael Lewis | (+44) 20 754-52166 | [email protected]
October 6, 2014 2
#1 How To Play OPEC Production Cuts
Saudi Production & Brent Spread
Heading Into Winter: Long Feb’15 vs. Short May’15 Brent Spread
Brent oil physical fundamentals are weak and further price declines are probable.
However, we expect the appearance of contango in the Brent oil market will eventually be met with OPEC
production cuts to tighten fundamentals and restore backwardation.
Falling Brent crude oil prices are already impacting budgetary positions among the major oil producers.
History shows that when OPEC takes action and cuts production, their efforts to stabilise and push oil prices
are successful. However, this is contingent on world GDP growth in excess of 2.5%.
Oil &OPEC Production Cuts
50
60
70
80
90
100
110
120
130
140
150
-14 -7 0 7 14 21 28 35 42 49 56 63 70WT
I oil p
rice=
10
0 in the d
ay b
efo
re q
uota
reduction
Mar-93 Apr-98 Jul-98
Apr-99 Feb-01 Apr-01
Sep-01 Jan-02 Nov-03
Apr-04 Nov-06 Feb-07
Oct-08
Number of trading days before and after first OPEC quota reduction
1998
2001
20086.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
-20
-15
-10
-5
0
5
10
15
1995 2000 2005 2010
1M-12M Brent time spread (USD, lhs)
Saudi oil production (mmb/d, rhs)
Contango typicallytriggers Saudi production cuts
Budget Breakeven s (Brent)
0
2
4
6
8
10
12
60
70
80
90
100
110
120
130
140OPEC member breakeven price ($/bbl, lhs)
Non-OPEC breakeven price ($/bbl, lhs)
Aug-14 production (mmb/d, rhs)
Brent Nov-14
Sources: Deutsche Bank, IEA, Bloomberg Finance LP Sources: DB EM Research, Reuters, IEA Sources: Deutsche Bank, OPEC, Bloomberg Finance LP
Markets Research
Deutsche Bank Michael Lewis | (+44) 20 754-52166 | [email protected]
October 6, 2014 3
#2 Pipeline Expansions Into Cushing Oklahoma
Inventories & The WTI-Brent Spread 2015 US Tight Oil Production By Incentive Price
Long Brent vs. Short WTI
The supply sources for new pipelines or pipeline expansion projects will be the Canadian oil sands in
Alberta, the Bakken formation of the Williston Basin in Montana and North Dakota, and the Denver-
Julesburg Basin straddling Colorado, Nebraska and Wyoming.
The incoming flows should help to rebuild inventories at Cushing as upstream feeder pipelines come online
over the coming year and thereby relieve upside pressure on WTI and widen its discount to Brent.
Close to 200 kb/d (or 9%) of 2015 expected tight oil production would not attract new investment below
USD90/bbl, and a further 650 kb/d would become unattractive between USD80-USD90/bbl.
-30
-25
-20
-15
-10
-5
0
5
100
10
20
30
40
50
60
Apr-04 Apr-06 Apr-08 Apr-10 Apr-12 Apr-14
Cushing inventory (million barrels, lhs)
WTI-Brent ($/bbl, rhs inverted scale)
0
500
1000
1500
2000
2500
<$50 $50-$60 $60-$70 $70-$80 $80-$90 >$90
650 kb/d
Sources: EIA, Bloomberg Finance LP, Deutsche Bank Sources: Wood Mackenzie, Deutsche Bank
Markets Research
Deutsche Bank Michael Lewis | (+44) 20 754-52166 | [email protected]
October 6, 2014 4
#3 Commodities & Divergent Central Bank Policies
SP500 vs. SPGSCI & USD TWI Removing The Gold Premium Gold:Silver & The ISM Index
Short Gold
Typically bull runs in the US last for six years, and the trough to peak is around 40% in magnitude. Since
the current upswing began in July 2011 and the US dollar TWI has rallied by around 18%, this would
suggest we are only half way through the current cycle.
A rising US dollar environment will typically mean commodity returns will underperform equity returns,
with precious metals and energy most sensitive to a rising US dollar.
A more hawkish Fed would also imply further gains in US real interest rates and the possible elimination
of gold’s premium versus physical and financial assets.
30
40
50
60
70
80
90
100
11030
35
40
45
50
55
60
65
1990 1996 2002 2008 2014
US ISM business confidence (lhs)
Gold to silver price ratio (rhs, inverted)
0
2
4
6
8
10
65
75
85
95
105
115
1992 1996 2000 2004 2008 2012
USD TWI (lhs)
S&P500/SPGSCI ratio (rhs)
In real terms (PPI) 725
In real terms (CPI) 770
Relative to per capita incomex 800
Relative to the S&P500 900
Versus copper 1050
Versus crude oil 1400
Average 941
Sources: DB Asset Allocation Research, Bloomberg Finance LP Sources: Deutsche Bank, IMF, Bloomberg Finance LP
Sources: Deutsche Bank, Bloomberg Finance LP
Markets Research
Deutsche Bank Michael Lewis | (+44) 20 754-52166 | [email protected]
October 6, 2014 5
#4 Winners & Losers Of A China Property Slowdown
Metal Prices & The US Dollar Chinese Zinc Consumption Chinese Property & Steel
Long Nickel vs. Short Copper
Industrial metal prices have been resilient to the strengthening in the US dollar. This may be hard to
justify in the event of any negative growth surprises in China.
We retain our relatively bullish view on the base metals, especially nickel, zinc and lead given the more
limited exposure to the Chinese property sector.
Not surprisingly, the steel-making materials such as iron ore are the most exposed to this sector since
the Chinese property sector comprises 30% of steel demand. Given the already large declines in iron
ore, we would highlight copper as the next market to be exposed from further distress in the Chinese
property sector.
70
72
74
76
78
80300
320
340
360
380
400
420
440
Jan-12 Aug-12 Mar-13 Oct-13 May-14
Spot returns of the SGSCI industrial metals index (lhs)
USD trade-weighted index (rhs, inverted)
Consumer Goods, 30%
Industrial Goods, 6%
Infrastructure, 22%
Non-residential construction,
19%
Residential construction,
13%
Transport, 10%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
-40%
-20%
0%
20%
40%
60%
80%
Oct-
07
Fe
b-0
8
Ju
n-0
8
Oct-
08
Fe
b-0
9
Ju
n-0
9
Oct-
09
Fe
b-1
0
Ju
n-1
0
Oct-
10
Fe
b-1
1
Ju
n-1
1
Oct-
11
Fe
b-1
2
Ju
n-1
2
Oct-
12
Fe
b-1
3
Ju
n-1
3
Oct-
13
Fe
b-1
4
Ju
n-1
4
Oct-
14
Monthly floor space sold YoY - 6MMA (Property sales)
Monthly crude steel production YoY - 6MMA (RHS)
22 months 20months
Last two property cycles were about 20 months long
Floor space sold leading crude steel production YoY by about 2-3 months
A potential disconnect?
Sources: Deutsche Bank, Bloomberg Finance LP Sources: Wood Mackenzie, Deutsche Bank
Source: NBS, WIND, Deutsche Bank
Markets Research
Deutsche Bank Michael Lewis | (+44) 20 754-52166 | [email protected]
October 6, 2014 6
#5 West Africa & Ebola Event Risk
Weekly Incidence Of Ebola Major Cocoa Producers Rising Cocoa Prices
Share of
Rank Country world exports (%)
#1 Cote d'Ivoire 37.8
#2 Ghana 21.2
#3 Indonesia 10.0
#4 Nigeria 5.4
#5 Ecuador 5.1
#6 Cameroon 5.1
#7 Brazil 4.9
#8 Papua NG 1.0
#21 Liberia 0.2
Others 9.4
0
100
200
300
400
500
600
700
800
Jan '5 Feb'16 Mar'30 May'11 Jun'22 Aug'3 Sep'14
Sierra Leone
Liberia
Guinea
Weekly incidence of confirmed, probable andsuspected Ebola cases by country
Nu
mb
er
of
ca
se
s
Long Cocoa
So far the impact on commodities has been relatively limited since Liberia, Sierra Leone and Guinea
combined represent less than 2% of global production/exports of iron ore, cocoa, coffee, cotton, rubber
and palm oil. However, risks exist in the form of contagion into Ivory Coast since one of the most
important cocoa growing regions in Liberia, Nima county, borders Ivory Coast.
Meanwhile Ghana (#10 gold producer globally) and Mali (#15) account for 5.1% of global gold output,
and 2.5% of world exports of iron ore come from Sierra Leone, Mauritania and Liberia combined. DRC
(#6 copper producer globally) and Zambia (#7) supplied 9.4% of the world’s copper in 2013.
40
60
80
100
120
140
160
2012 2013 2014
Cocoa
Cotton
Coffee
3-Jan-12=100
Source: WHO Source: USDA
Source: Bloomberg Finance LP
Markets Research
Deutsche Bank Michael Lewis | (+44) 20 754-52166 | [email protected]
October 6, 2014 7
#6 Valuation In The Agricultural Sector
Commodities In Real Terms SPGSCI Agricultural Index
Long SPGSCI Agricultural Index
We have seen significant upgrades to global grain and soybean production over recent months.
While there is an absence of obvious catalysts to drive agricultural prices higher currently, we believe
the strong rebound in agricultural production this year has pushed prices in grains and soybeans into
territory that is starting to look cheap.
El Niño risk has been downgraded over the past few months. However, heading into the next crop
year, we believe the sector is starting to under-price event risk.
400
600
800
1000
1200
1400
1600
1980 1984 1988 1992 1996 2000 2004 2008 2012
Index level of the total returns SPGSCI agricultural index
5-Jan-70=100
-43 -41
-30 -28-23
-19
-80
10 1015
2027 30
44 44
66 67
83
-60
-40
-20
0
20
40
60
80
100
Suga
r
US
natu
ral gas
Corn
Alu
min
ium
Wheat
Soybeans
Pla
tinu
m
Cotton
Nic
kel
Zin
c
Tin
Silv
er
Coffee
Cocoa
Le
ad
Copp
er
Go
ld
Palla
diu
m
Cru
de o
il
How far prices in real terms are currentlytrading versus their 2002-2013 average (%)
Expensive
Cheap
Upgrades To US Corn Harvest
10.0
11.0
12.0
13.0
14.0
15.0
M J J A S O N D J F M M J J
Bushels
(bill
ions)
USDA corn production estimate by month
US corn production projections by year
2011-12
2012-13
2013-142014-15
Source: USDA Sources: Deutsche Bank, Bloomberg Finance LP Source: Bloomberg Finance LP
Markets Research
Deutsche Bank Michael Lewis | (+44) 20 754-52166 | [email protected]
October 6, 2014
#7 Tightening Fundamentals In The PGMs
Given the risks of a more permanent reduction in South African productive capacity, in part driven by an
increase in loss-making sections of the mines, we not only expect PGM production in South Africa will be
unable to reach pre-strike levels but that it will help to sustain market deficits across the complex over the
next five years.
Pollution issues in China should sustain the drive to improve emissions. This will likely mean China is the
largest source of palladium demand growth globally over the next five years.
We would also expect rhodium to be another beneficiary, not least since investment participation in this
market is low compared to platinum and palladium.
Long Palladium vs. Short Gold
8
Palladium Is Our Top Pick
0
150
300
450
600
750
900
1050
1200
-2,500
-2,000
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
2005 2007 2009 2011 2013 2015F 2017F
US
$/o
zkoz
Market balance
Annual average priceForecast
PGM ETFs vs. Market & Stocks
0%
5%
10%
15%
20%
25%
30%
35%
Rhodium Palladium Platinum
% of market size
% of above ground stocks
Palladium Demand Growth (2013
To 2020E)
0 200 400 600 800 1000
Rest of World
Japan
Europe
North America
China
Ounces (000s)
Sources: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank Sources: Deutsche Bank, Bloomberg Finance LP
Markets Research
Deutsche Bank Michael Lewis | (+44) 20 754-52166 | [email protected]
October 6, 2014 9
#8 Commodity Volatility Risk Premium Strategies
Risk Premium Performance
Brent Short Vol Index
Volatility risk premium strategies are focused on the difference between the realised and implied volatility
across asset classes and the routes to isolate and capture this risk premium.
The existence and persistence of a volatility risk premium exist because of a lack of natural sellers of
options. Since hedging activity in commodities is most prevalent in the energy sector, this might help to
explain why the premium is particularly rich in this sector.
Drawdown events occur when there is a spike in realised vol. However, due to the memory of such shocks
in the implied vol market, the recovery period after a drawdown event is typically rapid.
-8.8
2.32.5
3.3
6.9 7.6
12.1
-10
-5
0
5
10
15
NatGas Nickel WTI Basket Brent Copper Gold
Excess returns year to date (%)
Measuring The 3M Implied VRP
Implied vs.
realised premium
(long-term)*
Implied vs.
realised premium
(since 2010)
Brent crude
oil 5.52% 6.67%
WTI crude oil 3.30% 4.84%
Natural Gas 3.19% 1.23%
Aluminium 1.32% 1.65%
Copper 0.93% 4.02%
Nickel 1.40% 2.72%
Gold 1.10% 0.84%
Silver -0.55% -0.98%
Brent Implied vs. Realised Vol
-50.00%
-45.00%
-40.00%
-35.00%
-30.00%
-25.00%
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Period from trough to previous peak Brent Short Vol strategy
Source for all charts: Deutsche Bank
Markets Research
Deutsche Bank Michael Lewis | (+44) 20 754-52166 | [email protected]
October 6, 2014 10
#9 Positioning For A Cold Northern Hemisphere Winter
US Natural Gas Storage Volume
Long Mar’15 vs. Short Apr’15 US Natural Gas Time Spread
US natural gas provides the most focused play on a colder-than-normal northern hemisphere winter,
particularly because storage levels remain below normal .
Indeed on our estimates, inventories in the first week of November will be at their lowest levels as a
percentage of working gas capacity since 2002.
The March-April spread is historically the most sensitive to colder-than-normal winter weather as falling
gas inventories create the possibility of lower storage deliverability, and thus rapidly raise expectations for
a tight March supply-demand balance in comparison to April.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
10Y Range (%)
10Y Avg (%)
2014
2014 Forecast
2015 Forecast
3543
1519 bcf
bcf
% o
f w
ork
ing
ga
s
US Natural Gas Mar-Apr Spread & Storage
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Mar May Jul Sep Nov Jan
2015 Mar-Apr Spread (%)
Projection
2015 Storage dev. from 10Y Avg (%)
Cold winter should see
backwardation rally
Sources: EIA, Deutsche Bank Sources: Deutsche Bank, EIA, Bloomberg Finance LP
Markets Research
Deutsche Bank Michael Lewis | (+44) 20 754-52166 | [email protected]
October 6, 2014 11
Commodity Themes
#1 How to play an OPEC quota reduction
Long Feb’15 vs. short May’15 Brent time spread
#2 Pipeline expansions into Cushing, Oklahoma
Long Brent vs. short WTI
#3 Commodities and divergent central bank policy
Short gold
#4 Winners & losers from a Chinese property market slowdown
Long nickel vs. short copper
#5 West Africa & Ebola event risk
Long cocoa
#6 Valuation in the agricultural sector
Long SPGSCI agricultural sub-index
#7 Tightening fundamentals in the PGM sector
Long palladium vs. short gold
#8 Commodity volatility risk premium
Short DB Brent crude oil vol index
#9 Positioning for a cold northern hemisphere winter
Long Mar’15 vs. short Apr’15 US natural gas time spread
Executive Summary
Markets Research
Deutsche Bank Michael Lewis | (+44) 20 754-52166 | [email protected]
October 6, 2014
06/10/2014 21:30:32 2010 DB Blue template
Appendix 1 Important Disclosures Additional Information Available upon Request
For disclosures pertaining to recommendations or estimates made on securities discussed in this research, please see the most recently
published company report or visit our global disclosure look-up page on our website at http://gm.db.com.
12
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Michael Lewis/ Michael Hsueh
Markets Research
Deutsche Bank Michael Lewis | (+44) 20 754-52166 | [email protected]
October 6, 2014 13
Regulatory Disclosures 1. Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the “Disclosures Lookup” and “Legal” tabs. Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank’s existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
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Markets Research
Deutsche Bank Michael Lewis | (+44) 20 754-52166 | [email protected]
October 6, 2014 14
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