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Lower Oil Prices Could Hurt Silver, Platinum and Aluminum In Short Term - Macquarie

By Kitco News
Tuesday December 9, 2014 11:06 AM

(Kitco News) - Platinum, silver and aluminum have had the highest correlation with oil prices in recent years, according to recent research from Macquarie, which means lower crude prices could hurt the metals complex in the short-term.

However, the analysts added that the medium-term outlook remains uncertain as there is a complex relation between oil and metals.

Looking at longer term, Macquarie noted that both along with platinum, copper and tin had the highest correlation with oil prices and palladium had the weakest correction.

Crude oil futures have dropped more than 40% during the second half of 2014 as a glut of oil floods the marketplace. Overnight, West Texas Intermediate January futures dropped to their lowest point since September 2009, hitting a session low of $62.25 a barrel. As of 10:56 a.m. EST oil prices were slightly higher with WTI crude at $63.53 a barrel.

Vikas Dwivedi, the firm’s oil economist, said that he is expecting oil prices to consolidate between $60 and $70 a barrel for most of 2015, rallying back to $90 a barrel by the end of the year or the first half of 2016.

“Crude oil is the most important traded commodity by value and the largest component of commodity indices. It is natural therefore to think that short-term fluctuations in its price are likely to impact other commodities, including metals,” the analysts said in the report.

The gold market probably has the most complex relationship with oil prices. Macquarie explained that the drop in gasoline prices could increase consumer spending for gold jewelry, boosting physical demand; however, on the other hand investment demand for gold will suffer as lower oil prices will lead to weak inflation.

The analysts also noted that weaker oil prices might lead to lower physical gold demand in the Middle East, which has been a significant driver of the market in the last two years.

Mining operations will see the biggest impact of weaker oil prices as metal production is “by its very nature an energy-intensive process.” Macquarie noted that aluminum production has the highest energy-related costs at around 40%, copper as the lowest with only 18% of production costs related to energy prices. Gold comes in second last with 22% of production costs related to energy prices.

“In the simplest terms, cheaper energy inputs means lower production costs throughout individual cost curves,” they said. “In oversupplied markets, which we currently have across most metals markets, this means that both the ‘fair value’ price and the level at which decisions to cut excess capacity move lower than before the reduction in oil price.”

However, the outlook on the mining sector isn’t as clear-cut.

“On one hand, with commodity prices lower, further spending cuts are likely, with 2015 set to result in the biggest sequential fall in capex in the recent three-year down cycle. In contrast however, the incentive price for most projects in $US terms will be coming down, which makes new investments appear more attractive,” they said.

Finally an important positive for the metals complex is that weaker oil prices are being mostly drive by excess supply and not weak demand. “We might find, then, that an oil price fall is not so bad for metals prices as the market thinks,” they said.

By Neils Christensen of Kitco News; nchristensen@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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