Outlook: Commodities prices to avoid price-crash pattern in Q4

In four of the last five years, commodities prices have fallen in Q4. This year, however, is expected to be different. Prices are projected to rise in the fourth quarter, as the gradual rebalancing in most markets continues and global macroeconomic fundamentals, although still weak, are nevertheless propping up prices. Forecasters polled this month by FocusEconomics expect commodities prices to increase 8.5% year-on-year in Q4 2016, which contrasts the 26.7% plunge registered in Q4 2015 and the 8.8% drop in Q4 2014.

In the past five years, commodity price movements have followed a seasonal pattern, showing strength in the first half of the year, followed by weakness in the second, with the worst performance in the final quarter. The fourth quarter has repeatedly been bad for prices because the outlook for the global economy has been revised down more often than not at that time, thereby worsening demand expectations for raw materials. This makes investors risk-averse, encouraging them to move resources out of risky assets such as commodities. Another pattern observed in recent years in the final quarter is that the market focus has usually turned to producers, which tend to be unwilling or unable to make the production cuts that the markets had expected to occur to bring fundamentals back into balance.

This year looks set to buck the trend. Analysts see a more robust outlook for commodities supported by a more positive outlook for prices of energy commodities, particularly for crude oil, as well as for precious metals. Going forward, the Consensus view among commodities experts is that demand will strengthen next year and prices will rise 5.7% annually in Q4 2017.

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