Outlook: Sentiment improves due to energy and base metals while global markets rebalance

Commodities prices increased 13.2% over the same quarter of the previous year in Q4 2016, breaking a pattern of consecutive declines in the final quarters of the previous four years. Prices for raw materials saw a gradual improvement starting in the second half of 2016 on the back of a steady recovery in most markets that came on the heels of stronger global demand. The analysts we surveyed this month project global commodities prices to continue rising throughout this year, propelled mainly by surging energy and base metals prices. Conversely, the outlook for precious metals is less positive this year, while agricultural raw materials prices are expected to remain subdued.

Energy prices rallied in the final quarter of 2016 and in the beginning of Q1 2017 mainly due to crude oil prices. Brent and WTI crude oil prices have increased solidly in the wake of OPEC’s first production cut agreement in ten years. The cuts, which started in January, will amount 1.2 million barrels per day (mbpd) with a further cut of 0.6 mbpd coming from non-OPEC producers, mainly Russia. The deal continues to be necessary to sustain prices and will do much to clear the large stock overhang at a time when the global oil market is slowly rebalancing. Prices for base metals also improved substantially in Q4 2016 as optimism about demand for metals and minerals has risen strongly. The outlook for industrial metals remains positive. It is supported by fiscal spending and an infrastructure-led boom in investment in China, and has also come on the back of investors’ view that Donald Trump’s infrastructure spending program will boost demand.

The global macroeconomic backdrop remains positive for commodities demand this year. After an expected 2.5% increase in 2016, the global economy is projected to experience a moderate improvement this year and expand 2.9%, according to the latest FocusEconomics Consensus Forecast for Major Economies. However, geopolitical factors, elections in various European countries and the new U.S. administration will all contribute to a highly-uncertain global context and thus to volatility in global financial and commodities markets. Against this backdrop, commodities prices are expected to increase 3.9% in Q4 2017 on the back of higher prices for energy, which will compensate for a drop in precious metals.

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