Energy Commodities Price Outlook l Living on a prayer
In Q3, energy prices hit a soft patch, but they are projected to increase towards the end of the year. The recovery will mainly be driven by winter-related demand, tighter energy markets and prospects of an agreement to freeze oil production by major producers. Although a potential agreement to cap oil output is welcome news, it is not likely to have a major impact on prices, given the current production levels.
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Oil prices rallied at the end of Q3 and beginning of Q4 after OPEC surprised the markets by announcing the outline of a deal to freeze output at between 32.5 and 33.0 million barrels a day. OPEC’s message was clear: freezing production levels is necessary for stock draws to accelerate and prices to trend higher. However, many analysts and market participants remain skeptical that OPEC members will finalize the agreement since they face significant challenges ahead of the 30 November meeting when the details are to be thrashed out. Brinkmanship between Saudi Arabia and Iran had thwarted previous such attempts, and the level at which Iran will agree to cap production remains a sore point. Figuring out the baseline from which each OPEC member will reduce output will be equally challenging. OPEC members have bought themselves two months to deliver a real deal and they are fully aware of the cost of failure. Securing a deal in November would support market sentiment, but it would come too late to tighten the market in Q4 16. In that case, oil producers would not start to reap the benefits of higher prices until next year.
There are legitimate reasons to remain skeptical about the agreement, but it certainly means that OPEC has opened a new chapter in its long history. Analysts surveyed by FocusEconomics expect energy commodities prices to increase 20.6% year-on-year in Q4 2016, which has been revised up from the 19.6% increase they forecast last month.
Base Metals Price Outlook l Production sets the pace
The third quarter has seen base metal prices diverge, driven mainly by supply-side considerations. Lead, nickel, tin and zinc are widely recognized as having the most challenging supply outlooks, having outperformed the sector. Aluminium and its alloys, copper and iron orehave been the worst performers, driven by oversupplied markets.
Aluminium—like steel—is outperforming as the metal continues to struggle with China’s industrial overcapacity. Expectations of capacity closures are fading as the year ends, with production picking up strongly in Q3. In fact, the pace of restart production in the Chinese aluminium industry is likely to be quickening in the second half of the year. For copper, production has increased steadily, with global mine output registering an increase of 4.5% in H1 2016 from the same period last year. This growth has been dominated by Peru. Several projects that were commissioned this year have increased the country’s output by nearly 55% annually in the same period. Excluding Peru, key producers such as Chile and China have experienced weak growth. Meanwhile, adherence to strict new environmental laws in the Philippines is putting nearly a quarter of the world’s nickel mine supply—and the only major supplier to China—at risk.
Although base metal prices remain sluggish, analysts expect prices to increase in the final quarter of 2016. Analysts see base metals prices increasing 5.5% in Q4 2016 over the same quarter last year (previous month’s forecast: +4.9% year-on-year), which, if confirmed, will represent a rebound compared to the 28.7% decline registered in Q4 2015.
Precious Metals Price Outlook l Monetary policy will set the tone
The shock of the Brexit vote has waned and the focus is now returning to the next U.S. rate hike. As a result, investors’ appetite for safe haven assets remained subdued in September and at the beginning of October, which weighed on precious metals prices. OPEC’s recent production-freeze agreement also failed to generate an upside price response in precious metals, particularly in gold prices, despite the potentially inflationary implications of such a deal.
Monetary easing policies in major central banks around the world—with the exception of the Federal Reserve—continue unabated. The European Central Bank will continue its monetary easing bias until inflation reaches its target. In Japan, subdued wage growth and declining inflation expectations should keep the Bank of Japan in easing mode too. Heading into the fourth quarter, most analysts expect precious metals prices to be supported by loose monetary policy from major central banks, as well as by market uncertainties related to the U.S. presidential elections and to the health of large European banks. However, downward pressure on the outlook comes from rising prospects that the Federal Reserve will increase interest rates at its December monetary policy meeting.
This year, investor demand will remain strong. So far this year, gold held in ETFs has increased by more than 300 metric tons. At this pace, it is likely that 2016 will record the largest ETFs inflows in a year, surpassing 2009 levels. Meanwhile, weak physical demand has remained as a headwind.
Against this backdrop, the outlook for precious metals remains positive and analysts project that prices will increase 20.8% annually in Q4 2016. This month’s projection was revised slightly down from the 21.5% increase that analysts had expected last month as data showing recently long liquidations reflect prospects of a Fed rate hike in December.
Agricultural Commodities Price Outlook l Crops lead decline in prices
Prices for agricultural raw materials were weak in Q3, following a strong rebound in Q2. The decline in prices was broad-based and was particularly hefty in grains such as corn, oats, soybeans and wheat, due to higher crops.
In the northern hemisphere, conditions for corn were mixed. While in the U.S. an above-average crop is expected this year, significant areas in Canada and the EU experienced adverse conditions and thus reduced slightly their yield expectations. In the southern hemisphere, planting is underway under generally favorable conditions in Argentina and Brazil. For wheat, prospects are positive in the northern hemisphere for the spring wheat season that is drawing to a close. Also, near-record yields are expected in Kazakhstan. In the southern hemisphere, conditions remain favorable, with the exception of Australia, which experienced frost that will likely constrain its yield. For soybeans, conditions remain generally favorable in the northern hemisphere, with good yield prospects expected in the U.S. That said, dry conditions in Ontario, Canada, have lowered expected yields. In the south, planting began in Brazil.
Overall production in corn, soybeans and wheat is set to reach new record highs this year. Consequently, analysts expect that markets of these grains will remain oversupplied. After a projected 7.0% year-on-year increase in Q4 2016—revised down from the 9.7% increase expected last month—prices are expected to slow substantially next year. Forecasters expect agricultural prices to rise just 0.8% in Q4 2017.
Written by: Ricardo Aceves