Commodities Prices Outlook March 2016

OUTLOOK | Global commodities prices likely bottomed out in Q1 2016

Global commodities prices plunged in 2015, maintaining the downward trajectory that began in the second half of 2014. In the final quarter of 2015, commodities prices plummeted 26.7% on an annual basis, although recent developments show that prices finally found their floor in the first quarter this year. After a prolonged slide—led by crude oil prices—that brought commodities prices to multi-year lows in mid-January, sentiment in the markets seems to have turned a corner in February and optimism continued to gain ground in the first weeks of March.

Analysts project that commodities prices will rise this year, although the recovery will be gradual. Nevertheless, the scenario remains challenging. A strong U.S. dollar is expected to persist this year due to diverging monetary policy between the U.S. and other major central banks, namely in the Eurozone and Japan. In addition, risks to the outlook for the global economy continue to be tilted to the downside due to worsening economic conditions in emerging economies. Against this backdrop, analysts expect commodities prices to have bottomed out in the first quarter and they see prices embarking on a gradual increase in the second half of the year. Prices are foreseen rising 4.4% on an annual basis in Q4 2016 although this is a downward revision from the 5.3% increase projected last month.

ENERGY | Potential oil output freeze agreement helps to prop up prices

Prices for energy, led mainly by oil, have been extremely volatile since the start of 2016. The price for Brent Crude Oil, the global benchmark, fell to under USD 28.0 per barrel in mid-January—the lowest level since 2003—before rebounding and hovering between USD 35.0 per barrel and USD 40.0 per barrel in the first half of March. According most analysts, these movements mainly reflect sentiment rather than fundamental changes in the oil market. Frederik Kunze, Commodities Analyst at NORD/LB Bank stated that, “the latest upward movements in the oil price seems to be a slight exaggeration. Market participants probably overestimate the short term impact of the drop in the rig count and possible output freezes. This might lead to corrections. In the long run, however, a stronger demand as well as limited supply will lead to rising prices.”

January was a tumultuous month for many assets, including oil, which were impacted by growing concerns regarding the global economy, particularly the slowdown in the Chinese economy and the divergence in global monetary policy. The subsequent rally in oil prices was the result of speculation regarding a possible coordinated production halt by major oil producers, mainly Russia and Saudi Arabia. Qatar and Venezuela also agreed to participate in the production cap. Still, significant uncertainty persists regarding the agreement as it remains to be seen if key producers, such as Iran and Iraq, will join the deal.

Despite all the noise, analysts polled by FocusEconomics this month cut the price outlook for both Brent and WTI. Analysts now expect global benchmark Brent to average USD 46.8 per barrel in Q4 2016 (previous estimate: USD 48.5 per barrel) and the U.S. benchmark WTI Crude Oil to average USD 45.8 per barrel (previous estimate: USD 47.5 per barrel). Heightened volatility in oil prices is expected to persist in the coming months due to instability in financial markets and increasing concerns about the global economy. This month’s downward revision to oil price projections, and thus those of energy prices, continued to reflect analysts’ view that downward pressures on prices will stem from increases in production, particularly in Iraq, which continues to ramp up production, as well as the return of Iran to international markets following the removal of sanctions. On top of that, global demand continues to be relatively weak, which could contribute to further accumulation of stock. Energy prices are expected to rise 13.1% year-on-year in Q4 2016, with the outlook skewed to the downside as analysts cut the energy price forecast for Q4 2016 by 8.0% over last month’s Consensus.

BASE METALS | Prices poised for a better second quarter

Many base metals have followed oil’s latest rout, reflecting concerns over the health of the Chinese economy, which is by far the largest consumer of base metals and other industrial raw materials. However, the prices for most base metals rebounded in recent days and have consolidated gains following the multi-year lows registered in mid-January. In recent weeks, a rebound of note was observed in prices for copper, iron ore, tin and zinc, and it looks as though investors, consumers and traders may be positioning themselves for a brighter Q2. Nevertheless, most analysts also consider that metals prices may have reached an area of considerable technical resistance that should cap further gains, at least in the coming weeks.

Analysts expect base metals prices to begin to recover from the low readings registered at the end of 2015 and beginning of 2016 toward the end of this year. Prices are expected to increase on average 2.4% on an annual basis in Q4 2016 as further output cuts and a slow increase in demand are seen supporting a gradual increase in prices. This month’s forecast was virtually unchanged from last month’s projection.

PRECIOUS METALS | Rally in precious metals prices carries into March

Precious metals continued to defy gravity and extended their rally in the first weeks of March. The increase in prices, driven mainly by gold and silver, reflect speculators’ and investors’ strong demand for safe-haven assets as they are keen to seek refuge in the face of rising geopolitical risks, global macroeconomic instability and turmoil in equity markets. However, the strong increase in prices for gold and silver has slowed jewelry demand in India, which is the world’s largest importer of gold. Meanwhile, although the Indian government is expected to cut duties on gold imports this year, it has maintained the duty on refined bullion at 10% and reintroduced a 1% sales tax on jewelry, and this has the potential to reduce demand further.

Following the strong rally registered at the beginning of the year, precious metals prices are expected to continue increasing, although analysts remain cautious. Prices are expected to remain under pressure from a monetary policy tightening in the U.S. and the greater appreciation of the dollar. Conversely, investors’ higher appetite for safe-haven assets should support prices, in particular for gold and silver. The outlook for precious metals is positive. Commodities forecasters project that prices will rise on average 5.2% in the last quarter of 2016. This month’s projection contrasts the 1.1% fall that analysts had projected last month.

AGRICULTURAL | Milder damage from El Niño and improved U.S. supply keep prices in check

Despite concerns that adverse weather associated with this year’s El Niño phenomenon—one of the strongest on record—could damage crops around the world, large harvests in the U.S. and broadly-positive crop developments in the Southern Hemisphere improved the supply outlook for many agricultural commodities, while slowing demand and subdued economic activity in many emerging economies is putting a dent in overall demand. Another key factor adding downward pressure to prices is a persistently-strong U.S. dollar.

Prices for agricultural raw materials are projected to increase throughout this year. The increase is expected to be gradual, however, as ample availability of stock following successive bumper crops will prevent faster growth. Our panel of experts projects that agricultural prices will start to rise in Q1 2016 and that they will recover last year’s lost ground in Q4. The commodities analysts we surveyed for this month’s Consensus Forecast project that prices will increase an average of 5.7% year-on-year in Q4 2016, which, if confirmed, will represent the first rise since Q2 2013. That said, analysts remain cautions regarding the evolution of agricultural prices and thus cut the forecast from the 6.0% increase projected in last month’s Consensus.

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