Commodities Economic Outlook May 2018

Commodities: Economic Outlook Commodities May 2018

May 16, 2018

Rally in oil prices and rising geopolitical threats push up commodity prices

In April, commodity prices recovered some of the ground lost in the previous month, when prices for a wide range of commodities, especially base metals, plunged following U.S. President Donald Trump’s decision to impose tariffs on aluminium and steel imports, as well as fears of an all-out trade war between China and the United States. Commodity prices rose an aggregated 2.0% month-on-month in April, contrasting March’s 1.9% decline. Energy was the main driver of April’s rise, followed by base metals. While they increased, prices for agriculture and precious metals recorded only small gains in the month.

Energy prices benefited from the ongoing rally in oil prices because of a combination of limited oil supply, strong demand and geopolitical risks. Participants in the OPEC oil cap deal continue to deliver, with compliance levels well above 100%, while resilient global growth is translating into strong demand for oil. Moreover, in April, fears that the U.S. would reinstate economic sanctions against Iran also boosted oil prices. On 8 May, following Trump’s announcement that the U.S. would effectively withdraw from the Iran nuclear deal, oil prices rallied even further. The decision could lead Iran to reduce oil supply in a context of a tight global oil market and fuel political instability in the Middle East, in which around one-third of the world's oil production is concentrated.

Base metal prices are slowly stabilizing following a plunge in March due to the imposition of tariffs on aluminium and steel imports by the United States. A softer tone adopted by both China and the United States is easing concerns about a full-scale trade war between the two countries, and recent data suggesting that the global economy is sailing smoothly bodes well for base metal prices. Moreover, on 30 April, Trump extended tariff exemptions on aluminium and steel by an extra month, to 1 June, for Canada, the European Union and Mexico. In the case of Argentina, Australia, and Brazil, tariffs were lifted permanently. In April, base metal prices benefited from higher aluminium prices as the U.S. threatened to impose sanctions on Russia’s largest aluminium producer, which would tighten global supply.

Precious metal prices continue to fluctuate in tandem with geopolitical risks, while agricultural prices are climbing due to solid demand and concerns over supply.

In this month’s survey, analysts polled by FocusEconomics expected commodity prices to rise 5.0% in Q4 2018 from the same period in 2017, mainly due to higher energy and agricultural prices.

Further down the road, analysts predict that lower energy prices, especially for oil, will drive growth in global commodity prices to slow. The Consensus view among commodities experts is that commodity prices will increase 2.6% in annual terms in Q4 2019.


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