Commodities: Renewed fears drive fall in commodities prices at the beginning of the year

February 16, 2016

OUTLOOK | Renewed fears drive fall in commodities prices at the beginning of the year

The last quarter of 2015 saw another fall in commodities prices mainly due to a combination of abundant supply, weak global demand—particularly from emerging economies—and a strong U.S. dollar. On average, commodities prices dropped 26.7% in Q4 2015 over the same period last year, which marked the fifth consecutive quarterly decline. That said, the drop in Q4 was less pronounced that in Q3, suggesting that some raw materials found their floor in the final quarter of 2015. However, as the new  year started, weakness in prices persisted as the aforementioned factors carried over into the first weeks of 2016. Moreover, a renewed fall in commodities prices, led by energy prices, was exacerbated by rising concerns regarding the health of global economy. In January, energy prices, driven by oil, fell to new multiyear lows, while price developments in base metals were somewhat mixed. Weakness persisted in agricultural raw materials, while prices for precious metals, driven by gold, rallied due to increasing risk aversion.

Analysts project that commodities prices will rise this year, although the recovery is expected to be gradual. A slow adjustment in the oil market and global cuts to production this year, coupled with the belief that many markets are close to touching floor, will put upward pressure on prices toward the end of the year. However, the scenario for commodities prices in 2016 remains challenging. A strong U.S. dollar—the currency in which most commodities are traded—is expected to persist this year on the back of diverging monetary policy in major central banks. Moreover, growth prospects for the global economy continue to deteriorate due to worsening economic conditions in emerging nations. Within this context, commodities prices are expected to remain weak for most of the year, yet analysts expect them to increase 5.3% year-on-year in Q4 2016. Nonetheless, risks to the outlook remain tilted to the downside as analysts reduced the price forecasts for the vast majority of commodities in this report.

ENERGY | Amid the low-oil-price environment, Russia and OPEC members meet to halt oil output

Energy prices fell at a double-digit rate in Q4 2015 and weakness carried over into the beginning of 2016. In fact, January was a tumultuous month for energy prices, in particular for oil prices, with weaker global demand, still strong U.S. supply and expectations that Iran would return to world markets earlier than anticipated. As a result, on 20 January, global benchmark Brent Crude Oil fell to USD 25.9 per barrel and U.S. benchmark WTI Crude Oil dropped to USD 26.7 per barrel. However, oil prices rallied in the following days amid speculation that Russia and OPEC would meet in earlier in February to discuss a 5% production cut. As the rumored production cuts didn’t materialize when expected, the price rally was short-lived. Prices fell again in the first two weeks of February due to renewed fears that global growth continues to falter. However, on 16 February, Saudi Arabia and Russia—the world’s largest crude producers—agreed to freeze oil output at January levels. Qatar and Venezuela also agreed to participate in the production cap. Due to these developments, prices are likely to jump in the coming days. However, it remains to be seen if other major producers, such as Iraq and Iran, get on board with the new policy. According to some analysts, the production freeze has been agreed to by nations whose production has not grown recently. Moreover, Iran reported that it is willing to discuss the deal, although the country has repeatedly stated that it would revive production and exports after sanctions on its oil industry were lifted.

Energy prices fell 40.7% annually in Q4 2015 (Q3: 46.2% year-o-year). This month, FocusEconomics analysts expect that energy prices, led mainly by crude oil, will begin a slow and gradual recovery from the current lows. Energy prices are expected to rise 22.1% year-on-year in Q4 2016, with Brent Crude Oil averaging USD 48.5 per barrel and WTI Crude Oil averaging USD 47.5 per barrel. On balance, the outlook for energy prices is skewed to the downside. Risks include a larger-than-expected increase in Iran’s exports and a possible recovery in Libya’s oil shipments. Ample oversupply is seen continuing to weigh on prices if global demand weakens more than expected. The view among analysts is that the recovery remains fragile and, as a result, they cut the energy price forecast for Q4 2016 by 6.6% over last month’s Consensus.

BASE METALS | Prices for some base metals rebound in February on producers’ cutbacks

Amid an oversupply in most markets and weakness in emerging economies, especially in China, base metals prices declined 28.7% annually in the last quarter of 2015, which marked the sixth quarter of decline. A further slowdown in China and larger-than-expected production associated with cost reductions and exchange rate depreciation in producing countries continued to exert downward pressure on prices. However, in recent days, prices for some metals rebounded on supply cut announcements and the belief that the downside for these metals is limited by the producer cost floor. A price rebound was mainly observed in copper, iron ore, lead, tin and zinc. Demand for base metals is likely to remain subdued in the first quarter of the year due to the beginning of the Chinese New Year (8 February). A post-New Year rebound in demand appears unlikely, given the ongoing deceleration in the Chinese economy and the current increase in its stockpile of metals. 

Following the price plunge in Q4 2015, base metals prices are expected to remain sluggish throughout most of the year. The Consensus view of analysts is that base metals prices will begin to recover in the last quarter of 2016 and they are seen increasing on average 2.5% year-on-year in Q4 2016. Production cuts in response to the low price environment are seen supporting a gradual increase in prices. That said, the forecast was reduced by 4.6% from last month’s projection as analysts consider that downside risks are still looming on the horizon. These risks continue to be slower demand from China and higher-than-expected production prompted by cost reductions and currency depreciation in producer nations.

PRECIOUS METALS | Precious metals see strong start to the year

Precious metals prices had a strong start to 2016, driven mainly by gold, platinum and, to a lesser extent silver. The driving force behind the outperformance in precious metals was the increasing institutional demand for safe-haven assets in the wake of the heightened financial turbulence that was observed at the beginning of the year. The increase in prices for platinum also reflected improved automobile sales data. Silver also fared well at the outset of the year, but prices were held back somewhat due to spillover effects and weaker sentiment in the wider base metals commodities. That said, prices for palladium have remained low in the past weeks due to underlying concerns regarding base metals and given its more relevant industrial uses.

Following an 8.0% year-on-year fall in Q4 2015, analysts expect prices for precious metals to continue falling throughout 2016. Prices are expected to be under pressure from a monetary policy tightening in the U.S. and greater appreciation of the dollar. However, investors’ higher appetite for safe-haven assets and robust demand from China and India should support prices, in particular for gold and silver. Due to the recent rally, the outlook for precious metals is tilted to the upside. Commodities experts surveyed this month by FocusEconomics project that prices will fall on average 1.1% in the last quarter of 2016. Analysts raised the Q4 2016’s forecast by 0.9% over the previous month’s projection.

AGRICULTURAL | Soft price changes registered at the beginning of 2016

Agricultural prices began to stabilize at the beginning of the year from the drops registered at the end of 2015. Weakness in prices persisted, nonetheless, due to favorable supply conditions (despite the strong El Niño phenomenon that is currently underway) with a number of agricultural products reaching record production levels. Other factors, including a persistently-strong U.S. dollar, low energy prices, high stock levels and weak growth in biofuels output, have contributed to keeping prices low at the outset of the year.

Following a 5.6% year-on-year decrease in Q4 2015, agricultural prices are expected to recover this year, but even that recovery is subject to downside risks. Dynamics in agricultural prices are more positive relative to other commodities. Our panel of analysts projects that agricultural prices will start recovering from Q3 2016 and that the increase will pick up momentum toward the end of the year. Commodities forecasters surveyed this month by FocusEconomics project that agricultural prices will increase 6.0% year-on-year in Q4 2016. The key upside risk associated to the outlook is the duration and intensity of El Niño. The intensity of the weather phenomenon is expected to peak during Q1 2016. That said, according to recent data, analysts’ view of the phenomenon is that, despite the fact that this El Niño is one of the strongest on record, its impact on agricultural prices is likely to be predominantly local rather than global. The majority of analysts also agree that a gradual, rather than fast increase in prices is supported by the elevated supply of most agricultural commodities.

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