Commodities: Commodities - Base metals and energy market lead price gains in Q1
May 17, 2017
Broad-based price gains were seen across commodity markets in Q1 2017, as prices continued to recover from 2015 and 2016’s lows. The FocusEconomics global commodity price index came in at 74.7 in Q1, above Q4 2016’s 71.6. According to FocusEconomics’ calculations, global commodity prices grew 4.4% at the start of the year from Q4 and were up 23.5% on an annual basis. As a result, prices are now resting at the highest level since Q2 2015.
Behind Q1’s result was strong impetus from energy prices, which are notably above last year’s levels. The deal between OPEC and non-OPEC producers has helped curb production and energy prices averaged a near two-year high in Q1. In addition, an improving global economy boosted base metal prices and moderate gains were also seen among precious metals and agricultural commodities.
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Looking forward, FocusEconomics analysts expect momentum to recede throughout the second quarter and see prices growing a moderate 0.3% from Q1. While dynamics from the energy market should remain solid, a poorer performance from base and precious metals will limit gains. Tightening liquidity in China, as well as concerns over the country’s growth, is denting base metal prices, while an expected hike in U.S. interest rates is eroding the appeal of precious metals.
Supply cuts lift outlook for energy prices
After languishing at low levels in 2015 and 2016, the rebalancing of the energy market is on track midway through the year and FocusEconomics analysts see prices recovering lost ground in H2. In Q4 2017, panelists see the FocusEconomics energy price index averaging 102.3, which if confirmed, would be the highest level seen since Q4 2014. In addition, it would represent a 12.0% expansion over Q4 2016. In 2018, panelists see the index rising further to 108.9.
Behind the forecast are higher oil prices, which are expected to rise even further due to supply cuts. While an initial six-month deal to cut production among OPEC and non-OPEC nations is set to expire in June, analysts are confident that it will be extended and in May, energy ministers from Saudi Arabia and Russia, stated that production cuts should be prolonged until 2018. Ministers from OPEC and non-OPEC countries will meet on 25 May to discuss the agreement.
On top of oil, FocusEconomics analysts see uranium prices ending the year on a better note. However, coking and thermal coal prices are seen falling in H2 and ending 2017 at a lower level than a year earlier. Natural gas will average slightly higher in Q4 2017 compared to a year before.
Positive global backdrop fuels slight pick-up
An improving global economy is seen putting upward pressure on base metals prices and our analysts see the FocusEconomics base metal price index averaging 65.2 in Q4, which represents a 4.5% annual increase from Q4 2016. In Q4 2018, the index is seen rising slightly to 65.4.
After soaring in the first quarter of the year, aluminium prices are seen continuing to rise on an annual basis in the reminder of the year although at a cooler pace. Supply constraints are fueling increasing prices, although concerns over China’s economy continue to hurt investor sentiment. The positive momentum in copper prices is also expected to wane, although prices are still seen ending the year 7.1% above Q4 2016’s level due to tighter supply and a dynamic U.S. economy. Meanwhile, prices for iron ore have plunged since the start of the year but FocusEconomics analysts see a slight pick-up from current levels by year-end.
Divergent outlook among agricultural commodities
A mix of weather, demand and politics is convoluting the outlook for agricultural commodities and our panelists hold divergent views across goods. Overall, the FocusEconomics agricultural commodities index is seen averaging 122.0 in Q4 2017, which is 5.0% higher than the same quarter last year. In 2018, the index is seen increasing slightly and averaging 124.3 in Q4.
Corn prices are seen rising substantially, partly due to a shift away from corn production by U.S. farmers. A fall in output and healthy consumption should support higher wheat prices, and the price of milk is also seen notably above 2016’s level in Q4. On the other hand, healthy supply has led FocusEconomics analysts to project lower prices for cocoa comparted to Q4 2016 as well as for soybeans and sugar.
All eyes on Federal Reserve meeting
Events in the precious metal market will be dominated by the outlook for U.S. interest rates as well as global uncertainty. Our analysts see the FocusEconomics precious metal index averaging 187.8 in Q4, which is only 0.4% above Q4 2016’s level. While elevated political uncertainty is fueling demand for gold and silver as safe-haven assets, a higher interest rate forecast for the U.S. is eroding gold and silver’s appeal as investments. In Q4 2018, the index is seen averaging higher at 193.2.
Meanwhile, a stronger global economy is supporting demand for palladium and platinum for their industrial uses. Palladium prices have surged in 2017 so far, buoyed by robust car sale data. While platinum has seen more moderate gains this year, a supply deficit is supporting a higher price outlook.