Commodities – oil and metals set for rally in 2017

Oil has come under heavy selling pressure again this week, striking three-month lows amid a fresh build in stockpiles. Crude entered a bear market again and slid below its 200-day moving average on Friday.

Longer term, however, there are signs the slump is over for crude oil and other commodities.

Commodity prices have bottomed out and are set for a rebound, the World Bank has said in its latest market report.

Key commodities rallied in the second quarter of 2016 thanks to healthier market sentiment and problems on the supply side.

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Overview

 

“Given this rebound and expected reduction in inventories during the second half of the year, the crude oil price forecast for 2016 is being raised to $43 per barrel (bbl) from $41/bbl in the April assessment, still a 15 percent drop from 2015,” said the World Bank.

Metals prices, it continued,  are projected to decline 11% in 2016, which is a bigger drop than forecast in April. According to the report, this is down to the ongoing surplus in the copper market.

“Agricultural prices for 2016 have been revised slightly upwards due to weather patterns in South America, but are still expected to register a marginal decline from last year,” added the World Bank report.

Meanwhile, safe haven demand for gold is dragging up precious metals prices, which were revised up 8 percentage points from April.

For 2017, the reports suggests there will be “a modest recovery” for most commodities as demand strengthens and supply tightens.

Energy

 

Energy prices climbed 30% in Q2, with oil prices averaging $47.70/bbl in June - 37% above their first quarter average.

This reflects supply disruptions from wildfires in Canada to militant attacks in Nigeria. Disruptions were also reported in Kuwait, Iraq, and Libya. Non-OPEC production fell but OPEC output made up the difference.

Non-energy

 

Non-energy commodity prices climbed by 7% in the second quarter.  Agriculture led the way with an 8% rise, while metals prices rose 5%.  Iron ore, zinc and tin saw the largest increase in prices thanks to stronger demand.

Gold was among the big risers, leading precious metal prices higher thanks to the continued low interest rate environment.

“Precious metals prices rose 8% due to strong investor demand prompted by anticipation of delays in the normalization of monetary policy in the United States and growing concerns about global growth,” the World Bank said.

Outlook

 

“All major commodity markets (with the exception of food and precious metals) will decline this year, but at a slower pace than predicted in April,” said the report. Its predictions are below:

Energy prices - expected to fall 16%, with average oil prices projected at $43/bbl in 2016.

Non-energy commodity prices – expected to fall 4%, down from the 5% drop forecast in the April assessment.

Metals prices – a decline of 11% is expected after falling 21% the year before. Nickel and copper to be the worst affected.

Precious metals – gold and co will buck the trend with an 8% gain on “stronger safe haven buying and deepening concerns about global growth prospects”.