Commodity Update – Downward risks have the upper hand

by: Hans van Cleef , Casper Burgering , Georgette Boele , Frank Rijkers

The recent weakening of the US dollar and building of speculative long positions by hedge funds and other investors, resulted in significant support for many commodities, except for precious metals. The support for those commodities was driven by hopes of economic recovery (leading to increased demand) as well as fear of supply disruptions. The weakening of the US dollar was the result of disappointing US data, in combination with fears of delayed Fed action. Going forward, we expect the US dollar to strengthen based on growth and monetary policy divergence. This would cap the upside for commodity gains in the near term. Looking further out, as demand accelerates, and individual supply issues are balanced out, we see upside potential for commodities.


Energy: Price recovery was based on speculation, not facts
The market anticipated a drop in US crude production as a result of lower oil prices. But while US rigs have more than halved already, US crude production only showed a modest easing in the past weeks. However, this does not change the significant oversupply situation which already exists for several years. The OPEC meeting is coming up in June, but we do not expect a change in OPEC policy. As the fundamentals did not change, and the situation of oil oversupply lingers on, we see downside risks to oil prices. Only a structural change to oil demand and global supply (especially US) could lead to a grounded oil price rally in H2.

Precious metals: Why gold’s descent is not over
For some time, precious metal prices have not showed a clear direction and as a result have moved in ranges. However, a lot is happening below the surface. For the coming months, we anticipate price weakness in precious metals. This is mainly because we expect a higher US dollar and higher US interest rate expectations to lead to further investor position liquidation. We also remain negative on gold in 2016 for the same reasons. But at some point in the coming months, economic fundamentals will come to the rescue and support silver, platinum and palladium prices in contrast to the situation for gold prices.

Base metals: stronger US dollar pushes prices up
The recent lift in base metals prices was caused by the US dollar weakening, demand improvements and higher oil prices. In our view, fundamentals in the aluminium market do not justify any strong price gain going forward. Sentiment in the copper market will be influenced by macro-economic data (esp. from China), US dollar volatility and the direction of the oil price. But for this year we keep especially our eye on Chinese import demand levels. Demand from China is still relatively low, but most recent import data shows some early revival. In the meantime, we expect price support due to positive macro-economic developments globally.

Ferrous metals: prices remain under threat of oversupply
In response to worsening steel market conditions, the Chinese government announced restructuring measures and aims to reduce domestic capacity. The plans are certainly a welcome initiative for the global steel market, but similar plans two years ago were not fully executed. This year’s main goals are to cut capacity (by 10% until 2018), gain more control over emissions and encourage M&A-activity. This looks ambitious, but we have our doubts that this will restore balance. In the meantime, excess steel from China is finding its way to international markets, depressing prices along the way.

Agriculturals: Sugar is in grip of dollar movements
The sentiment in the grains market was dominated by mostly weather-related issues and news about sowing data in the last weeks. Good prospects for US corn, wheat and soybeans signals stabilisation at the current low price levels. Wheat is moving in a divergent direction from the USD since half April. The reason therefore is abundant supply. The cocoa price has risen over 5% in the last two weeks, because of weakening in Ghanese production data, which could also support prices in the coming months.