Monthly Commodity Update – The Trump effect

by: Casper Burgering , Georgette Boele , Hans van Cleef

The performance of commodity prices since the US elections has been mixed. Industrial metal prices have surged (copper, iron ore) on the Trump reflation view. However, the stronger dollar and higher US interest rates have led to lower gold prices. Finally, oil prices have become more volatile on speculation that OPEC will find it difficult to reduce supply, while US oil supply could also be higher given Mr Trump’s more liberal energy sector policies. But we expect demand to rise going forward which should support oil prices. We expect the rally in base metal prices to continue because of the uplift in the US economy and less weak outlook of the Chinese economy. The outlook for gold and silver prices will remain weak because of a last leg of US dollar rally and higher US Treasury yields in 2017.

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Energy: Oil prices: still bullish, but recovery will take longer

We revised our oil price forecast lower. There are two main uncertainties which continue to dominate the market and may prevent the oil market to hit a balance before H2 2017. For a start, uncertainty about the intended OPEC production cut, which should be formalised at the 30 Nov meeting. Higher production by many OPEC members makes the likelihood of such a production cut significantly smaller. Moreover, there is uncertainty about the possible impact of Trump’s energy policy on the oil market. Together with recent USD appreciation, we have lowered our oil price forecast for 2016, 2017 and 2018, but we still expect prices to rise.

Precious metals: Gold hit by Trump reflation

Gold prices rallied temporarily on Donald Trump’s elections victory. However, investor sentiment made a U-turn. The sharp rise in US Treasury yields and US equity markets in an environment of positive investor sentiment triggered a substantial rally in the US dollar and caused a crash in gold prices. The price behaviour signals that every rally in gold prices is used as an opportunity by investors to unwind existing long gold positions. This is a negative sign to the gold price outlook for the coming year. We remain negative on gold, silver and platinum for 2018.

Base metals: Demand expected to hold up well in 2017

Confidence in the fundamental base metals market trends has firmed, though large differences can be seen between the various types of metal. Sentiment in the copper market is good. Copper price jumped on solid Chinese macro-numbers early November and the Trump election triggered an acceleration on the prospect of more infrastructural spending. The outlook for the aluminium, zinc and nickel markets is still bright. However, price increases in aluminium are expected to remain relatively low going forward, due to abundant supply. We expect to see demand holding up well, but further dollar strength will weigh on prices.

Ferrous metals: Prices steel raw materials jumped

The coking coal and the iron ore price increased further since the release of our previous monthly update. Coking coal prices soared by almost 34%, while the iron ore price jumped by more than 25%. Chinese demand for coking coal remains robust and many mills switched to spot market transactions to service their needs. In iron ore, the Trump election drifted prices higher, while fundamentally nothing changed. In any case, cost for steel mills have increased and in the coming months steel prices will increase. We expect an upturn in underlying steel demand (construction and automotive) during 2017, but oversupply will remain an issue.

Agriculturals: Broken trends

The rally of sugar came to a halt in October and prices have lost some ground in November. Prices eased in November based on expectations by the USDA that the global sugar supply deficit will narrow in 2016/17. Robusta coffee showed a similar pattern as the 2016 uptrend was broken in November after the Vietnam export outlook improved and investors closed some of their speculative long positions. Also Arabica coffee prices gave back some of this year’s gains. The slide in cocoa prices continued based on an expected global cocoa surplus in 2016/17 and a stronger US dollar.