Monthly Commodity Update – Dollar appreciation to limit upside potential

by: Georgette Boele , Casper Burgering , Nadia Menkveld , Hans van Cleef

After a more than ten percent gain in 2016, the upside potential for the CRB-index has faded somewhat for 2017, although we still expect some further gains for most base metals and for oil prices. Strong demand from China and reduced oversupply can still result in modest price increases. We expect oil prices to remain relatively stable in the first part of the year as the effects of a lower production by OPEC will be counterbalanced by increased production in the US. The rebalancing of the market away from excess supply will push prices higher in the second half. Our view on soft commodities and grains is more neutral to negative. We expect lower precious metal prices for the first half of 2017. We expect more rate hikes by the Fed (three of 25bp) than is currently anticipated in financial markets. Therefore, we expect the dollar to rise and EUR/USD to drop to 0.95 in the course of the year. As most commodities are denominated in dollars, our expected dollar-appreciation in 2017 should weigh on most commodities, or at least, could limit some of the upside potential.

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Energy: Oil prices: range bound

We expect oil prices to remain within a relatively small trading range during the first half of the year. OPEC/non-OPEC production cuts could prove supportive for oil prices. However,  higher oil prices will also trigger higher US shale oil production. On top of that, a stronger US dollar will also cap the upside potential of oil prices. Therefore we forecast a trading range of USD 50-60/bbl during the first half of the year. Risk of a lack of investment in the sector – threatening non-OPEC/non-shale oil production – could trigger speculative longs as soon as investors start to anticipate a lower oversupply/shortages in the market in H2 2017.

Precious metals: Lower gold prices                                                    

The outlook for gold prices for the first half of the year is negative. Investor demand remains the most crucial driver pushing gold prices lower. From an investor point of view there is little reason to hold gold. A further rise in US nominal and real yields is likely to continue to weigh on prices. Moreover, the last leg of a powerful rally in the US dollar is under way and this is weighing on gold. Prices could drop below USD 1,100 per ounce and approach the 2015 low of USD 1,046 per ounce. We expect prices to bottom out in USD 1.046-1.100 range.

Base metals: Good sentiment in base metals markets

Aluminium demand remains robust. But continuing high availability is preventing strong price gains. The copper price is also continuing its upward trend, though erratic stock patterns constitute an obstacle. The nickel market has seen LME stocks grow in the past two months, leading to weaker prices. We see a price rise for nickel thanks to the anticipated shortages in 2017. However, high nickel stocks, uncertainty about Indonesian availability and demand for stainless steel will put a brake on the pace of this increase. Zinc prices are expected to rise further in 2017, driven by the market imbalance and the recovery in construction globally.

Ferrous metals: Correction in prices steel raw materials

We expect divergent price trends in the ferrous metal markets. Raw materials (iron ore and coking coal) will stay on a downward trend due to more ample supply. With the price correction in the coking coal market having been under way since mid-December, the market appears to be moving towards a new balance. Iron ore availability is still high and this dampens price gains. The price for steel may rise a little further, also driven by relatively lively demand. This price movement will be sustained until the spread between the steel price and raw material prices normalises.

Agriculturals: Favourable weather puts pressure on soybean prices

The year started off positively for wheat, due to cold weather in the US and a lower dollar. But according to the USDA the wheat stocks are projected to reach the highest level since the late 1980s. Prices for soybean are also under pressure. After a relatively good year in 2016 due to high demand and weather constraints, things might be different in 2017. Harvesting conditions in Brazil are favourable. An abundant harvest is expected. In addition, US soybean export sales slowed down, which could be a signal that demand is cooling.