Resurrecting commodity prices?

by: Casper Burgering , Hans van Cleef , Georgette Boele

This year the CRB-index has risen by 10%. But over the past month the pace in growth of the index deteriorated slowly. Since mid-March, the CRB-index increased by only 1.4% until now. As we discussed in our previous Monthly Commodity Insights (March 2019), the trade talk narrative still has a positive impact on most commodity prices, but price gains become smaller.

Commodity price performance differed strongly in the various classes over the past month. WTI oil price increased by 9%, while natural gas price decreased by 8%. Metal prices such as gold and aluminium were pressured by 2% and copper price remained stable. Prices in grains markets – such as wheat, corn and soybean – decreased on plentiful supplies.

Positive China macro numbers have increased sentiment commodity markets, especially in industrial raw materials markets. Sound fundamentals will lift prices in most commodity markets. But given the high level of uncertainty, price gains will be capped.

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Energy: Oil rally continued – focus turns to Iran sanctions and OPEC ‘s reaction

We expect an average Brent oil price of USD 70/bbl in 2019. From current levels, both upside and downside risks are emerging. Downside risks contain Trump’s comments towards OPEC to rise production and cap the oil price. Upside risks are due to a possible final trade agreement between US and China as well as the insufficient level of investments in future exploration of – mainly – heavy sour oil.

Precious metals: Higher gold, silver and platinum prices

We remain positive on gold prices. First of all, our expectations of a weaker US dollar will lift price. Also, a less hawkish central banks and a more constructive outlook on the Chinese yuan will be supportive. And finally, the positive technical picture is also positive for price. The outlook for silver mostly resembles that of gold prices, as both precious metals tend to move in tandem. We think that in the near-term there is less upside potential in silver prices given the less favourable cyclical outlook.

Base metals: Signs of positive US/China trade talks continue to be supportive

Investors await the US-China trade war resolution. As soon as the talks result in a deal, prices will rise further. However, a positive outcome is already mostly priced in. We think that during 2019, base metals prices will remain strong. Fundamentally base metals markets are in good condition. In addition, our projected weakening of the US dollar (EUR/USD 1.16 eop 2019) will also provide support for base metal prices.

Ferrous metals: Markets remain plagued by overcapacity

Overcapacity will remain an issue in steel, iron ore and coking coal markets. Demand for steel is still growing globally, but the pace of growth is slowing because of a further cooling down of the Chinese economy and uncertainties in global trade. Overcapacity still remains a problem. Both China and Europe produce too much steel on an annual basis. China has ambitious plans to cut steel capacity by 150 million tonnes by the end of 2020. This helps to re-balance the global steel market and will eventually lift prices.

Agriculturals: Sufficient supplies in many agricultural commodity markets

The price pressure in a number of agricultural commodity markets can mainly be explained by the high availability. For example, the supply in the wheat, maize and soybean market is currently good. This has caused price pressure. There is currently sufficient supply in the sugar, cocoa and coffee market. However, the outlook for grains demand remains good, partly due to the higher production of ethanol. The demand for sugar is under pressure in Western economies, but has more growth potential in Asia. The demand for cocoa and coffee also remains robust, partly thanks to the current relatively low prices.