While sharp bounces from oversold conditions should be expected, there is little to suggest a fundamentally driven sustainable rally in any of the main commodities. Supply needs to be reduced in metals via production cuts while the whole Saudi Arabian venture of a surge in low cost production was aimed at reducing US higher cost oil production.
Nothing daunts or deters the gold bugs, with “peak gold” the latest narrative
So far it has managed to slightly lower US production but also substantially reduce US production costs and drastically lower breakeven levels. Oversupply remains.
Agriculture from an investment perspective is a weather-related lottery while those now nursing losses in gold will likely eventually lose patience.
What Can Investors Expect from Commodities?
Commodities, like currencies, are exceedingly volatile and highly unpredictable markets being driven principally by speculators and traders rather than investors.
A recent commentary from Axa Framlington’s Mark Tinker warmed to this theme noting “the fundamental problem with commodities and currencies is that they are not assets; they have no cash flows or projected returns, in fact they are simply traded prices.
As such they are what I refer to as “noise markets”, driven by momentum traders and hooked on news. When there is a lot of money trading in one direction the noise gets louder in order to attract more money in to allow the original noise maker to get out and the problem for real investors is that they tend to change their fundamental view based on this noise and are thus left stranded when the noise changes.
This year the noise peaked around the middle of June. The noise then flipped in reverse as the traders went short everything they had previously been long of. The so-called China trade of commodities, currencies and emerging markets flipped in the third quarter and even though these assets had been poor performers, it looks very clear to me that this triggered a widespread capitulation”.
Commodity markets bore the brunt of the risk unwind in Q3 and most commentators, while recognizing the prospect of what could be swift and substantial near term bounces as shorts are unwound, remain concerned about oversupply in most of the main markets and generally cautious:
Oil Forecast
Most commentators are of the view that oil prices will remain at broadly current levels into 2016. Goldman Sachs remain bearish, however, noting that while macro concerns precipitated the recent decline in prices, “it was warranted in our view by weak fundamentals. In fact, the oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016 on further OPEC production growth, resilient non-OPEC supply and slowing demand growth, with risks skewed to even weaker demand given China’s slowdown and its negative EM feedback loop”.
WTI prices are predicted to fall to $38 per barrel near term and only recover to $45 on a 12 month view, “our 2016 forecast is $45 versus $57 previously”. Analysts at JP Morgan are only slightly more optimistic with WTI forecasts at $44 for Q4, an average $46.50 in 2016 and a fourth quarter 2016 price of $52. Geopolitics may become more of an issue with Russia becoming heavily involved in Syria while low oil prices are causing havoc with M.E. countries fiscal positions
Industrial Metals Forecast
Neither are there many bullish views on industrial metals. Oversupply remains the main concern for copper and aluminium – which combined make up 75% of the sector. For the latter JP Morgan recently noted that “until serious amounts of higher-cost capacity closes and supply falls more in line with the current demand fundamentals we see aluminium price staying under pressure... (and)..., in addition to staying short copper, nickel and zinc, we also recommend going short aluminium. As for copper, Goldman Sachs remain bearish seeing “downside risks to our forecast... as demand concerns and the reality of 2016/17 supply additions hit home... copper’s bear cycle still has years to run.”
Agriculture Forecast
As ever, the outturn for agriculture prices in any one year is highly weather dependent but prices are also affected by inventories which remain high. Indeed, after two straight years of bumper crops in the US, 2015 has turned out to be fairly similar for soybeans, wheat and corn – hence Q3 weakness. With prices close to multi-year lows the downside is probably limited as prospects for harvests elsewhere in the world are more affected by an unfavourable El Nino weather event.
Gold and Precious Metals Forecast
In precious metals, the gold price continues to trade in the low $1,100’s, levels last seen in 2010 and more than 40% below the 2011 peak of $1,900. Nothing daunts or deters the gold bugs, however, with “peak gold” the latest narrative.
Some observers note that global gold production is about to fall in a big way with output topping out this year or next to be followed by a decline for a number of years. Chartists are turning bullish but perhaps, as noted several months ago, the better opportunities may be the in gold producers with valuations at mining companies at eight year lows and the sector having steadied in recent months following a 40% collapse since May.
