It is difficult to conceive of a much more challenging time for the commodity markets; most of the main commodities have collapsed in excess of 50% from their peaks, iron ore has crashed by 73%, crude oil has plunged by nearly two thirds, corn by 57%, copper by 53%, gold 45% and the main index, the UBS Bloomberg CMCI, 46%. Indeed, many commodity prices are close to the lows of 2008/9 resulting in huge swathes of the gains from the commodity super-cycle now having been wiped out.
In most instances, and particularly for industrial metals and bulks, the key factor generating another year of commodity price declines was excess supply, driven by slowing China and emerging market demand and rising production. For crude oil this new supply was principally US shale oil and in agriculture, the third excellent US harvest in a row has caused a further decline in grain prices. The sharp rise in the dollar was also most unhelpful amidst such a weak fundamental background.
Will Commodity Prices Improve in 2016?
Looking into 2016, not one of the leading commentators is bullish on commodities with most recommending underweight positions; Goldman Sachs, JP Morgan and Citi, for example. Yet conversely, few are actually that bearish on the prices of key commodities from current levels. Even Goldman Sachs, perhaps the most bearish of the main commodity commentators over much of the past few years, is currently expecting WTI crude oil to be $50 per barrel at the end of 2016 compared to $42 currently, a prospective rise of 19%, while JP Morgan, Citi, Credit Suisse and Barclays all expect even higher crude prices.
Gradual supply/demand rebalancing across the commodity complex is expected but at varying speeds as production cuts become essential for survival in many markets still mired in fundamental oversupply. Overall, 2016 could be the transitional year with high levels of volatility but perhaps some second half improvement.
Citi expects “a more persistent price recovery by 2017 for oil and base metals, and possibly agriculture”, while Goldman Sachs maintains that while current prices are not yet at an appealing entry point despite the perceived asymmetric risk-reward at low spot prices and post such weak returns, it “foresees much better commodity returns once we shift into the next phase of the business cycle, Recovery.” In general, most commentators favour oil over metals and agriculture and with little upside expected for gold.
