The commodity price index rebounded in the second quarter of 2016, and the upward momentum is continuing from the lows of January on account of improved market sentiments and tapering supplies. We have seen the oil prices jumping by more than a third due to supply constraint and strong demand. The crude oil is expected to be around $ 43 per barrel given the reduction in inventories and rise in demand as per the World Bank commodity outlook issue for July 2016. Metal prices have been projected to decline by 11% in 2016 mainly driven by larger surplus from copper market. Agricultural prices were slightly upward due to weather pattern in South America, but are expected to decline. The increase in demand for safe heaven assets post Brexit, moved precious metal prices by 8% from April assessment by the World Bank. For 2017, the World Bank expects a modest recovery for most commodities due to the strong demand and constrained supply.
Commodity prices demand (Source: World Bank)
Commodity prices index expected to decline: All main commodity price indices except food and precious metals are expected to decline. The reason being the supply is increasing while demand is poor on account of weak growth prospects from emerging market and developing economies.
Energy prices expected to fall ~16%: Energy prices are expected to fall by ~ 16% with average oil prices to be at $43/ bbl in 2016. For oil this implies marginally higher price in H2FY16 due to the controlled supply of oil in the market. Downside risk to the energy market price forecast is higher than expected output while demand from emerging market is weakening. Energy prices declined 45% in 2015 and continuously fell even in 2016 dropping over 16%. Since agriculture is energy intensive, lower energy prices reduced the cost of producing food commodities. Lower energy prices are said to also ease policy pressures to encourage production of biofuels.
Non energy commodity prices are expected to drop 4%: Non energy commodity prices are expected to fall by about 4% in 2016. Agricultural prices to rise by 2% but it is lower than 2015. This is due to dry weather condition in South America. Agricultural prices would be lower due to low energy prices as well as increased use of biofuels. Fertilizers are expected to fall by 18% due to surplus capacity, weak demand and low natural gas prices.
Metal prices are expected to be under pressure: Metal prices have been estimated to fall by 11% in 2016 after falling 21% in 2015. The prices were affected by weak demand prospects while new capacity addition is still on. Excess capacity with poor demand would keep metal prices under pressure. The larger decline is expected for nickel and copper due to over capacity while zinc would see tightening supply due to closure of the largest mine. Moreover, slowdown in China and currency depreciation in key suppliers would further add to a fall in metal price.
Commodity prices forecasts (Source: World bank)
Precious metals are estimated to rise further: Precious metal on the contrary is expected to rise by 8% in 2016 on stronger safe haven buying post Brexit and deepening concern about global growth prospects. Gold prices are highly influenced by dollar movements. The weakness in the dollar results into rise in precious commodity like gold, silver, and platinum. The falling income from bank and government also resulted into the investment in Gold, rising its demand influencing its prices to upward moves. The fall in dollar would be another forcing factor to boost gold prices, which would be an opportunity to look into the gold stocks. As the US Dollar falls from all of the Fed’s continuation of loose money policies, it would lift up gold prices to unprecedented highs. The high reserve based gold mining companies or companies announcing the gold reserves are likely to see solid upsurge in share price. There are market reports that at the S&P500 level, value of 18 out of the 23 gold miners with a market valuation of at least $300 million more than doubled, while 10 have at least tripled and five have quadrupled this year. Silver miners with $300 million plus valuation have been up between 137% – 532%.