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Oil range-bound while metals rally higher: commodity price index

Scotiabank Commodity Price Index advanced 4.9 percent m/m in July, with strength witnessed across major commodity segments


August 22, 2017
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TORONTO—The Scotiabank Commodity Price Index advanced 4.9 percent m/m in July, with broad-based strength witnessed across all major commodity segments. Oil prices remain anchored in the $45–50/bbl range (WTI) as the market waits for concrete signs that demand is finally beginning to outpace supply after nearly three years of sustained surplus. However, prices are expected to move above $50/bbl through the latter half of 2017 as market tightness is confirmed by sustained declines in visible inventories.

“Compliance with the production deal among participating OPEC members remains impressive, averaging 98 percent year-to-date, but discipline is slipping as the supply agreement moves into its ninth month,” said Rory Johnston, Commodity Economist at Scotiabank. “We expect that OPEC+ will agree to reintroduce withheld production based on prevailing market conditions when the deal ends in March 2018, ensuring that the market is not overwhelmed as members reopen their taps. However, the exact character of this production return remains unclear and the market will need further direction from participating governments to guide expectations.”

Venezuelan output continues to slide and risks to production are rising as the country falls further into domestic disarray. Beyond internal threats to the reliability of future shipments, the international community has widely rebuked the government’s recent moves to rewrite the constitution and the U.S. has threatened sanctions, including a potential ban on the import of Venezuelan crude. Such a ban would likely have little impact on global supply balances as Venezuelan cargoes would simply be diverted to other willing buyers, but it would have an impact on regional benchmarks that would likely need to replace lost barrels.

On the metals side, prices have benefitted from China’s twin shocks to both the supply and demand of many industrial metals. Strong economic activity in the first half of the year came on the back of stimulus-induced upswings in the manufacturing and construction sectors, increasing the demand for heavy commodities like steel and copper. At the same time, Beijing is reducing available supply by pushing ahead with plans aimed at cutting back excess domestic production capacity, which has weighed on profitability and exacerbated debt loads in an industry dominated by state-owned players.

Other highlights include:

  1. Iron-ore prices expected to fall to around $55/t by 4Q17, facilitating the needed contraction of low-quality Chinese production as Australia and Brazil ramp up high-quality capacity.
  2. Met-coal prices expected to fall toward $125/t, driven down by ample seaborne supply.
  3. Zinc’s outlook remains fundamentally strong, even though prices may temporarily fall back in sympathy with the broader metals market.
  4. Aluminium’s outlook is slightly more uncertain given rapidly-changing supply expectations in China, and prices jumped to a nearly three-year high in mid-August.