In Swedbank’s Commodities and Energy Newsletter we analyse commodity and energy markets with a focus on oil, metals and food products.
Stronger economy supports commodity prices
Commodity prices have risen broadly in the last year. Since bottoming out in early 2016, oil prices are up about 85%, metal prices 30% and food prices 10%, helping to push global inflation higher. In addition to increased demand, commodity prices have been driven by capacity cuts in mining and the oil sector. We expect the global recovery in 2017-2018 to contribute to rising commodity prices and higher inflation. The impact from the commodity market should decline going forward, however, not least due to base effects. For Sweden’s part, a stronger krona could also help to keep inflation in check. We see room for slightly higher oil prices, but less than before. US production has proven to be more competitive, and we expect oil prices to stop at USD 60 per barrel next year. The chances of a further rise in metal prices in the years to come are good as the economy improves and more is invested in infrastructure and defense. The risk is that actual spending, especially in the US, will be pushed off further into the future. The rise in food prices has been modest and has been largely reversed in early 2017, especially with respect to grains. Harvests are strong, which suggests that prices will remain low, though the food market is highly sensitive to supply disruptions from unfavorable weather conditions, for example, which always hang like a dark cloud over food commodities.
Tentative commodity markets
Commodity prices are trending slightly higher, but the upward momentum has slowed this fall. We expect the price-dampening effect of commodities on global inflation to ease, and instead anticipate a positive contribution in 2017, not least due to base effects. Swedbank’s Commodity Price Index was unchanged in September versus August, while the index excluding energy commodities fell by 0.8%. On an annualized basis, the index has risen by 3.5% from September 2015 and by 0.4% excluding energy commodities. Higher oil and coal prices are the main reason for the increase. In September oil prices climbed by an average of 1%, but it wasn’t until the end of the month that the price rise became apparent, when the OPEC countries agreed to cut output by 700 000 barrels per day. Coal prices have trended even higher, up by 4.7% in September, or by 25.2% in annualized terms. Metal prices fell in September, while food prices turned higher after having fallen in July and August. The price of gold continued to rise in the wake of low interest rates and cautious central banks.
Less tailwind in commodity markets
Swedbank’s Total Commodity Price Index rose in April by 6.7% in USD terms, continuing its recovery after bottoming out in January. While the index has risen by 24% in recent months, it is still has a way to go to reach last year’s level (20% lower). Energy commodities saw the biggest rise. Since mid-January oil prices have risen by just over 90% to nearly USD 50 a barrel at the time of writing, which has pushed food prices higher as well. Cyclical industrial metals have also showed signs of recovery, though the trend differs by metal. Zinc has risen more than nickel, which remains under pressure from large inventories.
Prices of precious metals (gold and silver) have resisted the price drop better than other commodities. The 20% rise in gold since the beginning of the year may be partly due to uncertainty overshadowing the global economy with many political risks and more expansionary monetary policy. A cautious Federal Reserve and weaker USD have supported gold prices at the same time that several central banks have increased the gold exposure in their currency reserves.
Commodities drop broadly as China slows
- Weaker growth in emerging markets squeezes metal prices
- Lower oil production in US, but higher in OPEC nations
- Good harvests and low energy prices mean lower food prices