COMMODITIES

8th Jan. 2016

WEEKLY WRAP
Editors: Caroline Bain & Julian Jessop

Poor start gives way to some more encouraging signs

• The prices of key industrial commodities fell further in the first full week of 2016, led by oil, as
China worries resurfaced again. The markets also concluded (rightly, in our view) that the
escalation of tensions between Saudi Arabia and Iran will simply make it even less likely that OPEC
will be able to agree to cut output any time soon. However, the week ended on a more positive
note as the Shanghai equity market and the renminbi stabilised. What’s more, commodities were
unfazed by the strong US jobs report, released on Friday. The large gains in non-farm payrolls
suggest that growth fears are overdone, but wage pressures are still too low to alarm the Fed. In
contrast, gold performed well throughout the week, consistent with our relatively upbeat view on
the prospects for precious metals in 2016 as a whole.

• The economic diary for the week ahead is relatively thin, although China trade data on Wednesday
(13th) will be worth a close look. Developments in China’s equity and currency markets will, of
course, also be followed closely, although our view is that fears of a “hard landing” and substantial
devaluation of the renminbi remain overdone. We expect China to keep its currency broadly stable
in trade-weighted terms in the coming months. The economic data should gradually improve too.

Chart 1: S&P GSCI by Category (1st Jan. 2015 = 100) Chart 2: Selected Price Moves in the Last Week
(Latest = 7th January) (1st January – 8th January) (%)
130 Energy 130 4 4
Industrial Metals 2 0.9 2
120 Precious Metals 120 0.7 Six of the largest falls
Agriculturals 0 0
110 110 -2 -2
-4 -4
100 100
-6 -6
90 90 -8 Six of the largest -8
increases
80 80 -10 -10
-12 -12
70 70

60 60
Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

Energy & Industrial Metals (page 2)

Precious Metals & Agriculturals (page 3)
Short-term Price Charts & Forecasts (page 4)
Selected Recent Publications (page 5)
Head of Commodities Research
Senior Commodities Economist
Senior Commodities Economist
Commodities Economist
Commodities Economist
Commodities Economist
Assistant Economist
Julian Jessop (julian.jessop@capitaleconomics.com)
Caroline Bain (caroline.bain@capitaleconomics.com)
John Kovacs (john.kovacs@capitaleconomics.com)
Simona Gambarini (simona.gambarini@capitaleconomics.com)
Tom Pugh (thomas.pugh@capitaleconomics.com)
Hamish Smith (hamish.smith@capitaleconomics.com)
Oliver Jones (oliver.jones@capitaleconomics.com)

Commodities Weekly Wrap 1

Energy
• Oil prices slumped further this week as more Chart 1: US Crude Oil & Gasoline Stocks (Million Barrels)
sharp falls in China’s equity index sapped Commercial crude oil (LHS) Gasoline (RHS)
495 235
confidence. What’s more, a dramatic surge in 490
230
US stocks of gasoline also raised fears about the 485
225
480
state of demand in the world’s largest oil
475 220
consumer (1). Even though the rise in gasoline 470 215
inventories was largely due to seasonal factors, 465
210
it still overshadowed the fall in stocks of crude 460
205
455
oil. (See our Energy Data Response, “US
450 200
Weekly Petroleum Status Report”, published on 13-Nov 20-Nov 27-Nov 04-Dec 11-Dec 18-Dec 25-Dec 01-Jan

Wednesday 6th.)
Chart 2: Oil Price (Brent, US Dollars Per Barrel)
• As a result of the recent price falls, OPEC’s 140 140

continued disarray and the uncertainty around 120

CE forecast
120
China, we have reduced our year-end forecast
100 100
for the price of Brent from $55 per barrel to
80 80
$45. (See our Energy Update, “A decade of two
halves for oil prices”, published on Thursday 60 60

7th.) However, we continue to expect the price 40 40

of Brent to recover to $60 in 2017 and $70 by 20 20

2020 (2). 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Industrial Metals
• The prices of oil and copper have had a fairly
Chart 3: Oil & Copper Prices
close historical relationship. As such, Chart 3 70 6,500
suggests that the copper price could be close to 65
6,000
$5,000 per tonne by end-2016 based on our 60 CE End-2016
Forecasts
revised oil forecast of $45 per barrel. However, 55 5,500

we think a pick-up in China’s economic activity 50

45 5,000
and subdued growth in supply will mean that
40
the copper price will be somewhat higher at Oil (Brent, US$ Per Barrel, LHS)
4,500
35
end-year. (See our Industrial Metals Update, Copper (LME, US$ Per Tonne, RHS)
30 4,000
“How will oil price developments affect Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

copper?”, published on Friday 8th.)

Chart 4: Iron Ore Price & Chinese Stocks
• We have revised down our forecast of the price 7 Iron Ore Inventories at Chinese Ports 160
(Inverted, Million tonnes, LHS)
of iron ore at end-2016 to $45 per tonne ($55 Iron Ore Price (US$ per Tonne, RHS) 140

previously) given the persistent expansion in 8

120
exports from Australia and Brazil and rising Lower
100
stocks
9
stocks in China (4). Although prices could fall 80
further in the near term, they should recover 60
10
and stabilise over the course of the year as
40
production is cut at some high-cost producers
11 20
and there is only a small decline in China’s Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

demand. (See our Industrial Metals Update, Sources – Thomson Reuters, Bloomberg, EIA, CE

“Iron ore prices to stabilise in 2016”, published

on Friday 8th.)

Commodities Weekly Wrap 2

Precious Metals
• The price of gold has increased by nearly 4% Chart 5: US Treasury Yields & Gold Price
0.4 1,300
this week on the back of safe-haven buying, US yields higher
0.5 1,250
triggered by the turmoil in China’s equity
0.6
1,200
markets and geopolitical tensions in North 0.7
1,150
Korea and the Middle East. Indeed, gold also 0.8
1,100
shook off a strong US payrolls report on Friday, 0.9
1,050
as wage pressures in the US remain 1.0 US 2-Year Treasury Yield
(%, Inverted, LHS) 1,000
1.1
comparatively subdued. Although we expect Gold (US$ per Oz, RHS)
1.2 950
further Fed tightening and dollar strength to Jan-15 Apr-15 Jul-15 Oct-15 Jan-16
prove headwinds for gold over the coming year
(5 & 6), the price should be supported by safe- Chart 6: US Dollar & Gold Price
haven demand, a pick-up in US inflation and 88
US Dollar Index (DXY) (Inverted, LHS)
1,350

strong buying from emerging economies. (See 90 Gold (US$ per Oz, RHS) 1,300

our Precious Metals Update, “Gold price to 92 Dollar 1,250

stronger
rally in 2016 despite US headwinds”, 94 1,200

published on Tuesday 5th.) 96 1,150

98 1,100
• Meanwhile, the more industrial precious metals
100 1,050
underperformed gold this week, weighed down
102 1,000
by fears of a collapse in China’s manufacturing Jan-15 Apr-15 Jul-15 Oct-15 Jan-16
demand. Palladium prices plummeted,
dropping by more than 10%.

Agriculturals Chart 7: Cocoa Price & Net Long Positions

120 Non-Commerical Net Long Positions 3,800
• Tropical commodity prices - including sugar, 100
(Thousand Contracts, LHS) 3,600
Cocoa (US$ per Tonne, RHS)
3,400
and coffee - fell sharply this week, pulled down
80 3,200
by a weakening of the Brazilian real. Cocoa 3,000
60
prices in particular have suffered in recent 2,800

weeks, as investor sentiment has soured (7). 40 2,600

2,400
This week was no different, with an 8% drop in 20
2,200
the price pushing it below $3,000 per tonne for 0 2,000

the first time since May. (See our Agricultural Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

Commodities Chart Book, “2015 laggards end

Chart 8: Soybean Price & Brazilian Reais Per US Dollar
year on a high”, published on Thursday 7th.) 0.0 Reais per US Dollar (Inverted, LHS) 1,900
0.5 Soybean Price (US Cents per Bushel, RHS) 1,800
• Meanwhile, the prices of grains and oilseeds 1,700
1.0
(with the exception of palm oil) held up 1.5
1,600
1,500
relatively well over the week. However, we 2.0 1,400

expect that soybean prices will fall this year, 2.5 1,300
CE 1,200
3.0
due to a combination of record global F'casts 1,100
3.5 Real Weaker
production and stocks, weakening producer 4.0
1,000
900
currencies (8) and a possible slowdown in the 4.5 800
2012 2013 2014 2015 2016 2017
growth of China’s demand. (See our
Sources –Bloomberg, Thomson Reuters, CFTC, CE
Agricultural Commodities Update, “More
weakness for soybean prices likely in 2016”,
published on Friday 8th.)

Commodities Weekly Wrap 3

Short-term Price Charts & Forecasts
Chart 1: Energy Chart 2: Industrial Metals (US$ per Tonne)
70 Crude Oil (Brent, $ per Barrel, LHS) 3.1 6,000 1,800
Coal (Rotterdam, $ per Tonne, LHS)
65 Copper (LHS)
US Natural Gas ($ per mBtu, RHS) 2.9 5,750
Aluminium (RHS) 1,700
60
2.7 5,500
55 1,600
2.5 5,250
50
2.3 5,000 1,500
45
2.1 4,750
40
1,400
35 1.9 4,500

30 1.7 4,250 1,300

Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16

Chart 3: Precious Metals (US$ per Oz) Chart 4: Agriculturals (US Cents per Bushel)
1,250 Gold (LHS) Platinum (LHS) 18.0 650 1,075
Wheat (LHS)
1,200 Silver (RHS) 17.5 1,050
600 Corn (LHS)
1,150 17.0 Soybean (RHS) 1,025
550
1,100 16.5 1,000
1,050 16.0 500 975
1,000 15.5 450 950
950 15.0 925
400
900 14.5 900
350
850 14.0 875

800 13.5 300 850

Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16

Source – Thomson Reuters

Actual Latest Forecasts

End End End End End
1 mth ago 1 week ago
Q1 16 Q2 16 Q3 16 Q4 16 Q1 17

(8th Dec.) (1st Jan.) (8th Jan.)

Energy
Crude Oil (Brent, $ per barrel) 40 37 34 30 35 40 45 55
US Natural Gas ($ per mBtu) 2.07 2.26 2.40 2.25 2.50 2.75 3.00 3.25
Coal (Rotterdam, $ per tonne) 47 48 49 48 47 46 45 44

Industrials ($ per tonne)

Copper 4,592 4,706 4,486 4,800 5,000 5,250 5,500 5,750
Aluminium 1,470 1,500 1,476 1,550 1,600 1,675 1,750 1,775
Iron Ore 39 43 42 40 42 44 45 47

Precious Metals ($ per oz)

Gold 1,074 1,060 1,102 1,100 1,150 1,200 1,250 1,250
Silver 13.91 13.79 14.04 14.25 14.80 15.70 16.50 16.75
Platinum 845 890 881 875 900 975 1,000 1,025

Agriculturals (cents per

bushel)
Corn 370 359 354 345 340 335 330 340
Soybeans 877 871 880 840 835 830 825 830
Wheat 470 470 473 445 440 435 430 440

Commodities Weekly Wrap 4

Selected Recent Publications
Date Publication Title
th
Fri 11 Industrial Metals Update Aluminium prices set for slow recovery in 2016
Energy Watch What to expect for oil prices in 2016?
Precious Metals Update Shrinking mine supply to bolster silver prices in 2016
Mon 14th Energy Update Paris agreement another nail in coal’s coffin
Precious Metals Markets Monitor Investor sentiment towards PMs still fragile
Tue 15th Commodities Update Why commodity markets (still) shouldn’t fear the Fed
Commodities Markets Chart Book Not all doom & gloom for commodities
th
Wed 16 Agricultural Commodities Update Sugar prices to recover a little further in 2016
Energy Data Response US Weekly Petroleum Status Report
Thu 17th Commodities Update Are commodity markets right to shrug off the Fed?
Energy Update What are the implications of US oil export restrictions being lifted?
th
Fri 18 Energy Watch What to expect for coal and gas prices in 2016
Agricultural Commodities Chart Book Volatile month for agriculturals
Industrial Metals Update 2016 should mark the turn for rare earths prices
Mon 21st Industrial Metals Update Another strong month for China’s metals imports
Agricultural Commodities Update Weak producer currencies to keep prices under pressure
Precious Metals Update Weak industrial demand continues to weigh on US silver trade
Industrial Metals Focus Aluminium prices to rise due to stronger automotive demand
Precious Metals Focus PGM prices to benefit from tighter emission control standards
nd
Tue 22 Precious Metals Update Precious metals supply to tighten as currency boost fades
Wed 23rd Energy Update Falling US production to support oil prices in 2016
Metals & Mining Watch Some reasons to be cheerful on copper
Industrial Metals Update Steel prices to recover slowly in 2016
Commodities Update Our six key themes for commodity markets in 2016
Energy Data Response US Weekly Petroleum Status Report
Mon 4th Jan. Commodities Update Bad news from China kicks off an unhappy New Year
Energy Update Saudi-Iran tensions unlikely to provide lasting boost to oil prices
Commodities Economics Chart Book A mixed December closes a bleak year for commodities
th
Tue 5 Precious Metals Update Gold price to rally in 2016 despite US headwinds
Wed 6th Industrial Metals Chart Book A bit of a breather in December
Energy Data Response US Weekly Petroleum Status Report
Thu 7th Industrial Metals Update Constrained supply may not be a panacea for alumina prices
Energy Update A decade of two halves for oil prices
Agricultural Commodities Chart Book 2015 laggards end year on a high
Fri 8th Agricultural Commodities Update More weakness for soybean prices likely in 2016
Industrial Metals Update Iron ore prices to stabilise in 2016
Industrial Metals Update How will oil price developments affect copper?
Precious Metals Update Three reasons to be positive on silver in 2016

To request a copy of any of these publications or to take a free trial of any of our services, please contact Conor Nevin in North America (+1
416 413 0428, conor.nevin@capitaleconomics.com), James Hayes in Europe (+44 (0)20 7808 4981, james.hayes@capitaleconomics.com) or
Tony Goldberg in Asia (+65 6595 5190, tony.goldberg@capitaleconomics.com).

Commodities Weekly Wrap 5