The Commodity Market Still Needs to Convince Investors That the Worst Is Over

The excess supply in the commodity market is decreasing too slowly for a quicker turnaround in commodity prices to occur, but in the last quarter of 2015, the trend of stabilization could persist if supply continues to decrease and demand continues to grow – emphasizes Ole Hansen, the chief commodity strategist at Saxo Bank, in his assumptions about key trends in the fourth quarter of this year.

– The last strong blow to the commodity market was the devaluation of the yuan in China, which severely impacted certain developing countries that were already under pressure from a strong dollar and fears of rising interest rates in the U.S. Russia and Brazil, for example, are in recession largely due to the sell-off in the commodity sector, but their internal issues, such as corruption in Brazil, or external problems, such as sanctions against Russia, should not be overlooked – said Hansen, adding that the low commodity prices we have now differ from the situation in 2008 and 2009 when the global financial crisis led to a sharp but short-lived recession that caused a collapse in demand.

– The current weakness is not a result of reduced economic activity but rather an increase in supply and a collapse in investor confidence – believes Hansen, explaining that all hedge funds with maturities in the U.S. commodity market have nearly record-low exposure to rising commodity prices. While this lack of confidence has affected prices, driving them to multi-year lows, it is also key to any eventual recovery, Hansen believes.

The recovery of the commodity market has already begun, according to Saxo Bank. Current lower prices in the crude oil market, a trend that started more than a year ago, still need to find a solid base that will convince players that the worst is over. Global demand has indeed risen sharply due to low prices, but supply is not relenting, so there is still a long way to normalization.    

 – With the reduction in production from the U.S., the Energy Information Administration believes that in 2016, production from non-OPEC countries will fall the most since 1992. If this happens, it will certainly help stabilize the market during the second half of 2016 and should aid in the gradual stabilization of oil prices and a potential rise to levels seen before 2015 – emphasizes Hansen, adding that the road to recovery is still very long and he believes that by the end of the year, a barrel of WTI oil will remain at $53, and Brent at around $55.

The second probably most interesting commodity in the global market is precious metals, gold and silver. These metals are relatively the most successful among commodities, although headlines over the past year have not suggested this. Throughout the year, the Bloomberg Precious Metals Index is down by just under ten percent, compared to the energy index with a minus of 50 percent or industrial metals with 26 percent. Given the sharp spikes and short-lived recoveries that have occurred since August, I believe in a hint of a turnaround in trends and we maintain our target that by the end of the year, gold will reach $1,250 per ounce, assuming it does not fall below $1,080, which would certainly change the trends, concludes Hansen.