Will commodity markets record their first positive year since 2010? It seems there are good prospects for that…

The commodity market is on track to record its first year of positive returns since 2010, but given that the Bloomberg Commodity Index still shows an increase of less than ten percent, this situation could easily change by the end of December. The main contributors to these good results are precious metals with a gain of 26 percent, while the energy sector is still stabilizing after a two-year sell-off. Besides precious metals, the commodity index has actually recovered due to supply reductions, whether it is about cutting production for crude oil and industrial metals or unintentional disruptions due to adverse weather conditions for the so-called ‘soft commodity’ sector, Saxo Bank reports in its analysis of expectations for the fourth quarter.

– The last quarter was supposed to bring a strong recovery in crude oil prices, or at least that’s how it looked at the beginning of the year. We expected that the prolonged low price would ultimately stimulate strong demand growth, while simultaneously reducing expensive production just enough to balance the market. However, prices have stabilized in the range of $45 to $50 per barrel and will continue to try to move away from this sort of deadlock by the end of the year – emphasizes Ole Hansen, head of commodity market analysis at Saxo Bank, adding that increased OPEC supply and Russian production, which has reached new record levels, have once again delayed the rebalancing process. The stabilization of oil production is further hindered by resistance from high-cost producers in the U.S. as they continued to increase the number of rigs in the last quarter.

Entering the fourth quarter, we have an agreement from the conference in Algeria that OPEC will cut production by up to 700,000 barrels per day, aiming to establish upper production limits to finally stabilize the market. However, key details remain unclear, and Hansen points out that it is uncertain who will cut production if Nigeria, Libya, and Iran are excluded from the agreement and who will monitor the ‘barrel-for-barrel’ cuts, given the expected increase in production from Nigeria and Libya. At the same time, analysts are skeptical about whether OPEC will truly be able to fulfill its promise, as fresh examples from the past show that actual production has often exceeded agreed limits. Finally, the question is when this cutting will begin – if it happens after the planned OPEC meeting at the end of November, the global market will only feel changes once we seriously enter 2017. It turns out that the decision was easy to make, but negotiations are just beginning, Hansen believes, emphasizing that Russia’s potential entry into this combination could bring prices back to levels from July of this year, but even then they will not be significantly higher.

U.S. elections, the Fed’s interest rate hike, the direction of the dollar, the global bond market, concerns about central banks’ experiments with negative rates… all these are topics in focus for gold investors, given their potential impact on trading.

– Gold was in a price range for most of the third quarter that was defined after the Brexit vote, but the main reason for the overall recovery of gold and silver is the continuous decline in yields in the global bond market as the cost of holding gold relative to low or negative yields from safe government bonds has decreased or even been completely eliminated – says Hansen, noting that the market’s obsession with the direction of short-term interest rates in the U.S., the dollar, and general trends in commodity markets also influence the positive movement of gold prices.

Overall, long-term forecasts for gold prices are positive, although the situation in the market over the past few months shows that the yellow metal needs a longer period of consolidation. Given that the dollar could soon start to strengthen, gold could rise if denominated in other currencies, such as the euro, New Zealand dollar, and Japanese yen, conclude the Danish investment bank.