Many global commodities hit by supply glut
A broad range of commodities has fallen to the lowest level in 16 years, wiping out many of the gains that were made during the Chinese boom during the first decade of this millennium. The main trigger for this weakness has not been slowing demand, but increased supply at a time when demand growth has failed to keep up, writes Ole Sloth Hansen.
Rising production of key commodities from oil to corn and iron ore are currently not finding the demand needed and, as a result, new lower levels are being sought in order for the market to properly balance supply and demand.
Financial as well as physical investors in gold have increasingly been looking elsewhere for investment opportunities. In July, gold hit a fresh multi-year low as selling from hedge funds and investors using exchange-traded funds intensified. The increased nervousness triggered by the devaluation move in China on August 10 however helped trigger a surge in short covering. In the near-term, gold will continue to struggle amid nervousness about what the United States (US) Federal Open Market Committee will do on interest rates. Analysts see the risk skewed to the upside as raised market uncertainty and falling emerging market currencies and stocks will increase demand for alternative investments. The end of year forecast remains at USD1275 (QAR4641) an ounce.
Ample supply from North and South America should help fill up inventories for the coming winter, so unless there is a last-minute upset ahead of the harvest, a limited upside remains for corn.
Global supply has been ramped up in anticipation of continued strong demand growth from emerging market countries, not least China. With that now hitting the brakes a response from producers in terms of slowing production has yet to materialise.
On that basis there is a limited potential but will at the same time not rule seeing some additional stimulus measures being applied by China. Copper should recover from current low levels towards USD5500/tonne (QAR20,020/tonne) at year-end.
With the outlook for industrial metals being one of a slight recovery before year-end, silver could outperforming gold and the price outlook could be around USD17/ounce (QAR426/ounce).
Oil is suffering from chronic oversupply. In its desperation to generate cash, the Organization of Petroleum Exporting Countries has ramped up production, while the expected reversal in US shale oil production has yet to materialise. During the coming three months, US refinery demand for crude will slow due to seasonal factors and this will lead to another increase in US inventories which currently stand some 100 million barrels above the five-year average. While it is generally believed that crude oil at USD40 (QAR145.6) is unprofitable for many US producers, the question is how soon we will see this impact in terms of lower production. Another concern that has emerged in recent weeks is whether the upbeat forecast for demand growth can be maintained given the current uncertainty related to China, the world’s largest importer of crude. Any downward revision to demand growth will only increase the supply glut thereby leaving the exposed to further losses before production eventually is reduced. By year-end, analysts see West Texas Intermediate crude oil back towards USD55 (QAR200.2), but it could be a very bumpy ride getting there.
Ole Sloth Hansen is the head of commodity strategy, Saxo Bank.