Commodity Markets Outlook. A World Bank Quarterly Report Read here
Most commodity prices continued to rise in the third quarter from their lows in early 2016. Crude oil prices are forecast to rise to $55 per barrel in 2017 from an average of $43/bbl this year as the market continues to rebalance and OPEC is likely to limit output. Metals prices are projected to rise more sharply in 2017 than forecast in July, as a result of faster-than-expected mine closures. Agricultural commodities prices are anticipated to rise slightly in 2017 after a minimal decline this year but with wide variations in the outlook for different commodities depending on supply conditions. This issue of the Commodity Markets Outlook analyzes OPEC’s recent decision to limit output by examining earlier commodity agreements and assessing the implications of changing market forces over the past decades. It concludes that commodity agreements have limited ability to influence global prices over extended periods of time and eventually collapse, often with unintended consequences. The ability of OPEC, the only surviving commodity organization seeking to influence markets, will be tested in the presence of unconventional oil suppliers, notably the U.S. shale oil industry.
OPEC in historical context: Commodity agreements and market fundamentals
On September 28, members of the Organization of the Petroleum Exporting Countries (OPEC) agreed to limit crude oil output to 32.5-33.0 million barrels per day, effectively ending two years of unrestrained production. This marked an important policy shift, especially for Saudi Arabia, the organization’s largest producer. The details of OPEC’s plan are to be worked out and announced at the group’s meeting on November 30. The Islamic Republic of Iran, Libya, and Nigeria, all OPEC members, are likely to be exempted from the production limits because of earlier production losses. The plan, if implemented, would be the first production cut since 2008. OPEC is also preparing a framework for consultations with non-OPEC producers. Against this background, this Special Focus section addresses the following questions: (1) What does OPEC’s new plan entail? (2) How does OPEC compare with earlier formal commodity agreements? (3) What do market forces over the past decade imply for OPEC’s ability to control prices? It concludes that formal commodity agreements have limited ability to influence the market and eventually collapse, often with unintended consequences. In the case of OPEC, the only surviving commodity organization seeking to influence markets, guiding global oil prices will be challenging in the presence of unconventional oil producers, notably U.S. shale oil.
Commodity Market Developments and Outlook
The World Bank Energy Price Index rose 3 percent in the third quarter of 2016 from the previous quarter. Oil prices were largely unchanged, as market rebalancing stalled. Meanwhile, coal prices surged 30 percent on government-ordered production cuts in China that raised import demand. Natural gas prices jumped 21 percent, largely due to developments in the United States: strong cooling demand due to warm weather, falling production, and higher exports—both by pipeline to Mexico, and via liquid natural gas (LNG), mainly to South America.
Gold prices increased 6 percent in the quarter, reaching a three-year monthly high of $1,340/toz in August. The gains were driven by record investor demand via exchange-traded funds and the fallout from the Brexit vote. However, prices fell sharply in early October on comments by the ECB that it may taper its bond buying program, and by the U.S. Federal Reserve that the economy is sound enough to absorb a rate increase—now expected in December. Rising interest rates typically have negative implications for gold prices, as investors seek yield-bearing assets. Physical gold demand has been very weak this year, and fell in the two largest consuming countries—India and China. Jewelry demand in India should improve in the fourth quarter during the festival and wedding seasons. Precious metals prices are projected to rise 7 percent in 2016, mainly due to stronger investment demand.
Silver and gold prices are expected to rise 8 percent in 2016, but decline going forward on expectations of U.S. monetary policy tightening and a stronger dollar. Physical demand for gold is expected to recover and remain robust in India and China, while mine production is expected to expand. Platinum prices are projected to decline 5 percent on a continued large stock overhang. Downside risks to the forecast include stronger-than-expected monetary tightening, dollar strengthening, and weaker demand. Upside risks include rising inflation, macro-economic concerns, adverse geopolitical events, and stronger physical demand from consumers, central banks and investors.