World Bank sees upward commodity trend

Raises projections from April forecast for crude oil but has negative outlook for metals and minerals

The World Bank has revised upwards its forecast for many commodity prices in the second half of 2016.

Some, it says, might end the year with a lower average price than in 2015 but on the whole, prices have already seen a bottom. It has a positive outlook for energy, non-energy, crude oil and gold; that for fertiliser and metal & minerals is still negative.

Its Commodity Markets outlook for July, a quarterly publication, shows most commodity price indices rebounded in the year's second quarter (Q2) from January lows, on improved market sentiment and tapering supply.

Precious metals have seen safe-haven buying, and gold and silver have shown a strong rise. Investor-driven gains were the result of weak US economic data that delayed the Federal Reserve's plan to raise policy interest rates. Prices also received a boost from Britain's vote to exit the European Union, as the outlook for Europe became less confident, amid weakening global growth and political uncertainty. Silver and gold prices are expected to rise eight per cent, mainly due to stronger investment demand. Down the line, they could decline with the tightening of US monetary policy and a strengthening dollar.

Physical demand for gold is expected to improve in India and China, the two largest consumers of the metal, where there has been a sharp fall.

Energy prices leapt almost 30 per cent in Q2. Oil prices averaged $47.70/bbl in June, 37 per cent above their Q1 average. The rebound reflects a number of supply disruptions. Due to this and the expected reduction in inventories during the second half of the year, the crude oil forecast for 2016 is being raised to $43 a barrel from the $41 a bbl (WTI) in the April assessment, still a 15 per cent drop from 2015. In 2017, the price is expected to be $53 a bbl, up by 23.7 per cent, compared to the April projection of $50.

Natural gas prices were down five per cent in Q2, particularly in Europe and Asia, due to weak demand and surplus supplies of liquefied natural gas. However, US gas prices rose from their lows in March on stronger demand and higher export. Coal prices rose two per cent on tightening supply and strong demand in China.

The metal and minerals outlook continues to be negative, mainly driven by an ongoing surplus in the copper market. The price index for 2016 was at 60, as against 67 in 2015; for 2017, it is projected at 62.

Within metals, the largest declines are for nickel and copper, amid surplus supply, while the zinc market is expected to tighten with the closure of large mines. Downside price risks for non-energy industrial commodities include further slowing in China and currency depreciation in key suppliers.

Non-energy commodity prices rose in Q2, led by agriculture, up by eight per cent due to a poor harvest in South America (some grains and soybeans) and East Asia (palm oil). Prices are expected to drop only four per cent in 2016.

Agricultural prices has been revised upwards by two percentage points but are still projected to average marginally lower in 2016 than in 2015. The outlook reflects adequate supplies for most commodities but also takes into account reduced harvests in South America, especially Brazil, due to dry weather conditions.