Oil rebound has Citi seeing worst over for commodities

The commodities market has turned a corner and prices are unlikely to return to lows seen in the first quarter, according to Citigroup Inc, which boosted forecasts from metals to grains amid an oil-led recovery.

The bottom was likely hit earlier this year when weak fundamentals across all commodities were reinforced by selling after the collapse of China's equity markets, Citigroup analysts including Ed Morse wrote in a report Tuesday. The bank is now predicting Brent oil will climb to $50 a barrel in the third quarter, earlier than its previous forecast for the fourth quarter, while increasing its year-end gold estimate by $100 an ounce to $1,250.

"This recovery is starting in the oil sector, where market fundamentals are tightening much faster than we had forecast at the start of the year," the analysts wrote. "Across the industrial metals, markets are also slowly firming and prices bottoming as new projects get postponed and surpluses are whittled down. So too in the agricultural sector, especially grains and sugar, where markets appear to be balancing quickly." Commodities have rebounded this year led by surging oil prices, with a Bloomberg index of 22 raw materials advancing more than 15 per cent since tumbling in January to the lowest level in records extending back to 1991. Citigroup's optimistic view differs from Goldman Sachs Group Inc, which upgraded its commodity outlook to neutral this month, while remaining bearish on industrial and precious metals.

Balancing agriculture
Brent has gained more than 70 per cent since hitting a 12-year low in January amid supply cuts and stronger demand. While rising commodity markets in 2016 are following a similar trend to 2015, they are unlikely to repeat the selloff seen last year because of improving fundamentals in the energy market, which are likely to be followed across some industrial metals, Citigroup said.

The agricultural complex appears to be on the verge of re-balancing, while row-crop prices are already 10 per cent to 20 per cent higher this year on Southern Hemisphere harvest disruptions and improving demand for exports and biofuels, Citigroup said.

The bank raised its 2016 corn forecast 10 cents a bushel to $3.70 and increased its soybean estimate 8 per cent to 10 percent for 2016-2017. Wheat will average just under $4.70 a bushel this year and may rebound above $5 next year if US exports increase. Sugar will trade in a 15.5 cents a pound to 17.5 cents a pound range this year and 17.5 cents to 19.5 cents in 2017 amid tighter supply.

Golden opportunity
While gold prices have dropped in May, it may be an opportune moment to "buy the dip," Citigroup said. Investors have flocked to the precious metal this year and that trend should remain robust in the month ahead, according to the bank. Bullion for immediate delivery has dropped the past three weeks as the US currency has climbed.

The bank is anticipating just one US interest rate increase in 2016 toward the end of the year, "effectively limiting the likelihood of a correction in gold prices for the next two quarters," according to the report.

The optimism doesn't extend to bulk commodities including thermal coal, with the bank forecasting low prices enduring through 2018. Iron ore supply cuts this year by most major exporters have largely been offset by low-cost expansions in Australia and restarts at some high-cost mines during the recent rally, according to Citigroup.

The bank remained bearish on iron ore with prices seen averaging $47 a ton this year. Weaker steel prices will encourage mills to restrain output and keep ore holdings low, putting pressures on Chinese iron ore imports, it said.

Aluminum prices are unlikely to sustain the elevated levels seen in the second quarter due to Chinese smelter restarts and declining input costs, such as bauxite, Citigroup said. The bank sees the metal trading in a $1,450 to $1,550 a tonne range on the London Metal Exchange for much of the rest of the year.