Monday, March 14, 2016

Is it a technical bounce or a fundamental recovery for commodities?

The generally downward trend of the commodity prices is currently turning five years old. Since April 2011, Bloomberg Commodity Index Total Return has lost 54%. But, since January 19, 2016, the index started rising and has already gained almost 9%. The prices for different commodities have recovered even more significantly: WTI crude oil has gained almost 50% over the past month, while gold has risen by almost 20% since late last year. The Canadian dollar has responded positively to these events: it started rising at exactly same time as the Bloomberg Commodity Index Total Return and has since jumped from less than 69 US cents to over 75 US cents.
Does this mean that commodity markets have passed the bottom or is this just another temporary upward spike? Many experts are calling this the market bottom for commodities. Indeed, when WTI oil reached a 7-year low at around $26 per barrel earlier this year, it was difficult to imagine that the price could go even lower, although there were many analysts expecting it to go as low as $20 per barrel. From the perspective of the current $40 per barrel, the $26 low does look like a bottom. Now, the question seems to be, where will the oil prices go from here, up, or back down towards $30/barrel levels?
There is no definite answer to this question. Goldman Sachs expects a wide price corridor, between $25 and $45 per barrel during the second quarter of 2016. The recent signs of more limited supply made Goldman Sachs analysts more optimistic as their previous forecast was between $20 and $40 per barrel. But these levels do assume that there is a high probability for the price to drop and re-test the previous low levels. Apart from more limited supply, the recent price rise has been attributed to the covering of short positions by market players. This means that once the short squeeze is over, the price may experience weakness again. Especially considering that Iran has recently announced its plans to increase its oil production from current 3 million barrels of oil per day to more than 4 million barrels per day.
Such fundamental factors as the continuing economic slow-down in China should also weigh on commodity prices. It just became known that China's industrial output has slowed to its weakest rate of growth since the financial crisis of 2008, to 5.4% in January and February. The recent spike in commodities could thus turn out to be a temporary one.

Ukrainian Credit Union Limited

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