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Pressure from rising Treasury yields likely to resume

This week the prices of most commodities got a boost as investors pared back expectations for rate hikes in the US, following lower than expected inflation data. That said, we still expect a further small rise in the US 10-year Treasury yield by the end of the year, which could put renewed downward pressure on the prices of commodities, and particularly gold, in the coming months. Supply disruption caused by the war in Ukraine seems to be easing, as grain ships have continued to leave Ukrainian ports. Meanwhile, there were renewed efforts to revive the 2015 Iran nuclear deal. While there are still hurdles, if a deal were agreed, we would expect a rapid rise in Iranian oil output, which would weigh on oil prices. Next week, we’ll be paying close attention to the latest activity and spending data from China on Monday. We expect that the data will show that the post-lockdown recovery lost steam in July, alongside a renewed deterioration in the property sector, which could weigh on industrial metals prices next week.

12 August 2022

Gloomy outlook for use of agriculturals in industry

Deteriorating global economic growth over the coming quarters will weigh on industrial demand for cotton, natural rubber and lumber. That said, high oil prices will offer some support to cotton and natural rubber prices, and our expectation for rate cuts in the US in late 2023 could boost the price of US lumber.

10 August 2022

Ethiopia: Unlikely to replicate exceptional growth again

Ethiopia has been grappling with the fallout from its internal conflict and severe drought which, coming alongside spillovers from the war in Ukraine, will result in much weaker growth in the coming years and a sovereign debt restructuring is likely. Over the medium-term, we're doubtful that the government will be able to push through its ambitious reform agenda. Ethiopia’s growth miracle, in which the economy grew at rates of 8-12%, has come to an end.

10 August 2022
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Oil prices fall, but supply risks remain

In a week of relative financial market calm, there was a pause in the large, sentiment-driven swings that have characterised most commodity prices in recent weeks. Instead, prices seemed to take direction from more fundamental drivers. That said, the largest moves were to the downside. Fears about softer demand have weighed particularly heavily on oil prices. But, we would not place too much emphasis on one week of price moves. Volatility in commodity prices has been incredibly high in recent months, and given the scale of supply risks that remain, we suspect there is scope for oil prices to recover some ground. Next week, we’re expecting trade data from China to show that weakness in the construction sector kept imports depressed in July, which will probably weigh on industrial metals prices. However, we expect metals prices to receive some support from a pick-up in Chinese economic activity in the coming quarters. Indeed, despite the deteriorating market backdrop, we suspect that the sharpest falls in industrial metals and agricultural commodities are now behind us.

Prices rally, but room for further gains is limited

The prices of most commodities across energy, metals and agriculturals rose this week. The common driver was investors dialling back their expectations of the aggressiveness of US monetary policy tightening, after data showed GDP contracted for a second consecutive quarter in Q2. However, we think investors may have gotten a little ahead of themselves and we forecast higher US interest rates than what the futures market implies. As a result, we think some of this expectation-related boost to prices will fade. Industrial metal prices also climbed on news that the People’s Bank of China will inject more money into China’s banking system to support lending to property developers. However, it’s not clear to what extent banks are willing to take on more exposure to the troubled property sector. Elsewhere, European natural gas prices surged again owing to Russia further restricting exports to Europe. We revised up our forecasts for non-US gas and coal prices this week to account for the tighter supply picture. Next week, OPEC+ meets on Wednesday to decide on oil production policy in September and possibly future months. News outlets report that the group will consider keeping output unchanged in September, although a “modest increase” will reportedly be discussed. Indeed, we suspect OPEC+ will agree to a looser production policy sooner or later, perhaps by even scrapping quotas. Meanwhile, we released new medium-term price forecasts in our quarterly Outlook publication yesterday.

Prices to find a floor

While non-energy commodities prices may fall a little further, we think the big move down in those prices is now behind us. Admittedly, the demand outlook has undeniably deteriorated in recent months, but many of the supply risks that prompted prices to soar earlier in the year are still with us. Moreover, our forecast of persistently high energy prices means that the cost of production of most other commodities will remain elevated for much of this year and into 2023.

Dollar strength likely to return and weigh on prices

It was a more positive week for prices, in large part owing to some softness in the US dollar. Otherwise, the news was not particularly positive for prices given the ECB’s surprise decision to hike its policy rate by 50bp (having signalled 25bp), persistent upheaval in China’s property sector and economic data showing clear signs of a downturn in most Western economies. As it happens, we think that the dollar will strengthen again in the coming weeks given that the Fed faces fewer constraints on its monetary policy than the ECB (upward pressure on periphery spreads and uncertain energy supply) and is likely to hike rates aggressively, as soon as next week. This will put downward pressure on “risky” assets like commodities. That said, supply of most industrial commodities is still highly constrained and stocks are low, which should at least limit the downside for prices.

Demand fears in the driving seat, for now

Most commodity prices fell this week as global monetary tightening and fears about economic growth intensified. The high June inflation reading in the US nails on another large rate hike at the FOMC’s meeting in July. And central banks in Canada and parts of Emerging Asia have also delivered hawkish surprises this week. Moreover, we expect our China Activity Proxy to show economic growth close to zero in 2022, and we are now forecasting a mild recession in Europe during the winter. These growth concerns are weighing on the outlook for commodities demand, and investors have generally responded by becoming more risk averse, with sharp falls in net-long positions and open interest in futures markets in most commodities.    

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