The commodity complex continues to soften with oil prices sliding below USD 50 per barrel and Chinese heavy industry commodities rushing lower. The resource reflation tide recedes with benchmark indices such as the Bloomberg Commodity Index trending towards last year’s levels. Commodity prices revert towards fundamentally reasonable levels on supply rather than demand trends.
As reported by Norbert Rücker at Julius Baer:
“the down move does not herald broader economic warning signs. Commodity demand remains at healthy levels but growth softens as the business cycle advances. Oil has reversed the gains made since the supply deal announcement.”.
Concerns about the persistent supply glut and US production growth pressured prices, with the latest down move likely accelerated by long covering in the futures market. Scepticism about the effectiveness of the supply deal had grown in recent weeks with global oil inventories receding much more slowly than anticipated. The revived US shale boom undermines the Middle East’s restriction efforts, among other sources of near-term supply growth. US oil production surpassed expectations in terms of an early bottoming and swift uptick, and is set to expand further based on the latest drilling momentum. Julius Baer expert adds that:
We see prices between USD 45 and 50 per barrel as fundamentally justified. Consequently we have raised our view to neutral from bearish and closed our short position. An extension of the supply deal beyond June looks likely but its effectiveness will remain questioned. Iron ore, coal and steel prices continue to soften on weak still mill profitability and the announcement of measures out of Beijing to curb excessive local government spending. High-flying infrastructure stimulus expectations lifted cyclical metals earlier this year, but with these hopes largely unfulfilled so far prices have come under pressure as of late. With the Chinese economy adapting to cruising speed, infrastructure spending hopes being realigned and seasonal headwinds persisting, we see further downside for the broader segment.