Commodities Outlook 2015
#1 Benchmark indices & a third year of under-performance: Following powerful price corrections, investors may be tempted to re-establish long exposures. However, US dollar strength should sustain the under-performance of commodity benchmark returns relative to equities.
#2 Living with lower oil prices: We believe Brent oil prices below USD60/barrel would, over time, inflict damage on US oil supply prospects. A more powerful and sustained slump in oil prices towards USD40/bbl would, in our view, be only likely to occur in a much weaker global growth environment.
#3 Natural gas supply growth: With 2015 supply growth likely to exceed the level needed to balance the market, we expect this year’s storage deficit to be eliminated by the end of Q1-15. Building surpluses over the balance of the year are likely to weigh on prices particularly in the summer.
#4 The Fed & gold: Lower oil prices will inflict more damage on the S&P500 than the US real economy and encourage an expansion in central bank balance sheets outside of the US. These may provide pockets of support for gold, but, US financial forces will eventually overwhelm and drive gold prices lower.
#5 The curse of over-valuation: Palladium has taken on the mantle of the world’s most richly priced commodity. While lower oil prices and a falling US unemployment rate should propel US auto sales higher, palladium fundamentals have to remain robust to justify our bullish price forecasts.
#6 Copper’s exposure to the property slowdown in China: Unlike energy, agricultural and bulk commodities, where prices are back to levels last seen in 2009, industrial metal have been more resilient. However, the copper market is moving into surplus and the lagged effects of the weaker Chinese property market will hit copper demand, as a result copper is our preferred short.
#7 Bulk commodities & the US dollar: Depreciating currencies have given bulk producers some breathing space to tolerate further price declines. This may delay the necessary production cuts, which will mean prices drift lower.