Oil prices more sustainable, metals price increase limited - Nomura

Research Team at Nomura, notes that the commodity prices declined sharply since their peak in mid-June 2014 but, since the beginning of 2016, have recovered almost 30%, based on the GSCI index.

Key Quotes

“The biggest increases are in oil prices and metal prices, while soft commodity prices have barely rebounded in many cases. The recent increase in commodity prices can be linked to various factors: (1) the rebound in Chinese growth pushing demand and speculation for infrastructure inputs (steel, iron ore), (2) a reduction in the oversupply of oil and a reduction in short oil positions, and (3) the weaker USD.

With commodity prices still well below their levels of mid-2014 despite the recent pickup, commodity exporter terms of trade remain much lower than they were two years ago, while commodity importer made terms-of-trade gains. Nevertheless, the recent pickup in commodity prices will ease some of the negative impact on commodity exports. Our analysis shows a strong, positive relationship between the ToT and the performance of the currency of the country.

With our China economists expecting the stimulus-induced pickup in the Chinese growth to fizzle later this year and oversupply conditions to remain, further price increases look limited.

The pickup in oil prices looks a bit more sustainable. The increase earlier this year came on the back of investors covering their short positions and anticipation that oil producers would freeze output. More recently, the rally has been supported by a genuine decline in supply, mainly in the US, making the increase in price more sustainable. However, a further increase could be limited. There are indications that the new Saudi Oil Minister intends to increase production, while, with every increase in prices, some oil projects become profitable and restart production, both increasing supply.”