Forecasting commodity markets for 2017 will depend largely on four main likely drivers. After a largely stellar year in 2016, the outlook for major commodities is likely to come down to the actions of Donald Trump, FED, the Chinese government and OPEC.
There is considerable uncertainty around the outlook of the implementation of the Opec agreement, which, if carried through, will undoubtedly impact oil markets. A modest recovery is projected for most commodities in 2017, as demand strengthens and supplies tighten.
Opec’s ability to affect oil prices is likely to be tested by the expansion of oil supply from unconventional sources, including shale producers. In particular, there are concerns that Opec members may not stick to their commitments, that demand will underwhelm – or, more pressingly, that rising prices will trigger a surge in production in the US.
However, there is now a sense that the market is returning closer to balance, helped by American Petroleum Institute (API) data last night estimating US crude stockpiles dropped by more than four million barrels last week.
In general, however, the market remains optimistic on supplies going into 2017 after the deal between Opec and other world producers, including Russia, to cut global output by 1.8 million barrels a day. Even the news that Libya, one of several Opec members exempted from the cuts, has doubled output to 600,000 barrels a day failed to dampen trader spirits too much.
Coal prices surged 30 per cent, reflecting strong import demand and tightening supply in China following restrictions on production aimed at reducing pollution.
U.S. natural gas prices jumped more than 33 percent due to strong demand for air conditioning, falling production, lower injections into storage, and increased exports to Mexico and to South America during the southern hemisphere winter. On September 28, Opec agreed to limit crude oil output to 32.5-33.0 million barrels per day, effectively ending two years of unrestrained production. This marked an important policy shift, especially for Saudi Arabia, the organization’s largest producer.
Opec, the only surviving commodity organization seeking to influence markets, guiding global oil prices will be challenging in the presence of unconventional oil producers, notably the US shale oil industry. The US crude oil rig count peaked at 1,609 in October 2014.
In contrast, it hit 316 in the week ending May 27, 2016-the lowest level since the 1940s. The US drilling activity fell due to lower crude oil prices. The lower prices were due to oversupply. The US crude oil rig count has risen by 109 rigs from the lows in May 2016. The big test then is whether higher prices provide another boost to US shale producers. As such, markets will also scour the US figures for signs the count of drilling rigs is picking up pace, which could suggest a production surge to come.
On the technical front, we see prices of NYMEX WTI, hitting $62-63( MCX: 4000-4,200) levels and then grinding lower from there back to $50. But, we believe anything below $45 ( MCX: 3,000) could evoke another round of cuts, which could potentially take prices to the mid $70’s (MCX: 4,800-5000) again.
GOLD & SILVER
I find myself more pessimistic for bullion going into 2017 and never felt like this even during last year this time around when prices hit a six year low after the announcement of rate hike. But, gold retraced higher subsequently, thanks to weak stock markets and doubts over further hikes.
Very similar announcement of a rate hike was made this month as well, but the difference is that, it is accompanied with negative fundamentals for gold. When we describe fundamentals for gold, it is to do with consumption and production.
Production has been on the rise and consumption declining rapidly in the large consuming countries, India and China, with China also being a largest miner of gold. India as a country has more trust in adornments, than other asset and it is reasonable to expect demand to suffer more till the first half of 2017, as Indians have to get used to buying gold officially.
However, in a country where the appetite for gold is insatiable, demonetization may have slowed down the gold demand only for a couple of quarters and we feel the demand will be back on track and so will the gold imports.
Looking back in 2016, gold received a kicker since the beginning of the year, after reaching its nadir right towards the end of 2015, where it sank to around $1 050/oz. But what appeared to be a rapidly deteriorating economic environment characterised by negative interest rates in many developed countries, has led the yellow metal to rise by almost $300/oz or slightly above 20% since the start of the year.
By the middle of the year predictions of $1500-$1900 started appearing from many of the reputed banks and institutions across the world purely based on hope that the FED might not hike rates for long period of time. Something like Brexit did not evoke the kind of reaction that is normally expected of gold and then came the trump shock taking any bullish meat left in gold.
Since then, prices have fallen for six straight weeks, the worst streak in a year, as prospects for higher US borrowing costs damped demand for gold, a for a zero yielding asset like gold. Markets don’t seem too optimistic about the outlook for 2017. Hedge funds cut their bets on a rally to the lowest since February, while outflows are ramping up from exchange-traded funds.
Where do we see the price of gold going in 2017? Given that stock markets, are becoming very bullish, gold could loose its safe-haven appeal. In the early days of 2016, markets were driven by fear, which is the reason gold rallied so strongly, but that has changed recently. Add to it Eurozone woes, the never-ending doubts over the fate of the Italian banking system, and general concerns over the health of the global economy. More so as Chairwoman Janet Yellen has opined that the US central bank could introduce another three rate hikes over the course of 2017. This for a central bank that has only hiked twice over the last decade.
With that in mind, we see gold moving towards the lows at $1045-50( MCX : 25,000) as of now, and a strong long-term support comes in around $990 ( MCX: 24,000). By the second half of 2017, prices could be around 900 USD, which is exactly the peak of 1980, after which it will turn around and evolve into a new and strong bull market. This could happen, as more rate hikes could derail the economic recovery of U.S and once again revive bullion’s appeal as a safe-haven asset.
Unlike gold, silver futures were at one point 39% higher on an annualised basis, with the Comex silver contract spiked from $13.841 an ounce on 4 January to $21.00 on 4th July. From there on, Fed sentiment and lower industrial demand knocked the stuffing out of silver bulls, taking the precious metal down to its current low of $15.59.
Silver has a stronger fundamental outlook which may see the commodity strengthen again. Silver is suffering from its relationship to gold presently. Gold and silver often trade at a relationship of 15 or 16 to one in the modern era. This ratio shows us that silver has a lot of ground to close – price-wise – which is why investment advisors often recommend allocations in both gold and silver and are excited about silver’s prospects.
Now that we have gold in a bear market, there’s less enthusiasm coming from investors. Half of silver supply is used to make things, as demand is picking up as economic growth fuels sales of electronics and Solar panels from China to the US.
Physical demand remains strong and as only a quarter of silver is produced from dedicated silver mines, supply prospects remain weak. Nonetheless, despite a strong fundamental outlook, we may see silver soften in the first few months of 2017 as the commodity suffers from a strong dollar and a US interest rate increase.
We still believe that we are still in a precious metals bull market that began some 15 years ago and has been temporarily abated and see opportunity in adversity and not to give up. The strategy for 2017 will be to look for a turnaround in gold sometime during the second quarter in the $13-14 range (MCX: 33,000-34,000), but using that direction to buy more of silver.
Speculators continued to book profits from most of the base metals’ recent meteoric run-up and concerns about demand growth in the world’s top commodities market lingered.
In China year, we saw most market participants surprised by the strength of both China’s coal and iron ore imports, which led to rallies in the prices of both commodities. Steel output is likely to also remain at least steady, perhaps biased weaker as the domestic property sector cools and exports struggle against mounting protectionism, which points to steady iron ore imports.
But the main point with China is that much of the rally in major commodities this year was driven by increased demand, the first time in five years that demand was the main driver of prices, rather than excess supply. And, with the crackdown on pollution due to these industries, supply side woes are expected to further support prices. However, much depends on how much economic stimulus China will allow in order to meet growth targets.
So far this year, copper is up around 16 percent, with much of that rise coming after Donald Trump won the US Presidential election. It also needs to be seen if the infrastructure push from President elect Trump, actually result in increased base metal demand.
China will strictly limit credit flowing into speculative buying in the property market in 2017, top leaders said at an economic conference on Friday. Though China’s economic data has been improving lately, the property market continues to face pressure and sales have been negative in certain cities.
China’s economy is currently reaping the benefits of the previous rate cuts, but with no new stimulus on the cards and steps being taken to rein in credit growth, it does not look like a good start for 2017. And, with the dollar expected to strengthen further, the headwinds for metals will only increase. Speculative money continues to pour into metals on the hopes of a Chinese recovery and US infrastructure push and any disappointment in either could quickly result in speculators abandoning the ship.
Technically, we expect LME copper to trade in the $5,100-6,500 range ( MCX: 350-450) for 2017.
For all the domestic price conversion to MCX, we have taken a US Dollar/Rupee at an average of 69.00 for 2017. Rudy Gay Womens Jersey