In a new report, the bank says oil prices will rise due to a sustained commitment on the part of oil producers to reduce production, while metals prices are expected to fall from current highs backed by increased Chinese demand
TORONTO—The Scotiabank Commodity Price Index advanced 4.9 per cent month over month in July, with all major commodity segments performing well.
The bank says oil prices remain anchored in the $45–50 per barrel range (West Texas Intermediate), but prices are expected to move above $50 per barrel through the latter half of 2017 due to sustained declines in visible inventories.
“Compliance with the production deal among participating OPEC members remains impressive, averaging 98 per cent year-to-date, but discipline is slipping as the supply agreement moves into its ninth month,” said Rory Johnston, commodity economist at Scotiabank.
The 14 nation Organization of the Petroleum Exporting Countries agreed to cut production by roughly 1.2 million barrels a day in November 2016, in an attempt to bolster prices.
Johnston continued, “We expect that OPEC+ will agree to reintroduce withheld production based on prevailing market conditions when the deal ends in March 2018, ensuring that the market is not overwhelmed as members reopen their taps. However, the exact character of this production return remains unclear and the market will need further direction from participating governments to guide expectations.”
Scotiabank says that on the metals side, prices have benefitted from China’s twin shocks to both the supply and demand of many industrial metals.
It says strong economic activity in China the first half of 2017 came on the back of stimulus-induced upswings in the manufacturing and construction sectors, increasing the demand for heavy commodities like steel and copper.
The bank also asserts that Beijing is reducing available supply by pushing ahead with plans aimed at cutting back excess domestic production capacity.
When it comes to specific metals, iron-ore prices are expected to fall to around $55 per tonne by the fourth quarter of 2017, facilitating the needed contraction of low-quality Chinese production as Australia and Brazil ramp up high-quality capacity.
Metallurgical coal prices are expected to fall toward $125 per tonne, driven down by ample seaborne supply.
Scotiabank says zinc’s outlook remains fundamentally strong, even though prices may temporarily fall back in sympathy with the broader metals market.
The bank says aluminium’s outlook is slightly more uncertain given rapidly-changing supply expectations in China, and prices jumped to a nearly three-year high in mid-August.