Theiss-Morgan report notes that the weakness in commodity price is expected to persist.
One exception is energy, where geopolitical tensions in the Middle East and supply disruptions of key OPEC producers have kept oil prices elevated..
Crude oil prices averaged $107/bbl during 2013Q3, up 2 percent since 2013Q2 and 4 percent higher than a year ago.
Spillover fears of Syria’s conflict to the Gulf and large output reductions by Iraq and Libya (almost 1 mb/d each) weighed in.
The decline in metal prices was halted during 2013Q3 but the index is down 11 percent since 2013Q1 on new mine supplies and expectations of slower demand growth by China.
Food prices continued their weakness, down 4 percent from 2013Q2 and 11 percent lower than a year ago,
as better supply conditions will bring stocks closer to historical levels.
In the baseline scenario, which assumes no macroeconomic shocks or supply disruptions, oil prices are expected to average $105/bbl in 2013, identical to the 2012 average (table 1). Agricultural prices are projected to decline 7.8 percent in 2013 under the assumption that the improved crop conditions already in place will continue.
Specifically, prices of food, beverages, and raw materials are expected to drop by 7.6, 10.9, and 6.9 percent, respectively.
Metal prices will fall about 8 percent due to abundant supplies and weakening demand. Fertilizer prices are expected to decline more than 17 percent, as new plants in the US are coming on stream, in turn a response to low natural gas prices. Precious metals prices are expected to drop almost 20 percent as institutional investors increasingly consider them less attractive “safe haven” alternatives, in addition to weakening physical demand.
There are a number of risks to the baseline forecasts.
Downside risks include weak oil demand if growth prospects in emerging economies
(where most of the demand growth is taking place) deteriorate sharply.
Over the long term, oil demand could be dampened further if substitution between crude oil
and natural gas intensifies. On the upside, a major oil supply disruption in the Gulf due to the ongoing conflict could add $50 or more to the price of oil.
However, the severity of the outcome depends on numerous factors, including the duration of the disruption, policy actions regarding emergency oil reserves, demand curtailment, and more importantly, OPEC’s response.
The prospects for the metal market depend importantly on Chinese demand, as the country accounts for 45 percent of global metal consumption.
However, if robust supply trends continue and weaker-than-anticipated demand growth materializes, metal prices could follow a path considerably lower than the baseline presented in this outlook, with significant consequences for metal exporters (and benefits for importers).
In agricultural commodity markets, the key risk is weather. According to global crop outlook assessment released by the U.S. Department of Agriculture on September 11, 2013, the global maize market will be better supplied in the upcoming 2013/14 season (production and stocks up 12 and 24 percent, respectively).
Wheat will improve as well (production up 8 percent this season), though not as well supplied by historical standards.
Thus, any adverse weather event could induce sharp increases in wheat prices—as it happened in 2012 when maize prices rallied almost 40 percent in less than two months.
Price risks for rice are on the downside, especially in view of the large public stocks held by Thailand. Indeed, when the Thai government announced the release of stocks, prices came under pressure—they dropped 20 percent in 4 months to average less than $450/ton in September, a 3-year low.
Theiss-Morgan Private Wealth Management