Commodities Outlook

The recent oil price weakness caused some panellists to flatten the trajectory of their one to two year forecasts for Brent and WTI in our May survey. US shale oil production and investment turned out to be much higher than anticipated, thwarting efforts by OPEC and other major oil exporters to reduce their crude stockpiles. A credit squeeze in China (exacerbated by US rate hikes) added to negative oil sentiment, as the risk of softer global demand made it harder to rebalance the over supply situation. The price of crude oil rallied in the run-up to our survey date, on news that Saudi Arabia and Russia appeared willing to extend the deal on output restraint (due to expire at the end of June) until March 2018. Some support also came from the Energy Information Agency, as it reported a decline in stockpiles of the fuel and its refined products, like RBOB, at the start of the US summer driving season. Yet combined inventory levels for the OECD economies have not dropped by a significant amount and extended OPEC supply cuts to compensate for higher US output will be difficult to justify. Certainly, intervention beyond a restricted period is not credible and it would be irrational for the cartel to underwrite the investment of non-members. Russia, which has just emerged from recession, will no doubt be eager to raise its own production by as much as possible to fund an economic revival. Volatility in the price of energy has affected other commodities, with a pull back in sentiment for most Industrial and Bulk Metals.

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