Growing Geopolitical Tensions Weigh on Commodity Prices

Oil and gas

July 11, 2018//-Global commodity prices declined for the first time in three months in June. The fall, however, was minimal (June: -0.1% month-on-month; May: +0.9% ), according to FocusEconomics, a leading provider of economic analysis and forecasts for 127 countries  in Africa, Asia, Europe and the Americas.

 In its July 2018 commodity estimates released this month, it noted: ” Developments related to U.S. sanctions against Iran led the two benchmark oil prices, along with their derivatives, to decline in June, while the ongoing trade spat between the United States and China sent key agricultural commodity prices down”.

Moreover, higher interest rates in the U.S. due to robust economic growth are diminishing the appetite for safe-haven assets, such as gold, negatively impacting their prices. That said, high geopolitical risks are supporting precious metals to some extent, the report observed.

On the flip side, base metals continued to benefit from higher prices for U.S. steel, stronger preference for greener industries and fears of output disruptions.

The panel of analysts surveyed this month by FocusEconomics expects commodity prices to increase 6.9% in Q4 2018 from the same period in 2017, mainly due to higher energy and agricultural prices.

Next year, analysts expect that a correction in energy prices, especially for oil and coal, will lead global commodity prices to post a smaller increase.

The Consensus view among FocusEconomics panelists is that commodity prices will rise 1.2% in annual terms in Q4 2019.

Uncertainty in the oil market drags on energy prices

The rally in oil prices in March, April and May came to an end in June, sending prices for oil and its derivatives down. Energy prices fell 1.8% month-on-month in June (May: +5.5% month-on-month), which represented only the second drop in prices in one year, according to economists at FocusEconomics.

“The previous decrease was recorded in February in the wake of a major rout in global equities. Political developments led the evolution of oil prices in recent weeks.

The announcement by Russia and Saudi Arabia in late May that they were ready to pump more oil to cope with declining production in Libya and Venezuela, and in anticipation of supply shortages from Iran due to the reimplementation of the U.S. sanctions, helped alleviate concerns about undersupply”.

This trend was reinforced on 23 June when OPEC and non-OPEC countries participating in the oil cap deal decided to reduce their compliance level to the accord from around 150% in May to 100%, a measure that would imply an injection of around 700,000 barrels per day.

Since late June, however, prices have moved sideways. Saudi Arabia agreed on 30 June to boost oil supply by an undisclosed amount—analysts expect an addition of up to 1 million barrels per day.

In response to the U.S. threat, Iran stated that it will close the Strait of Hormuz, a checkpoint of around one-third of the world’s oil traded by sea, pushing up oil prices.

This situation in the oil market reverberated across oil derivatives such as gasoline and gasoil. Meanwhile, natural gas prices are benefiting from the ongoing transition towards cleaner-burning fossil fuels.

Prices for natural gas, along with other fossil fuels such as coal, are also being supported by hot temperatures in China and the United States.

Despite rising uncertainty, prices for oil and oil-related products are expected to increase this year, driving most of the gains in energy prices.

Conversely, stricter environmental regulations will likely hit demand for coal. Analysts surveyed by FocusEconomics expect energy commodity prices to rise 18.7% year-on-year in Q4 2018.

Next year, our analysts expect energy prices to decline 2.2% in Q4 2019, mostly reflecting lower oil prices due to increased supply and a broader preference for cleaner energy globally.

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