Bank Looks for Commodities Prices to Rebound on “Broad Front” by 2017, Examines 2015 OPEC/Saudi Actions

Scotiabank Economics released its annual commodities outlook today, saying near term WTI could be US$30, based on post-Dec. 4 OPEC oil trading below US$35 already, “and could drop to US$30 near-term.”

saudi drill rigScotiabank reviewed Saudi Arabia’s Fall 2015 actions as “apparently willing to implement a series of output cuts over the next several years to bring prices back to the US$50 mark, if Iraq rejoined OPEC’s quota system, Iran moderated its projected output increase after sanctions are lifted, and non-OPEC producers also cut output. When these conditions were not met, according to the bank, Saudi Arabia rolled over its previous strategy of ‘rebuilding its market share at the expense of price’ — that is, achieving a rebalancing of world supply & demand conditions by forcing out higher-cost non-OPEC producers.”

The bank says the battle for market share has widened to ‘Saudi Arabia-versus-Russia-versus-Iran’ from its initial emphasis on the U.S. shales. “Unlike previous experience, OPEC did not even set a sales quota at the December meeting, with countries now largely producing at will. Since the November 27, 2014 meeting, OPEC production has increased by 1.41 mb/d, led by Iraq with an extraordinary 930,000 b/d gain (despite ISIL) and Saudi Arabia with 580,000 b/d.

“The coming year 2016 will remain challenging for most commodity producers — with global growth expected to remain lackluster at best,” said Patricia Mohr, Vice President of Economics and Commodity Market Specialist at Scotiabank. “In particular, competition in oil markets could intensify in the first half of 2016, as sanctions on Iran are lifted.

On a more positive note, the gradual tightening of supplies of many commodities — linked to production curtailments and a sharp slowdown in capacity expansion — in the face of rising demand should start to boost prices across a broad front by 2017.”

According to the report, a number of commodities will outperform in the coming year. Mohr outlines her ‘top picks’ for investors in 2016 as follows:

Forest product Oriented Strand Board (OSB) – a panel board used in residential construction and the ‘top’ performing industrial commodity of 2015. Mohr says OSB prices should strengthen further by the second half of 2016, as U.S. housing starts gradually recover in the face of limited supply.

Zinc – concentrate supplies will tighten due to mine depletion at Century & Lisheen in the second half of 2015, already announced mine production cuts in 2016 and extremely limited new mine development over the balance of the decade. Zinc is an important commodity in Canada.

Lithium – used in lithium-ion batteries for hybrid and electric cars, is of interest to mitigate climate change. Lithium prices have climbed about 15% in 2015 to US$7,500 per tonne, with strong demand in China.

Read the full Scotiabank Commodity Price Index here.

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