Oil Prices More Sustainable, Metals Price Increase Limited - Nomura
Research Team at Nomura, notes that the commodity prices declined
sharply since their peak in mid-June 2014 but, since the beginning of
2016, have recovered almost 30%, based on the GSCI index.
Key Quotes
“The biggest increases are in oil prices and metal prices, while soft
commodity prices have barely rebounded in many cases. The recent
increase in commodity prices can be linked to various factors: (1) the
rebound in Chinese growth pushing demand and speculation for
infrastructure inputs (steel, iron ore), (2) a reduction in the
oversupply of oil and a reduction in short oil positions, and (3) the
weaker USD.
With commodity prices still well below their levels of mid-2014 despite
the recent pickup, commodity exporter terms of trade remain much lower
than they were two years ago, while commodity importer made
terms-of-trade gains. Nevertheless, the recent pickup in commodity
prices will ease some of the negative impact on commodity exports. Our
analysis shows a strong, positive relationship between the ToT and the
performance of the currency of the country.
With our China economists expecting the stimulus-induced pickup in the
Chinese growth to fizzle later this year and oversupply conditions to
remain, further price increases look limited.
The pickup in oil prices looks a bit more sustainable. The increase
earlier this year came on the back of investors covering their short
positions and anticipation that oil producers would freeze output. More
recently, the rally has been supported by a genuine decline in supply,
mainly in the US, making the increase in price more sustainable.
However, a further increase could be limited. There are indications that
the new Saudi Oil Minister intends to increase production, while, with
every increase in prices, some oil projects become profitable and
restart production, both increasing supply.”