January 09, 2020 /03:06 PM / By The World Bank /
Header Image Credit: World Bank
Almost all major commodity price indexes fell in the third quarter of 2019, led by energy, which declined more than 8 percent (q/q). Trade tensions and weakness in global trade, manufacturing, and output growth are weighing on commodity demand. In line with subdued global growth prospects, most price forecasts have been revised down. Crude oil prices are forecast to average $60/bbl in 2019 and $58/bbl in 2020-a sharp downward revision since April. Amid heightened risks of a sharper-than-expected global downturn, the likelihood of a further slowdown in oil demand, and therefore lower oil prices, has risen. Non-energy prices are projected to fall in 2019 before stabilizing in 2020, although metals prices are forecast to be lower next year. A Special Focus examines the role of innovation and substitution in commodity consumption. It shows that, historically, demand surges have been accompanied by investment and innovation, in turn causing substitution both within commodity groups (for example, from coal to natural gas for energy) and across commodity groups (such as between paper, metal, and plastic in packaging).
Prices of almost 60 percent of commodities fell in the third quarter of 2019 amid mounting concerns about slowing global growth. This was a marked turnaround relative to the April Commodity Markets Outlook report, when a series of commodity-specific supply shocks boosted prices of many commodities, including oil. The current deteriorating macroeconomic environment, including a sharp slowdown in manufacturing and goods trade, has weighed heavily on commodity demand.
Energy prices fell more than 8 percent (q/q) in the third quarter, with similar declines across all three energy commodities (Figure 1). Crude oil prices averaged $60/bbl in the third quarter, 8 percent weaker than in the previous quarter. The fall in prices occurred despite an attack on Saudi Arabia's oil infrastructure, which triggered the largest one-day price rise in Brent crude oil since 1988 (the year when Brent crude futures began trading on futures exchanges). The spike unwound rapidly as market participants concluded that the impact would not be long-lasting. Also, on the supply side, growth in the United States has been much weaker than the record pace of 2018, and OPEC and its partners have agreed to continue with their production cuts. While oil production growth has slowed, the weakness in demand has been more severe. Demand growth expectations have been repeatedly revised downward and are now around 1 percent, or 1 million barrels per day-the weakest growth rate since 2012. Coal and natural gas prices have also continued to weaken, amid ample supply.
Most non-energy prices fell in the third quarter of 2019. Base metals and ore prices fell 2 percent, largely reflecting concerns about demand and trade tensions. Iron ore prices fell sharply as supply bottlenecks resulting from the Vale dam accident in Brazil eased. Nickel prices, as an exception to the broader base metals price weakness, surged after Indonesia (the world's largest nickel ore producer) announced a ban on nickel exports from the start of 2020. Precious metal prices surged in response to trade tensions and monetary policy loosening in advanced economies. Most agricultural commodity prices fell in the third quarter, as production expectations were revised upward and global stocks of key grains, notably rice and wheat, remained at multiyear highs. An exception was soybeans, whose prices rose on news that China had restarted purchasing U.S. crops-as a result of trade tensions, China had switched soybean purchases from the United States to alternative suppliers, and also to substitute commodities (see Special Focus for the role of substitution).
Outlook and Risks
Energy prices are expected to average almost 15 percent lower in 2019 than in 2018 (a substantial downward revision from April) and continue to decline in 2020 (Table 1). Non-energy prices are projected to decline 5 percent in 2019 (a smaller downward revision from April) and stabilize in 2020. The outlook for commodity prices, especially oil and metals, is vulnerable to a larger-than-expected slowdown in global growth, particularly in EMDEs.
Oil prices are projected to average $60/bbl in 2019 and are forecast to weaken to $58/bbl in 2020, $7/bbl lower than the previous forecast. The downward revision reflects the weaker outlook for global growth and therefore for oil demand. On the supply side, although U.S. production increases have been modest in 2019, they are expected to rise substantially by 2020 as new pipelines come into operation. The forecast assumes that production cuts by OPEC and its partners will be sustained into 2020. Risks to the oil price outlook are to the downside. Oil consumption growth is expected to increase slightly next year at a level usually associated with global downturns. If economic growth deteriorates further, oil demand could be substantially weaker. Conversely, the recent attack on Saudi Arabia's oil processing facilities serves as a reminder that geopolitical events remain a major risk that could drive up oil prices, despite the short-lived impact of the recent attack.
Metal prices are projected to fall 5 percent in 2019 and are forecast to fall further in 2020, as slowing global demand weighs heavily on the market. Risks to this outlook are to the downside. A greater-than-expected slowdown in global growth, particularly in China, poses the biggest risk.
Agricultural prices are expected to stabilize in 2020 following a projected fall in 2019, on reduced crop plantings. Risks to this outlook are on the downside. A resolution of trade tensions presents an upside risk for some commodities, such as soybeans and corn, while lower energy prices could reduce fuel costs and fertilizer prices, reducing prices of energy intensive crops such as oilseeds.
FIGURE 1 Commodity market developments
Broad-based weakness in global demand pushed most commodity prices lower in the third quarter of 2019. Although demand for oil has been repeatedly revised downward this year, growth is expected to accelerate in 2020. A material disappointment in demand, however, poses the key downside risk to the price forecast. The price forecasts for the three main commodity indexes-energy, agriculture, and metals-have been revised down since the April report, and prices are expected to fall or stabilize next year.
This edition of the Commodity Markets Outlook features a Special Focus on the role of substitution in commodity demand and a Box on the impact of the September 14 strike on Saudi Arabia's oil infrastructure.
Special Focus: The Role of Substitution in Commodity Demand
Understanding the drivers of commodity demand growth is of critical importance for EMDEs and especially commodity exporters. This Special Focus examines the role of innovation and substitution in commodity markets. It shows that, historically, demand surges have been accompanied by investment and innovation, in turn causing substitution both within commodity groups (for example, from coal to natural gas for energy) and across commodity groups (such as between paper, metal, and plastic for packaging). The Special Focus also provides empirical evidence for substitution between individual energy and metal commodities by examining the response of demand for a single commodity (e.g., copper) to the prices of its known substitutes (e.g., aluminum).
Box: The Impact of The September 14 Strike on Saudi Arabia's Oil Infrastructure
The September 14 strike on Saudi Arabia's oil facilities temporarily halved the country's production capacity-about 6 percent of global supply. Brent futures gained nearly 15 percent on the first trading day following the attack, their largest one-day increase. However, by the end of September, prices had returned to pre-attack levels as Saudi Arabia swiftly restored production. The backdrop of slowing demand also helped contain prices. Long-term futures prices are also unchanged, suggesting either geopolitical risk plays less of a role in risk premium of oil prices, that oil supplies have become more diversified (reducing risks associated with disruptions), or that other fundamental factors such as weaker global growth are weighing on oil prices. Despite their limited impact, the attacks highlight the oil market's dependence on critical infrastructure and transport bottlenecks that could be vulnerable to disruption.
Download Here - October 2019 Commodity Markets Outlook Report