The worst of the collapse in commodities prices is probably over, with oil poised to gain over the next 12 months, according to Pacific Investment Management. Just don't expect a major rebound.
Producers are shelving projects and scaling back output from Arctic oilfields to Indian aluminium mills amid the weakest returns from raw materials since 1999. While the response may help draw a line under the rout, prices are set to remain "lower for longer" because of excess inventories, said the money firm, which manages $US15 billion ($20.7 billion) in commodity assets.
"The declines in commodity prices are largely behind us," executive vice presidents Greg Sharenow and Nic Johnson said in an e-mail. California-based Pimco has about $US1.52 trillion under management. "Most prices are well into the marginal cost curve across metals and oil, and that will help to put a floor under prices here."
Oil poised
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
Oil may rise to a "baseline" of about $US60 a barrel in one year's time as the impact of supply cuts becomes more evident from early 2016, according to Sharenow. US crude output is down about 440,000 barrels a day from a four-decade high of 9.61 million barrels in June and the nation's drillers have sidelined more than half of the country's rigs in the last year.
Benchmark crude in London and New York tumbled to six-year lows in August and weaker prices are having a "significant impact on forward production growth," said Sharenow. Factor in natural decline rates and it means the oil market can re-balance supply and demand faster than other sectors like steel or aluminium, he said. West Texas Intermediate was at $US48.05 a barrel on Thursday while Brent was at $US51.71.
Platinum attractive
Gold prices are "broadly fair at the moment," said Johnson. "If real yields move lower or the Fed delays rate hikes beyond market expectations, we would expect gold to do well." The probability that the Federal Reserve will increase rates this year has dropped to 39 per cent, from 77 per cent at the end of August, according to futures data compiled by Bloomberg. Spot bullion has rebounded about 6 per cent after sliding to a five- year low in July and was at $US1144 an ounce.
Silver and platinum, which have declined on weaker industrial demand and slower emerging market growth, are both attractive at current prices and trading at multi-year lows relative to gold, Johnson said. Platinum this month touched the weakest in almost seven years, while silver fell in August to its lowest since 2009.
Watching Australian wheat
Forecasters predict the current El Nino weather pattern may become one of the strongest ever recorded and Pimco is "closely watching wheat," particularly given the prospect of a smaller crop in Australia, which is the world's fifth-biggest exporter.
Local farmers typically begin harvesting from October. Wheat futures in Chicago fell to the weakest in about five years in May and have since rebounded about 12 per cent to $US5.1825 a bushel.
Otherwise, current agricultural prices look sustainable for a long time, absent weather-induced supply shocks, while soybeans are "starting to look a bit cheap relative to other grains," Johnson said.
Bloomberg
