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Commodity Markets

OPEC Monthly Oil Market Report – August 2017


Commodity Markets

In July, energy commodity prices were supported by advances in crude oil and coal prices across regions.

In the category of non-energy commodities, base metals showed a broad-based advance mainly as a

result of strong momentum in the Chinese economy, as well as reduced supply due to weather and strike

related disruptions in key suppliers Chile and Indonesia. Agricultural commodities meanwhile advanced

mainly in the first half of the month on top of dry weather in the US plains but generally declined thereafter

after supply fears receded. Prices for precious metals declined on average but recovered in the second

half of the month on lower expected real interest rates in the US.

Trends in selected commodity markets

After two months of average declines there was a recovery in oil prices in the second half of the month on

improving signs of market rebalancing supported by overall commodities market sentiment. At the same

time, improving global manufacturing prospects yielded support to base metal prices. The Markit global

manufacturing PMI rose to a three-month high of 52.7, supported mainly by some acceleration in China.

Agricultural commodities were supported by adverse weather conditions in the US plains, though as weather

conditions improved the larger share of the gains were reversed. Meanwhile, a lower expected path of

interest rate increases by the US Federal Reserve (Fed) in the second half of the month was supportive of

gold prices while the US dollar generally weakened.

Agricultural prices

advanced with increases in food, beverages and raw materials groups. Increases in

food prices were led by higher soybean and wheat prices, particularly in the first days of the month as dry

weather in the US northern plains from the end of June to the beginning of July fuelled concerns about the

output of that region. However, with dry weather receding, market attention turned towards expectations

persistent large stocks in the marketing year 2017/2018. The US Department of Agriculture increased its

expectations for global ending stocks of soybean, rice and corn, while seeing a marginal decline for wheat.

Sugar prices advanced on top of a strengthening of the Brazilian currency, and a reduction on the taxes on

ethanol at the end of the month, both developments which are expected to encourage that a higher share of

the Brazilian sugarcane output be diverted towards ethanol rather than sugar production.

Base metal prices

experienced a broad based advance following strong performance of the construction

and manufacturing sectors of China in the 2Q17, which in the case of manufacturing appears to have further

strengthened in July as shown by the Caixin Manufacturing PMI reading of 51.4, vs. 50.4 the previous

month. At the same time, some disruptions from key suppliers were also supportive of prices. Copper prices

surged to two-year highs also supported by lower output in Chile – down 5.7% y-o-y in June according to the

country’s statistics institute - mainly related to torrential rain and mine strikes the previous months, while in

Indonesia the continuation of a strike in the Grasberg mine – the world’s second largest – also continued to

affect supplies. Nickel prices jumped mainly on uncertainties regarding the mining policies of the

government, which had appeared eager to relax mining restrictions the previous two months. Aluminium

prices increased at a smaller pace as the China output in the month of June was reported at 9.1% higher

y-o-y according to the International Aluminium Institute (IAI), and accounted for the majority of the 5.7% y-o-y

global output gain in that month. Iron ore prices jumped on strong demand for steel making. In June, global

steel output rose by 3.2% but largely due to a 5.7% y-o-y increase in steel output in China, according to

World Steel Association.

Energy commodity prices

advanced led by rising crude oil prices on increasing optimism about market

rebalancing after a series of stock drawdowns in the US. Natural gas prices were relatively stable in the US

though they declined at the end of the month on expectations that cooler weather at the beginning of August

would reduce demand. In Europe, hub prices were relatively weak for most of the month but strengthened at

the end of the month due to expectations of a heat wave at the beginning of August. Meanwhile, natural gas

inventories in the EU-28 were at 64% full at the end of July, versus 51.2% at the end of the previous month,

according to Gas Infrastructure Europe. Thermal coal prices rebounded for the second consecutive month on

increased thermal power demand in China following a heatwave during the month, reduced hydroelectric

output due to flooding and reduced supply from Indonesia and other suppliers.