MOMR September 2017
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Commodity Markets

8

OPEC Monthly Oil Market Report – September 2017

Commodity Markets

In the group of energy commodities, crude oil prices increased as a result of both the continuing decline in

US inventories and signs of continuing market rebalancing. Meanwhile, coal prices jumped due to higher

demand for power generation in China. With regard to non-energy commodities, agricultural price declines

were led by drops in grain prices based largely on receding fears of drought in the US plains and the

expectation of plentiful global supplies. However, at the end of the month and beginning of September,

cotton and orange prices increased in response to the potential damage caused by Hurricanes Harvey and

Irma to the US southern states’ crops. Base metals were supported by improving prospects for global

manufacturing activity and the continuing expansion of Chinese infrastructure and real estate investment,

while some supply disruption also played a part. Gold prices rose on reduced expectations of a rate hike in

December by the US Federal Reserve.

Trends in selected commodity markets

During the month, further improvement in global manufacturing activity led a rally in metal prices to their

highest level since 2014. The JPMorgan global manufacturing purchasers managers index (PMI), which

achieved a 75 month high of 53.1 compared to 52.6 from the previous month, signals the resilient pace of

global industrial production, while at the same time, supply disruptions from strikes, regulatory led mine

closures and weather related events has also tightened the market. Further support has arrived from

expectations of fewer interest rate increases by the US Federal Reserve in the short run, which is associated

with a weaker US dollar and stronger gold prices. Meanwhile the effects of Hurricanes Harvey and Irma have

supported the prices of various commodities. In the agricultural commodities’ group, cotton prices have

jumped by more than 12% since mid-August on concerns about the cotton crop in the State of Texas, which

according to the US Department of Agriculture (USDA) accounted for around 43% of the US cotton output in

2016. Furthermore, the expected path of Hurricane Irma will impact on the South East region, which

accounts for an additional 26% of US cotton production. The impact of Irma has also been reflected in a 15%

jump in the price of concentrated orange juice futures, as the State of Florida produces more than half of

US orange output.

Beyond the aforementioned storm related issues, monthly average agricultural prices declined with the

downward trajectory of food prices. Grains led the drop in food prices, largely reversing the gains achieved in

2Q17, as the impact of drought in the US plains, and flooding in South Asia during that quarter appear to

have been overestimated and global stocks of wheat, soybeans and rice are expected to increase due to

higher global supplies. USDA projections for global stocks of wheat at the end of the marketing year 2017/18

increased to 264.4 million metric tonnes (MMT) from 258.6 MMT in the previous month estimation, mainly

due to higher expected output from Russia and Ukraine. Average winter wheat prices declined by around

15% m-o-m. In the case of soybeans, the USDA revised up the 2017/18 global stocks forecast from 93.5 to

97.8 MMT due to higher expected US production which represents an increase from the 97.0 MMT of the

previous year. In the case of rice, global stocks estimations for 2017/2018 were slightly revised upwards to

122.9 MMT versus 119.4 MMT the previous year by the USDA in spite of lower expected output from

Bangladesh and Sri Lanka.

Metal prices were supported by improving prospects for global manufacturing and investment in

infrastructure in China. In spite of some recent slowdown, strong growth in fixed asset and real estate

investment has translated into higher steel demand. As a result, Chinese steel output has increased by

10.3% y-o-y in July and by 5.1% y-o-y from January to July. Iron ore prices rose by 12.3% during the month,

also supported by flat y-o-y mine output in July, in China. Amid rising Chinese steel and aluminium output,

with aluminium up 9% y-o-y, regulatory actions from the US Government will require close monitoring. During

the month, the US Department of Commerce preliminarily ruled that Chinese aluminium foil production

benefits from subsidies ranging from 16.7% to 81%, which could trigger tariffs in that same range. This could

be a harbinger of similar actions to other aluminium and steel products as well. Commodities used for steel

product making such as zinc and nickel have also risen due to higher steel product demand. Nickel prices

have also been supported by the Philippine Government’s continuation of the restrictions to open pit mining.

Copper prices have jumped to top strong manufacturing prospects globally while the effects of the supply