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Commodity Market Outlook 2019

It is that time of the year when we reflect on the events from the past year and forecast the turning of the page in the New Year. Commodity market had received the needed upsurge in 2018. With factors like sanctions and growing trade tensions driving the markets, increased volatility due to extreme uncertainty was observed and similar factors are likely to influence the commodities complex in 2019. The laggards of last year including gold, copper, corn and soybeans may change into the leaders of 2019. And the leaders of last year could turn into laggards this year.

Gold prices, having commenced the year at $1302.96 per troy ounce, immediately skyrocketed to $1365.87 per troy ounce. However, prices have since plunged and reached the lowest price of $1159.96 per troy ounce in August. Although the prices have been corrected and displayed a positive course of action, the bullion seems to be destined to remain at the lower levels. The main factor was the rising interest rates by the Federal Reserve. In hindsight, the rising interest rates make the interest-bearing instruments more attractive than gold. The Federal Reserve had raised the rates three times last year in a widely anticipated move. Jerome Powell, the Chairperson at Federal Reserve, has opined that the rates are now near where they need to be, meaning we might not witness further hikes in rates anytime soon. A pause in the rate hikes could take some pressure off the commodities since they are traded in US Dollar.

The oil markets were surrounded by ambiguity over the past year with the return of the US sanctions against Iran. Consequently, the oil cartel OPEC decided to reduce compliance with its production cut deal which had seen the group producing at levels last observed back in November 2016, when the decision was first implemented. Crude oil inclined from the opening price of $60.10 per barrel at the beginning of the year to $76.87 per barrel in October. Since then, prices have nosedived, breaking the important support level of $50 in the process. Both Russia and the US are producing at record levels. The robust growth coupled with the Iranian waivers has meant that the global oil markets are set to be well supplied as we enter 2019. Pundits forecast that the markets might experience a significant surplus over the first half of 2019. Likewise, OPEC might agree to another round of supply cuts at its December meeting. Confirmation of further cuts might prove to be supportive of the prices in the near term.

The ongoing trade war between USA and China had weighed down on the prices of copper. Having started at $3.2850 at the start of the year, prices declined over the course of the year. However, due to other news emancipating from various corners, the trade tensions appeared to be having little impact on demand from China with both strong imports and physical premiums prevalent in the market. Analysts have opined a small deficit between demand and supply encouraging investment in mining projects. On the other hand, the key downside risk is a further deterioration in trade combined with Chinese stimulus not being effective as was thought of. According to popular beliefs, copper is now among the most promising commodities entering 2019.

With a spectacular 30% gain in 2018, natural gas may reverse its fortunes in 2019. The month of November saw natural gas skyrocketing to $4.918 per MMBTU, the level not witnessed since February 2014. This spectacular rise could be the fuel that triggers the downfall. The end of the winter season could drive a seasonal pullback. The higher prices have also encouraged more capital spending which could help rebuild stockpiles for the winter months next year.

The commodities market has painted a mixed picture on the canvas with major factors from 2018 including the trade disputes and the duration of Fed rate hikes remaining to envelop over the markets in 2019. Numerous inflexion points are going to result from actions taken by Trump, China, Powell (Fed Chairperson) and the status of the US Dollar.

Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&d@mexnepal.com

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