Commodities outlook as oil nears $65 and gold demand plummets to eight-year low

This week saw the oil price hit just shy of $65 per barrel, its highest intra-day level in almost two-and-a-half years. Brent crude has rallied by more than 40 per cent since July, currently sitting at $63.48.

The rising prices have been driven by optimism that Opec and Russia will continue restricting supplies to ramp up demand, having extended its production cuts in May, and fears tensions in the Middle East could disrupt supplies.

Political uncertainty – namely rising tensions between the US and North Korea – also boosted demand for gold in September – the go-to safehaven for jittery investors – with the price of the yellow metal climbing above $1,300 for the first time in a year.

However, over the third quarter of 2017 demand for gold fell to an eight-year low, with a year-on-year drop of 9 per cent to 915 tonnes, according to the World Gold Council.

Gold ETF investors fell away in Q3, with inflows of 18.9 tonnes compared to the 144.3 tonnes in Q3 2016. More recently the price has fallen to $1,282.

Now that the geopolitcal tensions that took centre stage in September have eased slightly, what is the outlook for these commodities? Will central bank action drive gold investors towards riskier assets? And with non-Opec production is increasing, has the oil price reached a peak in its current cycle?

John Husselbee, head of multi-asset at Liontrust

We see a broadly balanced outlook for commodities. While the ongoing recovery in global economic growth, across both developed and developing countries, is supportive, the threat of a hard landing in China remains, and this is particularly of note for metals.

Meanwhile, China’s ongoing transition from a manufacturing to a services-based economy will continue to have a major impact on industrial commodities.

Looking around the asset class, the oil price has stabilised in recent months as the market rebalances between supply and demand. Opec cuts are less effective in a market of greater supply as a result of new technology and drilling techniques, although much of this price is dependent.

Gold prices continue to serve as a proxy for investor fear, currently driven by higher inflation and risk of falling markets. We have witnessed both of these scenarios this year but while gold has risen, it is way off all-time highs and investors should remember holding this physical commodity yields no income.

Elsewhere, copper prices have climbed on the back of strikes at some of the major mines and extra demand will come as the Americas begin to rebuild after the recent hurricanes.

Our long-term preference in this asset class is to use diversified commodity funds, which access commodities both directly and indirectly via equity-related commodities.

Tim Cockerill, investment director at Rowan Dartington

The quantity of any commodity available is always finite. Consequently, simple supply and demand characteristics drive prices. Most are bought for their practical uses in industry that, in turn, is tightly linked to the global economic cycle. There are always peripheral factors at play, most notably politics, but with the exception of gold it’s the long-term economic outlook that determines demand.

Tension between the US and North Korea will keep gold buoyant although I’m not expecting it to rise significantly. However, if the sabre rattling changes to action gold will spike sharply, while equities sell off.

Oil production is the most flexible of all the major commodities and to a degree price can be controlled, but that needs agreement among Opec members and non-members – but shale puts a cap on the upside, so again I’m not expecting to see it rise strongly.

As for the base metals, watch production levels and the global economy. The former has decreased in recent years but the latter remains subdued – the rally in prices since early 2016 seems more like a recovery than a new cycle.

Commodities have also become a speculators dream, and with a growing number of investors using algorithms, momentum trades in particular can build and fade quickly. This type of trading is short term and hard to predict and won’t change the longer term trends. But with no income being generated, speculators, and a global economy that is expanding slowly, we are not fans right now.

John Redwood, chief global strategist at Charles Stanley

Gold trading is sustained by two strong conflicting pulls. On days when the news is bad about the relationship between the US and North Korea, gold rallies. Other political tensions can also come to the aid of the yellow metal; independence movements in Kurdistan and Catalonia are helpful to gold bulls.

On days when the economic outlook predominates in more investors minds, gold retreats. Now people are looking forward to the Fed reining in quantitative easing, and seeing the Eurozone beginning to normalise monetary policy, they look to get better returns from other assets than gold. At Charles Stanley we think the economic backdrop is the more dominant influence. We do not expect a major military exchange involving the US to occur.

Base metals have done well on expectations of a healthy world recovery. Some of the pessimists about China have moderated their fears of a slowdown or debt crisis there, recognising the steady progress of that growing economy. We may have seen the best of the moves, which should discount the relatively favourable outlook.

Oil has shot up to the top of its recent trading range. The market for oil is tightening. Opec production cuts are having some impact, while demand is expanding thanks to world growth. Oil producers have got better at feeding oil market supply restriction stories to the financial world. There is still some way to go for there to be actual shortages so oil also seems well up with events. There seem to be better investments around than commodities given recent price movements.

Nick Greenwood, manager of the Miton Global Opportunities trust

Gold has been quite weak since the end of August and remains well below the level it reached in 2011.

Central banks are flagging that they intend to remove some of the emergency monetary policy initiatives that have been in place since the global financial crisis. If this move were to prove successful, it would place the gold price under pressure as its lack of yield would leave the yellow metal less attractive given income available elsewhere. In the longer term, India’s move away from an informal economy may well reduce a source of significant demand.

China continues to defy the doomsters. Manufacturing output remains strong and GDP growth solid. This partially explains the strength in mining equities in recent months and coincides with a rise in the renminbi from 6.9 versus the US dollar to 6.6 in October.

The Chinese authorities are concerned that currency strength will make their products less competitive on the world stage. Therefore, they are loosening policies. This stimulus will be supportive for base metals. Nevertheless, market prices would have to be strong to attract fresh supply.

We subscribe to the view that the price of oil remains in long-term decline notwithstanding the recent rally. There will less demand at the margin due to the move to renewables. Furthermore, producers in the Middle East are desperate for cash to ease geopolitical issues. They have few alternative routes to funding.