Commodity prices rallied 3.7% month-over-month in October, but were still weaker compared to the same period in 2014, according to Scotiabank’s Commodity Price Index.
And then, investors’ worries over China and a hike in U.S. interest rates returned in November, which led to investment funds bidding down oil and base metal prices.
“The further slowdown in China’s industrial activity, to 5.6% year-over-year in October, triggered renewed investment fund short selling,” says Patricia Mohr, vice president of Economics and commodity market specialist at Scotiabank. “Financial markets are also expecting the Fed to begin normalizing U.S. monetary policy in December, boosting an already high U.S. dollar and pulling down dollar-denominated commodity prices.”
What’s more, “Base metal prices have receded again in November amid quite negative sentiment over the outlook for China—excessively so in our view. [Also], London Metal Exchange zinc prices have retreated to US$0.73 per pound, just above average world break-even costs. However, prices appear to be over-sold relative to the fundamentals.”
For example, she adds, “Zinc concentrates are currently in technical deficit, with estimated world demand above supply, and the mine cutbacks by Glencore and 16 Chinese smelters will tighten market conditions further in 2016.”
On a more positive note, says Mohr, “Gold prices should start to rally around 2017, as mine development deferral leads to declining world gold production. A tightening in physical supplies should attract investors back to gold.”
- A widening discount on Western Canadian Select (WCS) heavy crude oil, following the outage at BP’s Indiana-based refinery in August, once more highlights the substantial cost of relying on only one key export market for the vast bulk of Canadian crude. Had oil pipeline capability been available to the B.C. Coast or Atlantic Canada, producers could have diverted crude to Asian markets, where price discounts on heavy crude are half U.S. levels. The decision by the U.S. to deny a permit for Keystone XL heightens the need to build oil export pipelines.
- Alberta’s climate change policy is intended to build public support for needed oil pipeline expansion.
- The Agricultural Index edged up in October (+0.6% month over month, but -9.7% year over year). That’s because a seasonal gain in wheat, barley and canola prices offset weaker prices for cattle and hogs. In-store prices for No.1 grade canola prices rose to US$385 per tonne and remain relatively high.