Oil: WARM

Syria’s civil war has caused tension across the Middle East, with loyalties divided among the world’s most prolific oil producing countries of Saudi Arabia, Qatar and Iran. This political instability has been supportive of the oil price, with Brent crude up 3.4% in the six months to 9 October.

“The regional instability is unlikely to be resolved in the near term and, therefore oil prices will remain elevated for the foreseeable future,” said Angelos Damaskos, chief executive officer of Sector Investment Managers and manager of the Junior Oils trust.

One of the main factors depressing oil supply in the region is US and EU sanctions on Iran, which have slashed Iranian production by up to 1.5 million barrels a day.

However, the US and Iran recently held their first high-level meeting since 1979 and this move has complicated the picture. Some observers have seen the meeting as a step towards future easing of sanctions, which would lower prices.

“Even the anticipation of a breakthrough could cause oil prices to fall sharply. The outlook is brighter than it has been for many years,” said Tom Pugh, commodities economist at Capital Economics.

“It is difficult to determine the precise extent to which the current high level of oil prices is caused by supply concerns, and how much is due to expectations of buoyant demand, as reflected also in the strength of global equity prices.”

However, Gary Dugan, chief investment officer, Asia and Middle East at Coutts, emphasised the long-running and complicated picture which has kept Iranian supplies low.

“We expect oil prices to remain firm, given market fears the conflict will cause problems throughout the region. It should also be noted that Iran supports the Assad regime, and US intervention will only delay any possible return of Iran into the international community. This is likely to slow the pace of Iranian oil supplies coming back to the market.”

Soybeans: COLD

Soybean prices soared 42% during 2012 after devastating weather – including the worst US drought for 25 years and below-average rainfall in India – reduced supplies to critical lows. However, the soybean bull run came to an end this year, and the S&P GSCI Soybean index is down an annualised 4.42%.

Prices are currently around $12.80/bushel, well below last year’s median price forecast from Morgan Stanley of $16/bushel.

Looking ahead, recent poor weather across the US Midwest – a key growing area for soybeans – has left the outlook for supplies “unusually uncertain”, said Damien Courvalin, analyst at Goldman Sachs.

However, Courvalin is bearish on the price outlook for the commodity, as supplies are not the whole picture.

“Importantly, while we see upside risk to current prices given downside risk to US production, we ultimately believe lower US exports and another large increase in South American soybean acreage and production will leave US inventories above last year’s level, and prices below the current forward curve,” he explained.

Pugh argued the uncertainty over the US harvest is already priced in to the crop. Moreover, he expects investor focus to shift more towards demand – at least until the Latin American harvest season, which begins in March 2014.

“There is still a premium in prices to compensate for the risk bad weather could harm the actual harvesting of the crops over this month and next,” Pugh said. “In the absence of any further disruptive weather, the premium in crop prices should therefore diminish.”

Soybean prices are still well above their long-term average, and are currently three times the price of corn. This will likely trigger the ‘substitution effect’, where farmers using soybeans for animal feed will switch to corn instead.

Slower growth in China, the world’s largest consumer of soybeans, could also hinder demand. In addition, if oil prices come down, this will reduce costs for crop growers, easing soybean pricing too, said Pugh. He expects soybean prices to fall to $10/bushel by the end of 2014.

Copper: HOT

The copper price has been turbulent this year, as mixed messages over the extent of copper demand weighed on investor sentiment. 

The price rose to $8,305/t in February, before a 20% sell-off in June saw the industrial metal slump to $6,600/t. Like other industrial metals, copper has suffered from concerns over China’s plans to cut infrastructure spending and its transition to a more consumer-led economy.

However, the metal has made some gains in recent months and, as with other asset classes, the copper spot price rose 3% in the aftermath of the Federal Reserve’s decision to continue with fiscal support.

Meanwhile, copper futures rose 1.1% recently on seasonal demand from Asia, where factories have cranked up production of goods for Christmas.

Some investors argue the impact of China’s slowdown in infrastructure spending has been overstated, as the country is still a massive importer of resources.

“Despite the slowdown in the overall growth rate of the Chinese economy, and the lower dependence on investment as a source of growth, that economy will still put tremendous pressure on the demand for hard commodities like copper and iron ore,” said Chris Iggo, chief investment officer, fixed income at AXA IM.

Demand for copper does not just come from Asia. Data shows US durable goods orders rose in August, while shipments of non-military capital goods rose 1.3% after two consecutive months of decline.

Indeed, copper prices may inch ahead of other base metals since it is supported by demand from a number of industries, argued Martin Arnold, senior analyst at ETF Securities.

“We expect copper to be one of the stronger performers, as it has a wide range of industrial applications from construction to the auto sector,” he said.

 Silver: HOT

A notoriously volatile commodity, silver has often been overlooked by investors in favour of its shinier cousin, gold.

Although 50% of silver demand comes from industry, where activity has been picking up in line with improved economic conditions around the globe, silver has been the worst-performing industrial metal of the last year. The price fell from $1,125/kg in October 2012 to $703/kg in August.

However, Mike McGlone, director of US research at ETF Securities, argued the price fall represents a potentially attractive entry point for investors as, if global economic growth continues to improve, industrial demand may increase.
McGlone also said there are signs of a turnaround in commercial demand for silver.

“A closer analysis reveals silver may have fallen too far and is poised for growth,” he said.

The US Mint silver coin sales are on course for sales of 50 million ounces. This would surpass 2011’s peak of 40 million ounces.

“While it has been a difficult year for precious metals investors, we feel silver has returned to attractive value near $20/oz, and can sustain gains above $20/oz as long as the global recovery remains buoyant, in turn continuing to lift physical demand,” McGlone said.

Meanwhile, news of the Federal Reserve’s plans to continue, rather than cut, its quantitative easing measures caused the dollar to fall to a seven-month low, while metal prices received a boost. Silver led the pack with a rise of 6.9% they day after the Fed announced it would not taper.

Garry White, chief investment commentator at Charles Stanley, explained: “The dollar and commodity prices typically have an inverse relationship, as a weaker US currency makes commodities such as gold, copper and oil cheaper to buy in other currencies. This, in turn, can boost demand and increases the price of basic material in dollar terms.”

If the dollar continues to fall, this could provide a further support to the price of silver. 

 Gold: HOT

Last year, worries over the future of the eurozone, the unknown effects of quantitative easing, and wildly volatile equity markets caused gold prices to soar to record levels of $1,800/oz, as investors sought the metal as a safe haven.

But as these worries subsided this year, and global economic growth appears to be picking up pace, the price of the physical metal fell 15% over two days in April. It has since continued to slide, and gold exchange-traded funds have seen large outflows.

In August, the precious metal rose a little ahead of the traditional autumn Asian wedding season – typically a time when gold jewellery sales increase.

Now, however, the outlook is uncertain. Gold regained its safe-haven status in early October as cautious investors moved back in following the shutdown of the US government. The price rose to $1,309/oz.

Further political turbulence in the US could be of support to the gold price, said Russ Koesterich, chief investment strategist for BlackRock.

“In the unlikely event Washington fails to raise the debt ceiling, stocks would likely suffer a much more pronounced pullback. Under that scenario, the only asset class that is a clear beneficiary would be gold,” he said.

However, Goldman Sachs’ Courvalin argued the political gridlock in the US has left prices skewed to the upside. He expects future gold upside to remain limited, as the resumption of economic growth will cause investors to favour other assets.

“We reiterate our neutral stance on gold prices, and continue to expect prices will resume their decline heading in to 2014, when we expect economic data to solidly confirm a reacceleration in US growth, and warrant a less accommodative monetary policy stance.”