Mid-Year Commodities Update: Is It Time To Buy?

Editor's Note: This post was originally published on July 21, 2015 and has been updated for freshness, accuracy, and comprehensiveness. Any opinions or forecasts in this post reflect the subjective judgments and assumptions of the author as of July 2015.

Commodities have been falling, mainly due to concerns over the Chinese stock market crash, economic turmoil in Greece and the recent Iran nuclear deal. So could this be a good time to buy commodities?

Not all of them. Here’s my updated forecast:

Crude oil - bullish

Near-term, I expect Brent to trade in the $60-$65/barrel range and WTI to trade in the $55-60/barrel range

Spreads between the two benchmarks could remain tight as US oil production begins to roll over due to lower rig count. A final deal with Iran could scare oil prices lower, but I believe the deal will not lead to substantial imports until the beginning of 2016 at the earliest. 

Over the next six-12 months, prices should correct to what I view as their fair value of WTI at $70-80/barrel and Brent at $80-90/barrel.  In opinion, this would be required to incentivize enough US supply growth to help balance world demand growth estimate (which I estimate at about 900 thousand barrels per day).

Copper - bullish

Copper prices are close to fair value in my view as they approach my estimated target of $3/lb

Currently, inventories are low; even a slight pickup in demand could result in a spike in prices as the cushion of oversupply is very small. We could see demand improve this year from higher grid spending in China, though likely offset in part by lower residential demand, in my opinion.

Longer-term, I expect the market to stay in a slight surplus for up to two years, after which supply growth is expected to slow, perhaps sharply, potentially leading to large deficits.

Iron ore - bearish

I expect prices to stay in the $60-$65/ton range over the next six months

We intend to be cautious going short, as low inventories could lead to increased volatility particularly if Chinese demand outlook changes. Inventories have fallen sharply over the last few weeks and are close to their 2013 lows when prices were higher than $150/ton. Contrary to previous cycles, this does not indicate an uptick in demand but rather a contraction in Chinese domestic supply. Supply growth from Australia over 2016-2020 will likely be lower than the high growth years of 2013-2015.

Thermal coal - bearish

I expect thermal coal prices to stay in the $50-$60/ton range for approximately the next five years

I remain structurally bearish on thermal coal prices over the next five years or so as the market will likely continue to remain oversupplied due to rising Indian and Chinese production, as well as anemic demand growth due to environmental regulations and competing power sources.

 Gold - bearish

I expect gold prices to fall to close to $1,000/oz over the next two years

Three major things could push prices lower: (1) reduced demand from China and India, (2) continued resilient mine supply and (3) the approaching Fed rates lift-off. ETF selling is expected to continue as real rates move higher, and tail risks become virtually non-existent, which would add to my bearishness.

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This was originally published on July 21, 2015. We have updated the content as necessary and otherwise believe the information is current and relevant.

Past results are not necessarily indicative of future results.

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