Written by commodities-now.com

The Economist Intelligence Unit has produced its first global forecast since the Brexit vote. Please find below, their forecasts for commodities until 2020.

Oil prices have fallen back slightly in the wake of the Brexit vote

The rally in oil prices, which saw dated Brent Blend, the global benchmark, doubling from a 13-year low of US$26/barrel in January to over US$52/b on June 8th, has stalled. A succession of bearish developments has prompted a wave of profit-taking and a readjustment of market expectations about the near-term outlook for prices. The contango (a situation where the spot price is lower than the future price) on oil futures prices has widened again, suggesting that market participants now expect a slower rebalancing of the oil market. The price of Brent fell by about 10% from its early June peak to around US$46/b in mid-July. As we expected, a key factor behind this reversal was the easing of supply disruptions, which enabled global supply to bounce back in June after a slowdown in May.

• Canadian output is on track to recover after devastating wildfires in May.
• Although militancy in the Niger Delta will persist, Nigerian production also increased in June.
• Coupled with a further rise in Saudi Arabian and Iranian production, this led to record OPEC output in June.

Demandfor Oil Showing Signs of Weakness

Meanwhile, demand has suddenly shown signs of weakness, with gasoline consumption in the U.S. falling month on month in April. In line with these trends, the International Energy Agency (IEA) reported that OECD commercial inventories kept accumulating in May and that floating storage had reached its highest level since 2009.

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In our interim global assumptions released on June 24th following the UK's vote to leave the EU, we lowered our 2016 oil price forecast from US$43/b to US$40/b.

Yet the current downward trend in prices has little to do with the Brexit vote, which, given the rapid recovery in global stock prices, seems to have had only a short-lived and marginal impact on market sentiment towards most risky assets. As such, although we maintain that prices will dip in the third quarter, before a more sustained recovery takes hold towards the end of the year, risks to our 2016 price forecast are to the upside.

Brent will slide in 2019-20, after peaking in 2018

Oil prices will rise in 2017, when annual global oil consumption will exceed production for the first time since 2013, leading to stock depletion. This will reflect both slightly faster global economic growth, which will underpin oil usage, and the negative impact of several years of low prices on investment (and therefore output).

However, in line with downside revisions to our 2017 global economic growth forecast (from 2.6% to 2.4%) after the Brexit vote, we now expect slightly softer oil demand and a slower recovery in oil prices. We therefore forecast that Brent will climb to an average of US$53/b in 2017, from US$56/b previously.

The global oil market will remain in deficit in 2018, pushing prices up further. However, we expect the rally to lose steam in the second half of that year, as slower GDP growth in China (and a much lower rate of investment) will take its toll on oil consumption growth in what will then be the world's biggest importer. China's slowdown will also have knock-on effects on other economies and weigh on sentiment globally. On balance, we expect prices to average US$65/b that year (previously US$68/b).

Continued output growth from OPEC countries, including Iran, Iraq and, significantly, Libya—where we expect some sort of political compromise to emerge, enabling a resumption of oil production—will lead supply to exceed demand again in 2019-20, especially since a forecast recession in the U.S. in 2019 will restrict consumption growth. In line with these trends, we expect Brent to edge down to an average of US$62/b in 2019 (previously US$63/b) and US$61/b (previously US$62/b) in 2020.

Some commodities stand out but prices will generally remain depressed in 2016

As in the case of oil, we expect the price of industrial and agricultural commodities to stage only a partial recovery in 2016-20. After years of oversupply and falling prices, markets are finally moving back towards balance, with our aggregate commodity price index registering its first quarter-on-quarter rise in two years in April-June. Despite this upward trend, however, prices of most commodities remain well below year-earlier levels. Furthermore, rebalancing is taking place at varying speed.

Tightening supply-demand balances have triggered rapid increases in the price of some raw materials—sugar and soybean stand out among soft commodities, zinc and tin among the metals yet other prices remain on a downward trend (liquefied natural gas) or near multiyear lows (copper). We believe that this growing divergence between individual commodity prices, based on idiosyncratic market developments, will persist in the near term.

More generally, many of the recent gains do not seem sustainable, as prices have moved ahead of fundamentals. For most industrial commodities, the rebalancing process is far from complete, reflecting subdued demand in China (by far the largest consumer of most industrial commodities) and a sluggish supply response to the low price environment (as producers cut costs and try to maintain output to preserve market share). Likewise, most agricultural prices remain under downward pressure from record stocks accumulated through successive bumper harvests in recent years.

On balance, despite some upward price revisions, we expect our aggregate commodity price index to decline for a fifth consecutive year in 2016, by 5.1%. Prices will rebound in 2017‑18, before China's reduced need for raw materials triggers renewed declines in 2019-20.

Hard commodities

Industrial raw materials prices remain highly volatile and are displaying diverging trends.

• Zinc is an outlier, as the London Metal (LME) cash price soared from a multi-year low of US$1,425/tonne to a one-year high of over US$2,100 in early July. Although the speed of this recovery was unexpected, we have long said that planned zinc mine closures will tighten the market in the coming years, leading to some detachment between zinc and the wider commodity complex.
• The picture is much bleaker for copper (and to a lesser extent aluminium), which carry the heaviest weight in our Industrial Raw Materials (IRM) index. Recently announced production cutbacks are not big enough to exert upward pressure on prices, given weakening demand and persistently high output levels in China, and elevated stocks.

Overall, we forecast that the IRM index will decline by 6.8% in 2016, following a 40% cumulative decline in 2011-15. In 2017 industrial commodity prices will rise for the first time in six years, gaining 7.9%, as markets tighten and stocks are gradually worked through.

Soft commodities

A very strong El Niño in 2015-16 ended in May. Although adverse weather associated with the recurring climate phenomenon has damaged crops in many parts of the world, putting upward pressure on some prices, most global agricultural commodities continue to trade at prices below 2015 levels. This reflects several factors, including subdued demand (amid sluggish global growth); record-high inventories following several bumper harvests in recent years; and still-strong outturns this season for a number of crops. There are some exceptions, however, such as soybean, which recorded strong gains in the first half of 2016, primarily due to market concerns about supply.

Although we expect soybean prices to fall back from the highs reached in early June, continued demand for soymeal from the feed sector, especially in Asia (amid growing demand for meat and fish), will keep prices on an upward trend in 2017. Overall, we expect the food, feedstuffs and beverages index to slide by 3.9% (previously 4.2%) in 2016. Prices will rebound in 2017, gaining 2.5% (previously 4.3%); ample stock availability following successive bumper crops will prevent faster increases.