Commodity Prices Plunge for Third Successive Year

Commodities have underperformed all other asset classes for a third successive year and produced their lowest annual returns since the 2008 financial crisis

Andy Brunner 10 December, 2015 | 10:30AM
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It is difficult to conceive of a much more challenging time for the commodity markets; most of the main commodities have collapsed in excess of 50% from their peaks, iron ore has crashed by 73%, crude oil has plunged by nearly two thirds, corn by 57%, copper by 53%, gold 45% and the main index, the UBS Bloomberg CMCI, 46%. Indeed, many commodity prices are close to the lows of 2008/9 resulting in huge swathes of the gains from the commodity super-cycle now having been wiped out.

In most instances, and particularly for industrial metals and bulks, the key factor generating another year of commodity price declines was excess supply, driven by slowing China and emerging market demand and rising production. For crude oil this new supply was principally US shale oil and in agriculture, the third excellent US harvest in a row has caused a further decline in grain prices. The sharp rise in the dollar was also most unhelpful amidst such a weak fundamental background.

Will Commodity Prices Improve in 2016?

Looking into 2016, not one of the leading commentators is bullish on commodities with most recommending underweight positions; Goldman Sachs, JP Morgan and Citi, for example. Yet conversely, few are actually that bearish on the prices of key commodities from current levels. Even Goldman Sachs, perhaps the most bearish of the main commodity commentators over much of the past few years, is currently expecting WTI crude oil to be $50 per barrel at the end of 2016 compared to $42 currently, a prospective rise of 19%, while JP Morgan, Citi, Credit Suisse and Barclays all expect even higher crude prices.

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About Author

Andy Brunner

Andy Brunner  is Head of Investment Strategy, Morningstar UK