Does the Recent Fall in Commodity Prices Signals a Buying Opportunity?

Commodity prices have slipped over the past six months, but analysts believe that in metals at least there is positive momentum going forward

Karen Kwok 29 June, 2017 | 3:10PM
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The recent fall in commodity prices might represent a buying opportunity, according to analysts. They point out that global economic growth should support demand for commodities – at least for metals - which should encourage more a more positive price momentum.

Over the past six months, commodity prices have fallen by 5.8%, while industrial metals are down 4.4%, according to data from ETF Securities.

Falling prices have had an impact on the energy sector as a whole, which is down 19.5% over this period. The share prices of mining stocks BHP Billiton (BLT) and Anglo American (AAL) are both down more than 9% year to date, while Rio Tinto (RIO) and Glencore (GLEN) are trading at similar levels after six months.  Besides BHP Billiton - that has is trading on its fair value estimate -  equity analysts from Morningstar say the other three stocks are trading above their shares’ fair value estimates.

“Most industrial metal prices fell last month as Chinese manufacturing PMIs [the Purchasing Mangers’ Index] slipped into contractionary territory and total social financing fell – indicating tightness in credit and liquidity,” said Nitesh Shah, a commodities strategist with ETF Securities.

James Sutton, client portfolio manager of the Bronze Rated JP Morgan Natural Resources fund agreed, saying that the natural resources sector’s four straight months of negative returns are due to a tightening of credit in China.

“Short-lived tightening and destocking cycles in China are an occupational hazard when investing in the mining sector, and we believe the market has become too bearish on these short-term drivers of demand,” said Sutton.

Chinese Demands Support Base Metals 

However, Chris Beauchamp, chief market analyst with IG, the online trading platform, says there may be further strength in commodity prices, especially in base metals. He says the foundations that supported earlier rallies still exist.

“There is further growth from China and continuing demands for metals. Global economic growth continues to rebound and looks strong. Commodities will go towards an upward trend although prices are not rising as fast as they can,” he said.

First State Global Resources clearly agree. In a recent published note they said: “While supply-related disruptions have moderated and the Chinese government has shifted to a policy tightening bias recently, underlying demand conditions remain supportive of base metal prices.

“China’s housing and construction sectors remain resilient. Significant infrastructure spending on the US$1 trillion ‘One Belt, One Road’ project should support long-term copper demand.” 

Will Oil Prices Settle at Long-Term Average of $40 a Barrel?  

While the fundamentals may be looking good for metal prices, the picture isn’t quite as positive when it comes to oil.

The oil price benchmark West Texas Intermediate is trading at $45 a barrel at the moment. OPEC - the intergovernmental organisation for the oil market – has been lowering production in a bid to support oil price at a higher rate. But rising output of crude oil, from countries like Brazil, Libya and Nigeria will drive oil prices lower, predicts Joshua Mahony, a market analyst with IG.

Shah also questions the efficiency of the OPEC’s attempt to cut production, as global oil production continues to rise, thanks largely increased production of US shale oil.

“Both US shale and other less conventional oil producers have learnt to operate in a lower-oil price environment. We expect US oil production to continue to expand, despite prices being less than half the level reached in 2014,” said Shah.

Shawn Driscoll, portfolio manager of the T. Rowe Price Global Natural Resources Equity fund agreed. He said: “Although some market participants are predicting a return to higher prices, we expect oil prices to settle into a new long-term average: around the $40 to $50 per barrel range.”

Seasonal Momentums in Oil Prices

Oil prices may be buoyed by some seasonal momentum: summer is usually driving season in the US, which can boost demand. In addition, the fall of oil inventories in the US may means a decline in supply, which could drive prices higher. However, IG’s Mahony points out that any forward momentum is likely to be temporary: “it is more likely a selling opportunity,” he said.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk