Fra Commerzbank:
One reason for the latest sharp fall of commodity prices is the fear of an economic slump in China. However, up to the end of June at least, China’s demand for commodities has barely decreased so lower commodity prices were not an indication for an even weaker economy. Rather, global supply has continued to rise in some cases.
As many production facilities are meanwhile unprofitable, supply should drop again soon. Consequently, prices should be higher again by the end of the year – provided the economy in China does not slump, as we expect. The economic situation is not good in China at the moment: the equity market bubble has burst and the unofficial Purchasing Managers’ Index at least is currently well below 50, which actually signals shrinking industrial production.
This bad news from China is certainly one reason why commodity prices have plunged recently. The price of a barrel of Brent has dropped by more than 20% since the beginning of July. The LME index for always very cyclically-sensitive base metal prices began to tumble already in May; since then, it has shed almost 20% (see chart on front page). More and more investors are asking themselves whether this price slide might indicate a slump in demand and economic performance in China or the emerging markets in general is possibly much worse than generally assumed.
The figures available do not give any signs of this.
Crude oil: Fight for market shares + fear of Iran’s return The situation with crude oil is clear. Although the demand for crude oil dipped by 0.2 million barrels a day in the second quarter according to data from the International Energy Agency (IEA) and our own seasonal adjustment, it was higher than expected at the onset of the year and the trend is still pointing upwards (Chart 1). This is at least the case up to June – newer figures are not available – also for China’s oil imports.
The decisive factor for the ever-increasing oversupply since the beginning of 2014, which had a huge impact on the oil price (Chart 2) – like in the years of substantial demand overhang in 2007/08 and 2010/11 – is the sharp rise in oil supply. According to the IEA, oil supply in the second quarter was more than five million barrels a day higher than two years before. The reasons lie in the fracking boom in the USA and the very strong increase in OPEC production in response to this.1 While US production has fallen slightly recently, OPEC increased its output again in July according to the Reuters survey and global production in July has therefore probably expanded again. Added to this was the expectation that Iran would export much more oil again soon following the nuclear agreement and oversupply could tend to rise again.
