More than half of commodity prices (and all non-coal energy prices) are expected to increase in 2018, but four-fifths of them will remain below their 2011 peaks, the World Bank said in its latest Commodity Markets Outlook report, adding that energy prices are forecast to rise 20 percent in 2018—a 16 percentage point upward revision from October 2017—and stabilise in 2019.
Non-energy prices are projected to gain more than 4 percent in 2018 before they stabilise in 2019. These constitute upward revisions of more than 2 percentage points for both years from the October 2017 forecast.
“If additional tariffs or sanctions are implemented, they could change the outlook for commodity prices in the short-term; however, their effect would likely unwind over the medium-term, as producers and consumers find new distribution channels, export markets or sources of finance,” the report said.
Oil prices are anticipated to average $65/bbl in 2018 and 2019 on robust demand and continued production restraint by OPEC and non-OPEC producers, notwithstanding increases in U.S. shale oil production.
Higher oil prices are expected to eventually feed into higher natural gas prices while coal prices will continue to decline as energy demand shifts towards less polluting sources.
Energy prices surged 10 percent in the first quarter of 2018 (q/q), led by oil and natural gas. Oil prices rose 10 percent, averaging $64.6/bbl over the quarter, and have more than doubled since bottoming in early 2016. Strong oil demand and greater-than-expected compliance by the 22 OPEC and non-OPEC producers to their agreed production cuts helped reduce inventories in the second half of 2017, the World Bank said.
Rising geopolitical concerns, especially about prospects for renewed sanctions on Iran, and tensions between Iran and Saudi Arabia in Yemen, bolstered prices in late March and rose further to $74/bbl in April. The rise in prices has supported a recovery in U.S. shale production, with total crude production increasing by more than 1.1mb/d in January 2018 relative to the previous year.
Upside risks to the forecasts, the report said, include potential supply losses arising from geopolitical events, a deterioration in República Bolivariana de Venezuela, deeper cuts by OPEC and non-OPEC countries or an extension of the agreement to a longer-term horizon. Conversely, a weakening of the agreement, or further efficiency gains among U.S. shale producers could depress prices, it added.
According to the World Bank report, metal prices are projected to increase 9 percent in 2018 due to a further pickup in demand. An 11 percent decline in iron ore prices—reflecting stronger production, especially in China—is expected to be more than offset by projected increases in all other base metals prices.
Nickel prices, in particular, are expected to remain 30 percent higher than in 2017, despite a slight moderation from their recent sharp rise, that reflect hopes for buoyant electric vehicle demand and the risk of Russian sanctions.
Metals prices increased over 4 percent due to strengthening global demand and concerns about tightening global supplies. China continued to enforce measures to curtail production of aluminum and steel over the winter to meet pollution goals, although production rose in non-restricted areas.
In April, the trade tensions between the United States and China initially weighed on all metals prices. However, aluminum prices subsequently surged and reached a seven-year high following the imposition of sanctions by the United States on the largest Russian aluminum producer (accounting for more than 6 percent of global supply). Nickel prices also rose amid fears that sanctions could be extended to other Russian metals producers—Russia accounts for 9 percent of global nickel production.
Precious metals prices gained 4 percent on expectations of rising inflation, a weaker dollar and heightened concerns about geopolitical risks. Upside price risks to the forecast include more robust global demand as well as production shortages. Supply could be curtailed by a slower ramp-up of new capacity, further sanctions against metal exporters, and policy changes in China. Downside risks are dominated by slower growth, the easing of pollution-related policies, and the reintroduction of idle capacity in China.
The World bank forecast agri prices to gain 2.2 percent in 2018 and a further 1.3 percent in 2019, the report said, adding that grain prices and oils and meal prices are projected to gain 8 percent and 4 percent, respectively, in 2018, mainly due to lower plantings.
A key policy risk is the introduction of countervailing duties on soybeans by China in response to U.S. tariffs.
Agricultural prices gained 4 percent, the largest quarterly increase in the past two years, largely due to lower wheat and maize plantings in the United States and a La Niña-related impact on banana production in Central America and soybean production in Argentina.