Commodities Face Uncertainty Amid Oil Availability, Strengthening Dollar, Trade Disputes, Desjardins Says

Commodity prices are in a bit of a tug of war right now amid uncertainty about oil availability, a strengthening dollar and ongoing trade disputes between the US and several countries, all of which need to be watched closely for signs of price direction, Desjardins analysts said in a note to clients on Thursday.

West Texas Intermediate oil futures are now well below their July peaks as fears of a global economic slowdown have offset concerns about the limited oil supply, the firm said.

The appreciation of the dollar, meanwhile, has had a negative effect on commodity prices, especially industrial metals and gold. Ongoing and escalating trade conflicts, which continue to threaten the health of the global economy, have increased concerns from end-users and investors and are weighing on metals, Desjardins said.

” Their synchronized downward drift indicates that uncertainty and a strong dollar were the main cause behind the drop in metal prices,” the firm said. “As economic growth remains strong, industrial metal prices should recover, especially if the uncertainty tapers off.”

Oil prices have been under pressure “for some time” as some countries are having production difficulties and new sanctions on Iran are now in effect. Oil production in the US continues to climb, reaching 11 million barrels a day in July, but that’s failed to stop US stockpiles from declining, said Desjardins, which pegs the average price of oil at $67 a barrel for the full year.

The Organization of the Petroleum Exporting Countries’ agreement to lower production, geopolitical issues in Venezuela, Libya and Nigeria, the lack of investment in Mexico and Angola and the announcement of new sanctions on Iran are all adding constraints to supply, the firm said. Despite increases in US output, inventories are falling.

“In fact, the oil market posted a deficit for five consecutive quarters and will only show a surplus in 2019, according to International Energy Agency forecasts,” Desjardins said. “OPEC and other big producers recently agreed to increase their output to meet demand, which is reflected in the data for the last two months. Geopolitical factors persist, however.”

The sanctions on Iran are of concern as the country exported about 2.2 million barrels a day, on average, in the first half of the year. The real impact will only be clear once they’ve been applied for some time, so it’s difficult to predict the extent to which supplies will be restricted, the firm said.

Increased oil production in the US helped counter the decline in global output, but the question remains: can the pace be maintained? The Energy Information Administration is calling for an increase of a million barrels a day in 2019, down from 1.44 million in 2018, but that’s still “robust” growth, Desjardins said in its report.

“As a result (of the slowdown in production growth), US output may not be able to offset additional drops in
production by the other major producers,” the report said. “At the same time, strong demand is being threatened by a trade war, which would slow down global growth. Trade conflicts between these (the US and China) could push China to turn to a different source to meet its energy needs. It would be tough for China to slash its US oil imports completely, but if it replaced a portion of them with Iranian oil, for example, the spread between the WTI and the Brent barrel price could widen.”