Commodity prices in the third quarter of 2018 were buffeted by geopolitical and macroeconomic events. Energy prices gained 3 percent in 2018 Q3 (q/q), partly in response to the impending re-imposition of sanctions on Iran by the United States along with continuing declines in production in Venezuela. As a result, crude oil prices are expected to average $72 per barrel (bbl) in 2018 (up from $53/bbl in 2017) and $74/bbl in 2019. This represents a sizable upward revision from the April 2018 forecast. Moreover, risks to the oil price forecast are to the upside in the short-term, given the recent decline in spare capacity. In contrast, metal and agricultural prices declined 10 and 7 percent, respectively, in the third quarter of 2018 amid robust supplies and trade disputes. Metal prices are expected to stabilize in 2019 whereas agricultural prices are expected to gain almost 2 percent. This edition also examines how energy and metal commodity markets have evolved over the past 20 years. It shows that China has been the main driver of commodity demand growth, particularly for coal and metals, but that its demand is likely to slow while other emerging market economies are unlikely to emulate China.
Commodity prices have been driven by a number of factors this year, including commodity-specific supply disruptions, rising U.S. interest rates, an appreciation of the U.S. dollar, growing trade tensions between major economies, and financial market pressures in some emerging market and developing economies (EMDEs).
Energy prices rose 3 percent in the third quarter of 2018 (q/q) and are more than 40 percent higher than the same period in 2017, with strong gains in oil, coal, and natural gas. Oil prices were volatile in the third quarter of 2018, with the price of Brent reaching a low of $70/bbl in August, before peaking at $86/bbl in early October. The increase in prices partly reflected continued production losses in Venezuela, and concerns that the reintroduction of sanctions on the Islamic Republic of Iran by the United States may have a greaterthan-expected impact on Iranian oil production and exports. Production increases by other members of the Organization of Petroleum Exporting Countries (OPEC), as well as the Russian Federation, are expected to partly offset this decline. Coal and natural gas prices have been supported by strong demand for electricity in Europe and Asia resulting from unusually hot temperatures.
Non-energy commodity prices declined 7 percent (q/q) in the third quarter of 2018. Metals prices dropped nearly 10 percent on weaker global demand, as well as concerns about the effects of the U.S.-China trade dispute on growth in China, which accounts for 50 percent of global metals demand. In contrast, supply constraints, including the closure of the world’s largest supplier of alumina and environmentally driven reductions in production in China, helped support prices of some metals. Agricultural prices fell nearly 7 percent, the largest quarterly decline since 2011 Q4. A range of factors have contributed to the weakness, such as ample supplies for most oilseeds and grains (except wheat), trade tensions, which affected a range of agricultural prices (notably soybeans), and EMDE currency depreciations (especially the Brazilian real).
Outlook and risks
Energy prices are expected to average 33 percent higher in 2018 compared to 2017—a 13- percentage point upward revision from April 2018—and stabilize in 2019 (Table 1). Nonenergy prices are projected to be roughly stable, gaining just under 2 percent in 2018 and an additional 1 percent in 2019, a modest downward revision from the April 2018 forecast. The outlook for commodity prices is vulnerable to policyrelated risks, especially in the short term. However, it is likely that the effect of any additional tariffs or sanctions would moderate over the medium-term, as producers and consumers find new distribution channels and export markets.
Oil prices are expected to average $72/bbl in 2018 and increase to $74/bbl in 2019. These forecasts are significantly higher ($7/bbl and $9/bbl, respectively) than the April 2018 projections, due to larger threats of supply disruptions and robust demand. Risks to the outlook are particularly heightened at present, and include the impact of U.S. sanctions on Iranian oil exports, a further deterioration of production in Venezuela, and an inability or unwillingness of other OPEC members to significantly expand production. Prices are likely to peak in the first half of 2019 and decline thereafter as U.S. production bottlenecks ease. After sizeable gains in 2018, natural gas and coal prices are expected to decline modestly in 2019.
Metals prices are forecast to gain 5 percent in 2018 and stabilize in 2019, reaching slightly lower levels than previously expected. Downside risks include a worsening of trade tensions between the United States and China, and weaker global growth. Upside risks include stronger demand from China due to policy stimulus, and tighter environmental constraints and policy actions that limit production, notably in China.
Agricultural prices, whose 2018 average will be similar to that of 2017, are projected to gain nearly 2 percent in 2019 as input costs rise, including energy and fertilizers. Downside risks to the price forecast emanate from escalating trade tensions. On the upside, risks include persistently high energy prices, which would raise fuel costs, fertilizer prices, as well as encouraging biofuels production, thereby lifting prices of energyintensive crops, notably grains and oilseeds.
FIGURE 1 Commodity market developments
Energy prices have risen this year, supported by supply concerns, while growing U.S.-China trade tensions weighed on global growth prospects and depressed metals prices. Agricultural prices softened on strong supply with the exception of wheat. Over the past two decades, China has become the most important source of demand in commodity markets.
Sources: Bloomberg, BP Statistical Review, IEA, USDA, World Bank, World Bureau of Metal Statistics. A. Bars denote change in index levels, where January 1, 2018 = 100. B. Last observation is September 2018. C. Price changes are expressed in logarithmic terms to ensure symmetry between positive and negative changes.
The implications of tariffs for commodity markets
The imposition of tariffs by the United States on imports from a number of countries and reciprocal actions by the affected countries have had a material impact on commodity markets. The commodity-specific tariffs have resulted in widening price differentials and diverted trade among countries. The more broadly-based tariffs have affected commodity markets through their impact on global trade, growth, and sentiment, especially regarding China, which is a major source of global metals and energy demand.
Special focus on shifts in commodity demand
Over the past 20 years demand for commodities has surged, driven by rapid growth in China, fundamentally altering the structure of global commodity markets. This edition’s special focus suggests that as China’s economy matures and shifts to less commodity-intensive activities, its demand for commodities is likely to plateau. Since other EMDEs are unlikely to fill this gap, commodity demand growth may slow. This reinforces the need for further economic diversification and strengthening of policy frameworks in EMDEs that are dependent on raw materials.