Key themes
The EU consumes around 10-15% of the world's oil and base metals, so commodity markets cannot fully ignore the shock to the European economy of the UK vote to leave the EU. This said, what happens to the USD and economic activity in China is more important for commodity markets. In our view, the USD should increase only temporarily before falling back next year, while we expect the Chinese economy to be affected slightly negatively this year. This suggests that commodity markets should be able to shrug off the impact of the UK vote to leave the EU on, for example, business investments in Europe. Furthermore, the supply side of the market continues to tighten, creating fundamental support for prices.
Oil
The higher USD has mitigated the positive effect on prices of lower US crude output. Towards the end of 2016 and in 2017, we expect higher global income growth, along with a further rebalancing of the oil market and a further decline in the USD, to lead to additional price increases. We recommend that consumers hedge exposure in 2017.
Metals
Over the coming year, we are looking for improvement in Chinese construction activity, which should support a recovery in base metal prices along with lower supply growth and a weaker USD and CNY. We recommend consumers hedge exposure in aluminium, copper and nickel for the rest of 2016 and in 2017 at current low levels.
Grains
Tighter supply has sent prices for oilseed higher, while an improved supply outlook has weighed on wheat prices. La Niña weather later this year may push prices higher, while high stock levels limit upside risk. Consumers may consider hedging the weather risk.
To read the entire report Please click on the pdf File Below