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Commodities: More Pain Ahead in 2015

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This year has been a tough one for many commodities, mainly due to a strong U.S. dollar. Many investment analysts say the situation isn’t likely to get any easier in 2015.

West Texas Intermediate and Brent crude oil futures, for instance, have lost over 45% of their value since June this year – prompting some investors to call this jolt the “oil shock of 2014.” Plus, the steep decline in oil prices has had an impact throughout the commodities sector, with further fallout anticipated for next year.

As an asset class, commodities weakened about 12% in the third quarter of 2014, according to Morningstar. For the 12 months ended Oct. 31, the group is now nearly 7%. 

In mid-December, crude-oil futures dropped below $57 a barrel, after the International Energy Agency further reduced its forecasts for global oil demand; the agency sees daily demand declining by 230,000 barrels a day to  900,000 in 2015.

Futures for sweet crude have declined 25% since Nov. 24. These declines have occurred thanks to both the U.S. shale boom, weakening demand in Asia and Europe, and the Middle Eastern producers’ hesitancy to put a dent in the global supply glut.

“A stronger U.S. dollar and ongoing concern over a projected 2015 surplus maintained a steady downward pressure on prices,” Citi Futures analyst Tim Evans said in a recent note.

As for prices in 2015, ANZ Research has slashed its oil-price forecasts by nearly 25%. It expects Nymex crude to average $68 a barrel and Brent crude to average $71 a barrel next year.

A recent Bloomberg survey of 17 analysts, though, sees Brent sliding to $50 a barrel, down from a high of close to the $116 a barrel in June.

Analysts at Goldman Sachs see further declines in prices for oil and for other commodities with anticipated strengthening of the U.S. dollar in 2015 and weaker demand for commodities in China.

Metals’ Madness

As for metals, Goldman Sachs is calling for gold to average $1,050 an ounce in 2015.

Gold futures for February traded at about $1,208 an ounce on Monday, according to Bloomberg. They have been weakening for several weeks amidst concern that the Federal Reserve is likely to raise interest rates, which would cut demand for the precious metal – seen by many as an alternative investment.

In the third quarter, gold prices dropped close to 8.5% as the U.S. economy and currency strengthened. They hit a four-year low in November.

Goldman Sachs also forecasts that copper is likely to weaken in 2014, but nickel, zinc and aluminum should outperform. 

Citi Research is more neutral on gold, estimating 2015 prices to average $1,220 an ounce; the group sees silver prices averaging $16.50 an ounce – both estimates are close to where these metals were priced as of Dec. 15.

“Money manager pessimism has been driven by weakening gold prices on the one hand and growing uncertainty over the economic outlook in China and Europe, which is undermining the silver’s industrial demand outlook on the other,” Citi said.

On the other hand, the bank is bullish on platinum and palladium prices, forecasting average 2015 prices of $1,350 an ounce and $870 an ounce, respectively.

Prices dropped about 18% for palladium and 20% for platinum between September and October, Citi noted.

“We remain highly positive for palladium’s fundamentals for 2015, [but] we have scaled back our price expectations, forecasting prices to average $870 [an] ounce, a $55 [per] ounce reduction versus our previous expectations. … [W]e continue to expect palladium prices will regain the highs seen in September [of 2014] by the fourth quarter next year, despite U.S. [dollar] headwinds,” they said in a report.

In addition, the bank said it is bullish on nickel, copper and lead prices, while neutral on aluminum and zinc prices.

Meanwhile, Credit Suisse has a price target of $950 on gold for late 2014. “Gold remains very expensive relative to historical norms, with carrying costs becoming more penal as U.S. interest rates begin to rise,” the bank explained.

No More ‘Supercycle’

Bank of America’s outlook is bearish to neutral on commodities in 2015, noting that the commodity “supercycle” has passed. China, which is seeing shifts in its economy, will negatively impact the demand for commodities, the bank noted.

The World Bank’s outlook is for commodity prices to remain weak next year due to a weaker euro, stronger U.S. dollar and broadening supplies.

The organization sees precious metals falling an additional 2% in 2015 and fertilizer prices dropping 3.5%.

As for agricultural commodities, the outlook for next year is mixed, according to analysts with Rabobank.

The group is most bullish on live cattle, cotton, sugar and wheat; slightly bullish on palm oil, corn and soymeal; neutral on soymeal and soy oil; and bearish on lean hogs, coffee, cocoa and soybeans.

“2015 will be another interesting year for agri-commodities,” explained Stefan Vogel, global head of Rabobank Agri Commodities Markets Research, in a research note. “Macro drivers remain very much in play, and price swings from supply and demand shocks are still likely, given that the stocks for most commodities are not yet at levels necessary to provide an adequate buffer.”