The outlook for commodity markets is slowly turning in a more positive direction. Recent monetary stimulus from the European Central Bank, the Federal Reserve and the Bank of Japan, the drop in USD and stimulus targeting the Chinese property market have all been beneficial for global demand for commodities. Additional tailwind for demand will likely follow from a further decline in USD and improvement in construction activity in China. On the supply side, rebalancing continues in the oil and base metals markets. Tail risks from disruptive weather and deterioration of the geopolitical situation still loom and could trigger a surge in precautionary demand, although high stocks should limit such need.
Oil
The upcoming meeting between OPEC and Russia should not impact oil prices. Instead, improvement in global income growth in the latter half of 2016 and in 2017 along with a rebalancing of oil market and a further decline in the USD should help prices to recover. We recommend that consumers hedge exposure in Q4 16 and 2017.
Metals
We are looking for improvement in Chinese construction activity, which should support a recovery in base metals prices along with lower supply growth and a weaker USD and CNY. We recommend consumers to hedge exposure in the rest of 2016 and in 2017 at current low levels.
Grains
Overall, the benign supply situation in the major grains and oilseeds markets is likely to continue to keep prices at a low level. However, consumers may consider hedging the risk of rising prices on the back of potential disruptive La Niña weather later this year.
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