Market Strategy - Monthly Commodities Strategy: Upside Risks From China - OCT 2017

The three-month outlook for commodity prices is generally positive, although industrial and precious metals look vulnerable to a near-term correction after strong recent gains. We believe that oil prices will edge higher over the coming months as the global market continues to tighten, aided by improving compliance with the ongoing OPEC/non-OPEC output deal. We also expect that the grains index is finally bottoming out after a multiyear bear market that has taken prices close to all-time lows in real terms.

Looking at 2018, the outlook for prices is more mixed and while we are bullish grains, we are bearish towards ferrous metals and expect oil prices to stagnate in the USD50-60/bbl range (for Brent). China's economic growth will slow in 2018 due to a renewed economic reform drive that will thin the construction project pipeline and as a result, we expect weaker growth in building materials demand. As discussed below, we will be watching the upcoming Communist Party Congress in October closely for any indication that this reorientation of growth policy away from the construction sector is going to be delayed.

Upside Risk To China-Related Commodities

Bullish Near-Term Outlook
Front-Month Brent Crude, USD/bbl (weekly chart)
Source: BMI

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