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Commodities stand on brink of bull market after oil’s recovery

by June 4, 2016 General

Commodities are nearing bull-market territory after rebounding from the lowest level in at least 25 years as oil prices rallied, complementing advances in recent weeks in soybeans and zinc.
The Bloomberg Commodity Index, which tracks returns from 22 raw materials, climbed 0.6 per cent to 87.24 in Singapore on Friday. The gauge bottomed at a closing low of 72.88 in January, and a finish above 87.45 would mark a 20 per cent advance, meeting the common definition of a bull market. The measure is still about 50 per cent below the high reached in 2011.
Commodities suffered five straight years of declines through 2015 as China slowed, denting raw-materials demand after producers ramped up supply on expectations the boom in Asia’s top economy would persist. Citigroup Inc said last month commodities had turned the corner and Tom Albanese, former head of miner Rio Tinto Group and chief executive officer of Vedanta Ltd, said in April that markets were beyond the worst as China showed signs of recovery. “The rebound in commodity prices this year has been consistent with the big picture of constrained supply, recovering demand and improving sentiment that we expect to lift prices further over the medium-term,” Simona Gambarini, a commodities economist at Capital Economics Ltd in London, said by email. Brent crude has surged from a 12-year low in January amid disruptions from Nigeria to Venezuela, and as US output declined, pressured by Opec’s policy of sustaining production. The global oil market has flipped to a deficit sooner than expected, Goldman Sachs Group Inc said in May.
Prices of zinc used to rustproof steel in auto bodies and suspension bridges climbed above $2,000 a metric tonne for the first time since July on Thursday after mine production cuts by Glencore and others. Goldman Sachs has dubbed zinc the “bullish exception” among metals in contrast to the bearish outlook for copper and aluminium.
Citigroup said in May that commodity prices were unlikely to return to lows seen in the first quarter and the bank increased forecasts for metals to grains amid the oil-led recovery. Soybeans consumed in cooking oil and livestock feed have jumped 34 per cent this year to the highest since 2014 because of lower crops in South America and concerns dry weather will cut US output.
Between Saudi Arabia’s new oil minister and the rest of Opec, a fragile peace reigns. Khalid al Falih, who replaced Ali al Naimi a month ago, faced a daunting premiere on the world stage at Opec’s 169th ministerial gathering in Vienna.
It took what Ed Morse of Citigroup Inc called a “publicity blitz” for Al Falih to ensure that Thursday’s assembly would run smoothly. That included pre-meeting head-to-head confabs with representatives from six member countries plus cozy dinners and meet-and-greets with consultants who advise hedge funds and oil traders.
Even Bijan Namdar Zanganeh, Iran’s Oil Minister, was won over, at least for now. After four years of quarrelling, Tehran and Riyadh parked their differences at the door and agreed on a new secretary-general for the group, Mohammed Barkindo of Nigeria. “The atmosphere in today’s meeting was calm without any tensions,” Zanganeh said on Thursday.
The calm is tentative. Vienna’s atmosphere of bonhomie had as much to do with oil prices flirting with a six-month high of $50 a barrel as it did Al Falih’s overtures. Wide differences among Opec nations remain, especially when it comes to restoring the production targets that were scrapped in December. And Thursday’s meeting, for all its ballyhooed friendliness, produced no new policy pronouncements.
Al Falih, 56, is Saudi Arabia’s first new oil minister in more than 20 years. He took over as Opec members’ resentment toward the kingdom erupted. In April, countries that favoured a freeze in production levels blamed Saudi Arabia for sinking it; the same month, Al Falih’s boss, Deputy Crown Prince Mohammed bin Salman, said the kingdom didn’t care whether oil prices were at $30 or $70, sending a shock wave through Opec members such as Venezuela, whose faltering economy is dependent on higher prices; and just a few weeks ago, Saudi Arabia’s longtime rivalry with Iran exploded into public finger-pointing at a preparatory meeting in Vienna.
It had gotten so bad that critics were wondering whether the Saudis envisioned a continued purpose for Opec. Al Falih turned that around.
“Al Falih clearly still sees a role and need for Opec, even in a world of shale oil,” said Jamie Webster, a fellow at the Centre on Global Energy Policy at Columbia University in New York.
As Al Falih was making the right noises in Vienna, the Saudi state-owned oil company announced its first-ever contract to supply refiners in the Baltics — another example of the intense campaign for market share.
Al Falih began his diplomatic tour after arriving in Vienna before everyone else. He landed on Monday night and went straight to his suite on the top floor of the luxurious Hyatt Hotel, skirting the media — something his predecessor rarely did. — Bloomberg
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