There is no getting around it, 2015 was a bloodbath for the commodity sector. Barring a few outliers like the cocoa market (which did rally in 2015) most commodities are closing out the year in a sea of red. Commodity demand around the globe fizzled throughout 2015 as advanced industrialized nations struggle to return to post-global financial crisis growth levels.
Pick your poison. Blame it on China's once insatiable appetite for raw commodities now gone dry. Blame it on slower global growth. Blame it on the strengthening U.S. dollar trend. There are plenty of factors which drove commodity demand lower and inventories levels higher throughout the year. Most commodities that grow in the dirt or are mined out of the ground plummeted in 2015 from energies to grains to livestock to gold. Cocoa was the only notable bullish commodity in 2015, with an 18% gain through December 11.
The declines were broad based. The S&P GSCI commodity index, which includes 24 exchange traded futures contracts across the energy, industrial metals, precious metals, agricultural and livestock sectors, sank 30.9% on a total return basis in 2015 through December 10.
Here's a snapshot of the worst performers:
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WTI Crude oil down 40.87%
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Coffee down 31.83%
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Copper down 25.3%
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Wheat down 20.6%
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Lean hogs down 17.1%
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Corn down 12.5%
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Gold down 9.5%
Source: www.Barchart.com data through December 11, 2015
Looking into 2016, a number of headwinds will remain in place for the global economy, and in turn the commodity sector, including a rising interest rate environment from the Federal Reserve, a stronger U.S. dollar trend and lower growth forecasts for China, a traditional commodity consumer powerhouse. Some Wall Street firms are turning positive on a handful of commodity markets but the forecasts remain commodity-specific and don’t extend to across-the-board commodity sector gains.
According to a BofA Merrill Lynch Global Research report: 2016 Outlook Commodities, the firm has turned positive on a number of commodities including WTI crude oil, natural gas and sugar, but remains negative on a spate of other commodity markets from soybeans to copper to gold.
The big loser in 2015: crude oil could see a turnaround. Moderately higher WTI crude oil prices are in the forecast, with an increase to $48 per barrel by the second quarter 2016 to end the year at $50 per barrel, supported by a contraction in non-OPEC supply and healthier supply/demand balances overall, says the BofA Merrill Lynch Global Research report.
Other firms also project a potential rebound in the gold market, another heavyweight in the commodity sector. Gold tumbled to its lowest level since February 2010 in December, but bargain conscious emerging market buyers could be sniffing around for a low in the precious metal. Jewelry demand from Indian and Chinese consumers remains a major driver for the gold market and is forecast to increase in 2016 as the five-year lows offer attractive levels to buy. HSBC forecasts higher gold prices in 2016 with a $1,205 per ounce average and higher to $1,300 per ounce in 2017.
Here is a quick look at two factors that will impact commodity price direction in 2016:
China is a wild card. Looking into 2016, Chinese growth will be an important driver for commodity market demand. From the 1980s until 2011 it was not unusual, in fact it was "normal" to see Chinese GDP growth in the double-digit range topping 10% per year. Chinese growth levels are now straining and falling to establish their new equilibrium and lower normal level, falling below 8% in 2012 and 2014. Even lower forecasts are now circulating for Chinese growth in 2016 from a 6.3% rate pegged by Wells Fargo to a 5.8% growth rate forecast from Nomura.
Key factor to watch: Chinese growth levels will be closely watched in 2016 and weaker-than-expected performance could pull the rug out of the already weak commodity demand outlook.
Can the US dollar index continue to rise? Most commodities are bought and sold on the global marketplace in U.S. dollars. As the U.S. dollar rises it tends to have a negative impact on commodities making them "more expensive" to buyers around the globe. From year-end 2014 to its December 2015 high the U.S. dollar climbed over 11% providing a stiff headwind to commodities.
Heading into 2016, the U.S. Federal Reserve is shifting into its first rate tightening cycle since the global financial crisis, which is expected to continue to support the U.S. dollar versus a number of the major currencies around the globe from an interest rate differential perspective.
Key factor to watch: Continuing gains in the U.S. dollar next year could continue to put a damper on the commodity sector and potentially limit gains.
Bottom line: As the calendar flips to 2016, many commodity markets are trading at multi-year lows. The U.S. dollar and Chinese growth levels could be key factors in determining if trend changes are in the midst.
