Commodity prices - is the bear market over?

In the past few months commodity prices have bounced back on a broad front having in some cases fallen sharply in recent years. This drop is to be seen as part of a classic commodity cycle that was driven primarily by the dynamic growth in the emerging markets, especially in China. As demand and supply on the commodity markets are not very price sensitive in the short term, relatively minor fluctuations in demand can prompt sharp changes in prices. The higher prices stimulated higher investment and, with a certain delay, resulted in an expansion of supply. In the wake of the slide in prices, production has been being throttled back again and investment reined in for a while now. Ultimately the markets need prices that are low enough to stimulate demand but high enough to provide incentives for production.

The oil market is continuing to adjust. Given signs of a decline in global overproduction, a renewed sharp downward correction in the oil price seems fairly unlikely. But with stocks still high, a further clear firming-up in the short term is unlikely and oil-price volatility is likely to remain elevated. The potential for a steep rise in the oil price in the medium term seems limited given that, as soon as prices are in the region of 50-65 USD/barrel, flexibly operating companies in the US unconventional oil industry will probably step up supply.

The individual markets for industrial commodities are still in various phases of correction.  The aggregate price of the commodities analyzed here is likely to have bottomed out. But for the time being a marked rebound is not on the cards.


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