Brexit panic to give way to commodity revival, Citi report suggests

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Commodities from oil to sugar to copper are poised for big gains in 2017, according to analysts at Citigroup Inc. They suggest that investors' anxiety over Brexit will dissipate quickly, giving way to renewed interest in raw materials.

Since the commodity super-cycle peaked in 2011, prices for metals, energy and agricultural goods have frequently risen from January to June, only to slump during the second half of the year. This year will break that discouraging pattern, the analysts assert.

"Citi expects the strong performance of commodities to resume this quarter and through the end of the year," Edward Morse and his team wrote in a report published on Monday.

The gains will only pick up speed after that, they said. "Citi is especially bullish [on] commodities for 2017."

Prices for oil are likely to shoot up 27 per cent in 2017, while natural gas prices will rocket ahead by 39 per cent, the analysts predict. Copper and zinc will advance by 10 per cent, while sugar climbs 22 per cent. To be sure, there will be some losers. Gold and silver prices are likely to retreat – although only slightly – from their recent gains, while iron ore producers will continue to struggle with too much supply.

Still, the overall message is resoundingly positive. "Fundamentals have improved across many commodity markets," Mr. Morse and his team wrote.

The improvement reflects cutbacks in new supply. As a general rule, producers have responded to weak prices by slamming the door on the construction of new mines and wells. That is helping to gradually restore balance to many markets suffering from persistent gluts.

"Commodity markets continue to lurch toward rebalancing as global demand continues to grow at a moderate rate while the pullback in capital spending is reducing not just supply growth but total supplies across nearly all extractive industries," Citi said.

The bank is especially positive about the outlook for oil. "The bear market is over," it asserted. While a bull market in energy has yet to begin, the momentum is swinging in the direction of higher oil prices.

Political and social upheaval in Venezuela and Nigeria are crimping supply from those major OPEC producers. Meanwhile, the cancellation of numerous projects elsewhere means that non-OPEC supply is now in year-over-year decline, and prices are still too low to spark a rebound in output from U.S. shale producers.

Citi forecasts that prices for West Texas Intermediate crude, the North American benchmark, will rise from about $45 (U.S.) a barrel now to $61 a barrel by the end of 2017 and remain there through 2018.

The trend bodes well for investors in commodity indexes, commodity-linked notes and similar investments. Money invested in such products surged 57 per cent over the first half of this year, reaching $385-billion, the highest level since June, 2014, according to Citi. It sees further growth ahead, backed by the strong outlook for energy prices.

Brexit will weigh on the market over the summer but is unlikely to affect commodity demand in the long term, the report says. Citi has cut expectations for economic growth in Britain and the euro zone, but it is forecasting only a small impact from Brexit outside of Europe.

One of the most noticeable effects of Britain's referendum result has been to chase investors into the supposed havens of gold and silver, but further gains by precious metals may be harder to come by.

The report's base case calls for a weaker U.S. dollar and a return of Asian demand to support gold at around its current level for the remainder of the year. In contrast, this year's biggest gainer – silver – looks like a riskier proposition. There is little enthusiasm to push the metal to new highs and a risk that recent gains could go into reverse, Citi says.