SOURCE: Scotiabank


December 02, 2016 12:05 ET

OPEC deals, copper rallies, and gold falls: Scotiabank

TORONTO, ON--(Marketwired - December 02, 2016) - The Scotiabank Commodity Price Index gained 9.1% m/m in October, supported by large positive moves in both the Oil & Gas and Metals & Minerals sub-indices. Of note in each of these markets are the recently concluded OPEC agreement and copper's aggressive 30% rally.

OPEC members reached consensus to cut output by 1.2 Mbpd to 32.5 Mbpd, effective January 2017. These cuts are conditional on further coordinated non-OPEC cuts pegged at 0.6 Mbpd, which will most likely come from Russia, Oman, and other central Asian producers. Volatility will likely increase further due to the increased importance of unpredictable OPEC communication and forthcoming confirmation of non-OPEC commitments.

"Sentiment will be even more important than usual with this deal because we have to wait months before we can verify production levels with secondary OPEC sources in March 2017," said Rory Johnston, Commodity Economist at Scotiabank. "The deal is also fragile, with virtually every player stating that participation is entirely dependent on everyone else doing their part."

If participants are 100% compliant with the deal as presented, a 1.8 Mbpd cut should move market balances firmly into deficit, but this will need to be maintained for a prolonged period if global inventories are to return to more typical levels. OPEC has stressed that it sees this collective cut as an altruistic action that helps balance the oil market more quickly than it would do so organically, which OPEC claims is better for producers and consumers alike.

"The stand-out metals story of the past month has been copper's aggressive rally from $2.10/lb on October 24th to $2.74/lb on November 28th, the highest level since the summer of 2015," said Johnston. "We believe that the rally is due to a mix of market overreaction to some transient tightness in refined metal balances and the subsequent speculative repositioning that helped maintain copper's journey upward. This rally doesn't alter our medium-term view on copper, and we expect prices to average in the $2.20-2.30/lb range between now and the end of 2018."

Gold saw a brief spike this month as well. Most pre-election gold commentary made it seem like the prospect of a Trump presidency would be markedly bullish, with many forecasts of $1,500/oz. It appeared to be heading in that direction in the early hours following the election, with gold jumping $65/oz before falling back to negative territory by end of business.

A faster assumed path for U.S. interest rate normalization will put broad pressure on gold prices, but 2017 could present a repeat of 2016's political surprises with an ample supply of EU elections and referenda on the docket. We continue to maintain our pre-election 2017-18 average gold forecast of $1,300/oz.

Read the full Scotiabank Commodity Price Index online at:,,3112,00.html.

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