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Commodity Monthly

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Commodity forecast update

Fri, Oct 17 2008, 08:07 GMT
by Danske Research Team

Danske Bank A/S

Due to the extraordinary situation in all financial markets, including commodities, we have moved forward our regularly monthly forecast update on commodity prices. See page 13 for the complete forecast table. Most notably we have slashed our average oil price forecast for 2009 from USD 110 to USD 80 a barrel.

The financial crisis is sweeping across all markets at the moment, and commodities have not been the place to hide. During the last month we have seen an almost collapse in commodity prices as the crisis has accelerated.

To stop this death-spiral in financial markets from accelerating into an outright credit crunch, central banks have pumped liquidity into the system on an unprecedented scale, and governments have injected capital into several commercial banks. The effect has been incipient signs of optimism in global financial markets. US stocks jumped the most since 1939 on Monday and the important inter bank rates have finally started to drop.

It might be that we have seen the worst of the financial crisis and the global rescue packages will stabilize markets. But we are now entering a period of very weak growth numbers. The real economy now has to pay the bill for the financial crisis. The latter is exactly what Fed Governor Bernanke warned about last night.

Europe in particular will have to pay the bill on a relative basis to the US in 2009. We expect a further strengthening of the USD relative to EUR to 125 on a 12M horizon. Previously we forecast EUR/USD at 135 in 12M. But remember, the stronger USD comes as a consequence of a weaker Euroland economy, not a stronger US economy. But for commodities, the effect of a stronger USD will most likely be negative, as we continue to expect commodities to trade in a close tandem with EUR/USD in 2009.

The big question for commodities is how severe the impact of the credit crisis will be on the real economy on a global basis. Last week our global economists once again had to revise their 2008 and 2009 forecasts lower. They are particularly worried about the current quarter and the first half of 2009, and we now basically call for a global recession in 2009. China and the Middle East are now the only major economic areas where we expect decent growth over the next 12 months. China is going to be pivotal for commodities going forward. And here we still forecast a growth rate of 8.8%. China is one of the countries where the central bank still has the power to boost the economy effectively. Remember, China tightened monetary policy quite strongly in H1 2009; the central bank is now reversing this tightening by cutting rates and easing credit curbs. Due to its relatively low inflation, China can possibly counter the impact of a slump in global growth. But even China cannot hide from the fact that global commodity demand growth will most likely slow significantly going forward.

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Published on  Fri, Oct 17 2008, 08:14 GMT