An oil price recovery is the key to a commodity rebound since oil is priced in dollars and it is an input into commodity production.
The continuation of economic stimulus programs in the EU, Japan and China bodes well for increased demand at some point. In addition, monetary policy in the US has been very accommodative but there are some indications further rate rises are in the cards soon.
The recent demand upturn in the steel industry from very negative growth to less negative growth is on positive sign as well. While not great, – 1 to 2% growth is better than -5% plus growth.
Geopolitically, the Syrian issue seems to be on the way to being resolved. Key clues as mentioned in my previous posts are the recent Saudi agreement to cut production and this happened after the Russians announced a symbolic pull-out of Syria. For more on the geopolitical reasons behind this please see my previous posts.
A supply shortage is in the making since prices have been kept low for too long by Saudi overproduction. Shale production is expected to decrease by 106.000 additional barrels by April. Most shale production is viable in US only if prices are at $50 to $60 USD per barrel. Only a few are viable in the $20 – $30 USD per barrel range.
Since the Saudis seem to have accomplished their mission, the market should return to a more stable supply/demand balance. In a recent article in Foreign Affairs (March 14, 2016), Mosbacher states that supply has been cut by the equivalent of 5% or 5 million barrels a day due to the reductions in public/private capital expenditure. He further argues that the Saudis only have 1.5 to 2 million barrels of capacity with 0.5 being heavy crude in which only the US can refine.
Based on all of these developments plus other factors, thus our price forecast is as follows:
2016: $45 to $60 USD per barrel
2017: $55 to $65 USD per barrel