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Energy Strength Offsets Metal Weakness: Scotiabank

/ -- Scotiabank's Commodity Price Index advanced by 3.3% m/m in June as energy gains offset further losses in the metals space. Commodities have broadly broken into two fairly distinct groups: one driven by demand considerations and thus particularly vulnerable to currently fragile global economic conditions, and one where commodity-specific supply concerns have lifted prices off recent lows.

The Oil & Gas index increased by 10.4% m/m in June, but prices have since eased, seemingly unable to sustainably breach $50/bbl amidst continued signs of oversupply. A reduction in unplanned supply outages, a glut of finished petroleum product inventories, falling refining margins, and upcoming seasonal refinery maintenance have shifted speculative sentiment.

"Uncertainty remains elevated and it is possible that prices temporarily fall back into the mid-$30s/bbl," said Rory Johnston, Commodity Economist at Scotiabank. "However, we would see this as a speed bump and remain of the view that WTI will rise to $50/bbl by year end and $60/bbl by the end of 2017 on the back of the weak upstream investment and continued reductions in non-OPEC supply. Sub-$50 WTI will help keep this ongoing rebalancing process on track, whereas Q2's premature rally threatened to artificially extend the glut by throwing cash-strapped producers an unexpected lifeline."

The Metals and Minerals index was the only losing segment in June, down 1.1% m/m, as copper and iron ore weakness overwhelmed other base metal gains. Zinc remains the bullish story within the base group, up 41% year-to-date. Fresh data indicates global concentrate supply is down 14% y/y through the first five months of 2016, but refined output has stubbornly endured at roughly stable levels.

Nickel has also rallied significantly through July, up 20% since late June. Like zinc, nickel's rise is also a supply-driven story as newly elected Filipino president Rodrigo Duterte's administration conducts an environmental crackdown on the country's nickel mines. The potential for further supply curtailments tips the price risk firmly to the upside, though near-record exchange-listed inventory levels will likely serve to keep a lid on any excessive upward price movement.

Other highlights from the report include:

  • Non-OPEC production will continue to decline on the back of lower capital investment.
  • Saudi Arabian crude inventories provide a glimpse of current oil policy thinking.
  • The Agriculture index rose 1.9% m/m in June, given persistent strength in lean hogs, which were up 8% since May and almost 50% YTD.
  • The Forest Products index gained 1.4% m/m as lumber prices continue to rally on the back of robust U.S. housing starts.

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

Scotiabank provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

About Scotiabank

Scotiabank is Canada's international bank and a leading financial services provider in North America, Latin America, the Caribbean and Central America, and Asia-Pacific. We are dedicated to helping our 23 million customers become better off through a broad range of advice, products and services, including personal and commercial banking, wealth management and private banking, corporate and investment banking, and capital markets. With a team of more than 89,000 employees and assets of $895 billion (as at April 30, 2016), Scotiabank trades on the Toronto (TSX: BNS) and New York Exchanges (NYSE: BNS). Scotiabank distributes the Bank's media releases using Marketwired. For more information, please visit and follow us on Twitter @ScotiabankViews.

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