The Start of the Rate Cut Cycle Will Lift Commodities

As mentioned in our January Economic Viewpoint External link., OPEC+'s voluntary production cuts have slashed into its market share (graph 3). The cartel's members, especially Saudi Arabia, have finally run out of patience, leading the group to announce a change in strategy at its June 2 meeting. Starting in September, OPEC+ will gradually phase out its voluntary cut of 2.2 million barrels per day—which has been in place since November 2022—to win back some of the market share lost to Western producers. This is a big change from the price control strategy it has used for more than two years. In addition, as of January 2025, the organization will begin lifting its voluntary cut of 1.7 million barrels per day, which it had announced in April 2023. Although the news sent oil prices down 8.7% since late May, they rebounded quickly (graph 4). It's worth pointing out that unwinding these cuts will add only 2.5 million barrels per day by December 2025, according to OPEC+'s own projections, and the real number of added barrels will probably be even lower. Even though we believe crude oil prices will pick up momentum in the second half of the year, higher output could limit potential gains.

The United States is still ramping up oil production, adding 7.4% since the year began. US supply is nevertheless faced with weaker demand, while gasoline deliveries, an indicator of US oil consumption, slid in the last week of May. Memorial Day weekend (May 25–27) marks the start of the summer travel season, which fuels demand for gasoline and usually coincides with an uptick in gasoline deliveries. However, lacklustre demand and the anticipated rise in OPEC+ production aren't expected to hold back the US oil sector. Efforts to replenish the Strategic Petroleum Reserve will put a floor beneath prices that should prevent crude oil from falling below US$70 per barrel for any length on time. In fact, soon after oil prices started to fall, US Secretary of Energy Jennifer Granholm announced that the country could easily accelerate repurchases for the stockpile, which currently amount to 3 million barrels per day.

In Canada, wildfires once again hit Alberta in April and May. Most of the fires were near Fort McMurray, the tar sands capital. But they've since come under control, without any companies reporting a direct impact on production. Evacuation notices, road closures and smoke may have nevertheless hampered productivity in the region. This happened when producers began seasonal maintenance on their equipment and facilities in April. Maintenance season usually ends in June. Alberta's output fell more sharply than expected in April (graph 5), and the wildfires in May suggest another month of decline. However, this spring's hardships could only temporarily dim an otherwise encouraging economic environment for Canadian oil producers. Now that the Trans Mountain pipeline has come into service between Alberta and the West Coast, Canadian producers can export to Asian markets and reduce their dependence on US refineries. Although the future of the oil industry is uncertain over the long term due to the energy transition, the sector still looks promising over the short and medium term. Alberta's output hit a new record high of 5.2 million barrels per day in December. As a result, the spread between WTI and Western Canadian Select (WCS) is expected to hover around US$14 per barrel in the second half of 2024.

Last month, a cooling of gasoline demand and lower crude prices caused gasoline prices to drop 4% in Canada and 2% in the United States (graph 6). A buildup of inventory due to the decline in deliveries also helped push down prices. It's not yet clear why gasoline consumption has stayed below seasonal norms. But we've noticed that the number of travellers at US airports has been high since the year began and is still growing (graph 7). This suggests people would rather fly than drive. Remote work is another factor limiting car travel, albeit to a lesser extent. Finally, the popularity of electric and hybrid vehicles in recent years may have put a small dent in demand. 

The wind finally appears to have shifted for natural gas prices. After a months-long downtrend that took it to extreme lows, the Henry Hub price jumped 35% from April to May (graph 8). But the market is likely to remain volatile, and the weather could push prices up or down. That said, we expect Henry Hub to continue gradually ticking higher until the end of the year. The Canadian natural gas industry will likely keep expanding given that the liquefied natural gas terminal This link will open in a new window. in Kitimat, BC, is slated to begin operations soon. 

Global aluminum prices are up 17% year-to-date (graph 9). The recent rally is due to a limited supply of bauxite, which is one of the main inputs in aluminum production. That said, the current price of aluminum (US$2,500 per ton) doesn't seem to be justified by the fundamentals and could correct in the weeks to come. We still believe it will rise for the rest of 2024 and 2025. The rate cut cycle and renewed growth in Europe suggest demand for this metal will heat up. However, the upward revision in our forecast for 2024 (to US$2,550 per ton) nevertheless mostly reflects stronger-than-expected price growth in the first half of the year. Projected growth for upcoming quarters remains unchanged.

The price of copper hit a high not seen since its 2021 peak of US$10,800 per ton (graph 10). But this impressive jump is rooted more in speculation than fundamentals. Markets got carried away with the news of weak Chilean production, which renewed fears of a shortage, especially in light of the energy transition. Keep in mind that the discrepancy between output and demand is nothing new. We've even talked about it in several Economic Viewpoints External link.. As a result, the price of copper is expected to slip back down from this peak. The outlook for copper prices nevertheless remains rosy for the next few quarters, yet gains are likely to be more modest than in the first half of the year.

The price of nickel climbed 8% from April to May, as last month's violent protests in the South Pacific islands of New Caledonia disrupted supply (graph 11). Although mine shutdowns are expected to be temporary, social unrest in the French territory could keep the risk premium on nickel prices in place for some time. Meanwhile, stronger manufacturing activity has exacerbated the increase in nickel prices. But this trend is expected to reverse in the coming months as a surge in global supply should weigh on prices. Supply is expected to recover in 2025, when the economy should be more robust. 

The iron ore market was all over the place in the first half, with prices swinging wildly (graph 12). The global economy's vulnerability to new crises and China's troubled property market have triggered big movements in iron prices. China accounts for more than 50% of demand for iron. The Chinese government's latest measures offer some reassurance, however, as it appears to be finally addressing the structural problems plaguing its economy. But a recovery in the country's property market seems far from certain, and the government's recent efforts are more focused on stabilizing the situation. Although the United States is an important importer of Canada's iron ore, China still represents around 25% of Canadian iron ore exports. That means a stronger Chinese economy can only be good news for our mining companies. That said, we're only expecting a modest uptick in global demand because, even though some central banks have already started cutting interest rates, it will be some time before rates go down far enough to make a difference. Given the above, we expect iron prices to slip a little over the next few quarters.

It's rather hard to explain why gold has climbed 12% since the year began. In fact, aside from central bank purchases, the fundamentals don't really support such a gain. Since mid-2022, central banks have accelerated their purchases to diversify their reserves (graph 13). Central bank purchases as a share of global demand rose from 14% in 2019 to 23% in 2023. In addition, a slowdown in the growth of total demand over the same period resulted in the share of gold held by investors contracting from 30% to 21%. Meanwhile, the price of silver has risen alongside gold to a 10-year high of more than US$32 per ounce (graph 14). Although prices may retreat from their recent peak, they should remain relatively stable for the rest of the year.

Abundant supply and weak demand shaved about 2% off platinum prices in the first half of the year. That said, the trend may reverse in the coming months as the market rebalances. Purchases of all-electric cars seem to be cooling as well. This should also boost the price of platinum, which is used in gasoline engines. Of all precious metals, palladium performed the worst, tumbling 18% since January (graph 15). The high cost of palladium early this year prompted a number of auto manufacturers to replace it with platinum, which drove palladium prices down considerably.

Higher-for-longer US interest rates seem to be curtailing demand for wood in the construction and renovation sectors. This is keeping lumber prices at historic lows (graph 16). We expected prices to appreciate somewhat as the weather warmed up, but it hasn't happened so far. Buyers remain cautious, hoping prices will fall further in future. Even though housing starts over the past few months show construction is gradually recovering in Canada, we expect a stronger rebound in the United States in late 2024 or early 2025.

These conditions make it hard for sawmills to turn a profit, as many of them find selling prices are too low to cover their production costs. In addition, the US Department of Commerce has announced an increase in duties levied against Canadian exporters of softwood lumber (from 8.05% to 13.86% External link.), which will take effect in August. There's some hope for Canadian producers regarding this dispute. In May, a special NAFTA External link. panel for settling disputes directed the US Department of Commerce to recalculate the countervailing duties imposed since 2016. The panel ruled that these duties were inconsistent with US law. This could result in refunds to Canadian producers, albeit only after several months of delays. We'll need to keep a close eye on this situation, as well as the potential impact of the US presidential election. Although both candidates have shown protectionist tendencies, the measures promised by Trump could have more of an impact on Canada-US trade and create significantly more uncertainty for businesses.

In general, the price scenario is still relatively neutral, with supply and demand for grains and oilseeds balancing each other out. Since global demand remains sluggish and supply doesn't seem to be lacking, the US Department of Agriculture (USDA) even expects a mild decline in the prices of major grains and oilseeds.

Still, we see a few price deviations from this scenario (graph 17). Projected Chinese imports of soybeans are on the rise, putting some upward pressure on prices. This is being offset by record Brazilian soybean production. Dry weather in Russia, the world's leading wheat exporter, explains the recent rebound in prices. Meanwhile corn prices are still very low compared to the average over the past few years. But prices have gradually firmed up a little after hitting bottom in February.

As its trade relations with the United States continue to deteriorate, China is gradually shifting away from soybean and corn producers in the US and importing more from those in Brazil and Argentina.

Fertilizers are becoming increasingly affordable, especially when compared to food prices (graph 18).

Although conditions have somewhat normalized, unforeseen geopolitical events and climate change could trigger volatility that may affect food and agricultural input prices. Canada also faces the threat of a potential rail strike in the months to come, which could lead to delays and additional costs in freight transportation.