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Jimmy Jean, Vice-President, Chief Economist and Strategist
Marc-Antoine Dumont, Senior Economist • Florence Jean-Jacobs, Principal Economist
Key Rate Cuts, A Struggling Chinese Economy and War in the Middle East: Volatile Months Ahead for Commodities
Summary
Global economic growth is still quite modest, helping inflation ease further and prompting many central banks to loosen their monetary policy. The Federal Reserve slashed its key rate from 5.50% to 5.00% in September (graph 1), and several other advanced economies, including Canada and the European Union, had begun cutting their rates earlier this summer. In China, the leading consumer of commodities, a new wave of stimulus measures was announced in late September. These measures are intended to break the economy out of its downward spiral. Most of them are focused on China’s persistent and pronounced property market slump, which is gradually spreading to the rest of the economy. However, the latest stimulus package may not be enough to turn things around. Additional budget measures will be needed to spur domestic demand, which has been depressed for more than two years. Although more consumer-centric measures would likely be more effective, the Chinese government is instead considering new infrastructure spending.
Given China’s economic woes and more anemic demand, the coming months may be volatile for some commodity prices, including for oil. Conflicts have multiplied between Israel, Hezbollah and Iran, posing a threat to Middle Eastern oil infrastructure. The global market is expected to see excess supply by the end of the year, due to weaker Chinese demand and higher output from the Organization of Petroleum Exporting Countries and its partners (OPEC+). But the resulting downward pressure on crude prices could be offset if the armed conflict escalates further. Nearly 25% of the world’s oil production is in the Middle East, meaning it could potentially be disrupted if the situation worsens significantly. From a macroeconomic perspective, there’s reason to believe that commodity demand will improve in 2025. Lower key interest rates should further support economic growth next year. Further stimulus measures are also expected from China, which should help boost demand for metals and oil. We therefore expect prices for most commodities to return to growth starting in 2025 (graph 2).
Energy
OPEC+ Hopes to Regain Market Share in an Increasingly Tense Geopolitical Climate
Forecasts
The global oil market is facing an oversupply, with OPEC+ abandoning its target of US$100 per barrel and instead hoping to recover the market shares it has lost to Western producers since 2022. But tensions between Israel and Iran have worsened, renewing fears that Middle Eastern oil production and transportation could be disrupted. We’ve revised our year-end target for West Texas Intermediate (WTI) to about US$75 per barrel. This reflects both the abundant supply and heightened geopolitical risks. We still believe that lower interest rates will help oil prices reach nearly US$80 per barrel in 2025, most likely during the second half of the year. That said, the risks surrounding this forecast are quite high, and the situation in the Middle Easy must be watched very closely. Natural gas prices should increase. El Niño is over and La Niña, its opposite phase, will likely have an effect on the climate. From a global standpoint, though, we expect modest growth from Europe and China, which should limit the anticipated gains on Henry Hub prices. We expect the year-end price to land around US$2.90 per MMBTU.
Oil
The conflict in the Middle East continues to broaden and intensify, with further ballistic missile strikes from Iran, air strikes by Israel and a ground offensive in southern Lebanon against Hezbollah. In response, oil prices jumped more than 9% between late September and early October (graph 3). Some of this increase was caused by a shift in tone from the United States, as Biden suggested at a press conference that the US would not prevent Israeli airstrikes against Iranian oil facilities. Remember that Iran accounts for 3.5% of the global oil supply. The situation has since calmed down, but the risk will remain as long as further attacks are on the table.
OPEC+ confirmed that it will increase production in December, abandoning its price control strategy and target price of US$100 per barrel. The oil cartel had initially planned to phase out its production cut of 2.2 MMb/d (millions of barrels per day) in October. Since it has failed to influence prices in a lasting fashion, OPEC+ is now very transparent in its intentions to win back some of the market share it has lost to Western producers. This change in strategy is undoubtedly because member nations have lost revenue as prices fall and production volume swells. It’s worth noting that the production has been above target for eight months now (graph 4). The increasingly frequent cheating by OPEC+ members brings to mind our January Economic Viewpoint External link., in which we described the usual path that led to OPEC+ disputes in 1985, 2008, 2015 and 2020. With global demand for oil expected to shrink in the second half of 2024, the market will be stuck with an excess of supply, especially with increased output from Libya (graph 5). It should also be noted that the 2025 demand outlook was revised downward once again by the International Energy Agency. Under these conditions, the risk of an oil glut is looming over the market.
In the United States, oil production held steady in the first week of October, just below its record high of 13.3 MMb/d (graph 6). But the active rig count, a leading production indicator, is down 6.7% from the start of the year. This is not unexpected—lower crude prices discourage drilling—and it suggests that US production gains will be more moderate in the coming months. Hurricane Milton also impacted production, as oil vessels were rerouted and some facilities closed as a precautionary measure External link. before it made landfall. The US Department of Energy took advantage of lower oil prices to shore up its Strategic Petroleum reserve, purchasing 6 million barrels External link. to be delivered from February through May 2025. This proactive purchase by the US government will help stabilize the North American oil industry. If prices were to fall below US$70 per barrel, it would start to eat away at the profit margins for some producers, which could lead to diminished supply. It may also be wise to build up the SPR, given the current crisis in the Middle East.
In Canada, Alberta production was up 4.1% in August 2024, compared to last year. Production and export volumes seem to have escaped any negative consequences of the forest fires and short Canada rail strike. The Trans Mountain Expansion pipeline should also help boost exports to Asia. But we’ll have to wait awhile before the WTI/WCS (Western Canada Select) spread narrows External link.. In the meantime, the conditions are favourable for higher Canadian output in 2025, and global demand should recover starting in the first quarter.
Gasoline
Lower oil prices and higher US refinery output dragged on gasoline prices in both the US and Canada (graph 7). Refining margins (the spread between crude and regular gas prices) plunged to an 11‑month low in August. Beyond the usual seasonal decline, the fundamentals suggest that gas prices should remain relatively stable in the coming months. US demand remains below its 2018 peak, and current conditions point to just slight gains in fuel consumption over the coming quarters. That said, uncertainty is high, as escalating tensions in the Middle East could cause prices to spike.
Natural Gas
After the 2022 global energy crisis, caused by the war in Ukraine, North America’s natural gas market hit a slump at the start of 2024, and prices ultimately plummeted (graph 8). Supply adjusted in the wake of this decline, though, as several producers operated at a loss. The rig count for natural gas then fell below 100, a historically low level. In the months ahead, prices should creep up, with winter temperatures leading to increased demand for heating. With El Niño over and its opposite phase, La Niña, potentially setting in, we may see increased energy needs over the winter months. While Canada’s natural gas industry is thriving, China’s economic woes may—in the very short term—cool some of its ardor. But the outlook remains rosy in the medium term, with the Coastal GasLink brining Albertan output to the Pacific. Asia’s appetite for natural gas, and China’s in particular, could grow by 15% between now and 2030 according to the International Energy Agency, and Canada is poised to benefit.
Base Metals
Prices Rose a Bit Prematurely
Forecasts
Aluminum, copper, nickel and iron ore prices all jumped after China announced its stimulus measures in late September. But while China’s measures are a step in the right direction, the market seems to have overestimated their effect, and base metal prices will likely lose some ground in the coming weeks. That said, prices should return to growth in the quarters ahead, as key rate cuts support Western demand. Iron ore prices are the only exception. They’re more sensitive to China’s property market outcomes. Given the gloomier outlook and the growing supply of iron ore, we expect prices to slide a bit in 2025. However, the new infrastructure spending could limit the price drop.
Aluminum
After falling this summer, aluminum prices returned to their upward trend in September, posting a monthly gain of 2% (graph 9). The outlooks for the next few months are good, though some nuance is required. On the macroeconomic front, we expect higher demand, thanks to looser monetary policy worldwide and China’s stimulus package. But looking at specific sectors, we can see that the Western automotive industry has been sluggish recently, which could limit potential price gains. All in all, we believe that aluminum prices will go up, thanks to an improved economic climate in 2025 and continued carbon reduction efforts. Our year-end target for next year is US$2,550 per ton. If Trump wins the presidential election on November 5, Canadian producers may face new tariffs External link., similar to those imposed in 2018. But the election isn’t won yet—and we don’t know when or how the United States would choose to implement new protectionist measures. It’s also difficult to assess the impact that new tariffs would have on the Canadian aluminum industry. In 2018, the effects were quite modest.
Copper
While copper prices are back under US$10,000 (graph 10), China’s stimulus announcement has caused them to jump 7.6% since the end of September. However, this new price is a bit high given the fundamentals, and we expect copper prices to close the year around US$9,000. In the medium term, prices will be propped up by the mismatch between copper production and the growing needs associated with the clean energy transition. Underinvestment in new mines continues to be a major challenge, especially as countries make progress on their decarbonization efforts—wind energy and power transmission, for example, are both copper intensive.
Nickel
The market is still in surplus, capping potential gains for nickel prices. Combined with the effects of China’s flailing economy, we expect prices to remain relatively stable over the next few quarters. Our year-end target for 2025 is closer to US$20,000 per ton. Nickel prices did soar after China announced its latest stimulus package, but we expect it—and other base metal prices—to retreat from its recent peak (graph 11). The outlook is more promising in the medium term, as the market should rebalance and demand should grow more steadily, mainly due to the energy transition.
Iron Ore
Global iron ore prices are intimately linked to China’s economy, particularly the state of its property market. That market has been in a downtrend since the start of the year, and as a result, iron ore prices have plummeted more than 20% from their January peak (graph 12). Here as well, China’s announcement caused prices to jump a bit higher than justified by market conditions, and we should see it correct in the weeks ahead. What’s more, industrial activity in Europe still hasn’t fully recovered from the 2022 energy crisis. But everything’s not lost for Canadian producers, even if nearly 40% of their exports went to China in 2023. Prices for high-grade iron ore, 66% Fe, produced by Quebec mines, still carry a price premium of US$14 per ton above the benchmark price. And the very high-grade ore, 69% Fe, attracts an even greater premium, with prices hovering near US$160 per ton. Minerai de Fer Québec is getting ready to begin mining this very high purity ore in 2025. All the same, we can expect these three prices to dip slightly over the next few quarters.
Precious Metals
Favourable Conditions for Gold Prices
Forecasts
Relatively robust financial demand, central bank purchases and market speculation have led us to upgrade our year-end price target to US$2,400 per ounce for 2024 and US$2,500 for 2025. However, prices may still correct. In the medium term, an increase in mining production should gradually rein in price of gold.
Gold and Silver
Key interest rate cuts, central bank purchases and global uncertainty have all caused gold prices to surge more than 26% from the start of the year (graph 13). Tensions in the Middle East have reached new heights recently, with Israel considering airstrikes on Iranian territory, pushing gold prices even higher as a result. But gold shouldn’t hang on to all of these gains and will likely fall from its recent peaks in the weeks ahead. The prices we now expect for the end of 2024 and 2025 are, however, higher than we’d recently predicted. In the medium term, we expect this price growth to provoke an increase in supply. When the real price of gold goes up, we generally see mining production grow in the 5 to 10 years that follow, as was the case in the 1930s and 1980s (graph 14). We therefore expect prices to moderate—or even fall—in the medium term. Meanwhile, the price of silver has returned to a level not seen since December 2011: over US$31 per ounce. Thanks to the favourable environment for precious metals, prices should continue to rise in the coming quarters.
Platinum and Palladium
Platinum prices rebounded in September, climbing 6% from their August low (graph 15). The outlook for demand has improved slightly, as sales of pure electric vehicles have declined in favour of hybrid and gas-powered models. This is giving platinum and palladium a boost, since they’re both used to make catalysts for combustion engines. We’re also seeing upward pressure from the anticipated drop in bond yields and the growing market deficit caused by poor mining output in Russia and Africa. All of this should drive platinum prices up over the next few quarters. Palladium prices, however, won’t see the same gains. Since this metal is in higher supply, price growth will be more limited.
Other Commodities
Weak Demand Continues to Weigh on Agricultural Commodities and Lumber
Forest Products
Residential construction stalled this summer in the United States, and the softer demand still seems to be weighing on lumber prices (graph 16). While prices have recovered from their July low, this is probably because supply has diminished due to curtailments. Many lumber mills have closed, both temporarily and permanently, over the last two years. British Columbia has been particularly hard hit, and Quebec hasn’t been spared either. According to Madison’s Lumber Reporter External link., production at North American mills was cut by 1,707 million board feet between January and August 2024. This 6% drop is largely due to curtailments in sawmill production (mainly closures and voluntary reductions), as sales prices are too low to generate a profit. Manufacturer operating expenses include the cost of timber, its transportation and onsite conversion at the sawmill. Sawmill expenses are mainly wages and energy costs. All of these costs are significantly higher than before the pandemic.
This means logging companies and sawmills are struggling to maintain their profitability. The seasonal slowdown in North American construction could keep prices at relatively low levels for the rest of the year. However, demand for building materials may go up in the wake of the hurricanes this fall, putting temporary upward pressure on prices. In the coming quarters, housing starts could also recover in the United States. Builder confidence is perking up and as interest rates fall, mortgage applications are on the rise. What’s more, both presidential candidates have committed to supporting construction, with Kamala Harris’s platform particularly focused on this. We could see lumber prices firm up more decisively as we approach next summer. But there are some lingering uncertainties, both in terms of prices and the financial health of companies in the lumber sector. Will the United States take a more protectionist turn under the next president? Will Canadian producers look for new export markets? Will the higher countervailing duties imposed by the US Department of Commerce be passed on to consumers through a price increase or will they lead to further sawmill closures? Will timber access in Quebec be constrained by an emergency order to protect the boreal caribou habitat? We’ll need to wait a few more months for the answers to these questions.
Agricultural Commodities
Wheat, corn and soybean prices have stopped plummeting, but downside pressures are limiting their recovery (graph 17). The biggest risk is China’s struggling economy, which is curbing demand for agricultural products. China is the world’s biggest consumer of wheat, soy and corn (FAO, 2022 External link.). The world food price index has also softened (graph 18).
Crops, yields and production have all been abundant, both in North America and in Brazil, the top global exporter of soy and the second largest corn exporter. The weather in South America bears watching, since the drought could eventually drive prices up for corn and soybeans. The US presidential elections could also cause agricultural commodities trade to fluctuate. The possibility of a Trump victory could prompt exporters to speed up trade before any tariffs can be imposed. Chinese imports of US soybeans spiked in August. But if we look over the year to date (January to August), the general trend is that US soybeans (‑24%) are losing ground to Brazilian ones (+12%) given the trade tensions between China and the US. (Producteurs de blé du Québec, 2024, in French only External link.). In all, conditions are still pointing to soft prices for wheat, soybean and corn.