The significant cut-back in supply across commodity markets is likely to result in a sharp correction in prices, underpinning the possibility that the sector could recover by mid-2016, says Van Eck Global.
Van Eck Global's commodity strategist, Roland Morris, said financial markets remain focused on weak demand for commodities, not taking into account relevant supply adjustments that could lead to a sector-wide recovery.
Mr Morris gave the example of US oil production, which peaked at 9.6 million barrels in 2011. He said production today is down to nine million barrels and is likely to fall below this in 2016.
“Not only has production on existing rigs been scaled back, but new deep water and oil sands projects that could have delivered between six and seven million barrels have been cancelled or pushed out beyond 2020,” he said.
“Meanwhile, demand for oil has actually been strong in 2015, up 1.7 million barrels from 2014. Relatively strong demand combined with meaningful cuts in supply will balance the market towards the middle of 2016, resulting in a higher oil price.”
Mr Morris also pointed to the same pattern within industrial commodities. Investment into coal is down by 60 per cent, iron ore by 50 per cent, copper by 33 per cent and gold by 27 per cent.
“These are meaningful reductions in investment that will result in significant reductions in future supply,” said Mr Morris.
As a result of the supply side response, Van Eck Global said that if global growth remains stable, a much tighter commodities market is likely. This may even mean some shortages in materials in 2016, resulting in an upward correction in many commodity prices.
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