Commodities outlook leans bearish

Commodity prices have rebounded over the last few months, thanks largely to synchronized global growth and the U.S. dollar’s depreciation. However, U.S. tariffs on steel and aluminum imports represent a recent hit.

“Going forward, commodity prices will continue to be vulnerable to developments on the trade front and associated market reaction,” says TD economist Dina Ignjatovic in a commodity price report. “Aside from sentiment, supply side factors will be key in determining the direction of prices.”

Read: Drill into oil names using these tactics

For example, demand for base metals is expected to remain strong, but a lack of investment in new projects in recent years will push most base metals markets into deficit in 2018. “Zinc is the tightest market, with the most upside potential for prices, although all base metals are poised to record annual gains,” says Ignjatovic.

For oil and agriculture markets, she expects continued abundant supplies to keep a lid on prices. Oil prices are forecast to anchor close to US$60 per barrel through 2019, with natural gas contained at just more than US$3.oo per MMBtu through that period.

Generally, she expects commodity prices to be flat with some upside risk.

A closer look at energy

Despite the oil rebound, the majority of energy-related companies have materially lagged the recovery in the underlying commodity price, says a market insight report from Richardson GMP. “This spread has been exacerbated for both Canada and the U.S. energy sectors in the past few months.”

The situation motivates the firm to ask whether the price of oil is set to fall or whether energy equities offer a compelling buying opportunity.

The report outlines factors that could send oil prices either higher or lower, such as production levels from OPEC member states and political risk.

Beyond these factors, the report says, “While we have a bearish tilt, the valuations in the equities appear to be pricing in a rather bearish scenario. That may be the opportunity.”

Further, the firm says that the energy sector tends to do well at the late stage of the cycle, like now.

Richardson GMP says it remains underweight energy in its portfolios, but is now “a bit more constructive in the more defensive integrateds given this disconnect between the commodity and share prices.”

For TD’s full commodity forecast, read TD’s report. For more details on energy risk, read the Richardson GMP report.

Also read:

Why oil’s pain could be renewables’ gain

Looking for undervalued utilities and energy names