Commodity Prices Predicted to Decline

Commodities, Investing & Retiring

The near-term future for commodities looks grim and the recently released “Commodity Markets Outlook, July 2015” from the World Bank reinforces this point. The second quarter of 2015 saw most commodities drop by 2% in overall non-energy commodity price indices. Oil prices were actually up slightly during the reporting period, but have taken a recent beating as Brent Crude has fallen below $50 per barrel again.

In the broad scheme, non-energy commodity indices are in a steady four-year decline and energy indices have not recovered in any serious way from the massive drop during 2014. The World Bank foresees the downward trends continuing at least through 2015, with a potential slight rebound in 2016. For 2015, the energy price index is expected to fall by 38.7% while the non-energy index is expected to drop 12.2%. (Note that much of this decline has already occurred.)

As a consumer, lower commodity prices are generally good news for you, but the degree is not always proportionate. Individual commodities can suffer from specific problems that spike through the supply chain and go against the trend of the overall sector. For example, lower oil prices have produced lower costs at the gas pump in general, but the refineries are a critical step in that chain. As of this writing, a major refinery announced unexpected downtime, causing regional gas prices to shoot up almost 50 cents overnight even as oil prices were near their lowest point.

There’s not much you can do about things on the consumer side, except decide whether you want to put off buying or buy lower-priced alternatives when possible. However, as an investor, you can decide whether a commodity downturn is a buying opportunity or simply a temporary stopping point in a continuing downward trend. To assess the situation properly, look at the world market as well as domestic factors.

World currency factors have a huge impact on commodity prices, since a relatively strong dollar makes commodities more expensive for overseas purchasers. The recent currency adjustment by China has had a huge effect on prices because of the size of their market and the abruptness of the devaluation change.

How do commodities interact with stocks? Commodity prices do not correlate as well with stocks as they used to. There is still a fundamental relationship between commodity raw materials and manufacturing, but more of the economy is service-oriented now and newer financial vehicles can drive stocks temporarily without a strong manufacturing push. Obviously if you are investing in commodities directly, you will need to consider the likely price trend, but you also need to look over your stock holdings carefully to check for indirect effects.

Oil prices are the most obvious, since oil affects so many elements of the economy from fuel costs to petrochemical feedstocks for a series of finished products. Things as diverse as asphalt to plastic wrap to molded plastic parts can contain petrochemical derivatives. Look for past connections between oil prices and higher or lower profits in your investment companies. Similarly, grain prices can affect restaurants directly but also have indirect effects throughout the food supply chain, even to livestock supplies through the availability of feed.

For detailed outlooks for individual commodities, see the complete World Bank report here.

Do you invest in ETFs that follow indices? Check the holdings in the underlying index for exposure to commodity prices. Some broad indices, such as the FTSE 100, are heavily dependent on them.

In short, look over the supply and demand situation and commodity predictions, but also consider currency effects and the ripple effect of specific commodities as they relate to your stock holdings. Whether you benefit or not depends on which side of the transaction your holdings are on — the supply side or the demand side.

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