Citi Makes a Clarion Call for Commodity Bulls With 2017 View

  • Oversupply is ‘finally being balanced,’ bank says in report
  • Bank bullish on oil, copper, zinc on 6 to 12-month horizon

Oil Markets: From Contango to Backwardation

Citigroup Inc. has given a clarion call for commodity bulls, predicting that most raw materials are expected to perform strongly next year as global economic growth picks up, the oversupply that’s dogged markets finally dissipates and investors plow in more funds.

The bank is bullish on oil, copper, zinc, and wheat on a six to 12-month horizon, with global growth seen at 2.7 percent from 2.5 percent in 2016, according to an e-mailed report. It’s bearish on coal and iron ore -- describing this year’s out-performance in bulks as a fluke -- and gold and soybeans.

Commodities have made a comeback this year after sinking to a quarter-century low in January as the oil market shows signs of rebalancing after a glut, and base metals rally on prospects for rising demand. Citigroup has flagged its optimism about raw materials in 2017 since at least July, and other banks have also turned more positive. Last month, Goldman Sachs Group Inc. recommended an overweight position for the first time in four years.

“For commodities in general, the oversupply that was induced by high prices in the first decade of this century are finally being balanced,” analysts led by Ed Morse wrote in the note. “What’s more, the cost structures across commodities are reaching an end of a period of persistent and record deflation.”

The Bloomberg Commodity Index has advanced 12 percent in 2016 after a five-year losing run that was spurred by a slowdown in China’s growth and gluts in everything from copper to crude oil. This year, advances in raw materials have been led by zinc, nickel, copper, Brent crude and sugar.

Citigroup laced its bullish outlook with warnings. Volatility is likely to pick up as markets rebalance and as developments in China shift prices, according to the bank. It cited the potential impact of government policy in Asia’s top economy, as well as heightened investor flows in futures.

Trump Risks

While Donald Trump’s victory in the U.S. election may bolster fiscal policy, his move away from globalization may pose a risk to the outlook for growth, Citigroup said. Trump’s election highlights a key risk, according to the bank, which flagged the potential for rising tensions, including trade wars.

Among the bank’s picks for 2017, oil may outperform the rest of the energy complex as the first OPEC production cut in eight years accelerates the balancing of the market, according to the report. In copper, the bank raised its 2017 average price target 9 percent to $5,575 a metric ton. The metal traded at $5,856 by 12:41 p.m. in London.

Iron ore’s 2016 advance, as well as that in coal, “was a fluke, and largely a result of domestic politics in China confronting market forces that remain inherently bearish,” Citigroup said. “The overall bearish iron ore outlook still holds,” it said, forecasting prices will drop every quarter next year.

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