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Special Feature: Commodity Market Review.


The overall IMF commodity price index fell by 9 percent since peaking in April 2011, because of generally weaker demand and an uncertain global economic outlook - a decline anticipated in the October 2012 World Economic Outlook Nonetheless, prices remain elevated compared with historical levels. Commodity prices bottomed out in June 2012 and have since risen by 12 percent as a result of supply constraints and some improvement in demand. Weather - related supply shocks helped lift cereal prices higher by 10 percent, although they have eased slightly.

Energy prices climbed 15 percent on lower production by the Organization of the Petroleum Exporting Countries (OPEC) and stronger emerging market and U.S. demand.

Metal prices 10 percent on expectations of stronger emerging market demand, but stocks remain high and most markets are in surplus. Recent declines in commodity price volatility reflect improvements in global financial conditions, realized on the back of policy actions that lowered the acute crisis risks.

These improvements also affected forward - looking indicators such as purchasing managers' indices and equity prices (along with prices of other risky assets), which rose globally. The near- term outlook for commodity prices, as reflected to futures prices, shoes broad declines across all main commodity groups, including oil. Overall, prices are projected to decline by 2 percent in 2013 (year on year), with improving supply prospects for all man commodity sectors.

Energy prices are expected to fall by almost 3 percent on recovering oil supply from the past year's outages and strong growth in non - OPEC supply, particularly in North America, which will continue to reduce U.S. crude oil imports.

Food prices are projected to fall by more than 2 percent on the assumption of normal weather and improved harvests, and beverage prices are expected to drop by about 12 percent on abundant supply. Metal prices are projected to trend upward, by more than 3 percent, which is consistent with global economic recovery and higher demand, especially in China.

However, there are a number of risks to the outlook of falling commodity prices - beyond those of weaker or stronger growth in the global economy and, more specifically, in emerging markets.

Upside risks to prices appear more pronounced than downside risks. On the supply side, a return of problems that affected metal and energy markets in the past decade (accidents, project delays, shortages of equipment and skilled labor) could again lead to supply deficits and higher prices.

Much stronger Chinese demand, for both domestic and restocking, is an added risk. Additional concerns include geopolitical tensions in the oil - producing regions of the Middle East and Africa and further non- OPEC supply outages or a major supply shock.

For agricultural commodities could result in higher prices for grains, especially corn, whose stock levels are historically low.

Downside price risks center on resurgent supplies of energy and metals, including the larger - than- expected growth in production of shale gas and tight oil in the United States and current metal supply overhangs.

Energy Market Developments and Prospects

Although energy prices rose by only 1 percent in 2012, they are up 15 percent since June 2012, led by gains in oil (19 percent) and U.S. natural gas (35 percent) - the latter on stronger demand for natural gas for power generation (which displaced coal) and depressed drilling for natural gas because of low prices.

Natural gas prices continue to diverge regionally, with market segmentation driven by whether gas prices are strongly linked to long-term oil priced contracts (yes in Japan, no in the United States) or whether this linkage has been loosened (Europe).

Liquefied natural gas (LNG) prices in Japan eased as demand moderated after the surge that accompanied the shutdown of nuclear power generation in the wake of the Fukushima disaster, but prices remain high. European natural gas prices also fell on weaker demand and increasing penetration of spot- priced gas supplies.

Energy prices are expected to decline during 2013, as reflected in future prices, led by crude oil.

Falling crude oil prices reflect expected increases in non- OPEC production and declining demand in industrial countries due to improved vehicle efficiency and the effects of higher prices.

However, the natural gas price index is expected to edge higher, led by a 34 percent increase in U.S. gas prices that will help sustain robust shale gas development.

LNG prices in Japan are expected to continue their decline in the face of lower demand as nuclear power generation comes back on line and as oil prices supply fall.

Coal prices are expected to decline on increasing supply and moderating demand, in part due to environmental constraints. Risks to energy prices, however, are tilted to the upside.


Spot crude prices: Crude oil prices have remained relatively stable- albeit high- since early 2011, with the average selling prices near dollar 105 a barrel during the past two years.

Prices have been supported by outages due to geopolitical events in several countries in the Middle East and Africa, the European Union oil embargo and U.S. sanctions against Iran, and other unexpected outages, such as in the North Sea.

The price of West Texas Intermediate (WTI) fell substantially below U.K. Brent because of a buildup in crude oil in the United States, primarily from new tight-oil production in North Dakota and Texas but also from rising Canadian oil imports.

Pipeline constraints limit the movement of these supplies to refineries on the Gulf Coast and elsewhere, and producers are shipping crude oil by rail and barge, which is economical because of the large price discount.

New pipeline projects and reversals of existing pipelines are under way, which will eventually lead to a narrowing of the Brent- WTI spread.

Price drivers: weaker aggregate demand (proxied by the log change in global industrial production) and declines in other demand components (that is, inventories), along with a positive oil supply response, explain the downward pressure on the spot crude oil price during the second and third quarter of 2012.

However, the spot began to pick up during the fourth quarter, as OPEC supply fell and geopolitical tensions rose, leading to a buildup in precautionary demand (inventories).

Recent IMF staff analysis suggests that both supply and (flow and precautionary) demand shocks have been important drivers of the spot oil price

Demand: World oil demand grew by 1 percent, or 0.9 million barrels a day (mbd), in 2012, with a decline of 0.6 mbd in the Organization for Economic Cooperation and Development (OECD) countries and growth of 1.5 mbd in non- OECD countries. Oil demand in the OECD has fallen by 9 percent (or for 4.5 mbd) since 2005 as a result of higher prices, greater efficiency, and recession - factors that are expected to affect development into 2013 and beyond emerging market demand has moderated from its rapid growth in recent years, demand picked up by 1.6 mbd during the second half of 2012, led by Brazil, China and countries in the Middle East and Asia.

These emerging market economies are expected to account for all the growth in global demand in 2013, which is projected to be little more than 08 mbd.

Supply: World oil supply grew by 2.5 mbd in 2012, well above demand, resulting in more than 1 mbd going into inventories.

The bulk of the increase was from OPEC (1.9 mbd), with the largest increments being the rebound in producing from Libya, followed by rising output in Saudi Arabia and Iraq.

However, OPEC remains concerned about weak demand and rising supply and has announced its desire to keep oil prices around dollar 100 a barrel, which generally satisfies its relatively high break - even requirements.

Non- OPEC supply grew by .6 mbd in 2012 led by increases in the United States and Canada and by smaller increments in China and Russia, which more than offset production losses in the other regions. Non- OPEC production is exceeding the growth in demand.

Buffers: Reflecting supply and demand developments during the fourth quarter of 2012 and estimates for the first quarter of 2013, there was a seasonal draw - down of inventories among OECD countries and an increase in OPEC spare capacity, albeit still below its historical average.
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Publication:Cambodian Business Review
Date:Jul 31, 2013
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