Citigroup chops back commodity forecasts as gluts to last longer

[TOKYO] Citigroup Inc chopped back commodities forecasts including oil and base metals after the sharp sell-off in raw materials in the opening weeks of the year and on speculation that slowing global growth will prolong the time it takes for markets to swing back into balance.

Brent crude is expected to average US$40 a barrel this year, compared with an estimate of US$51 in a November report, while the outlook for nickel was cut 22 per cent to US$8,450 a metric ton, analysts including Ed Morse wrote in a report received on Wednesday. Gold was a rare bright spot, with Citigroup's forecast raised 7.5 per cent to US$1,070 an ounce.

"Declining expectations of global growth are exacerbating the results of oversupply across commodity markets," the analysts wrote in the Jan 19 report. The lower worldwide demand for raw materials promises "to prolong the time it will take for commodities to come into balance," they said.

Commodities have been battered since the onset of 2016, with oil slumping to the lowest level since 2003, as gyrations in Chinese equities, a weaker yuan and signs of a slowing global economy spurred investors to shun risky assets. China reported the slowest annual growth since 1990 on Tuesday, the same day that the International Monetary Fund cut its world growth outlook. Glencore Plc Chairman Tony Hayward, former chief executive officer of BP Plc, told Bloomberg this week that there's "too much oil."

"The dramatic market sell-off that started 2016 is impacting all sectors, pushing commodities down even further," the analysts wrote. "Commodities prices have been under pressure from China" at the start of the year, they said, adding that the bank expects to revise price estimates more often this year as suppliers adjust output.

The Bloomberg Commodity Index, a measure of returns from 22 raw materials, sank to the lowest since its inception in 1991 earlier this month, and has lost 6.6 per cent since the start of the year. The slump follows five annual declines through 2015 as surpluses of everything from oil to iron ore swamped demand.

Forecast reductions in oil supply, potentially led by US producers, may help crude to rebound toward the end of the year, according to Citigroup. The bank expects Brent to average US$52 in the final three months of 2016 compared with US$40 between July and September and US$31 in the second quarter.

Copper will average US$4,650 a ton this year, while aluminum risks falling below US$1,400 a ton in the second quarter, according to the report. Bullion has benefited from the slump in equities and other raw materials, according to Citigroup, which said its haven rationale was back in vogue.

BLOOMBERG