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Don't get excited - the commodity price rally won't last

Mar 9, 2016, 14:53 IST

REUTERS/Lucas Jackson

Commodity prices across the board have rallied in the last few weeks, with oil passing $40 for the first time in 2016, and the price of iron ore soaring, seeing its best ever day of trading earlier this week.

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That rally has led some traders and commentators to suggest that after nearly two years of continuous price falls, the commodity sector has finally hit bottom, and that prices will return to a more stable, sustainable level in the coming months.

However, a number of big firms have come out to argue that the recent rally in the cost of raw materials is nothing but a blip, and that commodity prices are set to stay depressed for a while to come.

Tom Stevenson, an investment director for Fidelity - the financial services firm which manages more than $2 trillion of assets across the globe - is the latest to dampen any optimism in the commodities sector.

Speaking to BBC Radio 4's Today programme on Wednesday morning, Stevenson said:

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"My feeling about the commodities rally is that it's probably going to run out of steam because the fundamentals which are driving that market are unchanged and they are that we have huge oversupply of commodities, especially of the hard industrial commodities, the metals.

"Demand is incredibly weak and we've seen that the figures out of China this week have suggested that global trade is slowing, so I think the fundamentals of the commodities market have remained quite negative."

On Tuesday, Goldman Sachs released a series of reports, all of which argued that the commodity rout still has some time to run.

As first reported by the Financial Times, Goldman's head of commodities research, Jeffrey Currie said in a note: "Demand hasn't really changed, [so] it takes lower prices to push and keep supply below demand to create a deficit."

Goldman slayed commodities from steel and iron ore, all the way to gold, despite the recent rally.

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Along with Goldman's generally gloomy forecasts, a number of financial institutions have specifically focused on their belief that the price of oil will stay weak in the long term. On Monday, Norbert Ruecker, the Head of Commodities Research at Swiss private bank Julius Baer said that the company "still believe that oil prices experience a short-term bounce but no long-term recovery" while analysts at Barclays said that market optimism is "somewhat premature."

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