Commodity prices under pressure

Oil, gold, grains, steel. The prices of virtually all commodities are under pressure and it seems unlikely that this trend will be reversed in 2015. High production levels, sluggish global demand and structural market developments are causing substantial price decreases on the global market. While this is good news for the manufacturing sector, consumers also can benefit.


Hamza Khan, commodities analyst ING Financial Markets



The world is currently more or less awash with oil. In the United States, oil production has increased significantly due to shale oil, which can now be extracted in an economically viable manner thanks to new technologies. This will further reduce the US’ need for oil imports. The OPEC countries also continue to maintain high production levels, fearful of losing market share permanently if they restrict their production. They additionally hope that a low oil price will force US shale oil producers, who ramped up their production when the oil price was above 100 dollars a barrel, out of the market. High production levels combined with limited demand due to sluggish economies inevitably lead to low oil prices. In the short term we expect to see an increased supply of oil and prices which could drop further below 70 dollars a barrel. While the low oil price is only being passed on slowly to consumers, prices at the pump are now starting to fall also.

Demand for oil continues to fall, partly due to fundamental changes such as the increased availability of more sustainable alternatives. European drivers traditionally preferred to fill up with petrol. While diesel has gained ground during recent decades, there are signs this market is gradually becoming saturated. We anticipate a strong growth in the number of electric-powered vehicles. Biofuels and gas are becoming increasingly popular among businesses.


This is one of the four articles, earlier published in the December issue ‘The world in 2015’ of Dutch quarterly FD Outlook, in which Mark Cliffe (chief economist ING), Hamza Khan (commodities, ING Financial Markets), Richard Koning (equity, ING Financial Markets), Piter de Jong (ING Shanghai) and James Poon (ING Hong Kong & China) look ahead to 2015. They discuss a range of topics and markets, from the eurozone’s economy to global equity markets, commodity prices and China’s global ambitions.


Gold is still considered a safe haven for investors due to its intrinsic value. As such, the price of gold reflects investors’ concerns. The price of gold fell significantly during 2014 as equity markets performed well. There is little return from fixed-income securities at the current low interest rates. The fall in prices has made gold more attractive as an alternative investment. We consequently expect the price of gold to stabilise at the current level.



Maize and soya production levels in the US are very high. Sugar production and supply also remain constant. Brazilian coffee production was unexpectedly high following concerns about the weather conditions. In spite of concerns about the cocoa harvest in Liberia, one of the largest cocoa-producing countries, due to the ebola crisis, production there was nonetheless higher than expected. While there are plentiful supplies of many foodstuffs, this is not matched by demand for them. Russia’s ban on imports is one reason for this. We therefore do not anticipate any significant increase in food prices.


Falling commodity prices are passed on to consumers considerably more slowly than rising prices

Consumer prices

Most commodities are priced in US dollars. The dollar is relatively strong and hence expensive relative to other currencies. With demand from Europe and China remaining sluggish, the effect is heightened by the strong dollar, placing additional pressure on commodity prices. Rising commodity prices generally feed through very quickly into consumer prices. Falling commodity prices are passed on to consumers considerably more slowly. Processing manufacturers’ margins in particular will initially improve. Meat producers, for example, pay far less for animal feed, swelling their profit margin.

Finally: commodity markets tend to move in waves. When prices are high, new producers enter the market pushing up the supply level. As the supply increases and prices start to fall, some producers will pull out of the market again. At the moment we are in a phase of over-production and moderate global demand. The pressure on prices will therefore persist for the foreseeable future.


Also read the other three articles in this series:

Reasons to be optimistic

Equities markets continue to entice investors

China’s drive towards international expansion