Oil Price Rise Stirs Hopes of Commodity Rebound

The oil markets have reached the end of a “considerable downturn,” Saudi Arabia’s Energy minister, Khalid al-Falih, told a conference in London on October 19. Oil demand is rising despite slower global growth, he said.

The price of crude oil rose above $50 a barrel in October after OPEC surprised markets with its decision to cut output. The OPEC deal “potentially signifies a reversal of the two-year-long Saudi policy of holding off on supply intervention and allowing the markets to establish an equilibrium price by themselves,” says Omar Al-Nakib, senior economist at National Bank of Kuwait. The last time OPEC cut output to arrest a decline in prices was in 2008, in the depths of the financial crisis. In addition to relieving fiscal pressure on the Saudi economy, higher oil prices would help pave the way for the planned 2018 sale of a stake in Saudi Aramco, the national oil company. The rebound in crude from below $30 a barrel in January is also sparking hopes of a sustainable rise in commodity prices in general.

The Core Commodity CRB Index rose by 4.5% in the 30 days to October 18, but was down 4.6% from a year earlier. Australian thermal coal prices have doubled since June, after China capped its mining output. The upturn followed five years of falling commodities prices, and analysts say it could mark a turning point in the mining cycle. Paul Bloxham, chief economist at HSBC in Australia, says GDP growth, corporate profits, tax revenues, wage growth and possibly inflation all could get a lift from a sustainable rise in commodity prices.

There is a risk, however, that higher prices will stimulate increased production. Big oil companies are already cautiously increasing spending on new projects. Saudi Energy minister al-Falih says that by reducing production OPEC is sending a message to the market that it wants to unwind the global supply glut and encourage investment.

Commodity currencies in general, including the Brazilian real and the Russian ruble, have rallied this year, thanks in large part to the stabilization of commodity prices. If the turn for the better in commodity prices is sustained, it will have wide-ranging impacts, particularly in emerging markets.