TORONTO, Dec. 1, 2017 /CNW/ - OPEC+ granted a 9-month extension of its production agreement that was set to expire in March 2018, withholding roughly 1.8 Mbpd of oil supply through the end of next year. Crude prices are anticipated to experience a mild pullback through first quarter of 2018 to the low US$50s, as speculative positioning normalizes and the market moves into seasonal winter surplus.

"Despite the positive news out of Vienna, we believe that prices are a bit ahead of where they should be at this stage in the market's rebalancing process," said Rory Johnston, Commodity Economist at Scotiabank. "While we anticipate a temporary pullback, crude prices are expected to resume their upward trajectory as OPEC+'s production restraint and robust global demand growth keep the market in deficit for the year, regardless of likely supply gains from US shale producers."

The spread between WTI (North American) and Brent (Global seaborne) oil prices has widened due to insufficient pipeline capacity between Cushing, OK and the US Gulf Coast. Rapidly growing US shale production and steadily rising Canadian shipments have overwhelmed takeaway capacity to the coast, pushing up transportation costs. The WTI-Brent spread is expected to normalize through the first half of 2018 as more pipeline capacity comes online.

Scotiabank's Commodity Price Index advanced 2.1% m/m in October, to its highest level since February on the back of solid industrial commodity gains that more than made up for the mild decline in the prices of agricultural commodities.

Base metals continue to experience price gains on the back of bullish sentiment and a favourable fundamental outlook, while bulk commodities like iron ore have retreated from earlier highs and have settled into a steady lower range. This trend is expected to continue through 2018-19, though some recent price gains are likely to level before increasing.

Copper prices appear overvalued at their current levels of around US$3.10/lb, with few indicators of a truly tight market despite a nearly 30% gain since June. Copper's recent strength can be largely credited to supportive sentiment as money managers and hedge funds continue to bet on copper's connection to the accelerating global economy. While prices are anticipated to fall back to average US$2.85/lb in 2018, risks are tilted to the upside.

Further gains for zinc are anticipated as markets remain tight over the next two years, with prices expected to peak and average US$1.60/lb in 2019. Nickel's outlook is a bit more mixed as high inventories have insulated the market from the growing supply deficit.

Other highlights:

• Western Canadian Select (WCS) has experienced discounts to WTI widening as Canadian exports run up against limited takeaway capacity
• Zinc and nickel prices have also maintained their upward trek as supply deficits continue to impact inventories
• Aluminum's outlook is increasingly clouded by the uncertain impacts of China's Blue Sky environmental policy on the Chinese smelting industry and associated supply chain
• Price gains on aluminum are expected as compensation for the high-cost sources of supply

Read the full Scotiabank Commodity Price Index online at:

http://www.gbm.scotiabank.com/scpt/gbm/scotiaeconomics63/SCPI_2017-12-01.pdf  

Scotiabank provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

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SOURCE Scotiabank