Quarterly Forecast Update Edition

Macroeconomic Developments:

• Uncertainty abounds in commodity markets, whether it be the speed of forthcoming rate cuts, rising protectionism, scale of additional economic stimulus in China, or razor-edge U.S. election. A Republican sweep could substantially alter the economic/geopolitical backdrop.

• Crude oil prices are likely to remain volatile given the high level of risk around the Middle East conflict. Further complicating matters, OPEC+ has yet to finalize whether it will begin to unwind production curbs in December.

• Most major crop-producing regions in the Northern Hemisphere have enjoyed solid growing conditions this year and are in the process of reaping a large harvest, which is keeping a tight lid on prices.

• The global and particularly U.S. economies remain resilient. BMO Economics is projecting global growth of 3.1% in 2024 and 3.2% in 2025.

Commodity Forecast Highlights: [Quarterly Commentary Starting on Page 2]

• The BMO Capital Markets Commodity Price Index dipped 0.5% in September, though October is poised for a rebound.

• Energy: We recently lowered our annual WTI forecast to US$77.5/bbl in 2024 (or ~$75 for the rest of the year) and $77.5 in 2025 (previously $79 and $80 for the calendar years). No changes to natural gas.

• Metals: Precious metals outlook boosted as emerging-market de-dollarization efforts gather momentum. Modest revisions across the base metals segment, both upward (most notably, zinc) and downward (nickel).

• Forest Products: Lumber price forecast unchanged. Despite Fed policy easing, U.S. mortgage rates remain elevated, providing little spark to demand from the housing market with affordability near multi-decade lows.

• Agriculture: The outlook for crops is unchanged, with prices expected to remain low amid a large harvest. The forecast for cattle has been lifted, as it appears that herd rebuilding will take place only gradually.

Quarterly Forecast Update

Energy: The oil market is in a tremendous state of flux given the current geopolitical and economic backdrop. There appear to be three distinct forces pulling at crude oil prices: (1) a higher Middle East risk premium in response to the broadening in the war, (2) increasing uncertainty over OPEC+/Saudi Arabia’s production curb strategy, and (3) an unexpected slowing in Chinese oil demand. However, oil market participants still seem more focused on the latter two factors, which have been underpinning global supply/demand trends.

Although benchmark West Texas Intermediate crude recovered earlier losses following Iran’s missile attack on Israel, the rebound has been relatively muted. It appears that oil market participants have gravitated to the view that the conflict is unlikely to lead to a large, widespread and long-lasting disruption in crude oil production across the Middle East, including Saudi Arabia and the UAE. Even if a significant portion of Iranian production (3.4 mb/d or 3.3% of global oil supply in August) is taken offline (temporarily or permanently) via retaliation by Israel, it should easily be replaced by OPEC+’s spare capacity (~5.5 mb/d).

The bigger risk facing crude oil prices is that global supply may begin to increasingly outpace demand, which could result in larger market surpluses. Such a view was reinforced by OPEC+’s latest Joint Ministerial Monitoring Committee (JMMC) meeting, which suggested that the cartel is still sticking with its plan to begin unwinding its 2.2 mb/d in voluntary production cuts in December. This would amount to a monthly increase in cartel output of 205 kb/d over the following year. In preparation, Riyadh has reportedly been threatening to lower its official selling price in an effort to get non-compliant cartel members to bring their production in line with their quotas. Though OPEC+ may ultimately decide to postpone the start date of restoring production, global oil supply looks set to expand further either way. Non-OPEC+ production is also expected to edge up, as a number of countries are gradually expanding capacity, notably Brazil, Guyana, Norway, the U.S. and Canada.

Another source of uncertainty revolves around global oil demand, which has already surprised to the downside this year. That is due largely to China, which has typically accounted for just over half of annual growth. China’s oil consumption has witnessed a big slowdown in the past few months and now looks like it will only increase around 200 kb/d in 2024, compared to an average increase of 600 kb/d over the past decade. Note that the IEA was originally forecasting an increase of 700 kb/d at the start of the year. This surprising drop-off has many wondering whether it’s an anomaly and demand will bounce back next year, especially given Beijing’s latest stimulus package, or the beginning of a new trend. We would gravitate more to the latter given the rapid adoption of electric vehicles (accounting for over 50% of new motor vehicles sales) along with the development of high-speed rail networks. However, China is still a few years away from peak oil demand, as the overall stock of internal combustion engine motor vehicles is still expected to grow for the time being.

We remain comfortable with our current forecast for WTI to average US$77.5/bbl in 2024 (or ~$75 for the rest of the year) and $77.5 in 2025. However, risks to these projections remain tilted to the downside, especially if Middle East tensions were to suddenly calm.

Separately, the discount of Western Canada Select (WCS)—the country’s key heavy oil blend—to WTI looks to be settling in around US$13.50/bbl. If it stays around this level, this would be a big decline from the $18 averaged over the prior two years, although a smaller improvement versus the long-run average of $15. Nonetheless, it’s clear that the opening of the Trans Mountain pipeline expansion—TMX— in early May will make it cheaper to transport oil (compared to rail shipments to the U.S.) and, moreover, should allow Canadian oil to command higher prices on the international market due to direct shipments to overseas destinations (e.g., Asia). It’s difficult to gauge exactly where the WTI-WCS spread will ultimately settle but the $10.00-to-$12.50 range remains feasible. This is because U.S. demand for heavy oil from Canada is likely to increase as imports from Mexico decline once that country’s new refinery becomes fully operational.

Global natural gas prices, which have struggled mightily this year due to the combination of record supply and moderate temperatures, have found a firmer footing. Henry Hub—North America’s benchmark—has been averaging US$2.75/mmbtu of late (vs. $2.11 in the January-to-September period). The improvement can be largely attributed to U.S. producers proactively scaling back output over the past year. This has helped to offset strong associated petroleum gas production. Dry natural gas production fell 1.1% y/y to 101.7 bcf at the beginning of October. The bigger question is whether Henry Hub can sustain momentum in coming months.

Barring an extremely mild winter across the Northern Hemisphere, we continue to hold the view that Henry Hub should edge higher based on two key developments. First, the expected completion of new LNG projects in 2025 (Plaquemines and Corpus Christi Stage III) should allow U.S. producers to take better advantage of higher global natural gas prices. Note that the price of LNG cargoes in East Asia stood at US$13.16/mmbtu at the beginning of October, while the price of Title Transfer Facility—Europe’s natural gas benchmark—stood at US$12.58/mmbtu. Secondly, European demand for U.S. LNG should rise next year as Russia’s gas transit contract with Ukraine expires at the end of 2024. It bears mentioning that demand for natural gas remains robust, with the IEA reporting global natural gas consumption rose 2.8% y/y in the first three quarters of 2024, well above the 2% annual average between 2010 and 2020, and is forecast to grow 2.3% in 2025. Thus, we are maintaining our average Henry Hub forecasts of $2.25 in 2024 (or ~$2.75 for the rest of the year) and $3.25 in 2025.

On the flip side, the near-term outlook for Western Canadian natural gas prices remains very weak, as Canadian producers have ramped up production in anticipation of the completion of LNG Canada in Kitimat B.C., which is expected to start operations by mid-2025. The new LNG export facility should allow Canadian natural gas producers, particularly in B.C., to tap higher prices overseas, particularly in Asia. Recently, the price of AECO (Western Canada’s natural gas benchmark) has been suffering from excessive supply, averaging just over US$0.50/mmbtu in the past few months. Thus, the Henry Hub-AECO spread has blown out to the US$1.50-$2.00/mmbtu range, compared to a historical average of $1.00 (the cost of transportation to Henry Hub in Louisiana). The spread is likely to take some time to normalize, but it should eventually narrow back to its long-term average once LNG Canada is fully operational, as the latter will still draw on production from Alberta.

Metals: In a year marked by heightened economic and geopolitical uncertainty, persistent U.S. dollar strength and a depressed Chinese property sector, metals markets have displayed surprising resiliency. Most of the metals under our coverage have outperformed our expectations at the outset of 2024 and are currently trading above estimated long-run equilibrium levels. The LME Index of base metal prices is down 7% from recent highs notched in May but is still up 15% since the start of the year. Even starker is the roughly 30% year-to-date rise in precious metals.

China’s latest stimulus salvo at the end of September was a shot in the arm for metals market sentiment against an otherwise stagnant global industrial backdrop. The package marked the most concerted—albeit belated and not yet fully quantified—effort to boost the economy this year, though it remains to be seen whether it will be enough to durably revive consumer confidence and the battered property market. Regardless, while current price levels for base metals may not prove sustainable in the near term, gradually falling interest rates globally will help to underpin demand fundamentals as we enter 2025. In fact, notwithstanding the strong September U.S. jobs report, the balance of risks still lies toward more aggressive easing as the Fed and other major central banks have grown increasingly wary of undershooting their inflation targets.

However, one key area of uncertainty continues to hang over commodity markets, with the U.S. presidential and congressional elections still looking extremely tight. While gold prices initially sank after former president Trump’s victory in 2016, recovering within a year, base metals rallied on his plans to unleash massive infrastructure spending. Trump has made no such proposals this time around, though he has pledged sweeping tax cuts and across-the-board import tariffs. If implemented, this combination would likely lead to higher inflation and interest rates as well as retaliatory measures by trading partners. It’s worth noting that it’s not just the U.S./West that have been escalating their protectionist measures against China, but also emerging markets who have seen a flood of low-cost Chinese goods. Yet, the net effect for metals markets is not straightforward; increased global protectionism could threaten industrial activity resulting in lower metals demand in the near term, but may also lead to more segmented commodity supply chains and thus higher prices over the longer term. Meanwhile, precious metals would benefit from any post-election disputes over the results (e.g., recounts, legal challenges).

The biggest story in metals markets this year has been gold’s unrelenting upward march. The yellow metal is up a hefty 45% from this time last year and is now close to the 1980 all-time high in inflation-adjusted terms. According to the World Gold Council, September marked the fifth straight month of net gold ETF inflows, turning global year-to-date flows positive after three years of outflows. Gold’s renewed appeal to investors is being fueled by falling rates and elevated geopolitical/trade tensions. In addition, gold is receiving a large dividend from structurally higher central bank demand and emerging-market efforts to move away from the U.S. dollar in international trade and financial transactions. The de-dollarization trend appears to be gaining steam ahead of the upcoming BRICS+ summit in Russia, where participants will discuss moving forward with Project mBridge. This is a cross-border payment system developed in conjunction with the Bank for International Settlements, with a unit of trade backed by 60% BRICS currencies and 40% gold, thus requiring significant stockpiles of gold reserves. As such, we have raised our gold price forecasts to US$2,375/oz on average in 2024 and $2,500 in 2025 (both previously $2,300).

Silver continues to ride the coattails of gold’s record rally amid central bank easing and safe-haven buying. Despite not having the same tie-in to the de-dollarization story, silver has slightly outperformed gold over the last year, climbing nearly 50% with additional support from strong industrial demand (i.e., photovoltaics, power grids, EVs). Price support should likewise remain firm over the coming year, though growing calls for consolidation in China’s oversupplied solar industry could cap demand growth and prices. We thus expect silver to moderate from an average of US$28.00/oz this year (previously $27.25) to $27.50 in 2025 (previously $26.50).

In the base metals segment, the lower rate environment is clearly supportive, as is pronounced concentrate tightness in certain markets (copper, zinc). However, whether spot prices can maintain current elevated levels hinges on market hopes for more fiscal support in China. Expectations for large-scale, infrastructure-driven stimulus are unlikely to be met, with BMO Economics still projecting China's real GDP growth to soften to 4.8% in 2024 and 4.5% in 2025 (from 5.2% in 2023). Of note, it could take years to work off the overhang of pre-sold, uncompleted housing units, stifling new construction activity in the meantime. Meanwhile, China’s manufacturing sector may soon come under pressure from increased trade protectionism, with a potentially deep hit to growth from Trump’s proposed 60% tariff on all U.S. imports from China.

Copper is among the best positioned to benefit if more stimulus is rolled out in China, as spending will continue to be targeted at expanding and upgrading the electrical grid. Further, this year’s shortage in the copper concentrate market is likely to persist into 2025, which may require cutbacks to smelting capacity despite rebounding mine supply. We now project prices to remain steady at US$4.15/lb in annual average terms this year and next (previously $4.00 in 2025). The zinc market is also experiencing extreme raw material tightness amid falling mine production, as evidenced by spot treatment charges recently turning negative. Several Chinese smelters are set to close or undertake extended maintenance, implying a lower inventory cover. Notwithstanding still-weak demand, prices will remain well-supported until concentrate supply recovers later next year, averaging around the US$1.25/lb-mark in both 2024 and 2025 (vs. prior forecasts of $1.22 and $1.20).

Unlike copper and zinc, which are expected to remain close to their estimated long-run equilibrium price levels, aluminum and nickel will likely continue to trade at a discount. Aluminum prices will be kept in check by the combination of well-stocked global inventories, a lack of supply constraints on the horizon, and an expected drop in alumina prices (a key input for aluminum smelters). Following the recent broader commodity rally, we adjusted our 2024 price forecast to US$1.08/lb (from $1.07), while we maintained our 2025 forecast at $1.10. Nickel is the clear metals underperformer this year, weighed by surging low-cost supply from Indonesia, reduced industry forecasts for EV uptake, and improving performance of nickel-free batteries. There is a growing consensus in the industry that despite relatively robust demand prospects, there will be little trouble meeting supply needs in the medium term. Accordingly, we have lowered our price forecasts to US$7.70/lb in 2024 (from $7.80) and $7.50 in 2025 (from $8.00).

Forest Products: Lumber trends remain relatively subdued with benchmark Western Spruce-Pine-Fir (WSPF) prices averaging just US$366/mbf in the third quarter, down from $386 in Q2. Nevertheless, since bottoming in early July, WSPF has calmly and quietly drifted modestly higher, finding support from further B.C. sawmill production curtailments and a faint brightening of the demand outlook after the Fed's outsized inaugural cut in September. While lumber avoided any major spillover effects from the short-lived East Coast port strike, recent devastating hurricanes will impact both supply and demand, though it’s still too early to determine the ultimate fallout.

Broadly, enthusiasm in the sector remains muted as several headwinds remain in place heading into the typically slower building season. U.S. housing starts bounced off a multi-year low in July but remained at historically weak levels as of August, pressured by still-elevated mortgage rates and some cooling in the labour market. Still, the interest rate environment is expected to become more favourable for borrowers in the coming quarters and that’s driven a modest improvement in U.S. home builder confidence. While the latest U.S. jobs report cast some doubt on the expected pace of Fed rate cuts, outside a large flare-up in inflation pressures, the policy rate should be markedly lower by the end of the forecast period. That will provide a boon to U.S. home builders, though the upside may be limited by increased competition from rising existing home listings.

While lumber demand is expected to improve over the forecast horizon, the gradual pace of rate relief and the slow recovery in renovation activity following the pandemic-era surge remain key headwinds. Thus, we expect lumber prices will remain effectively rangebound over the near term, with upside risks tied tightly to the U.S. housing market outlook. We continue to project WSPF prices will average $400/mbf in 2024 (and in Q4), before seeing a modest recovery to $425 in 2025.

Agriculture: Wheat prices, like those of most other crops, have pulled up from recent lows but remain well below longer-run norms. Almost all major producing regions in the Northern Hemisphere, with the notable exception of Europe, are on track to realize better-than-average wheat yields this year. The U.S. Department of Agriculture (USDA) now estimates that U.S. wheat production will reach an eight-year high in 2024, while the Canadian crop has also turned out better than previously feared, as drought conditions have eased in parts of the Prairies. Even top-exporter Russia, which struggled with challenging weather during the spring, appears to have managed a decent crop. With global supply still running strong, wheat prices are expected to average US$5.80/bushel this year, down from $6.45 last year, though the market should recover to around $6.50 in 2025 if yields revert to trend.

Corn prices have also come under pressure this year, as conditions across the U.S. Midwest suggest a good crop is on the way. The U.S. Drought Monitor (USDM) currently estimates that just 6% of acreage in the Midwest is experiencing severe drought, down from 23% a year ago. Growing conditions are especially strong in Iowa, the top corn-producing state. As a result, the USDA currently rates 87% of the national crop in “fair” or better condition and expects another large increase in U.S. stockpiles this year. With supply still outpacing demand, corn prices are now expected to average around US$4.20/bushel in 2024, down from $5.65 last year, though geopolitical risks and relatively firm oil prices should bolster ethanol-related consumption and help put a floor under the market. Prices should trend gradually higher to around $4.90 in 2025.

Soybeans have dipped in tandem with corn this year, reflecting increasingly supportive growing conditions in North America. In the U.S., favourable weather across the Midwest has left 89% of the national crop rated “fair” or better by the USDA, which together with a jump in acreage, is likely to drive near-record production this year. At this point, almost half of the U.S. crop has been harvested, which is well ahead of schedule and is beginning to lift inventories. Growing conditions have also remained favourable in Southern Ontario, a hub of soybean production in Canada, which should keep production near last year’s all-time high. Given the abundant outlook for supply, soybean prices are expected to average around US$11.10/bushel in 2024, down from about $14.20 last year, but should increase to around $11.50 in 2025 if global yields normalize.

Canola prices have also trended lower this year, primarily due to slightly less challenging growing conditions across the all-important Prairie Provinces (the world’s top exporting region). The Canadian Drought Monitor currently estimates that 52% of the country’s agricultural land is experiencing abnormally dry weather, which is elevated but still a major improvement from 81% at the start of the year. With the weather delivering somewhat better than expected yields and an above-average amount of acreage devoted to the crop, production and stockpiles in Canada should increase this year. The canola market is also being affected by concern over China’s recently announced anti-dumping investigation, as well as broader abundance in the soybean space, which has provided an amply available substitute. As a result, canola prices are now expected to average US$450/tonne in 2024, down from $560 last year, before recovering to around $510 in 2025.

Hog prices have moved seasonally lower in the past few months but are little-changed over the past year, sitting slightly below longer-run norms. The tepid pricing environment has partly reflected sluggish demand, with protein consumption being squeezed by elevated interest rates and the generally higher price of household necessities. Supply has also become more abundant, as producers have reacted to the favourable feed price environment by shifting decisively into expansion mode, with the USDA now expecting the headcount of the North American hog herd to increase by 1.3% this year. Overall, hog prices are likely to average around US$84/cwt in 2024, up only slightly from $81 last year, but should improve to around $91 in 2025 as herd expansion tapers off and due to continued scarcity in the cattle space.

Cattle prices have continued to fluctuate near the all-time high set in June. Although the drought previously afflicting much of U.S. cattle country has dissipated and feed costs have improved significantly, herd rebuilding appears to be taking place only gradually. In fact, the USDA expects that the headcount of the U.S. cattle herd will actually decline for a sixth straight year in 2024, to almost 9% below its recent high in 2018. Lingering drought in Alberta has also weighed on the size of the Canadian herd. With supply running tight and producer economics looking better, there is a risk that prices could temporarily vault even higher as producers begin to hold animals back for breeding. Overall, cattle prices are expected to average US$184/cwt in 2024, up from around $173 last year, and will likely ease only moderately to $175 in 2025 amid a gradual herd rebuild.

Technical Note

The BMO Capital Markets Commodity Price Index is a fixed-weight, export-based index that encompasses the price movement of 20 commodities key to Canadian exports. Weights are each commodity’s average share of the total value of exports of the 20 commodities during the period 2012-21. Similarly, weights of sub-index components reflect the relative importance of commodities within their respective product group.

The all-commodities index and sub-indices consist of the following:

Unless otherwise specified, all indices reported in this publication correspond to prices in U.S. dollars.