Quarterly Forecast Update Edition

Macroeconomic Developments:

• Market sentiment toward commodities saw a marked shift in the last month, cheered by a firming economic outlook and the likelihood that central banks are preparing to ease policy notwithstanding lingering inflation stickiness.

• Crude oil prices have received a boost from concerns over supply disruptions in Russia, but are likely to remain volatile due to uncertainty around the path for both global oil supply and demand.

• Gold continues to notch fresh nominal highs, buoyed by the combination of prospective rate cuts, safe-haven demand, central bank purchases and strong Chinese buying. With current prices still well below the 1980 peak in real terms, there may be further room to run.

• BMO Economics' projection for global growth was bumped up a tenth to 2.9% in 2024 and remains at 3.0% for 2025.

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

• The BMO Capital Markets Commodity Price Index jumped 1.7% last month and April may see a bigger gain.

• Energy: No change to crude oil with the WTI forecast maintained at US$80.00/bbl this year due to OPEC+’s commitment to curbing production. However, we have cut our projection for Henry Hub natural gas by 50 cents to an average of US$2.25/mmbtu in 2024 as weather-related pressures persist.

• Metals: Upward revisions to gold, silver and copper forecasts in 2024 and 2025. These metals have more strongly felt the recent positive shift in market sentiment, while others await further supply restraint.

• Forest Products: Lumber forecast unchanged. Demand prospects are brightening despite weaker tailwinds from the interest rate outlook, though the return of previously curtailed production volumes should limit the upside.

• Agriculture: The outlook for crop prices has been lowered across the board after a good crop in the Southern Hemisphere and due to improved growing conditions in the United States.

Quarterly Forecast Update

Energy: The oil market has been whipsawed once again with benchmark West Texas Intermediate (WTI) crude sprinting past the US$85/bbl mark recently. It appears that a combination of factors, including a brighter global economic outlook; ongoing OPEC+ voluntary production cuts; an escalation in Middle East tensions; and, perhaps most importantly, Ukrainian drone attacks on Russian refineries, have altered the black gold’s fortunes. This stands in sharp contrast to the gloom at the start of the year when WTI was struggling to stay above $70 due to questions over OPEC+ cohesion, worries over a faltering Chinese economy and a relative lack of concern over supply disruptions from either the Russia-Ukraine or Israel-Hamas conflicts.

While it’s difficult to predict where crude oil heads from here, we remain comfortable with our average WTI price forecast of $80 for the whole of 2024. Upside and downside risks are fairly balanced in our view, especially given that oil prices sit at levels that likely satisfy Saudi Arabia but may also prevent U.S. shale production from accelerating. The key upside risk revolves around Russian and Middle Eastern production being disrupted by the two wars. Although estimates vary, it seems that up to 1.0 mb/d (or 15% of total) of Russian refinery capacity has been impacted to date, but roughly 3.0 mb/d might be within the striking range of Ukrainian drones. Otherwise, we think that the prospect of a big pick-up in global oil demand, of say over 2.0 mb/d in 2024 versus the current IEA projection of 1.3 mb/d, looks fairly slim despite the improving global economic outlook. OPEC is officially forecasting a hefty 2.3 mb/d increase.

On the flip side, downside risks largely relate to the prospect of the oil market suddenly being overwhelmed with too much supply. Although OPEC+ has proven to be quite cohesive since the pandemic-related fallout in early 2020, intra-cartel relations remain tense, which is why a significant share of cuts are now voluntary. We know, for example, that the UAE wants to produce more. The fact is that the unity of the cartel hinges on Saudi Arabia’s willingness to continue shouldering the brunt of cuts (currently 3.1 mb/d of the cartel’s total reduction of 5.6 mb/d). The desire of Riyadh to support the cartel’s current production cut strategy is rooted in its massive, multi-year spending spree to diversify its economy. However, it is likely that the kingdom remains worried about losing market share, particularly to U.S. shale producers, and eventually would like to taper its cuts. There is also a non-negligible risk of non-OPEC+ production surprising on the upside given U.S. shale producers’ ability to boost drilling efficiency (mainly by drilling longer horizontal wells). The EIA is conservatively forecasting that U.S. crude oil production rises by only 300 kb/d this year (vs. +1.1 mb/d in 2023). The latest Dallas Fed Energy Survey showed that U.S. producers can on average profitably drill a new well with WTI at $64.

Separately, the discount of Western Canada Select (WCS)—the country’s key heavy oil blend—to WTI has narrowed significantly to less than US$15/bbl since early March, compared to an average of just over $20 in the prior six months. Part of the reason behind the decline is temporary (oil sands maintenance) and the other is structural (impending Trans Mountain pipeline expansion—TMX—which will make it cheaper to transport oil compared to rail). Looking ahead, we expect the WTI-WCS spread to settle in the $10.00-to-$12.50 range once the TMX becomes fully operational, which would be below its long-run average of $15.

It appears that the energy forecasting community has been caught off guard once again on natural gas this year. Benchmark Henry Hub plumbed new lows in March, posting the lowest monthly average since the early 1990s, at US$1.49/mmbtu. Moreover, it does not appear that prices are going to rebound rapidly given the current supply glut. Thus, we are revising down our forecast for Henry Hub to $2.25 for the whole of 2024 (previously $2.75) though we are maintaining our projection of $3.25 for 2025.

It perhaps goes without saying, but the price of natural gas has once again proven to be one of the commodities most heavily influenced by weather conditions. Simply put, a much warmer-than-expected winter across most of the Northern Hemisphere severely blunted natural gas demand. Meanwhile, the EIA recently reported that U.S. natural gas production climbed a hefty 4.0% in 2023, largely boosted by shale oil associated output, mainly in the Permian region of western Texas and eastern New Mexico. Thus, even though production is projected to remain essentially flat this year, the natural gas market will remain well supplied, especially given that storage is still at elevated levels in both the U.S. and Europe.

Looking further down the road, North American natural gas prices are expected to trend gradually upward from current depressed levels. Looking past the weather forecast for the coming summer, the longer-term outlook for global natural gas demand remains favourable given its role in the clean energy transition and the fact that Europe is still in the midst of an energy crisis. The latter explains why the European price benchmark—Title Transfer Facility (TTF)—remains above pre-Russian invasion levels, currently hovering around US$8.50/mmbtu, compared with a pre-pandemic average of $5.50 between 2015 and 2019. Meanwhile, the average front-month futures price for liquefied natural gas (LNG) cargoes in East Asia has been around US$9.50/mmbtu. Higher prices in Europe and Asia should continue to benefit North American producers due to the upcoming completion of new LNG export terminals (expected beginning in late 2024). This explains why the energy forecasting community still projects Henry Hub to move into the $3.00-to-$4.00 range in 2025.

Meanwhile, the price of AECO (Western Canada’s natural gas benchmark) has also suffered due to oversupply, but not to the same degree as Henry Hub. Thus, the Henry Hub-AECO spread has narrowed to roughly US$0.25/mmbtu, compared to a historical average of $1.00 (the cost of transportation to Henry Hub in Louisiana). The spread is likely to normalize later this year but could narrow significantly once LNG Canada is fully operational, perhaps in early 2025, as it will draw heavily on production from the Western Canadian Sedimentary Basin. LNG Canada should allow Canadian natural gas to tap higher prices overseas, particularly in Asia.

Metals: Metals markets are off to a strong start in the second quarter. For one, the outlook for global growth and commodity demand in general has brightened. There has been a notable uptick in industrial activity in recent months, with the global manufacturing PMI shifting back into expansionary territory in February for the first time since August 2022 and strengthening further in March. Drilling down, the U.S. factory PMI posted its first expansion since September 2022 and the U.S. leading indicator grew for the first time in two years.

China is also showing marginally more promising signs post-Lunar New Year as the official PMI poked back above 50 after five months in contraction. The property market remains very weak but at least appears close to bottoming. Notably, despite continued weakness in China’s construction sector, global steel consumption is rising at its fastest pace since mid-2021. While we still do not anticipate that Beijing will unleash a fiscal/monetary bazooka, the authorities are keen to get already-announced stimulus measures flowing more efficiently in order to meet the real GDP growth target of ‘around 5.0%’.

Alongside the revival in global manufacturing, financial market sentiment toward the entire commodities complex appears to be improving. Investors had been quite wary of commodities in late 2023/early 2024 even as other asset classes soared, concerned about China’s economic malaise, loss of momentum in the energy transition and monetary policy uncertainty. The tide is now turning as confidence mounts that inflation is coming under control notwithstanding geopolitical threats to supply chains, and the major central banks appear ready to start cutting rates later this year. The start of Spring has coincided with some dramatic moves in metals prices and our forecast changes reflect the shift in mood. Taking a wider view, pressure from higher input costs (e.g., labour, freight, ESG-related) across the mining industry and thin project pipelines are working to raise long-run prices.

Perhaps the biggest story in metals markets at present is around gold, which has soared to record highs in nominal terms. Besides the fact that rate cuts are creeping closer, the yellow metal has been bolstered by rising anxiety about elevated government debt loads in an election-heavy year, fears of escalation in the Ukraine and Gaza conflicts, and strong demand from China. Purchases by the People’s Bank of China and other mainly emerging-market central banks have been a driving force for gold for well over a year, but the recent buying frenzy among younger Chinese consumers has added another uplift to prices. This surge in interest by Chinese households, reflecting widespread anxiety about the economy, property market and financial system, may soon be augmented by the return of advanced economy macro asset allocators, particularly once rate cutting cycles commence. On the flip side, some retail investment demand will likely be deterred by current high prices. Keep in mind today’s gold price on an inflation-adjusted basis is still nearly US$1,000 off the 1980 peak. We have raised our average gold price forecast to US$2,100/oz in 2024 (previously $1,975) and $2,000 in 2025 (previously $1,900).

In tandem, we have lifted our expectations for silver, which has skyrocketed above the US$27/oz-mark to its highest levels since mid-2021. Unlike gold, silver has already seen ETF flows start to turn around after two years of outflows, and due to its dual investment-industrial value, it’s well positioned to benefit from both impending rate cuts and the recovery in global manufacturing. We now expect silver to average US$25.00/oz in 2024 (previously $23.25) and $24.50 in 2025 (previously $23.00).

The first week of April saw some big price spikes in base metals too, with copper, aluminum and zinc popping to their highest levels since January 2023, April 2023 and January 2024, respectively. Even nickel perked up, though it remains below levels seen last month. Copper in particular has been a leading beneficiary of the recent shift in sentiment around commodities. Compounding the financial support for prices, the red metal has faced some new supply constraints, leading to a wider projected deficit this year and narrower surpluses in 2025 and 2026. It’s well known that the current mine supply pipeline can’t match decarbonization-related demand over the medium-to-long term. Still, copper struggled to return to the US$4/lb-mark for nearly a year, until mid-March when a rare, albeit non-binding, agreement was reached to curtail output at Chinese smelters amid a shortage of copper concentrate. As a result, we’ve raised our copper price forecasts to US$4.00/lb on average in 2024 (previously $3.80) and $3.80 in 2025 (previously $3.65).

Aluminum has been a laggard among base metals, with prices trending mostly sideways since the middle of last year. However, it managed to break out of its recent range in the latest sentiment-fuelled rally, rising to levels above the cost curve but below the estimated long-run price. Nevertheless, supply and demand fundamentals remain muted, with China’s overcapacity in solar panel production set to weigh on aluminum demand this year. Thus, we do not expect recent price levels to be sustained and our forecasts remain unchanged at US$1.05/lb in 2024 and $1.08 in 2025.

Likewise, we have maintained our nickel forecasts at US$7.75/lb and $8.00 for this year and next, below the 90^th percentile of the cost curve. After plunging nearly 50% over the course of 2023, prices turned up slightly following supply cuts enacted earlier this year. But the market is still facing sizeable surpluses over the next three years and stocks on the LME and Shanghai Futures Exchange are rising. Moreover, sentiment toward the entire battery raw materials complex remains bearish. Even with solid medium-term demand prospects, further output cuts—namely, in Indonesia and China—are likely needed to reduce oversupply and keep a floor under prices.

Prices also seem to have found a floor in the zinc market thanks to recent supply curbs. A strong signal was provided by the large drop in the annual benchmark contract treatment charge (paid to smelters by miners to convert ore into zinc metal) agreed at the start of April. The record-low treatment charge in real terms points to a very tight concentrate market, and we now anticipate a slightly larger market deficit this year (before a return to surpluses from 2025). However, demand remains subdued and, similar to nickel, LME inventories have been rising. Overall, we have revised our zinc forecast lower in 2024 to US$1.15/lb (previously $1.20) and higher in 2025 to $1.18 (previously $1.15).

Forest Products: Lumber prices have trended moderately higher over the last quarter, pushing to the top of the US$350-$450/mbf range of the past year and a half as budding signs of optimism in U.S. homebuilding are offsetting lacklustre renovation activity and home centre demand. Supply-side pressures are also giving a lift to prices, as substantial production curtailments over the past year have pulled sawmill capacity utilization rates well below longer-term norms. Consequently, benchmark Western spruce-pine-fir (WSPF) prices have risen to an average of $445 in Q1/23, up from roughly $400 in the prior quarter and $385 a year ago.

Despite weaker tailwinds from the interest rate outlook (i.e., less aggressive easing), housing demand continues to find support from the resilient labour market. While growth in U.S. housing starts has been choppy over the past year, the mix has been constructive for lumber as gains in the more lumber-intensive single-family segment (i.e., detached houses) have more than offset the impact from a contraction in multis (i.e., condos). Meantime, the outlook for single-family residential construction is expected to remain relatively bright, reflected in the NAHB’s latest housing market survey, which showed that expectations for sales in the next six months improved to the highest level since June. The pick-up in housing market sentiment is largely being driven by a combination of (1) robust labour market conditions, (2) expectations that interest rates will eventually fall this year, and (3) the still-low level of resale homes available for sale, which continues to push would-be buyers to the new build market.

While repair and renovation activity—another key pillar of lumber demand—remains muted following the pandemic-era surge, the aging stock of U.S. housing is likely to necessitate increased activity in the years ahead, providing another leg of pricing support. As such, we believe WSPF will average US$450/mbf in 2024, close to current levels, before rising to an average of $480 next year, though upward pressure from a more complete housing recovery should be kept in check as new and previously curtailed production comes online.

Agriculture: Wheat prices, along with those of most other crops, have continued to trend lower and are now well below longer-run inflation-adjusted norms (setting aside a minor reprieve in March). Although the resilient economy has been incrementally positive for demand, increasingly abundant supply has kept the market under pressure. In Australia, the largest wheat exporter in the Southern Hemisphere, yields and production were weak this year due to generally dry growing conditions, but the harvest was better than previously feared. More importantly, growing conditions have improved significantly in the United States. In Kansas, the top wheat-producing state, the U.S. Drought Monitor (USDM) estimates that only 2% of acreage is experiencing severe drought, down from 19% at the beginning of the year and 66% last spring. Conditions have also improved across the rest of the U.S. plains, and while Western Canada is still struggling under an oppressive drought, global supply prospects have improved on balance. Overall, wheat prices are now expected to average US$5.80/bushel in 2024, down from $6.50 last year, but should recover to around $6.70 in 2025 if crop yields revert to trend.

Corn prices have also been under pressure after a solid crop in South America. Although production in Brazil took a small step back, it remained above recent norms and output in Argentina jumped to a record high. Conditions across much of the U.S. corn belt have also improved, and while drought is still prevalent in top-grower Iowa, its extent has narrowed significantly in the lead up to the planting season. With supply outpacing demand, real corn prices are now well below longer-term norms and the near-term outlook has been reduced accordingly. Corn prices are now expected to average around US$4.50/bushel in 2024, down from $5.70 last year, though rising oil prices should bolster ethanol-related demand and help put a floor under the market. Prices should trend gradually higher to around $5.20 in 2025.

Soybeans have continued to move largely in tandem with corn prices this year, reflecting a strong crop in South America and improving conditions in North America. As in the corn segment, soybean output in Brazil edged lower this year but remained historically strong, while production in Argentina roughly doubled (while remaining somewhat short of an all-time high). Paraguay, another top-five soybean exporter, also posted near-record production this year. North of the equator, better conditions across the U.S. Midwest have further bolstered supply prospects (including in top-producer Illinois), as have generally favourable conditions in Southern Ontario, a hub of soybean production in Canada. With the stronger near-term supply outlook, soybean prices are expected to average around US$11.90 in 2024, down from $14.20 last year, but should recover to around $12.40 in 2025 if global yields normalize.

Canola prices have trended lower in sympathy with the broader oilseed complex this year despite ongoing supply challenges. As in the wheat space, number-two exporter Australia turned out a lacklustre crop this year. Supply prospects in the Northern Hemisphere have also remained dim, with Western Canada (easily the world’s most important exporting region) weighed down by continued drought and Ukraine (the number-three exporter) still locked in conflict with Russia. However, all these supply challenges have been countered by greater abundance in the soybean space, which has provided an amply available substitute and undermined canola demand. As a result, canola prices are now expected to average US$470/tonne in 2024, down from $560 last year, before recovering to around $540 in 2025.

Hog prices have gained ground over the past few months, but the increase has been mostly seasonal and prices remain below longer-run norms after adjusting for inflation. The weaker pricing environment has largely reflected sluggish demand, with protein consumption under broad pressure from elevated inflation and interest rates. A rapid recovery in poultry production after earlier culling related to the avian influenza outbreak has also pulled demand away from pork. However, hog prices should continue to gain traction, as the difficult marketing environment has put the headcount of the North American herd into a steep decline; the U.S. Department of Agriculture expects it to fall to a seven-year low at the end of 2024. Continued scarcity in the cattle and beef space is another near-term positive. Overall, hog prices are expected to average US$86/cwt in 2024, up from $81 in 2023, and should improve further to around $93 in 2025 amid leaner supply.

Cattle prices reached yet another record in mid-March, though the market has taken a breather over the past few weeks. Finally, drought conditions previously afflicting much of U.S. cattle country have dissipated. In Texas, easily the top-producing state, the USDM estimates that only 10% of acreage is currently experiencing severe drought, down from 60% in the fall. And Oklahoma, the number-two state, is now entirely free of severe drought, down from around 30% last fall. Strong prices and better pasture conditions are helping to spur renewed herd expansion, but a fundamental aspect of livestock production is that in order to increase supply, you must first hold back animals for breeding, which can produce a final pop in prices. Tellingly, longer-dated futures prices have been in decline even as spot prices have hit new highs. Overall, the outlook for cattle prices is unchanged at US$175/cwt in 2024, up from $173 last year, and $155 in 2025 as herd expansion begins to increase marketable supply. However, the recent transmission of avian flu into cattle represents a potential risk to both demand and pricing.

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.