London - Watch out for the unexpected in commodities in
2017. Barclays said raw materials markets from energy to metals face the high
likelihood of disruptions, giving a laundry list of possible threats including
a default by Venezuela, riots in Chile and a trade war with China.
“The new politics of populism and protectionist trade
policies have the potential to disrupt global supply and demand assumptions for
various commodities,” analysts including Michael Cohen and Dane Davis wrote in
a January 5 report. “We see risks skewed to the upside in 2017, based on a high
likelihood of disruption risk.”
Commodities advanced in 2016 to post the first annual
gain since 2010 as energy markets rebounded and investors reacted to unexpected
political events including Donald Trump’s election win in the US and
Britain’s vote to quit the European Union. Barclays said that the markets will
surprise in some fashion this year, and the bank’s analysis illustrated the key
point that politics are likely to matter just as much as economics.
“Commodity market black swan events come in many forms,
and the market may take years or an instant to price them in,” the analysts
wrote, defining them as extreme events or dynamics that market participants
aren’t currently pricing in. “China, Russia, the Middle East and Turkey are
likely to surprise the commodity complex in 2017.”
Black swans
The bank listed more than dozen potential black swan
events, dividing them into threats to supply, such as a loss of oil output in
Venezuela after a default, and threats to demand, such as an unexpected
slowdown in China’s economy. There were also what it termed threats to transit,
with risks to the supply routes that are vital to the flow of raw materials,
such as the South China Sea.
Relations between the US and Iran came at the head of
Barclays’s list, with the bank seeing a potential escalation in rhetoric
between the two countries amid Trump’s stated desire to overturn the recent
nuclear agreement. The 2015 accord, signed between Iran and six powers
including the US, brought the lifting of key economic sanctions.
Read also: China goes on $26trn commodity binge
“It should come a no surprise that Trump’s pledge to
dismantle the Iran nuclear deal ranks as one of the most significantly bullish
risks towards oil markets this year,” it said. Still, “we think his approach
will moderate from campaign rhetoric.”
A possible default by Venezuela would cause creditors and
business partners to step back and banks to freeze accounts for Petroleos de
Venezuela SA, according to the report. The ensuing liquidity crunch could
prevent the state oil company from making payments to partners that are
necessary to facilitate day-to-day operations, hurting production.
Trade war
China also offered scope for concern, with potential for
both a slump in the pace of expansion in Asia’s top economy, hurting raw
materials demand, and for a trade war, according to the note. The US may
implement a tariff schedule designed to halt the flow of Chinese imports, the
bank said.
“Heading into 2017, the major black swan risk for
commodity demand is an unexpected economic downturn in any of the major
commodity consuming nations. Namely, investors will continue to focus on the
Chinese economy,” it said. While the bank’s sees solid growth for the country
in 2017, “shocks do happen, and China is not immune from the unforeseen.”
Among the other black swan threats listed, there’s
potential for riots in Chile after the 2017 general election results, with high
and real risks of disruptions to copper production, it said. In Europe, an
“aggressive” Russia could push further into Ukraine, hurting the country’s iron
ore output, it said.
BLOOMBERG