Barclays flags ‘black swan threats’ to commodities

A visitor touches a 12.5 kilo gold bar during a preview day at the German Bundesbank Money Museum in Frankfurt

A visitor touches a 12.5 kilo gold bar during a preview day at the German Bundesbank Money Museum in Frankfurt

Published Jan 5, 2017

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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

 

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