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November 11, 2016 - Weekly Pricing Pulse
Despite positive economic data, oil markets continue to slide on growing skepticism around OPEC action.
The IHS Materials Price Index (MPI) was flat this week, a pause in the declining trend that first emerged in late August. A sharp 7.8% drop in the oil sub-index was largely offset by strong gains in metals, with the ferrous and nonferrous metals indexes up 8.6% and 2.9%, respectively.
Despite the overall MPI remaining level, commodity markets experienced a volatile week. Oil continues to suffer downward pressure as October's rally disappears. Brent crude has slipped significantly below $50/barrel, with last week's performance the worst since January. A jump in US inventory and persistent skepticism that OPEC can enact a production cut have undercut prices. Ferrous metal gains helped nullify oil's fall in the MPI, with large increases in iron ore prices driving the sub-index up. Iron ore is now following metallurgical coal higher, hitting a six-month high at around $65 per dry metric ton unit as Chinese buyers sought higher grade seaborne material.
Last week saw a slew of positive economic data, with the Markit Manufacturing Purchasing Managers' Indexes showing almost uniform gains globally, which underpinned gains in industrial metals. In the United States, third-quarter GDP data were surprisingly strong, with October's employment report once again solid, firming expectations for a year-end increase in US interest rates. Despite the solid economic data, we reaffirm our expectation that the MPI will remain fairly benign over the coming weeks, slipping slightly as commodity prices begin to show seasonal weakness and volatility emerges in the run-up to an anticipated year-end increase in US interest rates.