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October 7, 2016 - Weekly Pricing Pulse
OPEC's change of stance will improve the MPI's short-term prospects, and promises additional volatility ahead of the cartel’s November meeting.
Commodity markets were shaken last week by OPEC's announcement that the cartel will be looking at production cuts. Notwithstanding this surprise, our IHS Markit Materials Price Index (MPI) still lost ground for the second week in a row. The MPI dropped 1.2%, pressured most by continuing weakness in chemicals. Oil did go some way toward offsetting this decline, coming through with a 2.6% increase. Other gains were seen in nonferrous metals (up 2.2%), lumber (up 2.9%), and bulk freight (up a blistering 6.6%). Charter rates for bulk freight have now risen for six consecutive weeks.
Despite OPEC’s announcement that it intends to cut production by 0.75 million barrels per day (MMb/d), crucial details remained outstanding. First, the distribution of cuts remains a sensitive issue, especially given historic problems with members overproducing. Second, OPEC’s discipline may come under pressure if higher prices stimulate US production. Finally, quotas won’t be decided until November, which means that any action is still a few weeks away. Even so, the effect on oil prices was quite dramatic, with Brent climbing from $46/barrel to above $50/barrel by the early part of this week.
Other data were also positive for commodities. September's purchasing managers' index (PMI) data have shown some improvement in global manufacturing activity, with the key Caixin China PMI edging up to 50.1, indicating some growth. Looking ahead, movements in the MPI will be linked to chemicals, where we expect further price declines because of a seasonal drop in natural gas prices and the return of some capacity. However, oil will certainly be a point of volatility into November, as the market tries to anticipate the concrete details of OPEC’s recent "public" hawkishness.