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April 22, 2016 - Weekly Pricing Pulse
Post- Doha downward volatility is possible for the coming week; buyers should tactically wait for price declines.
The IHS Materials Price Index (MPI) bounced back last week, posting a 2.8% gain. A main driver was oil, which rallied by 11.5% leading up to the Doha meeting as expectations increasingly priced in a production freeze. Rising steel scrap and iron ore prices also added some upward momentum. Lastly, dry bulk freight rates appear to be stabilizing; they are now up about 10% since early 2016.
Despite bullish sentiment, on Sunday oil markets were shocked by the collapse of talks in Doha, with major producers failing to agree on any production freeze (IHS never expected a workable agreement). Early week trends showed oil prices retreating on the news, a downward move that will prove to be temporary. We still see oil markets moving to balance later this year, with prices being supported as a result, and additional firmness could come this week from the Kuwait strike that is curtailing the country's output.
Apart from oil, new Chinese economic figures also provided some lift to commodity markets last week. First-quarter GDP grew by 6.7% year on year (y/y), largely in line with overall expectations. Additionally, the 6.8% y/y increase in industrial production for March showed a nice improvement from February. Elsewhere, the two-tiered nature of the US economy has been evident in recent data. Service sectors are doing well, but manufacturing is struggling, as seen by soft US industrial production figures last week. Nonetheless, relatively low numbers in unemployment insurance claims also came through, further signaling US economic resilience. Taken together, the data show fundamentals slowly improving, exactly the kind of incoming data that are needed to provide real support to the MPI rally of the past 12 weeks.