How much further will iron ore prices rise?

Iron ore prices have been the surprise best performing commodity of 2016 so far, up over 80% from its December low of $38.30 per tonne to close to $70 per tonne at the start of this week. According to Credit Suisse the highest level of restocking for 15 years is the major cause of the rebound. However, the influx of private investors into this relatively nascent commodity market has increased the risk that prices overshoot, increasing the potential for a sharp pullback in coming weeks.

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So much attention has been focused on the supply side of this market, including reports of a wall of iron ore supply heading to China that the price rebound has come as a surprise. Iron ore prices could have much further to go in the short term with Credit Suisse particularly bullish about the near term prospects [our emphasis].

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Where is the catalyst for a sustained commodities bull market?

Commodity prices have had a poor few years since 2011. However, since the start of the past two months commodity prices have bounced with the Bloomberg commodity index up 15%. Is this just a ‘dead cat bounce’ or the start of something more sustained?

Its worth considering what has driven past rebounds in commodity prices and whether there are any similarities. What is clear is that every sustained, secular, long term bull market in commodities has resulted from a catalyst.

The industrialisation of the US in the late 19th century, and the German build-up prior to World War I, drove an upswing in commodity prices in the early 20th century. The next upswing came after World War II because of the rebuilding of Europe. More recently the industrialisation of Japan, and many other emerging Asian economies, also contributed to an upswing in commodity prices in the 1970s and the early 1980s.

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Oil price scenarios ahead of Doha meeting

Bank of America has published a report entitledĀ “Reduce risk heading into the Doha meeting” in which the bank details 4 possible scenarios coming out of the OPEC meeting this Sunday in Doha. The scenarios areĀ back to a price war, no output freeze, a soft output freeze, and a hard output freeze with some enforcement mechanism.

In our view, the last two scenarios would send Brent prices above $50/bbl in relatively short order, while the first two outcomes could lead to a price drop below $40/bbl.

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