Low and behold: Oil price forecasts for 2016 including one for $5 per barrel

Economist don’t forecast because they know, said J.K. Galbraith, they forecast because they’re asked. The same is true of oil price forecasters. Without commentary here is a selection of oil price forecasts from 2016 – some more accurate than others…

Jan – oil price predictions for 2016 including Libya’s prime minister predicting $5 per barrel

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Jan: Marc Faber – gold & oil price predictions

Jan: Prediction oil heading to $20 on dollar strength

May: David Rubenstein – oil Back to $70 Range Next Year

June: Boone Pickens – $50 to $60 oil by year end

July: Art Berman – the Coming Moonshot In Oil Prices

July: Oil price to fall – Marshall Gittler

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Materials Risk Dynamic Hedge: More on OPEC, Trump and the next industrial revolution

Chart of the week

Tight soybean market ‘leaves little margin for output error’ – UBS (Agrimoney)

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It’s the economy, stupid (Argus)

The role of expectations in commodity markets (Materials Risk)

Wheat Prices: How Low is Low? (Agricultural Economic Insights)

The Cobalt Pipeline (The Washington Post)

How Oil’s Fall Has Flummoxed Forecasters (WSJ)

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When will the weakest performing commodity market of 2016 hit bottom?

As we move into the final quarter of 2016 the weakest commodity futures markets of the year so far are those that put a price on meat; cattle (down 24%) and lean hogs (down 16%).

Back in November 2014 we highlighted how cattle prices had doubled since 2009 as high feed prices (partly the result of drought) had incentivised farmers to send their cattle to slaughter.

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Related article: How long will cattle price boom continue?

The  cattle cycle as its known suggests that inventory and production and by extension prices generally following predictable cycles, typically lasting around 10 to 12 years. All of which suggested that prices were close to a top. As it turned out November 2014 did mark the peak in the market with prices falling by 40% over the next two years.

There was a similar pattern with lean hog futures (which typically follows a much shorter 3 year hog cycle), albeit peaking five months earlier. They have since fallen by over 60%.

A combination of low feed prices (wheat in particular has also fallen sharply in 2016), rising beef production and hogs being sent for slaughter combined with weak export demand from China and Mexico (the devaluation of the peso threatens shipments for 40% of US ham).

Both markets represent just another examples of commodity cycles in action – high prices being the cure for high prices. But now as many other commodities rising sharply since the start of 2016 is it now the turn of the laggards – cattle and hogs – to catch-up?

Unlike most other commodities, cattle and hog futures have a very low correlation with the US dollar so the outlook for interest rates in December count for very little. But that’s not to say that macro factors are not important. Although feed prices (e.g. wheat and corn etc.) are still low, it could be argued that they are unlikely to go much lower. Meanwhile, on the demand side the peso could appreciate if Trump’s election prospects continue to deteriorate, boosting demand from Mexico.

Looking at live cattle futures prices stretching back to the 1980’s and considering the typical length of the cattle cycle, futures prices are probably only partly through their correction. And given the scale of the boom in prices relative to previous ones it may take much longer to work through (a lot like many other commodity markets following the super-cycle).

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Price data for lean hogs over the same period suggests that the current price level of around 50 may offer some support. However, given the prospect of continued weakness in cattle markets this is likely to weigh on the potential strength of any rebound in lean hog futures.

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Related article: Livestock prices: The top 10 most important drivers

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