Commodity prices rebound as oil searches for a bottom

February 12, 2015 - Weekly Pricing Pulse

The IHS Markit Materials Price Index (MPI) rose 3.0% last week, led by rebounds in oil, rubber, and chemical prices. Iron ore prices (now part of the MPI) also stabilized following a 14% slide over the preceding three weeks.

Ever since November's freefall, oil markets have sought a data point that would confirm a slowdown in US production growth and complement widespread announcements of layoffs, weak earnings, and scaled back capital expenditures. Markets seem to have found a compelling narrative in the falling weekly Baker Hughes rig count. Our caution is that the rig count is a single indicator, and has more implications for exploration than production. Plenty of other data suggest that the market is still struggling to reach a balance.

Macroeconomic data continue to highlight a challenging environment for commodities. This is exemplified by the People's Bank of China feeling compelled to ease conditions on banks ahead of Chinese New Year. Meanwhile, underwhelming global manufacturing PMIs were juxtaposed against a US labor report that beat expectations, supporting a midyear rate hike by the Federal Reserve. Rising yields on short-dated US Treasuries came in stark contrast to the situation in Europe, where yields on sovereign bonds along the maturity curve have fallen below zero in recent weeks.

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