Oil markets lead the rebound in exchange-traded commodities

May 14, 2015- Weekly Pricing Pulse

The IHS Markit Materials Price Index (MPI) increased 4.2% last week, driven by another broad increase in exchange-traded commodities. Oil, rubber, iron ore, and nonferrous metals again saw meaningful gains.

Oil prices touched a new high for the year last week, as data showed Chinese crude imports surged ahead of US imports in April. Crude oil markets seem poised for a correction, particularly in light of major increases in exports from Iraq and blockbuster production out of Russia and Saudi Arabia. A large backlog of drilled wells in North America (the so-called fracklog) will also help restrain prices. The bounce in oil prices has helped quell deflation fears, and is likely behind the recent selloff in bond markets.

In our view, the rebound in commodity prices appears overly optimistic based on incoming data, and suggests a belief that monetary policy will continue to prop up aggregate demand. To that effect, for a third time in six months, the People's Bank of China cut interest rates in a bid to ease credit conditions. The week ahead will shed further light on the state of the Chinese economy with fixed asset investment, retail sales and industrial production figures due to be released.

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