What happens in the resource sector is a great barometer for the world economy. Looking at where commodities prices are headed can even help us forecast what state the world economy will be in over the coming months.
Let's look at the major commodities, how they performed in Q1, and where they are headed in Q2 2015...
Commodities Prices: Looking Back at Q1 and Ahead to Q2
Commodities 2015: Oil Prices
Oil is still the biggest story in commodities prices right now. In June 2014, West Texas Intermediate crude oil prices peaked at $115/bbl. But throughout Q3 and Q4, oil prices declined rapidly as OPEC, led by the Saudis, slashed prices to retain market share.
By the time 2015 started, WTI was priced at $52.50, falling 55% from last summer's peak. Shale oil production was outpacing demand. Oil then moved within a price range of roughly $46 to $55 over Q1.
Lower prices will start having an effect on production in Q2. Reduced shale oil production in North America is already kicking in. The U.S. Energy Information Administration announced yesterday (Tuesday) it expects shale production in May of 4.98 million barrels per day, a decline of roughly 45,000 barrels from April. In addition, Saudi Arabia has begun raising May oil prices to Asian clients.
Look for these two trends to continue over the next three months. With that in mind, we could see oil end Q2 near $60 per barrel.
Commodities 2015: Natural Gas Prices
Natural gas prices have behaved similar to oil prices since last summer and in particular over Q1.
Prices started the year at $2.95 but ended the quarter at $2.64, losing 10.5%. April is when injection season starts, a time when restocking takes place after higher winter consumption.
Natural gas is currently below the five-year average inventories, which is bullish. But much will depend on the weather. An unusually warm spring and early summer will spur consumption and boost prices. Below-normal temperatures will dampen prices.
Given my expectations for higher oil prices and a forecast for higher than normal temperature in the western United States this spring, I think we could see natural gas prices end Q2 around $3.00, or about 14% higher.
Longer term, I'm bullish on natural gas given Mexico's appetite for U.S. exports, which has been gaining steam. This factor should get an even bigger boost in the next couple years as pipeline capacity ramps up, sending even more production southwards.
Now, let's look at where precious metals are headed in Q2 - starting with gold...
Commodities 2015: Gold Prices
Gold started Q1 off with a bang. Gold prices rose from $1,170 to $1,300 in the first two and a half weeks of January, for a stunning 11% gain.
But gold was unable to sustain that momentum, giving back all those gains and bottoming at $1,150 by mid-March. Gold prices ended the quarter at $1,190, eking out a 1.7% gain.
The shocking Swiss franc depeg from the euro and January's Greek elections spurred gold higher. But the U.S. dollar's continued strength and peak in mid-March coincided with gold's $1,150 bottom.
I expect the first interest rate hike by the U.S. Federal Reserve to happen later rather than sooner, perhaps as late at 2016.
I also think gold has sustained so much negative sentiment that it may well have bottomed. That doesn't mean it will shoot higher, but it could mean we'll start to see gradual price increases that hold up.
I also believe the U.S. Dollar Index may have peaked, at least for a while. That should also be supportive of higher gold prices. I predict we'll see gold finish Q2 in the $1,250 to $1,270 range.
Commodities 2015: Silver Prices
Silver typically follows gold and magnifies its price movement. So its behavior is overwhelmingly determined by gold's. And that was the case yet again in Q1.
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Silver followed gold's direction - up markedly in January, then down into mid-March as the dollar peaked. But Q1 silver prices outpaced gold's gains by about three to one, clocking an impressive 5.4% gain.
The relationship between the metals as measured by the gold/silver ratio is worth examining. It was on a long climb up from 58 in August 2013 to its peak of 76 in December 2014, as silver fell more than gold.
Its long-term average since 2001 is about 55. As it reverts to that level, silver will keep outpacing gold.
I believe silver will follow gold higher through to the end of Q2. My target is for it to reach the $18 to $18.50 range.
Commodities 2015: Copper Prices
Finally, let's look at copper.
The ubiquitous metal faced the same strengthening U.S. dollar headwind, topping in early July last year, and then steadily working its way lower.
Copper began 2015 at $2.90, then dramatically bottomed in late January near $2.45. It then started its recent rise to end Q1 at $2.75, for a loss of 5.2%.
As a mostly industrial metal, its fortunes depend a lot on infrastructure, construction, and the health of the global economy. Stimulus out of Europe, China, Japan, and a number of other areas may help. But I think the effects will be muted.
For that reason, I expect only a little further strength by the end of Q2, when I think copper could break even year to date at around $2.90.
| Commodity | Q1 Start Price | Q1 End Price | % Gain/Loss | Q2 End Price (Forecast) |
| Oil WTI | $52.50 | $47.50 | -10.5% | $60.00 |
| Natural gas Henry Hub | $2.95 | $2.64 | -10.5% | $3.00 |
| Gold | $1,170 | $1,190 | +1.7% | $1,250 - $1,270 |
| Silver | $15.75 | $16.60 | +5.4% | $18 - $18.50 |
| Copper | $2.90 | $2.75 | -5.2% | $2.90 |
There's one more factor to consider as we look at where commodities prices are headed...
How the U.S. Dollar Will Affect Commodities Prices in Q2
All of these commodities are priced in U.S. dollars, and so the overall effect of the currency must be evaluated.
It's too early to say if the dollar's rally is finished. The Fed's promised rate hike seems to have buoyed the dollar. But interestingly, some of these commodities, like oil, gold, and silver, have managed to display strength even as the dollar moved sideways at a sustained high level.
If the U.S. dollar continues to weaken over Q2, odds are good that will be supportive of commodities prices.
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