Citi: Q2 Commodities Outlook Hinges On Oil

In a new report, analysts at Citi Research looked at the slumping commodity market and updated their forecast for 2Q15 and beyond. One of the topics that analysts addressed is whether or not the worst of the slump is over or if there is downside remaining in oil and other commodities.

Prices Heading Lower?

Analysts believe that many commodities have found near-term support at current levels, but that this support could be short-lived. The center of the collapse in commodity prices is crude oil, and Citi analysts to not feel that crude oil has bottomed just yet.

According to the report, demand for crude oil will be seasonably low in Q2 due to refinery turnarounds. In addition, investment outflows from physically-backed crude oil ETFs will likely push crude prices lower.

International Weakness

General global economic weakness will continue to weigh on commodities in Q2. Analysts point out that supply levels of most commodities are robust and demand is soft. China’s cooling economy is a particular headwind for commodity prices, as it has provided much of the world’s commodity demand growth in recent years.

Geopolitical Risks

Low commodity prices are devastating for many governments around the world. Many oil-producing countries have seen their government revenues cut in half in the past year.

Analysts see the greatest political disruption risk in the Middle East, with conflicts already happening in Syria, Iraq and Yemen. Analysts believe that low oil prices and Middle East tensions put pressure on an already-strained Iran-Saudi relationship.

Oil Outlook

Citi sees a downside risk as low as $20/Bbl for oil in Q2. Shares of the United States Oil Fund ETF (NYSE: USO) are down nearly 50 percent in the past year but have traded up nearly 13 percent in the past month.