[ferro-alloys.com] Oil and iron ore prices have bounced over the past few days as the U.S. dollar has weakened, but can the rally last?

Maybe not says ANZ's senior commodity strategist Daniel Hynes, who is concerned about inventories weighing on prices:

Stubbornly higher inventories across several markets  continue to be a constraint on higher prices. This has been driven by a combination of rejuvenated supply and reluctance by consumers to restock amid the mixed economic outlook. Despite the rising optimism of economic growth around the world, growth in demand for many commodities is expected to remain relatively subdued. Therefore, the drawdown in inventory will be beholden to dynamics in the supply side. And with latent capacity sitting on the sidelines in many markets, supply is expected to be fairly price elastic. This circular reference may result in commodity prices remaining range bound until a circuit breaker can be found.

The problem for iron ore is rising supply from Chinese and Indian producers. Hynes notes that Chinese production of the steel making ingredient rose 15% year-on-year in the first quarter and that China's domestic production has been on the rise since prices bottomed in 2016.

Indian iron ore exports reached 22 million tonnes in 2016 but now they're on target to reach this amount fairly shortly given exports were up 218% year-on-year in May to 17 million tonnes.

Oil continues to be dogged by high inventories as well despite the extension of the production cuts by OPEC and Russia. OECD commercial inventories are around 3 billion barrels, though there has been a slight drawdown in the U.S., Japan and Europe. Here's Hynes again:

To draw OECD inventories down to the long-term average of 55 days of consumption, inventories would need to fall by approximately 410 million barrels. Even to get it within the typical band of 50-60 days, inventories would need to fall by over 200 million barrels. Until this occurs, oil prices may struggle to hold onto gains.

• [Editor:Wang Linyan]