8 December 2015 World Outlook 2016: Managing with less liquidity Commodities: Supply adjustment is well underway for oil. not so for the metals By next year, we expect that OPEC will have engineered one of the sharpest historical declines in US production. A modelled contraction of at least 650 kb/d would be comparable with the 600 kb/d fall in 1989 which occurred in the context of an extended supply slowdown beginning after prices fell in 1986. • Our modelling indicates that while the first half of next year will remain oversupplied and risks remain to the downside during this period, the steady contraction of US supply along with trend rates of demand growth will lead to a more normalised market balance in 2017. • We believe that the current recovery period in oil prices will be one of the slowest and most extended on record, owing partly to further growth in OPEC supply to 2017 when modelled OPEC production of 32.4 mmb/d matches our calculated call on OPEC (i.e., the volume required from OPEC to balance demand). • Oil at a Brent price of USD45/bbl is below the 2016 national budget breakeven level for all of the ten countries assessed by our EMEA macro team, and also below the breakevens for fourteen countries assessed by the IMF apart from Turkmenistan (with a breakeven of USD42.7/bbl). • However, budget breakevens may continue to fall as a result of coping strategies in the form of spending cuts and currency devaluation while government bond issuance and asset sales help to fund deficits, thus making another year of low prices survivable. • We maintain our bearish outlook for gold. We believe the first step in US policy normalisation will now more likely than not take place this month. Moreover, further tightening in 2016 is long overdue and a full pricing-in of this risk has yet to unfold. Additionally, further 6% strength in the trade- weighted US dollar confirms the downside scenario for gold. • For industrial metals, the b