JOHANNESBURG (miningweekly.com) – After dropping to a decade low in August and September, Scotiabank's Commodity Price Index rallied 3.7% month-on-month in October, but remained 29.1% lower than a year ago.

An easing of concern over the slowdown in China's economy and a potential US Federal Reserve (Fed) interest rate hike contributed to the lift in commodity prices in October; however, these worries returned in November, with investment funds bidding down oil and base metal prices.

"The further slowdown in China's industrial activity to 5.6% year-over-year in October triggered renewed investment fund short-selling. Financial markets are also expecting the Fed to begin normalising US monetary policy in December, boosting an already high US dollar and pulling down dollar-denominated commodity prices,” Scotiabank economics and commodity market specialist VP Patricia Mohr said.

She added that base metal prices have receded again in November amid quiet negative sentiment over the outlook for China – “excessively so in our view”.

London Metal Exchange (LME) zinc prices also retreated to $0.73/lb, just above-average world break-even costs. However, prices appear to be 'oversold' relative to the fundamentals.

Zinc concentrates were currently in technical deficit, with estimated world demand above supply, and the mine cutbacks by diversified mining company Glencore and 16 Chinese smelters were expected to tighten market conditions further in 2016.

Further, Mohr pointed out that the London Bullion Market Association’s gold prices – currently at a low of $1 071/oz – had been trading up and down as financial market expectations for a Fed rate hike rose and fell.

“On a more positive note, gold prices should start to rally around 2017 as mine development deferral leads to declining world gold production. Also, a tightening in physical supplies should attract investors back to gold,” she highlighted.

Meanwhile, the bank noted that the widening discount on Western Canadian Select (WCS) heavy crude oil from Canada following the outage at BP's Whiting, Indiana refinery in August once more highlighted the substantial cost of relying on only one key export market for the vast bulk of Canadian crude.

Had oil pipeline capability been available to the British Columbia coast or Atlantic Canada, producers could have diverted crude to Asian markets, where price discounts on heavy crude similar to WCS Heavy were half US levels.

“The decision by the US to deny a permit for Keystone XL heightens the need to build oil export pipeline capability to "tidewater" for Canada's oil industry – a dominant and important part of the Canadian economy,” the bank said.

The Oil & Gas Index led the rebound in resource prices in October, up 14.4% since September, but also stayed 49.2% below a year ago. While WTI oil only edged up to $46.29 a barrel, the discounts off WTI for both Alberta light and heavy oil prices narrowed markedly.