Lumber price: here’s why BofA forecasts a summer rally

Lumber price is up by 2.25% at $621.9. It is trading steadily above $600 after dropping to a 9-month low of $495.1. BofA’s outlook shows that the price may record a summer rally in the coming weeks.

Probable rally?

According to Bank of America (BofA), lumber price is likely to rally in late summer. In a note released on Tuesday, the bank’s research team, led by analyst George Staphos stated, “A better-than-expected demand outlook would prompt an inventory build and could spark a large move in pricing.”

To begin with, the bank has cited natural calamities – wildfires and hurricanes – as one of the reasons behind its bullish outlook on lumber price. Last week, Canada’s province of British Columbia declared a state of emergency following the rise in wildfires. Subsequently, Canfor Corporation, the leading producer of building products in the region, has condensed output by about 115 million board feet.

At the same time, the National Oceanic & Atmospheric Administration has predicted a highly active season of hurricane in the current year. Unfavourable weather conditions may impact operations at sawmills and logistics in the southern region of the United States. Besides, demand is likely to rise as homeowners board up their structures in preparation of the hurricanes. Destruction by the storms may further heighten rebuilding efforts, thus boosting lumber price.    

BofA has also highlighted the likelihood for lumber price to bounce off the producers’ cash cost. Currently, the cost curve’s upper end in Canada is about $500 to $600 per 1,000 board feet. This matches the level where lumber price is at the moment. According to analysts at BofA, it is unlikely that the prices will drop significantly below this level since it would result in producers reducing supply. As such, a rise in demand is set to boost the prices above the producers’ cash cost.   

Lumber price technical outlook

Lumber price remains on a downtrend, which has been the case since hitting its record high of 1,734.1 in mid-May. Since then, it has dropped by about 65.47%. Two weeks ago, it erased the gains it had made earlier in the current year by dropping past January’s low of 631.0 to trade at a 9-month low at 495.1. It has since rebounded to the crucial level of 600. At the time of writing, it was up by 2.25% at 621.9. On a two-hour chart, it is trading along the 25-day EMA and slightly below the 50-day EMA with an RSI of 50.

In the near term, I expect lumber price to trade within a tight range of between last week’s high of 702.1 and this week’s low of 542.3. At its current level, the outlook is rather neutral. If more buyers enter the market, the price is likely to surge past the horizontal channel’s upper border to the resistance level at 852.2. A move above that point will clear the path to the psychological level of 1,000. On the flip side, a bearish breakout will likely place the support level at 500.