COMMODITY FORECAST: MAPPING THE MARKET
A LOOK AT HOW GOLD, OIL AND INDUSTRIAL METALS ARE EXPECTED TO FARE THIS YEAR
Commodities were one of the best performing asset classes of 2021, with the Bloomberg Commodity Index gaining more than 25 per cent for the year. Demand rebounding after the pandemic, supply chain disruptions, government stimulus and adverse weather have all contributed to market tightness last year, driving commodity prices higher.
Heading into the year, supply chain disruptions are anticipated to improve, while the commodity balances will appear less tight than in 2021. This should ideally result in lower prices from current levels. Nonetheless, prices are expected to remain above long-term averages. Besides, there will be a number of macro headwinds, which will likely limit further upside for the commodities complex. Firstly, global central banks are set to tighten monetary policy over the course of 2022, which will increase the pressure on yields and the dollar. Since commodities are dollar-denominated and are nonyielding assets, this scenario will cap the upside.
The Chinese property market is another lingering concern. If there is a further slowdown, it is likely to put downward pressure on the complex, particularly metals. Nevertheless, the likelihood of this happening looks less likely as China seems to be becoming a little more accommodating when it comes to policy.
Fundamental backdrop remains favourable for oil
Oil is set to see strong supply growth from non-OPEC nations, which coupled with a further easing in OPEC+ supply cuts, should push the global oil market back into surplus. China and the US are trying to put political pressure on global oil markets by releasing oil from their strategic reserves. Nevertheless, OPEC leader Saudi Arabia’s comments suggest that the OPEC members are unlikely to succumb to pressure tactics. Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman commented that it was up to the US to release more supply from strategic petroleum reserves. However, whether or not the prices will correct on any more reserve supply releases, will depend on the magnitude of reserve replenishment, and how top oil importers exert pressure on OPEC.
From a fundamental perspective, oil seems to be bullish as demand for 2022 could hit a record high on the back of recovering air travel. The postpandemic demand outstrips supply, and it could go even higher as countries open up further. OECD inventories are likely to fall by the summer to their lowest levels since 2000. Moreover, OPEC+ spare capacity is also set to drop to historically low levels of about 1.2 million barrels per day (bpd). This sets a bullish backdrop for oil.
Heading into the year, supply chain disruptions are anticipated to improve, while the commodity balances will appear less tight than in 2021. This should ideally result in lower prices from current levels”