Two themes have dominated commodity markets at the turn of the year: the ongoing shortage of energy commodities and the global rise in cases of COVID-19. On the former, we think that shortages will start to ease meaningfully later this year, which will weigh on the prices of both energy commodities and other commodities with energy-intensive production processes.
However, we think the oil market may be dismissing the Omicron-related hit to demand a little too readily. After all, demand in the US has already softened significantly, and China has imposed new restrictions as part of its ‘zero-COVID’ strategy. As a result, the hit to oil demand may be larger and longer-lived than is currently priced into markets, which could lead to a sharp reversal in oil prices in the near term.
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