Precious Metals

Sky-high commodity prices on borrowed time

Supply shortages have directly pushed up the prices of energy commodities and have indirectly raised prices of other commodities by boosting production costs. We think this will remain the case for at least another few months. But as we move away from winter in the Northern Hemisphere and these supply shortages ease, we forecast that commodity prices will fall across the board. In the oil market, a rise in both OPEC+ and US supply will be the main factor dragging prices lower, while subdued Chinese demand will be the key factor weighing on the prices of industrial metals. Meanwhile, we now expect the Fed to raise interest rates four times this year, which should mean that the recent move higher in real yields is sustained. Consequently, we are also negative on the outlook for the gold price.

26 January 2022

We think the fundamental backdrop for gold remains negative

Despite its surprising resilience over the past few weeks, we still think the price of gold will fall to $1,600/oz. by the end of 2022.

25 January 2022

Deteriorating risk appetite adds to price headwinds

Despite falls in the prices of most other risky assets, including equities, commodities held up well this week. The prices of equities and commodities tracked each other relatively closely throughout the pandemic, but they have diverged sharply since the start of 2022, with commodities continuing to make gains. However, we expect commodity prices to ease back over the course of the year on the back of slower growth in economic activity and improved supply. Looking ahead to next week, the main event will be the Fed meeting on Tuesday. We expect the Fed to issue a more hawkish statement, which could well include an explicit hint that the first interest rate hike will come in March. This should weigh on commodity prices, although arguably it is already priced into market expectations. Fed tightening is one of the factors feeding into our forecasts, which we will flesh out in more detail in our forthcoming Commodities Overview, Energy and Metals Outlooks.

21 January 2022
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A good start to a bad year for commodity prices

Most commodity prices increased this week, with coal prices leading the pack on the back of Indonesia’s ban on coal exports this month. That said, we don’t see commodity prices rising for much longer. Indeed, Chinese imports of most raw materials fell back in December, with an especially sharp decline in imports of industrial metals. We think this is a sign of things to come in 2022. Weaker Chinese growth is one of the main reasons why we expect most prices to fall this year. Looking ahead, prices of energy and energy-intensive commodities could well be swayed by tensions between Russia and Ukraine and its allies. If tensions continue to build, this could lead to sharp swings in the price of European natural gas in particular. High gas prices in Europe have already led to the curbing of some energy-intensive metals production, including aluminium and zinc. On the data front, China will release Q4 GDP figures on Monday, which we expect to show weaker y/y growth. OPEC will also publish its December oil supply numbers on Tuesday. We expect another month of below-target output.

Prices to come off the boil in 2022

After a stellar run in 2020-21, we expect the prices of most commodities to ease back this year as economic activity slows, notably in China, and supply bottlenecks start to ease. Drop-In: Neil Shearing will host an online panel of our senior economists to answer your questions and update on macro and markets this Thursday, 13th January (11:00 ET/16:00 GMT). Register for the latest on everything from Omicron to the Fed to our key calls for 2022. Registration here.

Omicron risks receding; energy still in short supply

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.

Demand fears giving way to supply concerns

The experience of South Africa with the Omicron variant seems to have allayed investors’ fears over commodity demand. Indeed, the net long position held by investors in the oil futures market has begun to rise, indicating an improvement in sentiment. Despite softening oil demand in the US, any expectations of weaker energy demand owing to Omicron have been outweighed by supply concerns, following hits to oil output from pipeline outages in Libya and civil unrest in Kazakhstan. These latest shocks (which add to an already-large list of shocks) will support prices for now, which will mean that the cost of production of other energy-intensive commodities will remain high. With virus fears moved towards the backburner, attention will probably focus further on the supply picture in the coming weeks. China’s trade data for December will be released on Friday, which we expect to show that weak activity in the construction sector led to a softening in commodity imports.

Commodity supply shortages set to ease in 2022

In this Commodities Watch, we take a closer look at commodity markets where supply shortages during the pandemic have been most severe and, consequently, where price increases have been most extreme. While there isn’t a single cause of these shortages, there is one common theme: in all cases, prices now appear to be close to a peak (if they haven’t peaked already). That said, low stocks will mean that these markets remain vulnerable to a renewed surge in prices for some time yet.

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