The chart below depicts the price of sugar. As you can see, prices today are lower than what they have been in many instances from 1970. And why are sugar prices so low? Because the people who produce sugar have become more productive at it, thus the unit cost of production has fallen, and producers can still make money.
So why has all the monetary stimulus not pushed up the price of sugar much higher, as is conventional thinking? The answer is because commodity prices are supply and demand driven.
When we look at gold, which is supposed to be a hedge against inflation and monetary expansion, it is where it was about 10 years ago. And if we look at platinum, it is less than half of where it was a little over a decade ago.
In fact, monetary expansion has been going on for many years now, and it has not affected inflation by much. In Japan where QE and other central banking tricks were invented, the problem has almost always been deflation, not inflation.
What all this means is yes, we might get persistent inflation, and many inflation components might not be transitory (wadges for example), but at the end of the day prices for commodities are supply side driven and not driven by monetary policy.
So, if one wants to play in the commodity space, analyzing supply and demand metrics for each commodity separately is warranted. Speculation also plays a role, but speculation almost always drives prices short term and not long term. Lumber is a recent example.
The bottom line is that commodities are affected very little, if at all, from central bank policies. At the end of the day, it is supply and demand metrics that shape pricing.
Insofar as financial assets, yes, they are affected by monetary policy. However please note that in this case it is the intent of central bank to try to affect financial assets. This because this category of assets has a direct impact on financial conditions and the economy.
Crude oil prices rise to pre-pandemic 11-month highs, gaining support from Saudi Arabia’s 1 million bpd supply cuts, together with the fall of the US dollar, the oil demand recovery bets, and the lower crude inventories.
The US-based WTI crude contract extended a recent rally towards $54 per barrel level on Wednesday morning, while the international Brent crude contract rose as high as $57.50 per barrel, prices not seen since February 2020 and before the start of the pandemic.
The rally in the crude oil contracts continued into the energy stocks and ETFs, offsetting the surging Covid-19 cases around the world. Energy names such as Exxon Mobil, Valero, Conoco, Phillips 66, and the leading energy ETF “USO” have gained more than 50% since the recent lows in October, with some of them recovering almost all the pandemic-led losses.
Saudi Arabia’s supply Cuts:
Energy investors increase their bullish bets on crude oil contracts, amid expectations that the supply cuts by OPEC members will continue into 2021.
Saudi Arabia which is the de-facto leader of the OPEC group, has surprised the energy market by unilaterally deciding to cut its crude output by an extra 1 million barrels per day for February and March. The Arab country decided to tighten its crude supplies until the end of Q1 2021, to prevent a glut in the global oil storages caused by the lower demand for petroleum products amid the resumed global lockdowns to curb the spread of the second Covid-19 wave.
Mass vaccinations increase the hopes for oil demand recovery:
Herd immunity would be an important price catalyst for the oil market. Investors have already started positioning their funds into energy stocks and ETFs, anticipating that a successful roll out of a vaccine around the world, would reduce the pandemic-led global demand losses for jet and gasoline fuels in 2021-2022.
Energy prices have also gained support from the prospects of a massive US fiscal stimulus that would recover the industrial activity and hence the demand for petroleum products.
The recent fall of the US dollar to 3-year lows makes the dollar-denominated crude oil products cheaper for buyers with foreign currencies.
Finally, oil prices received an extra boost on Tuesday night, after the API crude oil inventory report for the US dropped by 5.8 million barrels last week to around 484.5 million barrels, surpassing analyst’s expectations for a fall of 2.3 million barrels.
Precious Metals began 2021 with strong gains as a global surge of Covid cases and the prospects of tougher social restrictions drive investors into safe-haven metals.
The four precious metals that trade on the future exchanges have posted their best annual performance since 2010. Gold and Palladium finished 2020 with 25% in gains, Platinum added 10% while Silver had a stellar year with 50% in gains.
Gold and Palladium hit record highs last year, gaining support from the pandemic outbreak, the expansionary monetary and fiscal policies, and the weaker US dollar.
Institutional investors jumped into bullion to hedge their portfolios against inflation risk and currency devaluation caused by the massive stimulus measures and the lower US real yields.
The US dollar index plunged near 3-year lows, making dollar-denominated precious metals more attractive for investors with foreign currencies.
Finally, Silver, Platinum, and Palladium gained traction by their dual role as safe-haven metals and industrial metals amid the strong economic rebound in China and their extended usage in renewable technologies.
As we are leaving behind a volatile year in the financial markets, we expect that the current uptrend price momentum in the commodity sector will continue throughout most of 2021.
We remain optimistic about the overall commodity market picture for the next year and we see another 10%-20% upside from the current price levels as the global economy comes back online, and “cyclical” sectors will benefit from a post-pandemic reopening.
The broader rally in the growth-led commodity sectors such as energies and industrial metals could be supported from the global economic growth after the pandemic, driven by an effective rollout of Covid-19 vaccines around the world, the continued fiscal and monetary relief stimulus to help stem market collapse, and the rebound in the global manufacturing and construction activity.
The vaccination of at least 50% of the global population until May 2021, could help bring a conclusion to the deadly pandemic and reopen the global economy, increasing the demand for commodity products not only in Asia but also in Europe and North America for manufacturing and construction usage.
China, as the world’s biggest commodity consumer (50% of the global demand), was the first country that exited from the Covid-19 crisis and this helped them recover quicker than the rest of the world. The country will see its economic growth rates rebounding above pre-pandemic levels in 2021 amid the low rate of virus cases in the country and the unprecedented infrastructure stimulus from the Chinese government, benefiting the commodity sectors.
The commodity market witnessed a roller-coaster ride in 2020
What goes up must come down and then usually goes back up again, at least in the case of the commodity prices in 2020.
The COVID-19 pandemic has plunged the global economy into its deepest recession since World War II, causing huge losses (more than 50%) in the prices of the commodities. The sector experienced the worst demand shock (-30% y-y) in their history amid the impact on their demand from the social lockdowns to contain the spread of the virus.
However, the commodity prices have since rebounded with surprising strength, recovering all the pandemic-led damages, even as Covid-19 cases continue to soar in Europe and the USA.
Industrial Metals: Bullish outlook for 2021
- 12-month forecast for Copper prices to average near $4 per pound, up 10% from the current levels.
- It is highly probable that the prices of Copper will retest the existing record highs of $4.60 in the period Q4 2021-Q1 2022. In the case of a stronger-than-expected global economic recovery, it may rise 30% from its current levels.
We believe that the industrial metals will continue their reopening-led rally into 2021 amid the hopes for a vaccine-related global economic recovery, the robust industrial demand from China, and the massive “green” investments.
The prices of the base metals showed impressive resilience to the pandemic, outperforming everybody’s expectations during the second half of 2020, and rising above their pre-pandemic levels. Copper prices climbed at $3.60 per pound at mid-December, hitting their highest since 2013, the Aluminium prices surpassed the psychological level of $2.000 per tonne, while Iron ore has been on a stellar run amid robust Chinese demand and supply concerns over the recent trade tension between China and Australia (possible tariffs on iron ore exports).
“Doctor” Copper is widely traded as a proxy for global economic health since its demand depends on the global growth rates and the construction-industrial activity. The usage of Copper and Aluminium in automobiles and constructions has taken off in the last decade, thanks to their good conduct of electricity, recyclability, and lightweight.
Industrial metals could also benefit from climate technology developments in 2021. Politicians including the European Union leaders and the new President of the USA Joe Baiden have promised massive “green” investments to expand the renewable energy capacity and to reduce carbon emissions. Copper and Aluminium will see their demand skyrocket since they are key elements to some climate technologies such as electric vehicles and their batteries, wind turbines, and solar panels.
Finally, the growing supply risks could act as a major bullish price driver in 2021, as a structural underinvestment in copper mines is seen in the last decade, caused by the low prices and lack of cheap liquidity amid the financial recession. The supply risk could deteriorate if we combine the low Copper stockpiles around the world and the frequent supply disruptions from major mines in Chile and South America amid labor strikes.
Crude oil: Bullish outlook for 2021
- 12-month forecast for WTI and Brent crude oil prices to trade between $50-$55 and $55-$60 per barrel respectively, up by 10%-15% from the current levels.
- It is highly probable the WTI and Brent crude oil prices to retest the pre-pandemic levels of $60 and $70 per barrel respectively at the Q4 2021-Q1 2022 in case of geopolitical risk premium, up 25% from the current levels.
We believe that the crude oil prices will continue their upward momentum into 2021. Brent crude oil price moved back above $50 per barrel in mid-December 2020, for the first time since the start of the pandemic, while the WTI crude climbed at $48 per barrel, recovering most of their pandemic-led losses in Q2.
The demand and supply dynamics in the energy markets will play a significant role for the crude oil prices next year. The bullish price outlook will be supported by a limited increase in crude oil supply from OPEC and its allies led by Russia, and by the growing optimism that the start of the COVID-19 vaccine rollout will drive a recovery in the global fuel demand in 2021.
Energy prices will also benefit from the rebound in the economic activity in China and other Asian industrial countries after the pandemic, which consumes in total more than 30% of the global oil supply.
The progress with the mass Covid-19 vaccinations in 2021 will be a bullish event for oil prices as it will put the global economy on a path to sustained recovery, affecting the oil demand in the second half of next year.
With vaccines on the horizon, we expect a significant rebound in the travel and transportation activity around the world which has been restricted due the virus outbreak. People will resume traveling with planes, ships, cars, and trains for business and entertainment in the second half of 2021 propelling a robust recovery in the demand for jet, maritime, and gasoline fuels.
A weaker US dollar will be another positive catalyst for oil prices in 2021, as it is the de-facto currency accepted for global trade (most contracts priced in US dollars). The greenback has slipped to 2.5-year lows against most currencies (DXY-dollar index fell below 90), making the dollar-denominated petroleum products more attractive to energy importers with foreign currencies.
OPEC and its de-facto leader Saudi Arabia are major influencers for oil prices as they always manage to avoid large surpluses or deficits in the oil market. Therefore, the willingness of Saudi Arabia and its non-OPEC allies (led by Russia) to keep their crude production at low levels amid the higher supply from Libya and US shale producers and until the full recovery of the global demand in 2021-2022, will be another bullish catalyst for the oil prices in the long term.
The coronavirus-driven oil price crash combined with the market shift towards renewable energy investments, had forced the shale oil drilling companies to cut production and delay investments in offshore projects, creating the risk for a supply deficit in the long run, which is certainly bullish for energy prices.
On the negative side, we expect that the current rise of Covid-19 infections will continue damaging global demand growth. With virus cases surging to record highs across Europe and the USA, they have announced new lockdowns and travel restrictions to curb the spread, weighing on near-term gasoline and jet fuel consumption.
We believe that the current vaccine-led rally in the commodity sector will be the first leg of a structural bull market amid their improved fundamentals. Therefore, we expect the prices of the energies and industrial metals to go higher by another 10%-20% in 2021 from their current levels, while every price correction will become a buying opportunity for the investors.
Optimism over COVID-19 vaccine developments led investors to rotate their funds into the growth-related energy market, sending the prices of Brent and WTI crude oil contracts to 8-month highs.
Brent crude oil price moved back above $51 per barrel for the first time since the start of the pandemic in early March, while the WTI crude hovers at $48 per barrel.
The rally in oil prices has been supported by the growing optimism that the start of the COVID-19 vaccine rollout will drive a recovery in the global demand and consumption of petroleum products in 2021. The bullish trend has also backed from the willingness of OPEC and its non-OPEC allies (led by Russia) to keep their crude production at low levels until the full recovery of the global demand in 2021-2022.
The UK and USA were the first countries in the world to approve and roll-out this week the COVID-19 vaccine developed by Pfizer Inc and German partner BioNTech SE. Both countries have already started vaccinating thousands of health-essential workers and elderly people. Health officials have said that the vaccinations for groups that are not at a high risk (people aged under 65) expect to take place in the spring of 2021, to achieve herd immunity.
The energy sector receives additional support and demand from the growth momentum from Asia since the economic and industrial activity in China has already recovered to pre-Covid levels.
Hence, the massive fiscal and monetary stimulus around the world has also boosted energy prices. The US lawmakers are near to agree the $908 billion fiscal stimulus bill needed to prop up the US economic activity.
The European Central Bank-ECB together with the US Federal Reserve has promised to keep the interest rates at low for another 1-2 years, to support the global economies rebound from the financial and health recession.
Demand risks from fresh Covid-led lockdowns:
The recent vaccine-led rally in crude oil prices has lost some steam amid the resurgence of Covid-19 in the USA and Europe, affecting oil consumption in the near-term.
The rising virus infections has forced the local governments to apply tighter restrictions-lockdowns over the Christmas holidays to limit the spread of the virus.
Copper is a primary industrial metal and a leading indicator of global economic health, while Gold is the exact opposite, recognized as a traditional safe-haven asset and a store of value during economic recessions.
Vaccine euphoria has been the biggest driver for commodities in the final quarter of 2020, as the market expects that an effective vaccine could stimulate a global economic rebound next year.
Since the vaccine announcements last month, the commodity market has seen an investment rotation, with investors moving away from the safety of Gold and Silver and jumping into riskier metals such as Copper, Iron Ore, and Aluminium which could benefit from the recovery of the industrial activity.
The price of Copper climbed to the highest level since March 2013, touching 3.50 dollars per pound and getting support from the recovered industrial demand from China and supply disruptions from South America.
After touching a record high of 2.075 dollars per ounce on August 07, Gold has retreated by more than 10% on risk appetite and outflows from Gold ETFs. However, Gold holds the support level of 1.800 dollars per ounce, getting support from the lower US dollar and the risk for higher inflation from the massive fiscal and monetary policies.
Copper, aluminium, and other industrial metals have enjoyed impressive run-ups in the second half of 2020, driven by the expectations for a full global economic recovery in 2021, the “green” investments, and supply disruptions in South America. Copper is widely considered as the bellwether (leading indicator) of the global economy as its demand depends on global growth.
It is anticipated that an effective coronavirus vaccine together with a mass vaccination in the first half of 2021, could help bring an end to the pandemic and reopen the global economy, boosting the demand and consumption of industrial metals.
The rally has fuelled from the strong industrial demand from China and South Korea, the massive infrastructure spending from the global governments, the cheap liquidity in the money market, the potential for more US stimulus, the optimism over coronavirus vaccines, and the weaker US dollar.
The price of Copper has seen a tremendous rally during the last weeks, climbing to the highest level since March 2013, touching 3.50 per pound. The red metal has risen almost 25% this year and 60% from March lows, on pace for its best year since 2017. The prices of aluminium and iron ore have also recovered from their lows in April.
The US dollar which is the de facto global currency accepted for trade throughout the world has slipped to 2-year lows against most currencies, making the dollar-denominated metals such as base metals more attractive to buyers with foreign currencies.
The first lockdown measures applied in March-May to stop the spread of the virus had hit massively the manufacturing and construction activity around the world, sending the demand and the prices of the base metals to multi-year lows.
Strong demand from China:
Primary industrial metals such as Copper and Aluminium have seen their demand recovering at record levels during the second half of 2020, especially from China, which has historically been the world’s biggest commodity consumer (by 50% of the global demand). China was the first country that exited from the Covid-19 crisis, with its economic growth rates rebounding to pre-pandemic levels.
The base metals benefited from the unprecedented infrastructure stimulus from the Chinese government, allowing the strong restart of the activity of some local industries such as the construction, manufacturing, automotive, and solar-green energy sector.
The use of copper and aluminium in automobile and construction sectors has taken off in the last decade, thanks to their good conduct of electricity, recyclability, and lightweight. The demand for base metals is expected to skyrocket until 2050 amid the greater use of electric vehicles, wind turbines, solar panelling, and expansion of renewable energy capacity to cut carbon emissions.
There are some potential headwinds in the global market which could damage the recent euphoria in the metal market. The renewed trade tensions between China and the USA, which are the largest economies of the world, together with the no-deal Brexit and the concerns over the record-high Covid-19 infections, could harm the demand for industrial metals.
Crude oil has lost more than 10% in October, sending WTI and Brent oil prices to a four-month low on growing concerns that the second wave of the pandemic will prompt renewed global lockdowns which will damage the demand and consumption for auto and aviation fuels.
Energy prices dipped to their lowest since June on Thursday, with WTI crude falling to $35 per barrel while the international benchmark Brent crude dropped to $36.50 per barrel. On Wednesday, the EIA inventory report showed a greater-than-expected inventory build of 4.3 mil barrels compared to estimates of 1.5 mil barrels, adding more pressure to the falling oil prices.
Another negative catalyst for oil prices was the rise of the US dollar to fresh monthly highs, making the dollar-denominated crude oil more expensive for holders of other currencies.
Monthly oil losses as coronavirus concerns weigh:
Oil suffers a second straight month of declines and it is on track for the biggest monthly slide since March as the global COVID-19 cases rose by a single-day record of 500.000 on Thursday and hospitalizations broke higher again. US new cases topped at 90.000 yesterday, setting a daily record, with New York, New Jersey, and the Midwest states becoming the epicenters of the pandemic.
With COVID-19 cases surging across Europe, France and Germany announced new nationwide lockdowns to curb the spread. France will require people to stay at home for all but essential activities from October 30th, while Germany will shut bars, restaurants, and theatres from November 02 until the end of the month.
Oversupplied Market adds pressure on oil prices:
As lockdowns begin to bite on energy demand concerns across the US and Europe, the near-term supply outlook starts to deteriorate. Libya has started picking up oil production after the end of the deadly civil war last week. Libyan production is expected to reach 1 million barrels per day in November, almost double from levels earlier in October.
OPEC and its allies including Russia, plan on reducing production cuts on January 01 2021, from a current 7.7 million barrels per day (bpd) to about 5.7 million bpd. However, Saudi Arabia, the de facto leader of OPEC, and Russia are in favor of maintaining the group’s output reduction of about 7.7 million bpd currently into 2021 amid the perspectives for pandemic-related lower fuel demand and higher supply from Libya and US shale producers. OPEC+ is scheduled to hold a virtual policy meeting over Nov. 30 and Dec. 1 to discuss the current developments and decide for the production cuts.
US Elections and Petroleum industry:
Energy traders have started focusing on potential risks in the coming US election on November 03. In the case of a Biden administration, it will cause problems in the growing US Shale oil industry as Biden expressed many times to ban the Fracking drilling method which produces air and water pollution. Also, he will promote his “Green energy program” with more than $2 billion worth of investments in renewable energy technologies.
The precious metals started the new trading week with further losses as investors are losing their appetite for safe-haven assets amid the positive vaccine developments and the growing optimism for a quick vaccine-led global economic recovery in 2021. The appetite for riskier assets increased last week over news for a smooth White House transition which is decreasing the political uncertainty.
Gold dropped 0.50% to $1.775/oz on Monday, while Silver lost more than 2.50% to $22/oz while heading for a fourth monthly drop in a row since July. Both precious metals are posting their biggest monthly declines since November 2016, with Gold losing 6% so far and Silver following with 15% losses.
Investors are moving away from safe-haven assets and heading into risk-on assets such as stocks and crude oil that propelled the major US indices such as the industrial Dow Jones and the S&P 500 to hit fresh record highs above 36.000 and 3.600 levels, respectively.
Gold prices lost 5% last week, the most since the week of March 13, breaking below the key support level of $1.800/oz. Gold has lost nearly 15% or $300/oz from its August record high of $2.077/oz, while Silver has lost 25% or $8/oz from its August record high of $30/oz.
Gold has lost almost 10% since the first vaccine announcement from Moderna, while its near-term outlook is becoming bearish, especially if the price fall below $1.700/oz in the next weeks.
The yellow metal has lost its shine during the Q4 2020 despite the US dollar weakness, the pandemic-related stimulus plans which increase the inflation rates, and the outbreak of the second wave of the pandemic in the North Hemisphere (USA-EE).
The rotation away from the traditional safe-haven assets such as Gold, Silver, Treasuries, US dollar, Japanese Yen, and Swiss Franc was based on one fundamental catalyst: the drug-makers Moderna, Pfizer, and AstraZeneca announced in early November that their Covid-19 vaccine candidates had a surprising efficacy level up to 95% in their trials, sparking hopes for a strong global economic recovery in 2021.
In addition, the U.S. health authorities are to hold an emergency meeting tomorrow Tuesday to recommend that the Food and Drug Administration allow healthcare professionals and people in long-term care facilities to be the first two groups to get a coronavirus vaccine developed by the Pfizer Inc. and their German partner BioNTech, which is awaiting approval.
The precious metals and especially Gold, are considered the ideal hedge assets against inflation which is likely to increase from monetary and fiscal stimulus plans. Gold gained more than $600/oz in 2020 amid the strong monetary policies from the Federal Reserve and other global Central Banks to support the local economies from the pandemic. All Central Banks reduced their interest rates near zero, increased the liquidity in the market with cheap money, benefiting the non-yielding Gold and Silver.
However, investors are cautious about the outlook of bullions (gold-silver), as they believe that a vaccine-led economic rebound would allow Fed and other Central Banks to slow down or even halt their easing monetary policies-bond purchasing programs.