In the near term, we expect OPEC’s limited spare capacity, a pickup in global travel, and China’s economic recovery to support oil prices. We also expect the war in Ukraine and weather-related factors to keep grain prices firm. We see around 15% upside in total returns for broad commodity indexes in the next six months, reports UBS.
Commodity markets have been volatile
- After soaring 42% as the war in Ukraine aggravated a tight post-pandemic global supply, the Bloomberg Commodity Index snapped a six-month rally in June.
- The index rebounded 4% in July but fell again in the first week of August, sliding over 3% as recession fears outweighed supply concerns.
Broader uptrend in commodities to be largely intact
- While OECD countries’ oil demand has been lackluster lately, it has been strong in non-OECD countries, especially China, where we believe the economic recovery is on track, as well as India and Mexico.
- Tightness in energy supply looks set to worsen with global inventories at multi-year lows, OPEC’s limited capacity, Europe’s ban on Russian oil, and Russia’s reduced gas flows to Europe.
- Poor weather conditions like La Niña have amplified the disruption caused by the Russia-Ukraine war.
Expecting commodity prices to rise in the near term
- We see another 15% upside in broad commodity indices over the next six months. We forecast Brent crude oil will rise to USD 130/bbl by end-September and remain elevated at around USD 125/bbl for the next three quarters.
- In the interim, we also recommend selling the downside price risks of select agricultural commodities, particularly those tied to energy markets like sugar.
Commodity prices are likely to remain supported in the near term by China’s economic reopening and concerns over supply disruptions due to the war in Ukraine. We prefer an active commodity strategy. Investors with a high risk tolerance can consider long-dated oil contracts in Brent or selling Brent downside risks.
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