The Bloomberg Commodities Index fell 5.3% in the two weeks leading up to 17 March as turmoil in the US and European banking sectors led to risk-aversion across most global asset classes. The sell-off was particularly acute in the energy sector, where oil prices suffered from mass liquidation by financial investors. As a result, the BCOM is headed for its fourth monthly decline.
But we believe accelerating growth in China, persistent production challenges, low inventories, and ongoing weather risks remain the key factors supporting higher commodity prices over the longer term. We forecast total returns of around 20% over the next 12 months for commodities.
Although oil prices are likely to remain volatile near term, we retain a positive outlook.
Brent crude prices have dropped over 10% so far this month following the collapse of SVB and Signature Bank a fortnight ago. We think that oil prices may remain volatile in the near term as the financial turmoil continues to evolve.
In the last two weeks, non-commercial accounts have slashed their net longs in aggregate Brent and WTI futures and options holdings to their lowest level since 2011. The position unwinding was driven by a reduction in longs and an increase in shorts—the latter we believe might be due to financial institutions seeking to protect against the downside price risks of options they had sold to oil producers.
But we still expect rising Chinese crude imports and lower Russian production to lift prices over the coming quarters. Chinese crude imports have been very strong so far in March although the pledged production cut by Russia has not led to a visible drop in Russian crude and refined product exports. That said, the US saw a large drop in refined product inventories last week. We expect more of such data to be supportive of prices in the coming months.
We have lifted gold to most preferred due to its haven traits.
Gold’s safe-haven qualities have shone brightly during the recent market volatility, which saw investors piling into the yellow metal as gold ETF holdings started to rise. Furthermore, central banks have continued to diversify into gold after a record year in 2022. Official purchases totaled nearly 80 metric tons in January after more than 1,100 metric tons purchased across all of last year.
Base metals to benefit from a recovery in demand, especially from China.
We think that much of the price trajectory in base metals will depend on the speed of Chinese inventory drawdowns from 2Q onwards. So far, inventory dynamics at LME warehouses remain supportive of prices, while tradable commodity inventories are at structurally low levels and highly concentrated in China. Meanwhile, housing sector data in China are showing signs of stabilization in line with the rest of the economy. As these dynamics develop, we forecast higher prices for base metals by year-end.
Agriculture prices to remain supported by climate and geopolitical risks.
Our benchmark agricultural price index is flat year-to-date, with an extension of the Black Sea grain deal the latest event to undermine prices. But the production outlook in the US and Europe remains unclear, and the probability of an El Niño event by year-end has risen to 60%. Historically, this event has negatively affected yields for corn, rice, and wheat.
So, we remain most preferred on commodities. While investors can take both direct and indirect exposure, we currently prefer the direct approach. We see opportunities in longer-dated oil contracts. Downward-sloping curves offer roll gains, while higher yields have improved returns on cash collateral. Separately, given the unique characteristics and drivers of individual commodities and structural commodity trends, we recommend an actively managed strategy to help boost returns relative to risk.