In our central scenario, we see prices of commodities staying volatile in the near term before stabilizing later in the year. Amid the risk of supply disruptions, we think broad commodities can be an effective geopolitical hedge for portfolios. Longer term, tight market fundamentals and structural drivers like the net-zero carbon transition should be supportive of the asset class.
Commodity prices have been volatile in the weeks since Russia’s invasion of Ukraine.
- Brent crude oil reached USD 139/bbl on 7 March, its highest level since 2008 amid concerns about supply disruption.
- As of 19 April, Brent is trading at USD 111/bbl— up 8.7% from last week and 43% year-to-date.
Tapping strategic reserves can ease, but not fix, structural imbalances.
- Tapping the US Strategic Petroleum Reserve will ease near-term supply pressure, but sets up restocking pressure down the line.
- Energy sanctions announced to date are consistent with a gradual removal of Russia from US and European energy supply chains.
- The reduction in Russian oil exports and production will tighten global supplies.
Beyond the current geopolitical factors, we think longterm drivers are supportive of commodities.
- Amid the risk of further supply disruptions, broad commodities can be an effective geopolitical hedge for portfolios.
- Fundamentals for the energy sector and industrial metals look supportive: Spare capacity is dwindling, visible inventories are falling, and markets are in deficit.
- The structural trend toward net-zero carbon is likely to mean generally higher commodity prices, with greater fluctuations.
Did you know?
- Russia accounts for around 40% of the European Union’s gas imports and 30% of its oil imports, and is the world’s largest wheat supplier. Ukraine is a material exporter of corn, wheat, and oilseeds.
- We now see Brent crude trading close to USD 115/bbl through the year.
- To navigate the twists and turns of commodity markets in 2022, an actively managed approach is advised.
Investment view
Commodity prices are likely to remain volatile in the near term amid uncertainty over the supply outlook. The asset class can be an effective geopolitical hedge in portfolios, and we think the medium-term outlook for commodities is supported by tight market fundamentals and structural trends like the energy transition.
Main contributors- Vincent Heaney, Giovanni Staunovo, Wayne Gordon, Alison Parums
Read original report – What’s next for commodities?, 19 April 2022.
