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Will commodities keep rising? | UBS United States of America

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We doubt OPEC’s plan to raise oil output will help ease the tightness in the market. In the near term, we expect China’s economic reopening and the US/Europe driving season to support oil prices. We see 10% upside in total returns for broad commodity indexes in the next six months.

Commodity prices have had volatile rally this year due to the Ukraine war, China lockdowns, and recession fears.

  • The Bloomberg Commodity Index is up 37% YTD as the war in Ukraine aggravated already tight supply in energy, agriculture and metals markets.
  • Oil hit a 14-yr high of USD 139/bbl when Russia invaded Ukraine, then fell on recession fears due to China lockdowns, Fed rate hikes, the US strategic reserves tap.

Higher targets and export curbs won’t ease pressure from structural imbalance, war, and weather risks.

  • The US’s release of strategic oil reserves sets up restocking pressure down the line, while OPEC’s higher production target is likely to be hampered by capacity limits.
  • Europe’s ban on Russian oil will likely add to the global structural imbalance.
  • Worsening agriculture conditions have amplified the disruption caused by the Ukraine-Russia war, as some countries curb food exports to protect domestic supply.

We continue to see higher commodity prices in the near term.

  • We see a further 10% upside in total returns for broad commodity indexes over the next six months, with Brent supported near USD 115/bbl through to June 2023.
  • We prefer an active commodity strategy, buying longer-dated oil contracts, and selling volatility in crude oil, copper, aluminum, platinum, corn, sugar, and live cattle.

Did you know?

  • Russia accounts for around 40% of the EU’s gas imports and 30% of its oil imports.
  • Russia also accounts for around 19% and 18% of global wheat and barley exports, respectively, while Ukraine makes up about 8%, 13%, and 46% of global wheat, corn, and sunflower oil exports.

Investment view

Commodity prices are likely to remain supported in the near term amid concerns over supply disruptions due to the war in Ukraine. We prefer an active commodity strategy. Investors with high-risk tolerance can consider long-dated oil contracts in Brent or selling Brent downside risks.

Main contributors – Patricia Lui, Giovanni Staunovo, Wayne Gordon

Content is a product of the Chief Investment Office (CIO).

Read original report – Will commodities keep rising?, 13 June 2022.

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