But we remain most preferred on this asset class. We continue to expect commodities prices to trend higher in 2023 and beyond, buoyed by China’s recovery, persistent production challenges, low inventories, and ongoing weather risks. We forecast total returns of around 20% for the broad commodity index over the next 12 months.
Although oil prices are likely to remain volatile near term, we retain a positive outlook. Brent crude prices have dropped around 4%following the collapse of SVB and Signature Bank more than two weeks ago. While a mild winter has led to lower drawdowns on energy inventories, the recent decline was exacerbated by financial institutions seeking to protect against the downside price risks of options they had sold to oil producers. In the last two weeks, non-commercial accounts have cut their net longs in aggregate Brent and WTI futures and options holdings to their lowest level since 2011.
But while we think that oil prices may remain volatile in the near term, 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, and although the pledged production cut by Russia has not led to a visible drop in Russian exports so far, we continue to anticipate a decline.
Furthermore, the US saw a large drop in refined product inventories last week and North Iraq has halted exports of 500,000 bpd since 25 March. We expect more of such data to support prices in the coming months.
Gold looks set to benefit from its safe-haven appeal in more uncertain markets. Gold has already been gaining due to the recent market volatility. The spot price broke above USD 2,000 an ounce to hit a 12-month high. Meanwhile, gold exchange traded funds look set to post net inflows in March for the first time in almost a year.
Given recent events, we think there’s a chance that gold prices will reach our end-March 2024 target of USD 2,100 earlier than expected. While a repeat of the global financial crisis appears to have been averted, we think it will take time for investor confidence to be fully restored.
Industrial metals should gain from a recovery in demand, especially from China. We think the price trajectory in base metals will depend on the speed of Chinese inventory drawdowns from the second quarter onwards. 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 industrial metals by year-end.
Agriculture prices should be supported by climate and geopolitical risks. Agricultural prices have been undermined by the extension of a deal earlier this month to allow the export of Ukrainian grain via the Black Sea. But the probability of an El Niño event, which has historically negatively affected yields for corn, rice, and wheat, has risen to 60% by year-end. Thus, we expect climate-related risks to drive markets higher in the second half of the year.
So, we remain most preferred on commodities. We continue to see opportunities in longer-dated Brent oil contracts with a price target of USD 100/bbl. We also recommend a long platinum trade, with a price target of USD 1,150/oz due to the metal’s close correlation to gold. We also see opportunities in selling the downside price risks in crude oil, copper, nickel, gold, and platinum. 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.
Main contributors - Mark Haefele, Patricia Lui, Wayne Gordon, Giovanni Staunovo, Christopher Swann, Jon Gordon
Content is a product of the Chief Investment Office (CIO).
Original report - Playing the long game in commodities, 29 March 2023.