CIO still see opportunities in longer-dated Brent oil contracts or selling Brent’s downside price risk over the next six months. (ddp)

The Bloomberg Commodity Index dipped to the lowest level since January 2022, while Brent crude oil fell to an 18-month low.

However, both indexes have since recovered some ground, and we maintain a positive outlook on broad commodities over the medium term. We expect the asset class to deliver strong diversification benefits for traditional portfolios amid ongoing supply-side constraints.

Oil market likely to tighten as OPEC+ output cuts kick in. In addition to weaker Chinese economic indicators, the downward move in prices might have been further intensified due to the forced selling of futures contracts by financial institutions—to protect against the downside risks of options they had sold to oil producers. But we continue to see oil demand holding up, and look for even higher demand over the coming months as airline flights have rebounded strongly to around 2019 levels. OPEC+ voluntary production cuts—starting this month—should also help the oil market tighten and push oil prices higher.

Market signals remain positive for industrial metals and agriculture. The rebound in Chinese consumption remains solid despite weaker factory activity. April’s nonmanufacturing PMI was robust at 56.4, while travel, tourism, and consumption data during the five-day Labor Day holiday came in stronger than expected. This should support both industrial metals and agricultural commodities. We also expect market balances to stay tight for most metals as exchange inventories are under downward pressure, while risks around the Black Sea grain deal and weather-related uncertainties continue to linger.

Gold nears all-time high amid risk-off sentiment. The precious metal is about USD 50/oz away from its record high of USD 2,075/oz, driven by a combination of ongoing US banking stress, uncertainties over US debt ceiling negotiations, and signals from the Federal Reserve that the hiking cycle is near the end. In addition, broad US dollar weakness, rising US recession risks, and solid central bank buying have also been supportive of gold. While gold is now more sensitive to short-term headwinds, it should remain a hedge within a portfolio context. We maintain our most preferred rating, with a target price of USD 2,200/oz by March 2024.

So, we still see opportunities in longer-dated Brent oil contracts or selling Brent’s downside price risk over the next six months. We also like to sell downside price risks in gold and silver and recommend an active investment approach to broad commodities.

Main contributors - Mark Haefele, Daisy Tseng, Giovanni Staunovo, Wayne Gordon, Jon Gordon

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

Original report - Commodity outlook remains positive on solid fundamentals, 9 May 2023.