Outlook for Commodities

 

Commodities are expected to be the best-performing asset class in 2021, with the Bloomberg Commodity index up roughly 25% YTD, but it has risen as high as 35% over the year. Recovering demand after Covid, supply chain interruptions, government regulation, and bad weather have all contributed to market tightening this year, pushing prices upward.

We predict supply chain disruptions to ease in 2022, but commodity balances will appear to be less tight than in 2021. This should lead to a decrease in pricing from present levels. But, more crucially, we anticipate them to continue to outperform long-term norms.

There will also be a lot of macro headwinds, which will restrict the commodities complex's upward potential. To begin with, central banks are expected to tighten monetary policy in 2022. Second, our foreign exchange experts predicts a stronger US dollar next year. Finally, there are concerns about the Chinese real estate market. If this sector continues to decline, it will exert negative pressure on the complex, particularly metals. However, the likelihood of this happening is decreasing since the Chinese government looks to be growing more accommodating when it comes to policy.

The European gas market is expected to remain tight throughout the winter, implying that there will be plenty of volatility in the coming months. Prices should drop as the heating season draws to a close. However, given the necessity to replace inventories throughout the injection season, they will remain high seasonally.

Over the course of 2022, precious metals are anticipated to struggle the most. Global central bank tightening, along with forecasts of further USD strength, should keep investor demand for gold low. The only scenario in which gold prices may rise further is if central banks reverse their tightening policies. Further severe waves of Covid-19 might be a cause for this.

We predict agricultural commodity prices to moderate next year, but they will still be higher than long-term norms. Due to weather damage to a number of significant growers' crops, the wheat market has risen to multi-year highs. Wheat ending stocks might rise somewhat in 2022, assuming regular weather. With La Nia weather concerns growing in Brazil, sugar and coffee prices are unclear heading into next season. Drought and frost have already wreaked havoc on the coffee industry. The amount of influence this will have on next season's crop will be determined by rainfall throughout the rainy season. Because of the uncertainty, coffee prices are expected to stay high until the market has a better understanding of the size of Brazil's next harvest.

Originally Published