CIO Commodity Commentary

Oil takes a break after dizzying heights

After climbing fast from its lows a year ago, oil prices have taken a breather. Since their March highs of over $66 U.S. dollars per barrel, West Texas Intermediate (WTI) and Brent have given back around 10%. This short-term correction is mainly due to renewed lockdown measures in Europe. India, too, is suffering from a resurgence in coronavirus cases and new Covid variants are dampening recovery hopes. A stronger U.S. dollar is another factor, as commodity prices tend to soften when the dollar rises. That said, our outlook on an oil-demand recovery is not gloomy either. While China has led the economic recovery so far, further upside for energy demand will need to come from countries outside China and Asia. In our view, the United States will likely recover first, followed by Europe, at a slower pace.

Oil supply meanwhile remains constrained. We have seen very limited capital expenditure by natural-resources companies and oil producers during the last round of quarterly reports. We expect product-capacity growth to lag behind demand growth. In the petroleum industry in particular, we observe a muted drilling picture, too. The Baker Hughes U.S. rig count increased by 9 to 411 in the week to March 19, which is still 361 lower than last year.[1] This shows that there has so far been a very limited drilling response to the higher oil price in the United States. OPEC, for its part, is continuing its efforts to restrict supply. If members stick to the announced production cap, global inventories should continue to draw down close to the five-year-average level pre-pandemic. Compliance by OPEC plus Russia with production limits will remain critical for the oil price in our view and the outcome of the next OPEC meeting at the beginning of April will be an important driver for prices.

Overall, therefore, we forecast that gradual economic recovery and restricted oil supply will continue to deplete the excess inventories built up in last year's lockdowns and bring the oil market back toward balance.

Meanwhile, the desire to gain exposure to the cyclical recovery will likely support prices for platinum and palladium, which are benefiting from improving industrial and manufacturing activity, while investor interest in gold remains weak. But gold and precious metal miners are being helped by an improving operational outlook as mines that were closed to slow the spread of Covid-19 return to normal production levels. Gold is hovering around the 1,700 U.S. dollars per ounce level, despite central banks continuing to affirm "lower-for-longer" interest-rate policies globally. Gold prices have been hurt by higher real interest rates and a firmer U.S. dollar and will likely require a new catalyst to break out of the recent range.

Lean hogs are leading livestock prices higher on continued concerns regarding containment of the African Swine Flu in China, but we are optimistic the outbreak can be contained. China is buying record amounts of corn and soybeans to feed the country’s pig herd. The U.S. Department of Agriculture expects China's buying spree of feed grain imports to triple to 24 million tons this year. Overall, however, China is very much behind on the purchase commitments laid out in the January 2020 trade deal. While the targets seemed high then, the pandemic of course worsened the picture with a big demand shock. Right now, China has reached about one third of its two-year purchase target. While we expect China to continue to import large amounts of grains, we do not believe that a failure to meet the targets in the deal will lead to higher U.S. tariffs on Chinese exports. On the supply side, the tight inventories leave little room for production issues this spring. Therefore, we maintain our positive outlook for grains overall.

Past 30-day and year-to-date performance of major commodity classes

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Past performance is not indicative of future returns.
Sources: Bloomberg Finance L.P. and DWS Investment Management Americas Inc. as of 3/25/21

1Bloomberg Commodity Index, 2Bloomberg Brent Crude Subindex, 3Bloomberg WTI Crude Oil Subindex, 4Bloomberg Natural Gas Subindex, 5Bloomberg Aluminum Subindex, 6Bloomberg Zinc Subindex, 7Bloomberg Gold Subindex, 8Bloomberg Copper Subindex, 9Bloomberg Platinum Subindex, 10Bloomberg Silver Subindex, 11Bloomberg Soybeans Subindex, 12Bloomberg Live Cattle Subindex, 13Bloomberg Corn Subindex, 14Bloomberg Wheat Subindex, 15Bloomberg Sugar Subindex, 16Bloomberg Cotton Subindex



All opinions and claims are based upon data on 3/23/21 and may not come to pass. This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Alternative investments may be speculative and involve significant risks including illiquidity, heightened potential for loss and lack of transparency. Alternatives are not suitable for all clients. Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Source: DWS Investment Management Americas Inc.

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