CIO Commodity Commentary

The bulls are back in town

At the beginning of January, OPEC and its allies, among them Russia, reached an agreement to gradually reverse their production cap rather than implement the scheduled sharp rise at the turn of the year. They also agreed to hold monthly meetings to review market conditions with the goal of phasing out the production cap. U.S. shale producers, similarly, are in no rush to bring back production capacity. These supply curbs are sustaining hopes that the supply side will be well managed should the pandemic curtail demand further. Uncertainty about demand persists in Europe, the UK, and the United States, and China has just placed over 22 million people in lockdown as new cases have flared. The market, however, has largely looked past these demand-side concerns. West-Texas-Intermediate (WTI) crude prices have risen well above 50 dollars per barrel from the mid-thirties at the beginning of last November – a rise of over 40%.

Several concerns, however, temper our optimism about oil-market prospects in the coming weeks. For one, the market is now focused on the latest lockdown in the UK, driven by a more infectious strain of Covid-19. Similar lockdowns may occur in mainland Europe and, potentially, the United States as the more infectious strain spreads. Meanwhile, as discussed above, OPEC and Russia are reviewing inventory balances monthly and may increase oil supply. While Saudi Arabia is reportedly in favor of proactive supply cuts to stay ahead of any demand slump, other members of the OPEC and Russia group, which includes the United Arab Emirates, appear eager to relax the quota. For the coming weeks, we therefore expect oil prices to move sideways.

We believe the outlook for the base-metal market, however, is better. It should continue to benefit from a strong economic recovery in China, optimism over vaccine developments, healthy fundamentals and a supportive macro backdrop. At the beginning of January, copper performed strongly. The new lockdown in China's Hebei region is likely to have an impact only on copper transportation and should barely affect production.

We believe the timing of Chinese policy normalization and a recovery in demand for metals across the globe remains key for base metals in general. Despite positive developments with fiscal stimulus in many countries, rising Covid-19 cases in some parts of the world are dampening investor optimism. But overall we expect a recovery in economic growth and demand to generate further gains in base-metal prices.

Gold, however, has had a choppy start to 2021 – after its best year in a decade – with its price dropping further from its over 2,000 dollars per ounce peak in August 2020 to around 1,840 dollars per ounce at present. Fiscal stimulus – after the Democrats took control of the Senate – is bullish for risk markets and bearish for gold, which is seen as a safe haven. The outperformance of base metals over precious metals continues to reflect investors' preference for assets that can benefit from a cyclical recovery. Nonetheless, gold appears to have found support above 1,800 dollars per ounce. As central banks continue to affirm "lower-for-longer" interest-rate policies globally, we would expect investors to continue to add gold to their portfolios to hedge against possible sharp rises in inflation. And speculation that the U.S. Federal Reserve (Fed) may reduce bond buying by year-end seems premature.

Agriculture continues to surge higher on strong demand despite a recent increase in prices. Grain prices are sharply higher, led by soybeans and corn – both gaining around 20% in the past 30 days. The U.S. Department of Agriculture has cut the corn inventory forecast to a seven-year low, which, coupled with the drier than normal weather in South America and strong Chinese demand, is strongly supportive of prices.

Softs, too, have moved higher, led by sugar and cotton. Sugar prices increased due to the rise in ethanol prices, thanks partially to surging oil prices following the OPEC decision. Coffee is the sole commodity to have lost ground as market participants observe the continued build up in exchange inventories. Lockdowns in Europe are also negative for coffee demand. Overall, however, a weaker dollar, strong global demand and limited supply are paving the way for a bull market in agricultural commodities.

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

202101_CIO Commodity Commentary_Chart.png

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

Past performance is not indicative of future returns.
Sources: Bloomberg Finance L.P., DWS Investment Management Americas Inc. as of 1/18/21

Appendix: Performance over the past 5 years (12-month periods)


12/15 - 12/16

12/16 - 12/17

12/17 - 12/18

12/18 - 12/19

12/19 - 12/20

Bloomberg Commodity Index






Bloomberg WTI Crude Oil Subindex






Bloomberg Brent Crude Subindex






Bloomberg Natural Gas Subindex






Bloomberg Gold Subindex






Bloomberg Silver Subindex






Bloomberg Platinum Subindex






Bloomberg Copper Subindex






Bloomberg Aluminum Subindex






Bloomberg Zinc Subindex






Bloomberg Corn Subindex






Bloomberg Wheat Subindex






Bloomberg Soybeans Subindex






Bloomberg Sugar Subindex






Bloomberg Cotton Subindex






Bloomberg Live Cattle Subindex






Past performance is not indicative of future returns.
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 1/18/21



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