CIO Commodity Commentary

Oil remains supported

While positive vaccine developments and generous stimulus packages are helping oil, the West Texas Intermediate (WTI) crude price’s bullish run has stalled, with the price remaining close to 60 U.S. dollars per barrel for two months. Increasing coronavirus cases in India, with daily new infections of well over 200,000, and strict lockdowns, are one of the factors casting a shadow over the global economic recovery story. Meanwhile OPEC agreed to ramp up production gradually over the next three months, and that Saudia Arabia tapers its voluntary cuts.[1] OPEC seems unlikely to change its policy much at its next meeting, on April 28, which, it is rumored, may even be downgraded from a full ministerial meeting to one of its monitoring committee meetings. We have confidence in the market's ability to absorb additional supply this summer, but expect volatility in the oil price due to the many uncertainties about demand.

In the longer term we have confidence in the economic recovery, even though it may not be smooth, and maintain our positive outlook for oil. Low capital expenditure is limiting the growth in U.S. oil supply and the vaccination rate is gathering steam in the United States and elsewhere. Meanwhile data from China pointing to high congestion in the rush hours are supportive of oil prices.

In light of the most recent 1.9 trillion U.S. dollar stimulus package and with another massive 2 trillion U.S. dollar infrastructure plan proposed by the new administration, it is almost a surprise that gold has broken back through the 1,700 U.S. dollars per ounce level and has returned roughly 4% to investors since the beginning of the month. Falling bond yields and a weakening U.S. dollar, however, have decreased the opportunity cost of holding the safe-haven metal and thereby supported prices. In addition China has significantly increased imports of the bullion. We, however, maintain our neutral view on gold as some of these factors might be short-lived. The economic revival that vaccinations and massive stimulus should bring makes it likely that base metals will continue to outperform precious ones. Palladium seems isolated from these developments as it is profiting from stricter emission rules which increase the demand for autocatalysts.

Higher emission standards also seem to have been positive for aluminum prices. China's efforts to curtail carbon emissions seem to raise concerns about future aluminum supply limitations. Copper, too, is climbing to new heights on increased demand. Other base metals stayed on the sidelines.

April's U.S. Department of Agriculture (USDA) World Aggregate Supply and Demand Estimates (WASDE) report confirmed multiple bullish signals, including increases to demand for corn, soybeans, and cotton, as well as cuts to Brazil corn production as a result of drought.[2]
Soybeans, however, are underperforming on fears regarding African Swine Flu in China, which is seen as a threat to demand. But proprietary data indicates to us that China's hog herd stabilized in March and increased in April. We therefore think the negativity may be overdone.
Soft-commodity prices have also risen, partly because of drought in Brazil, but also reflecting strong cotton demand and higher energy prices. Sugar prices increased due to the rise in ethanol prices, thanks partially to relatively strong oil prices.

In our view, tight inventories, strong demand, and a muted planting response are combining to create a very bullish setup in grains as we head into production season. We particularly like corn.

Within livestock, we expect volatility to persist, driven by uncertainty about the demand outlook for beef and pork. The sustainability of the global recovery and the fulfillment of purchase commitments from China, which depend on the degree of success containing African Swine Flu, will have important implications for livestock.

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 4/19/21

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

 

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