STEALTH: The stealth commodities rebound has broadened, after a terrible 2023. With oil breaking $90/bbl.. New gold highs. ‘Dr. Copper’ surging. Alongside soaring niches like cocoa. Demand has been under-estimated. Supply is structurally tight. And technicals disproportionately important. With investor sentiment depressed, demand for inflation hedges, and geopolitical risks rising. Its a better but not great outlook. With US dollar resilient, US bond yields high, and China demand half-hearted. And major natgas and cereals markets deeply over-supplied. Caveat emptor that commodities has the worst long-term record of all assets and ‘solution to high prices is high prices’.
FUNDAMENTAL: Commodities is seeing a slow-burn supply-demand squeeze. 5.5% OPEC+ oil supply cuts and weather-driven disruptions are coming against a backdrop of 15-years of supply under-investment driven by low prices and ESG headwinds. Whilst demand growth is being under-estimated, with US ‘exceptionalism’ and China manufacturing signs of life. Most recently by the US Energy Information Agency raising its oil demand outlook and correcting past under-estimates. Yet the asset class is far from firing on all cylinders. Natgas and cereals are over-supplied. The robust dollar is dampening overseas demand. And higher oil will start to fray OPEC unity.
TECHNICAL: We see these drivers as significant. 1) A geopolitical risk premium has reemerged in oil and been a driver of safer-haven gold. 2) Stalling US inflation progress has driven investor demand for traditional inflation-hedges like commodities. 3) Whilst low investor commodity allocations, its 2023 underperformance, and extreme longer term underperformance vs tech (see chart) are contrarian positives. Our global retail investor survey sends a mixed allocation message. With 8% highlighting commodities as the asset they are most likely to increase investments in. Its ranked behind crypto, stocks, cash as the most attractive. But ahead of local bonds, FX, alternatives.
All data, figures & charts are valid as of 10/04/2024.